UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

FOR THE FISCAL YEAR ENDED APRIL 30, 20052008

OR

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER 000-28139

BLUE COAT SYSTEMS, INC.

(Exact Name of Registrant as Specified In Its Charter)

420 NORTH MARY AVENUE

SUNNYVALE, CALIFORNIA 94085

SUNNYVALE, CALIFORNIA

Registrant’s Telephone Number, Including Area Code: (408) 220-2200

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.0001 Par Value

(Title of Class)None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  x

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 thatthan the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YesYES  x    No  NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is an accelerated filera shell company (as defined in Rule 12b-2 of the Act).    YesYES  ¨    NO  x    No  ¨

The aggregate market value of the Common Stockvoting and non-voting common equity stock held by non-affiliates of the Registrant (based onregistrant was $1,483,329,971 as of October 31, 2007, the last day of the registrant’s second fiscal quarter during its fiscal year ended April 30, 2008, based upon the closing sale price on The NASDAQ Stock Market LLC reported for thesuch date. Shares of Common Stock on the Nasdaq National Market on October 29, 2004) was approximately $178,790,428.

As of June 30, 2005, there were 12,394,350 shares of the Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Documents Incorporatedheld by Reference: Part III of this Annual Report on Form 10-K incorporates informationeach officer and director and by reference from the Registrant’s Proxy Statement for its 2005 Annual Meeting of Stockholders. Except as expressly incorporated by reference, the Registrant’s Proxy Statement shall noteach person who may be deemed to be an affiliate have been excluded. This determination of affiliate status is not necessarily a partconclusive determination for other purposes.

There were 38,356,564 of this Annual Reportthe registrant’s Common Stock issued and outstanding as of June 20, 2008.

Documents Incorporated by Reference:

Part III—Portions of the registrant’s definitive proxy statement to be issued in conjunction with registrant’s annual stockholders’ meeting to be held on Form 10-K.October 2, 2008.

BLUE COAT SYSTEMS, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, and other materials accompanying this Annual Report on Form 10-K contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to, statements concerning the following: expectations with respect to future market growth opportunities; changes in and expectations with respect to revenues and gross margins; future operating expense levels; the impact of quarterly fluctuations of revenue and operating results; our ability to achieve expected levels of revenues and profit contributions from acquired businesses; the impact of macroeconomic conditions on our business; the adequacy of our capital resources to fund operations and growth; investments or potential investments in acquired businesses and technologies (including our recent acquisition of Packeteer, Inc.), as well as internally developed technologies; the expansion and effectiveness of our direct sales force, distribution channel, and marketing activities; the recording of amortization of acquired technology and stock-based compensation; the impact of recent changes in accounting standards and assumptions underlying any of the foregoing. In some cases, forward-looking statements are identified by the use of terminology such as “anticipate,” “expect,” “intend,” “plan,” “predict,” “believe,” “estimate,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” or negatives or derivatives of the foregoing, or other comparable terminology.

The forward-looking statements in this Annual Report on Form 10-K involve known and unknown risks, uncertainties and other factors that may cause industry and market trends, or our actual results, level of activity, performance or achievements, to be materially different from any future trends, results, level of activity, performance or achievements expressed or implied by these statements. For a detailed discussion of these risks, uncertainties and other factors, see the “Risk Factors” section in Item 1A of this Annual Report on Form 10-K. We undertake no obligation to revise or update forward-looking statements to reflect new information or events or circumstances occurring after the date of this Annual Report on Form 10-K, except as required by applicable law.

PART I.

Item 1. Business1.Business

The discussion in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements on revenue expectations, future product acceptance, future product and sales development, future operating results, and future cash usage, as well as statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those indicated in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, our limited ability to forecast quarterly operating results and meet analyst or investor expectations, inability to create additional sales through our sales channel partners, variability in net revenue and earnings resulting from deferred revenue, manufacturing delays and price increases from our third-party manufacturers, supply shortage, inability to maintain a competitive position in the proxy appliance market, increased competition and inability to compete with our competitors, costs and effort in responding to investigations from the Securities and Exchange Commission (“SEC”), inability to sustain profitability, unpredictable increase in demand for our products, product concentration, technological changes, gross margin fluctuations, reliance on third-party software licenses, inability to generate increased international sales, unpredictable macroeconomic conditions, unpredictable sales cycles, legislation surrounding corporate governance and internal controls, undetected product errors, foreign currency exchange rate movements and economic conditions in foreign markets, inability to attract and retain key employees, costs and effort in defending a Class Action Lawsuit, inability to defend our intellectual property rights, inability to raise additional capital, gross margin erosion from large sales deals, increased litigation, new accounting standards, future acquisitions, product liability claims, occurrence of a natural disaster, volatility in our stock price and other risks discussed in this item under the heading “Factors Affecting Future Operating Results” and the risks discussed in our other recent SEC filings.

Blue Coat®Coat Systems, Inc., also referred to in this report as “we” or “us,” sells a family of products, including both intelligent hardware appliances and software, that secure and accelerate the delivery of business applications and other information over a Wide Area Network (“WAN”), “us” or the “Company”public Internet (also known as the Web). Our products are designed to accelerate the performance of our customers’ business applications, and work with both applications on a customer’s computer systems and applications hosted by external providers. In addition to enhancing the performance of applications, our products also are designed to allow customers to more safely use the Internet by providing security from malicious code and inappropriate content. Our appliances also enable policy-based control and centralized management of communications between users and applications across the WAN, Internet and customers’ internal networks.

On June 6, 2008, subsequent to our fiscal year end, we acquired Packeteer Inc., wasa pioneer in delivering sophisticated WAN traffic prioritization through the development and sale of application classification and performance management technologies and products. As a consequence of that acquisition, we have added the PacketShaper, Policy Center and Intelligence Center products formerly sold by Packeteer to our product line. See further discussion of the Packeteer acquisition in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, of this report.

Our principal markets include the market for Secure Web Gateway products, and the newly evolving WAN Application Delivery market, which includes products that both enhance WAN security and WAN performance, and improve the availability of business applications, where network users are distributed across multiple locations.

Our primary end user customers are medium and large distributed organizations, including finance, government, healthcare, education and other business enterprises. Enterprises deploy our products in their data centers, branch offices, and Internet gateways and mobile devices worldwide.

We were incorporated in Delaware on March 16,13, 1996 as CacheFlow®Web Appliance Inc. We changed our name to CacheFlow, Inc. on March 25, 1996, and completed our initial public offering on November 19, 1999. On August 21, 2002, we changed our name from CacheFlow Inc. to Blue Coat Systems, Inc., and this filing and all future SEC filings will be under the name Blue Coat Systems, Inc. Theour ticker symbol for our common stock was also changed from CFLO to BCSI.

On September 16, 2002, we filed an amendment to our Certificate of Incorporation, implementing a one-for-five reverse split of our outstanding common stock. Our common stock began trading under the split adjustment at the opening of theThe NASDAQ Stock Market on September 16, 2002. On August 16, 2007, our Board of Directors approved a two-for-one forward stock split of our common stock. The stock split was effected by the issuance of a stock dividend of one share of our common stock for each share of our common stock issued and outstanding as of the record date of September 13, 2007. Our common stock began trading under that split adjustment at the opening of the NASDAQ Global Market on October 4, 2007. In January 2008, we commenced trading on the NASDAQ Global Select Market. Our number of authorized shares of common stock however, remainsand preferred stock has remained at 200 million. We havemillion and 10 million, authorized but unissued shares of preferred stock.respectively, since our incorporation. All share and per share amounts in this Annual Report on Form 10-K, and in the accompanying consolidated financial statements and notes thereto, reflect the reverse stock split and subsequent forward split for all periods presented.

Overview

During the past few years, certain trends have fundamentally changed the basic architecture of the corporate enterprise network—and the way users and applications communicate across a distributed enterprise.

As a consequence of this evolution, IT organizations must address three distinct requirements to ensure that all network users remain productive:

We offer a family of appliances and software products that assist IT organizations in addressing the challenges of the distributed enterprise and meeting the above requirements. These appliances and software help secure and accelerate application delivery to all users connected over a private WAN or the public Internet, regardless of whether the applications are fast, inexpensivehosted internally or externally. Our Blue Coat ProxySG^®, ProxyAV, and easyProxyRA appliances, and our Blue Coat ProxySG^® Client software, are available in a wide range of configurations and work together as a centrally managed, policy-controlled system that is sufficiently flexible to deploybe scaled to support large complex organizations.

Secure Web Gateway Solutions

During the past several years, our primary business focus has been to offer proxy appliances used to control and manage. But these benefitssecure communications for users of a corporate network accessing content on the Internet. These appliances are located at the customer’s Internet gateway, which is the point where the network connects to the Internet. The performance of our proxy appliances has enabled us to establish a leadership position in the market for Secure Web Gateway products.

One of the key strengths of our appliances is our advanced proxy technology. Our proxy appliance acts as a middleman between users and various applications or Internet content. Users communicate with the proxy appliance on one side of the transaction, and applications and Internet content communicate with the proxy appliance on the other side of the transaction. There are two separate connections, both controlled and managed by the proxy appliance. Consequently, no content can leadget past the appliance unless it is in accordance with a policy that is created by the customer’s IT organization and that is automatically enforced by the appliance. This enables our proxy appliances to increased risks forprotect businesses from many of the enterprise, suchdangers of the Internet.

Our appliances offer a number of important features that enable more secure communication with the Internet, including:

Wide Area Network Application Delivery Solutions

During fiscal 2007, we extended our focus to address the need to improve performance and availability of critical business applications delivered across the WAN to remote and mobile users (commonly known as “WAN optimization” or “WAN acceleration”), while simultaneously securing the delivery of those applications and content. This market has been defined by IDC, a leading provider of IT market intelligence services, as the “WAN Application Delivery” market.

Our WAN Application Delivery products are delivered by the same proxy appliances that enable our Secure Web surfingGateway products. Our MACH5 (Multiprotocol Accelerated Caching Hierarchy) technology, which is

integrated into our appliances, provides five key capabilities that accelerate the delivery of business applications to remote users of a WAN, including:

Our MACH5 technology is also has the means to negatively affect the network infrastructure, whether intentionally or not. A solution is to use a proxy appliance that is designed to provide Web visibilityimprove the performance of business applications, including streaming video, encrypted SSL applications, and controlapplications hosted by third parties and accessed through the Internet.

Our appliances are deployed in both the centralized data centers and in the branch office. In addition, we make MACH5 functionality available as client-based software in our SG Client for users requiring accelerated application performance while also improving network performance.

Products

As of April 30, 2008, we offered the following products:

ProxySG Appliances

Our Blue Coat proxy appliances help organizations make the Web safe and productive for business, providing visibility and control of Web communications to protect against risks from spyware, Web viruses, inappropriate Web surfing, IM, video streaming and P2P file sharing - while actually improving Web performance. Positioned in the network between the users and the Internet, proxy appliances do not replace existing perimeter security devices; rather, they complement network firewalls by providing granular policy-based controls over Web traffic in ways that firewalls and other externally focused devices cannot.

Blue Coat Solutions

The Blue Coat ProxySGProxySG^™® family of proxy appliances provides enhanced visibilityserves as the foundation for both our Secure Web Gateway products and control of Web communications while actually improving Web performance. Based on Blue Coat SGOS^™, a custom, object-based operating system with integrated caching, these proxy appliances leverage existing authentication systems to enable flexible policy enforcement down toour WAN Application Delivery products. The appliance, when appropriately configured, may be placed at the individual user. ProxySG provides comprehensive proxy support of all Web protocols with integrated content filtering, spyware prevention, web virus scanning, instant messaging control, peer-to-peer control, streaming control and pop-up ad blocking.

The ProxyAV^™ family of appliances integrates with the ProxySGInternet gateway, to provide scalabilitysecurity with respect to Web-based communications, or may be placed at connection points for entry to or exit from a WAN (or “WAN links”) to enhance and accelerate the performance in real-time scanning of Web-based file downloads for viruses, worms and Trojans. Pairing the ProxyAV with the ProxySG provides significant advantages for high-speed Web virus scanningbusiness applications over that standalone systems cannot match. Both the ProxyAV 400 and ProxyAV 2000 series appliances provide the same comprehensive features with easy deployment and a choice of virus scanning engines from Sophos, McAfee and Panda.WAN.

Blue Coat’s end-to-end product portfolio includes powerful reporting, policy and configuration management software - delivering a scalable proxy system architecture for centralized or distributed enterprise environments. Each of these features is described in more detail below.

Web Proxy

First generation proxy servers - software-based applications running on general-purpose operating systems - offer a point of control for securing network access, but their performance degrades under today’s heavy Internet and intranet usage. Blue Coat’s proxyProxySG appliances are designed to provide next-generation proxy functionality that deliver businessfor simple management and technology benefits to Web-dependent enterprises.

Configured as a proxy server deployed between corporate usersinstallation by our customers, and the Internet, Blue Coat proxy appliances intelligently manage user requests for content. When a user selects a Universal Resource Locator (“URL”), the request first goes to the Blue Coat proxy appliance for authentication and authorization. If the objects from the requested page are already “cached” or stored on the Blue Coat appliance, they are immediately served to the user. If the objects are not stored locally, the Blue Coat appliance acts as a proxy for the user by communicating to the origin server via the Internet. When the objects are returned from the origin server, a copy is delivered to the user and also stored in the system’s cache to serve all subsequent requests. The entire transaction is monitored and logged for reporting and analyses purposes.

Blue Coat allows enterprises to proxy most Web protocols, including HTTP and HTTPS, which are commonly used for Web browsing; FTP which is used for file transfers streaming media protocols from Microsoft, Real and Quicktime and instant messaging protocols by the public IM vendors such as AOL, Microsoft and Yahoo.

Web Filtering

URL filtering, or the ability to control access to Web sites, is critical to minimizing an organization’s business risk. Inappropriate Web surfing can lead to decreased worker productivity and the introduction of viruses. Both situations can result in considerable financial costs for any company. Other security breaches occur through

inappropriate Web use such as the loss of intellectual property and other proprietary information. Unsanctioned Web-based applications can also consume large amounts of network bandwidth and the viewing of adult content sites by employees can lead to costly lawsuits.

Blue Coat proxy appliances provide policy controls in performance-based hardware and a custom operating system to give enterprises visibility and control over their employee’s Web communications. Combined with comprehensive enterprise policy controls, the Blue Coat ProxySG appliances provide the necessary components for effective content filtering.

Effectively controlling spyware, P2P, or IM requires deep content inspection and a high level of system performance. Controlling spyware, for example, not only requires URL filtering but also the ability to recognize and block “drive-by” installers, scan for known spyware signatures and detects spyware communication attempts. A URL filtering list alone cannot provide this level of content inspection to all instances of spyware activity. The Blue Coat solution combines custom hardware with a high-performance operating system, unique policy architecture with deep content inspection and an integrated proxy cache that stores commonly accessed content. The Blue Coat solution extends the reach of URL filteringeasily integrate with the performance that organizations require.

URL filtering deployed on a ProxySG (On-Proxy) integrates the scalability, performance, and protection of the proxy appliance with a comprehensive URL database. Blue Coat offers customers the option of integrating their choice of URL filtering database on-proxy, including Blue Coat Web Filter, Secure Computing’s SmartFilter, SurfControl Web Filter, Websense Enterprise, ISS Proventia Web Filter, ALSI InterSafe, and CyberGuard Webwasher.

The Blue Coat ProxySG also supports custom category creation, exceptions and overrides. Combined with a customer’s preferred URL filtering list, custom categories can be defined for special circumstances enabling an organization to advise, coach, and enforce corporate Internet policies and apply additional content security controls. These lists can act as both “black lists” (undesirable content) and “white lists” (allowed content).

Automatic URL updates ensure that the vendor’s list stays current on the ProxySG appliance while log files securely transferred to the favorite reporting solution produce reports for providing visibility of web communications.

Web Anti-Virus

Gateway Web anti-virus has not been widely deployed in organizations due to unacceptable throughput and latency experienced with existing products. Web anti-virus solutions that slow down response times for browser-based traffic force Information Technology staff to compromise between the performance users demand, and the security required by the business. This has been the situation with Web anti-virus, which has created open back doors in the security infrastructure that have allowed Web-based viruses to infect enterprise systems. These open doors include employee use of Web-based personal email and Internet file downloads.

Blue Coat now enables organizations to deploy Web anti-virus with scalable, high-performance options designed to meet the “real-time” requirements of Web traffic. Blue Coat has developed the ProxyAVappliance,a high-performance Web anti-virus appliance that delivers up to 249 Mbps throughput and 4 millisecond average latency for “real-time” Web traffic virus scanning. The ProxyAV appliance works in concert with Blue Coat’s ProxySG platform, which quickly and intelligently processes Web objects to determine which objects should be scanned for viruses. Suspect Web objects are then sent to the ProxyAV appliance where they are quickly scanned for viruses using the Sophos, McAfee or Panda virus scanning engine. If deemed clean by the scanning engine, a signal is sent back to the ProxySG indicating that delivery of the object may proceed to the end-user. Clean objects are also cached on the ProxySG for an additional performance benefit.

Blue Coat offers customers the flexibility to choose which anti-virus engines to run on the ProxyAV, among industry-leaders Sophos, McAfee and Panda, each providing automated updates. This flexibility of ProxyAV

allows customers to implement a layered anti-virus defense across the distributed enterprise, where a different anti-virus engine can be deployed at the Web gateway to complement email servers and desktops.

Spyware Prevention

Spyware and adware pose security, privacy and productivity risks for the enterprise. Users, often unknowingly, download spyware and Web content providers are financially incented to disperse spyware agents. This results in backdoors, key loggers, information collection, privacy breaches, and network abuse as spyware quietly “calls home.” It also crashes browsers, slows networks and overwhelms IT help desks.

Spyware leverages multiple vectors to be successful, making silver bullet defenses using coarse-grained controls useless and unproductive, impeding critical Web-based business communications. No single technique can filter out spyware and adware to defend against the threat.

Blue Coat provides a preventive spyware defense that combines multiple techniques in a high-performance solution acceptable for Web-based business communications. Latency is minimal and the protection layers are comprehensive to stop, block and scan spyware without impeding business processes.

Blue Coat’s proxy-based gateway anti-spyware solution utilizes advanced policy controls to stop “drive-by” spyware installations, which secretly install on desktop computers without user knowledge. The comprehensive solution also blocks access to known spyware Web sites and scans Web content for known spyware signatures. In addition, Blue Coat’s solution identifies and reports infected computers to IT administrators, while end-users are also notified that a spyware clean-up is required.

Instant Messaging Control

Instant Messaging usage has become commonplace within the enterprise and continues to increase. Employees can freely install public IM software from AOL, Microsoft or Yahoo to “chat” with peers, business colleagues and friends using the company network. Unauthorized use of these applications raises many valid security and productivity concerns among IT managers and security officers. Blue Coat ProxySG appliances allow organizations to gain control of public IM applications already in use. By applying access control, logging and reporting to public IM, organizations are able to turn public IM products into enterprise-safe messaging solutions. ProxySG appliances can specify which IM protocols and clients can be used on the network, and who can use them. The appliances allow administrators to configure IM for internal or external use, establish authentication rules for using IM, allow or deny attachments by file type, control use of status modes such as “idle” or “away,” and allow or deny chat room access or voice chat.

Peer-to-Peer (P2P) Control

P2P traffic, often characterized as file sharing music or movie files, is consuming valuable bandwidth on many networks today and can have an adverse impact on legitimate mission-critical applications. Additionally, P2P traffic opens the door for viruses and a host of legal concerns that can be counterproductive to any business. P2P may be contributing to some of the following issues:

P2P file sharing services allow an employee to circumvent corporate security measures. The very nature of the P2P client design is to evade firewalls and general network security. Blocking P2P at the firewall has proven to be extremely difficult because the application is capable of port-hopping, or finding open ports on the firewall. Because of the agile nature of P2P applications, P2P file sharing can be very difficult for administrators to detect, much less control. P2P packets cannot be classified simply by looking at packet headers such as IP address and port number.

Controlling the use of P2P in the enterprise requires a solution that is as dynamic as the problem itself. This means that an administrator must be able to evaluate the P2P problem from their own network perspective and apply controls that relate to their company’s policy needs. Blue Coat provides the architecture for immediate and dynamic P2P control. Blue Coat’s ProxySG allows an administrator to log and control P2P traffic to the degree required. Additionally, as P2P clients change, the ProxySG policy can be adjusted to capture new clients, blocking P2P communications to and from the Internet.

Bandwidth Management

Left unchecked, streaming media and recreational Web surfing can clog corporate networks with unnecessary traffic and limit mission-critical applications of the bandwidth needed to run effectively. Additionally, both service providers and corporations need to be able to protect themselves from flash-traffic situations and to manage their external bandwidth access costs. To protect bandwidth and scale a network requires infrastructure that employs policy-based controls to manage content, users and protocols.

Blue Coat ProxySG appliances provide a proven, flexible way to control and apply content-based protection policies for network bandwidth. With Blue Coat solutions, companies can control their network by applying:

Products

The Blue Coat ProxySG family of appliances includes the ProxySG 200 Series, 400 Series, 800 Series and 8000 Series. The four ProxySG appliance models are very similar in terms of functionality, but differ mainly in terms of their performance characteristics and scalability. The Blue Coat ProxyAV Web anti-virus appliances include the ProxyAV 400 Series and same as ProxyAV 2000 Series. These two models are also similar in functionality but differ primarily in terms of performance and scalability. The Blue Coat Spyware Interceptor anti-spyware appliance comes in one model and is designed for networks with 1,000 users or less. We currently license to our

customers custom operating systems, which are used in conjunction with our ProxySG and ProxyAV appliances, which include third party URL filtering software, third party anti-virus software and Blue Coat Reporter. We also manufacture an appliance called Director, which is used primarily to manage large numbers of ProxySG appliances in a customer’s environment.

ProxySG

The ProxySG family of proxy appliances includes the 200 Series, 400 Series, 800 Series and 8000 Series. Based on Blue Coat SGOS^™, a custom, object-based operating system with integrated caching, these proxy appliances leverage existing authentication systems to enable granular policy enforcement down to the individual user. Blue Coat’s end-to-end product portfolio includes powerful reporting, policy and configuration management software - delivering a scalable proxy system architecture for centralized or distributed enterprise environments. Delivered as a rack mountable appliance for simple installation and management, these ICSA-certified solutions easily integrate with existing security and network infrastructure. They are ICSA-certified and are available in four different models.

The ProxySG 200 and 400 SeriesOur ProxySG appliances enable corporations to extend Web traffic protection and control to the branch and remote locations, while significantly reducing the administration and management costs for securing a distributed enterprise. Both the ProxySG 800 and the ProxySG 8000 Series appliances wereuse our proprietary SGOS operating system, which is specifically designed to meet enterprise requirements for capacity, performance, availabilitysupport the security, acceleration, and centralized management. Whilepolicy control features of those appliances. They are available in a broad range of configurations to support all four provide the same broad application support and features, the 8000 Series providesnetwork users in an expandable, modular platform for customizing disk size, RAM and network interface cards. Our ProxySG appliances are comprisedorganization, regardless of a specialized hardware platform and our custom operating system (SGOS).

their physical location.

ProxySG 200 SeriesClient

The ProxySG 200 Series appliances are rack mount proxy appliances that extend Web visibility and control to the branch office. The 200 Series appliances include secure remote administration capabilities, and provide flexible control and high-end performance with up to 512 megabytes (“MB”) of memory, 40 gigabytes (“GB”) of disk capacity and a built-in pass-through card. Utilizing a custom, object-based operating system with integrated caching for performance, organizations can advise, coach and enforce granular policies down to individual users.

ProxySG 400 Series

TheOur Blue Coat ProxySG 400 Series are designedProxySG^® Client is software that is installed on a desktop or laptop computer that is located at a remote site without a ProxySG Appliance or that is used by a mobile user. The software uses our MACH5 technology, including caching, compression and protocol optimization, to increase control over branch and regional office Web communications while reducingaccelerate the costs associated with distributed deployments. Available as a rack mountable or desktop device, the ProxySG 400 platform easily “drops in” to branch and regional environments. The ProxySG 400 is available in two fixed configurations, one with a single 40GB disk drive and 256MB of random access memory (RAM), and the other with two 40GB disk drives and 512 MB of RAM.

ProxySG 800 Series

The ProxySG 800 Series appliances are easy to manage and install in minutes with little ongoing maintenance, optimized for regional and corporate office installations. The systems include removable, hot-swappable disk drives. Specific configurations range from systems with a single 36 GB disk drive and 512 MB of RAM, to systems with four 73 GB disk drives and 2 GB of RAM.

ProxySG 8000 Series

Blue Coat ProxySG 8000 Series appliances represent the next generation in high-end appliance platforms. These purpose-built proxy appliances provide enhanced visibility and controldelivery of Web communicationsand office applications used by these remote computers. This provides the user with wire-speed performance. Specific configurations range from systems with two 73 GB disk drives and 1 GB of RAMperformance that is similar to systems with eight 73 GB disk drives and 4 GB of RAM.that provided by a large WAN that uses a ProxySG appliance.

ProxyAV Appliances

The ProxyAVOur Blue Coat ProxyAV family of Web anti-virus appliances includes the 400 Series and 2000 Series. The Blue Coat ProxyAV enablesenable organizations to scan for viruses, worms, spyware and trojans enteringTrojans at the Internet gateway before permitting communications to enter the enterprise’s network. Such infected communications frequently arrive through Web-based backdoors that includeso-called “backdoors,” such as personal Web email accounts, where a majority of viruses and worms propagate, Web spam or email spam which unknowingly(that activates trojanTrojan downloads without the user’s consent), and browser-based file downloads that bypass existing virus scanning defenses. The Proxymechanisms. A ProxyAV applianceAV, combinedwhen implemented in combination with the Proxya ProxySG applianceSG, provides scalability forscalable virus scanning, plusand also provides the IT administrator with comprehensive visibility and control of enterprise Web communications. The ProxyAV leveragesProxyAV appliance uses virus scanning enginessoftware from such vendors as Sophos, McAfee, Symantec, Panda, and Panda. Kaspersky Lab.

ProxyRA Appliances

Our ProxyAVBlue Coat ProxyRA appliances are comprisedinstalled at the headquarters of an enterprise and enable authorized mobile users to securely connect to a specialized hardware platform.corporate network through a mobile client device (such as a laptop, PDA or airport kiosk computer). Our ProxyRA appliances use application-independent proxy architecture and proprietary connector technology to provide the following features:

ProxyAV 400 SeriesBlue Coat WebFilter

The ProxyAV 400 Series represents the next generation in appliance platforms for enterprise Web anti-virus scanning. The ProxyAV 400 SeriesOur Blue Coat WebFilter is a purpose-built Web anti-virus appliance designed for quick integration withfiltering product that operates on our ProxySG appliances and helps enterprises and service providers protect their users and networks from Internet threats and inappropriate content and traffic, such as adult content, spyware, phishing attacks, P2P traffic, IM and streaming traffic. Our WebFilter product includes a comprehensive database that is organized into relevant and useful categories. The WebFilter database continues to be developed and enhanced in response to the ProxySG 800 Series appliance for deployment in medium enterprise or distributed environments. The ProxyAV is delivered in two fixed configurations, one with a single 850 megahertz (MHz) processor and 512 megabytes (MB)actual Web usage patterns of random access memory (RAM), and the other with a single 1.26 gigahertz (GHz) processor and 512 MBcustomers, including through use of RAM.

ProxyAV 2000 Series

The ProxyAV 2000 Series is an appliance designed for scalable performance and simple integration with the Blue Coat ProxySGappliance. The ProxyAV 2000 Series is available in four different configurations ranging from systems with a single 2.0 gigahertz (GHz) Intel P4 Xeon processor with 768 megabytes (MB) of random access memory (RAM),our Dynamic Real-Time Rating (DRTR™) technology, which enables us to dual 2.4 gigahertz (GHz) Intel P4 Xeon processors with 3.0 gigabytes of RAM.

Spyware Interceptor

Blue Coat Spyware Interceptor is an effective anti-spyware appliance for networks with 1,000 users or less. Spyware Interceptor is built on Blue Coat’s proxy technology, and comes in an easy-to-deploy and affordable appliance form-factor. The appliance utilizes SCOPE^™ (Spyware Catching Object Protection Engine) technology to prevent both known and unknown forms of spyware at the gateway, which uniquely allows access to legitimate Web applications and the ability to safely view spyware-ladencategorize Web sites without becoming infected. The spyware prevention capabilitiesthat are not in Spyware Interceptor are derived from Blue Coat’s enterprise focused ProxySG^™ solution. Spyware Interceptor allows IT administratorsour database, but to minimize futile cycles using ineffective spyware cleaners.which a user sought access.

Spyware Interceptor requires an annual license subscription based onIn addition to our proprietary WebFilter product, our ProxySG appliances also support the numberuse of computers being supported. The subscription includes SCOPE engine updates, continuous spyware profile updatesthird party content filtering databases, including those offered by Secure Computing Corporation and Blue Coat’s policy optimization service backed by Blue Coat Labs.

Websense, Inc.

Blue Coat Reporter

The Blue Coat Reporter is auses transaction log processingdata captured by an appliance to produce both pre-defined and reporting product that generates out-of-the-boxcustom reports tailored forrelating to the Blue Coat proxy appliances. Reporter provides identity-basedperformance and security of user and network reporting that helps evaluate Webactivities on the enterprise’s WAN. The information in these reports can be used by the IT administrator to appropriately adjust policies or take other actions to enhance the security policies and resource management. Because it is Web-based and cross-platform, it gives companiesor performance of the flexibility to view Web usage reports from anywhere administrators or managers have access to a network connection and a Web browser.WAN.

Blue Coat Director

The Blue Coat Director delivers scalable changeis an appliance that provides centralized management for theof an enterprise’s Blue Coat ProxySGProxySG appliances. Built as an extensible management appliance, Director provides configuration management, security and policy management, and resource management for enterprises deploying a large number of ProxySG appliances as a foundation of the Web security infrastructure. Director enables administrators to:

WinProxy Software

The Blue Coat WinProxy® SecureSuite is an Internet security and sharing software package. The software allows small organizations and users to share an Internet connection without having Internet sharing expertise.

Our Key Strategies

Our objective is to be the leading provider of proxy appliances. Key elements of our strategy include the following:

Focus on the Mid/Large Enterprise Market Segment. We are focused on developing proxy appliances for the mid-to-large size enterprises, which might include organizations with several thousand users to organizations with tens-of-thousand of users. We believe this focus helps us to rapidly identify and target attractive market opportunities. We are directing our product development, marketing and sales activities at the enterprise market segment, which we believe represents the most attractive opportunity based on a demonstrated need for proxy appliances, the opportunity to sell to numerous customers and the level of existing competition.

Enhance Capabilities of our ProxySG. We intend to use our technological expertise to keep pace with the needs of the evolving proxy appliance market. We plan to continue to develop both the hardware and operating system of our solution to gain and maintain a competitive advantage and expand the market for our products. Our additional efforts to enhance the capabilities of our ProxySG appliances include adding more functionality to secure and control new emerging applications, enhancing security for emerging Web threats and increasing the price performance of our appliances.

Continue to Leverage Indirect Distribution Channels. We aim to focus our product distribution strategy around the use of distributors and resellers rather than a direct sales force. Enterprises have historically purchased security products from distributors and resellers, and we believe that we can improve our sales coverage and sales force productivity through continued expansion of distributors and resellers as distribution channels.

Sales and Marketing

Our products are delivered to end user customers in many countries worldwide. We also maintain a worldwide service and support organization that provides a broad range of service options to our customers, including 24x7 technical support and product education.

Our worldwide sales strategy is based upon the use of multiple methods and sales tiers to market and sell our products. We utilizemaintain a combinationdirect sales organization of our territory-basedhighly skilled sales teams,representatives and systems engineers. They are assigned to general territories covering defined geographic areas and to territories focused on a select number of large enterprise customers, or “Named Accounts.”

Our direct sales organization is complemented by a large channel of third party resellers and distributors. Our resellers are responsible for identifying and closing business on an independent basis. Our resellers are supported by our global distributors, as appropriate for eachmany of our target markets. We support our distribution channels with systems engineers and customer support personnel thatwhom provide technical serviceeducation, co-marketing, demonstration equipment and support to our customers. end user customers, and our internal channel sales specialists. During fiscal 2008, one customer, a distributor, accounted for 12% of our net revenue. Within each geographic area we also have a team of sales and technical specialists focused on the development of relationships with, and sales to, service providers and value-added resellers.

We have entered into agreements with resellersemploy a team of inside sales representatives in each geographic area to support both the direct sales organization and distributors such as Westcon, Allasso, Nissho Electronics, Alternative Technologieschannel partners. The primary function of our inside sales representatives is to develop and others.

qualify leads identified from our marketing activities and to forward those leads to the appropriate sales channel.

Our marketing efforts focus on increasing the awareness of our Blue Coat brand, educating the market awarenesson issues and challenges associated with WAN Application Delivery and Secure Web Gateway products, and creating demand creation for our products and technology and on promoting the Blue Coat brand.technology. We have a number ofdevelop marketing programs to support the sale and distribution of our products and to inform existing and potential customers within our target market segments

about the capabilities and benefits of our products. Our marketing efforts include participation in industry tradeshows,trade shows, informational seminars, preparation of competitive analyses, sales training, maintenance of our Web site, advertising, public relations, and public relations.

collateral solution documentation and enablement. In addition, we provide similar types of marketing support for our major sales channel partners worldwide.

Research and Development

We believe that strong product development capabilities are essential to our continued success and growth. Our current research and development efforts are primarily focused on developingadding new features and strengthening existing features that extend the acceleration and security capabilities of our WAN Application Delivery products as well as improvements and enhancementsenhancing the reliability, ease of use and installation and support of those products. At the same time, we are continuing to enhance the capabilities of our Secure Web Gateway products by adding new features and strengthening existing products. Research and development expenses were $16.5 million, $12.0 million and $11.9 million for the fiscal years ended April 30, 2005, 2004 and 2003, respectively.

features.

Our research and development team consists of engineers with extensive technical backgrounds in operating systems, algorithms, computer science, streaming media and network engineering.relevant disciplines. We believe that the experience and capabilities of our research and development professionals represents ais one of our significant competitive advantage for us.advantages. We also work closely with our customers in developingto understand their business needs and enhancingto focus our products. Our current researchdevelopment of new products and development efforts are primarily focused on enhancing the capabilities of our current proxy appliances by adding new features and strengthening existing features.product enhancements to better meet customer needs.

The market for proxy appliances is evolving rapidly. In order to stay competitive,While we must make significant investments in research and development based on what we perceive to be the direction of the market. We currently spend a significant amount of our resources on research and development projects and plan to continue to do so for the foreseeable future. Current research and development projects will enhance our position in the marketplace only if the proxy appliance market matures as we anticipate. Failure on our part to anticipate the direction of the market and develop products that meet those emerging needs will seriously impair our business, financial condition, and results of operations.

We expect that most of the enhancements to our existing and future products will be accomplished by internal development. However,development, we currently license somecertain technologies from third parties and will continue to evaluate externally developed solutionsproducts and technology for integration into our products. As well, we have acquired third party businesses, technologies and products to expand our capabilities and market, and may continue to do so in the future.

Research and development expense was $51.6 million, $39.9 million, and $26.8 million for the fiscal years 2008, 2007, and 2006, respectively, including stock-based compensation expense attributable to our research and development organization of $5.0 million, $3.3 million, and $0.9 million, respectively.

Manufacturing

We currently outsource to third parties, the manufacturing of our ProxySG products, exceptappliances and principally use standard parts and components that we perform final assembly and testing ourselves for our ProxySG 800.are available from multiple vendors. This approach allows us to reduce our investment in manufacturing capitalequipment, facilities, and inventory, and to take advantage of the expertise of our vendors. We rely primarily on two original design manufacturers and one business service process partner to assist in the design of our products and to manufacture and test our products. We have contracted with MiTAC International Corporation to design and manufacture our current product offerings and have contracted with Synnex Corporation to do final assembly and testing of those products. We also have contracted with Inventec Enterprise System Corporation to design and manufacture certain new high performance products that are not yet commercially available. All of these agreements are non-exclusive.

Our internal manufacturing operations consist primarily of project management, prototype development, materials and production planning, quality and reliability assurance and procurement and some final assembly, testing and quality control. Our standard parts and components are generally available from more than one vendor, whileas required in support of our custom parts are usually single sourced. We typically obtain these components through purchase orders and currently do not have contractual relationships or guaranteed supply arrangements with these suppliers. If one of these vendors ceased to provide us with necessary parts and components, we would likely encounter delays in product production as we make the transition to another vendor, which could seriously harm our business. Furthermore, if actual orders do not match our forecasts (as we have experienced in the past), we may have excess or insufficient inventory of some materials and components or we could incur cancellation charges or penalties, which would increase our costs or prevent or delay product shipments and could seriously harm our business.

outsourced manufacturing partners.

Backlog

We typically ship products shortly after receipt of an order. Our backlog is comprised of amounts for orders that we have accepted, but not shipped, and deferred revenue and accepted product orders which have not shipped.revenue. Deferred revenue is derivedincludes revenue from products whichthat have shipped to distributors, but have not yet shipped to end customers,customers; product shipments whichthat do not yet qualify as revenue in accordance with our revenue recognition policy,policy; and the unearned portion of service and maintenance contracts. AggregateOur backlog was approximately $92.8 million at April 30, 2005 and2008 as compared to $71.9 million at April 30, 2004 was approximately $25.42007, which represented an increase of $20. 9 million. The deferred revenue portion of our backlog increased by $33.8 million, and $15.4primarily as a result of an increase in new service contracts sold with our appliances, as well as the renewal of service contracts, while our backlog of orders accepted, but not shipped, declined by $12.9 million respectively. Wedue primarily to a decline in the growth rate of our North American business in the fourth quarter of fiscal 2008. However, due to occasional customer changes in delivery schedules or cancellation of orders prior to shipment (which can be made without significant penalty), we do not believe this backlog to be firm or that backlog as of any particular date is indicativea reliable indicator of future results.

A significant portion of our quarterly sales typically occurs during the last month of the quarter, which we believe reflects customer buying patterns of products similar to ours and other products in the technology industry generally.

Competition

We are a market leader in the Secure Internet Web market, although we may face increased competition in this market given recent consolidations. Our principal competitors in this market are Secure Computing Corporation, through its acquisitions of CyberGuard Corp. and CipherTrust, Inc.; and Websense, Inc., through its acquisition of PortAuthority Technologies, Inc. and SurfControl PLC; and Cisco Systems, Inc. through its acquisition of Ironport.

TheWe commercially released our first WAN Application Delivery product in May 2006. This is a market for proxy appliancesthat is intensely competitive, and it is evolving and subject to rapid technological change. Primary competitiveWe expect competition to increase in the future. Our principal competitors in this market are Riverbed Technology, Inc., Juniper Networks, Inc., Cisco Systems, Inc. and Citrix Systems, Inc. through its acquisition of Orbital Data Corp. In addition, we expect additional competition from other established and emerging companies as the WAN Application Delivery market continues to develop and expand, and as consolidation occurs.

The primary factors that have typically affectedconsidered by our marketcustomers in selecting an appropriate solution include product characteristics such as reliability, feature sets, scalability and ease of use, as well as factors such as price and the availability and quality of customer support.

Intellectual Property and Other Proprietary Rights

Our success is heavily dependent on our ability to create proprietary technology and to protect and enforce our intellectual property rights in that technology, as well as our ability to defend against adverse claims of third parties with respect to our technology and intellectual property. To protect our proprietary technology, we rely primarily on a combination of contractual provisions and confidentiality procedures to protect trade secrets, copyright and trademark laws, and patents. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate and unauthorized third parties, including our competitors, may independently develop similar or superior technology, duplicate or reverse engineer aspects of our products, or design around our patented technology or other intellectual property.

As of April 30, 2008, we had 18 issued U.S. patents, 34 pending U.S. patent applications (provisional and non-provisional), and 1 pending foreign patent application. There can be no assurance that any of our pending patent applications will issue or that the patent examination process will not result in our narrowing the claims applied for. Furthermore, there can be no assurance that we will be able to detect any infringement of our existing or future patents (if any); or, if infringement is detected, that our patents will be enforceable or that any damages awarded to us will be sufficient to adequately compensate us.

There can be no assurance or guarantee that any products, services or technologies that we are presently developing, or will develop in the future, will result in intellectual property that is protectable under law, whether in the United States or a foreign jurisdiction, that such intellectual property will produce competitive advantage for us, or that the intellectual property of competitors will not restrict our freedom to operate or put us at a competitive disadvantage.

From time to time we may and do receive notices from third parties alleging infringement of patents or other intellectual property rights or offering licenses under such intellectual property rights. While it is our policy to respect the legitimate intellectual property rights of others, we may defend against such claims or seek to negotiate licenses on commercially reasonable terms or otherwise settle such claims, where appropriate. Nevertheless, there has been a substantial amount of litigation over intellectual property rights in our industry and we expect this to continue. Hence, third parties may claim that we, or our current or potential future products, infringe their intellectual property rights, and any such claims, whether with or without merit, could be time-consuming, result in costly litigation, result in the assessment of damages, result in management distraction, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

Employees

As of April 30, 2008, we had a total of 1,033 employees, comprised of 351 in sales, 281 in research and development, 186 in customer support, 124 in general and administrative, 44 in manufacturing and 47 in marketing. Of these employees, 754 were located in North America and 279 were located in various other international locations. None of our employees are represented by collective bargaining agreements, nor have we experienced any work stoppages. We consider our relations with our employees to be good.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our Investor Relations Web site at www.bluecoat.com as soon as reasonably practicable after we file such material with the SEC. The other information posted on our Web site is not incorporated into this Annual Report.

Item 1A.Risk Factors

FACTORS AFFECTING FUTURE OPERATING RESULTS

In addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should be carefully considered by investors before making an investment decision. Our business, financial condition and results of operations could be seriously harmed as a consequence of any of the following risks and uncertainties. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem less significant also may impair our business, financial condition and results of operations, or result in a decline in the trading price of our common stock.

Our quarterly operating results fluctuate significantly and our ability to forecast our quarterly operating results is limited, so our operating results may not meet our guidance or third party expectations.

Our net revenue and operating results have in the past, and may in the future, vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control. These factors limit our ability to accurately predict our operating results on a quarterly basis, and include factors discussed elsewhere in this “Risk Factors” section together with the following:

A high percentage of our expenses, including those related to manufacturing overhead, technical support, research and development, sales and marketing, and general and administrative functions, are essentially fixed in the short term. As a result, if our net revenue is less than forecast, such expenses cannot effectively be reduced and our quarterly operating results will be adversely affected.

We believe that quarter-to-quarter comparisons of our operating results should not necessarily be relied upon as indicators of future performance. In the past our quarterly results have on occasion failed to meet our quarterly guidance and the expectations of public market analysts or investors, and it is likely that this will occur in the future. If this occurs our stock price likely will decline, and may decline significantly. Such a decline may also occur even when we meet our guidance but our results or future guidance fail to meet third party expectations.

We must anticipate market needs, and develop and introduce new products and enhance existing products to rapidly meet those needs, or we will lose market share and our operating results will be adversely affected.

To maintain our competitive position in a market characterized by rapid rates of technological advancement, we must correctly anticipate market requirements and invest our research and development resources to meet those requirements. The introduction of new products by others, 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. Our future success will depend in part upon our ability to:

There is no guarantee that we will accurately predict the direction in which the Secure Web Gateway and WAN Application Delivery markets will evolve. Failure on our part to anticipate the direction of our markets and to develop products and enhancements that meet the needs of those markets will significantly impair our business, financial condition and results of operations.

The WAN Applications Delivery market is intensely competitive and certain of our competitors have greater financial, technical, sales and marketing resources, and may take actions that could weaken our competitive position or reduce our net revenue.

We have increasingly invested in and focused on the WAN Application Delivery market. This market is intensely competitive, and the intensity of this competition is expected to increase in the future. IncreasedSuch increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any one of which could seriously harm our business.business, financial condition and operating results. We may not be able to compete successfully against current or future competitors and we cannot be certain that competitive pressures we face will not seriously harm our business. Our competitors vary in size and in the scope and breadth of the products and services they offer. We encounter competition from a variety of companies, including Cisco Systems, Network Appliance, Microsoft and others. In addition, we expect additionalthat there will be competition from other established and emerging companies as the market for proxy appliancesWAN Application Delivery products continues to develop and expand.

Many of our current and potential competitors have longer operating histories,histories; significantly greater financial, technical, sales and marketing and other resources,resources; significantly greater name recognitionrecognition; and a larger installed base of customers than we do. In addition, many of ourSuch competitors also may have well-established relationships with our current and potential customers and have extensive knowledge of our industry. As a result, ourthose competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, marketing, promotion and sale of their products than we can. Current and potential competitors have establishedThey also may make strategic acquisitions or may establish cooperative relationships among themselves or with third partiesother providers, thereby increasing their ability to increase the market acceptanceprovide a broader suite of their products. In addition, ourproducts, and potentially causing customers to defer purchasing decisions. Also, larger competitors may be able to replicateintegrate some of the functionality of our products into existing infrastructure products or to bundle WAN Application Delivery products with other product offerings. Finally, they may engage in aggressive pricing strategies or discounting. Any of the foregoing may limit our ability to compete effectively in the market and adversely affect our business, financial condition and operating results.

Our acquisitions may not provide the anticipated benefits and may disrupt our existing business.

In June of 2008, we completed our acquisition of Packeteer, Inc. (“Packeteer”). We have also acquired other businesses in the past, including our acquisition of Permeo Technologies, Inc. (“Permeo”) and our acquisition of certain assets of the NetCache business from Network Appliance. It is likely we will acquire additional businesses or assets in the future. There is no guaranty that such acquisitions will yield the benefits we anticipate. The success of any acquisition is impacted by a number of factors, and may be subject to the following risks:

Acquisitions may also result in risks to our existing business, including:

The occurrence of any of the above risks could seriously harm our business.

Economic uncertainty and adverse macroeconomic conditions may harm our business.

Our revenues and margins are dependent on various economic factors, including rates of inflation, currency fluctuations, energy costs, levels of consumer sentiment, and other macroeconomic factors which may impact levels of business spending. These conditions may affect corporate spending for IT products and services in specific geographies or more attractive offersbroadly. A decrease in corporate spending or demand for our products and services could result in:

In addition, a significant percentage of our operating expenses are fixed in nature and potential employeesbased on forecasted revenue trends, which could limit our ability to mitigate the negative impact on margins in the short term.

Recent adverse economic and strategic partners, more quickly developmarket conditions in the United States have resulted in delays in closing customer orders in that region, and further uncertainty or deterioration in these conditions could materially impact our business, operating results and financial condition.

Our internal investments in research and development may not yield the anticipated benefits.

The success of our business is predicated on our ability to create new products and technologies and to anticipate future market requirements and applicable industry standards. The process of developing new technologies is time consuming, complex and uncertain, and requires commitment of significant resources well in advance of being able to fully determine market requirements and industry standards. Furthermore, we may not be able to timely execute new product or technical initiatives because of errors in product planning or timing, technical difficulties that we cannot timely resolve, or a lack of appropriate resources. This could result in competitors bringing products to market before we do and a consequent decrease in our market share and net revenue. Our inability to timely and cost-effectively introduce new products and product enhancements, or the failure of these new products or enhancements to achieve market acceptance and comply with industry standards, could seriously harm our business, financial condition and operating results. Additionally, our introduction of new products and product enhancements could result in the obsolescence of previously purchased or committed inventory, potentially requiring the recording of material charges, which would reduce our net income.

Unless we develop better market awareness of our company and our products, our net revenue may not grow as anticipated.

We are a relatively new entrant in the WAN Application Delivery market and, in our opinion, have not yet established sufficient market awareness of our participation in that market. Market awareness of our capabilities and products is essential to our continued growth and our success in all of our markets, particularly in the WAN Application Delivery market. If our advertising and marketing programs are not successful in creating market awareness of our company and products, our business, financial condition and results of operations will be adversely affected, and we will not be able to achieve sustained growth.

If the market for WAN Application Delivery products does not develop as we anticipate, we may not be able to achieve an acceptable increase of our net revenue, and the price of our stock may decline.

We have increasingly invested in and focused on the WAN Application Delivery market. However, that is a new and rapidly evolving market. If this market fails to grow as we anticipate, or grows more slowly than we anticipate, we may not be able to sell as many of our WAN Application Delivery products as we currently project, which would result in a decline in our anticipated net revenue and could result in a decline in our stock price.

Third party product developments may impact the value of our products to users.

Our WAN Application Delivery appliances are purchased to secure, accelerate and control the delivery of third party software applications and content. It is possible that the providers of software applications and operating systems which operate with the software applications and content accelerated by our appliances may

enhance the performance of their software, such that further acceleration of affected applications and content is not necessary. This would make our products less valuable to users of that software. In addition, manufacturers of hardware or software may incorporate functionality similar to that offered by our WAN Application Delivery or Secure Web Gateway products directly into their products, which would make our products less valuable to users of those products. Any of the foregoing may limit our ability to sell our products and adversely affect our business, financial condition and operating results.

Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and material differences between forecasted and actual tax rates could have a material impact on our results of operations.

Forecasts of our income tax position and effective tax rate are complex and subject to uncertainty because our income tax position for each year combines the effects of a mix of profits and losses earned by us and our subsidiaries in various tax jurisdictions with a broad range of income tax rates, as well as changes in the valuation of deferred tax assets and liabilities, the impact of various accounting rules and changes to these rules, the results of examinations by various tax authorities, and the impact of any acquisition, business combination or other reorganization or financing transaction. To forecast our global tax rate, we estimate our pre-tax profits and losses by jurisdiction and calculate our tax expense by jurisdiction. If the mix of profits and losses, our ability to use tax credits, or effective tax rates by jurisdiction is different than those estimated, our actual tax rate could be materially different than forecasted, which could have a material impact on our results of operations.

In addition, we may be subject to examination of our income tax returns by the Internal Revenue Service and other tax authorities. While we regularly assess the likelihood of adverse outcomes from such examinations and the adequacy of our provision for income taxes, there can be no assurance that such provision is sufficient and that a determination by a tax authority will not have an adverse effect on our results of operations.

We issued convertible notes and warrants to fund our acquisition of Packeteer which could impact our liquidity.

We issued warrants and zero coupon senior convertible notes in an aggregate principal amount of $80 million that mature in 2013, in order to acquire Packeteer. If these notes are not converted prior to maturity we will be required to repay the principal amount, and may not have funds available to do so. As well, the notes contain certain conditions of default and, should a default occur, the holders of the notes may be able to require early payment of the notes.

If we are unable to raise additional capital, our business could be harmed.

We believe that our available cash, cash equivalents and short term investments will enable us to meet our capital requirements for at least the next 12 months. However, if cash is required for unanticipated needs, we may need additional capital during that period. The development and marketing of new products, the investment in our sales and marketing efforts, and the integration of the Packeteer business will require a significant commitment of resources. If the market for our products develops at a slower pace than anticipated, we could be required to raise substantial additional capital. We cannot be certain that additional capital will be available to us on favorable terms, or at all. If we were unable to raise additional capital when required, our business could be seriously harmed.

We have a history of losses and profitability could be difficult to sustain.

While we have been profitable in certain quarters, we have not been able to maintain consistent profitability on a quarterly basis. Although we were profitable in all four quarters of fiscal 2008, we were not profitable in three of the four fiscal quarters in fiscal 2007, and may not be profitable on a quarterly or annual basis in the future. Our ability to achieve, sustain or increase profitability on a quarterly or annual basis will be affected by changes in our business and the demand for our products and services. We expect our operating expenses to

increase as we endeavor to grow revenue, and we anticipate that we will make investments in our business. Our results of operations will be harmed if our revenue does not increase at a rate commensurate with the rate of increase in our expenses. If our revenue is less than anticipated or if our operating expenses exceed our expectations or cannot be adjusted quickly and efficiently, we may continue to experience losses on a quarterly and annual basis.

We must attract, assimilate and retain key personnel on a cost-effective basis, or our ability to execute our business strategy and generate sales could be harmed.

We depend on key management, research and development, and sales personnel, and our ability to attract and retain highly qualified and skilled personnel on an ongoing basis. Our success will depend in part on our ability to recruit and retain key personnel.

We have seen an increase in competition with respect to cash and equity compensation offered by employers in the Silicon Valley, and in other areas where we have operations, that may make it more difficult to attract and retain highly qualified employees. The majority of our employees, including our senior management personnel, are employed on an “at-will” basis, which may make it easier for key employees to leave us and move to new employment. Our inability to timely hire replacement or additional employees may impact our operations, since new hires frequently require extensive training before they achieve desired levels of productivity. This may affect our ability to grow our net revenue. In particular, new sales personnel typically take a number of months to achieve acceptable productivity and generate the expected level of sales.

We rely significantly on third party sales channel partners to sell our products.

A significant amount of our revenue is generated through sales by our sales channel partners, which include distributors and resellers. During fiscal 2008, approximately 96.4% of our revenue was generated through our indirect sales channels. We depend upon these partners to generate sales opportunities and to independently manage the sales process for opportunities with which they are involved. In order to increase our net revenue, we will need to maintain our existing sales channel partners and add new sales channel partners and effectively train and integrate them with our sales process. If we are unsuccessful in those efforts, our business will not grow and our operating results will be adversely affected.

Our products are complex, and there can be no assurance that the sales training programs that are offered to our sales channel partners will be effective. In addition, our sales channel partners may be unsuccessful in marketing, selling and supporting our products and services for reasons unrelated to training. Most of our sales channel partners do not have minimum purchase or bundle proxy appliancesresale requirements, and may cease selling our products at any time. They may also market, sell and support products and services that are competitive with ours, and may devote more resources to the marketing, sales and support of products competitive to ours. There is no assurance that we will retain these sales channel partners or that we will be able to secure additional or replacement sales channel partners in the future. The loss of one or more of our key sales channel partners in a mannergiven geographic area could harm our operating results within that area, as new sales channel partners typically require extensive training and take several months to achieve acceptable productivity.

We also depend on many of our sales channel partners to deliver first line service and support for our products. Any significant failure on their part to provide such service and support could impact customer satisfaction and future sales of our products. In addition, we recognize a portion of our revenue based on a sell-through model using information provided by our sales channel partners. If we are provided with inaccurate or untimely information, the amount, timing or accuracy of our reported net revenue could be affected.

If we are unable to establish fair value for any undelivered element of a customer order, revenue relating to the entire order may be deferred until the revenue recognition criteria for all elements of the customer order are met. This could lower our net revenue in one period and increase it in future periods, resulting in greater variability in net revenue and income period to period.

In the course of our sales efforts, we often enter into arrangements with our customers that require us to deliver a combination of different appliances, software products or services. We refer to each individual appliance, software product or service as an “element” of the overall arrangement with our customer. In some cases, these arrangements may require us to deliver particular elements in a future period. We do not recognize revenue on any element until it has been delivered. In addition, we do not recognize revenue on any delivered element until we can determine the fair value of all undelivered elements in the arrangement. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized at the earlier of when delivery of those elements occurs or when fair value can be determined. When the undelivered element for which we do not have a fair value is maintenance, revenue for the entire arrangement is recognized ratably over the maintenance period. As a result, a portion of the revenue we recognize in each quarter could relate to previously delivered products. Consequently, an increase in the number of multiple element arrangements with undelivered elements for which we cannot determine the fair value would negatively impact our net revenue in the current period, while increasing net revenue in future periods. In addition, we may not adjust our cost structure commensurately with the reduction in net revenue recognized in the current period, which would reduce our income for the current period. If there is a significant increase in sales related to multiple element arrangements with undelivered elements for which we cannot determine the fair value, we may not meet current revenue expectations since revenue associated with such arrangements will be recognized in future periods.

We are dependent on original design manufacturers and contract manufacturers to design and manufacture our products, and changes to those relationships, expected or unexpected, may result in delays or disruptions that could cause us to lose revenue and damage our customer relationships.

We depend primarily on original design manufacturers (each of whom is a third party original design manufacturer for numerous companies) to co-design and co-develop the hardware platform for our products. We also depend on independent contract manufacturers (each of whom is a third party manufacturer for numerous companies) to manufacture our products and the assemblies and components contained in our products. These manufacturers are not committed to design or manufacture our products on a long-term basis in any specific quantity or at any specific price. Also, from time to time, we may be required to add new manufacturers or manufacturing sites to accommodate growth in orders or the addition of new products. It is time consuming and costly to qualify and implement new original design manufacturer and contract manufacturer relationships and sites, and such additions increase the complexity of our supply chain management. Our ability to ship products to our customers could be delayed if we fail to effectively manage our contract manufacturer relationships; if one or more of our design manufacturers does not meet our development schedules; if one or more of our contract manufacturers experiences delays, disruptions or quality control problems in manufacturing our products; or if we are required to add or replace design manufacturers or contract manufacturers or sites. In addition, these manufacturers have access to certain of our critical intellectual property and could wrongly disclose or misappropriate such property. Moreover, an increasing portion of our manufacturing is performed in China and Taiwan and other countries and is, therefore, subject to risks associated with doing business in those countries. Each of these factors could adversely affect our business, financial condition and operating results.

If we fail to accurately predict our manufacturing requirements and manage our supply chain we could incur additional costs or experience manufacturing delays that could harm our business.

We provide forecasts of our requirements to our contract manufacturers on a rolling 12-month basis. If our forecast exceeds our actual requirements, the contract manufacturers may assess charges or we may have liability for excess inventory, each of which could negatively affect our gross margin. If our forecast is less than our

actual requirements, the contract manufacturers may have insufficient time and components to produce our product requirements, which could delay or interrupt manufacturing of our products and result in delays in shipments, customer dissatisfaction, and deferral or loss of revenue. As well, we may be required to purchase sufficient inventory to satisfy our future needs in situations where a component is being discontinued. If we fail to accurately predict our requirements, we may become liable for excess inventory that we cannot. Accordingly,and our contract manufacturers cannot use or we may be unable to fulfill customer orders. Any of the foregoing could adversely affect our business, financial condition and operating results.

We depend on single and, in some cases, sole and limited source suppliers for several key components, so our business is susceptible to shortages, unavailability, or price fluctuations.

We have limited sources of supply for certain key components of our products, which exposes us to the risk of component shortages or unavailability. In addition, we are unable to rapidly change quantities and delivery schedules because the procurement of certain components is subject to lengthy lead times and the qualification of additional or alternate sources is time consuming, costly and difficult. In the event our business growth exceeds our projections, or required components are otherwise in scarce supply, we may be subject to shortages, delays or unavailability of such components, or potential price increases, which may be substantial. If we are unable to secure sufficient components at reasonable prices in order to timely build our products, customer shipments may be delayed. This would adversely affect both our relationships with those customers and our net revenue. Alternatively, we may pay increased prices, which would impact our gross margin. Any of the foregoing could adversely affect our business, financial condition and operating results.

Our gross margin is affected by a number of factors, and may be below our expectations or the expectations of investors and analysts, which could cause a decline in our stock price.

Our gross margin percentage has been and will continue to be affected by a variety of factors, including:

For example, we have in the past entered into large revenue transactions with certain customers that, because of the product mix and volume discount, have decreased our gross margin percentage. We may, in the future, enter into similar transactions. As well, our lower end appliances have lower margins than our higher end appliances, and if our customers submit a large order or orders for our lower end appliances, the combination of lower margins and the volume discount provided to those customers would negatively impact our gross margin percentage.

Even if we achieve our net revenue and operating expense objectives, our net income and operating results may be below our expectations and the expectations of investors and analysts if our gross margins are below expectations. This could cause our stock price to decline.

Our international operations expose us to risks.

We currently have operations in a number of foreign countries. In fiscal 2008, 53.2% of our total net revenue was derived from customers outside of North America; thus, our business is substantially dependent on economic conditions and IT spending in markets outside North America. The expansion of our international operations and entry into additional international markets requires significant management attention and financial resources, and subjects us to certain inherent risks including:

To the extent we are unable to effectively manage our international operations and these risks, our international sales may be adversely affected, we may incur additional and unanticipated costs, and we may be subject to litigation or regulatory action. As a consequence, our business, financial condition and operating results could be seriously harmed.

The matters relating to our historical stock granting practices and the restatement of our consolidated financial statements in March 2007 have required us to incur substantial expenses, have resulted in litigation and regulatory inquiries, and may result in additional litigation, regulatory proceedings and governmental enforcement actions.

Our historical stock granting practices and the consequent restatement of our financial statements have exposed us to greater risks associated with litigation, regulatory and government enforcement actions. On

March 28, 2007, in our Form 10-K for the year ended April 30, 2006, we restated our consolidated financial statements as of April 30, 2005, and for the years ended April 30, 2005 and 2004, to correctly account for stock option grants for which we had determined that the measurement date for accounting purposes was different from the stated grant date (the “March 2007 Restatement”). In addition, we also restated our selected consolidated financial data as of and for the years ended April 30, 2005, 2004, 2003 and 2002, and the unaudited quarterly financial data for each of the quarters in the years ended April 30, 2006 and 2005, with the exception of the fourth quarter of fiscal 2006 (which had not then been filed). For more information on these matters, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Background of the Stock Option Investigation, Findings, Restatement of Consolidated Financial Statements, Remedial Measures and Related Proceedings,” and Item 9A, “Controls and Procedures” in our Annual Report on Form 10-K for the year ended April 30, 2006, and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Background of the Stock Option Investigation, Findings, Restatement of Consolidated Financial Statements, Remedial Measures and Related Proceedings,” and Item 4, “Controls and Procedures,” on Form 10-Q for the quarter ended January 31, 2007, each of which was filed with the SEC on March 28, 2007.

The matters addressed in the March 2007 Restatement have exposed us to greater risks associated with litigation, regulatory proceedings and government enforcement actions. As described in Note 10 of Notes to Consolidated Financial Statements, multiple derivative complaints have been filed in state and federal courts against our directors and certain of our executive officers pertaining to allegations relating to stock option grants, and certain proceedings with respect to such matters are ongoing at the SEC and the U.S. Attorney’s Office for the Northern District of California. We also may become the subject of, or otherwise be required to incur legal fees and costs in connection with, additional private litigation, regulatory proceedings, or government enforcement actions in connection with the March 2007 Restatement. No assurance can be given regarding the outcomes of such activities or that such outcomes will be consistent with the findings of our Special Committee reported in our Annual Report on Form 10-K for the year ended April 30, 2006. The resolution of these matters has been, and will continue to be, time consuming and expensive, and will distract management from the conduct of our business. Our available directors’ and officers’ liability insurance may not be sufficient to cover our legal expenses or those of persons we are obligated to indemnify, and may not cover all items for which we must procure representation or for which we are obligated to provide indemnification. Furthermore, if we are subject to adverse findings in litigation, regulatory proceedings or government enforcement actions, we could be required to pay damages or penalties or have other remedies imposed, which could harm our business, financial condition, results of operations and cash flows. In addition, the March 2007 Restatement and the related litigation and regulatory proceedings, and any negative outcome that may occur from them, could impact our relationships with customers and our ability to generate future net revenue.

In fiscal 2008, we continued to incur substantial expenses for legal, accounting, tax and other professional services related to the matters addressed above. In addition, we incurred expenses in connection with our resolution of issues related to the March 2007 Restatement that affected our international and domestic employees, including payment of taxes due under Internal Revenue Code Section 409A.

We may not be able to successfully manage the growth of our business if we are unable to improve our internal systems, processes and controls.

Our growth, as well as recent regulatory requirements and changes in financial standards, has placed increased demands on our management and our infrastructure. The acquisition of Packeteer, or any other acquisitions we may make, also will place increased demands on us. We need to continue to improve our internal systems, processes and controls to effectively manage our operations and growth, including our international growth into new geographies. We may not be able to successfully implement improvements to these systems, processes and controls in a timely or efficient manner, and we may discover deficiencies in existing systems, processes and controls. Our failure to improve our systems, processes and controls may result in our inability to manage the growth of our business and to accurately forecast our revenue, expenses and earnings, which could adversely affect our business, financial condition, operating results and stock price.

We rely on technology that we license from third parties, including software that is integrated with internally developed software and used with our products.

We rely on technology that we license from third parties, including third party software and open source software that is used with certain of our products. If we are unable to continue to license any of this software on commercially reasonable terms, we will face delays in releases of our software or we will be required to delete this functionality from our software until equivalent technology can be licensed or developed and integrated into our current product. In addition, the inability to obtain certain licenses or other rights might require us to engage in litigation regarding these matters, which could have a material adverse effect on our financial condition. Any of these developments could seriously harm our business.

Undetected product errors, or failures found in new products may result in a loss of or delay in market acceptance of our products, which could cause us to incur significant costs, reduce our sales or result in litigation.

Our products are highly complex and may contain undetected operating errors when first introduced or as new versions or enhancements are released. Despite testing by us and by current and potential customers, errors may not be found in new products or new versions until after commencement of commercial shipments, resulting in customer dissatisfaction and loss of or delay in market acceptance and sales opportunities. This could materially adversely affect our operating results. These errors could also cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. In addition, all of our products operate on our internally developed operating system. As a result, any error in the operating system will affect all of our products. We have experienced minor errors in the past in connection with new products and enhancements to existing products. We expect that errors will be found from time to time in new or enhanced products after commencement of commercial shipments, which could seriously harm our business.

Since our end user customers install our appliances directly into their network infrastructures, any errors, defects or other performance problems with our products could negatively impact their networks or other Internet users, resulting in financial or other losses. While we typically seek by contract to limit our exposure to damages, it is possible that new competitorssuch limitations might not exist or alliances amongmight not be enforced in the event of a product liability claim. Moreover, a product liability claim brought against us, even if not successful, would likely be time-consuming and costly and could seriously harm our business reputation.

We are the target of various litigation and regulatory proceedings, which could result in substantial costs, divert management attention and resources, and have a material adverse effect on our results of operations or financial position.

As described in Note 10 of Notes to Consolidated Financial Statements, we are a party to various litigation, including class action litigation arising out of our initial public offering in 1999 and stockholder derivative actions arising out of allegedly misleading statements about our prospects made between February 20, 2004 and May 27, 2004, which actions were subsequently amended to seek relief on our behalf from certain defendants with respect to our historical stock option practices.

As described in Note 10 of Notes to Consolidated Financial Statements, we are the subject of inquiries and investigations conducted by the SEC and the U.S. Attorney’s Office for the Northern District of California.

Any material litigation and regulatory proceeding inevitably results in the diversion of our management’s attention and expenditure of our resources. As well, any negative result or publicity could have a material adverse effect on our results of operations and financial condition.

If the protection of our proprietary technology is inadequate, our competitors may emergegain access to our technology, and rapidly acquire significantour market share. We also expect that competition will increase as a result of industry consolidation.

Intellectual Property and Other Proprietary Rightsshare could decline.

We depend significantlyOur success is heavily dependent on our ability to developcreate proprietary technology and maintain the proprietary aspectsto protect and enforce our intellectual property rights in that technology, as well as our ability to defend against adverse claims of third parties with respect to our technology.technology and intellectual property. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, copyright and trademark laws, and patents. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate and unauthorized third parties, including our competitors, may independently develop similar or superior technology, duplicate or reverse engineer aspects of our products, or design around patents that may be issued to usour patented technology or our other intellectual property.

We presently have severalAs of April 30, 2008, we had 18 issued U.S. patents, and34 pending U.S. patent applications. We cannot assure youapplications (provisional and non-provisional), and 1 pending foreign patent application.There can be no assurance that any of our pending patent applications will issue or that the patent examination process will not result in our narrowing the claims applied for. Furthermore, there can be no assurance that we will be able to detect any infringement of our existing or future patents (if any) or, if infringement is detected, that our patents issued will be enforceable or that any damages awarded to us will be sufficient to adequately compensate us.

There can be no assurance or guarantee that any products, services or technologies that we are presently developing, or will develop in the future, will result in intellectual property that is protectablesubject to legal protection under law, whether inthe laws of the United States or a foreign jurisdiction and that this intellectual property will produceproduces a competitive advantage for us, orus.

Third parties could assert that theour products infringe their intellectual property of competitors will not restrict our freedom to operate or put us at a competitive disadvantage.rights.

There has been a substantial amount of litigationThird parties have in the technology industry regarding intellectual property rightspast and we recently settled a lawsuit, which alleged infringement of certain United States patents by us (See Item 8, Note 11 “Litigation” ofmay in the consolidated financial statements included in this Annual Report on Form 10-K). Third parties mayfuture claim that we, or our current or potential future products infringe their intellectual property.property rights, and these claims, even if without merit, could harm our business by increasing our costs, reducing our net revenue or by creating customer concerns that result in reduced sales. This is particularly true in the patent area, as an increasing number of U.S. patents covering computer networking and Internet technology have been issued in recent years. Patent owners, including those that do not commercially manufacture or sell products, may claim that one or more of our products infringes a patent they own. For example, on or about April 18, 2008, Realtime Data, LLC d/b/a IXO filed a patent infringement lawsuit against Packeteer, Inc., a company we acquired on June 6, 2008, and subsequently amended the complaint and named us as a defendant on June 20, 2008, (see Note 10 in the Consolidated Financial Statements).

We expect that companies in the Internet and networking industries will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

Acquisitions

On November 16, 2004, we completed our acquisition of Cerberian, Inc. (“Cerberian”). The purchasemarket price of approximately $19.3 million consistedour stock is volatile, and is likely to be volatile in the future.

Since our initial public offering, the market price of approximately 0.8 million shares of Blue Coatour common stock valued at $17.4 million, $0.4 millionhas experienced significant fluctuations and is likely to continue to fluctuate significantly. Such volatility in direct transaction costs, Cerberian options assumed by Blue Coat valued at approximately $0.5 million and the fair value of promissory notes from Cerberian to Blue Coat of $1.0 million.

On November 14, 2003, we completed the acquisition of Ositis Software, Inc. (“Ositis”). The purchasetrading price of $8.7 million consisted of 0.4 million shares of Blue Coat commonour stock valued at $6.7 million, $1.1 millioncan occur in cash, $0.9 million in direct transaction costs, and Ositis warrants assumed by the Company valued at $43,000.

Employees

As of April 30, 2005, we had a total of 336 employees, comprised of 116 in research and development, 115 in sales, 11 in marketing, 39 in customer support, 15 in manufacturing and 40 inresponse to general and administrative. Of these employees, 234 were located in North America and 102 located internationally. None of our employees are represented by collective bargaining agreements, nor have we experienced any work stoppages. We consider our relations with our employees to be good.

Our future operating results depend significantly upon the continued service of our senior management, and key technical and sales personnel, most of who are not bound by an employment agreement. Competition for these personnel is intense, and we may not be able to retain themmarket conditions, changes in the future. Our future success also depends uponIT or technology market generally or changes in the specific markets in which we operate, and cause an increase or decline in our continuing abilitystock price without regard to attract and retain highly qualified individuals. We may experience difficulties managing our financial and operating performance if we are unable to attract and retain qualified personnel.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our Investor Relations Web site at www.bluecoat.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.performance. The information posted on our Web site is not incorporated into this Annual Report.

FACTORS AFFECTING FUTURE OPERATING RESULTS

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, including statements about our future plans, objectives, intentions and expectations. Many factors, including those described below, could cause actual results to differ materially from those discussed in these forward-looking statements.

Our business, financial condition and results of operations could be seriously harmed by any of the following risks. In addition, the tradingmarket price of our common stock could decline duequickly and significantly if we

fail to any of these risks.

Because we expectachieve our sales to fluctuate and our costs are relatively fixed in the short term, our ability to forecast our quarterly operating results is limited, andguidance or if our quarterly operating results are belowperformance fails to meet the expectationsexpectation of public market analysts or investors, theinvestors.

The market price of our common stock will likely decline.may fluctuate significantly in response to the following factors, among others:

A high percentagebe brought against a company after periods of our expenses, including those related to manufacturing overhead, technical support, research and development, sales and marketing, general and administrative functions, amortization of intangible assets and amortization of deferred compensation, are essentially fixedvolatility in the short term. Asmarket price of a company’s stock, and we have been subject to such litigation in the past. Such actions could result if our net sales are less than forecasted, our quarterly operating results are likely to be seriously harmedin management distraction and expense and, further, result in a decline in our stock price would likely decline.

price.

If we failWe are subject to create additional sales through our sales channel partners, our business will be seriously harmed.

A significant amount of our revenue is generated through sales by our sales channel partners, which include distributors, resellersgovernmental export and system integrators. During fiscal 2005, approximately 93.0% of our revenues were

generated through our indirect sales channels. We increasingly depend upon these partners to generate sales opportunities and to independently manage the entire sales process. In order to continue to increase our revenue, we will need to maintain our existing sales channel partners and add new sales channel partners. If we cannot do so, our business will not grow and our operating results will be adversely affected.

We provide our sales channel partners with specific programs to assist them in selling our products, but there can be no assuranceimport controls that these programs will be effective. In addition, our sales channel partners may be unsuccessful in marketing, selling and supporting our products and services, may also market, sell and support products and services that are competitive with ours, may devote more resources to the marketing, sales and support of products competitive to ours, or may cease selling our products and services altogether. We cannot assure you that we will retain these indirect channel partners or that we will be able to secure 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 through them could harm our operating results. Any new sales channel partner will require extensive training and typically take several months to achieve productivity. Many of our sales channel partners do not have minimum purchase or resale requirements and carry products that are competitive with our products. If we fail to manage existing sales channels, our business will be seriously harmed.

In addition, a limited number of sales channel partners have accounted for a large part of our revenue to date. For example, one of our distributors accounted for 15.9%, 24.1% and 19.0% of our net sales during the fiscal year ended April 30, 2005, 2004 and 2003, respectively. If this distributor, or any of our other large distributors, individually or in the aggregate, do not create additional sales, or fail to maintain their current levels of marketing, sales and support of our products and services, our operating results could be adversely affected. Since 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 partners or unexpected returns from these indirect channel partners could harm our business.

If we are unable to establish fair value for any undelivered portion of a customer order, revenue relating to the entire order will be deferred until the revenue recognition criteria for all portions of the customer order are met. This could lower our net revenue in one period and increase it in future periods resulting in greater variability in net revenue and earnings period to period.

In the course of our selling efforts, we often enter into arrangements with our customers that requiresubject us to deliver a combination of different appliances, software productsliability or services. We refer to each individual appliance, software product or service as an “element” of the overall arrangement with our customer. In some cases, these arrangements require us to deliver particular elements in a future period. We do not recognize revenue on any undelivered elements until we have fair value for the undelivered elements or such elements have been delivered to our customer. In the event we are unable to determine the fair value of any undelivered elements, we defer the revenue from the entire arrangement rather than just the undelivered elements. As a result, a portion of the revenue we recognize in each quarter could relate to previously delivered products. As such, an increase in the number of multiple element arrangements for which we cannot determine the fair value of any undelivered elements would negatively impact our net revenues in the current period while increasing net revenues in future periods. In addition, we may be unable to timely adjust our cost structure to reflect this reduction in net revenue recognized in the current period which could reduce our earnings for the current period. In addition, if sales related to multiple element arrangements for which we cannot determine the fair value of any undelivered elements increase significantly, sequential growth in our net revenue will decline since revenue associated with such arrangement will be recognized in future periods.

Because we depend on several third-party manufacturers to build our products, we are susceptible to manufacturing delays and sudden price increases, which could prevent us from shipping customer orders on time, if at all, and may result in the loss of sales and customers.

We currently purchase base assemblies or final assemblies for all of our current appliances. Our reliance on our third-party manufacturers reduces our control over the manufacturing process, exposing us to risks, including

reduced control over quality assurance, product costs and product supply. Any manufacturing disruption by our third-party manufacturers could impair our ability to fulfill orders. We also rely on several other third-party manufacturerscompete in international markets.

Our products are subject to build portions of our products. If we or our suppliers are unable to manage the relationships with these third-party manufacturers effectively, or if these third-party manufacturers experience delays, disruptions, capacity constraints or quality control problems in their manufacturing operations, or fail to meet our future requirements for timely delivery, our ability to ship products to our customers could be impaired and our business would be seriously harmed.

These manufacturers fulfill our supply requirements on the basis of individual purchase orders or agreements with us. Accordingly, these third-party manufacturers are not obligated to continue to fulfill our supply requirements, and the prices we are charged for these components could be increased on short notice. If there is any interruption in the operations of any one of these third-party manufacturers, or if we are required to change third-party manufacturers, this would adversely affect our ability to meet our scheduled product deliveries to our customers, which could cause the loss of existing or potential customers, or could increase our costs, which could adversely affect our gross margins.

In addition, the products that these third-party manufacturers build for us may not be sufficient in quality or in quantity to meet our needs. Our delivery requirements could be higher than the capacity of these third-party manufacturers, which would likely result in manufacturing delays, which could result in lost sales and the loss of existing and potential customers. We cannot be certain that these third-party manufacturers will be able to meet the technological or delivery requirements of our current products or any future products that we may develop and introduce. The inability of these third-party manufacturers in the future to provide us with adequate supplies of high-quality products, or the loss of any of our third-party manufacturers in the future, would cause a delay in our ability to fulfill customer orders while we attempt to obtain a replacement manufacturer. Delays associated with our attempting to replace or our inability to replace one of our third-party manufacturers would seriously harm our business by increasing our costs and affecting our gross margins.

We have no long-term contracts or arrangements with any of our third-party manufacturers that guarantee product availability, the continuation of particular payment terms or the extension of credit limits. We have experienced in the past,U.S. export controls and may experience inbe exported outside the future, problemsU.S. only with our third-party manufacturers, such as inferior quality, insufficient quantities and late deliverythe required level of product. To date, these problems have not materially adversely affected us. We may not be able to obtain additional volume purchaseexport license or manufacturing arrangements on terms thatunder an export license exception, because 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. 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 third-party manufacturers. We may experience difficulty in locating and qualifying suitable manufacturing candidates capable of satisfying our product specifications or quantity requirements.

Because some of the key components in our products come from limited sources of supply, we are susceptible to supply shortages or supply changes, which could disrupt or delay our scheduled product deliveries to our customers and may result in the loss of sales and customers.

We currently purchase several key parts and components used in the manufacture of our products from limited sources of supply. The introduction by these suppliers of new versions of their hardware, particularly if not anticipated by us, could require us to expend significant resources to incorporate this new hardwareencryption technology into our products. In addition, if these suppliers were to discontinue productionvarious countries regulate the import of a necessary part or component, we would be required to expend significant resources in locatingcertain encryption technology and integrating replacement parts or components from another vendor. In particular, we currently purchase the microprocessor for our ProxySG 200 and Sypware Interceptor appliances from a supplier who has notified us of their intent to discontinue the manufacture of this product. As a result, we are redesigning these appliances to allow us to utilize microprocessors from other sources. Our inability to modify the design of both the ProxySG 200 and Spyware Interceptor appliances and obtain microprocessors from an alternate supplier before on-

hand inventories, and amounts expected to be received from existing purchase commitments, are depletedhave enacted laws that could have an adverse impact on our financial condition and results of operations.

In addition, our reliance on a limited number of suppliers involves several risks, including:

Qualifying additional suppliers for limited source components can be time-consuming and expensive. Any of these events would be disruptive to us and could seriously harm our business. Any interruption or delay in the supply of any of these parts or components, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would seriously harmlimit our ability to meetdistribute our scheduled product deliveriesproducts or could limit our customers’ ability to implement our customers.

We must maintain a competitive positionproducts in those countries. Changes in our products or changes in export and import regulations may create delays in the proxy appliance market by developing and introducing newintroduction of our products while enhancing existingin international markets, prevent our customers with international operations from deploying our products globally or, in some cases, prevent the export or import of our products to matchcertain countries altogether. Any change in export or import regulations or related legislation, shift in the needsenforcement or scope of our customersexisting regulations, or else we will lose market share and our operating results will be adversely affected.

To maintain our competitive positionchange in a market characterizedthe countries, persons or technologies targeted by rapid ratessuch regulations, could result in decreased use of technological advancement, we must continue to invest significant resources in research and development. We need to develop and introduce new products and enhancements to existing products on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of our customers. The introduction of new products by others, 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. Our future success will depend in part upon our ability to:

We intend to extend the offerings under our product families in the future, both by introducing new products and by introducing enhancements to our existing products. However, we may experience difficulties in doing so, and our inability to timely and cost-effectively introduce new products and product enhancements, or the failure of these new products or enhancements to achieve market acceptance, could seriously harm our business. The process of developing new technologies is complex and uncertain, and if we fail to accurately predict our target customers’ changing needs and emerging technological trends, our business could be harmed. This process requires commitment of significant resources to develop new products before knowing whether our investments will result in products the market will accept. Furthermore, we may not be able to execute on new product initiatives because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and loss of market share and sales.

In addition, life cyclespotential customers with international operations. Any decreased use of our products are difficultor limitation on our ability to predict because the market forexport or sell our products is new and evolving and characterized by rapid technological change, frequent enhancements to existing products and new

product introductions, changing customer needs and evolving industry standards. The emergence of new industry standards might require us to redesign our products. If our products are not in compliance with industry standards, our customers and potential customers will not purchase our products. There is no guarantee that we will accurately predict the direction in which the proxy appliance market will evolve. Failure on our part to anticipate the direction of the market and develop products that meet those emerging needs will significantly impairwould likely adversely affect our business, financial condition and results of operations.operating results.

We expect increased competition and, if we do not compete effectively, weOur operations could experiencebe significantly hindered by the occurrence of a loss in our market share and sales.natural disaster, terrorist attack or other catastrophic event.

The marketOur business operations are susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks and other events beyond our control. In addition, a substantial portion of our facilities, including our headquarters, are located in Northern California, an area susceptible to earthquakes. We do not carry earthquake insurance for proxy appliances is intensely competitive, highly fragmentedearthquake-related losses. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and characterized by changing technology and evolving standards. Our competitors may announce new products, services or enhancements to existing products that better meet the needs of customers. Increased competition may cause price reductions or a loss of market share, either of which could have a material adverse effect onsimilar disruptions from unauthorized tampering with our business, results of operations and financial condition. Primary competitive factors that have typically affected our market include product characteristics such as reliability, scalability and ease of use, as well as price and customer support. The intensity of competition is expected to increase in the future. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any one of which could seriously harm our business.computer systems. We may not be ablecarry sufficient business interruption insurance to compete successfully against current or future competitors and we cannot be certaincompensate us for losses that competitive pressures we face will not seriously harm our business.

Some of our competitors have greater financial, technical, sales, marketing and other resources than we do. In addition, acquisitions of or other strategic transactions by our competitors could weaken our competitive position or reduce our revenue.

Our competitors vary in size and in the scope and breadth of the products and services they offer. We encounter competition from a variety of companies, including Cisco Systems, Network Appliance, Microsoft, and various others. In addition, we expect additional competition from other established and emerging companies as the market for proxy appliances continues to develop and expand. Some of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than we do. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our industry. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, marketing, promotion and sale of their products than we can. The products of our competitors may have features and functionality that our products do not have. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the market acceptance of their products. In addition, our competitors may be able to replicate our products, make more attractive offers to existing and potential employees and strategic partners, develop new products or enhance existing products and services more quickly, or bundle proxy appliances in a manner that we cannot provide. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We also expect that competition will increaseoccur as a result of industry consolidation.

We have been informed of SEC investigations, which could result in substantial costs and divert management attention and resources.

The SEC has informed us of its investigation into trading in certain securities, including trading in our securities, prior to our public announcement on May 27, 2004 of our financial results for the fourth quarter and fiscal year 2004 (the “May 27, 2004 Announcement”). The investigation is captionedIn the Matter of Trading in Certain Securities, H0-9818. To date the SEC has not identified us or any of these events. To the extent that such events disrupt our directorsbusiness or executive officers as targets of its investigation, but has served subpoenas for information from us and for testimony from certain officers. We are cooperating with the investigation. The SEC subsequently informed us that we are the subject of a formal order of private investigation captionedIn the Matter of Blue Coat Systems, Inc., HO-10096. We believe that the SEC is investigating whether certain present or former officers, directors, employees, affiliates or others made intentional

or non-intentional selective disclosure of material nonpublic information, traded in our stock while in possession of such information, or communicated such information to others who thereafter traded in our stock. We are cooperating with the SEC. An unfavorable outcome in, or resolution of, this matter may be costly, result in damage toadversely impact our reputation, among our customers and investors, or a drop in the price of our common stock, or both.

We have a history of losses and profitabilitysuch events could be difficult to sustain.

Although we achieved profitability in the second half of the fiscal year ended April 30, 2004, we incurred losses in each quarter prior to the third quarter of fiscal 2004. Since the third quarter of fiscal 2004, we have only been marginally profitable in some quarters and our profitability has fallen in several quarters. We may not be able to maintain quarterly or annual profitability in the future. Our ability to sustain or increase profitability on a quarterly or annual basis will be affected by changes in our business and the demand for our products and services. We expect our operating expenses to increase as our business grows, and we anticipate that we will make investments in our business. As a result, our results of operations will be harmed if our sales do not increase at a rate commensurate with the rate of increase in our expenses. If our sales growth is less than anticipated or if operating expenditures exceed our expectations or cannot be adjusted accordingly, we may experience losses on a quarterly and annual basis.

We experienced an increase in demand in our third quarter of fiscal 2004, which did not continue into the following quarter, and this may happen again.

If we experience an increase in demand in any one quarter, investors or analysts could view this as an indication of a trend that may continue into the following quarter. If the trend does not continue, investor or analyst perceptions of our company may be adversely affected and could cause a decline in the market price of our stock. For example, we experienced an increase in demand in our third quarter of fiscal 2004. This increased level of demand did not continue into the fiscal fourth quarter. Our stock price increased significantly following the release of our third quarter fiscal 2004 financial results, but declined dramatically when the trend did not continue into the next several quarters. Accordingly, our stock price may vary significantly as our operating results continue to fluctuate from quarter to quarter.

Our sales may not grow because our proxy appliances only protect Web-based applications and content, and our target customers may not wish to purchase our network security device without protection for non-Web based applications and content. Any failure of this product to satisfy customer demands could harm our business.

Our proxy appliances are specially designed to secure only Web-based protocols, such as http, https, ftp and streaming. While we believe that the majority of traffic traveling over the networks of our target customers is Web-based, a significant amount of our target customers’ network traffic may not be Web-based. Our products do not protect non-Web protocols. If our target customers do not wish to purchase a security device that only handles network traffic that is Web protocol-based, our target customers may not purchase our products and our growth could be limited. We may not be successful in achieving market acceptance of any new products that we develop if they do not contain non-Web based applications and content.

The market for proxy appliance solutions is relatively new, unknown and evolving, and subject to rapid technological changes. If this market does not develop as we anticipate, our sales may not grow and may decline. We need to continue to develop market awareness of our company and our products.

Sales of our products depend on increased demand for proxy appliances. The market for proxy appliances is a new and rapidly evolving market. If the market for proxy appliances fails to grow as we anticipate, or grows more slowly than we anticipate, our business will be seriously harmed. In addition, our business will be harmed if the market for proxy appliances continues to be negatively impacted by uncertainty surrounding macroeconomic growth.

Market awareness of our products is essential to the growth and success of our company. One of our goals is to increasingly market and advertise our company and our products. If our advertising and marketing programs are not successful in creating market awareness of our company and products, our revenues and results of operations could be substantially impacted.

Our gross margin percentage may be below our expectations or the expectations of investors and analysts due to a variety of factors, which would adversely affect our operating results and could result in a decline in the market price of our common stock.

Our gross margin percentage has been and will continue to be affected by a variety of factors, including:

Factors that could cause demand to be different from our expectations can include changes in customer order patterns, including order cancellations, changes in the level of inventory, and changes in business and economic conditions. We might achieve our revenue and operating expense objectives, but fail to meet our net income objectives, which would cause our operating results to be below our expectations and the expectations of investors and analysts, which might cause our stock price to decline.

We rely on technology that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions.

We rely on technology that we license from third parties, including software that is used in our products to perform key functions. If we are unable to continue to license any of this software on commercially reasonable terms, we will face delays in releases of our software or we will be required to drop this functionality from our software until equivalent technology can be identified, licensed or developed, and integrated into our current product. In addition, the inability to obtain certain licenses or other rights might require us to engage in litigation regarding these matters, which could have a material adverse effect on our financial condition. Any of these delays could seriously harm our business.

We may not be able to generate a significant level of sales from the international markets in which we currently operate.

We expect international customers to continue to account for a significant percentage of net sales in the future, but we may fail to maintain or increase international market demand for our products. Also, because our international sales are currently denominated in United States dollars, an increase in the value of the United States dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in international markets, and this would decrease our international sales. Our ability to generate international sales depends on our ability to maintain our international operations (including efficient use of existing resources and effective channel management), and to recruit additional international resellers.

Our international operations are subject to certain inherent risks including:

To the extent we are unable to manage these risks effectively, our growth, if any, in international sales will be limited and our business could be seriously harmed.

Unpredictable macroeconomic conditions could adversely impact our existing and potential customers’ ability and willingness to purchase our products, which would cause a decline in our sales.

Although we saw sequential revenue growth in fiscal years 2005 and 2004, there is uncertainty relating to the prospects for near-term U.S. economic growth and growth within the international markets. This uncertainty could possibly contribute to delays in decision-making by our existing and potential customers and a resulting decline in our sales. Continued uncertainty or a decrease in corporate spending could result in a decline to our sales and our operating results could be below our expectations and the expectations of public market analysts and investors.

Our variable sales cycle makes it difficult to predict the timing of a sale or whether a sale will be made, which makes our quarterly operating results less predictable.

Because customers have differing views on the strategic importance of implementing proxy appliances, the time required to educate customers and sell our products can vary widely. As a result, the evaluation, testing, implementation and acceptance procedures undertaken by customers can vary, resulting in a variable sales cycle, which typically ranges from one to nine months. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales and marketing expenses and expend significant management efforts. In addition, purchases of our products are frequently subject to unplanned processing and other delays, particularly with respect to larger customers for whom our products represent a very small percentage of their overall purchase activity. Large customers typically require approvals at a number of management levels within their organizations, and, therefore, frequently have longer sales cycles. Since one of our strategies is to focus on mid-to-large size enterprises, we may experience a lengthening of our sales cycle. In addition, as we compete for larger orders, competition is likely to increase causing customers to extend their decision making process. As a result of these factors, it is difficult to predict the timing of a sale or whether a sale will be made, which makes our quarterly operating results less predictable.

We are subject to evolving and expensive corporate governance regulations and requirements. our failure to adequately adhere to these requirements or the failure or circumvention of our controls and procedures could seriously harm our business.

Because we are a publicly-traded company, we are subject to certain federal, state and other rules and regulations, including rules and regulations recently adopted in response to laws adopted by Congress, such as the Sarbanes-Oxley Act of 2002. Compliance with these evolving regulations is costly and requires a significant diversion of management time and attention, particularly with regard to our disclosure controls and procedures and our internal controls over financial reporting. Although we have reviewed our disclosure controls and procedures and our internal controls over financial reporting in order to determine whether they are effective, our controls and procedures may not be able to prevent errors or fraud in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures may make it impossible for us to ensure that the objectives of the control system are met. A failure of our controls and procedures to detect errors or fraud could seriously harm our business and results of operations.

Undetected product errors, or failures found in new products may result in a loss of or delay in market acceptance of our products, which could cause us to incur significant costs and reduce our sales.

Our products may contain undetected operating errors when first introduced or as new versions are released. Despite testing by us and by current and potential customers, errors may not be found in new products or new versions until after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could materially adversely affect our operating results. These errors may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems.

In addition, all of our products operate on our internally developed operating system. As a result, any error in the operating system will affect all of our products. We have experienced minor errors in the past in connection with new products. We expect that errors will be found from time to time in new or enhanced products after commencement of commercial shipments, which could seriously harm our business.

We develop products in the United States and sell them throughout the world. As a result, changes in foreign currency exchange rates and/or weak economic conditions in foreign markets could negatively impact our financial results.

Because we develop products in the United States and sell them throughout the world, our financial results could be negatively affected by factors such as changes in foreign currency exchange rates and weak economic conditions in foreign markets. All of our sales are currently made in United States dollars and a strengthening of the dollar could make our products less competitive in foreign countries. Should the dollars strength increase in foreign markets, and/or weak economic conditions prevail in these markets, our net sales could be seriously impacted, since a significant portion of our nets sales are derived from international operations.

All of our foreign subsidiaries operating expenses are incurred in foreign currencies. As a result, should the dollar strengthen our foreign operating expenses would decrease and should the dollar weaken our foreign operating expenses would increase. Should foreign currency exchange rates fluctuate, our earnings and net cash flows from international operations may be adversely affected.

We are dependent upon key personnel and we must attract, assimilate and retain other highly qualified personnel or our ability to execute our business strategy and generate sales could be harmed.

Our business could be seriously disrupted if we do not maintain the continued service of our senior management, research and development and sales personnel. We have hired several senior executives recently and have experienced and may continue to experience transition in our management team. We expect that it will take time for our new management team to integrate into our company. The majority of our employees are employed on an “at-will” basis. Our ability to conduct our business also depends on our continuing ability to attract, hire, train and retain a number of highly skilled managerial, technical, sales, marketing and customer support personnel.

New hires frequently require extensive training before they achieve desired levels of productivity, so a high employee turnover rate could seriously impair our ability to operate and manage our business.

We are the target of a Class Action Lawsuit, which could result in substantial costs and divert management attention and resources.

Beginning on May 16, 2001, a series of putative securities class actions were filed against the firms that underwrote our initial public offering, us and some of our officers and directors in the U.S. District Court for the Southern District of New York. These cases have been consolidated under the case captioned In re CacheFlow, Inc. Initial Public Offering Securities Litigation., Civil Action No. 1-01-CV-5143. An additional putative securities class action has been filed in the United States District Court for the Southern District of Florida. The Court in the Florida case dismissed us and individual officers and directors from the action without prejudice. The complaints in the New York and Florida cases generally allege that the underwriters obtained excessive and undisclosed commissions in connection with the allocation of shares of common stock in our initial public offering, and maintained artificially high market prices through tie-in arrangements which required customers to buy shares in the after-market at pre-determined prices. The complaints allege that we and our current and former officers and directors violated Sections 11 and 15 of the Securities Act of 1933, and Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934, by making material false and misleading statements in the prospectus incorporated in the Company’s Form S-1 Registration Statement filed with the SEC in November 1999. Plaintiffs seek an unspecified amount of damages on behalf of persons who purchased our stock between November 19, 1999 and December 6, 2000. On April 19, 2002, plaintiffs filed an amended complaint.

Various plaintiffs have filed similar actions asserting virtually identical allegations against over 300 other public companies, their underwriters, and their officers and directors arising out of each company’s public offering. The lawsuits against us, along with these other related securities class actions currently pending in the Southern District of New York, have been assigned to Judge Shira A. Scheindlin for coordinated pretrial proceedings and are collectively captioned In re Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. Defendants in these cases have filed omnibus motions to dismiss. On February 19, 2003, the Court denied in part and granted in part the motion to dismiss filed on behalf of defendants, including us. The Court’s order did not dismiss any claims against us. As a result, discovery may now proceed. Our officers and directors have been dismissed without prejudice in this litigation.

In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including us, was submitted to the Court for approval. The terms of the settlement, if approved would dismiss and release all claims against participating defendants, including us. In exchange for this dismissal, D&O insurance carriers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants of at least $1.0 billion, and the issuer defendants would agree to an assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. The settlement is subject to a number of conditions, including court approval.

If the settlement does not occur, litigation against us would continue. We believe we have meritorious defenses and intends to defend the case vigorously. Securities class action litigation could result in substantial costs and divert our management’s attention and resources, which could seriously harm our business.

Beginning on April 11, 2004, several purported securities class action lawsuits were filed in the United States District Court for the Northern District of California against us and certain of our current and former officers on behalf of purchasers of our stock between February 20, 2004 and May 27, 2004 (the “alleged Class Period”). Plaintiffs allege that, during the alleged Class Period, defendants violated Sections 10(b), 20(a) and 20A of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by making false or misleading statements about our prospects. The cases have been consolidated but a lead plaintiff has not yet been selected. We and related defendants intend to defend the case vigorously.

On May 18, 2005, a purported shareholder derivative action was filed in the Superior Court of California, Santa Clara County, alleging that certain of our officers and directors violated their fiduciary duties to the Company.

The complaint is based largely on the same factual allegations as in the federal securities class action. Defendants intend to defend the case vigorously.

Although we cannot predict whether the IPO allocation cases will settle as proposed, and cannot predict the outcome of the SEC investigations, the securities class action, or the derivative case, the costs of defending these matters, an adverse result, or the diversion of management’s attention and resources could have a material adverse effect on our results of operations and financial condition.

In addition, from time to time and in the ordinary course of business, we may be subject to various other claims and litigation. Such claims, even if not estimable, could result in the expenditure of significant financial and other resources.

If the protection of our proprietary technology is inadequate, our competitors may gain access to our technology, and our market share could decline.

We depend significantly on our ability to develop and maintain the proprietary aspects of our technology. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, copyright and trademark laws and patents. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology, duplicate our products or design around patents that may be issued to us or our other intellectual property.

We presently have several issued patents, and pending United States patent applications. We cannot assure that any U.S. patent will be issued from these applications. Even with issued patents, we cannot assure that we will be able to detect any infringement or, if infringement is detected, that patents issued will be enforceable or that any damages awarded to us will be sufficient to adequately compensate us.

We currently operate in foreign locations and may increase the amount of research and development that is done internationally. The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Should we be unable to defend our existing or developed intellectual property, or should the existing laws protecting intellectual property and its development deteriorate, our business and our results of operations would be adversely affected.

There can be no assurance or guarantee that any products, services or technologies that we are presently developing, or will develop in the future, will result in intellectual property that is protectable under law, whether in the United States or a foreign jurisdiction, that this intellectual property will produce competitive advantage for us or that the intellectual property of competitors will not restrict our freedom to operate, or put us at a competitive disadvantage.

There has been a substantial amount of litigation in the technology industry regarding intellectual property rights and we recently settled a suit that alleged infringement of certain U.S. patents by us. (See Note 11 “Litigation” of the consolidated financial statements included in this Annual Report on Form 10-K) We expect that companies in the Internet and networking industries will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

If we are unable to raise additional capital, our business could be harmed.

As of April 30, 2005, we had approximately $47.3 million in cash and cash equivalents. We believe that these amounts will enable us to meet our capital requirements for at least the next 12 months. However, if cash is used for unanticipated needs, we may need additional capital during that period. The development and marketing of

new products will require a significant commitment of resources. In addition, if the market for proxy appliances develops at a slower pace than anticipated or if we fail to establish significant market share and achieve a meaningful level of sales, we could be required to raise substantial additional capital. We cannot be certain that additional capital will be available to us on favorable terms, or at all. If we were unable to raise additional capital when we require it, our business would be seriously harmed.

We may enter into large sales deals with certain customers, which, because of the product mix and volume discount, may decrease our total gross margin percentages.

We have in the past entered into large revenue arrangements with certain customers that, because of the product mix and volume discount, have decreased our total gross margin percentage. We may, in the future, enter into similar transactions. Our lower end appliances have poorer margins than our higher end appliance products, and if our customers submit a large order for our lower end appliances, the combination of smaller margins and volume discount provided to those customers would result in a negative impact to our gross margin percentage.

The legal environment in which we operate is uncertain and claims against us could cause our business to suffer.

Our products operate in part by storing material available on the Internet and making this material available to end users from our appliance. As well, our appliance may be used to block content from being accessed. This creates the potential for claims to be made against us, either directly or through contractual indemnification provisions with our customers, for defamation, negligence, copyright or trademarkintellectual property infringement, personal injury, censorship, invasion of privacy or other legal theories based on the nature, content, copying or copyingmodification of these materials.this content. As of April 30, 2005,2008, we have not accrued any liabilities relating to indemnification provisions with our customers. It is also possible that if any information provided through any of our products contains errors, third parties could make claims against us for losses incurred in reliance on this information. Our insurance may not cover potential claims of this type or be adequate to protect us from all liability that may be imposed.

Potential new accounting pronouncements may impact our future financial position or results of operations.Item 1B.Unresolved Staff Comments

None.

Future changes in financial accounting standards, including new changes in accounting for employee stock-based awards, may cause adverse, unexpected fluctuations in the timing of the recognition of revenues or expenses and may affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred and expected to continue to occur frequently, and we may make changes in our accounting policies in the future. As a result, we intend to invest significant resources to comply with evolving standards, and this investment may result in increased general and administrative expenses.

We may make acquisitions in the future, which could affect our operations.

We may make acquisitions in the future. Acquisitions of companies, products or technologies entail numerous risks, including:

Acquisitions may also cause us to:

Any of these problems or factors could seriously harm our business.

We could be subject to product liability claims, which are time-consuming and costly to defend.

Our customers install our proxy appliance products directly into their network infrastructures. Any errors, defects or other performance problems with our products could negatively impact the networks of our customers or other Internet users, resulting in financial or other damages to these groups. These groups may then seek damages from us for their losses. If a claim were brought against us, we may not have sufficient protection from statutory limitations or license or contract terms with our customers, and any unfavorable judicial decisions could seriously harm our business. A product liability claim brought against us, even if not successful, would likely be time-consuming and costly. A product liability claim could also seriously harm our business reputation.

Our operations could be significantly hindered by the occurrence of a natural disaster, terrorist attack or other catastrophic event.

Our operations are susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks and other events beyond our control. In addition, a substantial portion of our facilities, including our headquarters, is located in Northern California, an area susceptible to earthquakes. We do not carry earthquake insurance for earthquake-related losses. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems. We may not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of any of these events. Any such event could have a material adverse effect on our business, operating results and financial condition.

Our stock price is volatile and, as a result, you may have difficulty evaluating the value of our stock, and the market price of our stock may decline.

Since our initial public offering, the market price of our common stock has fluctuated significantly. The market price of our common stock may fluctuate significantly in response to the following factors, among others:

Item 2. Properties2.Properties

We are headquartered in Sunnyvale, California, where we lease two buildings consisting of an aggregate of approximately 53,000234,000 square feet forof office space pursuant to leases effective through November 2015. The second building was leased subsequent to our headquarters facilityfiscal year end under a First Amendment to Lease, which added the additional premises and extended the term of the lease. As a result of our acquisition of Packeteer subsequent to our fiscal year end, we also lease an administrative office consisting of approximately 105,000 square feet in Sunnyvale,Cupertino, California, under a lease that expires on August 31, 2005. In April 2004, we entered into a lease agreement to occupy approximately 29,000 square feet for general office uses locatedexpiring in Sunnyvale, California, which also expires on August 31, 2005. In March 2001, we entered into a lease agreement to occupy 46,000 square feet for a research and development facility in Sunnyvale, California, beginning in the first quarter of our 2002 fiscal year, which expires on June 30, 2006.December 2014. We also lease space for research and development in Draper, Utah,Utah; Austin, Texas; Waterloo, Ontario Canadain Canada; and Riga, Latvia. In addition, we lease space for sales and support in threeseveral metropolitan areas in North America. We also lease space for salesAmerica and support in the following countries: France, Germany, Japan, People’s Republic of China, Belgium, Taiwan, South Korea, United Arab Emirates andseveral other countries outside the United Kingdom.

In April 2005, we signed a lease agreement to occupy approximately 117,000 square feet for our headquarters facility in Sunnyvale, California, commencing September 2005. The lease will expire in August 2010.

In February 2002 we announced a restructuring plan that included closing down our research and development facilities in Redmond, Washington and certain facilities in Sunnyvale, California, and moving the U.S. research and development organization back into our headquarters facility in Sunnyvale, California. In October 2004, one of our facilities in Sunnyvale, California was subleased for the remainder of the lease term at a rental price that was consistent with our initial estimates. Our facility in Redmond, Washington was subleased in December 2002 for the remainder of the term of the original lease at a rental price consistent with our initial estimates.

States.

We believe that our existing facilities are adequate to meet our current requirements, and that suitable additional or substitute space will be available, if necessary.

Item 3. Legal3.Legal Proceedings

SeeThe information set forth under Note 10 of Notes to Consolidated Financial Statements, included in Part II, Item 8 Note 11 “Litigation” of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see the consolidated financial statements includedsection entitled “Risk Factors” in Item 1A of this Annual Report on Form 10-K.Report.

Item 4. Submission4.Submission of Matters to a Vote of Security Holders

None.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended April 30, 2005.

PART II.

Item 5. Market5.Market for Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

Our common stock has been quoted on theThe NASDAQ NationalStock Market since November 19, 1999, and we are currently traded under the symbol “BCSI”, or “CFLO” prior to our name change on August 21, 2002. Prior to November 19, 1999, there was no public market for the common stock.“BCSI.” The following table sets forth, for the periods indicated, the high and low closing prices of theour common stock as reported on the Nasdaq NationalNASDAQ Stock Market.

At April 30, 2008, there were 505 stockholders of record and the price of our common stock was $21.11. We believe that a significant number of beneficial owners of our common stock hold shares in street name.

Dividend Policy

Our present policy is to retain earnings, if any, to finance future growth. We have never paid cash dividends and have no present intention to pay cash dividends. At June 30, 2005, there were approximately 378 stockholders

Stock Performance Graph

The following graph compares the cumulative five-year total return provided shareholders on our common stock relative to the cumulative total returns of recordthe NASDAQ Composite index and the NASDAQ Computer Manufacturers index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on April 30, 2003 and its relative performance is tracked through April 30, 2008.

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Sale of Convertible Notes and Warrants

On April 20, 2008, we entered into a note purchase agreement (the “Note Purchase Agreement”) pursuant to which we agreed to sell $80 million aggregate principal amount of Zero Coupon Convertible Senior Notes due 2013 (the “Notes”) and warrants (the “Warrants”) to purchase an aggregate of 385,356 shares of common stock of Blue Coat at an exercise price of $20.76 to Manchester Securities Corp. (“Manchester”) and Francisco Partners II, L.P. (“FP”) in a private placement. The Notes do not bear interest.

On June 2, 2008, the Notes and the Warrants were issued to Manchester, FP and an entity affiliated with FP (collectively, the “Purchasers”). We offered and sold the Notes and the Warrants to the Purchasers in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. We relied on this exemption from registration based in part on representations made by the Purchasers in the Note Purchase Agreement.

Significant rights and obligations of the Purchasers and holders of the Notes (“Holders”) are as follows:

Conversion feature. The Notes are initially convertible into 3,853,564 shares of Blue Coat’s common stock at the Holders’ option at any time prior to maturity at the initial conversion price of $20.76.

Senior Debt. The Notes rank equal in right of payment to all of Blue Coat’s other existing and future senior unsecured indebtedness.

Put Right. The Notes provide that if our common stock is suspended from trading or ceases to be listed on an eligible market for a period of five (5) consecutive trading days or for more than an aggregate of fifteen (15) trading days in any 365 day period, a Holder may require us to repurchase for cash all or a portion of the Note at a purchase price equal to the principal amount of the Note, plus any late fees.

Registration Rights.On June 2, 2008, pursuant to the Note Purchase Agreement, we entered into a Registration Rights Agreement with FP and an entity affiliated with FP, which contained customary terms and conditions and provided for the registration of our common stock underlying the Notes and Warrants issued to FP and the entity affiliated with FP.

Sales of Series A Redeemable Convertible Preferred Stock

On June 22, 2006, we sold an aggregate of $42.1 million of Series A Preferred Redeemable Convertible Stock (“Series A Preferred Stock”) to entities affiliated with Francisco Partners and Sequoia Capital Growth. The aggregate proceeds were reduced by $0.2 million of transactional costs, resulting in net proceeds of $41.9 million. The financing consisted of 42,060 shares of our Series A Preferred Stock.

During September 2007, the 42,060 shares of Series A Redeemable Convertible Preferred Stock were converted into 4.8 million shares of our Common Stock. The conversions were exempt from registration under Section 3(a)(9) of the Securities Act of 1933. The conversion price of each share of Series A Redeemable Convertible Preferred Stock was $29.88. We believe$8.7625 per share, such that the conversion rate of the Series A Redeemable Convertible Preferred Stock was approximately 114.12-to-1.0. The conversions resulted in a significant number$41.9 million reduction of beneficial ownersSeries A Redeemable Convertible Preferred Stock, a $0.2 million increase in interest expense attributable to unamortized issuance costs, and a $42.1 million increase in stockholders’ equity.

On November 19, 2007, we filed a Certificate of Elimination of Series A Preferred Stock with the Delaware Secretary of State to eliminate the Series A Preferred Stock, as no shares of such series remained outstanding.

Significant rights and obligations of the Series A Preferred Stock were as follows:

Conversion feature. The 42,060 shares of Series A Preferred Stock were initially convertible at the option of the holders into approximately 4.8 million shares of our common stock. The conversion price of each share of Series A Preferred Stock was $8.7625 per share, or a conversion rate of approximately 114.12-to-1.0. Each share

of Series A Preferred Stock would be automatically converted into shares of Common Stock at the then effective conversion rate for such share upon the approval of the holders of at least a majority of the then-outstanding Series A Preferred Stock.

Redemption features. In the event that we did not complete an acquisition, whether by merger, consolidation, the purchase of assets or otherwise, of another entity or of certain assets of another entity, for at least $18,000,000 in cash within 150 days of June 22, 2006 (the “Closing Date”), the Series A Preferred Stock would have been redeemable at the option of either the holder or us during a 30 day period thereafter. This condition was satisfied with our acquisition of certain assets of the NetCache business from Network Appliance on September 11, 2006. The Series A Preferred Stock matured six years from the issuance and we would have been required to redeem the Series A Preferred Stock at that time. The redemption price is the price paid plus an amount equal to declared but unpaid dividends.

Liquidation preference. Upon liquidation of our business, the holders of Series A Preferred Stock would have been entitled to be paid an amount equal to the price paid, plus an amount equal to declared but unpaid dividends, before we made any distribution to the holders of any other class of stock holdthat is junior in ranking, including our Common Stock.

Voting rights.Each holder of Series A Preferred Stock was entitled to that number of votes equal to the number of shares of Common Stock into which the shares of Series A Preferred Stock held by such holder could be converted as of the record date. The holders of shares of Series A Preferred Stock were entitled to vote on all matters on which the holders of the Common Stock were entitled to vote. In addition, until June 22, 2007, the holders of at least a majority of the then-outstanding Series A Preferred Stock, voting as a separate class, were entitled to elect one (1) director to the Board of Directors at each meeting of, or pursuant to each consent of, our stockholders for the election of directors.

Dividends.The Series A Preferred Stock participated equally with the holders of Common Stock in street name.all dividends paid on the Common Stock, when, as and if declared by the Board of Directors, out of funds legally available, as if such shares of Series A Preferred Stock had been converted to shares of Common Stock immediately prior to the record date for the payment of such dividend. No dividends were declared during such time as the Series A Preferred Stock existed.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 6. Selected6.Selected Consolidated Financial Data

The following table setstables set forth our selected financialconsolidated balance sheet data as of April 30, 2008, 2007, 2006, 2005, 2004 and our statement of operations data for each of the fiscalfive years ended April 30, 2001 through April 30, 2005. For additional discussion regarding2008. The selected consolidated financial statement data include the itemsresults of operations of acquired businesses commencing on their respective acquisition dates.

The tables below should be read in this table, referconjunction with, and are qualified by reference to, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” IncludedOperations” and our consolidated financial statements and related notes, which are included in our operating resultsthis Form 10-K.

Except for the years ended April 30, 2005 and 2004,per share information, amounts reported below are the operations of Cerberian, Inc. and Ositis Software, Inc., from the dates of acquisition on November 16, 2004 and November 14, 2003, respectively.in thousands.

		As of April 30,
		2008			2007			2006			2005			2004
Consolidated Balance Sheet Data
Cash, cash equivalents and short-term investments		$	162,178		$	93,887		$	57,190		$	47,264		$	39,504
Investment in Packeteer, Inc.			25,092			—			—			—			—
Working capital			123,561			66,394			40,725			34,213			26,683
Total assets			387,768			248,674			164,164			97,862			67,669
Series A redeemable convertible preferred stock			—			41,879			—			—			—
Other long-term liabilities			23,915			16,489			10,130			4,232			5,289
Total stockholders’ equity			251,461			118,589			109,958			65,228			36,061

In addition, excess property and equipment were deemed impaired and written off in fiscal 2002.

Refer to Note 11The following table presents details of the total stock-based compensation expense that is included in each functional line item in the Notes to the Consolidated Financial Statements for additional information.consolidated statements of operations above:

Item 7. Management’s7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion inThis Annual Report on Form 10-K, and other materials accompanying this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical arecontain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including1934. These statements on revenuerelate to our future plans, objectives, expectations, future product acceptance, future productintentions and sales development, future operating results,financial performance and future cash usage, as well as statements regarding our expectations, beliefs, intentions or strategies regarding the future. Allassumptions that underlie these statements. These forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those indicated in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, statements concerning the following: expectations with respect to future market growth opportunities; changes in and expectations with respect to revenues and gross margins; future operating expense levels; the impact of quarterly fluctuations of revenue and operating results; our limited ability to forecast quarterly operating resultsachieve expected levels of revenues and meet analyst or investor expectations, inability to create additional sales through our sales channel partners, variability in net revenue and earnings resultingprofit contributions from deferred revenue, manufacturing delays and price increases from our third-party manufacturers, supply shortage, inability to maintain a competitive position inacquired businesses; the proxy appliance market, increased competition and inability to compete with our competitors, costs and effort in responding to investigations from the Securities and Exchange Commission (“SEC”), inability to sustain profitability, unpredictable increase in demand for our products, product concentration, technological changes, gross margin fluctuations, reliance on third-party software licenses, inability to generate increased international sales, unpredictableimpact of macroeconomic conditions unpredictableon our business; the adequacy of our capital resources to fund operations and growth; investments or potential investments in acquired businesses and technologies, including our recent acquisition of Packeteer, Inc. as well as internally developed technologies; the expansion and effectiveness of our direct and indirect sales cycles, legislation surrounding corporate governanceforces and internal controls, undetected product errors, foreign currency exchange rate movementsmarketing activities; the recording of amortization of acquired technology and economic conditionsstock-based compensation; the impact of recent changes in foreign markets, inability to attract and retain key employees, costs and effort in defending a Class Action Lawsuit, inability to defend our intellectual property rights, inability to raise additional capital, gross margin erosion from large sales deals, increased litigation, new accounting standards future acquisitions, product liability claims, occurrenceand assumptions underlying any of a natural disaster, volatilitythe foregoing. In some cases, forward-looking statements are identified by the use of terminology such as “anticipate,” “expect,” “intend,” “plan,” “predict,” “believe,” “estimate,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” or negatives or derivatives of the foregoing, or other comparable terminology.

The forward-looking statements in our stock pricethis Annual Report on Form 10-K involve known and unknown risks, uncertainties and other factors that may cause industry and market trends, or our actual results, level of activity, performance or achievements, to be materially different from any future trends, results, level of activity, performance or achievements expressed or implied by these statements. For a detailed discussion of these risks, discusseduncertainties and other factors, see the “Risk Factors” section in Item 1A of this item underAnnual Report on Form 10-K. We undertake no obligation to revise or update forward-looking statements to reflect new information or events or circumstances occurring after the heading “Factors Affecting Future Operating Results” and the risks discussed in our other recent SEC filings.date of this Annual Report on Form 10-K, except as required by applicable law.

Overview

Blue Coat® Systems, Inc., also referred to in this report as “we”, “us” or the “Company”, was incorporated in Delaware on March 16, 1996 and our current focus is on the proxy appliance market. Blue Coat proxy appliances help organizations make the Web safe and productive for business, providing visibility and control of Web communications to protect against risks from spyware, Web viruses, inappropriate Web surfing, instant messaging, video streaming and peer-to-peer file sharing - while actually improving Web performance. Positioned in the network between the users and the Internet, proxy appliances do not replace existing perimeter security devices; rather, proxy appliances complement network firewalls by providing granular policy-based controls over Web traffic in ways that firewalls and other externally focused devices cannot.

Our initial products, introduced in May of 1998, utilized caching technology to improve user response time for accessing Internet content. These systems were used by service providers and enterprises throughout the world and we achievedWe sell a market leadership position. By 1999, the caching market began evolving into two distinct markets – enterprises looking for proxy caches to securely connect employees to the Internet, and service providers looking for increased bandwidth savings and response time for their subscribers. During this timeframe, service provider customers represented the majority of our revenues. However, we enhanced our competitive position in both of the aforementioned markets through internal development and acquisitions. By early 2001, the demand for our enterprise proxy caches was growing, while the service provider market decreased significantly. In response to this trend, we accelerated our development and marketing efforts around our enterprise business, resulting in the launch of our ProxySG products in February 2002.

The Blue Coat family of proxy appliances and related software and services. Proxy appliances are computer hardware devices that, together with internal software, secure, accelerate and control the delivery of business applications and other information over a WAN or across an enterprise’s Internet gateway, where its local computer network links to the public Internet. Our goal is designedto provide intelligent application delivery solutions to optimize the flow of information throughout an enterprise, without compromising the integrity of that information.

When we first introduced our proxy appliances with WAN acceleration capability in fiscal 2007, we anticipated that the market for Web security and WAN acceleration products, each of which was then viewed as a separate market, would converge in the future. We believed that IT departments would be required to manage both functions and would select a single solution, where it met appropriate criteria. IDC, a leading information and technology research and advisory firm, defines that converged Web security market and WAN acceleration market as the WAN Application Delivery market.

We have increasingly seen the anticipated convergence of Web security and WAN acceleration and optimization, such that now many of our customers that purchase our products for their WAN acceleration and optimization capability are also implementing our Web security functionality. Similarly, our Web security customers are also implementing our WAN acceleration and optimization capabilities. We believe that enterprises are being driven by the need to centralize their IT operations, while simultaneously managing mobile employees and remote locations and dealing with global business needs and requirements. These trends, together with new types of applications (such as remotely hosted software-as-a-service and Web 2.0 applications), should create demand for the application delivery network that we envision and upon which we are focusing

development of our products. This network layer would monitor and control all information flowing between the communications network and the application servers and end users that it serves.

We continue to monitor domestic and global macroeconomic conditions, and their actual and anticipated impact on IT spending, including on spending for proxy appliances. In the fourth quarter of fiscal 2008, we had certain large sales transactions that failed to close, particularly in the U.S. We believe that these largely were delays, resulting from increased scrutiny of spending decisions, and that these sales opportunities will continue to be available to us. We have observed a lengthening of our average sales cycle, which means that sales take longer to close. In light of the difficult U.S. market and economic environment, we recently have been focusing more of our sales and marketing efforts on international transactions, and anticipate that a greater proportion of our revenue will be derived from such transactions in the near term, provided such markets do not suffer a material decline in IT spending.

We track financial metrics, including net revenue, operating margin, deferred revenue, cash flow from operations, and cash position, as key measures of our business performance.

Net Revenue

Net revenue, which includes both product revenue and service revenue, increased to $305.4 million in fiscal 2008 from $177.7 million in fiscal 2007, an increase of 72%. Our product revenue, consisting of sales of our proxy appliances and perpetual licenses to our Blue Coat WebFilter product, was $233.9 million in fiscal 2008. This was an increase of 71% compared with product revenue in fiscal 2007. We recognized $71.6 million in service revenue in fiscal 2008, a 75% increase compared with service revenue recognized in fiscal 2007.

Operating Margin

In fiscal 2008, our operating income increased to $25.1 million from an operating loss of $9.7 million in fiscal 2007. Our operating results during the year benefited from a decrease in our operating expenses as a percentage of revenue when compared with the prior year. Total operating expenses increased to $208.9 million during fiscal 2008 from $141.6 million in fiscal 2007, which was largely attributable to our continued investment in headcount to expand our sales force and marketing functions. Total operating expenses declined to 68% of net revenue in fiscal 2008 compared with 80% of net revenue in fiscal 2007.

Deferred Revenue

Net deferred revenue was $89.6 million at April 30, 2008 compared with $55.8 million at April 30, 2007. The increase was attributable to both an increase in the sales of new maintenance and renewal contracts to our customers and an increased level of inventory held by our stocking distributors. This increase was partially offset by the continued amortization of subscription-based revenue associated with our Blue Coat Web Filter product, which was sold on a subscription-basis until November 2006.

Cash Flow From Operations and Cash Position

During fiscal 2008, we generated cash flow from operations of $56.9 million, compared with $28.0 million generated during fiscal 2007. Our cash, restricted cash and short-term investments were $163.0 million at the end of fiscal 2008, compared with $98.9 million at the previous fiscal year end of April 30, 2007.

On August 16, 2007, our Board of Directors approved a two-for-one forward stock split of our common stock. The stock split was effected by the issuance of a stock dividend of one share of our common stock for each share of our common stock issued and outstanding as of the record date of September 13, 2007. The split-adjusted stock began trading on the NASDAQ Global Market on October 4, 2007. Our stock currently trades on the NASDAQ Global Select Market. All share numbers in this document reflect our capital structure as of the end of the fiscal year and are therefore on a post-split basis. Shares authorized and par value were not adjusted as they were not affected by the stock split.

Packeteer Acquisition

On June 6, 2008, after the close of fiscal 2008, we acquired Packeteer, Inc. (“Packeteer”), a pioneer in delivering sophisticated WAN traffic prioritization through the development and sale of application classification and performance management technologies and products. We believe that acquiring Packeteer will accelerate our ability to offer a comprehensive platform to address the application delivery and security challenges confronting today’s new business risks, which can includedistributed enterprise. We intend to continue to sell the risk of being suedPacketShaper^®, Intelligence Center and Policy Center products formerly offered by employees who witness inappropriate Web surfing by their coworkers, viruses brought in via back door channels suchPacketeer and to rebrand them as instant messaging and Web-based email, and network resource abuse due to

peer-to-peer (P2P) file sharing and video streaming. The Blue Coat ProxySG appliances,products. We also intend to enhance the technologies developed and new ProxyAV appliancesowned by Packeteer and to integrate them into our current and future products. The acquisition of Packeteer should provide us with increased sales resources, through the addition of Packeteer sales teams and channels; additional revenue, through sales of the additional products; and added cost efficiencies that result from scaling our business.

Our acquisition of Packeteer was effected through a tender offer, followed by a merger of our wholly-owned subsidiary into Packeteer. As a result of the transaction, Packeteer became our wholly owned subsidiary and each outstanding share of Packeteer that was not tendered in the tender offer (other than restricted shares; shares already held by us, Packeteer or our respective wholly-owned subsidiaries; or shares held by stockholders who properly perfect appraisal rights under Delaware law) was converted into the right to receive $7.10 per share in cash. The aggregate purchase price, which has not yet been determined, will consist of $264 million in cash paid for high-performance Web anti-virus,Packeteer’s common stock, plus the value of assumed stock options and direct transaction costs. To date, the acquisition has been funded by approximately $188 million in cash from internal sources and $80 million in cash from the issuance of convertible notes.

On April 20, 2008, we entered into a note purchase agreement, pursuant to which we agreed to sell $80 million of Zero Coupon Convertible Senior Notes due 2013 and warrants to purchase shares of our common stock to Manchester Securities Corp. (“Manchester”) and, Francisco Partners II, LP (“FP”) in a private placement. The notes and the warrants were issued to Manchester, FP and an affiliate of FP (the “Purchasers”) on June 2, 2008, following the expiration of the initial offering period of our tender offer. The notes do not bear interest, and are designedconvertible into shares of our common stock at the initial conversion price of $20.76, which represents a 5% conversion premium based on the closing price of our common stock on April 18, 2008. The warrants permit the Purchasers to enable organizationspurchase an aggregate of 385,356 shares of our common stock at an exercise price of $20.76. The warrants expire in June 2013. We used the proceeds from the private placement to minimize security riskspartially fund the acquisition of Packeteer.

The operations of Packeteer and reduceBlue Coat will be reported on a combined basis commencing with our financial statements for the management costs and complexity of their Web infrastructure.

quarter ending July 31, 2008.

Critical Accounting Policies and Estimates

The preparationOur discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformityaccordance with accounting principles generally accepted in the United StatesStates. The preparation of Americaour consolidated financial statements requires that weus to make estimates and judgments that affect the reported amounts of assets, liabilities, revenuesnet revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to inventories, valuation of goodwill, valuation of long-lived and identifiable intangible assets, restructuring liabilities, revenue recognitionRevenue Recognition and related receivable allowances, warranty obligations, income taxesAllowance for Doubtful Accounts, Stock-Based Compensation, Valuation of Inventories, Valuation of Goodwill, Valuation of Long-Lived and contingencies.Identifiable Intangible Assets and Income Taxes. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and such differences could be material. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

We have discussed the development and selection of critical accounting policies and estimates with our audit committee. We believe the accounting policies described below among others, are the onesthose that most frequently require us to make estimates and judgments that materially affect our financial statements, and therefore are critical to the understanding of our financial condition and results of operations:

Inventories.Inventories consist of raw materials, work-in-process and finished goods. Inventories are recorded at the lower of cost or market using the first-in, first-out method, after appropriate consideration has been given to obsolescence and inventory in excess of anticipated future demand. In assessing the ultimate recoverability of inventories, we are required to make estimates regarding future customer demand and market conditions. If actual market conditions are less favorable than those projected, additional write-offs and other charges against earnings may be required.

Valuation of Goodwill.We perform goodwill impairment tests annually in our fourth quarter or whenever indicators of impairment are present. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. For the purposes of our fiscal 2005 annual impairment test, we considered our market capitalization on the date of our impairment test and determined that no impairment existed.

Valuation of long-lived and identifiable intangible assets.We evaluate our long-lived and identifiable intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144,Accounting for Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). We review our long-lived assets, including property and equipment and identifiable intangible assets, for

impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Events or changes in circumstances that could result in an impairment review include, but are not limited to, significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for our business and significant negative industry or economic trends. Impairment is recognized when the carrying amount of an asset exceeds its fair value as calculated on a discounted cash flow basis.

Restructuring Liabilities. We have accrued various restructuring liabilities, through charges to “Restructuring Expense”, related to employee severance costs, facilities closure and lease abandonment costs, and contract termination costs in our consolidated financial statements. Our restructuring liabilities for facilities closure and lease abandonment costs include various assumptions, such as the time period over which abandoned facilities will be vacant, expected sublease terms, and expected sublease rates.

Revenue Recognition and Related Receivable AllowancesAllowance for Doubtful Accounts.

Our products include software that is essential to the functionality of the appliances. Additionally, we provide unspecified software upgrades and enhancements related to the appliances through our maintenance contracts for most of our products. Accordingly, we account for revenue in accordance with SOP No. 97-2, and all related interpretations. We recognize appliance and WinProxy revenue upon deliverywhen all of the product, assuming thatfollowing criteria are met: when persuasive evidence of an arrangement betweenexists; delivery or performance has occurred; the customer and us exists, the fee to the customersales price is fixed or determinable and collectabilitycollectibility is reasonably assured. InHowever, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the eventtiming and amount of revenue we have futurerecognize.

We define each of the four criteria above as follows:

Persuasive evidence of an arrangement exists. Evidence of an arrangement generally consists of customer purchase orders and, in certain instances, sales contracts or agreements.

Delivery or performance obligationshas occurred.Shipping terms and related documents, or must obtainwritten evidence of customer acceptance, revenue is deferred until the obligationswhen applicable, are metused to verify delivery or acceptance is obtained. During the fiscal year ended April 30, 2005, we deferredperformance. Most of our sales are made through distributors under agreements allowing for certain stock rotation rights. Net revenue and related costs of revenue based on future obligations.

Revenue andthe related cost of net revenue resulting from shipments to our distributors who have certain stock rotation rights are deferred until a point of salethe distributors report is received from the distributor confirming that our products have been sold to a reseller or an end user. customer. Product revenue in China is deferred until the customer registers the proxy appliance.

For sales made direct to end-users and value-added resellers, we recognize product revenue upon transfer of title and related costrisk of revenuesloss, which generally is upon shipment. We do not accept orders from these value-added resellers when we are recognized upon shipment based on our understandingaware that the value-added reseller does not have an order from an end user has been identified atcustomer. We do not have significant obligations for future performance, such as rights of return or pricing credits, associated with sales to end users and value-added resellers.

The sales price is fixed or determinable. We assess whether the time of shipment.

Maintenance and subscription contract revenuesales price is initially deferred and recognized ratably over the life of the contract with the related service cost expensed as incurred. Maintenance and subscription contracts usually have a 12-month duration but can extend to 36 months. Unearned maintenance and subscription contract revenue is included in deferred revenue.

Delivery is considered to have occurred for our appliances when the customer takes title to the product and assumes the risks and rewards of ownership. WinProxy software delivery is considered to have occurred when the software key is made available to the customer electronically.

When a sale involves multiple elements, we determine if these elements can be separated into multiple units of accounting. The entire fee from the arrangement is allocated to each respective elementfixed or determinable based on its relative fair valuepayment terms and whether the sales price is subject to refund or using the residual method, if appropriate. Revenue for each elementadjustment.

Collectibility is then recognized when revenue recognition criteria for that element is met. If we cannot establish fair value for any undelivered element, we would be required to recognize revenue for the whole arrangement at the time revenue recognition criteria for the undelivered element is met. Relative fair value for maintenance elements are determined based on substantive renewal rates.

We record the shipping costs in both revenue and cost of revenue when we bill our customers for shipping. If we do not charge our customers for shipping, the costs incurred for shipping are reflected in cost of revenue but not recorded in revenue.

reasonably assured.Probability of collection is assessed on a customer-by-customer basis. Our customers are subjected to a credit review process that evaluates the customers’ financial condition and ability to pay for our products and services. If it is determined from the outset of an arrangement that collection is not probable based upon ourthe review process, revenue is not recognized until cash receipt.

For products in an arrangement that includes multiple elements, such as appliances, maintenance, content filtering software or anti-virus software, we use the residual method to recognize revenue for the delivered

elements. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements, provided that Vendor Specific Objective Evidence (“VSOE”) exists for all undelivered elements. VSOE of fair value is based on the price charged when the element is sold separately. We analyze our stand alone maintenance renewals by sales channel and geography (strata). We determine the VSOE of fair value for maintenance by analyzing our stand alone maintenance renewals noting that a substantial majority of transactions fall within a narrow range for each stratum. In limited cases, vendor specific objective evidence of fair value is based on management determined prices. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized at the earlier of when delivery of those elements occurs or when fair value can be established for the remaining undelivered elements. When VSOE of fair value cannot be determined for an undelivered element, revenue for the entire arrangement is recognized ratably over the maintenance or subscription period.

Maintenance and subscription revenue is initially deferred and recognized ratably over the life of the contract, with the related expenses recognized as incurred. Maintenance and subscription contracts usually have a term of one to three years. Unearned maintenance and subscription revenue is included in deferred revenue. All shipping costs are charged to cost of net revenue. When we bill customers for shipping, we record the invoice amount for shipping costs in net revenue.

We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for doubtful accounts. We analyze accounts receivable and historical bad debts, customer concentrations, customer solvency, current economic and geographic trends, and changes in customer payment terms and practices when evaluating the adequacy of such allowance, and any required changes in the allowance are chargedrecorded to general and administrative expense.

We write off accounts receivable when they are deemed uncollectible.

Warranty Obligations.Stock-Based Compensation

Effective May 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective transition method. Under that transition method, compensation expenses recognized beginning on that date include: (a) compensation expense for all share-based payments granted prior to, but not yet vested as of May 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation expense for all share-based payments granted on or after May 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Because we elected to use the modified prospective transition method, results for prior periods have not been restated.

We accrue for warranty expenses as partestimate the fair value of options granted using the Black-Scholes option valuation model. We estimate the expected term of options granted based on our historical experience of grants, exercises and post-vesting cancellations. We estimate the volatility of our coststock options at the date of revenuegrant using a combination of historical and implied volatilities, consistent with SFAS No. 123(R) and SAB No. 107. We base the risk-free rate that we use in the Black-Scholes option valuation model on the implied yield in effect at the time revenueof option grant based on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of our option grants. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. Stock-based compensation expense under SFAS No. 123(R) is based on awards ultimately expected to vest, which requires us to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We estimated our forfeiture rate at 10% based on an analysis of historical pre-vesting forfeitures, and have reduced stock-based compensation expense accordingly. For options granted before May 1, 2006, we amortize the fair value on a graded basis. For options granted on or after May 1, 2006, we amortize the fair value on a straight-line basis. The fair value of all options are amortized over the requisite service periods of the awards, which are generally the vesting periods. We may elect to use different assumptions under the Black-Scholes option valuation model in the future, which could materially affect our net income or loss and net income or loss per share.

Valuation of Inventories

Inventories consist of raw materials and finished goods. Inventories are recorded at the lower of cost, using the first-in, first-out method, or market after appropriate consideration has been given to obsolescence and inventory in excess of anticipated future demand. In assessing the ultimate recoverability of inventories, we are required to make estimates regarding future customer demand and market conditions.

Valuation of Goodwill

We perform annual goodwill impairment tests in accordance with FASB SFAS No. 142,Goodwill and Other Intangible Assets, during our fourth fiscal quarter, or whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. The first step of the test identifies whether potential impairment may have occurred, while the second step of the test measures the amount of the impairment, if any. Impairment is recognized when the carrying amount of goodwill exceeds its fair value. The process of evaluating the potential impairment of goodwill is highly subjective and maintainrequires significant judgment. For purposes of the annual impairment test, we consider our market capitalization on the date of the impairment test since we have only one reporting unit. We performed our recurring annual review of goodwill in the fourth quarter of fiscal 2008 and concluded that no impairment existed at the end of our fiscal year 2008.

Valuation of Long-Lived and Identifiable Intangible Assets

We periodically evaluate potential impairments of our long-lived assets, including identifiable intangible assets, in accordance with FASB SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events or changes in circumstances that could result in an accrualimpairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for estimated future warranty obligations based uponour overall business and significant negative industry or economic trends. The process of evaluating the relationship between historicalpotential impairment of long-lived assets is subjective and anticipated warranty costs and revenue volumes. If actual warranty expenses are greater than those projected, additional obligations and other charges against earnings may be required. If actual warranty expenses are less than projected, prior obligationsrequires significant judgment. Variances in our assumptions could be reduced providinghave a positivesignificant impact on our reported results. We generally provideconclusions as to whether an asset is impaired or the amount of the impairment charge. Impairment is recognized when the carrying amount of an asset exceeds its fair value as calculated on a one-year warranty on hardware products and a 90-day warranty on software products.discounted cash flow basis.

Income Taxes.Taxes

We use the liability method to account for income taxes as required by the FASB SFAS No. 109,Accounting for Income Taxes (“SFAS No. 109”). As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves determining our income tax expense (benefit) together with calculating the deferred income tax expense (benefit) related to temporary differencesdifference resulting from the differing treatment of items for tax and accounting purposes, such as deferred revenue or deductibility of certain intangible assets. These temporary differences result in deferred tax assets andor liabilities, which are included within the consolidated balance sheets. We must then assess

On May 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48), issued in June 2006. FIN 48 prescribes a recognition threshold that a tax position is required to meet before being recognized in the likelihood that the deferred tax assets will be recovered through the generation of future taxable incomefinancial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. See Note 7—“Income Taxes” for additional information.

We record a valuation allowance to reduce our deferred tax assets to an amount that we believeestimate is more likely than not willto be realized. We have recordedconsider estimated future taxable income and prudent tax planning strategies in determining the need for a full valuation allowance. When we determine that it is more likely than not that some or all of our tax attributes will be realizable by either refundable income taxes or future taxable income, the

valuation allowance againstwill be reduced and the related tax impact will be recorded to the provision in that quarter. Likewise, should we determine that we are not likely to realize all or part of our deferred tax assets.

Contingencies. From timeassets in the future, an increase to time we are involvedthe valuation allowance would be recorded to the provision in various claims and legal proceedings. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range and no point within the range is more probable than any other. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur.

period such determination was made.

Results of Operations

Net Revenue

The following is a summary of net revenue and the changes in net revenue by fiscal year (in(dollars in thousands):

Demand for our products and related services continued to increasebe strong in fiscal 2005, which resulted2008, with net revenue increasing by 71.9% to $305.4 million as compared to $177.7 million in an increasefiscal 2007. The growth in net revenue from fiscal 2007 to fiscal 2008 is attributable to the following factors: 1) continued market acceptance of $30.1 million, or 45.6%,our products, including the renewal of service contracts from our expanding installed base; 2) demand generated from our expansion into the WAN Application Delivery market; and 3) increased sales and marketing efforts to broaden our market presence and expand our distribution channels. Service revenue increased 74.9% in fiscal 2008 as compared to the prior year.year as a result of new service contracts sold with our appliances in fiscal 2008 coupled with revenue recognized in the current year from service contracts sold with our appliances in prior years.

Net revenue increased by 25.4% to $177.7 million in fiscal 2007 from $141.7 million in fiscal 2006. The increasegrowth in demand isnet revenue from fiscal 2006 to fiscal 2007 was primarily attributable to continued market acceptance of our products, resultingincluding the renewal of service contracts from our expanding installed base, coupled with investments in our sales and marketing organizations, as well as our focus on larger enterprise customers.organizations.

Net revenue in fiscal 2004 increased $20.3 million, or 44.4%, from fiscal 2003. This increase was primarily driven by our success in establishing a broader market presence and expanding our distribution channels. Although net revenue increased slightly in the first half of fiscal 2004, net revenue increased significantly in the second half of the fiscal 2004 due to the release of our second generation of ProxySG products in September of 2003, as well as an overall increase in InformationAlternative Data Technology, spending during the fourth calendar quarter of 2003.

One of our distributorsInc. (a distributor) accounted for 15.9%, 24.1% and 19.0%12.2% of our net revenue during the fiscal year 2008. Computerlinks AG (a distributor) accounted for 11.2% of our net revenue during fiscal 2007. Westcon Group, Inc. (a distributor) accounted for 10.2% and 15.9% of our net revenue during the fiscal years ended2007 and 2006, respectively. As of April 30, 2005, 20042008 and 2003, respectively. The same distributor accounted for 11.3%, 12.7% and 20.4% of our gross accounts receivable at April 30, 2005, 2004 and 2003, respectively. Net revenue from this distributor has decreased as we have increasingly relied on sales to larger resellers who purchase directly from us. No other2007, no customer accounted for more than 10.0% of our net revenue or gross accounts receivable at April 30, 2005, 2004 and 2003, respectively.

receivable.

The following is a summary of net revenue by geographic area (in(dollars in thousands):

In

On a geographic basis, revenue in North America increased $60.1 million in fiscal 2005, we experienced strong growth in all geographic markets.2008, up 72.6% from fiscal 2007; Net revenue in North America increased $12.0$11.9 million in fiscal 2007, up 32.5% from prior year, on strong demand, especially for our ProxySG appliances. In fiscal 2004, net revenue in the North America increased $13.2 million, up 55.4%16.9% from fiscal 2003, again based on strong demand. Net2006. The year-over-year increases in net revenue in North America comprisesfor both fiscal 2008 and 2007 were primarily related to increased demand for our WAN Application Delivery products and a larger installed base of customers. Revenues from outside of North America continued to be a significant portionpart of our revenue mix. For the fiscal years 2008, 2007 and 2006, approximately 53.2%, 53.4% and 50.0%, respectively, of our total net revenue in part because we focused a substantial portionwere derived from customers outside of our sales and marketing activities in North America.

Net revenue in Europe, Middle East, and Africa (“EMEA”) increased $10.5$45.8 million in fiscal 2005,2008, up 53.8%69.0% from the prior year. From fiscal 2003 to fiscal 2004, net2007. Net revenue forin EMEA increased $6.8$12.5 million or 52.7%.in fiscal 2007, up 23.1% from fiscal 2006. The year-over-year increases in net revenue in EMEA for both fiscal 20052008 and fiscal 2004 are2007 were primarily related to investments in our sales and marketing organizations in the region coupled withand broader market acceptance of our products.products, coupled with continued leverage from our channel distribution model.

Net revenue in Central America and Latin America (“LATAM”) increased $2.2 million in fiscal 2008, up 139.0% from fiscal 2007, due to a focused effort to develop the business through investment in sales and marketing personnel and activities. Net revenue in LATAM increased $1.2 million in fiscal 2007 from fiscal 2006.

Net revenue in the Asia and Pacific region (“APAC”) increased $19.6 million in fiscal 2008, up 72.7% from fiscal 2007. Net revenue in Asia increased 79.8% to $17.1$10.3 million in fiscal 20052007, up 62.2% from the priorfiscal 2006. The year asover year increases in net revenue in Asia for both fiscal 2008 and 2007 were a result of increased demand for our products and related services, as well as increased investment in our sales and marketing organization in the Asia region. Growth in net revenue from fiscal 2003 to fiscal 2004 was 4.2% as we transitioned our selling efforts from caching appliances to proxy appliances.

APAC.

Gross Profit

The following is a summary of gross profit by fiscal year (in(dollars in thousands):

Gross profit forincreased $102.0 million, or 77.3%, to $234.0 million in fiscal 2005 increased $20.12008 from $132.0 million representing a 45.0% increase year-over-yearin fiscal 2007, which iswas consistent with the increase in net revenue. As a percentage of net revenue, gross profit in fiscal 2005 decreased slightly2008 increased to 67.4%76.6% from 67.7%74.3% in fiscal 2007, primarily due to more favorable product pricing, a product mix favoring higher margin products such as the gross profit improvement associated with the increased volume wasBlue Coat WebFilter, and higher overall revenue resulting in more effective leverage on fixed product costs, partially offset by investments in our service infrastructure, approximately $0.5 million of which related to the Cerberian acquisition.higher royalty expense.

Fiscal 2004 grossGross profit increased $16.3$33.3 million, or 57.4%33.7%, compared to $132.0 million in fiscal 20032007 from $98.7 million in fiscal 2006, primarily due to higher net revenue coupled with increased absorption of manufacturing and support costs.revenue. Gross profit as a percent of net revenue increased 5.6% from fiscal 2003 to 67.7%74.3% in fiscal 2004 as a result of2007 from 69.6% in fiscal 2006, which was primarily attributable to product price increases and increased absorption of fixed manufacturing and supportservice costs resulting from the increase in addition to lower component costs.net revenue.

Research and Development (R&D)

The following is a summary of research and development expense by fiscal year (in(dollars in thousands):

R&D expense in fiscal 2005 increased $4.6 million over the prior year, although R&D expense as a percentage of net revenue decreased slightly. R&D expense increased over the prior year primarily due to an increase in headcount of 34 people hired to facilitate the continued development of our product portfolio, 7 of which resulted from the Cerberian acquisition. Included in R&D expense for fiscal 2005 is approximately $0.6 million related to the Cerberian acquisition.

R&D expense in fiscal 2004 was relatively flat in absolute dollars as compared to fiscal 2003. However, due to the sharp increase in net revenue in fiscal 2004 as compared to 2003, R&D expense as a percentage of net revenue decreased significantly. The R&D organization increased by 20 people in the second half of fiscal 2004 primarily due to the acquisition of OsitisResearch and headcount additions required to effect the enhancement of our product portfolio.

R&Ddevelopment expense consists primarily of salaries and benefits, prototype costs, and testing equipment costs. R&D

Research and development expense increased $11.7 million in fiscal 2008. The increase in research and development expense from the prior year is largely attributable to an $8.5 million increase in salaries and benefits as a result of higher headcount. The increase was also partially attributable to stock-based compensation expense of $5.0 million recorded under SFAS No. 123(R) in fiscal 2008, as compared to $3.3 million recorded in fiscal 2007.

Research and development expense increased $13.1 million in fiscal 2007. The increase in research and development expense primarily resulted from higher expenditures on development of our WAN Application Delivery products and an increase in stock-based compensation expense of $2.4 million.

Research and development headcount was 116281 at April 30, 2005, 822008, 205 at April 30, 20042007, and 62176 at April 30, 2003.2006. We believe that continued investment in product enhancementenhancements and new product development is critical to achieving our strategic objectives. As a result, as our net revenue allow, we expect R&Dresearch and development expense to continue to increase in absolute dollars.

Sales and Marketing

The following is a summary of sales and marketing expense by fiscal year (in(dollars in thousands):

Sales and marketing expense increased $8.8 million in fiscal 2005 from the prior year as we continued to execute our strategy of expanding our market presence through investment in our sales and marketing organizations. Included in sales and marketing expense for fiscal 2005 is approximately $0.5 million related to the Cerberian acquisition. Sales and marketing expense decreased $1.1 million in fiscal 2004 compared to fiscal 2003 due to a substantial decrease in marketing expenditures offset by an increase in headcount. Sales and marketing headcount was 126 at April 30, 2005, 93 at April 30, 2004 and 81 at April 30, 2003. Sales and marketing expense consists primarily of salaries and benefits, commissions, travel, advertising and promotional expenses.

Sales and marketing expense increased $55.8 million to $128.9 million in fiscal 2008 from $73.1 million in fiscal 2007. Sales and marketing expense increased as we continued to expand our sales force and invest in marketing personnel. Salaries and benefits increased by approximately $19.0 million as a result of this activity. In addition, commission expense increased by $18.3 million due primarily to the increase in revenue, coupled with more aggressive sales incentives for WAN acceleration deployments and further development of emerging markets. Also contributing to the increase in sales and marketing expense was an increase in stock-based compensation expense of $2.4 million and an increase in advertising of $1.8 million.

ShouldSales and marketing expense increased demand for our products continue, we$20.3 million to $73.1 million in 2007 from $52.8 million in fiscal 2006. The increase in sales and marketing expense was primarily attributable to increases in sales personnel, marketing program spending, and volume-related expenses such as commission payments and higher travel costs.

Sales and marketing headcount was 398 at April 30, 2008, 285 at April 30, 2007 and 189 at April 30, 2006. We expect sales and marketing expense willto increase in absolute dollars because we intend to seek to increase sales in an effort to expandboth domestic and international markets, establish and expand new distribution channels, and introduce new products.

General and Administrative

The following is a summary of general and administrative expense by fiscal year (in(dollars in thousands):