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.

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 the 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 stockCorporate Secretary of Blue Coat Systems, Inc. at an exercise price of $20.76420 North Mary Avenue, Sunnyvale, CA 94085 or by fax at 1 408-220-2175 (with a confirmation copy sent by mail). The written notice must include the candidate’s name, biographical data and qualifications and attach a written consent from the candidate agreeing to Manchester Securities Corp. (“Manchester”)be named as a nominee and Francisco Partners II, L.P. (“FP”) into serve as a private placement. The Notes do not bear interest.

On June 2, 2008,director if elected. Candidates recommended by the NotesCompany’s stockholders will be evaluated against the same criteria and under the Warrants were issued to Manchester, FPsame policies and an entity affiliated with FP (collectively, the “Purchasers”). We offered and sold the Notes and the Warrantsprocedures applicable to the Purchasers in reliance onevaluation of candidates proposed by directors or management.

Board Meetings and Attendance

During fiscal 2009, the exemption from registration provided by Section 4(2)Board of Directors held ten (10) meetings. Each of the Securities Act. We relied on this exemption from registration baseddirectors participated in part on representations made by the Purchasers in the Note Purchase Agreement.

Significant rights and obligationsat least 75% of the Purchasers and holdersaggregate of (i) the total number of meetings of the Notes (“Holders”) are as follows:

Conversion feature. The Notes are initially convertible into 3,853,564 sharesBoard of Blue Coat’s common stock atDirectors and (ii) the Holders’ option at any time prior to maturity at the initial conversion pricetotal number of $20.76.

Senior Debt. The Notes rank equal in rightmeetings 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 portioncommittee of the Note at a purchase price equal to the principal amountBoard of Directors on which each such director then served. The independent members of the Note, plus any late fees.Board of Directors regularly meet in executive sessions.

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 registrationThe Company encourages attendance by members 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 $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 $41.9 million reduction of Series 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 that 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 eachthe Company’s annual meeting of or pursuant to each consentstockholders. At the Company’s 2008 Annual Meeting of our stockholders for the electionStockholders (held on October 2, 2008), directors of directors.

Dividends.The Series A Preferred Stock participated equally with the holders of Common Stock in all dividends paid on the Common Stock, when, as and if declared by the Board of Directors outMessrs. NeSmith, Hanna, Barth and Tolonen and Dr. Howes were in attendance and available for questions.

Executive Officers

Set forth below are the name, age, position 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.Selected Consolidated Financial Data

The following tables set forth our selected consolidated balance sheet data as of April 30, 2008, 2007, 2006, 2005, 2004 and our statement of operations data forbiographical information about each of the five years ended April 30, 2008. The selected consolidated financial statement data include the resultsCompany’s executive officers, as of operations of acquired businesses commencing on their respective acquisition dates.

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

Except for per share information, amounts reported below are 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

The following table presents details of the total stock-based compensation expense that is included in each functional line item in the consolidated statements of operations above:

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

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 and indirect sales forces 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.

Overview

We sell a 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 to 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 distributed enterprise. We intend to continue to sell the PacketShaper^®, Intelligence Center and Policy Center products formerly offered by Packeteer and to rebrand them as Blue Coat products. We also intend to enhance the technologies developed and owned 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 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 convertible 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 purchase 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 partially fund the acquisition of Packeteer.

The operations of Packeteer and Blue Coat will be reported on a combined basis commencing with our financial statements for the quarter ending July 31, 2008.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to Revenue Recognition and related Allowance for Doubtful Accounts, Stock-Based Compensation, Valuation of Inventories, Valuation of Goodwill, Valuation of Long-Lived and 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 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 have discussed the development and selection of critical accounting policies and estimates with our audit committee. We believe the accounting policies described below are those 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:

Revenue Recognition and Allowance 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 revenue when all of the following criteria are met: when persuasive evidence of an arrangement exists; delivery or performance has occurred; the sales price is fixed or determinable and collectibility is reasonably assured. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we recognize.

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 has occurred.Shipping terms and related documents, or written evidence of customer acceptance, when applicable, are used to verify delivery or performance. Most of our sales are made through distributors under agreements allowing for certain stock rotation rights. Net revenue and the related cost of net revenue resulting from shipments to distributors are deferred until the distributors report that our products have been sold to a 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 risk of loss, which generally is upon shipment. We do not accept orders from these value-added resellers when we are aware that the value-added reseller does not have an order from an end user customer. 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 sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment.

Collectibility is 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 the 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 recorded to general and administrative expense. We write off accounts receivable when they are deemed uncollectible.

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 estimate 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 stock options at the date of grant 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 of 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 requires 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 impairment 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 our overall business and significant negative industry or economic trends. The process of evaluating the potential impairment of long-lived assets is subjective and requires significant judgment. Variances in our assumptions could have a significant impact on our conclusions 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 discounted cash flow basis.

Income Taxes

We use the liability method to account for income taxes as required by SFAS No. 109,Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves determining our income tax expense together with calculating the deferred income tax expense related to temporary difference 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 or liabilities, which are included within the consolidated balance sheets.

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 financial 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 estimate is more likely than not to be realized. We consider estimated future taxable income and prudent tax planning strategies in determining the need for a 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 will 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 in the future, an increase to the valuation allowance would be recorded to the provision in the 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 (dollars in thousands):

Demand for our products and related services continued to be strong in fiscal 2008, with net revenue increasing by 71.9% to $305.4 million as compared to $177.7 million in fiscal 2007. The growth in net revenue from fiscal 2007 to fiscal 2008 is attributable to the following factors: 1) continued market acceptance of 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 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 growth in net revenue from fiscal 2006 to fiscal 2007 was primarily attributable to continued market acceptance of our products, including the renewal of service contracts from our expanding installed base, coupled with investments in our sales and marketing organizations.

Alternative Data Technology, Inc. (a distributor) accounted for 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 2007 and 2006, respectively. As of April 30, 2008 and 2007, no customer accounted for more than 10.0% of gross accounts receivable.

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

On a geographic basis, revenue in North America increased $60.1 million in fiscal 2008, up 72.6% from fiscal 2007; Net revenue in North America increased $11.9 million in fiscal 2007, up 16.9% from fiscal 2006. The year-over-year increases in net revenue in North America for 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 part 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 were derived from customers outside of North America.

Net revenue in Europe, Middle East, and Africa (“EMEA”) increased $45.8 million in fiscal 2008, up 69.0% from fiscal 2007. Net revenue in EMEA increased $12.5 million in fiscal 2007, up 23.1% from fiscal 2006. The year-over-year increases in net revenue in EMEA for both fiscal 2008 and 2007 were primarily related to investments in our sales and marketing organizations in the region and broader market acceptance of our 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 $10.3 million in fiscal 2007, up 62.2% from fiscal 2006. The year over 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 APAC.

Gross Profit

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

Gross profit increased $102.0 million, or 77.3%, to $234.0 million in fiscal 2008 from $132.0 million in fiscal 2007, which was consistent with the increase in net revenue. As a percentage of net revenue, gross profit in fiscal 2008 increased to 76.6% from 74.3% in fiscal 2007, primarily due to more favorable product pricing, a product mix favoring higher margin products such as Blue Coat WebFilter, and higher overall revenue resulting in more effective leverage on fixed product costs, partially offset by higher royalty expense.

Gross profit increased $33.3 million, or 33.7%, to $132.0 million in fiscal 2007 from $98.7 million in fiscal 2006, primarily due to higher net revenue. Gross profit as a percent of net revenue increased to 74.3% in fiscal 2007 from 69.6% in fiscal 2006, which was primarily attributable to product price increases and increased absorption of fixed manufacturing and service costs resulting from the increase in net revenue.

Research and Development

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

Research and development expense consists primarily of salaries and benefits, prototype costs, and testing equipment costs.

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 281 at April 30, 2008, 205 at April 30, 2007, and 176 at April 30, 2006. We believe that continued investment in product enhancements and new product development is critical to achieving our strategic objectives. As a result, we expect research 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 (dollars in thousands):

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.

Sales and marketing expense increased $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 to increase in absolute dollars because we intend to seek to increase sales in both 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 (dollars in thousands):

General and administrative expense consists primarily of salaries and benefits, legal services, accounting and audit services, and other general corporate expenses.

General and administrative expense decreased $0.2 million to $27.9 million in fiscal 2008 from $28.1 million in fiscal 2007. The decrease was largely attributable to an $8.7 million decrease in legal and accounting expenses associated with our March 2007 Restatement, offset by an increase of $6.0 million in payroll-related expenses and $2.6 million related to stock-based compensation.

General and administrative expense increased $14.5 million to $28.1 million in fiscal 2007 from $13.6 million in fiscal 2006. The increase in general and administrative expense was largely attributable to the legal, auditing and other professional fees of approximately $13.0. The increase was also attributable to stock-based compensation expense within general and administrative expense increasing to $2.1 million in fiscal 2007 from $1.8 million in fiscal 2006.

Stock-Based Compensation

The following summarizes stock-based compensation expense included in the cost classifications in our consolidated statement of operations for fiscal 2008, 2007 and 2006, respectively (in thousands):

Restructuring Charges

As of April 30, 2008, all actions under our February 2002, August 2001, and February 2001 restructuring plans were completed.

The following summarizes the restructuring reversal and changes in restructuring reserve by fiscal year (in thousands):

The following table summarizes activity related to restructuring activity during the three years ended April 30, 2008 (in thousands):

In fiscal 2007 and 2006, we reduced the restructuring accrual by $19,000 and $48,000, respectively, due to decreases in the estimated costs required to restore the leased facilities to the condition stipulated in the related lease agreements.

Acquired In-Process Technology

We recorded a non-cash charge of $3.3 million in fiscal 2006 for the value of in-process technology acquired in the Permeo acquisition, which relates to research and development projects that had not yet reached technological feasibility and had no future use in our development activities.

To establish the value of the in-process technology acquired from Permeo we used an income approach, which values an asset based on the earnings capacity of such asset considering the future cash flows that could potentially be generated by the asset over its estimated remaining life. These cash flows were discounted to their present value using a discount rate of 29.0%, which is equal to a rate that would theoretically provide sufficient return to a potential investor at an appropriate level of risk. The present value of the cash flows over the life of the asset is summed to equal the estimated value of the asset.

Interest Income and Other Expense

The following summarizes interest income and other income (expense) and changes in interest income and other income (expense) by fiscal year (dollars in thousands):

Interest income increased for the fiscal years ended April 30, 2008, 2007 and 2006 as a result of higher average cash and investment balances throughout the year.

Other expense consists primarily of foreign currency exchange gains or losses, banking fees, and non-recurring gains or losses realized outside our normal course of business. In addition, other expense for fiscal 2008, 2007 and 2006 included payroll taxes and related penalties for the disqualification of stock options caused by the revised measurement dates determined during the investigation of historical stock option granting practices.

Provision for Income Taxes

The following summarizes the provision for income taxes and changes in the provision for income taxes by fiscal year (dollars in thousands):

The benefit for income taxes of $2.0 million for fiscal 2008 is primarily related to a partial reversal of a valuation allowance on deferred tax assets that was recorded as a reduction to income tax expense, offset by foreign income taxes and the current tax provision for U.S. and state taxes due primarily from a prepayment of certain intercompany expenses associated with our international tax structure established in fiscal 2008. The provision for income taxes of $1.1 million for fiscal 2007, is primarily related to foreign income taxes currently due, and a deferred tax liability recorded for the tax amortization of goodwill related to the acquisition of the NetCache business from Network Appliance. The provision for income taxes of $0.3 million for fiscal 2006 is primarily foreign corporate income taxes.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized in future periods. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including operating results, our history of losses and forecasts of future taxable income.

At April 30, 2008, our projections of future taxable income enabled us to conclude that it is more likely than not that we will have future taxable income sufficient to realize a portion of our net deferred tax asset. Accordingly, $19.6 million ($17.4 million of federal and $2.2 million of state) of the valuation allowance on our deferred tax assets was reversed as a credit to the provision for income taxes. Our conclusion that a portion of our deferred tax assets is more likely than not to be realized is strongly influenced by our projections of future taxable income. Our estimate of future taxable income considers all available positive and negative evidence regarding our current and future operations, including projections of income in various states and foreign jurisdictions. We believe our estimate of future taxable income is reasonable; however, it is inherently uncertain,

and if our future operations generate taxable income greater than projected, further adjustments to reduce the valuation allowance are possible. Conversely, if we realize unforeseen material losses in the future, or our ability to generate future taxable income necessary to realize a portion of the deferred tax asset is materially reduced, additions to the valuation allowance could be recorded. At April 30, 2008, the balance of the deferred tax valuation allowance was approximately $23.1 million.

As of April 30, 2008, we had net operating loss carryforwards for federal income tax purposes of approximately $108.5 million, which will expire in fiscal years ending in 2011 through 2027 if not utilized. We also had net operating loss carryforwards for state income tax purposes of approximately $45.2 million, which will expire in fiscal 2009 through 2027 if not utilized. We also had federal and California research credit carryforwards of approximately $1.2 million and $6.7 million respectively. The federal credit will expire in fiscal 2027 and 2028 if not utilized. The California credit is not subject to expiration.

Utilization of our net operating loss and credit carryforwards are subject to substantial annual limitations due to the ownership change provisions of the Internal Revenue Code and similar state provisions. Annual limitations have resulted in the expiration of net operating loss and tax credit carryforwards before utilization of approximately $60.9 million and $3.6 million, respectively. Utilization of federal and state net operating losses of approximately $108.5 million and $37.3 million, respectively, as well as $.1 million and $4.6 million of federal and state credits, respectively, are subject to annual limitations ranging from approximately $1.0 million to $13.7 million. See Note 7—“Income Taxes” for additional information.

On May 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48Accounting for Uncertainty in Income Taxes (FIN 48), issued in June 2006. FIN 48 applies to all tax positions related to income taxes subject to SFAS No. 109. Under FIN 48 we recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. As a result of the implementation of FIN 48, we did not recognize a cumulative adjustment to the May 1, 2007 balance of retained earnings as the amount was deemed immaterial. The cumulative effect of adoption of FIN 48 did not result in a material adjustment to our tax liability for unrecognized income tax benefits. We classify interest and penalties related to uncertain tax positions as a component of our provision for income taxes. Accrued interest relating to the income tax on the unrecognized tax benefits as of May 1, 2007 and April 30, 2008, was approximately $19,000 and $34,000, respectively, with approximately $15,000 being included as a component of provision for income taxes in the year ended April 30, 2008. See Note 7—“Income Taxes” for additional information.

Acquisitions

Packeteer, Inc.On June 6, 2008, after the close of fiscal 2008, we completed the acquisition of Packeteer, Inc. (“Packeteer”), a provider of products for WAN traffic prioritization and acceleration. The transaction was effected through a tender offer, followed by a merger of our wholly-owned subsidiary, with and into Packeteer. As a result of the transaction, Packeteer became our wholly-owned subsidiary and each outstanding share of Packeteer common stock 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. We will pay approximately $269 million in total consideration for the acquisition of Packeteer common stock, which includes shares purchased privately on April 20, 2008, shares purchased through the tender offer and payments made as a consequence of the merger. 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 distributed enterprise.

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, L.P. (“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 convertible 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 purchase an aggregate of 385,356 shares of our common stock at an exercise price of $20.76. We used the proceeds from the private placement to partially fund the acquisition of Packeteer.

NetCache business from Network Appliance, Inc. On September 11, 2006, we completed the acquisition of certain assets of the NetCache business from Network Appliance. The final consideration for the transaction consisted of $23.9 million cash consideration, an aggregate of 720,000 shares of our common stock valued at $5.7 million and $1.0 million in direct transaction costs. Of the total purchase price, $0.7 million has been allocated to the intangible assets acquired, with the balance of $29.9 million allocated to goodwill. The NetCache business previously provided products to large enterprises to manage internet access and security and control Web content and application acceleration. NetCache was a business unit previously owned by Network Appliance, Inc. Our primary purpose for acquiring certain assets of the NetCache business was to increase our potential customer base through the conversion of existing NetCache customers to our proxy appliances.

Permeo Technologies, Inc.On March 3, 2006, we completed the acquisition of Permeo, Inc. (“Permeo”). The purchase price of $45.3 million consisted of $15.0 million in cash consideration, 2.6 million shares of our common stock valued at $28.7 million, $1.0 million in direct transaction costs which had been fully paid as of April 30, 2007, and Permeo stock options assumed by us valued at $0.6 million. Identifiable intangible assets acquired included developed technology and customer relationships, which are being amortized into “Cost of revenue—Product” and “Operating expenses,” respectively. Permeo was a provider of on-demand information security, providing a comprehensive remote access and information protection product that secured and extended corporate applications to mobile workers, business partners and customers. Permeo’s operations were assumed as of the date of the acquisition and are included in our results of operations beginning on March 3, 2006.

All acquisitions are accounted for as purchases in accordance with SFAS No. 141,Accounting for Business Combinations (“SFAS No. 141”); accordingly, we allocate the purchase price to the fair value of net tangible and intangible assets acquired, with the excess purchase price allocated to goodwill.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS No. 157”). SFAS No. 157 provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. We are required to adopt SFAS No. 157 for our fiscal year beginning May 1, 2008. The adoption of SFAS 157 is not expected to have a significant impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115(“SFAS No. 159”). SFAS No. 159 allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item will be reported in current earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes a company elects for similar types of assets and liabilities. This statement is effective for our fiscal year beginning May 1, 2008. The adoption of SFAS 159 is not expected to have a significant impact on our consolidated financial statements.

In June 2007, the FASB ratified a consensus opinion reached by the Emerging Issues Task Force (“EITF”) on EITF Issue 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Usein Future Research and Development Activities.” (“EITF 07-3”). The guidance in EITF 07-3 requires us to defer and capitalize nonrefundable advance payments made for goods or services to be used in research and

development activities until the goods have been delivered or the related services have been performed. If the goods are no longer expected to be delivered or the services are no longer expected to be performed, we would be required to expense the related capitalized advance payments. EITF 07-3 is effective for fiscal years beginning after December 15, 2007 and is to be applied prospectively to new contracts entered into on or after the commencement of that fiscal year. Early adoption is not permitted. Retrospective application of EITF 07-3 also is not permitted. We intend to adopt EITF 07-3 effective May 1, 2008 and do not expect the pronouncement to have a material effect on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. This statement is effective for our fiscal year beginning May 1, 2009. We are currently evaluating the impact of adopting SFAS 141R on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. This statement is effective for our fiscal year beginning May 1, 2009. The adoption of SFAS No. 160 is not expected to have a significant impact on our consolidated financial statements.

Liquidity and Capital Resources

Since our inception, we have financed our operations and capital expenditures through cash provided by operating activities, private sales of preferred and common stock and convertible debt, bank loans, equipment leases, and an initial public offering of our common stock. We believe our existing cash, cash equivalents, short-term investments and cash generated from operations, if any, will be sufficient to meet our operating requirements for at least the next twelve months, including working capital requirements and capital expenditures. We may choose at any time to raise additional capital to strengthen our financial condition, facilitate expansion, pursue strategic acquisitions or investments, or to take advantage of business opportunities as they arise.

Net cash provided by operating activities was $56.9 million for the fiscal 2008, compared with $28.0 million for fiscal 2007. This increase was largely attributable to the growth in net income for the fiscal year. Working capital sources of cash in fiscal 2008 included increases in deferred revenue of $33.8 million, accounts payable of $6.6 million, accrued payroll and related benefits of $2.1 million and other accrued liabilities of $3.7 million. Deferred revenue increased primarily as a result of an increase in new service contracts sold with our appliances as well as the renewal of service contracts from our expanding installed base, both of which are recognized ratably over the service period. Accounts payable and accrued liabilities increased during fiscal 2008 due to an increase in operating expenses. Accrued payroll and related benefits increased primarily due to increased headcount and a higher commission accrual. Working capital uses of cash during fiscal 2008 included an increase in our accounts receivable balance of $27.0 million. This increase was largely due to higher net revenues in fiscal 2008 and an increase in our days sales outstanding (“DSO”). Our DSO increased from 51 days at April 30, 2007 to 60 days at April 30, 2008, which was largely attributable to a greater concentration of revenues recognized in the last month of the quarter of fiscal 2008 as compared to fiscal 2007. Also contributing to working capital uses of cash was an increase in net deferred tax assets of $19.6 million as a result of the partial release in our valuation allowance.

Net cash provided by investing activities was $10.3 million for fiscal 2008, compared with $67.5 million used in investing activities for fiscal 2007. Net cash used in investing activities for fiscal 2008 included $121.8 million for the purchase of investment securities, $25.3 million for the purchase of Packeteer common stock, and $11.2 million for the purchase of property and equipment. This was offset by the sale of investment securities of $164.5 million. The increased use of cash for property and equipment, as compared to the prior year, was primarily related to purchases of computer equipment, software, furniture and leasehold improvements associated with the growth in our business. Net cash used in investing activities for fiscal 2007 included $124.4 million for the purchase of investment securities, $24.9 million in cash consideration and direct costs related to the acquisition of certain assets of the NetCache business, and $5.3 million for the purchase of property and equipment. In the future, we expect that any cash in excess of current requirements will continue to be invested in short-term investment grade, interest-bearing securities. Through the date of this report, the acquisition of Packeteer has been funded by approximately $188 million in cash from internal sources and $80 million in cash from the issuance of convertible notes.

Net cash provided by financing activities was $43.8 million for fiscal 2008, compared with $42.5 million net cash provided by financing activities for fiscal 2007. The net cash provided by financing activities in fiscal 2008 was attributable to proceeds from the issuance of common stock of $29.8 million and a tax benefit related to stock-based compensation of $14.0 million. The net cash provided by financing activities in fiscal 2007 was primarily related to the net proceeds received from our sale of Series A preferred stock of $41.9 million.

On June 2, 2008, we issued $80 million in Zero Coupon Convertible Senior Notes (the “Notes”) as well as warrants to purchase an aggregate of 385,356 shares of our common stock at an exercise price of $20.76 in a private placement. The Notes are convertible into 3,853,564 shares of our common stock at the holders’ option at any time prior to maturity at a conversion price of $20.76. The Notes do not bear interest. We used the $80 million proceeds from the private placement to partially fund the acquisition of Packeteer, Inc. The Notes mature in June of 2013 unless converted into common stock or accelerated as a result of our default under the Notes prior to such date.

Our long-term strategy is to maintain a minimum amount of cash and cash equivalents for operational purposes and to invest the remaining amount of our cash in interest bearing and highly liquid cash equivalents and marketable debt securities. As of April 30, 2008, cash, cash equivalents, short-term investments, and restricted cash totaled $163.0 million.

Contractual Obligations

Below is a summary of fixed payments related to certain contractual obligations as of April 30, 2008 (in thousands):

We lease certain equipment and office facilities under non-cancelable operating leases that expire at various dates through fiscal year 2014. The facility leases generally require us to pay operating costs, including property taxes, insurance and maintenance, and contain scheduled rent increases and certain other rent escalation clauses. Rent expense is recognized in our consolidated financial statements on a straight-line basis over the terms of the respective leases after consideration of rent holidays and improvement allowances, if applicable, with any assets purchased using a lessee improvement allowance capitalized as fixed assets and depreciated over the shorter of their useful lives or the lease term.

In September 2005, we commenced a five-year operating lease of a building that serves as our headquarters in Sunnyvale, California. As part of this agreement, we are required to maintain a $0.4 million irrevocable standby letter of credit with a major financial institution as a form of security. The letter of credit is secured by deposits and provides for automatic annual extensions, without amendment, through the end of the lease term in August 2010. The amount of the letter of credit did not change during fiscal 2008. The deposits securing the letter of credit are classified as long-term restricted cash in the accompanying consolidated balance sheets as of April 30, 2008 and 2007, respectively. We amended this lease subsequent to the end of fiscal 2008, as described in Note 13, Subsequent Events (Unaudited).

In addition, we have firm purchase and other commitments with various suppliers and contract manufacturers to purchase component inventory, manufacturing material and equipment. These agreements are enforceable and legally binding against us in the short-term and a majority of the amounts under these arrangements are due within one year. Our minimum obligation at April 30, 2008 under these arrangements was $9.5 million.

After the close of fiscal 2008, we completed the acquisition of Packeteer, and assumed responsibility for outstanding lease and purchase obligations existing at the time of the acquisition. We have not completed our review of these agreements, and cannot reasonably estimate the future contractual obligations at this time.

On April 20, 2008, we entered into a 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”) in a private placement. We also agreed to issue warrants to purchase an aggregate of 385,356 shares of our common stock at an exercise price of $20.76. The convertible notes and warrants were issued on June 2, 2008 and expire in June of 2013.

The Notes are convertible into shares of our common stock at the holders’ option at any time prior to maturity at the initial conversion price of $20.76, which represents a 5% conversion premium based on the closing price of Blue Coat’s common stock of $19.77 per share on April 18, 2008. The Notes do not bear interest.

In connection with our NetCache asset acquisition in September 2006, we entered into an escrow agreement pursuant to which we deposited in escrow $4.0 million, primarily to secure certain indemnification obligations to Network Appliance related to this transaction until December 2007. As of April 30, 2007, the balance in this

escrow account had grown to $4.1 million and was classified as short-term restricted cash equivalents. As of April 30, 2008, the escrow agreement had expired, the amounts held in escrow were released, and the related balance was reclassified to cash and cash equivalents in the consolidated balance sheet at April 30, 2008.

At April 30, 2008, we had a liability for unrecognized tax benefits of $2.8 million. Due to uncertainties with respect to the timing of future cash flows associated with our unrecognized tax benefits at April 30, 2008, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $2.8 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See “Note 7—Income Taxes” to our consolidated financial statements for a discussion of income taxes.

Off-Balance Sheet Arrangements

As of April 30, 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities, nor do we have any commitment or intent to provide funding to any such entities. As such, we are not materially exposed to any market, credit, liquidity or financing risk that could arise if we had engaged in such relationships.

We did not have any off-balance sheet transactions, arrangements, or obligations that are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, or capital resources.

Item 7A.Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are subject to certain market risks, including changes in exchange rates and interest rates. We do not undertake any specific actions to cover our exposures to exchange and interest rate risks, and we are not a party to any interest and exchange rate risk management transactions. We also do not purchase or hold any derivative financial instruments for speculative or trading purposes.

As of April 30, 2008, cash, cash equivalents and short-term investments totaled $163.0 million, $0.9 million of which is classified as restricted. These investments are primarily held in money market funds, commercial paper and corporate securities. We adhere to an investment policy that is intended to ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. The fair value of our investment portfolio would not be significantly impacted by either a 100 basis point increase or decrease in market interest rates, due principally to the short-term nature of the majority of our investment portfolio.

Foreign Currency Exchange Rate Risk

We sell our products throughout the world. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because all of our sales are currently billed and collected in U.S. dollars, a strengthening of the dollar could make our products less price-competitive in foreign markets. On the other hand, a weakening of the dollar could make our products more price-competitive in foreign markets. If the events described above were to occur, our net revenue and earnings could be materially affected, since a significant portion of our net revenue and earnings are derived from international operations. For the fiscal years 2008, 2007 and 2006, approximately 53.2%, 53.4% and 50.0% respectively, of our total net revenue were derived from customers outside of North America. Further, substantially all of the expenses of operating our foreign subsidiaries are incurred in foreign currencies. As a result, our U.S. dollar earnings and net cash flows from international operations may be affected by changes in foreign currency exchange rates. However, we do not consider the market risk associated with our international operations to be material. We do not currently use derivative financial instruments for hedging or speculative purposes.

Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements10-K/A.

Brian M. NeSmithhas served as President and Chief Executive Officer and as a director of the Company since March 1999. From December 1997 to March 1999, Mr. NeSmith served as Vice President of Nokia IP, Inc., a security router company, which acquired Ipsilon Networks, Inc., an IP switching company, where Mr. NeSmith served as Chief Executive Officer from May 1995 to December 1997. From October 1987 to April 1995, Mr. NeSmith held several positions at Newbridge Networks Corporation, a networking equipment manufacturer, including Vice President and General Manager of the VIVID group. Mr. NeSmith holds a B.S. in Electrical Engineering from the Massachusetts Institute of Technology.

Betsy E. Bayha has served as Senior Vice President, General Counsel and Secretary of the Company since April 2007. Ms. Bayha previously served as Senior Vice President, General Counsel and Secretary of NetIQ Corporation, a provider of integrated systems and security management software solutions, from November 2001 to June 2006, when it was acquired by a consortium of private equity firms. Prior to joining NetIQ, Ms. Bayha was in private practice representing high technology corporations in licensing, corporate and litigation matters for more than 20 years. She was a partner at General Counsel Associates from November 1994 through October 2001, and was a partner at the international law firm of Coudert Brothers from December 1986 through October 1994. Ms. Bayha holds a J.D. from Harvard Law School, an M.A. in public administration from The Ohio State University and a B.A. in economics from Oakland University.

Kevin T. Biggs has served as Senior Vice President, Worldwide Sales of the Company since January 2007. Mr. Biggs joined the Company from International Business Machines, Inc. (“IBM”), a manufacturer of computers and related products, where he held the position of Vice President of New Customer Acquisition from February 2004 to December 2006. Prior to that time, Mr. Biggs served

as IBM’s Vice President of Worldwide Sales, IBM Data Management Division, from August 2002 to February 2004; as IBM’s Vice President of Software Sales, IBM Americas West, from April 2002 to August 2002; and as IBM’s Vice President of Software, IBM Latin America, from September 1998 to April 2002. Prior to these executive roles, Mr. Biggs held a number of sales management positions at IBM since joining IBM in 1980. Mr. Biggs holds a B.A. in both Economics and Mathematics from Drury University.

David A. de Simonehas served as Senior Vice President of the Company since September 2003. He has served as Senior Vice President, Corporate Operations of the Company since May 2007. Previously, Mr. de Simone served as Senior Vice President, Engineering of the Company from September 2003 to May 2007. From late 2002 to September 2003, Mr. de Simone worked as an independent consultant, providing technical assistance and executive coaching to several clients. From mid 2000 to late 2002, Mr. de Simone served as Vice President of Platform Development for Brocade Communications Systems, a provider of storage area networking products. From February 1989 to May 2000, Mr. de Simone held a number of positions with Tandem Computers, an enterprise computer systems and transaction processing company, and with Compaq Computer Systems, a global computer systems, storage and solutions company, subsequent to its acquisition of Tandem Computers. During the last several years of his tenure with both Compaq and Tandem, Mr. de Simone was Vice President of Clustering Technology, and earlier in his tenure with Tandem he was a Director of Engineering. Mr. de Simone has an additional 11 years of experience in a variety of engineering and operations roles. Mr. de Simone holds a B.S.E.E. from the University of California, Davis.

Bethany J. Mayer has served as Senior Vice President, Worldwide Marketing and Corporate Development of the Company since October 2008. Previously, she served as Senior Vice President, World Wide Marketing of the Company from June 2007. From February 2007 to June 2007, Ms. Mayer served as Vice President of Business Planning and Marketing with JDS Uniphase Inc., an optical components company, and from March 2005 to February 2007, as the Chief Marketing Officer for Mirapoint Inc., an e-mail and e-mail security company. Ms. Mayer was Vice President of Marketing and Product Management for Vernier Networks, a network security company, from March 2004 to March 2005, and was Vice President of Product Marketing for Skystream Networks Inc., a video networking company, from March 2000 to March 2004. Prior to those positions, Ms. Mayer held various marketing and product management positions at Cisco Systems, a networking technology company, from September 1993 to March 2000. Ms. Mayer held various operations positions and engineering program positions at Apple Computer Inc., a computer technology company, from January 1990 to September 1993. Ms. Mayer held various positions in engineering program management at Lockheed Martin Inc., an aerospace defense company, from March 1983 to January 1990. Ms. Mayer holds a B.S. in political science from Santa Clara University.

Michael J. Gennaro has served as Interim Chief Financial Officer since May 2009. Mr. Gennaro has been a partner at FLG Partners, LLC since December 2006. Previously, Mr. Gennaro served as Vice President of Finance and Chief Financial Officer at Sylantro Systems, Inc., a provider of telecommunications software, from March 2000 to January 2006; as Vice President of Finance and Chief Financial Officer at Inverse Network Technology, Inc., a provider of software that measures the quality of internet service, from 1998 to 2000; and as Vice President of Finance of Novell, Inc., a provider of server operating systems and internet software, from 1994 to 1998. Prior to these positions, Mr Gennaro served as Vice President of Finance and Chief Financial Officer of Piiceon, Inc. and Verticom, Inc., and held several other finance-related positions at high-tech companies. Mr. Gennaro is a former Audit Manager with Arthur Young & Company, now Ernst & Young, and is a Certified Public Accountant in California and New Jersey. Mr. Gennaro holds an M.B.A. in Accounting from Rutgers Graduate School of Business and a B.S. in Mathematics from Rutgers University.

Code of Business Conduct

The Company’s Board of Directors has adopted a Code of Business Conduct, which outlines the principles of legal and ethical business conduct under which the Company does business. The Code of Business Conduct is applicable to all of the Company’s directors, officers and employees. The Code of Business Conduct is available under the heading “Corporate Governance” of the Investor Relations section of the Company’s website at http://www.bluecoat.com/aboutus/investor_relations. Upon request to the Company’s Secretary, the Company will provide a copy of the Code of Business Conduct free of charge. Any substantive amendment of the Code of Business Conduct, and any waiver of the Code of Business Conduct for executive officers or directors, will be made only after approval by the Company’s Board of Directors or a committee of the Board, and will be disclosed on the Company’s Web site. In addition, any such waiver will be disclosed within four days on a Form 8-K filed with the SEC if then required by applicable rules and regulations.

Section 16(a) Beneficial Ownership Reporting Compliance

The members of the Board of Directors, the executive officers of the Company and persons who beneficially own more than 10% of the Company’s outstanding Common Stock are subject to the reporting requirements of Section 16(a) of the Exchange Act which require them to file reports with respect to their ownership of the Company’s Common Stock and their transactions in such Common Stock. The Company has reviewed copies of Section 16(a) reports that it has received from such persons regarding their

transactions in Common Stock and their Common Stock holdings for fiscal 2009, together with written representations received from one or more of such persons that no annual Form 5 reports were required to be filed by them for fiscal 2009. Based upon this review, the Company believes that all reporting requirements under Section 16(a) for fiscal 2009 were met in a timely manner by such persons.

Item 11. Executive Compensation

Compensation Discussion and Analysis

The Compensation Committee oversees the Company’s compensation programs and has the exclusive authority to establish the compensation payable to the Company’s CEO and other executive officers. In addition, the Compensation Committee approves non-equity incentive programs in which the Company’s executive officers participate and discretionary bonuses made to the Company’s executive officers.

This Compensation Discussion and Analysis explains the Company’s compensation programs and discusses how they operate, particularly with respect to the Company’s named executive officers. During fiscal 2009, the Company’s “named executive officers” consist of the CEO, the Chief Financial Officer and the three most highly compensated executive officers (other than the CEO or Chief Financial Officer) who were serving as executive officers at the end of fiscal 2009. These are the Company’s Senior Vice President, Corporate Operations; Senior Vice President, Worldwide Sales; and Senior Vice President, General Counsel & Secretary.

Compensation Program Overview

The Company intends that its compensation programs provide compensation that is sufficient to attract and retain talented executives and that motivates them to achieve the Company’s strategic goals and objectives and to increase the market value of the Company’s stock over the long term. The Compensation Committee’s fundamental policy is to offer the Company’s executive officers competitive compensation opportunities based upon the Company’s overall performance, their individual contribution to the Company’s financial success and their personal performance. Each executive officer’s compensation package generally includes: (i) base salary, which is fixed; (ii) short-term incentive compensation, which is variable and consists of quarterly profit-sharing awards and, for sales personnel, sales incentive compensation; and (iii) long-term stock-based incentive awards.

Peer Group

In its determination of compensation amounts for fiscal 2009, the Company assessed market practices through review of available data with respect to the following peer group:

This peer group was comprised of network and software companies and was selected after consideration of annual revenue, market capitalization and headcount. The Company used the services of Radford to recommend members of the peer group, and to provide market data regarding executive compensation practices of the peer group. The Company periodically reviews and updates the composition of the peer group.

Compensation Components

Base Salary

The base salary for each executive officer is generally set at the time the officer commences employment. In determining the initial salary of an executive officer, the Compensation Committee considers information available from publicly available databases and private surveys, with particular emphasis on general market levels for companies in the peer group. The Compensation Committee reviews peer group data to assess market practices with respect to base compensation and cash based incentive compensation, but also considers the recommendation of the CEO and other factors including competitive dynamics, the skills and experience of the individual and the specific needs of the Company.

The Compensation Committee began its review of the compensation and performance of each of the Company’s executive officers for fiscal 2009 during the fourth quarter of fiscal 2008. This review was conducted during multiple meetings and discussions in which the Compensation Committee members and, in some cases, the CEO participated. The Chairman of the Audit Committee also participated in some discussions, including those that led to the final approval of fiscal 2009 executive compensation packages.

In reviewing the salary of each executive, the Compensation Committee considered the executive’s level of responsibility; each executive’s specific qualifications, experience and job performance; and the significance of other components of total compensation (such as sales incentive compensation for the Company’s Senior Vice President, Worldwide Sales). The Compensation Committee was provided with materials prepared by the Company’s Finance and Human Resources Departments that summarized the CEO’s initial recommendation for each executive and compared the recommendation against the compensation provided for comparable positions by members of the peer group at the 50^thand 65^thpercentiles. The recommendation of the CEO played a significant role in establishing the base salaries of executives other than the CEO, although the Compensation Committee’s final determinations were not identical to those initially proposed by the CEO. In increasing the CEO’s compensation, the Compensation Committee noted that the CEO’s salary had been substantially below that at the 50^thpercentile of the peer group for a period of years due to the CEO’s desire to receive a substantial portion of his compensation as variable compensation. However, the Compensation Committee believed it desirable to have the CEO’s fixed compensation more consistent with that of his peers and other executives of the Company, while continuing to have a significant percentage of his total compensation package consist of short-term and long-term incentives as described below.

As a consequence of its review, the Compensation Committee agreed upon the following base salaries to be paid to the Company’s named executive officers during fiscal 2009:

Short Term Incentive Compensation

Profit Sharing Plan

The Company presently maintains the Blue Coat Profit Sharing Plan (“Profit Sharing Plan”), which is applicable to all of the Company’s employees (other than certain sales personnel on commission), including the Company’s executive officers. The Profit Sharing Plan is intended to align the compensation of the Company’s executives with the interests of its stockholders by encouraging its executives to focus on profitability. It provides payment only if the Company achieves a minimum quarterly profit threshold.

Quarterly payments are made under the Profit Sharing Plan if the metric then used by the Company exceeds a threshold percentage of the Company’s net revenue for the applicable quarter. In fiscal 2009, the Company used non-GAAP operating profit as the applicable metric, which is the Company’s non-GAAP operating income for the quarter, excluding Profit Sharing Plan expenses. Non-GAAP operating income is the Company’s non-GAAP net income before the effect of non-operating income (such as interest) and income taxes. The Compensation Committee believes that this metric is appropriate because the Company’s effective tax rate and interest income and expense could not be affected by the majority of the Company’s employees. Non-GAAP net income also excludes expense related to the fair value write-up of acquired inventory sold, stock-based compensation expense, amortization of intangible assets, expenses associated with matters related to the stock option investigation, restructuring expenses, and related tax adjustments.

The quarterly target payment for executives was 30% of the individual’s quarterly base salary in fiscal 2009, compared to 20% in fiscal 2008. This increase was approved by the Compensation Committee based upon its determination that the target incentive compensation for the Company’s non-sales executives was below that offered to others holding comparable positions with members of its peer group. The Compensation Committee also believed that it was desirable to tie a larger portion of executive total compensation to achievement of the Company’s profit objectives.

During fiscal 2009, the threshold non-GAAP operating profit goal was 15% of net revenue. The Profit Sharing Plan paid 20% of an individual’s quarterly target amount for each 1% that the metric achievement for the quarter exceeded this 15% threshold percentage.

Any amounts earned by executives under the Profit Sharing Plan during fiscal 2009 were paid in five installments. An initial payment of 40% of the incentive amount earned during the quarter was paid in the following quarter. Thereafter, 15% of that amount was paid in each of the four succeeding quarters if the executive remained employed by the Company.

The actual amounts earned by each named executive officer for performance under the Profit Sharing Plan during fiscal 2009 were less than 1% of each individual’s base salary because the Company’s profit achievement in most quarters of fiscal 2009 was not sufficient to result in payments under the Profit Sharing Plan. These amounts are shown below in the “Summary Compensation Table.”

Sales Compensation

Because Mr. Biggs heads the Company’s sales operations, Mr. Biggs’ annual target incentive compensation, which was $350,000 in fiscal 2009, consisted of participation in the Profit Sharing Plan, as well as incentive compensation based upon the achievement of Company goals regarding sales expense as a percentage of revenue and achievement of annual bookings against his sales and service renewal quota. The sales compensation plan initially was approved in the first fiscal quarter of fiscal 2009 and was revised in the second fiscal quarter of fiscal 2009 to add quota with respect to products acquired as a consequence of the Company’s acquisition of Packeteer, Inc. (“Packeteer”).

Discretionary Bonuses

The Compensation Committee may award discretionary bonuses to executive officers from time to time. Such awards typically are recommended by the Company’s CEO. In February 2009, the Compensation Committee approved an award of $100,000 to Mr. de Simone, Senior Vice President, Corporate Operations, in recognition of his work in connection with leading the Company’s efforts to integrate the Packeteer products, operations and business.

Long Term Incentive Compensation (Equity Awards)

The Company provides long-term incentive compensation to its employees through the provision of equity awards under its equity plans. The Company’s equity program is broad-based and, like many of its peer companies, the Company has traditionally provided equity awards to all of its U.S.-based employees and many of its international employees. The Company believes that the provision of equity awards aligns the compensation of its employees to continued appreciation of its stock price over time, thereby focusing employee, executive and corporate performance on continued stockholder returns. Currently, the Company awards both options and restricted stock units to many of its employees, including executive officers. Because of the distinctive features of each type of award, the Company believes that a combination of award types provides a more effective compensatory result.

Options

The Company has traditionally used stock options as its principal means of equity compensation. Stock options allow the recipient to acquire shares of the Company’s Common Stock at a fixed price per share over a specified period of time. Typically, any stock option award made to an employee, including an executive officer, will vest over four years. The vesting schedule and the number of shares granted are intended to provide a meaningful incentive following the grant. Accordingly, the option will provide a return to the recipient only if he or she remains employed by the Company, and then only if the market price of the Company’s Common Stock appreciates.

Restricted Stock and Restricted Stock Units

The Company also grants restricted stock awards and restricted stock units (which do not have an exercise price). The Company’s use of restricted stock awards and restricted stock units, or full value awards, conserves shares available for issuance under its equity plans and reduces the potential dilution of its stockholders, as typically fewer shares are awarded under a full value award than under an option grant. Such awards are subject to forfeiture if the holder’s employment with the Company is terminated and, with the exception of performance-based awards, typically vest over a four year period on either a quarterly or an annual basis. The Company believes that full value awards are an effective retention tool and provide an incentive to increase the Company’s stock price.

Equity Budgets

The Company budgets for equity awards on an annual basis, and considers the size of its equity pool, its projected hiring plans (including the number of shares believed to be necessary to attract personnel at the levels at which it intends to hire) and its need to offer equity compensation to existing employees as an incentive and retention device, particularly given an analysis of the activities of the peer group and others with whom the Company competes for talent. The budget is prepared by management and is subject to the approval of the Compensation Committee.

Equity Awards Made to Executives

Generally, a significant equity award is made to an executive officer in the year that he or she commences employment. Under the Company’s Equity Award Policy, discussed below, additional equity awards may be made on the third Thursday of June, in

connection with the Company’s annual “refresh” program. Refresh awards are made after the completion of the Company’s annual focal reviews and budgeting process, each of which is conducted at the end of the fiscal year. In addition to refresh awards, other equity awards may be made to executives in connection with promotions and performance.

As part of its budgeting process and the Company’s broad-based equity refresh program for fiscal 2009, in May 2008, the Compensation Committee approved equity awards to each of the Company’s named executive officers. Those awards are set forth below in the “Grants of Plan-Based Awards During Fiscal 2009” table. In connection with the refresh awards, the CEO provided his initial recommendation to the Compensation Committee regarding the size and structure of the awards based upon his estimation of the size of the awards that would be necessary to recruit individuals of similar skill to the executive positions and then dividing that amount by four, to reflect the annual nature of the award.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTiming of Equity Awards and Equity Award Policy

The Board of Directors has adopted an Equity Award Policy (“Equity Award Policy”), which is intended to provide additional oversight over the Company’s making of equity awards. A copy of the Equity Award Policy, as currently in effect, is available under the heading “Corporate Governance” of the Investor Relations section of the Company’s website at http://www.bluecoat.com/aboutus/investor_relations. The Equity Award Policy was adopted, in part, to ensure that all equity awards made by the Company undergo appropriate scrutiny by the Board of Directors, that the timing of the Company’s equity awards are appropriate, and Stockholdersthat all stock options are granted at a price that is at least equal to the fair market value on the date of Blue Coat Systems, Inc.the award.

WeThe Company’s Equity Award Policy provides generally that stock options approved by the Compensation Committee will be effective on the third Thursday of the calendar month following the later of (a) the date of approval, or (b) the occurrence of the Award Event. It provides that equity awards approved by the Stock Option Committee will only be granted on the third Thursday of the calendar month following the date of approval, which must be after the occurrence of the Award Event. If the third Thursday of the month is not a business day, then the date of grant will be the first business day thereafter. Under the Equity Award Policy, the “Award Event” is the event justifying the issuance of the equity award, such as thebona fide commencement of employment, the promotion of an employee or the closing of an acquisition. Under the Equity Award Policy, fair market value is specified as the NASDAQ closing price of the Company’s Common Stock, and any stock option must have auditedan exercise price equal to or greater than the accompanying consolidated balance sheetsfair market value on the date of Blue Coat Systems, Inc.grant.

The Company’s Equity Award Policy governs the provision of annual refresh awards to existing employees. Under the Equity Award Policy, refresh awards are approved by the applicable committee of the Board after completion of the Company’s annual budget planning process and will be effective on the third Thursday of June.

Equity Ownership Guidelines

The Company’s Corporate Governance Guidelines state that each executive or director is required to hold, directly or indirectly, 2,000 shares of the Company’s Common Stock. Of that amount, 1,000 shares must be held by one year from the commencement of service and an additional 1,000 shares must be held by two years from the commencement of service. The Nominating/Corporate Governance Committee has waived this requirement with respect to Keith Geeslin, a director, due to policies in place at Francisco Partners and the investments made in the Company by Francisco Partners, as discussed below in “Certain Relationships and Related Transactions—Transactions with Francisco Partners.” The requirement has not been waived with respect to any other director or named executive officer.

Change in Control and Termination Benefits

Each of April 30, 2008the Company’s executives is employed on an “at will” basis. The Company has adopted an Executive Separation Policy that may provide benefits upon the termination of an executive’s employment. The Company has also entered into Change in Control Severance agreements with its CEO and executives. Additionally, the Company’s equity plans provide for acceleration of the vesting of equity awards under certain circumstances involving a change in control. The Company does not provide a tax gross up with respect to any severance or change in control benefits.

Executive Separation Policy

The Compensation Committee has approved an Executive Separation Policy in order to provide consistency and predictability in the Company’s treatment of executives upon termination of employment and to offer a reasonable level of transition assistance. The Executive Separation Policy provides that in the event an executive’s employment with the Company is terminated by the Company without cause or as a result of the executive’s resignation for good reason, and contingent upon the executive’s execution of a general release of claims against the Company in the form specified, the Company will pay the executive a lump sum payment equal to six months of base salary. As defined in the Executive Separation policy, “good reason” includes a material diminution in authority, duties or responsibilities; a reduction in base salary; and a material change in location.

With the exception of a contractual obligation to continue this type of severance protection to Mr. Biggs, the Board of Directors or Compensation Committee may amend, revise, suspend or terminate the Executive Separation Policy if the Company has not then entered into a definitive agreement to effect a change in control.

Potential Acceleration of Equity Awards

The Company also provides protection against the loss of equity awards, which are a valuable part of compensation for the Company’s employees (including executive officers), as a result of a change in control. Each of the 1999 Stock Incentive Plan and 2007 andStock Incentive Plan (“2007 Plan”), under which all outstanding unvested equity awards to named executive officers have been made, provides that upon a change in control (as defined in the related consolidated statements of operations, stockholders’relevant equity and cash flowsplan), each outstanding award will become fully vested unless the surviving corporation assumes the award or replaces it with a comparable award (as determined by the Compensation Committee). Even if an award is assumed by the successor corporation, it will become fully vested if the holder’s service is involuntarily or constructively terminated within 18 months following the change in control. A termination is involuntary if the individual is dismissed for eachreasons other than misconduct, or if the individual voluntarily resigns after one of the three yearsfollowing circumstances occurs without the individual’s consent: (a) a change in his position with the Company that materially reduces his level of responsibility; (b) a material reduction in his compensation; or (c) a relocation of the individual’s place of employment by more than fifty miles.

The written agreement entered into between Mr. Biggs and the Company in connection with the commencement of his employment provides that 50% of the shares under the stock option granted to him in April 2007 and 50% of the restricted shares awarded to him in April 2007 will vest in the event of a change in control.

Change in Control Severance Agreements

The Compensation Committee approved the Company’s entry into Executive Change in Control Severance Agreements with its executive officers effective May 1, 2009. These agreements provide for a lump sum cash payment based on the individual’s base salary and target incentive compensation, full acceleration of vesting on all unvested and outstanding equity awards, and payment of COBRA premiums for a limited period, ended April 30, 2008. Our audits also includedif the financial statement schedule listedindividual is terminated without cause or resigns for good reason within a given period before or after a change in control. The terms of these agreements and estimated potential payment amounts are described in “Estimated Payments Upon Termination Without Cause or Related To a Change in Control” below.

The Compensation Committee believes that the index at Item 15(2). These financial statementsbenefits provided by these agreements encourage the continued attention, dedication and schedule are the responsibilityobjectivity of the Company’s management. Our responsibilityexecutives to their assigned duties without the distraction that might arise from the possibility, threat or occurrence of a change in control of the Company, and provide an incentive to the executives to continue to grow the Company’s overall business and support potential strategic transactions in the best interest of the Company and its stockholders. In approving these change in control severance benefits, the Compensation Committee considered a number of factors, including the prevalence of similar benefits adopted by other publicly traded companies, including peer group companies.

Other Benefits

Executive officers are eligible to participate in all of the Company’s employee benefit plans, such as the Employee Stock Purchase Plan (“ESPP”); medical, dental, vision, group life, disability and accidental death and dismemberment insurance plans; and 401(k) plan, in each case on the same basis as other employees.

Tax Considerations

To maintain flexibility in compensating the Company’s officers in a manner designed to promote varying corporate goals, the Compensation Committee has not adopted a policy requiring all compensation to be deductible. If it determines that such action is appropriate and in the Company’s best interest, the Compensation Committee may approve compensation or changes to express an opinion on these financial statementsplans, programs or awards that may cause the compensation or awards to exceed the limitation under Section 162(m) of the Code, which currently limits deductibility of compensation in excess of $1 million paid to certain executive officers during a single year.

Compensation Committee Report

The Compensation Committee, comprised of independent directors, reviewed and schedule based on our audits.

We conducted our audits in accordancediscussed the above Compensation Discussion and Analysis with the standards ofCompany’s management. Based on that review and discussion, the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Blue Coat Systems, Inc. at April 30, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relationCompensation Committee recommended to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Notes 2, 6 and 7, to the consolidated financial statements, Blue Coat Systems, Inc. adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes, on May 1, 2007, and Statement of Financial Accounting Standards No. 123 (R) Share Based Payment, on May 1, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Blue Coat Systems, Inc.’s internal control over financial reporting as of April 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 27, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

San Jose, California

June 27, 2008

BLUE COAT SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

The accompanying notes are an integral part of these Consolidated Financial Statements.

BLUE COAT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)