UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

FOR THE QUARTERLY PERIOD ENDED OCTOBERJULY 31, 20082009

OR

FOR THE TRANSITION PERIOD FROM                    TO                    

COMMISSION FILE NUMBER 000-28139

BLUE COAT SYSTEMS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

420 NORTH MARY AVENUE

SUNNYVALE, CALIFORNIA 94085

(408) 220-2200

(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT’S PRINCIPAL EXECUTIVE OFFICES

AND TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

Indicate by check mark whether the registrant is a shell company (as determined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

There were 39,962,286 shares of the registrant’s Common Stock, par value $0.0001, issued and outstanding as of August 31, 2009.

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements thatwithin 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;levels and operating margins; the impact of quarterly fluctuations of revenue and operating results; our ability to achieve expected levels of revenues and profit contributions from acquired businesses; the impact of macroeconomic conditions on our business; the adequacy of our capital resources to fund operations and growth; investments or potential investments in acquired businesses and technologies (including our recent acquisition of Packeteer, Inc.), as well as internally developed technologies; the expansion and effectiveness of our direct sales force, distribution channel, and marketing activities;activities, including the recordingrealignment of amortization of acquired technologyour sales force and stock-based compensation;changes in our global fulfillment model; 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,“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 Quarterly Report on Form 10-Q 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 under partPart II, Item 1A of this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q.

PART I: FINANCIAL INFORMATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

See accompanying notesNotes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

Notes to Condensed Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principlesGAAP for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of Blue Coat Systems, Inc. and those of our subsidiaries, all of which are wholly owned. All inter-company balances and transactions have been eliminated. We record all acquisitions using the purchase method of accounting and, accordingly, include the acquired company’s results of operations in our consolidated results from the date of each acquisition. The consolidated financial statements include the accounts and operating results of Packeteer, Inc. (“Packeteer”) beginning June 6, 2008. In management’s opinion, the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented. The condensed consolidated balance sheet as of April 30, 2009 is derived from the April 30, 2009 audited consolidated financial statements.

The functional currency of our domestic and foreign operations is the United StatesU.S. dollar. Accordingly, the effects of foreign currency transactions, and of remeasuring the financial condition and results of operations from local currencies into the functional currency, are included in other expenseincome (expense) in the accompanying condensed consolidated statements of operations. In management’s opinion, the accompanying financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the results for the interim periods presented.

Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited financial statements should be read in conjunction with our 2008fiscal 2009 audited financial statements and footnotes included in our Annual Report on Form 10-K for the year ended April 30, 2008,2009, as filed with the Securities and Exchange Commission (“SEC”)(SEC) on June 30, 2008.22, 2009.

TheWe evaluated subsequent events through the time of filing on September 2, 2009, the date the accompanying condensed consolidated financial statements forwere issued.

Reclassifications

Certain prior year amounts have been reclassified to conform to the three and six months ended October 31, 2008 include thecurrent period’s presentation. Such reclassifications did not affect net revenues, operating results of Packeteer Inc. (“Packeteer”) beginning on June 6, 2008.

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. As of October 31, 2008, our stock is listed on the NASDAQ Global Select Market. All share numbers in this document are on a post-split basis. Shares authorized and par value were not adjusted as they were not affected by the stock split.income or net income.

Use of Estimates

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United StatesGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the dates of the condensed consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods. Actual results may differ from these estimates, and such differences could be material to our condensed consolidated financial condition and results of operations.

ReclassificationsRestricted Cash

Certain reclassificationsRestricted cash is comprised of $1.0 million in cash and cash equivalents pledged as collateral for two separate irrevocable letters of credit. These letters of credit currently expire in February and May 2010, respectively. The larger letter of credit, which is required by the terms of the lease of our corporate headquarters, is secured by deposits and provides for automatic annual extensions, without amendment, on each successive

expiration date, but no later than the lease expiration of November 30, 2015. The second letter of credit, which relates to an insurance policy, is secured by deposits and provides for automatic extension, without amendment, for one year following the date of expiration. The deposits securing these letters of credit are classified as restricted cash in the accompanying condensed consolidated balance sheets as of July 31, 2009 and April 30, 2009, respectively.

Concentration and Other Risks

Financial instruments that potentially subject us to credit risk consist of demand deposit accounts, money market accounts, commercial paper, corporate securities, U.S. government agency discount notes and trade receivables. We maintain demand deposit and money market accounts with financial institutions of high credit standing. Such deposits may be in excess of insured limits. We invest only in high-quality, investment grade securities and limit investment exposure in any one issue. Investments are classified as cash equivalents in our condensed consolidated balance sheets at July 31, 2009 and April 30, 2009. We believe the financial risks associated with these financial instruments are not material, and have not experienced material losses from our investments in these instruments.

Generally, we do not require collateral for sales to customers. However, we perform on-going credit evaluations of our customers’ financial condition and maintain an allowance for doubtful accounts. During the three months ended July 31, 2009, no single customer accounted for more than 10.0% of our net revenue. During the three months ended July 31, 2008, Arrow Enterprise Computing Solutions, Inc. (formerly, Alternative Data Technology, Inc.), a channel partner customer, accounted for 10.2% of our net revenue. As of July 31, 2009, no single customer accounted for more than 10.0% of our gross accounts receivable balance. As of April 30, 2009, Arrow Enterprise Computing Solutions, Inc. accounted for 12.4% of our gross accounts receivable balance.

We currently purchase several key parts and components used in the manufacture of our products from a limited number of suppliers. Generally we have been madeable to obtain an adequate supply of such parts and components. However, an extended interruption in the prior yearsupply of parts and components currently obtained from our suppliers could adversely affect our financial statements to conform to the current year presentation.condition and results of operations.

Revenue RecognitionSupply Chain Liabilities and Valuation of Inventory

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 maintenance contracts forWe outsource most of our products. Accordingly, we account for revenue in accordance with Statementmanufacturing, product fulfillment, repair, and supply chain management operations to contract manufacturers and a third party logistics provider, and a significant portion of Position No. 97-2, “Software Revenue Recognition,” (“SOP 97-2”) and all related interpretations. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery or performance has occurred; the sales price is fixed or determinable and collectibility is reasonably assured.

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, which, in most cases, allow for stock rotation rights. Net revenue and the related cost of net revenue resulting from shipments to distributors are deferred until the distributors report thatis a result of this activity. Our contract manufacturers procure components and manufacture our products have been soldbased on demand forecasts that we prepare. These forecasts are based on estimates of future product demand and are adjusted for overall market conditions. If the actual product demand is significantly lower than forecasted, we may be required 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,write down our inventory or accrue for excess supply chain liability, which generally is upon shipment. We do not accept orders from value-added resellers when we are aware that the value-added reseller does notcould 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. We assess probability of collection on a customer-by-customer basis. We subject our customers to a credit review process that evaluates their financial condition and ability to pay for our products and services. If we determine from the outset of an arrangement that collection is not probable based upon our review process, we do not recognize revenue until cash is received.

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”) of fair value 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, VSOE 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 each 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.

Cash Equivalents and Short-Term Investments

We consider all highly liquid investments with insignificant interest rate risk and original maturities of three months or less to be cash equivalents.

Short-term investments consist primarily of money market funds and corporate securities with original maturities between three months and one year. We determine the appropriate classification of our investments at the time of purchase and evaluate such designation as of each balance sheet date basedadverse impact on our intentgross margins and ability to use such funds for current operations. To date, all of our investments have been classified as available-for-sale and are carried at fair value, with unrealized gains and losses, if any, included in accumulated other comprehensive income (loss) in stockholders’ equity. The fair value of these securities is based on quoted market prices. Realized gains and losses and declines in value of securities judged to be other than temporary are included in other expense. The cost of securities sold is based on a specific identification methodology. Interest and dividends on all securities are included in interest income.profitability.

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable and payable and accrued liabilities. The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and payable and accrued liabilities approximate their respective fair values because of the short-term nature of those instruments.

Inventories

Inventories consistInventory consists of raw materials and finished goods. Inventories areInventory is recorded at the lower of cost (using the first-in, first-out method) or market, after we give appropriate consideration to obsolescence and inventory in excess of anticipated future demand. In assessing the ultimate recoverability of inventories,inventory, we are required to make estimates regarding future customer demand, the timing of new product introductions, economic trends and market conditions.

In connection with our acquisition of Packeteer during the first quarter of fiscal 2009, we recorded inventoriesinventory purchased as part of the Packeteer acquisition at its approximate fair value, equal to its estimated selling prices less the sum of the costs of disposal and a reasonable profit allowance for the selling effort. This resulted in a $20.3 million write-up of acquired inventory from its carrying value prior to the acquisition, of which $6.1approximately $1.5 million remains in inventory at July 31, 2009 and is expected to be sold by the end of inventory remains at October 31, 2008.the third quarter of fiscal 2010.

Inventories,

Inventory, net, consisted of the following (in thousands):following:

Valuation of Goodwill

We perform annual goodwill impairment tests in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets, (“SFAS No. 142”) 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 the application of significant judgment. For purposes of the annual impairment test, we consider our market capitalization on the date of the 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 April 30, 2008. For the first half of fiscal 2009, there have been no significant events or changes of circumstances that affect our valuation of goodwill.

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 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. Impairment is recognized when the carrying amount of an asset exceeds its fair value as calculated on a discounted cash flow basis.

Acquisition-related identified intangible assets are amortized on a straight-line basis over their estimated economic lives of three to seven years for developed technology and patents, five years for core technology, five to seven years for customer relationships and two years for trade name.

Business Combinations

We determine and allocate the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the business combination date in accordance with SFAS No. 141,Business Combinations. We are required to rely on our best estimates and assumptions we believe to be reasonable to allocate the purchase price, including fair value estimates, as of the business combination date. Such estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which generally is up to one year from the business combination date, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill.

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. 48Accounting 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 9—”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.

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).

We estimate the fair value of options granted using the Black-Scholes option valuation model. Effective May 1, 2008, we estimated the expected option term at 4.0 years based on our historical experience of grants, exercises and post-vesting cancellations. Beginning with our adoption of SFAS No. 123(R) on May 1, 2006 until April 30, 2008, we estimated the expected option term at 4.63 years. 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. Effective May 1, 2008, we estimated our forfeiture rate at 14.0% based on an analysis of historical pre-vesting forfeitures, and have reduced stock-based compensation expense accordingly. From May 1, 2006 until April 30, 2008, we used a forfeiture rate of 10.0%. 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 is 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 total and per-share net income or loss and net income or loss per share.

Guarantees, Indemnifications and Warranty Obligations

Our customer agreements generally include certain provisions for indemnifying such customers against liabilities if our products infringe a third party’s intellectual property rights. To date, we have not incurred any material costs as a result of such indemnification provisions and we have not accrued any liabilities related to such obligations in the accompanying condensed consolidated financial statements.

Our Bylaws provide that we shall indemnify our directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. We have also entered into indemnification agreements or other contractual arrangements with current and former executive officers and directors of our company and of certain of our subsidiaries, which contain provisions that may require us, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. We were required to indemnify certain current and former officers and directors and other employees for their attorneys’ fees and related expenses incurred in connection with the regulatory investigations relating to our historical stock option grant practices, and expect to have indemnification obligations to certain current and former officers and directors and other employees in connection with the derivative litigation relating to our historical stock option granting practices.

We accrue for warranty expenses in our cost of net revenue at the time revenue is recognized and maintain an accrual for estimated future warranty obligations based upon the relationship between historical and anticipated warranty costs and revenue volumes. If actual warranty expenses are greater than those projected, additional charges against earnings would be required. If actual warranty expenses are less than projected, our obligations would be reduced, providing a positive impact on our reported results. We generally provide a one-year warranty on hardware products and a 90-day warranty on software products.

Changes in our warranty obligations, which are included in “Otherother accrued liabilities” in our condensed consolidated balance sheetssheet for the sixthree months ended OctoberJuly 31, 2008 and 2007,2009, were as follows (in thousands):

Concentration and Other Risks

Financial instruments that potentially subject us to credit risk consist of demand deposit accounts, money market accounts, corporate securities and trade receivables. We maintain demand deposit and money market accounts with financial institutions of high credit standing. Such deposits may be in excess of insured limits. We invest only in high-quality, investment grade securities and limit investment exposure in any one issue. Investments are classified as cash equivalents or short-term investments in our condensed consolidated balance sheets at October 31, 2008 and April 30, 2008. We believe the financial risks associated with these financial instruments are minimal. We have not experienced material losses from our investments in these securities.

Generally, we do not require collateral for sales to customers. However, we perform on-going credit evaluations of our customers’ financial condition and maintain an allowance for doubtful accounts. For the three and six months ended October 31, 2008, bad debt expense was $1.3 million and $1.3 million, respectively. During the three months ended October 31, 2008, there was one receivable past due amount from a reseller for $1.2 million, which was reserved through a charge to bad debt expense and included in general and administrative expenses. For the three and six months ended October 31, 2007, bad debt expense was less than $0.1 million. During the three and six months ended October 31, 2008, one distributor accounted for 16.0% and 13.3%, of our net revenue, respectively. During the three and six months ended October 31, 2007, that distributor accounted for 20.5% and 14.6% of our net revenue, respectively. As of October 31, 2008, that distributor accounted for 18.7% of our gross accounts receivable balance. As of April 30, 2008, no customer accounted for more than 10.0% of our gross accounts receivable balance.

We currently purchase several key parts and components used in the manufacture of our products from a limited number of suppliers. Generally we have been able to obtain an adequate supply of such parts and components. However, an extended interruption in the supply of parts and components currently obtained from our suppliers could adversely affect our financial condition and results of operations.

Comprehensive Income

We report comprehensive income in accordance with FASB SFAS No. 130,Reporting Comprehensive Incomeand include adjustments to record unrealized gains and losses on available-for-sale securities. These adjustments are accumulated in “Accumulated other comprehensive income (loss)” in the stockholders’ equity section of the condensed consolidated balance sheets.

Significant components of our comprehensive income (loss) are as follows (in thousands):

Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 165,Subsequent Events(“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity

has evaluated subsequent events and the basis for selecting that date, which is required to either be the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. We adopted SFAS 165 on May 1, 2009 for the period ended July 31, 2009. The implementation of this standard did not have a material impact on our reporting of subsequent events either through recognition or disclosure.

In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(“FSP FAS 157-4”). FSP FAS 157-4 superseded FSP FAS 157-3 by clarifying when the volume and level of activity for the asset or liability have significantly decreased and included guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. We adopted FSP FAS 157-4 on May 1, 2009 for the period ended July 31, 2009. The implementation of this standard did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FSP FAS No. 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairment(“FSP FAS 115-2 and 124-2”). This FSP changes the method for determining whether an other-than-temporary impairment exists for debt securities and will change the amount of an impairment charge to be recorded in earnings. To determine whether an other-than-temporary impairment exists, an entity will assess the likelihood of selling the security prior to recovering its cost basis. This is a change from the current requirement for an entity to assess whether it has the intent and ability to hold a security to recovery. FSP FAS 115-2 and 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. We adopted FSP FAS 115-2 and 124-2 on May 1, 2009 for the period ended July 31, 2009. The implementation of these standards did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1,Disclosures about Fair Value of Financial Instruments(“FSP FAS 107-1 and APB 28-1”). This FSP requires that certain fair value disclosures be made quarterly, rather than annually, to provide users of financial statements with more timely information about the effects of current market conditions on the issuer’s financial instruments. The FSP requires disclosure in interim financial statements of the fair value of all financial instruments within the scope of FASB Statement No. 107,Disclosures about Fair Value of Financial Instruments, as well as the method(s) and significant assumptions used to estimate the fair value of those financial instruments. FSP FAS 107-1 and APB 28-1 are effective for interim and annual reporting periods ending after June 15, 2009. We adopted FSP FAS 107-1 and APB 28-1 on May 1, 2009 for the period ended July 31, 2009. The implementation of these standards did not have a material impact on our consolidated financial statements.

In November 2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 08-7,Accounting for Defensive Intangible Assets(“EITF 08-7”). A defensive intangible asset is an intangible asset acquired in a business combination that the acquirer does not intend to use, but will maintain in order to prevent others from using it. EITF 08-7 clarifies that a defensive intangible asset must be recognized at its fair value as a separate unit of accounting and that the useful life of the asset is the period of time over which others are prevented from using it. EITF 08-7 is effective for fiscal years beginning on or after December 15, 2008 and shall be applied prospectively. We adopted EITF 08-7 on May 1, 2009. The nature and magnitude of the specific impact will depend upon the nature and value of the defensive assets that we may acquire in acquisitions subsequent to adoption.

In June 2008, the FASB issued EITF Issue No. 07-5,Determining Whether an Instrument (or an Embedded Feature) Is indexed to an Entity’s Own Stock(“EITF 07-5”). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. We adopted EITF 07-5 on May 1, 2009. The embedded feature to our convertible senior notes is considered indexed to our own stock within the definition of EITF 07-5; however, the adoption of EITF 07-5 did not have a material impact on our consolidated financial statements.

In June 2008, the FASB Staff Position (FSP)issued FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(“EITF 03-6-1”). FSP EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends or dividend equivalents before vesting should be considered participating securities. We have made awards of restricted stock that contain non-forfeitable rights to dividends and those restricted shares will beare considered participating securities upon adoption of FSP EITF 03-6-1. FSP EITF 03-6-1, which is effective for fiscal years beginning after December 15, 2008 on a retrospective basis and will bebasis. We adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact of the adoption of FSP EITF 03-6-1 on May 1, 2009. The adoption did not have a material impact on our calculation of EPS.earnings per share.

In May 2008, the FASB issued FSP No. APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB No. 14-1 will require the issuer to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Further, the FSP will require bifurcation of a component of the debt, classification of that component in equity, and then accretion of the resulting discount on the debt as part of interest expense being reflected in the statement of income. FSP APB No. 14-1 is effective for fiscal years beginning after December 15, 2008, and will beis required to be applied retrospectively to all periods presented. We will be required to implement the standard during the first quarter of fiscal 2010. We currently are evaluating the effect, if any, that the adoption ofadopted FSP APB No. 14-1 willon May 1, 2009. The adoption did not have a material impact on our condensed consolidated financial statements.statements as we had no such qualifying convertible debt instruments.

In April 2008, the FASB issued FSP FAS No. 142-3, Determination of the Useful Life of Intangible Assets(“FSP FAS 142-3”). FSP FAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other IntangibleAssets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP FAS No. 142-3 is effective for fiscal years beginning after December 15, 2008, and early adoption is prohibited. We currently are evaluating the effect, if any, that the adoption ofadopted FSP FAS No. 142-3 on May 1, 2009. The impact will have on our condensed consolidated financial statements.

In March 2008,depend upon the FASB issued SFAS No. 161, Disclosures about Derivative Instrumentsnature, terms, and Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to provide an enhanced understanding of an entity’s use of derivative

instruments and, how they are accounted for under SFAS No. 133, and to require a tabular disclosuresize of the effects of such instruments and related hedged items on the entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We will be required to adopt SFAS No. 161 in the fourth quarter of fiscal 2009. Since SFAS No. 161 requires only additional disclosures about our derivatives and hedging activities, the adoption of SFAS No. 161 will not have an impact on our condensed consolidated financial condition or results of operations.acquisitions we consummate.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement(“SFAS No. 157”). SFAS No. 157 providesdefines fair value, establishes a framework that clarifies thefor measuring fair value, measurement objective within GAAP and its application under the various accounting standards whereexpands disclosures about fair value measurement is allowed or required. Undermeasurements. SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 requires fair value measurements to be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, FSP No. 157-2 was issued, which delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP No. 157-2 partially defersdeferred the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, including interim periods within that fiscal year, for items within its scope. EffectiveWe adopted FSP 157-2 on May 1, 2008, we adopted SFAS No. 157, except as it applies to those nonfinancial assets and nonfinancial liabilities within the scope of FSP No. 157-2.2009. Our partial adoption of SFAS No. 157 did not materially impact our financial position andor results of operations. We currently are assessing the impact of the adoption of SFAS No. 157 as it relates to our nonfinancial assets and nonfinancial liabilities, and have not yet determined the impact that such adoption will have on our condensed consolidated financial statements.

In October 2008, the FASB issued FSP FAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS No. 157-3 clarified the application of FAS No. 157. FSP FAS No. 157-3 demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP FAS No. 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have an impact on our condensed consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R),Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) amends SFAS No. 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 better evaluate the nature and financial effects of the business combination. It is effective for fiscal years beginning on or after December 15, 2008 and should be appliedapplies prospectively. SFAS No. 141(R) may have anwill impact on our condensed consolidated financial statements with respect to future acquisitions. We adopted SFAS 141(R) on May 1, 2009. Accordingly, we will apply these new provisions prospectively to any business combinations that are consummated after adoption. The nature and magnitude of the specific impact will depend upon the nature, terms, and size of the acquisitions consummated after the effective date.we consummate.

Note 2. Fair Value Measurement

Effective May 1, 2008, we adopted SFASIn April 2009, the FASB issued FSP FAS No. 157141(R)-1, Fair Value Measurement, except as it applies to those nonfinancial assetsAccounting for Assets Acquired and nonfinancial liabilities. SFAS No.157 defines fair value, establishesLiabilities Assumed in a framework for measuring fair value under generally accepted accounting principlesBusiness Combination That Arise from Contingencies(“FSP FAS 141(R)-1”). The FSP deals with the initial recognition and enhances disclosures about fair value measurements. Fair value is the price that would be received to sellmeasurement of an asset acquired or paid to transfer a liability assumed in an orderly transaction between market participants in the market in a business combination,

which the reporting entity transacts. Valuation techniques used to measure fair value under SFAS No.157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describesarises from a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last is considered unobservable. These levels of inputs are the following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant tocontingency, provided the fair value of the asset or liability on the date of acquisition can be determined. It will be effective for assets or liabilities.

OurIn December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“SFAS 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 to identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. We adopted SFAS 160 on May 1, 2009. The adoption of SFAS No.157this standard did not materially affect our financial position and results of operations, but SFAS No.157 does require new disclosures about how we value certain assets and liabilities. Much of the required disclosure relates to the inputs used to measure fair value, particularly in instances where the measurement uses significant unobservable (Level 3) inputs. Our financial instruments are valued using quoted prices in active markets or based upon other observable inputs. The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of October 31, 2008 (in thousands):

Our investments in money market funds are measured at fair value on a recurring basis. Our money market funds comply with Rule 2a-7 of the Investment Company Act of 1940 and are required to be priced and have a fair value of $1 net asset value per share. These money market funds are actively traded and reported daily through a variety of sources. Due to the structure and valuation required by the Investment Company Act of 1940 regarding Rule 2a-7 funds, the fair value of the money market fund investments are classified as Level 1.material impact on our consolidated financial statements.

Note 3. Stock-based Compensation2. Per Share Amounts

Our Convertible Senior Notes are participating securities whereby the holder would participate equally in any future dividends and in undistributed earnings with common stockholders; therefore, we calculated basic and diluted net income per share using the two-class method. Our unvested restricted stock awards are also considered participating securities; however, the number of unvested restricted stock awards outstanding is immaterial and therefore not included in our calculation under the two-class method. See Note 5 for further information regarding the Convertible Senior Notes and Warrants.

Under the two-class method, basic net income per share is computed by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Net income available to common stockholders is determined after allocating undistributed earnings to Convertible Senior Note holders. Diluted net income per share is computed using the weighted-average number of shares of common stock outstanding, including dilutive common shares subject to repurchase and potential shares assuming the (i) dilutive effect of outstanding stock awards, warrants and shares issuable under our employee stock purchase plan using the treasury stock method, and (ii) conversion of Convertible Senior Notes. For periods for which there is a net loss, the numbers of shares used in the computation of diluted net loss per share are the same as those used for the computation of basic net loss per share as the inclusion of dilutive securities would be anti-dilutive. No portion of the loss for the three months ended July 31, 2008 was allocated to the participating securities under the two-class method since there is no contractual obligation for the Convertible Senior Notes to share in our losses.

The following table summarizespresents the stock-based compensation expense for stock options, restricted stock awards, restricted stock unitscalculation of weighted average common shares used in the computations of basic and our Employee Stock Purchase Plan (“ESPP”) that we recordeddiluted per share amounts presented in the accompanying condensed consolidated statements of operations in accordance with SFAS No.123(R) for the threereconciled to basic and six months ended October 31, 2008 and 2007 (in thousands):diluted per share amounts available to common stockholders:

For the six months ended October 31, 2007, stock-based compensation expense included $1.5 million related to the Section 409(A) Tender Offer.

We use the Black-Scholes option pricing model to value our stock options. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. We considered our historical volatility and implied volatility in developing our estimate of expected volatility.

For the three and six months ended OctoberJuly 31, 2008, as well as for the three and six months ended October 31, 2007, we used the following weighted average assumptions to estimate the fair value of2009, outstanding stock options, granted:

and restricted stock awards covering 5.5 million shares were excluded from the calculation of diluted net income per share as their inclusion would have been anti-dilutive because their exercise prices were greater than or equal to the average market price of the common shares during the period. For the three and six months ended OctoberJuly 31, 2008, as well as for the threeoutstanding stock options, employee stock purchase plan shares and six months ended October 31, 2007, we used the following weighted average assumptions to estimate the fair value of shares purchased under our ESPP:

During the three and six months ended October 31, 2008, 253,672 and 343,402 options were exercised, respectively. As of October 31, 2008, there was approximately $27.9 million and $1.1 million of unrecognized stock-based compensation expense related to stock option grants and ESPP awards, which will be recognized over the remaining weighted average vesting period of approximately 2.79 years and 0.16 years, respectively.

The cost of restricted stock awards and restricted stock units is determined usingcovering 5.9 million shares were excluded from the fair valuecalculation of diluted net income per share because their inclusion would have been anti-dilutive due to our net loss for the period.

Warrants to purchase 385,356 shares of our common stock onwere outstanding at July 31, 2009 and 2008, but were not included in the datecomputation of diluted net income per share because the exercise price of the grant,warrants was greater than the average market price of our common stock during the three months ended July 31, 2009 and compensation expense is recognized over2008; therefore, their effect was anti-dilutive.

Shares of our common stock issuable upon the vesting period, which generally is four years. Duringassumed conversion of the second quarterConvertible Senior Notes in the amount of fiscal 2009, we awarded 60,500 shares3,853,564 were not included in the computation of restricted stock and 92,409 shares of restricted stock were canceled. As of Octoberdiluted net income per share for the three months ended July 31, 2008, we had approximately $8.6 million of unrecognized stock-based compensation expense,due to our net of estimated forfeitures, related toloss for the restricted stock awards and restricted stock units, which we will recognize over the remaining weighted average vesting period of approximately 3.03 years.period.

Note 4.3. Acquisitions

Fiscal 2009 Acquisition

Packeteer

We acquired Packeteer, Inc., a provider of sophisticated Wide Area Network (“WAN”) optimization and WAN traffic prioritization technologies, on June 6, 2008, by means of a merger of our wholly owned subsidiary with and into Packeteer, such that Packeteer became our wholly-owned subsidiary. We acquired Packeteer, among other things, to enrichadd to our existingproduct portfolio products that identify and classify the applications on the network and monitor application intelligence technology.response times and utilization. We have included the operating results of Packeteer in our consolidated financial results since the June 6, 2008 acquisition date.

The following table summarizes the components of the total purchase price (in thousands):

Atwas $278.6 million, which consisted of $264.0 million in cash paid to acquire the closing of the acquisition, there were approximately 2,644,294 million shares of ouroutstanding common stock issuable upon of the exercise of the outstanding options and restricted stock awards we assumed at the closing in accordance with the terms of the merger agreement. The conversion value of the Packeteer options assumed was based on the exercise price of each Packeteer option multiplied by a conversion ratio of 0.3850, which was calculated as the consideration price of $7.10 we paid for each outstanding share of Packeteer, common stock divided by the average price of our common stock for five trading days prior to the acquisition date of June 6, 2008. The purchase price includes $4.6 million which represents the fair market value of the vested options assumed. We also expect to recognize approximately $3.9 million of non-cash based stock-based compensation expense related to unvested stock options and restricted stock units at the acquisition date. This expense will be recognized beginning from the acquisition date over the weighted average service period of approximately 2.5 years. These awards were valued using a Black-Scholes option pricing model in accordance with SFAS No. 123(R), using the following weighted average assumptions:

Preliminary Purchase Price Allocation

We accounted for the acquisition of Packeteer using the purchase method of accounting. The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date of June 6, 2008. The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill. We believe the fair value assigned to the assets acquiredvested Packeteer equity awards assumed and liabilities assumed were based on reasonable assumptions. As of October 31, 2008, the total purchase price was allocated to the fair value of assets acquired and liabilities assumed as follows (in thousands):

Our allocation of$10.0 million in cash for direct transaction costs. In allocating the purchase price is based upon preliminary estimateson estimated fair values, we recorded approximately $145.8 million of goodwill, $55.4 million of identifiable intangible assets, $77.5 million of cash and assumptions with respect to fair value. These estimatesshort-term investments, $25.7 million of inventory, $16.0 million of deferred revenues and assumptions could change significantly during the purchase price allocation period, which is up to one year from the$9.8 million of other net tangible liabilities. Our acquisition date. Any change couldof Packeteer did not result in material variances between our future financial results and the amounts presented in these unaudited condensed consolidated financial statements.creation of a new business segment.

In connection with our acquisition of Packeteer, we formulated a plan to exit certain Packeteer facilities, discontinue certain Packeteer products, and involuntarily terminate the employment of certain Packeteer employees in certain locations.employees. In connection with this plan, on the acquisition date of June 6, 2008, we accrued $11.6 million related to employee severance costs and $1.9 million related to lease termination costs. For the fiscal quarter ending October 31, 2008, we paid $3.2 million related to employee severance costs. In addition, we paid $1.3 million related to lease termination costs and adjusted the lease termination accrual by $0.3 million. From the acquisition date of June 6, 2008 through OctoberJuly 31, 2008,2009, we paid $7.5$11.3 million related to employee severance costs and $1.3$3.5 million related to lease termination costs, and we adjusteddecreased the employee severance accrual by $0.3 million and increased the lease termination accrual by $0.3$1.6 million. The increase to the lease termination accrual includes a $1.6 million real estate commission paid in fiscal 2009 in connection with an assumed lease. As of OctoberJuly 31, 2008,2009, we had $4.1 million in unpaid employee severance costs and $0.9 million$93,000 in unpaid lease termination costs, the balancesbalance of which areis included in “Otherother accrued liabilities”liabilities in our condensed consolidated balance sheet as of OctoberJuly 31, 2008.2009. We anticipate the unpaid balances tofor lease termination costs will be paid by the end of the third quarter of fiscal 2009.2012.

Identifiable Intangible Assets

Intangible assets consist primarily of developed technology and patents, customer relationships and trade name. Developed technology is comprised of products that have reached technological feasibility and are a part of Packeteer’s product lines, and patentsThe following table summarizes the activity related to the design and development of Packeteer’s products. This proprietary know-how can be leveraged to develop new technology and products and improve our existing products. Customer relationships represent Packeteer’s underlying relationships with its customers. Trade name representsacquisition restructuring accrual for the fair value of brand and name recognition associated with the marketing of Packeteer’s products and services. three months ended July 31, 2009:

The amounts assigned to customer relationships, developed technology and patents, and trade name were $35.0 million, $20.0 million, and $0.4 million, respectively. We amortize developed technology and patents, customer relationships and trade names on a straight-line basis over their weighted average expected useful life of 5, 5, and 2 years, respectively. Developed technology and patents and trade name are amortized into cost of product while customer relationships are amortized into operating expenses.

Pre-Acquisition Contingencies

In connection with our acquisition of Packeteer, we have evaluated and continue to evaluate pre-acquisition contingencies relating to Packeteer that existed as of the acquisition date. If these contingencies become probable in nature and estimableadjustment recorded during the three month ended July 31, 2009 related to the settlement of a lease liability for less than originally provided for in our purchase price allocation period, amounts related to such contingencies will be recorded as an increase to the purchase price, and, if subsequent to the purchase price allocation period, such amounts will be recorded in our results of operations.allocation.

Our acquisition of Packeteer did not result in the creation of a new business segment.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of Blue Coat and Packeteer on a pro forma basis, after giving effect to the acquisition of Packeteer on June 6, 2008, and the issuance of convertible senior notes and associated warrants, the proceeds of which were used to finance a portion of the Packeteer acquisition. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitionsacquisition and convertible notes financing had taken place at the beginning of each of the periods presented.

The unaudited pro forma financial information for the sixthree months ended OctoberJuly 31, 2008 combines the historical results of Blue Coat for the sixthree months ended OctoberJuly 31, 2008 and, due to differences in our reporting periods, the historical results of Packeteer for one month ended May 31, 2008, due to the acquisition of Packeteer on June 6, 2008. The unauditedWe consider the Packeteer results for the period June 1 through June 6, 2008 to be immaterial and have, therefore, not accounted for that period in our pro forma financial information for the six months ended October 31, 2007 combines the historical results of Blue Coat for the six months ended October 31, 2007 and, due to differences in our reporting periods, the historical results of Packeteer for the six months ended September 30, 2007.information.

The following pro forma financial information for all periods presented includes purchase accounting adjustments for amortization charges from acquired identifiable intangible assets, depreciation on acquired property and equipment, adjustments to interest expense and issuance costcosts associated with convertible notes, stock basedstock-based compensation expense and related tax effects:

Note 4. Goodwill and Intangible Assets

Investment in PacketeerGoodwill

On April 20,The changes in the carrying amount of goodwill generally are not deductible for tax purposes. Current activity recorded to goodwill was as follows (in thousands):

The goodwill adjustment recorded during the three month ended July 31, 2009 related to the settlement of a lease liability for less than originally provided for in our purchase price allocation.

Intangible Assets

Our acquired intangible assets are as follows (in thousands):

April 30, 2009		Amortization period		Gross Amount			Accumulated Amortization				Net Carrying Value
Developed technology and patents		3-7 years		$	26,031		$	(7,058	)		$	18,973
Core technology		5 years			2,929			(2,649	)			280
Customer relationships		5-7 years			37,023			(7,722	)			29,301
Trade name		2 years			400			(180	)			220
Total				$	66,383		$	(17,609	)		$	48,774

Amortization expense for our intangibles assets for the three months ended July 31, 2009 and 2008 were allocated as follows:

As of July 31, 2009, we entered into a Stock Purchase Agreement pursuant to which we acquired 3,559,117 shareshad no identifiable intangible assets with indefinite lives. The weighted average remaining life of Packeteer common stock for $7.10 per share from the Liverpool Limited Partnershipidentifiable intangible assets was 3.8 years and Elliot International, L.P. for a total4.0 years as of approximately $25.3 million. This investment was valued at its fair value of $25.1 million atJuly 31, 2009 and April 30, 2008. This investment was considered part of the purchase price upon the closing of the acquisition of Packeteer on June 6, 2008.2009, respectively.

Estimated amortization expense related to intangible assets in future periods is as follows:

Note 5. Convertible Senior Notes

On June 2, 2008, we issued $80.0 million aggregate principal amount of Zero Coupon Convertible Senior Notes due June 2, 2013 (the “Notes”“Convertible Senior Notes”) and warrants (the “Warrants”) to purchase an aggregate of 385,356 shares of our common stock at an exercise price of $20.76 to Manchester Securities Corp., an affiliate of Elliott Associate, L.L.P.Associates, L.P. (“Manchester”) and Francisco Partners II, L.P. and Francisco Partners Parallel Fund II, L.P. (together, the “FP Entities”) in a private placement. The Convertible Senior Notes are reported on the condensed consolidated balance sheets at $76.6 million as of July 31, 2009, net of discounts of $3.4 million primarily related to the value assigned to the Warrants, which is amortized to interest expense over the life of the Convertible Senior Notes.

The Convertible Senior Notes rank equal in right of payment to any of our other existing and future senior unsecured indebtedness. The Convertible Senior Notes are initially convertible into 3,853,564 shares of our common stock at the holders’ option at any time prior to maturity at the initial conversion price of $20.76. The Convertible Senior Notes do not bear interest. The conversion price of the Convertible Senior Notes and the exercise price of the Warrants are subject to adjustment, if we:

If we issue rights, options, warrants or pay a cash dividend or otherwise make a distribution of cash or other assets to all holders of our common stock, such right, option, warrant, dividend or distribution shall also be issued to the holders of the Convertible Senior Notes and the Warrants on an as-converted or as-exercised basis.

Subject to certain exceptions, the holders of the Convertible Senior Notes, at their option, may require us to repurchase for cash all or a portion of the Convertible Senior Notes at a purchase price equal to 100% of the outstanding principal amount of the Convertible Senior Notes, if our common stock is suspended from trading or ceases to be listed on an eligible market for a period of 5 consecutive trading days or for more than 15 trading days in any 365-day period.

On June 2, 2008, we and the FP Entities entered into a Registration Rights Agreement, (the “Registration Rights Agreement”) containing customary terms and conditions providing for the registration of our common stock underlying the Convertible Senior Notes and the Warrants issued to the FP Entities. Pursuant to the Registration Rights Agreement, we filed an automatically effective resale shelf registration statement on August 4, 2008. We filed an amendment to that registration statement on June 23, 2009.

Keith Geeslin, a partner of Francisco Partners II, L.P., has served as a member of our Board of Directors since June 2006.

Note 6. Consolidated Balance Sheet DetailsData

Intangible Assets

Our acquired identifiable intangible assets are as follows (in thousands):

Amortization expense for our intangibles assets for the three and six months ended October 31, 2008 and 2007 was allocated as follows:

As of October 31, 2008, we had no identifiable intangible assets with indefinite lives. The weighted average remaining life of our identifiable intangible assets was 4.51 years and 4.0 years at October 31, 2008 and April 30, 2008, respectively.

Amortization expense related to intangible assets in future periods is as follows (in thousands):

Goodwill

The changes in the carrying amount of goodwill generally are not deductible for tax purposes. Current activity recorded to goodwill was as follows (in thousands):

Restructuring Accrual

In connection with our acquisition of Packeteer, we committed to a plan that resulted in the termination of the employment of 33 employees of Blue Coat. Restructuring charges consist primarily of personnel-related severance costs and stock-based compensation expenses. Stock-based compensation included in restructuring resulted primarily from the additional vesting of any unvested option shares and restricted shares upon termination of the employment of those employees pursuant to the terms of their separation agreements. DuringThe termination of employment of all 33 employees occurred during the first quarter of fiscal 2009, all 33 employees were terminated,and we recorded a restructuring charge of $1.5 million in our condensed consolidated statementstatements of operations, andincluding $0.1 million of stock-based compensation related to the acceleration of certain equity awards during that quarter. Since inception of the plan through the first quarter of fiscal 2010, we have paid severance in the amount of $0.9 million. During$1.5 million related to this accrual. We do not anticipate incurring future restructuring charges related to this plan.

The following table summarizes the second quarter of fiscal 2009, we paid severance in the amount of $0.4 million. We anticipate the remaining balance of $0.2 million, which is included in “Other accrued liabilities” in the condensed consolidated balance sheets, will be paid by the end of fiscal 2009.

Current activity recordedrelated to the restructuring accrual for the three and six months ended OctoberJuly 31, 2008 was as follows2009 (in thousands):

Other Accrued Liabilities

Other accrued liabilities consisted of the following:

Deferred Revenue

Deferred revenue consists of the following:

Note 7. Fair Value of Assets and Liabilities

Financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable and payable, accrued liabilities and Convertible Senior Notes. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash equivalents and Restricted Cash

The carrying amount of cash and cash equivalents and restricted cash reported on the balance sheet approximates its fair value. The fair values of investments are based upon quoted market prices.

Convertible Senior Notes

The carrying amount of the Convertible Senior Notes is net of discounts, primarily related to the associated Warrants. The fair value of the Convertible Senior Notes as of July 31, 2009 was determined based on an internal valuation model, which utilized quoted market prices and interest rates for similar instruments, and approximates its carrying value. See Note 5 for further information regarding the Convertible Senior Notes and Warrants.

The estimated fair values of our financial instruments are as follows:

SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last is considered unobservable. These levels of inputs are the following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Fair Value Measurements on a Recurring Basis

Our financial instruments are valued using quoted prices in active markets or based upon other observable inputs. The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of July 31, 2009 and April 30, 2009 (in thousands):

Our investments in money market funds are measured at fair value on a recurring basis. Our money market funds comply with Rule 2a-7 of the Investment Company Act of 1940 and are targeted to be priced and have a value of $1 net asset value per share. These money market funds are actively traded and reported daily through a

variety of sources. Due to the structure and valuation required by the Investment Company Act of 1940 regarding Rule 2a-7 funds, the fair value of the money market fund investments are classified as Level 1. As of July 31, 2009, 38.0% of our money market funds were guaranteed under the Treasury Money Market Guarantee Program.

Fair Value Measurements on a Nonrecurring Basis

During the quarter ended July 31, 2009, we did not remeasure any nonfinancial assets and liabilities measured at fair value on a nonrecurring basis (e.g., goodwill, intangible assets, property and equipment and nonfinancial assets and liabilities initially measured at fair value in a business combination).

Note 7. Per Share Amounts8. Stock-based Compensation

Basic net income per common share and diluted net income per common share are presented in conformity with SFAS No. 128,Earnings Per Share, for all periods presented. Basic net income per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of shares of common stock outstanding, including dilutive common shares subject to repurchase and potential shares assuming the (i) exercise of dilutive stock options and warrants using the treasury stock method; (ii) issuance of committed but unissued stock awards; and (iii) issuance of shares upon the conversion of outstanding Series A Redeemable Convertible Preferred Stock. For periods for which there is a net loss, the numbers of shares used in the computation of diluted net loss per share are the same as those used for the computation of basic net loss per share as the inclusion of dilutive securities would be anti-dilutive.

As of October 31, 2008, outstanding stock options and restricted stock awards covering 8.7 million shares were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive due to our net loss for the three and six months ended October 31, 2008. Included in these amounts were options covering 5.9 million shares and 5.8 million shares that were also anti-dilutive because their exercise prices were greater than or equal to the average market price of the common shares during the three and six months ended October 31, 2008, respectively.

For the three and six months ended October 31, 2007, outstanding stock options and restricted stock awards covering 0.5 million shares and 0.4 million shares, respectively, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive as their exercise prices were greater than or equal to the average market price of our common shares during the respective periods.

Warrants to purchase 385,356 shares of our common stock were outstanding at October 31, 2008, but were not included in the computation of diluted earnings per share because the exercise price of the warrants was greater than the average market price of our common stock during each of the three and six months ended October 31, 2008; therefore, their effect was anti-dilutive.

Shares of our common stock issuable upon the assumed conversion of the Senior Convertible Notes in the amount of 3,853,564, were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of our common stock during the three and six months ended October 31, 2008; therefore, their effect was anti-dilutive.

The following table presentssummarizes the calculation of weighted average common shares usedstock-based compensation expense for stock options, our Employee Stock Purchase Plan (“ESPP”), restricted stock awards and restricted stock unit awards that we recorded in the computations of basic and diluted per share amounts presented in the accompanying condensed consolidated statements of operations (in thousands, except per share amounts):in accordance with SFAS 123(R) for the three months ended July 31, 2009 and 2008:

We use the Black-Scholes option pricing model to calculate compensation expense. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. We considered our historical volatility and implied volatility in developing our estimate of expected volatility.

		Three Months Ended October 31,							Six Months Ended October 31,
		2008				2007			2008				2007
Diluted:
Weighted average common shares used in computing basic net income (loss) per common share			38,432				34,625			38,224				32,524
Add: Weighted average employee stock options			—				3,704							3,753
Add: Series A Redeemable Convertible Preferred Stock, as converted (1)			—				2,400							3,600
Add: Other weighted average dilutive potential common stock			—				106							74
Weighted average common shares used in computing diluted net income (loss) per common share			38,432				40,835			38,224				39,951
Diluted income (loss) per common share		$	(0.01	)		$	0.17		$	(0.16	)		$	0.24

For the three months ended July 31, 2009 and 2008, we used the following weighted average assumptions to estimate the fair value of stock options granted: