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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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(MARK ONE)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



FOR THE FISCAL YEAR ENDED APRIL 30, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



FOR THE TRANSITION PERIOD FROM              TO



COMMISSION FILE NUMBER 000-28139



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BLUE COAT SYSTEMS, INC.

(Exact Name of Registrant as Specified In Its Charter)



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|                                                               |  |                              
|-------------------------------------------------------------- |  | -----------------------------
|DELAWARE                                                       |  | 91-1715963                   
|(State or Other Jurisdiction of Incorporation or Organization) |  | (IRS Employer Identification)
|                                                               | 
|650 ALMANOR AVENUE SUNNYVALE, CALIFORNIA                       |  | 94085                        
|(Address of Principal Executive Offices)                       |  | (Zip Code)                   



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



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



|                    |  |                                     
|------------------- |  | ------------------------------------
|Title of Each Class |  | Name of Exchange on Which Registered
|None                |  | None                                



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

Common Stock, $.0001 Par Value

(Title of Class)



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No ̈



The aggregate market value of the Common Stock held by non-affiliates of the Registrant (based on the closing price for the Common Stock on
the Nasdaq National Market on October 29, 2004) was approximately $178,790,428.



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



DOCUMENTS INCORPORATED BY REFERENCE



Documents Incorporated by Reference: Part III of this Annual Report on Form 10-K incorporates information by reference from the Registrants Proxy Statement for its 2005 Annual Meeting of Stockholders. Except as
expressly incorporated by reference, the Registrants Proxy Statement shall not be deemed to be a part of this Annual Report on Form 10-K.



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BLUE COAT SYSTEMS, INC.



ANNUAL REPORT
ON FORM 10-K

TABLE OF CONTENTS



|          |  |                                                                                                |  |     
|--------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|          |  |                                                                                                |  | PAGE
|PART I.  
|          |  |                                                                                               
|Item 1.   |  | Business                                                                                       |  | 3   
|Item 2.   |  | Properties                                                                                     |  | 27  
|Item 3.   |  | Legal Proceedings                                                                              |  | 27  
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                            |  | 27  
|         
|PART II. 
|          |  |                                                                                               
|Item 5.   |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 27  
|Item 6.   |  | Selected Financial Data                                                                        |  | 28  
|Item 7.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 29  
|Item 7A.  |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 43  
|Item 8.   |  | Financial Statements and Supplementary Data                                                    |  | 44  
|Item 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 75  
|Item 9A.  |  | Controls and Procedures                                                                        |  | 75  
|Item 9B.  |  | Other Information                                                                              |  | 76  
|         
|PART III.
|          |  |                                                                                               
|Item 10.  |  | Directors and Executive Officers of the Registrant                                             |  | 77  
|Item 11.  |  | Executive Compensation                                                                         |  | 77  
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 77  
|Item 13.  |  | Certain Relationships and Related Transactions                                                 |  | 77  
|Item 14.  |  | Principal Accountant Fees and Services                                                         |  | 77  
|         
|PART IV. 
|          |  |                                                                                               
|Item 15.  |  | Exhibits, Financial Statement Schedules                                                        |  | 78  
|          |  | Signatures                                                                                     |  | 82  
|          |  | Exhibit Index                                                                                  |  | 83  
|          |  | Schedule II                                                                                    |  | 86  



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PART I.



Item 1. Business



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



Blue Coat® Systems, Inc., also referred to in this report as we, us or the Company, was incorporated
in Delaware on March 16, 1996 as CacheFlow® Inc. On August 21, 2002, we changed our name from CacheFlow Inc. to Blue Coat Systems, Inc. and this filing and all future SEC filings will be under the name Blue Coat Systems, Inc. The ticker symbol
for our common stock was also changed from CFLO to BCSI.



On September 16,
2002, we filed an amendment to our Certificate of Incorporation, implementing a one-for-five reverse split of our outstanding common stock. Our common stock began trading under the split adjustment at the opening of the NASDAQ Stock Market on
September 16, 2002. Our number of authorized shares of common stock, however, remains at 200 million. We have 10 million authorized but unissued shares of preferred stock. All share and per share amounts in this Annual Report on Form 10-K and in the
accompanying consolidated financial statements and notes thereto reflect the reverse stock split for all periods presented.



Overview



As organizations grow increasingly dependent on the Internet to communicate with customers, partners and employees, the Web browser is fast becoming the universal window into mission-critical communications and
information. This has many advantages for the enterprise: Web-based applications and protocols are fast, inexpensive and easy to deploy and manage. But these benefits can lead to increased risks for the enterprise, such as increased help-desk calls
due to spyware, legal liabilities associated with inappropriate Web surfing and content, open back doors for Web viruses to enter via instant messaging (IM) or personal Web email, network bandwidth and storage abuse due to peer-to-peer
(P2P) file sharing and video streaming, and productivity losses from non-business related Web surfing and IM chatting. When every user on the network has a Web browser, every user also has the means to negatively affect the network
infrastructure, whether intentionally or not. A solution is to use a proxy appliance that is designed to provide Web visibility and control while also improving network performance.



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



Blue Coat Solutions



The Blue Coat ProxySG family of proxy appliances provides enhanced visibility and control of Web
communications while actually improving Web performance. Based on Blue Coat SGOS, a custom, object-based operating system with integrated caching, these proxy appliances leverage existing authentication systems to enable flexible policy enforcement down to the individual user. ProxySG
provides comprehensive proxy support of all Web protocols with integrated content filtering, spyware prevention, web virus scanning, instant messaging control, peer-to-peer control, streaming control and pop-up ad blocking.



The ProxyAV family of appliances integrates with the ProxySG to provide scalability and performance in real-time scanning of
Web-based file downloads for viruses, worms and Trojans. Pairing the ProxyAV with the ProxySG provides significant advantages for high-speed Web virus scanning that standalone systems cannot match. Both the ProxyAV 400 and
ProxyAV 2000 series appliances provide the same comprehensive features with easy deployment and a choice of virus scanning engines from Sophos, McAfee and Panda.



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



Web Proxy



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



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



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



Web Filtering



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



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



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



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



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



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



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



Web Anti-Virus



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



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



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



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



Spyware Prevention



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



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



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



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



Instant Messaging Control



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



Peer-to-Peer (P2P) Control



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



| |  |  | Decreased bandwidth for mission critical applications;
| | - |  | ------------------------------------------------------



| |  |  | Law suits stemming from music and motion picture copyright infringement;
| | - |  | ------------------------------------------------------------------------



| |  |  | Introduction of adware, spyware, viruses and worms to the enterprise;
| | - |  | ---------------------------------------------------------------------



| |  |  | Decreased user productivity when searching for files and listening/viewing content;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Possible customer service delays due to network congestion; or
| | - |  | --------------------------------------------------------------



| |  |  | Possible loss of revenue through poor response times.
| | - |  | -----------------------------------------------------



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



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



Bandwidth Management



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



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



| |  |  | Policy-based Bandwidth Limits: Create policies to constrain who can use certain media types, and how much. For example, companies can allow their executives to view high-bandwidth
streaming media, but only allow the accounting group to view streams up to 56k on corporate sites.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Deny by content type: Flexible policy architecture limits certain users or network segments access to large amounts of data that potentially clog corporate networks. For example,
block MP3 files from being downloaded. Or, block MP3 files for everyone except the Webmaster who may require audio files to complete a corporate project.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Access control based on user, group, network address and time of day: Prevent all access to the Internet except for a group of users that need access to do their jobs, effectively
freeing bandwidth for mission-critical needs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Content positioning: Provides pre-positioning of content commonly accessed by users. Tools are available that let administrators pre-position large data types like multimedia and
streaming content, effectively optimizing the use of expensive WAN links through intelligent content positioning policies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Caching: Integrated into every Blue Coat appliance is patent-pending, intelligent caching software enabling Web and multimedia content to be stored locally - closer to users. With
up to 60 percent of end-user requests for content being redundant, caching provides a foundation for bandwidth management.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Products



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



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



ProxySG



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



The ProxySG 200 and 400 Series appliances enable corporations to extend Web traffic protection and control to the branch and remote locations, while significantly reducing the administration and management costs for securing a
distributed enterprise. Both the ProxySG 800 and the ProxySG 8000 Series appliances were designed to meet enterprise requirements for capacity, performance, availability and centralized management. While all four provide the same broad
application support and features, the 8000 Series provides an expandable, modular platform for customizing disk size, RAM and network interface cards. Our ProxySG appliances are comprised of a specialized hardware platform and our custom
operating system (SGOS).



ProxySG 200
Series



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



ProxySG 400 Series



The
Blue Coat ProxySG 400 Series are designed to increase control over branch and regional office Web communications while reducing the costs associated with distributed deployments. Available as a rack mountable or desktop device, the
ProxySG 400 platform easily drops in to branch and regional environments. The ProxySG 400 is available in two fixed configurations, one with a single 40GB disk drive and 256MB of random access memory (RAM), and the other
with two 40GB disk drives and 512 MB of RAM.



ProxySG 800
Series



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



ProxySG 8000 Series



Blue Coat ProxySG 8000 Series appliances represent the next generation in high-end appliance platforms. These purpose-built proxy appliances provide enhanced visibility and control of Web communications with wire-speed performance.
Specific configurations range from systems with two 73 GB disk drives and 1 GB of RAM to systems with eight 73 GB disk drives and 4 GB of RAM.



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ProxyAV



The ProxyAV family of Web anti-virus appliances includes the 400 Series and 2000 Series. The Blue Coat ProxyAV enables organizations to scan for viruses,
worms and trojans entering through Web-based backdoors that include personal Web email accounts where a majority of viruses and worms propagate, Web spam or email spam which unknowingly activates trojan downloads, and browser-based file downloads
that bypass existing virus scanning defenses. The ProxyAV combined with the ProxySG provides scalability for virus scanning, plus comprehensive visibility and control of enterprise Web communications. The ProxyAV leverages virus
scanning engines from Sophos, McAfee and Panda. Our ProxyAV appliances are comprised of a specialized hardware platform.



ProxyAV 400 Series



The ProxyAV 400 Series represents the next generation in appliance platforms for enterprise Web anti-virus scanning. The ProxyAV 400 Series
is a purpose-built Web anti-virus appliance designed for quick integration with the ProxySG 800 Series appliance for deployment in medium enterprise or distributed environments. The ProxyAV is delivered in two fixed configurations, one
with a single 850 megahertz (MHz) processor and 512 megabytes (MB) of random access memory (RAM), and the other with a single 1.26 gigahertz (GHz) processor and 512 MB of RAM.



ProxyAV 2000 Series



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



Spyware
Interceptor



Blue Coat Spyware Interceptor is an effective
anti-spyware appliance for networks with 1,000 users or less. Spyware Interceptor is built on Blue Coats proxy technology, and comes in an easy-to-deploy and affordable appliance form-factor. The appliance utilizes SCOPE (Spyware Catching Object Protection Engine) technology
to prevent both known and unknown forms of spyware at the gateway, which uniquely allows access to legitimate Web applications and the ability to safely view spyware-laden Web sites without becoming infected. The spyware prevention capabilities in
Spyware Interceptor are derived from Blue Coats enterprise focused ProxySG solution. Spyware Interceptor allows IT administrators to minimize futile cycles using ineffective spyware cleaners.



Spyware Interceptor requires an annual license subscription based on the number of computers being supported. The subscription includes SCOPE engine updates,
continuous spyware profile updates and Blue Coats policy optimization service backed by Blue Coat Labs.



Blue Coat Reporter



The Blue
Coat Reporter is a log processing and reporting product that generates out-of-the-box reports tailored for the Blue Coat proxy appliances. Reporter provides identity-based user and network reporting that helps evaluate Web security policies and
resource management. Because it is Web-based and cross-platform, it gives companies the flexibility to view Web usage reports from anywhere administrators or managers have access to a network connection and a Web browser.



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Blue Coat Director



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



| |  |  | Reduce management costs by centrally managing all ProxySG appliances;
| | - |  | ---------------------------------------------------------------------



| |  |  | Eliminate the need to configure remote devices manually;
| | - |  | --------------------------------------------------------



| |  |  | Rapidly deploy and upgrade ProxySG appliances;
| | - |  | ----------------------------------------------



| |  |  | Distribute user security policy across the network; and
| | - |  | -------------------------------------------------------



| |  |  | Recover from system problems with configuration snapshots and recovery.
| | - |  | -----------------------------------------------------------------------



WinProxy Software



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



Our Key Strategies



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



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



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



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



Sales and Marketing



We utilize a combination of our territory-based sales teams, resellers and distributors as appropriate for each of our target markets. We support our distribution channels with systems engineers and customer support
personnel that provide technical service and support to our customers. We have entered into agreements with resellers and distributors such as Westcon, Allasso, Nissho Electronics, Alternative Technologies and others.



Our marketing efforts focus on increasing market awareness and demand creation for our
products and technology and on promoting the Blue Coat brand. We have a number of marketing programs to support the sale and distribution of our products and to inform existing and potential customers within our target market segments



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



Research and Development



We believe
that strong product development capabilities are essential to our continued success and growth. Our research and development efforts are focused on developing new products as well as improvements and enhancements to our existing products. Research
and development expenses were $16.5 million, $12.0 million and $11.9 million for the fiscal years ended April 30, 2005, 2004 and 2003, respectively.



Our research and development team consists of engineers with extensive backgrounds in operating systems, algorithms, computer science, streaming media and network
engineering. We believe that the experience and capabilities of our research and development professionals represents a competitive advantage for us. We also work closely with our customers in developing and enhancing our products. Our current
research and development efforts are primarily focused on enhancing the capabilities of our current proxy appliances by adding new features and strengthening existing features.



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



We expect that most of the enhancements to our existing and future products will be accomplished by internal development. However, we currently license some technologies and will continue to evaluate externally developed solutions for
integration into our products.



Manufacturing



We currently outsource, to third parties, the manufacturing of our ProxySG products,
except that we perform final assembly and testing ourselves for our ProxySG 800. This approach allows us to reduce our investment in manufacturing capital and to take advantage of the expertise of our vendors. Our internal manufacturing
operations consist primarily of prototype development, materials planning and procurement, and some final assembly, testing and quality control. Our standard parts and components are generally available from more than one vendor, while our custom
parts are usually single sourced. We typically obtain these components through purchase orders and currently do not have contractual relationships or guaranteed supply arrangements with these suppliers. If one of these vendors ceased to provide us
with necessary parts and components, we would likely encounter delays in product production as we make the transition to another vendor, which could seriously harm our business. Furthermore, if actual orders do not match our forecasts (as we have
experienced in the past), we may have excess or insufficient inventory of some materials and components or we could incur cancellation charges or penalties, which would increase our costs or prevent or delay product shipments and could seriously
harm our business.



Backlog



We typically ship products shortly after receipt of an order. Our backlog is comprised of
deferred revenue and accepted product orders which have not shipped. Deferred revenue is derived from products which have shipped to distributors but have not yet shipped to end customers, product shipments which do not yet qualify as revenue in
accordance with our revenue recognition policy, and service contracts. Aggregate backlog at April 30, 2005 and April 30, 2004 was approximately $25.4 million and $15.4 million, respectively. We do not believe that backlog as of any particular date
is indicative of future results.



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Competition



The market for proxy appliances is intensely competitive, evolving and subject to rapid technological change. Primary competitive factors that have typically affected our
market include product characteristics such as reliability, scalability and ease of use, as well as price and customer support. The intensity of this competition is expected to increase in the future. Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any one of which could seriously harm our business. We may not be able to compete successfully against current or future competitors and we cannot be certain that competitive
pressures we face will not seriously harm our business. Our competitors vary in size and in the scope and breadth of the products and services they offer. We encounter competition from a variety of companies, including Cisco Systems, Network
Appliance, Microsoft and others. In addition, we expect additional competition from other established and emerging companies as the market for proxy appliances continues to develop and expand.



Many of our current and potential competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than we do. In addition, many of our competitors have well-established relationships with our current and
potential customers and have extensive knowledge of our industry. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the
development, marketing, promotion and sale of their products than we can. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the market acceptance of their
products. In addition, our competitors may be able to replicate our products, make more attractive offers to existing and potential employees and strategic partners, more quickly develop new products or enhance existing products and services, or
bundle proxy appliances in a manner that we cannot. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We also expect that competition will increase as a result of
industry consolidation.



Intellectual Property and Other Proprietary Rights



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



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



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



There has been a substantial amount of litigation in the
technology industry regarding intellectual property rights and we recently settled a lawsuit, which alleged infringement of certain United States patents by us (See Item 8, Note 11 Litigation of the consolidated financial statements
included in this Annual Report on Form 10-K). Third parties may claim that we, or our current or potential future products, infringe their intellectual property.



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



Acquisitions



On November 16, 2004, we completed our acquisition of Cerberian, Inc. (Cerberian). The purchase price of approximately $19.3
million consisted of approximately 0.8 million shares of Blue Coat common stock valued at $17.4 million, $0.4 million in direct transaction costs, Cerberian options assumed by Blue Coat valued at approximately $0.5 million and the fair value of
promissory notes from Cerberian to Blue Coat of $1.0 million.



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



Employees



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



Our future operating results depend significantly upon the continued service of our senior
management, and key technical and sales personnel, most of who are not bound by an employment agreement. Competition for these personnel is intense, and we may not be able to retain them in the future. Our future success also depends upon our
continuing ability to attract and retain highly qualified individuals. We may experience difficulties managing our financial and operating performance if we are unable to attract and retain qualified personnel.



Available Information



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



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FACTORS AFFECTING FUTURE OPERATING RESULTS



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



Our business, financial condition and results of operations could be seriously harmed by any
of the following risks. In addition, the trading price of our common stock could decline due to any of these risks.



Because we expect our sales to fluctuate and our costs are relatively fixed in the short term, our ability to forecast our quarterly operating results is limited,
and if our quarterly operating results are below the expectations of analysts or investors, the market price of our common stock will likely decline.



Our net sales and operating results are likely to continue to vary significantly from quarter to quarter. We believe that quarter-to-quarter comparisons of our
operating results should not be relied upon as principal indicators of future performance. It is likely that in some future quarter or quarters, our operating results will be below the expectations of public market analysts or investors. When this
occurs, the price of our common stock could decrease significantly. A number of factors are likely to cause variations in our sales and operating results, including factors described elsewhere in this Factors Affecting Future Operating
Results section.



We cannot reliably forecast our future quarterly sales
for several reasons, including:



| |  |  | Fluctuations in demand for our products and services;
| | - |  | -----------------------------------------------------



| |  |  | The market in which we compete is relatively new and rapidly evolving;
| | - |  | ----------------------------------------------------------------------



| |  |  | Our sales cycle varies substantially from customer to customer;
| | - |  | ---------------------------------------------------------------



| |  |  | Variations in the mix of products sold;
| | - |  | ---------------------------------------



| |  |  | The timing, size, and mix of orders from customers;
| | - |  | ---------------------------------------------------



| |  |  | Our sales cycle may lengthen as the complexity of proxy appliance solutions continues to increase;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | The level of competition in our target product markets;
| | - |  | -------------------------------------------------------



| |  |  | Market acceptance of new products and product enhancements;
| | - |  | -----------------------------------------------------------



| |  |  | Announcements, introductions and transitions of new products or product enhancements by us or our competitors;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Deferrals of customer orders in anticipation of new products or product enhancements introduced by us or our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Technological changes in our target product markets;
| | - |  | ----------------------------------------------------



| |  |  | The percentage of our sales related to subscription-based products;
| | - |  | -------------------------------------------------------------------



| |  |  | Future accounting pronouncements and changes in accounting policies; and
| | - |  | ------------------------------------------------------------------------



| |  |  | Our inability to predict future macro-economic conditions.
| | - |  | ----------------------------------------------------------



A high percentage of our expenses, including those related to manufacturing overhead, technical support, research and development, sales and marketing, general and
administrative functions, amortization of intangible assets and amortization of deferred compensation, are essentially fixed in the short term. As a result, if our net sales are less than forecasted, our quarterly operating results are likely to be
seriously harmed and our stock price would likely decline.



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



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



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



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



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



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



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



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



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



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reduced control over quality assurance, product costs and product supply. Any manufacturing disruption by our third-party manufacturers could impair our
ability to fulfill orders. We also rely on several other third-party manufacturers to build portions of our products. If we or our suppliers are unable to manage the relationships with these third-party manufacturers effectively, or if these
third-party manufacturers experience delays, disruptions, capacity constraints or quality control problems in their manufacturing operations, or fail to meet our future requirements for timely delivery, our ability to ship products to our customers
could be impaired and our business would be seriously harmed.



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



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



We have no long-term contracts or arrangements with any of
our third-party manufacturers that guarantee product availability, the continuation of particular payment terms or the extension of credit limits. We have experienced in the past, and may experience in the future, problems with our third-party
manufacturers, such as inferior quality, insufficient quantities and late delivery of product. To date, these problems have not materially adversely affected us. We may not be able to obtain additional volume purchase or manufacturing arrangements
on terms that we consider acceptable, if at all. If we enter into a high-volume or long-term supply arrangement and subsequently decide that we cannot use the products or services provided for in the agreement, our business will be harmed. Any of
these difficulties could harm our relationships with customers and cause us to lose orders.



In the future, we may seek to use additional third-party manufacturers. We may experience difficulty in locating and qualifying suitable manufacturing candidates capable of satisfying our product specifications or
quantity requirements.



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



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



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



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



| |  |  | a potential inability to obtain an adequate supply of required parts or components;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | supplier capacity restraints;
| | - |  | -----------------------------



| |  |  | financial or other difficulties faced by our suppliers;
| | - |  | -------------------------------------------------------



| |  |  | price increases;
| | - |  | ----------------



| |  |  | timely delivery; and
| | - |  | --------------------



| |  |  | component quality.
| | - |  | ------------------



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



We must maintain a competitive position in
the proxy appliance market by developing and introducing new products while enhancing existing products to match the needs of our customers or else we will lose market share and our operating results will be adversely affected.



To maintain our competitive position in a market characterized by rapid rates of
technological advancement, we must continue to invest significant resources in research and development. We need to develop and introduce new products and enhancements to existing products on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly sophisticated needs of our customers. The introduction of new products by others, market acceptance of products based on new or alternative technologies, or the emergence of
new industry standards, could render our existing products obsolete or make it easier for other products to compete with our products. Our future success will depend in part upon our ability to:



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



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



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



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



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



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



In addition, life cycles of our products are difficult to predict
because the market for our products is new and evolving and characterized by rapid technological change, frequent enhancements to existing products and new



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



We expect increased competition and, if we do not compete effectively, we could
experience a loss in our market share and sales.



The market for proxy
appliances is intensely competitive, highly fragmented and characterized by changing technology and evolving standards. Our competitors may announce new products, services or enhancements to existing products that better meet the needs of customers.
Increased competition may cause price reductions or a loss of market share, either of which could have a material adverse effect on our business, results of operations and financial condition. Primary competitive factors that have typically affected
our market include product characteristics such as reliability, scalability and ease of use, as well as price and customer support. The intensity of competition is expected to increase in the future. Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any one of which could seriously harm our business. We may not be able to compete successfully against current or future competitors and we cannot be certain that competitive
pressures we face will not seriously harm our business.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



| |  |  | fluctuations in demand for our products;
| | - |  | ----------------------------------------



| |  |  | market acceptance of our products;
| | - |  | ----------------------------------



| |  |  | the timing and size of customer orders and product implementations;
| | - |  | -------------------------------------------------------------------



| |  |  | the mix of direct and indirect sales;
| | - |  | -------------------------------------



| |  |  | the mix and average selling prices of products;
| | - |  | -----------------------------------------------



| |  |  | new product introductions and enhancements;
| | - |  | -------------------------------------------



| |  |  | component costs;
| | - |  | ----------------



| |  |  | manufacturing costs;
| | - |  | --------------------



| |  |  | availability of sufficient inventory to meet demand;
| | - |  | ----------------------------------------------------



| |  |  | increased price competition and pressures;
| | - |  | ------------------------------------------



| |  |  | changes in product pricings;
| | - |  | ----------------------------



| |  |  | actions taken by our competitors;
| | - |  | ---------------------------------



| |  |  | how well we execute on our strategy and operating plans; and
| | - |  | ------------------------------------------------------------



| |  |  | product configuration.
| | - |  | ----------------------



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



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



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



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



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



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Our international operations are subject to certain inherent risks including:



| |  |  | technical difficulties and costs associated with product localization;
| | - |  | ----------------------------------------------------------------------



| |  |  | challenges associated with coordinating product development efforts among geographically dispersed areas;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | potential loss of proprietary information due to piracy, misappropriation, or laws that may be less protective of our intellectual property rights;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lack of experience in certain geographic markets;
| | - |  | -------------------------------------------------



| |  |  | longer payment cycles for sales in certain foreign countries;
| | - |  | -------------------------------------------------------------



| |  |  | seasonal reductions in business activity in the summer months in Europe and certain other countries;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the significant presence of some of our competitors in some international markets;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | potentially adverse tax consequences;
| | - |  | -------------------------------------



| |  |  | import and export restrictions and tariffs;
| | - |  | -------------------------------------------



| |  |  | foreign laws and other government controls, such as trade and employment restrictions;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | management, staffing, legal and other costs of operating an enterprise spread over various countries;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | political instability in the countries where we are doing business; and
| | - |  | -----------------------------------------------------------------------



| |  |  | fears concerning travel or health risks that may adversely affect our ability to sell our products and services in any country in which the business sales culture encourages
face-to-face interactions.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Potential new accounting pronouncements may impact our future financial position or results of operations.



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



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



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



| |  |  | an inability to successfully integrate the operations, technologies, products and personnel of the acquired companies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | diversion of managements attention from normal daily operations of the business;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | loss of key employees of acquired companies; and
| | - |  | ------------------------------------------------



| |  |  | substantial transaction costs.
| | - |  | ------------------------------



Acquisitions may also cause us to:



| |  |  | issue equity securities that would dilute our current stockholders percentage ownership;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | assume certain liabilities;
| | - |  | ---------------------------



| |  |  | incur additional debt;
| | - |  | ----------------------



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| |  |  | make large and immediate one-time write-offs and restructuring and other related expenses;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | become subject to intellectual property or other litigation; and
| | - |  | ----------------------------------------------------------------



| |  |  | create goodwill or other intangible assets that could result in significant amortization expense.
| | - |  | -------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



| |  |  | changes in macro-economic conditions;
| | - |  | -------------------------------------



| |  |  | the introduction of new products by our competitors;
| | - |  | ----------------------------------------------------



| |  |  | changes in financial estimates or investment recommendations by securities analysts;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | our ability to keep pace with changing technological requirements;
| | - |  | ------------------------------------------------------------------



| |  |  | changes in market valuations of Internet-related and networking companies;
| | - |  | --------------------------------------------------------------------------



| |  |  | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | loss of a major customer;
| | - |  | -------------------------



| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------



| |  |  | fluctuations in stock market volumes;
| | - |  | -------------------------------------



| |  |  | speculation in the press or investment communication about our strategic position, financial condition, results of operations, business;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | significant transactions; and
| | - |  | -----------------------------



| |  |  | variations in our quarterly operating results.
| | - |  | ----------------------------------------------



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##### Table of Contents

Item 2. Properties



We lease approximately 53,000
square feet for our headquarters facility in Sunnyvale, California, under a lease that expires on August 31, 2005. In April 2004, we entered into a lease agreement to occupy approximately 29,000 square feet for general office uses located in
Sunnyvale, California, which also expires on August 31, 2005. In March 2001, we entered into a lease agreement to occupy 46,000 square feet for a research and development facility in Sunnyvale, California, beginning in the first quarter of our 2002
fiscal year, which expires on June 30, 2006. We also lease space for research and development in Draper, Utah, Waterloo, Ontario, Canada and Latvia. In addition, we lease space for sales and support in three metropolitan areas in North America. We
also lease space for sales and support in the following countries: France, Germany, Japan, Peoples Republic of China, Belgium, Taiwan, South Korea, United Arab Emirates and the United Kingdom.



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



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



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



Item 3. Legal Proceedings



See Item 8, Note 11
Litigation of the consolidated financial statements included in this Annual Report on Form 10-K.



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



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



PART II.



Item 5. Market for Registrants Common Equity and Related Stockholder Matters



Our common stock has been quoted on the NASDAQ National Market since November 19, 1999 under the symbol BCSI, or CFLO prior to our name change on
August 21, 2002. Prior to November 19, 1999, there was no public market for the common stock. The following table sets forth, for the periods indicated, the high and low closing prices of the common stock as reported on the Nasdaq National Market.



|                                   |  |      |       |     |   |      
|---------------------------------- |  | ---- | ----- | --- | - | -----
|                                   |  | High |       | Low
|For the year ended April 30, 2004: |  |      |       |     |   |      
|First Quarter                      |  | $    | 7.22  |     | $ | 5.36 
|Second Quarter                     |  | $    | 17.39 |     | $ | 5.30 
|Third Quarter                      |  | $    | 25.38 |     | $ | 14.81
|Fourth Quarter                     |  | $    | 64.16 |     | $ | 21.53
|                                   |  |     
|For the year ended April 30, 2005: |  |      |       |     |   |      
|First Quarter                      |  | $    | 47.56 |     | $ | 17.56
|Second Quarter                     |  | $    | 19.67 |     | $ | 10.41
|Third Quarter                      |  | $    | 25.75 |     | $ | 16.05
|Fourth Quarter                     |  | $    | 25.56 |     | $ | 14.40



Our present policy is to retain
earnings, if any, to finance future growth. We have never paid cash dividends and have no present intention to pay cash dividends. At June 30, 2005, there were approximately 378 stockholders of record and the price of our common stock was $29.88. We
believe that a significant number of beneficial owners of our common stock hold shares in street name.



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##### Table of Contents

Item 6. Selected Financial Data



The following
table sets forth selected financial data for the fiscal years ended April 30, 2001 through April 30, 2005. For additional discussion regarding the items in this table, refer to Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations. Included in our operating results for the years ended April 30, 2005 and 2004, are the operations of Cerberian, Inc. and Ositis Software, Inc., from the dates of acquisition on November 16, 2004 and
November 14, 2003, respectively.



|                                                                    |  |                                       |        |   |      |   |        |      |  |   |         |   |  |      |          |   |  |   |          |  
|------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | - |  | ---- | -------- | - |  | - | -------- | -
|                                                                    |  | Year Ended April 30,                  |       
|                                                                    |  | 2005                                  |        |   | 2004 |   |        | 2003 |  |   | 2002    |   |  | 2001 |         
|                                                                    |  | (in thousands, except per share data) |       
|Consolidated Statement of Operations Data:                          |  |                                       |        |   |      |   |        |      |  |   |         |   |  |      |          |   |  |   |          |  
|Net revenue                                                         |  | $                                     | 96,186 |   |      | $ | 66,068 |      |  | $ | 45,738  |   |  | $    | 55,641   |   |  | $ | 97,739   |  
|Gross profit                                                        |  |                                       | 64,876 |   |      |   | 44,749 |      |  |   | 28,423  |   |  |      | 26,649   |   |  |   | 43,066   |  
|Research and development                                            |  |                                       | 16,549 |   |      |   | 11,992 |      |  |   | 11,911  |   |  |      | 39,910   |   |  |   | 37,963   |  
|Sales and marketing                                                 |  |                                       | 33,882 |   |      |   | 25,104 |      |  |   | 26,236  |   |  |      | 39,541   |   |  |   | 81,698   |  
|General and administrative                                          |  |                                       | 9,075  |   |      |   | 5,206  |      |  |   | 5,042   |   |  |      | 11,616   |   |  |   | 42,667   |  
|Goodwill amortization (1)                                           |  |                                       |       |   |      |   |       |      |  |   |        |   |  |      | 29,489   |   |  |   | 98,987   |  
|In-process technology (2)                                           |  |                                       |       |   |      |   | 151    |      |  |   |        |   |  |      |         |   |  |   | 32,200   |  
|Impairment of assets (3)                                            |  |                                       |       |   |      |   |       |      |  |   |        |   |  |      | 138,785  |   |  |   | 272,871  |  
|Amortization of intangible assets (4)                               |  |                                       | 648    |   |      |   | 305    |      |  |   |        |   |  |      |         |   |  |   |         |  
|Restructuring (reversal) (5)                                        |  |                                       | (96    | ) |      |   | 1,536  |      |  |   | 1,273   |   |  |      | 15,475   |   |  |   | 1,850    |  
|Legal settlement (6)                                                |  |                                       |       |   |      |   | 1,100  |      |  |   |        |   |  |      |         |   |  |   |         |  
|                                                                    |  |                                       |        |   |      |   |        |      |  |   |         |   |  |      |          |   |  |   |          |  
|Total operating expenses                                            |  |                                       | 60,058 |   |      |   | 45,394 |      |  |   | 44,462  |   |  |      | 274,816  |   |  |   | 568,236  |  
|Net income (loss)                                                   |  |                                       | 5,375  |   |      |   | (348   | )    |  |   | (15,928 | ) |  |      | (247,031 | ) |  |   | (519,096 | )
|Net income (loss) available to common stockholders                  |  |                                       | 5,375  |   |      |   | (348   | )    |  |   | (15,928 | ) |  |      | (247,031 | ) |  |   | (519,096 | )
|                                                                    |  |                                       |        |   |     
|Basic net income (loss) per common share                            |  | $                                     | 0.46   |   |      | $ | (0.03  | )    |  | $ | (1.81   | ) |  | $    | (29.66   | ) |  | $ | (72.20   | )
|Diluted net income (loss) per common share                          |  | $                                     | 0.41   |   |      | $ | (0.03  | )    |  | $ | (1.81   | ) |  | $    | (29.66   | ) |  | $ | (72.20   | )
|                                                                    |  |                                       |        |   |     
|Shares used in computing basic net income (loss) per common share   |  |                                       | 11,628 |   |      |   | 9,956  |      |  |   | 8,777   |   |  |      | 8,329    |   |  |   | 7,190    |  
|Shares used in computing diluted net income (loss) per common share |  |                                       | 12,977 |   |      |   | 9,956  |      |  |   | 8,777   |   |  |      | 8,329    |   |  |   | 7,190    |  
|                                                                    | 
|                                                                    |  | As of April 30,                       |       
|                                                                    |  | 2005                                  |        |   | 2004 |   |        | 2003 |  |   | 2002    |   |  | 2001 |         
|                                                                    |  | (in thousands)                        |       
|Consolidated Balance Sheet Data:                                    |  |                                       |        |   |      |   |        |      |  |   |         |   |  |      |          |   |  |   |          |  
|Cash, cash equivalents and short-term investments                   |  | $                                     | 47,264 |   |      | $ | 39,504 |      |  | $ | 23,322  |   |  | $    | 39,946   |   |  | $ | 81,564   |  
|Working capital                                                     |  |                                       | 35,234 |   |      |   | 26,737 |      |  |   | 16,919  |   |  |      | 29,743   |   |  |   | 77,880   |  
|Total assets                                                        |  |                                       | 97,862 |   |      |   | 67,669 |      |  |   | 39,992  |   |  |      | 58,714   |   |  |   | 287,232  |  
|Total stockholders equity                                          |  |                                       | 66,249 |   |      |   | 36,115 |      |  |   | 16,777  |   |  |      | 30,264   |   |  |   | 256,751  |  

---

|(1) | Goodwill amortization includes charges related to the June 2000 acquisition of SpringBank Networks, Inc. and the December 2000 acquisition of Entera, Inc.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Acquired in-process technology relates to certain research and development projects assumed in the Entera and Ositis acquisitions that had not yet reached technological feasibility
and were deemed to have no alternative future use.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Impairment charges were recorded during fiscal 2001 and 2002 after we performed impairment assessments and concluded that a substantial portion of enterprise-level goodwill related
to Entera and Springbank acquisitions was not recoverable.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(4) | Amortization of intangible assets relates to identifiable intangible assets obtained through the Ositis and Cerberian acquisitions on November 14, 2003 and November 16, 2004,
respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Restructuring (reversal) expense includes costs associated with severance, abandoned lease space, and other charges; reversal of restructuring accrual in fiscal 2005 resulted from
reductions in the estimated costs for real estate taxes and contract termination fees.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Legal settlement expense relates to the settlement with Network Caching Technology L.L.C. in November 2003.
|--- | -----------------------------------------------------------------------------------------------------------

Refer to Note 11 in the Notes to the Consolidated Financial Statements for additional information.



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



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



Overview



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



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



The Blue Coat family of proxy appliances is designed to address todays new business risks, which can include the risk of being sued by employees who witness
inappropriate Web surfing by their coworkers, viruses brought in via back door channels such as instant messaging and Web-based email, and network resource abuse due to



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peer-to-peer (P2P) file sharing and video streaming. The Blue Coat ProxySG appliances, and new ProxyAV appliances for high-performance Web
anti-virus, are designed to enable organizations to minimize security risks and reduce the management costs and complexity of their Web infrastructure.



Critical Accounting Policies



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to inventories, valuation
of goodwill, valuation of long-lived and identifiable intangible assets, restructuring liabilities, revenue recognition and related receivable allowances, warranty obligations, income taxes and contingencies. We base our estimates on historical
experience and various other assumptions that are believed to be reasonable under the current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions, and such differences could be material. We believe the following critical accounting policies affect the more significant judgments and
estimates used in the preparation of our consolidated financial statements.



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



| |  |  | Inventories;
| | - |  | ------------



| |  |  | Valuation of goodwill;
| | - |  | ----------------------



| |  |  | Valuation of long-lived and identifiable intangible assets;
| | - |  | -----------------------------------------------------------



| |  |  | Restructuring liabilities;
| | - |  | --------------------------



| |  |  | Revenue recognition and related receivable allowances;
| | - |  | ------------------------------------------------------



| |  |  | Warranty obligations;
| | - |  | ---------------------



| |  |  | Income taxes; and
| | - |  | -----------------



| |  |  | Contingencies.
| | - |  | --------------



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



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



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



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



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



Revenue Recognition and Related Receivable Allowances. We recognize appliance and
WinProxy revenue upon delivery of the product, assuming that evidence of an arrangement between the customer and us exists, the fee to the customer is fixed or determinable, and collectability is reasonably assured. In the event we have future
performance obligations or must obtain customer acceptance, revenue is deferred until the obligations are met or acceptance is obtained. During the fiscal year ended April 30, 2005, we deferred certain revenue and related costs of revenue based on
future obligations.



Revenue and related cost of revenue resulting from
shipments to our distributors who have certain stock rotation rights are deferred until a point of sale report is received from the distributor confirming that our products have been sold to a reseller or an end user. For sales to resellers, revenue
and related cost of revenues are recognized upon shipment based on our understanding that an end user has been identified at the time of shipment.



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



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



When a sale involves multiple elements, we determine if these elements can be separated into
multiple units of accounting. The entire fee from the arrangement is allocated to each respective element based on its relative fair value or using the residual method, if appropriate. Revenue for each element is then recognized when revenue
recognition criteria for that element is met. If we cannot establish fair value for any undelivered element, we would be required to recognize revenue for the whole arrangement at the time revenue recognition criteria for the undelivered element is
met. Relative fair value for maintenance elements are determined based on substantive renewal rates.



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



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 our review process, revenue is not recognized until cash receipt.



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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 changes are charged to general and administrative expense.



Warranty Obligations.We accrue for warranty expenses as part of our cost of 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 obligations and other charges against earnings may be required. If actual warranty expenses are less than projected, prior
obligations could 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.



Income Taxes.We use the liability method to account for income taxes as required by the FASB SFAS No. 109, Accounting for Income
Taxes (SFAS No. 109). As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves determining our
income tax expense (benefit) together with calculating the deferred income tax expense (benefit) related to temporary differences resulting from the differing treatment of items for tax and accounting purposes, such as deferred revenue or
deductibility of certain intangible assets. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. We must then assess the likelihood that the deferred tax assets will be recovered
through the generation of future taxable income and record a valuation allowance to reduce deferred tax assets to an amount we believe more likely than not will be realized. We have recorded a full valuation allowance against deferred tax assets.



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



Results of Operations



Net Revenue



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



|                           |  |                      |        |   |      |   |        |      |  |   |        |   
|-------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | --
|                           |  | Year Ended April 30, |       
|                           |  | 2005                 |        |   | 2004 |   |        | 2003 | 
|Total net revenue          |  | $                    | 96,186 |   |      | $ | 66,068 |      |  | $ | 45,738 |   
|Change from prior year ($) |  | $                    | 30,118 |   |      | $ | 20,330 |      |  | $ | (9,903 | ) 
|Change from prior year (%) |  |                      | 45.6   | % |      |   | 44.4   | %    |  |   | (17.8  | )%



Demand for our products and related
services continued to increase in fiscal 2005, which resulted in an increase in net revenue of $30.1 million, or 45.6%, from the prior year. The increase in demand is primarily attributable to continued market acceptance of our products resulting
from investments in our sales and marketing organizations, as well as our focus on larger enterprise customers.



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



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One of our distributors accounted for 15.9%, 24.1% and 19.0% of our net revenue during the years ended April 30, 2005,
2004 and 2003, respectively. The same distributor accounted for 11.3%, 12.7% and 20.4% of our gross accounts receivable at April 30, 2005, 2004 and 2003, respectively. Net revenue from this distributor has decreased as we have increasingly relied on
sales to larger resellers who purchase directly from us. No other customer accounted for more than 10.0% of our net revenue or gross accounts receivable at April 30, 2005, 2004 and 2003, respectively.



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



|                  |  |                      |        |      |   |        |  |   |       
|----------------- |  | -------------------- | ------ | ---- | - | ------ |  | - | ------
|                  |  | Year Ended April 30,
|                  |  | 2005                 |        | 2004 |   | 2003  
|North America     |  | $                    | 48,951 |      | $ | 36,955 |  | $ | 23,774
|EMEA              |  |                      | 30,148 |      |   | 19,608 |  |   | 12,839
|Asia              |  |                      | 17,087 |      |   | 9,505  |  |   | 9,125 
|                  |  |                      |        |      |   |        |  |   |       
|Total net revenue |  | $                    | 96,186 |      | $ | 66,068 |  | $ | 45,738
|                  |  |                      |        |      |   |        |  |   |       



In fiscal 2005, we experienced strong
growth in all geographic markets. Net revenue in North America increased $12.0 million, up 32.5% from prior year, on strong demand, especially for our ProxySG appliances. In fiscal 2004, net revenue in the North America increased $13.2
million, up 55.4% from fiscal 2003, again based on strong demand. Net revenue in North America comprises a significant portion of the total net revenue in part because we focused a substantial portion of our sales and marketing activities in North
America.



Net revenue in Europe, Middle East, and Africa (EMEA)
increased $10.5 million in fiscal 2005, up 53.8% from the prior year. From fiscal 2003 to fiscal 2004, net revenue for EMEA increased $6.8 million, or 52.7%. The year-over-year increases in net revenue in EMEA for both fiscal 2005 and fiscal 2004
are primarily related to investments in our sales and marketing organizations in the region, coupled with broader market acceptance of our products.



Net revenue in Asia increased 79.8% to $17.1 million in fiscal 2005 from the prior year as a result of increased demand for our products and related services as well as
increased investment in our sales and marketing organization in the Asia region. Growth in net revenue from fiscal 2003 to fiscal 2004 was 4.2% as we transitioned our selling efforts from caching appliances to proxy appliances.



Gross Profit



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



|                                            |  |                      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                            |  | Year Ended April 30, |       
|                                            |  | 2005                 |        |   | 2004 |   |        | 2003 | 
|Gross profit                                |  | $                    | 64,876 |   |      | $ | 44,749 |      |  | $ | 28,423 |  
|Gross profit as a percentage of net revenue |  |                      | 67.4   | % |      |   | 67.7   | %    |  |   | 62.1   | %



Gross profit for fiscal 2005 increased
$20.1 million, representing a 45.0% increase year-over-year which is consistent with the increase in net revenue. As a percentage of net revenue, gross profit in fiscal 2005 decreased slightly to 67.4% from 67.7% as the gross profit improvement
associated with the increased volume was offset by investments in our service infrastructure, approximately $0.5 million of which related to the Cerberian acquisition.



Fiscal 2004 gross profit increased $16.3 million, or 57.4%, compared to fiscal 2003 due to higher net revenue coupled with increased
absorption of manufacturing and support costs. Gross profit as a percent of net revenue increased 5.6% from fiscal 2003 to 67.7% in fiscal 2004 as a result of increased absorption of manufacturing and support costs in addition to lower component
costs.



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Research and Development (R&D)



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



|                                                        |  |                      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                        |  | Year Ended April 30, |       
|                                                        |  | 2005                 |        |   | 2004 |   |        | 2003 | 
|Research and development                                |  | $                    | 16,549 |   |      | $ | 11,992 |      |  | $ | 11,911 |  
|Research and development as a percentage of net revenue |  |                      | 17.2   | % |      |   | 18.2   | %    |  |   | 26.0   | %



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



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



R&D expense consists primarily of salaries and benefits, prototype, and testing equipment costs. R&D headcount was 116 at April 30, 2005, 82 at April 30, 2004 and
62 at April 30, 2003. We believe that continued investment in product enhancement and new product development is critical to achieving our strategic objectives. As a result, as our net revenue allow, we expect R&D expense to continue to increase
in absolute dollars.



Sales and Marketing



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



|                                                   |  |                      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                   |  | Year Ended April 30, |       
|                                                   |  | 2005                 |        |   | 2004 |   |        | 2003 | 
|Sales and marketing                                |  | $                    | 33,882 |   |      | $ | 25,104 |      |  | $ | 26,236 |  
|Sales and marketing as a percentage of net revenue |  |                      | 35.2   | % |      |   | 38.0   | %    |  |   | 57.4   | %



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



Should increased demand for our products continue, we expect sales and marketing expense
will increase in absolute dollars in an effort to expand domestic and international markets, establish and expand new distribution channels, and introduce new products.



General and Administrative



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



|                                                          |  |                      |       |   |      |   |       |      |  |   |       |  
|--------------------------------------------------------- |  | -------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                          |  | Year Ended April 30, |      
|                                                          |  | 2005                 |       |   | 2004 |   |       | 2003 | 
|General and administrative expense                        |  | $                    | 9,075 |   |      | $ | 5,206 |      |  | $ | 5,042 |  
|General and administrative as a percentage of net revenue |  |                      | 9.4   | % |      |   | 7.9   | %    |  |   | 11.0  | %



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General and administrative expense in fiscal 2005 increased $3.9 million from the prior year to $9.1 million. In addition
to an increase in G&A headcount, contributing to the year-over-year increase were professional fees related to compliance with the Sarbanes-Oxley Act as well as legal fees associated with various legal matters more fully described in Note 11 to
the consolidated financial statements. We also recorded approximately $0.3 million in stock-based compensation expense related to the modification of the vesting terms for certain stock option grants included as part of a severance agreement with
our former CFO. G&A expense increased in fiscal 2004 compared to fiscal 2003 due to an increase in headcount.



We have been notified by our insurance carrier that we will be reimbursed for legal fees in excess of $350,000 incurred subsequent to April 16, 2005 related to the legal
matters discussed under the caption SEC Investigations in Note 11 of our consolidated financial statements. As a result, we do not expect legal fees associated with such matters to be significant to our results of operations for our
fiscal year ending April 30, 2006.



Should increased demand for our products
continue, we expect that general and administrative expense will increase in absolute dollars as we increase headcount to manage expanding operations and to appropriately respond to the requirements of section 404 of the Sarbanes Oxley Act.



Legal Settlement Fees



On August 1, 2001, Network Caching Technology L.L.C. (NCT) filed suit against us
and others in the United States District Court for the Northern District of California, alleging infringement of certain patents owned by NCT. The lawsuit was titled Network Caching Technology LLC vs. Novell, Inc. et al., Case No. CV-01-2079. On
October 29, 2003, Blue Coat and NCT entered into a settlement agreement by which Blue Coat received a fully paid up license under the NCT patents for all Blue Coat products and services and a full and complete release from any and all claims of
liability for any actual or alleged past and present infringement of the NCT patents. As consideration for the license rights and release, we paid $1.1 million to NCT and this expense was classified as a Legal Settlement on our statement
of operations. The Order of Dismissal regarding all causes of action between NCT and Blue Coat was entered on November 14, 2003.



Acquired In-Process Technology



We recorded a non-cash charge of approximately $0.2 million in fiscal 2004 for the value of in-process technology acquired in the Ositis acquisition, which relates to
research and development projects that had not yet reached technological feasibility and had no future use in our development activities. No such charges were recorded in fiscal years 2005 or 2003.



To establish the value of the in-process technology acquired from Ositis, 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 25.0%, theoretically equal to a rate that would 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.



Restructuring Charges



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



|                                  |  |                      |        |    |      |   |       |      |  |   |         |   
|--------------------------------- |  | -------------------- | ------ | -- | ---- | - | ----- | ---- |  | - | ------- | --
|                                  |  | Year Ended April 30, |       
|                                  |  | 2005                 |        |    | 2004 |   |       | 2003 | 
|Restructuring (reversal) expense  |  | $                    | (96    | )  |      | $ | 1,536 |      |  | $ | 1,273   |   
|Change in restructuring expense   |  | $                    | (1,632 | )  |      | $ | 263   |      |  | $ | (14,202 | ) 
|% Change in restructuring expense |  |                      | (106.3 | )% |      |   | 20.7  | %    |  |   | (91.8   | )%



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As discussed further under Restructuring Plans below, and in Note 5 Restructuring Accrual of the
consolidated financial statements included in this Annual Report on Form 10-K, we recorded $1.5 million and $1.3 million in fiscal 2004 and fiscal 2003, respectively, primarily related to facilities abandonment costs. We revised certain of our
estimates related to lease termination costs and reversed $0.1 million of restructuring charges in fiscal 2005.



Interest and Other Income (Expense)



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



|                                   |  |                      |        |    |      |   |        |      |  |   |       |   
|---------------------------------- |  | -------------------- | ------ | -- | ---- | - | ------ | ---- |  | - | ----- | --
|                                   |  | Year Ended April 30, |       
|                                   |  | 2005                 |        |    | 2004 |   |        | 2003 | 
|Interest income                    |  | $                    | 700    |    |      | $ | 295    |      |  | $ | 437   |   
|Other income (expense)             |  | $                    | (26    | )  |      | $ | 126    |      |  | $ | (65   | ) 
|% Change in interest income        |  |                      | 137.3  | %  |      |   | (32.5  | )%   |  |   | (79.2 | )%
|% Change in other income (expense) |  |                      | (120.6 | )% |      |   | (293.8 | )%   |  |   | (87.0 | )%



Interest income increased for the year
ended April 30, 2005 due to higher average cash and investment balances throughout the year as well as higher interest rates compared to the prior year. Interest income decreased in fiscal 2004 compared to fiscal 2003 due to lower average cash and
investment balances as well as lower interest rates.



Other income consists
primarily of realized gains and losses on investments, foreign exchange gains or losses, banking fees, and non-recurring gains or losses realized outside our normal course of business and, as such, is subject to variability. Other income for fiscal
2004 primarily reflected our recovery of a previously reserved employee note that was collected during the fourth quarter of fiscal 2004.



Provision for Income Taxes



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



|                           |  |                      |      |    |      |   |       |      |  |   |       |   
|-------------------------- |  | -------------------- | ---- | -- | ---- | - | ----- | ---- |  | - | ----- | --
|                           |  | Year Ended April 30, |     
|                           |  | 2005                 |      |    | 2004 |   |       | 2003 | 
|Provision for income taxes |  | $                    | 117  |    |      | $ | 124   |      |  | $ | 261   |   
|Change in provision        |  | $                    | (7   | )  |      | $ | (137  | )    |  | $ | (200  | ) 
|% Change in provision      |  |                      | (5.6 | )% |      |   | (52.5 | )%   |  |   | (43.4 | )%



The provision for income taxes, which
is composed entirely of foreign corporate income taxes, were $0.1 million, $0.1 million and $0.3 million for the years ended April 30, 2005, 2004 and 2003, respectively. The foreign corporate income taxes result from our international expansion and
the establishment of branches and subsidiaries in various jurisdictions.



We
have incurred losses from our inception through the second quarter in fiscal 2004. Management believes that, based on the history of such losses and other factors, the weight of available evidence indicates that it is more likely than not that we
will not be able to realize our deferred tax assets. Therefore, a full valuation allowance has been recorded against deferred tax assets at April 30, 2005, 2004 and 2003. The valuation allowance increased (decreased) by $1.2 million, $1.9 million
and ($10.4) million during fiscal years 2005, 2004 and 2003, respectively.



As
of April 30, 2005, we had net operating loss carryforwards for federal income tax purposes of approximately $204.5 million which will expire in fiscal years ending in 2011 through 2025 if not utilized. We also had net



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operating loss carryforwards for state income tax purposes of approximately $110.5 million which will expire in fiscal years ending in 2006 through 2015 if
not utilized. We also had federal and California research and other tax credit carryforwards of approximately $7.4 million which will expire in fiscal years 2012 through 2025 if not utilized.



Utilization of our net operating loss and tax credit carryforwards may be subject to
substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards
before utilization. The events that may cause ownership changes in our net operating loss include, but are not limited to, a cumulative stock ownership change of greater than 50.0% over a three year period.



Our deferred tax assets, which have been offset by the valuation allowance, include deferred
tax benefits associated with employee stock options and acquired net operating loss carryforwards. Deferred tax benefits associated with employee stock options of approximately $21.5 million will be credited to additional paid-in-capital when
realized. Deferred tax benefits associated with acquired net operating loss carryforwards of approximately $3.6 million, when realized, will first reduce goodwill and then non-current identifiable intangible assets.



Acquisitions



Cerberian, Inc.On November 16, 2004, we completed the acquisition of Cerberian, Inc. (Cerberian). The purchase price of
approximately $19.3 million consisted of approximately 0.8 million shares of Blue Coat common stock valued at $17.4 million, $0.4 million in direct transaction costs, Cerberian options assumed by Blue Coat valued at approximately $0.5 million and
the fair value of promissory notes from Cerberian to Blue Coat of $1.0 million. Cerberian was founded in 2000 as a Utah corporation and later incorporated as a Delaware corporation on January 9, 2001. Cerberian is a provider of URL filtering
software. Cerberians operations were assumed as of the date of the acquisition and are included in our results of operations beginning on November 16, 2004 and, as a result, are not reflected in our results of operations for the years ended
April 30, 2004 and 2003.



Ositis Software, Inc.On November 14, 2003, we
completed the acquisition of Ositis Software, Inc. (Ositis). The purchase price of $8.7 million consisted of 0.4 million shares of Blue Coat common stock valued at $6.7 million, $1.1 million in cash and $0.9 million in direct transaction
costs. Ositis, a California corporation, developed Web security and Internet access technologies. Ositis offered software and appliance solutions that provide customers with a system to safeguard and connect networked devices. Acquired products
include WinProxy, a secure Internet sharing solution, eShield, an appliance that includes anti-spam, antivirus and Web filtering on one platform, and Access Now VBN for visitor-based network connectivity. Ositis
operations were assumed as of the date of the acquisition and are included in our results of operations beginning on November 14, 2003 and, as a result, are not reflected in the results of operations for the fiscal year ended April 30, 2003.



Both acquisitions were accounted for as purchases in accordance with SFAS No.
141, Accounting for Business Combinations(SFAS No. 141); accordingly, we allocated the purchase price to the fair value of net tangible and intangible assets acquired, with the excess purchase price allocated to goodwill.
See Note 3 Acquisitions of the consolidated financial statements included in this Annual Report on Form 10-K for further discussion on Cerberian and Ositis acquisitions.



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Stock Compensation



The following summarizes stock compensation expense included in the below cost classifications in the consolidated statement of operations for the years ended April 30,
2005, 2004 and 2003, respectively (in thousands):



|                                 |  |                      |     |      |   |       |  |   |      
|-------------------------------- |  | -------------------- | --- | ---- | - | ----- |  | - | -----
|                                 |  | Year Ended April 30,
|                                 |  | 2005                 |     | 2004 |   | 2003 
|Stock-based compensation:        |  |                      |     |      |   |       |  |   |      
|                                 |  |                      |    
|Classified in cost of goods sold |  | $                    | 8   |      | $ | 81    |  | $ | 325  
|                                 |  |                      |     |      |   |       |  |   |      
|Classified in operating expense: |  |                      |     |      |   |       |  |   |      
|Research and development         |  |                      | 370 |      |   | 485   |  |   | 513  
|Sales and marketing              |  |                      | 322 |      |   | 568   |  |   | 1,009
|General and administrative       |  |                      | 291 |      |   | 79    |  |   | 223  
|                                 |  |                      |     |      |   |       |  |   |      
|Subtotal                         |  |                      | 983 |      |   | 1,132 |  |   | 1,745
|                                 |  |                      |     |      |   |       |  |   |      
|                                 |  | $                    | 991 |      | $ | 1,213 |  | $ | 2,070
|                                 |  |                      |     |      |   |       |  |   |      



We recorded stock compensation expense
totaling $1.0 million, $1.2 million and $2.1 million for the years ended April 30, 2005, 2004 and 2003, respectively, which were included in various cost classifications in the consolidated statement of operations. Stock compensation expense
reflects the amortization of deferred stock compensation, charges associated with stock options and warrants granted to non-employees for services, and modifications to stock-based awards for certain departed employees. As a result of the
acquisition of Ositis on November 14, 2003, total deferred stock compensation of $1.4 million was recorded in stockholders equity, of which approximately $0.7 million was recognized in each of the fiscal years ending April 30, 2005 and 2004.
In fiscal 2005, we also recorded approximately $0.3 million in expense related to the modification of the vesting terms for certain stock option grants included as part of a severance agreement with our former Chief Financial Officer. Total stock
compensation expense in fiscal 2005 decreased $0.2 million from the prior year.



Stock compensation expense decreased in fiscal 2004 compared to fiscal 2003 as a result of the reduction in deferred stock compensation associated with a reduction in headcount, partially offset in fiscal 2004 by an increase in expense due
to stock awards committed to be issued to Ositis Software personnel employed by us after the acquisition.



Deferred stock compensation from the Cerberian acquisition was insignificant in fiscal 2005. We recorded deferred stock compensation of approximately $1.4 million associated with the Ositis acquisition. We did not
record any deferred stock compensation in fiscal 2003. Our deferred stock compensation expense results from a variety of stock-based transactions. Increases to our deferred stock compensation balance represent the difference between the exercise
price and the market price of the underlying stock on the date of the stock option grant. However, we have also completed other stock-based transactions that impact deferred stock compensation, such as acquisitions in which the outstanding options
of the acquired entity are assumed, instances where modifications are made to the terms and conditions of outstanding stock option grants, and acquisitions where we have committed to issuing stock option awards to employees from the acquired entity,
who have joined Blue Coat.



Deferred stock compensation is amortized to stock
compensation expense over the option vesting period recognized immediately if there is no vesting period, or recognized over the term that the award is earned. In addition to amortization of deferred stock compensation, stock compensation expense
includes charges associated with stock options and warrants granted to non-employees for services, and modifications to stock-based awards for certain departed employees. Our policy is to amortize Ositis related deferred stock compensation using a
straight line method. Deferred stock compensation recorded in connection with our November 1999 initial public offering, certain below-market option grants in fiscal 2001 and unvested options assumed in our December 2000 acquisition of Entera are
amortized using a graded method. Graded amortization methods result in greater amortization in earlier years, including fiscal 2003.



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Although deferred stock compensation relating to shares issued to former Ositis employees was fully amortized in fiscal
2005, we may record additional deferred stock compensation and/or stock compensation expense in the future if management decides to grant stock options with exercise prices lower than fair market value of the stock, assume outstanding options in
future acquisitions, issue stock awards in future acquisitions, modify outstanding stock awards subsequent to their date of grant, or enter into other transactions that may require the recognition of additional compensation.



Restructuring Plans



As of April 30, 2005, substantially all actions under the February 2002, August 2001, and February 2001 restructuring plans had been
completed, except for payment of future rent obligations of $3.6 million, which are to be paid in cash through fiscal year 2008.



The following table summarizes activity related to restructuring activity during the three years ended April 30, 2005 (in thousands):



|                                                        |  |                             |        |   |                         |   |      |                                                  |  |   |       |   |  |   |        |  
|------------------------------------------------------- |  | --------------------------- | ------ | - | ----------------------- | - | ---- | ------------------------------------------------ |  | - | ----- | - |  | - | ------ | -
|                                                        |  | AbandonedLease SpaceAccrual |        |   | SeveranceRelatedAccrual |   |      | ContractTermination andFacilities ClosureAccrual |  |   | Total |  
|Balances at April 30, 2002                              |  | $                           | 9,503  |   |                         | $ | 406  |                                                  |  | $ | 969   |   |  | $ | 10,878 |  
|Cash payments                                           |  |                             | (3,067 | ) |                         |   | (406 | )                                                |  |   | (641  | ) |  |   | (4,114 | )
|Additions                                               |  |                             | 1,553  |   |                         |   |     |                                                  |  |   |      |   |  |   | 1,553  |  
|Reversals                                               |  |                             |       |   |                         |   |     |                                                  |  |   | (280  | ) |  |   | (280   | )
|                                                        |  |                             |        |   |                         |   |      |                                                  |  |   |       |   |  |   |        |  
|Balances at April 30, 2003                              |  |                             | 7,989  |   |                         |   |     |                                                  |  |   | 48    |   |  |   | 8,037  |  
|Cash payments                                           |  |                             | (2,947 | ) |                         |   |     |                                                  |  |   | (22   | ) |  |   | (2,969 | )
|Additions                                               |  |                             | 1,536  |   |                         |   |     |                                                  |  |   |      |   |  |   | 1,536  |  
|                                                        |  |                             |        |   |                         |   |      |                                                  |  |   |       |   |  |   |        |  
|Balances at April 30, 2004                              |  |                             | 6,578  |   |                         |   |     |                                                  |  |   | 26    |   |  |   | 6,604  |  
|Cash payments                                           |  |                             | (2,863 | ) |                         |   |     |                                                  |  |   | (2    | ) |  |   | (2,865 | )
|Reversals                                               |  |                             | (72    | ) |                         |   |     |                                                  |  |   | (24   | ) |  |   | (96    | )
|                                                        |  |                             |        |   |                         |   |      |                                                  |  |   |       |   |  |   |        |  
|Balances as of April 30, 2005                           |  |                             | 3,643  |   |                         |   |     |                                                  |  |   |      |   |  |   | 3,643  |  
|Less: current portion included in Current liabilities |  |                             | 2,729  |   |                         |   |     |                                                  |  |   |      |   |  |   | 2,729  |  
|                                                        |  |                             |        |   |                         |   |      |                                                  |  |   |       |   |  |   |        |  
|Long-term restructuring accrual                         |  | $                           | 914    |   |                         | $ |     |                                                  |  | $ |      |   |  | $ | 914    |  
|                                                        |  |                             |        |   |                         |   |      |                                                  |  |   |       |   |  |   |        |  



In fiscal 2005, we reduced our
restructuring accrual by $72,000 related to a revised estimate of real estate taxes on one of the leased facilities and by $24,000 due to contract termination costs which were lower than originally estimated.



During fiscal 2004, we increased our restructuring accruals for abandoned lease space by $1.5
million to reflect additional revisions of market trend information provided by a commercial real estate broker.



During fiscal 2003, we increased the restructuring accruals by $1.6 million for abandoned lease space, mainly due to the loss of our tenant in a leased building in
Sunnyvale, California. We also reduced our estimates for contract termination costs by $0.3 million during fiscal 2003, as we were able to negotiate lower settlement amounts than originally estimated.



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Liquidity and Capital Resources



We believe the existing cash, cash equivalents, and cash generated from operations, if any, will be sufficient to meet our operating
requirements for at least the next 12 months, including working capital requirements and capital expenditures. We may choose at any time to raise additional capital to strengthen our financial position, facilitate expansion, and pursue strategic
investments or to take advantage of business opportunities as they arise.



|                                                |  |                      |        |   |      |   |        |      |  |   |         |  
|----------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                |  | April 30,            |       
|(In thousands)                                  |  | 2005                 |        |   | 2004 |   |        | 2003 | 
|Cash and cash equivalents                       |  | $                    | 47,264 |   |      | $ | 39,504 |      |  | $ | 23,322  |  
|Restricted investments                          |  |                      | 1,855  |   |      |   | 1,991  |      |  |   | 1,991   |  
|                                                |  |                      |        |   |      |   |        |      |  |   |         |  
|                                                |  | $                    | 49,119 |   |      | $ | 41,495 |      |  | $ | 25,313  |  
|                                                |  |                      |        |   |      |   |        |      |  |   |         |  
|Percentage of total assets                      |  |                      | 50.2   | % |      |   | 61.3   | %    |  |   | 63.3    | %
|                                                |  |                      |        |   |      |   |        |      |  |   |         |  
|                                                | 
|                                                |  | Year Ended April 30, |       
|(In thousands)                                  |  | 2005                 |        |   | 2004 |   |        | 2003 | 
|Cash provided by (used in) operating activities |  | $                    | 11,025 |   |      | $ | 3,951  |      |  | $ | (16,266 | )
|Cash provided by (used in) investing activities |  |                      | (5,068 | ) |      |   | 5,427  |      |  |   | 16,285  |  
|Cash provided by financing activities           |  |                      | 1,803  |   |      |   | 17,262 |      |  |   | 365     |  
|                                                |  |                      |        |   |      |   |        |      |  |   |         |  
|Net increase in cash and cash equivalents       |  | $                    | 7,760  |   |      | $ | 26,640 |      |  | $ | 384     |  
|                                                |  |                      |        |   |      |   |        |      |  |   |         |  



Since our inception, we have financed
our operations and capital expenditures through private sales of preferred and common stock, bank loans, equipment leases, and an initial public offering of our common stock. During fiscal 2005 and 2004 we also financed our operations and capital
expenditures through cash provided by operating activities.



During the year
ended April 30, 2005, we generated $11.0 million in cash from operating activities compared to $4.0 million in the prior year. The sharp increase in cash provided by operating activities is a result of higher net income driven by the growth in net
revenue. Working capital sources of cash included a decrease in accounts payable of $0.6 million and an increase in deferred revenue of $4.3 million. Accounts payable increased during the year ended April 30, 2005 as a result of a higher volume of
business. Deferred revenue increased as a result of increased sales of service and support. Working capital uses of cash included increases in accounts receivable balance of $0.5 million, prepaid expenses and other current assets of $1.6 million,
and a decrease in accrued liabilities of $2.1 million. Accounts receivable increased as a result of significantly higher net revenue during fiscal 2005 as reflected in an increase in our day sales outstanding from 43.2 at April 30, 2004 to 44.5 at
April 30, 2005, partially offset by increased collection efforts. Accrued liabilities decreased over the prior year primarily as a result of cash payments made against the restructuring accrual recorded in prior years.



Net cash used in investing activities was $5.1 million for the year ended April 30, 2005
compared with $5.4 million net cash provided by investing activities for the year ended April 30, 2004. Net cash used in investing activities for the year ended April 30, 2005 included $1.4 million for the acquisition of Cerberian and $0.7 million
for the remaining payments from the Ositis acquisition, as well as purchase of property and equipment of $2.5 million. Net cash provided by investing activities in fiscal 2004 was $5.4 million, primarily due to sales of short-term investments of
$10.4 million partially offset by purchases of property and equipment of $1.4 million and $3.6 million used to acquire Ositis. 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.



Net cash provided by financing
activities was $1.8 million and $17.3 million for the years ended April 30, 2005 and 2004. The net cash provided by financing activities for the year ended April 30, 2005 was from the issuance of common stock through employee stock compensation
plans. The net cash provided by our financing activities for fiscal 2004 was primarily due to a private equity financing and the issuance of common stock through



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employee stock compensation plans. On September 18, 2003, we raised $12.9 million from the sale of 1,311,807 shares of our common stock to investment funds
and an individual affiliated with Sprout Group, a venture capital affiliate of Credit Suisse First Boston.



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, 2005, we had a total of $47.3 million in cash equivalents and short-term investments, as well as $1.9 million in restricted investments, providing us with a total cash position of $49.1 million.



We believe that our cash, cash equivalent and short-term investment balances
as of April 30, 2005 and cash generated from operations, if any, will provide sufficient capital to meet our requirements for at least the next twelve months. However, should prevailing economic conditions and/or financial, business and other
factors beyond our control adversely affect our estimates of our future cash requirements, or if cash is used for unanticipated purposes, we may need additional capital sooner than expected. Although we cannot guarantee that planned results will be
obtained in fiscal 2006 or that sufficient debt or equity capital will be available to us under acceptable terms, if at all, we believe that our planned cash flow assumptions can be realized. However, if we are not successful in generating
sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we could be unable to continue our operations. If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our existing stockholders will be reduced.



Contractual Obligations



Below is a
summary of fixed payments related to certain contractual obligations (in thousands):



|                                   |  |                        |        |                  |   |           |  |           |       |                  |   |       |  |   |    
|---------------------------------- |  | ---------------------- | ------ | ---------------- | - | --------- |  | --------- | ----- | ---------------- | - | ----- |  | - | ---
|                                   |  | Payments due by period
|                                   |  | Total                  |        | Less than 1 year |   | 1-3 years |  | 3-5 years |       | More than5 years
|Operating leases:                  |  |                        |        |                  |   |           |  |           |       |                  |   |       |  |   |    
|Abandoned space                    |  | $                      | 4,299  |                  | $ | 3,023     |  | $         | 1,276 |                  | $ |      |  | $ |   
|In use                             |  |                        | 10,798 |                  |   | 1,621     |  |           | 3,934 |                  |   | 4,525 |  |   | 718
|                                   |  |                        |        |                  |   |           |  |           |       |                  |   |       |  |   |    
|Total                              |  |                        | 15,097 |                  |   | 4,644     |  |           | 5,210 |                  |   | 4,525 |  |   | 718
|                                   |  |                        |        |                  |  
|Purchase and other commitments (1) |  |                        | 2,973  |                  |   | 2,973     |  |           |      |                  |   |      |  |   |   
|                                   |  |                        |        |                  |   |           |  |           |       |                  |   |       |  |   |    
|Total                              |  | $                      | 18,070 |                  | $ | 7,617     |  | $         | 5,210 |                  | $ | 4,525 |  | $ | 718
|                                   |  |                        |        |                  |   |           |  |           |       |                  |   |       |  |   |    

---

|(1) | Purchase and other commitments represent agreements to purchase component inventory, manufacturing material and equipment.
|--- | --------------------------------------------------------------------------------------------------------------------------



We lease certain equipment and office facilities under non-cancelable operating leases that
expire at various dates through 2010. 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 reflected in our consolidated financial statements on a straight-line basis over the terms of the respective leases.



In April 2005, we executed a five-year operating lease for a 117,000-square foot facility which will serve as our headquarters in Sunnyvale, California. The lease
commencement occurs in September 2005 and will extend for a term of five years from the commencement date. Lease payments escalate annually and the total future minimum lease payments amount to $8.4 million over the lease term, excluding lease
payments totaling $0.6 million for the first six months to be excused if the Company is not in default during the first 12 months of the lease term. A lessee improvement allowance of $1.2 million is provided to us to be used by June 30, 2006 and any
unused



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portion of the allowance shall be waived and forfeited. 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. This letter of credit provides for automatic annual extensions, without amendment, through the end of the lease term. Both irrevocable standby letters of credit referred to above are
classified as Restricted investments in the accompanying consolidated balance sheets as of April 30, 2005. In addition to the standby letter of credit discussed above, we maintain a $1.5 million irrevocable standby letter of credit for a
five-year operating lease related to a 46,000-square foot research and development facility in Sunnyvale, California. This letter of credit also extends automatically to each succeeding calendar year through June 30, 2006, unless otherwise
terminated in writing.



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 all amounts under these arrangements are due in
fiscal 2006. Our minimum obligation at April 30, 2005 under these arrangements was $3.0 million.



Off-Balance Sheet Arrangements



As of
April 30, 2005, 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 additional 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 do not maintain 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.



Recent Accounting Pronouncements



In
June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections(SFAS No. 154), a replacement of APB Opinion No. 20, Accounting Changes(APB 20), and FASB SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements(SFAS No. 3). SFAS No. 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No.
154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154 also requires that a change in method of depreciation, amortization, or
depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. SFAS No. 154 does not change the transition provisions of any existing
accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement. We do not believe the adoption of SFAS No. 154 will have a material impact on our financial statements.



On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment(SFAS No. 123(R)), which is a revision of FASB SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends FASB SFAS No. 95, Statement of Cash Flows (SFAS No. 95). SFAS No. 123(R) would require all share-based payments to employees, including grants of employee stock options, to be measured using a fair value method and
record such expense in the consolidated financial statements. In addition, the adoption of SFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from
share-based payment arrangements. Based on the phase-in implementation announced by the



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SEC on April 14, 2005, SFAS No. 123(R) is effective at the beginning of the first fiscal year beginning after June 15, 2005. The Company will be required to
apply SFAS No. 123(R) beginning May 1, 2006. The adoption of SFAS No. 123(R) will result in recording material charges related to employee stock-based compensation in future periods, impacting our consolidated financial position and results of
operations.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs(SFAS No. 151), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material impact on our financial statements.



In September 2004, the FASB staff issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) 03-1-1, or FSP EITF 03-01-1. Effective upon
issuance, FSP EITF 03-1-1 delayed, indefinitely, certain measurement and recognition guidance contained in EITF No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. Issued in March 2004, EITF
No. 03-1 includes guidance for determining and recording impairment for both debt and equity securities. EITF No. 03-1 also requires additional disclosure for investments that are deemed to be temporarily impaired under the standard. We do not
believe that the adoption of FSP EITF 03-01-1 will have a material impact on our financial position, results of operations or liquidity.



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 risk management transactions. We do not
purchase or hold any derivative financial instruments for speculative or trading purposes.



Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. As of April 30, 2005, we had approximately $43.7 million invested primarily in certificates of deposit and
fixed-rate, short-term corporate and U.S. government debt securities which are included in cash and cash equivalents in our consolidated balance sheets. We maintain a strict investment policy, which 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 interest rates due mainly to the
short-term nature of the major portion of our investment portfolio.



Foreign
Currency Exchange Rate Risk



We develop products in the United States and
sell them 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. Since all of our sales are currently made in United
States dollars, a strengthening of the dollar could make our products less competitive in foreign markets. If any of the events described above were to occur, our net revenue could be seriously impacted, since a significant portion of our net
revenue are derived from international operations. For the fiscal years 2005, 2004 and 2003, approximately 49.1%, 44.1% and 48.0%, respectively, of our total net revenue were derived from customers outside of North America. In contrast,
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 adversely 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.



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Item 8. Financial Statements and Supplementary Data



Index to Consolidated Financial Statements



|                                                                                                               |  |     
|-------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                               |  | Page
|Consolidated Balance Sheets as of April 30, 2005 and 2004                                                      |  | 45  
|                                                                                                               | 
|Consolidated Statements of Operations for each of the three years in the period ended April 30, 2005           |  | 46  
|                                                                                                               | 
|Consolidated Statements of Stockholders Equity for each of the three years in the period ended April 30, 2005 |  | 47  
|                                                                                                               | 
|Consolidated Statements of Cash Flows for each of the three years in the period ended April 30, 2005           |  | 48  
|                                                                                                               | 
|Notes to the Consolidated Financial Statements                                                                 |  | 49  
|                                                                                                               | 
|Reports of Independent Registered Public Accounting Firm                                                       |  | 73  



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BLUE COAT SYSTEMS, INC.



CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                                                                                                                                 |  |               |          |   |               |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ------------- | - | -------- | -
|                                                                                                                                                                 |  | April 30,2005 |          |   | April 30,2004 |  
|ASSETS                                                                                                                                                           |  |               |          |   |               |   |          |  
|Current assets:                                                                                                                                                  |  |               |          |   |               |   |          |  
|Cash and cash equivalents                                                                                                                                        |  | $             | 47,264   |   |               | $ | 39,504   |  
|Accounts receivable, net of allowance for doubtful accounts of $235 and $540 at April 30, 2005 and 2004, respectively                                            |  |               | 11,541   |   |               |   | 10,441   |  
|Inventories                                                                                                                                                      |  |               | 350      |   |               |   | 1,228    |  
|Prepaid expenses and other current assets                                                                                                                        |  |               | 3,460    |   |               |   | 1,829    |  
|                                                                                                                                                                 |  |               |          |   |               |   |          |  
|Total current assets                                                                                                                                             |  |               | 62,615   |   |               |   | 53,002   |  
|                                                                                                                                                                 |  |              
|Property and equipment, net                                                                                                                                      |  |               | 3,763    |   |               |   | 2,490    |  
|Restricted investments                                                                                                                                           |  |               | 1,855    |   |               |   | 1,991    |  
|Goodwill                                                                                                                                                         |  |               | 24,753   |   |               |   | 7,456    |  
|Identifiable intangible assets, net                                                                                                                              |  |               | 3,993    |   |               |   | 1,849    |  
|Purchased software                                                                                                                                               |  |               | 411      |   |               |   |         |  
|Other assets                                                                                                                                                     |  |               | 472      |   |               |   | 881      |  
|                                                                                                                                                                 |  |               |          |   |               |   |          |  
|Total assets                                                                                                                                                     |  | $             | 97,862   |   |               | $ | 67,669   |  
|                                                                                                                                                                 |  |               |          |   |               |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                             |  |               |          |   |               |   |          |  
|Current liabilities:                                                                                                                                             |  |               |          |   |               |   |          |  
|Accounts payable                                                                                                                                                 |  | $             | 3,743    |   |               | $ | 2,890    |  
|Accrued payroll and related benefits                                                                                                                             |  |               | 3,468    |   |               |   | 2,564    |  
|Deferred revenue                                                                                                                                                 |  |               | 13,592   |   |               |   | 10,147   |  
|Accrued acquisition costs                                                                                                                                        |  |               | 19       |   |               |   | 4,991    |  
|Accrued restructuring                                                                                                                                            |  |               | 2,729    |   |               |   | 3,100    |  
|Other accrued liabilities                                                                                                                                        |  |               | 3,830    |   |               |   | 2,573    |  
|                                                                                                                                                                 |  |               |          |   |               |   |          |  
|Total current liabilities                                                                                                                                        |  |               | 27,381   |   |               |   | 26,265   |  
|                                                                                                                                                                 |  |              
|Accrued restructuring, less current portion                                                                                                                      |  |               | 914      |   |               |   | 3,504    |  
|Deferred revenue, less current portion                                                                                                                           |  |               | 3,318    |   |               |   | 1,785    |  
|                                                                                                                                                                 |  |               |          |   |               |   |          |  
|Total liabilities                                                                                                                                                |  |               | 31,613   |   |               |   | 31,554   |  
|                                                                                                                                                                 |  |              
|Commitments and contingencies                                                                                                                                    |  |               |          |   |               |   |          |  
|                                                                                                                                                                 |  |              
|Stockholders equity:                                                                                                                                            |  |               |          |   |               |   |          |  
|Preferred stock: $0.0001 par value, issuable in series, 10,000,000 shares authorized; none issued                                                                |  |               |          |   |               |   |          |  
|Common stock: $0.0001 par value, 200,000,000 shares authorized; 12,436,482 and 11,128,164 shares issued and outstanding at April 30, 2005 and
2004, respectively |  |               | 1        |   |               |   | 1        |  
|Additional paid-in capital                                                                                                                                       |  |               | 927,184  |   |               |   | 903,141  |  
|Treasury stock, at cost; 140,217 and 132,214 shares held at April 30, 2005 and 2004, respectively                                                                |  |               | (903     | ) |               |   | (903     | )
|Deferred stock compensation                                                                                                                                      |  |               | (10      | ) |               |   | (727     | )
|Accumulated deficit                                                                                                                                              |  |               | (860,024 | ) |               |   | (865,399 | )
|Accumulated other comprehensive income                                                                                                                           |  |               | 1        |   |               |   | 2        |  
|                                                                                                                                                                 |  |               |          |   |               |   |          |  
|Total stockholders equity                                                                                                                                       |  |               | 66,249   |   |               |   | 36,115   |  
|                                                                                                                                                                 |  |               |          |   |               |   |          |  
|Total liabilities and stockholders equity                                                                                                                       |  | $             | 97,862   |   |               | $ | 67,669   |  
|                                                                                                                                                                 |  |               |          |   |               |   |          |  



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



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BLUE COAT SYSTEMS, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|----------------------------------------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                              |  | Year Ended April 30, |       
|                                                                              |  | 2005                 |        |   | 2004 |   |        | 2003 | 
|Net revenue:                                                                  |  |                      |        |   |      |   |        |      |  |   |         |  
|Product                                                                       |  | $                    | 78,495 |   |      | $ | 52,251 |      |  | $ | 35,827  |  
|Service                                                                       |  |                      | 17,691 |   |      |   | 13,817 |      |  |   | 9,911   |  
|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|Total net revenue                                                             |  |                      | 96,186 |   |      |   | 66,068 |      |  |   | 45,738  |  
|Cost of revenue:                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|Product                                                                       |  |                      | 25,589 |   |      |   | 17,141 |      |  |   | 12,733  |  
|Service                                                                       |  |                      | 5,721  |   |      |   | 4,178  |      |  |   | 4,582   |  
|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|Total cost of revenue                                                         |  |                      | 31,310 |   |      |   | 21,319 |      |  |   | 17,315  |  
|                                                                              |  |                      |       
|Gross profit                                                                  |  |                      | 64,876 |   |      |   | 44,749 |      |  |   | 28,423  |  
|                                                                              |  |                      |       
|Operating expenses:                                                           |  |                      |        |   |      |   |        |      |  |   |         |  
|Research and development                                                      |  |                      | 16,549 |   |      |   | 11,992 |      |  |   | 11,911  |  
|Sales and marketing                                                           |  |                      | 33,882 |   |      |   | 25,104 |      |  |   | 26,236  |  
|General and administrative                                                    |  |                      | 9,075  |   |      |   | 5,206  |      |  |   | 5,042   |  
|Amortization of intangible assets                                             |  |                      | 648    |   |      |   | 305    |      |  |   |        |  
|Restructuring (reversal)                                                      |  |                      | (96    | ) |      |   | 1,536  |      |  |   | 1,273   |  
|Legal settlement                                                              |  |                      |       |   |      |   | 1,100  |      |  |   |        |  
|In-process technology                                                         |  |                      |       |   |      |   | 151    |      |  |   |        |  
|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|Total operating expense                                                       |  |                      | 60,058 |   |      |   | 45,394 |      |  |   | 44,462  |  
|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|Operating income (loss)                                                       |  |                      | 4,818  |   |      |   | (645   | )    |  |   | (16,039 | )
|Interest income                                                               |  |                      | 700    |   |      |   | 295    |      |  |   | 437     |  
|Other income (expense)                                                        |  |                      | (26    | ) |      |   | 126    |      |  |   | (65     | )
|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|Income (loss) before income taxes                                             |  |                      | 5,492  |   |      |   | (224   | )    |  |   | (15,667 | )
|Provision for income taxes                                                    |  |                      | (117   | ) |      |   | (124   | )    |  |   | (261    | )
|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|Net income (loss)                                                             |  | $                    | 5,375  |   |      | $ | (348   | )    |  |   | (15,928 | )
|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|Net income (loss) per common share:                                           |  |                      |        |   |      |   |        |      |  |   |         |  
|Basic                                                                         |  | $                    | 0.46   |   |      | $ | (0.03  | )    |  | $ | (1.81   | )
|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|Diluted                                                                       |  | $                    | 0.41   |   |      | $ | (0.03  | )    |  | $ | (1.81   | )
|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|Weighted average shares used in computing net income (loss) per common share: |  |                      |        |   |      |   |        |      |  |   |         |  
|Basic                                                                         |  |                      | 11,628 |   |      |   | 9,956  |      |  |   | 8,777   |  
|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  
|Diluted                                                                       |  |                      | 12,977 |   |      |   | 9,956  |      |  |   | 8,777   |  
|                                                                              |  |                      |        |   |      |   |        |      |  |   |         |  



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



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BLUE COAT SYSTEMS, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In thousands)



|                                                                                       |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|-------------------------------------------------------------------------------------- | ------ | ------------ | - | -------------------------- | - | - | -------------- | - | ------- | --------------------------------- |  | ---- | --------------------------- |  | - | ------------------- | - |  | -------------------------------------------- | --- | - | ----- | - | ------ | - |  | - | -------- | - |  | - | --- | - |  | - | ------- | -
|                                                                                       |        | Common Stock |   | Additional Paid-In Capital |   |   | Treasury Stock |   |         | NotesReceivable From Stockholders |  |      | Deferred Stock Compensation |  |   | Accumulated Deficit |   |  | AccumulatedOther Comprehensive Income (Loss) |     |   | Total |  
|                                                                                       | Shares |              |   | Amount                     |   |   | Shares         |   |         | Amount                            |  |      |                             |  |   |                    
|Balances at April 30, 2002                                                             |        | 8,913        |   |                            | $ | 1 |                | $ | 883,967 |                                   |  | (136 | )                           |  | $ | (895                | ) |  | $                                            | (57 | ) |       | $ | (3,622 | ) |  | $ | (849,123 | ) |  | $ | (7  | ) |  | $ | 30,264  |  
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                  
|Components of comprehensive loss:                                                      |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Net loss                                                                               |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   | (15,928  | ) |  |   |    |   |  |   | (15,928 | )
|Net unrealized gain on available for sale securities                                   |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   | 20  |   |  |   | 20      |  
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Total comprehensive loss                                                               |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   | (15,908 | )
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Issuance of common stock under employee stock option and employee stock purchase plans |        | 139          |   |                            |   |  |                |   | 339     |                                   |  | 29   |                             |  |   | 5                   |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 344     |  
|Interest on notes receivable from stockholders                                         |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              | (14 | ) |       |   |       |   |  |   |         |   |  |   |    |   |  |   | (14     | )
|Stock-based compensation expense related to modified employee stock options            |        |             |   |                            |   |  |                |   | 162     |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   | (114   | ) |  |   |         |   |  |   |    |   |  |   | 48      |  
|Amortization of deferred stock-based compensation                                      |        |             |   |                            |   |  |                |   | (882    | )                                 |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   | 2,904  |   |  |   |         |   |  |   |    |   |  |   | 2,022   |  
|Reversal of deferred stock-based compensation due to cancellations                     |        |             |   |                            |   |  |                |   | (225    | )                                 |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   | 225    |   |  |   |         |   |  |   |    |   |  |   |        |  
|Repayment of notes receivable                                                          |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              | 27  |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 27      |  
|Repurchase of stock and related notes receivable settlement                            |        | (4           | ) |                            |   |  |                |   | (9      | )                                 |  | (25  | )                           |  |   | (13                 | ) |  |                                              | 16  |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | (6      | )
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Balances at April 30, 2003                                                             |        | 9,048        |   |                            |   | 1 |                |   | 883,352 |                                   |  | (132 | )                           |  |   | (903                | ) |  |                                              | (28 | ) |       |   | (607   | ) |  |   | (865,051 | ) |  |   | 13  |   |  |   | 16,777  |  
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                  
|Components of comprehensive loss:                                                      |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Net loss                                                                               |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   | (348     | ) |  |   |    |   |  |   | (348    | )
|Net unrealized (loss) on available for sale securities                                 |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   | (11 | ) |  |   | (11     | )
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Total comprehensive loss                                                               |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   | (359    | )
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Issuance of common stock under employee stock option and employee stock purchase plans |        | 619          |   |                            |   |  |                |   | 4,318   |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 4,318   |  
|Interest on notes receivable from stockholders                                         |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              | (11 | ) |       |   |       |   |  |   |         |   |  |   |    |   |  |   | (11     | )
|Repayment of notes receivable from stockholders                                        |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              | 39  |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 39      |  
|Sale of common stock, net of issuance costs                                            |        | 1,312        |   |                            |   |  |                |   | 12,944  |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 12,944  |  
|Stock-based compensation expense related to modified employee stock options            |        |             |   |                            |   |  |                |   | 20      |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 20      |  
|Common stock issued in Ositis acquisition                                              |        | 127          |   |                            |   |  |                |   | 2,164   |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 2,164   |  
|Fair Value of warrants assumed in connection with Ositis acquisition                   |        |             |   |                            |   |  |                |   | 43      |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 43      |  
|Deferred stock-based compensation related to Ositis acquisition                        |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   | (1,389 | ) |  |   |         |   |  |   |    |   |  |   | (1,389  | )
|Common stock issued to certain Blue Coat employees as part of Ositis acquisition       |        | 22           |   |                            |   |  |                |   | 376     |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 376     |  
|Amortization of deferred stock-based compensation                                      |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   | 1,222  |   |  |   |         |   |  |   |    |   |  |   | 1,222   |  
|Reversal of deferred stock-based compensation due to cancellations                     |        |             |   |                            |   |  |                |   | (47     | )                                 |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   | 47     |   |  |   |         |   |  |   |    |   |  |   |        |  
|Reversal of previously amortized deferred stock-based compensation                     |        |             |   |                            |   |  |                |   | (29     | )                                 |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | (29     | )
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Balances at April 30, 2004                                                             |        | 11,128       |   |                            |   | 1 |                |   | 903,141 |                                   |  | (132 | )                           |  |   | (903                | ) |  |                                              |    |   |       |   | (727   | ) |  |   | (865,399 | ) |  |   | 2   |   |  |   | 36,115  |  
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                  
|Components of comprehensive income:                                                    |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Net income                                                                             |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   | 5,375    |   |  |   |    |   |  |   | 5,375   |  
|Net unrealized (loss) on available for sale securities                                 |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   | (1  | ) |  |   | (1      | )
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Total comprehensive loss                                                               |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   | 5,374   |  
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Issuance of common stock under employee stock option and employee stock purchase plans |        | 253          |   |                            |   |  |                |   | 1,810   |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 1,810   |  
|Common stock issued to certain Blue Coat employees as part of Ositis acquisition       |        | 249          |   |                            |   |  |                |   | 4,122   |                                   |  | (8   | )                           |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 4,122   |  
|Common stock issued in Cerberian acquisition                                           |        | 806          |   |                            |   |  |                |   | 17,854  |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 17,854  |  
|Deferred Stock-based compensation related to modified employee stock options           |        |             |   |                            |   |  |                |   | 262     |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   |       |   |  |   |         |   |  |   |    |   |  |   | 262     |  
|Deferred stock-based compensation related to Cerberian acqusition                      |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   | (17    | ) |  |   |         |   |  |   |    |   |  |   | (17     | )
|Reversal of deferred stock-based compensation due to cancellations                     |        |             |   |                            |   |  |                |   | (5      | )                                 |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   | 5      |   |  |   |         |   |  |   |    |   |  |   |        |  
|Amortization of deferred stock-based compensation                                      |        |             |   |                            |   |  |                |   |        |                                   |  |     |                             |  |   |                    |   |  |                                              |    |   |       |   | 729    |   |  |   |         |   |  |   |    |   |  |   | 729     |  
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  
|Balances at April 30, 2005                                                             |        | 12,436       |   |                            | $ | 1 |                | $ | 927,184 |                                   |  | (140 | )                           |  | $ | (903                | ) |  | $                                            |    |   |       | $ | (10    | ) |  | $ | (860,024 | ) |  | $ | 1   |   |  | $ | 66,249  |  
|                                                                                       |        |              |   |                            |   |   |                |   |         |                                   |  |      |                             |  |   |                     |   |  |                                              |     |   |       |   |        |   |  |   |          |   |  |   |     |   |  |   |         |  



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



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BLUE COAT SYSTEMS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                                   |  |                      |        |   |      |   |        |      |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                   |  | Year Ended April 30, |       
|                                                                                                   |  | 2005                 |        |   | 2004 |   |        | 2003 | 
|Operating Activities                                                                               |  |                      |        |   |      |   |        |      |  |   |         |  
|Net income (loss)                                                                                  |  | $                    | 5,375  |   |      | $ | (348   | )    |  | $ | (15,928 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                      |        |   |      |   |        |      |  |   |         |  
|Depreciation                                                                                       |  |                      | 1,679  |   |      |   | 2,068  |      |  |   | 2,930   |  
|Amortization                                                                                       |  |                      | 1,012  |   |      |   | 305    |      |  |   |        |  
|Stock-based compensation                                                                           |  |                      | 991    |   |      |   | 1,213  |      |  |   | 2,070   |  
|Non-cash charge (reversal) for acquired in-process technology and restructuring charges            |  |                      | (96    | ) |      |   | 1,687  |      |  |   |        |  
|Loss (gain) on disposition of equipment                                                            |  |                      | 14     |   |      |   | (29    | )    |  |   | 53      |  
|Interest payments (accrued) on notes receivable from stockholders                                  |  |                      |       |   |      |   | 28     |      |  |   | (14     | )
|Changes in operating assets and liabilities:                                                       |  |                      |        |   |      |   |        |      |  |   |         |  
|Accounts receivable                                                                                |  |                      | (513   | ) |      |   | (2,361 | )    |  |   | (1,980  | )
|Inventories                                                                                        |  |                      | 878    |   |      |   | (105   | )    |  |   | 133     |  
|Prepaid expenses and other current assets                                                          |  |                      | (1,558 | ) |      |   | (673   | )    |  |   | 654     |  
|Other assets                                                                                       |  |                      | 430    |   |      |   | 184    |      |  |   | 7       |  
|Accounts payable                                                                                   |  |                      | 619    |   |      |   | 2,279  |      |  |   | (1,942  | )
|Accrued liabilities                                                                                |  |                      | (2,122 | ) |      |   | (2,715 | )    |  |   | (4,767  | )
|Deferred revenue                                                                                   |  |                      | 4,316  |   |      |   | 2,418  |      |  |   | 2,518   |  
|                                                                                                   |  |                      |        |   |      |   |        |      |  |   |         |  
|Net cash provided by (used in) operating activities                                                |  |                      | 11,025 |   |      |   | 3,951  |      |  |   | (16,266 | )
|                                                                                                   |  |                      |       
|Investing Activities                                                                               |  |                      |        |   |      |   |        |      |  |   |         |  
|Purchases of property and equipment                                                                |  |                      | (2,548 | ) |      |   | (1,431 | )    |  |   | (743    | )
|Sales of investment securities, net                                                                |  |                      | 135    |   |      |   | 10,447 |      |  |   | 17,028  |  
|Purchase of capitalized software                                                                   |  |                      | (537   | ) |      |   |       |      |  |   |        |  
|Acquisition of Ositis, net of cash acquired                                                        |  |                      | (669   | ) |      |   | (3,628 | )    |  |   |        |  
|Acquisition of Cerberian, net of cash acquired                                                     |  |                      | (1,449 | ) |      |   |       |      |  |   |        |  
|Proceeds from sales of equipment                                                                   |  |                      |       |   |      |   | 39     |      |  |   |        |  
|                                                                                                   |  |                      |        |   |      |   |        |      |  |   |         |  
|Net cash provided by (used in) investing activities                                                |  |                      | (5,068 | ) |      |   | 5,427  |      |  |   | 16,285  |  
|                                                                                                   |  |                      |       
|Financing Activities                                                                               |  |                      |        |   |      |   |        |      |  |   |         |  
|Net proceeds from issuance of common stock                                                         |  |                      | 1,803  |   |      |   | 4,318  |      |  |   | 344     |  
|Net proceeds from equity financing                                                                 |  |                      |       |   |      |   | 12,944 |      |  |   |        |  
|Repayment of notes receivable                                                                      |  |                      |       |   |      |   |       |      |  |   | 27      |  
|Repurchase of common stock from employees                                                          |  |                      |       |   |      |   |       |      |  |   | (6      | )
|                                                                                                   |  |                      |        |   |      |   |        |      |  |   |         |  
|Net cash provided by financing activities                                                          |  |                      | 1,803  |   |      |   | 17,262 |      |  |   | 365     |  
|                                                                                                   |  |                      |        |   |      |   |        |      |  |   |         |  
|Net increase in cash and cash equivalents                                                          |  |                      | 7,760  |   |      |   | 26,640 |      |  |   | 384     |  
|Cash and cash equivalents at beginning of period                                                   |  |                      | 39,504 |   |      |   | 12,864 |      |  |   | 12,480  |  
|                                                                                                   |  |                      |        |   |      |   |        |      |  |   |         |  
|Cash and cash equivalents at end of period                                                         |  | $                    | 47,264 |   |      | $ | 39,504 |      |  | $ | 12,864  |  
|                                                                                                   |  |                      |        |   |      |   |        |      |  |   |         |  
|Supplemental schedule of noncash investing and financing activities                                |  |                      |        |   |      |   |        |      |  |   |         |  
|Issuance of common stock for acquisition of businesses                                             |  | $                    | 21,971 |   |      | $ | 2,540  |      |  | $ |        |  
|Cash paid for income taxes, net of refunds                                                         |  | $                    | 98     |   |      | $ | 277    |      |  | $ | 313     |  



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



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Note 1. Business



Blue Coat® Systems, Inc.,
also referred to in this report as it, its or the Company, was incorporated in Delaware on March 16, 1996 as CacheFlow, Inc. On August 21, 2002 the Company changed its name from CacheFlow,® Inc. to Blue Coat
Systems, Inc. and this filing and all future Securities Exchange Commission (SEC) filings will be under the name Blue Coat Systems, Inc. The ticker symbol for the Companys common stock was also changed from CFLO to BCSI.



As organizations grow increasingly dependent on the Internet to communicate
with customers, partners and employees, the Web browser is fast becoming the universal window into mission-critical communications and information. This has many advantages for the enterprise: Web-based applications and protocols are fast,
inexpensive and easy to deploy and manage. But these benefits can lead to increased risks for the enterprise, such as increased help-desk calls due to spyware, legal liabilities associated with inappropriate Web surfing and content, open back doors
for Web viruses to enter via instant messaging (IM) or personal Web email, network bandwidth and storage abuse due to peer-to-peer (P2P) file sharing and video streaming, and productivity losses from non-business related Web surfing and IM chatting.
When every user on the network has a Web browser, every user also has the means to negatively affect the network infrastructure, whether intentionally or not. A solution is to use a proxy appliance that is designed to provide Web visibility and
control while also improving network performance.



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



Note 2. Summary of Significant Accounting Policies



Basis of Presentation



The consolidated financial statements include Blue Coat Systems, Inc.s accounts and those of its subsidiaries, all of which are wholly owned. All intercompany balances and transactions have been eliminated.



The consolidated financial statements for the fiscal year ended April 30, 2005
and 2004 include the accounts and operating results of Cerberian, Inc. and Ositis Software, Inc., beginning November 16, 2004 and November 14, 2003, respectively (see Note 3).



Use of Estimates



The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the dates of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results may differ from these estimates, and such differences could be material to the Companys consolidated financial position and results of operations. The Companys critical accounting
estimates include (i) inventories, (ii) valuation of goodwill, (iii) valuation of long-lived and identifiable intangible assets, (iv) restructuring liabilities, (v) revenue recognition and related receivable allowances, (vi) warranty obligations,
(vii) income taxes, and (viii) commitments and contingencies.



Reclassifications



Certain balances in the Companys 2004
and 2003 consolidated financial statements have been reclassified to conform to the current year presentation.



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Cash Equivalents and Short-Term Investments



The Company considers 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 debt
securities with original maturities between three months and one year. Management determines the appropriate classification of the Companys investments at the time of purchase and evaluates such designation as of each balance sheet date based
on its intent and ability to use such funds for current operations. To date, all of the Companys 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 income (expenses) and have not been significant to date. Interest and dividends on all securities are included in interest income.



Inventories



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



Property and Equipment



Property and equipment are stated at cost, subject to adjustments for impairment, less accumulated depreciation and amortization.
Depreciation and amortization are provided on a straight-line basis over the following estimated useful lives:



|                              |  |                                               
|----------------------------- |  | ----------------------------------------------
|Software                      |  | 3 years                                       
|Furniture and fixtures        |  | 3 years                                       
|Computer and office equipment |  | 3-5 years                                     
|Leasehold improvements        |  | Shorter of useful life or remaining lease term



Valuation of Goodwill



The Company performs 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) on an annual basis during its 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 if 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
the purposes of the Companys fiscal 2005 annual impairment test of its goodwill, the Company considered its market capitalization on the date of its impairment test and determined that no goodwill impairment existed.



Valuation of Long-Lived and Identifiable Intangible Assets



The Company periodically evaluates potential impairments of its long-lived assets, including
identifiable intangible assets, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). The Company evaluates long-lived assets, including identifiable intangible assets, for



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impairment on an annual basis during its fourth quarter, or 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 the Companys overall business and significant negative industry or economic trends. Impairment is recognized when the carrying amount of an asset exceeds its fair value. In connection
with the annual impairment analysis of goodwill, the Company assessed the recoverability of the intangible assets subject to amortization in accordance with SFAS No. 144. For the year ended April 30, 2005, no impairment expense was recognized.



Restructuring Liabilities



Restructuring activities were initiated prior to December 31, 2002 and were recorded in
accordance with Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).The
Company has accrued various restructuring liabilities, through charges to Restructuring Expense, related to employee severance costs, facilities closure and lease abandonment costs, and contract termination costs in the consolidated
financial statements. The Companys restructuring liabilities for facilities closure and lease abandonment costs include various assumptions, such as the time period over which abandoned facilities will be vacant, expected sublease terms, and
expected sublease rates.



Revenue Recognition and Related Receivable
Allowances



The Company recognizes appliance and WinProxy revenue upon
delivery of the product, assuming that evidence of an arrangement between the customer and the Company exists, the fee to the customer is fixed or determinable and collectability is reasonably assured. In the event the Company has future performance
obligations or must obtain customer acceptance, revenue is deferred until the obligations are met or acceptance is obtained. During the fiscal year ended April 30, 2005, the Company deferred certain revenue and related costs of revenue based on
future obligations.



Revenue and related cost of revenue resulting from
shipments to the Companys distributors who have certain stock rotation rights are deferred until a point of sale report is received from the distributor confirming that the Companys products have been sold to a reseller or an end user.
For sales to resellers, revenue and related cost of revenues are recognized upon shipment based on the Companys understanding that an end user has been identified at the time of shipment.



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



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



When a sale involves multiple elements, the Company determines if these
elements can be separated into multiple units of accounting. The entire fee from the arrangement is allocated to each respective element based on its relative fair value or using the residual method, if appropriate. Revenue for each element is then
recognized when revenue recognition criteria for that element is met. If the Company cannot establish fair value for any undelivered element, the Company would be required to recognize revenue for the whole arrangement at the time revenue
recognition criteria for the undelivered element is met. Relative fair value for maintenance elements are based on substantive renewal rates.



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The Company records shipping costs in both revenue and cost of revenue when it bills its customers for shipping. If the
Company does not charge its customers for shipping, the costs incurred for shipping are reflected in cost of revenue but not recorded in revenue.



Probability of collection is assessed on a customer-by-customer basis. The Companys customers are subjected to a credit review process that evaluates the
customers financial condition and ability to pay for the Companys 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.



The Company performs ongoing credit evaluations of its
customers financial condition and maintains an allowance for doubtful accounts. The Company analyzes 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 changes are expensed to general and administrative expense.



Research and Development



Research and development costs are expensed as incurred.



Guarantees and Warranty Obligations



The Companys customer agreements generally include certain provisions for indemnifying such customers against liabilities if the Companys products infringe a
third partys intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying consolidated financial
statements.



The Company accrues for warranty expenses as part of its cost of
revenue at the time revenue is recognized and maintains 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 obligations and other charges against earnings may be required. If actual warranty expenses are less than projected, prior obligations could be reduced, providing a positive impact on our reported results. The
Company generally provides a one-year warranty on hardware products and a 90-day warranty on software products.



Advertising Costs



Advertising costs are charged to sales and marketing expense as incurred. Advertising costs were $0.2 million, $0.1 million and $0.1 million, for the years ended April 30, 2005, 2004 and 2003, respectively.



Income Taxes



The Company uses the liability method to account for income taxes as required by SFAS No.
109, Accounting for Income Taxes, (SFAS No. 109). As part of the process of preparing the Companys consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which
it operates. This process involves determining the Companys income tax expense (benefit) together with calculating the deferred income tax expense (benefit) related to temporary differences resulting from the differing treatment of items for
tax and accounting purposes, such as deferred revenue or deductibility of certain intangible assets. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. The Company must then
assess the likelihood that the deferred tax assets will be recovered through the generation of future taxable income. As of April 30, 2005, the Company has a full valuation allowance against its net deferred tax assets because the Company determined
that it is more likely than not that its deferred tax assets will not be realized in the foreseeable future.



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Comprehensive Income (Loss)



The Company reports comprehensive income (loss) in accordance with Statement of Financial Accounting Standard No. 130, Reporting
Comprehensive Income, (SFAS No. 130). Included in other comprehensive income (loss) are 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 balance sheets.



Significant components of the Companys comprehensive income (loss) are as follows (in thousands):



|                                                           |  |                      |       |   |      |   |      |      |  |   |         |  
|---------------------------------------------------------- |  | -------------------- | ----- | - | ---- | - | ---- | ---- |  | - | ------- | -
|                                                           |  | Year Ended April 30, |      
|                                                           |  | 2005                 |       |   | 2004 |   |      | 2003 | 
|Net income (loss)                                          |  | $                    | 5,375 |   |      | $ | (348 | )    |  | $ | (15,928 | )
|Unrealized gains (losses) on available-for-sale securities |  |                      | (1    | ) |      |   | (11  | )    |  |   | 20      |  
|                                                           |  |                      |       |   |      |   |      |      |  |   |         |  
|Comprehensive income (loss)                                |  | $                    | 5,374 |   |      | $ | (359 | )    |  | $ | (15,908 | )
|                                                           |  |                      |       |   |      |   |      |      |  |   |         |  



Stock-Based Compensation



The Company accounts for stock-based awards granted to employees and
officers using the intrinsic value method and to non-employees using the fair value method.



Under the intrinsic value method, when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized as prescribed by
Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees and related interpretations. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as amended by SFAS
No. 148, Accounting for Stock-Based Compensation (SFAS No. 148), under the fair value method, costs are measured on the earlier of either a performance commitment or the completion of performance by the non-employee provider of
goods or services, and are determined based on estimated fair value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. During fiscal 2005, a stock-based compensation
charge of $0.3 million was recorded due to a stock option modification in a severance agreement with the Companys departing Chief Financial Officer where the vesting of certain options was accelerated.



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The following table illustrates the pro forma effect on net loss and net loss per share for the years ended April 30,
2005, 2004 and 2003 had the Company applied the fair value method to account for stock-based awards to employees (in thousands):



|                                                                                                                                                                 |  |                      |        |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                                                 |  | Year Ended April 30, |       
|                                                                                                                                                                 |  | 2005                 |        |   | 2004 |   |         | 2003 | 
|Net income (loss), as reported                                                                                                                                   |  | $                    | 5,375  |   |      | $ | (348    | )    |  | $ | (15,928 | )
|Stock-based employee compensation expense included in the determination of net income (loss), as reported                                                        |  |                      | 991    |   |      |   | 1,213   |      |  |   | 2,070   |  
|Stock-based compensation for stock awards issued related to Ositis acquisition                                                                                   |  |                      | (676   | ) |      |   | (714    | )    |  |   |        |  
|Stock-based employee compensation expense that would have been included in the determination of net loss if the fair value method had been
applied to all awards |  |                      | (8,388 | ) |      |   | (11,870 | )    |  |   | (16,736 | )
|                                                                                                                                                                 |  |                      |        |   |      |   |         |      |  |   |         |  
|Pro forma net loss                                                                                                                                               |  | $                    | (2,698 | ) |      | $ | (11,719 | )    |  | $ | (30,594 | )
|                                                                                                                                                                 |  |                      |        |   |      |   |         |      |  |   |         |  
|Basic net income (loss) per common share:                                                                                                                        |  |                      |        |   |      |   |         |      |  |   |         |  
|As reported                                                                                                                                                      |  | $                    | 0.46   |   |      | $ | (0.03   | )    |  | $ | (1.81   | )
|                                                                                                                                                                 |  |                      |        |   |      |   |         |      |  |   |         |  
|Pro forma                                                                                                                                                        |  | $                    | (0.23  | ) |      | $ | (1.18   | )    |  | $ | (3.49   | )
|                                                                                                                                                                 |  |                      |        |   |      |   |         |      |  |   |         |  
|Diluted net income (loss) per common share:                                                                                                                      |  |                      |        |   |      |   |         |      |  |   |         |  
|As reported                                                                                                                                                      |  | $                    | 0.41   |   |      | $ | (0.03   | )    |  | $ | (1.81   | )
|                                                                                                                                                                 |  |                      |        |   |      |   |         |      |  |   |         |  
|Pro forma                                                                                                                                                        |  | $                    | (0.23  | ) |      | $ | (1.18   | )    |  | $ | (3.49   | )
|                                                                                                                                                                 |  |                      |        |   |      |   |         |      |  |   |         |  



For purposes of pro forma disclosures,
the estimated fair value of stock-based awards to employees is amortized to pro forma expense over the vesting period for stock options and over the applicable purchase periods for stock purchases under the Employee Stock Purchase Plan
(ESPP). The weighted average grant date fair value of stock options granted to employees was $13.82, $8.40 and $1.98 per share during the years ended April 30, 2005, 2004 and 2003, respectively. The weighted average fair value of
employee stock purchase rights granted under the ESPP was $8.40, $2.40 and $1.95 per share during the years ended April 30, 2005, 2004 and 2003, respectively. Such weighted average grant date fair values were estimated using the Black-Scholes option
valuation model and the assumptions included below.



Pro forma information
regarding the results of operations and net loss per share is determined as if the Company had accounted for employee stock options using the fair value method. Under this method, the fair value of each option granted is estimated on the date of
grant using the Black-Scholes option valuation model.



For the years ended
April 30, 2005, 2004 and 2003, the fair value of the Companys stock-based awards to employees was estimated using the following weighted average assumptions:



|                        |  |                      |   |  |      |   |  |      |   |  |      |   |  |      |   |  |      |  
|----------------------- |  | -------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                        |  | Year Ended April 30, |  
|                        |  | Options              |   |  | ESPP |  
|                        |  | 2005                 |   |  | 2004 |   |  | 2003 |   |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Risk-free interest rate |  | 3.30                 | % |  | 3.49 | % |  | 3.26 | % |  | 2.43 | % |  | 1.37 | % |  | 1.38 | %
|Dividend yield          |  | 0                    | % |  | 0    | % |  | 0    | % |  | 0    | % |  | 0    | % |  | 0    | %
|Expected life (years)   |  | 3.97                 |   |  | 4.00 |   |  | 4.00 |   |  | 1.25 |   |  | 0.50 |   |  | 0.50 |  
|Expected volatility     |  | 1.23                 |   |  | 0.82 |   |  | 1.22 |   |  | 1.02 |   |  | 0.77 |   |  | 1.01 |  



Per Share Amounts



Basic net income (loss) per common share and diluted net income (loss) per common share
are presented in conformity with SFAS No. 128, Earnings Per Share (SFAS No. 128), for all periods presented. Basic net



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income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Basic per
share amounts are computed by using the weighted average number of shares of the Companys common stock, less the weighted average number of common shares subject to repurchase, outstanding during the period. Diluted net income (loss) 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 and (ii) issuance of committed but un-issued stock awards. Basic and diluted net income (loss) per share for the years ended April 30, 2005 were presented separately. For periods for which there is a net loss, the numbers of shares used
in the computation of diluted net income (loss) per share are the same as those used for the computation of basic net income (loss) per share as the inclusion of dilutive securities would be anti-dilutive. The total number of shares excluded from
the calculation of diluted net loss per common share was approximately 1,619,000 and 320,000 for the years ended April 30, 2004 and 2003, respectively.



The following table presents the calculation of weighted average common shares used in the computations of basic and diluted per share amounts presented in the
accompanying consolidated statements of operations (in thousands):



|                                                                                     |  |                      |        |      |   |       |      |  |   |         |  
|------------------------------------------------------------------------------------ |  | -------------------- | ------ | ---- | - | ----- | ---- |  | - | ------- | -
|                                                                                     |  | Year Ended April 30, |       
|                                                                                     |  | 2005                 |        | 2004 |   |       | 2003 | 
|Net income (loss) available to common stockholders                                   |  | $                    | 5,375  |      | $ | (348  | )    |  | $ | (15,928 | )
|                                                                                     |  |                      |       
|Basic:                                                                               |  |                      |        |      |   |       |      |  |   |         |  
|Weighted-average shares of common stock outstanding                                  |  |                      | 11,628 |      |   | 9,958 |      |  |   | 8,830   |  
|Less: Weighted average shares of common stock subject to repurchase                  |  |                      |       |      |   | (2    | )    |  |   | (53     | )
|                                                                                     |  |                      |        |      |   |       |      |  |   |         |  
|Weighted average common shares used in computing basic net income (loss) per share   |  |                      | 11,628 |      |   | 9,956 |      |  |   | 8,777   |  
|                                                                                     |  |                      |        |      |   |       |      |  |   |         |  
|Basic net income (loss) per share                                                    |  | $                    | 0.46   |      | $ | (0.03 | )    |  | $ | (1.81   | )
|                                                                                     |  |                      |        |      |   |       |      |  |   |         |  
|Diluted:                                                                             |  |                      |        |      |   |       |      |  |   |         |  
|Weighted-average common shares used in computing basic net income (loss) per share   |  |                      | 11,628 |      |   | 9,956 |      |  |   | 8,777   |  
|Add: Weighted average employee stock options and warrants                            |  |                      | 1,271  |      |   |      |      |  |   |        |  
|Add: Other weighted-average dilutive potential common stock                          |  |                      | 78     |      |   |      |      |  |   |        |  
|                                                                                     |  |                      |        |      |   |       |      |  |   |         |  
|Weighted average common shares used in computing diluted net income (loss) per share |  |                      | 12,977 |      |   | 9,956 |      |  |   | 8,777   |  
|                                                                                     |  |                      |        |      |   |       |      |  |   |         |  
|Diluted net income (loss) per share                                                  |  | $                    | 0.41   |      | $ | (0.03 | )    |  | $ | (1.81   | )
|                                                                                     |  |                      |        |      |   |       |      |  |   |         |  



Foreign Currency Adjustments



The functional currency of the Companys domestic and foreign
operations is the U.S. dollar. Accordingly, the effects of foreign currency transactions, and of remeasuring the financial position and results of operations from local currencies into the functional currency, are included in other income
(expense) in the accompanying consolidated statements of operations. These amounts were not material during any of the three years in the period ended April 30, 2005.



Fair Value of Financial Instruments



The carrying amounts of the Companys financial instruments, which include cash, cash equivalents, short-term investments and restricted investments, approximate
their respective fair values based on quoted market prices.



Concentration
and Other Risks



Financial instruments that potentially subject the
Company to credit risk consist of demand deposit accounts, money market accounts, commercial paper, corporate debt securities and trade receivables. The Company



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maintains its demand deposit and money market accounts primarily with one financial institution with high credit standing. The Company invests only in
high-quality, investment grade securities and limits investment exposure in any one issue. Investments are classified as cash equivalents on the Companys consolidated balance sheets for the years ended April 30, 2005 and 2004. Management
believes the financial risks associated with these financial instruments are minimal. The Company has not experienced material losses from its investments in these securities.



Generally, the Company does not require collateral for sales to customers. However, the Company performs on-going credit valuations of its
customers financial condition and maintains an allowance for doubtful accounts. One of the Companys distributors accounted for 15.9%, 24.1% and 19.0% of its net revenue during the years ended April 30, 2005, 2004 and 2003, respectively.
The same distributor accounted for 11.3%, 12.7% and 20.4% of the Companys gross accounts receivable balances for the years ended April 30, 2005, 2004 and 2003, respectively. No other customer accounted for more than 10.0% of the Companys
gross accounts receivable balances for the same time periods.



The Company
currently purchases several key parts and components used in the manufacture of its products from a limited number of suppliers. Generally the Company has 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 the Companys suppliers could adversely affect its business and consolidated financial statements.



Contingencies



From time to time the Company is involved in various claims and legal proceedings. If management believes that a loss arising from these matters is probable and can
reasonably be estimated, the Company records the amount of the loss, or the minimum estimated liability when the loss is estimated using a range and no point within the range is more probable than any other. As additional information becomes
available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could result in a
material adverse impact on the results of operations for the period in which the ruling occurs, or future periods.



Recent Accounting Pronouncements



In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections(SFAS No. 154), a replacement of APB Opinion No. 20, Accounting
Changes(APB 20), and FASB SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements(SFAS No. 3). SFAS No. 154 applies to all voluntary changes in accounting principle, and changes the requirements
for accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154
also requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June
1, 2005. SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement. The Company does not believe the adoption of SFAS
No. 154 will have a material impact on its financial statements.



On December
16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment(SFAS No. 123(R)), which is a revision of FASB SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123(R)
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB SFAS No. 95, Statement of Cash Flows (SFAS No. 95). SFAS No. 123(R) would require all share-based payments to employees, including
grants of employee stock options, to be measured using a fair value method and record such expense in the consolidated financial statements. In addition, the adoption of SFAS No. 123(R) will require additional accounting related to the income tax
effects and additional disclosure



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regarding the cash flow effects resulting from share-based payment arrangements. Based on the phase-in implementation announced by the SEC on April 14, 2005,
SFAS No. 123(R) is effective at the beginning of the first fiscal year beginning after June 15, 2005. The Company will be required to apply SFAS No. 123(R) beginning May 1, 2006. The adoption of SFAS No. 123(R) will result in recording material
charges related to employee stock-based compensation in future periods, impacting the Companys consolidated financial position and results of operations.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs(SFAS No. 151), which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 151 will have a material
impact on its financial statements.



In September 2004, the FASB staff issued
FASB Staff Position (FSP) EITF 03-01-1, or FSP EITF 03-01-1. Effective upon issuance, FSP EITF 03-1-1 delayed, indefinitely, certain measurement and recognition guidance contained in EITF No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. Issued in March 2004, EITF No. 03-1 included guidance for determining and recording impairment for both debt and equity securities. EITF No. 03-1 also requires additional disclosure for
investments that are deemed to be temporarily impaired under the standard. We do not believe that the adoption of FSP EITF 03-01-1 will have a material impact on our financial position, results of operations or liquidity.



Note 3. Acquisitions



Cerberian, Inc.



On November 16, 2004, the Company completed its acquisition of Cerberian, Inc. (Cerberian). The purchase price of approximately $19.3 million consisted of
approximately 0.8 million shares of Blue Coat common stock valued at $17.4 million, $0.4 million in direct transaction costs, Cerberian options assumed by Blue Coat valued at approximately $0.5 million and the elimination of promissory notes from
Cerberian to Blue Coat of $1.0 million. The acquisition was accounted for as a purchase in accordance with SFAS No. 141, Accounting for Business Combinations(SFAS No. 141). This purchase price has been allocated to the tangible
and intangible assets acquired with the excess purchase price being allocated to goodwill.



Cerberian was founded in 2000 as a Utah corporation and later incorporated as a Delaware corporation on January 9, 2001. Cerberian was a provider of URL filtering software. Cerberians operations were assumed as
of the date of the acquisition and are included in the results of operations of the Company beginning on November 16, 2004 and, as a result, are not reflected in the results of operations for the years ended April 30, 2004 and 2003.



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The updated allocation of the purchase price, based on the fair value of each component, consisted of the following at
April 30, 2005 (in thousands):



|                                             |  |   |        |  
|-------------------------------------------- |  | - | ------ | -
|Consideration and direct transaction costs:  |  |   |        |  
|Fair value of Blue Coat common stock         |  | $ | 17,357 |  
|Direct transaction costs                     |  |   | 437    |  
|Fair value of assumed Cerberian options      |  |   | 497    |  
|Promissory notes from Cerberian to Blue Coat |  |   | 1,034  |  
|                                             |  |   |        |  
|Total purchase price                         |  | $ | 19,325 |  
|                                             |  |   |        |  
|Allocation of purchase price:                |  |   |        |  
|Cash and cash equivalents                    |  | $ | 2      |  
|Accounts receivable                          |  |   | 588    |  
|Other current assets                         |  |   | 66     |  
|Fixed assets                                 |  |   | 184    |  
|Other assets                                 |  |   | 21     |  
|Liabilities assumed                          |  |   | (2,033 | )
|Deferred stock compensation                  |  |   | 17     |  
|Identifiable intangible assets               |  |   | 3,030  |  
|Goodwill                                     |  |   | 17,450 |  
|                                             |  |   |        |  
|Total purchase price                         |  | $ | 19,325 |  
|                                             |  |   |        |  



Upon closing the acquisition of
Cerberian, the Company eliminated the promissory notes from Cerberian to Blue Coat totaling $1.0 million and paid off other notes payable to third parties totaling $0.5 million and paid off various capital leases of $0.1 million. The Company also
incurred $0.4 million in severance costs during the year ended April 30, 2005, related to the consolidation of various activities in an effort to eliminate redundancies and increase organizational efficiencies within the newly combined company.



The Companys primary purpose for acquiring Cerberian was to expand its
employee internet management products, as well as gain access to Cerberians customer base. The Company believes that the intangible assets of Cerberian strengthen its product offerings and allow it to market a more competitive solution to its
customers.



To establish the value of the intangible assets, the Company, with
the assistance of an independent valuation specialist, used an income approach. The Company utilized a five-step process to value the intangible assets: (i) revenue associated with the intangible assets was projected; (ii) cost of revenue was then
estimated for each period in which revenue was projected; (iii) the resulting net cash flow was tax effected and reduced further by charges for the use of fixed assets, working capital and other assets necessary to generate these cash flows; (iv)
the resulting net cash flows were discounted at a rate commensurate with their risk; and (v) the Company summed the discounted cash flows to estimate their fair market values. The Company then estimated the tax benefits associated with the
intangible asset and this benefit was included in the value of the intangible assets.



As part of the valuation analysis, an understanding of the technology acquired and its future use after the acquisition was necessary. Accordingly, several factors were considered: (i) whether or not the acquired technology had achieved
technological feasibility; (ii) the time, costs and risks to complete the development of the technology; (iii) the roadmap for the technology post acquisition; (iv) the existence of any alternative use for the technology; (v) the additional use of
any core technology; and (vi) the results of any enhancements or embellishments to the technology.



Using the above guidelines at the time of the acquisition, the Companys management identified intangible assets that were valued separately from goodwill. The intangible assets identified were core technology
and customer base. The intangible assets were valued using an income approach as described above. The cash flows were



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discounted to their present value using a discount rate of 24.0%. Intangible assets acquired through the Cerberian acquisition and their estimated useful
lives are as follows (in thousands):



|                               |  |                    |  |             |      
|------------------------------ |  | ------------------ |  | ----------- | -----
|Identifiable intangible assets |  | Amortizationperiod |  | GrossAmount
|Core technology                |  | 5 years            |  | $           | 2,590
|Customer base                  |  | 5 years            |  |             | 440  
|                               |  |                    |  |             |      
|Total                          |  |                    |  | $           | 3,030
|                               |  |                    |  |             |      



The potential value of the combined
companies products and technologies contributed to a purchase price that resulted in goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible
assets. Goodwill is not deductible for tax purposes and is not subject to amortization; however, it is to be tested for impairment at least annually in accordance with SFAS No. 142. Approximately $17.6 million of the total purchase price was
allocated to goodwill upon the closing of Cerberian acquisition on November 16, 2004. In the fourth quarter of fiscal 2005, the Company recorded an adjustment of $0.2 million related to a decrease in legal and accounting transaction fees, resulting
in a corresponding decrease to goodwill.



Ositis Software, Inc.



On November 14, 2003, the Company completed its acquisition of Ositis
Software, Inc. (Ositis). The purchase price of $8.7 million consisted of 0.4 million shares of Blue Coat common stock valued at $6.7 million, $1.1 million in cash, $0.9 million in direct transaction costs, and Ositis warrants assumed by
the Company valued at $43,000 which have all been exercised.



Ositis
operations have been included in the results of operations of Blue Coat beginning on November 14, 2003. The acquisition was accounted for as a purchase in accordance with SFAS No. 141, Accounting for Business Combinations (SFAS No.
141); accordingly, the Company allocated the purchase price to the fair value of assets acquired and liabilities assumed.



The final allocation of the purchase price, based on the fair value of each component, consisted of the following (in thousands):



|                                                |  |   |        |  
|----------------------------------------------- |  | - | ------ | -
|Consideration and direct transaction costs:     |  |   |        |  
|Cash                                            |  | $ | 1,051  |  
|Fair value of Blue Coat common stock            |  |   | 6,662  |  
|Estimated direct transaction costs              |  |   | 911    |  
|Fair value of assumed Ositis warrants           |  |   | 43     |  
|                                                |  |   |        |  
|Total purchase price                            |  | $ | 8,667  |  
|                                                |  |   |        |  
|Allocation of purchase price:                   |  |   |        |  
|Cash and cash equivalents                       |  | $ | 350    |  
|Accounts receivable                             |  |   | 441    |  
|Other current assets                            |  |   | 43     |  
|Other assets                                    |  |   | 124    |  
|Debt assumed                                    |  |   | (1,100 | )
|Moving, lease termination, and transition costs |  |   | (491   | )
|Legal and investment banking fees               |  |   | (479   | )
|Deferred revenue                                |  |   | (174   | )
|Accounts payable and accrued liabilities        |  |   | (1,250 | )
|Deferred employee compensation                  |  |   | 1,596  |  
|Identifiable amortizable intangible assets      |  |   | 2,153  |  
|In-process technology                           |  |   | 151    |  
|Goodwill                                        |  |   | 7,303  |  
|                                                |  |   |        |  
|Total purchase price                            |  | $ | 8,667  |  
|                                                |  |   |        |  



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Upon closing the acquisition of Ositis, the Company recorded approximately $1.6 million of deferred employee
compensation. Of the $1.6 million, $0.2 million was recorded as a prepaid expense related to committed cash consideration and $1.4 million related to committed stock awards to be issued over 12 months, which was recorded as deferred stock
compensation in the equity section of the Companys balance sheet. These amounts were amortized over a 12-month period beginning in November 2003. The Company incurred compensation expense of $0.8 million during each of the years ended April
30, 2005 and 2004, related to amortization of prepaid employee compensation and deferred employee stock compensation. The final allocation of purchase price also included the return of approximately 8,000 escrow shares to treasury stock in the third
quarter of fiscal 2005.



To establish the value of the intangible assets, the
Company used an income approach, which values an asset based on 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 15.0% for the developed technology and 20.0% for the core technology that would provide sufficient return to a potential investor and 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. Intangible assets acquired through the Ositis acquisition and their estimated useful lives consisted of the following (in thousands):



|                               |  |                    |  |             |      
|------------------------------ |  | ------------------ |  | ----------- | -----
|Identifiable intangible assets |  | Amortizationperiod |  | GrossAmount
|Developed technology           |  | 3 years            |  | $           | 1,331
|Core technology                |  | 5 years            |  |             | 339  
|Customer base                  |  | 5 years            |  |             | 483  
|                               |  |                    |  |             |      
|Total                          |  |                    |  | $           | 2,153
|                               |  |                    |  |             |      



The potential value of the combined
companies products and technologies contributed to a purchase price that resulted in goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible
assets. Goodwill is not deductible for tax purposes and is not subject to amortization, however, it is to be tested for impairment at least annually in accordance with SFAS No. 142. Approximately $7.7 million of the total purchase price was
allocated to goodwill upon closing of the Ositis acquisition on November 14, 2003. For the year ended April 30, 2005, the Company recorded an adjustment of $0.2 million related to a decrease in the fair value of assumed liabilities, resulting in a
corresponding decrease to goodwill.



Pro-forma financial results



Unaudited pro forma results from operations for the years ended April
30, 2005 and 2004, assuming the acquisitions of Cerberian and Ositis were completed on May 1, 2004 and 2003, respectively, would be as follows (in thousands, except per share amounts):



|                                |  |                      |        |      |   |        |  
|------------------------------- |  | -------------------- | ------ | ---- | - | ------ | -
|                                |  | Year Ended April 30, |       
|                                |  | 2005                 |        | 2004 |  
|Net revenue                     |  | $                    | 98,174 |      | $ | 69,700 |  
|Operating income (loss)         |  | $                    | 4,087  |      | $ | (5,687 | )
|Net income (loss)               |  | $                    | 4,240  |      | $ | (5,990 | )
|Basic income (loss) per share   |  | $                    | 0.35   |      | $ | (0.55  | )
|Diluted income (loss) per share |  | $                    | 0.32   |      | $ | (0.55  | )



The unaudited pro forma financial
information is presented for informational purposes only, and is not necessarily indicative of what the Companys operating results would have been, had the acquisition been completed on the date for which the pro forma results give effect (May
1, 2004 and 2003). Included in the results for the years ended April 30, 2005, and 2004 were expenses related to the acquisition of Ositis and Cerberian, such as the amortization of intangible assets, stock compensation, and integration costs.



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Note 4. Consolidated Balance Sheet Data



Inventories



Inventories, net consist of the following (in thousands):



|                |  |           |     |      |   |      
|--------------- |  | --------- | --- | ---- | - | -----
|                |  | April 30,
|                |  | 2005      |     | 2004
|Raw materials   |  | $         | 255 |      | $ | 450  
|Work-in-process |  |           | 5   |      |   | 186  
|Finished goods  |  |           | 90  |      |   | 592  
|                |  |           |     |      |   |      
|Total           |  | $         | 350 |      | $ | 1,228
|                |  |           |     |      |   |      



Property and Equipment



Property and equipment, net consist of the following (in thousands):



|                                               |  |           |         |   |      |   |        |  
|---------------------------------------------- |  | --------- | ------- | - | ---- | - | ------ | -
|                                               |  | April 30, |        
|                                               |  | 2005      |         |   | 2004 |  
|Computer and office equipment                  |  | $         | 7,527   |   |      | $ | 6,376  |  
|Software                                       |  |           | 4,727   |   |      |   | 3,564  |  
|Furniture and fixtures                         |  |           | 1,292   |   |      |   | 1,168  |  
|Leasehold improvements                         |  |           | 1,049   |   |      |   | 869    |  
|Construction in progress                       |  |           | 232     |   |      |   | 272    |  
|                                               |  |           |         |   |      |   |        |  
|                                               |  |           | 14,827  |   |      |   | 12,249 |  
|Less accumulated depreciation and amortization |  |           | (11,064 | ) |      |   | (9,759 | )
|                                               |  |           |         |   |      |   |        |  
|                                               |  | $         | 3,763   |   |      | $ | 2,490  |  
|                                               |  |           |         |   |      |   |        |  



Depreciation expense was $1.7 million,
$2.1 million and $2.9 million for the years ended April 30, 2005, 2004 and 2003, respectively.



Intangible Assets



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



|                     |  |                    |  |             |       |                         |   |        |                   |  |   |      
|-------------------- |  | ------------------ |  | ----------- | ----- | ----------------------- | - | ------ | ----------------- |  | - | -----
|April 30, 2005       |  | Amortizationperiod |  | GrossAmount |       | AccumulatedAmortization |   |        | Net CarryingValue
|Developed technology |  | 3 years            |  | $           | 1,331 |                         | $ | (665   | )                 |  | $ | 666  
|Core technology      |  | 5 years            |  |             | 2,929 |                         |   | (340   | )                 |  |   | 2,589
|Customer base        |  | 5 years            |  |             | 923   |                         |   | (185   | )                 |  |   | 738  
|                     |  |                    |  |             |       |                         |   |        |                   |  |   |      
|Total                |  |                    |  | $           | 5,183 |                         | $ | (1,190 | )                 |  | $ | 3,993
|                     |  |                    |  |             |       |                         |   |        |                   |  |   |      
|                     |  |                    |  |            
|April 30, 2004       |  | Amortizationperiod |  | GrossAmount |       | AccumulatedAmortization |   |        | Net CarryingValue
|Developed technology |  | 3 years            |  | $           | 1,331 |                         | $ | (222   | )                 |  | $ | 1,109
|Core technology      |  | 5 years            |  |             | 339   |                         |   | (34    | )                 |  |   | 305  
|Customer base        |  | 5 years            |  |             | 483   |                         |   | (48    | )                 |  |   | 435  
|                     |  |                    |  |             |       |                         |   |        |                   |  |   |      
|Total                |  |                    |  | $           | 2,153 |                         | $ | (304   | )                 |  | $ | 1,849
|                     |  |                    |  |             |       |                         |   |        |                   |  |   |      



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Total amortization expense for the identifiable intangible assets was approximately $0.9 million and $0.3 million for the
years ended April 30, 2005 and 2004, respectively. No amortization expense was recognized for the year ended April 30, 2003. As of April 30, 2005, the Company had no identifiable intangible assets with indefinite lives. The weighted average life of
identifiable intangible assets was 4.4 and 3.5 years as of April 30, 2005 and 2004, respectively. There were no identifiable intangible assets as of April 30, 2003.



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



|                     |  |              |      
|-------------------- |  | ------------ | -----
|Year Ended April 30, |  | Amortization
|2006                 |  | $            | 1,214
|2007                 |  |              | 992  
|2008                 |  |              | 771  
|2009                 |  |              | 688  
|2010                 |  |              | 328  
|                     |  |              |      
|                     |  | $            | 3,993
|                     |  |              |      



Goodwill



Changes in goodwill are as follows (in thousands):



|                             |  |                      |        |   |      |   |       |  
|---------------------------- |  | -------------------- | ------ | - | ---- | - | ----- | -
|                             |  | Year Ended April 30, |       
|                             |  | 2005                 |        |   | 2004 |  
|Balance, beginning of period |  | $                    | 7,456  |   |      | $ |      |  
|Ositis acquisition           |  |                      |       |   |      |   | 7,712 |  
|Ositis adjustment            |  |                      | (153   | ) |      |   | (256  | )
|Cerberian acquisition        |  |                      | 17,565 |   |      |   |      |  
|Cerberian adjustment         |  |                      | (115   | ) |      |   |      |  
|                             |  |                      |        |   |      |   |       |  
|Balance, end of period       |  | $                    | 24,753 |   |      | $ | 7,456 |  
|                             |  |                      |        |   |      |   |       |  



Current Other Accrued Liabilities



Current other accrued liabilities consisted of the following (in
thousands):



|                                 |  |           |       |      |   |      
|-------------------------------- |  | --------- | ----- | ---- | - | -----
|                                 |  | April 30,
|                                 |  | 2005      |       | 2004
|Professional and consulting fees |  | $         | 959   |      | $ | 462  
|Accrued royalty                  |  |           | 703   |      |   | 432  
|Warranty reserve                 |  |           | 262   |      |   | 295  
|Sales and marketing costs        |  |           | 226   |      |   | 308  
|Other                            |  |           | 1,680 |      |   | 1,076
|                                 |  |           |       |      |   |      
|Total other accrued liabilities  |  | $         | 3,830 |      | $ | 2,573
|                                 |  |           |       |      |   |      



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Warranty Obligations



Changes in the Companys warranty obligations, which are included in Other Current Liabilities, for the years ended April 30, 2005 and 2004 were as follows (in
thousands):



|                                    |  |                      |      |   |      |   |      |  
|----------------------------------- |  | -------------------- | ---- | - | ---- | - | ---- | -
|                                    |  | Year Ended April 30, |     
|                                    |  | 2005                 |      |   | 2004 |  
|Beginning balances                  |  | $                    | 295  |   |      | $ | 350  |  
|Warranties issued during the period |  |                      | 952  |   |      |   | 386  |  
|Settlements made during the period  |  |                      | (985 | ) |      |   | (441 | )
|                                    |  |                      |      |   |      |   |      |  
|Ending balances                     |  | $                    | 262  |   |      | $ | 295  |  
|                                    |  |                      |      |   |      |   |      |  



Note 5. Restructuring Accrual



As of April 30, 2005, substantially all actions under the February 2002,
August 2001, and February 2001 restructuring plans had been completed, except for payment of future rent obligations of $3.6 million, which are to be paid in cash through fiscal year 2008.



The following table summarizes restructuring activity during the three years ended April 30,
2005:



|                                                        |  |                               |        |   |                           |   |      |                                                    |  |   |       |   |  |   |        |  
|------------------------------------------------------- |  | ----------------------------- | ------ | - | ------------------------- | - | ---- | -------------------------------------------------- |  | - | ----- | - |  | - | ------ | -
|                                                        |  | Abandoned Lease Space Accrual |        |   | Severance Related Accrual |   |      | Contract Termination and Facilities ClosureAccrual |  |   | Total |  
|Balances at April 30, 2002                              |  | $                             | 9,503  |   |                           | $ | 406  |                                                    |  | $ | 969   |   |  | $ | 10,878 |  
|Cash payments                                           |  |                               | (3,067 | ) |                           |   | (406 | )                                                  |  |   | (641  | ) |  |   | (4,114 | )
|Additions                                               |  |                               | 1,553  |   |                           |   |     |                                                    |  |   |      |   |  |   | 1,553  |  
|Reversals                                               |  |                               |       |   |                           |   |     |                                                    |  |   | (280  | ) |  |   | (280   | )
|                                                        |  |                               |        |   |                           |   |      |                                                    |  |   |       |   |  |   |        |  
|Balances at April 30, 2003                              |  |                               | 7,989  |   |                           |   |     |                                                    |  |   | 48    |   |  |   | 8,037  |  
|Cash payments                                           |  |                               | (2,947 | ) |                           |   |     |                                                    |  |   | (22   | ) |  |   | (2,969 | )
|Additions                                               |  |                               | 1,536  |   |                           |   |     |                                                    |  |   |      |   |  |   | 1,536  |  
|                                                        |  |                               |        |   |                           |   |      |                                                    |  |   |       |   |  |   |        |  
|Balances at April 30, 2004                              |  |                               | 6,578  |   |                           |   |     |                                                    |  |   | 26    |   |  |   | 6,604  |  
|Cash payments                                           |  |                               | (2,863 | ) |                           |   |     |                                                    |  |   | (2    | ) |  |   | (2,865 | )
|Reversals                                               |  |                               | (72    | ) |                           |   |     |                                                    |  |   | (24   | ) |  |   | (96    | )
|                                                        |  |                               |        |   |                           |   |      |                                                    |  |   |       |   |  |   |        |  
|Balances as of April 30, 2005                           |  |                               | 3,643  |   |                           |   |     |                                                    |  |   |      |   |  |   | 3,643  |  
|Less: current portion included in Current liabilities |  |                               | 2,729  |   |                           |   |     |                                                    |  |   |      |   |  |   | 2,729  |  
|                                                        |  |                               |        |   |                           |   |      |                                                    |  |   |       |   |  |   |        |  
|Long-term restructuring accrual                         |  | $                             | 914    |   |                           | $ |     |                                                    |  | $ |      |   |  | $ | 914    |  
|                                                        |  |                               |        |   |                           |   |      |                                                    |  |   |       |   |  |   |        |  



In fiscal 2005, the Company reduced
its restructuring accrual by $72,000 related to a revised estimate of real estate taxes on one of the leased facilities and by $24,000 due to lower contract termination costs than originally estimated.



During fiscal 2004, the Company increased its restructuring accruals, for abandoned lease
space by $1.5 million to reflect a deterioration in market trend information provided by a commercial real estate broker.



During fiscal 2003, the Company increased the restructuring accruals by $1.6 million for abandoned lease space, mainly due to the loss of its tenant in a leased building
in Sunnyvale, California. The Company also reduced its estimates for contract termination costs by $0.3 million during fiscal 2003, as it was able to negotiate lower settlement amounts than originally estimated.



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Note 6. Stockholders Equity



Preferred Stock



The Companys Certificate of Incorporation authorizes 10,000,000 shares of preferred stock. The preferred stock is undesignated and the Board of Directors has the
authority to issue new series of preferred stock and determine the rights, preferences and privileges of such preferred stock.



Common Stock



The Company has either assumed or entered into Stock Purchase Agreements in connection with the sale of common stock to employees, consultants and directors. The Company has the right to repurchase, at the original
issue price, a declining percentage of certain of the shares of common stock issued based on the respective service periods. As of April 30, 2005, 2004 and 2003, 70, 2,387 and 4,322, shares, respectively, of common stock issued under these
agreements were subject to repurchase.



Equity Financing



On September 18, 2003, the Company sold 1,311,807 shares of common stock, $.0001 par value
per share, to investment funds and an individual affiliated with Sprout Group, a venture capital affiliate of Credit Suisse First Boston, at a price of $9.91 per share. The share price was determined using the average closing price per share of Blue
Coats common stock on the Nasdaq National Market over the five trading days ending on the trading date prior to the date of closing. The offering resulted in net proceeds of approximately $12.9 million, which were used for general corporate
purposes. The shares of common stock issued in the transaction have not been registered under the Securities Act of 1933, and may not be offered or sold in the absence of a registration statement in effect with respect to the securities under the
Securities Act of 1933 or an applicable exemption from registration requirements. The shares of common stock issued in such transaction are eligible for re-sale pursuant to Rule 144 under the Securities Act of 1933, subject to the volume limitations
and other conditions specified in such rule.



Warrants



In connection with the acquisition of Ositis, the Company assumed
warrants outstanding to purchase Ositis common stock using an exchange ratio contained in the Ositis merger agreement. Based on this exchange ratio, the total number of the Companys shares that may be purchased by warrant holders of Ositis
common stock is 2,804. Using the Black Scholes valuation model, the Company valued these shares at $43,000, which was included as part of the total purchase consideration for Ositis. As of April 30, 2005, 2,727 of these warrants were issued.



The following table illustrates total outstanding warrants as of April 30,
2005:



|               |  |                |       |                 |                      
|-------------- |  | -------------- | ----- | --------------- | ---------------------
|April 30, 2005
|Shares         |  | Exercise Price |       | Expiration Date
|1,982          |  | $              | 0.63  |                 | Jan. 2006 - Dec. 2009
|119            |  |                | 47.32 |                 | March, 2006          
|626            |  | $              | 91.48 |                 | July, 2008           
|               |  |                |       |                 |                      
|2,727          |  |                |       |                 |                      
|               |  |                |       |                 |                      



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Note 7. Employee and Director Stock Plans



1996 Stock Incentive Plan



In 1996, the Company established the 1996 Stock Option Plan (the 1996 Plan) under which stock options were granted to employees, directors and consultants.
After September 24, 1999 no options could be granted under the 1996 plan.



Options that expire and shares issued under the 1996 Plan that are repurchased become available for issuance under the Companys 1999 Stock Incentive Plan, which is discussed further below.



1999 Stock Incentive Plan



In September 1999, the Companys Board of Directors adopted the 1999 Stock Incentive
Plan (the Incentive Plan), which became effective upon the effective date of the Companys initial public offering. The number of shares reserved under the Incentive Plan automatically increase on January 1 each year beginning 2002
by 400,000 shares, and will increase on an annual basis by the lesser of 5% of the total amount of common stock outstanding or 400,000 shares. Furthermore, any options granted under the 1996 Plan that are cancelled or exercised and subsequently
repurchased by the Company become available for future issuance under the Incentive Plan. As of April 30, 2005, 3,590,084 shares of common stock have been authorized for issuance under the plan. The exercise price for incentive stock options and
non-qualified stock options granted under the Incentive Plan may not be less than 100.0% and 85.0%, respectively, of the fair market value of common stock on the option grant date and the stock options are generally subject to a four-year vesting
term.



1999 Director Option Plan



In September 1999, the Companys Board of Directors adopted the 1999 Director Option
Plan (the Directors Plan). Under the Directors Plan, each non-employee director joining the Board of Directors following the effective date of the Companys initial public offering automatically receives options to purchase 5,000
shares of common stock. In addition, each non-employee director automatically receives options to purchase 1,000 shares of common stock at each annual meeting of the Board of Directors held in the year 2000 and thereafter. Options granted under the
Directors Plan will have an exercise price equal to the fair market value of the common stock on the option grant date. The number of shares reserved under the Directors Plan automatically increases by 20,000 shares annually beginning January 1,
2000. As of April 30, 2005, 176,500 shares of common stock have been authorized for issuance under the plan. The Companys Board of Directors, at its discretion, may reduce the automatic annual increase in reserved shares.



2000 Supplemental Stock Option Plan



In February 2000, the Companys Board of Directors adopted the 2000 Supplemental Stock
Option Plan (the 2000 Plan), under which 600,000 shares of common stock were reserved for issuance. Non-executive employees and consultants are eligible to participate in the 2000 Plan. The 2000 Plan provides for the grant of
non-statutory stock options to purchase shares of the Companys common stock and/or grants of restricted shares of common stock. The exercise price for stock options issued under the 2000 Plan may not be less than 25.0% of the fair market value
of common stock on the option grant date. As of April 30, 2005, the number of common stock shares authorized for issuance under the plan for future issuance equaled 358,536.



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Stock option activity under all stock option plans is as follows:



|                          |  |                     |   |  |                                          |      
|------------------------- |  | ------------------- | - |  | ---------------------------------------- | -----
|                          |  | Outstanding Options
|                          |  | Number ofShares     |   |  | Weighted-AverageExercise Price Per Share
|Balance at April 30, 2002 |  | 1,916,726           |   |  | $                                        | 60.60
|Options granted           |  | 1,092,587           |   |  | $                                        | 2.43 
|Options exercised         |  | (57,390             | ) |  | $                                        | 2.65 
|Options canceled          |  | (856,322            | ) |  | $                                        | 49.14
|                          |  |                     |   |  |                                          |      
|Balance at April 30, 2003 |  | 2,095,601           |   |  | $                                        | 37.05
|Options granted           |  | 1,419,500           |   |  | $                                        | 13.60
|Options exercised         |  | (533,199            | ) |  | $                                        | 7.63 
|Options canceled          |  | (197,017            | ) |  | $                                        | 76.43
|                          |  |                     |   |  |                                          |      
|Balance at April 30, 2004 |  | 2,784,885           |   |  | $                                        | 27.95
|Options granted           |  | 631,413             |   |  | $                                        | 17.61
|Options exercised         |  | (147,939            | ) |  | $                                        | 6.10 
|Options canceled          |  | (124,461            | ) |  | $                                        | 33.59
|                          |  |                     |   |  |                                          |      
|Balance at April 30, 2005 |  | 3,143,898           |   |  | $                                        | 26.44
|                          |  |                     |   |  |                                          |      



The following table provides
segregated ranges of stock options outstanding at April 30, 2005:



|                         |  |                                                |  |                                         |  |                                 |        |                                               |           |                                |   |       
|------------------------ |  | ---------------------------------------------- |  | --------------------------------------- |  | ------------------------------- | ------ | --------------------------------------------- | --------- | ------------------------------ | - | ------
|Options Outstanding      |  | Options Exerciseable                          
|Range of Exercise Prices |  | Number of Options Outstanding atApril 30, 2005 |  | Weighted AverageContractual Life(Years) |  | Weighted Average Exercise Price |        | Number of OptionsExercisable atApril 30, 2005 |           | Weighted AverageExercise Price
|$0.05-$0.05              |  | 50                                             |  | 5.53                                    |  | $                               | 0.05   |                                               | 50        |                                | $ | 0.05  
|$2.25-$2.25              |  | 422,194                                        |  | 7.19                                    |  | $                               | 2.25   |                                               | 280,618   |                                | $ | 2.25  
|$2.50-$5.44              |  | 299,047                                        |  | 7.68                                    |  | $                               | 4.75   |                                               | 166,692   |                                | $ | 4.58  
|$5.60-$5.60              |  | 329,483                                        |  | 8.13                                    |  | $                               | 5.60   |                                               | 139,077   |                                | $ | 5.60  
|$7.86-$11.95             |  | 375,778                                        |  | 8.85                                    |  | $                               | 10.14  |                                               | 66,908    |                                | $ | 8.52  
|$12.50-$16.05            |  | 329,083                                        |  | 8.13                                    |  | $                               | 14.96  |                                               | 139,891   |                                | $ | 14.98 
|$16.24-$18.04            |  | 353,306                                        |  | 7.27                                    |  | $                               | 16.94  |                                               | 242,196   |                                | $ | 16.78 
|$19.09-$21.53            |  | 463,147                                        |  | 8.27                                    |  | $                               | 21.12  |                                               | 160,789   |                                | $ | 20.89 
|$21.60-$60.00            |  | 323,850                                        |  | 7.88                                    |  | $                               | 31.99  |                                               | 109,325   |                                | $ | 37.33 
|$85.31-$525.00           |  | 247,960                                        |  | 5.13                                    |  | $                               | 177.58 |                                               | 245,960   |                                | $ | 177.80
|                         |  |                                                |  |                                         |  |                                 |        |                                               |           |                                |   |       
|$0.05-$525.00            |  | 3,143,898                                      |  | 7.71                                    |  | $                               | 26.44  |                                               | 1,551,506 |                                | $ | 38.72 
|                         |  |                                                |  |                                         |  |                                 |        |                                               |           |                                |   |       



At April 30, 2005, 1,247,809 options
were available for grant and 4,391,707 shares of common stock were authorized for future issuance under the aforementioned option plans.



Employee Stock Purchase Plan (ESPP)



In September 1999, the Companys Board of Directors adopted the ESPP, which became effective upon the effective date of the Companys initial public offering.
Under the plan, eligible employees may purchase common stock through payroll deductions, which in any event may not exceed 15% of an employees compensation, at a price equal to the lower of 85% of the closing fair market value of the common
stock on the day prior to the beginning of the offering or the last day of the applicable six-month purchase period. The number of shares reserved under the ESPP is automatically increased by 100,000 shares annually, beginning January 31, 2000. As
of April 30, 2005, a total of 638,273 shares of common stock have been authorized for future issuance under the ESPP. The Companys Board of Directors, at its discretion, may reduce the automatic annual increase in reserved shares.



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Note 8. Income Taxes



The provision for income taxes of $0.1 million, $0.1 million and $0.3 million for the years ended April 30, 2005, 2004 and 2003, respectively, is composed entirely of
foreign corporate income taxes.



A reconciliation of the income tax provision
to the amount computed by applying the statutory federal income tax rate to net income (loss) before income taxes is summarized as follows (in thousands):



|                                         |  |                      |        |   |      |   |     |      |  |   |        |  
|---------------------------------------- |  | -------------------- | ------ | - | ---- | - | --- | ---- |  | - | ------ | -
|                                         |  | Year Ended April 30, |       
|                                         |  | 2005                 |        |   | 2004 |   |     | 2003 | 
|Provision at statutory rate              |  | $                    | 1,922  |   |      | $ | (78 | )    |  | $ | (5,484 | )
|Acquired in-process technology           |  |                      |       |   |      |   | 53  |      |  |   |       |  
|Future benefits not currently recognized |  |                      | (2,067 | ) |      |   | (54 | )    |  |   | 4,707  |  
|Stock compensation                       |  |                      | 4      |   |      |   | 28  |      |  |   | 724    |  
|Foreign taxes                            |  |                      | 117    |   |      |   | 124 |      |  |   | 261    |  
|Other                                    |  |                      | 141    |   |      |   | 51  |      |  |   | 53     |  
|                                         |  |                      |        |   |      |   |     |      |  |   |        |  
|Provision for income taxes               |  | $                    | 117    |   |      | $ | 124 |      |  | $ | 261    |  
|                                         |  |                      |        |   |      |   |     |      |  |   |        |  



Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets are as
follows (in thousands):



|                                     |  |           |          |   |      |   |          |  
|------------------------------------ |  | --------- | -------- | - | ---- | - | -------- | -
|                                     |  | April 30, |         
|                                     |  | 2005      |          |   | 2004 |  
|Deferred tax assets:                 |  |           |          |   |      |   |          |  
|Net operating loss carryforwards     |  | $         | 75,627   |   |      | $ | 94,816   |  
|Stock compensation                   |  |           | 8,011    |   |      |   | 8,206    |  
|Inventory reserves                   |  |           | 96       |   |      |   | 1,677    |  
|Restructuring reserves               |  |           | 1,408    |   |      |   | 2,203    |  
|Other accruals/reserves              |  |           | 2,848    |   |      |   | 2,241    |  
|Fixed assets                         |  |           | 1,720    |   |      |   | 806      |  
|Tax credits                          |  |           | 6,051    |   |      |   | 4,091    |  
|Capitalized research and development |  |           | 23,062   |   |      |   | 2,791    |  
|                                     |  |           |          |   |      |   |          |  
|Subtotal                             |  | $         | 118,823  |   |      | $ | 116,831  |  
|                                     |  |          
|Valuation allowance                  |  |           | (117,279 | ) |      |   | (116,077 | )
|                                     |  |           |          |   |      |   |          |  
|Total deferred tax assets            |  | $         | 1,544    |   |      | $ | 754      |  
|                                     |  |           |          |   |      |   |          |  
|Deferred tax liabilities:            |  |           |          |   |      |   |          |  
|Intangibles                          |  |           | (1,544   | ) |      |   | (754     | )
|                                     |  |           |          |   |      |   |          |  
|Total deferred tax liabilities       |  |           | (1,544   | ) |      |   | (754     | )
|                                     |  |          
|Net deferred tax assets              |  | $         |         |   |      | $ |         |  
|                                     |  |           |          |   |      |   |          |  



The Company has incurred losses from
its inception through April 30, 2004. Management believes that, based on the history of such losses and other factors, the weight of available evidence indicates that it is more likely than not that it will not be able to realize its deferred tax
assets. Therefore, a full valuation allowance has been recorded at April 30, 2005 and 2004. The valuation allowance increased (decreased) by $1.2 million, $1.9 million, and ($10.4) million during fiscal years 2005, 2004 and 2003, respectively.



As of April 30, 2005, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $204.5 million, which will expire in fiscal years ending in 2011 through 2025, if not utilized. The



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Company also had net operating loss carryforwards for state income tax purposes of approximately $110.5 million, which will expire in fiscal years ending in
2006 through 2015, if not utilized. The Company also had federal and California research and other tax credit carryforwards of approximately $7.4 million, which will expire in fiscal years 2012 through 2025, if not utilized.



Utilization of the Companys net operating loss and tax credit carryforwards may be
subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating loss and tax credit
carryforward before utilization. The events that may cause ownership changes in the Companys net operating loss include, but are not limited to, a cumulative stock ownership change of greater than 50.0% over a three year period.



The Companys deferred tax assets, which have been offset by the valuation allowance,
include deferred tax benefits associated with employee stock options and acquired net operating loss carryforwards. Deferred tax benefits associated with employee stock options of approximately $21.5 million will be credited to additional
paid-in-capital when realized. Deferred tax benefits associated with acquired net operating loss carryforwards of approximately $3.6 million, when realized, will first reduce goodwill and then non-current identifiable intangible assets.



Federal and state income taxes have not been provided on accumulated but undistributed
earnings of certain foreign subsidiaries aggregating approximately $0.8 million at April 30, 2005, as such earnings have been reinvested in the business. If such earnings were not permanently reinvested, a deferred tax liability of $35,000 would
have been required.



Note 9. Defined Contribution Benefit Plan



The Company has a defined contribution benefit plan under Section 401(k)
of the Internal Revenue Code, which covers substantially all United States employees. Eligible employees may contribute pre-tax amounts to the plan via payroll withholdings, subject to certain limitations. The Company does not match contributions by
plan participants.



Note 10. Commitments and Contingencies



Guarantees and Product Warranties



The Company applies the disclosure provisions of FASB interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others (FIN 45) to its agreements that contain guarantee or indemnification clauses. These disclosure
provisions expand those required by SFAS No. 5, Accounting for Contingencies, (SFAS No. 5) by requiring that guarantors disclose certain types of guarantees, even if the likelihood of requiring the guarantors performance is
remote. As of April 30, 2005, to the best of the Companys estimates, it has no liabilities under indemnification arrangements and guarantees, as applicable.



Lease Commitments



The Company leases certain facilities and equipment under non-cancelable operating leases. Certain of the Companys facility leases provide for periodic rent
increases based on the general rate of inflation and contain provisions which permit renewal at the end of the respective lease terms.



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Future minimum lease payments under non-cancelable operating leases with initial or remaining terms in excess of one year
are as follows (in thousands):



|                             |  |           |       |        |   |        |  |   |       
|---------------------------- |  | --------- | ----- | ------ | - | ------ |  | - | ------
|Year ending April 30,        |  | Abandoned |       | In Use |   | Total 
|2006                         |  | $         | 3,023 |        | $ | 1,621  |  | $ | 4,644 
|2007                         |  |           | 1,018 |        |   | 1,659  |  |   | 2,677 
|2008                         |  |           | 258   |        |   | 2,275  |  |   | 2,533 
|2009                         |  |           |      |        |   | 2,289  |  |   | 2,289 
|2010                         |  |           |      |        |   | 2,236  |  |   | 2,236 
|Thereafter                   |  |           |      |        |   | 718    |  |   | 718   
|                             |  |           |       |        |   |        |  |   |       
|Total minimum lease payments |  | $         | 4,299 |        | $ | 10,798 |  | $ | 15,097
|                             |  |           |       |        |   |        |  |   |       



Rent expense was $2.9 million, $2.6
million and $3.0 million for the years ended April 30, 2005, 2004 and 2003, respectively. Of the $4.3 million in total operating lease commitments for abandoned facilities, as summarized above, a reserve for $3.6 million has been provided and is
included in the captions Accrued restructuring reserve and Accrued restructuring reserve, less current portion in the accompanying consolidated balance sheet at April 30, 2005 and 2004. The remaining $0.7 million represents
estimated sublease income.



In April 2005, the Company executed a five-year
operating lease for a 117,000-square foot facility which will serve as the Companys headquarters in Sunnyvale, California. The lease commencement occurs in September 2005 and will extend for a term of five years from the commencement date.
Lease payments escalate annually and the total future minimum lease payments amount to $8.4 million over the lease term, excluding lease payment of $0.6 million for the first six months to be excused if the Company is not in default during the first
12 months of the lease term. A lessee improvement allowance of $1.2 million is provided to us to be used by June 30, 2006 and any unused portion of the allowance shall be waived and forfeited. As part of this agreement, the Company is required to
maintain a $0.4 million irrevocable standby letter of credit with a major financial institution as a form of security. This letter of credit provides for automatic annual extensions, without amendment, through the end of the lease term. Both
irrevocable standby letters of credit referred to above are classified as Restricted investments in the accompanying consolidated balance sheets as of April 30, 2005. In addition to the standby letter of credit discussed above, the
Company maintains a $1.5 million irrevocable standby letter of credit for a five-year operating lease related to a 46,000-square foot research and development facility in Sunnyvale, California. This letter of credit also extends automatically to
each succeeding calendar year through June 30, 2006, unless otherwise terminated in writing.



Purchase and Other Commitments



The
Company has 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 the Company in the
short-term and all amounts under these arrangements are due in fiscal 2006. The minimum obligation under these commitments at April 30, 2005 was $3.0 million.



Note 11. Litigation



IPO Allocation Litigation. Beginning on May 16, 2001, a series of putative securities class actions were filed against the firms that underwrote the Companys initial public offering, the Company, and some
of its officers and directors in the U.S. District Court for the Southern District of New York. These cases have been consolidated under the case captionedIn re CacheFlow, Inc. Initial Public Offering Securities Litigation., Civil Action No.
1-01-CV-5143. An additional putative securities class action has been filed in the United States District Court for the Southern District of Florida. The Court in the Florida case dismissed the Company and individual officers and directors from the
action without prejudice. The complaints in the New York and Florida cases generally allege that the underwriters obtained excessive and undisclosed commissions in connection with



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the allocation of shares of common stock in the Companys initial public offering, and maintained artificially high market prices through tie-in
arrangements which required customers to buy shares in the after-market at pre-determined prices. The complaints allege that the Company and its current and former officers and directors violated Sections 11 and 15 of the Securities Act of 1933, and
Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934, by making material false and misleading statements in the prospectus incorporated in the Companys Form S-1 Registration Statement filed
with the Securities and Exchange Commission in November 1999. Plaintiffs seek an unspecified amount of damages on behalf of persons who purchased the Companys stock between November 19, 1999 and December 6, 2000. On April 19, 2002, plaintiffs
filed an amended complaint. Various plaintiffs have filed similar actions asserting virtually identical allegations against over 300 other public companies, their underwriters, and their officers and directors arising out of each companys
public offering. The lawsuits against the Company, along with these other related securities class actions currently pending in the Southern District of New York, have been assigned to Judge Shira A. Scheindlin for coordinated pretrial proceedings
and are collectively captionedIn re Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. Defendants in these cases have filed omnibus motions to dismiss. On February 19, 2003, the Court denied in part and granted in part
the motion to dismiss filed on behalf of defendants, including the Company. The Courts order did not dismiss any claims against the Company. As a result, discovery may now proceed. The Companys officers and directors have been dismissed
without prejudice in this litigation. In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including the Company, was submitted to the Court for approval. The terms of the settlement, if approved would
dismiss and release all claims against participating defendants, including the Company. In exchange for this dismissal, D&O insurance carriers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants of at least $1.0
billion, and the issuer defendants would agree to an assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. The settlement is subject to a number of conditions, including court approval.
If the settlement does not occur, litigation against the Company would continue. The Company believes it has meritorious defenses and intends to defend the case vigorously.



SEC Investigations. The SEC has informed the Company of its investigation into trading in certain securities, including trading in
the Companys securities, prior to the Companys public announcement on May 27, 2004 of its financial results for the fourth quarter and fiscal year 2004 (the May 27, 2004 Announcement). The investigation is captioned In the
Matter of Trading in Certain Securities, H0-9818. To date the SEC has not identified the Company or any of its directors or executive officers as targets of its investigation, but has served subpoenas for information from the Company and for
testimony from certain officers. The Company is cooperating with the investigation. The SEC subsequently informed the Company that it is the subject of a formal order of private investigation captioned In the Matter of Blue Coat Systems,
Inc., HO-10096. The Company believes that the Commission is investigating whether certain present or former officers, directors, employees, affiliates or others made intentional or non-intentional selective disclosure of material nonpublic
information, traded in the Companys stock while in possession of such information, or communicated such information to others who thereafter traded in the Companys stock. The Company is cooperating with the SEC.



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



Derivative Litigation. On May 18, 2005, a purported shareholder derivative action was
filed in the Superior Court of California, Santa Clara County, alleging that certain of the Companys officers and directors violated their fiduciary duties to the Company. The complaint is based largely on the same factual allegations as in
the federal securities class action. Defendants intend to defend the case vigorously.



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



Infringement
Litigation. On August 1, 2001, Network Caching Technology L.L.C. (NCT) filed suit against the Company and others in the United States District Court for the Northern District of California, alleging infringement of certain patents owned
by NCT. The lawsuit was styled Network Caching Technology LLC vs. Novell, Inc. et al., Case No. CV-01-2079. On October 29, 2003, the Company and NCT entered into a settlement agreement by which the Company received a fully paid up license under the
NCT patents for all Company products and services and a full and complete release from any and all claims of liability for any actual or alleged past and present infringement of the NCT patents. As consideration for the license rights and release,
the Company paid a total of $1.1 million, expensed as a separate line item on the Companys statement of operations named Legal settlement. The Order of Dismissal regarding all causes of action between NCT and the Company was
entered November 14, 2003.



Periodically, the Company reviews the status of
each significant matter and assesses potential financial exposure. Because of the uncertainties related to the (i) determination of the probability of an unfavorable outcome and (ii) amount and range of loss in the event of an unfavorable outcome,
management is unable to make a reasonable estimate of the liability that could result from any pending litigation described above and no accrual was recorded in the Companys balance sheet as of April 30, 2005. As additional information becomes
available, the Company will reassess the probability and potential liability related to pending litigation, which could materially impact the Companys results of operations and financial position.



From time to time and in the ordinary course of business, the Company may be subject to
various other claims and litigation. Such claims could result in the expenditure of significant financial and other resources.



Note 12. Geographic and Product Category Information Reporting



The Company operates in one segment to design, develop, market and support proxy appliances. The chief operating decision maker, the Companys chief executive
officer, allocates resources and makes operating decisions based on financial data consistent with the presentation in the accompanying consolidated financial statements. The Companys revenue consists of two product categories: product and
service. Total international revenue consists of sales from the Companys U.S. operations to non-affiliated customers in other geographic regions. During fiscal 2005, 2004 and 2003, there were no intra-company sales, and no material long-lived
assets were located in the Companys foreign subsidiaries.



Operating
decisions regarding the costs of the Companys products and services are made with information that is consistent with the presentation in the accompanying consolidated statements of operations. Therefore, the Company currently believes it is
impractical to separately present such costs.



Net revenue is attributed to
geographic areas based on the location of the customers. The following is a summary of net revenue by geographic area (in thousands):



|                  |  |                      |        |   |       |   |   |      |        |  |       |   |  |   |        |  |       |  
|----------------- |  | -------------------- | ------ | - | ----- | - | - | ---- | ------ |  | ----- | - |  | - | ------ |  | ----- | -
|                  |  | Year Ended April 30, |       
|                  |  | 2005                 |        |   | 2004  |   |   | 2003 |       
|                  |  | $                    |        | % |       |   | $ |      | %      |  |       | $ |  | % |       
|North America     |  | $                    | 48,951 |   | 50.9  | % |   | $    | 36,955 |  | 55.9  | % |  | $ | 23,774 |  | 52.0  | %
|EMEA              |  |                      | 30,148 |   | 31.3  |   |   |      | 19,608 |  | 29.7  |   |  |   | 12,839 |  | 28.0  |  
|Asia              |  |                      | 17,087 |   | 17.8  |   |   |      | 9,505  |  | 14.4  |   |  |   | 9,125  |  | 20.0  |  
|                  |  |                      |        |   |       |   |   |      |        |  |       |   |  |   |        |  |       |  
|Total net revenue |  | $                    | 96,186 |   | 100.0 | % |   | $    | 66,068 |  | 100.0 | % |  | $ | 45,738 |  | 100.0 | %
|                  |  |                      |        |   |       |   |   |      |        |  |       |   |  |   |        |  |       |  



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The following is a summary of net revenue by product category (in thousands):



|                  |  |                      |        |   |       |   |   |      |        |  |       |   |  |   |        |  |       |  
|----------------- |  | -------------------- | ------ | - | ----- | - | - | ---- | ------ |  | ----- | - |  | - | ------ |  | ----- | -
|                  |  | Year Ended April 30, |       
|                  |  | 2005                 |        |   | 2004  |   |   | 2003 |       
|                  |  | $                    |        | % |       |   | $ |      | %      |  |       | $ |  | % |       
|Product           |  | $                    | 78,495 |   | 81.6  | % |   | $    | 52,251 |  | 79.1  | % |  | $ | 35,827 |  | 78.3  | %
|Service           |  |                      | 17,691 |   | 18.4  |   |   |      | 13,817 |  | 20.9  |   |  |   | 9,911  |  | 21.7  |  
|                  |  |                      |        |   |       |   |   |      |        |  |       |   |  |   |        |  |       |  
|Total net revenue |  | $                    | 96,186 |   | 100.0 | % |   | $    | 66,068 |  | 100.0 | % |  | $ | 45,738 |  | 100.0 | %
|                  |  |                      |        |   |       |   |   |      |        |  |       |   |  |   |        |  |       |  



Note 13. Selected Quarterly
Financial Data (Unaudited)



A summary of the Companys quarterly
consolidated financial results is as follows (in thousands, except per share data):



|                                           |  |                    |        |   |                     |   |        |                     |  |                   |        |  |   |       
|------------------------------------------ |  | ------------------ | ------ | - | ------------------- | - | ------ | ------------------- |  | ----------------- | ------ |  | - | ------
|                                           |  | Three Months Ended
|                                           |  | July 31,2004 (1)   |        |   | October 31,2004 (1) |   |        | January 31,2005 (2) |  | April 30,2005 (3)
|Net revenue                                |  | $                  | 21,124 |   |                     | $ | 21,928 |                     |  | $                 | 24,749 |  | $ | 28,385
|Gross profit                               |  |                    | 14,205 |   |                     |   | 14,434 |                     |  |                   | 16,789 |  |   | 19,456
|Net income                                 |  |                    | 1,680  |   |                     |   | 607    |                     |  |                   | 267    |  |   | 2,821 
|Basic net income per common share          |  | $                  | 0.15   |   |                     | $ | 0.05   |                     |  | $                 | 0.02   |  | $ | 0.23  
|Diluted net income per common share        |  | $                  | 0.13   |   |                     | $ | 0.05   |                     |  | $                 | 0.02   |  | $ | 0.21  
|                                           | 
|                                           |  | Three Months Ended
|                                           |  | July 31,2003       |        |   | October 31,2003 (4) |   |        | January 31,2004 (5) |  | April 30,2004 (6)
|Net revenue                                |  | $                  | 12,410 |   |                     | $ | 13,418 |                     |  | $                 | 19,114 |  | $ | 21,126
|Gross profit                               |  |                    | 8,268  |   |                     |   | 8,865  |                     |  |                   | 13,537 |  |   | 14,160
|Net income (loss)                          |  |                    | (1,056 | ) |                     |   | (2,644 | )                   |  |                   | 1,962  |  |   | 1,390 
|Basic net income (loss) per common share   |  | $                  | (0.12  | ) |                     | $ | (0.27  | )                   |  | $                 | 0.19   |  | $ | 0.13  
|Diluted net income (loss) per common share |  | $                  | (0.12  | ) |                     | $ | (0.27  | )                   |  | $                 | 0.16   |  | $ | 0.11  

---

|(1) | The first and second quarters of fiscal 2005 results include a $0.3 million stock compensation expense each quarter related to the amortization of deferred stock compensation and
intangible asset amortization of $0.2 million each quarter, both related to the Ositis acquistion.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The third quarter of fiscal 2005 results include a $1.0 million stock compensation expense related to the modification of stock option grants associated with a severance agreement
with the former CFO and intangible asset amortization of $0.2 million in connection with the Cerberian acquisition.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The fourth quarter of fiscal 2005 results include a $0.7 million stock compensation reversal related to previously recorded expense as a result of revising the severance agreement
with the former CFO. Amortization of Cerberian intangible assets for $0.2 million was also recorded.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The second quarter of fiscal 2004 results include a $1.1 million legal settlement with Network Caching Technology L.L.C. and restructuring expense of $0.9 million for abandoned
lease space.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | The third quarter of fiscal 2004 results include a $0.2 million write-off of acquired in-process technology, intangible asset amortization of $0.2 million and deferred stock
compensation of $0.3 million in connection with the Ositis acquisition.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | The fourth quarter of fiscal 2004 results include a $0.6 million restructuring expense as a result of increasing the accrual for abandoned lease space, intangible asset amortization
of $0.2 million and amortization of deferred stock compensation of $0.3 million in connection with the Ositis acquisition.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders of Blue Coat Systems, Inc.



We have audited the accompanying consolidated balance sheets of Blue Coat Systems, Inc. as of April 30, 2005 and 2004, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three
years in the period ended April 30, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of 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, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended April 30, 2005, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the
information set forth herein.



We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Blue Coat Systems, Inc. internal control over financial reporting as of April 30, 2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 11, 2005 expressed an unqualified opinion thereon.



/s/ ERNST & YOUNG LLP



San Jose, California

July 11, 2005



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders of Blue Coat Systems, Inc.



We have audited managements assessment, included in the accompanying Management Report
on Internal Control Over Financial Reporting, that Blue Coat Systems, Inc. maintained effective internal control over financial reporting as of April 30, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Blue Coat Systems Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our
audit.



We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.



In our opinion, managements assessment
that Blue Coat Systems, Inc. maintained effective internal control over financial reporting as of April 30, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Blue Coat Systems Inc. maintained, in all
material respects, effective internal control over financial reporting as of April 30, 2005, based on the COSO criteria.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the fiscal 2005 consolidated financial statements
and our report dated July 11, 2005 expressed an unqualified opinion thereon.



/s/ ERNST & YOUNG LLP



San Jose, California

July 11, 2005



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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.



None.



Item 9A. Controls and Procedures



Attached as
exhibits to this Annual Report on Form 10-K are certifications of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), which are required pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as
amended (the Exchange Act). The Controls and Procedures section of this Annual Report on Form 10-K includes information concerning the controls and controls evaluation referenced in the certifications. The report of Ernst
& Young LLP, our independent registered public accounting firm, is set forth at the end of Part II, Item 8 of this Annual Report on Form 10-K. This report addresses Ernst & Young LLPs audit of our internal control over financial
reporting and of managements assessment of internal control over financial reporting set forth below. This section of the Annual Report on Form 10-K should be read in conjunction with the certifications and the report of Ernst & Young LLP
for a more complete understanding of the matters presented.



Evaluation of
Disclosure Controls



We evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. This controls evaluation was performed under the supervision and with the participation of management, including our CEO and
CFO. Disclosure controls are procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported
within the time periods specified by the SEC. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure. Our quarterly evaluation of disclosure controls includes an evaluation of some components of our internal control over financial reporting. We also perform a separate annual evaluation of internal control over financial
reporting for the purpose of providing the management report below.



The
evaluation of our disclosure controls included a review of their objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Annual Report on Form 10-K. In the course of the
controls evaluation, we reviewed identified data errors or control problems and sought to confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis
so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the disclosure controls can be reported in our periodic reports on Form 10-Q and Form 10-K. Many of the components of our disclosure controls are also
evaluated on an ongoing basis by our internal finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and to modify them as necessary. We intend to maintain the disclosure controls as
dynamic systems that we adjust as circumstances merit.



Based on the controls
evaluation, our CEO and CFO have concluded that, subject to the limitations noted in this Part II, Item 9A, as of the end of the period covered by this Form 10-K, our disclosure controls were effective to provide reasonable assurance that
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to the Company is made known to management,
including the CEO and the CFO, particularly during the time when our periodic reports are being prepared.



Management Report on Internal Control over Financial Reporting



Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with
the participation of our management, including our CEO and CFO, we conducted an evaluation of the



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effectiveness of our internal control over financial reporting as of April 30, 2005 based on the guidelines established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of April 30,
2005 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.



Managements assessment of the effectiveness of our internal control over financial
reporting as of April 30, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included at the end of Part II, Item 8 of this Annual Report on Form 10-K.



Limitations on Effectiveness of Controls



Our management, including the CEO and the CFO, do not expect that our disclosure controls or
our internal controls over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur
and not be detected.



Item 9B. Other Information



None



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PART III.



Item 10. Directors and Executive Officers of the Registrant.



Executives of the Registrant



See the
information set forth in the section entitled Proposal No. 1  Election of Directors, Other Information  Executive Officers and Compliance with Section 16(a) of the Exchange Act in the 2005 Proxy
Statement, which is incorporated herein by reference.



Item 11. Executive Compensation.



See the
information set forth in the sections entitled Equity Compensation Plan Information and Executive Compensation and Related Information in the 2005 Proxy Statement, which are incorporated herein by reference.



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.



See the information set forth in the section entitled Security Ownership of Certain Beneficial Owners and Management in the 2005 Proxy Statement, which is
incorporated herein by reference.



Item 13. Certain Relationships and Related Transactions.



See the information set forth in the section entitled Certain Relationships and Related Transactions in the 2005 Proxy Statement, which is incorporated herein by reference.



Item 14. Principal Accountant Fees and Services.



See the information set forth in the section entitled Principal Accountant Fees and Services in the 2005 Proxy Statement, which is incorporated herein by reference.



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PART IV.



Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K



| | (a) | Financial Statements and Financial Statement Schedules
| | --- | ------------------------------------------------------



1. Financial Statements



See Item 8 of this Annual Report on Form 10-K



2. Financial Statement Schedules



The following financial statement schedule of Blue Coat Systems, Inc. is filed as part of this Report and should be read in conjunction with the
Financial Statements of Blue Coat Systems, Inc.



Schedule II                 Valuation and Qualifying Accounts



Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or
is shown in the financial statements or notes thereto.



3.
Exhibits



|       |  |                                                                                                                                                                                                                                                                                                                                           
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                                                                                                               
|2.1    |  | Agreement and Plan of Merger and Reorganization, dated as of October 28, 2003, by and among Blue Coat Systems, Inc., Riga Corp., Ositis Software, Inc., Vilis Ositis and Liana Abele (which is
incorporated herein by reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the Commission on November 28, 2003)              
|       | 
|2.2    |  | Agreement and Plan of Merger and Reorganization, dated as of July 16, 2004, by and among Blue Coat Systems, Inc., Utah Merger Corporation, Cerberian, Inc., and Scott Petty (which is
incorporated herein by reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the Commission on November 23, 2004)                       
|       | 
|2.3    |  | Amendment Number 1 to Agreement and Plan of Merger and Reorganization, dated as of October 5, 2004, by and among Blue Coat Systems, Inc., Utah Merger Corporation, Cerberian, Inc., and Scott
Petty (which is incorporated herein by reference to Exhibit 2.2 of Form 8-K filed by the Registrant with the Commission on November 23, 2004
|       | 
|3.1    |  | Amended and Restated Certificate of Incorporation of the Registrant (which is incorporated herein by reference to Exhibit 3.2 to the Registrants Registration Statement on Form S-1 No.
333-87997)                                                                                                                                       
|       | 
|3.2    |  | Amended and Restated Bylaws of the Registrant (which is incorporated herein by reference to Exhibit 3.4 to the Registrants Registration Statement on Form S-1 No.
333-87997)                                                                                                                                                             
|       | 
|3.3    |  | Certificate of Ownership and Merger of Blue Coat Systems, Inc. with and into Cacheflow Inc. (which is incorporated herein by reference to Exhibit 3.3 of Form 10-Q filed by the Registrant with
the Commission on December 16, 2002)                                                                                                      
|       | 
|3.4    |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of Blue Coat Systems, Inc. dated September 12, 2002 (which is incorporated herein by reference to Exhibit 3.4 of
Form 10-Q filed by the Registrant with the Commission on December 16, 2002)                                                                
|       | 
|3.5    |  | Certificate of Amendment to Certificate of Incorporation of Cacheflow International Inc., changing its name from Cacheflow International Inc. to Blue Coat Systems International Inc. (which is
incorporated herein by reference to Exhibit 3.5 of Form 10-Q filed by the Registrant with the Commission on December 16, 2002)            



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|       |  |                                                                                                                                                                                                                                                       
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                           
|4.1    |  | Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5                                                                                                                                                                                              
|       | 
|4.2    |  | Specimen Certificate of the Registrants Common Stock (which is incorporated herein by reference to Exhibit 4.3 of Form 10-K filed by the Registrant with the Commission on July 29,
2003)                                                            
|       | 
|10.1   |  | Form of Indemnification Agreement (which is incorporated herein by reference to Exhibit 10.1 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                    
|       | 
|10.2   |  | 1996 Stock Option Plan (which is incorporated herein by reference to Exhibit 10.2 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                               
|       | 
|10.3   |  | 1999 Stock Incentive Plan (which is incorporated herein by reference to Exhibit 10.3 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                            
|       | 
|10.4   |  | 1999 Director Option Plan (which is incorporated herein by reference to Exhibit 10.4 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                            
|       | 
|10.5   |  | 1999 Employee Stock Purchase Plan (which is incorporated herein by reference to Exhibit 10.5 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                    
|       | 
|10.6   |  | Commercial lease agreement between Registrant, the Arrillaga Foundation and the Perry Foundation, dated July 14, 1998 (which is incorporated herein by reference to Exhibit 10.6 to the
Registrants Registration Statement on Form S-1 No. 333-87997)
|       | 
|10.7   |  | Commercial lease agreement between Registrant and Zetron Properties, Inc., dated April 20, 2000 (which is incorporated herein by reference to Exhibit 10.7 of Form 10-K filed by the Registrant
with the Commission on July 16, 2001)                 
|       | 
|10.8   |  | Commercial lease agreement between Blue Coat Systems Canada and Wiebe Property Corporation Ltd., dated May 1, 1999 (which is incorporated herein by reference to Exhibit 10.8 to the
Registrants Registration Statement on Form S-1 No. 333-87997)   
|       | 
|10.9   |  | Offer Letter with Brian NeSmith (which is incorporated herein by reference to Exhibit 10.9 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                      
|       | 
|10.10  |  | Offer Letter with Alan Robin (which is incorporated herein by reference to Exhibit 10.10 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                        
|       | 
|10.11  |  | Offer Letter with John Scharber (which is incorporated herein by reference to Exhibit 10.13 of Form 10-K filed by the Registrant with the Commission on July 16, 2001)                                                                                
|       | 
|10.12  |  | Offer Letter with Robert Verheecke (which is incorporated herein by reference to Exhibit 10.14 of Form 10-K filed by the Registrant with the Commission on July 16, 2001)                                                                             
|       | 
|10.13  |  | Consulting Agreement with Marc Andreessen (which is incorporated herein by reference to Exhibit 10.16 to the Registrants Registration Statement on Form S-1 No.
333-87997)                                                                           
|       | 
|10.14  |  | 2000 Supplemental Stock Option Plan (which is incorporated herein by reference to Exhibit 99.1 of Form S-8 filed by the Registrant with the Commission on April 11, 2000)                                                                             
|       | 
|10.15  |  | Michael Malcolm Resignation Agreement (which is incorporated herein by reference to Exhibit 10.18 of Form 10-Q filed by the Registrant with the Commission on December 15,
2000)                                                                      
|       | 
|10.16  |  | SpringBank Networks, Inc. 2000 Stock Incentive Plan (which is incorporated herein by reference to Exhibit 99.2 of Form S-8 filed by the Registrant with the Commission on September 8,
2000)                                                          



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|       |  |                                                                                                                                                                                                                                                                                                                                             
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                                                                                                                 
|10.17  |  | Entera, Inc. 1999 Equity Incentive Plan (which is incorporated herein by reference to Exhibit 99.1 of Form S-8 filed by the Registrant with the Commission on December 18,
2000)                                                                                                                                                            
|       | 
|10.18  |  | Entera, Inc. 2000 Equity Incentive Plan (which is incorporated herein by reference to Exhibit 99.2 of Form S-8 filed by the Registrant with the Commission on December 18,
2000)                                                                                                                                                            
|       | 
|10.19  |  | Commercial lease agreement between Registrant and Sunnyvale VIII Trust, dated March 30, 2001 (which is incorporated herein by reference to Exhibit 10.22 of Form 10-K filed by the Registrant
with the Commission on July 16, 2001)                                                                                                         
|       | 
|10.20  |  | Commercial sublease agreement between Registrant and Kuokoa Networks, Inc., dated July 10, 2002 and First Amendment to Sublease between Registrant and Kuokoa Networks, Inc., dated July 16,
2002 (which is incorporated herein by reference to Exhibit 10.22 of Form 10-Q filed by the Registrant with the Commission on December 16, 2002)
|       | 
|10.21  |  | Commercial sublease agreement between Registrant and Merit Financial, Inc., dated October 25, 2002 (which is incorporated herein by reference to Exhibit 10.23 of Form 10-Q filed by the
Registrant with the Commission on December 16, 2002)                                                                                               
|       | 
|10.22  |  | Offer Letter with David de Simone (which is incorporated herein by reference to Exhibit 10.24 of Form 10-Q filed by the Registrant with the Commission on December 12, 2003)                                                                                                                                                                
|       | 
|10.23  |  | Common Stock Purchase Agreement dated September 18, 2003 (which is incorporated herein by reference to Exhibit 10.1 of Form 8-K filed by the Registrant with the Commission on September 22,
2003)                                                                                                                                          
|       | 
|10.24  |  | Registration Rights Agreement dated September 18, 2003 (which is incorporated herein by reference to Exhibit 10.2 of Form 8-K filed by the Registrant with the Commission on September 22,
2003)                                                                                                                                            
|       | 
|10.25  |  | Technology License And Settlement Agreement dated October 29, 2003 by and between Network Caching Technology L.L.C and Blue Coat Systems, Inc. (which is incorporated herein by reference to
Exhibit 10.27 of Form 10-Q filed by the Registrant with the Commission on December 12, 2003.)                                                  
|       | 
|10.26  |  | Commercial lease agreement between Registrant and 525 Almanor LLC, dated March 9, 2004 (which is incorporated herein by reference to Exhibit 10.28 of Form 10-K filed by the Registrant with
the Commission on July 14, 2004)                                                                                                               
|       | 
|10.27  |  | Source Code License & Services Agreement, effective August 12, 2004, by and between Blue Coat Systems, Inc. and Flowerfire, Inc. (which is incorporated herein by reference to Exhibit 10.1
of Form 10-Q filed by the Registrant with the Commission on September 9, 2004)                                                                  
|       | 
|10.28  |  | Commercial sublease agreement between Registrant and Infoblox Inc., dated October 7, 2004 (which is incorporated herein by reference to Exhibit 10.4 of Form 10-Q filed by the Registrant with
the Commission on December 9, 2004)                                                                                                          
|       | 
|10.29  |  | Employment Agreement between Blue Coat Systems, Inc. and Robert Verheecke dated as of November 4, 2004 (which is incorporated herein by reference to Exhibit 10.1 of Form 10-Q filed by the
Registrant with the Commission on December 9, 2004)                                                                                             
|       | 
|10.30  |  | Form of Notice of Grant of Stock Option and Stock Option Agreement used to evidence options granted under the Blue Coat Systems, Inc. 1999 Stock Incentive Plan (which is incorporated herein
by reference to Exhibit 10.2 of Form 10-Q filed by the Registrant with the Commission on December 9, 2004)                                    



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|       |  |                                                                                                                                                                                                                                                                                           
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                                                               
|10.31  |  | Triple Net Space Lease between Mary Avenue Office LLC as Lessor and Blue Coat Systems, Inc., a Delaware corporation, as Lessee, dated April 21, 2005 (which is incorporated herein by reference
to Exhibit 10.1 of Form 8-K filed by the Registrant with the Commission on April 26, 2005)
|       | 
|10.32  |  | Employment Agreement between Blue Coat Systems, Inc. and Kevin Royal dated as of March 31, 2005                                                                                                                                                                                           
|       | 
|10.33  |  | Separation Agreement between Blue Coat Systems, Inc. and Robert Verheecke dated as of April 29, 2005                                                                                                                                                                                      
|       | 
|14.1   |  | Code of Business Conduct, adopted by the Board of Directors of Blue Coat Systems, Inc. on November 16, 2004 (which is incorporated herein by reference to Exhibit 14.1 of Form 8-K filed by the
Registrant with the Commission on November 23, 2004)                                      
|       | 
|21.1   |  | Subsidiaries                                                                                                                                                                                                                                                                              
|       | 
|23.1   |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                  
|       | 
|31.1   |  | Certification of Brian NeSmith                                                                                                                                                                                                                                                            
|       | 
|31.2   |  | Certification of Kevin Royal                                                                                                                                                                                                                                                              
|       | 
|32.1   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                    



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|              |  |                         |  |                                                
|------------- |  | ----------------------- |  | -----------------------------------------------
|              |  | BLUE COAT SYSTEMS, INC.
|              |  | (Registrant)           
|              |  |                        
|July 12, 2005 |  | By:                     |  | /s/ BRIAN M. NESMITH                           
|              |  |                         |  | Brian M. NeSmith                               
|              |  |                         |  | President, Chief Executive Officer and Director



KNOW ALL PERSONS BY
THESE PRESENTS, that each person whose signature appears below constitutes and appoints Brian M. NeSmith and Kevin Royal, or either of them, each with the power of substitution, his attorney-in-fact, to sign any amendments to this Form 10-K, and to
file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.



Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:



|                                         |  |                                                                                             |  |              
|---------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | -------------
|Signature                                |  | Title                                                                                       |  | Date         
|/s/ BRIAN M. NESMITHBrian M. NeSmith     |  | President, Chief Executive Officer and Director (Principal Executive Officer)               |  | July 12, 2005
|                                         |  |                                                                                            
|/s/ KEVIN ROYALKevin Royal               |  | Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) |  | July 12, 2005
|                                         |  |                                                                                            
|/s/ MARC ANDREESSENMarc Andreessen       |  | Director                                                                                    |  | July 12, 2005
|                                         |  |                                                                                            
|/s/ JAY SHIVELEYJay Shiveley             |  | Director                                                                                    |  | July 12, 2005
|                                         |  |                                                                                            
|/s/ DAVE HANNADave
Hanna                 |  | Director                                                                                    |  | July 12, 2005
|                                         |  |                                                                                            
|/s/ ANDREW S. RACHLEFFAndrew S. Rachleff |  | Director                                                                                    |  | July 12, 2005
|                                         |  |                                                                                            
|/s/ JAMES A. BARTHJames A. Barth         |  | Director                                                                                    |  | July 12, 2005



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EXHIBIT INDEX



|       |  |                                                                                                                                                                                                                                                                                                                                           
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                                                                                                               
|2.1    |  | Agreement and Plan of Merger and Reorganization, dated as of October 28, 2003, by and among Blue Coat Systems, Inc., Riga Corp., Ositis Software, Inc., Vilis Ositis and Liana Abele (which is
incorporated herein by reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the Commission on November 28, 2003)              
|       | 
|2.2    |  | Agreement and Plan of Merger and Reorganization, dated as of July 16, 2004, by and among Blue Coat Systems, Inc., Utah Merger Corporation, Cerberian, Inc., and Scott Petty (which is
incorporated herein by reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the Commission on November 23, 2004)                       
|       | 
|2.3    |  | Amendment Number 1 to Agreement and Plan of Merger and Reorganization, dated as of October 5, 2004, by and among Blue Coat Systems, Inc., Utah Merger Corporation, Cerberian, Inc., and Scott
Petty (which is incorporated herein by reference to Exhibit 2.2 of Form 8-K filed by the Registrant with the Commission on November 23, 2004
|       | 
|3.1    |  | Amended and Restated Certificate of Incorporation of the Registrant (which is incorporated herein by reference to Exhibit 3.2 to the Registrants Registration Statement on Form S-1 No.
333-87997)                                                                                                                                       
|       | 
|3.2    |  | Amended and Restated Bylaws of the Registrant (which is incorporated herein by reference to Exhibit 3.4 to the Registrants Registration Statement on Form S-1 No.
333-87997)                                                                                                                                                             
|       | 
|3.3    |  | Certificate of Ownership and Merger of Blue Coat Systems, Inc. with and into Cacheflow Inc. (which is incorporated herein by reference to Exhibit 3.3 of Form 10-Q filed by the Registrant with
the Commission on December 16, 2002)                                                                                                      
|       | 
|3.4    |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of Blue Coat Systems, Inc. dated September 12, 2002 (which is incorporated herein by reference to Exhibit 3.4 of
Form 10-Q filed by the Registrant with the Commission on December 16, 2002)                                                                
|       | 
|3.5    |  | Certificate of Amendment to Certificate of Incorporation of Cacheflow International Inc., changing its name from Cacheflow International Inc. to Blue Coat Systems International Inc. (which is
incorporated herein by reference to Exhibit 3.5 of Form 10-Q filed by the Registrant with the Commission on December 16, 2002)            
|       | 
|4.1    |  | Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5                                                                                                                                                                                                                                                                                  
|       | 
|4.2    |  | Specimen Certificate of the Registrants Common Stock (which is incorporated herein by reference to Exhibit 4.3 of Form 10-K filed by the Registrant with the Commission on July 29,
2003)                                                                                                                                                
|       | 
|10.1   |  | Form of Indemnification Agreement (which is incorporated herein by reference to Exhibit 10.1 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                                                                                                        
|       | 
|10.2   |  | 1996 Stock Option Plan (which is incorporated herein by reference to Exhibit 10.2 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                                                                                                                   
|       | 
|10.3   |  | 1999 Stock Incentive Plan (which is incorporated herein by reference to Exhibit 10.3 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                                                                                                                
|       | 
|10.4   |  | 1999 Director Option Plan (which is incorporated herein by reference to Exhibit 10.4 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                                                                                                                
|       | 
|10.5   |  | 1999 Employee Stock Purchase Plan (which is incorporated herein by reference to Exhibit 10.5 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                                                                                                        
|       | 
|10.6   |  | Commercial lease agreement between Registrant, the Arrillaga Foundation and the Perry Foundation, dated July 14, 1998 (which is incorporated herein by reference to Exhibit 10.6 to the
Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                    



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|       |  |                                                                                                                                                                                                                                                                                                                                             
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                                                                                                                 
|10.7   |  | Commercial lease agreement between Registrant and Zetron Properties, Inc., dated April 20, 2000 (which is incorporated herein by reference to Exhibit 10.7 of Form 10-K filed by the Registrant
with the Commission on July 16, 2001)                                                                                                       
|       | 
|10.8   |  | Commercial lease agreement between Blue Coat Systems Canada and Wiebe Property Corporation Ltd., dated May 1, 1999 (which is incorporated herein by reference to Exhibit 10.8 to the
Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                         
|       | 
|10.9   |  | Offer Letter with Brian NeSmith (which is incorporated herein by reference to Exhibit 10.9 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                                                                                                            
|       | 
|10.10  |  | Offer Letter with Alan Robin (which is incorporated herein by reference to Exhibit 10.10 to the Registrants Registration Statement on Form S-1 No. 333-87997)                                                                                                                                                                              
|       | 
|10.11  |  | Offer Letter with John Scharber (which is incorporated herein by reference to Exhibit 10.13 of Form 10-K filed by the Registrant with the Commission on July 16, 2001)                                                                                                                                                                      
|       | 
|10.12  |  | Offer Letter with Robert Verheecke (which is incorporated herein by reference to Exhibit 10.14 of Form 10-K filed by the Registrant with the Commission on July 16, 2001)                                                                                                                                                                   
|       | 
|10.13  |  | Consulting Agreement with Marc Andreessen (which is incorporated herein by reference to Exhibit 10.16 to the Registrants Registration Statement on Form S-1 No.
333-87997)                                                                                                                                                                 
|       | 
|10.14  |  | 2000 Supplemental Stock Option Plan (which is incorporated herein by reference to Exhibit 99.1 of Form S-8 filed by the Registrant with the Commission on April 11, 2000)                                                                                                                                                                   
|       | 
|10.15  |  | Michael Malcolm Resignation Agreement (which is incorporated herein by reference to Exhibit 10.18 of Form 10-Q filed by the Registrant with the Commission on December 15,
2000)                                                                                                                                                            
|       | 
|10.16  |  | SpringBank Networks, Inc. 2000 Stock Incentive Plan (which is incorporated herein by reference to Exhibit 99.2 of Form S-8 filed by the Registrant with the Commission on September 8,
2000)                                                                                                                                                
|       | 
|10.17  |  | Entera, Inc. 1999 Equity Incentive Plan (which is incorporated herein by reference to Exhibit 99.1 of Form S-8 filed by the Registrant with the Commission on December 18,
2000)                                                                                                                                                            
|       | 
|10.18  |  | Entera, Inc. 2000 Equity Incentive Plan (which is incorporated herein by reference to Exhibit 99.2 of Form S-8 filed by the Registrant with the Commission on December 18,
2000)                                                                                                                                                            
|       | 
|10.19  |  | Commercial lease agreement between Registrant and Sunnyvale VIII Trust, dated March 30, 2001 (which is incorporated herein by reference to Exhibit 10.22 of Form 10-K filed by the Registrant
with the Commission on July 16, 2001)                                                                                                         
|       | 
|10.20  |  | Commercial sublease agreement between Registrant and Kuokoa Networks, Inc., dated July 10, 2002 and First Amendment to Sublease between Registrant and Kuokoa Networks, Inc., dated July 16,
2002 (which is incorporated herein by reference to Exhibit 10.22 of Form 10-Q filed by the Registrant with the Commission on December 16, 2002)
|       | 
|10.21  |  | Commercial sublease agreement between Registrant and Merit Financial, Inc., dated October 25, 2002 (which is incorporated herein by reference to Exhibit 10.23 of Form 10-Q filed by the
Registrant with the Commission on December 16, 2002)                                                                                               
|       | 
|10.22  |  | Offer Letter with David de Simone (which is incorporated herein by reference to Exhibit 10.24 of Form 10-Q filed by the Registrant with the Commission on December 12, 2003)                                                                                                                                                                
|       | 
|10.23  |  | Common Stock Purchase Agreement dated September 18, 2003 (which is incorporated herein by reference to Exhibit 10.1 of Form 8-K filed by the Registrant with the Commission on September 22,
2003)                                                                                                                                          
|       | 
|10.24  |  | Registration Rights Agreement dated September 18, 2003 (which is incorporated herein by reference to Exhibit 10.2 of Form 8-K filed by the Registrant with the Commission on September 22,
2003)                                                                                                                                            



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|       |  |                                                                                                                                                                                                                                                                                                         
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                                                                             
|10.25  |  | Technology License And Settlement Agreement dated October 29, 2003 by and between Network Caching Technology L.L.C and Blue Coat Systems, Inc. (which is incorporated herein by reference to
Exhibit 10.27 of Form 10-Q filed by the Registrant with the Commission on December 12, 2003)               
|       | 
|10.26  |  | Commercial lease agreement between Registrant and 525 Almanor LLC, dated March 9, 2004 (which is incorporated herein by reference to Exhibit 10.28 of Form 10-K filed by the Registrant with
the Commission on July 14, 2004)                                                                           
|       | 
|10.27  |  | Source Code License & Services Agreement, effective August 12, 2004, by and between Blue Coat Systems, Inc. and Flowerfire, Inc. (which is incorporated herein by reference to Exhibit 10.1
of Form 10-Q filed by the Registrant with the Commission on September 9, 2004)                              
|       | 
|10.28  |  | Commercial sublease agreement between Registrant and Infoblox Inc., dated October 7, 2004 (which is incorporated herein by reference to Exhibit 10.4 of Form 10-Q filed by the Registrant with
the Commission on December 9, 2004)                                                                      
|       | 
|10.29  |  | Employment Agreement between Blue Coat Systems, Inc. and Robert Verheecke dated as of November 4, 2004 (which is incorporated herein by reference to Exhibit 10.1 of Form 10-Q filed by the
Registrant with the Commission on December 9, 2004)                                                         
|       | 
|10.30  |  | Form of Notice of Grant of Stock Option and Stock Option Agreement used to evidence options granted under the Blue Coat Systems, Inc. 1999 Stock Incentive Plan (which is incorporated herein
by reference to Exhibit 10.2 of Form 10-Q filed by the Registrant with the Commission on December 9, 2004)
|       | 
|10.31  |  | Triple Net Space Lease between Mary Avenue Office LLC as Lessor and Blue Coat Systems, Inc., a Delaware corporation, as Lessee, dated April 21, 2005 (which is incorporated herein by reference
to Exhibit 10.1 of Form 8-K filed by the Registrant with the Commission on April 26, 2005)              
|       | 
|10.32  |  | Employment Agreement between Blue Coat Systems, Inc. and Kevin Royal dated as of March 31, 2005                                                                                                                                                                                                         
|       | 
|10.33  |  | Separation Agreement between Blue Coat Systems, Inc. and Robert Verheecke dated as of April 29, 2005                                                                                                                                                                                                    
|       | 
|14.1   |  | Code of Business Conduct, adopted by the Board of Directors of Blue Coat Systems, Inc. on November 16, 2004 (which is incorporated herein by reference to Exhibit 14.1 of Form 8-K filed by the
Registrant with the Commission on November 23, 2004                                                     
|       | 
|21.1   |  | Subsidiaries                                                                                                                                                                                                                                                                                            
|       | 
|23.1   |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                
|       | 
|31.1   |  | Certification of Brian NeSmith                                                                                                                                                                                                                                                                          
|       | 
|31.2   |  | Certification of Kevin Royal                                                                                                                                                                                                                                                                            
|       | 
|32.1   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                  



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##### Table of Contents

Schedule II



BLUE COAT SYSTEMS,
INC.



VALUATION AND QUALIFYING ACCOUNTS



Allowance for Doubtful Accounts and Sales Returns



|                     |  |                              |           |                                              |   |          |            |  |   |                        |   |  |   |        
|-------------------- |  | ---------------------------- | --------- | -------------------------------------------- | - | -------- | ---------- |  | - | ---------------------- | - |  | - | -------
|Year Ended April 30, |  | Balance atBeginning ofPeriod |           | Additions - (Reductions) toCosts andExpenses |   |          | Deductions |  |   | Balance atEnd ofPeriod
|2003                 |  | $                            | 2,250,000 |                                              | $ | (52,000  | )          |  | $ | (1,523,000             | ) |  | $ | 675,000
|2004                 |  |                              | 675,000   |                                              |   | (147,000 | )          |  |   | 12,000                 |   |  |   | 540,000
|2005                 |  |                              | 540,000   |                                              |   | (330,000 | )          |  |   | 25,000                 |   |  |   | 235,000



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