Blue Coat Systems 10Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2009

¨	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

BLUE COAT SYSTEMS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE

91-1715963

(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)

(IRS EMPLOYER

IDENTIFICATION)

420 NORTH MARY AVENUE

SUNNYVALE, CALIFORNIA 94085

(408) 220-2200

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

AND TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

(Do not check if a smaller

reporting company)

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

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


CLASS		OUTSTANDING AS OF FEBRUARY 28, 2009
Common Stock, par value $.0001		39,494,132

TABLE OF CONTENTS



		PAGE
PART I. FINANCIAL INFORMATION		4

Item 1.	Condensed Consolidated Financial Statements	4

	Condensed Consolidated Balance Sheets as of January 31, 2009 and April 30, 2008	4

	Condensed Consolidated Statements of Operations for the three and nine months ended January 31, 2009 and 2008	5

	Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2009 and 2008	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

PART II. OTHER INFORMATION		38

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults Upon Senior Securities	48

Item 4.	Submission of Matters to a Vote of Security Holders	48

Item 5.	Other Information	48

Item 6.	Exhibits	49

	Signature	50

FORWARD-LOOKING STATEMENTS

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

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

PART I: FINANCIAL INFORMATION

Item 1:

Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)


	January 31, 2009			April 30, 2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	110,914		$	160,974
Short-term investments		—			1,204
Accounts receivable, net of allowance of $1,566 and $176, respectively		72,056			59,056
Inventories		5,540			262
Prepaid expenses and other current assets		12,082			7,163
Current portion of deferred income tax assets		8,683			7,294

Total current assets		209,275			235,953
Property and equipment, net		31,254			14,975
Restricted cash		849			861
Goodwill		243,459			92,243
Identifiable intangible assets, net		51,942			5,010
Investment in Packeteer		—			25,092
Non-current deferred income tax assets		10,478			11,867
Other assets		1,704			1,767

Total assets	$	548,961		$	387,768

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	23,618		$	18,695
Accrued payroll and related benefits		18,818			16,464
Deferred revenue		98,127			68,242
Other accrued liabilities		13,264			8,991

Total current liabilities		153,827			112,392
Deferred revenue, less current portion		31,115			21,318
Deferred rent, less current portion		5,656			1,349
Other non-current liabilities		7,411			1,248
Convertible senior notes, due in 2013		76,123			—
Commitments and contingencies
Stockholders’ equity:
Preferred stock: $0.0001 par value; issuable in series; 9,958 shares authorized; none issued and outstanding		—			—
Common stock: $0.0001 par value; 200,000 shares authorized; 39,059 and 38,267 shares issued and outstanding at January 31, 2009 and April 30, 2008, respectively		2			2
Additional paid-in capital		1,157,783			1,128,903
Treasury stock, at cost; 324 and 276 shares held at January 31, 2009 and April 30, 2008, respectively		(1,571	)		(903	)
Accumulated deficit		(881,385	)		(876,362	)
Accumulated other comprehensive income (loss)		—			(179	)

Total stockholders’ equity		274,829			251,461

Total liabilities and stockholders’ equity	$	548,961		$	387,768

See accompanying notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended January 31,						Nine Months Ended January 31,
	2009			2008			2009			2008
Net revenue:
Product	$	72,495		$	62,841		$	231,221		$	167,626
Service		37,101			18,540			99,902			49,583

Total net revenue		109,596			81,381			331,123			217,209
Cost of net revenue:
Product		19,028			13,168			66,261			33,802
Service		11,474			6,131			33,445			16,486

Total cost of net revenue		30,502			19,299			99,706			50,288
Gross profit		79,094			62,082			231,417			166,921
Operating expenses:
Sales and marketing		43,608			32,483			132,208			92,455
Research and development		18,606			13,240			56,963			37,564
General and administrative		10,877			6,517			35,192			18,991
Amortization of intangible assets		1,821			112			4,846			337
Restructuring		—			—			1,546			—

Total operating expenses		74,912			52,352			230,755			149,347

Operating income		4,182			9,730			662			17,574
Interest income, net		56			1,857			520			4,620
Other expense		(440	)		(337	)		(1,980	)		(526	)

Income (loss) before income taxes		3,798			11,250			(798	)		21,668
Provision for income taxes		2,735			760			4,225			1,583

Net income (loss)	$	1,063		$	10,490		$	(5,023	)	$	20,085

Net income (loss) per common share:
Basic	$	0.03		$	0.28		$	(0.13	)	$	0.59

Diluted	$	0.02		$	0.26		$	(0.13	)	$	0.50

Weighted average shares used in computing net income (loss) per common share:
Basic		42,433			37,721			38,342			34,256

Diluted		43,190			40,597			38,342			40,210

See accompanying Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended January 31,
	2009			2008
Operating Activities
Net income (loss)	$	(5,023	)	$	20,085
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		7,467			4,022
Amortization		8,584			1,399
Stock-based compensation		13,800			12,767
Tax benefit (expense) of stock option deduction		(928	)		—
Excess tax benefits from stock-based compensation		(176	)		(549	)
Loss on disposition of equipment		282			20
Accretion of warrants and issuance costs related to convertible notes		596			—
Accretion of Series A redeemable convertible preferred stock issuance costs		—			181
Stock-based compensation related to restructuring		88			—
Changes in operating assets and liabilities:
Accounts receivable, net		(1,778	)		(16,443	)
Inventories		20,381			292
Prepaid expenses and other current assets		(1,973	)		1,005
Other assets		689			(426	)
Accounts payable		2,721			(2,667	)
Accrued payroll and related benefits		(5,093	)		846
Other accrued liabilities		(13,022	)		1,711
Restructuring accrual		139			(238	)
Deferred rent		2,820			5
Deferred income tax liabilities		(393	)		500
Deferred revenue		23,683			25,873

Net cash provided by operating activities		52,864			48,383
Investing Activities
Purchases of investment securities		—			(101,223	)
Sales and maturities of investment securities		1,217			86,046
Release of escrow from NetCache acquisition		—			4,120
Purchases of property and equipment		(20,605	)		(6,651	)
Acquisition of Packeteer, net of cash acquired		(169,956	)		—

Net cash used in investing activities		(189,344	)		(17,708	)
Financing Activities
Net proceeds from issuance of common stock		6,587			26,747
Excess tax benefits from stock-based compensation		176			549
Net proceeds from issuance of convertible notes		79,657			—

Net cash provided by financing activities		86,420			27,296

Net increase (decrease) in cash and cash equivalents		(50,060	)		57,971
Cash and cash equivalents at beginning of period		160,974			50,013

Cash and cash equivalents at end of period	$	110,914		$	107,984

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	7,202		$	—
Non-cash financing activities
Conversion of Series A redeemable convertible preferred stock		—			42,060

See accompanying Notes to Condensed Consolidated Financial Statements.

Notes to Condensed Consolidated Financial Statements

Note 1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of Blue Coat Systems, Inc. and those of our subsidiaries, all of which are wholly owned. All inter-company balances and transactions have been eliminated. The functional currency of our domestic and foreign operations is the United States dollar. Accordingly, the effects of foreign currency transactions, and of remeasuring the financial condition and results of operations from local currencies into the functional currency, are included in other expense in the accompanying condensed consolidated statements of operations. In management’s opinion, the accompanying financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the results for the interim periods presented.

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

The condensed consolidated financial statements for the three and nine months ended January 31, 2009 include the operating results of Packeteer Inc. (“Packeteer”) beginning on June 6, 2008.

On August 16, 2007, our Board of Directors approved a two-for-one forward stock split of our common stock. The stock split was effected by the issuance of a stock dividend of one share of our common stock for each share of our common stock issued and outstanding as of the record date of September 13, 2007. The split-adjusted stock began trading on the NASDAQ Global Market on October 4, 2007. As of January 31, 2009, our stock is listed on the NASDAQ Global Select Market. All share numbers in this document are on a post-split basis. Shares authorized and par value were not adjusted as they were not affected by the stock split.

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 assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the dates of the condensed consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods. Actual results may differ from these estimates, and such differences could be material to our condensed consolidated financial condition and results of operations.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

Revenue Recognition

Our products include software that is essential to the functionality of the appliances. Additionally, we provide unspecified software upgrades and enhancements related to the appliances through maintenance contracts for most of our products. Accordingly, we account for revenue in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” (“SOP 97-2”) and all related interpretations. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery or performance has occurred; the sales price is fixed or determinable and collectibility is reasonably assured.

We define each of the four criteria above as follows:

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

Delivery or performance has occurred. Shipping terms and related documents, or written evidence of customer acceptance, when applicable, are used to verify delivery or performance. Most of our sales are made through distributors under agreements, which, in most cases, allow for stock rotation rights. Net revenue and the related cost of net revenue resulting from shipments to distributors are deferred until the distributors report that our products have been sold to a customer. Product revenue in China is deferred until the customer registers the proxy appliance.

For sales made direct to end-users and value-added resellers, we recognize product revenue upon transfer of title and risk of loss, which generally is upon shipment. We do not accept orders from value-added resellers when we are aware that the value-added reseller does not have an order from an end user customer. We do not have significant obligations for future performance, such as rights of return or pricing credits, associated with sales to end users and value-added resellers.

The sales price is fixed or determinable. We assess whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment.

Collectibility is reasonably assured. We assess probability of collection on a customer-by-customer basis. We subject our customers to a credit review process that evaluates their financial condition and ability to pay for our products and services. If we determine from the outset of an arrangement that collection is not probable based upon our review process, we do not recognize revenue until cash is received.

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

Maintenance and subscription revenue is initially deferred and recognized ratably over the life of the contract, with the related expenses recognized as incurred. Maintenance and subscription contracts usually have a term of one to three years. Unearned maintenance and subscription revenue is included in deferred revenue.

Cash Equivalents and Short-Term Investments

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

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

Fair Value of Financial Instruments

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

Inventories

Inventories consist of raw materials and finished goods. Inventories are recorded at the lower of cost (using the first-in, first-out method) or market, after we give appropriate consideration 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.

In connection with our acquisition of Packeteer during the first quarter of fiscal 2009, we recorded inventories purchased as part of the acquisition at estimated selling prices less the sum of the costs of disposal and a reasonable profit allowance for the selling effort. This resulted in a $20.3 million write-up of inventory, of which approximately $4.3 million remains in inventory at January 31, 2009.

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


	January 31, 2009		April 30, 2008
Raw materials	$	712	$	—
Finished goods		4,828		262

Total	$	5,540	$	262

Valuation of Goodwill

We perform annual goodwill impairment tests in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets, (“SFAS No. 142”) during our fourth fiscal quarter, or whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. The first step of the test identifies whether potential impairment may have occurred, while the second step of the test measures the amount of the impairment, if any. An impairment of goodwill is recognized when the carrying amount of the assets exceeds their fair value. The process of evaluating the potential impairment of goodwill is highly subjective and requires the application of significant judgment. For purposes of the annual impairment test, we consider our market capitalization on the date of the test, since we have only one reporting unit. We performed our recurring annual review of goodwill in the fourth quarter of fiscal 2008 and concluded that no impairment existed at April 30, 2008. For the first nine months of fiscal 2009, there have been no significant events or changes of circumstances that affect our valuation of goodwill.

Valuation of Long-Lived and Identifiable Intangible Assets

We periodically evaluate potential impairments of our long-lived assets, including identifiable intangible assets, in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events or changes in circumstances that could result in an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business and significant negative industry or economic trends. Impairment is recognized when the carrying amount of an asset exceeds its fair value as calculated on a discounted cash flow basis.

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

Business Combinations

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

Income Taxes

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

On May 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes (FIN 48), issued in June 2006. FIN 48 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. See Note 9—”Income Taxes” for additional information.

refundable income taxes or future taxable income, the valuation allowance will be reduced and the related tax impact will be recorded to the provision in that quarter. Likewise, should we determine that we are not likely to realize all or part of our deferred tax assets in the future, an increase to the valuation allowance would be recorded to the provision in the period such determination was made.

Stock-Based Compensation

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

We estimate the fair value of options granted using the Black-Scholes option valuation model. Effective May 1, 2008, we estimated the expected option term at 4.0 years based on our historical experience of grants, exercises and post-vesting cancellations. Beginning with our adoption of SFAS No. 123(R) on May 1, 2006 until April 30, 2008, we estimated the expected option term at 4.63 years. We estimate the volatility of our stock options at the date of grant using a combination of historical and implied volatilities, consistent with SFAS No. 123(R) and Staff Accounting Bulletin No. 107 (SAB 107),Share-Based Payment. We base the risk-free rate that we use in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant based on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of our option grants. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. Stock-based compensation expense under SFAS No. 123(R) is based on awards ultimately expected to vest, which requires us to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Effective May 1, 2008, we estimated our forfeiture rate at 14.0% based on an analysis of historical pre-vesting forfeitures, and have reduced stock-based compensation expense accordingly. From May 1, 2006 until April 30, 2008, we used a forfeiture rate of 10.0%. For options granted before May 1, 2006, we amortize the fair value on a graded basis. For options granted on or after May 1, 2006, we amortize the fair value on a straight-line basis. The fair value of all options is amortized over the requisite service periods of the awards, which are generally the vesting periods. We may use different assumptions under the Black-Scholes option valuation model in the future, which could materially affect our total and per-share net income or loss and net income or loss per share.

Guarantees, Indemnifications and Warranty Obligations

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

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

We accrue for warranty expenses in our cost of revenue at the time revenue is recognized and maintain an accrual for estimated future warranty obligations based upon the relationship between historical and anticipated warranty costs and revenue volumes. If actual warranty expenses are greater than those projected, additional charges against earnings would be required. If actual warranty expenses are less than projected, our obligations would be reduced, providing a positive impact on our reported results. We generally provide a one-year warranty on hardware products and a 90-day warranty on software products. Changes in our warranty obligations, which are included in “Other accrued liabilities,” in our condensed consolidated balance sheets for the nine months ended January 31, 2009 and 2008, were as follows (in thousands):


	Nine Months Ended January 31,
	2009			2008
Beginning balances	$	434		$	459
Warranties issued during the period		1,930			1,620
Settlements made during the period		(1,889	)		(1,477	)
Warranty liabilities assumed in Packeteer acquisition		383			—

Ending balances	$	858		$	602

Concentration and Other Risks

Financial instruments that potentially subject us to credit risk consist of demand deposit accounts, money market accounts, corporate securities and trade receivables. We maintain demand deposit and money market accounts with financial institutions of high credit standing. Such deposits may be in excess of insured limits. We invest only in high-quality, investment grade securities and limit investment exposure in any one issue. Investments are classified as cash equivalents or short-term investments in our condensed consolidated balance sheets at January 31, 2009 and April 30, 2008. We believe the financial risks associated with these financial instruments are minimal. We have not experienced material losses from our investments in these securities.

Generally, we do not require collateral for sales to customers. However, we perform on-going credit evaluations of our customers’ financial condition and maintain an allowance for doubtful accounts. For the three months ended January 31, 2009, we had a bad debt recovery of $0.1 million and for the nine months ended January 31, 2009, bad debt expense was $1.2 million. During the second quarter of fiscal 2009, there was one receivable past due amount from a reseller for $1.2 million, which was reserved through a charge to bad debt expense and included in general and administrative expenses. For the three and nine months ended January 31, 2008, bad debt expense was less than $0.1 million. During the three months ended January 31, 2009, one customer accounted for 13.0% of our net revenue and another customer accounted for 10.3% of our net revenue. During the nine months ended January 31, 2009, one customer accounted for 13.2% of our net revenue. During the three and nine months ended January 31, 2008, one customer accounted for 12.9% and 14.0% of our net revenue, respectively. As of January 31, 2009, one customer accounted for 12.6% of our gross accounts receivable balance. As of April 30, 2008, no customer accounted for more than 10.0% of our gross accounts receivable balance.

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

Comprehensive Income

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

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


	Three Months Ended January 31,				Nine Months Ended January 31,
	2009		2008		2009			2008
Net income (loss)	$	1,063	$	10,490	$	(5,023	)	$	20,085
Unrealized gain on available-for-sale securities		—		52		—			57

Comprehensive income (loss)	$	1,063	$	10,542	$	(5,023	)	$	20,142

Recent Accounting Pronouncements

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

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

In May 2008, the FASB issued FSP No. APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB No. 14-1 will require the issuer to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Further, the FSP will require bifurcation of a component of the debt, classification of that component in equity, and then accretion of the resulting discount on the debt as part of interest expense being reflected in the statement of income. FSP APB No. 14-1 is effective for fiscal years beginning after December 15, 2008, and will be required to be applied retrospectively to all periods presented. We will be required to implement the standard during the first quarter of fiscal 2010. We currently are evaluating the effect, if any, that the adoption of FSP APB No. 14-1 will have on our condensed consolidated financial statements.

In April 2008, the FASB issued FSP FAS No. 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other Intangible Assets. FSP FAS No. 142-3 is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. We currently are evaluating the effect, if any, that the adoption of FSP FAS No. 142-3 will have on our condensed consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to provide an enhanced understanding of an entity’s use of derivative instruments and, how they are accounted for under SFAS No. 133, and to require a tabular disclosure of the effects of such instruments and related hedged items on the entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We will adopt SFAS No. 161 in the fourth quarter of fiscal 2009. Since SFAS No. 161 requires only additional disclosures about our derivatives and hedging activities, the adoption of SFAS No. 161 will not have an impact on our condensed consolidated financial condition or results of operations.

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

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

In December 2007, the FASB issued SFAS No. 141(R),Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) amends SFAS No. 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to better evaluate the nature and financial effects of the business combination. It is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. SFAS No. 141(R) will have an impact on our condensed consolidated financial statements with respect to future acquisitions. The nature and magnitude of the specific impact will depend upon the nature, terms, and size of the acquisitions consummated after the effective date.

Note 2. Fair Value Measurement

Effective May 1, 2008, we adopted SFAS No. 157, Fair Value Measurement, except as it applies to those nonfinancial assets and nonfinancial liabilities. SFAS No.157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. Valuation techniques used to measure fair value under SFAS No.157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last is considered unobservable. These levels of inputs are the following:

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

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

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

Our adoption of SFAS No.157 did not materially affect our financial position and results of operations, but SFAS No.157 does require new disclosures about how we value certain assets and liabilities. Much of the required disclosure relates to the inputs used to measure fair value, particularly in instances where the measurement uses significant unobservable (Level 3) inputs. Our financial instruments are valued using quoted prices in active markets or based upon other observable inputs. The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of January 31, 2009 (in thousands):


	Level 1		Level 2		Level 3		Total
Money Market Funds (1)	$	97,414	$	—	$	—	$	97,414

(1)	– Included in cash and cash equivalents and restricted cash on our condensed consolidated balance sheet as of January 31, 2009

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

Note 3. Stock-based Compensation

The following table summarizes the stock-based compensation expense for stock options, restricted stock awards, restricted stock units and our Employee Stock Purchase Plan (“ESPP”) that we recorded in the condensed consolidated statements of operations in accordance with SFAS No.123(R) for the three and nine months ended January 31, 2009 and 2008 (in thousands):


	Three Months Ended January 31,				Nine Months Ended January 31,
	2009		2008		2009		2008
Stock-based compensation expense:
Cost of product	$	176	$	172	$	500	$	616
Cost of service		263		195		839		609
Sales and marketing		1,529		1,243		4,780		4,264
Research and development		1,397		1,088		3,898		3,949
General and administrative		1,093		1,263		3,784		3,329

Subtotal		4,458		3,961		13,801		12,767
Restructuring		—		—		88		—

Total	$	4,458	$	3,961	$	13,889	$	12,767

For the nine months ended January 31, 2008, stock-based compensation expense included $1.5 million related to the Section 409(A) Tender Offer.

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

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


	Three Months Ended January 31,				Nine Months Ended January 31,
	2009		2008		2009		2008
Risk-free rate	1.30	%	3.28	%	2.90	%	4.64	%
Expected dividend yield	—		—		—		—
Expected life (in years)	4.0		4.63		4.0		4.63
Expected volatility	0.87		0.84		0.74		0.66
Expected forfeitures	14.0	%	10.0	%	14.0	%	10.0	%


	Three Months Ended January 31,				Nine Months Ended January 31,
	2009		2008		2009		2008
Risk-free rate	1.97	%	4.21	%	1.90	%	4.73	%
Expected dividend yield	—		—		—		—
Expected life (in years)	0.49		0.50		0.49		0.45
Expected volatility	0.68		0.56		0.69		0.47

During the three and nine months ended January 31, 2009, 2,714 and 346,116 options were exercised, respectively. As of January 31, 2009, there was approximately $25.6 million and $0.3 million of unrecognized stock-based compensation expense related to stock option grants and ESPP awards, which will be recognized over the remaining weighted average vesting period of approximately 2.74 years and 0.04 years, respectively.

The cost of restricted stock awards and restricted stock units is determined using the fair value of our common stock on the date of the grant, and compensation expense is recognized over the vesting period, which generally is four years. During the third quarter of fiscal 2009, we awarded 3,000 shares of restricted stock and 18,011 shares of restricted stock were canceled. As of January 31, 2009, we had approximately $7.7 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to the restricted stock awards and restricted stock units, which we will recognize over the remaining weighted average vesting period of approximately 2.82 years.

Note 4. Acquisition

We acquired Packeteer, Inc., a provider of Wide Area Network (“WAN”) optimization and WAN traffic prioritization technologies, on June 6, 2008, by means of a merger of our wholly owned subsidiary with and into Packeteer, such that Packeteer became our wholly-owned subsidiary. We acquired Packeteer, among other things, to enrich our existing application intelligence technology. We have included the operating results of Packeteer in our consolidated financial results since the June 6, 2008 acquisition date.

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


Cash	$	263,973
Fair value of vested Packeteer stock options assumed		4,610
Direct transaction costs		8,944

Total preliminary purchase price	$	277,527

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


Interest rate	1.99	%
Volatility	0.67
Expected life	0.48 years
Expected dividend yield	0	%

Preliminary Purchase Price Allocation

We accounted for the acquisition of Packeteer using the purchase method of accounting. The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date of June 6, 2008. The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill. We believe the fair value assigned to the assets acquired and liabilities assumed were based on reasonable assumptions. As of January 31, 2009, the total purchase price was allocated to the fair value of assets acquired and liabilities assumed as follows (in thousands):


Cash and short-term investment	$	77,537
Other tangible assets		44,403
Acquired intangible assets		55,400
Goodwill		151,216
Accounts payable and other liabilities		(35,029	)
Deferred revenues		(16,000	)

Total purchase price allocation	$	277,527

Our allocation of the purchase price is based upon preliminary estimates and assumptions with respect to fair value. These estimates and assumptions could change significantly during the purchase price allocation period, which is up to one year from the acquisition date. Any change could result in material variances between our future financial results and the amounts presented in these unaudited condensed consolidated financial statements.

In connection with our acquisition of Packeteer, we formulated a plan to exit certain Packeteer facilities, discontinue certain Packeteer products, and involuntarily terminate Packeteer employees in certain locations. In connection with this plan, on the acquisition date of June 6, 2008, we accrued $11.6 million related to employee severance costs and $1.9 million related to lease termination costs. For the fiscal quarter ending January 31, 2009, we paid $3.6 million related to employee severance costs and $0.9 million related to lease termination costs. From the acquisition date of June 6, 2008 through January 31, 2009, we paid $11.2 million related to employee severance costs and $2.2 million related to lease termination costs, and we increased the lease termination accrual by $0.3 million. As of January 31, 2009, we did not have any unpaid lease termination costs and had $0.4 million in unpaid employee severance costs, the balance of which is included in “Other accrued liabilities” in our condensed consolidated balance sheet as of January 31, 2009. We anticipate the unpaid balances to be paid by the end of fiscal 2009.

The following table summarizes the activity related to the acquisition restructuring accrual as of January 31, 2009 (in thousands):


	Severance			Facilities
Balance at June 6, 2008	$	11,615		$	1,919
Cash payment		(4,306	)		—

Balance at July 31, 2008		7,309			1,919
Cash payment		(3,223	)		(1,330	)
Increase to accrual		—			274

Balance at October 31, 2008		4,086			863
Cash payment		(3,645	)		(863	)

Balance at January 31, 2009	$	441		$	—

Identifiable Intangible Assets

Intangible assets consist primarily of developed technology and patents, customer relationships and trade name. Developed technology is comprised of products that have reached technological feasibility and are a part of Packeteer’s product lines, and patents related to the design and development of Packeteer’s products. This proprietary know-how can be leveraged to develop new technology and products and improve our existing products. Customer relationships represent Packeteer’s underlying relationships with its customers. Trade name represents the fair value of brand and name recognition associated with the marketing of Packeteer’s products and services. The amounts assigned to customer relationships, developed technology and patents, and trade name were $35.0 million, $20.0 million, and $0.4 million, respectively. We amortize developed technology and patents, customer relationships and trade names on a straight-line basis over their weighted average expected useful life of 5, 5, and 2 years, respectively. Developed technology and patents and trade name are amortized into cost of product while customer relationships are amortized into operating expenses.

Pre-Acquisition Contingencies

In connection with our acquisition of Packeteer, we have evaluated and continue to evaluate pre-acquisition contingencies relating to Packeteer that existed as of the acquisition date. If these contingencies become probable in nature and estimable during the purchase price allocation period, amounts related to such contingencies will be recorded as an increase to the purchase price, and, if subsequent to the purchase price allocation period, such amounts will be recorded in our results of operations.

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

Pro Forma Financial Information

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

The unaudited pro forma financial information for the three months ended January 31, 2008 combines the historical results of Blue Coat for the three months ended January 31, 2008 and, due to differences in our reporting periods, the historical results of Packeteer for the three months ended December 31, 2007. The unaudited pro forma financial information for the nine months ended January 31, 2009 combines the historical results of Blue Coat for the nine months ended January 31, 2009 and, due to differences in our reporting periods, the historical results of Packeteer for one month ended May 31, 2008, due to the acquisition of Packeteer on June 6, 2008. The unaudited pro forma financial information for the nine months ended January 31, 2008 combines the historical results of Blue Coat for the nine months ended January 31, 2008 and, due to differences in our reporting periods, the historical results of Packeteer for the nine months ended December 31, 2007.

The following pro forma financial information for all periods presented includes purchase accounting adjustments for amortization charges from acquired identifiable intangible assets, depreciation on acquired property and equipment, adjustments to interest expense and issuance cost associated with convertible notes, stock-based compensation expense and related tax effects (in thousands, except per share amounts):


	Three Months Ended January 31,			Nine Months Ended January 31,
	2008			2009			2008
Net revenue	$	122,876		$	342,169		$	326,889
Net income (loss)	$	(919	)	$	(10,992	)	$	2,008
Net income (loss) per share - basic	$	(0.02	)	$	(0.29	)	$	0.06
Net income (loss) per share - diluted	$	(0.02	)	$	(0.29	)	$	0.05

Investment in Packeteer

On April 20, 2008, we entered into a Stock Purchase Agreement pursuant to which we acquired 3,559,117 shares of Packeteer common stock for $7.10 per share from the Liverpool Limited Partnership and Elliot International, L.P. for a total of approximately $25.3 million. This investment was valued at its fair value of $25.1 million at April 30, 2008. This investment was considered part of the purchase price upon the closing of the acquisition of Packeteer on June 6, 2008.

Note 5. Convertible Senior Notes

On June 2, 2008, we issued $80.0 million aggregate principal amount of Zero Coupon Convertible Senior Notes due June 2, 2013 (the “Notes”) and warrants (the “Warrants”) to purchase an aggregate of 385,356 shares of our common stock at an exercise price of $20.76 to Manchester Securities Corp., an affiliate of Elliott Associate, L.L.P. (“Manchester”) and Francisco Partners II, L.P. and Francisco Partners Parallel Fund II, L.P. (together, the “FP Entities”) in a private placement. The Notes are reported on the condensed consolidated balance sheets at $76.1 million as of January 31, 2009, net of discounts of $3.9 million primarily related to the Warrants. The value assigned to the Warrants will be amortized to interest expense over the life of the Notes.

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

•

issue shares of our common stock as a dividend or distribution on our shares of common stock;

•

effect a stock split or stock combination;

•

issue shares of capital stock in the event of a reclassification; or

•

purchase shares of our common stock pursuant to a tender offer or exchange offer at a premium to market.

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

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

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

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

Note 6. Balance Sheet Details

Intangible Assets

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


January 31, 2009	Amortization period	Gross Amount		Accumulated Amortization			Net Carrying Value
Developed technology and patents	3-7 years	$	26,031	$	(5,890	)	$	20,141
Core technology	5 years		2,929		(2,520	)		409
Customer relationships	5-7 years		37,023		(5,901	)		31,122
Trade name	2 years		400		(130	)		270

Total		$	66,383	$	(14,441	)	$	51,942


April 30, 2008	Amortization period	Gross Amount		Accumulated Amortization			Net Carrying Value
Developed technology	3-7 years	$	6,031	$	(2,785	)	$	3,246
Core technology	5 years		2,929		(2,097	)		832
Customer relationships	5-7 years		2,023		(1,091	)		932

Total		$	10,983	$	(5,973	)	$	5,010

Amortization expense for our intangibles assets for the three and nine months ended January 31, 2009 and 2008 was allocated as follows (in thousands):


	Three Months Ended January 31,				Nine Months Ended January 31,
	2009		2008		2009		2008
Included in cost of net revenues	$	1,348	$	298	$	3,623	$	893
Included in cost of operations		1,821		112		4,846		337

Total	$	3,169	$	410	$	8,469	$	1,230

As of January 31, 2009, we had no identifiable intangible assets with indefinite lives. The weighted average remaining life of our identifiable intangible assets was 4.27 years and 4.0 years at January 31, 2009 and April 30, 2008, respectively.

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


Year Ended April 30,	Amortization
2009 (remaining three months)	$	3,168
2010		12,397
2011		11,889
2012		11,781
2013		11,607
Thereafter		1,100

	$	51,942

Goodwill

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


Balance at May 1, 2008	$	92,243
Goodwill related to Packeteer acquisition		151,216

Balance at January 31, 2009	$	243,459

Restructuring Accrual

In connection with our acquisition of Packeteer, we committed to a plan that resulted in the termination of 33 employees of Blue Coat. Restructuring charges consist primarily of personnel-related severance costs and stock-based compensation expenses. Stock-based compensation included in restructuring resulted primarily from the additional vesting of any unvested option shares and restricted shares upon termination of the employment of those employees pursuant to the terms of their separation agreements. During the first quarter of fiscal 2009, all 33 employees were terminated, we recorded a restructuring charge of $1.5 million in our condensed consolidated statement of operations. During the nine months ended January 31, 2009, we paid severance in the amount of $1.4 million. We anticipate the remaining balance of $0.1 million, which is included in “Other accrued liabilities” in the condensed consolidated balance sheets, will be paid by the end of fiscal 2009.

The following table summarizes the activity related to the restructuring accrual as of January 31, 2009 (in thousands):


Balance at May 1, 2008	$	—
Restructuring charges		1,546
Cash payment		(868	)
Stock-based compensation		(88	)

Balance at July 31, 2008		590
Cash payment		(390	)

Balance at October 31, 2008		200
Cash payment		(61	)

Balance at January 31, 2009	$	139

Other Accrued Liabilities

Other accrued liabilities consisted of the following (in thousands):


	As of
	January 31, 2009		April 30, 2008
Accrued royalty	$	3,157	$	939
Accrued severance costs		580		—
Professional and consulting fees		2,120		1,410
Federal, State and Foreign income tax payable		1,017		2,254
Warranty obligations		858		434
Other		5,532		3,954

Total other accrued liabilities	$	13,264	$	8,991

Note 7. Per Share Amounts

Basic net income per common share and diluted net income per common share are presented in conformity with SFAS No. 128,Earnings Per Share and EITF 03-6,Participating Securities and the Two-Class Method” for all periods presented. The Company’s Convertible Senior Notes are participating securities whereby the holder would participate equally in any future dividends and in undistributed earnings with common shareholders.

Under the two-class method, basic net income (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding for the period. Net income (loss) applicable to common stockholders is determined by allocating undistributed earnings to Convertible Senior Note holders. 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; (ii) issuance of committed but unissued stock awards; (iii) issuance of shares upon the conversion of outstanding Series A Redeemable Convertible Preferred Stock; and (iv) conversion of Convertible Senior Notes. For periods for which there is a net loss, the numbers of shares used in the computation of diluted net loss per share are the same as those used for the computation of basic net loss per share as the inclusion of dilutive securities would be anti-dilutive.

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 condensed consolidated statements of operations reconciled to basic and diluted per share amounts applicable to common shareholders (in thousands, except per share amounts):


	Three Months Ended January 31,					Nine Months Ended January 31,
	2009			2008		2009			2008
Basic net income (loss) per share
Numerator:
Net income (loss)	$	1,063		$	10,490	$	(5,023	)	$	20,085
Less: undistributed earnings allocated to Convertible Senior Notes holders		(97	)		—		—			—

Net income (loss) applicable to common shareholders	$	966		$	10,490	$	(5,023	)	$	20,085
Denominator:
Basic weighted average common shares used in computing basic net income (loss) per common share		42,433			37,721		38,342			34,256
Effect of participating Convertible Senior Notes		(3,854	)		—		—			—

Weighted average common shares outstanding using the two-class method		38,579			37,721		38,342			34,256

Basic income (loss) applicable to common shareholders per common share	$	0.03		$	0.28	$	(0.13	)	$	0.59

Diluted earnings per share
Numerator:
Net income (loss)	$	1,063		$	10,490	$	(5,023	)	$	20,085
Less: undistributed earnings allocated to Convertible Senior Notes holders		(95	)		—		—			—

Net income (loss) applicable to common shareholders	$	968		$	10,490	$	(5,023	)	$	20,085
Denominator:
Basic weighted average common shares used in computing basic net income (loss) per common share		42,433			37,721		38,342			34,256
Add: Weighted average employee stock options		300			2,717		—			3,411
Add: Series A Redeemable Convertible Preferred Stock, as converted (1)		—			—		—			2,400
Add: Other weighted average dilutive potential common stock		457			159		—			143

Weighted average common shares used in computing diluted net income (loss) per common share		43,190			40,597		38,342			40,210
Effect of participating Convertible Senior Notes		(3,854	)		—		—			—

Weighted average common share outstanding using the two-class method		39,336			40,597		38,342			40,210

Diluted income (loss) applicable to common shareholders per common share	$	0.02		$	0.26	$	(0.13	)	$	0.50

(1)	All shares of Series A Redeemable Convertible Preferred Stock were subsequently converted into common stock by the end of September 2007.

No portion of the loss for the nine months ended January 31, 2009 was allocated to the participating security under the two-class method since there is no contractual obligation for these Convertible Senior Notes to share in the losses of the Company.

For the three months ended January 31, 2009 and 2008 outstanding stock options and restricted stock awards covering 7.7 million shares and 0.7 million shares, respectively, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive as their exercise prices were greater than or equal to the average market price of our common shares during the respective periods.

For the nine months ended January 31, 2009, outstanding stock options and restricted stock awards covering 8.5 million shares were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive due to our net loss for the nine months ended January 31, 2009. Included in the 8.5 million shares that were excluded are outstanding stock options and restricted awards covering 6.4 million shares that were also anti-dilutive because their exercise prices were greater than or equal to the average market price of the common shares during the respective period. For the nine months ended January 31, 2008 outstanding stock options and restricted stock awards covering 0.5 million shares were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive as their exercise prices were greater than or equal to the average market price of our common shares during the respective periods.

Warrants to purchase 385,356 shares of our common stock were outstanding at January 31, 2009, but were not included in the computation of diluted earnings per share because the exercise price of the warrants was greater than the average market price of our common stock during each of the three and nine months ended January 31, 2009; therefore, their effect was anti-dilutive.

Shares of our common stock issuable upon the assumed conversion of the Senior Convertible Notes in the amount of 3,853,564 were not included in the computation of diluted earnings per share for the nine months ended January 31, 2009, due to our net loss for that period.

Note 8. Commitments

Leases

We lease certain equipment and office facilities under non-cancelable operating leases that expire at various dates through 2016. The facility leases generally require us to pay operating costs, including property taxes, insurance and maintenance, and may contain scheduled rent increases and certain other rent escalation clauses. Rent expense is recognized in our condensed consolidated financial statements on a straight-line basis over the terms of the respective leases after consideration of rent holidays and improvement allowances, if applicable, with any assets purchased using a lessee improvement allowance capitalized as fixed assets and depreciated over the shorter of their useful lives or the lease term.

On June 20, 2008, we amended the lease for our corporate headquarters. Pursuant to the lease amendment, we added 116,586 additional square feet of space and extended the term of the original lease through November 30, 2015. The lease amendment provides for an annualized base rent ranging from $2.7 million to $3.4 million for the new premises during the term of the lease applicable to the new premises, which commenced on November 1, 2008. The lease amendment provides for an annualized base rent ranging from $2.9 million to $3.4 million for the existing premises during the extension term, which commences on September 1, 2010.

Rent expense was $2.9 million and $1.1 million for the three months ended January 31, 2009 and 2008, respectively. Rent expense was $7.6 million and $3.3 million for the nine months ended January 31, 2009 and 2008, respectively.

As of January 31, 2009, 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,	Total
2009 (remaining three months)	$	3,107
2010		11,110
2011		10,510
2012		10,271
2013		10,217
Thereafter		22,246

Future minimum lease payments		67,461
Less: payments to be received from sublease		(17,534	)

Total future minimum lease payments, net	$	49,927

Lease commitments include future minimum rent payments for several facilities that we will vacate pursuant to our Packeteer post-acquisition integration activities.

Other

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 to be paid by the end of fiscal 2010. Our minimum obligation at January 31, 2009 under these arrangements was $9.3 million.

Note 9. Income Taxes

The provision for income taxes for the three and nine months ended January 31, 2009 was $2.7 million and $4.2 million, respectively, as compared to $0.8 million and $1.6 million, respectively, for the three and nine months ended January 31, 2008. The provision primarily reflects current U.S., state and foreign income taxes in taxable foreign jurisdictions. The primary difference between the effective tax rate and the federal statutory tax rate relates to taxes in foreign jurisdictions with a tax rate different than the U.S. federal statutory rate, non-deductible stock-based compensation expense, limitation of utilization of tax attributes, a temporary suspension of net operating losses under California Assembly Bill 1452 and retroactive renewal and extension of the federal research and development credit under the Emergency Economic Stabilization Act of 2008.

Our total gross unrecognized tax benefits as of October 31, 2008 and January 31, 2009 were $9.6 million and $8.7 million, respectively. Included in our gross unrecognized tax benefits as of January 31, 2009 is approximately $3.7 million of tax benefits that, if recognized, would result in an adjustment to our effective tax rate and approximately $4.2 million of tax benefits that would result in an adjustment to goodwill.

In accordance with FIN 48, paragraph 19, we have elected to classify interest and penalties related to uncertain tax positions as a component of our provision for income taxes. Accrued interest and penalties relating to the income tax on our unrecognized tax benefits was approximately $375,000 and $421,000 as of October 31, 2008 and January 31, 2009, respectively, with approximately $46,000 and $168,000 included as a component of our provision for income taxes for the three and nine months ended January 31, 2009, respectively.

Due to our taxable loss position since inception through fiscal 2007, all tax years are subject to examination in the U.S. and state jurisdictions. We are also subject to examination in various foreign jurisdictions for tax years 2000 forward, none of which were individually material. We are unable to anticipate the change in the balance of the unrecognized tax benefits in the next twelve months due to pending examinations in foreign jurisdictions and continued assessment of potential contingencies.

Note 10. Litigation

With regard to the matters discussed below, although we cannot predict the outcome of the IPO allocation cases, the derivative litigations or the patent litigation, the costs of defending these matters (including, as applicable, our obligations to indemnify current or former officers, directors, employees or customers) could have a material adverse effect on our results of operations and financial condition.

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

IPO Allocation Litigation

Beginning on May 16, 2001, a series of putative securities class actions were filed in the United States District Court for the Southern District of New York against the firms that underwrote our initial public offering, us, and some of our officers and directors. These cases have been consolidated under the case captioned In re CacheFlow, Inc. Initial Public Offering Securities Litigation, Civil Action No. 1-01-CV-5143. In November 2001, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York against the firms that underwrote Packeteer’s initial public offering, Packeteer, and some of its officers and directors. An amended complaint, captionedIn re Packeteer, Inc. Initial Public Offering Securities Litigation, Civil Action No. 01-CV-10185, was filed on April 20, 2002.

These are two of a number of actions coordinated for pretrial purposes as In re Initial Public Offering Securities Litigation, 21 MC 92, with the first action filed on January 12, 2001. Plaintiffs in the coordinated proceeding are bringing claims under the federal securities laws against numerous underwriters, companies, and individuals, alleging generally that defendant underwriters engaged in improper and undisclosed activities concerning the allocation of shares in the IPOs of more than 300 companies during late 1998 through 2000. Among other things, the plaintiffs allege that the underwriters’ customers had to pay excessive brokerage commissions and purchase additional shares of stock in the aftermarket in order to receive favorable allocations of shares in an IPO.

The consolidated amended complaint in our case seeks unspecified damages on behalf of a purported class of purchasers of our common stock between December 9, 1999 and December 6, 2000. Pursuant to a tolling agreement, the individual defendants were dismissed without prejudice. On February 19, 2003, the court denied our motion to dismiss the claims against us.

The amended complaint in the Packeteer case seeks unspecified damages on behalf of a purported class of purchaser’s of Packeteer’s common stock between July 27, 1999 and December 6, 2000.

In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including us and Packeteer, was submitted to the Court for approval. On August 31, 2005, the Court preliminarily approved the settlement. In December 2006, the appellate court overturned the certification of classes in the six test cases that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. Because class certification was a condition of the settlement, it was deemed unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement. Plaintiffs have filed amended master allegations and amended complaints in the six focus cases. On March 26, 2008, the Court denied the defendants’ motion to dismiss the amended complaints. It is uncertain whether there will be any revised or future settlement.

Derivative Litigations

Actions Pending Against Us

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 by making false or misleading statements about our prospects between February 20, 2004 and May 27, 2004. On July 17, 2006, plaintiffs filed a consolidated amended complaint, adding allegations that certain current and former officers and directors violated their fiduciary duties to us since our initial public offering by granting and failing to account correctly for stock options. That amended complaint sought various types of relief on our behalf from the individual defendants. On September 8, 2006, another and substantively identical purported shareholder derivative action was filed against certain of our current and former officers and directors. Both of these state derivative cases have been consolidated.

On August 8 and September 5, 2006, two purported shareholder derivative actions were filed in the United States District Court for the Northern District of California against certain of our current and former officers and directors. Like the state derivative actions, the federal derivative actions allege that certain of our current and former officers and directors violated their fiduciary duties since our initial public offering by granting and failing to account correctly for stock options and seek various relief on our behalf from the individual defendants. Both of these federal cases have been consolidated.

On November 30, 2007, the federal and state plaintiffs each filed consolidated amended complaints in their respective actions, which focus on our historical stock option granting practices and assert claims for breach of fiduciary duty and other state and federal law claims against certain of our current and former officers and directors.

The plaintiffs in the federal action, by letter dated June 20, 2008, demanded our Board of Directors take action to remedy the conduct complained of. The demand followed our filing of a motion to dismiss on the grounds that plaintiffs had failed to make a pre-suit demand. The demand letter largely repeats the allegations and requested relief in the federal and state derivative actions. The federal court has stayed the action until April 2009 to permit our Board of Directors to consider the demand. In response to the demand letter, our Board of Directors formed a special committee, composed of directors James R. Tolonen and Keith Geeslin, on June 25, 2008. The special committee was granted plenary authority to decide whether it is in the best interests of the Company and its shareholders to pursue or otherwise resolve the claims raised in the demand letter and in the federal and state derivative actions and any other claims of the Company that the special committee deems necessary or appropriate to consider concerning our historical stock option practices.

The court in the state action has stayed that action pending a case management conference presently scheduled for April 2009.

Action Pending Against Packeteer

On or about October 10, 2007, Vanessa Simmonds, a purported shareholder of Packeteer, filed a complaint in the United States District Court, Western District of Washington, against the underwriters of Packeteer’s 1999 initial public offering of its common stock, seeking recovery in the name of Packeteer for alleged violation by those underwriters of Section 16(b) of the Securities Exchange Act of 1934, as amended. The complaint seeks to recover from the underwriters any “short-swing profits” obtained by them in violation of Section 16(b). Packeteer is named as a nominal defendant. On February 28, 2008, the plaintiff filed an amended complaint asserting substantially similar claims as those set forth in the initial complaint and naming three additional underwriters as defendants.

This is one of 54 actions coordinated for pretrial purposes as In re Section 16(b) Litigation, Master Case No. 07-1549 JLR, with the first action filed on October 2, 2007. In July 2008, Packeteer and 29 other nominal defendants moved to dismiss the amended complaint. Packeteer also separately moved to dismiss the action brought against it on the ground that the plaintiff lacks standing to pursue the action because her interest was extinguished when Packeteer merged into our wholly-owned subsidiary on June 6, 2008. The Court heard the motions to dismiss in January 2009.

Patent Litigation

On April 18, 2008, Realtime Data, LLC d/b/a IXO (“Realtime”) filed a patent infringement lawsuit in the United States District Court, Eastern District of Texas against Packeteer and eleven other companies, including five customers of Packeteer (Realtime Data, LLC d/b/a IXO v. Packeteer, Inc. et al., Civil Action No. 6:08-cv-144). The complaint asserted infringement of seven patents. Packeteer is alleged to have infringed five of those patents. The plaintiff seeks damages for past infringement, enhanced damages for alleged willful infringement, and injunctive relief. On June 20, 2008, Realtime filed a First Amended Complaint which asserts infringement of two additional patents. Packeteer is alleged to have infringed one of those patents. The First Amended Complaint also names us as a defendant and asserts that we infringe the same six patents that allegedly are infringed by Packeteer. We and Packeteer have denied infringement of the patents, and have counterclaimed against the plaintiff, asserting that all of the patent claims asserted against us are invalid or unenforceable. The Court has scheduled a claim construction hearing for April 9, 2009, and trial for January 4, 2010.

Note 11. Geographic and Product Category Information Reporting

We conduct business in one operating segment to design, develop, market and support proxy appliances in support of the WAN Application Delivery market, which includes products with secure web gateway and WAN acceleration functionality. Our chief operating decision maker, our chief executive officer, allocates resources and makes operating decisions based on financial data consistent with the presentation in the accompanying consolidated financial statements. Our revenue consists of two product categories: product and service. Total international revenue consists of sales made by our U.S. operations to non-affiliated customers in other geographic regions outside the U.S.

Operating decisions regarding the costs of our products and services are made with information that is consistent with the presentation in the accompanying condensed consolidated statements of operations.

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):


	Three months ended January 31,
	2009				2008
	$		%		$		%
North America	$	41,741	38.1	%	$	35,448	43.5	%
EMEA (1)		43,905	40.0			32,953	40.5
LATAM (2)		2,369	2.2			627	0.8
APAC (3)		21,581	19.7			12,353	15.2

Total net revenue	$	109,596	100.0	%	$	81,381	100.0	%


	Nine months ended January 31,
	2009				2008
	$		%		$		%
North America	$	139,036	42.0	%	$	106,956	49.2	%
EMEA (1)		122,762	37.0			79,102	36.4
LATAM (2)		8,200	2.5			1,601	0.8
APAC (3)		61,125	18.5			29,550	13.6

Total net revenue	$	331,123	100.0	%	$	217,209	100.0	%

(1)	Europe, Middle East, and Africa (“EMEA”)

(2)	Central America and Latin America (“LATAM”)

(3)	Asia and Pacific regions (“APAC”)

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


	Three months ended January 31,
	2009				2008
	$		%		$		%
Product	$	72,495	66.1	%	$	62,841	77.2	%
Service		37,101	33.9			18,540	22.8

Total net revenue	$	109,596	100.0	%	$	81,381	100.0	%


	Nine months ended January 31,
	2009				2008
	$		%		$		%
Product	$	231,221	69.8	%	$	167,626	77.2	%
Service		99,902	30.2			49,583	22.8

Total net revenue	$	331,123	100.0	%	$	217,209	100.0	%

At January 31, 2009, substantially all of our long-lived assets were located in the United States.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

Overview

We sell a family of proxy appliances and related software and services. Proxy appliances are computer hardware devices that, together with internal software, secure, accelerate and control the delivery of business applications and other information over a WAN or across an enterprise’s Internet gateway, where its local computer network links to the public Internet.

On June 6, 2008, we acquired Packeteer, Inc. (“Packeteer”), a pioneer in delivering sophisticated WAN traffic prioritization, for a purchase price of approximately $277.5 million. Packeteer developed and sold application classification and performance management technologies and products. Much of our focus during the first nine months of fiscal 2009 was on integrating the business of Packeteer into our existing business and creating a single organization (including an integrated sales force) designed to take advantage of cost, management, technology, and sales and market synergies. We have continued to sell the PacketShaper^®, Intelligence Center and Policy Center products formerly offered by Packeteer and intend to rebrand certain Packeteer products as Blue Coat products.

We primarily purchased Packeteer to accelerate our ability to offer a comprehensive platform to address the application delivery and security challenges confronting today’s distributed enterprise. These challenges include the requirement to centralize IT operations, while simultaneously managing mobile employees and remote locations, and the requirement to respond to global business needs on a real-time basis. We believe that such requirements, together with the predominance of new types of applications (such as remotely hosted software-as-a-service, rich media and Web 2.0 applications) will create demand for a new network layer that we call the application delivery network. This network layer will monitor and control all information flowing between the communications network and the application servers and end users that it serves. Our strategy is to provide application delivery solutions that work as part of an application delivery network infrastructure that optimizes and secures the flow of such information throughout an enterprise. We offer products that provide visibility into the business applications operating on the network, as well as securing and optimizing the delivery of those applications.

We continue to monitor the current unfavorable and uncertain domestic and global macroeconomic conditions, and their actual and anticipated impact on IT spending, including on spending for proxy appliances. While we believe that our products offer an attractive return on investment and that sales of our products may be less affected by current conditions than many IT products, we believe our average sales cycle is lengthening, as customers more carefully scrutinize spending decisions. This means that sales take longer to close. Despite the challenging economic and market environment, we continue to hire sales personnel, as we believe that we need more sales personnel to address and grow our current and anticipated market. We suffered an unanticipated level of attrition in our sales force after the Packeteer acquisition and did not recruit sufficient personnel to replace the attrition and to grow our sales force. We added sales personnel in the third fiscal quarter and intend to add sales personnel in the fourth fiscal quarter. However, in our experience, it takes a number of quarters for new sales representatives to become fully productive, so we do not anticipate that we will see the benefit of such investment in the near term. We also are selectively hiring personnel in other areas we believe to be strategic to our operation, including support and research and development.

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

Net Revenue

Net revenue, which includes both product and service revenue, increased to $109.6 million in the third quarter of fiscal 2009 from $81.4 million in the third quarter of fiscal 2008. Net product revenue in the third quarter of fiscal 2009 was $72.5 million, a $9.7 million increase compared to the same quarter in fiscal 2008. The increase in product revenue was primarily due to revenue attributable to Packeteer products and increased sales of existing products. Net product revenue includes sales of our proxy appliances and perpetual licenses for our Blue Coat WebFilter product. Included in product revenue is $14.4 million in sales attributable to Packeteer products. We recognized $37.1 million in service revenue in the third quarter of fiscal 2009, a $18.6 million increase compared to the same quarter in fiscal 2008. Included in service revenue is $9.2 million attributable to Packeteer services. The balance of the increase was driven primarily by the continued growth in our installed base, resulting in an increase in sales of service contracts.

Operating Margin

Our operating margin (income/loss before income taxes) was $3.8 million for the third quarter of fiscal 2009, a decrease of $7.5 million compared to the third quarter of fiscal 2008. The decrease was primarily attributable to a reduction in our gross profit margin from 76.3% in the third quarter of fiscal 2008 to 72.2% in the third quarter of fiscal 2009. Our gross profit margin was impacted by a write-up of inventories acquired from Packeteer and by a write-down of Packeteer’s deferred service revenue as required by purchase accounting rules.

Deferred Revenue

Net deferred revenue was $129.2 million at January 31, 2009 compared with $89.6 million at April 30, 2008. The increase was primarily attributable to an increase in the sales of new maintenance and renewal contracts to our customers and deferred revenue attributable to the Packeteer acquisition, partially offset by a decrease in deferred revenue related to our channel inventory.

Cash Flow from Operations and Cash Position

For the first nine months of fiscal 2009, we generated cash flow from operations of $52.9 million, compared to $48.4 million generated for the same period in fiscal 2008. The increase in operating cash flow was primarily due to higher cash collections and increased accounts payable due to improved supplier payment management, offset by payments made related to our Packeteer acquisition, including transaction costs, severance payments and other liabilities assumed as a result of the Packeteer acquisition and lower net income, excluding non-cash charges. Our cash and cash equivalents and restricted cash were $111.8 million at January 31, 2009, compared to $163.0 million at April 30, 2008. The overall decrease in our cash and equivalents balance was primarily due to the cash used for our Packeteer acquisition, partially offset by the proceeds received from our convertible debt issuance on June 2, 2008.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to Revenue Recognition and related Allowance for Doubtful Accounts, Stock-Based Compensation, Valuation of Inventories, Valuation of Goodwill, Valuation of Long-Lived and Identifiable Intangible Assets and Income Taxes. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and such differences could be material.

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

•

Revenue Recognition and Allowance for Doubtful Accounts

•

Stock-Based Compensation

•

Valuation of Inventories

•

Valuation of Goodwill

•

Valuation of Long-Lived and Identifiable Intangible Assets

•

Income Taxes

Revenue Recognition and Allowance for Doubtful Accounts

Our products include software that is essential to the functionality of the appliances. Additionally, we provide unspecified software upgrades and enhancements related to the appliances through maintenance contracts for most of our products. Accordingly, we account for revenue in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” and all related interpretations. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery or performance has occurred; the sales price is fixed or determinable and collectibility is reasonably assured.

We define each of the four criteria above as follows:

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

Delivery or performance has occurred. Shipping terms and related documents, or written evidence of customer acceptance, when applicable, are used to verify delivery or performance. Most of our sales are made through distributors under agreements, which in most cases, allow for stock rotation rights. Net revenue and the related cost of net revenue resulting from shipments to distributors are deferred until the distributors report that our products have been sold to a customer. Product revenue in China is deferred until the customer registers the proxy appliance.

The sales price is fixed or determinable. We assess whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment.

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

Stock-Based Compensation

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

We estimate the fair value of options granted using the Black-Scholes option valuation model. Effective May 1, 2008, we estimated the expected option term at 4.0 years based on our historical experience of grants, exercises and post-vesting cancellations. Beginning with our adoption of SFAS No. 123(R) on May 1, 2006 until April 30, 2008, we estimated the expected option term at 4.63 years. We estimate the volatility of our stock options at the date of grant using a combination of historical and implied volatilities, consistent with SFAS No. 123(R) and SAB No. 107. We base the risk-free rate that we use in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant based on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of our option grants. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. Stock-based compensation expense under SFAS No. 123(R) is based on awards ultimately expected to vest, which requires us to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Effective May 1, 2008, we estimated our forfeiture rate at 14.0% based on an analysis of historical pre-vesting forfeitures, and have reduced stock-based compensation expense accordingly. From May 1, 2006 until April 30, 2008, we used a forfeiture rate of 10.0%. For options granted before May 1, 2006, we amortize the fair value on a graded basis. For options granted on or after May 1, 2006, we amortize the fair value on a straight-line basis. The fair value of all options is amortized over the requisite service periods of the awards, which are generally the vesting periods. We may use different assumptions under the Black-Scholes option valuation model in the future, which could materially affect our total and per-share net income or loss and net income or loss per share.

Valuation of Inventories

Valuation of Goodwill

Valuation of Long-Lived and Identifiable Intangible Assets

Income Taxes

We record a valuation allowance to reduce our deferred tax assets to an amount that we estimate is more likely than not to be realized. We consider estimated future taxable income and prudent tax planning strategies in determining the need for a valuation allowance. When we determine that it is more likely than not that some or all of our tax attributes will be realizable by either refundable income taxes or future taxable income, the valuation allowance will be reduced and the related tax impact will be recorded to the provision in that quarter. Likewise, should we determine that we are not likely to realize all or part of our deferred tax assets in the future, an increase to the valuation allowance would be recorded to the provision in the period such determination was made.

Results of Operations

The following table sets forth, as a percentage of net revenue, condensed consolidated statements of operations data for the periods indicated:


	Three Months Ended January 31,				Nine Months Ended January 31,
	2009		2008		2009		2008
Net revenue:
Product	66.1	%	77.2	%	69.8	%	77.2	%
Service	33.9		22.8		30.2		22.8

Total net revenue	100.0		100.0		100.0		100.0
Cost of net revenue
Product	17.4		16.2		20.0		15.5
Service	10.4		7.5		10.1		7.6

Total cost of net revenue	27.8		23.7		30.1		23.1
Gross profit	72.2		76.3		69.9		76.9
Operating expenses:
Sales and marketing	39.8		39.9		39.9		42.6
Research and development	17.0		16.3		17.2		17.3
General and administrative	9.9		8.0		10.6		8.7
Amortization of intangible assets	1.7		0.1		1.5		0.2
Restructuring	—		—		0.5		—

Total operating expenses	68.4		64.3		69.7		68.8

Operating income	3.8		12.0		0.2		8.1
Interest income	0.1		2.3		0.2		2.1
Other income (expense)	(0.4	)	(0.5	)	(0.6	)	(0.2	)

Income (loss) before income taxes	3.5		13.8		(0.2	)	10.0
Provision for income taxes	2.5		0.9		1.3		0.7

Net income (loss)	1.0	%	12.9	%	(1.5	)%	9.3	%

Net Revenue

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


	Three Months Ended January 31,						Nine Months Ended January 31,
	2009			2008			2009			2008
Total net revenue	$	109,596		$	81,381		$	331,123		$	217,209
Change from same period prior year ($)	$	28,215		$	34,273		$	113,914		$	93,981
Change from same period prior year (%)		34.7	%		72.8	%		52.4	%		76.3	%

Net revenue, which includes both product and service revenue, increased $28.2 million, or 34.7%, to $109.6 million in the third quarter of fiscal 2009. Net product revenue in the third quarter of fiscal 2009 was $72.5 million, a $9.7 million increase compared to the same quarter in fiscal 2008, and included $14.4 million in sales of Packeteer products. We recognized $37.1 million in service revenue in the third quarter of fiscal 2009, an $18.6 million increase compared to the same quarter in fiscal 2008, and included $9.2 million attributable to Packeteer. The balance of the increase in net revenue was driven primarily by the continued growth in our installed base, resulting in an increase in sales of service contracts.

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


	Three months ended January 31,
	2009				2008
	$		%		$		%
North America	$	41,741	38.1	%	$	35,448	43.5	%
EMEA (1)		43,905	40.0			32,953	40.5
LATAM (2)		2,369	2.2			627	0.8
APAC (3)		21,581	19.7			12,353	15.2

Total net revenue	$	109,596	100.0	%	$	81,381	100.0	%


	Nine months ended January 31,
	2009				2008
	$		%		$		%
North America	$	139,036	42.0	%	$	106,956	49.2	%
EMEA (1)		122,762	37.0			79,102	36.4
LATAM (2)		8,200	2.5			1,601	0.8
APAC (3)		61,125	18.5			29,550	13.6

Total net revenue	$	331,123	100.0	%	$	217,209	100.0	%

(1)	Europe, Middle East, and Africa (“EMEA”)

(2)	Central America and Latin America (“LATAM”)

(3)	Asia and Pacific regions (“APAC”)

Net revenue grew in all geographies in the three and nine months ended January 31, 2009, compared to the same periods of fiscal 2008. For the three months ended January 31, 2009, as compared to the comparable prior year period, net revenue in North America increased $6.3 million, or 17.8%, net revenue in EMEA increased $11.0 million, or 33.2%, net revenue in LATAM increased $1.7 million, or 277.8% and net revenue in APAC increased $9.2 million, or 74.7%. For the nine months ended January 31, 2009, as compared to the comparable prior year period, net revenue in North America increased $32.1 million, or 30.0%, net revenue in EMEA increased $43.7 million, or 55.2%, net revenue in LATAM increased $6.6 million, or 412.2% and net revenue in APAC increased $31.6 million, or 106.9%.

Gross Profit

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


	Three Months Ended January 31,						Nine Months Ended January 31,
	2009			2008			2009			2008
Gross profit	$	79,094		$	62,082		$	231,417		$	166,921
Gross profit as a percentage of net revenue		72.2	%		76.3	%		69.9	%		76.9	%

Gross profit was $79.1 million in the third quarter of fiscal 2009, compared to $62.1 million for the third quarter of fiscal 2008. As a percentage of net revenue, gross profit for the third quarters of fiscal 2009 and 2008 was 72.2% and 76.3%, respectively. Gross profit was $231.4 million for the first nine months of fiscal 2009 compared to $166.9 million for the first nine months of fiscal 2008. As a percentage of net revenue, gross profit for the first nine months of fiscal 2009 and 2008 was 69.9% and 76.9%, respectively. The decline in gross profit as a percentage of net revenue for the three and nine months ended January 31, 2009 as compared to the comparable periods in 2008 primarily was attributable to higher costs of net revenues associated with the purchase accounting adjustments to inventories acquired in the Packeteer acquisition, amortization of acquired intangible assets, a write-down of deferred service revenue in connection with the Packeteer acquisition, as required by purchase accounting rules, as well as increased manufacturing spending and other cost of goods sold as a percentage of revenue when compared to the third fiscal quarter of 2008.

Sales and Marketing

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


	Three Months Ended January 31,						Nine Months Ended January 31,
	2009			2008			2009			2008
Sales and marketing	$	43,608		$	32,483		$	132,208		$	92,455
Sales and marketing as a percentage of net revenue		39.8	%		39.9	%		39.9	%		42.6	%

Sales and marketing expense consists primarily of salaries and benefits, commissions, travel, advertising and promotional expenses.

Sales and marketing expense increased $11.1 million to $43.6 million for the third quarter of fiscal 2009 from $32.5 million for the third quarter of fiscal 2008. These amounts represented 39.8% and 39.9% of net revenue for the third quarters of fiscal 2009 and 2008, respectively. Sales and marketing expense increased $39.7 million to $132.2 million for the first nine months of fiscal 2009 from $92.5 million for the first nine months of fiscal 2008. These amounts represented 39.9% and 42.6% of net revenue for the first nine months of fiscal 2009 and fiscal 2008, respectively. The increase in sales and marketing expense for both periods was primarily attributable to headcount increases and related expenses such as commission payments and travel costs as well as increased marketing program spending. The increase in sales and marketing expense was consistent with our plans to increase our market share in the growing WAN Application Delivery market. The increase in marketing training and travel costs primarily resulted from our integration of the Blue Coat and Packeteer sales organizations. Sales and marketing headcount was 510 at January 31, 2009, compared to 365 at January 31, 2008.

We expect sales and marketing expenses to increase in absolute dollars during the remainder of the fiscal year, as we continue to expand our sales force. As a percentage of revenue, we expect sales and marketing expenses to remain consistent with the rate experienced during the first nine months of fiscal year 2009.

Research and Development

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


	Three Months Ended January 31,						Nine Months Ended January 31,
	2009			2008			2009			2008
Research and development	$	18,606		$	13,240		$	56,963		$	37,564
Research and development as a percentage of net revenue		17.0	%		16.3	%		17.2	%		17.3	%

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

Research and development expense increased $5.4 million to $18.6 million in the third quarter of fiscal 2009 from $13.2 million for the third quarter of fiscal 2008. These amounts represented 17.0% and 16.3% of net revenue for the third quarters of fiscal 2009 and 2008, respectively. Research and development expense increased $19.4 million to $57.0 million for the first nine months of fiscal 2009 from $37.6 million for the first nine months of fiscal 2008. These amounts represented 17.2% and 17.3% of net revenue for the first nine months of fiscal 2009 and 2008, respectively. The increase in research and development expense for both periods was primarily attributable to higher employee costs from increased headcount. The increase in research and development expense for the nine months ended January 31, 2009, was also due to Packeteer acquisition-related integration and transition costs. Research and development headcount was 339 at January 31, 2009, compared to 252 at January 31, 2008.

We plan to continue our investment in research and development and expect these expenses to increase in absolute dollars and as a percentage of revenue for the remainder of fiscal 2009.

General and Administrative

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


	Three Months Ended January 31,						Nine Months Ended January 31,
	2009			2008			2009			2008
General and administrative	$	10,877		$	6,517		$	35,192		$	18,991
General and administrative as a percentage of net revenue		9.9	%		8.0	%		10.6	%		8.7	%

General and administrative expense consists primarily of salaries and benefits, accounting and audit costs, legal costs, and legal settlement costs.

General and administrative expense increased $4.4 million to $10.9 million for the third quarter of fiscal 2009 from $6.5 million for the third quarter of fiscal 2008. These amounts represented 9.9% and 8.0% of net revenue for the third quarters of fiscal 2009 and 2008, respectively. General and administrative expense increased $16.2 million to $35.2 million for the first nine months of fiscal 2009 from $19.0 million for the first nine months of fiscal 2008. These amounts represented 10.6% and 8.7% of net revenue for the first nine months of fiscal 2009 and 2008, respectively. The increase in general and administrative expense for both periods was primarily due to higher employee costs associated with increased headcount and increased legal and legal settlement costs. The increase in general and administrative expense for the nine months ended January 31, 2009 was also due to Packeteer acquisition-related integration and transition costs and increased bad debt expense. General and administrative headcount was 176 at January 31, 2008, compared to 112 at January 31, 2008.

We expect general and administrative expenses to remain essentially flat for the remainder of fiscal year 2009.

Acquisition and Amortization of Intangible Assets

We completed the acquisition of Packeteer on June 6, 2008. The acquired intangible assets associated with the Packeteer acquisition consist of developed technology and patents, customer relationships and trade name. Developed technology is comprised of products that have reached technological feasibility and are a part of Packeteer’s product lines, and patents related to the design and development of Packeteer’s products. Customer relationships represent Packeteer’s underlying relationships with its customers. Trade name represents the fair value of brand and name recognition associated with the marketing of Packeteer’s products and services. The amounts assigned to customer relationships, developed technology and patents, and trade name were $35.0 million, $20.0 million, and $0.4 million, respectively. We amortize developed technology and patents, customer relationships and trade name on a straight-line basis over their weighted average expected useful life of 5, 5, and 2 years, respectively.

Of the total estimated purchase price of $277.5 million for Packeteer, approximately $151.2 million was allocated to 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. In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, goodwill resulting from business combinations subsequent to June 30, 2001 is not amortized but instead is tested for impairment at least annually (more frequently if certain indicators are present). In the event that management determines that the value of goodwill has become impaired, the combined company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.

For the three months ended January 31, 2009 and 2008, as well as for the nine months ended January 31, 2009 and 2008, the amortization of intangible assets was related to our June 6, 2008 acquisition of Packeteer, our September��11, 2006 acquisition of certain assets of the NetCache business from Network Appliance, our March 3, 2006 acquisition of Permeo, Inc., our November 16, 2004 acquisition of Cerberian, Inc. and our November 14, 2003 acquisition of Ositis Software, Inc. The amortization of developed technology and patents and trade name is charged to cost of goods sold while the amortization of core technology and customer relationships is charged to operating expense. Total amortization expense for our identifiable intangible assets was $3.2 million and $8.5 million in the three and nine months ended January 31, 2009, respectively, and approximately $0.4 million and $1.2 million in the three and nine months ended January 31, 2008, respectively. Amortization expense related to intangible assets in the remaining three months of fiscal 2009 is expected to be $3.2 million.

Restructuring Charges

In connection with our acquisition of Packeteer, we committed to a plan that resulted in the termination of 33 employees of Blue Coat. Restructuring charges consist primarily of personnel-related severance costs and stock-based compensation expenses. Stock-based compensation included in restructuring resulted primarily from the additional vesting of any unvested option shares and restricted shares upon termination of the employment of those employees pursuant to the terms of their separation agreements. During the first quarter of fiscal 2009, all 33 employees were terminated and we recorded a restructuring charge of $1.5 million on our condensed consolidated statement of operations. During the nine months ended January 31, 2009, we paid severance in the amount of $1.4 million. We anticipate the remaining balance of $0.1 million will be paid by the end of fiscal 2009.

Interest Income and Other Income

The following summarizes interest income and other expense (in thousands):


	Three Months Ended January 31,						Nine Months Ended January 31,
	2009			2008			2009			2008
Interest income, net	$	56		$	1,857		$	520		$	4,620
Other expense	$	(440	)	$	(337	)	$	(1,980	)	$	(526	)

For the three and nine months ended January 31, 2009, as compared with the comparable prior year periods, interest income, net decreased as a result of our reduced cash and cash equivalents balances as well as a decrease in our average investment yield due to lower interest rates in addition to increased interest expense associated with our Convertible Senior Notes. Other expense consists primarily of foreign currency exchange gains or losses. Foreign exchanges losses increased during the nine months ended January 31, 2009, primarily during the first half of fiscal 2009, as the U.S. dollar strengthened against foreign currencies during the comparable periods of 2008.

Provision for Income Taxes

Due to our taxable loss position since inception through fiscal year 2007, all tax years are subject to examination in the U.S. and state jurisdictions. We are also subject to examination in various foreign jurisdictions for tax years 2000 forward, none of which were individually material. We are unable to anticipate the change in the balance of the unrecognized tax benefits in the next twelve months due to pending examinations in foreign jurisdictions and continued assessment of potential contingencies.

Recent Accounting Pronouncements

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

In May 2008, the FASB issued FSP No. APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP No. APB 14-1 will require the issuer to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Further, the FSP will require bifurcation of a component of the debt, classification of that component in equity, and then accretion of the resulting discount on the debt as part of interest expense being reflected in the statement of income. FSP APB No. 14-1 is effective for fiscal years beginning after December 15, 2008, and will be required to be applied retrospectively to all periods presented. We will be required to implement the standard during the first quarter of fiscal 2010. We currently are evaluating the effect, if any, that the adoption of FSP APB No. 14-1 will have on our condensed consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to provide an enhanced understanding of an entity’s use of derivative instruments and, how they are accounted for under SFAS No. 133, and to require tabular disclosure of the effects of such instruments and related hedged items on the entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We will adopt SFAS No. 161 in the fourth quarter of fiscal 2009. Since SFAS No. 161 requires only additional disclosures about our derivatives and hedging activities, the adoption of SFAS No. 161 will not have an impact on our condensed consolidated financial condition or results of operations.

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

In December 2007, the FASB issued SFAS No. 141(R),Business Combinations. SFAS No. 141(R) amends SFAS No. 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to better evaluate the nature and financial effects of the business combination. It is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. SFAS No. 141(R) will have an impact on our consolidated financial statements with respect to future acquisitions. The nature and magnitude of the specific impact will depend upon the nature, terms, and size of any acquisitions consummated after the effective date.

Liquidity and Capital Resources

Liquidity

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

As of January 31, 2009, we had cash and cash equivalents of $110.9 million and restricted cash of $0.8 million. We paid $264.0 million in cash for the Packeteer acquisition, which closed during the first quarter of fiscal 2009. The Packeteer acquisition was funded primarily from our cash balance of $161.0 million as of April 30, 2008 and the issuance of Zero Coupon Convertible Senior Notes and associated warrants, which generated net proceeds of $79.7 million. In addition, we acquired cash of $77.5 million as a result of the Packeteer acquisition. We believe our existing cash, cash equivalents, short-term investments and cash generated from operations, if any, will be sufficient to meet our operating requirements for at least the next twelve months, including working capital requirements and capital expenditures. We may seek to raise additional capital to strengthen our financial condition, facilitate expansion and pursue strategic acquisitions or investments, or to take advantage of business opportunities as they arise.

The following summarizes cash and cash equivalents, short-term investments and restricted cash (in thousands):


	As of January 31, 2009			As of April 30, 2008
Cash and cash equivalents	$	110,914		$	160,974
Short-term investment		—			1,204
Restricted cash		849			861

Subtotal		111,763			163,039
Total assets	$	548,961		$	387,768

Percentage of total assets		20.4	%		42.0	%

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 believe that our planned cash flow assumptions for fiscal 2009 can be realized, we cannot guarantee that our planned results will be obtained in fiscal 2009. As well, given the current dislocation in debt and equity capital markets, we cannot guarantee that, should it be required, sufficient debt or equity capital will be available to us under acceptable terms, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced.

Cash Flow (in thousands):


	Nine Months Ended January 31,
	2009			2008
Cash provided by operating activities	$	52,864		$	48,383
Cash used in investing activities		(189,344	)		(17,708	)
Cash provided by financing activities		86,420			27,296

Net (decrease) increase in cash and cash equivalents	$	(50,060	)	$	57,971

Our largest source of operating cash flows is cash collections from our customers who purchase our appliances, perpetual licenses to our Blue Coat WebFilter products and, to a lesser extent, service contracts. Our primary uses of cash from operating activities are for personnel related expenditures, product costs, and facility related payments. Net cash provided by operating activities was $52.9 million for the first nine months of fiscal 2009, compared to $48.4 million in the comparable prior year period. The increase

in operating cash flow was primarily due to higher cash collections and increased accounts payable due to improved supplier payment management. These increases were offset by payments made related to our Packeteer acquisition, including transaction costs, severance payments and other liabilities assumed as a result of the Packeteer acquisition and lower net income, excluding non-cash charges.

Net cash used by investing activities was $189.3 million for the first nine months of fiscal 2009, compared to $17.7 million used by investing activities in the same period last year. The increase in investing activities was primarily due to cash used to purchase Packeteer of $170.0 million, net of cash acquired, and $14.0 million of increased purchases of property and equipment, consisting primarily of furniture and leasehold improvements. In comparison to the first nine months of fiscal 2008, which also included $4.1 million related to the escrow release from the NetCache acquisition and net purchases of investment securities of $15.2 million.

Net cash provided by financing activities was $86.4 million for the first nine months of fiscal 2009, compared to $27.3 million provided in the same period last year. The increase in financing activities was primarily due to the net proceeds of $79.7 million from our issuance of convertible notes. The net cash provided by our financing activities for the first nine months of fiscal 2008 primarily consisted of the proceeds from the exercise of employee stock options and purchases of our stock under our employee stock purchase plan.

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.

Commercial Commitments

Leases

We lease certain equipment and office facilities under non-cancelable operating leases that expire at various dates through 2016. The facility leases generally require us to pay operating costs, including property taxes, insurance and maintenance, and contain scheduled rent increases and certain other rent escalation clauses. Rent expense is recognized in our condensed consolidated financial statements on a straight-line basis over the terms of the respective leases after consideration of rent holidays and improvement allowances, if applicable, with any assets purchased using a lessee improvement allowance capitalized as fixed assets and depreciated over the shorter of their useful lives or the lease term.

As of January 31, 2009, 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,	Total
2009 (remaining three months)	$	3,107
2010		11,110
2011		10,510
2012		10,271
2013		10,217
Thereafter		22,246

Future minimum lease payments		67,461
Less: minimum payment to be received from sublease		(17,534	)

Total future minimum lease payments, net	$	49,927

Lease commitments include future minimum rent payments for several facilities that we will vacate pursuant to our Packeteer post-acquisition integration activities.

Other

Pre-Acquisition Contingencies

In connection with our acquisition of Packeteer, we have evaluated and continue to evaluate pre-acquisition contingencies relating to Packeteer that existed as of the acquisition date. If these pre-acquisition contingencies that existed as of the acquisition date become probable in nature and estimable during the purchase price allocation period, amounts related to such contingencies will be recorded as an increase to the purchase price, and, if subsequent to the purchase price allocation period, such amounts will be recorded in our results of operations.

Item 3.

Quantitative and Qualitative Disclosures about Market 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 also do not purchase or hold any derivative financial instruments for hedging, speculative or trading purposes.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. As of January 31, 2009, we had cash and cash equivalents of $110.9 million and restricted cash of $0.8 million. These amounts are primarily held in money market funds. 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 market interest rates due mainly to the short-term nature of the majority 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 are affected by factors such as changes in foreign currency exchange rates and economic conditions in foreign markets. Because all of our sales are currently billed and collected in U.S. dollars, a strengthening of the dollar could make our products less price-competitive in foreign markets. If the events described above were to occur, our net revenue and earnings could be seriously impacted, since a significant portion of our net revenue and earnings are derived from international operations. For the three and nine months ended January 31, 2009, approximately 61.9% and 58.0%, respectively, of our total net revenue was 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 affected by changes in foreign currency exchange rates. However, we do not consider the market risk associated with our international operations to be material.

Item 4.

Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to Blue Coat, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to Blue Coat’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any change in our internal control over financial reporting during that quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

The information set forth above under Note 10 contained in the “Notes to Condensed Consolidated Financial Statements” is incorporated herein by reference.

Item 1A.

Risk Factors

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

We have added a new risk factor affecting our business, entitled “Changes in our global distribution practices may harm our business”, since those presented in our Annual Report on Form 10-K, Part I, Item 1A, for the fiscal year ended April 30, 2008. We also have updated a number of those risk factors to reflect our acquisition of Packeteer and various other developments in our business since that time. There have been no material changes in our assessment of the risk factors that we have updated.All of our risk factors are included below.

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

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

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The timing, size and mix of orders from customers;

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Fluctuations in demand for our products and services;

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Certain markets in which we compete are relatively new and are evolving;

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Variability and unpredictability in the rate of growth in the markets in which we compete;

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Our ability to continue to increase our respective market shares consistent with past rates of increase;

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Our variable sales cycles, which may lengthen as the complexity of products and competition in our markets increases;

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The level of competition in our target product markets, including new entrants or substantial discounting;

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Market acceptance of our new products and product enhancements;

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Announcements, introductions and transitions of new products or product enhancements by us or our competitors, and deferrals of customer orders which may result from such announcements, introductions and transitions;

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Technological changes in our product target markets;

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Future accounting pronouncements and changes in accounting policies;

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Our recognition of revenue in accordance with Statement of Position (“SOP”) 97-2 requires that some product revenue be recognized ratably over a defined period or deferred to a future period if we are unable to establish fair value for the undelivered element, such as support; and

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Future macroeconomic conditions in our domestic and international markets, as well as the level of discretionary IT spending generally.

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

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

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

To maintain our competitive position in a market characterized by rapid rates of technological advancement, we must correctly anticipate market requirements and invest our research and development resources to meet those requirements. The introduction of new products by others, market acceptance of products based on new or alternative technologies, or the emergence of new industry standards, could render our existing products obsolete or make it easier for other products to compete with our products. Our future success will depend in part upon our ability to:

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develop and maintain competitive products;

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

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

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

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

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

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

We have increasingly invested in and focused on the WAN Application Delivery market. This market is intensely competitive, and the intensity of this competition is expected to increase in the future. Such 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, financial condition and operating results. We may not be able to compete successfully against current or future competitors and we cannot be certain that competitive pressures we face will not seriously harm our business. Our competitors vary in size and in the scope and breadth of the products and services they offer. In addition, we expect that there will be competition from other established and emerging companies as the market for WAN Application Delivery products continues to develop and expand.

Many of our current and potential competitors have longer operating histories; significantly greater financial, technical, sales and marketing resources; significantly greater name recognition; and a larger installed base of customers than we do. Such competitors also may have well-established relationships with our current and potential customers and extensive knowledge of our industry. As a result, those 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. They also may make strategic acquisitions or establish cooperative relationships among themselves or with other providers, thereby increasing their ability to provide a broader suite of products, and potentially causing customers to defer purchasing decisions. Also, larger competitors may be able to integrate some of the functionality of our products into existing infrastructure products or to bundle WAN Application Delivery products with other product offerings. Finally, they may engage in aggressive pricing strategies or discounting. Any of the foregoing may limit our ability to compete effectively in the market and adversely affect our business, financial condition and operating results.

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

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

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inability to successfully integrate the operations, technologies, products and personnel of the acquired companies;

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diversion of management’s attention from normal daily operations of the business;

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loss of key employees; and

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substantial transaction costs.

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

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dilution of our current stockholders’ percentage ownership to the extent we issue new equity;

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assumption of additional liabilities;

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incurrence of additional debt or a decline in available cash;

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adverse effects to our financial statements, such as the need to make large and immediate write-offs or the incurrence of restructuring and other related expenses;

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liability for intellectual property infringement and other litigation claims, which we may or may not be aware of at the time of acquisition; and

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creation of goodwill or other intangible assets that could result in significant amortization expense or impairment charges.

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

Economic uncertainty and adverse macroeconomic conditions may harm our business.

Our revenues and margins are dependent on various economic factors, including rates of inflation, currency fluctuations, energy costs, levels of consumer sentiment, and other macroeconomic factors which may impact levels of business spending. These conditions, including the current turmoil in the global credit markets, may affect corporate spending for IT products and services in specific geographies or more broadly, and could result in:

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a significant reduction in our net revenue, gross margin and operating margin;

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increased price competition for our products and services;

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risk of excess and obsolete inventory;

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higher overhead costs as a percentage of net revenue;

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a reduced ability to collect customer receivables;

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difficulty in accurately forecasting demand for our products and services;

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insolvency or credit difficulties confronting our customers, affecting their ability to purchase or pay for our products and services; and

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insolvency or credit difficulties confronting our key suppliers, which could disrupt our supply chain.

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

Recent adverse economic and market conditions in the United States and globally could result in delays in closing customer orders, and further uncertainty or deterioration in these conditions could materially impact our business, operating results and financial condition.

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

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

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

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

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

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

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

Our WAN Application Delivery appliances are purchased to secure, accelerate and control the delivery of third party software applications and content. It is possible that the providers of software applications and operating systems which operate with the software applications and content accelerated by our appliances may enhance the performance of their software, such that further acceleration of affected applications and content is not necessary. This would make our products less valuable to users of that software. In addition, manufacturers of hardware or software may incorporate functionality similar to that offered by our WAN Application Delivery or Secure Web Gateway products directly into their products, which would make our products less valuable to users of those products. Any of the foregoing may limit our ability to sell our products and adversely affect our business, financial condition and operating results.

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

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

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

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

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

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

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

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

While we have been profitable in certain quarters, we have not been able to maintain consistent profitability on a quarterly basis. Although we were profitable in all four quarters of fiscal 2008, we were not profitable in the first two quarters in fiscal 2009, and may not be profitable on a quarterly or annual basis in the future. Our ability to achieve, sustain or increase profitability on a quarterly or annual basis will be affected by changes in our business and the demand for our products and services. We expect our operating expenses to increase as we endeavor to grow revenue, and we anticipate that we will make investments in our business. Our results of operations will be harmed if our revenue does not increase at a rate commensurate with the rate of increase in our expenses. If our revenue is less than anticipated or if our operating expenses exceed our expectations or cannot be adjusted quickly and efficiently, we may continue to experience losses on a quarterly and annual basis.

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

We depend on key management, research and development, and sales personnel, and our ability to attract and retain highly qualified and skilled personnel on an ongoing basis. Our success will depend in part on our ability to recruit and retain key personnel. In particular, we experienced higher than anticipated attrition of sales personnel following our acquisition of Packeteer, which may have impacted our operations.

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

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

A significant amount of our revenue is generated through sales by our sales channel partners, which include distributors and resellers. During fiscal 2008, approximately 96.4% of our revenue was generated through our indirect sales channels and during the first nine months of fiscal 2009, approximately 97.7% of our revenue was generated through our indirect sales channels. We depend upon these partners to generate sales opportunities and to independently manage the sales process for opportunities with which they are involved. In order to increase our net revenue, we will need to maintain our existing sales channel partners and add new sales channel partners and effectively train and integrate them with our sales process. If we are unsuccessful in those efforts, our business will not grow and our operating results will be adversely affected.

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

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

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

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

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

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

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

We provide forecasts of our requirements to our contract manufacturers on a rolling 12-month basis. If our forecast exceeds our actual requirements, the contract manufacturers may assess charges or we may have liability for excess inventory, each of which could negatively affect our gross margin. If our forecast is less than our actual requirements, the contract manufacturers may have insufficient time and components to produce our product requirements, which could delay or interrupt manufacturing of our products and result in delays in shipments, customer dissatisfaction, and deferral or loss of revenue. As well, we may be required to purchase sufficient inventory to satisfy our future needs in situations where a component is being discontinued. If we fail to accurately predict our requirements, we may become liable for excess inventory that we and our contract manufacturers cannot use or we may be unable to fulfill customer orders. Any of the foregoing could adversely affect our business, financial condition and operating results.

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

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

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

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

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market acceptance of our products and fluctuations in demand;

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the timing and size of customer orders and product implementations;

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increased price competition and changes in product pricing;

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actions taken by our competitors;

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new product introductions and enhancements;

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manufacturing and component costs;

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availability of sufficient inventory to meet demand;

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purchase of inventory in excess of demand;

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our execution of our strategy and operating plans;

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changes in our sales model;

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geographies in which sales are made; and

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revenue recognition rules.

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

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

Our international operations expose us to risks.

We currently have operations in a number of foreign countries. In fiscal 2008, 53.2% of our total net revenue was derived from customers outside of North America and during the first nine months of fiscal 2009, 58.0% of our total net revenue was derived from customers outside of North America; thus, our business is substantially dependent on economic conditions and IT spending in markets outside North America. The expansion of our international operations and entry into additional international markets requires significant management attention and financial resources, and subjects us to certain inherent risks including:

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technical difficulties and costs associated with product localization;

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

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

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our limited experience in establishing a sales and marketing presence, together with the appropriate internal systems, processes and controls, in certain geographic markets;

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longer payment cycles for sales in certain foreign countries;

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seasonal reductions in business activity in the summer months in Europe and at other times in various countries;

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the significant presence of some of our competitors in some international markets;

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potentially adverse tax consequences;

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import and export restrictions and tariffs and other trade protection initiatives;

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potential failures of our foreign employees to comply with both U.S. and foreign laws, including antitrust laws, trade regulations and the Foreign Corrupt Practices Act;

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compliance with foreign laws and other government controls, such as those affecting trade, privacy, the environment and employment;

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

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fluctuations in foreign exchange rates;

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political or economic instability, war or terrorism in the countries where we are doing business; and

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

The matters relating to our historical stock granting practices and the restatement of our consolidated financial statements in March 2007 have required us to incur substantial expenses and have resulted in litigation and regulatory inquiries.

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

Item 9A, “Controls and Procedures” in our Annual Report on Form 10-K for the year ended April 30, 2006, and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Background of the Stock Option Investigation, Findings, Restatement of Consolidated Financial Statements, Remedial Measures and Related Proceedings,” and Item 4, “Controls and Procedures,” on Form 10-Q for the quarter ended January 31, 2007, each of which was filed with the SEC on March 28, 2007.

The matters addressed in the March 2007 Restatement have exposed us to greater risks associated with litigation. As described in Note 10 of Notes to Condensed Consolidated Financial Statements, multiple derivative complaints have been filed in state and federal courts against certain of our directors and officers pertaining to allegations relating to stock option grants, and our Board of Directors empowered a new Special Committee to investigate matters with respect to a demand made by the plaintiffs in the federal action. No assurance can be given regarding the outcomes of such activities or that such outcomes will be consistent with the findings of our original Special Committee reported in our Annual Report on Form 10-K for the year ended April 30, 2006. The resolution of these matters has been, and will continue to be, time consuming and expensive, and will distract management from the conduct of our business. Our available directors’ and officers’ liability insurance may not be sufficient to cover our legal expenses or those of persons we are obligated to indemnify, and may not cover all items for which we must procure representation or for which we are obligated to provide indemnification. In addition, the March 2007 Restatement and the related litigation, and any negative outcome that may occur from them, could impact our relationships with customers and our ability to generate future net revenue.

During the first nine months of fiscal 2009, we continued to incur substantial expenses for legal services related to the matters addressed above.

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

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

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

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

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

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

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

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

As described in Note 10 of Notes to Condensed Consolidated Financial Statements, we are a party to various litigation, including class action litigation arising out of our initial public offering in 1999 and stockholder derivative actions arising out of allegedly misleading statements about our prospects made between February 20, 2004 and May 27, 2004, which actions were subsequently amended to seek relief on our behalf from certain defendants with respect to our historical stock option practices. As well, on or about April 18, 2008, Realtime Data, LLC d/b/a IXO filed a patent infringement lawsuit against Packeteer, Inc., a company we acquired on June 6, 2008, and subsequently amended the complaint and named us as a defendant on June 20, 2008.

Any material litigation inevitably results in the diversion of our management’s attention and expenditure of our resources for defense costs for us and parties to whom we may have indemnification obligations. As well, we may pay material amounts in settlement costs or damages, which could have a material adverse effect on our results of operations and financial condition.

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

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

As of January 31, 2009, we had 22 issued U.S. patents, 36 pending U.S. patent applications (provisional and non-provisional), and 1 pending foreign patent applications, and Packeteer had 60 issued U.S. patents, 63 pending U.S. patent applications (provisional and non-provisional), 1 foreign issued patent and 4 pending foreign patent applications.There can be no assurance that any of our pending patent applications will issue or that the patent examination process will not result in our narrowing the claims applied for. Furthermore, there can be no assurance that we will be able to detect any infringement of our existing or future patents (if any) or, if infringement is detected, that our patents will be enforceable or that any damages awarded to us will be sufficient to adequately compensate us.

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

Third parties could assert that our products infringe their intellectual property rights.

Third parties have in the past and may in the future claim that our current or future products infringe their intellectual property rights, and these claims, even if without merit, could harm our business by increasing our costs, reducing our net revenue or by creating customer concerns that result in reduced sales. This is particularly true in the patent area, as an increasing number of U.S. patents covering computer networking and Internet technology have been issued in recent years. Patent owners, including those that do not commercially manufacture or sell products, may claim that one or more of our products infringes a patent they own. For example, on or about April 18, 2008, Realtime Data, LLC d/b/a IXO filed a patent infringement lawsuit against Packeteer, Inc., a company we acquired on June 6, 2008, and certain of its customers, and subsequently amended the complaint and named us as a defendant on June 20, 2008 (see Note 10 in the Condensed Consolidated Financial Statements).

We expect that companies in the Internet and networking industries will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims 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, or injunctive relief could be entered against us, each of which could seriously harm our business. The existence of such litigation may serve to delay or otherwise adversely affect purchasing decisions by our customers.

The market price of our stock is volatile, and is likely to be volatile in the future.

Since our initial public offering, the market price of our common stock has experienced significant fluctuations and is likely to continue to fluctuate significantly. Such volatility in the trading price of our stock can occur in response to general market conditions, changes in the IT or technology market generally or changes in the specific markets in which we operate, and cause an increase or decline in our stock price without regard to our operating performance. The market price of our common stock could decline quickly and significantly if we fail to achieve our guidance or if our performance fails to meet the expectation of public market analysts or investors.

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

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variations in our quarterly operating results;

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changes in financial estimates or investment recommendations by securities analysts;

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changes in macroeconomic conditions;

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the introduction of new products by our competitors;

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our ability to keep pace with changing technological requirements;

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

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

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loss of a major customer;

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additions or departures of key personnel;

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fluctuations in stock market volumes;

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investor confidence in our stock, technology stocks and the stock market in general;

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

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significant transactions; and

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regulatory or litigation matters.

It is not uncommon for securities class actions or other litigation to be brought against a company after periods of volatility in the market price of a company’s stock, and we have been subject to such litigation in the past. Such actions could result in management distraction and expense and, further, result in a decline in our stock price.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

Our products are subject to U.S. export controls and may be exported outside the U.S. only with the required level of export license or under an export license exception, because we incorporate encryption technology into our products. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products globally or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and operating results.

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

Our business operations are susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks and other events beyond our control. In addition, a substantial portion of our facilities, including our headquarters, are located in Northern California, an area susceptible to earthquakes. We do not carry earthquake insurance for 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. To the extent that such events disrupt our business or adversely impact our reputation, such events could adversely affect our operating results and financial condition.

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

Our products operate in part by storing material available on the Internet and making this material available to end users from our appliance. As well, our appliance may be used to block content from being accessed. This creates the potential for claims to be made against us, either directly or through contractual indemnification provisions with our customers, for defamation, negligence, intellectual property infringement, personal injury, censorship, invasion of privacy or other legal theories based on the nature, content,

copying or modification of this content. As of January 31, 2009, 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.

Changes in our global distribution practices may harm our business.

We are in the process of revising our global distribution practices and intend to transition to exclusive use of non-stocking distributors worldwide during the first two quarters of fiscal 2010. While this will not materially affect our practices in North America, it will constitute a significant change in certain other regions. The success of this change will depend on our ability to implement new systems and processes, and our ability to forecast our requirements for inventory. If we fail to successfully implement such systems or processes, or to forecast our requirements, we may be unable to fulfill customer orders or may have excess inventory on our books at the end of a quarter, each of which could adversely affect our business, financial condition and operating results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders

None

Item 5.

Other Information

None

Item 6.

Exhibits


Number		Description

3.8		Amended and Restated Bylaws (which is incorporated herein by reference to Exhibit 99.1 to the Registrant’s 8-K filed with the Commission on February 27, 2009).

31.1		Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Chief Executive Officer and Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements 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.

/s/ Kevin S. Royal

Kevin S. Royal

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

Dated: March 10, 2009

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Good

Blue Coat Systems (BCSI) Inactive 10-Q2009 Q3 Quarterly report

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