10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

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

FOR THE FISCAL YEAR ENDED APRIL 30, 2008

OR

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER 000-28139

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

(Address of Principal Executive Offices and Zip Code)

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

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

Title of Each Class	Name of Exchange on Which Registered
Common Stock, $.0001 Par Value	The NASDAQ Stock Market LLC

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

None

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

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

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

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

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

Large accelerated filer  x Accelerated filer  ¨ Non-accelerated filer  ¨ Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ¨    NO  x

The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was $1,483,329,971 as of October 31, 2007, the last day of the registrant’s second fiscal quarter during its fiscal year ended April 30, 2008, based upon the closing sale price on The NASDAQ Stock Market LLC reported for such date. Shares of Common Stock held by each officer and director and by each person who may be deemed to be an affiliate have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

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

Documents Incorporated by Reference:

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

BLUE COAT SYSTEMS, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

		PAGE
	PART I.
Item 1.	Business	4
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	25
Item 2.	Properties	25
Item 3.	Legal Proceedings	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
	PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
Item 6.	Selected Consolidated Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 8.	Financial Statements and Supplementary Data	50
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	86
Item 9A.	Controls and Procedures	87
Item 9B.	Other Information	88
	PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	89
Item 11.	Executive Compensation	89
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	89
Item 13.	Certain Relationships and Related Transactions, and Director Independence	89
Item 14.	Principal Accounting Fees and Services	89
	PART IV.
Item 15.	Exhibits, Financial Statement Schedules	90
	Signatures	91
	Exhibits	92
	Schedule II	97

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FORWARD-LOOKING STATEMENTS

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

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

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PART I.

Item 1. Business

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

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

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

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

We were incorporated in Delaware on March 13, 1996 as Web Appliance Inc. We changed our name to CacheFlow, Inc. on March 25, 1996, and completed our initial public offering on November 19, 1999. On August 21, 2002, we changed our name to Blue Coat Systems, Inc., and our ticker symbol for our common stock from CFLO to BCSI.

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

Overview

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

• The number of enterprise branch offices and mobile network users has continued to increase. As a result, a growing number of employees, and in some cases the majority of an enterprise’s employees, now work outside the corporate headquarters, or away from its data centers.

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• Data centers, servers, storage and applications are increasingly being consolidated at enterprise headquarters in order to reduce costs, optimize use of resources, better safeguard critical business information, and comply with new regulatory requirements requiring greater control over IT systems. As a result, a growing number of users must now connect securely and efficiently to the enterprise headquarters through a WAN to access the business applications and business information systems required to be productive.

• There is an increasing number of threats to the security and availability of corporate networks, including those resulting from malicious code, viruses, Trojans, spam, spyware, and the use of instant messaging.

• Most business applications are designed to perform optimally over a local area network (“LAN”) and are not designed or architected to be accessed over a WAN. As a consequence, these applications, although often critical to the enterprise, perform very inefficiently and slowly when used by remote and mobile users. In addition, other commonly used applications, such as Web protocols, video/streaming, and Secure Sockets Layer (“SSL”), consume large amounts of bandwidth, causing further degradation of application performance for the remote and mobile users of a corporate network. Where employees do not experience an acceptable level of network performance, their productivity may suffer and they may even cease to use an application altogether.

• Many companies are now outsourcing one or more critical business applications, such as customer relationship management or “CRM”, enterprise resource planning or “ERP”, human resources, and procurement applications. In such circumstances, the application is hosted remotely by the service provider and is typically accessed through the Internet. Since corporate IT organizations do not control these applications or the Internet, it is more difficult to ensure that these applications perform well and are secure, especially for remote and mobile users.

• The Web browser is becoming the ubiquitous user interface for many applications, and provides virtually all users of a corporate network with access to the Web itself. The amount of Internet traffic on the corporate WAN has increased dramatically.

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

• They must be able to block Internet security threats and inappropriate content, prevent leakage of sensitive information, and grant authorized users timely access to necessary applications and content.

• They must significantly improve the performance of critical business applications being delivered to remote users in branch offices and to mobile users. These applications can include ERP, CRM, and productivity and office applications; e-mail; file systems; streaming media; and Web-based applications, including encrypted SSL applications.

• They must be able to monitor the specific activities and performance of users and applications, as well as be able to implement and enforce access and security policies, to ensure that the business is providing an acceptable and cost effective level of application performance and network security for all users, including those located outside of enterprise headquarters.

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

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Secure Web Gateway Solutions

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

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

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

• Web content filtering—the ability to allow or block specific types of Web content from entering the corporate network. The use of Web content filtering can prevent potential security breaches and can block employees from viewing inappropriate content when using the company’s computer system.

• Web anti-virus (“AV”) protection—the ability to automatically scan and block viruses and other potentially malicious network traffic using leading third party anti-virus products.

• Spyware prevention—the ability to prevent installation of spyware and other malicious code on individual user computers, and eliminate that as a cause of performance problems and security vulnerabilities.

• Instant messaging (“IM”) and Skype control—the ability to prevent these types of peer-to-peer (“P2P”) applications from creating an opportunity for leakage of sensitive, confidential information, as well as managing IM content and blocking inappropriate use of such applications.

• Prevention of rogue streaming media applications—the ability to limit or block the use of unauthorized P2P applications, which often degrade network performance, by network users.

• SSL threat protection—the ability to identify and block threats presented by the use of the SSL, or Secure Sockets Layer, protocol. While use of SSL improves security by encrypting confidential data communicated over the Internet, it may also provide a means for hidden viruses, worms, and other security threats to enter the network.

• User authentication—the ability to automatically validate a user who requests access to secure corporate content. Our appliances interface with virtually all leading authentication systems, including NT LAN Manager, RADIUS, LDAP and Active Directory, to provide user validation.

Wide Area Network Application Delivery Solutions

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

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

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

• Bandwidth management—the ability to assign a set level of bandwidth to specific users and applications and prioritize delivery of that traffic over the WAN.

• Protocol optimization—a technique that enhances the efficiency of protocols by reducing the communication required between the user and the application.

• Object caching—a technique where reusable content is stored on the appliance which eliminates the need to repeatedly transfer that information across the WAN.

• Byte caching—a technique that assigns, stores and uses abbreviated expressions that represent repetitive WAN traffic, which conserves bandwidth and accelerates delivery of the application.

• Compression—a technique that uses an industry standard algorithm to package and unpackage information for efficient transmission across a WAN.

Our MACH5 technology is also designed to improve the performance of business applications, including streaming video, encrypted SSL applications, and applications hosted by third parties and accessed through the Internet.

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

Products

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

ProxySG Appliances

Our Blue Coat ProxySG^® family of proxy appliances serves as the foundation for both our Secure Web Gateway products and our WAN Application Delivery products. The appliance, when appropriately configured, may be placed at the Internet gateway, to provide security with respect to Web-based communications, or may be placed at connection points for entry to or exit from a WAN (or “WAN links”) to enhance and accelerate the performance of business applications over that WAN.

ProxySG appliances are designed for simple management and installation by our customers, and easily integrate with the customer’s existing security and network infrastructure. They are ICSA-certified and are available in four different models.

Our ProxySG appliances use our proprietary SGOS operating system, which is specifically designed to support the security, acceleration, and policy control features of those appliances. They are available in a broad range of configurations to support all network users in an organization, regardless of their physical location.

ProxySG Client

Our Blue Coat ProxySG^® Client is software that is installed on a desktop or laptop computer that is located at a remote site without a ProxySG Appliance or that is used by a mobile user. The software uses our MACH5 technology, including caching, compression and protocol optimization, to accelerate the delivery of Web and office applications used by these remote computers. This provides the user with performance that is similar to that provided by a large WAN that uses a ProxySG appliance.

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ProxyAV Appliances

Our Blue Coat ProxyAV family of Web anti-virus appliances enable organizations to scan for viruses, worms, spyware and Trojans at the Internet gateway before permitting communications to enter the enterprise’s network. Such infected communications frequently arrive through so-called “backdoors,” such as personal Web email accounts, Web spam or email spam (that activates Trojan downloads without the user’s consent), and browser-based file downloads that bypass existing virus scanning mechanisms. A ProxyAV appliance, when implemented in combination with a ProxySG appliance, provides scalable virus scanning, and also provides the IT administrator with comprehensive visibility and control of enterprise Web communications. The ProxyAV appliance uses virus scanning software from such vendors as Sophos, McAfee, Symantec, Panda, and Kaspersky Lab.

ProxyRA Appliances

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

• On-demand access to Web and non-Web applications without the need to install virtual private network (“VPN”) or other special software on the client device.

• Comprehensive support for client devices not managed by the enterprise’s IT department, including features to block inadvertent or malicious information leakage to or from the client device.

• Integrated security services with respect to communications between the corporate network and the client device, including monitoring for encryption and spyware and implementing policy-based controls.

Blue Coat WebFilter

Our Blue Coat WebFilter is a Web filtering product that operates on our ProxySG appliances and helps enterprises and service providers protect their users and networks from Internet threats and inappropriate content and traffic, such as adult content, spyware, phishing attacks, P2P traffic, IM and streaming traffic. Our WebFilter product includes a comprehensive database that is organized into relevant and useful categories. The WebFilter database continues to be developed and enhanced in response to the actual Web usage patterns of customers, including through use of our Dynamic Real-Time Rating (DRTR™) technology, which enables us to categorize Web sites that are not in our database, but to which a user sought access.

In addition to our proprietary WebFilter product, our ProxySG appliances also support the use of third party content filtering databases, including those offered by Secure Computing Corporation and Websense, Inc.

Blue Coat Reporter

Blue Coat Reporter uses transaction log data captured by an appliance to produce both pre-defined and custom reports relating to the performance and security of user activities on the enterprise’s WAN. The information in these reports can be used by the IT administrator to appropriately adjust policies or take other actions to enhance the security or performance of the WAN.

Blue Coat Director

Blue Coat Director is an appliance that provides centralized management of an enterprise’s Blue Coat ProxySG appliances.

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Sales and Marketing

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

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

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

We employ a team of inside sales representatives in each geographic area to support both the direct sales organization and channel partners. The primary function of our inside sales representatives is to develop and qualify leads identified from our marketing activities and to forward those leads to the appropriate sales channel.

Our marketing efforts focus on increasing the awareness of our Blue Coat brand, educating the market on issues and challenges associated with WAN Application Delivery and Secure Web Gateway products, and creating demand for our products and technology. We develop marketing programs to support the sale and distribution of our products and to inform existing and potential customers within our target market segments about the capabilities and benefits of our products. Our marketing efforts include participation in industry trade shows, informational seminars, preparation of competitive analyses, sales training, maintenance of our Web site, advertising, public relations, and collateral solution documentation and enablement. In addition, we provide similar types of marketing support for our major sales channel partners worldwide.

Research and Development

We believe that strong product development capabilities are essential to our continued success and growth. Our current research and development efforts are primarily focused on adding new features and strengthening existing features that extend the acceleration and security capabilities of our WAN Application Delivery products and enhancing the reliability, ease of use and installation and support of those products. At the same time, we are continuing to enhance the capabilities of our Secure Web Gateway products by adding new features and strengthening existing features.

Our research and development team consists of engineers with extensive technical backgrounds in relevant disciplines. We believe that the experience and capabilities of our research and development professionals is one of our significant competitive advantages. We also work closely with our customers to understand their business needs and to focus our development of new products and product enhancements to better meet customer needs.

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

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

Manufacturing

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

Our internal manufacturing operations consist primarily of project management, prototype development, materials and production planning, quality and reliability assurance and procurement as required in support of our relationships with our outsourced manufacturing partners.

Backlog

Our backlog is comprised of amounts for orders that we have accepted, but not shipped, and deferred revenue. Deferred revenue includes revenue from products that have shipped to distributors, but have not yet shipped to end customers; product shipments that do not yet qualify as revenue in accordance with our revenue recognition policy; and the unearned portion of service and maintenance contracts. Our backlog was approximately $92.8 million at April 30, 2008 as compared to $71.9 million at April 30, 2007, which represented an increase of $20. 9 million. The deferred revenue portion of our backlog increased by $33.8 million, primarily as a result of an increase in new service contracts sold with our appliances, as well as the renewal of service contracts, while our backlog of orders accepted, but not shipped, declined by $12.9 million due primarily to a decline in the growth rate of our North American business in the fourth quarter of fiscal 2008. However, due to occasional customer changes in delivery schedules or cancellation of orders prior to shipment (which can be made without significant penalty), we do not believe this backlog to be firm or that backlog is a reliable indicator of future revenue levels.

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

Competition

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

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

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

Intellectual Property and Other Proprietary Rights

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

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

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

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

Employees

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

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Available Information

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

Item 1A. Risk Factors

FACTORS AFFECTING FUTURE OPERATING RESULTS

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

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

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

• The timing, size and mix of orders from customers;

• Fluctuations in demand for our products and services;

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

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

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

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

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

• Market acceptance of our new products and product enhancements;

• 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;

• Technological changes in our product target markets;

• Future accounting pronouncements and changes in accounting policies;

• 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:

• develop and maintain competitive products;

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

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

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

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

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

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

We have increasingly invested in and focused on the WAN Application Delivery market. This market is intensely competitive, and the intensity of this competition is expected to increase in the future. 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.

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

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

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

• loss of key employees; and

• substantial transaction costs.

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

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

• assumption of additional liabilities;

• incurrence of additional debt or a decline in available cash;

• 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;

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

• 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 may affect corporate spending for IT products and services in specific geographies or more broadly. A decrease in corporate spending or demand for our products and services could result in:

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

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• increased price competition for our products and services;

• risk of excess and obsolete inventory;

• higher overhead costs as a percentage of net revenue, and

• a reduced ability to collect customer receivables.

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 have resulted in delays in closing customer orders in that region, and further uncertainty or deterioration in these conditions could materially impact our business, operating results and financial condition.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our products are complex, and there can be no assurance that the sales training programs that are offered to our sales channel partners will be effective. In addition, our sales channel partners may be unsuccessful in marketing, selling and supporting our products and services for reasons unrelated to training. Most of our sales channel partners do not have minimum purchase or 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.

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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

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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:

• market acceptance of our products and fluctuations in demand;

• the timing and size of customer orders and product implementations;

• increased price competition and changes in product pricing;

• actions taken by our competitors;

• new product introductions and enhancements;

• manufacturing and component costs;

• availability of sufficient inventory to meet demand;

• purchase of inventory in excess of demand;

• our execution of our strategy and operating plans;

• changes in our sales model;

• geographies in which sales are made; and

• 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.

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

Our international operations expose us to risks.

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

• technical difficulties and costs associated with product localization;

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

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

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

• longer payment cycles for sales in certain foreign countries;

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

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

• potentially adverse tax consequences;

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

• 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;

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

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

• fluctuations in foreign exchange rates;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There can be no assurance or guarantee that any products, services or technologies that we are presently developing, or will develop in the future, will result in intellectual property that is 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 subsequently amended the complaint and named us as a defendant on June 20, 2008, (see Note 10 in the Consolidated Financial Statements).

We expect that companies in the Internet and networking industries will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

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

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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:

• variations in our quarterly operating results;

• changes in financial estimates or investment recommendations by securities analysts;

• changes in macroeconomic conditions;

• the introduction of new products by our competitors;

• our ability to keep pace with changing technological requirements;

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

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

• loss of a major customer;

• additions or departures of key personnel;

• fluctuations in stock market volumes;

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

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

• significant transactions; and

• 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.

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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 April 30, 2008, we have not accrued any liabilities relating to indemnification provisions with our customers. It is also possible that if any information provided through any of our products contains errors, third parties could make claims against us for losses incurred in reliance on this information. Our insurance may not cover potential claims of this type or be adequate to protect us from all liability that may be imposed.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We are headquartered in Sunnyvale, California, where we lease two buildings consisting of an aggregate of approximately 234,000 square feet of office space pursuant to leases effective through November 2015. The second building was leased subsequent to our fiscal year end under a First Amendment to Lease, which added the additional premises and extended the term of the lease. As a result of our acquisition of Packeteer subsequent to our fiscal year end, we also lease an administrative office consisting of approximately 105,000 square feet in Cupertino, California, under a lease expiring in December 2014. We also lease space for research and development in Draper, Utah; Austin, Texas; Waterloo, Ontario in Canada; and Riga, Latvia. In addition, we lease space for sales and support in several metropolitan areas in North America and in several other countries outside the United States.

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

Item 3. Legal Proceedings

The information set forth under Note 10 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Item 1A of this Report.

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

None.

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PART II.

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

Price Range of Common Stock

Our common stock has been quoted on The NASDAQ Stock Market since November 19, 1999, and we are currently traded under the symbol “BCSI.” The following table sets forth, for the periods indicated, the high and low closing prices of our common stock as reported on the NASDAQ Stock Market.

	High		Low
For the year ended April 30, 2008:
First Quarter	$	27.77	$	17.10
Second Quarter	$	51.56	$	24.68
Third Quarter	$	39.20	$	24.58
Fourth Quarter	$	29.58	$	19.50
For the year ended April 30, 2007:
First Quarter	$	11.27	$	6.84
Second Quarter	$	11.38	$	6.44
Third Quarter	$	13.04	$	10.93
Fourth Quarter	$	19.34	$	12.94

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

Dividend Policy

Our present policy is to retain earnings, if any, to finance future growth. We have never paid cash dividends and have no present intention to pay cash dividends.

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Stock Performance Graph

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

	4/03		4/04		4/05		4/06		4/07		4/08
Blue Coat Systems, Inc.	$	100.00	$	646.25	$	208.70	$	315.36	$	508.12	$	611.88
NASDAQ Composite		100.00		134.18		134.93		165.79		181.16		173.24
NASDAQ Computer Manufacturers		100.00		134.03		131.10		151.30		180.32		194.76

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

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Sale of Convertible Notes and Warrants

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

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

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

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

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

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

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

Sales of Series A Redeemable Convertible Preferred Stock

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

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

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

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

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

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

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

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

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

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

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Item 6. Selected Consolidated Financial Data

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

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

Except for per share information, amounts reported below are in thousands.

	Year Ended April 30,
	2008			2007			2006			2005			2004
Consolidated Statements of Operations
Net revenue:
Product	$	233,858		$	136,770		$	116,083		$	78,495		$	52,251
Service		71,581			40,930			25,639			17,691			13,817
Total net revenue		305,439			177,700			141,722			96,186			66,068
Cost of net revenue:
Product (1)		48,056			31,779			33,207			25,726			17,214
Service (1)		23,389			13,969			9,841			5,784			4,142
Total cost of net revenue		71,445			45,748			43,048			31,510			21,356
Gross profit		233,994			131,952			98,674			64,676			44,712
Operating expenses:
Research and development (1)		51,587			39,882			26,785			17,881			13,454
Sales and marketing (1)		128,927			73,083			52,829			35,334			25,664
General and administrative (1)		27,909			28,072			13,593			6,703			8,149
In-process technology (2)		—			—			3,300			—			151
Amortization of intangible assets (3)		450			619			706			648			305
Restructuring reversal (4)		—			(19	)		(48	)		(96	)		1,536
Legal settlement		—			—			—			—			1,100
Total operating expense		208,873			141,637			97,165			60,470			50,359
Operating income (loss)		25,121			(9,685	)		1,509			4,206			(5,647	)
Interest income		5,870			3,922			2,055			691			295
Other income (expense)		(461	)		(311	)		(349	)		(124	)		115
Income (loss) before income taxes		30,530			(6,074	)		3,215			4,773			(5,237	)
Provision (benefit) for income taxes		(2,038	)		1,124			275			117			124
Net income (loss)	$	32,568		$	(7,198	)	$	2,940		$	4,656		$	(5,361	)
Net income (loss) per common share:
Basic	$	0.93		$	(0.25	)	$	0.11		$	0.20		$	(0.27	)
Diluted	$	0.82		$	(0.25	)	$	0.10		$	0.18		$	(0.27	)
Weighted average shares used in computing net income (loss) per common share:
Basic		35,179			29,188			25,930			23,256			19,912
Diluted		39,659			29,188			29,284			25,816			19,912

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

(1) Includes stock-based compensation expense.

(2) Acquired in-process technology relates to certain research and development projects assumed in the Permeo and Ositis acquisitions in fiscal 2006 and fiscal 2004, respectively, that had not yet reached technological feasibility and were deemed to have no alternative future use.

(3) Amortization of intangible assets relates to identifiable intangible assets obtained through the NetCache, Permeo, Cerberian and Ositis acquisitions on September 11, 2006, March 3, 2006, November 16, 2004 and November 14, 2003, respectively.

(4) Restructuring expenses in fiscal 2004 included costs associated with severance, abandoned lease space, and other charges. Reversal of restructuring reserves in fiscal 2005, 2006 and 2007 resulted from reductions in the estimated costs required to restore leased facilities to the condition stipulated in the related lease agreements.

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

	Year Ended April 30,
	2008 (1)		2007 (1)		2006		2005			2004
Supplementary Data on Stock-Based Compensation (reversal)
Cost of product	$	775	$	468	$	31	$	114		$	73
Cost of service		808		471		57		60			42
Research and development		4,986		3,325		866		1,505			1,923
Sales and marketing		5,593		3,169		618		1,191			1,124
General and administrative		4,644		2,067		1,809		(2,126	)		2,942
Total stock-based compensation	$	16,806	$	9,500	$	3,381	$	744		$	6,104

(1) Amounts included in 2008 and 2007 reflect the adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment”, which was effective for us on May 1, 2006.

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

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

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

Overview

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

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

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

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

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

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

Net Revenue

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

Operating Margin

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

Deferred Revenue

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

Cash Flow From Operations and Cash Position

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

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

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Packeteer Acquisition

On June 6, 2008, after the close of fiscal 2008, we acquired Packeteer, Inc. (“Packeteer”), a pioneer in delivering sophisticated WAN traffic prioritization through the development and sale of application classification and performance management technologies and products. We believe that acquiring Packeteer will accelerate our ability to offer a comprehensive platform to address the application delivery and security challenges confronting today’s distributed enterprise. We intend to continue to sell the PacketShaper^®, Intelligence Center and Policy Center products formerly offered by Packeteer and to rebrand them as Blue Coat products. We also intend to enhance the technologies developed and owned by Packeteer and to integrate them into our current and future products. The acquisition of Packeteer should provide us with increased sales resources, through the addition of Packeteer sales teams and channels; additional revenue, through sales of the additional products; and added cost efficiencies that result from scaling our business.

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

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

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

Critical Accounting Policies and Estimates

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

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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 our maintenance contracts for most of our products. Accordingly, we account for revenue in accordance with SOP No. 97-2, and all related interpretations. We recognize revenue when all of the following criteria are met: when persuasive evidence of an arrangement exists; delivery or performance has occurred; the sales price is fixed or determinable and collectibility is reasonably assured. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we recognize.

We define each of the four criteria above as follows:

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

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

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

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

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

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

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

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

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

Stock-Based Compensation

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

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

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Valuation of Inventories

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

Valuation of Goodwill

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

Valuation of Long-Lived and Identifiable Intangible Assets

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

Income Taxes

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

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

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

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

Results of Operations

Net Revenue

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

	Year Ended April 30,
	2008			2007			2006
Total net revenue	$	305,439		$	177,700		$	141,722
Change from prior year ($)	$	127,739		$	35,978		$	45,536
Change from prior year (%)		71.9	%		25.4	%		47.3	%

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

Net revenue increased by 25.4% to $177.7 million in fiscal 2007 from $141.7 million in fiscal 2006. The growth in net revenue from fiscal 2006 to fiscal 2007 was primarily attributable to continued market acceptance of our products, including the renewal of service contracts from our expanding installed base, coupled with investments in our sales and marketing organizations.

Alternative Data Technology, Inc. (a distributor) accounted for 12.2% of our net revenue during the fiscal year 2008. Computerlinks AG (a distributor) accounted for 11.2% of our net revenue during fiscal 2007. Westcon Group, Inc. (a distributor) accounted for 10.2% and 15.9% of our net revenue during the fiscal years 2007 and 2006, respectively. As of April 30, 2008 and 2007, no customer accounted for more than 10.0% of gross accounts receivable.

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

	Year Ended April 30,
	2008				2007				2006
	$		%		$		%		$		%
North America	$	142,934	46.8	%	$	82,812	46.6	%	$	70,866	50.0	%
EMEA (1)		112,110	36.7			66,323	37.3			53,858	38.0
LATAM (2)		3,850	1.3			1,611	0.9			377	0.3
APAC (3)		46,545	15.2			26,954	15.2			16,621	11.7
Total net revenue	$	305,439	100.0	%	$	177,700	100.0	%	$	141,722	100.0	%

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

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

(3) Asia and Pacific regions (“APAC”)

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On a geographic basis, revenue in North America increased $60.1 million in fiscal 2008, up 72.6% from fiscal 2007; Net revenue in North America increased $11.9 million in fiscal 2007, up 16.9% from fiscal 2006. The year-over-year increases in net revenue in North America for both fiscal 2008 and 2007 were primarily related to increased demand for our WAN Application Delivery products and a larger installed base of customers. Revenues from outside of North America continued to be a significant part of our revenue mix. For the fiscal years 2008, 2007 and 2006, approximately 53.2%, 53.4% and 50.0%, respectively, of our total net revenue were derived from customers outside of North America.

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

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

Net revenue in the Asia and Pacific region (“APAC”) increased $19.6 million in fiscal 2008, up 72.7% from fiscal 2007. Net revenue in Asia increased $10.3 million in fiscal 2007, up 62.2% from fiscal 2006. The year over year increases in net revenue in Asia for both fiscal 2008 and 2007 were a result of increased demand for our products and related services, as well as increased investment in our sales and marketing organization in APAC.

Gross Profit

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

	Year Ended April 30,
	2008			2007			2006
Gross profit (1)	$	233,994		$	131,952		$	98,674
Gross profit as a percentage of net revenue (1)		76.6	%		74.3	%		69.6	%

(1) Includes stock-based compensation expense. For a further discussion of stock-based compensation expense, see the section entitled “Stock-Based Compensation Expense” below.

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

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

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Research and Development

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

	Year Ended April 30,
	2008			2007			2006
Research and development (1)	$	51,587		$	39,882		$	26,785
Research and development as a percentage of net revenue (1)		16.9	%		22.4	%		18.9	%

(1) Includes stock-based compensation expense. For a further discussion of stock-based compensation expense, see the section entitled “Stock-Based Compensation Expense” below.

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

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

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

Research and development headcount was 281 at April 30, 2008, 205 at April 30, 2007, and 176 at April 30, 2006. We believe that continued investment in product enhancements and new product development is critical to achieving our strategic objectives. As a result, we expect research and development expense to continue to increase in absolute dollars.

Sales and Marketing

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

	Year Ended April 30,
	2008			2007			2006
Sales and marketing (1)	$	128,927		$	73,083		$	52,829
Sales and marketing as a percentage of net revenue (1)		42.2	%		41.1	%		37.3	%

(1) Includes stock-based compensation expense. For a further discussion of stock-based compensation expense, see the section entitled “Stock-Based Compensation Expense” below.

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

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

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

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

General and Administrative

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

	Year Ended April 30,
	2008			2007			2006
General and administrative (1)	$	27,909		$	28,072		$	13,593
General and administrative as a percentage of net revenue (1)		9.1	%		15.8	%		9.6	%

(1) Includes stock-based compensation expense resulting. For a further discussion of stock-based compensation expense, see the section entitled “Stock-Based Compensation Expense” below.

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

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

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

Stock-Based Compensation

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

	Year Ended April 30,
	2008 (1)		2007 (1)		2006
Stock-based compensation:
Classified in cost of goods sold
Cost of product	$	775	$	468	$	31
Cost of service		808		471		57
Subtotal		1,583		939		88
Classified in operating expense:
Research and development		4,986		3,325		866
Sales and marketing		5,593		3,169		618
General and administrative		4,644		2,067		1,809
Subtotal		15,223		8,561		3,293
Total stock-based compensation expense	$	16,806	$	9,500	$	3,381

(1) Amounts included in 2007 and 2008 reflect the adoption of SFAS No. 123(R). In accordance with the modified prospective transition method, our consolidated statement of income for fiscal 2006 has not been restated to reflect, and does not include, the impact of SFAS No. 123(R).

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Restructuring Charges

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

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

	Year Ended April 30,
	2008		2007			2006
Restructuring reversal	$	—	$	(19	)	$	(48	)
Change in restructuring reversal	$	—	$	29		$	48

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

Balances as of April 30, 2005	$	3,643
Cash payments		(2,701	)
Reversals		(48	)
Balances as of April 30, 2006		894
Cash payments		(637	)
Reversals		(19	)
Balances as of April 30, 2007		238
Cash payments		(238	)
Balances as of April 30, 2008	$	—

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

Acquired In-Process Technology

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

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

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Interest Income and Other Expense

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

	Year Ended April 30,
	2008			2007			2006
Interest income	$	5,870		$	3,922		$	2,055
Other expense	$	(461	)	$	(311	)	$	(349	)
% Change in interest income		49.7	%		90.9	%		197.4	%
% Change in other income (expense)		48.2	%		(10.9	)%		(181.5	)%

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

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

Provision for Income Taxes

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

	Year Ended April 30,
	2008			2007			2006
Provision (benefit) for income taxes	$	(2,038	)	$	1,124		$	275
Change in provision	$	(3,162	)	$	849		$	158
% Change in provision		(281.3	)%		308.7	%		135.0	%

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

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

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

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

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

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

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

Acquisitions

Packeteer, Inc. On June 6, 2008, after the close of fiscal 2008, we completed the acquisition of Packeteer, Inc. (“Packeteer”), a provider of products for WAN traffic prioritization and acceleration. The transaction was effected through a tender offer, followed by a merger of our wholly-owned subsidiary, with and into Packeteer. As a result of the transaction, Packeteer became our wholly-owned subsidiary and each outstanding share of Packeteer common stock that was not tendered in the tender offer (other than restricted shares; shares already held by us, Packeteer or our respective wholly-owned subsidiaries; or shares held by stockholders who properly perfect appraisal rights under Delaware law) was converted into the right to receive $7.10 per share. We will pay approximately $269 million in total consideration for the acquisition of Packeteer common stock, which includes shares purchased privately on April 20, 2008, shares purchased through the tender offer and payments made as a consequence of the merger. We believe that acquiring Packeteer will accelerate our ability to offer a comprehensive platform to address the application delivery and security challenges confronting today’s distributed enterprise.

On April 20, 2008, we entered into a note purchase agreement, pursuant to which we agreed to sell $80 million of Zero Coupon Convertible Senior Notes due 2013 and warrants to purchase shares of our common stock to Manchester Securities Corp. (“Manchester”) and Francisco Partners II, L.P. (“FP”) in a private

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placement. The notes and the warrants were issued to Manchester, FP and an affiliate of FP (the “Purchasers”) on June 2, 2008, following the expiration of the initial offering period of our tender offer. The notes do not bear interest, and are convertible into shares of our common stock at the initial conversion price of $20.76, which represents a 5% conversion premium based on the closing price of our common stock on April 18, 2008. The warrants permit the Purchasers to purchase an aggregate of 385,356 shares of our common stock at an exercise price of $20.76. We used the proceeds from the private placement to partially fund the acquisition of Packeteer.

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

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

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

Recent Accounting Pronouncements

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

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

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

45

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

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

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

Liquidity and Capital Resources

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

	April 30,
(Dollars In thousands)	2008			2007			2006
Cash, cash equivalents and short-term investments	$	162,178		$	93,887		$	57,190
Restricted cash and cash equivalents		861			4,981			1,357
	$	163,039		$	98,868		$	58,547
Percentage of total assets		42.0	%		39.8	%		35.7	%
	Year Ended April 30,
(In thousands)	2008			2007			2006
Cash provided by operating activities	$	56,901		$	27,960		$	22,422
Cash provided by (used in) investing activities		10,267			(67,465	)		(32,102	)
Cash provided by financing activities		43,793			42,528			9,486
Net increase (decrease) in cash and cash equivalents	$	110,961		$	3,023		$	(194	)

46

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

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

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

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

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

47

Contractual Obligations

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

	Year Ended April 30,
	2009		2010		2011		2012		2013		Thereafter		Total
Future minimum lease payments	$	5,136	$	3,667	$	1,967	$	951	$	713	$	81	$	12,515
Purchase and other commitments		8,926		100		100		200		200		—		9,526
Total	$	14,062	$	3,767	$	2,067	$	1,151	$	913	$	81	$	22,041

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

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

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

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

On April 20, 2008, we entered into a note purchase agreement pursuant to which we agreed to sell $80 million aggregate principal amount of Zero Coupon Convertible Senior Notes due 2013 (the “Notes”) in a private placement. We also agreed to issue warrants to purchase an aggregate of 385,356 shares of our common stock at an exercise price of $20.76. The convertible notes and warrants were issued on June 2, 2008 and expire in June of 2013.

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

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

48

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

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

Off-Balance Sheet Arrangements

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

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

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

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

Foreign Currency Exchange Rate Risk

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

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm	51
Consolidated Balance Sheets as of April 30, 2008 and 2007	52
Consolidated Statements of Operations for the years ended April 30, 2008, 2007 and 2006	53
Consolidated Statements of Stockholders’ Equity for the years ended April 30, 2008, 2007 and 2006	54
Consolidated Statements of Cash Flows for the years ended April 30, 2008, 2007 and 2006	55
Notes to Consolidated Financial Statements	56

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Blue Coat Systems, Inc. as of April 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended April 30, 2008. Our audits also included the financial statement schedule listed in the index at Item 15(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

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

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

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

/s/ ERNST & YOUNG LLP

San Jose, California

June 27, 2008

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BLUE COAT SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

	April 30, 2008			April 30, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	160,974		$	50,013
Short-term investments		1,204			43,874
Restricted cash equivalents		—			4,120
Accounts receivable, net of allowance of $176 and $160, respectively		59,056			32,079
Inventories		262			489
Prepaid expenses and other current assets		7,163			7,536
Current portion of deferred tax asset		7,294			—
Total current assets		235,953			138,111
Property and equipment, net		14,975			9,309
Restricted cash		861			861
Goodwill		92,243			92,243
Identifiable intangible assets, net		5,010			6,650
Other assets		1,767			1,500
Non-current deferred income tax asset		11,867			—
Investment in Packeteer		25,092			—
Total assets	$	387,768		$	248,674
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,695		$	12,051
Accrued payroll and related benefits		16,464			11,710
Deferred revenue		68,242			41,910
Accrued restructuring		—			238
Other accrued liabilities		8,991			5,808
Total current liabilities		112,392			71,717
Deferred revenue, less current portion		21,318			13,858
Deferred rent, less current portion		1,349			1,585
Deferred income taxes		—			483
Other non-current liabilities		1,248			563
Series A redeemable convertible preferred stock; $0.0001 par value; 0 and 42 authorized; none at April 30, 2008, 42 issued and outstanding at April 30, 2007 (Aggregate liquidation preference $42,060 at April 30, 2007)		—			41,879
Commitments and contingencies
Stockholders’ equity:
Preferred stock: $0.0001 par value; issuable in series; 9,958 shares authorized; none issued or outstanding		—			—
Common stock: $0.0001 par value; 200,000 shares authorized; 38,267 and 29,942 shares issued and outstanding at April 30, 2008 and 2007, respectively		2			2
Additional paid-in capital		1,128,903			1,028,409
Treasury stock, at cost; 276 shares held at April 30, 2008 and 2007, respectively		(903	)		(903	)
Accumulated deficit		(876,362	)		(908,930	)
Accumulated other comprehensive income (loss)		(179	)		11
Total stockholders’ equity		251,461			118,589
Total liabilities, redeemable convertible preferred stock and stockholders’ equity	$	387,768		$	248,674

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

52

BLUE COAT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Year Ended April 30,
	2008			2007			2006
Net revenue:
Product	$	233,858		$	136,770		$	116,083
Service		71,581			40,930			25,639
Total net revenue		305,439			177,700			141,722
Cost of net revenue:
Product		48,056			31,779			33,207
Service		23,389			13,969			9,841
Total cost of net revenue		71,445			45,748			43,048
Gross profit		233,994			131,952			98,674
Operating expenses:
Research and development		51,587			39,882			26,785
Sales and marketing		128,927			73,083			52,829
General and administrative		27,909			28,072			13,593
Amortization of intangible assets		450			619			706
Restructuring reversal		—			(19	)		(48	)
In-process technology		—			—			3,300
Total operating expenses		208,873			141,637			97,165
Operating income (loss)		25,121			(9,685	)		1,509
Interest income		5,870			3,922			2,055
Other expense		(461	)		(311	)		(349	)
Income (loss) before income taxes		30,530			(6,074	)		3,215
Provision (benefit) for income taxes		(2,038	)		1,124			275
Net income (loss)	$	32,568		$	(7,198	)	$	2,940
Net income (loss) per common share:
Basic	$	0.93		$	(0.25	)	$	0.11
Diluted	$	0.82		$	(0.25	)	$	0.10
Weighted average shares used in computing net income (loss) per common share:
Basic		35,179			29,188			25,930
Diluted		39,659			29,188			29,284

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

53

BLUE COAT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

	Common Stock			Additional Paid-In Capital			Treasury Stock					Deferred Stock-Based Compensation			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Amount					Shares		Amount
Balances at April 30, 2005	24,872	$	1	$	973,530		(280	)	$	(903	)	$	(2,729	)	$	(904,672	)	$	1		$	65,228
Components of comprehensive income:
Net income	—		—		—		—			—			—			2,940			—			2,940
Net unrealized loss on available for sale securities	—		—		—		—			—			—			—			(2	)		(2	)
Total comprehensive income																						2,938
Issuance of common stock under employee stock option and employee stock purchase plans	1,804		1		9,484		—			—			—			—			—			9,485
Deferred stock-based compensation	—		—		487		—			—			(487	)		—			—			—
Common stock issued in Permeo acquisition	2,638		—		29,350		—			—			—			—			—			29,350
Deferred stock-based compensation related to Permeo acquisition	—		—		—		—			—			(426	)		—			—			(426	)
Amortization of deferred stock-based compensation	—		—		—		—			—			1,741			—			—			1,741
Stock-based compensation related to modified employee stock options	—		—		1,642		—			—			—			—			—			1,642
Exercise of Ositis warrants	—		—		—		4			—			—			—			—			—
Balances at April 30, 2006	29,314		2		1,014,493		(276	)		(903	)		(1,901	)		(901,732	)		(1	)		109,958
Components of comprehensive loss:
Net loss	—		—		—		—			—			—			(7,198	)		—			(7,198	)
Net unrealized gain on available for sale securities	—		—		—		—			—			—			—			12			12
Total comprehensive loss																						(7,186	)
Issuance of common stock under employee stock option	184		—		649		—			—			—			—			—			649
Common stock issued in the acquisition of certain assets of the NetCache business	720		—		5,668		—			—			—			—			—			5,668
Elimination of deferred compensation related to adoption of SFAS 123(R)	—		—		(1,901	)	—			—			1,901			—			—			—
Stock-based compensation expenses	—		—		9,500		—			—			—			—			—			9,500
Balances at April 30, 2007	30,218		2		1,028,409		(276	)		(903	)		—			(908,930	)		11			118,589
Components of comprehensive income:
Net income	—		—		—		—			—			—			32,568			—			32,568
Net unrealized (loss) on available for sale securities	—		—		—		—			—			—			—			(190	)		(190	)
Total comprehensive gain																						32,378
Common shares issued under stock option and stock purchase plans	3,525		—		29,793		—			—			—			—			—			29,793
Tender offer					(2,683	)	—			—			—			—			—			(2,683	)
Tax benefit from stock-based awards	—		—		14,518		—			—			—			—			—			14,518
Stock-based compensation expenses	—		—		16,806		—			—			—			—			—			16,806
Conversion of preferred stock into common	4,800		—		42,060		—			—			—			—			—			42,060
Balances at April 30, 2008	38,543	$	2	$	1,128,903		(276	)	$	(903	)	$	—		$	(876,362	)	$	(179	)	$	251,461

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

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BLUE COAT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended April 30,
	2008			2007			2006
Operating Activities
Net income (loss)	$	32,568		$	(7,198	)	$	2,940
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		5,557			3,919			2,440
Amortization		1,845			2,000			1,514
Stock-based compensation		16,806			9,500			3,381
Accretion of preferred stock issuance costs		181			—			—
Tax benefit of stock option deduction		14,518			—			—
Excess tax benefit of stock option deductions		(14,000	)		—			—
Restructuring reversal		—			(19	)		(48	)
In-process technology		—			—			3,300
Loss (gain) on disposition of equipment		18			(35	)		230
Changes in operating assets and liabilities:
Accounts receivable		(26,977	)		(9,794	)		(10,573	)
Inventories		227			(54	)		(85	)
Prepaid expenses and other current assets		373			(3,641	)		(298	)
Other assets		(472	)		(969	)		(19	)
Accounts payable		6,644			6,614			1,839
Accrued payroll and related benefits		2,071			4,259			2,050
Accrued restructuring		(238	)		(637	)		(2,701	)
Other accrued liabilities		3,715			1,422			(259	)
Deferred rent		(83	)		132			1,996
Deferred income taxes		(19,644	)		483			—
Deferred revenue		33,792			21,978			16,715
Net cash provided by operating activities		56,901			27,960			22,422
Investing Activities
Proceeds from sale of equipment		—			148			35
Purchases of property and equipment		(11,241	)		(5,282	)		(6,717	)
Proceeds from sale and maturities of short-term investments		164,489			87,082			576
Purchases of short-term investments		(121,831	)		(124,368	)		(10,200	)
Investment in Packeteer		(25,270	)		—			—
Acquisition of Permeo, net of cash acquired		—			(151	)		(15,796	)
Release of escrow from NetCache acquisition		4,120			—			—
Acquisition of NetCache		—			(24,894	)		—
Net cash provided by (used in) investing activities		10,267			(67,465	)		(32,102	)
Financing Activities
Net proceeds from issuance of common stock		29,793			649			9,486
Excess tax benefit from stock-based compensation		14,000			—			—
Net proceeds from sales of Series A redeemable convertible preferred stock		—			41,879			—
Net cash provided by financing activities		43,793			42,528			9,486
Net increase (decrease) in cash and cash equivalents		110,961			3,023			(194	)
Cash and cash equivalents at beginning of period		50,013			46,990			47,184
Cash and cash equivalents at end of period	$	160,974		$	50,013		$	46,990
Supplemental schedule of non-cash investing and financing activities
Conversion of Series A redeemable convertible preferred stock	$	42,060		$	—		$	—
Cash paid for interest	$	257		$	248		$	6
Issuance of common stock for acquisitions	$	—		$	5,668		$	29,350
Cash paid for income taxes, net of refunds	$	916		$	315		$	110

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

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Note 1. Business

Blue Coat Systems, Inc., also referred to in this report as “we,” “us” or the “Company,” was incorporated in Delaware on March 13, 1996. We sell a family of products, including both intelligent hardware appliances and client software, that secure and accelerate the delivery of business applications and other information over a Wide Area Network (“WAN”), or the public Internet (also known as the Web). Our products accelerate the performance of our customers’ business applications, and work with both applications on a customer’s computer systems and applications hosted by external providers. In addition to enhancing the performance of applications, our products also allow customers to safely use the Internet by providing security from malicious code and inappropriate content. Our appliances also enable policy-based control and centralized management of communications between users and applications across the WAN, Internet and across customers’ internal networks, and are delivered to end users in several countries worldwide.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The 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 income (expense)” in the accompanying consolidated statements of operations. These amounts were not material during any of the three years in the period ended April 30, 2008. 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 periods presented.

The consolidated financial statements for the fiscal years ended April 30, 2008, 2007 and 2006 include the accounts and operating results of the NetCache business acquired from Network Appliance, Inc., and Permeo Technologies, Inc., beginning September 11, 2006, and March 3, 2006, respectively.

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

Reclassifications

Certain prior year amounts have been reclassified to conform to the current period’s presentation.

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 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 consolidated financial condition and results of operations.

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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 allowing for certain stock rotation rights. Net revenue and the related cost of net revenue resulting from shipments to distributors are deferred until the distributors report that our products have been sold to a customer. Product revenue in China is deferred until the customer registers the proxy appliance.

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

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

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

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

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

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Shipping Costs

When we bill customers for shipping, we record shipping costs in both net revenue and cost of net revenue. If we do not charge customers for shipping, the cost incurred for shipping are reflected in cost of net revenue.

Allowance for Doubtful Accounts

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 as general and administrative expense.

Stock-Based Compensation

At April 30, 2008, we have two active stock-based employee compensation plans, which are described more fully in Note 6. Prior to May 1, 2006, we accounted for stock-based employee compensation plans under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by FASB Statement (SFAS) 123, “Accounting for 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, stock-based compensation cost recognized after May 1, 2006 includes: (a) compensation cost 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 cost 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 stock options granted using the Black-Scholes option valuation model. Further, we have elected to use the straight-line method of amortization for stock-based compensation related to stock options granted after May 1, 2006. We will continue to amortize stock-based compensation using the graded method for stock options granted prior to May 1, 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107, which provides supplemental implementation guidance for SFAS No. 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS No. 123(R).

In November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (“SFAS No. 123(R)-3”). We have adopted the simplified method to calculate the beginning balance of the additional paid-in-capital (“APIC”) pool of the excess tax benefit, and to determine the subsequent impact on the APIC pool and our Statements of Cash Flows of the tax effects of employee stock-based compensation awards that were outstanding upon our adoption of SFAS No. 123(R).

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The following table illustrates the effect on our net income (loss) and net income (loss) per share for the year ended April 30, 2006 as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation using the Black-Scholes valuation model (in thousands, except per share amounts):

	Year Ended April 30, 2006
Net income, as reported	$	2,940
Stock-based employee compensation expense included in the determination of net income, as reported		3,381
Stock-based compensation for stock awards issued related to Ositis acquisition		—
Stock-based employee compensation expense that would have been included in the determination of net loss if the fair value method had been applied to all awards		(13,669	)
Pro forma net loss	$	(7,348	)
Basic net income (loss) per common share:
As reported	$	0.11
Pro forma	$	(0.29	)
Diluted net income (loss) per common share:
As reported	$	0.10
Pro forma	$	(0.29	)

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, commercial paper 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

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

Concentration and Other Risks

Financial instruments that potentially subject us to credit risk consist of demand deposit accounts, money market accounts, commercial paper, corporate debt securities and trade receivables. We maintain demand deposit and money market accounts with financial institutions of high credit standing. 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 consolidated balance sheets for the years ended April 30, 2008 and

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2007. 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 valuations of our customers’ financial condition and maintain an allowance for doubtful accounts. Alternative Data Technology, Inc. accounted for 12.2% of our net revenue during the year ended April 30, 2008. ComputerLinks AG accounted for 11.2% of our net revenue during the years ended April 30, 2007. Westcon Group, Inc. accounted for 10.2% of our net revenue during the year ended April 30, 2006. As of April 30, 2008 and 2007, no customer accounted for more than 10.0% of gross accounts receivable.

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 business and consolidated financial statements.

Inventories

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

Property and Equipment

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

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

Valuation of Goodwill

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

Long-Lived and Identifiable Intangible Assets

We periodically evaluate potential impairments of our long-lived assets, including identifiable intangible assets, in accordance with FASB SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events or

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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 purchased technology, five years for core technology and five to seven years for customer contracts.

Restructuring Liabilities

We initiated certain restructuring activities prior to December 31, 2002 and have recorded them in accordance with EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). We have accrued through charges to restructuring in our consolidated financial statements, various restructuring liabilities related to employee severance costs, facilities closure and lease abandonment costs, and contract termination costs. All restructuring activities were completed by the end of the second quarter of fiscal 2008.

Research and Development

We account for costs related to research, design and development of our products in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. Development costs for software to be sold or otherwise marketed are included in research and development.

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 with each of our executive officers and directors containing 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 expect to have indemnification obligations to certain current and former officers and directors and other employees in connection with the regulatory investigations and 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, 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.

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Contingencies

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

Advertising Costs

Advertising costs are charged to sales and marketing expense as incurred. Advertising costs were $2.1 million for the year ended April 30, 2008 and $0.3 million for each of the years ended April 30, 2007 and 2006.

Comprehensive Income

We report comprehensive income in accordance with FASB SFAS No. 130, Reporting Comprehensive Income. Included in other comprehensive income are adjustments to record unrealized gains and losses on available-for-sale securities. These adjustments are aggregated in accumulated other comprehensive income (loss) in the stockholders’ equity section of the balance sheet.

Per Share Amounts

Basic net income per common share and diluted net income per common share are presented in conformity with FASB SFAS No. 128, Earnings Per Share, for all periods presented. Basic net income per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of shares of common stock outstanding, including dilutive common shares subject to repurchase and potential shares assuming the (i) exercise of dilutive stock options and warrants using the treasury stock method; (ii) issuance of committed but unissued stock awards; and (iii) shares issuable upon the assumed conversion of outstanding Series A Redeemable Convertible Preferred Stock.

Under the treasury stock method, outstanding options are assumed to be exercised if their exercise price is below the average fair market value of our common stock for a given period, and the proceeds from the exercise of such options are assumed to be used by us to repurchase shares of our common stock on the open market. Additionally, unearned stock-based compensation, significant amounts of which was recorded as part of our restatement and has been presented in stockholders’ equity, is considered proceeds for purposes of applying the treasury stock method to determine incremental common shares to be included in diluted shares in periods in which we have reported net income. For fiscal years 2008, 2007 and 2006, options to purchase 1,435,938, 3,699,230 and 988,854 shares of common stock, respectively, were considered anti-dilutive and, therefore, were not included in the computation of diluted earnings per share.

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

	Year Ended April 30,
	2008		2007			2006
Net income (loss)	$	32,568	$	(7,198	)	$	2,940
Basic:
Weighted-average shares of common stock outstanding		35,179		29,188			25,930
Basic net income (loss) per share	$	0.93	$	(0.25	)	$	0.11
Diluted:
Weighted-average common shares used in computing basic net income per share		35,179		29,188			25,930
Add: Weighted average employee stock options and warrants		2,527		—			3,216
Add: Weighted average dilutive effect of escrow shares		—		—			56
Add: Other weighted average dilutive potential common stock		153		—			82
Add: Series A Preferred weighted average dilutive potential common stock		1,800		—			—
Weighted average common shares used in computing diluted net income (loss) per share		39,659		29,188			29,284
Diluted net income (loss) per share	$	0.82	$	(0.25	)	$	0.10

Recent Accounting Pronouncements

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

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

In June 2007, the FASB ratified a consensus opinion reached by the EITF on EITF Issue 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“EITF 07-3”). The guidance in EITF 07-3 requires us to defer and capitalize nonrefundable advance payments made for goods or services to be used in research and development activities until the goods have been delivered or the related services have been performed. If the goods are no longer expected to be delivered or the services are no longer expected to be performed, we would be required to expense the related capitalized advance payments. EITF 07-3 is effective for fiscal years beginning after December 15, 2007 and is to be applied prospectively to new contracts entered into on or after the commencement of that fiscal year. Early adoption is not permitted. Retrospective application of EITF 07-3 also is not permitted. We intend to

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adopt EITF 07-3 effective May 1, 2008 and do not expect the pronouncement to have a material effect on our consolidated financial statements.

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

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

In December 2007, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 110 (SAB 110) to amend the SEC’s views discussed in Staff Accounting Bulletin 107 (SAB 107) regarding the use of the simplified method in developing an estimate of the expected life of stock options in accordance with SFAS No. 123(R). SAB 110 is effective for us beginning in the first quarter of fiscal 2009. The adoption of SAB 110 is not expected to have a significant impact on our consolidated financial statements.

Note 3. Acquisitions

NetCache business from Network Appliance, Inc.

On September 11, 2006, we completed the acquisition of certain assets of the NetCache business from Network Appliance. The final consideration for the transaction consisted of $23.9 million cash consideration, an aggregate of 720,000 shares of our common stock valued at $5.7 million and $1.0 million in direct transaction costs. Of the total purchase price, $0.7 million has been allocated to the intangible assets acquired, with the balance of $29.9 million allocated to goodwill.

The NetCache business previously provided products to large enterprises to manage internet access and security and control Web content and application acceleration. NetCache was a business unit previously owned by Network Appliance, Inc. Our primary purpose for acquiring certain assets of the NetCache business was to increase our potential customer base through the conversion of existing NetCache customers to our proxy appliances. One employee joined us from Network Appliance as a result of the acquisition. Accordingly, our operating costs were not materially impacted. We have not generated a significant amount of revenue from the sale of NetCache appliances. Net revenue for the fiscal year ended April 30, 2007 and April 30, 2008 reported on our Consolidated Statement of Operations includes $1.7 million and zero, respectively, related to the sale of NetCache appliances and related service.

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The final allocation of the estimated purchase price, based on the fair value of certain components, consisted of the following at April 30, 2008 (in thousands):

Consideration and direct transaction costs:
Cash	$	23,914
Fair value of Blue Coat common stock		5,668
Direct transaction costs		980
Total purchase price	$	30,562
Allocation of purchase price:
Identifiable intangible assets	$	700
Goodwill		29,862
Total purchase price	$	30,562

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

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

Using the above guidelines at the time of the acquisition, we identified one intangible asset that was valued separately from goodwill using the income approach as described above. The intangible asset identified was customer relationships. The cash flows were discounted to their present value using a discount rate of approximately 19%. As of April 30, 2008, the acquired intangible asset and its estimated useful life are as follows (in thousands):

Identifiable intangible assets	Amortization period	Gross Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	5 years	$	700	$	(227	)	$	473

Amortization expense related to the acquired intangible was $0.2 million and $87 thousand during the years ended April 30, 2008 and 2007, respectively. The amortization for customer relationships is recorded as an operating expense. Amortization expense in future periods is expected to be as follows (in thousands):

Year Ended April 30,	Total Amortization
2009	$	140
2010		140
2011		140
2012		53
	$	473

The acquisition of NetCache did not result in the creation of a new business segment.

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Permeo Technologies, Inc.

On March 3, 2006, we completed the acquisition of Permeo Technologies, Inc. (“Permeo”). The purchase price of $45.3 million consisted of $15.0 million in cash consideration, 2.6 million shares of our common stock valued at $28.7 million, $1.0 million in direct transaction costs, which was fully paid as of April 30, 2007, and Permeo stock options assumed by us valued at $0.6 million. The purchase price has been allocated to the tangible and intangible assets acquired, with the excess purchase price being allocated to goodwill. Identifiable intangible assets include developed technology and customer relationships, which are being amortized to “Cost of revenue—Product” and “Operating expenses,” respectively.

The final allocation of the purchase price, based on the fair value of certain components, consisted of the following at April 30, 2008 (in thousands):

Consideration and direct transaction costs:
Cash	$	14,946
Fair value of Blue Coat common stock		28,720
Direct transaction costs		1,009
Fair value of assumed Permeo options		630
Total purchase price	$	45,305
Allocation of purchase price:
Cash and cash equivalents	$	8
Accounts receivable		171
Other current assets		126
Property and equipment		429
Other assets		12
Liabilities assumed		(1,895	)
Deferred stock compensation		426
Identifiable intangible assets		5,100
In-process technology		3,300
Goodwill		37,628
Total purchase price	$	45,305

Note 4. Consolidated Balance Sheet Data

Cash, Cash equivalents and Investments

The carrying amount of cash and cash equivalents reported on the balance sheet approximates its fair value. Short-term investments consist of marketable debt securities. The fair values of investments are based upon quoted market prices.

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The following is a summary of cash, cash equivalents and available-for-sale securities as of April 30, 2008 and 2007, respectively (in thousands):

	As of April 30,
	2008							2007
	Amortized Cost		Unrealized Loss			Estimated Fair Value		Amortized Cost		Unrealized Gain		Estimated Fair Value
Cash	$	1,285	$	—		$	1,285	$	737	$	—	$	737
Money market funds		160,550		—			160,550		37,500		—		37,500
Commercial paper		—		—			—		33,675		—		33,675
Corporate securities		1,205		(1	)		1,204		16,244		1		16,245
Government securities		—		—			—		2,977		9		2,986
Auction rate preferred securities		—		—			—		7,724		1		7,725
Investment in Packeteer, Inc.		25,270		(178	)		25,092		—		—		—
	$	188,310	$	(179	)	$	188,131	$	98,857	$	11	$	98,868
Reported as:
Cash and cash equivalents						$	160,974					$	50,013
Short-term investments							1,204						43,874
Short-term restricted cash equivalents							—						4,120
Long-term restricted cash							861						861
Investment in Packeteer, Inc.							25,092						—
						$	188,131					$	98,868

The following is a summary of the cost and estimated fair value of cash, cash equivalents and available-for-sale securities at April 30, 2008, by contractual maturity (in thousands):

	April 30, 2008
	Amortized Cost		Estimated Fair value
Mature in one year or less	$	163,040	$	163,039

On April 20, 2008, the Company entered into a Stock Purchase Agreement pursuant to which it acquired 3,559,117 shares of Packeteer’s 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 has been classified as a long-term investment on the balance sheet at April 30, 2008 at its fair value of $25.1 million. Subsequent to this purchase, we entered into a merger agreement among us, Cooper Acquisition, Inc., a Delaware corporation and our wholly-owned subsidiary (“Merger Subsidiary”) and Packeteer, Inc., which transaction was completed on June 6, 2008, subsequent to our fiscal year end. See additional discussion of this transaction in Note 13 Subsequent Events (Unaudited).

To date we have not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value. We recognize an impairment charge when the decline in the estimated fair value of a marketable security below the amortized cost is determined to be other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including the duration of time and the severity to which the fair value has been less than our amortized cost, any adverse changes in the investees’ financial condition and our intent and ability to hold the marketable security for a period of time sufficient to allow for any anticipated recovery in market value.

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Inventories

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

	April 30,
	2008		2007
Raw materials	$	—	$	262
Finished goods		262		227
Total	$	262	$	489

Property and Equipment

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

	April 30,
	2008			2007
Computer and office equipment	$	18,293		$	13,509
Software		9,885			6,709
Furniture and fixtures		1,532			882
Leasehold improvements		5,119			2,788
Construction in progress		491			521
		35,320			24,409
Less accumulated depreciation and amortization		(20,345	)		(15,100	)
	$	14,975		$	9,309

Depreciation expense was $5.6 million, $3.9 million and $2.4 million for the years ended April 30, 2008, 2007 and 2006, respectively.

Goodwill

For the years ended April 30, 2008 and 2007, changes in goodwill are as follows (in thousands):

	Year Ended April 30,
	2008		2007
Balance, beginning of year	$	92,243	$	62,462
Permeo acquisition adjustment		—		(81	)
NetCache acquisition		—		29,862
Balance, end of year	$	92,243	$	92,243

Intangible Assets

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

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

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April 30, 2007	Amortization period	Gross Amount		Accumulated Amortization			Net Carrying Value
Developed technology	3-7 years	$	6,031	$	(2,114	)	$	3,917
Core technology	5 years		2,929		(1,511	)		1,418
Customer relationships	5-7 years		2,023		(708	)		1,315
Total		$	10,983	$	(4,333	)	$	6,650

Total amortization expense for the identifiable intangible assets was approximately $1.6 million, $1.8 million and $1.3 million for the years ended April 30, 2008, 2007 and 2006, respectively. As of April 30, 2008, we had no identifiable intangible assets with indefinite lives. The weighted average life of identifiable intangible assets was 4.0 years and 6.3 years as of April 30, 2008 and 2007, respectively.

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

Year Ended April 30,	Amortization
2009	$	1,557
2010		1,197
2011		868
2012		781
2013		607
Thereafter		—
	$	5,010

Other assets

In April 2007, we entered into a license agreement under which we received a nonexclusive, perpetual, worldwide, royalty-free license to use software for a total purchase price of approximately $1.0 million. In accordance with SFAS No. 86, Accounting for the Cost of Software to be Sold, Leased or Otherwise Marketed, we capitalized the total purchase price and are amortizing it over its estimated useful life of seven years. For the year ended April 30, 2008 and 2007, amortization expense related to this capitalized software was $154,000 and $13,000, respectively and were included in the “Cost of revenue—Product” in our consolidated statement of operations.

As of April 30, 2008, amortization expense in future periods for this capitalized software is expected to be as follows (in thousands):

Year Ended April 30,	Amortization
2009	$	154
2010		154
2011		154
2012		154
2013		154
Thereafter		101
	$	871

Accrued payroll and related benefits

	April 30,
	2008		2007
Accrued payroll and related benefits	$	16,464	$	11,710

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At April 30, 2008 and 2007, accrued payroll and related benefits included approximately $3.3 million and $3.8 million in payroll tax accruals resulting from the disqualification of stock options caused by the revised measurement dates determined during the investigation of historical stock option granting practices.

Current Other Accrued Liabilities

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

	April 30,
	2008		2007
Professional and consulting fees	$	1,410	$	625
Accrued royalty		939		416
Warranty obligations		434		459
Sales and marketing costs		157		162
Federal and State income tax payable		1,824		23
Foreign income tax payable		430		580
Deferred rent		697		544
Other		3,100		2,999
Total current other accrued liabilities	$	8,991	$	5,808

Warranty Obligations

Changes in our warranty obligations, which are included in the “Current other accrued liabilities” table above, for the years ended April 30, 2008 and 2007 were as follows (in thousands):

	Year Ended April 30,
	2008			2007
Beginning balances	$	459		$	319
Warranties issued during the year		2,055			1,534
Settlements made during the year		(2,080	)		(1,394	)
Ending balances	$	434		$	459

Deferred revenue

Deferred revenue consists of the following (in thousands):

	April 30,
	2008		2007
Deferred product revenue, current	$	11,178	$	5,654
Deferred service revenue, current		57,064		36,256
Total deferred revenue, current		68,242	$	41,910
Deferred service revenue, long-term		21,318		13,858
Total deferred revenue	$	89,560	$	55,768

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Note 5. Restructuring Charges (Reversal)

As of April 30, 2008, all actions under the February 2002, August 2001, and February 2001 restructuring plans were completed. The following table summarizes our abandoned lease space accrual related to restructuring activity during the three years ended April 30, 2008 (in thousands):

Balances as of April 30, 2005	$	3,643
Cash payments		(2,701	)
Reversals		(48	)
Balances as of April 30, 2006		894
Cash payments		(637	)
Reversals		(19	)
Balances as of April 30, 2007		238
Cash payments		(238	)
Balances as of April 30, 2008	$	—

Note 6. Stockholders’ Equity

Preferred Stock

During September 2007, the 42,060 shares of Series A Redeemable Convertible Preferred Stock were converted into 4,800,000 shares of our Common Stock. The conversions were exempt from registration under Section 3(a)(9) of the Securities Act of 1933. The conversion price of each share of Series A Redeemable Convertible Preferred Stock was $17.525 per share, such that the conversion rate of the Series A Redeemable Convertible Preferred Stock was approximately 114.12-to-1.0. The conversions resulted in a $41.9 million reduction of Series A Redeemable Convertible Preferred Stock, a $0.2 million increase in interest expense attributable to unamortized issuance costs, and a $42.1 million increase in stockholders’ equity. On November 19, 2007, we filed a Certificate of Elimination of Series A Preferred Stock with the Delaware Secretary of State to eliminate the Series A Preferred Stock, as no shares of such series remained outstanding.

Significant rights and obligations of the Series A Redeemable Convertible Preferred Stock included the following:

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

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

Voting rights. Each holder of Series A Redeemable Convertible Preferred Stock was entitled to that number of votes equal to the number of shares of Common Stock into which the shares of Series A Redeemable Convertible Preferred Stock held by such holder could be converted as of the record date.

Restricted Common Stock

We have either assumed or entered into Stock Purchase Agreements in connection with the sale of common stock to employees. We have the right to repurchase, at the original issue price, a declining percentage of certain of the shares of common stock issued based on the service periods related to restricted stock awards.

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Restricted stock awards as of April 30, 2008 and 2007 and changes during fiscal 2008 and 2007, respectively, were as follows:

	Shares		Weighted Average Grant Date Fair Value
Balance at April 30, 2006	12,600		$	8.50
Granted	100,800		$	17.58
Balance at April 30, 2007	113,400		$	16.57
Granted	221,534		$	25.83
Vested	(29,020	)	$	17.58
Cancelled	(5,498	)	$	24.57
Balance at April 30, 2008	300,416		$	23.15

Warrants

In connection with the acquisition of Ositis in November 2003, we assumed warrants outstanding to purchase Ositis common stock using an exchange ratio contained in the Ositis merger agreement. Based on this exchange ratio, the total number of our shares that may be purchased by warrant holders of Ositis common stock is 5,608. Using the Black Scholes valuation model, we valued these shares at $43,000, which was included as part of the total purchase consideration for Ositis.

Outstanding warrants at April 30, 2008, 2007 and 2006, comprised 1,252 shares with an exercise price of $45.74 and an expiration of July 2008.

Description of Stock-Based Compensation Plans

2007 Stock Incentive Plan

On August 27, 2007, our Board of Directors approved the 2007 Stock Incentive Plan (the “2007 Stock Incentive Plan”), under which 2,000,000 shares of common stock were reserved for issuance, together with shares reserved against options or awards made under the 1999 Stock Incentive Plan, 2000 Supplemental Stock Option Plan, 1999 Director Option Plan or 2007 New Employee Stock Incentive Plan (the “Prior Plans”) as of the date of effectiveness of the 2007 Stock Incentive Plan. The 2007 Stock Incentive Plan provides for five different types of equity compensation awards: stock options, restricted stock; stock appreciation rights; stock units; and certain automatic stock option grants to non-employee members of our Board of Directors. The 2007 Stock Incentive Plan was approved by our stockholders on October 2, 2007, and became effective at that time. The Prior Plans were terminated upon the effectiveness of the 2007 Stock Incentive Plan and options and awards made under the Prior Plans are deemed incorporated into the 2007 Stock Incentive Plan, but shall remain outstanding in accordance with their original terms. On October 4, 2007, the effective date of our stock dividend, the shares of common stock reserved for issuance under the 2007 Stock Incentive Plan increased to 4,000,000 shares, and shares reserved against outstanding options or awards under the Prior Plans increased by twice the amount then reserved. The 2007 Stock Incentive Plan will automatically terminate on the tenth anniversary of the adoption of the 2007 Stock Incentive Plan by the Board of Directors (August 27, 2017).

As of April 30, 2008, 3,528,079 shares of our common stock were available for future equity awards under the 2007 Stock Incentive Plan and 5,742,562 shares of common stock were outstanding under the aforementioned equity incentive plans, including the 2007 Stock Incentive Plan and the Prior Plans.

Employee Stock Purchase Plan

In September 1999, our Board of Directors adopted the Employee Stock Purchase Plan (“ESPP”), which became effective upon our initial public offering. Under the ESPP, eligible employees may purchase common

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stock through payroll deductions, not to exceed 15% of an employee’s compensation, at a price equal to 85% of the closing fair market value of our common stock on the lower of the day prior to the beginning of the offering or the last day of the applicable six-month purchase period. The number of shares reserved under the ESPP automatically increased each year since inception and will increase on an annual basis by 200,000 shares annually. Our Board of Directors, at its discretion, may reduce the automatic annual increase in reserved shares. Effective March 1, 2006, the ESPP was modified to reduce offering periods to six months from a prior maximum of two years. In addition, a contribution limitation of $10,000 per six-month offering period was established and the ability to change contributions during an offering period, other than in conjunction with a withdrawal from the ESPP, was eliminated.

As of April 30, 2008, 1,349,972 shares of common stock were available for future purchase and 1,250,028 shares of common stock have been issued under the employee stock purchase plan.

Impact of the Adoption of SFAS No. 123(R)

See Note 2 for a description of our adoption of SFAS No. 123(R), “Share-Based Payment,” on May 1, 2006. The following table summarizes the stock-based compensation expense for stock options, our employee stock purchase plan, and our 2007 Tender Offer that we recorded in the statements of operations in accordance with SFAS No. 123(R) for the years ended April 30, 2008 and 2007 (in thousands).

	Year Ended April 30, 2008		Year Ended April 30, 2007		Year Ended April 30, 2006 (1)
Stock-based compensation expense:
Cost of product	$	775	$	468	$	31
Cost of service		808		471		57
Research and development		4,986		3,325		866
Sales and marketing		5,593		3,169		618
General and administrative		4,644		2,067		1,809
Total	$	16,806	$	9,500	$	3,381

(1) Represents stock based compensation recorded under APB 25 prior to adoption of FAS123(R).

Determining Fair Value under SFAS No. 123(R)

• Valuation and Amortization Method. We estimate the fair value of stock options granted using the Black-Scholes option valuation model. 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 of stock-based compensation on a straight-line basis for options expected to vest. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods.

• Expected Term. The expected term of options granted represents the period of time that they are expected to be outstanding. We estimate the expected term of options granted based on our historical experience of grants, exercises and post-vesting cancellations. Contractual term expirations have not been significant.

• Expected Volatility. 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 SEC Staff Accounting Bulletin No. 107. Historical volatilities are calculated based on the historical prices of our common stock over a period equal to the expected term of our option grants, while implied volatilities are derived from publicly traded options of our common stock. Prior to the adoption of SFAS No. 123(R), we relied exclusively on the historical prices of our common stock in the calculation of expected volatility.

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• Expected Forfeitures. Stock-based compensation expense under SFAS No. 123(R) is based on awards ultimately expected to vest, and requires that forfeitures be estimated at the time of grant and revised, if necessary, if actual forfeitures differ from those estimates. We estimated our forfeiture rate at 10% based on an analysis of historical pre-vesting forfeitures, and have reduced stock-based compensation expense accordingly.

• Risk-Free Rate. The risk-free interest rate that we use in the Black-Scholes option valuation model is 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.

• Dividends. 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.

We used the following assumptions to estimate the fair value of options granted and shares purchased under our employee stock plans and stock purchase plan for fiscal years ended April 30, 2008, 2007 and 2006:

	Year Ended April 30,
Stock Options	2008		2007		2006
Risk-free rate	4.30	%	4.90	%	4.38	%
Expected life (in years)	4.63		4.63		4.14
Expected volatility	0.68		0.68		0.95
Expected forfeitures	10.00	%	10.00	%	10.00	%

	Year Ended April 30,
Employee Stock Purchase Plan	2008		2007		2006
Risk-free rate	2.56	%	5.06	%	4.38	%
Expected life (in years)	0.50		0.50		1.25
Expected volatility	0.67		0.41		0.71

The total number of unvested options outstanding as of April 30, 2008 and 2007 was 3,516,110 and 3,596,363 respectively. The total fair value of options vested during fiscal years ended April 30, 2008 and 2007 was $9.0 million, and $10.1 million, respectively.

There were 241,866, zero, and 284,708 shares purchased through our employee stock purchase plan during the fiscal years ended April 30, 2008, 2007 and 2006, respectively. Included in the consolidated statement of operations for the year ended April 30, 2008 and 2007 was $1.8 million and $110,000, respectively, in stock-based compensation expense related to the amortization of expenses related to shares granted under our employee stock purchase plan.

As of April 30, 2008, $29.8 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2012. The weighted average term of the unrecognized stock-based compensation expense is 2.51 years.

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The following table provides segregated ranges of stock options outstanding at April 30, 2008:

Range of Exercise Prices		Options Outstanding				Options Exercisable
		Number of Options Outstanding	Weighted Average Contractual Life (Years)	Weighted Average Exercise Price		Number of Options Exercisable	Weighted Average Exercise Price
$	0.03–$    2.80	293,504	4.93	$	2.28	287,442	$	2.29
$	2.87–$    6.97	169,133	6.42	$	6.18	109,991	$	5.79
$	7.09–$    8.35	826,632	7.10	$	7.93	452,810	$	7.68
$	8.38–$  10.00	494,471	5.98	$	9.36	333,209	$	9.39
$	10.08–$  12.03	330,955	7.31	$	10.51	155,515	$	10.57
$	12.12–$  15.00	399,294	4.77	$	14.15	380,743	$	14.20
$	15.25–$  17.58	743,002	8.48	$	17.34	284,940	$	17.20
$	18.95–$  25.77	1,418,781	8.62	$	22.88	370,103	$	22.32
$	26.00–$  40.96	496,584	8.79	$	31.44	47,901	$	28.62
$	41.32–$262.50	570,206	4.53	$	83.68	367,985	$	103.32
$	0.03–$262.50	5,742,562	7.17	$	22.76	2,790,639	$	24.19

We received $29.8 million, $0.6 million and $9.5 million in cash from the issuance of common stock under all employee stock plans for the fiscal years ended April 30, 2008, 2007 and 2006, respectively.

We historically estimated the expected life of options using our best estimate of employee exercise behavior at the time. This estimate considered the vesting period for the employee stock options and assumptions we believed reasonable about the post-vesting holding period. Upon adoption of SFAS No. 123(R) on May 1, 2006, we updated this estimate to reflect more recent historical experience of employee stock option exercises and cancellations.

We historically relied exclusively on the historical prices of our common stock in the calculation of expected volatility. Upon adoption of SFAS No. 123(R) on May 1, 2006, we updated this calculation to reflect the volatility of our stock options at the date of grant using a combination of historical and implied volatilities. Historical volatilities are calculated based on the historical prices of our common stock over a period equal to the expected term of our option grants, while implied volatilities are derived from publicly traded options of our common stock.

For the purposes of pro forma disclosures, the estimated fair value of the stock based awards is amortized to expense over the vesting period for options and the offering period for stock purchases under the Employee Stock Purchase Plan.

As of April 30, 2008, shares of common stock reserved for future issuance consisted of the following:

	April 30, 2008
Warrants outstanding	1,252
Stock options outstanding	5,742,562
Stock options available for grant	3,528,079
Employee stock purchase plan	1,349,972
Total	10,621,865

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A summary of stock option activity under all stock-based compensation plans during the year ended April 30, 2008 is as follows:

	Options outstanding
	Number of Options		Weighted Average exercise price Per share		Weighted Average Remaining Contractual term (in Years)	Aggregate Intrinsic Value (in million)
Balance at April 30, 2005	6,284,004		$	13.23
Options granted	2,268,100		$	12.65
Options exercised	(1,518,224	)	$	4.96
Options forfeited	(486,278	)	$	13.45
Options assumed	113,196		$	3.50
Balance at April 30, 2006	6,660,798		$	14.73
Options granted	1,693,690		$	12.93
Options exercised	(83,562	)	$	7.77
Options forfeited	(697,148	)	$	20.73
Balance at April 30, 2007	7,573,778		$	14.11
Options granted	1,747,072		$	28.81
Options exercised	(3,066,832	)	$	8.34
Options forfeited	(511,456	)	$	18.37
Outstanding at April 30, 2008	5,742,562		$	22.76	7.22	$	34.33
Exercisable at April 30, 2008	2,790,652		$	24.19	5.61	$	22.57
Vested and expected to vest at April 30, 2008	5,371,235		$	22.77	7.05	$	33.18

The weighted average grant date fair value of stock options granted to employees was $16.84, $14.69 and $17.71 per share during the years ended April 30, 2008, 2007 and 2006, respectively. The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between our closing stock price on the last trading day of the fourth quarter of 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on April 30, 2008. As the fair market value of our common stock changes, the above amount will change as well. Total intrinsic value of options exercised was $74 million, $0.8 million, and $20.1 million for the years ended April 30, 2008, 2007 and 2006, respectively.

	Year Ended April 30,
	2008			2007			2006
	Number of shares	Weighted Average Price per Share		Number of shares	Weighted Average Price per Share		Number of shares	Weighted Average Price per Share
Options granted with an exercise price equal to fair value at date of grant	1,747,072	$	28.81	1,623,390	$	13.06	318,900	$	10.26
Options granted with an exercise price greater than fair value at date of grant	—	$	—	34,600	$	8.90	663,950	$	13.53
Options granted with an exercise price less than fair value at date of grant	—	$	—	35,700	$	10.58	1,285,250	$	12.78

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As of April 30, 2008, we had two active stock-based employee compensation plans, which are described below. We also had awards issued under four other stock-based compensation plans, which have been terminated and are identified below.

2007 Tender Offer

We conducted an investigation into our historical stock option granting processes which led to the Fiscal 2007 Restatement. As a consequence of that investigation, we determined that the measurement dates for a number of stock option grants made by us during the period from November 1999 to May 2006 differed from the measurement dates previously used to account for such grants. This resulted in a lower exercise price for those options than the fair market value on the actual grant date and, for accounting purposes, such options were deemed to have been issued at a discount, which could expose the holders of those options to potentially adverse tax consequences under Section 409A of the Internal Revenue Code and state law equivalents. We made a tender offer to certain individuals and provided them the opportunity to increase the exercise price of the discounted options to the fair market value on the actual grant date of that option, in order to avoid the potentially adverse tax consequences (the “2007 Tender Offer”). The 2007 Tender Offer was completed on May 29, 2007. As a result of the 2007 Tender Offer, we amended outstanding options covering 1,788,080 shares of our common stock. In addition, under the terms of the 2007 Tender Offer, the participants whose options were amended received a special cash bonus, in the aggregate amount of $2.7 million, to compensate them for the higher exercise prices per share in effect for their amended options. The bonus costs, which were recorded during the first quarter of fiscal 2008, resulted in a decrease to additional paid-in capital of $1.2 million, an increase in stock-based compensation expense of $1.5 million and an increase in payroll tax expenses of $0.2 million. Under Section 409A of the Internal Revenue Code, the cash bonus could not be paid in the same calendar year in which the options were amended. Accordingly, the cash bonuses were paid in January 2008.

Note 7. Income Taxes

The domestic and foreign components of income (loss) before income taxes were as follows (in thousands):

	Year Ended April 30,
	2008			2007			2006
U.S.	$	72,375		$	(7,843	)	$	2,899
Non-U.S.		(41,845	)		1,769			316
Total pre-tax earnings (losses)	$	30,530		$	(6,074	)	$	3,215

The provision for taxes on earnings was as follows (in thousands):

	Year Ended April 30,
	2008			2007		2006
U.S. federal taxes:
Current	$	15,785		$	—	$	—
Deferred		(17,353	)		435		—
Non-U.S. taxes:
Current		995			641		275
Deferred		—			—		—
State taxes:
Current		827			—		—
Deferred		(2,292	)		48		—
Provision (benefit) for income taxes	$	(2,038	)	$	1,124	$	275

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

	Year Ended April 30,
	2008			2007			2006
Provision at statutory rate	$	10,686		$	(2,126	)	$	1,125
State & Local income taxes		(952	)		—			—
Acquired in-process technology		—			—			1,155
Foreign losses not benefited		15,750			—			—
Net operating loss utilization		(10,382	)		—			—
Valuation allowance		(17,603	)		979			(2,547	)
Stock compensation		2,032			1,639			115
Foreign taxes		(109	)		22			275
Meals & entertainment		161			131			145
R & D Credit		(1,663	)		—			—
Other		42			479			7
Provision (benefit) for income taxes	$	(2,038	)	$	1,124		$	275

The benefit for income taxes of $2.0 million for fiscal 2008, is primarily related to foreign income taxes, the current tax provision for US and state taxes due primarily to a prepayment of certain intercompany expenses associated with our international structure put in place during 2008, netted with a partial valuation allowance release that was recorded as a credit to income tax expense.

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

	April 30,
	2008			2007
Deferred tax assets:
Net operating loss carryforwards	$	11,658		$	39,777
Stock compensation		7,177			6,146
Other accruals/reserves		10,115			7,721
Fixed assets		906			890
Tax credits		3,390			4,395
Capitalized research and development		11,929			14,818
		45,175			73,747
Valuation allowance		(23,072	)		(71,404	)
Total deferred tax assets	$	22,103		$	2,343
Deferred tax liabilities:
Intangible assets	$	(1,676	)	$	(2,343	)
Goodwill		(1,266	)		(483	)
Total deferred tax liabilities		(2,942	)		(2,826	)
Net deferred tax assets (liabilities)	$	19,161		$	(483	)

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

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At April 30, 2008, our projections of future taxable income enabled us to conclude that it is more likely than not that we will have future taxable income sufficient to realize a portion of our net deferred tax asset. Accordingly, $19.6 million ($17.4 million of federal and $2.2 million of state) of the valuation allowance on our deferred tax assets was reversed as a credit to income tax expense. Our conclusion that a portion of our deferred tax assets is more likely than not to be realized is strongly influenced by our projections of future taxable income. Our estimate of future taxable income considers all available positive and negative evidence regarding our current and future operations, including projections of income in various states and foreign jurisdictions. We believe our estimate of future taxable income is reasonable, but is inherently uncertain, and if our future operations generate taxable income greater than the projected amounts, further adjustments to reduce the valuation allowance are possible. Conversely, if we realize unforeseen material losses in the future, or our ability to generate future taxable income necessary to realize a portion of the deferred tax asset is materially reduced, additions to the valuation allowance could be recorded. At April 30, 2008, the balance of the deferred tax valuation allowance was approximately $23.1 million.

As of April 30, 2008, we had net operating loss carryforwards for federal income tax purposes of approximately $108.5 million, which will expire in fiscal years ending in 2011 through 2027 if not utilized. We also had net operating loss carryforwards for state income tax purposes of approximately $45.2 million, which will expire in fiscal years ending in 2009 through 2027 if not utilized. The Company has $75.6 million of federal net operating loss and $42.2 million of state net operating loss that are where no deferred tax asset was recorded pursuant to Footnote 82 of SFAS 123(R). We also had federal and California research credit carryforwards of approximately $1.2 million and $6.7 million respectively. The federal credit will expire in fiscal years ending in 2027 through 2028 if not utilized. The California credit is not subject to expiration.

Utilization of our net operating loss and credit carryforwards are subject to substantial annual limitations due to the ownership change provisions of the Internal Revenue Code and similar state provisions. Annual limitations have resulted in the expiration of the net operating loss and tax credit carryforwards before utilization of approximately $60.9 million and $3.6 million, respectively. Utilization of federal and state net operating losses of approximately $108.5 million and $37.3 million, respectively, as well as $0.1 million and $4.6 million of federal and state credits, respectively, are subject to an annual limitation ranging from approximately $1.0 million to $13.7 million.

Federal and state income taxes have not been provided on accumulated but undistributed earnings of certain foreign subsidiaries aggregating approximately $5.9 million at April 30, 2008; as such earnings have been indefinitely reinvested in the business. If such earnings were not indefinitely reinvested, a deferred tax liability of approximately $0.3 million would have been required.

We adopted FIN 48 effective May 1, 2007. As a result of the implementation of FIN 48, we did not recognize a cumulative adjustment to the May 1, 2007 balance of retained earnings as the amount was deemed immaterial.

As of May 1, 2007, we had gross unrecognized tax benefits of approximately $2.2 million. Included in the balance of unrecognized tax benefits as of May 1, 2007, is approximately $1.4 million of tax benefits that, if recognized, would result in an adjustment to our effective tax rate, and approximately $0.2 million of tax benefits that, if recognized, would result in an adjustment to goodwill.

As of April 30, 2008, we had gross unrecognized tax benefits of approximately $2.8 million. Included in the balance of unrecognized tax benefits as of April 30, 2008 is approximately $1.8 million of tax benefits that if recognized, would result in an adjustment to our effective tax rate and $0.3 million that would impact paid-in-capital. We do not anticipate the total amount of our unrecognized tax benefits to significantly change over the next twelve months.

In accordance with FIN 48, paragraph 19, we have decided to classify interest and penalties related to uncertain tax positions as a component of our provision for income taxes. Accrued interest and penalties relating

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to the income tax on the unrecognized tax benefits as of May 1, 2007 and April 30, 2008, were approximately $19,000 and $34,000, respectively, with approximately $15,000 being included as a component of provision for income taxes in the year ended April 30, 2008.

Total amount of gross unrecognized tax benefits (in thousands):

Opening balance at May 1, 2007	$	2,247
Increase in balance due to current year tax positions		971
Reductions for prior year tax positions		(373	)
Closing balance at April 30, 2008	$	2,845

Due to our taxable loss position in prior years, all tax years are open to examination in the U.S. and state jurisdictions. We are also open to examination in various foreign jurisdictions for tax years 2000 and forward, none of which were individually material.

Note 8. Defined Contribution Benefit Plan

We have a defined contribution benefit plan under Section 401(k) of the Internal Revenue Code, which covers substantially all United States employees. Eligible employees may contribute pre-tax amounts to the plan via payroll withholdings, subject to certain limitations. Effective January 1, 2006, we began matching participant contributions on a dollar for dollar basis up to the lower of 3% of a participant’s eligible compensation or $1,500 per calendar year. Matching contributions are invested in accordance with a participant’s existing investment elections and become fully vested after four years of service. The matching contributions for the year ended April 30, 2008 were approximately $0.8 million.

Note 9. Commitments and Contingencies

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 with each of our executive officers and directors containing 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 expect to have indemnification obligations to certain current and former officers and directors and other employees in connection with the regulatory investigations and litigation relating to the matters covered in our Fiscal 2007 Restatement, and have made advances to such parties to cover attorneys’ fees that they incurred in connection with such matters.

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, 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.

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Leases

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

Rent expense was $4.5 million, $3.5 million and $3.1 million for the years ended April 30, 2008, 2007 and 2006, respectively.

As of April 30, 2008, 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,	Amount
2009	$	5,136
2010		3,667
2011		1,967
2012		951
2013		713
Thereafter		81
Total minimum lease payments	$	12,515

In September 2005, we commenced a five-year operating lease of a building that serves as our headquarters in Sunnyvale, California. As part of this agreement, we are required to maintain a $0.4 million irrevocable standby letter of credit with a major financial institution as a form of security. The letter of credit is secured by deposits and provides for automatic annual extensions, without amendment, through the end of the lease term in August 2010. During fiscal year 2007, the letter of credit was increased by $0.5 million due to a leasehold improvement, resulting in a balance of $0.9 million as of April 30, 2007. The letter of credit is classified as “Long-term restricted cash” in the accompanying consolidated balance sheets as of April 30, 2008 and April 30, 2007, respectively.

Other

In connection with our NetCache asset acquisition in September 2006, we entered into an escrow agreement pursuant to which we deposited in escrow $4.0 million, primarily to secure certain indemnification obligations to Network Appliance related to this transaction. As of April 30, 2007, the balance in this escrow account was $4.1 million and classified as “Short-term restricted cash equivalents” in the accompanying consolidated balance sheets. In fiscal year 2008, the escrow agreement had expired, the amounts held in escrow were released, and the related balance was reclassified to cash and cash equivalents in the consolidated balance sheet at April 30, 2008.

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 through August 30, 2013. Our minimum obligation at April 30, 2008 under these arrangements was $9.5 million.

Legal settlement expenses are included in general and administrative expenses in the Consolidated Statement of Operations.

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Note 10. Litigation

With regard to the matters discussed below, although we cannot predict whether the IPO allocation cases will settle as proposed, and cannot predict the outcome of the derivative litigation, the SEC and other regulatory investigations, 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.

Periodically, we review the status of each significant matter and assess potential financial exposure. Because of the uncertainties related to the (i) determination of the probability of an unfavorable outcome and (ii) amount and range of loss in the event of an unfavorable outcome, we are unable to make a reasonable estimate of the liability that could result from any pending litigation described below and no accrual has been recorded in our balance sheet as of April 30, 2008. As additional information becomes available, we will reassess the probability and potential liability related to pending litigation, which could materially impact 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. This is one 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 IPO’s 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.

In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including us, 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, which the defendants in those cases have moved to dismiss. Plaintiffs have also moved, for class certification in the six focus cases, which the defendants in those cases have opposed. It is uncertain whether there will be any revised or future settlement.

Derivative Litigation

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

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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.

In the federal action, the Company and the individual defendants filed motions to dismiss on the grounds that plaintiffs had failed to make a pre-suit demand on our Board of Directors and had failed to state actionable claims. The federal plaintiffs thereafter advised defendants that they would make a demand on our Board of Directors. On June 12, 2008, the federal court entered an order requiring plaintiffs to make a demand by June 20, 2008, and staying the action until early October 2008 to permit our Board of Directors to consider the demand. The federal plaintiffs submitted their demand letter to our Board of Directors on June 20, 2008. The demand letter largely repeats the allegations and requested relief in the federal and state derivative actions. In response to the demand letter, on June 25, 2008, our Board of Directors formed a special committee, composed of directors James R. Tolonen and Keith Geeslin. 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.

In the state action, the Company and the individual defendants have moved to stay the action on the ground that the state action is duplicative of the broader federal action and have demurred on the grounds that the state plaintiffs failed to make a pre-suit demand on our Board of Directors and failed to state actionable claims.

Regulatory Investigations

In July 2006, we were advised that the SEC was conducting an informal inquiry into our historical stock option granting practices and related accounting, In the Matter of Blue Coat Systems, Inc., SF-3165. We have been voluntarily cooperating with the investigation. In May 2008, the SEC issued a formal order of nonpublic investigation in connection with this investigation and issued a subpoena to a former officer of the Company. The Company and its current directors, officers, and employees continue to cooperate with the SEC on a voluntary basis. The SEC’s investigation is a nonpublic, fact-finding inquiry to determine if there have been violations of the federal securities laws.

Patent Litigation

On April 18, 2008, Realtime Data, LLC d/b/a IXO (“Realtime”) filed a patent infringement lawsuit against Packeteer, Inc. (“Packeteer”), a company that we acquired on June 6, 2008, and eleven other companies, including five customers of Packeteer (Realtime Data, LLC d/b/a IXO v. Packeteer, Inc. et al. in the United

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States District Court, Eastern District of Texas, Civil Action No. 6:08-cv-144). The complaint asserted infringement of seven patents, five of which were asserted against Packeteer. On June 20, 2008, Realtime filed a First Amended Complaint which asserts infringement of two additional patents, one of which is asserted against Packeteer. 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.

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 Wide Area Network (“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 by our U.S. operations to non-affiliated customers in other geographic regions. During fiscal year 2008, 2007 and 2006, there were no intra-company sales.

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

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

	Year Ended April 30,
	2008				2007				2006
	$		%		$		%		$		%
North America	$	142,934	46.8	%	$	82,812	46.6	%	$	70,866	50.0	%
EMEA (1)		112,110	36.7			66,323	37.3			53,858	38.0
LATAM (2)		3,850	1.3			1,611	0.9			377	0.3
APAC (3)		46,545	15.2			26,954	15.2			16,621	11.7
Total net revenue	$	305,439	100.0	%	$	177,700	100.0	%	$	141,722	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):

	Year Ended April 30,
	2008				2007				2006
	$		%		$		%		$		%
Product	$	233,858	76.6	%	$	136,770	77.0	%	$	116,083	81.9	%
Service		71,581	23.4			40,930	23.0			25,639	18.1
Total net revenue	$	305,439	100.0	%	$	177,700	100.0	%	$	141,722	100.0	%

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The following table presents a summary of long-lived assets as of April 30, 2008 and 2007 by geographic area:

	April 30,
	2008		2007
Long-Lived Assets:
Property and equipment, net
United States	$	12,253	$	8,102
International		2,722		1,207
Subtotal		14,975		9,309
Identifiable intangible assets, net United States		5,010		6,650
Total Long-Lived Assets	$	19,985	$	15,959

Note 12. Selected Quarterly Financial Data (Unaudited)

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

	Three Months Ended
	July 31, 2007 (restated) (1)			October 31, 2007			January 31, 2008		April 30, 2008
Net revenue	$	62,403		$	73,425		$	81,381	$	88,230
Gross profit		47,792			57,047			62,082		67,073
Net income		2,642			6,953			10,490		12,483
Basic net income per common share	$	0.08		$	0.20		$	0.28	$	0.33
Diluted net income per common share	$	0.07		$	0.17		$	0.26	$	0.32
	Three Months Ended
	July 31, 2006 (2)			October 31, 2006 (2)			January 31, 2007 (2)		April 30, 2007 (2)
Net revenue	$	36,415		$	39,705		$	47,108	$	54,472
Gross profit		26,165			29,583			34,868		41,336
Net income (loss)		(3,137	)		(3,344	)		42		(759	)
Basic net income (loss) per common share	$	(0.11	)	$	(0.12	)	$	0.00	$	(0.03	)
Diluted net income (loss) per common share	$	(0.11	)	$	(0.12	)	$	0.00	$	(0.03	)

(1) Basic net income per common share and diluted net income per common share are presented in conformity with FASB SFAS No. 128, Earnings Per Share, for all periods presented. Basic net income per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of shares of common stock outstanding, including dilutive common shares subject to repurchase and potential shares assuming the (i) exercise of dilutive stock options and warrants using the treasury stock method; (ii) issuance of committed but unissued stock awards; and (iii) shares issuable upon the assumed conversion of outstanding Series A Redeemable Convertible Preferred Stock. The company has restated the earnings per share for the first quarter of fiscal 2008 in accordance with EITF 03-6, Participating Securities and the Two-Class Method under SFAS No. 128, in order to include the Series A Redeemable Convertible Preferred Stock in the computation of basic earnings per share using the two-class method. All shares of such preferred stock were converted into common stock by the end of September 2007.

(2) Basic and diluted per share amounts have been adjusted to reflect the 2 for 1 stock split in October 2007.

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Note 13. Subsequent Events (Unaudited)

On June 6, 2008, we completed the acquisition of Packeteer, Inc. (“Packeteer”), a provider of products for WAN traffic prioritization and acceleration. The transaction was effected through a tender offer, followed by a merger of our wholly-owned subsidiary, Cooper Acquisition, Inc., with and into Packeteer. As a result of the transaction, Packeteer became our wholly-owned subsidiary and each outstanding share of Packeteer common stock that was not tendered in the tender offer (other than restricted shares; shares already held by us, Packeteer or our respective wholly-owned subsidiaries; or shares held by stockholders who properly perfect appraisal rights under Delaware law) was converted into the right to receive $7.10 per share. The aggregate purchase price, which has not yet been determined, will consist of $264 million in cash paid for Packeteer’s common stock, plus the value of assumed stock options and direct transaction costs. To date, the acquisition has been funded by approximately $188 million in cash from internal sources and $80 million in cash from the issuance of convertible notes. The operations of Packeteer and Blue Coat will be reported on a combined basis commencing with our financial statements for the quarter ending July 31, 2008.

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

On June 9, 2008, in connection with our acquisition of Packeteer, Inc. we committed to a plan of termination that will result in a reduction of approximately 130 employees of the Company, Packeteer and various affiliates worldwide. The plan includes workforce reductions, the acceleration of certain employee benefits, and outplacement assistance.

The Company expects to complete the termination plan by the end of the first fiscal quarter ending July 31, 2008. The Company expects total costs in the range of $10.0 million to $12.0 million, of which $1.2 million to $1.4 million will be recorded as a charge in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” In addition, $8.8 million to $10.6 million will be recorded as an assumed liability. We also expect to incur additional costs related to approximately 36 employees on transition assignments. The significant majority of the charges are expected to be cash expenditures.

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, which commences on the earlier of November 1, 2008 or our occupancy of the new premises for the conduct of business. 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.

On April 18, 2008, Realtime Data, LLC d/b/a IXO (“Realtime”) filed a patent infringement lawsuit against Packeteer, Inc. (“Packeteer”), a company that we acquired on June 6, 2008, and eleven other companies, including five customers of Packeteer (Realtime Data, LLC d/b/a IXO v. Packeteer, Inc. et al. in the United States District Court, Eastern District of Texas, Civil Action No. 6:08-cv-144). The complaint asserted infringement of seven patents, five of which were asserted against Packeteer. On June 20, 2008, Realtime filed a First Amended Complaint which asserts infringement of two additional patents, one of which is asserted against Packeteer. 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.

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

None.

86

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We are committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of April 30, 2008, the end of the period covered by this Annual Report on Form 10-K.

Inherent Limitations on Internal Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures and implementing controls and procedures based on the application of management’s judgment.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework set forth in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of April 30, 2008.

The effectiveness of our internal control over financial reporting as of April 30, 2008 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which follows.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

87

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited Blue Coat Systems, Inc.’s internal control over financial reporting as of April 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Blue Coat Systems, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, Blue Coat Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of April 30, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Blue Coat Systems, Inc. as of April 30, 2008 and April 30, 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended April 30, 2008 of Blue Coat Systems, Inc. and our report dated June 27, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California

June 27, 2008

Item 9B. Other Information

None

88

PART III.

Item 10. Directors, Executive Officers and Corporate Governance

(a) Identification of Directors. The information required by this Item is incorporated by reference from the responsive information to be contained in our Proxy Statement.

(b) Identification of Executive Officers and Certain Significant Employees. The information required by this Item is incorporated by reference from the responsive information to be contained in our Proxy Statement.

(c) Compliance with Section 16(a) of the Exchange Act. The information required by this Item is incorporated by reference from the responsive information to be contained in our Proxy Statement.

(d) Code of Ethics. The information required by this Item is incorporated by reference from the responsive information to be contained in our Proxy Statement.

(e) Audit Committee. The information required by this Item is incorporated by reference from the responsive information to be contained in our Proxy Statement.

Item 11. Executive Compensation

The information required by this Item is incorporated by reference from the responsive information to be contained in our Proxy Statement.

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

The information required by this Item is incorporated by reference from the responsive information to be contained in our Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference from the responsive information to be contained in our Proxy Statement.

Item 14. Principal Accounting Fees and Services

The information required by this Item is incorporated by reference from the responsive information to be contained in our Proxy Statement.

89

PART IV.

Item 15. Exhibits and Financial Statement Schedules

1. Financial Statements

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

2. Financial Statement Schedules

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

Schedule II        Valuation and Qualifying Accounts

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

3. Exhibits

See Exhibit Index. The Exhibits listed in the accompanying Exhibit Index are filed as part of this report.

90

SIGNATURES

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

	BLUE COAT SYSTEMS, INC.
	(Registrant)
June 30, 2008	By:	/s/ BRIAN M. NESMITH
		Brian M. NeSmith
		President, Chief Executive Officer and Director

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

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

Signature	Title	Date
/s/ BRIAN M. NESMITH Brian M. NeSmith	President, Chief Executive Officer and Director (Principal Executive Officer)	June 30, 2008
/s/ KEVIN S. ROYAL Kevin S. Royal	Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)	June 30, 2008
/s/ DAVID W. HANNA David W. Hanna	Chairman of the Board and Director	June 30, 2008
/s/ JAMES A. BARTH James A. Barth	Director	June 30, 2008
/s/ KEITH B. GEESLIN Keith B. Geeslin	Director	June 30, 2008
/s/ TIMOTHY A. HOWES Timothy A. Howes	Director	June 30, 2008
/s/ JAMES R. TOLONEN James R. Tolonen	Director	June 30, 2008

91

EXHIBIT INDEX

Number	Description
2.1	Agreement and Plan of Merger and Reorganization, dated as of October 28, 2003, by and among Blue Coat Systems, Inc., Riga Corp., Ositis Software, Inc., Vilis Ositis and Liana Abele (which is incorporated herein by reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the Commission on November 28, 2003)
2.2	Agreement and Plan of Merger and Reorganization, dated as of July 16, 2004, by and among Blue Coat Systems, Inc., Utah Merger Corporation, Cerberian, Inc., and Scott Petty, as Stockholders’ Representative (which is incorporated herein by reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the Commission on November 23, 2004)
2.3	Amendment Number 1 to Agreement and Plan of Merger and Reorganization, dated as of October 5, 2004, by and among Blue Coat Systems, Inc., Utah Merger Corporation, Cerberian, Inc., and Scott Petty, as Stockholders’ Representative (which is incorporated herein by reference to Exhibit 2.2 of Form 8-K filed by the Registrant with the Commission on November 23, 2004)
2.4	Agreement and Plan of Merger and Reorganization, dated as of December 30, 2005, by and among Blue Coat Systems, Inc., Permeo Technologies, Inc., Pivot Acquisition Corp., and Chris Pacitti, as Stockholders’ Representative (which is incorporated herein by reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the Commission on January 4, 2006)
2.5	Asset Purchase Agreement, dated as of June 22, 2006, between Blue Coat Systems, Inc. and Network Appliance, Inc. (which is incorporated herein by reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the Commission on June 23, 2006)
2.6	Amendment to Asset Purchase Agreement, dated as of September 8, 2006, between Blue Coat Systems, Inc. and Network Appliance, Inc. (which is incorporated herein by reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the Commission on September 11, 2006)
2.7	Agreement and Plan of Merger, dated as of April 20, 2008, among Packeteer, Inc., Blue Coat Systems, Inc. and Cooper Acquisition, Inc. (which is incorporated herein by reference to Exhibit 2.01 to the Registrant’s 8-K filed with the Commission on April 23, 2008)
3.1	Amended and Restated Certificate of Incorporation of the Registrant (which is incorporated herein by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 No. 333-87997)
3.2	Amended and Restated Bylaws of the Registrant (which is incorporated herein by reference to Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1 No. 333-87997)
3.3	Certificate of Ownership and Merger of Blue Coat Systems, Inc. with and into CacheFlow Inc. (which is incorporated herein by reference to Exhibit 3.3 of Form 10-Q filed by the Registrant with the Commission on December 16, 2002)
3.4	Certificate of Amendment to Amended and Restated Certificate of Incorporation of Blue Coat Systems, Inc. dated September 12, 2002 (which is incorporated herein by reference to Exhibit 3.4 of Form 10-Q filed by the Registrant with the Commission on December 16, 2002)
3.5	Certificate of Designation, Preferences, and Rights of Series A Preferred Stock (which is incorporated herein by reference to Exhibit 4.1 of Form 8-K filed by the Registrant with the Commission on June 23, 2006)
3.6	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 November 19, 2007)
3.7	Certificate of Elimination of Series A Preferred Stock (which is incorporated herein by reference to Exhibit 99.1 to the Registrant’s 8-K filed with the Commission on November 21, 2007)

92

Number	Description
4.1	Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6 and 3.7
4.2	Specimen Certificate of the Registrant’s Common Stock (which is incorporated herein by reference to Exhibit 4.3 of Form 10-K filed by the Registrant with the Commission on July 29, 2003)
9.1	Voting Agreement, dated as of June 22, 2006, by and among Blue Coat Systems, Inc., Francisco Partners II, L.P., Francisco Partners Parallel Fund II, L.P., Sequoia Capital Growth Fund III, Sequoia Capital Growth Partners III and Sequoia Capital Growth III Principals Fund (which is incorporated herein by reference to Exhibit 9.1 of Form 8-K filed by the Registrant with the Commission on June 23, 2006)
10.1	Form of Indemnification Agreement (which is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1/A No. 333-87997)
10.2	1996 Stock Option Plan (which is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 No. 333-87997)
10.3*	1999 Stock Incentive Plan (which is incorporated herein by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 No. 333-87997)
10.4*	1999 Director Option Plan (which is incorporated herein by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 No. 333-87997)
10.5*	1999 Employee Stock Purchase Plan (which is incorporated herein by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1 No. 333-87997)
10.6	Reserved
10.7	Reserved
10.8	Commercial lease agreement between CacheFlow Canada and Wiebe Property Corporation Ltd., dated May 1, 1999 (which is incorporated herein by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 No. 333-87997)
10.9*	Offer Letter with Brian NeSmith (which is incorporated herein by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1/A No. 333-87997)
10.10	2000 Supplemental Stock Option Plan (which is incorporated herein by reference to Exhibit 99.1 of Form S-8 filed by the Registrant with the Commission on April 11, 2000)
10.11	SpringBank Networks, Inc. 2000 Stock Incentive Plan (which is incorporated herein by reference to Exhibit 99.2 of Form S-8 filed by the Registrant with the Commission on September 8, 2000)
10.12	Entera, Inc. 1999 Equity Incentive Plan (which is incorporated herein by reference to Exhibit 99.1 of Form S-8 filed by the Registrant with the Commission on December 18, 2000)
10.13	Entera, Inc. 2000 Equity Incentive Plan (which is incorporated herein by reference to Exhibit 99.2 of Form S-8 filed by the Registrant with the Commission on December 18, 2000)
10.14*	Offer Letter with David de Simone (which is incorporated herein by reference to Exhibit 10.24 of Form 10-Q filed by the Registrant with the Commission on December 12, 2003)
10.15	Common Stock Purchase Agreement dated September 18, 2003 (which is incorporated herein by reference to Exhibit 10.1 of Form 8-K filed by the Registrant with the Commission on September 22, 2003)

93

Number	Description
10.16	Registration Rights Agreement dated September 18, 2003 (which is incorporated herein by reference to Exhibit 10.2 of Form 8-K filed by the Registrant with the Commission on September 22, 2003)
10.17	Technology License And Settlement Agreement dated October 29, 2003 by and between Network Caching Technology L.L.C and Blue Coat Systems, Inc. (which is incorporated herein by reference to Exhibit 10.27 of Form 10-Q filed by the Registrant with the Commission on December 12, 2003)
10.18	Source Code License & Services Agreement, effective August 12, 2004, by and between Blue Coat Systems, Inc. and Flowerfire, Inc. (which is incorporated herein by reference to Exhibit 10.1 of Form 10-Q filed by the Registrant with the Commission on September 9, 2004)
10.19*	Form of Notice of Grant of Stock Option and Stock Option Agreement used to evidence options granted under the Blue Coat Systems, Inc. 1999 Stock Incentive Plan (which is incorporated herein by reference to Exhibit 10.2 of Form 10-Q filed by the Registrant with the Commission on December 9, 2004)
10.20*	Employment Agreement between Blue Coat Systems, Inc. and Kevin Royal dated as of March 31, 2005 (which is incorporated herein by reference to Exhibit 10.32 of Form 10-K filed by the Registrant with the Commission on July 14, 2005)
10.21	Triple Net Space Lease between Mary Avenue LLC as Lessor and Blue Coat Systems, Inc. , a Delaware corporation, as Lessee, dated April 21, 2005 ( which is incorporated by reference to the Registrant’s Form 8-K filed with the Commission on April 26, 2005)
10.22	Cerberian, Inc. 2000 Stock Option Plan (which is incorporated herein by reference to Exhibit 10.22 of Form 10-K filed by the Registrant with the Commission on March 28, 2007)
10.23	Permeo Technologies, Inc. 2001 Stock Option Plan (which is incorporated herein by reference to Exhibit 10.23 of Form 10-K filed by the Registrant with the Commission on March 28, 2007)
10.24	Series A Preferred Stock Purchase Agreement dated as of June 22, 2006, by and among Blue Coat Systems, Inc., Francisco Partners II, L.P., Francisco Partners Parallel Fund II, L.P., Sequoia Capital Growth Fund III, Sequoia Capital Growth Partners III and Sequoia Capital Growth III Principals Fund (which is incorporated herein by reference to Exhibit 10.1 of Form 8-K filed by the Registrant with the Commission on June 23, 2006)
10.25	Investors’ Rights Agreement dated as of June 22, 2006, by and among Blue Coat Systems, Inc., Francisco Partners II, L.P., Francisco Partners Parallel Fund II, L.P., Sequoia Capital Growth Fund III, Sequoia Capital Growth Partners III and Sequoia Capital Growth III Principals Fund (which is incorporated herein by reference to Exhibit 10.2 of Form 8-K filed by the Registrant with the Commission on June 23, 2006)
10.27	Design and Manufacturing Services Agreement, effective as of June 11, 2008, between MiTAC International Corporation and Blue Coat Systems, Inc.
10.28*	2006 Profit Sharing Plan (which is incorporated by reference to Exhibit 10.28 of Form 10-Q for the period ending January 31, 2007, filed by the Registrant with the Commission on March 28, 2007)
10.29*	Offer Letter with Kevin Biggs, dated as of December 3, 2006 (which is incorporated by reference to Exhibit 10.29 of Form 10-Q for the period ending January 31, 2007, filed by the Registrant with the Commission on March 28, 2007)
10.30*	Offer Letter with Betsy E. Bayha, dated as of March 27, 2007 (which is incorporated herein by reference to Exhibit 10.30 of Form 10-K filed by the Registrant with the Commission on July 13, 2007)
10.31*	2007 New Employee Stock Incentive Plan (which is incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Registrant with the Commission on June 18, 2007)

94

Number	Description
10.32*	Form of Notice of Grant of Stock Option and Stock Option Agreement used to evidence options granted under Blue Coat Systems, Inc. 2007 New Employee Stock Incentive Plan (which is incorporated by reference to Exhibit 10.2 of Form 8-K filed by the Registrant with the Commission on June 18, 2007)
10.33*	Form of Notice of Award of Restricted Stock and Restricted Stock Agreement used to evidence restricted stock awarded under Blue Coat Systems, Inc. 2007 New Employee Stock Incentive Plan (which is incorporated by reference to Exhibit 10.3 of Form 8-K filed by the Registrant with the Commission on June 18, 2007)
10.34*	Form of Notice of Award of Restricted Stock and Restricted Stock Agreement used to evidence restricted stock awarded under Blue Coat Systems, Inc. 1999 Stock Incentive Plan (which is incorporated herein by reference to Exhibit 10.34 of Form 10-K filed by the Registrant with the Commission on July 13, 2007)
10.35	Form of Notice of Grant of Stock Option and Stock Option Agreement used to evidence options granted under Blue Coat Systems, Inc. 2000 Supplemental Stock Option Plan (which is incorporated herein by reference to Exhibit 10.35 of Form 10-K filed by the Registrant with the Commission on July 13, 2007)
10.36*	Form of Notice of Grant of Stock Option and Stock Option Agreement used to evidence options granted under Blue Coat Systems, Inc. 1999 Director Option Plan (which is incorporated herein by reference to Exhibit 10.36 of Form 10-K filed by the Registrant with the Commission on July 13, 2007)
10.37	Form of Amended and Restated Indemnification Agreement
10.38*	2007 Stock Incentive Plan
10.39*	Restricted Stock Agreement used to evidence restricted stock awarded under Blue Coat Systems, Inc. 2007 Stock Incentive Plan
10.40*	Stock Option Agreement used to evidence options granted under Blue Coat Systems, Inc. 2007 Stock Incentive Plan
10.41*	Executive Separation Policy, effective November 15, 2007
10.42	Design and Manufacturing Services Agreement, effective as of February 15, 2008, between Inventec Enterprise System Corporation and Blue Coat Systems, Inc.
10.43	Amended and Restated Supply Agreement, effective as of September 8, 2005, between SYNNEX Corporation and Blue Coat Systems, Inc.
10.44	Note Purchase Agreement among Blue Coat Systems, Inc., Manchester Securities Corp. and Francisco Partners II, L.P., dated April 20, 2008 (which is incorporated herein by reference to Exhibit 10.01 to the Registrant’s 8-K filed with the Commission on April 23, 2008)
10.45	Final Form of Warrant (which is incorporated herein by reference to Exhibit 10.01 to the Registrant’s 8-K filed with the Commission on June 3, 2008)
10.46	Stock Purchase Agreement, dated as of April 20, 2008, among The Liverpool Limited Partnership, Elliott International, L.P. and Blue Coat Systems, Inc. (which is incorporated herein by reference to Exhibit 10.02 to the Registrant’s 8-K filed with the Commission on April 23, 2008)
10.47	Tender and Support Agreement, dated as of April 20, 2008, among Blue Coat Systems, Inc., Cooper Acquisition, Inc. and the individuals listed on the signature page thereto (which is incorporated herein by reference to Exhibit 2.02 to the Registrant’s 8-K filed with the Commission on April 23, 2008)

95

Number	Description
10.48*	Profit Sharing Plan, as amended effective May 1, 2008
10.49	Final Form of Note (which is incorporated herein by reference to Exhibit 10.02 to the Registrant’s 8-K filed with the Commission on June 3, 2008)
10.50	Registration Rights Agreement by and between Blue Coat Systems, Inc. and Francisco Partners II, L.P. and Francisco Partners Parallel Fund, L.P. (as Investors), dated June 2, 2008 (which is incorporated herein by reference to Exhibit 4.01 to the Registrant’s 8-K filed with the Commission on June 3, 2008)
23.1	Consent of Ernst & Young, LLP, Independent Registered Public Accounting Firm.
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.

* Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company’s Annual Report on Form 10-K pursuant to Item 15(b).

96

Schedule II

BLUE COAT SYSTEMS, INC.

VALUATION AND QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts

Year Ended April 30,	Balance at Beginning of Period		Additions- (Reductions) to Costs and Expenses			Deductions			Balance at End of Period
2006	$	235,000	$	(19,468	)	$	(70,532	)	$	145,000
2007		145,000		15,000			—			160,000
2008		160,000		76,000			(60,000	)		176,000

97

EX-10.27

Exhibit 10.27

Design & Manufacturing Services Agreement

DESIGN & MANUFACTURING SERVICES AGREEMENT

This Design & Manufacturing Services Agreement (“Agreement”) is entered into as of this 11 day of June 2008 (“Effective Date”) between MiTAC International Corporation, a Taiwanese corporation having its principal place of business at No. 200, Wen Hua 2^nd Rd., Kuei Shan Hsiang, Taoyuan, Taiwan R.O.C. (“Vendor”), and Blue Coat Systems, Inc., a Delaware corporation, having its principal place of business at 420 North Mary Avenue, Sunnyvale, CA 94085 (“Blue Coat”).

RECITALS

WHEREAS, Blue Coat desires that Vendor perform certain design and manufacturing services, including purchasing, assembly and manufacture, testing and delivery of the products defined in Product Design Document(s);

WHEREAS, the parties desire to define the general terms and conditions governing Vendor’s manufacture and delivery of such products, all as further set forth in this Agreement; and

WHEREAS, Blue Coat intends to work with Vendor to design, manufacture and fulfill certain products.

NOW THEREFORE, in consideration of the mutual covenants, promises and undertakings set forth herein, and for other good and valuable consideration, Blue Coat and the Vendor agree as follows:

1. DEFINITIONS

1.1 “Affiliate” shall mean (a) any company owned or controlled to the extent of at least fifty percent (50%) of its issued and voting capital by a party to this Agreement and any other company so owned or controlled (directly or indirectly) by any such company or the owner of any such company, or (b) any partnership, joint venture or other entity directly or indirectly controlled by, controlling, or under common control of, to the extent of fifty percent (50%) or more of voting power (or otherwise having power to control its general activities), a party to this Agreement.

1.2 “Blue Coat Consigned Items” shall mean, collectively, the Blue Coat Equipment and Blue Coat Material.

1.3 “Blue Coat Equipment” shall mean the test equipment, fixtures, ovens, appurtenances, test hardware and software, and any other items provided or to be provided by Blue Coat to Vendor, as listed in the applicable Product Information Document.

1.4 “Blue Coat Material” shall mean any Components or materials that are used to manufacture a Product that are provided by Blue Coat to Vendor.

1.5 “Blue Coat Requirements Document” shall mean Blue Coat’s requirements document associated with a Product as amended in writing pursuant to the terms of this Agreement.

1.6 “Components” shall mean the component parts that make up a finished Product.

1.7 “Component Cost” shall mean the cost paid by Vendor for a Component.

1

Design & Manufacturing Services Agreement

1.8 “Component Lead Time” shall mean the minimum amount of time necessary to purchase a Component in order to meet the current Forecast. Product Lead Times may be specified in a Product Information Document.

1.9 “Customer” shall mean an end user of a Product or a channel partner or service provider of Blue Coat.

1.10 “Deliverable” shall mean any of the following: Product Specifications, Test Plan, EVT Prototype, DVT Prototype, PVT Prototype, Final Deliverable and the Product Design Document.

1.11 “Design Services” shall mean printed circuit board design, printed circuit board assembly design, mechanical design, firmware design, electrical design, system or sub-system design, component engineering or other design services as specified in a Statement of Work.

1.12 “DVT Prototype” shall mean the design validation testing prototype and associated test completion documents to be completed and delivered to Blue Coat by Vendor after Blue Coat’s acceptance of the EVT Prototype.

1.13 “EVT Prototype” shall mean the engineering verification testing prototype and associated test completion documents to be completed and delivered to Blue Coat by Vendor after Blue Coat’s acceptance of the Product Specifications.

1.14 “Excess Components” shall mean a Unique and Special Component on hand at Vendor’s site that is in excess of the amount needed for the current Forecast; provided, however, that such Component was purchased by Vendor in order to meet a previous Forecast. A Component shall not be an “Excess Component” if it was purchased outside of the Component Lead Time necessary to meet the Forecast in effect at the time of purchase.

1.15 “Final Deliverable” shall mean the Deliverable that is delivered to Blue Coat by Vendor after Blue Coat’s acceptance of the PVT Prototype and completion of first article inspections of a Product by Blue Coat. The Final Deliverable shall be the Product to be manufactured under the Manufacturing Services Agreement.

1.16 “Forecast” shall have the definition set forth in Section 7.4.

1.17 “Long Lead Time Component” shall mean a Component that has a lead time greater than the associated Product Lead Time.

1.18 “Min/Max Components” shall mean the Components necessary to build the minimum and maximum levels of Product inventory required by Blue Coat, as specified in a Product Information Document.

1.19 “MOQ Components” shall mean the Components purchased by Vendor pursuant to minimum order requirements from Supplier as approved by Vendor in writing and specified in a Product Information Document.

1.20 “NCNR Components” shall mean non-cancelable and non-returnable Components purchased by Vendor as agreed to in writing by Blue Coat and specified in a Product Information Document.

1.21 “Obsolete Component” shall mean a Unique and Special Component that will no longer be utilized in the manufacture of a Product. A Component shall not be an “Obsolete Component” if it was purchased outside of the Component Lead Time necessary to meet the Forecast in effect at the time of purchase.

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1.22 “Product Lead Time” shall mean the pre-determined amount of time that is agreed by the parties and set forth in a Product Information Document.

1.23 “Product” shall mean the product set forth in a Product Information Document.

1.24 “Product Design Document” shall mean the document that contains the information and details set forth in Exhibit A and other information related to the manufacture and ownership of a Product (as updated by the parties from time to time). Without limiting the foregoing, a Product Design Document shall contain the following items: (a) Bill of Materials, (b) identification of Unique Components, (c) Product Specifications, (d) identification of any Tooling and Blue Coat Equipment necessary or useful to the manufacture of the Product, (e) ownership of any Tooling and Blue Coat Equipment, (d) Test Plan, (f) the approved vendor list (AVL) and (g) any associated diagrams, drawings, data, formulas, processes, procedures and other documentation related or necessary to the manufacture of the Product.

1.25 “Product Information Document” shall mean a document that contains the associated Product Design Document and any other information and detail related to the manufacture, sale and cost of a Product substantially in the form set forth in Exhibit B.

1.26 “Product Specifications” shall mean the technical and functional specifications for a Product as outlined in the Product Design Document (as may be amended by the parties in writing pursuant to the terms of this Agreement).

1.27 “PVT Prototype” shall mean the production validation testing prototype and associated test completion documents to be completed and delivered to Blue Coat by Vendor after acceptance by Blue Coat of the DVT Prototype.

1.28 “Slow Moving Inventory” shall mean a Unique Component that has been on hand at Vendor’s site for more than six (6) months provided such Component was not purchased outside of the Component Lead Time necessary to meet the Forecast in effect at the time of purchase.

1.29 “Special Components” shall mean NCNR Components, MOQ Components, Long Lead Time Components and Min/Max Components for a particular Product.

1.30 “Statement of Work” shall mean the written statement of work for each Product or design project that contains (at a minimum) the information set forth in Exhibit C (as amended in writing from time to time upon mutual agreement of the parties).

1.31 “Supplier” shall mean a third party supplier of Components, Blue Coat Equipment, Blue Coat Materials or Tooling.

1.32 “Test Plan” shall mean the specifications for testing a Product that are defined by Vendor and approved by Blue Coat for each Product.

1.33 “Transformation Cost” shall mean the cost incurred in manufacturing a Product other than Component Costs as specified in a Product Information Document. Transformation Costs shall include, but not be limited to, labor costs, logistics costs, profit and other overhead costs.

1.34 “Total Product Cost” shall mean the Component Costs plus the Transformation Costs, as specified in a Product Information Document.

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1.35 “Tooling” shall mean the tooling, equipment or other materials used in the manufacture of a Product that are supplied by a third party and are paid for by Blue Coat in accordance with the terms of this Agreement.

1.36 “Unique Components” shall mean Components that are specific and unique to a Product and that are not sold by a Supplier in the ordinary course of business to any party (other than Blue Coat) as specified in a Product Information Document.

2. PROCESS

2.1 Blue Coat Requirements Document. Blue Coat shall be responsible for the definition of the Product and delivery of the Blue Coat Requirements Document.

2.2 Proposal. Upon receipt of the Blue Coat Requirements Document, Vendor shall provide a proposal to Blue Coat outlining the estimated costs, delivery dates, schedules and Deliverables associated with such Product defined in the Blue Coat Requirements Document. If agreed upon by Blue Coat, the parties shall execute a Statement of Work that embodies the terms such proposal.

2.3 Design Services. Vendor shall perform the Design Services as outlined in a Statement of Work and the Blue Coat Requirements Document. This shall include, but not be limited to completion and acceptance (as defined in Section 3) of each of the following Deliverables: Product Specifications, Test Plan, EVT Prototype, DVT Prototype, PVT Prototype, Final Deliverable and the Product Design Document. If the terms of a Product Design Document and this Agreement shall conflict in any way, the terms of the Product Design Document shall prevail.

2.4 Testing. Vendor shall perform Product testing in accordance with the Test Plan.

3. ACCEPTANCE. When Vendor has completed a Deliverable, Vendor will deliver it to Blue Coat. Blue Coat will accept or reject a Deliverable within thirty (30) days after delivery (unless another time period is specified in a Statement of Work). If Blue Coat rejects a Deliverable, Vendor will use best commercial efforts to promptly correct the failures properly specified in the rejection notice (at no additional cost to Blue Coat) within ten (10) working days. When it believes that it has made the necessary corrections, Vendor will again deliver the Deliverable to Blue Coat and the acceptance/rejection/correction provisions above shall be reapplied until the Deliverable is accepted; provided, however, that upon the second or any subsequent rejection, Blue Coat may terminate the respective project or Product by ten (10) days notice unless the Deliverable is accepted during the notice period. In the event that Blue Coat fails to reject the Deliverable within the aforementioned period, such Deliverable shall be deemed accepted. The cost incurred from such termination hereunder shall be mutually agreed upon and equitably allocated between the parties in accordance with their responsibility for its underlying cause.

4. MANUFACTURE AND SALE OF PRODUCTS. Upon the completion and agreement of a Product Information Document, Vendor agrees that it will manufacture and sell to Blue Coat the Product(s) in accordance with the associated Product Specifications and other terms set forth in this Agreement and the associated Product Information Document. Affiliates will also be able to purchase Products pursuant to the terms of this Agreement. Vendor shall be entitled to modify the payment terms of an Affiliate if such Affiliate is deemed to be a “Credit Concerning Entity”. A “Credit Concerning Entity” is defined as a company that does not meet all of the Credit Criteria set forth in Exhibit D. If the Affiliate is deemed to be a Credit Concerning Entity and Mitac elects to modify the payment terms, then Mitac shall provide the Affiliate with ten (10) business days written notice prior to the effective date of such modification. As soon as the Affiliate is no longer a Credit Concerning Entity, the payment terms shall revert back to thirty (30) days following invoice date.

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5. ENGINEERING CHANGE ORDERS

5.1 Blue Coat Proposed Changes. Blue Coat may change the Product or Product Information Document at any time. Such changes may include, but are not limited to, changes to applicable drawings, designs or specifications; required method of shipment or packing; or place of delivery. In the event that Blue Coat elects to make a change, Blue Coat shall issue an engineering change order in writing to Vendor specifying the change (“Blue Coat ECO”). For standard Blue Coat ECOs, Vendor shall provide a written acknowledgement within five (5) working days of receipt of the Blue Coat ECO, and include a proposed schedule to implement such change, an estimate of the cost to implement such change (if applicable) and the costs associated with any Components that may become Obsolete Components as a consequence of the change (the “Acknowledgement”). Blue Coat shall review such proposed schedule and estimates and either accept or reject the Acknowledgement. If Blue Coat accepts the Acknowledgement, Blue Coat shall pay Vendor the amounts specified in the Acknowledgement in accordance with the terms agreed to by the parties. Notwithstanding the above, with the exception of approved Unique Components and Special Components, Blue Coat shall not be responsible for reimbursing Vendor for Obsolete Components that were purchased outside of the Product Lead Time necessary to meet the Forecast in effect at the time of the Blue Coat ECO (defined below).

5.2 Vendor Proposed Changes.

5.2.1 General Restrictions. Subject to the terms of this Section, Vendor may not (a) relocate any part of the facility in which Product(s) are manufactured; (b) make any change to Product Specifications or the manufacturing procedures or quality assurance processes associated with Product(s); or (c) change any other Blue Coat requirements related to a Product, including without limitation the manufacturing or supply of a Product (each of (a), (b) and (c) shall be considered an “Engineering Change”).

5.2.2 Change Procedure. Where Vendor wishes to implement an Engineering Change, Vendor shall issue an engineering change order in writing to Blue Coat specifying the change (“Vendor ECO”). The Vendor ECO shall include, without limitation, sufficient details regarding the nature of the proposed Engineering Change, the reason for the proposed change, details regarding its implementation, the impact of the change (including but not limited to scheduling and costs), and the proposed implementation date of the Engineering Change. Promptly after issuing the foregoing Vendor ECO, Vendor shall, at a mutually agreed upon cost, provide Blue Coat with sufficient evaluation samples of the affected Product (after having incorporated the Engineering Change) and other information requested by Blue Coat to enable Blue Coat to evaluate the Engineering Change. Blue Coat may, acting in its sole discretion, reject any Engineering Change and shall notify Vendor in writing of such rejection within fifteen (15) working days from its receipt of such Product samples and other information. While Blue Coat is considering an Engineering Change or if Blue Coat rejects an Engineering Change, Vendor shall continue to perform the Design Services and manufacture and supply such Product, in accordance with the terms of this Agreement, without the Engineering Change. Where Blue Coat provides its written approval of the Engineering Change, Vendor shall implement the change on a mutually agreed schedule and cost.

6. SUBCONTRACTORS. The parties acknowledge that the obligations set forth in this Agreement must be performed by Vendor except where third parties selected by Vendor are approved in advance and in writing by Blue Coat (“Subcontractors”). If any part of the performance under this Agreement is dependent on the performance of Subcontractors, Vendor shall promptly provide a report to Blue Coat outlining the reasons why such work is unsuitable for Vendor’s performance. Vendor shall be responsible for the activities of Subcontractors. Blue Coat will not be responsible for payment or other obligations to any Subcontractors unless otherwise agreed in writing. If for any reason Vendor fails to make prompt payment to a Subcontractor, Blue Coat reserves the right, if in the sole option of Blue Coat, production of a Product could be adversely affected due to unavailability of Components from Subcontractor, to make payment directly to the Subcontractor and to reduce any amounts due from Blue Coat to Vendor by the amount of payment made by Blue Coat to Subcontractor. Notwithstanding the foregoing, any such payment reduction from Blue Coat to Vendor shall not exceed Vendor’s invoice cost with such Subcontractor, plus any costs directly resulting from the delinquency (including the need to expedite manufacture or delivery).

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7. PURCHASE ORDERS

7.1 Purchase Orders. Blue Coat purchase orders may be issued in writing, by mail or facsimile, or by electronic means as the parties may from time to time agree. Blue Coat’s purchase orders for Products shall include the following:

(a) Identification of Products ordered by Blue Coat part number and descriptions;

(b) Quantity to be purchased;

(c) Price of Products ordered;

(d) Date the Product is to be delivered (“Delivery Date”);

(e) Shipping destination; and

(f) Labeling instructions.

7.2 Controlling Terms. All purchase orders and invoices under this Agreement shall be subject only to the terms and conditions hereof. In the event the terms of any such purchase order, confirmation or similar document conflicts with or are additional to the terms of this Agreement, the terms of this Agreement alone shall apply and shall govern regardless of execution of such document by one or both parties. Any other Vendor terms and conditions shall not apply to this Agreement or the purchase orders unless otherwise agreed by the parties in writing.

7.3 Purchase Order Process. All purchase orders received by Vendor shall be deemed accepted by Vendor unless Vendor notifies Blue Coat within one (1) business days of receipt that such purchase order is not in compliance with the terms of this Agreement. If Vendor has any reason to believe it will not meet the required shipment date, it shall notify Blue Coat within the aforementioned period. Blue Coat shall have the ability to track the status of any purchase order online using a Vendor maintained web site. Vendor shall provide Blue Coat with an electronic shipping notification within two (2) working days after a Product has shipped. Invoicing will be daily with all relevant and accurate tracking numbers and freight charges included with the invoice. Vendor shall include any information pertaining to the shipping of a Product as reasonably requested by Blue Coat.

7.4 Forecasts. Before the beginning of each month, Blue Coat shall provide a non-binding, rolling twelve (12) month forecast setting forth Blue Coat’s demand for Product (“Forecast”).

7.5 Cancellation of Purchase Orders. Blue Coat may provide Vendor with a cancellation notice at any time. Vendor shall, upon receipt of such notice, stop work on such units of Products to the extent specified therein. Notwithstanding anything to the contrary herein, Blue Coat agrees to be liable the costs incurred from such cancellation in accordance with Section 12 of this Agreement.

7.6 Special Orders. Upon written request from Blue Coat, Vendor shall use its best commercial efforts to fulfill order for Products in excess of that set forth in Blue Coat’s Forecast. Blue Coat may, at its option, submit purchase orders requesting immediate shipment (as early as same day shipment) (“Rush Orders”). Vendor shall use its best efforts to fill Rush Orders. Vendor’s failure to fulfill such Rush Orders shall not constitute a breach of this Agreement.

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8. DELIVERY TERMS

8.1 Packaging. Vendor shall package and label Product(s) in accordance with the packaging and shipping specifications specified in a Product Specifications. Vendor shall not mark or label a Product except as set forth in the associated Product Specifications. Vendor shall be responsible for any loss or damage to Products due to Vendor’s failure to preserve, package or handle a Product in accordance with Blue Coat’s packaging and shipping specifications. Vendor will bear all risk of loss, damage or destruction to the ordered Products until delivery to a carrier specified by Blue Coat in writing.

8.2 Shipping. Vendor shall ship the Products on the Delivery date and in accordance with FCA Hong Kong INCOTERMS 2000. All Products shall ship from Vendor in order to meet the Delivery Date.

8.3 Late Shipments. Vendor shall immediately notify Blue Coat in writing upon becoming aware that any part of a shipment of Products will not be, or has not been, delivered by the Delivery Date and shall provide reasons for the delay and a revised Delivery Date. Vendor’s revised Delivery Date must take into account the use of all means available to expedite production and delivery of the delayed Products, including without limitation expediting the procurement of materials, using expedited transportation means and labor overtime (“Accelerated Measures”). In the event of such delay, Blue Coat may assess a charge to Vendor based on the loss Blue Coat incurs as a result of agreements Blue Coat has with its customers or channel partners

8.4 Inspection. Notwithstanding any prior inspection or payment by Blue Coat, all Products shall be subject to final inspection and acceptance within thirty (30) days after delivery.

8.5 Documentation. Vendor shall maintain complete and accurate shipping documentation for all shipments for a minimum of three (3) years following the date of shipment. Shipment documentation includes the purchase order, packing slip, commercial invoice, carrier waybill, any information pertaining to direct fulfillment of Product and Vendor billing invoice. Blue Coat and its authorized agents and representatives shall have access to such records for purposes of performing an audit during normal business hours during the term of this Agreement and during periods which Vendor is required to retain such records.

8.6 Allocation. Vendor agrees that, in the event of a need to allocate performance among Vendor’s customers, Blue Coat’s order(s), subject to normal lead-time requirements, shall be filled according to an allocation plan no less favorable than that provided to any other Vendor customer. Vendor shall provide Blue Coat with immediate notice if it anticipates or has reason to believe that Vendor’s output of a Product shall not be sufficient to meet Blue Coat’s Forecast.

9. PRICING AND PAYMENT TERMS

9.1 Prices. The initial price for a Product shall be set forth in the associated Product Information Document. Prices will be reviewed on a quarterly basis and are subject to anticipated reductions as provided in this Agreement. The Total Product Cost model shall be specified in the Product Information Document

9.2 Non-Recurring Engineering Fee. As consideration for the Tooling and any other items specifically outlined in a Product Design Document, Blue Coat shall pay to Vendor a non-recurring engineering fee as specified in the associated Product Information Document or SOW (as the case may be).

9.3 Taxes. Prices stated in a Product Information Document are in U.S. dollars and are inclusive of all taxes, other than taxes on a party’s net income, which shall be the sole responsibility of that party.

9.4 Payment Terms. Vendor shall invoice Blue Coat upon shipment of a Product. All undisputed payments due hereunder shall be paid in US dollars not later than thirty (30) days following the invoice date. Vendor shall be entitled to modify the payment terms if Blue Coat is deemed to be a “Credit Concerning Entity”.

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A “Credit Concerning Entity” is defined as a company that does not meet all of the Credit Criteria set forth in Exhibit D. If Blue Coat is deemed to be a Credit Concerning Entity and Vendor elects to modify the payment terms, then Vendor shall provide Blue Coat with ten (10) business days written notice prior to the effective date of such modification. As soon as Blue Coat is no longer a Credit Concerning Entity, the payment terms shall revert back to thirty (30) days following invoice date.

9.5 Monthly Report. Within the first five (5) days of each month, Vendor shall provide Blue Coat with a detailed accounts receivable aging report (in electronic format). Such report shall be sent to accountsreceivable@bluecoat.com.

9.6 Favorable Terms. Vendor warrants that during the term of this Agreement the terms and conditions of this Agreement, including discounts, prices and shipping, are no less favorable than the terms, conditions, discounts and prices given to any third party that purchases or licenses the similar products or services from Vendor under similar terms and conditions. Blue Coat reserves the right to hire a third party (a US nationally recognized auditing firm) to audit Vendor’s books and records limited to the transaction documents between Blue Coat and Vendor, during the term of this Agreement and for sixty (60) days thereafter to verify Vendor’s compliance with this Section. The audit shall be strictly subject to Vendor’s confidential obligations to any third party. The cost of the audit shall be borne by Blue Coat, unless it is determined through the audit that Vendor is charging Blue Coat at least 10 percent more than another party, in which event Vendor shall pay for the audit. If the audit indicates that Vendor has overcharged Blue Coat (with evidence provided to Vendor), Vendor shall pay to Blue Coat the difference within forty-five (45) days after such discovery.

9.7 Non-approved Charges. Blue Coat shall not be liable without Blue Coat’s prior approval to Vendor for any overtime charges, freight charges or Component product price increases incurred by Vendor.

10. COST REDUCTIONS

10.1 Cost Reduction. Vendor shall use commercially diligent efforts to achieve ongoing reductions in both Component Costs and Transformation Costs. Vendor shall work on achieving cost savings in both materials and processes, and such savings shall serve to reduce the Total Product Cost of a Product. In addition, Vendor shall use its commercially reasonable efforts to institute any cost reduction proposals reasonably suggested by Blue Coat, and shall reduce the Total Product Cost of Product(s) to Blue Coat by an amount equal to the per unit saving realized therefrom. Vendor agrees to pass on the benefits of cost reductions as follows:

10.1.1 Blue Coat Suggested Cost Reduction

(a) If Blue Coat suggests or initiates the cost reduction (including without limitation cost reductions resulting from Blue Coat’s directions to Vendor with respect to the specification, use or acquisition of Components), then the Total Product Cost of all Products to which the reduction is applicable shall be decreased by 100% of such cost reduction;

10.1.2 Vendor Suggested Cost Reduction

(a) If Vendor initiates a cost reduction, then the price of all Products to which the reduction is applicable shall be decreased by 50% of such cost reduction for a period of three (3) months following the sale of the first Product to which such cost reduction is applicable; and

(b) The price of all Products to which the reduction is applicable shall be decreased by 100% of such cost reduction after the three (3) month period has ended; and

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10.1.3 Neutral Cost Reduction. If there is a reduction in the cost of a Component that is not initiated by Vendor or Blue Coat, then the Total Product Cost of all Products to which the reduction is applicable shall be decreased by 100% of such cost reduction upon the first sales of Products which are sold to Blue Coat by Vendor at the new price.

11. SOURCING.

11.1 Sourcing of Components. Vendor shall be primarily responsible for the procurement of the Components, but shall seek Blue Coat’s input with respect to such Components. Vendor will use its best efforts to negotiate appropriate terms with Suppliers, in each case subject to acceptance by Blue Coat, and to otherwise participate in the process of Component procurement as requested by Blue Coat. Vendor agrees to use diligent efforts to ensure that any Component used in the design and manufacture of a Product does not have a foreseeable end of life that occurs prior to the end of the projected Product’s life. Vendor will, contingent upon its compliance with other confidential obligations, provide Blue Coat with copies of preliminary specifications, working drafts of specifications and completed portions of specifications pertaining to the Components throughout the term of this Agreement. Vendor will use its best efforts to negotiate appropriate terms with Suppliers. Vendor will promptly provide Blue Coat with a copy of the final specification for any Component when it is completed.

11.2 Approved Vendors. Vendor shall notify Blue Coat immediately of all changes to the existing production processes, supply chain or approved vendor list set forth in the associated Product Information Document. No change is to be released to production without the written consent of Blue Coat. The following basic rules are applicable:

11.2.1 A Parts. Any change to a Component that is deemed an “A Part” (as defined in the associated Product Information Document) shall require the written approval and qualification of both Blue Coat and Vendor. In addition a Blue Coat ECO and Vendor ECO are required.

11.2.2 B Parts. Any change to a Component that is deemed a “B Part” (as defined in the associated Product Information Document) shall require the written approval and qualification of only Vendor. In addition a Blue Coat ECO and Vendor ECO are required.

11.2.3 C Parts. Any change to a Component that is deemed a “C Part” (as defined in the associated Product Information Document) shall require a written notification from Vendor to Blue Coat and a Vendor ECO.

12. INVENTORY LIABILITY.

12.1 Inventory Liability Report. Vendor shall provide Blue Coat with a monthly report setting forth the number of Slow Moving Inventory, Excess Components and Obsolete Components.

12.2 Disposition Process for Obsolete and Excess Components. On a quarterly basis (based on Blue Coat’s fiscal quarter), the following disposition process shall be followed for all Obsolete Components and Excess Components:

12.2.1 Vendor shall use diligent commercial efforts throughout the quarter to sell such Slow Moving Inventory, Obsolete Components and/or Excess Components, provided, any difference between the purchase price and the market price should be absorbed by Blue Coat.

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12.2.2 If Vendor is unable to sell such Obsolete Components and/or Excess Components before the end of the fiscal quarter, then Blue Coat will either (a) pay an agreed upon price to Vendor to cover the cost of both the Component and the cost of scrapping such Component, (b) pay an agreed upon price to Vendor to cover the acquisition of the Component by Blue Coat (and delivery to a third party location) or (c) pay an agreed upon carrying cost to Vendor and Vendor shall retain such Obsolete Components and/or Excess Components in inventory on Blue Coat’s behalf, provided that (i) Obsolete Components need not be carried by Vendor in excess of three (3) months and either (a) or (b) shall be applicable after the three (3) month period has ended and (ii) Excess Components need not be carried by Vendor in excess of one (1) year and either (a) or (b) shall be applicable after the one (1) year period has ended.

12.3 Disposition Process for Slow Moving Inventory. Before the end of each fiscal quarter, Blue Coat and Vendor shall agree upon a carrying cost to be paid by Blue Coat to Vendor in order to retain (on Blue Coat’s behalf) any Slow Moving Inventory, provided that Slow Moving Inventory need not be carried by Vendor in excess of one (1) year and after the one (1) year period has ended Blue Coat will either (a) pay an agreed upon price to Vendor to cover the cost of both the Component and the cost of scrapping such Component, (b) pay an agreed upon price to Vendor to cover the acquisition of the Component by Blue Coat (and delivery to a third party location).

12.4 Mitigation. Subject to the notification requirements set forth herein, Vendor will exercise commercially reasonable efforts to mitigate Blue Coat’s liability for Excess Components, Obsolete Components Slow Moving Inventory and Special Components, including, without limitation, by canceling or rescheduling materials orders, selling materials or utilizing the materials for other customers. However, Vendor shall obtain prior written consent from Blue Coat prior to any sale of any A Part Component (as defined in the Product Information Document). Upon request from Blue Coat, Vendor shall provide Blue Coat with evidence of such efforts to mitigate liability. Unless otherwise contained herein, the maximum total Blue Coat liability for any Slow Moving Inventory, Excess Components or Obsolete Components may not exceed Vendor’s unit price for such Components as set forth in the Product Information Document.

12.5 Exceptions. If the Forecast for any period is reduced due a Warranty defect (where such Warranty defect caused a Customer to withdraw an expected order for Products) or due to an Epidemic Failure, then Blue Coat shall not be liable (under this Section or otherwise) for any Component or Product costs or expenses related to such reduction.

13. REPORTING

13.1 Accounting Records. In addition, Vendor shall maintain complete and accurate records of all amounts billed and billable to Blue Coat and payments made by Blue Coat hereunder (in accordance with U.S. generally accepted accounting practices) for a period of three (3) years following the expiration or termination of this Agreement. Vendor agrees to provide reasonable supporting documentation concerning any disputed invoice to Blue Coat within thirty (30) days after Blue Coat provides written notice of dispute to Vendor.

13.2 Audit. To the fullest extent that Supplier may do so without violating any confidentiality obligations to any third parties, Supplier will allow Blue Coat and its authorized agents and representatives to audit the production of the Products during normal business hours during the term of this Agreement and during periods which Vendor is required to retain such records, with at least fifteen (15) days prior written notice, and in such a manner so as not to interfere with Vendor’s or Vendor’s Subcontractors normal business activities. Any and all such records disclosed to Blue Coat shall be deemed “Confidential Information” (whether or not such records are labeled or identified as such).

14. COMMUNICATION. Vendor agrees to use its commercially diligent efforts to provide Blue Coat with written notice as soon as commercially practicable upon the occurrence of any event that could affect a Product. This includes, but is not limited to: supply chain issues (e.g., shortages in Components or other materials necessary for the manufacture of a Product, issues with Suppliers or relationships with Suppliers, supplier corrective action report notices, etc.), design issues (e.g., issues with design validation testing), delivery

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issues (e.g., transit delays, strikes, etc.) operational issues (e.g., work order fall-outs greater than 90%, kit level failures) and Vendor business issues (e.g., change in business stability, any material press releases regarding Vendor business, etc.). Vendor shall provide Blue Coat with at least six (6) months notice prior to the date any Component or material used in the manufacture of a Product will reach end of life status. Blue Coat may either select a substitute component or place one (1) final binding purchase order, within the last time buy period notified by such Supplier. Blue Coat reserves the right to discontinue procurement of any Product (“End Of Life Product”). Any Product designated as an End Of Life Product will be identified to Vendor in writing at least one hundred and twenty days (120) days in advance of the last shipment, and issue purpose orders of End Of Life Product with quantity forecasted for the 3 months to Vendor. Blue Coat acknowledges that orders placed for End Of Life Product are non-cancelable and non-returnable and cannot be rescheduled. In case any purchase order of End Of Life Product is agreed to be cancelled by Vendor, Blue Coat shall be liable for any damage or losses caused to Vendor, including without limitation to actual costs of materials, shipping and labor costs incurred by Vendor, compensation to a supplier of Vendor. Blue Coat acknowledge that Vendor may, with Blue Coat’s prior written consent, be required to purchase a minimum order quantity of Units of a material which are manufactured for Blue Coat’s End Of Life Product. In the event that Blue Coat’s purchase order of End Of Life Product not satisfy the minimum order quantity of the aforementioned material, Blue Coat agrees to be fully liable for the costs or expenses of such excess materials, either help re-sell or pay for such excess materials.

15. QUALITY

15.1 Quality Control. Vendor acknowledges and agrees that all Products will be designed and manufactured in accordance with the highest industry standards applicable for similar products and also in accordance with the Quality Control Standards set forth in Blue Coat’s Operations Supplier Quality Manual.

15.2 Quality Control Personnel. Blue Coat may at its option and expense send its quality control personnel to Vendor’s facilities to assist in or observe the work in progress. Blue Coat may from time to time suggest commercially reasonable modifications to Vendor’s procedures for performing the work under this Agreement for the purpose of enhancing or assuring quality, and Vendor shall, using Vendor’s best judgment, act in good faith to either (a) comply with such suggestions or (b) explain to Blue Coat why such suggestion is not in the best interests of Blue Coat or why such suggestion should not be implemented.

15.3 Facility Inspection. Vendor shall, whenever reasonably requested by Blue Coat, permit Blue Coat, or a third party acting on behalf of Blue Coat, the opportunity to inspect (at Vendor’s facility) the processes and procedures used by Vendor to perform its obligations under this Agreement. Blue Coat shall provide Vendor with at least three (3) business days notice prior to the visit.

16. QUARTERLY REVIEWS

16.1 Information Production. Vendor shall provide and Blue Coat will review all Component Costs and Transformation Costs on a quarterly basis. Costs to be reviewed include, but are not limited to, time studies for production and costs related to repairs, testing, kitting, inventory management, shipping and quality inspections.

16.2 Management Reviews. After receipt of the information set forth in Section 16.1, Blue Coat and Vendor shall, when Blue Coat requests, meet (by telephone, videoconference or in person) to discuss Vendor’s performance, prices and other issues relating to this Agreement, including but not limited to Vendor’s performance with regard to technology, quality, cost, availability and ease of doing business (collectively “TQCAB”). At each such meeting, Product prices shall be reviewed for adjustments, and the parties shall agree on the appropriate price adjustments and the manner and the timing of their implementation, on a fair and reasonable basis. The parties will mutually agree upon and set price reduction targets for each of the new two (2) calendar quarters based on Forecast and other factors affecting price, including without limitation those listed in Product Information Documents and identify actions and corresponding responsibilities of the parties

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required to achieve the target price reductions. If Vendor fails to implement previously agreed targets with respect to Vendor TQCAB, then Blue Coat and Vendor will cooperate to identify the cause of such failure in order for both parties to achieve the target price reductions afterward.

17. TOOLING, BLUE COAT EQUIPMENT & BLUE COAT MATERIALS

17.1 Provision of Blue Coat Consigned Items. Blue Coat may provide Blue Coat Consigned Items to Vendor free of charge pursuant to the terms and conditions of this Agreement for use by Vendor in the design, testing, manufacture and supply of Products exclusively for and to Blue Coat. Vendor shall use Blue Coat Materials on a “first-in, first-out” basis to reduce the risk of obsolete or unusable material.

17.2 Storage. Except as otherwise provided in the Agreement, Vendor shall, at its cost, subject to Section 12, be responsible for safekeeping at its manufacturing facility all Blue Coat Consigned Items and Tooling, shall maintain the same in good condition and repair, shall store for normal wear and tear the Blue Coat Consigned Items and Tooling at such facility in a place that meets the requirements of this Agreement and shall segregate such Blue Coat Consigned Items and Tooling from other customer’s materials. All such Blue Coat Consigned Items and Tooling, while in the possession and under the control of Vendor, shall be at Vendor’s risk.

17.3 Orders for Blue Coat Materials. After execution of this Agreement, Vendor shall order, take delivery of or pay for, by way of a purchase order, those Blue Coat Materials, if any, required to manufacture the Products ordered by Blue Coat within the lead time of product manufacturing and in accordance with the Purchase Orders issued by Blue Coat. All purchase orders submitted to Blue Coat by Vendor shall include a description of the required Blue Coat Materials, the quantities ordered, the prices thereof, the proposed delivery date, and such other information as the parties may agree from time to time. Amounts due from Vendor will be paid forty five (45) days following the invoice date which shall be no earlier than the shipment date. Vendor purchase orders may be issued in writing, by mail or facsimile, or by electronic means as the parties may from time to time agree.

17.4 Tracking. Vendor shall maintain complete and accurate records of the quantity of Blue Coat Materials received from Blue Coat, along with the quantity used in Products shipped to or on behalf of Blue Coat and the quantity wasted in the manufacture, test and supply of Products. Vendor shall provide such records or related information as required from time to time by Blue Coat during the term and Blue Coat may, on fifteen (15) business days notice to Vendor, audit such information at Vendor’s site. Vendor shall maintain and properly safeguard any such wasted Blue Coat Materials so that it may be audited hereunder and salvaged, should Blue Coat desire.

17.5 Permitted Use. Blue Coat grants Vendor a limited license to use the Blue Coat Consigned Items and Tooling only as set forth in this Agreement. Vendor acknowledges and agrees that Vendor is only a bailee of the Blue Coat Consigned Items and Tooling on the terms and conditions set out this Agreement, and that Vendor will use them in accordance with any operation instructions provided or government regulations. Vendor will not pledge or otherwise encumber the Blue Coat Consigned Items or Tooling. In the event the premises in which the Blue Coat Consigned Items or Tooling is installed are encumbered in any way (e.g. a financial institution has a security interest in the premises or property thereon), Vendor shall provide notice to any party having such an interest that (a) the Blue Coat Consigned Items or Tooling are contained within such premises; (b) the Blue Coat Consigned Items and Tooling are the property of Blue Coat; (c) any encumbrance over the premises or Vendor’s property does not extend to the Blue Coat Consigned Items or Tooling; and (d) Blue Coat retains its rights of recovery and repossession of the Blue Coat Consigned Items and Tooling. Vendor shall immediately report to Blue Coat: (i) any seizure or attachment of the Blue Coat Consigned Items or Tooling by Vendor’s creditors; (ii) any petition in bankruptcy, insolvency, receivership or similar proceedings filed by, or against, Vendor; or (iii) any arrangement, composition or similar agreement for the benefit of Vendor’s creditors.

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17.6 Prohibited Uses. Vendor shall use the Blue Coat Consigned Items and Tooling only for the permitted use as described in this Agreement and only for the exclusive benefit of Blue Coat. Any use or activity by or on behalf of Vendor associated with Blue Coat Consigned Items or Tooling that is not expressly permitted by this Agreement is prohibited. Without limiting the generality of the immediately preceding sentence, Vendor agrees not, and not to allow others, to: (i) modify, alter, disassemble, cut, destroy, cleave, crush or reverse-engineer Blue Coat Consigned Items or Tooling; (ii) sell, rent, loan, donate, give any guarantee or security interest in, transfer possession or purport to transfer title in any way of, Blue Coat Consigned Items or Tooling to any third party; (iii) allow any employee, agent or contractor not adequately trained to work with Blue Coat Consigned Items or Tooling or not involved in the testing or demonstrations of the Blue Coat Consigned Items or Tooling to have access to the Blue Coat Consigned Items or Tooling; or (iv) use or transport the Blue Coat Consigned Items or Tooling outside of Vendor’s own facilities without written permission from Blue Coat.

17.7 Costs. In the event Blue Coat Consigned Items or Tooling may require repair, upgrading or calibration or has exceeded its useful life, Vendor shall notify Blue Coat of such and Blue Coat shall reimburse or replace such Blue Coat Consigned Items or Tooling. Both parties recognize that such reimbursement shall only be for materially significant, actual incurred costs. Vendor shall bear all risk of loss regarding, and be liable for any damage to, the Blue Coat Consigned Items and Tooling (reasonable wear and tear excepted). Vendor will insure the Blue Coat Consigned Items and Tooling against loss or damage during the term of this Agreement and while in Vendor’s custody, and will deliver to Blue Coat, upon request, proof of such insurance. Vendor shall pay to Blue Coat the new replacement cost as assessed by Blue Coat and agreed by Vendor, of any Blue Coat Consigned Item or Tooling that is lost, stolen, destroyed or damaged beyond repair. Vendor shall bear no risk of loss or not be liable for any damage to the Blue Coat Consigned Items and Tooling if Blue Coat delays or refuses to receive Vendor’s return of such Blue Coat Consigned Items and Tooling either after expiration or termination of this Agreement or upon Vendor’s reasonable request. Any item, article, accessory, document or thing supplied in conjunction with the Blue Coat Consigned Items (including operation manuals) or Tooling not returned to Blue Coat, at Blue Coat’s request, and Vendor is willing to keep upon termination or expiration of this Agreement shall be paid for by Vendor with a fee determined by Blue Coat being charged to Vendor.

17.8 Tooling. As it applies to Tooling, the obligations of Vendor set forth in this Section 15 shall apply regardless of whether the Tooling is located at Vendor site or a third party site. Vendor shall, upon request from Blue Coat, transfer all right, title and interest to the Tooling to Blue Coat, free and clear of any liens or other encumbrances. Upon any termination or expiration of this Agreement, Vendor shall assist and cooperate in good faith with the physical transfer by Blue Coat of the Tooling to other locations designated by Blue Coat at Blue Coat’s cost.

17.9 Delivery of Blue Coat Consigned Items. Vendor shall, at Blue Coat’s costs, assist with any customs/export/trade related approvals, duties and/or other obligations as may be required for the delivery of the Blue Coat Materials, Blue Coat Equipment and Tooling.

18. OWNERSHIP

18.1 Blue Coat Property. Subject to Section 18.2, Blue Coat shall own all right, title and interest in and to the Product Design Document, the Product Information Document, all Product(s), portions of Products currently in production, Tooling and Blue Coat Consigned Material.

18.2 Inventions. Unless otherwise specified in an applicable Product Information Document and excluding Vendor Property (defined below), (i) any and all Product designs, inventions or improvements, (ii) any other design, inventions or improvements and any and all discoveries, products, computer programs (including source code), tooling, procedures, improvements, developments, drawings, works of authorship,

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specifications, data, memoranda, notes, documents, manuals, information, and other items made, authored, conceived or developed by or for Blue Coat, which result from or relate to a Product (items (i) and (ii) are referred to, collectively, as “Product Information”), and (iii) any patent rights, copyrights, trade secret rights, mask work rights and other rights throughout the world (collectively, “Intellectual Property Rights”) contained or embodied in, or arising from the Product Information shall be the sole property of Blue Coat. Blue Coat shall have the sole right to obtain and to hold in its own name any copyrights, patents, mask work rights, trademark registration, or other legal protection as may be appropriate to such Product Information and any derivatives thereof. Blue Coat shall have the sole right to determine the method of protection for any such Product Information, including the right to protect the same as trade secrets, to use and disclose the same without prior patent application or to file registration for copyright, patent, mask work rights, or trademark in its own name, as Blue Coat deems appropriate in its sole and absolute discretion. Subject to the provisions of this Agreement, Blue Coat hereby grants to Vendor, its affiliates, and subcontractors, which manufactures the Product on behalf of Vendor, a limited, personal, worldwide, non-exclusive license, without the right to sublicense, to Product Information, and any associated Intellectual Property Rights to make, manufacture, test, assemble and repair the Product as specified herein.

18.3 Vendor Property. All right, title and interest in Vendor’s pre-existing technology and IP Rights and Confidential Information (“Pre-existing Technology”) shall remain Vendor’s exclusive property. Vendor shall retain all right, title and ownership to any discoveries, inventions, technical information, procedures, design, manufacturing or other processes, software, firmware, technology, know-how or other Intellectual Property Rights comprising Vendor’s design techniques or manufacturing processes that are used or created by Vendor in performing the Design Services or manufacturing services and which do not comprise part of the Product Design Document, Product Information Document or Product Information (“Vendor Process Technology”). “Pre-existing Technology” and “Vendor Process Technology” shall be deemed “Vendor Property”. During the term of this Agreement, Vendor hereby grants to Blue Coat a worldwide, irrevocable, perpetual, non-exclusive, fully paid-up, royalty free right and license to reproduce, distribute, perform use, import, export, manufacture, have manufactured, offer to sell and sell any Vendor Property or other intellectual property rights incorporated or used in the Products manufactured for Blue Coat under this Agreement.

18.4 Assignment. The parties hereby make any assignments necessary to accomplish the foregoing ownership provisions. In interpreting such ownership provisions anything made or conceived or reduced to practice by an employee or contractor of a party in the course of performance under this Agreement will be deemed so made or conceived or reduced to practice by that party; each party has and will have appropriate agreements with all such employees and contractors necessary to fully effect the provisions of this Section 18.4.

18.5 Perfection. A party being assigned any proprietary right under this Agreement will have the exclusive right to, and, at such party’s expense, the assigning party agrees to assist such party in every proper way (including, without limitation, becoming a nominal party) to, evidence, record and perfect the assignment and to apply for and obtain recordation of and from time to time enforce, maintain, and defend such proprietary rights. Each party will execute all documents as the other may reasonably request for such purposes.

18.6 Proprietary Rights Notices. Vendor agrees to properly mark each Product and any accompanying documentation with Blue Coat’s copyright or other proprietary rights notice, as directed by Blue Coat, to indicate Blue Coat’s intellectual property rights in such Products. Unless otherwise provided herein, nothing in this Agreement shall be construed as a grant of any license, right or interest in any trademark, trade name or service mark of either party, or any third party from whom either party may have acquired license rights.

18.7 Trademark Use. All trademarks, service marks, trade names or logos identifying the Products or Blue Coat (the “Marks”) are the exclusive property of Blue Coat. Vendor will not take any action that jeopardizes Blue Coat’s proprietary rights or acquire any rights in the Marks except as specifically set forth below. Vendor will not register, directly or indirectly, any trademark, service mark, trade name, copyright,

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company name or other proprietary or commercial right which is identical or confusingly similar to the Marks or which constitute a translation into other languages. Vendor will use the Marks exclusively to identify the Products. Any use of the Marks shall clearly identify Blue Coat as the owner of the Marks. Vendor will immediately notify Blue Coat if Vendor learns (i) of any potential infringement of the Marks by a third party, or (ii) that the use of the Marks may infringe the proprietary rights of a third party. Blue Coat will determine the steps to be taken under those circumstances. In connection with any potential infringement of or by the Marks, Vendor will (i) provide Blue Coat with the assistance that Blue Coat may reasonably request, and (ii) not take steps on its own without Blue Coat’s prior approval.

19. WARRANTIES

19.1 Authority. Each party warrants that it has the right and authority to enter into this Agreement and perform its obligations hereunder.

19.2 Quality. Vendor shall perform and hereby warrants that all Products, when delivered in accordance with the purchase order, will have passed the test and quality control procedures set forth in the Operations Supplier Quality Manual and will meet the associated Product Specifications for such Product.

19.3 Product Warranty. Subject to the terms of this Section 19.3, Vendor warrants to Blue Coat that each Product: (a) has been manufactured in accordance with Blue Coat’s applicable manufacturing testing procedures; (b) meets the requirements set forth in the purchase order and Product Information Document and; (c) shall be free from defects in design, material and workmanship (excluding defects in the Blue Coat software) (“Warranty”). The warranty period for a Product shall be fifteen (15) months from the Delivery Date from Vendor (“Warranty Period”).

19.4 Service Warranty. Vendor warrants to Blue Coat and its customers that any services to be provided by Vendor hereunder shall be performed to a standard reasonably acceptable in the industry.

19.5 Design Warranty. Vendor warrants to Blue Coat that it will perform the Design Services so as to produce a Final Deliverable that conforms in all material respects to the Product Design Document, the Statement of Work and the Blue Coat Requirements Document.

19.6 Warranty Process. Products that fail to meet the Warranty during the Warranty Period shall be returned to Vendor (pursuant to the RMA process set forth in Section 19.9) and, at Blue Coat’s option, Vendor shall, at Vendor’s cost, promptly (a) repair or replace such Product at no cost to Blue Coat. Notwithstanding the above, if a Product fails to meet the Warranty during the Warranty Period and the Customer refuses a replacement, then, at the option of Blue Coat, Vendor shall credit any amounts paid for such Product. All Products repaired or replaced under warranty shall be warranted for a period equal to the greater or the remainder of the original Warranty Period or three (3) months.

19.7 Out of Warranty Process. Products that fail to meet the Warranty after the Warranty Period shall be returned to Vendor (pursuant to the RMA process set forth in Section 19.9) and Vendor shall promptly repair such Product if appropriate. Blue Coat shall pay the fee set forth in the Product Information Document for all such repairs.

19.8 Replacement of Product. Upon request from Blue Coat, Vendor will deliver a replacement of any product that does not meet the Warranty requirements (whether or not under the Warranty Period).

19.9 Product Returns. Within forty-eight (48) hours after receipt of a request to return a Product, Vendor shall issue a Return Materials Authorization number (“RMA”). If no RMA is issued within two (2) business days plus a one (1) business day grace period (three (3) business days total), Blue Coat (or its customer) may return the Product without further notice to Vendor and without an RMA. In the event that a

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Product is determined to not meet the Warranty, Vendor shall pay all costs associated with the transportation of the returned Product, including the cost of transportation from Blue Coat to Vendor’s plant, and where applicable, transportation of replacement or repaired Products to Blue Coat, as well as all insurance costs associated with the returned Products and the repaired and replacement Products. In all other circumstances, freight costs shall be borne by the shipper. Any Products repaired by Vendor may only be delivered to a customer shall not be delivered as “new” products.

19.10 Failure Analysis. Vendor shall, within five (5) business days of receipt of Products, complete a basic failure analysis on all Products returned to Vendor. Upon Blue Coat request, Vendor shall perform next level failure analysis and deliver a written report of such analysis and Vendor’s findings within seven (7) business days.

19.11 No Trouble Found (“NTF”) – In-Warranty / Out of Warranty. To the extent the monthly (by calendar month) NTF rate for a particular Product does not exceed the percentage specified in the Product Information Document (“NTF Percentage”), there will be no charge associated with any Product returned which is determined by Vendor to be NTF after testing. NTF charges, which may be established and amended by both parties in writing from time to time, will apply only in the event that the number of units determined to be NTF exceeds the NTF Percentage of the total of such Product returned to Vendor for repair within any month. Meanwhile, Vendor will return last revision of the Product, and Blue Coat mutually agreed reasonable rate for such return.

19.12 Epidemic Failure. If, during any consecutive ninety (90) day period of the term, the percentage of Products that fail to meet the above Warranty (as a result of the same symptom and same root cause) is cumulatively equal to or in excess of the “Product Warranty Failure Percentage” set forth in the associated Product Information Document for the same root cause, then such failure shall be considered an “Epidemic Failure.” If no Product Warranty Failure Percentage is set forth in a Product Information Document or if no Product Warranty Failure Percentage is specified in a Product Information Document , the default Product Warranty Failure Percentage shall be three percent (3%) of the same Product. If an Epidemic Failure occurs, then:

(a) Vendor shall, at its cost, provide Support Services (defined below) and/or, if deemed necessary by Blue Coat, at Vendor’s cost, ensure an effective quarantine, containment action, and disposition of suspect materials related to the Epidemic Failure at the Vendor, Blue Coat and/or Customer locations.

(b) Vendor shall notify Blue Coat promptly and provide an initial problem verification report, including a containment and failure analysis plan per the Blue Coat SCAR Procedure. A complete report, including permanent corrective and preventive action, shall be provided by the Vendor to Blue Coat within seven (7) calendar days of initial notification;

(c) Vendor shall update Blue Coat on a daily basis with the status and findings of the foregoing analysis and plan and provide such other reasonable information required by Blue Coat in connection therewith; and

(d) Blue Coat may immediately terminate this Agreement with respect to the affected Product if Vendor fails to act as required in accordance with preceding subsections.

19.13 Warranty Exclusions. Warranties set forth in this Section 19 will not apply to defects or malfunction of the Product arising from (i) improperly installed, repaired, altered or otherwise modified (other than by Vendor or Vendor’s subcontractors), (ii) misuse, abuse, negligence or accident, (other than by Vendor or Vendor’s subcontractors); (iii) Blue Coat Materials, if any.

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19.14 EXCEPT AS EXPRESSLY WARRANTED IN THIS AGREEMENT, VENDOR HEREBY DISCLAIMS ALL WARRANTIES, COVENANTS AND REPRESENTATIONS EXPRESS, STATUTORY AND IMPLIED, APPLICABLE TO PRODUCTS, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND ANY WARRANTY THAT ANY PRODUCT IS DELIVERED FREE OF CLAIMS OF THIRD PARTIES BY WAY OF INFRINGEMENT OR THE LIKE.

20. SUPPORT SERVICES.

20.1 Support Defined. Vendor shall, at Vendor’s cost, provide technical assistance, functionally equivalent replacement Products, repair services and failure analysis services (collectively, “Support Services”) on each Product, including discontinued Products, during the Warranty Period. Vendor shall make available Support Services for an additional period of five (5) years after last shipment day at commercially reasonable rates. All repaired or replacement Products shall be warranted in accordance with the provisions of Section 19. Except as otherwise expressly provided herein, Vendor may not discontinue the manufacture or supply of Products or Support Services without Blue Coat’s prior written consent. Vendor shall also, at Blue Coat’s request and at mutually-agreed reasonable cost, provided Vendor personnel at Blue Coat’s site to provide Product order and other functional liaison services to Blue Coat, as Blue Coat may reasonably require.

20.2 Hotline. Vendor shall provide Blue Coat with two telephone numbers, one of which will be answered twenty-four (24) hours a day, seven (7) days a week by Vendor’s highly qualified technical support personnel (xxx-xxx-xxxx and xxx-xxx-xxxx). Vendor shall also provide Blue Coat with an email address for reporting all issues (xxxx@xxxx.com). When Blue Coat emails or phones in an issue to Vendor, Vendor shall open a support case immediately and respond within thirty (30) minutes with a case tracking ticket number assigned to such issue for tracking purposes. Vendor shall input any such support case into Vendor’s own internal problem reporting systems. Vendor shall use diligent commercial efforts to resolve all issues as soon as commercially practicable.

21. TERM AND TERMINATION

21.1 Term. This Agreement shall begin upon the Effective Date and, unless earlier terminated as provided herein, shall continue in effect for three (3) years (“Initial Term”). The Agreement shall automatically renew for additional one (1) year terms unless and until either party provides written notice of non-renewal at least one (1) year prior to the end of any such term

21.2 Termination of Agreement.

(a) For Breach. If a party materially breaches any provision of this Agreement, the non-breaching party may terminate this Agreement upon thirty (30) days written notice (fifteen (15) days for breach of Section 9.4, Payment Terms) thereof unless such material breach is cured within the notice period.

(b) Termination For Convenience. After the Initial Term, either party may terminate this Agreement, or any part thereof, at any time for its sole convenience by giving twelve (12) month advance written notice of termination to the other party. Upon receipt of such notice from Blue Coat, Vendor will, except to the extent otherwise specified in such notice, immediately stop all work previously authorized.

(c) Effect of Termination. No termination or expiration of this Agreement shall (i) relieve either party from any obligations hereunder which have accrued on or before the effective date of such termination or expiration including without limitation any obligation to pay to the other party any sum owed pursuant to this Agreement, (ii) affect any rights of either party with respect to any breach of this Agreement, or (iii) cancel any purchase order for the Product placed by Blue Coat and accepted by Vendor pursuant to this Agreement. Unfilled purchase orders (or portions thereof) that are not cancelled by the non-breaching party will be filled and paid for in accordance with the terms of this Agreement.

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21.3 Survivability and Obligations Upon Termination. Section 8.5, 9.4, 13.1, 13.2, 17.7, 17.8, and 18-29 shall survive the termination of this Agreement. Furthermore, in the event of any termination or expiration of this Agreement (a) Vendor shall deliver all Tooling, Blue Coat Equipment and Blue Coat Material to Blue Coat within five (5) working days after termination or otherwise agreed period (or upon Blue Coat’s demand), (b) each party shall return or destroy the other party’s Confidential Information (except each party may retain any Confidential Information (i) for archival purposes, (ii) as necessary to perform the transitional services set forth in Section 22 and (iii) in the case of Blue Coat, as necessary for manufacturing a Product) (c) the parties shall comply with the transition services provisions set forth in Section 22.

22. TRANSITION SERVICES

22.1 Transition after Termination. Following any termination or expiration of this Agreement, each party shall assist and cooperate in good faith with the other party to enable an orderly dissolution of the relationship . Vendor shall provide, at no cost to Blue Coat, technical support and assistance as Blue Coat may reasonably request in connection with the transition of the design and/or manufacture of Products to a third party, unless the termination is by Vendor for cause.

22.2 Right to Manufacture. Upon the expiration or termination of this Agreement (other than for an uncured breach by Blue Coat), Vendor hereby grants Blue Coat a royalty-free, worldwide, nonexclusive, perpetual, irrevocable and have-made right and license to manufacture and have manufactured the Products and to use, reproduce and otherwise exploit the Vendor Property in order to commercialize reproduce, distribute, modify, make, use, sell, have made or have sold the Products unless the termination is by Vendor for cause. Notwithstanding the above, if Vendor is obligated to pay a third party royalties or license fees in order to use or exploit of portions of the Vendor Property not owned by Vendor (“Third Party Property”), then Vendor shall (a) notify Blue Coat and provide all information pertaining to the fees paid for such Third Party Property and (b) assist Blue Coat in obtaining the same or more favorable terms for such Third Party Property upon request by Blue Coat. Blue Coat acknowledges that, upon termination of this Agreement, it may be necessary to negotiate and pay certain fees in order to use and otherwise exploit the Third Party Property as authorized herein. If Vendor does not provide the notice set forth in (a) above, then Vendor shall be responsible for any royalties or fees associated with Third Party Property.

23. EXPORT. In exporting and importing Products, each party agrees (a) to comply with all export and import laws, rules, policies, procedures, restrictions and regulations of the Department of Commerce or other United States or foreign agency or authority, and (b) not to export or import, or allow the export or re-export or import of any goods in violation of any such restrictions, laws or regulations. Each party shall obtain all licenses, permits and approvals required by any government in connection with performing its obligations hereunder; provided that in doing so each party shall at all times fully protect the Confidential Information and proprietary rights of the other party. Blue Coat shall provide the export classification for each Product to Vendor. Each party will indemnify and hold the other party harmless for any breach of this Section 23 by such party.

24. INDEPENDENT CONTRACTOR. Each party shall be deemed to be an independent contractor to the other party, and not its agent, joint venturer, partner or employee. Neither party shall have any authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other party.

25. LIMITATION OF LIABIILTY. EXCEPT FOR A BREACH OF SECTION 26 (CONFIDENTIALITY) OR FOR LIABILITY ARISING FROM THE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT OF A PARTY, IN NO EVENT WILL EITHER PARTY BE LIABLE TO

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THE OTHER PARTY OR TO ANY OTHER PERSON OR ENTITY FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES RELATED TO THIS AGREEMENT WHETHER UNDER CONTRACT, TORT, STRICT LIABILITY, NEGLIGENCE, OR ANY OTHER LEGAL OR EQUITABLE CLAIM OR THEORY, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR A CLAIM (AND ANY FEES RELATED TO A CLAIM) PURSUANT TO SECTION 27 (INDEMNIFCIATION) OR A BREACH OF SECTION 26 (CONFIDENTIALITY), OR FOR LIABILITY ARISING FROM THE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT OF A PARTY, IN NO EVENT WILL EITHER PARTY’S LIABILITY FOR ANY CLAIMS ARISING OUT OF THIS AGREEMENT EXCEED TEN (10) MILLION DOLLARS.

26. CONFIDENTIALITY

26.1 Proprietary Information. Prior to and during the performance of this Agreement, the parties may disclose or furnish to each other proprietary marketing, technical or business information either verbally or in tangible form (the “Confidential Information”); all or any of which have been identified or marked at the time of disclosure as “proprietary” or “confidential” by the disclosing party and, if not in tangible form, reduced to writing marked in a manner to indicate its confidential nature and furnished to the receiving party within ninety (90) days of the initial disclosure. Notwithstanding the above, the Product Design Document(s), the Product Information Document(s), any information concerning Product design, construction, assembly, manufacture, development, or architecture or a Product and information concerning Customers shall be deemed to be the Confidential Information of Blue Coat regardless of being marked as such. Confidential Information of the disclosing party shall be held in confidence by the receiving party and not directly or indirectly disclosed, copied or used by the receiving party (except as necessary to perform under this Agreement). Each party agrees that, except as may be required by law, including the rules and regulations of the United States Securities and Exchange Commission, the terms and existence of this Agreement are confidential and neither party shall disclose such information. Notwithstanding the foregoing, each party may, without further consent of the other party, disclose the contents of this Agreement to its shareholders, potential acquirors, accountants, professional and financial advisors, insurers and other persons necessary for the functioning of such party’s business operations.

26.2 Non-Confidential Information. Confidential Information shall not include information that (a) is already known to the receiving party without any obligation of confidentiality; (b) has entered the public domain through no action or inaction of the receiving party; (c) is generally available to the public; (d) was disclosed to the receiving party by a third party not in violation of the disclosing party’s proprietary rights or (e) independently developed by the receiving party without access to the Confidential Information or (f) is required to be disclosed in accordance with a judicial or other governmental order, provided that, the receiving party, subject to what is permitted under the applicable law, either (i) gives the disclosing party reasonable notice prior to such disclosure to allow the disclosing party a reasonable opportunity to seek a protective order or equivalent, or (ii) obtains a written assurance from the competent judicial or governmental entity that it will afford Confidential Information the highest level of protection afforded under the applicable law or regulation.

26.3 Injunction. Each party acknowledges that the Confidential Information of the disclosing party constitutes valuable trade secrets of the disclosing party and that the unauthorized disclosure or use of such Confidential Information by the receiving party will cause irreparable harm, for which no remedies of law will be adequate. Accordingly, the parties agree that the disclosing party shall be entitled to injunctive relief against the receiving party in the event that the receiving party breaches the confidentiality obligations set forth in this Section 26.

26.4 Insider Trading. Vendor acknowledges that it is aware that Blue Coat is a publicly-traded company and that its Confidential Information may constitute material non-public information under U.S. securities laws and regulations. As such, Vendor shall ensure that its agents and employees are contractually prohibited from transacting in Blue Coat’s securities based on such Confidential Information or from communicating such Confidential Information to others in connection with the trading of such securities.

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26.5 Data Security. The receiving party shall implement safeguards and procedures to prevent unauthorized access to, and the destruction, loss, misuse or improper alteration of, all Confidential Information of the disclosing party. If the receiving party becomes aware of any unauthorized access to the disclosing party’s Confidential Information, it shall report immediately in detail such incident to the disclosing party and take appropriate remedial actions. Vendor will comply with Blue Coat’s written requirements for vendors and offsite development companies, as Vendor is notified of such requirements which may be revised from time to time. In addition to such requirements, Vendor will also adhere to data security requirements and procedures, that provide for, without limitation: (i) the highest industry standard security systems, computers and technologies, including firewalls and encryption; (ii) physical security procedures, including security guards and regular monitoring of all work areas; (iii) background checks on Vendor’s personnel; (iv) restriction of use and copying of Blue Coat Confidential Information on a “need-to-know” basis and only at authorized locations; (v) regular monitoring of the transport and storage of Blue Coat Confidential Information; (vi) regular monitoring of password procedures; and (vii) regular and random monitoring of Suppliers and other employees providing Design Services or working on Blue Coat Products.

27. INDEMNIFICATION

27.1 Blue Coat Indemnification of Vendor. Blue Coat shall defend Vendor and its employees, directors, officers, subsidiaries, successors and assigns (each a “Vendor Party”) from and against third party claims asserted against any Vendor Party to the extent such claims assert that (a) the Blue Coat Requirements Document (or any process, method, design, product or component that directly and necessarily results from compliance with the Blue Coat Requirements Document); (b) Blue Coat Consigned Items; (c) Marks; or (d) modifications made to the Product Design Document as instructed by Blue Coat, infringes any patent, trademark, mask work, copyright, trade secret or other intellectual property right of a third party; provided (i) Vendor gives prompt written notice of the claim; and (ii) Vendor reasonably cooperates in the defense or settlement of the claim. Vendor may participate in the defense of the claim, with its own counsel at its own expense. Blue Coat shall pay any final judgment on the claim and will pay any settlement costs to which it agrees. Blue Coat shall not be responsible for any settlement costs to which it does not agree in writing.

27.2 Vendor Indemnification of Blue Coat. Vendor shall defend Blue Coat and its employees, directors, officers, subsidiaries, successors and assigns (each a “Blue Coat Party”) from and against third party claims asserted against any Blue Coat Party to the extent such claims (a) assert that the design or manufacturing process used by Vendor in the manufacture of Products hereunder or the design of a Product or any method, process outlined in or component of a Product Information Document hereunder infringes any patent, trademark, mask work copyright, trade secret or other intellectual property right of a third party; or (b) are based on the gross negligence or willful misconduct of Vendor or its agents; provided that Blue Coat shall be required to (i) give Vendor prompt written notice of the Claim and (ii) Blue Coat reasonably cooperates in the defense or settlement of the claim. Vendor shall pay any final judgment on the claim and will pay any settlement costs to which it agrees. Vendor shall not be responsible for any settlement costs to which it does not agree in writing. This Section does not apply to the extent the claim is specific to the (A) Blue Coat Consigned Items, or other materials procured from Blue Coat designated suppliers or otherwise dictated by Blue Coat; (B) unauthorized modifications or other unauthorized alterations made to the Product after delivery (by a party other than Vendor); (C) modifications or other alterations made to the Product Design Document as instructed by Blue Coat; (D) process, method, design, product or component that directly and necessarily results from compliance with the Blue Coat Requirements Document; or (E) Marks.

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Design & Manufacturing Services Agreement

27.3 Correction. If Vendor reasonably believes that a certain manufacturing process or method used by Vendor in the manufacture of a Product or the manufacture or sale or use of a Product may be enjoined, Vendor shall use all diligent commercial efforts to either promptly (a) procure for Blue Coat the right to continue to use the same or (b) replace or modify the same to make it non-infringing.

28. LIENS AND SECURITY INTERESTS. During the term of this Agreement, Vendor warrants that Vendor has not and will not, directly or indirectly create, incur or permit to exist any lien, encumbrances or security interest on or with respect to the Components or Products or any portion thereof .

29. MISCELLANEOUS.

29.1 Assignability. Neither party shall transfer or assign any of its rights or obligations hereunder without the prior written consent of the other party and any transfer or obligations hereunder without the prior written consent of the both parties shall be void and of no effect. Notwithstanding the foregoing, Blue Coat may assign this Agreement without consent to an Affiliate or to an acquirer of all or substantially all of Blue Coat’s equity, assets or business provided that such Affiliate or acquirer is not the competitor of Vendor.

29.2 Insurance. Vendor shall maintain (at its own expense) all necessary insurance required by local laws or statutes of where Vendor’s registered office locates, which may be including but not limited to, workmen’s compensation, disability, and unemployment insurance, as well as public liability, product liability, property damage, and automobile liability insurance against any and all losses, claims, demands, proceedings, damages, costs, charges and expenses for injuries or damage to any person or property arising out of or in connection with this Agreement that are the result of the fault or negligence of Vendor.

29.3 Binding Nature; No Third Party Beneficiary. The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties, and their respective successors and permitted assigns, and is made solely and specifically for their benefit. No other person shall have any right, interest or claim hereunder or be entitled to any benefits under or on account of this Agreement as a third-party beneficiary or otherwise.

29.4 Waiver. Any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given, and only if such waiver is express and in writing by the parties hereto.

29.5 Governing Law and Venue. This Agreement shall in all respects be governed by and construed in accordance with the laws of the State of California, without regard to conflicts of laws provisions and without regard to the United Nations Convention on Contracts for the International Sale of Goods. The sole and exclusive venue and jurisdiction for all disputes arising from this Agreement shall be the state and Federal courts located in Santa Clara, California, and each party hereby consents to such jurisdiction and venue.

29.6 Entire Agreement. This Agreement supersedes all proposals, oral or written, all negotiations, conversations, or discussions between or among parties relating to the subject matter of this Agreement and all past dealing or industry custom.

29.7 Notices. Any notices required or permitted to be given hereunder shall be given in writing and shall be delivered to the address written above (a) in person, (b) by certified mail, postage prepaid, return receipt requested, or (c) by a commercial overnight courier that guarantees next day delivery and provides a receipt. Notices to Blue Coat must be sent to the attention of the General Counsel. Notices to Vendor must be sent to:

29.8 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, Vendor and its successors and assigns and Blue Coat and Blue Coat’s successors and assigns.

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Design & Manufacturing Services Agreement

29.9 Amendments. Any provision hereof may be amended and the observance of any provision of this Agreement may be waived (either generally or in any particular instance and either retroactively or prospectively) only with the written consent of Blue Coat and Vendor. However, it is the intention of the parties that this Agreement be controlling over additional or different terms of any invoices, confirmations or similar documents (other than additional terms (e.g. quantities, proposed ship dates, etc.) expressly contemplated herein as to be supplied in such documents) even if accepted in writing by both parties.

29.10 Counterparts. This Agreement may be executed in one (1) or more counterparts.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, all as of the day and year first above written.

MiTAC International Corporation
By:	/s/ James C. Yuan
Title:	VP/General Counsel
Blue Coat Systems, Inc.
By:	/s/ David de Simone
Title:	SVP Corporate Operations

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EXHIBIT A

PRODUCT DESIGN DOCUMENT

The following Product Information Document shall be considered a part of the Design & Manufacturing Services Agreement entered into by Blue Coat Systems, Inc. (“Blue Coat”) and MiTAC International Corporation (“Vendor”) on             , 2008 (the “Agreement”). All terms not defined herein shall have the meaning ascribed to them in the Agreement.

Effective Date:

Product Description:

Bill of Materials/Pricing:

AVL:

Unique Components:

Component Lead Time:

Product Specifications

See Bluecoat’s SRD

Tooling

Blue Coat Equipment:

ESS Testing Chamber

Test Plan:

Project Managers:

Ownership:

Additional Requirements or Obligations:

Accepted and Agreed to by:

BLUE COAT SYSTEMS, INC.	MiTAC International Corporation
By:	By:
Name:	Name:
Title:	Title:
Date:	Date:

EXHIBIT B

PRODUCT INFORMATION DOCUMENT

The following Product Information Document shall be considered a part of the Design & Manufacturing Services Agreement entered into by Blue Coat Systems, Inc. (“Blue Coat”) and [INSERT FULL CORPORATE NAME OF MITAC] (“Vendor”) on             , 2008 (the “Agreement”). All terms not defined herein shall have the meaning ascribed to them in the Agreement. The Product Design Document, shall be incorporated by reference to this Product Information Document and sets forth the Product Specifications and other details associated with the Product.

Effective Date:

Product Name:

Product Lead Time:

Vendor Manufacturing Facility:

P.D.D. Information:

Contact Information:

Escalation Path:

Product Warranty Failure Percentage:

Out of Warranty Repair costs:

[insert Spreadsheet #1 – Finished Goods Information]

[insert Spreadsheet #2 – Component Information]

Escalation of Issues:

Vendor will respond to all issue raised by Blue Coat or that Vendor becomes aware (“Issues”) of in accordance with the Issue Resolution Table set forth below. All response times are measured from the time Vendor receives an Issue notice (by email or phone) or Vendor has otherwise detected the Issue. The level of effort Vendor must apply to resolving Issues is continuous and best commercial efforts. The severity level of the Issues reported by Blue Coat shall be determined by Blue Coat.

Issue Resolution Table

Severity Level	Response Time	Fix Time and Resolution	Feedback            to     Blue Coat
Severity 1 Issue	One (1) hour	Vendor personnel to work normal and overtime hours as well as ensure that machines are running 24x7 to fix problem	Daily
Severity 2 Issue	Four (4) hour	Vendor will work during normal business hours to provide a resolution.	Weekly         or     better

Exhibit – Design & Manufacturing Services Agreement

During the resolution of Issues, Vendor will escalate unresolved Issues in accordance with the Escalation Table set forth below. Escalation shall, at a minimum, take the form of electronic communication, on which Blue Coat is a copied recipient. If a Issue has not been resolved within five (5) days then, at Blue Coat’s request, Vendor will assign a dedicated resource to resolve the Issue and will communicate to Blue Coat the dedicated resource contact information.

Escalation Table

Escalation Level	Elapsed Time	Vendor Escalation Contact
1A	Initial identification	[insert title]
1B	8 hours	[insert title]
1C	24 hours	[insert title]
1D	3 days	[insert title]
1E	5 days	[insert title]
1F	7 days	[insert title]
Contacts: Vendor shall designate a primary point of contact for the areas specified below. Vendor may change its designated point of contact at any time upon written notice to Blue Coat.
Department	Contact Name	Contact Information (phone and email)
Blue Coat shall designate a primary point of contact for the areas specified below. Vendor shall only contact the specified person assigned to the area designated below. Blue Coat may change its designated point of contact at any time upon written notice to Vendor.
Department	Contact Name	Contact Information (phone and email)

Exhibit – Design & Manufacturing Services Agreement

Test Specifications:

Product Manufacturing Time:

Quality Control Standards:

Additional Requirements or Obligations:

Accepted and Agreed to by:

BLUE COAT SYSTEMS, INC.	[INSERT FULL CORPORATE NAME OF MITAC
By:	By:
Name:	Name:
Title:	Title:
Date:	Date:

Exhibit – Design & Manufacturing Services Agreement

EXHIBIT C

STATEMENT OF WORK

Deliverables:

Product specifications

Test plan:

Schedule:

Pricing:

NRE Fees:

Blue Coat Equipment Pricing:

Tooling:

Accepted and Agreed to by:

BLUE COAT SYSTEMS, INC.	[INSERT FULL CORPORATE NAME OF MITAC
By:	By:
Name:	Name:
Title:	Title:
Date:	Date:

Exhibit – Design & Manufacturing Services Agreement

EXHIBIT D

CREDIT CRITERIA

The following are considered “Credit Criteria” under the Agreement:

1. Prompt payment record. This means payment is made by Blue Coat within the thirty (30) day requirement.

2. Positive net income. This means that at the end of each Blue Coat fiscal year, Blue Coat has had two (2) previous years of positive net income (measured using annual results).

3. Quick Ratio: This means that at the end of each quarter and fiscal year the “Quick Ratio” is greater than one (1). Quick Ratio =

Current Assets - Inventory

Current Liability

4. Current Ratio: This means that at the end of each quarter and fiscal year the “Current Ratio” is greater than one (1). Current Ratio =

Current Assets

Current Liability

5. Debt Equity Ratio: This means that at the end of each quarter and fiscal year the “Debt Equity Ratio” is less than one (1).

Debt

Net Worth

EX-10.37

Exhibit 10.37

BLUE COAT SYSTEMS, INC.

AMENDED AND RESTATED INDEMNIFICATION AGREEMENT

This Amended and Restated Indemnification Agreement (“Agreement”) is made as of ____________________ (the “Effective Date”) by and between Blue Coat Systems, Inc., a Delaware corporation (the “Company”), and __________________ (“Indemnitee”).

RECITALS

WHEREAS, highly competent persons have become more reluctant to serve publicly held corporations as directors, officers, or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against risks of claims and actions against them arising out of their service to and activities on behalf of the corporation;

WHEREAS, there has been a substantial increase in corporate litigation, subjecting directors, officers, employees, agents and fiduciaries to increased risks of claims and actions against them;

WHEREAS, the Board of Directors of the Company (the “Board”) has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company’s stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future;

WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company’s directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general trend of insurance companies to reduce the scope of coverage of such insurance;

WHEREAS, the Bylaws of the Company (the “Bylaws”) require indemnification of the officers and directors of the Company to the fullest extent authorized under the General Corporation Law of the State of Delaware (“DGCL”). Indemnitee may also be entitled to indemnification pursuant to the DGCL and under California law;

WHEREAS, the Bylaws and DGCL provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the board of directors, officers and other persons with respect to indemnification;

WHEREAS, Indemnitee is concerned that the protection available under the Bylaws and DGCL and any insurance may not be adequate to protect Indemnitee, and in consideration of serving as a director, officer or employee (as applicable), desires to be assured of adequate protection, and the Company desires Indemnitee to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that Indemnitee be so indemnified;

WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;

WHEREAS, the Company has entered into previous indemnification agreements with certain officers and directors and desires to amend and restate those obligations, as well as to provide other officers and directors with contractual indemnity protection; and

WHEREAS, this Agreement is a supplement to and in furtherance of the indemnification provided in the Bylaws and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.

NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:

Section 1. Services to the Company. Indemnitee agrees to serve, or continue to serve, as a director, officer or employee (as applicable) of the Company. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee. The foregoing notwithstanding, this Agreement shall continue in force after Indemnitee’s services to the Company have ceased.

Section 2. Definitions. As used in this Agreement:

(a) “Corporate Status” describes the status of a person who is or was a director, officer, employee or agent of the Company or of any other corporation, partnership or joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company.

(b) “Enterprise” shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent.

(c) “Expenses” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding. Expenses also shall include Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedes or supersedeas bond, or other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

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(d) “Independent Counsel” means a law firm, or a partner (or, if applicable, member) of such a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees and expenses of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

(e) “Proceeding” shall include any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee was, is or will be involved as a party or otherwise by reason of Indemnitee’s Corporate Status, by reason of any action taken by him or of any action on his part while acting in such capacity, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, in each case whether or not serving in such capacity at the time any liability or expense is incurred for which indemnification, reimbursement, or advancement of expenses can be provided under this Agreement; provided, however, that, other than a Proceeding initiated by Indemnitee to enforce his or her rights under this Agreement, the term “Proceeding” shall include a Proceeding (or part thereof) initiated by Indemnitee only if such Proceeding (or part thereof) was authorized by the Board of Directors.

Section 3. Indemnity in Third-Party Proceedings. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. Indemnitee shall not enter into any settlement in connection with a Proceeding without ten (10) days’ prior notice to the Company.

Section 4. Indemnity in Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 4 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 4, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in

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good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. No indemnification for Expenses shall be made under this Section 4 in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudged by a court to be liable to the Company, unless and only to the extent that the Delaware Court of Chancery (the “Delaware Court”) or any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification for such expenses as the Delaware Court or such other court shall deem proper.

Section 5. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provisions of this Agreement, to the extent that Indemnitee is a party to or a participant in and is successful, on the merits or otherwise, in any Proceeding or in defense of any claim, issue or matter therein, in whole or in part, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against (a) all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter and (b) any claim, issue or matter related to any such successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

Section 6. Indemnification For Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.

Section 7. Additional Indemnification.

(a) Notwithstanding any limitation in Sections 3, 4, or 5, the Company shall indemnify Indemnitee to the fullest extent permitted by law if Indemnitee is a party to or threatened to be made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the Proceeding.

(b) For purposes of Section 7(a), the meaning of the phrase “to the fullest extent permitted by law” shall include, but not be limited to:

(i) to the fullest extent permitted by the provision of the DGCL that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the DGCL or such provision thereof, and

(ii) to the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors, employees or agents.

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Section 8. Exclusions. Notwithstanding any provision in this Agreement to the contrary, the Company shall not be obligated under this Agreement to make any indemnity with respect to any claim made against Indemnitee:

(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision.

(b) for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Exchange Act, as amended, or similar provisions of state statutory law or common law; or

(c) for which payment is prohibited by applicable law.

Section 9. Advances of Expenses. The Company shall advance, to the extent not prohibited by law, the Expenses incurred by Indemnitee in connection with any Proceeding, and such advancement shall be made within ten (10) days after the receipt by the Company of a statement or statements requesting such advances (which shall include invoices received by Indemnitee in connection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditures made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice) from time to time, whether prior to or after final disposition of any Proceeding. Advances shall be unsecured and interest free. Advances shall be made without regard to Indemnitee’s ability to repay the expenses and without regard to Indemnitee’s ultimate entitlement to indemnification under the other provisions of this Agreement. Advances shall include any and all reasonable Expenses incurred pursuing an action to enforce this right of advancement, including Expenses incurred preparing and forwarding statements to the Company to support the advances claimed. The Indemnitee shall qualify for advances upon the execution and delivery to the Company of this Agreement which shall constitute an undertaking providing that the Indemnitee undertakes to the fullest extent required by law to repay the advance if and to the extent that it is ultimately determined by final judicial decision from which there is no further right to appeal that Indemnitee is not entitled to be indemnified by the Company. This Section 9 shall not apply to any claim made by Indemnitee for which indemnity is excluded pursuant to Section 8. The right to advances under this paragraph shall in all events continue until final disposition of any Proceeding, including any appeal therefrom.

Section 10. Procedure for Notification and Defense of Claim.

(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request therefor.

(b) The Company will be entitled to participate in the Proceeding at its own expense.

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Section 11. Procedure Upon Application for Indemnification.

(a) Upon written request by Indemnitee for indemnification pursuant to Section 10(a), a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall be made in the specific case by Independent Counsel chosen in accordance Section 11(b) below in a written opinion to the Board, a copy of which shall be delivered to Indemnitee, and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made as soon as practicable, but in no event later than ten (10) days, after such determination. Indemnitee shall cooperate with the Independent Counsel making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such counsel upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the Independent Counsel shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

(b) The Independent Counsel shall be selected by Indemnitee. The Company may, within ten (10) days after written notice of such selection, deliver to the Indemnitee a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 2 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is so made, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within twenty (20) days after the later of submission by Indemnitee of a written request for indemnification pursuant to Section 10(a) hereof, and the final disposition of the Proceeding, including any appeal therein, no Independent Counsel shall have been selected and not objected to, the Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Company to the selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 11(a) hereof. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 13(a) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

Section 12. Presumptions and Effect of Certain Proceedings.

(a) In making a determination with respect to entitlement to indemnification hereunder, the Independent Counsel making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 10(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by the Independent Counsel of any determination contrary to that presumption. Neither the failure of the Company or of Independent Counsel to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company or by Independent Counsel that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

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(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of guilty or nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.

(c) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or the Board or counsel selected by any committee of the Board or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser, investment banker or other expert selected by the Company or the Board or any committee of the Board. The provisions of this Section 12(c) shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.

(d) The knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.

Section 13. Remedies of Indemnitee.

(a) Subject to Section 13(e), in the event that (i) a determination is made pursuant to Section 11 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 9 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 11(a) of this Agreement within sixty (60) days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5 or 6 or the last sentence of Section 11(a) of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification pursuant to Section 3, 4 or 7 of this Agreement is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication by a court of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 13(a); provided, however, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 5 of this Agreement. The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration.

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(b) In the event that a determination shall have been made pursuant to Section 11(a) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 13 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 13 the Company shall have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.

(c) If a determination shall have been made pursuant to Section 11(a) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 13, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.

(d) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 13 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefor) advance, to the extent not prohibited by law, such Expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification or advance of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be, in the suit for which indemnification or advances is being sought.

(e) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding, including any appeal therein.

Section 14. Non-exclusivity; Survival of Rights; Insurance; Subrogation.

(a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company’s Certificate of Incorporation, Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently

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under the Certificate of Incorporation, Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

(b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of any other Enterprise, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable (or for which advancement is provided hereunder) hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

(e) The Company’s obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of Expenses from such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise.

Section 15. Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a) ten (10) years after the date that Indemnitee shall have ceased to serve as a director, officer or employee (as applicable) of the Company or (b) one (1) year after the final termination of any Proceeding, including any appeal, then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 13 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his spouse, heirs, executors, administrators, and personal or legal representatives. The Company shall require and cause any successor (whether

9

direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all or a substantial part of the business and/or assets of the Company, by written agreement in form and substance satisfactory to the Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

Section 16. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

Section 17. Enforcement.

(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve, or continue to serve, as a director, officer or employee (as applicable) of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director, officer or employee (as applicable) of the Company.

(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided, however, that this Agreement is a supplement to and in furtherance of the Certificate of Incorporation of the Company, the Bylaws of the Company and applicable law, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.

Section 18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by the parties thereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of this Agreement nor shall any waiver constitute a continuing waiver.

Section 19. Notice by Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. The failure of Indemnitee to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise; provided, however, that the Company may offset against amounts payable as indemnification hereunder any loss suffered by the Company that the Company can conclusively establish directly results from the failure of Indemnitee to provide such prompt notification (e.g., the costs to vacate a default judgment).

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Section 20. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed or at the address of the party, (b) mailed by certified or registered mail with postage prepaid and return receipt requested, on the third business day after the date on which it is so mailed, (c) mailed by reputable overnight courier and receipted for at the address of the party, or (d) sent by facsimile transmission, with receipt of oral confirmation that such transmission has been received:

(a) If to Indemnitee, at such address as Indemnitee shall provide to the Company.

(b) If to the Company to:

Blue Coat Systems, Inc.

420 North Mary Avenue

Sunnyvale, CA 94085

Attention: Chief Executive Officer

or to any other address as may have been furnished to Indemnitee by the Company.

Section 21. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).

Section 22. Applicable Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 13(a) of this Agreement, the Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Delaware Court, and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) appoint, to the extent such party is not otherwise subject to service of process in the State of Delaware, Incorporating Services, Ltd., Dover, Delaware as its agent in the State of Delaware as such party’s agent for acceptance of legal process in connection with any such

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action or proceeding against such party with the same legal force and validity as if served upon such party personally within the State of Delaware, (iv) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.

Section 23. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

Section 24. Miscellaneous. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

Section 25. Prior Agreements. This Agreement supersedes and replaces in its entirety any prior indemnification agreement between the Company and Indemnitee (“Prior Agreement”) as of the Effective Date; provided, however, that this Agreement shall not affect the obligations of either party under a Prior Agreement, where the Company has been notified of a proceeding and has undertaken to provide indemnification to Indemnitee with respect to such proceeding under the Prior Agreement prior to the Effective Date. The Prior Agreement shall remain in effect and shall continue to govern the parties’ respective obligations with respect to that proceeding.

IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written.

BLUE COAT SYSTEMS, INC.
By:
	Name:
	Title:

INDEMNITEE:
By:
	Name:

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EX-10.38

Exhibit 10.38

BLUE COAT SYSTEMS, INC.

2007 STOCK INCENTIVE PLAN

(As Adopted on August 27, 2007 and Effective October 2, 2007)

TABLE OF CONTENTS

		Page
ARTICLE 1.	INTRODUCTION	1
ARTICLE 2.	ADMINISTRATION	1
2.1	Committee Composition	1
2.2	Committee Responsibilities	1
2.3	Non-Officer Grants	1
ARTICLE 3.	SHARES AVAILABLE FOR GRANTS	1
3.1	Basic Limitation	1
3.2	Shares Returned to Reserve	2
3.3	Dividend Equivalents	2
ARTICLE 4.	ELIGIBILITY	2
4.1	Incentive Stock Options	2
4.2	Other Grants	2
ARTICLE 5.	OPTIONS	2
5.1	Stock Option Agreement	2
5.2	Number of Shares	2
5.3	Exercise Price	2
5.4	Exercisability and Term	3
5.5	Modification or Assumption of Options	3
ARTICLE 6.	PAYMENT FOR OPTION SHARES	3
6.1	General Rule	3
6.2	Surrender of Stock	3
6.3	Exercise/Sale	3
6.4	Other Forms of Payment	3
ARTICLE 7.	AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE MEMBERS OF THE BOARD	3
7.1	Initial Grants	3
7.2	Annual Grants	4
7.3	Accelerated Exercisability	4
7.4	Exercise Price	4
7.5	Term	4
7.6	Affiliates of Non-Employee Members of the Board	4
ARTICLE 8.	STOCK APPRECIATION RIGHTS	4
8.1	SAR Agreement	4
8.2	Number of Shares	4
8.3	Exercise Price	5
8.4	Exercisability and Term	5
8.5	Exercise of SARs	5
8.6	Modification or Assumption of SARs	5
ARTICLE 9.	RESTRICTED SHARES	5
9.1	Restricted Stock Agreement	5
9.2	Payment for Awards	5
9.3	Vesting Conditions	5
9.4	Voting and Dividend Rights	6
ARTICLE 10.	STOCK UNITS	6
10.1	Stock Unit Agreement	6
10.2	Payment for Awards	6

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		Page
10.3	Vesting Conditions	6
10.4	Voting and Dividend Rights	6
10.5	Form and Time of Settlement of Stock Units	6
10.6	Death of Recipient	7
10.7	Creditors’ Rights	7
ARTICLE 11.	CHANGE IN CONTROL.	7
11.1	Effect of Change in Control	7
11.2	Involuntary Termination	7
ARTICLE 12.	PROTECTION AGAINST DILUTION	7
12.1	Adjustments	7
12.2	Dissolution or Liquidation	8
12.3	Reorganizations	8
ARTICLE 13.	LIMITATION ON RIGHTS	9
13.1	Retention Rights	9
13.2	Stockholders’ Rights	9
13.3	Regulatory Requirements	9
ARTICLE 14.	WITHHOLDING TAXES	9
14.1	General	9
14.2	Share Withholding	9
ARTICLE 15.	LIMITATION ON PAYMENTS	9
15.1	Scope of Limitation	9
15.2	Basic Rule	10
15.3	Reduction of Payments	10
15.4	Overpayments and Underpayments	10
15.5	Related Corporations	10
ARTICLE 16.	FUTURE OF THE PLAN	10
16.1	Term of the Plan	10
16.2	Amendment or Termination	11
16.3	Stockholder Approval	11
ARTICLE 17.	DEFINITIONS	11-14

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BLUE COAT SYSTEMS, INC.

2007 STOCK INCENTIVE PLAN

ARTICLE 1. INTRODUCTION.

The Plan was adopted by the Board to be effective as of the Effective Date. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Non-Employee Members of the Board and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Non-Employee Members of the Board and Consultants with exceptional qualifications and (c) linking Employees, Non-Employee Members of the Board and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options (which may constitute ISOs or NSOs) or stock appreciation rights.

The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware (except their choice-of-law provisions).

ARTICLE 2. ADMINISTRATION.

2.1 Committee Composition. The Compensation Committee of the Board shall administer the Plan. The Committee shall consist exclusively of two or more members of the Board, who shall be appointed by the Board. In addition, each member of the Committee shall meet the following requirements:

(a) Any listing standards prescribed by the principal securities market on which the Company’s equity securities are traded;

(b) Such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under section 162(m)(4)(C) of the Code, to the extent deemed advisable by the Board;

(c) Such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and

(d) Any other requirements imposed by applicable law, regulations or rules.

2.2 Committee Responsibilities. The Committee shall (a) select the Employees, Non-Employee Members of the Board and Consultants who are to receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of such Awards, (c) interpret the Plan, (d) make all other decisions relating to the operation of the Plan and (e) carry out any other duties delegated to it by the Board under the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee’s determinations under the Plan shall be final and binding on all persons.

2.3 Non-Officer Grants. The Board may also appoint an additional committee of the Board composed of two or more directors of the Company. The members of the additional committee need not satisfy the requirements of Section 2.1. Such committee or the Board may (a) administer the Plan with respect to Employees and Consultants who are not Non-Employee Members of the Board and are not considered executive officers of the Company under section 16 of the Exchange Act, (b) grant Awards under the Plan to such Employees and Consultants and (c) determine all features and conditions of such Awards. Within the limitations of this Section 2.3, any reference in the Plan to the Committee shall include the Board or an additional committee to whom the Board has delegated the required authority under this Section 2.3.

ARTICLE 3. SHARES AVAILABLE FOR GRANTS.

3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of Common Shares issued under the Plan shall not exceed

1

(a) 2,000,000 plus the number of Common Shares reserved against options or awards outstanding under the Predecessor Plans on the Effective Date plus (b) the Common Shares described in Section 3.2. Common Shares awarded as Restricted Shares or Stock Units will be counted against the share reserve as 1.5 Common Shares for every one Common Share subject thereto. The number of Common Shares that are subject to Awards outstanding at any time under the Plan shall not exceed the number of Common Shares that then remain available for issuance under the Plan. All Common Shares available under the Plan may be issued upon the exercise of ISOs. The limitations of this Section 3.1 and Section 3.2 shall be subject to adjustment pursuant to Article 12.

3.2 Shares Returned to Reserve. If Options, SARs or Stock Units are forfeited or terminate for any other reason before being exercised or settled, then the Common Shares subject to such Options, SARs or Stock Units shall again become available for issuance under the Plan. If SARs are exercised, then all of the Common Shares (if any) actually issued in settlement of such SARs plus any Common Shares that represent payment of the exercise price shall reduce the number available under Section 3.1. If Stock Units are settled, then only the number of Common Shares (if any) actually issued in settlement of such Stock Units shall reduce the number available under Section 3.1. If Restricted Shares or Common Shares issued upon the exercise of Options are reacquired by the Company pursuant to a forfeiture provision, then such Common Shares shall again become available for issuance under the Plan. Further, if Restricted Shares or Stock Units are forfeited or repurchased by the Company, then 1.5 times the number of Common Shares so forfeited or repurchased will again become available for issuance under the Plan.

3.3 Dividend Equivalents. Any dividend equivalents paid or credited under the Plan shall not be applied against the number of Common Shares that may be issued under the Plan, whether or not such dividend equivalents are converted into Stock Units.

ARTICLE 4. ELIGIBILITY.

4.1 Incentive Stock Options. Only Employees who are common-law employees of the Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, an Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the additional requirements set forth in section 422(c)(5) of the Code are satisfied.

4.2 Other Grants. Only Employees, Non-Employee Members of the Board and Consultants shall be eligible for the grant of Restricted Shares, Stock Units, NSOs or SARs.

ARTICLE 5. OPTIONS.

5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee’s other compensation.

5.2 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 12. Options granted to an Optionee in a single fiscal year of the Company shall not cover more than 250,000 Common Shares, except that Options granted to a new Employee in the fiscal year of the Company in which his or her Service commences may cover up to 500,000 Common Shares. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 12.

5.3 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price, which shall not be less than 100% of the Fair Market Value of a Common Share on the date of grant. The preceding sentence shall not apply to Options granted pursuant to an assumption of, or substitution for, another option in a manner that would satisfy the requirements of section 424(a) of the Code, whether or not such section is applicable.

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5.4 Exercisability and Term. Each Stock Option Agreement shall specify the date or event when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an Option shall in no event exceed 10 years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s Service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited.

5.5 Modification or Assumption of Options. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding options or may accept the cancellation of outstanding options (whether granted by the Company or by another issuer) in return for the grant of new options for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option. Notwithstanding anything in this Plan to the contrary, and except for the adjustments provided in Article 12, neither the Committee nor any other person may decrease the exercise price for any outstanding Option after the date of grant nor cancel or allow an optionee to surrender an outstanding Option to the Company as consideration for the grant of a new Option with a lower exercise price or the grant of another type of Award the effect of which is to reduce the exercise price of any outstanding Option.

ARTICLE 6. PAYMENT FOR OPTION SHARES.

6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash or cash equivalents at the time when such Common Shares are purchased, except that the Committee at its sole discretion may accept payment of the Exercise Price in any other form(s) described in this Article 6. However, if the Optionee is a Non-Employee Member of the Board or executive officer of the Company, he or she may pay the Exercise Price in a form other than cash or cash equivalents only to the extent permitted by section 13(k) of the Exchange Act.

6.2 Surrender of Stock. With the Committee’s consent, all or any part of the Exercise Price may be paid by surrendering, or attesting to the ownership of, Common Shares that are already owned by the Optionee. Such Common Shares shall be valued at their Fair Market Value on the date the new Common Shares are purchased under the Plan.

6.3 Exercise/Sale. With the Committee’s consent, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to a securities broker approved by the Company to sell all or part of the Common Shares being purchased under the Plan and to deliver all or part of the sales proceeds to the Company.

6.4 Other Forms of Payment. With the Committee’s consent, all or any part of the Exercise Price and any withholding taxes may be paid in any other form that is consistent with applicable laws, regulations and rules.

ARTICLE 7. AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE MEMBERS OF THE BOARD.

7.1 Initial Grants. Each Non-Employee Member of the Board who first becomes a member of the Board after the Effective Date shall receive a one-time grant of an NSO covering 10,000 Common Shares on the date such Non-Employee Member of the Board first joins the Board. Each Non-Employee Member of the Board who first becomes Chairman of the Audit Committee after the Effective Date shall also receive a one-time grant of an

3

NSO covering 7,500 Common Shares on the date such Non-Employee Member of the Board first becomes Chairman of the Audit Committee. Each such NSO shall become exercisable in four equal annual installments over the four-year period commencing on the date of grant. A Non-Employee Member of the Board who previously was an Employee shall not receive a grant under this Section 7.1.

7.2 Annual Grants. Upon the conclusion of each regular annual meeting of the Company’s stockholders held in the year 2007 or thereafter, each Non-Employee Member of the Board who will continue serving as a member of the Board thereafter shall receive an NSO covering 4,000 Common Shares. Upon the conclusion of each regular annual meeting of the Company’s stockholders held in the year 2007 or thereafter, and in addition to the Award for Board service referenced above, each Non-Employee Member of the Board who will serve as a member of the Audit Committee thereafter shall receive an NSO covering 2,500 Common Shares and each Non-Employee Member of the Board who will continue serving as Chairman of the Audit Committee thereafter shall receive an additional NSO covering 5,000 Common Shares. Notwithstanding the foregoing, none of the NSOs described in this Section 7.2 shall be granted in the calendar year in which the same Non-Employee Member of the Board received an NSO described in Section 7.1. NSOs granted under this Section 7.2 shall become exercisable in full on the first anniversary of the date of grant. A Non-Employee Member of the Board who previously was an Employee shall be eligible to receive grants under this Section 7.2.

7.3 Accelerated Exercisability. All NSOs granted to a Non-Employee Member of the Board under this Article 7 shall also become exercisable in full in the event that the Company is subject to a Change in Control before such Non-Employee Member of the Board’s Service terminates. Acceleration of exercisability may also be required by Section 12.3.

7.4 Exercise Price. The Exercise Price under all NSOs granted to a Non-Employee Member of the Board under this Article 7 shall be equal to 100% of the Fair Market Value of a Common Share on the date of grant, payable in one of the forms described in Sections 6.1, 6.2 and 6.3.

7.5 Term. All NSOs granted to a Non-Employee Member of the Board under this Article 7 shall terminate on the earliest of (a) the date 10 years after the date of grant or (b) the date twelve months after the termination of such Non-Employee Member of the Board’s Service for any reason, provided that the Board may set a shorter period for either of the foregoing limitations.

7.6 Affiliates of Non-Employee Members of the Board. The Committee may provide that the NSOs that otherwise would be granted to a Non-Employee Member of the Board under this Article 7 shall instead be granted to an affiliate of such Non-Employee Member of the Board. Such affiliate shall then be deemed to be a Non-Employee Member of the Board for purposes of the Plan, provided that the Service-related vesting and termination provisions pertaining to the NSOs shall be applied with regard to the Service of the Non-Employee Member of the Board.

ARTICLE 8. STOCK APPRECIATION RIGHTS.

8.1 SAR Agreement. Each grant of a SAR under the Plan shall be evidenced by a SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee’s other compensation.

8.2 Number of Shares. Each SAR Agreement shall specify the number of Common Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Article 12. SARs granted to an Optionee in a single fiscal year shall in no event pertain to more than 250,000 Common Shares, except that SARs granted to a new Employee in the fiscal year of the Company in which his or her Service commences may pertain to a maximum of 500,000 Common Shares. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 12.

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8.3 Exercise Price. Each SAR Agreement shall specify the Exercise Price, which shall in no event be less than 100% of the Fair Market Value of a Common Share on the date of grant. The preceding sentence shall not apply to SARs granted pursuant to an assumption of, or substitution for, another SAR in a manner that would satisfy the requirements of section 424(a) of the Code if such section were applicable.

8.4 Exercisability and Term. Each SAR Agreement shall specify the date all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. A SAR Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s Service. SARs may be awarded in combination with Options, and such an Award may provide that the SARs will not be exercisable unless the related Options are forfeited. A SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. A SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control.

8.5 Exercise of SARs. Upon exercise of a SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Common Shares, (b) cash or (c) a combination of Common Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Common Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Common Shares subject to the SARs exceeds the Exercise Price. If, on the date a SAR expires, the Exercise Price is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. A SAR Agreement may also provide for an automatic exercise of the SAR on an earlier date.

8.6 Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs. The foregoing notwithstanding, no modification of a SAR shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such SAR.

ARTICLE 9. RESTRICTED SHARES.

9.1 Restricted Stock Agreement. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Stock Agreement between the recipient and the Company. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements entered into under the Plan need not be identical.

9.2 Payment for Awards. Restricted Shares may be sold or awarded under the Plan for such consideration as the Committee may determine, including (without limitation) cash, cash equivalents, property, past services and future services. Within the limitations of the Plan, the Committee may accept the cancellation of outstanding options in return for the grant of Restricted Shares.

9.3 Vesting Conditions. Each Award of Restricted Shares shall be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock Agreement. In no event shall vesting be at a rate faster than (a) one (1) year following the date of grant if vesting is subject to achievement of performance goals, and (b) three (3) years following the date of grant if vesting is not subject to achievement of performance goals; provided, however, that an Award may vest in annual installments in the event it vests over multiple years. The Committee may include among such conditions the requirement that the performance of the Company or a business unit of the Company for a specified period of one or more fiscal years (the “Performance Period”) equal or exceed a target determined in advance by the Committee. The Committee shall determine such performance. Such target shall be based on one or more of the criteria set forth in

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Appendix A. The Committee shall identify such target not later than the 90^th day of the Performance Period. In no event shall more than 125,000 Restricted Shares that are subject to performance-based vesting conditions be granted to any Participant in a single fiscal year of the Company, except that up to 250,000 Restricted Shares subject to performance-based vesting conditions may be granted to a new Employee in the fiscal year of the Company in which his or her Service commences. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 12. A Restricted Stock Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events.

9.4 Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other stockholders. A Restricted Stock Agreement, however, may require that any cash dividends paid on Restricted Shares (a) be accumulated and paid when such Restricted Shares vest or (b) be invested in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid.

ARTICLE 10. STOCK UNITS.

10.1 Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the recipient and the Company. Such Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the recipient’s other compensation.

10.2 Payment for Awards. To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of the Award recipients.

10.3 Vesting Conditions. Each Award of Stock Units shall be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement, provided that in no event shall vesting be at a rate faster than one (1) year following the date of grant if vesting is subject to achievement of performance goals and vesting shall be over a period of at least three (3) years from the date of grant if not subject to achievement of performance goals; provided, however, that an Award may vest in annual installments in the event it vests over multiple years. The Committee may include among such conditions the requirement that the performance of the Company or a business unit of the Company for a specified period of one or more fiscal years equal or exceed a target determined in advance by the Committee. The Committee shall determine such performance. Such target shall be based on one or more of the criteria set forth in Appendix A. The Committee shall identify such target not later than the 90^th day of such period. In no event shall more than 125,000 Stock Units that are subject to performance-based vesting conditions be granted to any Participant in a single fiscal year of the Company, except that up to 250,000 Stock Units subject to performance-based vesting conditions may be granted to a new Employee in the fiscal year of the Company in which his or her Service commences. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 12. A Stock Unit Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events. In addition, acceleration of vesting may be required under Section 12.3.

10.4 Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to dividend equivalents if provided in the agreement. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Common Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Common Shares, or in a combination of both. Prior to distribution, any dividend equivalents that are not paid shall be subject to the same conditions and restrictions as the Stock Units to which they attach.

10.5 Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any combination of both, as determined by the Committee. The

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actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Common Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article 12.

10.6 Death of Recipient. Any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient’s death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s estate.

10.7 Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Agreement.

ARTICLE 11. CHANGE IN CONTROL.

11.1 Effect of Change in Control. In the event of any Change in Control, each outstanding Award shall automatically accelerate so that each such Award shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the Common Shares at the time subject to such Award and may be exercised for any or all of those shares as fully-vested Common Shares. However, an outstanding Award shall not so accelerate if and to the extent such Award is, in connection with the Change in Control, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable Award for shares of the capital stock of the successor corporation (or parent thereof). The determination of Award comparability shall be made by the Committee, and its determination shall be final, binding and conclusive.

11.2 Involuntary Termination. In addition, in the event that the Award is assumed by the successor corporation (or parent thereof) and the Participant experiences an Involuntary Termination within eighteen months following a Change in Control, each outstanding Award shall automatically accelerate so that each such Award shall, immediately prior to the effective date of the Involuntary Termination, become fully exercisable for all of the Common Shares at the time subject to such Award and may be exercised for any or all of those shares as fully-vested Common Shares.

ARTICLE 12. PROTECTION AGAINST DILUTION.

12.1 Adjustments. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares or a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, corresponding adjustments shall automatically be made in each of the following:

(a) The number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Article 3;

(b) The limitations set forth in Sections 5.2, 7.1, 7.2, 8.2, 9.3 and 10.3;

(c) The number of Common Shares covered by each outstanding Option and SAR;

(d) The Exercise Price under each outstanding Option and SAR; and

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(e) The number of Stock Units included in any prior Award that has not yet been settled.

In the event of a declaration of an extraordinary dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of the foregoing. Except as provided in this Article 12, a Participant shall have no rights by reason of any issuance by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class.

12.2 Dissolution or Liquidation. To the extent not previously exercised or settled, Options, SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Company.

12.3 Reorganizations. In the event that the Company is a party to a merger or consolidation, all outstanding Awards shall be subject to the agreement of merger or consolidation. Such agreement shall provide for one or more of the following:

(a) The continuation of such outstanding Awards by the Company (if the Company is the surviving corporation).

(b) The assumption of such outstanding Awards by the surviving corporation or its parent, provided that the assumption of Options or SARs shall comply with section 424(a) of the Code (whether or not the Options are ISOs).

(c) The substitution by the surviving corporation or its parent of new awards for such outstanding Awards, provided that the substitution of Options or SARs shall comply with section 424(a) of the Code (whether or not the Options are ISOs).

(d) Full exercisability of outstanding Options and SARs and full vesting of the Common Shares subject to such Options and SARs, followed by the cancellation of such Options and SARs. The full exercisability of such Options and SARs and full vesting of such Common Shares may be contingent on the closing of such merger or consolidation. The Optionees shall be able to exercise such Options and SARs during a period of not less than five full business days preceding the closing date of such merger or consolidation, unless (i) a shorter period is required to permit a timely closing of such merger or consolidation and (ii) such shorter period still offers the Optionees a reasonable opportunity to exercise such Options and SARs. Any exercise of such Options and SARs during such period may be contingent on the closing of such merger or consolidation.

(e) The cancellation of outstanding Options and SARs and a payment to the Optionees equal to the excess of (i) the Fair Market Value of the Common Shares subject to such Options and SARs (whether or not such Options and SARs are then exercisable or such Common Shares are then vested) as of the closing date of such merger or consolidation over (ii) their Exercise Price. Such payment shall be made in the form of cash, cash equivalents, or securities of the surviving corporation or its parent with a Fair Market Value equal to the required amount. Such payment may be made in installments and may be deferred until the date or dates when such Options and SARs would have become exercisable or such Common Shares would have vested. Such payment may be subject to vesting based on the Optionee’s continuing Service, provided that the vesting schedule shall not be less favorable to the Optionee than the schedule under which such Options and SARs would have become exercisable or such Common Shares would have vested. If the Exercise Price of the Common Shares subject to such Options and SARs exceeds the Fair Market Value of such Common Shares, then such Options and SARs may be cancelled without making a payment to the Optionees. For purposes of this Subsection (e), the Fair Market Value of any security shall be determined without regard to any vesting conditions that may apply to such security.

(f) The cancellation of outstanding Stock Units and a payment to the Participants equal to the Fair Market Value of the Common Shares subject to such Stock Units (whether or not such Stock Units are then

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vested) as of the closing date of such merger or consolidation. Such payment shall be made in the form of cash, cash equivalents, or securities of the surviving corporation or its parent with a Fair Market Value equal to the required amount. Such payment may be made in installments and may be deferred until the date or dates when such Stock Units would have vested. Such payment may be subject to vesting based on the Participant’s continuing Service, provided that the vesting schedule shall not be less favorable to the Participant than the schedule under which such Stock Units would have vested. For purposes of this Subsection (f), the Fair Market Value of any security shall be determined without regard to any vesting conditions that may apply to such security.

ARTICLE 13. LIMITATION ON RIGHTS.

13.1 Retention Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an Employee, Non-Employee Member of the Board or Consultant. The Company and its Parents, Subsidiaries and Affiliates reserve the right to terminate the Service of any Employee, Non-Employee Member of the Board or Consultant at any time, with or without cause, subject to applicable laws, the Company’s certificate of incorporation and by-laws and a written employment agreement (if any).

13.2 Stockholders’ Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the time when a stock certificate for such Common Shares is issued or the acquisition of such Common Shares is entered upon the records of the duly authorized transfer agent of the Company or, if applicable, the time when he or she becomes entitled to receive such Common Shares by filing any required notice of exercise and paying any required Exercise Price. No adjustment shall be made for cash dividends or other rights for which the record date is prior to such time, except as expressly provided in the Plan.

13.3 Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing.

ARTICLE 14. WITHHOLDING TAXES.

14.1 General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied.

14.2 Share Withholding. To the extent that applicable law subjects a Participant to tax withholding obligations, the Committee may permit, and in its discretion may require, such Participant to satisfy all or part of such obligations by having the Company withhold all or a portion of any Common Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Common Shares that he or she previously acquired. Such Common Shares shall be valued at their Fair Market Value on the date they are withheld or surrendered. This Section 14.2 shall apply only to the minimum extent required by applicable tax laws.

ARTICLE 15. LIMITATION ON PAYMENTS.

15.1 Scope of Limitation. This Article 15 shall apply to an Award only if the independent auditors selected for this purpose by the Committee (the “Auditors”) determine that the after-tax value of such Award to the Participant, taking into account the effect of all federal, state and local income taxes, employment taxes and excise taxes applicable to the Participant (including the excise tax under section 4999 of the Code), will be greater after the application of this Article 15 than it was before the application of this Article 15. If this Article 15 applies to an Award, it shall supersede any contrary provision of the Plan or of any Award granted under the Plan

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15.2 Basic Rule. In the event that the Auditors determine that any payment or transfer by the Company under the Plan to or for the benefit of a Participant (a “Payment”) would be nondeductible by the Company for federal income tax purposes because of the provisions concerning “excess parachute payments” in section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Article 15, the “Reduced Amount” shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of section 280G of the Code.

15.3 Reduction of Payments. If the Auditors determine that any Payment would be nondeductible by the Company because of section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Article 15, present value shall be determined in accordance with section 280G(d)(4) of the Code. All determinations made by the Auditors under this Article 15 shall be binding upon the Company and the Participant and shall be made within 60 days of the date a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan.

15.4 Overpayments and Underpayments. As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company which should not have been made (an “Overpayment”) or that additional Payments which will not have been made by the Company could have been made (an “Underpayment”), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant that the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant that he or she shall repay to the Company, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount that is subject to taxation under section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code.

15.5 Related Corporations. For purposes of this Article 15, the term “Company” shall include affiliated corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code.

ARTICLE 16. FUTURE OF THE PLAN.

16.1 Term of the Plan. The Plan, as set forth herein, shall become effective on the date approved by the Company’s stockholders at the Annual Meeting in 2007. The Plan shall remain in effect until the earlier of (a) the date the Plan is terminated under Section 16.2 or (b) the 10^th anniversary of the date the Board adopted the Plan.

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The Plan shall serve as the successor to the Predecessor Plans, and no further option grants shall be made under the Predecessor Plans after the Effective Date. All options outstanding under the Predecessor Plans as of such date shall, immediately upon effectiveness of the Plan, be deemed incorporated into the Plan but shall remain outstanding in accordance with their terms. Each outstanding option under the Predecessor Plans shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such options with respect to their acquisition of Common Shares.

16.2 Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan.

16.3 Stockholder Approval. An amendment of the Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable laws, regulations or rules.

ARTICLE 17. DEFINITIONS.

17.1 “Affiliate” means any entity other than a Subsidiary, if the Company and/or one or more Subsidiaries own not less than 50% of such entity.

17.2 “Award” means any award of an Option, a SAR, a Restricted Share or a Stock Unit under the Plan.

17.3 “Board” means the Company’s Board of Directors, as constituted from time to time.

17.4 “Cause” means :

(a) An unauthorized use or disclosure by the Participant of the Company’s confidential information or trade secrets, which use or disclosure causes material harm to the Company;

(b) A material breach by the Participant of any agreement between the Participant and the Company;

(c) A material failure by the Participant to comply with the Company’s written policies or rules;

(d) The Participant’s conviction of, or plea of “guilty” or “no contest” to, a felony under the laws of the United States or any State thereof;

(e) The Participant’s gross misconduct, including (without limitation) fraud, embezzlement or dishonesty;

(f) A continuing failure by the Participant to perform assigned duties after receiving written notification of such failure from the Board; or

(g) A failure by the Participant to cooperate in good faith with a governmental or internal investigation of the Company or its directors, officers or employees, if the Company has requested the Participant’s cooperation.

17.5 “Change in Control” means:

(a) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (i) the continuing or surviving entity and (ii) any direct or indirect parent corporation of such continuing or surviving entity;

(b) The sale, transfer or other disposition of all or substantially all of the Company’s assets;

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(c) A change in the composition of the Board, as a result of which fewer than 50% of the incumbent directors are directors who either:

(i) Had been directors of the Company on the date 24 months prior to the date of such change in the composition of the Board (the “Original Directors”); or

(ii) Were appointed to the Board, or nominated for election to the Board, with the affirmative votes of at least a majority of the aggregate of (A) the Original Directors who were in office at the time of their appointment or nomination and (B) the directors whose appointment or nomination was previously approved in a manner consistent with this Paragraph (ii); or

(d) Any transaction as a result of which any person is the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing at least 50% of the total voting power represented by the Company’s then outstanding voting securities. For purposes of this Subsection (d), the term “person” shall have the same meaning as when used in sections 13(d) and 14(d) of the Exchange Act but shall exclude (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or of a Parent or Subsidiary and (ii) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company.

A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

17.6 “Code” means the Internal Revenue Code of 1986, as amended.

17.7 “Committee” means the Compensation Committee of the Board, as further described in Article 2.

17.8 “Common Share” means one share of the common stock of the Company.

17.9 “Company” means Blue Coat Systems, Inc., a Delaware corporation.

17.10 “Consultant” means a consultant or adviser who provides bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor.

17.11 “Effective Date” shall mean the date the Plan is effective as set forth in Section 16.1.

17.12 “Employee” means a common-law employee of the Company, a Parent, a Subsidiary or an Affiliate who is newly hired as a employee by the Company, or who is rehired following a bona fide period of interruption of employment, including persons who become new employees of the Company, a Parent, a Subsidiary or an Affiliate in connection with a merger or acquisition.

17.13 “Exchange Act” means the Securities Exchange Act of 1934, as amended.

17.14 “Exercise Price,” in the case of an Option, means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. “Exercise Price,” in the case of a SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common Share in determining the amount payable upon exercise of such SAR.

17.15 “Fair Market Value” means the closing price of the Common Shares as reported on Nasdaq or such other exchange on which the Common Shares are then traded on the applicable date. If Common Shares are no longer traded on a public U.S. securities market, the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. The Committee’s determination shall be conclusive and binding on all persons.

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17.16 “Involuntary Termination” means the termination of the Participant’s Service by reason of:

(a) The involuntary discharge of the Participant by the Company (or the Parent, Subsidiary or Affiliate employing him or her) for reasons other than Cause;

(b) such individual’s voluntary resignation following (A) a change in his or her position with the Company which materially reduces his or her level of responsibility, (B) a reduction in his or her level of base salary, or (C) a relocation of such individual’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Company without the individual’s consent; or

(c) Any other reason approved by the Committee.

17.17 “ISO” means an incentive stock option described in section 422(b) of the Code.

17.18 “Non-Employee Member of the Board” means a member of the Board who is not an Employee.

17.19 “NSO” means a stock option not described in sections 422 or 423 of the Code.

17.20 “Option” means an ISO or NSO granted under the Plan and entitling the holder to purchase Common Shares.

17.21 “Optionee” means an individual or estate holding an Option or SAR.

17.22 “Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date.

17.23 “Participant” means an individual or estate holding an Award.

17.24 “Plan” means this Blue Coat Systems, Inc. 2007 Stock Incentive Plan, as amended from time to time.

17.25 “Predecessor Plans” means the Company’s existing 1999 Stock Incentive Plan, 2000 Supplemental Stock Option Plan, 1999 Director Option Plan, and 2007 New Employee Stock Incentive Plan.

17.26 “Restricted Share” means a Common Share awarded under the Plan.

17.27 “Restricted Stock Agreement” means the agreement between the Company and the recipient of a Restricted Share that contains the terms, conditions and restrictions pertaining to such Restricted Share.

17.28 “SAR” means a stock appreciation right granted under the Plan.

17.29 “SAR Agreement” means the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his or her SAR.

17.30 “Service” means service as an Employee, Non-Employee Member of the Board or Consultant.

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17.31 “Stock Option Agreement” means the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his or her Option.

17.32 “Stock Unit” means a bookkeeping entry representing the equivalent of one Common Share, as awarded under the Plan.

17.33 “Stock Unit Agreement” means the agreement between the Company and the recipient of a Stock Unit that contains the terms, conditions and restrictions pertaining to such Stock Unit.

17.34 “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

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APPENDIX A

PERFORMANCE CRITERIA FOR RESTRICTED SHARES AND STOCK UNITS

The Committee may establish milestones derived from the following criteria when it makes Awards of Restricted Shares or Stock Units that vest entirely or in part on the basis of performance:

The performance goals that may be used by the Committee for such awards shall consist of: operating profits (including EBITDA), net profits, earnings per share, profit returns and margins, gross profit margins, revenues, return on assets, stockholder return and/or value, stock price and working capital. Performance goals may be measured solely on a corporate, subsidiary or business unit basis, or a combination thereof. Further, performance criteria may reflect absolute entity performance or a relative comparison of entity performance to the performance of a peer group of entities or other external measure of the selected performance criteria. Profit, earnings and revenues used for any performance goal measurement shall exclude: asset write-downs; accruals for historic environmental obligations; effect of changes in tax law or rate on deferred tax liabilities; accruals for Board-approved reorganization and restructuring programs; uninsured catastrophic property losses; the cumulative effect of changes in accounting principles; and any extraordinary non-recurring items as described in Accounting Principles Board Opinion No. 30 and/or in management’s discussion and analysis of financial performance appearing in the Company’s annual report to stockholders for the applicable year.

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EX-10.39

Exhibit 10.39

BLUE COAT SYSTEMS, INC.

2007 STOCK INCENTIVE PLAN

NOTICE OF RESTRICTED STOCK AWARD

(US EMPLOYEES)

You have been granted restricted shares of Common Stock (the “Shares”) of Blue Coat Systems, Inc. (the “Company”), in consideration for your services with the Company, on the following terms:

Name of Recipient:	«Name»
Total Number of Shares Granted:	«TotalShares»
Board Approval Date:	[Date]
Fair Market Value per Share on Grant Date:	$[Value Per Share]
Total Fair Market Value of Award on Grant Date:	$[Total Value]
Vesting Commencement Date:	«VestDay»
Quarterly Vesting Dates:	March 15th; June 15th; September 15th; December 15th
Vesting Schedule:	________ [specify number] Shares will vest on __________ (the “Initial Vesting Date”), subject to your completion of continuous service as an employee or consultant of the Company or a subsidiary of the Company (“Service”) from the Vesting Commencement Date through the Initial Vesting Date. Thereafter, an additional 6.25% of the Shares will vest on each of the next 12 Quarterly Vesting Dates, subject to your completion of continuous Service during the period between Quarterly Vesting Dates. ____ Shares will vest on _____ (“Final Vesting Date”), subject to your completion of continuous Service during the period between the last Quarterly Vesting Date and the Final Vesting Date.

You and the Company agree that these Shares are awarded under and governed by the terms and conditions of the Restricted Stock Agreement, which is attached to and made a part of this document, and the Company’s 2007 Stock Incentive Plan (the “Plan”).

You further agree that the Company may deliver by email all documents relating to the Plan or this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a web site maintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by email. By your signature below, you agree to pay any withholding taxes due on award, vesting or transfer of the Shares.

RECIPIENT:	BLUE COAT SYSTEMS, INC.
	By:
	Title:

BLUE COAT SYSTEMS, INC.

2007 STOCK INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

(US EMPLOYEES)

Grant	On the terms and conditions set forth in the Notice of Restricted Stock Award and this Restricted Stock Agreement (“Agreement”), the Company hereby grants to you the number of Shares set forth in the Notice of Restricted Stock Award. Terms not defined in this Agreement shall have the meaning set forth in the 2007 Stock Incentive Plan (the “Plan”), incorporated herein by reference.
Payment for Shares	No payment is required for the Shares that you are receiving, except for satisfying any withholding taxes that may be due as a result of the grant of this award, the vesting of the Shares or the transfer of the Shares.
Vesting	The Shares will vest and become non-forfeitable in installments, as shown in the Notice of Restricted Stock Award. No additional Shares vest after your service as a Non-Employee Member of the Board or an Employee or Consultant of the Company or a Parent, Subsidiary or Affiliate (“Service”) has terminated for any reason.
Change in Control	In the event of a Change in Control, then the vesting of the Shares will not automatically accelerate unless this award is, in connection with the Change in Control, not to be assumed by the successor corporation (or its parent) or to be replaced with a comparable award for shares of the capital stock of the successor corporation (or its parent). The determination of award comparability will be made by the Committee, and its determination will be final, binding and conclusive. The vesting of the Shares may also be accelerated in the event of certain reorganizations, as provided under Section 12.3 of the Plan.
Involuntary Termination After a Change in Control	If in connection with a Change in Control the award is assumed by the successor corporation (or its parent) and you experience an Involuntary Termination within eighteen months following such Change in Control, the vesting of the Shares will automatically accelerate so that this award will, immediately before the effective date of the Involuntary Termination, become fully vested for all of the Shares at the time subject to this award.

	An Involuntary Termination means the termination of your Service by reason of: (a) your involuntary dismissal or discharge by the Company (or the Parent, Subsidiary or Affiliate employing you) for reasons other than Cause; (b) your voluntary resignation following (1) a change in your position with the Company which materially reduces your level of responsibility, (2) a reduction in your level of base salary or (3) a relocation of your place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Company without your consent; or any other reason approved by the Committee.
Forfeiture	If your Service terminates for any reason, then this award will automatically terminate (and the Shares shall be forfeited) with respect to any Shares that (a) have not vested before your termination date and (b) do not vest as a result of the termination. You will receive no payment for any Shares that are forfeited under this Agreement. The Company determines when your Service terminates for this purpose.
Leaves of Absence and Part-Time Work	For purposes of this award, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing and if continued crediting of Service is required by applicable law, the Company’s leave of absence policy or the terms of your leave. But your Service terminates when the approved leave ends, unless you immediately return to active work. If you go on a leave of absence, then the vesting schedule specified in the Notice of Restricted Stock Award may be adjusted in accordance with the Company’s leave of absence policy or the terms of your leave.
Stock Certificates	The certificates for Shares that have not vested may be held in escrow by the Company.
Restrictions on Delivery	The Company reserves the right to restrict, in whole or in part, the delivery of vested shares pursuant to your award prior to the satisfaction of all legal requirements relating to the issuance of such shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing.
Voting Rights	You may vote your Shares even before they vest until or unless such Shares are forfeited.
Withholding Taxes	No stock certificates will be released to you unless you have made arrangements, acceptable to the Company, to pay any and all withholding taxes that may be due as a result of (a) the grant of this award, (b) the vesting of the Shares or (c) the transfer of the Shares to you. With the Company’s consent, these arrangements may include (i) withholding Shares of Company stock granted hereunder with a Fair Market Value equal to or less than the minimum amount of taxes the Company is required to withhold, (ii) surrendering shares that

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	you previously acquired or (iii) the payment of withholding taxes from the proceeds of the sale of Shares through a Company-approved broker. The Fair Market Value of the shares you surrender, determined as of the date taxes otherwise would have been withheld in cash, will be applied as a credit against the withholding taxes. The Company reserves the right to withhold Shares pursuant to clause (i) or to withhold from any other amounts due to you from the Company if you have not satisfied your tax withholding obligations.
Restrictions on Resale	Unvested Shares may not be transferred by you, and the Company may take such action as it deems appropriate to enforce the foregoing. You agree not to sell any vested shares when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply during your Service and for such period of time after the termination of your Service as the Company may specify.
No Retention Rights	None of the Notice of Restricted Stock Award, this Agreement, or your award gives you the right to be retained by the Company or a Parent, Subsidiary or Affiliate in any capacity. The Company and any Parent, Subsidiary or Affiliate reserve the right to terminate your Service at any time, with or without cause.
Adjustments	In the event of a stock split, a stock dividend or a similar change in Company stock, the number of Shares that have not been transferred to you and remain subject to this award may be adjusted pursuant to the Plan.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions).
The Plan and Other Agreements	The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Company’s Finance Department. This Agreement, together with the Notice of Restricted Stock Award and the Plan, constitute the entire understanding between you and the Company regarding this award. Any prior agreements, commitments or negotiations concerning this award are superseded. This Agreement may be amended only by another written agreement between the parties.

You agree to all of the terms and conditions described above and in the Company’s 2007 Stock Incentive Plan.

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EX-10.40

Exhibit 10.40

BLUE COAT SYSTEMS, INC.

2007 STOCK INCENTIVE PLAN

STOCK OPTION AGREEMENT

(U.S. EMPLOYEES)

Grant of Option	You have been granted an option to purchase up to the number of Common Shares specified in the Notice of Stock Option Grant (“Option Shares”), effective on the Date of Grant set forth in such Notice of Stock Option Grant. Terms not defined in this Stock Option Agreement shall have the meaning set forth in the 2007 Stock Incentive Plan (the “Plan”) incorporated herein by reference..
Tax Treatment	This option is intended to be an incentive stock option under Section 422 of the Internal Revenue Code (or ISO) or a nonstatutory option or NSO), as provided in the Notice of Stock Option Grant. However, notwithstanding any designation in such Notice as an ISO, to the extent that the aggregate fair market value (determined as of the applicable Date of Grant) of the Common Stock for which one or more options granted to you may for the first time become exercisable exceeds the $100,000 or as otherwise required by federal tax laws, this option shall be treated as an NSO. You are responsible for any taxes owed by you in connection with this option.
Vesting	This option becomes exercisable in installments, as shown in the Notice of Stock Option Grant. No additional shares become exercisable after your service as a Non-Employee Member of the Board or an Employee or Consultant of the Company or a Parent, Subsidiary or Affiliate (“Service”) has terminated for any reason.
Term	This option expires in any event on the 10th anniversary of the Date of Grant, as shown in the Notice of Stock Option Grant. (It will expire earlier if your Service terminates, as described below.) If the expiration date of your option is not a business day and you wish to exercise your option by the expiration date, it is your responsibility to ensure that you have validly exercised your option prior to the expiration date. This option may also be subject to earlier termination upon a Change in Control or other corporate events, as described in the Plan.

Regular Termination	If your Service terminates for any reason except death, Permanent Disability or Cause, then this option will expire on the date 3 months after your termination date. The Company determines when your Service terminates for this purpose.
Permanent Disability	If your Service terminates because of your Permanent Disability, then this option will expire on the date 12 months after your termination date. The Company determines when your Service terminates for this purpose. Permanent Disability means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than 12 months.
Death	If you die while in Service, the option will expire on the date 12 months after the date of death.
Misconduct	If your Service terminates for Cause, then this option will terminate immediately and cease to be outstanding.
Change in Control	In the event of a Change in Control, then the vesting of this option will not automatically accelerate unless this option is, in connection with the Change in Control, not to be assumed by the successor corporation (or its parent) or to be replaced with a comparable option for shares of the capital stock of the successor corporation (or its parent). The determination of option comparability will be made by the Committee, and its determination will be final, binding and conclusive. The exercisability of this option may also be accelerated in the event of certain reorganizations, as provided under Section 12.3 of the Plan.
Involuntary Termination After a Change in Control	If in connection with a Change in Control the option is assumed by the successor corporation (or its parent) and you experience an Involuntary Termination within eighteen months following such Change in Control, the vesting of this option will automatically accelerate so that this option will, immediately before the effective date of the Involuntary Termination, become fully exercisable for all of the Common Shares at the time subject to this option and may be exercised for any or all of those shares as fully-vested Common Shares.

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	An Involuntary Termination means the termination of your Service by reason of: (a) your involuntary dismissal or discharge by the Company (or the Parent, Subsidiary or Affiliate employing you) for reasons other than Cause; (b) your voluntary resignation following (1) a change in your position with the Company which materially reduces your level of responsibility, (2) a reduction in your level of base salary or (3) a relocation of your place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Company without your consent; or any other reason approved by the Committee.
Restrictions on Exercise	The obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to your option prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing.
Notice of Exercise	When you wish to exercise this option, you must do so in the form and manner as specified by the Company at that time. The exercise will be effective only upon delivery of any form of notice then required, together with payment of the exercise price as described below. If someone else wants to exercise this option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.
Form of Payment	When you submit your notice of exercise, you must include payment of the option exercise price for the shares you are purchasing. To the extent permitted by applicable law, payment may be made in one (or a combination of two or more) of the following forms:
	•        Cash or check made payable to the Company.
	•        With the Company’s consent, certificates for, or attestations of ownership of, Common Shares that you already own, along with any forms needed to effect a transfer of those shares to the Company. The Fair Market Value of the shares, determined as of the effective date of the option exercise, will be applied to the option exercise price.

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	•        To the extent permitted by applicable law, irrevocable directions to a securities broker approved by the Company to sell all or part of your option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the option exercise price and any withholding taxes. (The balance of the sale proceeds, if any, will be delivered to you.) The Company may require a specific notice of exercise, which may require information from the broker, to use this method of exercise.
Withholding Taxes and Stock Withholding	You will not be allowed to exercise this option unless you make arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the option exercise. With the Company’s consent, these arrangements may include withholding Common Shares that otherwise would be issued to you when you exercise this option, with respect to up to the statutory minimum withholding amount required by applicable tax law. Such withheld Common Shares shall be valued at their Fair Market Value on the date they are withheld. The Company shall not be required to issue any Common Shares with respect to this option until such tax withholding obligations are satisfied.
Restrictions on Resale	You agree not to sell any option shares at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as your Service continues and for such period of time after the termination of your Service as the Company may specify.
Transfer of Option	Before your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will or by a beneficiary designation. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your option in any other way.
Employment or Retention Rights	None of the Notice of Stock Option Grant, this Stock Option Agreement or your option gives you the right to be retained by the Company or a Parent, Subsidiary or Affiliate in any capacity. The Company and any Parent, Subsidiary or Affiliate reserve the right to terminate your Service at any time, with or without cause.

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Stockholder Rights	You, or your estate or heirs, have no rights as a stockholder of the Company under this option and with respect to the Option Shares until you have exercised this option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this option, except as described in the Plan.
Adjustments	In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan.
Applicable Law	This Stock Option Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions).
The Plan and Other Agreements	The text of the Plan is incorporated in this Agreement by reference. A copy of the Plan is available on the Company’s intranet or by request to the Company’s Finance Department.
	This Stock Option Agreement, together with the Notice of Stock Option Grant and the Plan constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. This Agreement may be amended only by another written agreement signed by both parties.

YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE COMPANY’S 2007 STOCK INCENTIVE PLAN.

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EX-10.41

Exhibit 10.41

BLUE COAT SYSTEMS, INC.

EXECUTIVE SEPARATION POLICY

Effective November 15, 2007

WHEREAS, each executive of Blue Coat Systems, Inc. (the “Company”) is employed on an “at will” basis;

WHEREAS, the Company acknowledges that, in the event an executive’s employment is terminated by the Company, it is likely that it will take the executive a period of time to locate new employment.

WHEREAS, the Company has previously agreed to make limited separation payments to certain executives in the event such executives’ employment is terminated other than for cause and believes it appropriate to establish an Executive Separation Policy that is applicable to its Executive Officers (within the meaning of Section 16 of the Securities Exchange Act of 1934) and such other executives as may be designated by the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”) from time to time (“Executives”).

The following is the Company’s policy with respect to separation compensation payable to Executives:

In the event an Executive’s employment with the Company is terminated either by the Company without Cause, or as a result of the Executive’s resignation for Good Reason, and subject to the Executive’s execution, before he or she receives any of the benefits provided for in this paragraph, of a release of claims against the Company in substantially the terms set forth in Exhibit A (attached hereto) and such release becoming effective in accordance with its terms, the Executive will be entitled to receive an amount equal to six months of his or her base salary as in effect on the date employment terminates (the “Separation Payment’). The Separation Payment will be subject to applicable income and employment tax withholding and will be paid in accordance with the Company’s standard payroll procedures.

The Separation Payment under this Separation Policy shall be paid in one lump sum from the general assets of the Company on the first scheduled payroll date of the Company following the latest of the following dates: the Executive’s last day of employment, the date the Company receives the Executive’s signed release, or the date the revocation period (if any) specified in the release expires. The Company shall complete the form of release and deliver it to the Executive within 30 days after his or her employment terminates. The form of the release will specify how much time such Executive has to sign it and whether there is a revocation period.

This Separation Policy and the Separation Payments provided for under this policy are intended to qualify for the short-term deferral exception to Section 409A described in Treasury Regulation Section 1.409A-1(b)(4) to the maximum extent possible, and to the extent they do not so qualify, they are intended to qualify for the involuntary separation pay plan exception to Section 409A described in Treasury Regulation Section 1.409A-1(b)(9)(iii) to the maximum extent possible. Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” within the meaning of Section 409A and the regulations thereunder, as determined by the Compensation Committee, as of the date of Executive’s “separation from service” as defined in Treasury Regulation Section 1.409A-1(h) (or any successor regulation) and if any payments or entitlements provided for in this Agreement constitute a “deferral of compensation” within the meaning of Section 409A and cannot be paid or provided in the manner provided herein without subjecting Executive to additional tax, interest or penalties under Section 409A, then any such payment and/or entitlement which is payable during the first six months following Executive’s “separation from service” shall be paid or provided to Executive in a lump sum on the first business day immediately following the six-month anniversary of Executive’s “separation from service”. If this provision applies, it shall supersede any contrary provision of this Separation Policy.

The following definitions apply to this Separation Policy:

(A) “Cause” for termination of an Executive’s employment relationship with the Company will exist under only the following circumstances:

(i) any willful and material act of personal dishonesty taken by the Executive in connection with his or her job responsibilities which is intended to result in the Executive’s substantial personal enrichment;

(ii) any willful act of fraud, embezzlement or other misconduct that materially damages the Company;

(iii) any willful failure to follow the legal directives of the Executive’s immediate supervisor (other than failure to meet performance goals, objectives or measures), in each case in a manner that results in material damage to the Company and that is not corrected within thirty (30) days following written notice thereof to the Executive by his or her immediate supervisor, such notice to state with specificity the nature of the failure; provided that if the failure cannot be reasonably be corrected by the Executive within thirty (30) days of written notice thereof, correction shall be commenced by the Executive within thirty (30) days and may be corrected within a reasonable period thereafter; or

(iv) any willful and material breach of any agreement with the Company that is not corrected within thirty (30) days following written notice thereof to the Executive by his or her immediate supervisor, such notice to state with specificity the nature of the breach; provided that if the breach cannot reasonably be corrected within thirty (30) days of written notice thereof, correction shall be commenced by the Executive within thirty (30) days and may be corrected within a reasonable period thereafter.

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(B) “Good Reason” for the Executive to voluntarily terminate his or her employment relationship with the Company will exist under only the following circumstances:

(i) without the Executive’s express written consent, a material diminution in the authority, duties or responsibilities of the supervisor to whom the Executive is required to report, or a material diminution in the Executive’s duties, authority or responsibilities relative to his or her duties, authority or responsibilities in effect immediately prior to such reduction, or the Executive’s removal from such authority, duties and responsibilities, unless he or she is provided with comparable duties, position and responsibilities that do not represent a material diminution;

(ii) without the Executive’s express written consent, a reduction by Blue Coat of his or her base salary as in effect immediately prior to such reduction, other than in connection with an action affecting a majority of the Executives covered by the Separation Policy;

(iii) without the Executive’s express written consent, a relocation that results in a material change in the geographic location at which the Executive must perform his or her services; or

(iv) the Company’s failure to cause this Agreement and its obligations hereunder to be expressly assumed by its successor in the event of a Change in Control, as defined in the Company’s 2007 Stock Incentive Plan.

For the Executive to receive the benefits under this Separation Policy as a result of a voluntary resignation for Good Reason, all of the following requirements must be satisfied: (1) the Executive must provide notice to the Company of his or her intent to assert Good Reason for resignation within 90 days of the initial existence of one or more of the conditions set forth in subclauses (i) through (iv); (2) the Company will have 30 days from the date of such notice to remedy the condition and, if it does so, the Executive may withdraw his or her resignation or may resign with no benefits under this Separation Policy; and (3) any termination of employment due to resignation for Good Reason must occur within two years of the initial existence of one or more of the conditions set forth in subclauses (i) through (iv). Should the Company remedy the condition as set forth above and then one or more of the conditions arises again within two years following the initial occurrence of a condition, then the Executive may assert Good Reason again subject to all of the conditions set forth herein.

General Provisions

The Company (or its acquiror or successor) will withhold applicable taxes and other payroll deductions from any payment under this Separation Policy as required by law.

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No amounts under this Separation Policy shall actually be funded, set aside or otherwise segregated prior to payment. The obligation to pay the Separation Payments hereunder shall at all times be an unfunded and unsecured obligation of the Company and be paid out of the general assets of the Company (or its acquiror or successor). Participants shall have the status of general creditors.

No participant shall have the right to alienate, pledge or encumber his or her interest in this Separation Policy, and such interest shall not (to the extent permitted by law) be subject in any way to the claims of the participant’s creditors or to attachment, execution or other process of law.

This Separation Policy supersedes and replaces any prior agreements, representations or understandings, whether written, oral or implied, between the Employee and the Company with respect to the subject matter hereof.

No action of the Company in establishing this Separation Policy, no action taken under this Separation Policy and no provision of this Separation Policy itself shall be construed to grant any person the right to remain in the employ of the Company or its subsidiaries for any period of specific duration. Rather, each Executive is employed “at will,” which means that either such employee or the Company may terminate the employment relationship at any time for any reason, with or without cause.

The Board of Directors or the Compensation Committee may amend, revise, suspend or terminate this Separation Policy from time to time in their sole discretion, provided that no amendment or termination may be effected after the date that the Company enters into a definitive agreement to effect a Change in Control. The determinations of the Board of Directors or the Compensation Committee with regard to this Separation Policy will be final and binding on all participants.

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EXHIBIT A

GENERAL RELEASE OF ALL CLAIMS

In consideration of the Separation Payment to be paid to ____________ (“Executive”) by Blue Coat Systems, Inc. ( the “Company”), as described in the attached Company Executive Separation Policy (the “Policy”), Executive, on Executive’s own behalf and on behalf of Executive’s heirs, executors, administrators and assigns, to the fullest extent permitted by applicable law, hereby fully and forever releases and discharges the Company and its past, present and future directors, officers, employees, agents, successors, predecessors, subsidiaries, parent, shareholders, employee benefit plans and assigns (together called “the Releasees”), from all known and unknown claims and causes of action including, without limitation, any claims or causes of action arising out of or relating in any way to Executive’s employment with the Company, including the termination of that employment.

1. Executive understands and agrees that this General Release of All Claims (the “Release”) is a full and complete waiver of all claims including, without limitation, claims of wrongful discharge, constructive discharge, breach of contract, breach of the covenant of good faith and fair dealing, harassment, retaliation, discrimination, violation of public policy, defamation, invasion of privacy, interference with a leave of absence, personal injury or emotional distress and claims under Title VII of the Civil Rights Act of 1964, the Fair Labor Standards Act, the Equal Pay Act of 1963, the Americans With Disabilities Act, the Civil Rights Act of 1866, the Age Discrimination in Employment Act of 1967 (ADEA), the California Labor Code, the California Fair Employment and Housing Act or any other federal or state law or regulation relating to employment or employment discrimination. Executive further understands and agrees that this waiver includes all claims, known and unknown, to the greatest extent permitted by applicable law.

2. Executive also hereby agrees that nothing contained in this Release shall constitute or be treated as an admission of liability or wrongdoing by the Releasees or Executive.

3. In addition, Executive hereby expressly waives any and all rights and benefits conferred upon Executive by the provisions of Section 1542 of the Civil Code of the State of California, which states as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.

4. If any provision of this Release is found to be unenforceable, it shall not affect the enforceability of the remaining provisions and the court shall enforce all remaining provisions to the fullest extent permitted by applicable slaw.

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5. This Release constitutes the entire agreement between Executive and Releasees with regard to the subject matter of this Release. It supersedes any other agreements, representations or understandings, whether oral or written and whether express or implied, which relate to the subject matter of this Release. Executive understands and agrees that this Release may be modified only in a written document signed by Executive and a duly authorized officer of the Company.

6. Executive agrees that the Company shall have no duty to provide to Executive any severance benefits described in the Separation Policy unless and until Executive (a) has signed the Company’s Proprietary Information and Inventions Agreement (“PIIA”) and (b) has returned to the Company any and all of the Company’s property in Executive’s possession or under Executive’s control (including, but not limited to, cellular phones; computers; keys; credit cards; access badges; Company files or documents, including copies thereof; or facsimile machines). Executive further agrees that at all times in the future Executive shall remain bound by the PIIA.

7. [INCLUDE PARAGRAPHS 7 AND 8 FOR ANY EMPLOYEE WHO IS 40 OR OVER AT TIME OF TERMINATION] Executive understands that Executive has the right to consult with an attorney before signing this Release. Executive also understands that Executive has twenty-one days after receipt of this Release to review and consider this Release, discuss it with an attorney of Executive’s own choosing, and decide to execute it or not execute it. Executive also understands that Executive may revoke this Release during a period of seven days after Executive signs it and that this Release will not become effective for seven days after Executive signs it (and then only if Executive does not revoke it). In order to revoke this Release, within seven days after Executive executes this Release Executive must deliver to _____________ at the Company a letter stating that Executive is revoking it.

8. Executive understands that if Executive chooses to revoke this Release within seven days after Executive signs it, Executive will not receive any Separation Payment and the Release will have no effect.

9. Executive agrees not to disclose to others the terms of this Release, except that Executive may disclose such information to Executive’s spouse and to Executive’s attorney or accountant in order for such attorney or accountant to render services to Executive related to this Release.

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10. Executive states that before signing this Release, Executive:

• Has read it,

• Understands it,

• Knows that he or she is giving up important rights,

• Is aware of his or her right to consult an attorney before signing it, and

• Has signed it knowingly and voluntarily.

Date:
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EX-10.42

Exhibit 10.42

Design & Manufacturing Services Agreement

DESIGN & MANUFACTURING SERVICES AGREEMENT

This Design & Manufacturing Services Agreement (“Agreement”) is entered into as of this 15 day of February, 2008 (“Effective Date”) between Inventec Enterprise System Corporation (“Vendor”), a Taiwan corporation having its principal place of business at No 3, Gongye 1st Road, Taoyuan County 324, Pingjhen City, , Taiwan, R.O.C., and Blue Coat Systems, Inc., a Delaware corporation having its principal place of business at 420 North Mary Avenue, Sunnyvale, CA 94085 (“Blue Coat”).

RECITALS

WHEREAS, Blue Coat desires that Vendor perform certain design and manufacturing services, including purchasing, assembly and manufacture, testing and delivery of the products defined in Product Design Document(s);

WHEREAS, the parties desire to define the general terms and conditions governing Vendor’s manufacture and delivery of such products, all as further set forth in this Agreement; and

WHEREAS, Blue Coat intends to work with Vendor to design, manufacture and fulfill products under the “Ruby” project.

NOW THEREFORE, in consideration of the mutual covenants, promises and undertakings set forth herein, and for other good and valuable consideration, Blue Coat and the Vendor agree as follows:

1. DEFINITIONS

1.1 “Affiliate” shall mean (a) any company owned or controlled to the extent of at least fifty percent (50%) of its issued and voting capital by a party to this Agreement and any other company so owned or controlled (directly or indirectly) by any such company or the owner of any such company, or (b) any partnership, joint venture or other entity directly or indirectly controlled by, controlling, or under common control of, to the extent of fifty percent (50%) or more of voting power (or otherwise having power to control its general activities), a party to this Agreement.

1.2 “Blue Coat Consigned Items” shall mean, collectively, the Blue Coat Equipment and Blue Coat Material.

1.3 “Blue Coat Equipment” shall mean the test equipment, fixtures, ovens, appurtenances, test hardware and software, and any other items provided or to be provided by Blue Coat to Vendor, as listed in the applicable Product Information Document.

1.4 “Blue Coat Material” shall mean any Components or materials that are used to manufacture a Product that are provided by Blue Coat to Vendor irrespective of any payment by Vendor for such Components or materials.

1.5 “Blue Coat Requirements Document” shall mean Blue Coat’s requirements document associated with a Product as amended in writing pursuant to the terms of this Agreement.

1.6 “Components” shall mean the component parts that make up a finished Product.

1.7 “Component Cost” shall mean the cost paid by Vendor for a Component.

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Design & Manufacturing Services Agreement

1.8 “Component Lead Time” shall mean the minimum amount of time necessary to purchase a Component in order to meet the current Forecast. Product Lead Times may be specified in a Product Information Document.

1.9 “Customer” shall mean an end user of a Product or a channel partner or service provider of Blue Coat.

1.10 “Design Services” shall mean printed circuit board design, printed circuit board assembly design, mechanical design, firmware design, electrical design, system or sub-system design, component engineering or other design services as specified in a Statement of Work.

1.11 “DVT Prototype” shall mean the design validation testing prototype and associated test completion documents to be completed and delivered to Blue Coat by Vendor after Blue Coat’s acceptance of the EVT Prototype.

1.12 “EVT Prototype” shall mean the engineering verification testing prototype and associated test completion documents to be completed and delivered to Blue Coat by Vendor after Blue Coat’s acceptance of the Product Specifications.

1.13 “Excess Components” shall mean a Unique and Special Component on hand at Vendor’s site that is in excess of the amount needed for the current Forecast; provided, however, that such Component was purchased by Vendor in order to meet a previous Forecast. A Component shall not be an “Excess Component” if it was purchased outside of the Component Lead Time necessary to meet the Forecast in effect at the time of purchase.

1.14 “Final Deliverable” shall mean the Deliverable that is delivered to Blue Coat by Vendor after Blue Coat’s acceptance of the PVT Prototype and completion of first article inspections of a Product by Blue Coat . The Final Deliverable shall be the Product to be manufactured under the Manufacturing Services Agreement.

1.15 “Forecast” shall have the definition set forth in Section 7.4.

1.16 “Long Lead Time Component” shall mean a Component that has a lead time greater than the associated Product Lead Time.

1.17 “Min/Max Components” shall mean the Components necessary to build the minimum and maximum levels of Product inventory required by Blue Coat, as specified in a Product Information Document.

1.18 “MOQ Components” shall mean the Components purchased by Vendor pursuant to minimum order requirements from Supplier as approved by Vendor in writing and specified in a Product Information Document.

1.19 “NCNR Components” shall mean non-cancelable and non-returnable Components purchased by Vendor as agreed to in writing by Blue Coat and specified in a Product Information Document.

1.20 “Obsolete Component” shall mean a Unique and Special Component that will no longer be utilized in the manufacture of a Product. A Component shall not be an “Obsolete Component” if it was purchased outside of the Component Lead Time necessary to meet the Forecast in effect at the time of purchase.

1.21 “Product Lead Time” shall mean the pre-determined amount of time that is agreed by the parties and set forth in a Product Information Document.

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Design & Manufacturing Services Agreement

1.22 “Product” shall mean the product set forth in a Product Information Document.

1.23 “Product Design Document” shall mean the document that contains the information and details set forth in Exhibit A and other information related to the manufacture and ownership of a Product (as updated by the parties from time to time). Without limiting the foregoing, a Product Design Document shall contain the following items: (a) Bill of Materials, (b) identification of Unique Components, (c) Product Specifications, (d) identification of any Tooling and Blue Coat Equipment necessary or useful to the manufacture of the Product, (e) ownership of any Tooling and Blue Coat Equipment, (d) Test Plan, (f) the approved vendor list (AVL) and (g) any associated diagrams, drawings, data, formulas, processes, procedures and other documentation related or necessary to the manufacture of the Product.

1.24 “Product Information Document” shall mean a document that contains the associated Product Design Document and any other information and detail related to the manufacture, sale and cost of a Product substantially in the form set forth in Exhibit B.

1.25 “Product Specifications” shall mean the technical and functional specifications for a Product as outlined in the Product Design Document (as may be amended by the parties in writing pursuant to the terms of this Agreement).

1.26 “PVT Prototype” shall mean the production validation testing prototype and associated test completion documents to be completed and delivered to Blue Coat by Vendor after acceptance by Blue Coat of the DVT Prototype.

1.27 “Slow Moving Inventory” shall mean a Unique Component that has been on hand at Vendor’s site for more than six (6) months provided such Component was not purchased outside of the Component Lead Time necessary to meet the Forecast in effect at the time of purchase.

1.28 “Special Components” shall mean NCNR Components, MOQ Components, Long Lead Time Components and Min/Max Components for a particular Product.

1.29 “Statement of Work” shall mean the written statement of work for each Product or design project that contains (at a minimum) the information set forth in Exhibit C (as amended in writing from time to time upon mutual agreement of the parties).

1.30 “Supplier” shall mean a third party supplier of Components, Blue Coat Equipment, Blue Coat Materials or Tooling.

1.31 “Test Plan” shall mean the specifications for testing a Product that are defined by Vendor and approved by Blue Coat for each Product.

1.32 “Transformation Cost” shall mean the cost incurred in manufacturing a Product other than Component Costs as specified in a Product Information Document. Transformation Costs shall include, but not be limited to, labor costs, logistics costs, profit and other overhead costs.

1.33 “Total Product Cost” shall mean the Component Costs plus the Transformation Costs, as specified in a Product Information Document.

1.34 “Tooling” shall mean the tooling, equipment or other materials used in the manufacture of a Product that are supplied by a third party and are paid for by Blue Coat in accordance with the terms of this Agreement.

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Design & Manufacturing Services Agreement

1.35 “Unique Components” shall mean finished goods, work in process, or Components that are specific and unique to a Product and that is not sold by a Supplier in the ordinary course of business to any party (other than Blue Coat) as specified in a Product Information Document.

2. PROCESS

2.1 Blue Coat Requirements Document. Blue Coat shall be responsible for the definition of the Product and delivery of the Blue Coat Requirements Document.

2.2 Proposal. Upon receipt of the Blue Coat Requirements Document, Vendor shall provide a proposal to Blue Coat outlining the estimated costs, delivery dates, schedules and Deliverables associated with such Product defined in the Blue Coat Requirements Document. If agreed upon by Blue Coat, the parties shall execute a Statement of Work that embodies the terms such proposal.

2.3 Design Services. Vendor shall perform the Design Services as outlined in a Statement of Work and the Blue Coat Requirements Document. This shall include, but not be limited to completion and acceptance (as defined in Section 3) of each of the following Deliverables: Product Specifications, Test Plan, EVT Prototype, DVT Prototype, PVT Prototype, Final Deliverable and the Product Design Document. If the terms of a Product Design Document and this Agreement shall conflict in any way, the terms of the Agreement shall prevail.

2.4 Testing. Vendor shall perform Product testing in accordance with the Test Plan.

3. ACCEPTANCE. When Vendor has completed a Deliverable, Vendor will deliver it to Blue Coat. Blue Coat will accept or reject a Deliverable within thirty (30) days after delivery (unless another time period is specified in a Statement of Work). If Blue Coat rejects a Deliverable, Vendor will use best commercial efforts to promptly correct the failures properly specified in the rejection notice (at no additional cost to Blue Coat) within ten (10) days. When it believes that it has made the necessary corrections, Vendor will again deliver the Deliverable to Blue Coat and the acceptance/rejection/correction provisions above shall be reapplied until the Deliverable is accepted; provided, however, that upon the second or any subsequent rejection, Blue Coat may terminate this Agreement by ten (10) days notice unless the Deliverable is accepted during the notice period.

4. MANUFACTURE AND SALE OF PRODUCTS. Upon the completion and agreement of a Product Information Document, Vendor agrees that it will manufacture and sell to Blue Coat the Product(s) in accordance with the associated Product Specifications and other terms set forth in this Agreement and the associated Product Information Document. Affiliates will also be able to purchase Products pursuant to the terms of this Agreement provided that Blue Coat warrants that any and all obligations and debts of the Affiliates will be discharged in a timely fashion. Blue Coat and the Affiliates agree that they shall be jointly and severally liable to Vendor for all damages and losses arising out of delays or failures to perform under this Agreement.

5. ENGINEERING CHANGE ORDERS

5.1 Blue Coat Proposed Changes. Blue Coat may change the Product or Product Information Document at any time. Such changes may include, but are not limited to, changes to applicable drawings, designs or specifications; required method of shipment or packing; or place of delivery. In the event that Blue Coat elects to make a change, Blue Coat shall issue an engineering change order in writing to Vendor specifying the change (“Blue Coat ECO”). For standard Blue Coat ECOs, Vendor shall provide a written acknowledgement within one (1) day of receipt of the Blue Coat ECO, and include a proposed schedule to implement such change, an estimate of the cost to implement such change (if applicable) and the costs associated with any Components that may become Obsolete Components as a consequence of the change (the “Acknowledgement”). Blue Coat shall review such proposed schedule and estimates and either accept or reject

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Design & Manufacturing Services Agreement

the Acknowledgement. If Blue Coat accepts the Acknowledgement, Blue Coat shall pay Vendor the amounts specified in the Acknowledgement in accordance with the terms agreed to by the parties. Notwithstanding the above, with the exception of approved Unique Components and Special Components, Blue Coat shall not be responsible for reimbursing Vendor for Obsolete Components that were purchased outside of the Product Lead Time necessary to meet the Forecast in effect at the time of the Blue Coat ECO (defined below).

5.2 Vendor Proposed Changes.

5.2.1 General Restrictions. Subject to the terms of this Section, Vendor may not (a) relocate any part of the facility in which Product(s) are manufactured; (b) make any change to Product Specifications or the manufacturing procedures or quality assurance processes associated with Product(s); or (c) change any other Blue Coat requirements related to a Product, including without limitation the manufacturing or supply of a Product (each of (a), (b) and (c) shall be considered an “Engineering Change”).

5.2.2 Change Procedure. Where Vendor wishes to implement an Engineering Change, Vendor shall issue an engineering change order in writing to Blue Coat specifying the change (“Vendor ECO”). The Vendor ECO shall include, without limitation, sufficient details regarding the nature of the proposed Engineering Change, the reason for the proposed change, details regarding its implementation, the impact of the change (including but not limited to scheduling and costs), and the proposed implementation date of the Engineering Change. Promptly after issuing the foregoing Vendor ECO, Vendor shall, at a mutually agreed upon cost, provide Blue Coat with sufficient evaluation samples of the affected Product (after having incorporated the Engineering Change) and other information requested by Blue Coat to enable Blue Coat to evaluate the Engineering Change. Blue Coat may, acting in its sole discretion, reject any Engineering Change and shall notify Vendor in writing of such rejection within thirty (30) days from its receipt of such Product samples and other information. While Blue Coat is considering an Engineering Change or if Blue Coat rejects an Engineering Change, Vendor shall continue to perform the Design Services and manufacture and supply such Product, in accordance with the terms of this Agreement, without the Engineering Change. Where Blue Coat provides its written approval of the Engineering Change, Vendor shall implement the change on a mutually agreed schedule and cost.

6. SUBCONTRACTORS. The parties acknowledge that the obligations set forth in this Agreement must be performed by Vendor except when Vendor provides prior written notification to Blue Coat. Vendor shall be responsible for the activities of Subcontractors. Blue Coat will not be responsible for payment or other obligations to any Subcontractors.

7. PURCHASE ORDERS

7.1 Purchase Orders. Blue Coat purchase orders may be issued in writing, by mail or facsimile, or by electronic means as the parties may from time to time agree. Blue Coat’s purchase orders for Products shall include the following:

(a) Identification of Products ordered by Blue Coat part number and descriptions;

(b) Quantity to be purchased;

(c) Price of Products ordered;

(d) Date the Product is to be delivered to Blue Coat or its designated forwarder in accordance with F.C.A. term (INCOTERMS 2000) (“Delivery Date”);

(e) Shipping destination; and

(f) Labeling instructions.

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Design & Manufacturing Services Agreement

7.2 Controlling Terms. All purchase orders and invoices under this Agreement shall be subject only to the terms and conditions hereof. In the event the terms of any such purchase order, confirmation or similar document conflicts with or are additional to the terms of this Agreement, the terms of this Agreement alone shall apply and shall govern regardless of execution of such document by one or both parties. Any other Vendor terms and conditions shall not apply to this Agreement or the purchase orders.

7.3 Purchase Order Process. All purchase orders received by Vendor shall be deemed accepted by Vendor unless Vendor notifies Blue Coat within ten (10) business minutes of receipt that such purchase order is not in compliance with the terms of this Agreement. If Vendor has any reason to believe it will not meet the required shipment date, it shall notify Blue Coat within one (1) business hour provided Blue Coat has submitted a purchase order quantity is consistent with the current Forecast. Blue Coat shall have the ability to track the status of any purchase order online using a Vendor maintained web site. Vendor shall provide Blue Coat with an electronic shipping notification within ten (10) minutes after a Product has shipped. Invoicing will be daily with all relevant and accurate tracking numbers and freight charges included with the invoice. Vendor shall include any information pertaining to the shipping of a Product as reasonably requested by Blue Coat.

7.4 Forecasts. Before the beginning of each month, Blue Coat shall provide a non-binding, rolling twelve (12) month forecast and a binding four (4) week forecast setting forth Blue Coat’s demand for Product (“Forecast”).

7.5 Cancellation of Purchase Orders. Subject to Blue Coat’s liability for Special Components and Unique Components as set forth in Section 12, Blue Coat may provide Vendor with a cancellation notice at any time. Vendor shall, upon receipt of such notice, stop work on such units of Products to the extent specified therein.

7.6 Special Orders. Upon written request from Blue Coat, Vendor shall use its best commercial efforts to fulfill order for Products in excess of that set forth in Blue Coat’s Forecast. Blue Coat may, at its option, submit purchase orders requesting immediate shipment (as early as same day shipment) (“Rush Orders”). Vendor shall use its best efforts to fill Rush Orders.

8. DELIVERY TERMS

8.1 Packaging. Vendor shall package and label Product(s) in accordance with the packaging and shipping specifications specified in a Product Specifications. Vendor shall not mark or label a Product except as set forth in the associated Product Specifications. Vendor shall be responsible for any loss or damage to Products due to Vendor’s failure to preserve, package or handle a Product in accordance with Blue Coat’s packaging and shipping specifications. Vendor will bear all risk of loss, damage or destruction to the ordered Products until delivery to a carrier specified by Blue Coat in writing.

8.2 Shipping. Vendor shall tender Product(s) F.C.A. Vendor’s premises (INCOTERMS 2000). Vendor shall ship Product(s) to the designated forwarder who will ship to the location set forth in the purchase order. For the avoidance of doubt, Vendor shall perform direct fulfillment of most purchase orders. In case Vendor is requested to ship Product(s) to the location set forth in the purchase order, the associated freight charges will be invoiced by Vendor to Blue Coat on the invoice associated with such purchase order. Title and risk of loss of the Product(s) will pass to Blue Coat upon delivery of the Products to Blue Coat’s forwarder.

8.3 Late Shipments. Vendor shall immediately notify Blue Coat in writing upon becoming aware that any part of a shipment of Products will not be, or has not been, delivered by the Delivery Date and shall provide reasons for the delay and a revised Delivery Date. Vendor’s revised Delivery Date must take into account the use of all means available to expedite production and delivery of the delayed Products, including

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Design & Manufacturing Services Agreement

without limitation expediting the procurement of materials, using expedited transportation means and labor overtime (“Accelerated Measures”). Vendor shall bear the cost difference incurred as a result of the Accelerated Measures provided that such delay is attributable to Vendor. A default by the designated forwarder will not, by itself, constitute a cause attributable to Vendor.

8.4 Inspection. Notwithstanding any prior inspection or payment by Blue Coat, all Products shall be subject to final inspection and acceptance within sixty (60) days after delivery.

8.5 Documentation. Vendor shall maintain complete and accurate shipping documentation for all shipments for a minimum of five (5) years following the date of shipment . Shipment documentation includes the purchase order, packing slip, commercial invoice, carrier waybill, any information pertaining to direct fulfillment of Product and Vendor billing invoice. Blue Coat and its authorized agents and representatives shall have access to such records for purposes of performing an audit during normal business hours during the term of this Agreement and during periods which Vendor is required to retain such records.

8.6 Allocation. Vendor agrees that, in the event of a need to allocate performance among Vendor’s customers, Blue Coat’s order(s), subject to normal lead-time requirements, shall be filled according to an allocation plan no less favorable than that provided to any other Vendor customer. Vendor shall provide Blue Coat with immediate notice if it anticipates or has reason to believe that Vendor’s output of a Product shall not be sufficient to meet Blue Coat’s Forecast.

9. PRICING AND PAYMENT TERMS

9.1 Prices. The initial price for a Product shall be set forth in the associated Product Information Document. Prices will be reviewed on a quarterly basis and are subject to anticipated reductions as provided in this Agreement. The Total Product Cost model shall follow the model set forth below:

Cost Element	Calculation
Bill of Material	Actual - No Mark-Ups
Material Mark Up	3% of PCBA BOM cost (Not include HDD/ CPU/ Memory/ Enclosure/ Power Suppler)
System Assembly Cost	Fremont Burdened Labor Rate: $37.50/hour
System Test Cost	Fremont Burdened Labor Rate: $37.50/hour
ESS with ORT	For every 1 hour of ESS, estimated 8 minutes of labor cost might be required by BC experiences
Utility Test Costs	Fremont Burdened Rate: $10/hour (actual - no mark-ups)
Administration, Overhead & Profit	Flat Rate: $50
Freight	Actual - No Mark Ups / Pending mutually agreed shipping route and method

9.2 Non-Recurring Engineering Fee. As consideration for the Tooling and any other items specifically outlined in a Product Design Document, Blue Coat shall pay to Vendor a non-recurring engineering fee as specified in the associated Product Information Document or SOW (as the case may be).

9.3 Taxes. Prices stated in a Product Information Document are in U.S. dollars and are inclusive of all taxes, other than taxes on a party’s net income, which shall be the sole responsibility of that party. Subject to Blue Coat’s provision to Vendor of an appropriate resale certificate, Vendor shall be solely responsible for any sales or use tax assessed upon the manufacture and sale of Product(s) to Blue Coat hereunder.

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Design & Manufacturing Services Agreement

9.4 Payment Terms. Vendor shall invoice Blue Coat upon shipment of a Product. All payments due hereunder shall be paid in US dollars not later than forty-five (45) days following the invoice date (which shall be no earlier than the shipment date) specified in an accurate invoice issued by Vendor without any delay, deductions, set-offs, discounts or withholdings whatsoever. In case an inaccurate invoice is received by Blue Coat, Blue Coat shall notify Vendor within ten (10) business days of receipt of the inaccurate invoice. After such notice, Vendor shall promptly correct and reissue an invoice for the accurate payment due and payable. Blue Coat shall be obligated to make the payment within forty-five (45) days following the shipment date despite the foregoing dispute. Vendor shall be entitled to charge Blue Coat, and Blue Coat shall pay to Vendor, interest at the rate of 1.5% per month on all amounts not paid when due, except that Blue Coat shall have a grace period of two days. Notwithstanding the above, if Vendor is not able to receive funds through Evaluated Receipt Settlement (ERS), then the grace period set forth above shall be five (5) days.

9.5 Monthly Report. Within the first five (5) days of each month, Vendor shall provide Blue Coat with a detailed accounts receivable aging report (in electronic format). Such report shall be sent to accountsreceivable@bluecoat.com.

9.6 Favorable Terms. Vendor warrants that during the term of this Agreement the terms and conditions of this Agreement, including discounts, prices and shipping, are no less favorable than the terms, conditions, discounts and prices given to any third party that either retains Vendor to perform design services or purchases or licenses similar quantities of the similar products or services from Vendor under similar terms and conditions.

9.7 Non-approved Charges. Blue Coat shall not be liable without Blue Coat’s prior approval to Vendor for any overtime charges, freight charges or Component product price increases incurred by Vendor.

10. COST REDUCTIONS

10.1 Cost Reduction. Vendor shall use commercially diligent efforts to achieve ongoing reductions in both Component Costs and Transformation Costs. Vendor shall work on achieving cost savings in both materials and processes, and such savings shall serve to reduce the Total Product Cost of a Product. In addition, Vendor shall institute any cost reduction proposals reasonably suggested by Blue Coat, and shall reduce the Total Product Cost of Product(s) to Blue Coat by an amount equal to the per unit saving realized therefrom. Vendor agrees to pass on the benefits of cost reductions as follows:

10.1.1 Blue Coat Suggested Cost Reduction

(a) If Blue Coat suggests or initiates the cost reduction (including without limitation cost reductions resulting from Blue Coat’s directions to Vendor with respect to the specification, use or acquisition of Components), then the Total Product Cost of all Products to which the reduction is applicable shall be decreased by 75% of such cost reduction for the first three (3) months following the sale of the first Product to which such cost reduction is applicable; and

(b) The price of all Products to which the reduction is applicable shall be decreased by 100% of such cost reduction after the three (3) month period has ended.

10.1.2 Vendor Suggested Cost Reduction

(a) If Vendor initiates a cost reduction, then the price of all Products to which the reduction is applicable shall be decreased by 25% of such cost reduction for a period of three (3) months following the sale of the first Product to which such cost reduction is applicable; and

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(b) The price of all Products to which the reduction is applicable shall be decreased by 50% of such cost reduction after the three (3) month period has ended; and

(c) The price of all Products to which the reduction is applicable shall be decreased by 100% of such cost reduction after the six (6) month period above has ended.

10.1.3 Neutral Cost Reduction. If there is a reduction in the cost of a Component that is not initiated by Vendor or Blue Coat, then the Total Product Cost of all Products to which the reduction is applicable shall be decreased by 100% of such cost reduction immediately.

11. SOURCING.

11.1 Sourcing of Components. Vendor shall be primarily responsible for the procurement of the Components, but shall seek Blue Coat’s input with respect to such Components. However, the source and terms of procurement for critical Components (as determined by Blue Coat), shall be subject to acceptance by Blue Coat. Vendor will provide Blue Coat with copies of preliminary specifications, working drafts of specifications and completed portions of specifications pertaining to the Components throughout the term of this Agreement. Vendor will use its best efforts to negotiate appropriate terms with Suppliers. Vendor will promptly provide Blue Coat with a copy of the final specification for any Component when it is completed. Vendor agrees to use all diligent efforts to ensure that any Component used in the design and manufacture of a Product does not have a foreseeable end of life that occurs prior to the end of the projected Product’s life.

11.2 Approved Vendors. Vendor shall notify Blue Coat immediately of all changes to the existing production processes, supply chain or approved vendor list set forth in the associated Product Information Document. No change is to be released to production without the written consent of Blue Coat. The following basic rules are applicable:

11.2.1 A Parts. Any change to a Component that is deemed an “A Part” (as defined in the associated Product Information Document) shall require the written approval and qualification of both Blue Coat and Vendor. In addition a Blue Coat ECO and Vendor ECO are required.

11.2.2 B Parts. Any change to a Component that is deemed a “B Part” (as defined in the associated Product Information Document) shall require the written approval and qualification of only Vendor. In addition a Blue Coat ECO and Vendor ECO are required.

11.2.3 C Parts. Any change to a Component that is deemed a “C Part” (as defined in the associated Product Information Document) shall require a written notification from Vendor to Blue Coat and a Vendor ECO.

12. INVENTORY LIABILITY.

12.1 Inventory Liability Report. Vendor shall provide Blue Coat with a monthly report setting forth the number of Slow Moving Inventory, Excess Components and Obsolete Components.

12.2 Disposition Process for Obsolete and Excess Components. On a quarterly basis (based on Blue Coat’s fiscal quarter), the following disposition process shall be followed for all Obsolete Components and Excess Components:

12.2.1 Vendor shall use diligent commercial efforts throughout the quarter to sell such Slow Moving Inventory, Obsolete Components and/or Excess Components,

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12.2.2 If Vendor is unable to sell such Obsolete Components and/or Excess Components before the end of the fiscal quarter, then Blue Coat will either (a) pay an agreed upon price to Vendor to cover the cost of both the Component and the cost of scrapping such Component, (b) pay an agreed upon price to Vendor to cover the acquisition of the Component by Blue Coat (and delivery to a third party location) or (c) pay an agreed upon carrying cost to Vendor and Vendor shall retain such Obsolete Components and/or Excess Components in inventory on Blue Coat’s behalf (provided that Obsolete Components need not be carried by Vendor in excess of three (3) months and either (a) or (b) shall be applicable after the three (3) month period has ended).

12.3 Disposition Process for Slow Moving Inventory. Before the end of each fiscal quarter, Blue Coat and Vendor shall agree upon a carrying cost to be paid by Blue Coat to Vendor in order to retain (on Blue Coat’s behalf) any Slow Moving Inventory.

12.4 Mitigation. Subject to the notification requirements set forth herein, Vendor will exercise commercially reasonable efforts to mitigate Blue Coat’s liability for Excess Components, Obsolete Components Slow Moving Inventory and Special Components, including, without limitation, by canceling or rescheduling materials orders, selling materials or utilizing the materials for other customers. However, Vendor shall obtain prior written consent from Blue Coat prior to any sale of any A Part Component (as defined in the Product Information Document). Upon request from Blue Coat, Vendor shall provide Blue Coat with evidence of such efforts to mitigate liability. Unless otherwise contained herein, the maximum total Blue Coat liability for any Slow Moving Inventory, Excess Components or Obsolete Components may not exceed Vendor’s original unit price for such Components as set forth in the Product Information Document.

12.5 Exceptions. If the Forecast for any period is reduced due to a Warranty defect (where such Warranty defect caused a Customer not to place an expected order for Products) or due to an Epidemic Failure, then Blue Coat shall not be liable (under this Section 12 or otherwise) for any related Component or Product costs or expenses. Upon request of Vendor, Blue Coat shall provide reasonable documentation supporting the claim that an order was expected and included in a previous Forecast.

13. REPORTING

13.1 Website. Vendor shall at all times maintain a fully updated web site in order for Blue Coat to monitor production and inventory levels of Product, Components, Blue Coat Material, Blue Coat Equipment and Tooling. The information on the website should include any operational, quality and manufacturing control data associated with a Product. In addition, the website should include costed reports setting forth the amount of time each Component has been in inventory, the Forecast under which each Component was purchased, the date the Component was purchased and any open purchase orders for Components that have been ordered but are not in inventory.

13.2 Accounting Records. In addition, Vendor shall maintain complete and accurate records of all amounts billed and billable to Blue Coat and payments made by Blue Coat hereunder (in accordance with U.S. generally accepted accounting practices) for a period of three (3) years following the expiration or termination of this Agreement. Vendor will not modify its accounting treatment or methods for calculating or determining or allocating costs relating to a Product without Blue Coat’s prior written consent, which consent shall not be unreasonably withheld. Vendor agrees to provide reasonable supporting documentation concerning any disputed invoice to Blue Coat within thirty (30) days after Blue Coat provides written notice of dispute to Vendor.

13.3 Audit. Blue Coat and its authorized agents and representatives shall have access to all records specified in this Section and any other record related to Vendor’s performance under this Agreement (excluding any financial report and accounting books unless such financial reports or accounting books are requested by a government agency or pursuant to government regulation) for purposes of audit during normal business hours

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during the term of this Agreement and during periods which Vendor is required to retain such records and upon at least ten (10) days prior notice. Any and all such records disclosed to Blue Coat shall be deemed “Confidential Information” (whether or not such records are labeled or identified as such).

14. COMMUNICATION. Vendor agrees to provide Blue Coat with written notice as soon as commercially practicable upon the occurrence of any event that could affect a Product. This includes, but is not limited to: supply chain issues (e.g., shortages in Components or other materials necessary for the manufacture of a Product, issues with Suppliers or relationships with Suppliers, supplier corrective action report notices, etc.), design issues (e.g., issues with design validation testing), delivery issues (e.g., transit delays, strikes, etc.) operational issues (e.g., work order fall-outs greater than 90%, kit level failures) and Vendor business issues (e.g., change in business stability, any material press releases regarding Vendor business, etc.). Vendor shall provide Blue Coat with at least six (6) months notice prior to the date any Component or material used in the manufacture of a Product will reach end of life status. Blue Coat may either select a substitute component or place one (1) final binding purchase order, within the last time buy period notified by such Supplier.

15. QUALITY

15.1 Quality Control. Vendor acknowledges and agrees that all Products will be designed and manufactured in accordance with the highest industry standards applicable for similar products and also in accordance with the Quality Control Standards set forth in Blue Coat’s Operations Supplier Quality Manual.

15.2 Quality Control Personnel. Blue Coat may at its option and expense send its quality control personnel to Vendor’s facilities to assist in or observe the work in progress. Blue Coat may from time to time suggest commercially reasonable modifications to Vendor’s procedures for performing the work under this Agreement for the purpose of enhancing or assuring quality, and Vendor shall, using Vendor’s best judgment, act in good faith to either (a) comply with such suggestions or (b) explain to Blue Coat why such suggestion is not in the best interests of Blue Coat or why such suggestion should not be implemented.

15.3 Facility Inspection. Vendor shall, whenever reasonably requested by Blue Coat, permit Blue Coat, or a third party acting on behalf of Blue Coat, the opportunity to inspect (at Vendor’s facility) the processes and procedures used by Vendor to perform its obligations under this Agreement. Blue Coat shall provide Vendor with forty-eight (48) hours notice prior to the visit.

16. QUARTERLY REVIEWS

16.1 Information Production. Vendor shall provide and Blue Coat will review all Component Costs and Transformation Costs on a quarterly basis. Costs to be reviewed include, but are not limited to, time studies for production and costs related to repairs, testing, kitting, inventory management, shipping and quality inspections.

16.2 Management Reviews. After receipt of the information set forth in Section 16.1, Blue Coat and Vendor shall, when Blue Coat requests, meet (by telephone, videoconference or in person) to discuss Vendor’s performance, prices and other issues relating to this Agreement, including but not limited to Vendor’s performance with regard to technology, quality, cost, availability and ease of doing business (collectively “TQCAB”). At each such meeting, Product prices shall be reviewed for adjustments, and the parties shall agree on the appropriate price adjustments and the manner and the timing of their implementation, on a fair and reasonable basis. The parties will mutually agree upon and set price reduction targets for each of the new two (2) calendar quarters based on Forecast and other factors affecting price, including without limitation those listed in Product Information Documents and identify actions and corresponding responsibilities of the parties required to achieve the target price reductions. If Vendor fails to implement previously agreed targets with respect to Vendor TQCAB, then Blue Coat and Vendor will cooperate to identify the cause of such failure in order for both parties to achieve the target price reductions afterward.

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17. TOOLING, BLUE COAT EQUIPMENT & BLUE COAT MATERIALS

17.1 Provision of Blue Coat Consigned Items. Blue Coat may provide Blue Coat Consigned Items to Vendor pursuant to the terms and conditions of this Agreement for use by Vendor in the design, testing, manufacture and supply of Products exclusively for and to Blue Coat. Vendor shall use Blue Coat Materials on a “first-in, first-out” basis to reduce the risk of obsolete or unusable material.

17.2 Storage. Except as otherwise provided in the Agreement, Vendor shall, at its cost, be responsible for safekeeping at its manufacturing facility all Blue Coat Consigned Items and Tooling, shall maintain the same in good condition and repair, shall store the Blue Coat Consigned Items and Tooling at such facility free of charge in a place that meets the requirements of this Agreement and shall segregate such Blue Coat Consigned Items and Tooling from other customer’s materials. All such Blue Coat Consigned Items and Tooling, while in the possession and under the control of Vendor, shall be at Vendor’s risk.

17.3 Orders for Blue Coat Materials. After execution of this Agreement, Vendor shall order, take delivery of or pay for, if applicable, by way of a purchase order, those Blue Coat Materials, if any, required to manufacture the Products ordered by Blue Coat. All purchase orders submitted to Blue Coat by Vendor shall include a description of the required Blue Coat Materials, the quantities ordered, the prices thereof, if applicable, the proposed delivery date, and such other information as the parties may agree from time to time. Amounts due from Vendor will be paid forty five (45) days following the invoice date which shall be no earlier than the shipment date. Vendor purchase orders may be issued in writing, by mail or facsimile, or by electronic means as the parties may from time to time agree.

17.4 Tracking. Vendor shall maintain complete and accurate records of the quantity of Blue Coat Materials received from Blue Coat, along with the quantity used in Products shipped to or on behalf of Blue Coat and the quantity wasted in the design, manufacture, test and supply of Products. Vendor shall provide such records or related information as required from time to time by Blue Coat during the term and Blue Coat may, on two (2) business days notice to Vendor, audit such information at Vendor’s site. Vendor shall maintain and properly safeguard any such wasted Blue Coat Materials so that it may be audited hereunder and salvaged, should Blue Coat desire.

17.5 Permitted Use. Blue Coat grants Vendor a limited license to use the Blue Coat Consigned Items and Tooling only as set forth in this Agreement. Vendor acknowledges and agrees that Vendor is only a bailee of the Blue Coat Consigned Items (excluding the Blue Coat Materials paid for by Vendor) and Tooling on the terms and conditions set out this Agreement, and that Vendor will use them in accordance with any operation instructions provided or government regulations. Vendor will not pledge or otherwise encumber the Blue Coat Consigned Items or Tooling. In the event the premises in which the Blue Coat Consigned Items or Tooling is installed are encumbered in any way (e.g. a financial institution has a security interest in the premises or property thereon), Vendor shall provide notice to any party having such an interest that (a) the Blue Coat Consigned Items or Tooling are contained within such premises; (b) the Blue Coat Consigned Items (excluding the Blue Coat Materials paid for by Vendor) and Tooling are the property of Blue Coat; (c) any encumbrance over the premises or Vendor’s property does not extend to the Blue Coat Consigned Items(excluding the Blue Coat Materials paid for by Vendor) or Tooling; and (d) Blue Coat retains its rights of recovery and repossession of the Blue Coat Consigned Items(excluding the Blue Coat Materials paid for by Vendor) and Tooling. Vendor shall immediately report to Blue Coat: (i) any seizure or attachment of the Blue Coat Consigned Items or Tooling by Vendor’s creditors; (ii) any petition in bankruptcy, insolvency, receivership or similar proceedings filed by, or against, Vendor; or (iii) any arrangement, composition or similar agreement for the benefit of Vendor’s creditors.

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17.6 Prohibited Uses. Vendor shall use the Blue Coat Consigned Items and Tooling only for the permitted use as described in this Agreement and only for the exclusive benefit of Blue Coat. Any use or activity by or on behalf of Vendor associated with Blue Coat Consigned Items or Tooling that is not expressly permitted by this Agreement is prohibited. Without limiting the generality of the immediately preceding sentence, Vendor agrees not, and not to allow others, to: (i) modify, alter, disassemble, cut, destroy, cleave, crush or reverse-engineer Blue Coat Consigned Items or Tooling; (ii) sell, rent, loan, donate, give any guarantee or security interest in, transfer possession or purport to transfer title in any way of, Blue Coat Consigned Items or Tooling to any third party; (iii) allow any employee, agent or contractor not adequately trained to work with Blue Coat Consigned Items or Tooling or not involved in the testing or demonstrations of the Blue Coat Consigned Items or Tooling to have access to the Blue Coat Consigned Items or Tooling; or (iv) use or transport the Blue Coat Consigned Items or Tooling outside of Vendor’s own facilities without written permission from Blue Coat.

17.7 Costs. In the event Blue Coat Consigned Items or Tooling may require repair, upgrading or calibration or has exceeded its useful life, Vendor shall notify Blue Coat of such and Blue Coat shall reimburse or replace such Blue Coat Consigned Items or Tooling. Both parties recognize that such reimbursement shall only be for materially significant, actual incurred costs. Vendor shall bear all risk of loss regarding, and be liable for any damage to, the Blue Coat Consigned Items and Tooling (reasonable wear and tear excepted). Vendor will insure the Blue Coat Consigned Items and Tooling against loss or damage during the term of this Agreement and while in Vendor’s custody, and will deliver to Blue Coat, upon request, proof of such insurance. Vendor shall pay to Blue Coat the new replacement cost as assessed by Blue Coat and agreed by Vendor, of any Blue Coat Consigned Item or Tooling that is lost, stolen, destroyed or damaged beyond repair. Notwithstanding the foregoing, if a Blue Coat Consigned Item or Tooling is destroyed or damaged beyond repair and such destruction or damage is a result of complying with direct instructions from Blue Coat, then Vendor shall not be responsible for the replacement cost specified above. Vendor shall bear no risk of loss or not be liable for any damage to the Blue Coat Consigned Items and Tooling if Blue Coat delays or refuses to receive Vendor’s return of such Blue Coat Consigned Items and Tooling either after expiration or termination of this Agreement or upon Vendor’s reasonable request. Any item, article, accessory, document or thing supplied in conjunction with the Blue Coat Consigned Items (including operation manuals) or Tooling not returned to Blue Coat upon termination or expiration of this Agreement shall be paid for by Vendor with a fee determined by Blue Coat being charged to Vendor.

17.8 Tooling. As it applies to Tooling, the obligations of Vendor set forth in this Section 15 shall apply regardless of whether the Tooling is located at Vendor site or a third party site. Vendor shall, upon request from Blue Coat, transfer all right, title and interest to the Tooling to Blue Coat, free and clear of any liens or other encumbrances. Upon any termination or expiration of this Agreement, Vendor shall assist and cooperate in good faith with the physical transfer by Blue Coat of the Tooling to other locations designated by Blue Coat at Blue Coat’s cost.

17.9 Delivery of Blue Coat Consigned Items. Vendor shall assist with any customs/export/trade related approvals, duties and/or other obligations as may be required for the delivery of the Blue Coat Materials, Blue Coat Equipment and Tooling at Blue Coat’s cost.

18. OWNERSHIP

18.1 Blue Coat Property. Subject to Section 18.2 and the NRE payment from Blue Coat (as specified in the Product Information Document), Blue Coat shall own all right, title and interest in and to the Product Design Document, the Product Information Document, all Product(s), portions of Products currently in production, Tooling and Blue Coat Consigned Material.

18.2 Inventions. Excluding Vendor Property (defined below) and subject to the full payment of NRE to Vendor, (i) any and all Product designs, inventions or improvements, (ii) any other design, inventions or improvements and any and all discoveries, products, computer programs (including source code), tooling, procedures, improvements, developments, drawings, works of authorship, specifications, data, memoranda,

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notes, documents, manuals, information, and other items made, authored, conceived or developed by or for Blue Coat, which result from or relate to a Product (items (i) and (ii) are referred to, collectively, as “Product Information”), and (iii) any patent rights, copyrights, trade secret rights, mask work rights and other rights throughout the world (collectively, “Intellectual Property Rights”) contained or embodied in, or arising from the Product Information shall be the sole property of Blue Coat. Blue Coat shall have the sole right to obtain and to hold in its own name any copyrights, patents, mask work rights, trademark registration, or other legal protection as may be appropriate to such Product Information and any derivatives thereof. Blue Coat shall have the sole right to determine the method of protection for any such Product Information, including the right to protect the same as trade secrets, to use and disclose the same without prior patent application or to file registration for copyright, patent, mask work rights, or trademark in its own name, as Blue Coat deems appropriate in its sole and absolute discretion. Subject to the provisions of this Agreement, Blue Coat hereby grants to Vendor, its affiliates, and subcontractors, which manufactures the Product on behalf of Vendor, a limited, personal, worldwide, non-exclusive license, without the right to sublicense, to Product Information, and any associated Intellectual Property Rights to make, manufacture, test, assemble and repair the Product as specified herein.

18.3 Vendor Property. All right, title and interest in Vendor’s pre-existing technology and IP Rights and Confidential Information (“Pre-existing Technology”) shall remain Vendor’s exclusive property. Vendor shall retain all right, title and ownership to any discoveries, inventions, technical information, procedures, design, manufacturing or other processes, software, firmware, technology, know-how or other Intellectual Property Rights comprising Vendor’s design techniques, manufacturing process that are used or created by Vendor in performing the Design Services or manufacturing services or other work performed under this Agreement and which do not comprise part of the Product Design Document, Product Information Document or Product Information (“Vendor Process Technology”). “Pre-existing Technology” and “Vendor Process Technology” shall be deemed “Vendor Property”. During the term of this Agreement, Vendor hereby grants to Blue Coat a worldwide, irrevocable, perpetual, non-exclusive, fully paid-up, royalty free right and license to reproduce, distribute, perform use, import, export, manufacture, have manufactured, offer to sell and sell any Vendor Property or other intellectual property rights incorporated or used in the Products manufactured for Blue Coat under this Agreement.

18.4 Assignment. The parties hereby make any assignments necessary to accomplish the foregoing ownership provisions. In interpreting such ownership provisions anything made or conceived or reduced to practice by an employee or contractor of a party in the course of performance under this Agreement will be deemed so made or conceived or reduced to practice by that party; each party has and will have appropriate agreements with all such employees and contractors necessary to fully effect the provisions of this Section 18.4.

18.5 Perfection. A party being assigned any proprietary right under this Agreement will have the exclusive right to, and, at such party’s expense, the assigning party agrees to assist such party in every proper way (including, without limitation, becoming a nominal party) to, evidence, record and perfect the assignment and to apply for and obtain recordation of and from time to time enforce, maintain, and defend such proprietary rights. Each party will execute all documents as the other may reasonably request for such purposes.

18.6 Proprietary Rights Notices. Vendor agrees to properly mark each Product and any accompanying documentation with Blue Coat’s copyright or other proprietary rights notice, as directed by Blue Coat, to indicate Blue Coat’s intellectual property rights in such Products. Unless otherwise provided herein, nothing in this Agreement shall be construed as a grant of any license, right or interest in any trademark, trade name or service mark of either party, or any third party from whom either party may have acquired license rights.

18.7 Trademark Use. All trademarks, service marks, trade names or logos identifying the Products or Blue Coat (the “Marks”) are the exclusive property of Blue Coat. Vendor will not take any action that jeopardizes Blue Coat’s proprietary rights or acquire any rights in the Marks except as specifically set forth below. Vendor will not register, directly or indirectly, any trademark, service mark, trade name, copyright,

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company name or other proprietary or commercial right which is identical or confusingly similar to the Marks or which constitute a translation into other languages. Vendor will use the Marks exclusively to identify the Products. Any use of the Marks shall clearly identify Blue Coat as the owner of the Marks. Vendor will immediately notify Blue Coat if Vendor learns (i) of any potential infringement of the Marks by a third party, or (ii) that the use of the Marks may infringe the proprietary rights of a third party. Blue Coat will determine the steps to be taken under those circumstances. In connection with any potential infringement of or by the Marks, Vendor will (i) provide Blue Coat with the assistance that Blue Coat may reasonably request, and (ii) not take steps on its own without Blue Coat’s prior approval.

19. WARRANTIES

19.1 Authority. Each party warrants that it has the right and authority to enter into this Agreement and perform its obligations hereunder.

19.2 Quality. Vendor shall perform and hereby warrants that all Products, when delivered in accordance with the purchase order, will have passed the test and quality control procedures set forth in the Operations Supplier Quality Manual and will meet the associated Product Specifications for such Product.

19.3 Product Warranty. Subject to the terms of this Section 19.3, Vendor warrants to Blue Coat that each Product: (a) has been manufactured in accordance with Blue Coat’s applicable manufacturing testing procedures; (b) meets the requirements set forth in the purchase order and Product Information Document and; (c) shall be free from defects in design, material and workmanship (“Warranty”). The warranty period for a Product shall be three (3) years from the Delivery Date specified in the purchase order (“Warranty Period”).

19.4 Service Warranty. Vendor warrants to Blue Coat that any services to be provided by Vendor hereunder shall be performed to a standard reasonably acceptable in the industry.

19.5 Design Warranty. Vendor warrants to Blue Coat that it will perform the Design Services so as to produce a Final Deliverable that conforms in all material respects to the Product Design Document, the Statement of Work and the Blue Coat Requirements Document.

19.6 Warranty Process. Products that fail to meet the Warranty during the Warranty Period shall be returned to Vendor (pursuant to the RMA process set forth in Section 19.9) and, at Blue Coat’s option, Vendor shall, at Vendor’s cost, promptly repair or replace such Product at no cost to Blue Coat. Notwithstanding the above, if a Product fails to meet the Warranty during the Warranty Period and the Customer refuses a replacement, then, at the option of Blue Coat, Vendor shall refund any amounts paid for such Product. All Products repaired or replaced under warranty shall be warranted for a period equal to the greater or the remainder of the original Warranty Period or twelve (12) months.

19.7 Out of Warranty Process. Products that fail to meet the Warranty after the Warranty Period shall be returned to Vendor (pursuant to the RMA process set forth in Section 19.9) and Vendor shall promptly repair such Product if appropriate. Blue Coat shall pay the fee set forth in the Product Information Document for all such repairs.

19.8 Replacement of Product. Upon request from Blue Coat, Vendor will deliver a replacement of any product that does not meet the Warranty requirements (whether or not under the Warranty Period). In such case, if such notice is received by Vendor before noon, then Vendor shall deliver a replacement Product to the location specified by Blue Coat before 1pm that same business day. If such notice is received by Vendor after noon, then Vendor shall deliver a replacement Product to the location specified by Blue Coat before 1pm the next business day.

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19.9 Product Returns. Within eight (8) business hours after receipt of a request to return a Product, Vendor shall issue a Return Materials Authorization number (“RMA”). If no RMA is issued within two (2) business days, Blue Coat (or its customer) may return the Product without further notice to Vendor and without an RMA. In the event that a Product is determined to be “dead on arrival”, Vendor shall pay all costs associated with the transportation of the returned Product, including the cost of transportation from Blue Coat to Vendor’s plant, and where applicable, transportation of replacement or repaired Products to Blue Coat, as well as all insurance costs associated with the returned Products and the repaired and replacement Products. In all other circumstances, freight costs shall be borne by the shipper. Any Products repaired by Vendor shall not be delivered as “new” products.

19.10 No Trouble Found. The Product Information Document shall specify a “no trouble found” percentage threshold (“NTF Percentage”) and the fees associated with exceeding such NTF Percentage. If the percentage of products returned to Vendor for “no trouble found” exceeds the NTF Percentage (as measured on a quarterly basis), then Blue Coat shall pay the amounts specified in the Product Information Document. For purposes of this Agreement “no trouble found” means a Product or Component is returned as defective but no defect is found after all normal testing procedures are performed and therefore the Vendor is unable to determine the need for repair or further corrective action.

19.11 Failure Analysis. Vendor shall, within two (2) business days of receipt of Products, complete a basic failure analysis on all Products returned to Vendor. Upon Blue Coat request, Vendor shall perform next level failure analysis and deliver a written report of such analysis and Vendor’s findings within two (2) business days.

19.12 Epidemic Failure. If, during any consecutive ninety (90) day period of the Warranty Period, the percentage of Products that fail to meet the above Warranty is cumulatively equal to or in excess of the “Product Warranty Failure Percentage” set forth in the associated Product Information Document for the same root cause, then such failure shall be considered an “Epidemic Failure.” If no Product Warranty Failure Percentage is set forth in a Product Information Document or if no Product Warranty Failure Percentage is specified in a Product Information Document , the default Product Warranty Failure Percentage shall be three percent (3%). If an Epidemic Failure occurs, then:

(a) Vendor shall, at its cost, provide Support Services (defined below) and/or, if deemed necessary by Blue Coat, at Vendor’s cost, ensure an effective quarantine, containment action, and disposition of suspect materials related to the Epidemic Failure at the Vendor, Blue Coat and/or Customer locations.

(b) Vendor shall notify Blue Coat promptly and provide an initial problem verification report, including a containment and failure analysis plan per the Blue Coat SCAR Procedure. A complete report, including permanent corrective and preventive action, shall be provided by the Vendor to Blue Coat within seven (7) calendar days of initial notification;

(c) Vendor shall update Blue Coat on a daily basis with the status and findings of the foregoing analysis and plan and provide such other reasonable information required by Blue Coat in connection therewith; and

(d) Blue Coat may immediately terminate this Agreement with respect to the affected Product if Vendor fails to act as required in accordance with preceding subsections.

19.13 Warranty Exclusions. Warranties set forth in this Section 19 will not apply to defects or malfunction of the Product arising from (i) improperly installed, repaired, altered or otherwise modified (other than by Vendor or Vendor’s subcontractors), (ii) misuse, abuse, negligence or accident, (other than by Vendor or Vendor’s subcontractors); (iii) Blue Coat Materials, if any.

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19.14 EXCEPT AS EXPRESSLY WARRANTED IN THIS AGREEMENT, VENDOR HEREBY DISCLAIMS ALL WARRANTIES, COVENANTS AND REPRESENTATIONS EXPRESS, STATUTORY AND IMPLIED, APPLICABLE TO PRODUCTS, DELIVERABLE OR SERVICES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND ANY WARRANTY THAT ANY PRODUCT IS DELIVERED FREE OF CLAIMS OF THIRD PARTIES BY WAY OF INFRINGEMENT OR THE LIKE.

20. SUPPORT SERVICES.

20.1 Support Defined. Vendor shall, at Vendor’s cost, provide technical assistance, functionally equivalent replacement Products, repair services and failure analysis services (collectively, “Support Services”) on each Product, including discontinued Products, during the Warranty Period. After the expiration of the Warranty Period Vendor shall make available Support Services for an additional period of five (5) years at commercially reasonable rates. All repaired or replacement Products shall be warranted in accordance with the provisions of Section 19. Except as otherwise expressly provided herein, Vendor may not discontinue the manufacture or supply of Products or Support Services without Blue Coat’s prior written consent. Vendor shall also, at Blue Coat’s request and at mutually-agreed reasonable cost, provided Vendor personnel at Blue Coat’s site to provide Product order and other functional liaison services to Blue Coat, as Blue Coat may reasonably require.

20.2 Hotline. Vendor shall provide Blue Coat with two telephone numbers, one of which will be answered twenty-four (24) hours a day, seven (7) days a week by Vendor’s highly qualified technical support personnel (xxx-xxx-xxxx and xxx-xxx-xxxx). Vendor shall also provide Blue Coat with an email address for reporting all issues (xxxx@xxxx.com). When Blue Coat emails or phones in an issue to Vendor, Vendor shall open a support case immediately and respond within eight (8) business hours with a case tracking ticket number assigned to such issue for tracking purposes. Vendor shall input any such support case into Vendor’s own internal problem reporting systems. Vendor shall use diligent commercial efforts to resolve all issues as soon as commercially practicable.

21. TERM AND TERMINATION

21.1 Term. This Agreement shall begin upon the Effective Date and, unless earlier terminated as provided herein, shall continue in effect for three (3) years (“Initial Term”). The Agreement shall automatically renew for additional one (1) year terms unless and until either party provides written notice of non-renewal at least one (1) year prior to the end of any such term

21.2 Termination of Agreement.

(a) Termination for Bankruptcy, Change of Control and Breach. If a party (i) institutes or there is instituted against it any proceeding under any bankruptcy, protection of rights of creditors or insolvency laws (which proceeding is not dismissed within 120 days), (ii) institutes or there is instituted against it any proceeding for liquidation or winding up (which proceeding is not dismissed within 120 days), (iii) is continuously unable to pay its debts when due, (iv) makes an assignment for the benefit of creditors, (v) has a receiver appointed with respect to any substantial part of its assets or business, (vi) ceases to function as a going concern or to conduct its operation in the normal course of business, (vii) except as may be permitted under Section 29.1, transfers all or substantially all of its properties or merges with or into any other entity or there is otherwise any change in its controlling interest or ownership, without the prior written consent of the other party, or (viii) materially breaches any provision of this Agreement, the other party may terminate this Agreement upon thirty (30) days written notice (fifteen (15) days for breach of Section 9.4, Payment Terms) thereof unless the material breach is cured within the notice period.

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(b) Termination For Convenience. After the Initial Term, either party may terminate this Agreement, or any part thereof, at any time for its sole convenience by giving twelve (12) month advance written notice of termination to the other party. Upon receipt of such notice from Blue Coat, Vendor will, except to the extent otherwise specified in such notice, immediately stop all work previously authorized.

(c) Effect of Termination. No termination or expiration of this Agreement shall (i) relieve either party from any obligations hereunder which have accrued on or before the effective date of such termination or expiration including without limitation any obligation to pay to the other party any sum owed pursuant to this Agreement, (ii) affect any rights of either party with respect to any breach of this Agreement, or (iii) cancel any purchase order for the Product placed by Blue Coat and accepted by Vendor pursuant to this Agreement. Unfilled purchase orders (or portions thereof) that are not cancelled by the non-breaching party will be filled and paid for in accordance with the terms of this Agreement.

21.3 Survivability and Obligations Upon Termination. Section 8.5, 9.4, 13.2, 13.3, 17.8, and 18-29 shall survive the termination of this Agreement. Furthermore, in the event of any termination or expiration of this Agreement (a) Vendor shall deliver all Tooling, Blue Coat Equipment and Blue Coat Consigned Items (excluding the Blue Coat Materials paid for by Vendor) to Blue Coat within five (5) days after termination (or upon Blue Coat’s demand), (b) each party shall destroy the other party’s Confidential Information (except each party may retain any Confidential Information (i) for archival purposes, (ii) as necessary to perform the transitional services set forth in Section 22 and (iii) in the case of Blue Coat, as necessary for manufacturing a Product) (c) the parties shall comply with the transition services provisions set forth in Section 22.

22. TRANSITION SERVICES

22.1 Transition after Termination. Following any termination or expiration of this Agreement, each party shall assist and cooperate in good faith with the other party to enable an orderly dissolution of the relationship . Vendor shall provide, at no cost to Blue Coat, technical support and assistance as Blue Coat may reasonably request in connection with the transition of the design and/or manufacture of Products to a third party, unless the termination is by Vendor for cause.

22.2 Right to Manufacture. Upon the expiration or termination of this Agreement (other than for an uncured breach by Blue Coat) and except as otherwise outlined in a Product Information Document, Vendor hereby grants Blue Coat, a royalty-free, worldwide, nonexclusive, perpetual, irrevocable and sublicensable right and license to manufacture and have manufactured the Products and to use, reproduce and otherwise exploit the Vendor Property in order to commercialize reproduce, distribute, modify, make, use, sell, have made or have sold the Products.

23. EXPORT. In exporting and importing Products, each party agrees (a) to comply with all export and import laws, rules, policies, procedures, restrictions and regulations of the Department of Commerce or other United States or foreign agency or authority, and (b) not to export or import, or allow the export or re-export or import of any goods in violation of any such restrictions, laws or regulations. Each party shall obtain all licenses, permits and approvals required by any government in connection with performing its obligations hereunder; provided that in doing so each party shall at all times fully protect the Confidential Information and proprietary rights of the other party. Blue Coat shall provide the export classification for each Product to Vendor. Each party will indemnify and hold the other party harmless for any breach of this Section 23 by such party.

24. INDEPENDENT CONTRACTOR. Each party shall be deemed to be an independent contractor to the other party, and not its agent, joint venturer, partner or employee. Neither party shall have any authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other party.

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25. LIMITATION OF LIABIILTY. EXCEPT FOR A CLAIM FOR DAMAGES TO A THIRD PARTY FINALLY AWARDED BY A COURT OF COMPETENT JURISDICTION PURSUANT TO SECTION 27 (INDEMNIFICATION), OR A BREACH OF SECTION 26 (CONFIDENTIALITY), OR FOR LIABILITY ARISING FROM THE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT OF A PARTY, IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR TO ANY OTHER PERSON OR ENTITY FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES RELATED TO THIS AGREEMENT WHETHER UNDER CONTRACT, TORT, STRICT LIABILITY, NEGLIGENCE, OR ANY OTHER LEGAL OR EQUITABLE CLAIM OR THEORY, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

EXCEPT FOR A CLAIM (AND ANY FEES RELATED TO A CLAIM) PURSUANT TO SECTION 27 (INDEMNIFICATION) (“INDEMNIFICATION EXCEPTION”) OR A BREACH OF SECTION 26 (CONFIDENTIALITY), IN NO EVENT WILL EITHER PARTY’S LIABILITY FOR ANY CLAIM ARISING OUT OF THIS AGREEMENT EXCEED THREE (3) MILLION DOLLARS. NOTWITHSTANDING THE FOREGOING, THE INDEMNIFICATION EXCEPTION SHALL ONLY APPLY TO A CLAIM OF INDEMNIFICATION AGAINST VENDOR TO THE EXTENT THE DAMAGES ARISE OUT OF OR RESULT FROM THE MANUFACTURING PROCESS.

26. CONFIDENTIALITY

26.1 Proprietary Information. Prior to and during the performance of this Agreement, the parties may disclose or furnish to each other proprietary marketing, technical or business information either verbally or in tangible form (the “Confidential Information”); all or any of which have been identified or marked at the time of disclosure as “proprietary” or “confidential” by the disclosing party and, if not in tangible form, reduced to writing marked in a manner to indicate its confidential nature and furnished to the receiving party within ninety (90) days of the initial disclosure. Notwithstanding the above, the information contained in the Product Design Document(s), the information contained in the Product Information Document(s), any Product Information, and information concerning Customers shall be deemed to be the Confidential Information of Blue Coat regardless of being marked as such. Confidential Information of the disclosing party shall be held in confidence by the receiving party and not directly or indirectly disclosed, copied or used by the receiving party (except as necessary to perform under this Agreement). Each party agrees that, except as may be required by law, including the rules and regulations of the United States Securities and Exchange Commission, the terms and existence of this Agreement are confidential and neither party shall disclose such information. Notwithstanding the foregoing, each party may, without further consent of the other party, disclose the contents of this Agreement to its shareholders, potential acquirors, accountants, professional and financial advisors, insurers and other persons necessary for the functioning of such party’s business operations and who are bound by terms and conditions of confidentiality no less restrictive than the terms contained in this Agreement.

26.2 Non-Confidential Information. Confidential Information shall not include information that (a) is already known to the receiving party without any obligation of confidentiality; (b) has entered the public domain through no action or inaction of the receiving party; (c) is generally available to the public; (d) was disclosed to the receiving party by a third party without a duty of confidentiality; (e) independently developed by the receiving party without access to the Confidential Information or (f) is required to be disclosed in accordance with a judicial or other governmental order, provided that, the receiving party, subject to what is permitted under the applicable law, either (i) gives the disclosing party reasonable notice prior to such disclosure to allow the disclosing party a reasonable opportunity to seek a protective order or equivalent, or (ii) obtains a written assurance from the competent judicial or governmental entity that it will afford Confidential Information the highest level of protection afforded under the applicable law or regulation.

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Design & Manufacturing Services Agreement

26.3 Injunction. Each party acknowledges that the Confidential Information of the disclosing party constitutes valuable trade secrets of the disclosing party and that the unauthorized disclosure or use of such Confidential Information by the receiving party will cause irreparable harm, for which no remedies of law will be adequate. Accordingly, the parties agree that the disclosing party shall be entitled to injunctive relief against the receiving party in the event that the receiving party breaches the confidentiality obligations set forth in this Section 26.

26.4 Insider Trading. Each party acknowledges that it is aware that the other party is a publicly-traded company and that its Confidential Information may constitute material non-public information under U.S. or Taiwan securities laws and regulations. As such, each party shall ensure that its agents and employees are contractually prohibited from transacting in the other party’s securities based on such Confidential Information or from communicating such Confidential Information to others in connection with the trading of such securities.

26.5 Data Security. The receiving party shall implement safeguards and procedures to prevent unauthorized access to, and the destruction, loss, misuse or improper alteration of, all Confidential Information of the disclosing party. If the receiving party becomes aware of any unauthorized access to the disclosing party’s Confidential Information, it shall report immediately in detail such incident to the disclosing party and take appropriate remedial actions. Vendor will comply with Blue Coat’s written requirements for vendors and offsite development companies, as Vendor is notified of such requirements which may be revised from time to time. In addition to such requirements, the receiving party will also adhere to data security requirements and procedures, that provide for, without limitation: (i) the highest industry standard security systems, computers and technologies, including firewalls and encryption; (ii) physical security procedures, including regular monitoring of all work areas; (iii) background checks on its personnel; (iv) restriction of use and copying of the disclosing party’s Confidential Information on a “need-to-know” basis and only at authorized locations; (v) regular monitoring of the transport and storage of the disclosing party’s Confidential Information; (vi) regular monitoring of password procedures; and (vii) regular and random monitoring of Suppliers and other employees providing Design Services or working on Blue Coat Products.

27. INDEMNIFICATION

27.1 Blue Coat Indemnification of Vendor. Blue Coat shall defend Vendor and its employees, directors, officers, subsidiaries, successors and assigns (each a “Vendor Party”) from and against third party claims asserted against any Vendor Party to the extent such claims assert that (a) the Blue Coat Requirements Document (or any process, method, design, product or component that directly and necessarily results from compliance with the Blue Coat Requirements Document); (b) Blue Coat Consigned Items; (c) Marks; or (d) modifications made to the Product Design Document as instructed by Blue Coat, infringes any patent, trademark, mask work, copyright, trade secret or other intellectual property right of a third party; provided (i) Vendor gives prompt written notice of the claim; and (ii) Vendor reasonably cooperates in the defense or settlement of the claim. Vendor may participate in the defense of the claim, with its own counsel at its own expense. Blue Coat shall pay any final judgment on the claim and will pay any settlement costs to which it agrees. Blue Coat shall not be responsible for any settlement costs to which it does not agree in writing.

27.2 Vendor Indemnification of Blue Coat. Vendor shall defend Blue Coat and its employees, directors, officers, subsidiaries, successors and assigns (each a “Blue Coat Party”) from and against third party claims asserted against any Blue Coat Party to the extent such claims (a) assert that the design or manufacturing process used by Vendor in the manufacture of Products hereunder or the design of a Product or any method, process outlined in or component of a Product Information Document hereunder infringes any patent, trademark, mask work copyright, trade secret or other intellectual property right of a third party; or (b) are based on the gross negligence or willful misconduct of Vendor or its agents; provided that Blue Coat shall be required to (i) give Vendor prompt written notice of the Claim and (ii) Blue Coat reasonably cooperates in the defense or settlement of the claim. Vendor shall pay any final judgment on the claim and will pay any settlement costs to which it agrees. Vendor shall not be responsible for any settlement costs to which it does not agree in writing. This Section does not apply to the extent the claim is specific to the (A) Blue Coat Consigned Items, or other materials procured from Blue Coat designated suppliers or otherwise dictated by Blue Coat; (B) unauthorized

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Design & Manufacturing Services Agreement

modifications or other unauthorized alterations made to the Product after delivery (by a party other than Vendor); (C) modifications or other alterations made to the Product Design Document as instructed by Blue Coat; (D) process, method, design, product or component that directly and necessarily results from compliance with the Blue Coat Requirements Document; or (E) Marks.

27.3 Correction. If Vendor reasonably believes that a certain manufacturing process or method used by Vendor in the manufacture of a Product or the manufacture or sale or use of a Product may be enjoined, Vendor shall use all diligent commercial efforts to either promptly (a) procure for Blue Coat the right to continue to use the same or (b) replace or modify the same to make it non-infringing.

28. LIENS AND SECURITY INTERESTS. During the term of this Agreement, Vendor warrants that Vendor has not and will not, directly or indirectly create, incur or permit to exist any lien, encumbrances or security interest on or with respect to the Components or Products or any portion thereof.

29. MISCELLANEOUS.

29.1 Assignability. Neither party shall transfer or assign any of its rights or obligations hereunder without the prior written consent of the other party and any transfer or obligations hereunder without the prior written consent of the both parties shall be void and of no effect. Notwithstanding the foregoing, Blue Coat may assign this Agreement without consent to an Affiliate or to an acquirer of all or substantially all of Blue Coat’s equity, assets or business provided that such Affiliate or acquirer is not the competitor of Vendor.

29.2 Insurance. Vendor shall maintain (at its own expense) all necessary insurance, including but not limited to, workmen’s compensation, disability, and unemployment insurance, as well as public liability, product liability, property damage, and automobile liability insurance against any and all losses, claims, demands, proceedings, damages, costs, charges and expenses for injuries or damage to any person or property arising out of or in connection with this Agreement that are the result of the fault or negligence of Vendor.

29.3 Binding Nature; No Third Party Beneficiary. The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties, and their respective successors and permitted assigns, and is made solely and specifically for their benefit. No other person shall have any right, interest or claim hereunder or be entitled to any benefits under or on account of this Agreement as a third-party beneficiary or otherwise.

29.4 Waiver. Any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given, and only if such waiver is express and in writing by the parties hereto.

29.5 Governing Law and Venue. This Agreement shall in all respects be governed by and construed in accordance with the laws of the State of California, without regard to conflicts of laws provisions and without regard to the United Nations Convention on Contracts for the International Sale of Goods. The sole and exclusive venue and jurisdiction for all disputes arising from this Agreement shall be the state and Federal courts located in Santa Clara, California, and each party hereby consents to such jurisdiction and venue.

29.6 Entire Agreement. This Agreement supersedes all proposals, oral or written, all negotiations, conversations, or discussions between or among parties relating to the subject matter of this Agreement and all past dealing or industry custom.

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Design & Manufacturing Services Agreement

29.7 Notices. Any notices required or permitted to be given hereunder shall be given in writing and shall be delivered to the address written above (a) in person, (b) by certified mail, postage prepaid, return receipt requested, or (c) by a commercial overnight courier that guarantees next day delivery and provides a receipt. Notices to Blue Coat must be sent to the attention of the General Counsel. Notices to Vendor must be sent with copy to:

Legal & IP Center

Inventec Corporation

66 Hou-Kang Street, Shih-Lin District, Taipei 111, Taiwan, R.O.C.

Fax: 886-2-2881-6706

Email: chang.nancynw@inventec.com

Attn: Nancy Chang

29.8 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, Vendor and its successors and assigns and Blue Coat and Blue Coat’s successors and assigns.

29.9 Amendments. Any provision hereof may be amended and the observance of any provision of this Agreement may be waived (either generally or in any particular instance and either retroactively or prospectively) only with the written consent of Blue Coat and Vendor. However, it is the intention of the parties that this Agreement be controlling over additional or different terms of any invoices, confirmations or similar documents (other than additional terms (e.g. quantities, proposed ship dates, etc.) expressly contemplated herein as to be supplied in such documents) even if accepted in writing by both parties.

29.10 Counterparts. This Agreement may be executed in one (1) or more counterparts.

29.11 Force Majeure. Neither party shall be liable for any delay or failure in performance due to: acts of God, earthquake, flood, riots, fire, epidemics, war, strike and other labor difficulties, embargoes, acts of civil or military authorities or terrorism (a “Force Majeure Event”) unless caused by that party’s negligence or willful misconduct. Each party shall immediately notify the other party of the occurrence of Force Majeure Event affecting such party and shall use all reasonable efforts to recommence performance as soon as possible. If a Force Majeure Event occurs, the party not affected by the Force Majeure Event may suspend its performance, in whole or in part, for the duration of the Force Majeure Event, and, if the Force Majeure Event prevents the other party from performing all or any substantial part of its obligations for a period greater than thirty (30) consecutive days, terminate the Agreement. If Blue Coat is the party affected by the Force Majeure Event, Blue Coat shall be liable for any agreed upon cancellation charges and both parties shall be responsible for termination obligations as provided for in this Agreement.

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, all as of the day and year first above written.

Inventec Enterprise System Corporation
By:	/s/ Paul Wang
Title:	President, Enterprise Business Group
Blue Coat Systems, Inc.
By:	/s/ David de Simone
Title:	SVP Corporate Operations

SIGNATURE PAGE TO MANUFACTURING SERVICES AGREEMENT

EXHIBIT A

PRODUCT DESIGN DOCUMENT

The following Product Information Document shall be considered a part of the Design & Manufacturing Services Agreement entered into by Blue Coat Systems, Inc. (“Blue Coat”) and Inventec Enterprise System Corporation (“Vendor”) on             , 2007 (the “Agreement”). All terms not defined herein shall have the meaning ascribed to them in the Agreement.

Effective Date:

Product Description:

Bill of Materials/Pricing:

AVL:

Unique Components:

Component Lead Time:

Product Specifications:

Tooling:

Blue Coat Equipment:

Test Plan:

Project Managers:

Blue Coat:

Vendor:

Ownership:

Additional Requirements or Obligations:

Accepted and Agreed to by:

BLUE COAT SYSTEMS, INC.	INVENTEC ENTERPRISE SYSTEM CORPORATION
By:	By:
Name:	Name:
Title:	Title:
Date:	Date:

EXHIBIT B

PRODUCT INFORMATION DOCUMENT

The following Product Information Document shall be considered a part of the Design & Manufacturing Services Agreement entered into by Blue Coat Systems, Inc. (“Blue Coat”) and Inventec Enterprise System Corporation (“Vendor”) on             , 2008 (the “Agreement”). All terms not defined herein shall have the meaning ascribed to them in the Agreement. The Product Design Document, shall be incorporated by reference to this Product Information Document and sets forth the Product Specifications and other details associated with the Product.

Effective Date:

Product Name:

Product Lead Time:

Vendor Manufacturing Facility:

P.D.D. Information:

Contact Information:

Escalation Path:

Product Warranty Failure Percentage:

Out of Warranty Repair costs:

[insert Spreadsheet #1 – Finished Goods Information]

This Spreadsheet #1 would be attached to this Product Information Document and contain the following information:

• Part Number

• Total Product Cost

[insert Spreadsheet #2 – Component Information]

This Spreadsheet #2 would be attached to this Product Information Document and contain the following information:

• Part Number

• Unit Price

• Manufacturer Name

• Product Manufacturing Time

• Product Lead Time

• Inventory Liability

• MOQ (insert the quantity if applicable)

• NCNR (insert an ‘x’ if applicable)

• Min/Max (insert the quantity if applicable)

• Custom vs. Standard

• Insert a ‘C’ if the component is a Custom Component

• Insert a ‘S’ if the component is Standard

• AVL Status

• Insert ‘A’ if classified as an ‘A’ part

• Insert ‘B’ if classified as a ‘B’ part

• All others not noted are assumed as ‘C’ parts

Escalation of Issues:

Severity Definitions:

Severity 1 Issues: Immediate Customer Impact (BC Customer)

Severity 2 Issues: Potential/Pending Customer Impact (BC Customer)

Vendor will respond to all issue raised by Blue Coat or that Vendor becomes aware (“Issues”) of in accordance with the Issue Resolution Table set forth below. All response times are measured from the time Vendor receives an Issue notice (by email or phone) or Vendor has otherwise detected the Issue. The level of effort Vendor must apply to resolving Issues is continuous and best commercial efforts. The severity level of the Issues reported by Blue Coat shall be determined by Blue Coat.

Issue Resolution Table

Severity Level	Response Time	Fix Time and Resolution	Feedback            to     Blue Coat
Severity 1 Issue	Fifteen (15) minutes	Vendor will work 24 x 7 to provide a resolution.	Daily
Severity 2 Issue	One (1) hour	Vendor will work during normal business hours to provide a resolution.	Weekly        or     better

During the resolution of Issues, Vendor will escalate unresolved Issues in accordance with the Escalation Table set forth below. Escalation shall, at a minimum, take the form of electronic communication, on which Blue Coat is a copied recipient. If a Issue has not been resolved within five (5) days then, at Blue Coat’s request, Vendor will assign a dedicated resource to resolve the Issue and will communicate to Blue Coat the dedicated resource contact information.

Escalation Table

Escalation Level	Elapsed Time	Vendor Escalation Contact
1A	Initial identification	[insert title]
1B	4 hours	[insert title]
1C	24 hours	[insert title]
1D	48 hours	[insert title]
1E	3 days	[insert title]
1F	5 days	[insert title]
Contacts: Vendor shall designate a primary point of contact for the areas specified below. Vendor may change its designated point of contact at any time upon written notice to Blue Coat.
Department	Contact Name	Contact Information (phone and email)

Blue Coat shall designate a primary point of contact for the areas specified below. Vendor shall only contact the specified person assigned to the area designated below. Blue Coat may change its designated point of contact at any time upon written notice to Vendor.

Department Contact Name Contact Information (phone and email)

Test Specifications:

Product Manufacturing Time:

Quality Control Standards:

Additional Requirements or Obligations:

Accepted and Agreed to by:

BLUE COAT SYSTEMS, INC.	INVENTEC ENTERPRISE SYSTEM CORPORATION
By:	By:
Name:	Name:
Title:	Title:
Date:	Date:

EXHIBIT C

STATEMENT OF WORK

Deliverables:

Product specifications

Test plan:

Schedule:

Pricing:

NRE Fees:

Blue Coat Equipment Pricing:

Tooling:

Accepted and Agreed to by:

BLUE COAT SYSTEMS, INC.	INVENTEC ENTERPRISE SYSTEM CORPORATION
By:	By:
Name:	Name:
Title:	Title:
Date:	Date:

EX-10.43

Exhibit 10.43

AMENDED AND RESTATED SUPPLY AGREEMENT

This Amended and Restated Supply Agreement (“Agreement”) is entered into as of this 8th day of September 2005 (“Effective Date”) between SYNNEX Corporation (“Synnex”), a Delaware corporation having its principal place of business at 44201 Nobel Drive, Fremont, CA 94538, and Blue Coat Systems, Inc. (“Blue Coat”) a Delaware corporation, having its principal place of business at 420 North Mary Avenue, Sunnyvale, CA 94085.

RECITALS

WHEREAS, the parties previously entered into a Supply Agreement on December 29, 2000 (“Original Supply Agreement”);

WHEREAS, the parties intend to amend and restate the Original Supply Agreement on the terms set forth in this Agreement;

NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties agree as follows:

AGREEMENT

1. DEFINITIONS

1.1 “Base Unit” shall mean the proprietary system designed by Blue Coat and manufactured by MiTAC International Corporation.

1.2 “Common Components” are materials that are distributed by Synnex in some manner (as specified in a Product Information Document).

1.3 “Custom Components” shall mean materials specific and unique to the Products that cannot be returned to suppliers or sold to third parties and which are not used by Synnex in the ordinary course of business (as specified in a Product Information Document).

1.4 “Components” shall mean the complete list of components or bill of materials that are used to manufacture a Product as set forth in a Product Information Document.

1.5 “Component Lead Time” shall mean the lead time associated with a particular Component (as specified in a Product Information Document).

1.6 “Excess Buffer Stock” shall mean Buffer Stock that has been in inventory at Synnex for over three (3) months provided that such Buffer Stock (a) could not previously be shipped to a customer during the three month period and (b) was not manufactured by Synnex outside of the agreed upon Buffer Stock needs.

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1.7 “Excess Components” shall mean a Component that has been in inventory at Synnex for over six (6) months provided that such Component (a) could not previously be utilized in the manufacture of a Product during such six (6) month period and (b) was not purchased by Synnex outside of the Total Lead Time necessary to meet the Forecasts and Buffer Stock requirements.

1.8 “Obsolete Components” means Components that will be discarded or unused due to such Engineering Change Order (as defined in Section 2.3) provided that such Component was not purchased by Synnex outside of the Total Lead Time necessary to meet the Forecasts and Buffer Stock requirements.

1.9 “Products” means the product set forth in a Product Information Document.

1.10 “Product Information Document” means an exhibit to this Agreement that contains information and details related to the manufacture, sale and cost of a Product.

1.11 “Product Manufacturing Time” means the pre-determined amount of lead time between receiving a purchase order for a Product and shipping the Product (as defined in the Product Information Document).

1.12 “Purchased Components” means materials that are neither Custom Components nor Common Components (as specified in the Product Information Document).

1.13 “Resource Costs” means the cost of Product other than Component Costs. Resource Costs shall include, but not be limited to, labor costs, facilities costs and other overhead costs.

1.14 “Sensitive Components” means a Component where the cost tends to fluctuate significantly in very short period of time. Components classified as Sensitive Components are listed in the applicable Product Information Document.

1.15 “Software” means the software portion of the Product that is embedded in the hardware of the Product, the user documentations, packaging and any enhancements, modifications, updates, bug fixes, releases, patents, patent rights, copyrights, trade secrets, know how and other intellectual property related thereto.

1.16 “Specifications” shall mean the technical and functional specifications for a Product as set forth in a Product Information Document and as modified from time to time by written agreement of Blue Coat and Synnex.

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1.17 “Total Product Cost” shall mean Synnex’s costs to acquire all Components for a Product, all Resource Costs related to the manufacture and shipment of a Product and the profit to Synnex applicable to a Product (all as specified in a Product Information Document).

1.18 “Total Lead Time” means, for a particular Component, the period of time that includes both the Component Lead Time and the Product Manufacturing Time.

1.19 “Variable Costs” shall mean the cost of the Custom Components, the Purchased Components and the Resource Costs.

2. MANUFACTURE AND SALE OF PRODUCTS

2.1 Product Information Document. For each Product to be manufactured and sold by Synnex, Blue Coat and Synnex shall execute a Product Information Document in the form set forth in Exhibit A. At a minimum, the Product Information Document shall include, without limitation, the name and description of the Product, Specifications, Quality Control Standards. Product Manufacturing Time, Components, Components Costs, Component Lead Time, Engineering Charges and Project Managers.

2.2 Products. Subject to the terms and conditions of this Agreement, Synnex shall manufacture and sell to Blue Coat the Products set forth on each Product Information Document. Products shall be manufactured by Synnex according to the Product Specifications.

2.3 Engineering Change Orders. Blue Coat may change the Specifications for a Product at any time. In the event that Blue Coat makes such changes, Blue Coat shall issue an engineering change order in writing to Synnex specifying the change in design, manufacturing process or installation and engineering specifications (“Engineering Change Order”). Within five (5) days of receipt of an Engineering Change Order, Synnex shall provide a written acknowledgement (“Acknowledgement”), including a proposed schedule to implement such changes or additions, an estimate of the cost to implement such changes or additions and the costs associated with the Obsolete Components. Blue Coat shall review such proposed schedule and estimates and either accept or reject the Acknowledgement. If Blue Coat accepts the Acknowledgement, Blue Coat shall pay Synnex the amounts specified in the Acknowledgement. Notwithstanding the above, Blue Coat shall not be responsible for reimbursing Synnex for Obsolete Components that were purchased outside of the Total Lead Time necessary to meet the Forecasts (defined below).

2.4 Project Manager. Each party shall appoint project managers (“Project Managers”) associated with Products. The names, addresses, telephone, fax numbers and email address of the Project Managers are set forth in the Product Information Document. The Project Managers shall act as liaisons between the parties with respect to their

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respective performances as it relates to their particular Product and shall provide the parties from time to time with the names and telephone number of additional specific contact persons when such direct contact is preferable. In the event that either party appoints a new Project Manager, such party shall promptly notify the other.

2.5 Subcontractors. The parties acknowledge that the work and manufacturing obligations set forth in this Agreement must be performed by Synnex except where third parties selected by Synnex are approved in advance and in writing by Blue Coat (“Subcontractors”). If any part of the performance under this Agreement is dependent on the performance of Subcontractors, Synnex shall inspect and promptly report to Blue Coat any material defect that renders such work unsuitable for Synnex’s proper performance. Synnex’s silence shall constitute approval of such Subcontractor performance as fit, proper and suitable for Synnex’s performance under this Agreement, and, in any case, Synnex shall be responsible for the activities of Subcontractors. Blue Coat will not be responsible for payment or other obligations to any Subcontractors. If for any reason Synnex fails to make prompt payment to a Subcontractor and as a result, the production of the Product could be halted due to unavailability of components from Subcontractor, then Synnex shall immediately notify Blue Coat and the parties shall work in good faith to resolve the issue.

3. OWNERSHIP

3.1 Tools As between the parties, Blue Coat shall own all tools it provides to Synnex (“Tools”).

3.2 Inventions. As between the parties, Blue Coat exclusively shall have all right, title and interest (including all patent rights, copyrights, trade secret rights, mask work rights and other rights throughout the world (collectively, “Intellectual Property Rights”)) in any and all information relating to Product design, construction, assembly, development or architecture, all inventions, ideas, suggestions regarding Product improvements or other information made or conceived or reduced to practice by Synnex (or the parties jointly) in the course of performing the services under this Agreement (“Inventions”). Synnex will have no right or license in the foregoing, except as expressly provided herein.

3.3 Assignment. The parties hereby make any assignments necessary to accomplish the foregoing ownership provisions. In interpreting such ownership provisions anything made or conceived or reduced to practice by an employee or contractor of a party in the course of performance under this Agreement will be deemed so made or conceived or reduced to practice by that party; each party has and will have appropriate agreements with all such employees and contractors necessary to fully effect the provisions of this Section.

3.4 Perfection. A party being assigned any proprietary right under this Agreement will have the exclusive right to, and, at such party’s expense, the assigning

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party agrees to assist such party in every proper way (including, without limitation, becoming a nominal party) to, evidence, record and perfect the assignment and to apply for and obtain recordation of and from time to time enforce, maintain, and defend such proprietary rights. A party will execute all documents the other may reasonably request for such purposes,

3.5 Synnex Intellectual Property. Synnex shall retain all ownership and rights, including all Intellectual Property Rights, in and to it’s proprietary electronics and manufacturing techniques except to the extent such rights were invented pursuant to Synnex’s performance under this Agreement (“Synnex Pre-Existing Rights”). Any Synnex Pre-Existing Rights that were created prior to the Effective Date but are used or necessary to the manufacture and fulfillment of the Products, Synnex hereby provides Blue Coat with a non-exclusive, irrevocable, perpetual license to such Synnex Pre-Existing Rights.

4. PRICING AND PAYMENT TERMS

4.1 Prices. The initial price for a Product shall be set forth in the Product Information Document.

4.2 Adjustment to Variable Costs. On a quarterly basis the parties will review the Total Product Cost of the Products. Within the first seven (7) business days of a calendar quarter, Synnex shall provide Blue Coat with written notice of the positive and negative price variances that have occurred and the proposed changes in Variable Costs to be implemented in the next Blue Coat fiscal quarter (“New Costs”). Such New Costs shall be in effect for one quarter (such quarter shall be measured using Blue Coat’s fiscal quarter), provided that the cost of the Sensitive Components, does not change significantly (greater than five percent (5%) of the total Sensitive Component price) during the one quarter period. If the cost of Sensitive Components changes significantly during the one quarter period, then, upon mutual agreement by Blue Coat and Synnex, the Total Product Cost of the Products can be adjusted during the one quarter period. Purchase orders placed prior to the proposed effective date and not canceled by Blue Coat shall not be affected by the New Costs.

4.3 Total Product Cost Notification. At least five (5) business days prior to the beginning of each Blue Coat fiscal quarter, Synnex shall notify Blue Coat of the Total Product Cost (based on using the New Costs amounts) and provide Blue Coat with a breakdown of the costs and profit used to calculate such Total Product Cost.

4.4 Engineering Charge and Special Tooling. Blue Coat shall pay to Synnex a non-recurring Engineering Charge (as specified in the Product Information Document) to reimburse Synnex for the out-of-pocket cost of the special equipment and tooling associated with the manufacture of the Product and any other special equipment or tooling that the parties subsequently determine in writing (and add to the Product Information Document) (collectively, the “Special Tooling”). For purposes of this

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Agreement, Synnex represents and warrants that the Special Tooling shall not be commercially used on behalf of any party other than Blue Coat. Synnex shall, upon payment of the Engineering Charge by Blue Coat, transfer all right, title and interest to the Special Tooling to Blue Coat, free and clear of any liens or other encumbrances. Upon any termination or expiration of this Agreement, Synnex shall assist and cooperate in good faith with the transfer by Blue Coat of the Special Tooling to other locations designated by Blue Coat. During the term of this Agreement, Blue Coat shall reimburse Synnex for expenses or costs related to the Special Tooling (including repairs) that are previously approved by Blue Coat.

4.5 Other Costs. Blue Coat shall also pay any pre-approved (in writing by Blue Coat) additional costs and expenses that are not specified in this Agreement. Any such costs or expenses shall be paid within thirty (30) days after receipt of invoice.

4.6 Cost Reduction. On a quarterly basis, Synnex shall use commercially reasonable efforts to minimize the cost in the Component Costs and Resource Costs. Synnex shall provide and Blue Coat will review all Component Costs and Resource Costs on a quarterly basis. Costs to be reviewed include, but are not limited to, time studies for production and costs related to repairs, testing, kitting, inventory management, shipping and quality inspections. Costing analysis will include generic salary information for relevant personnel including staffing quantities and volumes. The parties will work together to develop a process for standardizing this quarterly review. Once this process is developed it shall be memorialized and incorporated into this Agreement as Exhibit B. Synnex shall use commercially reasonable efforts to work on achieving cost savings on both materials and processes, and such savings shall be reflected in a reduction of the Total Product Cost. In addition, Synnex shall use commercially reasonable efforts to institute any cost reduction proposals reasonably suggested by Blue Coat, and to reduce the purchase price of the Products to Blue Coat by an amount equal to the per unit saving realized therefrom.

4.7 Taxes. Prices stated in the Product Information Document are in U.S. dollars and include any withholding taxes and the like. Synnex agrees that amounts paid pursuant to this Agreement are not subject to sales and use tax. Blue Coat agrees to provide Synnex with satisfactory documentation (including but not limited to resale exemption or other certificates) supporting such status. All other items of tax based in whole or in part on the income of a party shall be the sole responsibility of such party.

4.8 Payment Terms. Synnex shall invoice Blue Coat upon shipment of the Product. All undisputed payments due hereunder shall be paid in U.S. dollars not later than thirty (30) days following the invoice date which shall be no earlier than the ship date. In the event that an invoice is not paid within forty (40) days following the invoice date (provided Blue Coat has not paid any invoices late in the previous twelve, a late charge shall be charged to Blue Coat of one percent (1%) per month of the delinquent undisputed invoice amount. If Blue Coat’s gross revenue in any one quarter drops more than 25% over the previous quarter, then Synnex reserves the right to alter or change any and all credit terms upon five (5) business days prior written notice to Blue Coat.

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4.9 Favorable Terms. Synnex warrants that during the term of this Agreement the terms and conditions of this Agreement, including discounts, prices and shipping, are no less favorable than the terms, conditions, discounts and prices given to any third party that purchases or licenses products or services from Synnex in similar quantities and under similar conditions. Blue Coat reserves the right to audit Synnex’s books and records, during the term of this Agreement and for three (3) years after its termination to verify Synnex’s compliance with this Section. The audit will not be done more than once in any calendar year and shall be done through an independent third party. Such third party shall execute a non-disclosure agreement prior to performing the audit. The cost of the audit shall be borne by Blue Coat, unless the third party determines that Synnex is not in compliance with this Section in which event Synnex shall pay for the audit. If the third party determines that Synnex has not charged Blue Coat the correct price, Synnex shall pay to Blue Coat the difference within thirty (30) days after the third party issues its report.

4.10 Inventory Count. Within the first five (5) days of each Blue Coat calendar month, Synnex shall notify Blue Coat of the total number of Products in inventory, the total number of Components in inventory (in a costed report), how long each Component has been in inventory, the Forecasts under which each Component was purchased, the date the Component was purchased and any open purchase orders for Components that have not been received.

5. PURCHASE ORDERS

5.1 Purchase Orders. Blue Coat’s purchase orders for Products shall include the following:

(a) Identification of Products ordered by Blue Coat part number and descriptions;

(b) Quantity to be purchased;

(c) Price of Products ordered;

(d) Required shipment date; and

(e) Shipping information (including location).

5.2 Controlling Terms. All purchase orders and invoices under this Agreement shall be subject only to the terms and conditions hereof. In the event the terms of any such purchase order, confirmation or similar document conflicts with or are

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additional to the terms of this Agreement, the terms of this Agreement alone shall apply and shall govern regardless of execution of such document by one or both parties, except that the parties may agree to negotiate non-preprinted terms which shall be effective only if executed by both parties. Any other terms and conditions (from either party) shall not apply to this Agreement or the purchase orders.

5.3 Purchase Order Process. All purchase orders received by Synnex for Products shall be accepted or rejected by Synnex within one (1) business day upon their receipt, if the purchase order is in compliance with the terms of this Agreement. Any purchase order no rejected within the time period will be deemed accepted. Synnex may only reject a purchase order for good cause. If Synnex has any reason to believe it will not meet the required shipment date, it shall use reasonable efforts to notify Blue Coat within four (4) business hours, but in no event shall such notice be more than two (2) business days of the receipt of the purchase order. Blue Coat shall have the ability to track the status of any purchase order online using the web site located at wss.synnex.com. Synnex shall provide Blue Coat with an electronic shipping notification within two (2) hours after the Product has shipped (however, Synnex shall use diligent efforts to improve this response time to one (1) hour). Invoicing will be daily with all relevant and accurate tracking numbers and freight charges included with the invoice.

5.4 Forecasts. Before the beginning of each month, Blue Coat shall provide non-binding, rolling twelve (12) month forecasts setting forth Blue Coat’s demand for Product. Before the beginning of each month, Blue Coat shall also provide Synnex with binding three (3) month forecast (“Forecast”).

5.5 Cancellation of Purchase Orders. Provided such notice is within forty-eight (48) hours after submission of a purchase order, Blue Coat may cancel or modify such purchase order without the approval of Synnex. Notwithstanding the foregoing, in the event that Blue Coat cancels some quantity of units of Products ordered pursuant to a purchase order or Forecast, Synnex, upon receipt of such written notice of such cancellation, shall stop work on such units of Products to the extent specified therein. Blue Coat’s termination liability for a cancellation shall be limited to payment for all units of Products shipped to Blue Coat, payment for any units of Buffer Stock and payment of any Purchased Components and/or Custom Components as set forth in Section 9.

5.6 Order Increases. Upon written request from Blue Coat, Synnex shall use its commercially diligent efforts to (a) ship on the requested date the number of items ordered by Blue Coat in excess of that set forth in Blue Coat’s Forecast; and (b) ship items in less than the expected lead-time if so requested by Blue Coat. However, failure to perform the foregoing shall not be considered a default under this Agreement.

5.7 Rush Orders. Blue Coat may, at its option, submit purchase orders requesting immediate shipment (as early as same day shipment) (“Rush Orders”). Synnex shall use its commercially diligent efforts to fill Rush Orders.

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6. SHIPPING

6.1 Packaging and Shipping. Synnex shall package and label the Products pursuant to the Specifications. Synnex shall not mark or label the Products except as set forth in the Specifications. Synnex shall tender the Products FOB Origin and ship the Products to the designated shipping location set forth in the purchase order. Freight charges not billed as collect to Blue Coat’s customers will be invoiced to Blue Coat on the invoice associated with each purchase order. All Products shall ship from Synnex in order to meet the required shipment date specified on the purchase order. In the event a shipment will not meet the required shipment date (and such failure was in Synnex’s control), routing may be changed to premium transportation at Blue Coat’s request. In that event, Synnex shall bear the expense of any difference in the freight costs for the premium transportation.

6.2 Documentation. Synnex shall maintain complete and accurate shipping documentation for all shipments for a minimum of five (5) years following the date of shipment. Shipment documentation includes the purchase order, packing slip, commercial invoice, carrier waybill and Synnex billing invoice. Blue Coat and its authorized agents and representatives shall have access to such records for purposes of performing an audit during normal business hours during the term of this Agreement and during periods which Synnex is required to retain such records. Any and all such records disclosed to Blue Coat shall be deemed “Confidential Information” as referenced in Section 17 below.

6.3 Late Shipments. Under no circumstances will Synnex be liable for (a) any late shipment damages if it fails to ship items that were ordered and scheduled for shipment in shorter than the standard Product Manufacturing Time and Synnex was unable to ship on time, (b) any late shipment damages if the delay was due to a Blue Coat designated supplier issue or (c) any late shipment damages if the delay was due to force majeure.

6.4 Allocation. Synnex shall in any event use diligent commercial efforts to maintain the ability to supply all Product that Blue Coat orders from Synnex. Synnex agrees that, in the event of an allocation due to a Force Majeure event, Blue Coat’s order(s), subject to normal lead-time requirements, shall be filled according to an allocation plan no less favorable than that provided to any other Synnex customer. Synnex shall provide Blue Coat with as much notice as possible if it anticipates or has reason to believe that Synnex’s output of the Product shall not be sufficient to meet all of Blue Coat’s requirements for any period.

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7. ACCEPTANCE & REJECTION

7.1 Inspection. Notwithstanding any prior inspection or payment by Blue Coat, all Products shall be subject to final inspection and acceptance at Blue Coat’s specified destination within sixty (60) days after delivery.

7.2 Rejection. If any Product is defective, or otherwise not in conformity with the requirements of Blue Coat’s applicable Specifications, Blue Coat may require Synnex to promptly replace the Product and Synnex shall replace such Product within five (5) working days of Synnex’s receipt of such request. If after being requested by Blue Coat Synnex fails to promptly replace or correct any defective item, then Blue Coat shall have the right, at its sole option and in addition to any other rights or remedied it may have, to (a) replace or correct such Product and charge to Synnex the cost occasioned thereby, or (b) without further notice to cancel the applicable purchase order relative to the rejected material without penalty or terminate this Agreement for default in accordance with the termination provisions herein and require refund of any payments made relative to the rejected Products. At Blue Coat’s request, Synnex shall provide to Blue Coat a failure analysis report specifying the reason for failure of any rejected Product. No Product shall be returned to Synnex without an accompanying Synnex supplied RMA number.

7.3 Credits. If a Product was returned pursuant to Section 7.2 due to an error by Synnex (e.g., an error as to workmanship or integration of the Components), then Synnex shall credit Blue Coat the amount paid for the replacement Product. The Product Information Document may contain information specifying Synnex’s responsibilities and where Synnex shall be obligated to credit Blue Coat pursuant to this Section 7.2 and 7.3.

8. QUALITY

8.1 Quality Control. Synnex acknowledges and agrees that the Products will be subject to the Quality Control Standards set forth in the Product Information Document. Synnex shall perform and hereby warrants that all Products to be shipped have passed the test and quality control procedures set forth in the Product Information Document and meet the Specifications in all material respects.

8.2 Quality Control Personnel. Blue Coat may at its option and expense send its quality control personnel to Synnex’s manufacturing and assembly facilities to assist in or observe the work in progress as set forth in the Product Information Document without materially interrupting Synnex’s business. Blue Coat may from time to time suggest commercially reasonable modification to Synnex’s procedures for performing the work under this Agreement for the purpose of enhancing or assuring quality and Synnex shall act in good faith to comply with such suggestions.

8.3 Quality. Synnex shall provide the Products to Blue Coat free of manufacturing defects and in conformance with this Agreement.

8.4 Management Reviews. Reviews will be held on a quarterly basis, after the close of Blue Coat’s fiscal quarter, to assess the performance of Synnex against the

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mutually established objectives and criteria. Reviews will include the resetting of standards for subsequent periods as well as establishing and measuring Synnex’s performance record at Blue Coat. The location and/or meeting method will be mutually agreed upon by the parties. If on-site meetings are determined to be appropriate, the intent will be to alternate periodically between Blue Coat and Synnex sites.

8.5 Facility Inspection. Synnex shall, whenever reasonably requested by Blue Coat, permit Blue Coat, or a third party acting on behalf of Blue Coat, the opportunity to inspect the production process at Synnex’s facility with respect to a Product, provided that such inspection shall not exceed one (1) per year. Blue Coat shall provide Synnex with two (2) week notice prior to the visit.

8.6 Production Monitoring and Records. Synnex shall at all times maintain fully updated production (including but not limited to work forecasted, work in progress and inventory levels), and Synnex shall permit Blue Coat to monitor at any time such levels through a Synnex’s web page or its successor site. In addition, Synnex shall maintain complete and accurate records of all amounts billed and billable to Blue Coat, Variable Costs and payments made by Blue Coat hereunder in accordance with U.S. generally accepted accounting practices (consistently applied) for a period of three (3) years following the date of final payment for Products within the term of this Agreement. Synnex will not modify its accounting treatment or methods for calculating or determining or allocating costs relating to the Products without Blue Coat’s prior written consent, which such consent shall not be unreasonably withheld. Synnex agrees to provide reasonable supporting documentation concerning any disputed invoice to Blue Coat within thirty (30) days after Blue Coat provides written notice of dispute to Synnex. Blue Coat agrees to submit to Synnex any dispute regarding any invoices, in writing, within thirty (30) days after Blue Coat becomes aware, but in no event longer than ninety (90) days after the invoice date, of an issue that may give rise to a dispute. Each party shall have thirty (30) days to respond to claims in writing. Blue Coat and its authorized agents and representatives shall have access to such records for purposes of audit during normal business hours during the term of this Agreement and during periods which Synnex is required to retain such records. Any and all such records disclosed to Blue Coat shall be deemed “Confidential Information” (whether or not such records are labeled or identified as such) as referenced in Section 17 below.

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9. INVENTORY LIABILITY

In the event that Synnex purchases or orders Components, in order to meet Blue Coat’s requirements for Buffer Stock or Forecasts, Blue Coat may be required to purchase the unused portion of such Components from Synnex upon demand if Blue Coat fails to purchase Products in accordance with such Forecast. Blue Coat shall pay for such Components in the amounts and at times contemplated as follows:

9.1 Common Components. Blue Coat shall have no payment obligation or other liability for Common Components that are purchased by Synnex for this Agreement and Synnex shall indemnify and hold Blue Coat harmless from all costs and expenses arising from such Common Components.

9.2 Purchased Components. Synnex shall purchase, pursuant to this Agreement, Purchased Components as required to meet the Forecasts. In the event that any Purchased Components become Excess Components or Obsolete Components, Synnex will make every effort to return the Purchased Components to the respective suppliers or resell the Purchased Components to third parties (up to a period of thirty (30) days). Blue Coat shall reimburse Synnex for any price differential between the selling price and the then current value of the Purchased Components provided that Synnex shall use its best commercially reasonable efforts to sell the Purchased Components at the best price available. Additionally, any restocking fees or related return fees charged by suppliers for accepting the return of Purchased Components shall be the obligation of Blue Coat. In the event Purchased Components are not returned to the suppliers or resold to third parties within thirty (30) days of Synnex’s demand for payment therefor, such Purchased Components shall be deemed to be Custom Components.

9.3 Custom Components. Synnex shall purchase, pursuant to this Agreement, Custom Components as required to meet the Forecasts and purchase orders. In the event that any Custom Components become Excess Components, Blue Coat shall pay Synnex for a reasonable carrying cost for such inventory of Excess or Obsolete Custom Components within thirty (30) business days of (a) Synnex’s demand for payment therefor or (b) the deemed conversion of Purchase Components to Custom Components as a result of expiration of the thirty (30) day period specified in Section 9.2. In the event that any Custom Components become Obsolete Components, Blue Coat shall pay Synnex the amount Synnex paid for such Custom Components within thirty (30) days after such Custom Component becoming an Obsolete Component.

9.4 Buffer Stock. Synnex will be required to maintain a minimum buffer stock of all Products as specified in a Product Information Document (and updated by Blue Coat as needed) (“Buffer Stock”). This Buffer Stock is to accommodate requests for expedited orders and dead-on-arrival replacements. Additionally, the Buffer Stock will be used to accommodate expected and unexpected quarterly business cycle fluctuations. However, the Buffer Stock will not exceed a maximum as specified in Product Information Document. If the Buffer Stock becomes Excess Buffer Stock, then Blue

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Coat shall pay either (a) reasonable carrying costs for such Excess Buffer Stock or (b) the Product cost as outlined in the Product Information Document or the updated cost agreed to by the parties.

10. TERM AND TERMINATION

10.1 Term. This Agreement shall begin upon the Effective Date and, unless terminated as provided herein, shall continue in effect for five (5) years. The Agreement shall automatically renew for additional one (1) year terms unless and until either party provides written notice of non-renewal at least one hundred and eighty (180) days prior to the end of any such term.

10.2 Termination of Agreement.

(a) For Breach. If a party materially breaches any provision of this Agreement, the non-breaching party may terminate this Agreement upon thirty (30) days written notice thereof unless such material breach is cured within the notice period.

(b) Effect of Termination for Breach. If any unfilled or partially unfilled purchase orders are outstanding at termination, the non-breaching party may cancel them without obligation to make any payments to the breaching party. Unfilled purchase orders (or portions thereof) that are not cancelled by the non-breaching party will be filled and paid for in accordance with the terms of this Agreement.

10.3 Survivability and Obligations Upon Termination. Section 1, 3, 8, 9 (for a period of three (3) months after the date of termination) and 10 through 20 shall survive the termination of this Agreement. Furthermore, in the event of any termination or expiration of this Agreement (a) Synnex shall deliver all Tools to Blue Coat within five (5) days after termination, (b) each party shall return or destroy the other party’s Confidential Information with destruction certificate (if requested), except an archival copy as required by record retention policies or law and (c) the parties shall comply with the transition services provisions set forth in Section 11.

11. TRANSITION AFTER TERMINATION. Following any termination or expiration of this Agreement, each party shall assist and cooperate in good faith with the other party to enable an orderly dissolution of the relationship or the relationship contemplated hereby. Any such assistance and cooperation shall be at each parties standard rates. Synnex shall use diligent efforts to provide to Blue Coat all services and assistance reasonably requested by Blue Coat to enable an orderly transition of the services at Synnex’s standard rates for the employees involved in providing such transition services.

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12. WARRANTIES

12.1 Authority. Each party warrants that it has the right and authority to enter into this Agreement and perform its obligations hereunder.

12.2 No Liens. Synnex further warrants that the Products will be shipped to Blue Coat or its designated location free of all liens, claims and/or encumbrances.

12.3 No Defects. Synnex warrants that all Products shipped hereunder will be free from material defects in materials and workmanship and will conform in all material respects to the Specifications for thirteen (13) months (the “Warranty Period”) from the date of shipment of the Products to Blue Coat or its designee. During the Warranty Period, Blue Coat will ship defective Products, if any, to Synnex FOB Origin freight prepaid. Synnex shall repair or replace and return to Blue Coat (or the location designated by Blue Coat) defective Products within five (5) business days after receiving the defective Products. Synnex shall ship the repaired or replaced Products FOB Destination to be designated by Blue Coat via the same ship method as the Products being returned, freight prepaid. The Warranty Period covering repaired or replaced Products shall be the greater of the remainder of the original Warranty Period or ninety (90) days. The method of disposition of any replaced Products will be as mutually agreed by both parties in writing.

12.4 Repairs Not Covered Under Warranty. In addition to repairs covered in the Section above, Synnex shall provide repair services on all Products for at least five (5) years after the Warranty Period has expired at the rates set forth in the Repair Service Level Agreement attached hereto as Exhibit B.

12.5 THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES WHETHER STATUTORY, EXPRESS OR IMPLIED. INCLUDING BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR PARTICULAR PURPOSE AND NON-INFRINGEMENT AND FOR ALL OTHER OBLIGATIONS OR LIABILITIES ON SYNNEX’S PART.

13. SYNNEX NEITHER ASSUMES, NOR AUTHORIZES ANY OTHER PERSON TO ASSUME FOR SYNNEX, ANY OTHER LIABILITY IN CONNECTION WITH THE SALE OF PRODUCTS TO BLUE COAT OR ITS CUSTOMERS. THIS WARRANTY SHALL NOT APPLY TO ANY UNITS OF PRODUCTS WHICH SHALL HAVE BEEN REPAIRED OR ALTERED OTHER THAN BY SYNNEX OR WHICH SHALL HAVE BEEN SUBJECT TO MISUSE, NEGLIGENCE, OR ACCIDENT. SYNNEX SHALL NOT BE LIABLE FOR PERSONAL INJURY RESULTING DIRECTLY OR INDIRECTLY FROM THE DESIGN, MATERIAL, OPERATION OR INSTALLATION OF ANY UNITS OF PRODUCTS, OTHER THAN FOR PERSONAL INJURY RESULTING SOLELY FROM WORKMANSHIP.

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14. EXPORT. In exporting and importing the Products, each party agrees to comply with all export and import laws, rules, policies, procedures, restrictions and regulations of the Department of Commerce or other United States or foreign agency or authority, and not to export or import, or allow the export or re-export or import of any goods in violation of any such restrictions, laws or regulations. Each party shall obtain all licenses, permits and approvals required by any government; provided that in doing so Synnex shall at all times fully protect the Confidential Information and proprietary rights of Blue Coat and shall not bind Blue Coat to any action or inaction unless agreed to in writing by Blue Coat. Blue Coat shall provide accurate product export classifications and valuations to Synnex. Each party will indemnify and hold the other party harmless for any breach of this Section 14 by such party.

15. RELATIONSHIP OF PARTIES AND LIABILITY

15.1 Independent Contractor. Synnex and Blue Coat shall be deemed to be an independent contractor to one another and not its agent or employee. Neither party shall have any authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other party.

15.2 Indemnity. Each party shall be responsible for all acts and omissions, whether or not willful, reckless or negligent, of it, its agents and employees, and shall indemnify and defend the other party and its customers against and save it harmless from, any and all claims, demands, damages, losses, costs, attorney’s fees or expenses of whatever nature (including, without limitation, those resulting from infringement, design defects, product liability or violations of any law) made against or sustained by each party by reason of the foregoing or this Agreement or the work performed hereunder, whether or not any breach of contract is involved.

16. LIMITATION OF LIABILITY. EXCEPT FOR A CLAIM PURSUANT TO SECTION 15.2 OR A BREACH OF SECTION 17, OR FOR LIABILITY ARISING FROM THE GROSS NEGLIGENCE OR INTENTIONAL CONDUCT OF A PARTY, IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES RELATED TO THIS AGREEMENT, WHETHER FROM ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY OR ANY OTHER LEGAL OR EQUITABLE THEORY.

17. CONFIDENTIALITY

17.1 Proprietary Information. Prior to and during the performance of this Agreement, the parties may disclose or furnish to each other proprietary marketing, technical or business information either verbally or in tangible form (the “Confidential Information”). Any information concerning Product design, the Base Unit, construction, assembly, manufacture, development, or architecture or the Product, and information concerning the business, products, marketing efforts, technology or finances of Blue Coat shall be deemed to be the Confidential Information of Blue Coat. All information

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referenced in Section 6.2 and 8.6 above and any information concerning proprietary electronics and manufacturing techniques (except those invented pursuant to Synnex’s obligations under the Agreement) and information concerning the business, products, marketing efforts, technology or finances of Synnex, shall be deemed to be the Confidential Information of Synnex. All Confidential Information of the disclosing party shall be held in confidence by the receiving party and not directly or indirectly disclosed, copied or used. The terms and existence of this Agreement are confidential and neither party shall disclose such information except as required by operation of law or regulatory authority.

17.2 Non-Confidential Information. The confidentiality obligation set forth in Section 17.1, shall not apply to information that (a) is already known to the receiving party without any obligation of confidentiality; (b) has entered the public domain through no action or inaction of the receiving party; (c) is generally available to the public; or (d) was disclosed to the receiving party by a third party not in violation of the disclosing party’s proprietary rights.

17.3 Injunction. Each party acknowledges that the Confidential Information of the disclosing party constitutes valuable trade secrets of the disclosing party and that the unauthorized disclosure or use of such Confidential Information by the receiving party will cause irreparable harm, for which no remedies of law will be adequate. Accordingly, the parties agree that the disclosing party shall have the right, in addition to any other remedies, to obtain injunctive relief against the receiving party in the event that the receiving party breaches the confidentiality obligations set forth in this Section 17.

18. INFRINGEMENT INDEMNIFICATION. Blue Coat shall defend, indemnify and hold harmless Synnex with respect to any claim, demand, cost or expense (including reasonable attorney’s fees), settlement, and damages finally awarded to the extent that it is based upon a third party claim that a Product infringes any United states or foreign patent, copyright, trademark or trade secret. Blue Coat’s indemnification obligations herein are conditioned upon Synnex (a) providing prompt notice of any indemnifiable claim to Blue Coat, (b) permitting Blue Coat to assume sole control of the defense and settlement of such claim or action provided that Blue Coat does not prejudice Synnex’s position by admitting liability for Synnex for which Blue Coat has no obligation to indemnify Synnex or cause Synnex to incur any costs for which Blue Coat has no obligation to indemnify Synnex (in such case, Synnex must provide consent for the settlement, such consent not to be unreasonably withheld or delayed), and (c) Synnex reasonably cooperating (at Blue Coat’s expense) in the defense and settlement thereof. The foregoing states the sole and exclusive remedy and obligations of Blue Coat for infringement arising from this Agreement.

19. LIENS AND SECURITY INTERESTS. Synnex warrants that Synnex has not and will not, directly or indirectly create, incur or permit to exist any lien, encumbrances or security interest on or with respect to the Components or Products during the term (except those persons claiming by, through or under Blue Coat).

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20. MISCELLANEOUS.

20.1 Assignability. Each party shall not transfer or assign any of its rights or obligations hereunder without the prior written consent of the other party and any transfer or obligations hereunder without the prior written consent of the both parties shall be void and of no effect. Notwithstanding the foregoing, Blue Coat may assign this Agreement without consent to an acquirer of all or substantially all of Blue Coat’s equity, assets or business.

20.2 Waiver. Any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given, and only if such waiver is express and in writing by the parties hereto.

20.3 Governing Law and Venue. This Agreement shall in all respects be governed by and construed in accordance with the laws of the State of California, without regard to conflicts of laws provisions thereof and without regard to the United Nations Convention on Contracts for the International Sale of Goods. The sole and exclusive venue and jurisdiction for all disputes arising from this Agreement shall be the state and Federal courts located in San Francisco, California.

20.4 Entire Agreement. This Agreement supersedes all proposals, oral or written, all negotiations, conversations, or discussions between or among parties relating to the subject matter of this Agreement and all past dealing or industry custom.

20.5 Notices. All notices or demands by any party pursuant to this Agreement shall be made by personal delivery or certified mail, return receipt requested to the addresses written above. All such notices shall be deemed received upon actual receipt for personal delivery and upon deposit in the U.S. mail, postage prepaid, for certified mail delivery.

20.6 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, Synnex and its successors and assigns and Blue Coat and Blue Coat’s successors and assigns.

20.7 Amendments. Any provision hereof may be amended and the observance of any provision of this Agreement may be waived (either generally or in any particular instance and either retroactively or prospectively) only with the written consent of Blue Coat and Synnex. However, it is the intention of the parties that this Agreement be controlling over additional or different terms of any invoices, confirmations or similar documents (other than additional terms (e.g. quantities, proposed ship dates, etc.) expressly contemplated herein as to be supplied in such documents) even if accepted in writing by both parties.

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20.8 Counterparts. This Agreement may be executed in one (1) or more counterparts.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, all as of the day and year first above written.

SYNNEX Corporation
By:	/s/ Simon Y. Leung
Title:	General Counsel and Corporate Secretary
Blue Coat Systems, Inc.
By:	/s/ Kevin S. Royal
Title:	Chief Financial Officer

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EXHIBIT A

PRODUCT INFORMATION DOCUMENT

The following Product Information Document shall be considered a part of the Amended and Restated Supply Agreement entered into by Blue Coat Systems, Inc. and Synnex Corporation on September 8, 2005. All terms not defined herein shall have the meaning ascribed to them in the Amended and Restated Supply Agreement.

Effective Date:

PRODUCT INFORMATION

Product:

Specifications:

Product Manufacturing Time:

Quality Control Standards:

PRICING AND MATERIAL INFORMATION

Initial Price:

A-1

Exhibit A - Product Information Document (cont.)

Component Breakdown:

Component Component
Cost Component
Lead Time Component Type (Custom, Common, Sensitive or Purchased)

Engineering Costs:

OTHER

Project Managers:

Blue Coat:

Synnex:

Additional Requirements or Obligations:

Accepted and Agreed to by:

BLUE COAT SYSTEMS, INC.	SYNNEX CORPORATION
By:	By:
Name:	Name:	Simon Y. Leung
Title:	Title:	General Counsel and Corporate Secretary
Date:	Date:

A-2

EXHIBIT B

REPAIR SLA

B-1

EX-10.48

Exhibit 10.48

BLUE COAT SYSTEMS, INC.

PROFIT SHARING PLAN

(As Amended Effective May 1, 2008)

1. PURPOSES OF THE PLAN

1.1 The Blue Coat Systems, Inc. Profit Sharing Plan (the “Plan”) is established to promote the interests of the Company and reward employees for the achievement of superior financial results.

2. ADMINISTRATION OF THE PLAN

2.1 The Compensation Committee of the Board of Directors of the Company (the “Committee”) shall approve the Plan and adopt rules and regulations to implement the Plan. Decisions of the Committee shall be final and binding on all parties who have an interest in the Plan.

3. DETERMINATION OF PARTICIPANTS

3.1 An individual shall be eligible to participate in the Plan if he or she is an Employee on the first day of the last month of the fiscal quarter. Payments to eligible employees who joined the Company within the quarter will be pro-rated based on the number of days of employment, divided by the total days within the quarter.

3.2 For purposes of the Plan:

(i) An individual shall be considered an “Employee” as long as such individual remains employed by the Company or one or more of its Subsidiaries. Sales personnel on commission are excluded from the Plan.

4. PROFIT SHARING AWARDS

4.1 The profit sharing plan is established as an incentive to achieve superior financial results. Profit sharing is applicable for fiscal quarters in which the Operating Profit (“OP”) exceeds 10%. OP is calculated as the Company’s gross profit minus operating expenses. For purposes of the profit sharing calculation, OP is calculated before expense, if any, under the Plan. The Plan pays 20% of an individual’s target rate for each 1% of OP in excess of 10%, such that 100% of an individual’s target is paid at OP of 15%. Payments under the Plan are not capped. Target rates by level are 30% for Tier One, 15% for Tier Two and 7.5% for Tier Three. Tier One shall consist of Section 16 executives and certain other senior officers or employees approved by Compensation Committee. Tier Two shall consist of Vice Presidents, Directors and Senior Managers. Tier Three shall consist of all other employees. Sales personnel on commission are excluded from the Plan. In appropriate circumstances, one or more additional tiers may be established (each a “Supplemental Tier”). The establishment of a Supplemental Tier and the employees assigned to the Supplemental Tier must be approved by the Compensation Committee.

4.2 The aggregate bonus pool established by the formula set forth in Section 4.1 above shall be allocated among the eligible Employees in accordance with this Section 4.2 and as approved the Compensation Committee in connection with a Supplemental Tier.

A. Tier One profit sharing payout at target is 30% of quarterly base pay.

B. Tier Two profit sharing payout at target is 15% of quarterly base pay.

C. Tier Three profit sharing payout at target is 7.5% of quarterly base pay.

5. PAYMENT OF BONUS AWARDS

5.1 Profit sharing plan distributions to Tier One participants are paid as follows: 40% of each fiscal quarter’s calculation is paid in the subsequent quarter, with the remaining 60% deferred and paid out over the next four (4) quarters at 15% per quarter pending an individual’s continued employment. Profit sharing plan distributions to Tier Two and Tier Three participants are paid in the subsequent quarter, pending an individual’s continued employment.

6. GENERAL PROVISIONS

6.1 The Plan shall become effective when adopted by the Board of Directors. The Board of Directors or the Compensation Committee may at any time amend, suspend or terminate the Plan, provided it must do so in a written resolution and such action shall not adversely affect rights and interests of Plan participants to individual bonuses earned prior to such amendment, suspension or termination.

6.2 No amounts awarded or accrued under this Plan shall be funded, set aside or otherwise segregated prior to payment. The obligation to pay the bonuses awarded hereunder shall at all times be an unfunded and unsecured obligation of the Company. Plan participants shall have the status of general creditors and shall look solely to the general assets of the Company for payment of their bonus awards.

6.3 No Plan participant shall have the right to alienate, pledge or encumber his/her interest in this Plan, and such interest shall not (to the extent permitted by law) be subject in any way to the claims of the Employee’s credits or to attachment, execution or other process of law.

6.4 No action of the Company in establishing the Plan, no action taken under the Plan by the Committee and no provision of the Plan itself shall be construed to grant any person the right to remain in the employ of the Company or its subsidiaries for any period of specific duration. Rather, to the extent permitted by applicable law, each Employee will be employed “at will,” which means that either such Employee or the Company may terminate the employment relationship at any time for any reason, with or without cause. Only the President has the authority to enter into an agreement on any other terms, and he or she can only do so in a writing signed by him or her.

6.5 This is the full and complete agreement between the eligible Employees and the Company with respect to its subject matter.

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EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-91737, 333-34552, 333-49842, 333-52012, 333-65192, 333-82864, 333-113544, 333-120976, 333-123230, 333-132406, 333-142234, 333-144605, 333-146-969, and 333-149601, and Form S-3 No. 333-55744) of Blue Coat Systems, Inc. of our reports dated June 27, 2008, with respect to the consolidated financial statements and schedule of Blue Coat Systems, Inc. and the effectiveness of internal control over financial reporting of Blue Coat Systems, Inc., included in this Annual Report (Form 10-K) for the year ended April 30, 2008.

/s/ ERNST & YOUNG LLP

San Jose, California

June 27, 2008

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Brian M. NeSmith, certify that:

1. I have reviewed this annual report on Form 10-K of Blue Coat Systems, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 30, 2008

/s/ BRIAN M. NESMITH

Brian M. NeSmith

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Kevin S. Royal, certify that:

1. I have reviewed this annual report on Form 10-K of Blue Coat Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 30, 2008

/s/ KEVIN S. ROYAL

Kevin S. Royal

Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), Brian M. NeSmith, Chief Executive Officer of Blue Coat Systems, Inc. (the “Company”), and Kevin S. Royal, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:

1. The Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2008, to which this Certification is attached as Exhibit 32.1 (the “Report”), fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934, and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: June 30, 2008

/s/ BRIAN M. NESMITH	/s/ KEVIN S. ROYAL
Brian M. NeSmith President and Chief Executive Officer	Kevin S. Royal Senior Vice President and Chief Financial Officer

This certification is not deemed to be “filed” for purposes of section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. This certification is not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.