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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

FOR THE FISCAL YEAR ENDED APRIL 30, 2003

OR

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER 000-28139

BLUE COAT SYSTEMS, INC.

(Exact Name of Registrant as Specified In Its Charter)

(408) 220-2200

Registrant’s Telephone Number, Including Area Code

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

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

Common Stock, $.0001 Par Value

(Title of Class)

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

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

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

The aggregate market value of the Common Stock held by non-affiliates of the Registrant (based on the closing price for the Common Stock on the Nasdaq National Market on October 31, 2002) was approximately $26,055,638.

As of June 30, 2003, there were 8,924,876 shares of the Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III is incorporated by reference from specified portions of the Registrant’s definitive Proxy Statement to be issued in conjunction with the Registrant’s 2003 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the Registrant’s fiscal year ended April 30, 2003.

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BLUE COAT SYSTEMS, INC.

ANNUAL REPORT ON FORM 10-K

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PART I.

Item 1.     Business

The discussion in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements on revenue expectations, product acceptance, product and sales development, operating results, and cash usage, as well as statements on our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those indicated in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, uncertainty in future operating results, uncertainty in the secure proxy appliance market, increased competition, downturn in macroeconomic conditions, inability to raise additional capital, inability to implement our distribution strategy, inability to introduce new products, increased litigation, failure to comply with Nasdaq’s listing standards, inability to attract and retain key employees, fluctuations in quarterly operating results, product concentration, technological changes, and other risks discussed in this item under the heading “Factors Affecting Future Operating Results” and the risks discussed in our other recent Securities and Exchange Commission filings.

Overview

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

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

We are focused on the secure proxy appliance market. Our secure proxy appliances, called ProxySGs, serve as a point of control and integration for multiple Web security functions. Our products are designed to enable enterprises to minimize security risks and reduce the management costs and complexity of their Web infrastructure.

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

Convergence around Web protocols and their related security threats has made organizations understand the business consequences of an inadequate security infrastructure. Many of these organizations are rethinking

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existing Internet connectivity and security services that have evolved rapidly without the benefit of a coherent architecture, resulting in complex infrastructures that are difficult to scale and manage. To protect their businesses, these enterprise organizations need the capability to easily understand and control what is happening via the Web. This capability is enabled by a new layer of security infrastructure, called a secure proxy appliance, which serves as a point of control and integration for multiple Web security functions.

Blue Coat Solutions

Our suite of products provide customers with application-level security, policy-based control capabilities, comprehensive management and reporting functionality for applications such as authorization management, Web usage monitoring, proxy caching services, content filtering, virus scanning, content security, and instant messaging control. Our products enable businesses to reduce security risks and the management costs and complexity of their Web infrastructure.

Authorization Management

An effective enterprise security infrastructure begins with authentication, authorization and accounting. These services are the starting point for user and content protection and control. The first step, authentication, is to determine the identity of the requestor as it relates to a given request for access. Once the system determines the identity for a given request, the next step, authorization, is to associate policy with the identified user. In short, authorization governs what resources a user can access and what a user can do with those resources based on a set of rules. Systems that grant access to resources must also effectively track the use of those resources. This accounting information is necessary to effectively audit events in the case of fraud, malicious use, or to determine proof. Our ProxySG provides a powerful authentication, authorization and accounting system for Web protection and control. ProxySG supports cross-organizational authentication to multiple security databases or directories. Once users are identified, other conditions can be examined to determine the access privileges for a given request. The ProxySG appliance provides the power to define one set of rules for protection and control, and to tie those rules to any number of policy conditions—all without redefining users in yet another management directory/database. The ProxySG uses an authenticated user identifier to trigger a certain action or rule. Requests can be authorized based on any combination of known identifiers. In addition, all requests through the ProxySG are logged, providing detailed accounting information. This gives the visibility necessary to determine Web usage patterns, audit user history, track security issues and develop comprehensive Web protection and control policy.

Web Usage Monitoring

Our ProxySG provides a robust and flexible way to monitor users and audit Web and streaming traffic for both external and internal content requests. The flexible logging features of the ProxySG, coupled with integrated authentication and identification capabilities, give organizations the power to monitor Web access for every user in the network at any time, regardless of where they are. Internet access traffic flowing through the ProxySG gives administrators and managers the ability to audit Web traffic as needed. This processing point gives a robust picture of the Web usage for the entire network or specific information on individual or department usage patterns. These logs can be made available both in real time and on a scheduled basis. Because ProxySG logs are standardized, customers can choose from a variety of commonly available reporting tools or use the Blue Coat Reporter, described further on page 7.

Proxy Caching Services

To maximize employee productivity, organizations need to ensure a high quality Internet experience for users. In addition, enterprises need to implement content and user policies to manage Web traffic growth, while effectively using network resources. At the same time, corporate security cannot be compromised and Internet performance cannot be allowed to degrade. First generation proxy servers—software-based applications running

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on general-purpose operating systems—offered a point of control for securing network access, but their performance degrades under today’s heavy Internet and intranet usage. Blue Coat’s secure proxy appliances provide next-generation proxy functionality that delivers business and technology benefits to Web-dependent enterprises.

Configured as a proxy caching server deployed between corporate users and the Internet, these optimized appliances intelligently manage user requests for content. When a user selects a URL, the request goes first to the Blue Coat secure proxy appliance for authentication and authorization. If the objects from the requested page are already in cache on the Blue Coat appliance, they are immediately served to the user. If the objects are not stored locally, the Blue Coat security appliance acts as a proxy for the user by communicating to the origin server via the Internet. When the objects are returned from the origin server a copy is delivered to the user and also stored on the system’s cache to serve all subsequent requests. The entire transaction is monitored and logged for reporting and planning purposes.

Blue Coat’s unique Web Knowledge Framework allows enterprises to handle nearly all Web protocols, including HTTP, HTTPS, FTP, Microsoft streaming (MMS and HTTP streaming), Real streaming (RTSP and HTTP streaming), QuickTime streaming (over RTSP), MP3, Flash, and hundreds of other Web object types

Content Filtering

To realize all the benefits the Internet offers, companies need to enforce Internet access policies to prevent employees from accessing inappropriate or unproductive content. The first step in implementing company-wide Internet access policy is Web usage monitoring, or understanding which users are doing what with their company-provided Web access. Once security and network management personnel have an understanding of what kinds of use and misuse are occurring on the network, the next step is to provide enforcement for corporate Web access policy. This enforcement requires the ability to identify and match users with Web access policies. Our ProxySG appliances provide a robust and flexible way to enforce Internet access policies based on content categories (gambling, sex, etc.), content type (http, ftp, streaming, etc.), identity (user, group, etc.), or network conditions. Turning on these multiple combinations of policy requires a unique level of performance. Software-only solutions cannot scale to enterprise demands with this kind of granularity enabled. Our ProxySG makes it possible by integrating our policy architecture, specialized operating system and network hardware, and a cache that stores commonly accessed content for reuse. Our ProxySG appliances provide the performance and manageability required for enterprise-wide policy-based content filtering.

Virus Scanning

Our ProxySG appliances provide a robust and flexible way to block viruses from Web protocols inside and outside the firewall. The ProxySG’s architecture is designed for handling Web requests that require scanning for potentially malicious mobile code and viruses. ProxySG appliances use the standard Internet Content Adaptation Protocol, ICAP, to vector responses to virus scanning servers from other vendors to deliver unmatched flexibility and performance in scanning Web content. In this way, organizations can define multiple scanning services for specific functions. Administrators can set flexible virus scanning policies based on specific destination domain, URL, file extension or mime type. The ability to choose the right service for the job provides security administrators with the tools to scale virus scanning infrastructure for Web requests as needed. In combination with the ability to block by content type and scan Web protocols for malicious code, ProxySG appliances can effectively sanitize Web content. ProxySG appliances also scale a company’s virus scanning capability in several ways. First, storing scanned Web content for reuse effectively eliminates the need to rescan every request. Once data is deemed safe, it is available for subsequent requests without the delay that would normally result from a rescan of the same content. Second, ProxySG appliances can load-balance scanning requests across multiple scanning servers, allowing security administrators to add scanning capacity as needed. Finally, ProxySG appliances automatically detect virus pattern updates on the virus scanning servers and mark content for rescan as necessary. ProxySG appliances are compatible with leading virus scanning solutions, including ICAP versions of Symantec’s CarrierScan Server and Trend Micro’s InterScan Server.

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Content Security

Our ProxySG products give security professionals the tools necessary to protect and control the network from a variety of new Web-based threats. In addition, the ProxySG provides the visibility and flexible content policy capabilities needed to respond in cases where a security breach has occurred. With our ProxySG appliances, security administrators can:

Instant Messaging Control

Instant Messaging (IM) usage has become commonplace within the enterprise and continues to increase. Each month employees install free IM software from AOL, Microsoft or Yahoo! to “chat” with peers, business colleagues and friends using the company network. Unauthorized use of these applications raises many valid security and productivity concerns among IT managers and security officers. Blue Coat Systems enables organizations to secure and control the IM applications already in use—providing the granular access control, security and logging required for enterprise-class messaging solutions with the software that is already on users’ desktops. Blue Coat’s IM security products control users and their utilization of public IM applications including AOL IM, Yahoo IM, and Microsoft’s MSN Messaging products. Blue Coat’s granular policy architecture controls not only which users are allowed to utilize Instant Messaging, but which IM protocols are allowed, what features are to be enabled, to whom they may IM or chat with (inside the company and/or outside the company), what time of the day they can IM, how logging should be handled, and much more. Enterprises can leverage their existing authentication infrastructure and all of the power and flexibility of Blue Coat’s secure proxy appliance to handcuff unauthorized IM usage on the corporate network.

Products

We call our secure proxy appliances ProxySGs. We manufacture three main types of ProxySG appliances, the ProxySG 400 Series, the ProxySG 800 Series and the ProxySG 6000 Series. These three types of ProxySG appliances are very similar in terms of functionality, and differ mainly in terms of their performance characteristics and scalability. We currently license two separate software products, third party URL filtering software and Blue Coat Reporter, which are used in conjunction with our ProxySG appliances. We also manufacture an appliance called Director, which is used primarily to manage large numbers of ProxySG appliances in a customer’s environment. Lastly, we currently still sell several legacy products, our model 700 and model 7000 server accelerators, and 6000 series client accelerators.

ProxySG

Our ProxySG appliances are designed to serve as a point of integration for multiple enterprise security applications, providing the security, control and acceleration enterprises need to enhance investments in Web

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technology. The ProxySG acts in concert with existing routers, firewalls and servers to reduce the complexity and management cost of Web security and eliminate the need to trade-off best practices security for Web performance.

Our ProxySG appliances are comprised of a specialized hardware platform and our operating system (SGOS). Our specialized hardware platforms provide security, scalability and performance in an easy to deploy form factor that is typically rack mounted, while SGOS provides the security and control application functionality enterprises require to protect their Web-enabled networks. List prices for our ProxySG and associated products range from $3,495 to $150,000.

ProxySG 400 Series

The ProxySG 400 is specifically designed to increase security and reduce costs associated with regional and branch office Web protection. Delivered as a rack mountable or desktop device, the ProxySG 400 platform easily drops in to remote environments where technical support staff is not always available. The ProxySG 400 is available in two fixed configurations, one with a single 40gigabyte (GB) disk drive and 256 megabytes (MB) of random access memory (RAM), and the other with two 40 GB disk drives and 512 MB of RAM.

ProxySG 800 Series

The ProxySG 800 is an easy to manage appliance that installs in minutes with little ongoing maintenance. The systems include removable, hot-swappable disk drives. Specific configurations range from systems with a single 18 GB disk drive and 512 MB of RAM to systems with four 73 GB disk drives and 2GB of RAM.

ProxySG 6000 Series

The ProxySG 6000 provides a high-end solution with greater expandability for locations where high bandwidth and throughput are required. Specific configurations range from systems with two 36 GB disk drives and 768 MB of RAM to systems with eight 73 GB disk drives and 4 GB of RAM.

Visual Policy Manager

Blue Coat’s Visual Policy Manager provides a graphical way to develop and implement an organization’s Web security policies. With Visual Policy Manager, security and network administrators can quickly create policy rules that leverage the flexible policy architecture of the ProxySG. The Visual Policy Manager software is included as part of SGOS.

URL Filtering

Our URL Filtering solutions integrate our appliance with software from leading content filtering vendors allowing organizations to improve productivity, reduce legal liability, and conserve bandwidth by automatically determining which Web sites to block as well as continually updating the lists of restricted sites. By leveraging the ProxySG policy framework, organizations can restrict access to Internet sites by user, group, time of day, bandwidth, and other factors. In addition, because the ProxySG can cache frequently requested content, redundant requests from authorized users for acceptable URLs are served from the ProxySG, reducing network bandwidth utilization and improving the end-user’s quality of experience.

Reporter

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

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Director

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

Legacy Products

700 Series and 7000 Series Server Accelerators

Server accelerators are specifically designed to improve the performance, scalability, security and manageability of high-traffic Web sites. They feature a high RAM-to-disk ratio and a built-in Secure Sockets Layer encryption/decryption processor. This processor can manage 10-40 times more secure sessions than a standard Web server, allowing for the acceleration of both public (HTTP) and private (HTTPS) content. The system software, called CacheOS^™ Server Edition, is expressly tuned for the workload of a high-traffic Web site.

6000 Series Client Accelerator

Client accelerators enable organizations, typically service providers, to effectively manage, distribute and accelerate content with high levels of speed and efficiency. These products are designed as integrated appliances, combining specialized hardware platforms with our tightly coupled CacheOS operating system. They are deployed between users and the Internet, and intelligently manage requests for Web and multimedia content.

Our Key Strategies

Our objective is to be the leading provider of secure proxy appliance solutions by delivering high-performance, innovative ProxySG appliances. Key elements of our strategy include the following:

Apply our ProxySG Focus to the Enterprise Market Segment.    We are focused exclusively on developing ProxySG appliances. We believe this focus helps us to rapidly identify and target attractive market opportunities. We are directing our product development, marketing and sales activities at the enterprise market segment, which we believe represents the most attractive opportunity based on a demonstrated need for secure proxy appliances, the opportunity to sell to numerous customers and the level of existing competition.

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

Focus on Indirect Distribution Channels.    We intend to focus our product distribution strategy around the use of distributors and resellers rather than a direct sales force. Enterprises have historically purchased security products from distributors and resellers, and we believe that we can improve our sales coverage and sales force

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productivity through expanding the use of distributors and resellers as distribution channels. Historically, virtually all of our international sales have been made through resellers, while domestically we have relied more heavily on a direct sales force. We intend to increase the use of distributors and resellers in our domestic market and reduce our reliance on direct sales.

Sales and Marketing

We utilize a combination of our direct sales force, resellers, systems integrators and distributors as appropriate for each of our target markets. Our domestic business, which historically has been predominately direct, is in the process of leveraging distribution channels consistent with our evolving business strategy. Our international business continues to be almost exclusively indirect. We believe it is important to maintain our international presence and continue to develop products and services to address international markets. We support our distribution channels with systems engineers and customer support personnel that provide technical service and support to our customers. We have entered into agreements with resellers and distributors such as Westcon, Allasso, Nissho Electronics and others.

Our marketing efforts focus on increasing market awareness of our products and technology and on promoting the Blue Coat brand. Our strategy is to create this awareness through marketing programs that distinguish our products based on their features and functionality. We have a number of marketing programs to support the sale and distribution of our products and to inform existing and potential customers within our target market segments about the capabilities and benefits of our products. Our marketing efforts include participation in industry tradeshows, informational seminars, preparation of competitive analyses, sales training, maintenance of our Web site, advertising and public relations.

Research and Development

We believe that strong product development capabilities are essential to the continued success and growth of the Company. Our research and development efforts are focused on developing new products as well as improvements and enhancements to our existing products. Research and development expenses were $11.4 million, $35.1 million and $27.7 million for the fiscal years ended April 30, 2003, 2002 and 2001, respectively.

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

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

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

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Manufacturing

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

Competition

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

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

Intellectual Property and Other Proprietary Rights

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

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independently develop similar technology, duplicate our products or design around patents that may be issued to us or our other intellectual property.

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

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

We rely on technology that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. For example, we license subscription-filtering technology from Secure Computing. 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 will be required to drop this functionality from our software until equivalent technology can be identified, licensed or developed, and integrated into our current product. Any of these delays could seriously harm our business.

There has been a substantial amount of litigation in the technology industry regarding intellectual property rights and we are currently defending a suit, which alleges infringement of certain United States patents by us (See Item 8, Note 13 “Litigation” of the consolidated financial statements included in this Annual Report on Form 10-K). While we believe the case is without merit, it does show it is possible that third parties may claim that we, or our current or potential future products, infringe their intellectual property. We expect that companies in the Internet and networking industries will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

Employees

As of April 30, 2003, we had a total of 195 employees, comprised of 62 in research and development, 72 in sales, 9 in marketing, 16 in customer support, 11 in manufacturing and 25 in general and administrative. Of these employees, 138 were located in North America and 57 located internationally. None of our employees are represented by collective bargaining agreements, nor have we experienced any work stoppages. We consider our relations with our employees to be good.

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

Available Information

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

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FACTORS AFFECTING FUTURE OPERATING RESULTS

The discussion in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements on revenue expectations, product acceptance, product and sales development, operating results, and cash usage, as well as statements on our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those indicated in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, uncertainty in future operating results, uncertainty in the secure proxy appliance market, increased competition, downturn in macroeconomic conditions, inability to raise additional capital, inability to implement our distribution strategy, inability to introduce new products, increased litigation, failure to comply with Nasdaq’s listing standards, inability to attract and retain key employees, fluctuations in quarterly operating results, product concentration, technological changes, and other risks discussed in this item under the heading “Factors Affecting Future Operating Results” and the risks discussed in our other recent Securities and Exchange Commission filings. Our business, financial condition and results of operations could be seriously harmed by any of the following risks. The trading price of our common stock could decline due to any of these risks.

We have a history of losses, expect to incur future losses and may never achieve profitability, which could result in the decline of the market price of our common stock.

We incurred net losses of $15.9 million, $247.0 million and $519.1 million for the years ended April 30, 2003, 2002 and 2001, respectively. As of April 30, 2003, we had an accumulated deficit of $865.1 million. We have not had a profitable quarter since our inception and we expect to continue to incur net losses on a quarterly and annual basis in the future. We expect to continue to incur significant operating expenses and, as a result, we will need to generate significant revenues if we are to achieve profitability. We may never achieve profitability.

The market for secure proxy appliance solutions is relatively new and rapidly evolving, and if this market does not develop as we anticipate, our sales may not grow and may even decline.

Sales of our products depend on increased demand for secure proxy appliances. The market for secure proxy appliances is a new and rapidly evolving market. If the market for secure proxy appliances fails to grow as we anticipate, or grows more slowly than we anticipate, our business will be seriously harmed. In addition, our business will be harmed if the market for secure proxy appliances continues to be negatively impacted by uncertainty surrounding macro-economic growth. Because this market is new, we cannot predict its potential size or future growth rate, if any.

To maintain our competitive position in a market characterized by rapid rates of technological advancement, we must continue to invest significant resources in research and development. There is no guarantee that we will accurately predict the direction in which the secure proxy appliance market will evolve. Failure on our part to anticipate the direction of the market and develop products that meet those emerging needs will significantly impair our business and operating results and our financial condition will be materially adversely affected.

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

The market for secure proxy appliances is intensely competitive, evolving and subject to rapid technological changes. Primary competitive factors that have typically affected our market include product characteristics such as reliability, scalability and ease of use, as well as price and customer support. The intensity of competition is expected to increase in the future. Increased competition is likely to result in price reductions, reduced gross

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margins and loss of market share, any one of which could seriously harm our business. We may not be able to compete successfully against current or future competitors and we cannot be certain that competitive pressures we face will not seriously harm our business. Our competitors vary in size and in the scope and breadth of the products and services they offer. We encounter competition from a variety of companies, including Cisco Systems, Network Appliance and various others. In addition, we expect additional competition from other established and emerging companies as the market for secure proxy appliances continues to develop and expand.

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

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

U.S. economic growth slowed significantly in the past two and one half years. In addition, there is uncertainty relating to the prospects for near-term U.S. economic growth, as well as the extent to which the U.S. slowdown will impact international markets. This slowdown and uncertainty contributed to delays in decision-making by our existing and potential customers and a resulting decline in our sales in the second half of fiscal 2001 and all of fiscal 2002 and 2003. Continued uncertainty or a continued slowdown could result in a further decline in our sales and our operating results could again be below our expectations and the expectations of public market analysts and investors. Our stock price has materially declined over the past two and one half years and our stock price may continue to decline in the event that we fail to meet the expectations of public market analysts or investors in the future.

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

As of April 30, 2003, we had approximately $12.8 million in cash and cash equivalents and $10.5 million in short-term investments. We believe that these amounts will enable us to meet our capital requirements for at least the next twelve months. However, if cash is used for unanticipated needs, we may need additional capital during that period. The development and marketing of new products will require a significant commitment of resources. In addition, if the market for secure proxy appliances develops at a slower pace than anticipated or if we fail to establish significant market share and achieve a meaningful level of sales, we could be required to raise substantial additional capital. We cannot be certain that additional capital will be available to us on favorable terms, or at all. If we were unable to raise additional capital when we require it, our business would be seriously harmed.

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

We intend to focus our product distribution strategy around the use of distributors and resellers rather than a direct sales force. Enterprises have historically purchased security products from distributors and resellers, and we believe that we can improve our sales coverage and sales force productivity through expanding the use of

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distributors and resellers as distribution channels. Historically, virtually all of our international sales have been made through resellers, while domestically we have relied more heavily on a direct sales force. We intend to increase the use of distributors and resellers in our domestic market and reduce our reliance on direct sales.

Currently, over seventy-five percent of our revenue is generated through sales to our sales channel partners, which include distributors, resellers and system integrators. We increasingly depend upon these partners to generate sales opportunities and to independently manage the entire sales process. We provide our sales channel partners with specific programs to assist them in this process, but there can be no assurance that these programs will be effective or that our sales channel partners will be able to generate increasing revenues to us without significant additional investment on our part. To achieve profitability, we require our sales to grow without a commensurate increase in sales costs. Increasing sales through our sales channel partners is our primary strategy for achieving this. If we fail to create additional sales through our sales channel partners, our business will be seriously harmed.

If we are unable to introduce new products and services that achieve market acceptance quickly, we could lose existing and potential customers and our sales would decrease.

We need to develop and introduce new products and enhancements to existing products on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of our customers. We intend to extend the offerings under our product family in the future, both by introducing new products and by introducing enhancements to our existing products. However, we may experience difficulties in doing so, and our inability to timely and cost-effectively introduce new products and product enhancements, or the failure of these new products or enhancements to achieve market acceptance, could seriously harm our business. Furthermore, the reduction of research and development headcount resulting from the February 2002 restructuring and from attrition during fiscal 2003, may make this even more difficult. Life cycles of our products are difficult to predict because the market for our products is new and evolving and characterized by rapid technological change, frequent enhancements to existing products and new product introductions, changing customer needs and evolving industry standards. The introduction of competing products that employ new technologies and emerging industry standards could render our products and services obsolete and unmarketable or shorten the life cycles of our products and services. The emergence of new industry standards might require us to redesign our products. If our products are not in compliance with industry standards that become widespread, our customers and potential customers may not purchase our products.

We are entirely dependent on market acceptance of our secure proxy appliances and, as a result, lack of market acceptance of these products could cause our sales to fall.

To date, our prior caching products, secure proxy appliances and related services have accounted for all of our net sales. We anticipate that revenues from our current product family and services will continue to constitute substantially all of our net sales for the foreseeable future. As a result, a decline in the prices of, or demand for, our current product family and services, or their failure to achieve broad market acceptance, would seriously harm our business.

Undetected software or hardware errors could cause us to incur significant warranty and repair costs and negatively impact the market acceptance of our products.

Our products may contain undetected software or hardware errors. These errors may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. The occurrence of these problems could result in the delay or loss of market acceptance of our products and would likely seriously harm our business. All of our products operate on our internally developed operating system. As a result, any error in the operating system will affect all of our products. We have experienced minor errors in the past in connection with new products. We expect that errors will be found from time to time in new or enhanced products after commencement of commercial shipments.

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

In June and July 2001, a series of putative securities class actions were filed against the firms that underwrote our initial public offering, us, and some of our officers and directors in the U.S. District Court for the Southern District of New York. These cases have been consolidated under the case captioned In re CacheFlow, Inc. Initial Public Offering Securities Litigation., Civil Action No. 1-01-CV-5143. An additional putative securities class action has been filed in the United States District Court for the Southern District of Florida. In the amended complaint that was filed, the plaintiffs apparently dropped us and individual officers and directors from the case. The complaints in the cases in New York and Florida generally allege that the underwriters obtained excessive and undisclosed commissions in connection with the allocation of shares of common stock in our initial public offering, and maintained artificially high market prices through tie-in arrangements which required customers to buy shares in the after-market at pre-determined prices. The complaints allege that we and our current and former officers and directors violated Sections 11 and 15 of the Securities Act of 1933, and Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Act of 1934, by making material false and misleading statements in the prospectus incorporated in our Form S-1 registration statement filed with the Securities and Exchange Commission in November 1999. Plaintiffs seek an unspecified amount of damages on behalf of persons who purchased our stock between November 19, 1999 and December 6, 2000. In the cases pending in New York, the Court has appointed a lead plaintiff for the consolidated cases. On April 19, 2002 plaintiffs filed an amended complaint. Various plaintiffs have filed similar actions asserting virtually identical allegations against over 300 other public companies, their underwriters, and their officers and directors arising out of each company’s public offering. The lawsuits against us, along with these other related securities class actions currently pending in the Southern District of New York, have been assigned to Judge Shira A. Scheindlin for coordinated pretrial proceedings and collectively captioned In re Initial Public Offering Securities Litigation Civil Action No. 21-MC-92. Defendants in these cases have filed omnibus motions to dismiss on common pleading issues. Oral argument on these omnibus motions to dismiss was held on November 1, 2002. Our officers and directors have been dismissed without prejudice in this litigation. On February 19, 2003, the Court denied in part and granted in part the motion to dismiss filed on behalf of defendants, including us. The Court’s order did not dismiss any claims against us. As a result, discovery may now proceed.

A proposal has been made for the settlement and release of claims against the issuer defendants, including us, in exchange for a guaranteed recovery to be paid by the issuer defendants’ insurance carriers and an assignment of certain claims. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the court.

If the settlement does not occur, and litigation against us continues, we believe we have meritorious defenses and intend to defend the case vigorously. We believe the outcome would not have a material adverse effect on our business, results of operations or financial condition. Securities class action litigation could result in substantial costs and divert our management’s attention and resources, which could seriously harm our business.

On August 1, 2001, Network Caching Technology L.L.C. filed suit against us and others in the U.S. District Court for the Northern District of California. The case is captioned Network Caching Technology, L.L.C., v. Novell, Inc., Volera, Inc., Akamai Technologies, Inc., CacheFlow, Inc., and Inktomi Corporation, civil Action No. CV-01-2079. The complaint alleges infringement of certain U.S. patents. The complaint seeks unspecified compensatory and treble damages and to permanently enjoin the defendants from infringing the patents in the future. We intend to defend against the allegations in the complaint vigorously and believe that the allegations in the lawsuit are without merit; however, if a judgment were issued against us, it could have a material adverse effect on our business, results of operations, or financial condition.

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We may incur net losses or increased net losses if we are required to record additional significant accounting charges related to excess facilities that we are unable to sublease.

We have existing commitments to lease office space in Sunnyvale, California and Redmond, Washington in excess of our needs for the foreseeable future. The commercial real estate market in the San Francisco Bay Area and the Seattle Area has developed such a large excess inventory of office space that we believe we will be unable to sublease a substantial portion of our excess office space in the near future. Accordingly, in the fourth quarter of fiscal 2002, we recorded an excess facilities charge of $9.5 million, which represented the remaining lease commitments for vacant facilities, net of expected sublease income. As of April 30, 2003, $8.0 million of this accrued liability remains on the balance sheet. In July 2002, one of our facilities in Sunnyvale, California was subleased for the remainder of the lease term at a rental price that was consistent with our initial estimates. Our facility in Redmond, Washington was subleased in December 2002 for the remainder of the term of the original lease at a rental price consistent with our initial estimates. Due to its financial difficulties, our tenant in Sunnyvale, California surrendered the premises and vacated the property in January 2003. The facility in Sunnyvale, California is currently vacant and available for subleasing. As a result, we revised and increased our restructuring accruals for abandoned space by approximately $1.6 million during fiscal 2003 based on new market trend information provided by a commercial real estate broker. We may be required to record additional charges if our tenants default on their lease obligations and if current market conditions for the commercial real estate market remain the same or worsen.

If we fail to manage existing sales channels, our sales will not grow.

We evaluate and modify our distribution strategy from time to time to meet market requirements. Any direct channel new hire or new sales channel partner will require extensive training and typically take several months to achieve productivity. Competition for qualified sales personnel and sales channel partners is intense, and we might not be able to hire the kind and number of candidates we are targeting. If we fail to manage existing sales channels, our business will be seriously harmed.

Many of our sales channel partners do not have minimum purchase or resale requirements and carry products that are competitive with our products. These sales channel partners may not give a high priority to the marketing of our products or may not continue to carry our products. They may give a higher priority to other products, including the products of competitors. We may not retain any of our current sales channel partners or successfully recruit new sales channel partners. Events or occurrences of this nature could seriously harm our business.

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

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

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

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

Our sales may not grow because our secure proxy appliances only protect Web based applications and content, and our target customers may not wish to purchase an additional network security device.

Our Web security appliances are specially designed to only secure Web based protocols such as http, https, ftp and streaming. While we believe that the majority of traffic traveling over the networks of our target customers is Web based, a significant amount of their network traffic is not. Our products do not protect non-Web protocols. Our target customers may not wish to purchase an additional security device that only handles network traffic that is Web protocol based. As a result, our target customers may not purchase our products and our business would be seriously harmed.

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

Because customers have differing views on the strategic importance of implementing secure proxy appliances, the time required to educate customers and sell our products can vary widely. As a result, the evaluation, testing, implementation and acceptance procedures undertaken by customers can vary, resulting in a variable sales cycle, which typically ranges from one to nine months. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales and marketing expenses and expend significant management efforts. In addition, purchases of our products are frequently subject to unplanned processing and other delays, particularly with respect to larger customers for whom our products represent a very small percentage of their overall purchase activity. Large customers typically require approvals at a number of management levels within their organizations, and, therefore, frequently have longer sales cycles. The increasingly complex technological issues associated with secure proxy appliance solutions, combined with the macro-economic slowdown, contributed to longer sales cycles in fiscal years 2002 and 2003 and a resulting decline in our sequential quarterly sales through much of those periods. We may experience order deferrals or loss of sales as a result of lengthening sales cycles.

Our use of rolling forecasts could lead to excess or inadequate inventory, or result in cancellation charges or penalties, which could seriously harm our business.

We use rolling forecasts based on anticipated product orders, product order history and backlog to determine our materials requirements. Lead times for the parts and components that we order vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. If actual orders do not match our forecasts, as we experienced in the past, we may have excess or inadequate inventory of some materials and components or we could incur cancellation charges or penalties, which would increase our costs or prevent or delay product shipments and could seriously harm our business.

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

We currently purchase from Mitac Corporation (“Mitac”) the base assemblies of most of our current products. Any Mitac manufacturing disruption could impair our ability to fulfill orders. We also rely on several other third-party manufacturers to build portions of our products. If we or our suppliers are unable to manage the

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relationships with these manufacturers effectively or if these manufacturers fail to meet our future requirements for timely delivery, our business would be seriously harmed. These manufacturers fulfill our supply requirements on the basis of individual purchase orders or agreements with us. Accordingly, these manufacturers are not obligated to continue to fulfill our supply requirements, and the prices we are charged for these components could be increased on short notice. Any interruption in the operations of any one of these manufacturers would adversely affect our ability to meet our scheduled product deliveries to our customers, which could cause the loss of existing or potential customers and would seriously harm our business. In addition, the products that these manufacturers build for us may not be sufficient in quality or in quantity to meet our needs. Our delivery requirements could be higher than the capacity of these manufacturers, which would likely result in manufacturing delays, which could result in lost sales and the loss of existing and potential customers. We cannot be certain that these manufacturers or any other manufacturer will be able to meet the technological or delivery requirements of our current products or any future products that we may develop and introduce. The inability of these manufacturers or any other of our contract manufacturers in the future to provide us with adequate supplies of high-quality products, or the l