Blue Coat Systems (BCSI)

Convertible Preferred Stock

During June 2001, the Company issued 980,903 shares of Series A preferred stock at $5.1894 per share for an aggregate purchase price of $5,090,313 to fund its operations. The Series A preferred stock was issued for approximately $3,000,000 cash, $1,627,313 of assigned tangible and intangible assets from one investor, and $463,000 of assigned intellectual property rights from another investor.

During April 2002, the Company issued 1,000,000 shares of Series B preferred stock at $1.00 per share for an aggregate purchase price of $1,000,000 in cash. During August 2002, the Company issued 4,000,000 shares of Series B preferred stock at $1.00 per share for an aggregate purchase price of $4,000,000 in cash.

During May 2003, the Company issued 9,622,258 shares of Series C preferred stock at $1.2857 per share for an aggregate purchase price of $12,371,429 in cash. The Series C preferred stock is presented in the accompanying balance sheets, net of related offering expenses of approximately $136,000. In connection with the issuance of Series C preferred stock, the Company also exchanged 299,045 shares of Series A preferred stock for 299,045 shares of Series B preferred stock.

The preferred stock is convertible into common stock at any time at the option of the holder at a ratio that is defined in the relevant agreement, subject to adjustment for future dilution. The preferred stock automatically converts into common stock upon the closing of a firm-underwritten public offering in excess of $30 million and the price per share paid by the public is at least $8.99 per share, or at the option of two-thirds (2/3) of the outstanding shares of preferred stock voting on an as-converted basis.

Series B and Series C preferred stock holders shall be entitled to receive dividends when, as and if declared by the Company’s Board of Directors, on a pari passu (equal) basis at the rate of 8% per annum of the applicable liquidation preference per share of preferred stock, prior and in preference to any declaration or payment of any dividend on Series A preferred stock or common stock. Dividends when and as declared by the Board of Directors, on each share of Series B and Series C preferred stock shall be paid pro rata according to the Original Issue Price of such shares of Series B and Series C preferred stock. Dividends on each share of Series B and Series C preferred stock shall be cumulative and shall accrue on each share from day to day from the date of issuance until paid, whether or not declared, and whether or not there are profits, surplus, or other funds legally available for the payment of dividends. Dividends in arrears as of March 31, 2005 and 2004 are approximately $1,915,000 and $857,000, respectively, for Series C preferred stock. Dividends in arrears as of March 31, 2005 and 2004 are approximately $1,164,000 and $685,000, respectively, for Series B preferred stock.

If dividends on the full preferential amounts for Series B and Series C preferred stock have been paid, the holders of Series A preferred stock shall be entitled to receive dividends, when, as and if declared by the Company’s Board of Directors, at the rate of 8% of the Series A Original Issue Price prior and in preference to any declaration or payment of any dividend on common stock. Dividends on each share of Series A preferred stock shall be non-cumulative.

In the event of liquidation, the Series C preferred shareholders are entitled to receive $1.2857 per share, plus all accrued or declared and unpaid dividends, if any, prior to any distribution to any other shareholders. In the event of liquidation, if the assets and funds available for distribution exceed of the aggregate liquidation preferences to Series C preferred shareholders, the Series B preferred shareholders are entitled to receive $1.00 per share, plus all accrued or declared and unpaid dividends, if any, prior to any distribution to Series A preferred and common shareholders. In the event of liquidation, if the assets and funds available for distribution exceed of the aggregate liquidation preferences to Series C and Series B preferred shareholders, the Series A preferred shareholders are entitled to receive $5.1894 per share, plus all declared and unpaid dividends, if any, prior to any distribution to Series A preferred and common shareholders.

If the assets and funds available for distribution exceed the aggregate liquidation preferences to the holders of Series A, Series B, and Series C preferred shareholders, the remaining assets and funds of the Company available for distribution to the Company’s shareholders shall be distributed ratably among the holders of Series A preferred, Series B preferred, Series C

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Permeo Technologies, Inc.

Notes to Financial Statements

preferred, and common stock in proportion to the number of shares held by them, where each share of preferred stock is treated as having been converted into the largest number of common shares into which the preferred shares could be converted. The distribution to Series A, Series B, and Series C preferred stock can not exceed five (5) times the applicable liquidation preference of any such series of preferred stock.

The Company has reserved approximately 13,300,000 shares of its common stock for issuance upon conversion of its Series A, Series B, and Series C preferred stock.