Blue Coat Systems, Inc. ("Blue Coat" or the Company) is a developer and distributor of "proxy" software, which helps corporations control employee access to Internet websites and to potentially dangerous downloadable files.

The Complaint charges Blue Coat and certain of the Company's executive officers with violations of federal securities laws. Plaintiff claims Defendants' omissions and material misrepresentations artificially inflated the Company's stock price, inflicting damages on investors. The Complaint alleges that, from its founding in 1996 through the beginning of the Class period, Blue Coat had never turned a profit. On February 19, 2004, Blue Coat announced an unprecedented increase in sales, and its first profitable quarter. During a public conference call that same day, Defendants stated a belief that gross margins in the following quarter would fall in the range of 68-69%. This news drove the stock price up to $38.27 on February 20, 2004, on unusually high volume of 1.3 million shares. Unbeknownst to investors, these gross margin calculations did not reflect any realistic expectations as to what could be achieved, given material business issues of which the Defendants would have been aware. Almost immediately following the February 19 conference call, certain Defendants began selling large blocks of shares, at prices ranging from $40-52 per share.

The Complaint further alleges that on or around May 27, 2004, Blue Coat made a surprise announcement that its purported gross margin calculations had fallen short for the fourth quarter of fiscal 2004 and profitability was lower than that achieved in the third quarter. The next trading day, May 28, 2004, Blue Coat shares plummeted $11.45 per share to close at $27.80 per share. By August 2004, Blue Coat shares fell as low as $10 per share before recovering to approximately the $20 level.

The Complaint also states that in the summer of 2004, the SEC began an informal inquiry into trading of Blue Coat stock in or about the fourth quarter of fiscal 2004, which the Company initially characterized as involving only "individuals or organizations outside the company." By early 2005, however, the SEC had upgraded its inquiry to a formal investigation. Instead of only individuals or organizations outside the Company, the SEC was now focusing on "whether certain present or former officers, directors, employees, affiliates or others made intentional or non-intentional selective disclosure of material nonpublic information, traded in the Company's stock while in possession of such information, or communicated such information to others who thereafter traded in the Company's stock."

According to a press release dated October 10, 2005, Blue Coat said after the closing bell on Monday that the securities class action lawsuit filed against the Company and certain of its current and former officers has been voluntarily dismissed without prejudice by the lead Plaintiff. The lawsuit concerned the fourth quarter of fiscal 2004, the Sunnyvale, Calif.-based provider of proxy appliances said.