CACHEFLOW INC, 10-K, 2000-07-28

CACHEFLOW INC
10-K, 2000-07-28
COMPUTER INTEGRATED SYSTEMS DESIGN

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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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, 2000

[_]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

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CACHEFLOW INC.
(Exact name of registrant as specified in its charter)

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Delaware 91-1715963
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification)
650 Almanor Avenue
Sunnyvale, California 94086
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code: (408) 220-2200

Securities registered pursuant to Section 12(b) of the act:

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<S> <C>
Title of each class Name of exchange on which registered
None None
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Securities registered pursuant to Section 12(g) of the act:

Common Stock, $.0001 par value
(Title of Class)

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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 the Form 10-K or any
amendment to this Form 10-K. [_]

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 May 31, 2000) was approximately $840,784,945.

As of June 30, 2000, there were 39,008,680 shares of the Registrant's Common
Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III is incorporated by reference to
specified portions of the Registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's 2000 Annual Meeting of Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended April 30, 2000.

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CACHEFLOW, INC.

ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

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Page
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PART I.
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 20
Item 3. Legal Proceedings............................................. 21
Item 4. Submission of Matters to a Vote of Security Holders........... 21
Item 4A. Executive Officers of the Registrant.......................... 21
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder 22
Matters.......................................................
Item 6. Selected Financial Data....................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition 24
and Results of Operations.....................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 28
Item 8. Financial Statements and Supplementary Data................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting 52
and Financial Disclosure......................................
PART III.
Item 10. Directors and Executive Officers of the Registrant............ 52
Item 11. Executive Compensation........................................ 52
Item 12. Security Ownership of Certain Beneficial Owners and 52
Management....................................................
Item 13. Certain Relationships and Related Transactions................ 52
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8- 53
K.............................................................
Signatures.................................................... 55
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PART I.

ITEM 1. BUSINESS

The discussion in this 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 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, fluctuations in quarterly operating results, uncertainty in future
operating results, litigation, product concentration, competition,
technological changes, management of our growth and expansion, integration of
acquisitions and other risks discussed in this item under the heading "Factors
Affecting Future Operating Results" and the risks discussed in our other
Securities and Exchange Commission filings.

Overview

CacheFlow Inc., a Delaware corporation also referred to in this report as
"we" or the "Company", was formed on March 13, 1996. We design, develop and
market Internet caching appliances that are purpose-built to accelerate and
optimize the flow of information over the Internet. Our products are deployed
by our customers throughout their network infrastructures to improve the
performance of their networks and reduce network costs, while enhancing network
security. Customers for our products include large and small Internet service
providers, or ISPs, and corporate enterprises. These companies purchase our
products in order to improve the performance of their networks and to
accelerate and optimize the delivery of content to the end-user over the
Internet.

Industry Background

The Internet is dramatically changing the way businesses and individuals
communicate and conduct commerce. As a result, the increasing volume of
Internet traffic is much more than just web surfing; it's big business. The
Gartner Group projects that business-to-business e-commerce revenues will reach
$3.9 trillion by 2003. With this rising volume of traffic, Internet and
Intranet infrastructures are quickly reaching capacity. Slow response times and
site outages due to heavy demand are common outcomes of these overburdened
network infrastructures. For organizations that rely on the web for commerce
and/or operational purposes, these problems can be expected to have a direct,
adverse impact on both the top and bottom lines. For example, Zona Research has
published a study that demonstrates how online customers abandon a site after
more than an 8-second delay. Many of these customers may simply visit a
competitor's site to complete their purchase, potentially never returning to
the "troubled" site. In the past, sites that wanted to avoid these issues had
little choice but to invest in more infrastructure--more servers, more network
equipment, more staff and more data center space.

Now, through the emergence of caching technology, these sites can
effectively address the problems of performance, scaling and management.
Caching optimizes how content is delivered, either moving it closer to the
requesting users or accelerating it outward from the web site. There are two
primary types of caching solutions: software-based and appliance. Software-
based approaches consist of a caching software application running on a
general-purpose operating system like Solaris, Linux or Windows 2000. While
these systems offer flexibility, they suffer from complex administration and
potential security breaches of the well-known operating

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system. Appliances are self-contained solutions which are expressly built for
caching. Due to this singular design, they are fast, simple, reliable and
secure.

Much as network routing has evolved from a general-purpose to a purpose-
built solution, so is caching. The advantages of a specialized appliance are
clear. When a device is designed to perform a dedicated task, it will perform
that task more effectively than a multi-function alternative. The results of an
appliance approach to caching are significant: reduced web response times,
simpler administration and management, lower network and data center costs,
higher reliability, robust data security and always-accurate content. Driven by
these benefits, the caching appliance market is projected to expand from $440
million in 2000 to $2.1 billion by 2003 (source: GartnerGroup/Dataquest).

The CacheFlow Solution

CacheFlow designs, develops, markets, and sells Internet acceleration and
content management solutions which include specialized devices that are
purpose-built to accelerate and optimize the flow of information over the
Internet. Our products improve response time for Internet users and provide
network administrators and managers a high degree of control over the access,
flow and delivery of Internet content. Our products also reduce the number of
redundant requests for information that must be processed and delivered, thus
reducing the load on the Internet and corporate networks. The principal
benefits of our Internet caching appliances include:

High Performance. Our purpose-built appliances were designed from
inception for high-performance Internet caching. Our appliances provide
high data throughput and reduce latency, or the time between initiating a
request for data and the completion of the actual data transfer. Even
content that is not stored in our caching appliances is accelerated when
the request for that content goes through a CacheFlow appliance, since our
appliances simultaneously retrieve numerous objects from the origin server.
In many cases, our appliances double the speed of content delivery.

Ease of Installation and Management. Our products are designed for easy
installation and maintenance, reducing the cost and time required for
implementation and use. Network managers at ISPs and enterprises generally
install our appliances in the same racks that hold their servers and other
network equipment. In many cases, our Internet caching appliances can be
installed in under thirty minutes. All of or products provide customers
with a range of management features, functions, user interfaces and modes
of operation. In addition, the software and operating systems of our
appliances are designed to efficiently interact with our customers'
existing networking equipment.

Attractive Return on Investment. By allowing content to be served from a
cache located closer to the user, instead of the origin server on the
Internet, enterprises and ISPs employing our Internet caching appliances
require less network capacity and can reduce data transmission costs. Our
customers better utilize the capacity of their existing network since
redundant traffic is removed from the network and served from the cache.
The need for enterprises engaged in e-commerce to purchase additional
servers can be reduced since our Internet caching appliances eliminate a
significant amount of traffic that could otherwise overload their existing
servers, requiring incremental server capacity. Our products also help to
improve the productivity of Internet users by reducing web response time.
Faster downloading of web content increases productivity and end-user
satisfaction.

Security. Our appliances run on a proprietary and purpose-built
operating system. CacheOS is designed to be less vulnerable to unauthorized
entry than caches based on more commonly understood, general-purpose
operating systems, such as Windows NT, UNIX or NetWare. Because it was
designed specifically for caching, CacheOS consists of far fewer lines of
code than general-purpose operating systems, creating fewer potential bugs
and fewer potential ways to break into the operating system. In addition,
CacheOS employs authentication and filtering capabilities that prohibit
unauthorized users from accessing or penetrating through the cache.

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Broad Product Suite. Enterprises and ISPs have varying capacity,
reliability and data throughput needs, depending on the size and nature of
their operations. We offer a wide range of products to meet different
price, performance and reliability requirements, and provide an upgrade
path to our customers as they expand their networks. Our products can be
deployed in a variety of environments, ranging from small or remote network
locations to large ISPs or enterprise headquarters.

Delivery of Fresh Web Content. Moving content closer to the user
increases network efficiency, but creates the risk that the content
delivered is not up-to-date, or fresh. Internet caching appliances store
content, but do not originate or own that content, so in order to provide
fresh content, caches must monitor the source of content for changes.
Unlike traditional caches that have no mechanisms to monitor and ensure
freshness, our Internet caching appliances actively check the origin
servers and update content through efficient and sophisticated algorithms
that monitor user activity and the frequency with which source content is
changed without requiring additional capacity or adversely affecting
response time. These algorithms are managed through a control mechanism
that allows the network administrator to easily set the level of freshness
delivered by the cache. The algorithms are self-adapting based on the
administrative settings.

Ability to Manage the Flow of Content. Our Internet caching appliances
are installed at points in the Internet infrastructure where all of the
content being requested by a user can flow through our appliances. Our
appliances are able to take advantage of their placement at this network
juncture to provide a range of additional value-added services, including
user authentication, content filtering, user tracking and control of cached
content.

Customers and Applications

Customers have purchased and used our products for a variety of different
applications. ISPs typically use our products to help generate new sources of
revenue from content providers and/or content consumers (e.g. broadband
services, web hosting, content distribution, etc.), or to reduce their
operating costs by improving their use of network capacity or facilities.
Enterprises typically use our products for handling e-commerce related traffic
and as a replacement for proxy servers. Backlog for products ordered but not
yet shipped was $14.1 million, none and none for the three years ended April
30, 2000, 1999 and 1998.

The following are our principal target markets:

Service Providers

Competition in the service provider market is intense. As a result
service providers are consistently looking for competitive advantage.
Competitive advantage typically comes in one of two forms, additional value
added services which become incremental sources of revenue, or reduced
operating costs which contribute to improved profitability. Our products
can help service providers at both.

Bandwidth gain reduces service provider operating costs. Our caching
appliances store and serve the most frequently requested Internet content
closer to the users requesting that content. By deploying our products
throughout their network, service providers can increase the quantity of
customers they can service without adding to the traffic levels on their
backbone, or adding to the network capacity that they purchase from other
service providers. This "bandwidth gain," allows them to improve quality of
service for existing customers and provide the infrastructure to scale for
new customer additions, all while preserving valuable network capacity and
in turn controlling operating costs.

Improved performance attracts more revenues from end user
customers. This is most apparent amongst the new broadband service
providers. Broadband ISPs, using DSL or cable infrastructure to offer high-
speed Internet access, enable the delivery of a wide range of new content
and the ability to make the Internet a truly interactive medium. However,
while these solutions offer faster access speeds from the user to their
ISP, they do not shorten the physical distance between user and web content
or reduce network traffic congestion on the Internet itself. For example,
it does not help to build a twelve-lane on-

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ramp to a highway if the highway itself has only two lanes and it is
congested. Despite the ability to move content more quickly, broadband
networks still frequently suffer diminished performance when content must
be transmitted many times over the same network path or when many users
request the same content from the origin server simultaneously. These
problems are particularly acute when the content being transmitted includes
large files, which is the nature of broadband content such as video.
Therefore, faster access speeds do not necessarily result in significantly
faster response times when a user is accessing web content that originated
across the Internet. Consumers, therefore, may not enjoy the full benefit
that they expect from broadband. Our appliances can enhance the
capabilities of a broadband network, helping broadband ISPs compete to
attract and retain customers. Our products help broadband providers deliver
better performance to their customers. This gives broadband providers that
use our products a competitive advantage over their competitors that do not
use our products.

Value added services attracts more revenues from content provider
customers. Content hosting service providers are seeking to capitalize on
the growth of e-commerce. These companies manage the e-commerce
infrastructure and networks for third party content providers, allowing
them to focus on content and customers rather than network management.
Content hosting providers are using caching to accelerate the performance
of their hosted customers' e-commerce sites. To generate performance
improvements, service providers deploy caches in various geographically
dispersed data center locations and distribute site content to these
caches. When an online user accesses a Web site, they are actually directed
to the cache in close proximity to their location. Since content does not
have to travel through as many network points to reach its destination,
users see faster response times, resulting in a more productive web
experience.

Enterprise Proxy Server Replacement

The amount of data traffic over many enterprise networks has increased
significantly. For many enterprises, exchanging and accessing information
over their intranets and from the Internet is a strategically important
tool in increasing productivity. With this dependence on remote sources of
information, enterprises face a number of risks, including end user access
of inappropriate content, unauthorized outside entities gaining access to
their networks, unpredictable network traffic volumes, and new traffic
types that, if not controlled, could have adverse effects on network
capacity and performance. Proxy servers are devices that allow the network
administrator to implement corporate policies to control the flow of
information in and out of the network. However, the growth in data traffic
in large enterprises has outpaced the growth in proxy server capacity,
forcing many network administrators to choose between accommodating growth
and maintaining control. The growth in Internet usage has created a number
of difficulties with the performance, management and reliability of
existing proxy server solutions. Our appliances are designed to replace
proxy servers in enterprise networks, enabling Web-dependent organizations
to improve the performance of their networks.

E-commerce

Many organizations have come to rely on their web sites as a means of
attracting new customers and generating additional revenue. Increased
business use of the Internet, coupled with the widespread adoption of e-
commerce by consumers, has resulted in large amounts of traffic flowing to
e-commerce sites. Many organizations' current network infrastructures are
incapable of handling this increase in traffic, resulting in overburdened
firewalls, which are network security systems, and e-commerce servers,
which are used to process commercial transactions over the Internet,
resulting in fewer transactions per day for the e-commerce site.
Furthermore, slower response times and poor quality of service can lead
consumers to become dissatisfied with the e-commerce experience and either
stop making web purchases or go to a competitor's web site where
performance is better, which can result in a loss of potential revenues.
Deploying caches as part of an e-commerce infrastructure solution can
improve capacity, throughput and response times, while helping to reduce
costs. By storing and delivering frequently requested content from

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caches deployed at the network boundary, congested e-commerce sites can
decrease the traffic load from Web servers and firewalls. This can result
in a network that can serve more Web pages faster, improving the end-user
experience and enabling the infrastructure to support more transactions.

Products

All of our products are designed as integrated appliances, which are
specialized hardware platforms coupled tightly with our CacheOS operating
system. We have specialized our products around several attributes including
type of content (traditional web or streaming), type of customer (service
provider, enterprise, or ecommerce), and type of deployment (content provider
or content consumer). These specializations allow us to meet the different
price, performance, capacity, feature set, and reliability requirements of both
our customers and our potential customers in each of our target market
segments.

Current Products include:

100 Series--The CacheFlow 110 Internet caching appliance, the sole model
within the 100 Series, is designed for use by small ISPs and corporate
branch or remote offices. The CacheFlow 110 is designed to support Internet
traffic loads of up to 1.5 million bits per second or the equivalent speed
of a T-1 connection.

500 Series--The CacheFlow 500 Series includes our 515, 525 and 545
Internet caching appliances, which are specifically designed to support
ISPs and enterprises with Internet connections up to 15 million bits per
second. The CacheFlow 500 Series is typically deployed in front of web
servers, which are used to publish information on the Internet, and
firewalls, which are network security systems, and is used for accelerating
the delivery of content to ISP and enterprise users.

3000 Series--The CacheFlow 3000 Series is comprised of high-performance
Internet caching appliances designed specifically to support ISPs and
enterprises with Internet connections from 10 to 45 million bits per second
or the equivalent speed of a T-3 connection. Our 3000 Series is expandable,
providing our customers with the ability to add capacity to the appliance
as their needs grow.

5000 Series--The CacheFlow 5000 Series is comprised of high-performance
Internet caching appliances designed for high scalability and reliability.
The CacheFlow 5000 is highly scalable, designed to support traffic loads
ranging from 45 million bits per second or the equivalent speed of a T-3
connection, to more than 155 million bits per second, the equivalent speed
of an OC-3 connection. Our 5000 Series can contain up to three separate AC
or DC power supplies to allow uninterrupted operation and is expandable,
providing our customers with the ability to add capacity to the appliances
as their needs grow.

The CacheFlow Strategy

Our objective is to be a leading provider of Internet acceleration and
content management solutions by delivering high-performance, innovative
Internet caching appliances. Key elements of our strategy include the
following:

Apply our Content Management Focus to Targeted Market Segments. Since
our inception, we have focused exclusively on developing Internet caching
appliances. We believe this exclusive focus helps us to rapidly identify
and target attractive market opportunities. We are directing our product
development, marketing and sales activities at specific market segments
that we believe represent attractive opportunities based on a demonstrated
need for caching, the opportunity to sell to numerous customers and the
level of existing competition. We are focused on three market segments:
service providers, enterprise proxy server replacement, and e-
commerce/distributed content services. We intend to use our customer
relationships in these market segments to further penetrate these segments
as well as other related markets.

Enhance Capabilities of our Appliances. We intend to use our
technological expertise to meet the needs of the evolving Internet
acceleration and content management market. We plan to continue to

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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 appliances
include adding more functionality to control the flow of content,
customizing hardware and software to enhance performance and developing
enhancements to improve ease of deployment.

Broaden Distribution Channels. We intend to extend our distribution
channels to meet the anticipated growth in demand for Internet caching
appliances. We plan to continue to expand both our direct and indirect
sales channels in order to continue to extend our marketing reach and
increase our volume distribution. In particular, we plan to enter into
relationships with additional resellers, systems integrators and original
equipment manufacturers to increase penetration of the enterprise and ISP
markets.

Build the CacheFlow Brand. We intend to establish CacheFlow as the
premier brand in the Internet acceleration and content management market.
We believe that brand awareness is important to increase market acceptance
of Internet caching appliances generally and to identify us as a leading
provider of Internet caching appliance solutions. We intend to continue to
educate customers, resellers, systems integrators and original equipment
manufacturers about the value of implementing caching appliances. We
believe a thorough process of explanation and education of our products
will help to promote brand recognition and to further an overall acceptance
and understanding of caching appliances. To this end, we intend to increase
our investments in a broad range of marketing and educational programs.

Strategic Relationships

We believe that our business benefits greatly from working closely with
other leading communications infrastructure suppliers. By collaborating with
others, we are able to design products that interoperate more effectively with
other network devices, add features and functionality to our products and
expand our distribution channels, enabling us to access additional customers
and markets. We have recently established strategic relationships with several
companies, including:

Alcatel

Alcatel is a leading global manufacturer of communications infrastructure
for telecommunications and data networks. We entered into an OEM agreement with
Alcatel that enables Alcatel to resell our Internet caching appliances. Alcatel
has a strong international presence and large customer base, including
international providers of broadband communications services and regional bell
operating companies (RBOCs) in the United States.

Akamai

Akamai provides a content delivery service that improves Web site speed and
reliability. We entered into a strategic alliance with Akamai. The alliance
includes an initiative to integrate caching and content delivery technologies
to accelerate and optimize Web performance. The product is designed to automate
the process of distributing information to caching servers, significantly
decreasing the time required for customers to implement Akamai's services. The
combined solution will help E-commerce and content sites better service online
customers through enhanced performance, scalability and reliability. In
addition to the technology integration, we obtained the right to resell
Akamai's Freeflow caching services and Akamai obtained the right to sell our
caching appliances.

Computer Sciences Corporation

Computer Sciences Corporation , or CSC, is one of the world's leading
consulting and IT services firms. We entered into a global reseller agreement
with CSC that enables CSC to integrate CacheFlow appliances into solutions
offered by its Global Infrastructure Services Group.

Electronic Data Systems

EDS is a global leader in providing e-business and information technology
services. We entered into a global reseller agreement with EDS. The agreement
enables EDS to integrate CacheFlow Internet caching

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appliances with other technologies to deliver complete solutions to enterprise,
e-commerce and government customers.

Hewlett-Packard

Hewlett-Packard is a global provider of computing and imaging solutions and
services. We entered into a joint product development and reseller partnership
with Hewlett-Packard. The alliance also includes a global reseller agreement.

WestCon

WestCon is a global channel provider of networking technology products. We
entered into a distribution agreement with WestCon. They will serve as
CacheFlow's primary distribution arm within North America.

Sales and Marketing

We utilize a combination of our direct sales force, resellers, systems
integrators and original equipment manufacturers as appropriate for each of our
target 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 network equipment
providers such as Akamai, Alcatel, CSC, EDS, Hewlett Packard, Lucent
Technologies, Nissho Electronics, Sumitronics and WestCon. We intend to pursue
relationships with additional resellers and original equipment manufacturers to
implement our distribution strategy and to expand our customer base. We have
also been expanding our sales force rapidly, and plan to continue to do so in
the future.

Our marketing efforts focus on increasing the market awareness of our
products and technology and promoting the CacheFlow brand. Our strategy is to
create this awareness by distinguishing our products based on their high level
of performance. 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,
preparation of competitive analyses, sales training, maintenance of our web
site, advertising and public relations.

Research and Development

Following our inception in March 1996, we developed the first version of
CacheOS, which was specifically designed as the operating platform for our
Internet caching appliances. Our research and development efforts are focused
on developing technological improvements to and new versions of our Internet
caching appliances. Research and development expenses were $9.6 million, $4.0
million, and $2.4 million for the fiscal years ended April 30, 2000, 1999, and
1998, respectively.

Our research and development team consists of engineers with extensive
backgrounds in operating systems, algorithms, computer science and network
engineering. We believe that the experience and capabilities of our research
and development professionals represents a competitive advantage for CacheFlow.
In June 2000, the Company acquired SpringBank Networks, adding additional
engineers to our staff as well as complimentary technology. We have worked
closely with several of our customers in developing and enhancing our products.
Our current research and development efforts are primarily focused on three
strategic initiatives:

developing Internet caching appliances to address price/performance
points for which we do not currently offer products;

improving the performance of our Internet caching appliances, including
data throughput and response time; and

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adding new features and strengthening the existing features of our
Internet caching appliances to give them enhanced capabilities.

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

Manufacturing

We currently outsource the manufacturing of all of the subassemblies and
components of our Internet caching appliances, including printed circuit
boards, custom power supplies, chassis, cables and subassemblies, to third
parties, and we perform final assembly and testing in-house. This approach
allows us to reduce 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. We plan to subcontract final assembly to
third parties in the future. Our standard parts and components are generally
available from more than one vendor. 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. We recently hired a Senior Vice President of Manufacturing to implement
new manufacturing strategies and optimize product quality and cost.

Competition

The market for Internet caching solutions is intensely competitive, evolving
and subject to rapid technological change. The intensity of 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 primarily encounter competition from a variety of
companies, including Cisco Systems, Inktomi, Network Appliance, Novell, and
various others using publicly available, free software. In addition, because
there are relatively low barriers to entry in the Internet caching market, we
expect additional competition from other established and emerging companies as
the market for Internet caching 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 Internet caching 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,

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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 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 pending United States patent applications and
several pending patent applications in foreign patent offices. Although we have
not been issued any patents to date, one patent application pending before the
United States Patent Office has been allowed and is expected to issue as a
United States patent.

We cannot assure you that any U.S. or international patent will be issued
from these 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 CacheOS 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. It is possible that in the future 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, 2000, we had a total of 306 employees, including 68 in
research and development, 173 in sales, marketing and customer support, 26 in
manufacturing and 39 in general and administrative. Of these employees, 246
were located in North America with 60 located internationally. None of our
employees is 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 key technical, sales and senior management personnel, many 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 expected
growth and performance if we are unable to attract and retain qualified
personnel.

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FACTORS AFFECTING FUTURE OPERATING RESULTS

Risks Related to Our Business

We only began selling our products in May 1998 and, as a result, you may have
difficulty evaluating our business and operating results.

We were founded in March 1996 and did not sell any products or services
until May 1998. The market for our products is unproven. Our limited operating
history makes an evaluation of our future prospects very difficult. We expect
to encounter risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets. Many of these risks are
described in more detail in this "Factors Affecting Future Operating Results"
section. Our business will be seriously harmed if we do not successfully
execute our business strategy or if we do not successfully address the risks we
face.

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 available to common stockholders of $62.7 million and
$13.2 million for the years ended April 30, 2000 and 1999. As of April 30,
2000, we had an accumulated deficit of $82.8 million. We have not had a
profitable quarter since our inception and we expect to continue to incur net
losses in the future. To date, we have funded our operations from the sale of
equity securities and through bank loans and equipment leases.

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. We expect to incur
substantial non-cash costs relating to the amortization of deferred
compensation, which will contribute to our net losses. As of April 30, 2000, we
had an aggregate of $43.5 million of deferred compensation to be amortized. The
Company may record additional compensation expense in the future if management
decides to grant below-market stock options in order to attract and retain
employees in a highly competitive labor market.

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 in this "Factors
Affecting Future Operating Results" section.

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

we have a limited operating history, and the market in which we compete
is relatively new and rapidly evolving;

delays or cancellations of orders by a few customers can significantly
impact net sales within a quarter; and

our sales cycle varies substantially from customer to customer.

A high percentage of our expenses, including those related to 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.

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

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 Internet caching 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 can take as long as 9 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. Sales cycles for our products that are sold to
enterprises have traditionally been longer than sales cycles for our products
that are sold to Internet service providers, or ISPs. We expect that sales to
enterprises will increase as a percentage of our total sales over time, and,
accordingly, we expect that the average sales cycle for our products will
increase. In addition, purchases of our products are frequently

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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.

We are entirely dependent on market acceptance of our Internet caching
appliance product family and, as a result, a decline in sales or lack of
market acceptance of these products could cause our sales to fall.

To date, our Internet caching appliance product family 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.
The CacheFlow 100 Series, 500 Series, 3000 Series and 5000 Series products are
the only products that we currently sell. Our CacheFlow 1000 Series and 2000
Series products, which have historically accounted for a substantial portion
of our net sales, have been discontinued and replaced by our recently
introduced CacheFlow 3000 Series products. We introduced our 3000 Series
product in September 1999 and our 5000 Series product in June 1999. We cannot
be certain that our CacheFlow 3000 Series or 5000 Series products will
continue to achieve any significant degree of market acceptance.

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.
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.

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 rely on several third-party manufacturers to build portions of our
products. If we are unable to manage our relationships with these
manufacturers effectively or if these manufacturers fail to meet our future
requirements for timely delivery, our business would be seriously harmed. We
have no written agreement with any of these manufacturers and they fulfill our
supply requirements on the basis of individual purchase orders from 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
exceed the capacity of these manufacturers, which would likely result in
manufacturing delays, which could result in lost sales and the loss

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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 loss of any of our contract manufacturers in
the future, would cause a delay in our ability to fulfill customer orders while
we attempt to obtain a replacement manufacturer. Delays associated with our
attempting to replace or our inability to replace one of our manufacturers
would seriously harm our business.

We may experience production delays, quality control problems and assembly
capacity constraints in assembling our products, which could result in a
decline of sales.

We currently conduct most of the final assembly and all of the testing of
our products at our headquarters in Sunnyvale, California. We have transitioned
final assembly for some of our products to third parties and we may transition
additional final assembly in the future. If we were unable to identify a third-
party final assembler, we would be required to make additional capital
investments in new or existing assembly facilities. To the extent any capital
investments are required, our gross margins and, as a result, our business
could be seriously harmed. We may experience production interruptions or
quality control problems in connection with any transition of final assembly,
either of which would seriously harm our business. Either any third-party
assembler or we may experience substantial assembly capacity constraints. In
the event of any capacity constraints we may be unable to accept certain orders
from, and deliver products in a timely manner to, our customers. This could
result in the loss of existing or potential customers and would seriously harm
our business.

Because some of the key components in our products come from limited sources
of supply, we are susceptible to supply shortages or supply changes, which
could disrupt or delay our scheduled product deliveries to our customers and
may result in the loss of sales and customers.

We currently purchase several key parts and components used in the
manufacture of our Internet caching appliances from limited sources of supply.
For example, we purchase custom power supplies and Intel hardware for use in
all of our Internet caching appliances. The introduction by Intel or others of
new versions of their hardware, particularly if not anticipated by us, could
require us to expend significant resources to incorporate this new hardware
into our products. In addition, if Intel or others were to discontinue
production of a necessary part or component, we would be required to expend
significant resources in locating and integrating replacement parts or
components from another vendor. Qualifying additional suppliers for limited
source components can be time-consuming and expensive. Any of these events
would be disruptive to us and could seriously harm our business. Further,
financial or other difficulties faced by these suppliers or unanticipated
demand for these parts or components could limit the availability of these
parts or components. Any interruption or delay in the supply of any of these
parts or components, or the inability to obtain these parts or components from
alternate sources at acceptable prices and within a reasonable amount of time,
would seriously harm our ability to meet our scheduled product deliveries to
our customers.

Our use of rolling forecasts could lead to excess or inadequate inventory,
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, we may have excess or
inadequate inventory of some materials and components, which would increase our
costs or prevent or delay product shipments and could seriously harm our
business.

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We are dependent upon key personnel and we must attract, assimilate and
retain other highly qualified personnel in the future or our ability to
execute our business strategy or generate sales could be harmed.

Our business could be seriously disrupted if we do not maintain the
continued service of our senior management, research and development and sales
personnel. All of our employees are employed on an "at-will" basis. Our
ability to conduct our business also depends on our continuing ability to
attract, hire, train and retain a substantial number of highly skilled
managerial, technical, sales, marketing and customer support personnel. New
hires frequently require extensive training before they achieve desired levels
of productivity, so a high employee turnover rate could seriously impair our
ability to operate and manage our business. We are particularly dependent on
hiring additional personnel to increase our direct sales and research and
development organizations. Competition for personnel is intense, especially in
the San Francisco Bay Area, and we may fail to retain our key employees, or
attract, assimilate or retain other highly qualified personnel in the future.
If so, our business would be seriously harmed.

Our management team is new, and our business could be seriously harmed if
integration of our management team into our company is not successful.

We have recently experienced significant transition in our management team.
Brian NeSmith, our President and Chief Executive Officer, joined us in March
1999. Additionally, many members of our senior management team have joined the
company within the past 12 months. Our business could be seriously harmed if
integration of our management team into our company is not successful. We
expect that it will take time for our new management team to integrate into
our company and it is too early to predict whether these changes will be
successful.

In order to manage our growth and expansion, we will need to improve and
implement new systems, procedures and controls, which could be time-consuming
and costly.

We have expanded our operations rapidly since the inception of our company
and we currently intend to continue this expansion. This expansion of our
operations has placed and is expected to continue to place a significant
strain upon our management systems and financial and operational resources. If
we are unable to effectively manage future growth and expansion, our business
will be seriously harmed. We currently have research and development
facilities in Sunnyvale, California, Redmond, Washington and Waterloo,
Ontario, Canada. The coordination and management of these product development
organizations that are located at different sites requires significant
management attention and coordination, particularly from our managerial and
engineering organizations. If we are unable to coordinate and manage these
separate development organizations, our business will be seriously harmed.

Our ability to compete effectively and to manage future expansion of our
operations will require us to continue to improve our financial and management
controls, reporting systems and procedures on a timely basis, and expand,
train and manage our employee work force. The number of our employees
increased from 40 at April 30, 1998 to 306 at April 30, 2000, and we plan to
further increase our headcount. We recently implemented a new enterprise
resource planning software system that replaced substantially all of our
business and manufacturing systems. While we have not had significant problems
to date, we may encounter difficulties in transitioning to the new enterprise
resource planning software system. Even after we implement this system, our
personnel, systems, procedures and controls may be inadequate to support our
future operations.

If we fail to expand our direct and indirect sales channels, our sales will
not grow.

We need to substantially expand our direct sales operations, both
domestically and internationally, in order to increase market awareness and
sales of our products and services. Our products and services require a
sophisticated sales effort targeted at senior management of our customers. We
have recently expanded our direct sales force and plan to hire additional
sales personnel. New hires will require extensive training and

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typically take several months to achieve productivity. Competition for
qualified sales personnel is intense, and we might not be able to hire the
kind and number of sales personnel we are targeting. If we fail to increase
our direct sales capabilities as we have planned, our business will be
seriously harmed.

We also need to expand our indirect sales channels, and if we fail to do so
our ability to market and sell our products could be seriously harmed. We
depend on our indirect sales channels, which include resellers, systems
integrators and original equipment manufacturers, for a significant percentage
of our net sales. For example, for the year ended April 30, 2000,
approximately 55% of our net sales resulted from sales through indirect
channels. Our agreements with our indirect channel partners are generally not
exclusive and in many cases may be terminated by either party without cause.
Many of these indirect channel partners do not have minimum purchase or resale
requirements and carry products that are competitive with our products. These
resellers 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 indirect channel partners or successfully recruit new indirect channel
partners. Events or occurrences of this nature could seriously harm our
business.

If we are unable to expand our customer service and support organization, we
may not be able to retain our existing customers or attract new customers,
and our sales may decline.

We currently have a small customer service and support organization and
will need to increase our capabilities to support new customers and the
expanding needs of our existing customers. If we are unable to expand our
customer service and support organization, we may not be able to retain our
existing customers or attract new customers.

We may not be able to enter into new international markets or generate a
significant level of sales from the international markets in which we
currently operate.

For the fiscal year ended April 30, 2000, sales to customers outside of the
United States and Canada accounted for approximately 48% of our net sales. We
expect international customers to continue to account for a significant
percentage of net sales in the future, but we may fail to maintain or increase
international market demand for our products. Also, because our international
sales are currently denominated in United States dollars, an increase in the
value of the United States dollar relative to foreign currencies could make
our products more expensive and, therefore, potentially less competitive in
international markets, and this would decrease our international sales. Our
ability to expand international sales depends on our ability to expand our
international operations, including establishing manufacturing assembly
capabilities overseas, hire international personnel and recruit additional
international resellers. To the extent we are unable to do so in a timely
manner, our growth, if any, in international sales will be limited and our
business could be seriously harmed. In addition, if we fail to expand and
improve our worldwide operating systems, our ability to accurately forecast
sales demand, manage our supply chain and record and report financial and
management information will be adversely affected, seriously harming 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 CacheOS operating system. As a result, any
error in CacheOS 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 could be subject to product liability claims, which are time-consuming and
costly to defend.

Our customers install our Internet caching appliances directly into their
network infrastructures. Any errors, defects or other performance problems with
our Internet caching appliance products could negatively impact our customers'
internal networks, resulting in financial or other damages to our customers.
Our customers may then seek damages from us for their losses. If a claim were
brought against us, we may not have sufficient protection from statutory
limitations, or license or contract terms with our customers and any
unfavorable judicial decisions could seriously harm our business. We have not
experienced any product liability claims to date. However, a product liability
claim brought against us, even if not successful, would likely be time-
consuming and costly. A product liability claim could seriously harm our
business reputation.

Risks Associated with Potential Acquisitions

We consummated a merger with SpringBank Networks in June 2000. If we fail to
develop and integrate SpringBank Networks' technology into our products and
services, our quarterly and annual operating results may be adversely affected.
Other risks we may face with respect to our merger with SpringBank Networks
include the potential disruption of our ongoing business and distraction of
management; the difficulty of assimilating SpringBank Networks' personnel; and
the maintenance of uniform standards, corporate cultures, controls, procedures
and policies. Our inability to address any of these risks successfully could
harm our business.

We may make acquisitions in the future. Acquisitions of companies, products
or technologies entail numerous risks, including an inability to successfully
assimilate acquired operations and products, diversion of management's
attention, loss of key employees of acquired companies and substantial
transaction costs. Some of the products acquired may require significant
additional development before they can be marketed and may not generate revenue
at levels anticipated by us. Moreover, future acquisitions by us may result in
dilutive issuances of equity securities, the incurrence of additional debt,
large one-time write-offs and the creation of goodwill or other intangible
assets that could result in significant amortization expense. Any of these
problems or factors could seriously harm our business.

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

We depend significantly on our ability to develop and maintain the
proprietary aspects of our technology. If we were unable to do so, our business
would be seriously harmed. For a discussion of our efforts to protect our
proprietary technology, see "Business--Intellectual Property and Other
Proprietary Rights."

If we are unable to raise additional capital, our ability to effectively
manage our growth or enhance our products could be harmed.

At April 30, 2000, we had approximately $91.5 million in cash and cash
equivalents and $33.8 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 acquisitions or other unanticipated
uses, we may need additional capital. The development and marketing of new
products and the expansion of indirect channels and associated support
personnel will require a significant commitment of resources. In addition, if
the market for Internet caching 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.

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Risks Related to the Internet Caching Appliance Industry

The market for Internet caching appliances is new and unpredictable, and if
this market does not develop as we anticipate, our sales may not grow.

Sales of our products depend on increased demand for Internet caching
appliances. The market for Internet caching appliances is a new and rapidly
evolving market. If the market for Internet caching appliances fails to grow as
we anticipate, or grows more slowly than we anticipate, our business will be
seriously harmed. Because this market is new, we cannot predict its potential
size or future growth rate. Our ability to generate net sales in this emerging
market will depend on, among other things, our ability to:

educate potential end users and indirect channel partners about the
benefits of Internet caching appliances;

continue to develop our direct sales channel; and

establish and maintain relationships with leading indirect channel
partners.

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

Our Internet caching appliances operate in part by storing material
available on the Internet and making this material available to end users from
our appliance. This creates the potential for claims to be made against us,
either directly or through contractual indemnification provisions with
customers, for defamation, negligence, copyright or trademark infringement,
personal injury, invasion of privacy or other legal theories based on the
nature, content or copying of these materials. 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.

The adoption of laws that impose taxes on Internet commerce could adversely
affect our business.

Tax authorities at the international, federal, state and local levels are
currently reviewing the appropriate tax treatment of companies engaged in
Internet commerce. Many of our customers are engaged in Internet commerce, and
any taxes imposed on them may adversely impact their businesses and may result
in order cancellations or postponements of product purchases by them, which
would seriously harm our business. Laws regarding the Internet remain largely
unsettled and the adoption or modification of laws or regulations relating to
the Internet, or interpretations of existing law, could seriously harm our
business.

Because the sales of our products are dependent on the increased use and
widespread adoption of the Internet, if use of the Internet does not develop
as we anticipate, our sales may not grow.

Sales of our products depend on the increased use and widespread adoption of
the Internet. Our business would be seriously harmed if the use of the Internet
does not increase as anticipated or if our ISP customers' Internet-related
services are not well received by the marketplace. The acceptance and use of
the Internet in international markets, where we derive a large portion of our
net sales, are in earlier stages of development than in the United States. If
the Internet fails to gain sufficient acceptance in international markets, our
business could be seriously harmed. The resolution of various issues concerning
the Internet will likely affect the use and adoption of the Internet. These
issues include security, reliability, capacity, congestion, cost, ease of
access and quality of service. For example, recently certain popular websites
experienced denial-of-service attacks, which called into question the ability
of these and other websites to ensure the security and reliability of their on-
line businesses. Even if these issues are resolved, if the market for Internet-
related products and services fails to develop, or develops at a slower pace
than anticipated, our business would be seriously harmed.

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Governmental regulation of the communications industry may negatively affect
our customers and result in decreased demand for our products, which would
cause a decline in our sales.

The jurisdiction of the Federal Communications Commission, or FCC, extends
to the communications industry, to our customers and to the products that our
customers sell. Future regulations set forth by the FCC or other regulatory
bodies may adversely affect Internet-related industries. Regulation of our
customers may seriously harm our business. For example, FCC regulatory
policies that affect the availability of data and Internet services may impede
our customers' penetration into some markets. In addition, international
regulatory bodies are beginning to adopt standards for the communications
industry. The delays that these governmental processes entail may cause order
cancellations or postponements of product purchases by our customers, which
would seriously harm our business.

Risks Related to Securities Markets

Our stock price is volatile and, as a result, you may have difficulty
evaluating the value of our stock, and the market price of our stock may
decline.

Since our initial public offering in November 1999, the market price of our
common stock has fluctuated significantly. The market price of our common
stock may continue to fluctuate significantly in response to the following
factors:

variations in our quarterly operating results;

changes in financial estimates or investment recommendations by
securities analysts;

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; and

fluctuations in stock market prices and volumes.

Our stock price volatility may make us susceptible to class action
litigation, which is time-consuming and costly to defend.

In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of the
company's securities. We may in the future be the target of similar
litigation. If we become engaged in securities class action litigation, our
management's attention and resources may be diverted and we may incur
substantial costs, resulting in serious harm to our business.

ITEM 2. PROPERTIES

We lease approximately 53,000 square feet for our headquarters facility in
Sunnyvale, California, under a lease that expires on August 31, 2005. We also
lease space for research and development in Redmond, Washington and Waterloo,
Ontario, Canada. In addition, we lease space for sales and support in ten
metropolitan areas in North America. We also lease space for sales and support
in the following countries: Australia, France, Germany, Hong Kong, Japan,
People's Republic of China, Singapore, South Korea, Sweden, Taiwan, the
Netherlands, United Arab Emirates, and the United Kingdom. These properties
are suitable for our current operations; however, the majority of our space is
being fully utilized. Therefore, we expect to continue to acquire or lease
additional space as we proceed with the planned expansion of our domestic and
international operations.

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ITEM 3. LEGAL PROCEEDINGS

See the information set forth in the note entitled "Litigation" in Item 8,
Note 9 of this Form 10-K.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended April 30, 2000.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are biographical summaries of our executive officers as of
July 15, 2000:

Brian NeSmith, 38, has served as President and Chief Executive Officer and a
director of CacheFlow since March 1999. From December 1997 to March 1999, Mr.
NeSmith served as Vice President of Nokia IP, Inc., a security router company,
which acquired Ipsilon Networks, Inc., an IP switching company, where Mr.
NeSmith served as Chief Executive Officer from May 1995 to December 1997. From
October 1987 to April 1995, Mr. NeSmith held several positions at Newbridge
Networks Corporation, a networking equipment manufacturer, including vice
president and general manager of the VIVID group. Mr. NeSmith holds a B.S. in
electrical engineering from the Massachusetts Institute of Technology.

Nai-Ting Hsu, 51, has served as Senior Vice President of CacheFlow Ventures
since July 2000 and prior to that as Senior Vice President of Research and
Development at CacheFlow since October 1999. From May 1997 to October 1999, Dr.
Hsu served as Vice President and General Manager of the Consumer Network
Division, Senior Vice President of Asia Pacific, and Senior Vice President and
General Manager of the Consumer Products Division of C-Cube Microsystems Inc.,
a digital video compression company, which acquired DiviCom Inc., a digital
television company, where Dr. Hsu served as Vice President of Engineering from
April 1995 until its acquisition by C-Cube. From May 1991 until April 1995, Dr.
Hsu served as Vice President of Engineering at MasPar Inc., a massive parallel
computing company. Dr. Hsu holds a B.S. in Electrical Engineering from National
Chiao Tung University, Taiwan, and M.S. and Ph.D. degrees in Computer Sciences
from the University of Wisconsin, Madison.

Michael Johnson, 47, has served as Vice President and Chief Financial
Officer of CacheFlow since July 1999. From May 1998 to July 1999, Mr. Johnson
served as Vice President of Finance and Chief Financial Officer of AdiCom
Wireless, Inc., a developer of CDMA based wireless access systems. From May
1994 to April 1998, Mr. Johnson served as Controller and Chief Accounting
Officer of Ascend Communications Inc., a provider of wide area networking
systems. Mr. Johnson holds a B.S. in business administration from California
State University Hayward and is also a Certified Public Accountant.

Alan Robin, 44, has served as Senior Vice President of Sales at CacheFlow
since July 1999. From January 1997 to July 1999, Mr. Robin served as Vice
President of Sales of Ipsilon Networks, Inc., an IP switching company, and then
of Nokia IP, Inc., a security router company, which acquired Ipsilon Networks,
Inc. in December 1997. From January 1991 to January 1997, Mr. Robin held a
number of sales and sales management positions at Wellfleet/Bay Networks, a
networking company. Mr. Robin holds an A.B. in chemistry from Kenyon College
and a M.B.A. in finance from Fairleigh Dickenson University.

21
<PAGE>

PART II.

ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Our common stock has been quoted on the Nasdaq National Market under the
symbol "CFLO" since November 19, 1999. Prior to that time, there was no public
market for the common stock. The following table sets forth, for the periods
indicated, the high and low closing prices per share of the common stock as
reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Third Quarter (since November 19, 1999)...................... $164.69 $84.50
Fourth Quarter............................................... $148.00 $30.50
</TABLE>

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. At June 30, 2000, there were approximately 238 stockholders of
record and the price per share of our common stock was $61.56. We believe that
a significant number of beneficial owners of our common stock hold shares in
street name.

On November 18, 1999, CacheFlow Inc. commenced its initial public offering,
or IPO, pursuant to a Registration Statement on Form S-1 (File No. 333-87997).
In the IPO, CacheFlow Inc. sold an aggregate of 5,750,000 shares of common
stock (including an over-allotment option of 750,000 shares) at $24.00 per
share. The IPO generated aggregate gross proceeds of approximately $138,000,000
for the Company. The aggregate net proceeds to the Company were approximately
$126,502,000, after deducting underwriting discounts and commissions of
approximately $9,660,000 and expenses of the offering of approximately
$1,838,000. The Company intends to continue to use the net proceeds of the IPO
for general corporate purposes, including to fund our operating losses, working
capital needs, expenditures for research and development and sales and
marketing efforts. In addition, we may use a portion of the net proceeds to
fund acquisitions or investments in complementary businesses, technologies, or
products. Pending any of these uses, we will continue to invest the net
proceeds in investment grade, interest-bearing securities.

22
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data from March 13, 1996,
our inception date, through the fiscal year ended April 30, 2000.

<TABLE>
<CAPTION>
Period from
Year Ended April 30, March 13, 1996
--------------------------- (Inception) to
2000 1999 1998 April 30, 1997
-------- -------- ------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales......................... $ 29,277 $ 7,036 $ -- $ --
Stock compensation................ (38,405) (3,776) (59) --
Net loss available to common
shareholders..................... (62,653) (13,202) (5,507) (1,443)
Basic and diluted net loss per
share............................ $ (3.31) $ (2.17) $ (1.43) $ (0.73)
Shares used in computing basic and
diluted net loss per share....... 18,935 6,093 3,842 1,965
Pro forma basic and diluted net
loss per share................... $ (2.30) $ (0.79) $ -- $ --
Shares used in computing pro forma
basic and diluted net loss per
share............................ 27,218 16,626 -- --

<CAPTION>
As of April 30,
-------------------------------------------
2000 1999 1998 1997
-------- -------- ------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents, and short-
term investments................. $125,320 $ 2,291 $ 7,349 $ 3,605
Working capital................... 126,435 787 6,955 3,589
Total assets...................... 140,734 6,716 8,461 3,769
Long-term debt, net of current
portion.......................... -- 3,211 7 --
Total stockholder's equity
(deficit)......................... 132,630 (344) 7,600 3,702
</TABLE>

23
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Overview

The Company designs, develops, markets and supports Internet acceleration
and content management solutions, which include high-performance Internet
caching appliances. From our inception in March 1996 through April 30, 1998, we
were considered to be in the development stage. Our activities were related
primarily to conducting research and development, developing our initial
product, recruiting personnel, building sales channels, establishing the market
for our initial product, raising capital and purchasing operating assets.

We began commercial shipment of our first products in May 1998. Since that
time, we have introduced other Internet caching appliances, which have a
variety of hardware configurations designed for the different price,
performance, capacity and reliability requirements of our customers. The list
prices of our caching appliances increase as they become more highly
configured. Substantially all of our net sales through April 30, 2000 were
attributable to sales of our Internet caching appliance products. We anticipate
that these products will continue to account for a substantial portion of our
net sales for the foreseeable future.

The Company recorded deferred stock compensation of approximately $71.8
million, $13.6 million and $150,000 for the years ended April 30, 2000, 1999
and 1998. These amounts represent the difference between the exercise price and
the deemed fair value of stock option and warrant grants to employees,
consultants, directors and third parties on the date such stock awards were
granted. Related stock compensation expense is recorded over the option vesting
period, generally two to four years, or immediately if there is no vesting
period. The Company recorded stock compensation expense of approximately $38.4
million, $3.8 million and $59,000 for the years ended April 30, 2000, 1999, and
1998. Between May 1, 2000 and June 15, 2000, we recorded additional deferred
stock compensation totaling $494,000, and the Company may record additional
compensation in the future if management decides to grant below-market stock
options in order to attract and retain employees in a highly competitive labor
market. We expect compensation expense, which is primarily attributable to
amortization of deferred compensation charges, to impact our reported results
through April 30, 2004. Given the balance of deferred stock compensation on the
balance sheet and recent grant history, we expect stock compensation expense to
be a significant operating expense as this deferral is recognized.

We have incurred net losses in each quarter since inception. As of April 30,
2000, we had an accumulated deficit of $82.8 million. Our net loss available to
common shareholders for the years ended April 30, 2000, 1999 and 1998 was $62.7
million, $13.2 million and $5.5 million. These losses resulted from significant
costs incurred in the development and sale of our products and services, and
from amortization of deferred stock compensation. We expect our operating
expenses to increase significantly, particularly sales and marketing and
research and development expenses. As a result, we expect to incur additional
operating losses and continued negative cash flow from operations through the
third quarter of fiscal year 2001.

24
<PAGE>

Our limited operating history makes the prediction of future operating
results difficult. We believe that period-to-period comparisons of our
operating results should not be relied upon as predictive of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties encountered by companies at an early stage of development,
particularly companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties.

Results of Operations

For the year ended April 30, 1998, we did not record any net sales. The
following table sets forth, as a percentage of net sales, consolidated
statements of operations data for the periods indicated:

<TABLE>
<CAPTION>
Year Ended April 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net sales ......................................... 100.0 % 100.0 %
Cost of goods sold................................. 38.3 46.9
---------- ----------
Gross profit....................................... 61.7 53.1
Operating expenses:
Research and development......................... 32.9 57.3
Sales and marketing.............................. 98.7 97.6
General and administrative....................... 16.2 29.4
Stock compensation............................... 131.2 53.7
---------- ----------
Total operating expenses....................... 279.1 238.0
---------- ----------
Operating loss..................................... (217.4) (184.8)
Interest income.................................... 12.9 2.3
Interest expense................................... (2.5) (5.1)
---------- ----------
Net loss before income taxes....................... (207.0) (187.6)
Provisions for income taxes........................ 0.3 0.0
---------- ----------
Net loss........................................... (207.3) (187.6)
Accretion of preferred stock....................... (6.7) 0.0
---------- ----------
Net loss available to common shareholders.......... (214.0)% (187.6)%
---------- ----------
</TABLE>

Net Sales. We did not generate any sales for the period from inception to
April 30, 1998. Net sales increased to $29.3 million in fiscal 2000 from $7.0
million in fiscal 1999. This increase was attributable to higher sales volumes
resulting from the introduction of new products and growth in our customer base
as we expanded our sales force. During fiscal 2000, no customer accounted for
more than 10% of our net sales, and during fiscal 1999, three customers
accounted for an aggregate of approximately 33% of our net sales. Direct and
indirect channel sales accounted for 45% and 55% of our net sales in fiscal
2000 and 59% and 41% of our net sales in fiscal 1999. Net sales from
international operations were $14.1 million, or 48% of net sales, in fiscal
2000, and $3.1 million, or 44% of net sales, in fiscal 1999. In the quarter
ended April 30, 2000, approximately 55% of our net sales were from
international customers. We expect this trend of more revenue being generated
from international customers to continue in the future. Overall, we expect our
net sales to increase as a result of continued growth in our sales force,
broader acceptance of our products in the marketplace, and the introduction of
new products, although the current year-over-year growth rate in our net sales
will not continue in the future.

Gross Profit. Gross profit increased to $18.1 million in fiscal 2000 from
$3.7 million in fiscal 1999. This increase in gross profit was primarily
attributable to the introduction of new products and their growing acceptance
in the marketplace and higher sales volumes. Gross margin increased to 61.7% in
fiscal 2000 from 53.1% in fiscal 1999. This increase in gross margin was
principally due to the resulting economies of scale from higher unit production
and cost savings achieved by outsourcing component manufacturing. Our gross

25
<PAGE>

margin has been and will continue to be affected by a variety of factors,
including competition, fluctuations in demand for our products, the timing and
size of customer orders and product implementations, the mix of direct and
indirect sales, the mix and average selling prices of products, new product
introductions and enhancements, component costs, manufacturing costs and
product configuration.

Research and Development. Research and development expenses consist
primarily of salaries and benefits, and prototype and test equipment costs.
Research and development expenses increased to $9.6 million in fiscal 2000 from
$4.0 million in fiscal 1999 and $2.4 million in fiscal 1998. These increases in
research and development expenses in absolute dollars were primarily
attributable to increased staffing and associated support for engineers
required to expand and enhance our product line, and, to a lesser extent,
expenses related to prototype and test equipment units. Research and
development headcount increased to 68 at April 30, 2000 from 21 in fiscal 1999
and 18 in fiscal 1998. As a percentage of net sales, research and development
expenses decreased to 32.9% in fiscal 2000 from 57.3% in fiscal 1999. This
decrease in research and development expenses as a percentage of net sales
reflects the fact that our net sales during these periods increased more
rapidly than our research and development expenses. We believe that significant
investments in research and development will be required to remain competitive
and expect that research and development expenses will continue to increase in
absolute dollars in future periods. Through April 30, 2000, all research and
development costs have been expensed as incurred.

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and benefits, commissions, advertising and promotional expenses, and
customer service and support costs. Sales and marketing expenses increased to
$28.9 million in fiscal 2000 from $6.9 million in fiscal 1999 and $1.7 million
in fiscal 1998. These increases in sales and marketing expenses in absolute
dollars were related to the expansion of our sales and marketing organization
as we increased headcount and added sales and support facilities worldwide.
Sales and marketing headcount increased to 173 at April 30, 2000 from 30 in
fiscal 1999 and 19 in fiscal 1998. As a percentage of net sales, sales and
marketing expenses increased to 98.7% for the year ended April 30, 2000 from
97.6% in fiscal 1999. We expect to continue to increase our sales and marketing
expenses significantly in absolute dollars in an effort to expand domestic and
international markets, introduce new products, and establish and expand new
distribution channels.

General and Administrative. General and administrative expenses increased to
$4.8 million in fiscal 2000 from $2.1 million in fiscal 1999 and $1.6 million
in fiscal 1998. These increases in general and administrative expenses in
absolute dollars were primarily attributable to increased staffing and
associated expenses necessary to manage and support our growth. General and
administrative headcount increased to 39 at April 30, 2000 from 10 in fiscal
1999 and 6 in fiscal 1998. As a percentage of net sales, general and
administrative expenses decreased to 16.2% for the year ended April 30, 2000
from 29.4% in fiscal 1999. These decreases in general and administrative
expenses as a percentage of net sales reflect the fact that our net sales
during these periods increased more rapidly than our general and administrative
expenses. We expect general and administrative expenses to increase in absolute
dollars as we continue to increase headcount to manage expanding operations and
facilities and incur the additional expenses associated with operating as a
public company.

Stock Compensation. Stock compensation expense increased to $38.4 million in
fiscal 2000 from $3.8 million in fiscal 1999 and $59,000 in fiscal 1998. This
non-cash charge reflects the amortization of deferred stock compensation. Stock
compensation has increased significantly in fiscal 2000 as a result of the
amortization of significant stock compensation, which was recorded concurrent
with the Company's November 1999 initial public offering. Based on the options
granted through April 30, 2000, we expect stock compensation to remain a
significant component of our operating expenses through fiscal 2004.

Other Income (Expense), Net. Other income (expense), net increased to net
other income of $3.0 million in fiscal 2000, from net other expense of $197,000
in fiscal 1999 and net other income of $233,000 in fiscal 1998. This increase
is primarily attributable to increased interest income earned on the Company's
cash equivalents and short-term investments, which grew significantly following
the completion of the Company's initial public offering in November 1999.

26
<PAGE>

Provision for Income Taxes. The provision for income taxes of $73,000 in
fiscal 2000 is composed entirely of foreign corporate income taxes. The foreign
corporate income taxes are a function of the Company's international expansion
and the establishment of branches and subsidiaries in various jurisdictions.
The provision for income taxes is based on income taxes on minimum profits the
foreign operations generated for services provided to the Company. The
Company's tax expense for fiscal 2001 will continue to be significantly
dependent on the amount and mix of income derived from sources subject to
corporate income taxes of foreign taxing jurisdictions.

Accretion of Preferred Stock. Accretion of preferred stock increased to $2.0
million in fiscal 2000, from none in fiscal 1999 and 1998. This charge was
recorded in connection with the November 1999 issuance of 280,953 shares of
Series D preferred stock at $11.00 per share to accrete the stock to its fair
value. During November 1999, all of the shares of Series D preferred stock
converted to common stock upon completion of the Company's initial public
offering.

Post year-end Acquisition. On June 5, 2000, the Company and SpringBank
Networks, Inc., a Delaware corporation ("SpringBank"), consummated a merger
pursuant to a merger agreement dated as of June 3, 2000. SpringBank has
survived the merger as a wholly-owned subsidiary of CacheFlow. Pursuant to the
agreement, each issued and outstanding share of common stock of SpringBank was
converted into the right to receive 0.2 shares of common stock of CacheFlow. In
addition, each outstanding option to purchase SpringBank Common Stock was
assumed by CacheFlow and converted into an option to purchase 0.2 shares of
CacheFlow Common Stock pursuant to the exchange ratio in the merger agreement.
The exercise price of the options to purchase CacheFlow Common Stock was also
determined pursuant to the exchange ratio in the merger agreement. Purchase
consideration totaled approximately $177 million and included approximately 2.8
million shares of CacheFlow Common Stock and approximately $8 million of
assumed liabilities. This transaction was accounted for as a purchase, and the
purchase price was allocated to tangible and intangible assets in proportion to
the fair value of those assets.

Liquidity and Capital Resources

From inception through November 1999, we financed our operations and the
purchase of property and equipment through private sales of preferred stock,
with net proceeds of $37.9 million, as well as through bank loans and equipment
leases. In November 1999, we financed our operations through an initial public
offering of our common stock, with net proceeds of $126.5 million, net of
underwriting discounts, commissions and offering costs. At April 30, 2000, we
had $91.5 million in cash and cash equivalents, $33.8 million in short-term
investments, and $126.4 million in working capital.

Net cash used in operating activities was $23.6 million in fiscal 2000, $9.7
million in fiscal 1999, and $5.1 million in fiscal 1998. We used cash primarily
to fund our net losses from operations.

Net cash used in investing activities was $37.9 million in fiscal 2000 and
$971,000 in fiscal 1999. Net cash used in investing activities was primarily
attributable to purchases of short-term securities, and to a lesser extent, to
purchases of property, plant and equipment. Net cash provided by investing
activities was $2.8 million in fiscal 1998 and was primarily attributable to
the sale of short-term investments. We expect that, in the future, any cash in
excess of current requirements will continue to be invested in short-term
investment grade, interest-bearing securities.

Capital expenditures were $4.0 million in fiscal 2000, $971,000 in fiscal
1999, and $623,000 in fiscal 1998. Our capital expenditures consisted primarily
of purchases of plant, equipment and software. Current capital commitments are
approximately $500,000, principally for office furniture and equipment. We
expect that our capital expenditures will continue to increase in the future.

Net cash provided by financing activities was $150.7 million in fiscal 2000,
$5.6 million in fiscal 1999, and $9.4 million in fiscal 1998. During May 1999,
we raised approximately $20.0 million in gross proceeds from the sale of Series
C Preferred Stock at $4.575 per share. During October 1999, we raised
approximately $2.8 million through the cash exercise of options granted to a
board member and consultant to purchase

27
<PAGE>

702,380 shares of common stock at $4.00 per share. During November 1999, we
raised approximately $3.1 million through the sale of 280,953 shares of Series
D Preferred Stock at $11.00 per share. We also raised approximately $126.5
million, net of underwriting discounts, commissions and offering costs through
the sale of 5,750,000 shares of our common stock in an initial public offering
at $24.00 per share. During December 1999, $4.5 million of these proceeds were
used to repay all of the Company's outstanding debt. In fiscal 1999, cash
provided by financing activities was primarily attributable to the issuance of
$4.0 million in debt obligations. In fiscal 1998, cash provided by financing
activities was primarily attributable to $9.3 million in net proceeds from
private sales of preferred stock.

We believe that working capital will be sufficient to meet our working
capital and capital expenditure requirements for at least the next twelve
months. Thereafter, we may find it necessary to obtain additional equity or
debt financing. Furthermore, if cash is used for acquisitions or other
unanticipated uses, we may need additional capital sooner than expected. In the
event additional financing is required, we may not be able to raise it on
acceptable terms or at all.

Year 2000 Readiness

In the past, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its assessment and
testing of systems. The Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the year 2000 date change.
To date, Year 2000 compliance costs have not been material. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.

If it comes to our attention that there are any Year 2000 problems with our
products or that any third-party hardware and software used in our internal
systems is not Year 2000 compliant, then we will endeavor to make modifications
to our products and internal systems, or purchase new internal systems, to
quickly respond to the problem. At the present time, however, we do not
anticipate incurring additional material costs related to Year 2000 compliance.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and sell them 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. Since all of our sales are currently made in United States dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. If any of the events described above were to occur, our net sales
could be seriously impacted, since a significant portion of our net sales are
derived from international operations. Net sales from international operations
represented 48% of total net sales for the year ended April 30, 2000.

28
<PAGE>

Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. As of April 30, 2000, we had approximately $124.4
million invested primarily in fixed-rate, short-term corporate and U.S.
government debt securities which are subject to interest rate risk and will
decrease in value if market U.S. interest rates increase. We maintain a strict
investment policy, which is intended to ensure the safety and preservation of
our invested funds by limiting default risk, market risk, and reinvestment
risk. The table below presents notional amounts and related weighted-average
interest rates by year of maturity for our investment portfolio as of April 30,
2000 (none as of April 30, 1999).

<TABLE>
<CAPTION>
Fair
2001 2002 Total Value
-------- ------ -------- --------
($ in thousands)
<S> <C> <C> <C> <C>
Cash equivalents
Fixed rate.............................. $ 90,683 $ -- $ 90,683 $ 90,660
Average rate............................ 6.14% -- 6.14% --
Short-term investments
Fixed rate.............................. $ 23,881 $9,985 $ 33,866 $ 33,788
Average rate............................ 6.32% 6.81% 6.46% --
-------- ------ -------- --------
Total Investment Securities........... $114,564 $9,985 $124,549 $124,448
======== ====== ======== ========
Average rate.............................. 6.18% 6.81% 6.23%
</TABLE>

We do not hold any equity securities or derivative investments.

29
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of April 30, 2000 and 1999................. 31
Consolidated Statements of Operations for each of the three years in the
period ended April 30, 2000.............................................. 32
Consolidated Statements of Stockholders' Equity (Deficit) for each of the
three years in the period ended April 30, 2000........................... 33
Consolidated Statements of Cash Flows for each of the three years in the
period ended April 30, 2000.............................................. 34
Notes to the Consolidated Financial Statements............................ 35
Report of Independent Auditors............................................ 51
</TABLE>

30
<PAGE>

CACHEFLOW INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
April 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................. $ 91,532 $ 2,291
Short-term investments.................................... 33,788 --
Accounts receivable, net of allowance for doubtful
accounts and sales returns of $350 and $121 at April 30,
2000 and 1999, respectively.............................. 3,112 1,353
Inventories............................................... 4,741 932
Prepaid expenses and other current assets................. 1,200 60
-------- --------
Total current assets....................................... 134,373 4,636
Property and equipment, net................................ 4,721 1,351
Other assets............................................... 1,640 729
-------- --------
Total assets.......................................... $140,734 $ 6,716
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable.......................................... $ 2,465 $ 1,464
Accrued payroll and related benefits...................... 2,611 420
Deferred revenue.......................................... 1,375 367
Other accrued liabilities................................. 1,487 166
Borrowings under line of credit........................... -- 643
Current portion of long-term obligations.................. -- 789
-------- --------
Total current liabilities.................................. 7,938 3,849
Deferred revenue........................................... 166 --
Long-term obligations, less current portion................ -- 3,211
-------- --------
Total liabilities..................................... 8,104 7,060
Commitments
Stockholders' equity (deficit):
Preferred stock:
$0.0001 par value, issuable in series: 10,000 and 30,000
shares authorized at April 30, 2000 and 1999,
respectively; none and 9,970 shares outstanding at
April 30, 2000 and 1999, respectively; aggregate
liquidation preference of none and $34,457 at April 30,
2000 and 1999, respectively............................ -- 1
Common stock:
$0.0001 par value, 200,000 and 60,000 shares authorized
at April 30, 2000 and 1999, respectively; 36,128 and
12,894 shares issued and outstanding at April 30, 2000
and 1999, respectively................................. 4 1
Additional paid-in capital................................ 264,304 30,877
Notes receivable from stockholders........................ (4,713) (1,004)
Deferred stock compensation............................... (43,489) (10,067)
Accumulated other comprehensive loss...................... (101) --
Accumulated deficit....................................... (82,805) (20,152)
Treasury stock, at cost, 76 and no shares held at April
30, 2000 and 1999, respectively.......................... (570) --
-------- --------
Total stockholders' equity (deficit)....................... 132,630 (344)
-------- --------
Total liabilities and stockholders' equity (deficit).. $140,734 $ 6,716
======== ========
</TABLE>

See accompanying notes to the consolidated financial statements.

31
<PAGE>

CACHEFLOW INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Net sales........................................ $ 29,277 $ 7,036 $ --
Cost of goods sold............................... 11,212 3,297 --
-------- -------- -------
Gross profit..................................... 18,065 3,739 --
Operating expenses:
Research and development....................... 9,646 4,034 2,396
Sales and marketing............................ 28,903 6,865 1,655
General and administrative..................... 4,757 2,069 1,630
Stock compensation............................. 38,405 3,776 59
-------- -------- -------
Total operating expenses..................... 81,711 16,744 5,740
-------- -------- -------
Operating loss................................... (63,646) (13,005) (5,740)
Interest income.................................. 3,780 160 258
Interest expense................................. (747) (357) (25)
-------- -------- -------
Net loss before income taxes..................... (60,613) (13,202) (5,507)
Provision for income taxes....................... 73 -- --
-------- -------- -------
Net loss......................................... (60,686) (13,202) (5,507)
Accretion of preferred stock..................... (1,967) -- --
======== ======== =======
Net loss available to common stockholders........ $(62,653) $(13,202) $(5,507)
======== ======== =======
Basic and diluted net loss per common share...... $ (3.31) $ (2.17) $ (1.43)
Shares used in computing basic and diluted net
loss per common share........................... 18,935 6,093 3,842
======== ======== =======
Pro forma basic and diluted net loss per common
share........................................... $ (2.30) $ (0.79)
======== ========
Shares used in computing pro forma basic and
diluted net loss per common share............... 27,218 16,626
======== ========
</TABLE>

See accompanying notes to the consoldiated financial statements.

32
<PAGE>

CACHEFLOW INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)

<TABLE>
<CAPTION>
Preferred Notes Accumulated Treasury
Stock Common Stock Additional Receivable Deferred Other Stock
--------------- -------------- Paid-In From Stock Comprehensive Accumulated -------------
Shares Amount Shares Amount Capital Stockholders Compensation Loss Deficit Shares Amount
------- ------ ------ ------ ---------- ------------ ------------ ------------- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at April
30, 1997 ........ 5,831 $ 1 7,184 $ 1 $ 5,143 $ -- $ -- $ -- $ (1,443) -- $ --
Issuance of
Series B
preferred stock,
net of issuance
costs........... 4,139 -- -- -- 9,329 -- -- -- -- -- --
Exercise of
stock options by
employees ...... -- -- 340 -- 25 -- -- -- -- -- --
Issuance of
common stock to
third parties
for services ... -- -- 93 -- 7 -- -- -- -- -- --
Repurchase of
common stock ... -- -- (1,600) -- (8) -- -- -- -- -- --
Deferred stock
compensation ... -- -- -- -- 150 -- (150) -- -- -- --
Amortization of
deferred stock
compensation ... -- -- -- -- -- -- 52 -- -- -- --
Net loss ....... -- -- -- -- -- -- -- -- (5,507) -- --
------- ----- ------ --- --------- ------- -------- ----- -------- ---- ------
Balances at April
30, 1998 ........ 9,970 1 6,017 1 14,646 -- (98) -- (6,950) -- --
Exercise of
stock options by
employees ...... -- -- 6,843 -- 2,049 -- -- -- -- -- --
Issuance of
common stock to
third parties
for services ... -- -- 34 -- 20 -- -- -- -- -- --
Stock
compensation ... -- -- -- -- 156 -- -- -- -- -- --
Issuance of
warrants in
connection with
debt issuance .. -- -- -- -- 437 -- -- -- -- -- --
Note receivable
from stockholder
for the exercise
of stock options
................ -- -- -- -- -- (999) -- -- -- -- --
Interest on note
receivable from
stockholder for
the exercise of
stock options .. -- -- -- -- -- (5) -- -- -- -- --
Deferred stock
compensation ... -- -- -- -- 13,569 -- (13,569) -- -- -- --
Amortization of
deferred stock
compensation ... -- -- -- -- -- -- 3,600 -- -- -- --
Net loss ....... -- -- -- -- -- -- -- -- (13,202) -- --
------- ----- ------ --- --------- ------- -------- ----- -------- ---- ------
Balances at April
30, 1999 ........ 9,970 1 12,894 1 30,877 (1,004) (10,067) -- (20,152) -- --
Issuance of
Series C
preferred stock,
net of issuance
costs........... 4,372 -- -- -- 19,976 -- -- -- -- -- --
Issuance of
Series D
preferred stock,
net of issuance
costs........... 281 -- -- -- 3,090 -- -- -- -- -- --
Exercise of
stock options by
employees ...... -- -- 1,785 1 6,421 -- -- -- -- -- --
Notes receivable
from
stockholders for
the exercise of
stock options .. -- -- -- -- -- (3,547) -- -- -- -- --
Issuance of
common stock to
nonemployees ... -- -- 692 -- 2,726 -- -- -- -- 68 --
Repurchase of
common stock
from employees
................ -- -- (289) -- (79) -- -- -- -- (140) (61)
Interest on
notes receivable
from
stockholders for
the exercise of
stock options .. -- -- -- -- -- (162) -- -- -- -- --
Deferred stock
compensation ... -- -- -- -- 71,848 -- (71,848) -- -- -- --
Amortization of
deferred stock
compensation ... -- -- -- -- -- -- 38,426 -- -- -- --
Exercise of
Series A and C
warrants ....... 673 -- -- -- 976 -- -- -- -- (4) (509)
Issuance of
common stock in
an initial
public offering,
net of issuance
costs........... -- -- 5,750 1 126,502 -- -- -- -- -- --
Conversion of
Series A, B, C,
and D preferred
stock to common
stock .......... (15,296) (1) 15,296 1 -- -- -- -- -- -- --
Net loss ....... -- -- -- -- -- -- -- -- (60,686) -- --
Unrealized
gain/loss on
short-term
investments .... -- -- -- -- -- -- -- (101) -- -- --
Accretion of
Series D
preferred stock
................ -- -- -- -- 1,967 -- -- -- (1,967) -- --
------- ----- ------ --- --------- ------- -------- ----- -------- ---- ------
Balances at April
30, 2000 ........ -- $ -- 36,128 $ 4 $ 264,304 $(4,713) $(43,489) $(101) $(82,805) (76) $ (570)
======= ===== ====== === ========= ======= ======== ===== ======== ==== ======
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balances at April
30, 1997 ........ $ 3,702
Issuance of
Series B
preferred stock,
net of issuance
costs........... 9,329
Exercise of
stock options by
employees ...... 25
Issuance of
common stock to
third parties
for services ... 7
Repurchase of
common stock ... (8)
Deferred stock
compensation ... --
Amortization of
deferred stock
compensation ... 52
Net loss ....... (5,507)
-------------
Balances at April
30, 1998 ........ 7,600
Exercise of
stock options by
employees ...... 2,049
Issuance of
common stock to
third parties
for services ... 20
Stock
compensation ... 156
Issuance of
warrants in
connection with
debt issuance .. 437
Note receivable
from stockholder
for the exercise
of stock options
................ (999)
Interest on note
receivable from
stockholder for
the exercise of
stock options .. (5)
Deferred stock
compensation ... --
Amortization of
deferred stock
compensation ... 3,600
Net loss ....... (13,202)
-------------
Balances at April
30, 1999 ........ (344)
Issuance of
Series C
preferred stock,
net of issuance
costs........... 19,976
Issuance of
Series D
preferred stock,
net of issuance
costs........... 3,090
Exercise of
stock options by
employees ...... 6,422
Notes receivable
from
stockholders for
the exercise of
stock options .. (3,547)
Issuance of
common stock to
nonemployees ... 2,726
Repurchase of
common stock
from employees
................ (140)
Interest on
notes receivable
from
stockholders for
the exercise of
stock options .. (162)
Deferred stock
compensation ... --
Amortization of
deferred stock
compensation ... 38,426
Exercise of
Series A and C
warrants ....... 467
Issuance of
common stock in
an initial
public offering,
net of issuance
costs........... 126,503
Conversion of
Series A, B, C,
and D preferred
stock to common
stock .......... --
Net loss ....... (60,686)
Unrealized
gain/loss on
short-term
investments .... (101)
Accretion of
Series D
preferred stock
................ --
-------------
Balances at April
30, 2000 ........ $132,630
=============
</TABLE>

See accompanying notes to the consolidated financial statements.

33
<PAGE>

CACHEFLOW INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Year Ended April 30,
-----------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Operating Activities
Net loss........................................ $(60,686) $(13,202) $(5,507)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 774 261 91
Stock compensation............................ 38,405 3,776 59
Interest on notes receivable from
stockholders................................. (162) (5) --
Debt issuance costs........................... 256 437 --
Changes in operating assets and liabilities:
Accounts receivable........................... (1,759) (1,353) --
Inventories................................... (3,809) (525) (369)
Prepaid expenses and other current assets..... (1,396) (7) (40)
Other assets.................................. (883) (719) (7)
Accounts payable.............................. 1,001 1,035 362
Accrued liabilities........................... 4,686 594 359
-------- -------- -------
Net cash used in operating activities....... (23,573) (9,708) (5,052)
Investing Activities
Purchases of property and equipment............. (4,034) (971) (623)
Purchases of short-term investments............. (33,897) -- 3,410
-------- -------- -------
Net cash used in investing activities....... (37,931) (971) 2,787
Financing Activities
Net proceeds from issuance of preferred stock... 23,526 -- 9,329
Net proceeds from issuance of common stock...... 132,112 1,051 25
Repurchase of employee common stock............. (140) -- (8)
Payments on debt obligations and line of
credit......................................... (4,753) (73) (55)
Borrowings from line of credit.................. -- 643 --
Proceeds from issuance of debt obligations...... -- 4,000 128
-------- -------- -------
Net cash provided by financing activities... 150,745 5,621 9,419
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents.................................... 89,241 (5,058) 7,154
Cash and cash equivalents at beginning of year.. 2,291 7,349 195
-------- -------- -------
Cash and cash equivalents at end of year........ $ 91,532 $ 2,291 $ 7,349
======== ======== =======
Supplemental disclosure of cash flow information
Cash paid for interest.......................... $ 309 $ 375 $ 10
======== ======== =======
Noncash investing and financing activities
Purchase of equipment under capital lease....... $ 110 $ -- $ --
======== ======== =======
Warrants issued in connection with long-term
debt and strategic customer arrangements....... $ 509 $ 437 $ --
======== ======== =======
Accretion of preferred stock.................... $ 1,967 $ -- $ --
======== ======== =======
Issuance of notes receivable to stockholders for
the exercise of stock options and related
interest....................................... $(3,547) $(1,004) $ --
======== ======== =======
</TABLE>

See accompanying notes to the consolidated financial statements.

34
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

Organization

CacheFlow Inc., hereafter also referred to as the "Company," was organized
and incorporated in the state of Delaware on March 13, 1996. The Company
operates in one segment to design, develop, market and support high-performance
Internet caching appliances.

Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated. From inception in March 1996 through April 30, 1998, the
Company was considered to be in the development stage. The Company's sales
activities were initiated in the first quarter of fiscal 1999.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents consisted primarily of commercial paper investments at April 30,
2000, and money market investments at April 30, 1999. Short-term investments
consisted of debt securities with original maturities between three months and
two years.

Management determines the appropriate classification of debt and equity
securities at the time of purchase and evaluates such designation as of each
balance sheet date. To date, all marketable debt securities 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 (deficit). Realized gains and losses and
declines in value of securities judged to be other than temporary are included
in interest income and have not been significant to date. Interest and
dividends on all securities are included in interest income.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to credit risk
consist of demand deposit accounts, money market accounts, commercial paper,
corporate debt securities, and trade receivables. The Company maintains its
demand deposit accounts and its money market accounts primarily with one
financial institution. The Company's investment advisors are instructed to only
invest in high-quality, investment grade securities and to limit investment
exposure in any one issue. The Company has partially financed its operations
through long-term debt with a lending institution. Management believes the
financial risks associated with these financial instruments are minimal.

The Company generally does not require collateral for sales to customers.
For the year ended April 30, 2000, no customers individually accounted for over
10% of our net sales. For the year ended April 30, 1999, three customers
individually accounted for over 10% of our net sales, for an aggregate of
approximately 33% of our net sales.

35
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Concentrations of Supply

The Company currently purchases several key parts and components used in the
manufacture of its Internet caching appliance products from limited sources of
supply.

Concentrations of Sales

The Company's Internet caching appliance product family and related services
have accounted for all of the Company's net sales for the two years ended April
30, 2000.

Inventories

Inventories consist of raw materials, work-in-process and finished goods.
Inventories are recorded at the lower of cost or market using the first-in,
first-out method.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the lesser of the estimated useful life, generally three to five
years, or the lease term of the respective assets.

Revenue Recognition

The Company generally recognizes product revenue upon shipment assuming that
collectibility is probable, unless the Company has future obligations for
installation or must obtain customer acceptance, in which case revenue is
deferred until these obligations are met. Maintenance contract revenue is
initially deferred when the customer purchases a maintenance contract and
recorded evenly over the life of the contract. Maintenance contract revenue for
the year ended April 30, 2000 and 1999 was $360,000 and $25,000, respectively.

Warranty Reserves

The Company's products generally carry a one-year warranty that includes
factory repair services. Estimated expenses for warranty obligations, including
the cost of replacement parts, are generally accrued at the same time as
related product revenue is recognized.

Income Taxes

The Company uses the liability method to account for income taxes as
required by the Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.

Research and Development

Costs to develop the Company's products are expensed as incurred in
accordance with the FASB's Statement of Financial Accounting Standards No. 2,
"Accounting for Research and Development Costs," which establishes accounting
and reporting standards for research and development.

36
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Comprehensive Income (Loss)

The Company reports comprehensive income (loss) in accordance with the
Financial Accounting Standards Board's (FASB) Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Included in other
comprehensive income (loss) for the Company are adjustments to record
unrealized gains and losses on available-for-sale securities. These adjustments
are accumulated in "Accumulated other comprehensive loss" in the stockholder's
equity section of the balance sheet. The following table presents the Company's
comprehensive net loss (in thousands):

<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Net loss available to common stockholders...... $(62,653) $(13,202) $(5,507)
Unrealized loss on investments................. (101) -- --
-------- -------- -------
Comprehensive loss............................. $(62,754) $(13,202) $(5,507)
======== ======== =======
</TABLE>

Stock-Based Compensation

The Company accounts for its stock options and equity awards in accordance
with the provisions of the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and has elected to follow the
"disclosure only" alternative prescribed by the FASB's Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).

Fair Value of Financial Instruments

The fair value of the Company's short-term investments is based on quoted
market prices. The fair value of long-term debt obligations are estimated based
on current interest rates available to the Company for debt instruments with
similar terms, degrees of risk, and remaining maturities. The carrying values
of these obligations approximate their fair values.

Net Loss Per Common Share

Basic net loss per common share and diluted net loss per common share are
presented in conformity with the FASB's Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128), for all periods presented.

In accordance with FAS 128, basic and diluted net loss per common share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less the weighted average number of shares of
common stock issued to founders, investors and employees that are subject to
repurchase. Pro forma basic and diluted net loss per common share, as presented
in the condensed consolidated statements of operations, have been computed as
described above and also give effect, under Securities and Exchange Commission
guidance, to the conversion of the convertible preferred stock (using the if-
converted method) from the original date of issuance. The shares used in
calculating the pro forma basic and diluted net loss per common share amounts
also include warrants to purchase series A and C preferred stock as such
warrants expired upon the completion of the Company's initial public offering
of its common stock. The weighted average share amounts exclude warrants to
purchase series B preferred stock as such warrants remained outstanding after
the initial public offering was complete.

37
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table presents the calculation of basic and diluted net loss
per common share and pro forma basic and diluted net loss per common share (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Historical:
Net loss available to common stockholders.... $(62,653) $(13,202) $(5,507)
======== ======== =======
Weighted-average shares of common stock
outstanding................................. 23,555 9,214 7,340
Less: Weighted-average shares subject to
repurchase.................................. (4,620) (3,121) (3,498)
-------- -------- -------
Weighted-average shares used in computing
basic and diluted net loss per common
share....................................... 18,935 6,093 3,842
======== ======== =======
Basic and diluted net loss per common share.. $ (3.31) $ (2.17) $ (1.43)
======== ======== =======
Pro Forma:
Shares used above............................ 18,935 6,093 3,842
Pro forma adjustment to reflect the weighted
effect of the assumed conversion of
preferred stock............................. 7,919 9,970
Pro forma adjustment to reflect the weighted
effect of the assumed conversion of
preferred stock warrants.................... 364 563
-------- --------
Shares used in computing pro forma basic and
diluted net loss per common share........... 27,218 16,626
======== ========
Pro forma basic and diluted net loss per
common share................................ $ (2.30) $ (0.79)
======== ========
</TABLE>

The Company has excluded all preferred stock, warrants for preferred stock,
outstanding stock options and shares subject to repurchase from the calculation
of diluted net loss per common share because all such securities are
antidilutive for all periods presented. The total number of shares excluded
from the calculations of diluted net loss per common share was (in thousands)
14,784, 16,980, and 14,548 for the three years ended April 30, 2000, 1999 and
1998.

Foreign Currency Adjustments

Management has determined that the functional currency of the Company's
domestic and foreign operations is the U.S. dollar. Accordingly, the effects of
foreign currency transactions, and of remeasuring the financial position and
results of operations from local currencies into the functional currency, are
included in "interest expense." These amounts have not been material for each
of the three years in the period ended April 30, 2000.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising expenses for
the years ended April 30, 2000, 1999 and 1998 were $450,000, $270,000, and
$84,000, respectively, and are included in sales and marketing expenses.

Segment Information

The Company has adopted the FASB's Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information." The Company operates in one

38
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

segment to design, develop and market Internet caching appliances that are
specifically designed, or purpose-built, to accelerate and manage the flow of
information over the Internet.

Recent Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133), which will be effective for the Company's fiscal year ending April 30,
2002. This statement establishes accounting and reporting standards requiring
that every derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the consolidated balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The Company has not
evaluated the impact of FAS 133; however, it believes the adoption of FAS 133
will not have a material effect on the consolidated financial position,
results of operations, or cash flows as the Company has not entered into any
derivative contracts.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements of public registrants. The
provisions of SAB 101 are effective for the Company in the fourth quarter of
fiscal 2001. SAB 101 had no effect on our operating results for the year ended
April 30, 2000 and is not expected to materially impact our future results of
operations.

Note 2. Balance Sheet Data

Cash equivalents and short-term investments consisted of the following (in
thousands):

<TABLE>
<CAPTION>
April 30, 2000
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Money market funds............. $ 1,636 $ -- $ -- $ 1,636
Commercial paper............... 66,514 -- (25) 66,489
Corporate debt securities...... 56,399 2 (78) 56,323
--------- ----- ----- --------
$ 124,549 $ 2 $(103) $124,448
========= ===== ===== ========
Included in cash equivalents... $ 90,683 $ 2 $ (25) $ 90,660
Included in short-term
investments................... 33,866 -- (78) 33,788
--------- ----- ----- --------
$ 124,549 $ 2 $(103) $124,448
========= ===== ===== ========
Due within one year............ $ 114,523 $ 2 $ (62) $114,463
Due between one and two years.. 10,026 -- (41) 9,985
--------- ----- ----- --------
$ 124,549 $ 2 $(103) $124,448
========= ===== ===== ========
</TABLE>

As of April 30, 1999, the Company had $2,263,000 of money market funds in
cash and cash equivalents.

39
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
April 30,
---------------
2000 1999
------- ------
<S> <C> <C>
Raw materials............................................... $ 2,380 $ 610
Work-in-process............................................. 317 45
Finished goods.............................................. 2,044 277
------- ------
$ 4,741 $ 932
======= ======

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

<CAPTION>
April 30,
---------------
2000 1999
------- ------
<S> <C> <C>
Computer and office equipment............................... $ 3,925 $1,224
Software.................................................... 1,446 469
Furniture and fixtures...................................... 307 23
Leasehold improvements...................................... 182 --
------- ------
5,860 1,716
Less accumulated depreciation and amortization.............. (1,139) (365)
------- ------
$ 4,721 $1,351
======= ======
</TABLE>

Certain computer and office equipment are recorded under capital lease
arrangements that aggregated $29,000 as of April 30, 1999 (none were
outstanding as of April 30, 2000). Accumulated amortization on the assets
recorded under capital leases aggregated $8,000 as of April 30, 1999.

Note Receivable from Officer

In August 1999, the Company entered into a five-year non-recourse, non-
interest bearing note for $800,000 with an officer of the Company for the
purchase of a primary residence. The note is secured by the officer's primary
residence, and is presented in "Other assets" in the Company's balance sheet at
April 30, 2000.

Note 3. Stockholders' Equity (Deficit)

Stock Split

In June 1999, the Company's Board of Directors and stockholders approved a
2-for-1 stock split of the Company's authorized, issued and outstanding common
and preferred stock. All common and preferred share and per share amounts in
the accompanying consolidated financial statements have been retroactively
adjusted to reflect the 2-for-1 stock split.

40
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Preferred Stock

Preferred stock consisted of the following series (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
Shares Shares Issued and
Authorized at Outstanding at Per Share Aggregate
April 30, April 30, ------------------------- Liquidation
------------- ------------------ Noncumulative Liquidation Preference at
Series 2000 1999 2000 1999 Dividend Preference April 30, 2000
------ ------ ------ -------- --------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
A....................... -- 6,394 -- 5,831 $0.07 $ 0.88 $ --
B....................... -- 4,400 -- 4,139 $0.23 $ 2.26 --
C....................... -- -- -- -- $0.46 $ 4.58 --
D....................... -- -- -- -- $1.10 $11.00 --
Undesignated............ 10,000 19,206 -- -- $0.00 $ 0.00 --
------ ------ ------- --------- -----
Total................. 10,000 30,000 -- 9,970 $ --
====== ====== ======= ========= =====
</TABLE>

The holders of Series A, B, C and D preferred stock are entitled to annual
noncumulative dividends per share as shown above when and if declared by the
board of directors. In the event of any voluntary or involuntary liquidation of
the Company, Series A, B, C and D preferred stockholders are entitled to a
liquidation preference per share as shown above plus any declared but unpaid
dividends, all in preference to the holders of the common stock. If upon
occurrence of such event, the asset and funds thus distributed among the
holders of the preferred stock shall be insufficient to permit the payment to
such holders, then the entire assets and funds of the corporation legally
available for distribution shall distribute ratably among the holders of Series
A, B, C and D preferred stock in proportion to the aggregate preferential
amounts each such holder is otherwise entitled to receive. Upon the completion
of a distribution, the holders of the common stock will ratably receive any and
all remaining assets of the Company. No dividends on the Company's preferred
stock have been declared.

The holders of Series A, B and C preferred stock have the right, at any time
after the date of issuance, to convert each of their shares into common shares.
The initial conversion ratio is one-to-one for shares of Series A, B, and C
preferred shares but is subject to adjustments for dilution. The holders of
each share of preferred stock have the right to one vote for each share of
common stock into which the preferred stock can be converted.

In September 1999, the Company's Board of Directors approved a decrease in
authorized shares of preferred stock from 30,000,000 to 10,000,000 upon the
completion of the Company's initial public offering of its common stock.

In November 1999, the Company authorized and issued 280,953 shares of series
D preferred stock at $11.00 per share. The series D preferred stock has similar
rights, preferences and privileges as series A, B, and C preferred stock. In
connection with the issuance of the series D preferred stock, the Company
recorded a non-cash charge of approximately $1,967,000 to accrete the stock to
its fair value.

In November 1999, the Company closed its initial public offering of its
common stock and all preferred shares outstanding on the close date were
converted one-for-one into shares of common stock.

Stock Option Grants

The Company granted 677,380 options to a consultant of the Company who is
also the holder of Series D preferred shares on October 13, 1999 to purchase
common stock at an exercise price of $4.00 per share. The

41
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

options were immediately vested, nonforfeitable and exerciseable and were
subsequently exercised. The fair value of the options was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk free rate of 6.0%, expected life of the options of 0.05
years, 60% volatility and no dividend yield. The Company calculated a value of
approximately $8,129,000 for the consultant's options and recorded this amount
in October 1999.

Warrants

In October and November of 1996, the Company issued a total of 562,850
warrants to purchase Series A preferred stock at an exercise price of $0.875
per share. The warrants were immediately exercisable and expired at the earlier
of April 30, 2000 or at the completion of the Company's initial public offering
of its common stock. In November 1999, all of these warrants were exercised
prior to the completion of the Company's initial public offering.

In connection with the long-term debt agreements entered into in November
1998, the Company issued warrants to purchase 141,842 shares of Series B
preferred stock at an exercise price of $3.42 per share. The value of the
Series B warrants was estimated using the Black-Scholes option pricing model
with the following assumptions: weighted-average risk free interest rate of
6.0%, weighted-average contractual life of 0.22 years, 60% volatility and no
dividend yield. The Company calculated a value of $507,000 and this amount was
recorded as deferred issuance costs in other assets. This amount was amortized
over the term of the agreement to interest expense. In December 1999, this
long-term debt arrangement was repaid and terminated, at which time the
unamortized deferred issuance costs, which were immaterial, were written off as
interest expense.

In April 1999, the Company entered into a strategic relationship with a
customer. As part of the arrangement the Company issued warrants to purchase
110,000 shares of Series C preferred stock at an exercise price of $4.575 per
share. A portion of the warrants was immediately exercisable and the remaining
warrants became exercisable in September 1999. The warrants expired at the
earlier of April 30, 2002 or at the completion of the Company's initial public
offering of its common stock. In April 1999, the Company recorded a charge of
$17,000 based on the fair value of the warrants. The Company recorded an
additional charge of approximately $604,000 in the year ended April 30, 2000,
which represents the fair value of the warrants. The fair value of the warrants
was determined using the Black-Scholes model. In November 1999, all of these
warrants were exercised prior to completion of the Company's initial public
offering.

Common Stock

On November 19, 1999, the Company completed its initial public offering, in
which it sold 5,750,000 shares of common stock (including an over-allotment
option of 750,000 shares) at $24 per share. Upon the closing of the offering,
all of the Company's preferred stock converted to common stock. Proceeds from
the offering were approximately $126,502,000, net of underwriter's discounts,
commissions and offering costs.

The Company has entered into Stock Purchase Agreements in connection with
the sale of common stock to employees, consultants and directors. The Company
typically has the right to repurchase, at the original issue price, a declining
percentage of certain of the shares of common stock issued based on the
employees, consultants, and directors service periods. The repurchase right
generally declines on a percentage basis over four years based on the length of
the each respective employee's continued employment with the Company, and the
director's membership on the Board of Directors under this agreement. As of
April 30, 2000, 1999 and 1998, 3,987,916, 4,963,456 and 1,467,082 shares,
respectively, of common stock issued under these agreements were subject to
repurchase.

42
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In September 1999, the Company's Board of Directors approved an increase in
authorized shares of common stock from 60,000,000 to 200,000,000 upon the
completion of the Company's initial public offering of its common stock.

Shares of Common Stock Reserved for Future Issuance

Common stock reserved for future issuance consisted of the following (in
thousands):

<TABLE>
<CAPTION>
April 30,
-------------
2000 1999
------ ------
<S> <C> <C>
Common stock reserved for:
Preferred stock.............................................. -- 9,970
1996 Stock Option Plan....................................... 6,880 2,058
1999 Stock Incentive Plan.................................... 7,240 --
1999 Director Option Plan.................................... 500 --
2000 Supplemental Stock Option Plan.......................... 3,000
Employee Stock Purchase Plan................................. 3,000 --
Preferred stock warrants..................................... 142 814
Other option grants.......................................... 300 --
------ ------
21,062 12,842
====== ======
</TABLE>

Notes Receivable from Stockholders

In April 1999, the Company entered into a note for $999,900 with an officer
of the Company for the purchase of common stock. The note bears interest at
4.99% and the note and related interest are payable in full on April 12, 2004.
The note is secured by 2 million shares of common stock of the Company owned by
the officer. The note was issued with full recourse.

In September 1999, the Company entered into two five-year notes for $495,000
each with two employees of the Company for the purchase of common stock. The
notes bear interest at 5.98% and the notes and related interest are payable in
full in September 2004. Each note is secured by 90,000 shares of common stock
of the Company owned by each employee. The notes are full recourse.

In October 1999, the Company entered into a five-year note for $2,519,900
with an officer of the Company for the purchase of common stock. The note bears
interest at 5.54% and the note and related interest are payable in full in
October 2004. The note is secured by 420,000 shares of common stock of the
Company owned by the officer. The note is full recourse.

Note 4. Employee and Director Stock Plans

In 1996, the Company established the 1996 Stock Option Plan (the 1996 Plan)
under which stock options may be granted to employees, directors and
consultants of the Company and authorized 1,000,000 shares of common stock
thereunder. Through various amendments, the Board of Directors and stockholders
approved the increase in the number of shares authorized for issuance under the
1996 Plan to 15,643,000. Under the 1996 Plan, nonstatutory stock options may be
granted to employees and consultants, and incentive stock options (ISO) may be
granted only to employees. In the case of an ISO that is granted to an employee
who, at the time of the grant of such option, owns stock representing more than
10% of the total combined voting power of all classes of stock of the Company,
the per share exercise price shall not be less than 110% of the fair market
value per share on the date of grant or, granted to any other employee, the per
share exercise price shall not be

43
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

less than 100% of the fair value per share on the date of grant. The exercise
price for non-qualified options may not be less than 85% of the fair value of
common stock at the option grant date.

Options issued under the 1996 Plan are immediately exercisable, and shares
issued upon exercise of an option are subject to a right of repurchase by the
Company at the original issuance price. The repurchase right lapses as
determined by the Company's Board of Directors, generally 25% after one year
and 2.08% per month thereafter. At April 30, 2000, 1999, and 1998 the Company
had 3,988,000, 4,327,000, and 269,000 shares, respectively, which were subject
to repurchase rights under the 1996 Plan. No shares were repurchased under the
1996 plan during fiscal 1999 and 1998. For the year ended April 30, 2000,
429,000 shares were repurchased under the 1996 Plan at the original issuance
price.

The 1996 Plan will continue in effect for a term of ten years unless
terminated by the Company's Board of Directors at an earlier date. Any option
granted under the 1996 plan shall be exercisable at such times and under such
conditions as determined by the Company's Board of Directors.

Employee Stock Purchase Plan

In September 1999, the Company's Board of Directors adopted the Employee
Stock Purchase Plan, or ESPP. The plan became effective upon the effective date
of the Company's initial public offering of its common stock. As of April 30,
2000, a total of 3,000,000 shares of common stock have been reserved for
issuance under the plan. Under the plan, eligible employees may purchase common
stock through payroll deductions, which in any event may not exceed 15% of an
employee's compensation, at a price equal to the lower of 85% of the fair
market value of the common stock at the beginning of each offering period or at
the end of each purchase period. The number of shares reserved under the
Employee Stock Purchase Plan automatically increased by 500,000 shares
beginning January 31, 2000, and will continue to do so annually. The Company's
Board of Directors, at its discretion, may reduce the automatic annual increase
in reserved shares.

1999 Stock Incentive Plan

In September 1999, the Company's Board of Directors adopted the 1999 Stock
Incentive Plan (the "Incentive Plan") under which 5,000,000 shares of common
stock have been reserved for issuance. The plan became effective upon the
effective date of the Company's initial public offering of its common stock.
The number of shares reserved under the Incentive Plan automatically increased
on January 1, 2000 by 1,794,013 shares and will increase on an annual basis by
the lesser of 5% of the total amount of common stock outstanding or 2,000,000
shares. The exercise price for incentive stock options and non-qualified stock
options may not be less than 100% and 85%, respectively, of the fair market
value of common stock on the option grant date.

1999 Director Option Plan

In September 1999, the Company's Board of Directors adopted the 1999
Director Option Plan (the "Directors' Plan") under which 500,000 shares of
common stock have been reserved for issuance. The Director's Plan became
effective on the date of its adoption. Each non-employee director joining the
Board of Directors following the effective date of the initial public offering
will automatically receive options to purchase 25,000 shares of common stock.
In addition, each non-employee director will automatically receive options to
purchase 5,000 shares of common stock at each annual meeting of the Board of
Directors held in the year 2000 and thereafter. Each option will have an
exercise price equal to the fair market value of the common stock on the option
grant date. The number of shares reserved under the Directors' Plan
automatically increased by 100,000 shares beginning January 31, 2000 and will
continue to do so annually. The Company's Board of Directors, at its
discretion, may reduce the automatic annual increase in reserved shares.

44
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2000 Supplemental Stock Option Plan

In February 2000, the Company's board of directors adopted the 2000
Supplemental Stock Option Plan (the "2000 Plan") under which 3,000,000 shares
of common stock have been reserved for issuance. Employees and consultants are
eligible to participate in the 2000 Plan, and outside directors and executive
officers are not eligible to participate. The 2000 Plan provides for the grant
of nonstatutory stock options to purchase shares of our common stock and
restricted shares of our common stock. The exercise price for stock options
issued under the 2000 Plan may not be less than 25% of the fair market value of
common stock on the option grant date.

Stock option activity under all plans and options issued outside all plans
were as follows (in thousands except per share amounts):

<TABLE>
<CAPTION>
Outstanding Options
--------------------------
Weighted-Average
Number of Exercise Price
Shares Per Share
--------- ----------------
<S> <C> <C>
Balance at April 30, 1997......................... 850 $ 0.06
Options granted................................. 3,386 $ 0.09
Options exercised............................... (340) $ 0.08
Options canceled................................ (150) $ 0.08
------
Balance at April 30, 1998......................... 3,746 $ 0.09
Options granted................................. 5,371 $ 0.61
Options exercised............................... (6,843) $ 0.37
Options canceled................................ (406) $ 0.34
------
Balance at April 30, 1999......................... 1,868 $ 0.51
Options granted................................. 11,743 $18.96
Options exercised............................... (2,477) $ 3.74
Options canceled................................ (480) $11.08
------
Balance at April 30, 2000......................... 10,654 $19.62
======
</TABLE>

The following table summarizes information about stock options outstanding
at April 30, 2000 (in thousands except per share amounts and life).

<TABLE>
<CAPTION>
Options Outstanding Options Exerciseable
-------------------------------------------------------------------- ----------------------------------
Number of Options Weighted Average Number of Options
Range of Outstanding at Contractual Life Weighted Average Exerciseable at Weighted Average
Exercise Prices April 30, 2000 (Years) Exercise Price April 30, 2000 Exercise Price
--------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.075-$ 0.50 769 8.24 $ 0.41 769 $ 0.41
$ 1.00-$ 2.00 1,576 9.16 $ 1.78 1,166 $ 1.79
$ 4.00-$ 5.50 2,455 9.36 $ 4.61 2,136 $ 4.54
$ 6.00-$ 12.00 1,128 9.52 $10.34 973 $ 10.25
$24.00-$ 25.50 1,121 9.58 $24.20 810 $ 24.00
$26.10-$ 30.50 2,811 9.95 $30.27 19 $ 30.50
$85.00-$101.50 794 9.77 $88.99 -- $101.50
------ ---- ------ ----- -------
$0.075-$101.50 10,654 9.48 $19.62 5,873 $ 7.21
====== =====
</TABLE>

At April 30, 2000, 7,266,827 shares were available for future option grants
under all plans.

45
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock Compensation

For the three years ended April 30, 2000, 1999, and 1998 the Company
recorded deferred stock compensation of $71,848,000, $13,569,000 and $150,000,
respectively. These amounts represent the difference between the exercise price
and the deemed fair value of the Company's common stock on the date such stock
options were granted. For the three years ended April 30, 2000, 1999, and 1998
the Company recorded amortization of stock compensation of $38,426,000,
$3,600,000 and $52,000, respectively. At April 30, 2000 and 1999, the Company
had $43,489,000 and $10,067,000, respectively, of remaining unamortized
deferred compensation. Such amounts are included as a reduction of
stockholders' equity (deficit) and are being amortized using a graded method
over the vesting period of each respective option.

Pro Forma Disclosures of the Effect of Stock-Based Compensation

Pro forma information regarding results of operations and net loss per share
is required by FAS 123, which also requires that the information be determined
as if the Company had accounted for its stock-based awards to employees under
the fair value method of FAS 123. The fair value for each stock-based award was
estimated at the date of grant using the Black-Scholes option pricing model for
the year ended April 30, 2000 and the minimum value option pricing model for
the years ended April 30, 1999 and 1998 with the following weighted-average
assumptions:

<TABLE>
<CAPTION>
Year Ended April
30,
----------------------
Options ESPP
---------------- ----
2000 1999 1998 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Risk-free interest rate.............................. 6.25% 6.00% 6.00% 6.25%
Dividend yield....................................... 0% 0% 0% 0%
Expected life (years)................................ 5 5 5 0.67
Expected volatility.................................. 1.29 n/a n/a 2.37
</TABLE>

The option valuation models were developed for use in the estimation of the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock-based awards have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock-based awards.

For purposes of pro forma disclosures, the estimated fair value of the
Company's stock-based awards to employees is amortized to pro forma expense
over the vesting period for stock options and over the six-month purchase
period for stock purchases under the ESPP. Pro forma information follows (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C> <C>
Pro forma net loss........................ $(74,940) $(13,261) $(5,520)
======== ======== =======
Pro forma basic and diluted net loss per
common share............................. $ (3.96) $ (2.18) $ (1.43)
======== ======== =======
</TABLE>

The per share weighted average grant date fair value of options granted,
which is the value assigned to the options under FAS 123, was $19.79, $0.14 and
$0.02, for options granted for the years ended April 30, 2000, 1999 and 1998,
respectively. The weighted average fair value of employee stock purchase rights
issued under the Company's ESPP was $17.36 per share for the year ended April
30, 2000 (the year the ESPP was adopted).

46
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The pro forma impact of stock-based awards on the net loss for the year
ended April 30, 1998 reflects compensation expense for two years' vesting while
the year ended April 30, 1999 reflects compensation expense for three years'
vesting of outstanding stock-based awards.

Note 5. Income Taxes

The provision for income taxes of $73,000 for the year ended April 30, 2000
is composed entirely of foreign corporate income taxes. There is no provision
for income taxes for the years ended April 30, 1999 and 1998.

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

<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Provision at statutory rate..................... $(21,215) $(4,621) $(1,927)
Future benefits not currently recognized........ 12,686 2,784 1,925
Stock compensation.............................. 8,506 1,475 --
Other........................................... 96 362 2
-------- ------- -------
Provision for income taxes.................... $ 73 $ -- $ --
======== ======= =======
</TABLE>

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 the Company's deferred tax assets are as follows (in thousands):

<TABLE>
<CAPTION>
April 30,
-------------------
2000 1999
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 12,659 $ 5,384
Stock compensation expenses........................... 6,547 --
Other................................................. 1,974 729
--------- --------
Total deferred tax assets........................... $ 21,180 $ 6,113
Valuation allowance..................................... (21,180) (6,113)
--------- --------
Net deferred tax assets................................. $ -- $ --
========= ========
</TABLE>

The Company has incurred losses from inception through fiscal 2000.
Management believes that, based on the history of such losses and other
factors, the weight of available evidence indicates that it is more likely than
not that the Company will not be able to realize its deferred tax assets and
thus a full valuation allowance has been recorded at April 30, 2000 and 1999.
The valuation allowance increased $15,067,000 and $3,621,000 during 2000 and
1999, respectively.

As of April 30, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $33,476,000, which expire in
fiscal years 2011 through 2020.

The Company also had net operating loss carryforwards for state income tax
purposes of approximately $16,400,000, which expire in fiscal years 2004
through 2005.

Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.

47
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 6. Lines of Credit and Long-Term Debt Obligations

In November 1996, the Company entered into a borrowing arrangement with a
financial institution for a line of credit of $400,000. The borrowings under
the line of credit bore interest at the prime rate plus 2% (10.5% at April 30,
1998) and were scheduled to expire in May 1999. In November 1998, the Company
amended the line of credit agreement with the same financial institution such
that the total available credit was increased from $400,000 to $3,000,000. The
amended $3,000,000 credit line was comprised of two components: a $2,500,000
credit line and a $500,000 term loan. Each component is discussed further
below.

The $2,500,000 credit line was limited such that the Company may not borrow
in excess of $2,500,000 or 80% of eligible domestic accounts receivable
balances plus 65% of foreign accounts receivable balances. The amended
$2,500,000 amended credit line bore interest at the financial institution's
prime rate plus 0.75% (8.5% at April 30, 1999, respectively) and was scheduled
to expire in November 1999. As of April 30, 1999, the outstanding balance under
the amended line of credit was $643,000. In November 1999, the Company again
amended the line of credit agreement with the same financial institution such
that the $2,500,000 credit line bore interest at the financial institution's
prime rate plus 0.50% and was scheduled to expire in April 2000. In December
1999, the outstanding balance was repaid in full and the credit line was
terminated.

The $500,000 term loan, which was scheduled to expire in November 2002, bore
interest at the financial institution's prime rate plus 1.75% (9.5% at April
30, 1999). As of April 30, 1999, the full $500,000 was outstanding under the
term loan. In December 1999, the outstanding balance was repaid in full and the
term loan was terminated.

In November 1998, the Company entered into an additional credit agreement
with another financial institution, which provided a total credit facility of
$3,850,000. A portion of the credit facility represented a $3,500,000 three-
year term loan, all of which was outstanding as of April 30, 1999. The
remaining $350,000 of available credit is related to an equipment line of
credit, of which no amount was outstanding as of April 30, 1999. The term loan
and equipment line of credit were secured by substantially all of the Company's
assets, bore interest at 13% and 11.4% and were scheduled to mature in November
2002 and May 2000, respectively. This credit facility was repaid in full during
December 1999 and was terminated.

The above agreements required the Company to maintain compliance with
certain financial covenants and prohibit the Company from paying dividends on
its common stock. As of April 30, 1999 the Company was in compliance with such
financial covenants. The compliance covenants were not in effect as of April
30, 2000 since all of the Company's credit facilities had been terminated by
that date. As of April 30, 2000 and 1999, the total amount available under the
Company's financial arrangements was none and $568,000, respectively.

Note 7. Defined Contribution Benefit Plan

The Company has a defined contribution benefit plan under Section 401(k) of
the Internal Revenue Code, which covers substantially all United States-based
employees. Eligible employees may contribute pre-tax amounts to the plan via
payroll withholdings, subject to certain limitations. The Company does not
match contributions by plan participants.

48
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 8. Lease Commitments

The Company leases certain facilities and equipment under noncancelable
operating leases. Certain of the Company's facility leases provide for periodic
rent increases based on the general rate of inflation. Future minimum lease
payments under operating leases are as follows (in thousands):

<TABLE>
<S> <C>
Year ending April 30,
2001.............................................................. $ 2,414
2002.............................................................. 2,099
2003.............................................................. 1,921
2004.............................................................. 1,879
2005.............................................................. 1,943
Thereafter........................................................ 866
-------
Total minimum lease payments........................................ $11,122
=======
</TABLE>

Rent expense for the three years ended April 30, 2000, 1999 and 1998 was
$2,342,000, $1,300,000 and $329,000 respectively.

Note 9. Litigation

On September 16, 1999, Nokia IP, Inc. filed a lawsuit in Santa Clara County
Superior Court naming CacheFlow Inc., and certain officers of the company, as
defendants. These officers were formerly employed by Ipsilon Networks, Inc.,
which was acquired by Nokia in December 1997. Following the acquisition, these
officers became employees of Nokia upon completion of the acquisition. Nokia's
complaint alleged that the Company and these officers formerly employed by
Nokia acted improperly in hiring other former Nokia employees. The lawsuit also
claimed that a certain officer of the Company violated a non-competition
provision contained in his employment agreement with Nokia. The complaint
demanded compensatory and punitive damages as well as a court order prohibiting
the defendants from disclosing or using Nokia's trade secrets or confidential
information, or acting in a manner that violates these officers' contractual
duties to Nokia. The Company and the individual defendants filed an answer to
the complaint denying Nokia's allegations. On November 14, 1999, the Company
and Nokia executed a term sheet settling the litigation. On February 8, 2000,
the Company completed a definitive settlement agreement with Nokia and
thereafter Nokia filed with the court a notice of dismissal terminating the
lawsuit. The confidential settlement agreement does not require the Company to
make any monetary payments to Nokia.

From time to time and in the ordinary course of business, the Company may be
subject to various claims, charges, and litigation. In the opinion of
management, final judgments from such pending claims, charges, and litigation,
if any, against the Company would not have a material adverse effect on its
consolidated financial position, results of operations, or cash flows.

Note 10. Geographic Information Reporting

The Company operates in one segment to design, develop, market and support
high-performance Internet caching appliances. Total export revenue consisted of
sales from the Company's U.S. operations to non-affiliated customers in other
geographic regions. Sales between geographic areas are accounted for at prices
that provide a profit, and are in accordance with the rules and regulations of
the respective governing authorities. During fiscal 2000 and 1999, there were
no intra-enterprise sales, and no material long-lived assets were located in
the Company's foreign operations. No geographical information was provided for
1998, as there were no net sales.

49
<PAGE>

CACHEFLOW, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

<TABLE>
<CAPTION>
Year Ended April 30,
---------------------
2000 1999
---------- ----------
<S> <C> <C>
North America........................................... $ 15,349 $ 3,920
Europe.................................................. 4,982 1,376
Asia.................................................... 8,946 1,740
---------- ---------
Consolidated............................................ $ 29,277 $ 7,036
========== =========
</TABLE>

Note 11. Selected Quarterly Financial Data (unaudited, in thousands, except per
share data)

<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
July 31, 1999 October 31, 1999 January 31, 2000 April 30, 2000
------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net sales............... $ 3,612 $ 4,838 $ 8,033 $ 12,794
Gross profit............ 2,232 2,952 4,951 7,930
Net loss................ (6,557) (20,591) (17,772) (17,733)
Basic and diluted net
loss per common share.. (0.80) (2.35) (0.64) (0.56)
<CAPTION>
Three Months Ended
--------------------------------------------------------------
July 31, 1998 October 31, 1998 January 31, 1999 April 30, 1999
------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net sales............... $ 809 $ 1,082 $ 2,201 $ 2,944
Gross profit............ 211 430 1,311 1,787
Net loss................ (2,302) (3,486) (2,817) (4,597)
Basic and diluted net
loss per common share.. (0.47) (0.62) (0.45) (0.63)
</TABLE>

Note 12. Subsequent Event

Business Acquisition

On June 5, 2000, the Company acquired all of the outstanding capital stock
of SpringBank Networks, Inc. ("SpringBank"), through a stock-for-stock merger,
pursuant to which each issued and outstanding share of common stock of
SpringBank was converted into the right to receive 0.2 shares of common stock
of CacheFlow. In addition, each outstanding option to purchase SpringBank
Common Stock was assumed by CacheFlow and converted into an option to purchase
0.2 shares of CacheFlow Common Stock determined pursuant to the exchange ratio
in the Merger Agreement. The exercise price of the options to purchase
CacheFlow Common Stock was also determined pursuant to the exchange ratio in
the Merger Agreement. Purchase consideration totaled approximately $177 million
and included approximately 2.8 million shares of CacheFlow Common Stock and
approximately $8 million of assumed liabilities. This transaction was accounted
for as a purchase, and the purchase price was allocated to tangible and
intangible assets in proportion to the fair value of those assets.

Repayment of Notes Receivable

As of July 10, 2000, an officer of the Company repaid the Company all
principal and accrued interest owed under an $800,000 promissory note to
purchase a primary residence and a $999,900 promissory note to purchase shares
of common stock.

50
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
CacheFlow Inc.

We have audited the accompanying consolidated balance sheets of CacheFlow
Inc. as of April 30, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended April 30, 2000. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.

We conducted our audits in accordance with auditing standards generally
accepted in the 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of CacheFlow Inc. at April 30, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended April 30, 2000, in conformity with accounting principles generally
accepted in the United States. 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.

/s/ Ernst & Young LLP

Walnut Creek, California
May 16, 2000 except Note 12,
which is as of July 10, 2000.

51
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executives of the Registrant

See the information set forth in the section entitled "Proposal No. 1--
Election of Directors" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission with 120
days after the end of our fiscal year ended April 30, 2000 (the "2000 Proxy
Statement"), which is incorporated herein by reference, and the information set
forth in the section entitled "Executive Officers of the Registrant." See also
the information set forth in the section entitled "Compliance with Section
16(a) of the Exchange Act" in the 2000 Proxy Statement, which is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

See the information set forth in the section entitled "Executive
Compensation and Related Information" in the 2000 Proxy Statement, which is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

See the information set forth in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" in the 2000 Proxy Statement, which is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

See the information set forth in the section entitled "Certain Relationships
and Related Transactions" in the 2000 Proxy Statement, which is incorporated
herein by reference.

52
<PAGE>

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial Statements and Financial Statement Schedules

1. Financial Statements

See Item 8 of this Form 10-K

2. Financial Statement Schedules

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

Schedule II Valuation and Qualifying Accounts and Reserves

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

<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
2.1 Agreement and Plan of Reorganization by and among CacheFlow Inc.,
Wildcat Merger Corporation, SpringBank Networks, Inc. and Soren
Christensen (as Stockholder's Agent) (which is incorporated herein by
reference to Exhibit 2.1 of Form 8-K filed by the Registrant with the
Commission on June 19, 2000)

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)

4.1 Reference is made to Exhibits 3.1 and 3.2

4.2 Amended and Restated Investor's Rights Agreement, dated May 28, 1999
(which is incorporated herein by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-1 No. 333-87997)

4.3 Series C Preferred Stock Purchase Agreement, dated May 28, 1999
(which is incorporated herein by reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form S-1 No. 333-87997)

4.4 Amendment No. 1 to Series C Preferred Stock Purchase Agreement, dated
October 29, 1999 (which is incorporated herein by reference to
Exhibit 4.4 to the Registrant's Registration Statement on Form S-1
No. 333-87997)

4.5 Specimen Certificate of the Registrant's Common Stock (which is
incorporated herein by reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-1 No. 333-87997)

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 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)
</TABLE>

53
<PAGE>

<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
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 Commercial lease agreement between Registrant, the Arrillaga
Foundation and the Perry Foundation, dated July 14, 1998 (which is
incorporated herein by reference to Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 No. 333-87997)

10.7 Commercial lease agreement between Registrant and Redmond Whitehall
Associates, Inc., dated February 19, 1997 (which is incorporated
herein by reference to Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)

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 No. 333-87997)

10.10 Offer Letter with Alan Robin (which is incorporated herein by
reference to Exhibit 10.10 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)

10.11 Offer Letter with Mike Johnson (which is incorporated herein by
reference to Exhibit 10.11 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)

10.12 Amended and Restated Loan and Security Agreement between the
Registrant and Silicon Valley Bank, dated October 13, 1998 (which is
incorporated herein by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1 No. 333-87997)

10.13 Loan modification agreement between the Registrant and Silicon Valley
Bank, dated October 12, 1999 (which is incorporated herein by
reference to Exhibit 10.13 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)

10.14 Subordinated Loan and Security Agreement between the Registrant and
Comdisco, Inc. dated as of November 18, 1998 (which is incorporated
herein by reference to Exhibit 10.14 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)

10.15 Series D Preferred Stock Purchase Agreement (which is incorporated
herein by reference to Exhibit 10.15 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)

10.16 Consulting Agreement with Marc Andreessen (which is incorporated
herein by reference to Exhibit 10.16 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)

10.17 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)

16.1 Letter from Deloitte and Touche LLP, former independent accountants
to the Registrant (which is incorporated herein by reference to
Exhibit 16.1 to the Registrant's Registration Statement on Form S-1
No. 333-87997)

16.2 Letter from PricewaterhouseCoopers LLP, former independent
accountants to the Registrant (which is incorporated herein by
reference to Exhibit 16.2 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)

21.1 Subsidiaries (which is incorporated herein by reference to Exhibit
21.1 to the Registrant's Registration Statement on Form S-1 No. 333-
87997)

23.1 Consent of Ernst & Young LLP, independent auditors

27.1 Financial Data Schedule
</TABLE>

(b) No reports on Form 8-K were filed during the quarter ended April 30,
2000.

54
<PAGE>

SIGNATURES

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

Cacheflow Inc.
(Registrant)

/s/ Brian M. NeSmith
July 28, 2000 By: _________________________________
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 Michael J. Johnson, or
either of them, each with the power of substitution, his attorney-in-fact, to
sign any amendments to this Form 10-K (including post-effective amendments),
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 Sections 13 or 15(d) the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Brian M. NeSmith President, Chief Executive July 28, 2000
______________________________________ Officer and Director
Brian M. NeSmith (Principal Executive
Officer)

/s/ Michael J. Johnson Vice President, Chief July 28, 2000
______________________________________ Financial Officer and
Michael J. Johnson Secretary (Principal
Financial and Accounting
Officer)

/s/ Marc Andreessen Director July 28, 2000
______________________________________
Marc Andreessen

/s/ David W. Hanna Director July 28, 2000
______________________________________
David W. Hanna

______________________________________ Chairman of the Board,
Michael A. Malcolm Director

/s/ Stuart G. Phillips Director July 28, 2000
______________________________________
Stuart G. Phillips

/s/ Andrew S. Rachleff Director July 28, 2000
______________________________________
Andrew S. Rachleff
</TABLE>

55
<PAGE>

EXHIBIT INDEX

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)

4.1 Reference is made to Exhibits 3.1 and 3.2

4.3 Series C Preferred Stock Purchase Agreement, dated May 28, 1999 (which
is incorporated herein by reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form S-1 No. 333-87997)

4.4 Amendment No. 1 to Series C Preferred Stock Purchase Agreement, dated
October 29, 1999 (which is incorporated herein by reference to Exhibit
4.4 to the Registrant's Registration Statement on Form S-1 No. 333-
87997)

4.5 Specimen Certificate of the Registrant's Common Stock (which is
incorporated herein by reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-1 No. 333-87997)

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 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 Commercial lease agreement between Registrant, the Arrillaga Foundation
and the Perry Foundation, dated July 14, 1998 (which is incorporated
herein by reference to Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)

10.7 Commercial lease agreement between Registrant and Redmond Whitehall
Associates, Inc., dated February 19, 1997 (which is incorporated herein
by reference to Exhibit 10.7 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)

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)
</TABLE>

56
<PAGE>

<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
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 No. 333-87997)

10.10 Offer Letter with Alan Robin (which is incorporated herein by reference
to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1
No. 333-87997)

10.11 Offer Letter with Mike Johnson (which is incorporated herein by
reference to Exhibit 10.11 to the Registrant's Registration Statement
on Form S-1 No. 333-87997)

10.12 Amended and Restated Loan and Security Agreement between the Registrant
and Silicon Valley Bank, dated October 13, 1998 (which is incorporated
herein by reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)

10.13 Loan modification agreement between the Registrant and Silicon Valley
Bank, dated October 12, 1999 (which is incorporated herein by reference
to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1
No. 333-87997)

10.15 Series D Preferred Stock Purchase Agreement (which is incorporated
herein by reference to Exhibit 10.15 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)

10.16 Consulting Agreement with Marc Andreessen (which is incorporated herein
by reference to Exhibit 10.16 to the Registrant's Registration
Statement on Form S-1 No. 333-87997)

10.17 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)

16.1 Letter from Deloitte and Touche LLP, former independent accountants to
the Registrant (which is incorporated herein by reference to Exhibit
16.1 to the Registrant's Registration Statement on Form S-1 No. 333-
87997)

16.2 Letter from PricewaterhouseCoopers LLP, former independent accountants
to the Registrant (which is incorporated herein by reference to Exhibit
16.2 to the Registrant's Registration Statement on Form S-1 No. 333-
87997)

21.1 Subsidiaries (which is incorporated herein by reference to Exhibit 21.1
to the Registrant's Registration Statement on Form S-1 No. 333-87997)

23.1 Consent of Ernst & Young LLP, independent auditors

27.1 Financial Data Schedule
</TABLE>

57
<PAGE>

SCHEDULE II

CACHEFLOW, INC.

VALUATION AND QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts and Sales Returns

<TABLE>
<CAPTION>
Balance at Additions-Charged
Beginning of to Costs and Deductions- Balance at
Year Ended April 30, Period Expenses Write-offs End of Period
-------------------- ------------ ----------------- ----------- -------------
<S> <C> <C> <C> <C>
1998.................. -- -- -- --
1999.................. -- 121,000 -- 121,000
2000.................. 121,000 229,000 -- 350,000
</TABLE>