<PAGE>

  As filed with the Securities and Exchange Commission on September 28, 1999.
                                                       Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                ---------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                                ---------------
                                CACHEFLOW INC.
            (Exact name of Registrant as specified in its charter)
                                ---------------
         Delaware                    7373                    91-1715963
     (State or other          (Primary Standard           (I.R.S. Employer
     jurisdiction of              Industrial           Identification Number)
     incorporation or        Classification Code
      organization)                Number)

                              650 Almanor Avenue
                          Sunnyvale, California 94086
                                (408) 220-2200
              (Address, including zip code, and telephone number,
     including area code, of the Registrant's principal executive offices)
                                ---------------
                               BRIAN M. NESMITH
                     President and Chief Executive Officer
                                CacheFlow Inc.
                              650 Almanor Avenue
                          Sunnyvale, California 94086
                                (408) 220-2200
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                ---------------
                                  Copies to:
       Robert V. Gunderson, Jr.                William H. Hinman, Jr.
          Daniel E. O'Connor                     Shearman & Sterling
       Gunderson Dettmer Stough                  1550 El Camino Real
 Villeneuve Franklin & Hachigian, LLP       Menlo Park, California 94025
        155 Constitution Drive                     (650) 330-2200
     Menlo Park, California 94025
            (650) 321-2400

                                ---------------
   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

                                ---------------
                        CALCULATION OF REGISTRATION FEE
<TABLE>
 ------------------------------------------------------------------------------
 ------------------------------------------------------------------------------
<CAPTION>
                                             Proposed Maximum
  Title of Each Class of                         Aggregate        Amount of
Scurities to be Registerede                  Offering Price(1) Registration Fee
 ------------------------------------------------------------------------------
 <S>                                         <C>               <C>
 Common Stock, $.0001 par value per share...    $50,000,000        $13,900
 ------------------------------------------------------------------------------
 ------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(o).

   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and we are not soliciting offers to buy these  +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued    , 1999

                                       Shares
                                     [LOGO]
                                  COMMON STOCK

                                  -----------

CacheFlow Inc. is offering shares of its common stock. This is our initial
public offering and no public market currently exists for our shares. We
anticipate that the initial public offering price will be between $    and $
per share.

                                  -----------

We have filed an application for our common stock to be quoted on the Nasdaq
National Market under the symbol "CFLO."

                                  -----------

Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.

                                  -----------

                               PRICE $    A SHARE

                                  -----------

<TABLE>
<CAPTION>
                                                  Underwriting
                                  Price to        Discounts and      Proceeds to
                                   Public          Commissions        CacheFlow
                                  --------        -------------      -----------
<S>                           <C>               <C>               <C>
Per Share....................         $                 $                 $
Total........................       $                 $                 $
</TABLE>

CacheFlow Inc. has granted the underwriters the right to purchase up to an
additional     shares to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on    , 1999.

                                  -----------

MORGAN STANLEY DEAN WITTER ___________________________CREDIT SUISSE FIRST BOSTON

                             DAIN RAUSCHER WESSELS
                    a division of Dain Rauscher Incorporated

     , 1999
<PAGE>



                             INSIDE FRONT COVER

The heading for the page reads "A New Layer of the Internet Infrastructure."

In the center of the page is a graphic. The graphic is a triangle layered into
five horizontal sections. In the top section is the word "User." In the next
four sections from top to bottom are the words "Content," "Cache,"
"Router," and "Switch."

At the top left of the page runs the following text:

"The Internet cache appliance"

The text continues at the middle right of the page:

"manages content flow."

At the bottom of the page is our logo.
<PAGE>

At the top of the page is our logo.

Immediately underneath our logo is the word "Solutions."

In the center of the page is a picture of one of our Internet caching
appliances.

Immediately underneath this picture and across the bottom of the page runs the
following text:

"The CacheFlow family of Internet caching appliances combines CacheOS embedded
software with purpose-built appliance hardware."

At the top left of the page is a graphic, with the words "Enterprise Caching"
immediately underneath.  The graphic is a picture of a cityscape at night.

Immediately below the words "Enterprise Caching" is the following text:

"Accomodate growth in mission critical Internet and intranet traffic without
sacrificing control; enhance employee productivity with response time
improvements; replace overloaded proxy servers to scale performance and reduce
operating costs; deliver performance equality to branch office employees."

At the bottom left of the page is a graphic, with the words "E-Commerce
Acceleration" immediately underneath. The graphic is a picture of a portion of a
computer keyboard.

Immediately below the words "E-Commerce Acceleration" is the following text:

"Increase transaction capacity while reducing operating costs; improve
consumer quality of service with faster response times; offload servers to
deliver accelerated performance and surge protection; offload overburdened
firewalls without sacrificing security."

At the top right of the page is a graphic, with the words "Broadband
Fulfillment" immediately underneath. The graphic is a picture of a person's
hand plugging a fiber-optic cable into a switch.

Immediately below the words "Broadband Fulfillment" is the following text:

"Enable the performance gains expected from broadband; reduce the effects of
Internet distance, congestion and latency; speed the delivery of popular
content; scale network capacity to meet growing demand."

At the bottom right of the page is a graphic, with the words "International
Access" immediately underneath.  The graphic is a picture of the Arc de
Triomphe, which is a monument in France.

Immediately below the words "International Access" is the following text:

"Improve bandwidth application; reduce the impact of Internet distance,
congestion and latency; increase network capacity while reducing operating
costs; attract and retain customers with response time improvements."
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                      Page
                                      ----
<S>                                   <C>
Prospectus Summary..................    4
Risk Factors........................    6
Special Note Regarding Forward-
 Looking Statements.................   19
Use of Proceeds.....................   20
Dividend Policy.....................   20
Capitalization......................   21
Dilution............................   22
Selected Consolidated Financial
 Data...............................   23
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   24
</TABLE>
<TABLE>
<CAPTION>
                                     Page
                                     ----
<S>                                  <C>
Business...........................   33
Management.........................   45
Certain Transactions...............   55
Principal Stockholders.............   56
Description of Capital Stock.......   58
Shares Eligible for Future Sale....   61
Underwriters.......................   63
Legal Matters......................   66
Experts............................   66
Additional Information.............   66
Change in Independent Accountants..   66
Index to Consolidated Financial
 Statements........................  F-1
</TABLE>

                               ----------------

   We were incorporated in Delaware on March 13, 1996. Our principal executive
offices are located at 650 Almanor Avenue, Sunnyvale, California 94086, and
our telephone number is (408) 220-2200.

   You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.

   In this prospectus, "CacheFlow," "we," "us" and "our" refer to CacheFlow
Inc. Unless otherwise indicated, all information contained in this prospectus:

  .  assumes that the underwriters' over-allotment option is not exercised;
     and

  .  reflects the two-for-one split of our common stock and preferred stock
     effected in June 1999.

   Until      , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.

                                       3
<PAGE>

                               PROSPECTUS SUMMARY

   You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes appearing
elsewhere in this prospectus.

                                   CACHEFLOW

   CacheFlow is a leading provider of Internet caching appliances that
accelerate and manage the flow of information over the Internet. We focus
exclusively on designing, developing, marketing and supporting products that
are specifically designed, or purpose-built, for high-performance Internet
caching. In its most basic form, a cache stores data physically closer to end
users, eliminating the need to retrieve data from its source each time it is
requested. All of our caching appliances are based on CacheOS, our proprietary
high-performance operating system. Our Internet caching appliances enable our
Internet service provider and enterprise customers to reduce web response
times, easily manage and administer their networks and reduce overall network
costs. In addition, our Internet caching appliances are designed to provide
better network security and more up-to-date content than traditional caching
solutions.

   The number of Internet users, Internet access devices and web pages
worldwide is expected to grow rapidly. This growth, coupled with the increasing
complexity of web content, is expected to significantly increase the volume of
data transmitted across the Internet and corporate intranets. The physical
infrastructure of the Internet must therefore accommodate sharply increased
volumes of data traffic, including a high degree of redundant data, as well as
highly unpredictable and event-driven usage patterns. Advances in
communications technology have improved the Internet's ability to transfer
packets of data, but these technologies do not reduce the volume of data that
must be moved from origin server to user, shorten the physical distance between
source and user, or enable the analysis or control of web content. Web servers
are becoming overloaded by a growing number of content requests, and slow web
response time remains a continuing problem that can have a significant
financial impact on corporate enterprises and Internet service providers. While
traditional caching solutions reduce the physical distance between content and
user and remove much of the redundant traffic from the network, these solutions
do not comprehensively address the disparate requirements of Internet service
providers, enterprises and users. Due to increasing network traffic volumes,
rising network complexity and heightened user expectations for Internet
performance, we believe that the market for Internet caching appliances will
grow rapidly. According to the GartnerGroup, this market is projected to grow
from $92 million in 1999 to over $1 billion in 2003.

   As of August 31, 1999, we had approximately 100 customers, including
Internet service providers such as Road Runner and germany.net, as well as
corporate enterprises such as Delta Airlines and Xerox. Our business strategy
is to be the leading provider of Internet caching solutions by continuing to
deliver high-performance, innovative Internet caching appliances. To implement
our strategy, we intend to leverage our Internet caching focus to target
specific markets that are particularly well-suited for our appliances. Using
our technological expertise, we intend to continue to develop both the software
and hardware elements of our appliances. We intend to extend our distribution
channels by expanding our direct sales force and establishing relationships
with additional resellers, systems integrators and original equipment
manufacturers. We also intend to increase our investments in a broad range of
marketing and educational programs to build and establish the CacheFlow brand.

                                ----------------

   We were incorporated in Delaware in March 1996. Our principal executive
offices are located at 650 Almanor Avenue, Sunnyvale, California 94086, and our
telephone number is (408) 220-2200.

                                       4
<PAGE>

                                  THE OFFERING

<TABLE>
<S>                        <C>
Common stock offered......     shares
Common stock to be
 outstanding after this
 offering.................     shares
Use of proceeds........... For working capital and general corporate purposes.
Proposed Nasdaq National
 Market symbol............ CFLO
</TABLE>

   The information above is based on shares outstanding as of July 31, 1999,
and assumes the conversion of all outstanding shares of preferred stock into
14,341,912 shares of common stock upon the completion of this offering. This
information also includes 672,850 shares issuable upon exercise of warrants
that expire upon the closing of this offering. This information does not
include 3,401,251 shares subject to outstanding options as of July 31, 1999,
and 141,842 shares issuable upon exercise of outstanding warrants as of July
31, 1999, which warrants do not expire upon the closing of this offering.
Between August 1, 1999 and September 24, 1999, we granted options to purchase
an additional 2,874,000 shares of common stock.

                      SUMMARY CONSOLIDATED FINANCIAL DATA
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                           Year Ended      Three Months Ended
                                           April 30,            July 31,
                                        -----------------  --------------------
                                         1998      1999      1998       1999
                                        -------  --------  ---------  ---------
                                                               (unaudited)
<S>                                     <C>      <C>       <C>        <C>
Consolidated Statement of Operations
 Data:
  Net sales...........................  $    --  $  7,036  $     809  $   3,612
  Gross profit........................       --     3,739        211      2,232
  Operating expenses..................    5,740    16,744      2,584      8,243
  Operating loss......................   (5,740)  (13,005)    (2,373)    (6,011)
  Net loss............................   (5,507)  (13,202)    (2,302)    (6,047)
  Basic and diluted net loss per
   common share.......................  $ (1.88) $  (3.06) $    (.65) $    (.97)
  Weighted average shares used in
   computing basic and diluted net
   loss per common share..............    2,936     4,316      3,517      6,214
  Pro forma basic and diluted net loss
   per common share...................            $  (.89)            $    (.30)
  Shares used in computing pro forma
   basic and diluted net loss per
   common share.......................             14,849                19,946
</TABLE>

   The pro forma basic and diluted share calculations above and the pro forma
column below give effect to the conversion of all outstanding shares of
preferred stock into 14,341,912 shares of common stock upon the completion of
this offering, as if the conversion occurred at the date of original issuance.
The pro forma basic and diluted share calculations above and the pro forma
column below also reflect the cash exercise of warrants to purchase 672,850
shares at a weighted average exercise price of $1.48 per share prior to
completion of the offering. The pro forma as adjusted column below gives effect
to this offering and the application of the proceeds at an assumed initial
public offering price of $    per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
                                                     As of July 31, 1999
                                               -------------------------------
                                                                    Pro Forma
                                               Actual   Pro Forma  As Adjusted
                                               ------- ----------- -----------
                                                       (unaudited)
<S>                                            <C>     <C>         <C>
Consolidated Balance Sheet Data:
  Cash and cash equivalents................... $17,825   $18,821     $
  Working capital.............................  16,880    17,876
  Total assets................................  24,019    25,015
  Long-term obligations, net of current
   portion ...................................   3,211     3,211
  Total liabilities...........................   7,986     7,986
  Total stockholders' equity..................  16,033    17,029
</TABLE>

                                       5
<PAGE>

                                 RISK FACTORS

   An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors and the other information
in this prospectus before investing in our common stock. Our business,
financial condition and results of operations could be seriously harmed by any
of the following risks. The trading price of our common stock could decline
due to any of these risks, and you may lose all or part of your investment.

Risks Related to Our Business

   Our business is difficult to evaluate because we have a limited operating
history.

   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 "Risk Factors" 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 and we expect to incur future losses.

   We incurred net losses of $1.4 million from our inception in March 1996
through April 30, 1997, $5.5 million for the fiscal year ended April 30, 1998,
$13.2 million for the fiscal year ended April 30, 1999, and $6.0 million for
the quarter ended July 31, 1999. As of July 31, 1999, we had an accumulated
deficit of approximately $26.2 million. We have not had a profitable quarter
since our inception and we expect to continue to incur net losses in the
future. We may never achieve profitability. 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. In particular, we anticipate that our operating expenses will
increase substantially in the future as we:

  .  fund increased levels of research and development;

  .  enhance our existing products and create and market additional products;

  .  increase our direct sales and marketing activities, particularly by
     expanding our direct sales force;

  .  expand our indirect sales channels;

  .  make additional investments to develop our brand; and

  .  implement additional internal systems, develop additional infrastructure
     and hire additional employees.

   We expect to incur substantial non-cash costs relating to the amortization
of deferred compensation, which will contribute to our net losses. As of July
31, 1999, we had an aggregate of $19.5 million of deferred compensation to be
amortized. Between August 1, 1999 and September 24, 1999, we recorded
additional deferred compensation charges of $17.6 million with respect to
stock option grants made during this period.

   We expect our operating results to fluctuate, which makes the management of
our business more difficult.

   Our net sales and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:

  .  fluctuations in demand for Internet caching appliances;

  .  the timing and size of the shipment of individual orders;


                                       6
<PAGE>

  .  announcements of new products and product enhancements by us or by our
     competitors;

  .  the level of competition;

  .  unexpected delays in introducing new or enhanced products, including
     manufacturing delays;

  .  our ability to obtain sufficient supplies of limited source components
     for our products at acceptable prices, or at all;

  .  the mix of our products sold and the mix of distribution channels
     through which we sell our products;

  .  our ability to control expenses; and

  .  capital budget cycles of existing and potential customers and changes in
     these cycles.

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

  .  sales in any quarter are dependent on orders booked and shipped in that
     quarter, and we often operate with very little order backlog;

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

  .  we expect that, for the foreseeable future, most of our sales will come
     from a small number of customers, so 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.

   Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful. 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 will likely decrease significantly.

   We expect increased competition, and if we do not compete effectively our
business could be seriously harmed.

   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 public domain 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

                                       7
<PAGE>

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.

   Our variable sales cycle makes it difficult to predict the timing of a sale
or whether a sale will be made.

   The timing of our sales is difficult to predict because of the variability
of the sales cycle for our products. 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
typically ranges from two to six months. Sales cycles for our products that
are sold to enterprises have traditionally been longer than sales cycles for
our products that are sold to 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. While our
customers are evaluating our products and before they place an order with us,
we may incur substantial sales and marketing expenses and expend significant
management efforts. In addition, product purchases are frequently subject to
unplanned processing and other delays, particularly with respect to larger
customers for whom our products represent a very small percentage of their
overall purchase activity. Large customers typically require approvals at a
number of management levels within their organizations, and, therefore,
frequently have longer sales cycles.

   We are entirely dependent on the success of our Internet caching appliance
product family and the introduction of future products.

   To date, our Internet caching appliance product family and related services
have accounted for all of our net sales. 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 achieve any significant degree of market
acceptance.

   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. Our inability to timely, cost-effectively and successfully
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, changing customer needs and evolving industry standards.
The introduction of products employing new technologies and emerging industry
standards could render our products obsolete and unmarketable.

   To be successful, we need to develop and introduce new products and
services and enhancements to existing products and services on a timely basis.
These products and services must keep pace with competitive offerings,
technological developments and emerging industry standards, address the ever-
changing and increasingly sophisticated needs of our customers, and achieve
market acceptance.

   In developing new products and services and enhancements to existing
products, we may:

  .  fail to develop and market products that respond to competitive
     offerings, technological changes or emerging industry standards in a
     timely or cost-effective manner;

                                       8
<PAGE>

  .  encounter products, capabilities or technologies developed by others
     that render our products and services obsolete or noncompetitive or that
     shorten the life cycles of our existing products and services;

  .  experience difficulties that could delay or prevent the successful
     development, introduction and marketing of these new products and
     services and enhancements to existing products; or

  .  fail to develop new products and services and enhancements to existing
     products that adequately meet the requirements of the marketplace or
     achieve market acceptance.

   We are dependent on several third-party manufacturers.

   We rely on several third-party manufacturers to build portions of our
products. 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. 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. 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 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 substantial assembly capacity constraints, which could
negatively affect our net sales.

   We currently conduct all final assembly and testing of our products at our
headquarters in Sunnyvale, California. We plan to transition final assembly to
third parties in the future. 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 we or any third-
party assembler 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. In
addition, if we are 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 such capital investments are required, our gross
margins, and as a result, our business could be seriously harmed.

   Some of the key components in our products come from limited sources of
supply.

   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 certain 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

                                       9
<PAGE>

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.

   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 certain materials and components, which
could seriously harm our business.

   We are dependent upon key personnel and we must attract, assimilate and
retain other highly qualified personnel in the future.

   Our future success depends on the continued service of our senior
management, research and development and sales personnel. We have recently
experienced significant transition in our management team. Brian NeSmith, our
President and Chief Executive Officer, joined us in March 1999. Stuart Aaron,
our Vice President of Marketing and Product Management, joined us in April
1999. Terry Printy, our Vice President of Customer Support, joined us in June
1999. Alan Robin, our Senior Vice President of Sales, and Michael Johnson, our
Vice President and Chief Financial Officer, joined us in July 1999. 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. None of our employees is bound by an employment agreement and we
do not carry key-person life insurance. The loss of the services of one or
more of our key personnel could seriously harm our business.

   Our future success 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. We are particularly dependent
on hiring additional personnel to increase our direct sales and research and
development organizations. In addition, new hires frequently require extensive
training before they achieve desired levels of productivity. Competition for
such 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 business could be seriously harmed by the Nokia IP litigation.

   On September 16, 1999, Nokia IP filed a lawsuit in Santa Clara County
Superior Court naming CacheFlow Inc., Brian NeSmith, our President and Chief
Executive Officer and a director, and Alan Robin, our Senior Vice President of
Sales, as defendants. Messrs. NeSmith and Robin were officers and employees of
Ipsilon Networks, Inc., which was acquired by Nokia in December 1997.
Following the acquisition, Messrs. NeSmith and Robin became employees of
Nokia. Nokia's allegations against us include misappropriation of trade
secrets, unfair competition and inducing breach of contract. Nokia's
allegations against Messrs. NeSmith and Robin include breach of contract,
misappropriation of trade secrets and unfair competition and, with respect to
Mr. Robin only, breach of fiduciary duty. Nokia's claims are based upon
Nokia's allegation that Mr. NeSmith has violated a non-competition and non-
solicitation provision contained in his employment agreement with Nokia and
that Mr. Robin has violated a non-solicitation obligation to Nokia. Nokia is
seeking compensatory and punitive damages, a decree that the defendants'
alleged acts were and are unfair acts of competition, orders restraining and
enjoining the defendants from disclosing or using Nokia's trade secrets or
confidential and proprietary information and acting in a manner that violates
Messrs. NeSmith's and Robin's contractual and fiduciary duties to Nokia,
attorneys' fees and other specified damages. This litigation was only recently
filed and we are presently evaluating these claims. We and the other
defendants believe that there are meritorious defenses to the asserted claims
and intend to defend the litigation vigorously. However, the outcome of
litigation is inherently unpredictable and the results of the litigation may
not be favorable to us or the other defendants. In such case, our business
could be seriously harmed. Regardless of the ultimate outcome, the litigation
could result in substantial expense to us and significant diversion of effort
by our managerial and other personnel.

                                      10
<PAGE>

   In order to manage our growth and expansion, we will need to improve and
implement new systems, procedures and controls.

   We have expanded our operations rapidly since the inception of our company
and we currently intend to continue this expansion. The number of our
employees increased from 40 at April 30, 1998 to 126 at August 31, 1999, and
we plan to further increase our headcount. 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. 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. We believe that our existing
managerial and other systems will not be adequate to support our anticipated
growth, and we are currently planning to implement a new enterprise resource
planning software system that will replace substantially all of our business
and manufacturing systems. 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 are unable to effectively manage
future growth and expansion, our business will be seriously harmed.

   We depend on a limited number of customers.

   To date, a significant portion of our net sales has resulted from a small
number of customers placing relatively large orders. For the fiscal year ended
April 30, 1999, three customers accounted for approximately 33% of our net
sales. For the quarter ended July 31, 1999, two customers accounted for
approximately 22% of our net sales. We anticipate that our operating results
for any given period will continue to depend to a significant extent on large
orders from a small number of customers. As a result, our quarterly operating
results may fluctuate significantly if we are unable to complete one or more
substantial sales in a quarter.

  Some of our smaller customers may present credit and other risks.

   Some of our products are designed for use by smaller customers. Sales to
smaller customers entail certain risks, including increased credit risks and
the need for additional sales and support personnel to support an increased
volume of customers.

   If we fail to expand our direct and indirect sales channels, our growth
will be limited.

   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 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 depend on our indirect sales channels, which include resellers, systems
integrators and original equipment manufacturers, for a significant percentage
of our net sales. For the fiscal year ended April 30, 1999, approximately 41%
of our net sales resulted from sales through indirect sales channels. For the
quarter ended July 31, 1999, approximately 39% of our net sales resulted from
sales through indirect channels. We need to expand our indirect channels, and
if we fail to do so our business could be seriously harmed. Our agreements
with such indirect channel partners are generally not exclusive and in many
cases may be terminated by either

                                      11
<PAGE>

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. In addition, any sales through
indirect channel partners will have lower gross margins than direct sales.

   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 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.

   Our dependence on international markets involves many risks.

   For the fiscal year ended April 30, 1999, we derived approximately 44% of
our net sales from customers outside of the United States and Canada. For the
quarter ended July 31, 1999, 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. To successfully expand international sales, we must
expand 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.

   The acceptance and use of the Internet in international markets 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. In addition, we may fail to maintain or increase
international market demand for our products.

   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 those markets. In addition, we rely significantly on our
indirect channel partners in international sales efforts. Since these partners
are not our employees and typically do not offer our products exclusively, we
can not be certain that they will continue to market our products.

   Additional risks inherent in our international business activities
generally include:

  .  government regulation regarding privacy issues for Internet users;

  .  expenses associated with customizing products for foreign countries;

  .  expenses associated with obtaining foreign regulatory approvals;

  .  protectionist laws and business practices that favor local competition;

  .  dependence on local vendors;

  .  multiple, conflicting and changing governmental laws and regulations;

  .  longer sales and accounts receivable cycles;

  .  increased difficulties in collecting accounts receivable;

  .  difficulties in managing operations across disparate geographic areas;

                                      12
<PAGE>

  .  difficulties associated with enforcing agreements through foreign legal
     systems;

  .  reduced or limited protection of our intellectual property rights in
     some countries;

  .  potentially adverse tax consequences, including restrictions on the
     repatriation of earnings;

  .  foreign currency exchange rate fluctuations; and

  .  political and economic instability.

   Undetected software or hardware errors could seriously harm us.

   Our products may contain undetected software or hardware errors. 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. 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.

   We could be subject to potential product liability.

   Our customers integrate our Internet caching appliances into their network
architectures. 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. Although our
license agreements typically contain provisions designed to limit our exposure
to claims, unfavorable judicial decisions could negate such limitation of
liability provisions. 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.

   Our business could be affected by Year 2000 issues.

   The "Year 2000 issue" refers generally to the problems that some software
and hardware may have in determining the correct century for the year. For
example, software with date-sensitive functions that is not Year 2000
compliant may not be able to distinguish whether "00" means 1900 or 2000,
which may result in failures or the creation of erroneous results.

   We believe that our current products are Year 2000 compliant when
configured and used in accordance with the related documentation, and provided
that the other network components in the host network and any other software
used with our products are Year 2000 compliant. However, we have not tested
for Year 2000 compliance the compatability of our products with the other
network components in the host network and any other software used by our
customers with our products. We continue to respond to customer questions
about prior versions of our products on a case-by-case basis.

   We have defined Year 2000 compliant as the ability to:

  .  correctly handle date information needed for the December 31, 1999 to
     January 1, 2000 date change;

  .  function according to the product documentation provided for this date
     change, without changes in operation resulting from the advent of a new
     century, assuming correct configuration;

  .  respond to two-digit date input in a way that resolves the ambiguity as
     to century in a disclosed, defined and predetermined manner;

  .  store and provide output of date information in ways that are
     unambiguous as to century if the date elements in interfaces and data
     storage specify the century; and

                                      13
<PAGE>

  .  recognize Year 2000 as a leap year.

   We have tested software obtained from third parties, including licensed
software, shareware, and freeware that is incorporated into our products, and
we are seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite testing by us and current and potential customers, and
assurances from developers of products incorporated into our products, our
products may contain undetected errors or defects associated with Year 2000
date functions. Known or unknown errors or defects in our products could
result in delay or loss of net sales, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of
which could seriously harm our business. Some commentators have predicted
significant litigation regarding Year 2000 compliance issues, and we are aware
of such lawsuits against software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent we may be
affected by it.

   We have initiated an assessment of our material internal information
technology systems, including both our own software products and third-party
software and hardware technologies, but we have not initiated an assessment of
our non-information technology systems. We are seeking assurances from our
third-party software vendors that their systems are Year 2000 compliant. In
addition, we intend to seek assurances from the vendors of any future software
purchased by us, including our planned purchase of a new enterprise resource
planning system. We are not currently aware of any material operational issues
or costs associated with preparing our internal information technology and
non-information technology systems for the Year 2000. However, we may
experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal information
technology and non-information technology systems.

   We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, financial
condition and results of operations could be seriously harmed.

   We have not separately accounted for Year 2000 costs in the past. To date,
these costs have not been material. We will incur additional costs related to
the Year 2000 efforts for administrative personnel to manage the project,
outside contractor assistance, technical support for our products, product
engineering and customer satisfaction. In addition, we may experience
significant problems and costs with Year 2000 compliance that could seriously
harm our business.

   We have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our
critical operations. The cost of developing and implementing such a plan may
itself be significant. Finally, we are also subject to external forces that
might generally affect industry and commerce, such as utility or
transportation company Year 2000 compliance failure interruptions.

   If the protection of our proprietary technology is inadequate, our
competitors may gain access to our technology, and our business could be
seriously harmed.

   We depend significantly on our ability to develop and maintain the
proprietary aspects of our technology. To protect our proprietary technology,
we rely primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, copyright and trademark laws and patents. Despite
our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to 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.

                                      14
<PAGE>

   We currently have four United States patent applications on file and
pending before the United States Patent and Trademark Office. We also
currently have four PCT International Applications on file to reserve rights
in foreign jurisdictions under appropriate international treaties. 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 such
patent will be enforceable or that any damages awarded to us will be
sufficient to adequately compensate us.

   In addition, we cannot assure you that any products, services or
technologies that we are developing, or will develop in the future, will
result in intellectual property that is protectable under law, whether in the
United States or a foreign jurisdiction, that such intellectual property will
produce competitive advantage for us or that the intellectual property of
competitors will not restrict our freedom to operate, or put us at a
competitive disadvantage.

   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 such
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.

   We may need additional capital, which may not be available.

   At July 31, 1999, we had approximately $17.8 million in cash and cash
equivalents. We believe that this amount, combined with proceeds from this
offering, 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 revenue, 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 are
unable to raise additional capital when we require it, our business would be
seriously harmed.

Risks Related to the Internet Caching Appliance Industry

   Sales of our products are dependent on demand for Internet caching
appliances.

   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 success in generating 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.


                                      15
<PAGE>

   The market for our products is characterized by rapid technological change.

   The market for our products is new and is characterized by rapid
technological change, frequent enhancements to existing products and new
product introductions, changes in customer requirements and evolving industry
standards. We may not be able to respond quickly or effectively to these
developments. To be successful, 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.

   The introduction of new products by competitors, market acceptance of
products based on new or alternative technologies, or the emergence of new
industry standards, could render our existing products obsolete, which would
seriously harm our business. 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.

   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.

   Internet-related laws could adversely affect our business.

   Laws and regulations which apply to communications and commerce over the
Internet are becoming more prevalent. For example, the European Union recently
enacted its own privacy regulations, and is currently considering copyright
legislation that may extend the right of reproduction held by copyright
holders to include the right to make temporary copies for any reason. In
addition, tax authorities at the international, federal, state and local
levels are currently reviewing the appropriate tax treatment of companies
engaged in Internet commerce. We cannot predict the result of current attempts
to impose taxes on commerce over the Internet, but any taxes imposed on our
customers may adversely impact their businesses and may result in order
cancellations or postponements of product purchases by our customers, which
would seriously harm our business. The law of the Internet, however, remains
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how exisitng laws such as those
governing intellectual property, privacy and libel apply to the Internet. The
adoption or modification of laws or regulations relating to the Internet, or
interpretations of existing law, could seriously harm our business.

   Sales of our products are dependent on the increased use and widespread
adoption of the Internet.

   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. Certain critical
issues concerning use of the Internet are unresolved and will likely affect
use of the Internet. These issues include security, reliability, bandwidth,
congestion, cost, ease of access and quality of service. 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.

                                      16
<PAGE>

   Our business may be adversely affected by government regulation of the
communications industry.

   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 certain 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 the Securities Markets

   Our stock price may be volatile.

   Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. We will negotiate and determine the initial
public offering price with the representatives of the underwriters based on
several factors. This price may vary from the market price of the common stock
after this offering. The market price of the common stock may 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;

  .  the limited number of shares of our common stock that is expected to be
     publicly traded;

  .  sales of common stock or other securities in the future; and

  .  fluctuations in stock market prices and volumes.

   Our business may be adversely affected by class action litigation due to
stock price volatility.

   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.

   Control by existing stockholders may limit your ability to influence the
outcome of director elections and certain transactions.

   Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will beneficially own     shares,
or approximately   %, of the outstanding shares of common stock, or   % if the
underwriters' over-allotment option is exercised in full. These stockholders,
if acting together, would be able to significantly influence all matters
requiring approval by our stockholders, including the election of directors
and the approval of mergers or other business combination transactions.

                                      17
<PAGE>

   Substantial sales of our common stock could adversely affect our stock
price.

   Sales of a substantial number of shares of our common stock after this
offering could adversely affect the market price of our common stock by
potentially introducing a large number of sellers of our common stock into a
market in which our common stock price is already volatile, thus driving our
common stock price down. In addition, the sale of these shares could impair
our ability to raise capital through the sale of additional equity securities.
Based on shares outstanding as of July 31, 1999, upon completion of this
offering, we will have        shares of common stock outstanding, or
shares if the underwriters' over-allotment option is exercised in full. Our
directors, executive officers and current stockholders have executed lock-up
agreements that limit their ability to sell shares of our common stock. These
stockholders have agreed not to sell or otherwise dispose of any shares of our
common stock for a period of at least 180 days after the date of this
prospectus without the prior written approval of Morgan Stanley & Co.
Incorporated. When these lock-up agreements expire, these shares and the
shares of common stock underlying any options held by these individuals will
become eligible for sale, in some cases pursuant only to the volume, manner of
sale and notice requirements of Rule 144. In addition, after this offering,
the holders of approximately   shares of common stock, or their transferees,
will be entitled to various rights with respect to the registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by
affiliates) immediately upon the effectiveness of such registration. See
"Shares Eligible for Future Sale."

   Investors will experience immediate dilution.

   The initial public offering price of our common stock is expected to be
substantially higher than the book value per share of our outstanding common
stock immediately after the offering. Accordingly, if you purchase our common
stock in this offering, you will incur immediate dilution of approximately
$    in the book value per share of our common stock from the price you pay
for our common stock, assuming an initial public offering price of $      per
share.

   Anti-takeover provisions in our charter documents and Delaware law could
prevent or delay a change in control of our company.

   Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult
for a third party to acquire us, even if doing so would be beneficial to our
stockholders. See "Description of Capital Stock--Antitakeover Effects of
Provisions of the Certificate of Incorporation and Delaware Law."

                                      18
<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus. These factors may cause our actual results to
differ materially from any forward-looking statement.

   In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "intends," "would," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue"
or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially.

   Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform such statements to
actual results.

                                      19
<PAGE>

                                USE OF PROCEEDS

   The net proceeds to CacheFlow from the sale of the     shares of common
stock offered hereby are estimated to be $    million, at an assumed initial
public offering price of $    and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, the net proceeds of
this offering are estimated to be $    million. The primary purposes of this
offering are to obtain additional equity capital, create a public market for
our common stock, and facilitate future access to public markets. We expect to
use the net proceeds for general corporate purposes, including working
capital. A portion of the net proceeds may also be used to repay debt
obligations of CacheFlow, which totaled $4.6 million as of July 31, 1999. A
portion of the net proceeds may also be used for the acquisition of
businesses, products and technologies that are complementary to ours. We have
no current plans, agreements or commitments and are not currently engaged in
any negotiations with respect to any such transaction. Pending such uses, we
will invest the net proceeds of this offering in investment grade, interest-
bearing securities.

                                DIVIDEND POLICY

   We have not paid any cash dividends since our inception and do not intend
to pay any cash dividends in the foreseeable future. The terms of our line of
credit prohibit the payment of dividends on our capital stock.

                                      20
<PAGE>

                                CAPITALIZATION

   The following table sets forth as of July 31, 1999:

  .  our actual capitalization;

  .  our capitalization on a pro forma basis, after giving effect to the
     conversion of all outstanding shares of preferred stock into 14,341,912
     shares of common stock upon the completion of this offering and the cash
     exercise of warrants to purchase 672,850 shares of preferred stock at a
     weighted average exercise price of $1.48 per share prior to completion
     of the offering and the conversion of these shares of preferred stock
     into common stock upon completion of the offering; and

  .  our capitalization on a pro forma as adjusted basis, to additionally
     reflect this offering and the application of the proceeds at an assumed
     initial public offering price of $    per share, after deducting the
     estimated underwriting discounts and commissions and estimated offering
     expenses.

<TABLE>
<CAPTION>
                                                         July 31, 1999
                                                 ------------------------------
                                                                     Pro Forma
                                                 Actual   Pro Forma As Adjusted
                                                 -------  --------- -----------
                                                          (unaudited)
                                                        (in thousands)
<S>                                              <C>      <C>       <C>
Long-term obligations, net of current portion... $ 3,211   $ 3,211
Stockholders' equity............................
 Preferred stock, $.0001 par value; 30,000,000
  shares authorized actual; 10,000,000 shares
  authorized pro forma and pro forma as
  adjusted; 14,341,912 shares issued and
  outstanding actual; no shares issued and
  outstanding pro forma or pro forma as
  adjusted......................................       1        --
 Common stock, $.0001 par value; 60,000,000
  shares authorized actual; 200,000,000 shares
  authorized pro forma and pro forma as
  adjusted; 12,656,269 shares issued and
  outstanding actual; 27,671,031 shares issued
  and outstanding pro forma;     issued and
  outstanding pro forma as adjusted.............       1         2
 Additional paid-in capital.....................  62,794    63,790
 Note receivable from stockholder...............  (1,017)   (1,017)
 Deferred stock compensation.................... (19,547)  (19,547)
 Accumulated deficit............................ (26,199)  (26,199)
                                                 -------   -------
  Total stockholders' equity....................  16,033    17,029
                                                 -------   -------
    Total capitalization........................ $19,244   $20,240
                                                 =======   =======
</TABLE>

   The information above excludes 3,401,251 shares of common stock issuable
upon exercise of outstanding options under our 1996 Stock Option Plan as of
July 31, 1999 with a weighted average exercise price of $1.21 per share,
141,842 shares of common stock issuable upon exercise of outstanding warrants
as of July 31, 1999 (assuming the conversion of all outstanding shares of
preferred stock into common stock) with a weighted average exercise price of
$3.42 per share, and 33,217 shares of common stock reserved for issuance under
our 1996 Stock Option Plan as of July 31, 1999. On August 27, 1999, we amended
our 1996 Stock Option Plan to increase the number of shares authorized for
issuance thereunder by 3,000,000 shares. Between August 1 and September 24,
1999, we granted options to purchase 2,874,000 shares of common stock. On
September 24, 1999, we adopted our 1999 Stock Incentive Plan as a successor
plan to replace our 1996 Stock Option Plan, whereby 5,000,000 shares were
reserved for issuance thereunder. No options will be granted under the 1996
Stock Option Plan after this offering. In addition, on September 24, 1999, we
adopted our Employee Stock Purchase Plan and reserved 2,500,000 shares of
common stock for issuance under such plan and our 1999 Non-Employee Director
Option Plan and reserved 500,000 shares of common stock for issuance under
such plan. See "Management--1999 Stock Incentive Plan," "Employee Stock
Purchase Plan" and "--1999 Director Option Plan."

                                      21
<PAGE>

                                   DILUTION

   The pro forma net tangible book value of our common stock as of July 31,
1999 was $16.7 million, or $.60 per share. Pro forma net tangible book value
per share represents the amount of our stockholders' equity, less intangible
assets, divided by the pro forma number of shares of common stock outstanding
after giving effect to the conversion of all outstanding shares of preferred
stock into 14,341,912 shares of common stock upon the completion of this
offering and the cash exercise of warrants to purchase 672,850 shares of
preferred stock prior to completion of the offering and the conversion of
these shares of preferred stock into common stock.

   Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving
effect to our sale of     shares of common stock in this offering at an
assumed initial offering price of $    per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses and the
application of the net proceeds therefrom, our pro forma as adjusted net
tangible book value as of July 31, 1999, would have been $   , or $    per
share. This represents an immediate increase in net tangible book value of
$    per share to existing stockholders and an immediate dilution in net
tangible book value of $    per share to investors purchasing shares of common
stock in this offering, as illustrated in the following table:

<TABLE>
<S>                                                                   <C>  <C>
 Assumed initial public offering price per share.....................      $
 Pro forma net tangible book value per share as of July 31, 1999..... $.60
 Increase per share attributable to new investors....................
                                                                      ----
 Pro forma as adjusted net tangible book value per share after this
  offering...........................................................
                                                                           ----
 Net tangible book value dilution per share to new investors.........      $
                                                                           ====
</TABLE>

   The following table sets forth as of July 31, 1999, after giving effect to
the conversion of all outstanding shares of preferred stock into 14,341,912
shares of common stock upon the completion of this offering and the cash
exercise of warrants to purchase 672,850 shares of preferred stock prior to
completion of the offering and the conversion of these shares of preferred
stock into common stock, the difference between the existing stockholders and
the investors purchasing shares in this offering at the assumed initial
offering price of $   per share with respect to the number of shares purchased
from us, the total consideration paid and the average price per share paid:

<TABLE>
<CAPTION>
                             Shares Purchased  Total Consideration
                            ------------------ ------------------- Average Price
                              Number   Percent   Amount    Percent   Per Share
                            ---------- ------- ----------- ------- -------------
   <S>                      <C>        <C>     <C>         <C>     <C>
   Existing stockholders..  27,671,031       % $37,581,000       %     $1.36
   New investors..........
                            ----------  -----  -----------  -----
     Totals...............              100.0% $            100.0%
                            ==========  =====  ===========  =====
</TABLE>

   As of July 31, 1999, there were options outstanding to purchase a total of
3,401,251 shares of common stock at a weighted average exercise price of $1.21
per share under our 1996 Stock Option Plan. In addition, as of July 31, 1999,
there were outstanding warrants to purchase a total of 141,842 shares of
common stock (assuming the conversion of all of our preferred stock into
common stock) at a weighted average exercise price of $3.42 per share. Between
August 1, 1999 and September 24, 1999, we granted options to purchase
2,874,000 shares of common stock at a weighted average exercise price of $4.69
per share. To the extent outstanding options or warrants are exercised, there
will be further dilution to new investors.

                                      22
<PAGE>

                     SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere
in this prospectus. The consolidated statement of operations data for the
period from inception (March 13, 1996) to April 30, 1997 and for each of the
two years in the period ended April 30, 1999, and the consolidated balance
sheet data at April 30, 1998 and 1999, are derived from, and are qualified by
reference to, the audited consolidated financial statements included in this
prospectus. The consolidated balance sheet data at April 30, 1997 are derived
from audited consolidated financial statements not included in this
prospectus. The selected consolidated financial data at July 31, 1999 and for
the three months ended July 31, 1998 and July 31, 1999 have been derived from
our unaudited consolidated financial statements included in this prospectus.
The unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements contained in this
prospectus and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of such
information. Consolidated results of operations for the three months ended
July 31, 1999 are not necessarily indicative of the results that may be
expected for the full fiscal year.

<TABLE>
<CAPTION>
                              Period from                       Three Months
                             March 13, 1996    Year Ended           Ended
                             (Inception) to    April 30,          July 31,
                               April 30,    -----------------  ----------------
                                  1997       1998      1999     1998     1999
                             -------------- -------  --------  -------  -------
                                  (in thousands, except per share data)
<S>                          <C>            <C>      <C>       <C>      <C>
Consolidated Statement of
 Operations Data:
Net sales..................     $   --      $   --   $  7,036  $   809  $ 3,612
Cost of goods sold.........         --          --      3,297      598    1,380
                                -------     -------  --------  -------  -------
Gross profit...............         --          --      3,739      211    2,232
Operating expenses:
 Research and development..       1,055       2,396     4,034      755    1,613
 Sales and marketing.......         130       1,655     6,865    1,335    3,481
 General and
  administrative...........         310       1,630     2,069      275      667
 Stock compensation........           4          59     3,776      219    2,482
                                -------     -------  --------  -------  -------
    Total operating
     expenses..............       1,499       5,740    16,744    2,584    8,243
                                -------     -------  --------  -------  -------
Operating loss.............      (1,499)     (5,740)  (13,005)  (2,373)  (6,011)
Other income (expense),
 net.......................          56         233      (197)      71      (36)
                                -------     -------  --------  -------  -------
Net loss...................     $(1,443)    $(5,507) $(13,202) $(2,302) $(6,047)
                                =======     =======  ========  =======  =======
Basic and diluted net loss
 per share.................     $ (1.54)    $ (1.88) $  (3.06) $  (.65) $  (.97)
Shares used in computing
 basic and diluted net loss
 per share.................         939       2,936     4,316    3,517    6,214
Pro forma basic and diluted
 net loss per share........                          $   (.89)          $  (.30)
Shares used in computing
 pro forma basic and
 diluted net loss per
 share.....................                            14,849            19,946
</TABLE>

<TABLE>
<CAPTION>
                                                As of April 30,        As of
                                             -----------------------  July 31,
                                              1997    1998    1999      1999
                                             ------  ------  -------  --------
                                                     (in thousands)
<S>                                          <C>     <C>     <C>      <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short term
 investments................................ $3,605  $7,349  $ 2,291  $17,825
Working capital.............................  3,589   6,955      787   16,880
Total assets................................  3,769   8,461    6,716   24,019
Long-term obligations, net of current
 portion....................................    --        7    3,211    3,211
Total liabilities...........................    --      861    7,060    7,986
Accumulated deficit......................... (1,443) (6,950) (20,152) (26,199)
Total stockholders' equity (deficit)........  3,702   7,600     (344)  16,033
</TABLE>

                                      23
<PAGE>

   MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS

   You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with the consolidated
financial statements and notes to consolidated financial statements appearing
elsewhere in this prospectus. This discussion and analysis contains forward-
looking statements that involve risks, uncertainties and assumptions. Our
actual results may differ materially from those anticipated in these forward-
looking statements as a result of many factors, including, but not limited to,
those set forth under "Risk Factors" and elsewhere in this prospectus.

Overview

   We design, develop, market and support 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, bandwidth 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 July 31, 1999 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 future net sales for the foreseeable future.

   We market our products through our direct sales force, which is
complemented by indirect sales channels consisting of resellers, systems
integrators and original equipment manufacturers. Customers that purchase our
products through our direct sales force generally do so by delivering a
purchase order. Direct and indirect sales accounted for approximately 59% and
41% of our net sales for the fiscal year ended April 30, 1999, and
approximately 61% and 39% of our net sales for the quarter ended July 31,
1999. Sales through indirect channels have lower gross margin than direct
sales. As a result, we expect that our total gross margin on product sales
will decline if the portion of sales that are made through indirect channels
increases.

   Net sales from international operations were $3.1 million, or approximately
44% of net sales, for the fiscal year ended April 30, 1999, and $1.7 million,
or approximately 48% of net sales, for the quarter ended July 31, 1999. The
majority of international sales were made in Europe and Asia by a combination
of our direct sales force and indirect channels. We treat sales to customers
in Canada as part of North American sales, and not as international sales. Our
international sales are denominated in United States dollars.

   For the year ended April 30, 1999, Sumitronics, Global One Communications
and Nissho Electronics each accounted for more than ten percent of our net
sales, for an aggregate of approximately 33% of our net sales. For the quarter
ended July 31, 1999, Road Runner and Global One Communications each accounted
for more than ten percent of our net sales, for an aggregate of approximately
22% of our net sales.

   We generally record product revenue upon shipment, net of allowances for
estimated sales returns and uncollectable customer accounts. Maintenance
contract revenue is initially deferred when a maintenance contract is
purchased by the customer and recorded evenly over the life of the contract.
To date, maintenance contract revenue has not been a significant portion of
our net sales.

   We recorded deferred stock compensation of approximately $4,000, $157,000
and $13.7 million for the period from inception (March 13, 1996) to April 30,
1997 and for the years ended April 30, 1998 and 1999 and $12.0 million for the
quarter ended July 31, 1999. These amounts represent the difference between
the exercise price and the deemed fair value of certain stock option and
warrant grants to employees, consultants, directors and third parties. Related
stock compensation expense is recorded over the related option or warrant
vesting

                                      24
<PAGE>

period, generally two to four years, or immediately if there is no vesting
period. We recorded stock compensation expense of approximately $4,000,
$59,000 and $3.8 million for the period from inception to April 30, 1997 and
for the years ended April 30, 1998 and 1999 and $2.5 million for the quarter
ended July 31, 1999 using a graded vesting method. Based on grants from August
1 through September 24, 1999, we expect to record additional stock
compensation charges of approximately $17.6 million. As a result of the
cumulative effect of stock compensation charges, we expect stock compensation
expense, which is primarily attributable to amortization of deferred
compensation charges, to impact our reported results through April 30, 2004.
In addition, we intend to record a charge of approximately $604,000 for the
quarter ended October 31, 1999 related to certain warrants.


   We have incurred net losses in each quarter since inception. As of July 31,
1999, we had an accumulated deficit of $26.2 million. Our net loss was $5.5
million for the fiscal year ended April 30, 1998, $13.2 million for the fiscal
year ended April 30, 1999, and $6.0 million for the quarter ended July 31,
1999. These losses resulted from significant costs incurred in the development
and sale of our products and services. We expect to experience significant
growth in our operating expenses, particularly research and development and
sales and marketing expenses. As a result, we expect to incur additional
losses and continued negative cash flow from operations for the foreseeable
future.

   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 state of development,
particularly companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties.

Selected Quarterly Results of Operations

   Because we have a limited operating history, we believe that year-to-year
comparisons prior to 1999 are less meaningful than an analysis of recent
quarterly operating results. Accordingly, we are first providing a discussion
and analysis of our results of operations for the five quarters ended July 31,
1999.

                                      25
<PAGE>

   The following tables set forth, in dollars and as a percentage of revenues,
consolidated statements of operations data for each of the five quarters ended
July 31, 1999. This information has been derived from our unaudited
consolidated financial statements. The unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements contained in this prospectus and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary
for a fair presentation of such information. You should read this information
in conjunction with our consolidated financial statements and notes thereto
appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                            Three Months Ended
                                  -------------------------------------------
                                   Jul.     Oct.     Jan.     Apr.     Jul.
                                    31,      31,      31,      30,      31,
                                   1998     1998     1999     1999     1999
                                  -------  -------  -------  -------  -------
                                          (amounts in thousands)
<S>                               <C>      <C>      <C>      <C>      <C>
Consolidated Statements of
 Operations Data:
Net sales........................ $   809  $ 1,082  $ 2,201  $ 2,944  $ 3,612
Cost of goods sold...............     598      652      890    1,157    1,380
                                  -------  -------  -------  -------  -------
Gross profit.....................     211      430    1,311    1,787    2,232
Operating expenses:
 Research and development........     755      958      978    1,343    1,613
 Sales and marketing.............   1,335    1,719    1,654    2,157    3,481
 General and administrative......     275      685      510      599      667
 Stock compensation..............     219      587      871    2,099    2,482
                                  -------  -------  -------  -------  -------
    Total operating expenses.....   2,584    3,949    4,013    6,198    8,243
                                  -------  -------  -------  -------  -------
Operating loss...................  (2,373)  (3,519)  (2,702)  (4,411)  (6,011)
Other income (expense), net......      71       33     (115)    (186)     (36)
                                  -------  -------  -------  -------  -------
Net loss......................... $(2,302) $(3,486) $(2,817) $(4,597) $(6,047)
                                  =======  =======  =======  =======  =======
As a Percentage of Net Sales:
Net sales........................   100.0%   100.0%   100.0%   100.0%   100.0%
Cost of goods sold...............    73.9     60.3     40.4     39.3     38.2
                                  -------  -------  -------  -------  -------
Gross margin.....................    26.1     39.7     59.6     60.7     61.8
Operating expenses:
 Research and development........    93.3     88.5     44.4     45.6     44.7
 Sales and marketing.............   165.0    158.9     75.1     73.3     96.4
 General and administrative......    34.0     63.3     23.1     20.3     18.5
 Stock compensation..............    27.1     54.3     39.6     71.3     68.6
                                  -------  -------  -------  -------  -------
    Total operating expenses.....   319.4    365.0    182.2    210.5    228.2
                                  -------  -------  -------  -------  -------
Operating loss...................  (293.3)  (325.2)  (122.8)  (149.8)  (166.4)
Other income (expense), net......     8.8      3.0     (5.2)    (6.3)    (1.0)
                                  -------  -------  -------  -------  -------
Net loss......................... (284.5)% (322.2)% (128.0)% (156.1)% (167.4)%
                                  =======  =======  =======  =======  =======
</TABLE>

   Net Sales

   Net sales increased in each of the five quarters ended July 31, 1999, from
$809,000 for the quarter ended July 31, 1998 to $3.6 million for the quarter
ended July 31, 1999. The increase was primarily attributable to the
introduction of new products and their growing acceptance in the marketplace,
growth in our customer base, and the addition of individuals to our sales
force. We offer products in both fixed and expandable configurations. The
growth in net sales was attributable to a combination of higher unit sales
volumes and higher average selling prices associated with increased sales of
expandable configuration systems. We expect that prior growth rates of our net
sales will not be sustained in the future.

                                      26
<PAGE>

   Gross Profit

   Gross profit increased in each of the five quarters ended July 31, 1999,
from $211,000 for the quarter ended July 31, 1998 to $2.2 million for the
quarter ended July 31, 1999. Gross margin increased from approximately 26.1%
to 61.8% over the five quarters ended July 31, 1999. The increase in gross
profit was principally attributable to the introduction of new products and
their growing acceptance in the marketplace and higher sales volumes. The
increase in gross margin was primarily due to the resulting economies of scale
from higher unit production and cost savings achieved by outsourcing component
manufacturing.

   Our gross 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.

   Operating Expenses

   Research and Development. Research and development expenses consist
primarily of salaries and benefits, and prototype and test equipment costs.
Our research and development expenses increased in each of the five quarters
ended July 31, 1999, from $755,000 for the quarter ended July 31, 1998 to $1.6
million for the quarter ended July 31, 1999. The increases in research and
development expenses 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. 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.
Through July 31, 1999, 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. Our sales and marketing expenses generally
increased over the five quarters ended July 31, 1999, from $1.3 million for
the quarter ended July 31, 1998 to $3.5 million for the quarter ended July 31,
1999. The increases in sales and marketing expenses were primarily related to
the expansion of our sales and marketing organization, the increase in our
direct sales force, increased commission expenses related to higher sales
volumes, and the expansion of sales and support facilities worldwide. 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. Our general and administrative expenses
increased from $275,000 for the quarter ended July 31, 1998 to $667,000 for
the quarter ended July 31, 1999. The increases in general and administrative
expenses were primarily attributable to increased staffing and associated
expenses necessary to manage and support our growth. We expect general and
administrative expenses to increase in absolute dollars as we continue to
increase staffing to manage expanding operations and facilities and incur the
additional expenses associated with operating as a public company.

                                      27
<PAGE>

Results of Operations

   For the period from our inception in March 1996 through 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>
                                                               Three Months
                                                                Ended July
                                                                    31,
                                                  Year Ended   ---------------
                                                April 30, 1999  1998     1999
                                                -------------- ------   ------
<S>                                             <C>            <C>      <C>
Consolidated Statements of Operations Data:
Net sales......................................      100.0%     100.0%   100.0%
Cost of goods sold.............................       46.9       73.9     38.2
                                                    ------     ------   ------
Gross margin...................................       53.1       26.1     61.8
Operating expenses:
 Research and development......................       57.3       93.3     44.7
 Sales and marketing...........................       97.6      165.0     96.4
 General and administrative....................       29.4       34.0     18.5
 Stock compensation............................       53.6       27.1     68.6
    Total operating expenses...................      237.9      319.4    228.2
                                                    ------     ------   ------
Operating loss.................................     (184.8)    (293.3)  (166.4)
Other income (expense), net....................       (2.8)       8.8     (1.0)
                                                    ------     ------   ------
Net loss.......................................     (187.6)%   (284.5)% (167.4)%
                                                    ======     ======   ======
</TABLE>

   Comparison of Quarters Ended July 31, 1999 and 1998

   Net Sales. Net sales increased from $809,000 for the quarter ended July 31,
1998 to $3.6 million for the quarter ended July 31, 1999. The increase was
primarily attributable to the introduction of new products and their growing
acceptance in the marketplace, growth in our customer base, and the addition
of individuals to our sales force. Growth in net sales was also attributable
to a combination of higher unit sales volumes and higher average selling
prices associated with increased sales of our expandable configuration
systems. During the quarter ended July 31, 1998, three customers accounted for
approximately 51% of our net sales, and during the quarter ended July 31,
1999, two customers accounted for approximately 22% of our net sales.

   Gross Profit. Gross profit increased from $211,000 for the quarter ended
July 31, 1998 to $2.2 million for the quarter ended July 31, 1999. Gross
margin increased from approximately 26.1% for the quarter ended July 31, 1998
to approximately 61.8% for the quarter ended July 31, 1999. The increase in
gross profit was primarily attributable to the introduction of new products
and their growing acceptance in the marketplace and higher sales volumes. The
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.

   Research and Development. Research and development expenses increased from
$755,000 for the quarter ended July 31, 1998 to $1.6 million for the quarter
ended July 31, 1999. The increase in research and development expenses was
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.

   Sales and Marketing. Sales and marketing expenses increased from $1.3
million for the quarter ended July 31, 1998 to $3.5 million for the quarter
ended July 31, 1999. The increase in sales and marketing expenses was
primarily related to the expansion of our sales and marketing organization,
the increase in our direct sales force, increased commission expenses related
to higher sales volumes, and the expansion of sales and support facilities
worldwide.

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<PAGE>

   General and Administrative. General and administrative expenses increased
from $275,000 for the quarter ended July 31, 1998 to $667,000 for the quarter
ended July 31, 1999. The increase in general and administrative expenses was
primarily attributable to increased staffing and associated expenses necessary
to manage and support our growth.

   Other Income (Expense), Net. Other income (expense), net consists of
interest income, interest expense and other non-operating expenses. Other
income (expense), net decreased from $71,000 for the quarter ended July 31,
1998, to $(36,000) for the quarter ended July 31, 1999. The decrease was
primarily attributable to increased interest costs as a result of incurring
additional borrowings.

  Comparison of Period from Inception (March 13, 1996) to April 30, 1997 and
   Fiscal Years Ended April 30, 1998 and 1999

   Net Sales. We did not generate any sales for the period from inception to
April 30, 1998. Net sales for the fiscal year ended April 30, 1999 were $7.0
million. The increase was primarily attributable to the introduction of new
products and their growing acceptance in the marketplace, higher unit sales
volumes, growth in our customer base, and the addition of individuals to our
sales force. During the fiscal year ended April 30, 1999, three customers
accounted for approximately 33% of our net sales.

   Gross Profit. We did not generate any sales for the period from inception
to April 30, 1998. The increase in gross profit and gross margin in the year
ended April 30, 1999 was attributable to generating sales in fiscal 1999.

   Research and Development. Research and development expenses increased from
$1.1 million for the period from inception to April 30, 1997 to $2.4 million
for the fiscal year ended April 30, 1998 to $4.0 million for the fiscal year
ended April 30, 1999. The increases in research and development expenses 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.

   Sales and Marketing. Sales and marketing expenses increased from $130,000
for the period from inception to April 30, 1997 to $1.7 million for the fiscal
year ended April 30, 1998 to $6.9 million for the fiscal year ended April 30,
1999. The increases in sales and marketing expenses were primarily related to
the expansion of our sales and marketing organization, the increase in our
direct sales force, increased commission expenses related to higher sales
volumes, and the expansion of sales and support facilities worldwide.

   General and Administrative. General and administrative expenses increased
from $310,000 for the period from inception to April 30, 1997 to $1.6 million
for the fiscal year ended April 30, 1998 to $2.1 million for the fiscal year
ended April 30, 1999. The increases in general and administrative expenses
were primarily attributable to increased staffing and associated expenses
necessary to manage and support our growth.

   Other Income (Expense), Net. Other income (expense), net increased from
$56,000 for the period from inception to April 30, 1997 to $233,000 for the
fiscal year ended April 30, 1998, and decreased to $(197,000) for the fiscal
year ended April 30, 1999. The increase from the period from inception to
April 30, 1997 to the fiscal year ended April 30, 1998 was primarily
attributable to increased investment income from cash received from equity
financings. The decrease from the fiscal year ended April 30, 1998 to the
fiscal year ended April 30, 1999 was primarily attributable to increased
interest costs as a result of incurring additional borrowings.

Income Taxes

   Income taxes consist of federal, state and local taxes, when applicable. We
expect significant consolidated net losses for the foreseeable future, which
should generate net operating loss carryforwards. However, our ability to use
net operating losses may be subject to annual limitations. Under the
provisions of the Internal Revenue Code, certain substantial changes in our
ownership may limit the amount of net operating loss

                                      29
<PAGE>

carryforwards that could be utilized annually in the future to offset taxable
income. In addition, income taxes may be payable during this time due to
operating income and the imposition of federal or state minimum taxes. We
recognized no provision for taxes, because we operated at a loss throughout
the years ended April 30, 1997, 1998 and 1999, and for the quarter ended July
31, 1999.

Liquidity and Capital Resources

   Since inception, we have financed our operations and the purchase of
property and equipment through private sales of preferred stock, with net
proceeds of $33.4 million, as well as through bank loans and equipment leases.
At July 31, 1999, we had $17.8 million in cash and cash equivalents and
$16.9 million in working capital.

   Net cash used in operating activities was $1.4 million for the period from
inception to April 30, 1997, $5.1 million for the fiscal year ended April 30,
1998, $9.7 million for the fiscal year ended April 30, 1999, and $3.9 million
for the quarter ended July 31, 1999. We used cash primarily to fund our net
losses from operations.

   Net cash used in investing activities was $3.5 million for the period from
inception to April 30, 1997, $971,000 for the fiscal year ended April 30, 1999
and $472,000 for the quarter ended July 31, 1999. Net cash provided by
investing activities was $2.8 million for fiscal year ended April 30, 1998.
Net cash used in investing activities was primarily attributable to purchases
of property, plant and equipment and short-term investments. Net cash provided
by investing activities was primarily attributable to the proceeds from the
sale of short-term investments. We expect that, in the future, any cash in
excess of current requirements will be invested in investment grade, interest-
bearing securities.

   Net cash provided by financing activities was $5.1 million for the period
from inception to April 30, 1997, $9.4 million for the fiscal year ended April
30, 1998, $5.6 million for the fiscal year ended April 30, 1999 and $19.9
million for the quarter ended July 31, 1999.

   Capital expenditures were $123,000 for the period from inception to April
30, 1997, $623,000 for the fiscal year ended April 30, 1998, $971,000 for the
fiscal year ended April 30, 1999, and $472,000 for the quarter ended July 31,
1999. Our capital expenditures consisted of purchases of plant, equipment and
software. We expect that our capital expenditures will continue to increase in
the future.

   We currently have two credit facilities. In November 1998, we amended our
then existing credit facility to increase the amount available thereunder from
$400,000 to $3.0 million. This credit facility, which expires in November 1999
and bears interest at the prime interest rate plus .75%, had $1.2 million
available for borrowing as of July 31, 1999. In November 1998, we entered into
an additional credit facility consisting of a $3.5 million three year term
loan and a $350,000 equipment line of credit. The term loan and equipment line
of credit are secured by all of our assets and bear interest at 13.0% and
11.4% and mature in November 2002 and May 2000. As of July 31, 1999, all
amounts under the term loan had been borrowed, and all amounts under the
equipment line of credit were available for borrowing. Both of our credit
facilities require us to maintain compliance with certain financial covenants.

   We believe that working capital together with the net proceeds from the
sale of the common stock in this offering 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. In the event additional financing is required, we
may not be able to raise it on acceptable terms or at all.

Year 2000 Readiness

   The "Year 2000 issue" refers generally to the problems that some software
and hardware may have in determining the correct century for the year. For
example, software with date-sensitive functions that is not Year 2000
compliant may not be able to distinguish whether "00" means 1900 or 2000,
which may result in failures or the creation of erroneous results.

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<PAGE>

   We believe that our current products are Year 2000 compliant when
configured and used in accordance with the related documentation, and provided
that the other network components in the host network and any other software
used with our products are Year 2000 compliant. However, we have not tested
for Year 2000 compliance the compatability of our products with the other
network components in the host network and any other software used by our
customers with our products. We continue to respond to customer questions
about prior versions of our products on a case-by-case basis.

   We have defined Year 2000 compliant as the ability to:

  .  correctly handle date information needed for the December 31, 1999 to
     January 1, 2000 date change;

  .  function according to the product documentation provided for this date
     change, without changes in operation resulting from the advent of a new
     century, assuming correct configuration;

  .  respond to two-digit date input in a way that resolves the ambiguity as
     to century in a disclosed, defined and predetermined manner;

  .  store and provide output of date information in ways that are
     unambiguous as to century if the date elements in interfaces and data
     storage specify the century; and

  .  recognize Year 2000 as a leap year.

   We have tested software obtained from third parties, including licensed
software, shareware, and freeware that is incorporated into our products, and
we are seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite testing by us and current and potential customers, and
assurances from developers of products incorporated into our products, our
products may contain undetected errors or defects associated with Year 2000
date functions. Known or unknown errors or defects in our products could
result in delay or loss of net sales, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of
which could seriously harm our business. Some commentators have predicted
significant litigation regarding Year 2000 compliance issues, and we are aware
of such lawsuits against software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent we may be
affected by it.

   We have initiated an assessment of our material internal information
technology systems, including both our own software products and third-party
software and hardware technologies, but we have not initiated an assessment of
our non-information technology systems. We are seeking assurances from our
third-party software vendors that their systems are Year 2000 compliant. In
addition, we intend to seek assurances from the vendors of any future software
purchased by us, including our planned purchase of a new enterprise resource
planning system. We are not currently aware of any material operational issues
or costs associated with preparing our internal information technology and
non-information technology systems for the Year 2000. However, we may
experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal information
technology and non-information technology systems.

   We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, financial
condition and results of operations could be seriously harmed.

   We have not separately accounted for Year 2000 costs in the past. To date,
these costs have not been material. We will incur additional costs related to
the Year 2000 efforts for administrative personnel to manage the project,
outside contractor assistance, technical support for our products, product
engineering and customer

                                      31
<PAGE>

satisfaction. In addition, we may experience significant problems and costs
with Year 2000 compliance that could seriously harm our business.

   We have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our
critical operations. The cost of developing and implementing such a plan may
itself be significant. Finally, we are also subject to external forces that
might generally affect industry and commerce, such as utility or
transportation company Year 2000 compliance failure interruptions.

Recently Issued Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," or FAS 133. The new standard establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. FAS 133
will be effective for the Company's fiscal year ending April 30, 2002. We do
not expect FAS 133 to have a material effect on our consolidated financial
condition or results of operations.

Qualitative and Quantitative Disclosures about Market Risk

   We develop products in the United States and sell them in North America,
Asia and Europe. 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. Our interest income is sensitive to
changes in the general level of United States interest rates, particularly
since the majority of our investments are cash and cash equivalents. Due to
the nature of our cash and cash equivalents, we have concluded that they do
not expose us to material risk.


                                      32
<PAGE>

                                   BUSINESS

   The prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements.

Overview

   We are a leading provider of Internet caching appliances that are
specifically designed, or purpose-built, to accelerate and manage the flow of
information over the Internet. Our products enable our customers to improve
the performance of their networks and reduce network costs, while enhancing
network security. As of August 31, 1999, we had approximately 100 customers
and 575 installations. End users of our products include large and small
Internet service providers, or ISPs, and corporate enterprises.

Industry Background

   The Internet has emerged as one of the fastest growing communications media
in history, and is dramatically changing the way businesses and individuals
communicate and conduct commerce. International Data Corporation, or IDC,
estimates that there were approximately 97 million users of the Internet at
the end of 1998, and projects that the number of Internet users will grow to
over 319 million by 2002. IDC also projects that the number of Internet access
devices worldwide will grow from an estimated 120 million in 1998 to over 515
million by the end of 2002. Similarly, the amount of content available on the
Internet is increasing rapidly. IDC estimates that the number of web pages
worldwide will grow from approximately 829 million in 1998 to over 7.7 billion
by 2002.

   The volume of data transmitted across the Internet and corporate intranets
is also growing as a result of increasingly complex content. Web sites and e-
mail messages, for example, increasingly incorporate graphics as well as audio
and video elements which require much larger files than simple text. Each time
an Internet user requests web page content, the request, access and
transmission of this content must follow a network path from user to origin
server and back. This process is repeated serially for each object that a web
page contains. Popular web pages typically contain ten to twenty objects,
requiring multiple transmissions per web page. This serial request of content
significantly lengthens web response time. In addition, with users anywhere
accessing information anywhere, traffic patterns are unpredictable.

   The physical infrastructure of the Internet today must therefore
accommodate sharply increased volumes of data traffic, which includes a high
degree of redundant data, as well as highly unpredictable and event-driven
usage patterns. Advances in communications technology such as high-speed
routers, switches and broadband access technologies have improved the Internet
infrastructure and its ability to transfer packets of data. However, these
technologies do not reduce the volume of data that must be moved from origin
server to user, nor the physical distance between source and user. Further,
these improvements do not allow for the analysis or control of the actual
content. As a result, servers are still overloaded by the growing number of
requests, and web response time remains a continuing problem despite the
advent of broadband technologies and other improvements in data transmission
capacity, or bandwidth.

   Slow web response time and web server outages can have a significant
financial impact on corporate enterprises and Internet service providers, or
ISPs. As enterprises increasingly depend on the Internet to conduct business,
web server availability and performance become increasingly important for
generating revenue and communicating with customers and vendors. The
availability and performance of web servers and the quality of a customer's
web site experience directly impact revenue for a business engaged in
electronic commerce, or e-commerce. Delayed web server response times decrease
productivity and can threaten the revenue-generating or communications
capabilities of the Internet. Users who have difficulty accessing a web site
may stop using it or find an alternative site. In the case of ISPs, slow web
response times may frustrate their customers, encouraging them to cancel their
service.

   In response to these problems, caching technologies based on proprietary
software solutions or open platforms were introduced. By storing frequently
requested Internet content physically closer to users, caching reduces the
distance over which web content must travel, and removes much of the redundant
traffic from the network. By saving bandwidth, these caching solutions are
able to modestly reinforce the extensive improvements in routing, switching
and transmission capacity. However, they do not adequately address the

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<PAGE>

disparate requirements of ISPs, enterprises and users. Specifically, these
solutions have failed to address market demand for:

  .  reduced web response time, including download times for non-cached
     content;

  .  simple administration and management;

  .  reduced network costs;

  .  secure networks; and

  .  fresh web content.

   For example, traditional software-based caching solutions based on general-
purpose operating systems, where source code is widely available and well
understood, can be costly, difficult to implement and manage and vulnerable to
security breaches. Caching solutions based on publicly available software, or
freeware, generally provide inferior performance, security and features
because they lack consistent, dedicated programming efforts. More recently,
some vendors have chosen to modify hardware-based solutions, such as filers or
routers, from their original purpose to become caching solutions. Because
these hardware-based solutions were initially designed for other purposes,
they can be slower than other alternatives, more cumbersome to operate and
less efficient. Finally, these traditional hardware and software caching
solutions have had limited success in ensuring the freshness of content served
from the cache.

   In recent years, the increasing complexity within networks required the
introduction of dedicated routing and switching appliances in order to achieve
desired network performance and reliability levels. Similarly, increasing
traffic volumes, network complexity and user expectations for the performance
of the Internet require the introduction of a specifically-designed, dedicated
Internet caching appliance to reduce web response time, provide extensive
administration and management capabilities, reduce network costs, ensure data
security and deliver fresh content. As a result, the Internet caching
appliance market is expected to grow rapidly. According to the GartnerGroup,
this market is expected to grow from approximately $92 million in 1999 to over
$1 billion in 2003, representing a compounded annual growth rate of
approximately 85%.

The CacheFlow Solution

   CacheFlow designs, develops, markets and supports high-performance Internet
caching appliances that manage the flow of information over the Internet. We
are exclusively focused on developing appliances that are specifically
designed, or purpose-built, for Internet caching. At the foundation of each
CacheFlow product is CacheOS, our high-performance operating system designed
specifically to manage and accelerate the delivery of Internet content. As
purpose-built appliances, our products enhance network performance by reducing
the data burden on the network backbone, firewall and server. 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. 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 uncached content is
accelerated, since our appliances simultaneously retrieve numerous objects
from the origin server, in many cases doubling the speed of content delivery.
Designed to be intelligent pieces of network equipment, our appliances become
network-aware, content-aware elements of the network that improve network
efficiency and speed web response times.

   Ease of Installation and Management. Our products are designed for easy
installation and maintenance, reducing the cost and time required for
implementation and use. In many cases, our Internet caching appliances can be
installed in under thirty minutes. All of our products provide customers with
a range of management features, functions, user interfaces and modes of
operation. In addition, our appliances support relevant networking standards,
enabling our appliances to interact with existing networking equipment such as
routers, servers, switches and load balancers.

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<PAGE>

   Attractive Return on Investment. Our products are designed to reduce
bandwidth costs. 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 bandwidth and can
reduce data transmission costs. Our customers better utilize the bandwidth of
their existing network since redundant traffic is offloaded from the network
and served from the cache. Enterprises engaged in e-commerce can reduce the
need to purchase additional servers since our Internet caching appliances
offload 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. In addition, CacheOS employs
authentication and filtering capabilities that prohibit unauthorized users
from accessing or penetrating through the cache.

   Broad Product Suite. Enterprises and ISPs have varying bandwidth,
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
fresh. Internet caching appliances store content, but do not originate or own
that content, so in order to provide fresh content, caches must track the
content at its origin. Unlike traditional caches that are passive, our
Internet caching appliances are active, refreshing content through efficient
and sophisticated algorithms that monitor user activity and the frequency with
which source content is changed without requiring additional bandwidth 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 they interact with
the content being requested, the user requesting that content and the network
infrastructure itself. Our appliances are able to leverage their placement at
this network juncture to provide a range of additional value-added services,
including content filtering, user tracking and control of cached content.

The CacheFlow Strategy

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

   Leverage Internet Caching Focus to Target 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 intend to leverage 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 leverage our
technological expertise to meet the needs of the evolving Internet caching
market. We plan to continue to develop both the software and hardware elements
of our solution to gain and maintain a competitive advantage and expand the
market for our products. Our additional efforts to enhance the capabilities of
our appliances include adding more functionality to control

                                      35
<PAGE>

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 caching appliance 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.

Products

   Our products are designed to meet the different price, performance,
bandwidth and reliability requirements of our customers and potential
customers. Embedded in each of our caching appliances is our CacheOS operating
system. Because CacheOS acts as a common platform across our product line, all
of our products support a consistent set of software features and functions, a
common easy-to-manage user interface and common operational characteristics.

   Internet Caching Appliances

   We began commercial shipment of our first Internet caching appliances in
May 1998. Our current product family is separated into four product series:

    .  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 Mbps, the equivalent of
       a T-1 line.

    .  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
       Mbps. The CacheFlow 500 Series is typically deployed in front of web
       servers and firewalls 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
       45Mbps, the equivalent of a T-3 line. Our 3000 Series provides 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 specifically for
       carrier-class scalability and reliability. The CacheFlow 5000 is
       highly scalable, designed to support traffic loads ranging from 45
       Mbps, or T-3, to more than 155 Mbps, the equivalent of OC-3. Our
       5000 Series can contain up to three separate AC or DC power supplies
       to allow uninterrupted operation and provides our customers with the
       ability to add capacity to the appliances as their needs grow.

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<PAGE>

   The following table describes the configurations of our Internet caching
appliances:

<TABLE>
<CAPTION>
                                                    Maximum   Maximum   Fixed/
   Series                                          Disk Space Memory  Expandable
   ------                                          ---------- ------- ----------
   <S>                                             <C>        <C>     <C>
   CacheFlow 100..................................     4 Gb   128 Mb    Fixed
   CacheFlow 500..................................    36 Gb   768 Mb    Fixed
   CacheFlow 3000.................................    63 Gb     1 Gb  Expandable
   CacheFlow 5000.................................   243 Gb     4 Gb  Expandable
</TABLE>

   CacheOS

   CacheOS is the operating system that runs all of our Internet caching
appliances. Unlike general operating systems, such as Windows NT, UNIX and
NetWare, CacheOS was developed specifically to enable Internet caching and,
therefore, does not contain the millions of lines of code necessary to support
the many features required of a general operating system. As a result, our
Internet caching appliances run more efficiently. Because we developed CacheOS
internally, our Internet caching appliances are more secure than caching
devices that run on operating systems whose source code is more commonly
understood. In addition, our operating system enables redundancies, such as
storing multiple copies of images on each disk within the appliance and
keeping a copy of CacheOS on each disk, so that if one disk fails, the next
can automatically reboot the appliance. These redundancies allow our caching
appliances to be highly reliable.

   CacheOS is designed with a variety of features that improve network
performance and administration.

  .  Object Pipelining reduces web response time by enabling the simultaneous
     retrieval of multiple objects on a page.

  .  Adaptive Probabilistic Refresh improves content freshness without
     sacrificing response time by tracking and checking content freshness,
     independently of user requests, based on the probability that the
     content will be requested and the probability that the content has
     changed.

  .  Value-based Deletion reduces web response time and improves network
     efficiency by deleting excess content stored in the cache, based on the
     probability that the content will be requested and the time required to
     retrieve that content.

  .  Security is enhanced because CacheOS is a specialized, internally-
     developed operating system, which is designed to be less vulnerable to
     unauthorized entry than caches based on more commonly understood,
     general purpose operating systems. In addition, CacheOS enhances cache
     management security for network administrators.

  .  Transparent and Proxy Mode Support provides administrators with
     increased deployment flexibility by allowing CacheOS to simultaneously
     service direct requests from client browsers and redirected requests
     from routers or Layer 4 switches.

  .  Filtering prevents viewing of restricted content and provides increased
     security by allowing administrators to control the content that users
     can access.

  .  Authentication prevents unauthorized access to the cache and increases
     security by requiring users to identify themselves and verifying access
     privileges before granting users access to the cache.

  .  Easy Installation and Maintenance. CacheOS installs quickly and easily
     into customers' networks and is easy-to-maintain, is reliable and has a
     low cost of ownership.

Customers and Applications

   We began commercial shipment of our first Internet caching appliances in
May 1998 and, as of August 31, 1999, we had approximately 100 customers and
575 installations. Our customers include both large and small ISPs, as well as
enterprises. We sell our products both domestically and internationally. Net
sales from international operations were $3.1 million, or approximately 44% of
net sales, for the fiscal year ended April 30, 1999, and $1.7 million, or
approximately 48% of net sales, for the quarter ended July 31, 1999.

                                      37
<PAGE>

   The following end-user customers and resellers have purchased or leased
over $50,000 of our products:

<TABLE>
<CAPTION>
Internet Service Providers      Enterprises                    Resellers
--------------------------      -----------------              ---------------
<S>                             <C>                            <C>
Clear Communications            Delta Airlines                 BTN Internetworking
Datacom Caribe                  Force 3                        Colt Telecom
germany.net                     Goldman Sachs                  Dynavar Networking
Global One Communications       Hewlett-Packard                Lidcam Technology
Helsinki Telephone              Hughes Network Systems         Lucent Technologies
Infonie                         Lucent Technologies            Nissho Electronics
MTS Advanced                    Xerox                          Phitech
Road Runner                                                    Solunet
Servint Corp. Internet Services                                Stark Technology
Swisscom                                                       Sumitronics

</TABLE>

   For the year ended April 30, 1999, Sumitronics, Global One Communications
and Nissho Electronics each accounted for over ten percent of our net sales,
for an aggregate of approximately 33% of our net sales. For the quarter ended
July 31, 1999, Road Runner and Global One Communications each accounted for
over ten percent of our net sales, for an aggregate of approximately 22% of
our net sales.

   Customers have purchased and used our products for a variety of different
applications. ISPs typically use our products to help meet the performance
potential of broadband technology, to achieve bandwidth savings and to gain
efficiencies in web and applications hosting. Enterprises typically use our
products for handling e-commerce related traffic and as a replacement for
proxy servers. The following are our principal target markets:

   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 and e-
commerce servers, 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.

   Customer Case Study: Delta Airlines. Delta Airlines, a leading worldwide
airline company, was looking for a solution to scale the performance of its
online travel service. Delta wanted to increase capacity for special
promotions, offer surge protection against peak traffic loads, and accommodate
an overall increase in usage of its e-commerce site without sacrificing
performance, manageability or control. Delta contemplated deploying additional
web servers and firewalls, but instead chose our Internet caching appliances.
Because of the level of security afforded by our proprietary operating system,
Delta was able to deploy our products outside its corporate firewall and in
front of its web site. By servicing user requests for content outside the
firewall, our products were able to reduce traffic on the servers, firewall
and intranet, helping to reduce operating costs. As a result, Delta was able
to increase the capacity of its site and improve the response time and content
freshness, without the need for additional firewalls or web servers. According
to Delta, approximately 92% of user requests for content from Delta's web site
are now being served from our products.

   Bandwidth Savings

   As the Internet has evolved as a network for shared data, content has
become accessible to end users throughout the world. In many cases, this
content does not originate from web sites located near the user requesting the
information, resulting in slower response times to end users and significant
bandwidth costs to

                                      38
<PAGE>

ISPs. Because most Internet content originates in the United States, these
issues are particularly acute for international users.

   Customer Case Study: germany.net. germany.net, a large ISP in Germany,
needed a way to meet growing customer demand for faster access to the
Internet. germany.net found that much of the content its customers were
accessing was hosted on web servers located outside of Germany, resulting in
increasingly slow response times and high bandwidth costs. At the same time,
germany.net wanted to minimize its operating costs. germany.net had been
running cache software on Unix servers, which required daily maintenance. To
improve quality of service for existing customers and provide the
infrastructure to scale with new customer additions, while preserving valuable
bandwidth, germany.net deployed our Internet caching appliances. They reported
an immediate improvement in performance, including web sites where content was
being requested for the first time. Because our products request all objects
on a particular web site simultaneously, the host web server does not need to
be re-contacted each time a separate object is requested, enabling germany.net
to deliver noticeably reduced response times for its customers.

   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 bandwidth and
performance. Proxy servers offering user authentication and filtering
capabilities were originally put into networks to 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.

   Customer Case Study: Xerox. Xerox, a global leader in the document
processing business, was experiencing significant growth in the amount of data
traffic over its network, and wanted to enhance its ability to deliver
critical web-based data to its employees in a timely manner. Increasing
intranet and Internet usage by Xerox employees worldwide was resulting in
congestion in its network and slower response times for its employees. This
problem was compounded by the fact that Xerox was transporting several
terabytes of information every day. Recognizing that the moving and sharing of
data was critical in enhancing employee productivity, both at corporate
headquarters and among remote offices, Xerox needed a reliable solution that
would scale with its employees' growing usage and would enable it to better
manage traffic over its network. Xerox chose our Internet caching appliances
to accomplish these objectives. By placing our caching appliances between
their intranet and the Internet, Xerox was able to offload many of the
requests that otherwise would have been routed to its proxy servers. According
to Xerox, it has experienced immediate and significant productivity gains as
well as significant improvements in bandwidth efficiency and response time.

   Broadband

   Broadband ISPs offer high-speed Internet access, enabling the delivery of a
wide range of new content and the ability to make the Internet a truly
interactive medium. However, faster access speeds do not necessarily result in
significantly faster response time due to the distance, congestion and latency
of the Internet itself. Customer expectation of high-speed Internet access
remains largely unfulfilled, posing a challenge for broadband ISPs competing
to attract and retain customers.

   Customer Case Study: Road Runner. Road Runner, a leading provider of high-
speed Internet service delivered over cable infrastructure, was looking for
product solutions to enhance network performance. Because the broadband market
is viewed as new and highly competitive, it was critical for Road Runner to
continue to deliver high-quality service in order to attract new customers and
retain existing customers. In addition, Road

                                      39
<PAGE>

Runner wanted to ensure a high level of performance for the web content that
Road Runner itself hosts. Road Runner also required a network infrastructure
product that was reliable and would enable them to scale with their growing
customer base. At the same time, Road Runner sought a product solution that
was easy to configure and deploy, and that was secure. As a result, Road
Runner chose our Internet caching appliances. According to Road Runner, the
speed of our appliances has helped Road Runner attract world-class content
providers and because Road Runner has been able to redirect much of its
traffic through our appliances, response time for its customers has improved
significantly.

Technology

   CacheFlow's Internet caching appliances are high-performance, self-tuning
systems that are easy to install and manage and are produced in a variety of
storage configurations. At the core of our technology is our proprietary
special-purpose operating system, CacheOS, which we created specifically to be
the foundation for a family of high-performance Internet caching appliances.
CacheOS is designed to enable our wide range of products, from small shared
caches to very large caches, to manage and accelerate the delivery of Internet
content. Our appliances' high performance, ease of installation and
management, security, and ability to deliver fresh content are made possible
by certain proprietary technologies.

   Efficient, Purpose-Built Operating System. CacheOS is designed to be faster
and more reliable than a general-purpose operating system. At the core of
CacheOS is a high-performance multitasking kernel that provides sub-
microsecond inter-process message passing. CacheOS operates at higher speeds
because it does not have the overhead of providing the general-purpose
services of a standard operating system, such as virtual memory, multiple
address spaces and memory protection. CacheOS uses a high-performance TCP/IP
stack based on the Berkeley Net/3 stack with modifications that support high
connection rates, fast recovery of lost packets and minimal data copying.
CacheOS is designed to be less vulnerable to security attacks than caches
based on more commonly understood, general-purpose operating systems such as
Windows NT, UNIX or NetWare. CacheOS can be remotely managed and monitored
using a Java-enabled browser or through a command-line interface. In addition,
geographically distributed caches can be centrally administered using custom-
designed scripts. CacheOS can be configured to automatically send e-mail
alerts and important operational statistics. New releases of CacheOS software
can be installed remotely over the network, with only a minimal interruption
of service. Additionally, CacheOS is designed to provide high availability. In
the event of a system failure, CacheOS detects the failure and is generally
able to restart in less than 20 seconds. If the appliance experiences a power
outage, it automatically restarts and becomes operational within a few
minutes.

   Web Object Storage System. CacheOS uses a high-performance specialized
object storage system designed specifically for storing and retrieving web
objects on disk. The method of storing objects on disk is critical for
achieving high performance with a large number of users. It determines how
quickly a cached object can be accessed when a client requests it, how rapidly
new objects can be acquired from the origin web server and the rate at which
client requests can be serviced. The web object storage system is an object
cache. A relatively small number of objects, such as system code,
configuration objects and log files, are stored on each disk within the cache.
These objects are stored on multiple disks to achieve fault tolerance. All
other stored objects are stored in such a way that they can be removed to
create space for new, incoming objects. The object cache is not a file system,
and uses no directories. Objects are located on disk using an efficient hash
table in RAM that ensures that any object can be accessed in a single disk
read. This design results in higher object throughput on each disk and better
response time.

   Object Pipelining. CacheOS uses a technology known as object pipelining to
speed the delivery of web content, even when it is not stored in the cache.
This technology improves web page response time and reduces page load times.
Without object pipelining, web browsers request embedded objects serially, a
few at a time. Pipelining reduces web page download times by retrieving all
web page objects from the origin web server simultaneously and in parallel.

                                      40
<PAGE>

   Adaptive Probabilistic Refresh. CacheOS utilizes asynchronous refresh
checks, which means that refresh checks are performed without increasing
response time for client requests. Thus, the delivery of web content is not
delayed by a "freshness" check of the content at the origin server prior to
delivery. CacheOS uses adaptive object refresh algorithms, which increase the
likelihood that objects being served from the cache are fresh. These
algorithms adapt to determine how often objects change and how popular each
object is. Because the cache actively maintains the freshness of its objects,
end users receive up-to-date web content with fast response times.

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 Lucent Technologies, Nissho Electronics
and Sumitronics. 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 been expanding our sales force
rapidly, and, as of August 31, 1999, we employed 69 persons in sales,
marketing and customer support.

   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. 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. As of August 31, 1999, we employed 36 persons in research and
development.

   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

  .  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 developed internally. However, we currently license certain
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 certain printed
circuit boards, custom power supplies, chassis, cables and

                                      41
<PAGE>

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 leverage 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 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. As of August 31, 1999, we employed 7 persons in
manufacturing.

Competition

   The market for Internet caching solutions is intensely competitive,
evolving and subject to rapid technological change. Our competitors vary in
size and in the scope and breadth of the products and services they offer. Our
competitors' solutions are generally based on a hardware appliance, public
domain software or proprietary software. We primarily encounter competition
from Cisco Systems, Inktomi, Network Appliance, Novell and various others
using public domain software. In addition, because there are relatively low
barriers to entry in the Internet market, we expect additional competition
from other established and emerging companies as the market for Internet
caching continues to develop and expand.

   We believe that the principal competitive factors affecting our market are
product quality and performance, product features, ability to implement
solutions and customer service. We also believe that solutions specifically
designed for Internet caching have a competitive advantage over solutions that
are derived from products designed for other uses. Although we believe that
our products currently compete favorably with respect to these factors we may
not be able to maintain our competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.

Intellectual Property and Other Proprietary Rights

   We depend significantly on our ability to develop and maintain the
proprietary aspects of our technology. To protect our proprietary technology,
we rely primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, copyright and trademark laws and patents. Despite
our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to 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 currently have four United States patent applications on file and
pending before the United States Patent and Trademark Office. We also
currently have four PCT International Applications on file to reserve rights
in foreign jurisdictions under appropriate international treaties.

   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 such patent will be enforceable or that any damages awarded to us will be
sufficient to adequately compensate us.

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

                                      42
<PAGE>

   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 such
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.

   CacheFlow is a registered trademark in the United States. We also have
filed applications to register the following trademarks in the United States:
"CacheOS," "Content Aware Network Aware," "Content Aware," "Network Aware,"
"Accelerating the Intranet," "Accelerating the Web" and "Internet
Accelerator." The above mentioned trademark applications are subject to review
by the United States Patent and Trademark Office, may be opposed by private
parties and may not issue.

Litigation

   On September 16, 1999, Nokia IP filed a lawsuit in Santa Clara County
Superior Court naming CacheFlow Inc., Brian NeSmith, our President and Chief
Executive Officer and a director, and Alan Robin, our Senior Vice President of
Sales, as defendants. Messrs. NeSmith and Robin were officers and employees of
Ipsilon Networks, Inc., which was acquired by Nokia in December 1997.
Following the acquisition, Messrs. NeSmith and Robin became employees of
Nokia. Nokia's allegations against us include misappropriation of trade
secrets, unfair competition and inducing breach of contract. Nokia's
allegations against Messrs. NeSmith and Robin include breach of contract,
misappropriation of trade secrets and unfair competition and, with respect to
Mr. Robin only, breach of fiduciary duty. Nokia's claims are based upon
Nokia's allegation that Mr. NeSmith has violated a non-competition and non-
solicitation provision contained in his employment agreement with Nokia and
that Mr. Robin has violated a non-solicitation obligation to Nokia. Nokia is
seeking compensatory and punitive damages, a decree that the defendants'
alleged acts were and are unfair acts of competition, orders restraining and
enjoining the defendants from disclosing or using Nokia's trade secrets or
confidential and proprietary information and acting in a manner that violates
Messrs. NeSmith's and Robin's contractual and fiduciary duties to Nokia,
attorneys' fees and other specified damages. This litigation was only recently
filed and we are presently evaluating these claims. We and the other
defendants believe that there are meritorious defenses to the asserted claims
and intend to defend the litigation vigorously. However, the outcome of
litigation is inherently unpredictable and the results of the litigation may
not be favorable to us or the other defendants. In such case, our business
could be seriously harmed. Regardless of the ultimate outcome, the litigation
could result in substantial expense to us and significant diversion of effort
by our managerial and other personnel.

Employees

   As of August 31, 1999, we had a total of 126 employees, including 36 in
research and development, 69 in sales, marketing and customer support, 7 in
manufacturing and 14 in general and administrative. Of these employees, 111
were located in North America with 15 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.

                                      43
<PAGE>

   Our future operating results depend significantly upon the continued
service of our key technical, sales and senior management personnel, none of
whom is 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 such qualified
personnel.

Facilities

   We lease approximately 39,000 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 nine
metropolitan areas in North America as well as Dusseldorf, London, Stockholm,
Sydney, Taipei and Tokyo.

                                      44
<PAGE>

                                  MANAGEMENT

Executive Officers and Directors

   Our executive officers and directors and their ages as of August 31, 1999,
are as follows:

<TABLE>
<CAPTION>
Name                     Age Position
----                     --- --------
<S>                      <C> <C>
Brian M. NeSmith........  37 President and Chief Executive Officer, Director
Michael A. Malcolm......  54 Chairman of the Board, Director
Stuart G. Aaron.........  29 Vice President, Marketing and Product Management
Douglas A. Crow.........  38 Vice President, Product Development
Michael J. Johnson......  46 Vice President, Chief Financial Officer and Secretary
Ray G. Myers............  64 Vice President, Manufacturing
Terry L. Printy.........  44 Vice President, Customer Support
Alan L. Robin...........  43 Senior Vice President, Sales
Ian Telford.............  58 President of CacheFlow Canada
Rangaswamy Vasudevan....  49 Chief Technology Officer
William S. Warner.......  40 Vice President, Business Development
David W. Hanna(2).......  60 Director
Stuart G.
 Phillips(1)(2).........  41 Director
Andrew S. Rachleff(1)...  40 Director
</TABLE>
--------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee

   Brian NeSmith 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.

   Michael Malcolm has served as Chairman of the board of directors of
CacheFlow since March 1996. From June 1997 to December 1998, Mr. Malcolm also
served as President and Chief Executive Officer of CacheFlow. From April 1992
to October 1994, Mr. Malcolm served as President and Chief Executive Officer
of Network Appliance Inc., a network filer company. Mr. Malcolm holds a B.S.
in mechanical engineering from the University of Denver and M.A. and Ph.D.
degrees in computer science from Stanford University.

   Stuart Aaron has served as Vice President of Marketing and Product
Management of CacheFlow since April 1999. From July 1993 to April 1999, Mr.
Aaron held several marketing and product management positions at Newbridge
Networks Corporation, a networking equipment manufacturer. Prior to that time,
Mr. Aaron worked as an industry analyst with the Network Strategies Practice
of Ernst & Young LLP where he specialized in Internetworking and Network
Management. Mr. Aaron holds a B.S. in electrical engineering from Cornell
University.

   Douglas Crow has served as Vice President of Product Development of
CacheFlow since May 1996. From June 1992 to May 1996, Mr. Crow served as
Development Manager of Wall Data Inc., a host connectivity software company.
Mr. Crow holds a B.S. in computer science from the University of Washington.

   Michael Johnson 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.


                                      45
<PAGE>

   Ray Myers has served as Vice President of Manufacturing of CacheFlow since
October 1997. From May 1993 to April 1996, Mr. Myers served as Vice President
of Manufacturing of Network Appliance Inc., a network filer company. Mr. Myers
holds a B.S. in physics from Colorado College and a B.S. in business finance
from San Jose State University.

   Terry Printy has served as Vice President of Customer Support of CacheFlow
since June 1999. From January 1999 to May 1999, Mr. Printy served as Vice
President of Worldwide Services of Nokia IP, Inc., a security router company.
From October 1990 to April 1998, Mr. Printy served as Vice President and
General Manager of Worldwide Service at Network General Corporation, a
protocol analysis company.

   Alan Robin 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.

   Ian Telford has served as President of CacheFlow Canada since May 1, 1999.
From March 1995 to April 1999, Mr. Telford served as Chief Executive Officer
of Scaleable Software Solutions, Inc., a company he co-founded that
specializes in operating system and file development. From December 1983 to
January 1991, Mr. Telford held a variety of positions at Waterloo Microsystems
Inc., a software company specializing in the production of PC Network
Operating Systems, and then at Hayes Microcomputer Products (Canada) Limited,
which acquired the assets of Waterloo Microsystems in January of 1991. Mr.
Telford holds a B.S. in industrial chemistry from The City University, London,
England.

   Rangaswamy Vasudevan has served as Chief Technology Officer of CacheFlow
since August 1997. From April 1989 to July 1997, Mr. Vasudevan served as a
Senior Engineer and a Sun Distinguished Engineer at Sun Microsystems, Inc., a
manufacturer of network computing equipment. Mr. Vasudevan holds a Bachelor of
Technology in electrical engineering from the Indian Institute of Technology
and a Ph.D. in computer science from the University of Waterloo.

   William Warner has served as Vice President of Business Development of
CacheFlow since August 1999. He also served as Vice President of Sales at
CacheFlow from September 1997 to August 1999. From March 1987 to April 1997,
Mr. Warner served as Director of the Telecommunications Industry Group of
Silicon Graphics, Inc., a manufacturer of computer equipment. Mr. Warner holds
a B.S. in political science and business from the University of Kansas.

   David Hanna has served as a director of CacheFlow since October 1996. From
December 1998 to March 1999, Mr. Hanna also served as our President and Chief
Executive Officer. Since March 1998, Mr. Hanna has served as President and
Chief Executive Officer of Sage Software, Inc., a financial software company.
Mr. Hanna served as President and Chief Executive Officer of State of The Art,
Inc., a financial software developer, from November 1993 until March 1998. Mr.
Hanna currently serves as President of The Hanna Group, which provides
operational and strategic consulting to both small, high-tech companies and to
larger organizations requiring growth restoration and restructuring. In
addition, Mr. Hanna serves as Chairman of Hanna Capital Management Inc., which
provides financial management services to high-net-worth individuals. He is
Chief Executive Officer of Hanna Ventures, which invests in networking,
communications, and internet/intranet companies. Mr. Hanna also serves on the
boards of directors of several privately held companies. Mr. Hanna holds a
B.S. in business administration from the University of Arizona.

   Stuart Phillips has served as a director of CacheFlow since January 1997.
Since June 1997, Mr. Phillips has been a General Partner at U.S. Venture
Partners, a venture capital firm. From October 1993 to June 1997, Mr. Phillips
served as Vice President of Central Engineering at Cisco Systems Inc., an
internetworking company. Mr. Phillips also serves on the boards of directors
of several privately held companies. He holds a B.S. in electronics from the
University of Wales at Cardiff, U.K.

                                      46
<PAGE>

   Andrew Rachleff has served as a director of CacheFlow since October 1997.
In May 1995, Mr. Rachleff co-founded Benchmark Capital, a venture capital
firm, and has served as a general partner since that time. Prior to co-
founding Benchmark Capital, Mr. Rachleff spent ten years as a general partner
with Merrill, Pickard, Anderson & Eyre, a venture capital firm. Mr. Rachleff
also serves on the boards of directors of NorthPoint Communications Group,
Inc., a competitive local exchange carrier, and several privately held
companies. Mr Rachleff holds a B.S. in economics from the University of
Pennsylvania and an M.B.A. from Stanford University.

Board of Directors

   CacheFlow currently has authorized five directors. Each director holds
office until the next annual meeting of stockholders or until his or her
successor is duly elected and qualified. The officers serve at the discretion
of the board. There are no family relationships among the directors and
officers of CacheFlow.

Board Committees

  The audit committee consists of Stuart Phillips and Andrew Rachleff. The
audit committee makes recommendations to the board of directors regarding the
selection of independent accountants, reviews the results and scope of audit
and other services provided by our independent accountants and reviews and
evaluates the our audit and control functions.

   The compensation committee consists of David Hanna and Stuart Phillips. The
compensation committee makes recommendations regarding our stock plans and
makes decisions concerning salaries and incentive compensation for our
employees and consultants.

Compensation Committee Interlocks and Insider Participation

   No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee.

Director Compensation

   Directors currently do not receive any cash compensation from CacheFlow for
their services as members of the board of directors, although members are
reimbursed for expenses in connection with attendance at board of directors
and committee meetings. Directors are eligible to participate in CacheFlow's
stock plans, and beginning in 1999, employee directors will also be able to
participate in CacheFlow's 1999 Stock Incentive Plan and non-employee
directors will receive periodic option grants under CacheFlow's 1999 Director
Option Plan. See "Management--1999 Stock Incentive Plan" and "--1999 Director
Option Plan."

   Options were granted during the fiscal year to Messrs. Hanna and Malcolm
and those options are disclosed in the table below entitled Option Grants in
Last Fiscal Year.

                                      47
<PAGE>

Executive Compensation

   The following table sets forth information with respect to compensation for
the fiscal year ended April 30, 1999 paid by us for services by each of the
individuals who served as our Chief Executive Officer during the fiscal year,
Mr. Hanna, who served as our Chief Executive Officer from December 11, 1998 to
March 2, 1999, and each of the four other executive officers whose total
salary and bonuses for the fiscal year exceeded $100,000, collectively
referred to as the Named Executive Officers:

                          Summary Compensation Table

<TABLE>
<CAPTION>
                                                                   Long-Term
                                                                  Compensation
                                                                     Awards
                                                                  ------------
                                                      Annual
                                                   Compensation    Securities
                                                 ----------------  Underlying
Name and Principal Position                       Salary   Bonus    Options
---------------------------                      -------- ------- ------------
<S>                                              <C>      <C>     <C>
Brian M. NeSmith, President and Chief Executive
 Officer........................................ $  8,978 $    --  2,000,000
Michael A. Malcolm, Chairman....................  197,854      --  1,000,000
Douglas A. Crow, Vice President, Product
 Development....................................  133,626      --         --
David Hanna, Director (1).......................   21,708      --    250,000
Kelly Herrell, Former Vice President,
 Marketing......................................  148,765      --         --
Rangaswamy Vasudevan, Chief Technical Officer...  149,907      --         --
William S. Warner, Vice President, Business
 Development....................................  149,889  40,000         --
</TABLE>
--------
(1) Consulting fees were paid to Hanna Group for services rendered by Mr.
    Hanna.

Option Grants in Last Fiscal Year

   The following table sets forth each grant of stock options during the
fiscal year ended April 30, 1999 to each of the Named Executive Officers. We
have not granted stock appreciation rights. Each of the options listed in the
table is immediately exercisable. The shares purchasable thereunder are
subject to repurchase by CacheFlow at the original exercise price paid per
share upon the optionee's cessation of service prior to vesting in such
shares. For Mr. Malcolm, the repurchase right on half of his option shares
lapses and he vests as to these option shares in a series of 36 equal monthly
installments from October 14, 1998. The repurchase right on the second half of
his options lapses and he vests as to these option shares in a series of six
equal monthly installments from October 14, 1998. For Mr. NeSmith, the
repurchase right on his option lapses and he vests as to 25% of the option
shares upon completion of one year of service from the date of grant and the
balance in a series of equal monthly installments over the next 36 months of
service thereafter. In addition, he vests in an additional 25% of the option
shares upon a merger and certain other corporate transactions.

   We have calculated the percentage of total options granted to employees
based on an aggregate of 5,371,400 options granted to our employees during the
12 months ended April 30, 1999. The exercise price for each option was equal
to the fair market value of our common stock as determined by our board of
directors on the date of grant. The exercise price may be paid in cash, in
shares of our common stock valued at fair market value on the exercise date or
through a cashless exercise procedure involving a same-day sale of the
purchased shares. We may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by the
optionee in connection with such exercise.

   We have calculated the potential realizable value based on the term of the
option at the time of grant (ten years) and we assumed stock price
appreciation of 5% and 10% is assumed pursuant to rules promulgated by the
Securities and Exchange Commission; this does not represent our prediction of
our stock price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the exercise price on the date of
grant appreciates at the indicated rate for the entire term of the option and
that the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.

                                      48
<PAGE>

<TABLE>
<CAPTION>
                                       Individual Grants
                         ----------------------------------------------
                                                                          Potential Realizable
                                                                            Value at Assumed
                         Number of    % of Total                             Annual Rates of
                         Securities     Options     Exercise            Stock Price Appreciation
                         Underlying     Granted      Price                   for Option Term
                          Options   to Employees in   Per    Expiration -------------------------
Name                      Granted     Fiscal Year    Share      Date        5%           10%
----                     ---------- --------------- -------- ---------- ----------- -------------
<S>                      <C>        <C>             <C>      <C>        <C>         <C>
Brian M. NeSmith........ 2,000,000       37.0%        $.50      3/1/09  $   628,895 $   1,593,742
Michael A. Malcolm...... 1,000,000       18.4          .50    10/13/08      314,448       796,872
Douglas A. Crow.........       --         --           --          --           --            --
David Hanna.............   250,000        4.6          .50      3/1/09       78,612       199,218
Kelly Herrell...........       --         --           --          --           --            --
Rangaswamy Vasudevan....       --         --           --          --           --            --
William S. Warner.......       --         --           --          --           --            --
</TABLE>

   In addition to the options listed above, on July 26, 1999, Mr. Johnson, our
Vice President and Chief Financial Officer, received an option to purchase
250,000 shares and an option to purchase 65,000 shares at an exercise price of
$2.00 per share. On July 26, 1999, Mr. Robin, our Senior Vice President of
Sales, received an option to purchase 250,000 shares and an option to purchase
222,000 shares at an exercise price of $2.00 per share. On June 21, 1999, Mr.
Printy, our Vice President of Customer Support, received an option to purchase
75,000 shares at an exercise price of $2.00 per share. On August 27, 1999, we
granted options to Mr. Crow for 240,000 shares, Mr. Telford for 123,000
shares, and Mr. Printy for 37,500 shares at an exercise price of $4.00 per
share. On September 27, 1999, we granted an option to Mr. NeSmith for 200,000
shares at an exercise price of $5.50 per share. All of these options are
immediately exercisable and the shares purchasable thereunder are subject to
repurchase by us at the original exercise price paid per share upon the
optionee's cessation of service prior to vesting in such shares. The
repurchase right lapses as to 25% of the option shares upon completion of one
year of service from the date of grant and the balance in a series of equal
monthly installments over the next 36 months of service thereafter, except
that the option granted to Mr. Crow and certain of the options granted to Mr.
Telford begin to vest in 2000 or 2001.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

   The following table sets forth for each of the Named Executive Officers the
number of options exercised during the fiscal year ended April 30, 1999 and
the number and value of securities underlying unexercised options that are
held by the Named Executive Officers as of April 30, 1999. With respect to
options exercised, value realized refers to the fair market value of the
purchased shares on the option exercise date, less the exercise price paid for
such shares. Since our options are immediately exercisable at grant, any
shares purchased under those options will be subject to repurchase by us, at
the original exercise price paid per share, upon the optionee's cessation of
service with CacheFlow, prior to vesting in such shares. Accordingly, we have
chosen to report the number of the underlying shares that are vested and the
number unvested as of April 30, 1999. The heading "Vested" refers to shares no
longer subject to repurchase; the heading "Unvested" refers to shares subject
to repurchase as of April 30, 1999. Our board of directors determined that the
fair market value of our common stock on April 30, 1999 was $1.00 per share.
<TABLE>
<CAPTION>
                                                                            Value of
                                                    Number of             Unexercised
                                              Securities Underlying       in-the-Money
                                               Unexercised Options         Options at
                           Shares               at April 30, 1999        April 30, 1999
                         Acquired on  Value   ------------------------  ----------------
Name                      Exercise   Realized  Vested       Unvested    Vested  Unvested
----                     ----------- -------- ------------ -----------  ------- --------
<S>                      <C>         <C>      <C>          <C>          <C>     <C>
Brian M. NeSmith........  2,000,000  $   --            --          --   $   --  $   --
Michael A. Malcolm......        --       --            --          --       --      --
Douglas A. Crow.........        --       --         20,000         --    15,000     --
David Hanna.............    250,000      --            --          --       --      --
Kelly Herrell...........    490,000   85,750           --          --       --      --
Rangaswamy Vasudevan....    470,000   82,250           --          --       --      --
William S. Warner.......    490,000   85,750           --          --       --      --
</TABLE>


                                      49
<PAGE>

Change of Control Arrangements

   The compensation committee of the board of directors, as plan administrator
of the 1999 Stock Incentive Plan, has the authority to provide for accelerated
vesting of the shares of common stock subject to outstanding options held by
the Named Executive Officers and any other person in connection with certain
changes in control of CacheFlow. In connection with our adoption of the 1999
Stock Incentive Plan, we have provided that upon a change in control of
CacheFlow, each outstanding option and all shares of restricted stock will
generally become fully vested unless the surviving corporation assumes the
option or award or replaces it with a comparable award. In addition, an option
or award will become fully exercisable and fully vested if the holder's
employment or service is involuntarily terminated within 18 months following
the change in control.

   Except for Mr. NeSmith, Mr. Johnson, and Mr. Robin, none of the Named
Executive Officers has an employment agreement with CacheFlow, and their
employment may be terminated at any time. CacheFlow has entered into an
agreement with Mr. NeSmith, dated February 24, 1999 which provides that his
salary shall be $175,000 per year. The agreement provides for the grant of an
option to Mr. NeSmith to purchase shares of our common stock at the fair
market value on the grant date. The agreement also provides that we will
extend a loan to Mr. NeSmith of up to $800,000. The agreement also provides
for acceleration of vesting of option shares as if Mr. NeSmith remained
employed for one additional year in the event of certain changes in control of
CacheFlow.

   We have entered into an agreement with Mr. Johnson, our Vice President and
Chief Financial Officer, dated June 4, 1999 which provides that his salary
shall be $170,000 per year. The agreement provides for the grant of an option
to Mr. Johnson to purchase shares of common stock at the fair market value on
the grant date. The agreement also provides for acceleration of vesting of
option shares as if Mr. Johnson remained employed for one additional year in
the event that he is not offered the same or similar position following
certain changes in control of CacheFlow.

   CacheFlow has entered into an agreement with Mr. Robin, our Senior Vice
President of Sales, dated July 12, 1999 which provides for a salary of
$150,000 per year and a target commission of up to $125,000 per year. Under
the agreement, he is also eligible for cash bonuses of $200,000 each payable
60 days after his start date and on August 1, 2000. The agreement provides for
the grant of an option to Mr. Robin to purchase shares of our common stock at
the fair market value on the grant date. The agreement also provides for
payment of severance pay in the amount of six months base salary plus bonus in
the event that Mr. Robin's employment is terminated without cause. The
agreement also provides for acceleration of vesting of option shares as if Mr.
Robin remained employed for one additional year in the event that his
employment is terminated without cause; after three years of employment,
vesting acceleration declines by one month for each month of service and does
not apply after four years of employment. The agreement also provides for
acceleration of vesting of option shares as if Mr. Robin remained employed for
one additional year in the event that he is not offered the same or similar
position following certain changes in control of CacheFlow.

1999 Stock Incentive Plan

   Share Reserve. Our board of directors adopted our 1999 Stock Incentive Plan
on September 24, 1999 to be effective on the effective date of this offering.
We also intend to ask our stockholders to approve this plan. We have reserved
5,000,000 shares of our common stock for issuance under the 1999 Stock
Incentive Plan. This includes any shares not yet issued under our 1996 Stock
Option Plan on the date of this offering which will be available only under
the 1999 Stock Incentive Plan after this offering. On January 1 of each year,
starting with the year 2000, the number of shares in the reserve will
automatically increase by 5% of the total number of shares of common stock
that are outstanding at that time or, if less, by 2,000,000 shares. In
general, if options or shares awarded under the 1999 Stock Incentive Plan or
the 1996 Stock Option Plan are forfeited, then those options or shares will
again become available for awards under the 1999 Stock Incentive Plan. We have
not yet granted any options under the 1999 Stock Incentive Plan.

   Outstanding options under the 1996 Stock Option Plan will be incorporated
into the 1999 Stock Incentive Plan at the time of this offering and no further
option grants will be made under the 1996 Stock Option Plan.

                                      50
<PAGE>

The incorporated options will continue to be governed by their existing terms,
unless the Board elects to extend one or more features of the 1999 Stock
Incentive Plan to those options or to other outstanding shares. The Board has
elected to extend the change in control acceleration feature of the 1999 Stock
Incentive Plan to all outstanding options and unvested shares. Previously,
options granted under the 1996 Stock Option Plan provided that vesting of the
shares would accelerate upon an acquisition only if not assumed by the
acquiring entity.

   Administration. The compensation committee of our board of directors
administers the 1999 Stock Incentive Plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operation
of our 1999 Stock Incentive Plan. The committee has the discretion to
determine who will receive an award, what type of award it will be, how many
shares will be covered by the award, what the vesting requirements will be (if
any), and what the other features and conditions of each award will be. The
compensation committee may also reprice outstanding options and modify
outstanding awards in other ways.

   Eligibility. The following groups of individuals are eligible to
participate in the 1999 Stock Incentive Plan:

  .  employees;

  .  members of our board of directors who are not employees; and

  .  consultants.

   Types of Award. The 1999 Stock Incentive Plan provides for the following
types of award:

  .  incentive stock options to purchase shares of our common stock;

  .  nonstatutory stock options to purchase shares of our common stock;

  .  restricted shares of our common stock;

  .  stock appreciation rights and stock units.

   Options and Stock Appreciation Rights. An optionee who exercises an
incentive stock option may qualify for favorable tax treatment under Section
422 of the Internal Revenue Code of 1986. On the other hand, nonstatutory
stock options do not qualify for such favorable tax treatment. The exercise
price for incentive stock options granted under the 1999 Stock Incentive Plan
may not be less than 100% of the fair market value of our common stock on the
option grant date. In the case of nonstatutory stock options, the minimum
exercise price is 85% of the fair market value of our common stock on the
option grant date. Optionees may pay the exercise price by using:

  .  cash;

  .  shares of common stock that the optionee already owns;

  .  a full-recourse promissory note, except that the par value of newly
     issued shares must be paid in cash;

  .  an immediate sale of the option shares through a broker designated by
     us; or

  .  a loan from a broker designated by us, secured by the option shares.

   A participant who exercises a stock appreciation right shall receive the
increase in value of our common stock over the base price. The base price for
stock appreciation rights granted under the 1999 Stock Incentive Plan shall be
determined by the compensation committee. The settlement value of the stock
appreciation right may be paid in cash or shares of common stock.

   Options and stock appreciation rights vest at the time or times determined
by the compensation committee. In most cases, our options and stock
appreciation rights will vest over a four-year period following the date of
grant. Options and stock appreciation rights generally expire 10 years after
they are granted. The Compensation Committee may provide for a longer term
except that options and stock appreciation rights generally expire earlier if
the participant's service terminates earlier. The 1999 Stock Incentive Plan
provides that no participant

                                      51
<PAGE>

may receive options or stock appreciation rights covering more than 1,500,000
shares in the same year, except that a newly hired employee may receive
options or stock appreciation rights covering up to 2,000,000 shares in the
first year of employment.

   Restricted Shares. Restricted shares may be awarded under the 1999 Stock
Incentive Plan in return for:

  .  cash;

  .  a full-recourse promissory note, except that the par value of newly
     issued shares must be paid in cash;

  .  services already provided to us; and

  .  in the case of treasury shares only, services to be provided to us in
     the future.

   Restricted shares vest at the time or times determined by the compensation
committee. Stock units may be awarded under the 1999 Stock Incentive Plan. No
cash consideration shall be required of the award recipients. Stock units may
be granted in consideration of a reduction in the recipient's other
compensation or in consideration of services rendered. Each award of stock
units may or may not be subject to vesting and vesting, if any, shall occur
upon satisfaction of the conditions specified by the compensation committee.
Settlement of vested stock units may be made in the form of cash, shares of
common stock or a combination of both.

   Change in Control. If a change in control of CacheFlow occurs, an option or
restricted stock award under the 1999 Stock Incentive Plan will generally
become fully vested. However, if the surviving corporation assumes the option
or award or replaces it with a comparable award, then vesting will not
accelerate. An option or award will become fully exercisable and fully vested
if the holder's employment or service is involuntarily terminated within 18
months following the change in control. A change in control includes:

  .  a merger of CacheFlow after which our own stockholders own 50% or less
     of the surviving corporation (or its parent company);

  .  a sale of all or substantially all of our assets;

  .  a proxy contest that results in the replacement of more than one-half of
     our directors over a 24-month period; or

  .  an acquisition of 50% or more of our outstanding stock by any person or
     group, other than a person related to CacheFlow (such as a holding
     company owned by our stockholders).

   Amendments or Termination. Our board may amend or terminate the 1999 Stock
Incentive Plan at any time. If our board amends the plan, it does not need to
ask for stockholder approval of the amendment unless applicable law requires
it. The 1999 Stock Incentive Plan will continue in effect indefinitely, unless
the board decides to terminate the plan earlier.

Employee Stock Purchase Plan

   Share Reserve and Administration. Our board of directors adopted our
Employee Stock Purchase Plan on September 24, 1999, to be effective on the
effective date of this offering. We also intend to ask our stockholders to
approve this plan. Our Employee Stock Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code. We have reserved 2,500,000
shares of our common stock for issuance under the plan. In addition, on
January 31 of each year, starting with the year 2000, the number of shares in
the reserve will automatically increase by 500,000 shares or such lesser
number as our board of directors determines. The plan will be administered by
the compensation committee of our board of directors.

   Eligibility. All of our employees are eligible to participate if they are
employed by us for more than 20 hours per week and for more than five months
per year. Eligible employees may begin participating in the Employee Stock
Purchase Plan at the start of any offering period. Each offering period lasts
24 months. Overlapping offering periods start on August 1 and February 1 of
each year. However, the first offering period will start on the effective date
of this offering and end on January 31, 2002.

                                      52
<PAGE>

   Amount of Contributions. Our Employee Stock Purchase Plan permits each
eligible employee to purchase common stock through payroll deductions. Each
employee's payroll deductions may not exceed 15% of the employee's cash
compensation. Purchases of our common stock will occur on July 31 and January
31 of each year. Each participant may purchase up to 2,000 shares on any
purchase date. But the value of the shares purchased in any calendar year
(measured as of the beginning of the applicable offering period) may not
exceed $25,000.

   Purchase Price. The price of each share of common stock purchased under our
Employee Stock Purchase Plan will be 85% of the lower of:

  .  the fair market value per share of common stock on the date immediately
     before the first day of the applicable offering period, or

  .  the fair market value per share of common stock on the purchase date.

   In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:

  .  the price per share to the public in this offering, or

  .  the fair market value per share of common stock on the purchase date.

   Other Provisions. Employees may end their participation in the Employee
Stock Purchase Plan at any time. Participation ends automatically upon
termination of employment with CacheFlow. If a change in control of CacheFlow
occurs, our Employee Stock Purchase Plan will end and shares will be purchased
with the payroll deductions accumulated to date by participating employees,
unless the plan is assumed by the surviving corporation or its parent. Our
board of directors may amend or terminate the Employee Stock Purchase Plan at
any time. Our Chief Executive Officer may also amend the plan in certain
respects. If our board increases the number of shares of common stock reserved
for issuance under the plan (except for the automatic increases described
above), it must seek the approval of our stockholders.

1999 Director Option Plan

   Share Reserve. Our board of directors adopted our 1999 Director Option Plan
on September 24, 1999. The 1999 Director Option Plan became effective on the
date of its adoption. We also intend to ask our stockholders to approve this
plan. We have reserved 500,000 shares of our common stock for issuance under
the plan. In addition, on January 31 of each year, starting with the year
2000, the number of shares in the reserve will automatically increase by
100,000 shares or such lesser number as our board of directors determines. In
general, if options granted under the 1999 Director Option Plan are forfeited,
then those options will again become available for grants under the plan. The
Director Option Plan will be administered by the compensation committee of our
board of directors, although all grants under the plan are automatic and non-
discretionary.

   Initial Grants. Only the non-employee members of our board of directors
will be eligible for option grants under the 1999 Director Option Plan. Each
non-employee director who first joins our board after the effective date of
the 1999 Director Option Plan will receive an initial option for 25,000
shares. For new directors, that grant will occur when the director takes
office. The initial options vest in four equal annual installments over the
four-year period following the date of grant.

   Annual Grants. At the time of each of our annual stockholders' meetings,
beginning in 2000, each non-employee director who will continue to be a
director after that meeting will automatically be granted an annual option for
5,000 shares of our common stock. However, a new non-employee director who is
receiving the initial option will not receive the annual option in the same
calendar year. The annual options are fully vested on the first anniversary of
the date of grant.

   Other Option Terms. The exercise price of each non-employee director's
option will be equal to the fair market value of our common stock on the
option grant date. A director may pay the exercise price by using

                                      53
<PAGE>

cash, shares of common stock that the director already owns, or an immediate
sale of the option shares through a broker designated by us. The non-employee
directors' options have a 10-year term, except that they expire one year after
a director leaves the board (if earlier). If a change in control of CacheFlow
occurs, a non-employee director's option granted under the 1999 Director
Option Plan will become fully vested.

   Amendments or Termination. Our board may amend or terminate the 1999
Director Option Plan at any time. If our board amends the plan, it does not
need to ask for stockholder approval of the amendment unless applicable law
requires it. The 1999 Director Option Plan will continue in effect
indefinitely, unless the board decides to terminate the plan.

                                      54
<PAGE>

                             CERTAIN TRANSACTIONS

   Since our inception on March 13, 1996, we have sold preferred stock to the
following persons who are our principal stockholders, executive officers or
directors.

<TABLE>
<CAPTION>
                                  Shares of       Shares of       Shares of
                                  Series A        Series B        Series C
Investor                       Preferred Stock Preferred Stock Preferred Stock
--------                       --------------- --------------- ---------------
<S>                            <C>             <C>             <C>
Entities affiliated with
 Benchmark Capital ...........    3,222,858         796,462         738,068
Entities affiliated with U.S.
 Venture Partners.............           --       2,654,868         455,622
Entities affiliated with
 Technology Crossover
 Ventures.....................           --              --       1,890,816
Michael A. Malcolm............      777,144         221,240         801,116
Persons and entities
 affiliated with David W.
 Hanna........................      800,002         367,258         209,432
Ray G. Myers..................       75,374              --          43,716
Joseph J. Pruskowski..........       58,572              --              --
</TABLE>

   Shares held by all affiliated persons and entities have been aggregated.
Share numbers and purchase price information are reflected on an as if
converted into shares of common stock basis. See "Principal Stockholders" for
more detail on shares held by these purchasers. The per share purchase price
for the Series A Preferred Stock was $.875. The per share purchase price for
the Series B Preferred Stock was $2.26. The per share purchase price for the
Series C Preferred Stock was $4.575. Andrew S. Rachleff, one of our directors,
is an affiliate of each of the entities affiliated with Benchmark Capital.
Stuart G. Phillips, one of our directors, is an affiliate of each of the
entities affiliated with U.S. Venture Partners.

   We loaned $999,900 to Brian M. NeSmith, our President and Chief Executive
Officer, on April 13, 1999, pursuant to a full-recourse promissory note that
is due April 12, 2004 and bears interest at the rate of 4.99% per annum. We
also loaned $800,000 to Mr. NeSmith on August 31, 1999, pursuant to a non-
recourse, interest free promissory note that is due August 30, 2004. The
promissory notes are secured by 2,000,000 shares of our common stock owned by
Mr. NeSmith.

   In addition, we have granted options to some of our directors and executive
officers. See "Management--Option Grants in the Last Fiscal Year" and
"Principal Stockholders."

   We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors on the board of directors, and
will continue to be on terms no less favorable to us than could be obtained
from unaffiliated third parties.

                                      55
<PAGE>

                            PRINCIPAL STOCKHOLDERS

   The following table sets forth information regarding beneficial ownership
of our common stock as of July 31, 1999, and as adjusted to reflect the sale
of shares offered hereby held by:

  .  each person who we know to own beneficially more than five percent of
     our common stock;

  .  each of the Named Executive Officers;

  .  each of our directors; and

  .  all directors and executive officers as a group.

   The number of shares of common stock outstanding after this offering
includes      shares of common stock being offered for sale in this offering.
The percentage of beneficial ownership for the following table is based on
27,671,031 shares of common stock outstanding as of July 31, 1999, after
giving effect to the conversion of all outstanding shares of preferred stock
into common stock upon the completion of this offering and the cash exercise
of warrants to purchase 672,850 shares of preferred stock prior to completion
of the offering and the conversion of these shares of preferred stock into
common stock, and assuming no exercise of the underwriters' over-allotment
option. The number of shares beneficially owned and the percent beneficially
owned set forth in the table below assumes that existing stockholders,
officers and directors do not purchase any shares in the offering. See
"Underwriters."

   In accordance with the rules of the Securities and Exchange Commission,
beneficial ownership includes voting or investment power with respect to
securities and includes the shares issuable pursuant to stock options and
warrants that are exercisable within 60 days of July 31, 1999. Shares issuable
pursuant to stock options and warrants are deemed outstanding for computing
the percentage of the person holding such options and warrants but are not
outstanding for computing the percentage of any other person.

   To our knowledge, except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock.
<TABLE>
<CAPTION>
                                              Shares
                                           Beneficially       Percent
                                              Owned     Beneficially Owned
                                           ------------ ----------------------
                                                         Before        After
  Name and Address of Beneficial Owner        Number    Offering     Offering
  ------------------------------------     ------------ ---------    ---------

<S>                                        <C>          <C>          <C>
Michael A. Malcolm.......................    5,163,785         18.7%
 650 Almanor Avenue
 Sunnyvale, California 94086
Entities affiliated with Benchmark
 Capital(1)..............................    4,757,388         17.2
 2480 Sand Hill Road, Suite 200
 Menlo Park, California 94025
Entities affiliated with U.S. Venture
 Partners(2).............................    3,110,490         11.2
 2180 Sand Hill Road, Suite 300
 Menlo Park, California 94025
Joseph J. Pruskowski(3)..................    2,520,243          9.1
 18109 236th Avenue NE
 Woodinville, Washington 98072
Brian M. NeSmith(4)......................    2,000,000          7.2
 650 Almanor Avenue
 Sunnyvale, California 94086
Entities affiliated with Technology
 Crossover Ventures(5)...................    1,890,816          6.8
 56 Main Street, Suite 210
 Millburn, New Jersey 07041
Douglas A. Crow(6).......................      620,000          2.2
William S. Warner........................      490,000          1.8
Rangaswamy Vasudevan.....................      470,000          1.7
Andrew S. Rachleff(1)....................    4,757,388         17.2
Stuart G. Phillips(7)....................    3,280,490         11.9
David W. Hanna(8)........................    1,626,692          5.9
All directors and executive officers as a
 group (14 persons)(9)...................   19,556,065         70.7
</TABLE>

                                      56
<PAGE>

--------
* Less than 1%.
(1) Consists of 4,176,178 shares held by Benchmark Capital Partners, L.P. and
    581,210 shares held by Benchmark Founders' Fund, L.P. Mr. Rachleff, one of
    our directors, is a managing member of Benchmark Capital Management Co.,
    L.L.C., which is the general partner of each of Benchmark Capital
    Partners, L.P. and Benchmark Founders' Fund, L.P. Mr. Rachleff disclaims
    beneficial ownership of the shares held by Benchmark Capital Partners,
    L.P. and Benchmark Founders' Fund, L.P. except to the extent of his
    pecuniary interest therein arising from his interest therein.
(2) Consists of 2,799,438 shares held by U.S. Venture Partners V, L.P.,
    155,526 shares held by USVP V International, L.P., 87,094 shares held by
    2180 Associates Fund V, L.P. and 68,432 shares held by USVP V Entrepreneur
    Partners, L.P. Mr. Phillips, one of our directors, is a general partner of
    Presidio Management Group V, L.L.C., which is the general partner of each
    of U.S. Venture Partners V, L.P., USVP V International, L.P., 2180
    Associates Fund V, L.P. and USVP V Entrepreneur Partners, L.P. Mr.
    Phillips disclaims beneficial ownership of the shares held by U.S. Venture
    Partners V, L.P., USVP V International, L.P., 2180 Associates Fund V, L.P.
    and USVP V Entrepreneur Partners, L.P., except to the extent of his
    pecuniary interest therein arising from his general partnership interest
    therein.
(3) Includes 33,100 shares held by Mr. Pruskowski's spouse.
(4)  Excludes options immediately exercisable for 200,000 shares granted after
     July 31, 1999.
(5) Consists of 13,730 shares held by TCV III (GP), 65,216 shares held by TCV
    III, L.P., 1,733,374 shares held by TCV III (Q), L.P. and 78,496 shares
    held by TCV III Strategic Partners, L.P.
(6) Includes options immediately exercisable for 20,000 shares.
(7) Includes 170,000 shares owned individually by Mr. Phillips, 2,799,438
    shares held by U.S. Venture Partners V, L.P., 155,526 shares held by USVP
    V International, L.P., 87,094 shares held by 2180 Associates Fund V, L.P.
    and 68,432 shares held by USVP V Entrepreneur Partners, L.P. Mr. Phillips,
    one of our directors, is a general partner of Presidio Management Group V,
    L.L.C., which is the general partner of each of U.S. Venture Partners V,
    L.P., USVP V International, L.P., 2180 Associates Fund V, L.P. and USVP V
    Entrepreneur Partners, L.P. Mr. Phillips disclaims beneficial ownership of
    the shares held by U.S. Venture Partners V, L.P., USVP V International,
    L.P., 2180 Associates Fund V, L.P. and USVP V Entrepreneur Partners, L.P.,
    except to the extent of his pecuniary interest therein arising from his
    general partnership interest therein.
(8) Consists of 928,384 shares owned individually by Mr. Hanna, 342,858 shares
    held by K-H Investors (1996-B), L.P., 101,770 shares held by K-H Investors
    (1998-A), L.P., 122,000 shares held by Hanna Ventures-CacheFlow III, L.P.,
    87,432 shares held by the David William Hanna Trust dated October 30,
    1989, and 44,248 shares held by Mr. Hanna's spouse. Mr. Hanna, one of our
    directors, is an affiliate of K-H Investors (1996-B), L.P., K-H Investors
    (1998-A), L.P. and Hanna Ventures-CacheFlow III, L.P. Mr. Hanna disclaims
    beneficial ownership of the shares held by these entities, except to the
    extent of his pecuniary interest therein.
(9) Includes options immediately exercisable for 630,800 shares.

                                      57
<PAGE>

                         DESCRIPTION OF CAPITAL STOCK

   Our authorized capital stock will consist of 200,000,000 shares of common
stock, par value $.0001 per share, and 10,000,000 shares of preferred stock,
par value $.0001 per share, after giving effect to the amendment and
restatement of our amended and restated certificate of incorporation to delete
references to Series A, Series B and Series C Preferred Stock, which will
occur immediately following the closing of this offering.

Common Stock

   As of July 31, 1999, there were 27,671,031 shares of common stock
outstanding that were held of record by approximately 85 stockholders, after
giving effect to the conversion of all outstanding shares of preferred stock
into 14,341,912 shares of common stock upon the completion of this offering
and the cash exercise of warrants to purchase 672,850 shares of preferred
stock prior to completion of the offering and the conversion of these shares
of preferred stock into common stock. There will be     shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option
and assuming no exercise after July 31, 1999 of outstanding options, after
giving effect to the sale of the shares of common stock in this offering. Upon
the closing of this offering, our amended and restated certificate of
incorporation will authorize 200,000,000 shares of common stock.

   The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably dividends, if any, as may be declared from
time to time by the board of directors out of legally available funds. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up
of CacheFlow, the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable.

Preferred Stock

   Upon the closing of this offering, our amended and restated certificate of
incorporation will authorize 10,000,000 shares of preferred stock. The board
of directors has the authority to issue the preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting any series or the designation of such
series, without further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of CacheFlow without further action by the stockholders. For
example, the board of directors could issue preferred stock that has the power
to prevent a change of control transaction. The issuance of preferred stock
with voting and conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to others. We
currently have no plans to issue any of the preferred stock.

Warrants

   As of July 31, 1999, there were warrants outstanding to purchase 141,842
shares of common stock at an exercise price of $3.42 per share (assuming the
conversion of all of our preferred stock into common stock).

   Warrants to purchase 562,850 shares of Series A Preferred Stock at an
exercise price of $.875 expire upon the closing of this offering, and we
anticipate that these warrants will be exercised prior to this offering and
the

                                      58
<PAGE>

underlying shares of preferred stock converted into common stock upon the
closing of this offering. Warrants to purchase 110,000 shares of Series C
Preferred Stock at an exercise price of $4.575 expire upon the closing of this
offering, and we anticipate that these warrants will be exercised prior to
this offering and the underlying shares of preferred stock converted into
common stock upon the closing of this offering.

Antitakeover Effects of Provisions of the Certificate of Incorporation and
Delaware Law

   Amended and Restated Certificate of Incorporation

   The amended and restated certificate of incorporation provides that all
stockholder actions must be effected at a duly called meeting and not by a
consent in writing. This provision could discourage potential acquisition
proposals and could delay or prevent a change of control of CacheFlow because
a potential acquisition of CacheFlow could not be approved by the stockholders
without a duly called meeting. See "Risk Factors--Effect of Certain Charter
Provisions; Antitakeover Effects of Certificate of Incorporation and Delaware
Law."

   Delaware Takeover Statute

   We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to various exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless: (A) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder; (B) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (1) by persons who are directors and also
officers and (2) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (C) on or subsequent
to such date, the business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.

   Section 203 defines business combination to include: (A) any merger or
consolidation involving the corporation and the interested stockholder; (B)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (C) subject to
various exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (D) any transaction involving the corporation that has the effect
of increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or (E) the
receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation. In general, Section 203 defines an interested stockholder as any
entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with or
controlling or controlled by such entity or person.

Registration Rights

   After this offering, the holders of approximately 23,284,762 shares of
outstanding common stock will be entitled to rights with respect to the
registration of such shares under the Securities Act. The holders of
registration rights are those investors that purchased shares of our Series A,
Series B and Series C Preferred Stock, as well as some of our present and
former officers. Under the terms of the agreements between us and the holders
of these registrable securities, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, the holders
are entitled to notice of the registration and are entitled to include these
shares in the registration. Certain of the stockholders benefiting from these
rights may also require us to file a registration statement under the
Securities

                                      59
<PAGE>

Act at our expense with respect to their shares of common stock, and we are
required to use our best efforts to effect a registration. Further, holders
may require us to file additional registration statements on Form S-3. These
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration in certain circumstances.

Transfer Agent and Registrar

   The Transfer Agent and Registrar for the common stock is    .

                                      60
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

   Prior to this offering, there has been no market for our common stock.
Therefore, future sales of substantial amounts of our common stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of existing contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.

   Upon completion of this offering, we will have     shares of common stock
outstanding, assuming no exercise of options and warrants outstanding as of
July 31, 1999 other than warrants to purchase 672,850 shares of preferred
stock that we assume will be exercised prior to the closing of the offering
and the conversion of all these shares of preferred stock into common stock.
Of these shares, the     shares sold in this offering will be freely
transferable without restriction or registration under the Securities Act,
except for any shares purchased by one of our existing "affiliates," as that
term is defined by the Securities Act, which shares will be subject to the
resale limitations of Rule 144 adopted under the Securities Act. The remaining
27,671,031 shares of common stock existing are "restricted securities" as
defined in Rule 144. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144 or 701 of the Securities Act. As a result of the contractual
restrictions described below and the provisions of Rules 144 and 701,
additional shares will be available for sale in the public market as follows:
(A) no restricted securities will be eligible for immediate sale on the date
of this prospectus, (B) 22,626,595 restricted securities will be eligible for
sale upon expiration of lock-up agreements 180 days after the date of this
prospectus subject to Rule 144 or Rule 701, (C) 4,371,586 restricted
securities will be eligible for sale as of May 28, 2000, and (D) 672,850
restricted securities will be eligible for sale between August 24, 2000 and
the date that is one year after the effective date of the offering.

   Lock-Up Agreements

   We, our executive officers, directors and our stockholders have agreed not
to offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, or enter into any swap or
similar agreement that transfers, in whole or in part, the economic risk of
ownership of the common stock, for a period of 180 days after the date of this
prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated, subject to limited exceptions. However, these contractual
restrictions may be released prior to expiration of the lock-up period. In
addition, existing stockholders have agreed not to exercise any registration
rights they may have for a similar period of 180 days.

   Rule 144

   In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who owns shares that were purchased from us (or any affiliate) at
least one year previously, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of our then-
outstanding shares of common stock (    shares immediately after this
offering) or the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person (or persons whose shares are aggregated) who is not deemed to have been
one of our affiliates at any time during the three months preceding a sale,
and who owns shares within the definition of "restricted securities" under
Rule 144 that were purchased from us (or any affiliate) at least two years
previously, would be entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.


                                      61
<PAGE>

   Rule 701

   Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisers prior to the date we become subject to the reporting
requirements of the Securities Exchange Act of 1934, or the Exchange Act,
pursuant to written compensatory benefit plans or written contracts relating
to the compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements
of the Exchange Act, along with the shares acquired upon exercise of such
options (including exercises after the date of this prospectus). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this prospectus, may be sold by persons other than affiliates subject only to
the manner of sale provisions of Rule 144 and by affiliates under Rule 144
without compliance with its minimum holding period requirements.

   Registration Rights

   After this offering pursuant to this prospectus, the holders of
approximately 23,284,762 shares of common stock, or their transferees, will be
entitled to various rights with respect to the registration of such shares
under the Securities Act. Registration of such shares under the Securities Act
would result in such shares becoming freely tradable without restriction under
the Securities Act (except for shares purchased by affiliates) immediately
upon the effectiveness of such registration. See "Description of Capital
Stock--Registration Rights."

   Stock Options and Warrants

   As of July 31, 1999, options to purchase a total of 3,401,251 shares of
common stock pursuant to our 1996 Stock Option Plan were outstanding and
exercisable. All of the shares subject to options are subject to lock-up
agreements. As of July 31, 1999, warrants to purchase up to 141,842 shares of
common stock (assuming the conversion of all of our preferred stock into
common stock) were outstanding and exercisable. An additional 33,217 shares of
common stock were available for future option grants under our 1996 Stock
Option Plan. On August 27, 1999, we amended our 1996 Stock Option Plan to
increase the number of shares authorized for issuance thereunder by 3,000,000
shares. Between August 1, 1999 and September 24, 1999, we granted options to
purchase 2,874,000 shares of common stock. On September 24, 1999, we adopted,
subject to stockholder approval, our 1999 Stock Incentive Plan to replace the
1996 Stock Option Plan, and reserved 5,000,000 shares for issuance thereunder,
plus an additional number of shares equal to 5% of the shares outstanding on
the first day of January 2000 and each year thereafter. We will not grant any
options under our 1996 Stock Option Plan after the completion of this
offering. In addition, on September 24, 1999, we adopted, subject to
stockholder approval, our Employee Stock Purchase Plan, and reserved 2,500,000
shares of common stock for issuance thereunder, plus an additional 500,000
shares on January 31 of 2000 and each year thereafter and our 1999 Director
Option Plan, and reserved 500,000 shares of common stock for issuance
thereunder, plus an additional 100,000 shares on January 1 of 2000 and each
year thereafter. See "Management--1999 Stock Incentive Plan," "--Employee
Stock Purchase Plan," "--1999 Director Option Plan," "Description of Capital
Stock--Warrants" and Notes 3, 4 and 9 of Notes to Financial Statements.

   We intend to file registration statements under the Securities Act covering
approximately 5,000,000 shares of common stock subject to outstanding options
or issuable pursuant to our 1999 Stock Incentive Plan and 500,000 shares of
common stock issuable pursuant to our 1999 Director Option Plan, and 2,500,000
shares of common stock issuable pursuant to our Employee Stock Purchase Plan.
We expect to file the registration statement covering shares issuable pursuant
to the Employee Stock Purchase Plan within 5 days of the effective date of
this offering and to file the registration statement covering shares offered
pursuant to the 1999 Stock Incentive Plan and 1999 Director Option Plan within
approximately 30 days after the closing of this offering. Shares registered
under such registration statements will, subject to Rule 144 volume
limitations applicable to affiliates, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with us or the contractual restrictions described above. See
"Management--1999 Stock Incentive Plan," "--Employee Stock Purchase Plan" and
"--1999 Director Option Plan."

                                      62
<PAGE>

                                 UNDERWRITERS

   Under the terms and subject to conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation
and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, are
acting as representatives, have severally agreed to purchase, and CacheFlow
has agreed to sell to the underwriters, the respective number of shares of
common stock set forth opposite the names of such underwriters below:

<TABLE>
<CAPTION>
                                                                        Number
   Name                                                                of Shares
   ----                                                                ---------
   <S>                                                                 <C>
   Morgan Stanley & Co. Incorporated..................................
   Credit Suisse First Boston Corporation.............................
   Dain Rauscher Wessels..............................................
                                                                         ----
   Total..............................................................
                                                                         ====
</TABLE>

   The underwriters and the representatives are collectively referred to as
the underwriters and the representatives. The underwriters are offering the
shares of common stock subject to their acceptance of the shares from
CacheFlow. The underwriting agreement provides that the obligations of the
several underwriters to pay for and accept delivery of the shares of common
stock offered by us in this offering are subject to the approval of legal
matters by their counsel and to other conditions. The underwriters are
obligated to take and pay for all of the shares of common stock offered by us
in this offering, other than those covered by the over allotment option
described below, if any such shares are taken.

   The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $   per share under the public
offering price. Any underwriter may allow, and such dealers may reallow, a
concession not in excess of $   per share to other underwriters or to certain
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.

   CacheFlow has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set forth on
the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise such option solely for the purpose
of covering over-allotments, if any, made in connection with the offering of
the shares of common stock offered by this prospectus. To the extent such
option is exercised, each underwriter will become obligated, subject to
limited conditions to purchase approximately the same percentage of such
additional shares of common stock as the number set forth next to such
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of the underwriters in the
preceding table. If the underwriters' option is exercised in full, the total
price to the public would be $ million, the total underwriters' discounts and
commissions would be $ million and total proceeds to CacheFlow would be
$ million.

   The underwriters have informed CacheFlow that the underwriters do not
intend sales to discretionary accounts to exceed five percent of the total
number of shares of common stock offered by them.

   CacheFlow has filed an application for our common stock to be quoted on the
Nasdaq National Market under the symbol "CFLO."

   At the request of CacheFlow, the underwriters will reserve up to     shares
of common stock to be offered hereby for sale, at the initial public offering
price, to directors, officers, employees, business associates

                                      63
<PAGE>

and related persons of CacheFlow. In addition, the underwriters have agreed to
reserve additional shares of common stock pursuant to an agreement we have
with the holders of our Series C Preferred Stock. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares which
are not so purchased will be offered by the underwriters to the general public
on the same basis as the other shares offered hereby.

   In connection with our Series C Preferred Stock financing, we agreed to use
our best efforts to cause the managing underwriters of our initial public
offering to establish a directed share program whereby the managing
underwriters would offer the Series C Preferred Stock investors the
opportunity to purchase shares of our common stock in our initial public
offering. The dollar amount of the common stock to be offered to the Series C
Preferred Stock investors pursuant to the directed share program is not to
exceed $5,000,000, and is subject to reduction under certain circumstances.
The Series C Preferred Stock investors have no obligation to purchase any of
the shares offered to them. We intend that all offers to purchase shares
pursuant to the directed share program will be made in compliance with all
federal and state securities laws, including Rule 134 of the Securities Act of
1933, as amended, and all applicable rules and regulations promulgated by the
National Association of Securities Dealers, Inc.

   CacheFlow, our directors and executive officers and our stockholders and
option holders have each agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated, on behalf of the underwriters, he, she or
it will not, for the period ending 180 days after the date of this prospectus:

  .  offer, pledge, sell, contract to sell, sell any option or contract to
     purchase, purchase any option or contract to sell, grant any option,
     right or warrant to purchase, lend, or otherwise transfer or dispose of,
     directly or indirectly, any shares of common stock or any securities
     convertible into or exercisable or exchangeable for common stock, or

  .  enter into any swap or similar agreement that transfers, in whole or in
     part, any of the consequences of ownership of the common stock.

   The restrictions described in the previous paragraph do not apply to:

  .  the issuance by CacheFlow of shares of common stock upon the exercise of
     an option or a warrant or the conversion of a security outstanding on
     the date of this prospectus of which the underwriters have been advised
     in writing;

  .  transactions by any person other than CacheFlow relating to shares of
     common stock or other securities acquired in open market transactions
     after the completion of the offering of the shares;

  .  the granting of stock options pursuant to existing CacheFlow employee
     benefit plans, provided that such options do not become exercisable and
     such options do not vest during the such 180-day period; or

  .  certain gifts, distributions or transfers to trusts, provided that
     transferees in transactions described in this clause enter into lock-up
     agreements similar to those described in the previous paragraph.

   In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may agree to sell or
allot more shares than the     shares of common stock CacheFlow has agreed to
sell them. This over-allotment would create a short position in the common
stock for the underwriters' account. To cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.

                                      64
<PAGE>

   CacheFlow and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.

Pricing of the Offering

   Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:

  .  the future prospects of CacheFlow and its industry in general;

  .  sales, earnings and certain other financial operating information of
     CacheFlow in recent periods; and

  .  the price earnings ratios, price sales ratios, market prices of
     securities and certain financial and operating information of companies
     engaged in activities similar to those of CacheFlow.

   The estimated public offering price range set forth on the cover page of
this prospectus is subject to change as a result of market conditions and
other factors.

                                      65
<PAGE>

                                 LEGAL MATTERS

   The validity of the issuance of the common stock offered hereby will be
passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, Menlo Park, California. Members of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP participating in the consideration of
legal matters relating to this offering beneficially own 91,452 shares of our
common stock (assuming the conversion of all of our preferred stock into
common stock). Legal matters in connection with this offering will be passed
upon for the underwriters by Shearman & Sterling, Menlo Park, California.

                                    EXPERTS

   Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of April 30, 1998 and 1999, and for each of the three
years in the period ended April 30, 1999 as set forth in their report dated
September 24, 1999. We have included our consolidated financial statements in
the prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report given on their authority as experts in auditing and
accounting.

                            ADDITIONAL INFORMATION

   We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
with respect to us and our common stock, reference is made to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of the contract or document
filed as an exhibit to the registration statement. Each such statement is
qualified in all respects by reference to that exhibit. The registration
statement, including exhibits and schedules, may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from such office after payment of fees
prescribed by the Commission. The Commission maintains a World Wide web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the site is http://www.sec.gov.

                       CHANGE IN INDEPENDENT ACCOUNTANTS

   Effective August 27, 1999, Ernst & Young LLP was engaged as our independent
auditors and replaced other auditors who were dismissed as our independent
accountants on the same date. The decision to change auditors was approved by
our board of directors on August 27, 1999. Prior to August 27, 1999, our
former auditors, which included two separate audit firms, issued reports on
the year ended April 30, 1998 and the period from inception (March 13, 1996)
to April 30, 1997. The reports of our former auditors did not contain an
adverse opinion or disclaimer of opinion qualified or modified as to audit
scope or accounting principle. The auditor's opinion for the year ended April
30, 1998 did contain an uncertainty as to substantial doubt regarding our
ability to continue as a going concern. In connection with the audits for the
period from inception (March 13, 1996) through April 30, 1997 and the year
ended April 30, 1998 and the period through August 27, 1999, there were no
disagreements with our former auditors on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of our former
auditors, would have caused them to make reference thereto in their report.
Our former auditors have not audited or reported on any of the financial
statements or information included in this prospectus. Prior to August 27,
1999, we have not consulted with Ernst & Young LLP on items that involved our
accounting principles or the form of audit opinion to be issued on our
financial statements. We have requested that our former auditors furnish us
with letters addressed to the Securities and Exchange Commission stating
whether or not they agree with the above statements. Copies of these letters
are filed as an exhibit to the registration statement of which this prospectus
forms a part.

                                      66
<PAGE>

                                 CACHEFLOW INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                        <C>
Report of Independent Auditors............................................  F-2
Consolidated Balance Sheets...............................................  F-3
Consolidated Statements of Operations.....................................  F-4
Consolidated Statements of Stockholders' Equity (Deficit).................  F-5
Consolidated Statements of Cash Flows.....................................  F-6
Notes to Consolidated Financial Statements................................  F-7
</TABLE>

                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
CacheFlow Inc.

   We have audited the accompanying consolidated balance sheets of CacheFlow
Inc. as of April 30, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended April 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated 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, 1998 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended April 30, 1999, in conformity with generally accepted accounting
principles.

                                                          /s/ Ernst & Young LLP
Walnut Creek, California
September 24, 1999

                                      F-2
<PAGE>

                                 CACHEFLOW INC.

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

<TABLE>
<CAPTION>
                                                                     Pro Forma
                                                                   Stockholders'
                                       April 30,                     Equity at
                                    -----------------   July 31,     July 31,
                                     1998      1999       1999         1999
                                    -------  --------  ----------- -------------
                                                       (unaudited)  (unaudited)
              ASSETS

<S>                                 <C>      <C>       <C>         <C>
Current assets:
  Cash and cash equivalents.......  $ 7,349  $  2,291   $ 17,825
  Accounts receivable, net of
   allowance for doubtful accounts
   and sales returns of $121 and
   $300 at April 30, and July 31,
   1999, respectively.............      --      1,353      1,957
  Inventories.....................      407       932      1,721
  Prepaid expenses and other
   current assets.................       53        60        152
                                    -------  --------   --------
Total current assets..............    7,809     4,636     21,655
Property and equipment, net.......      642     1,351      1,706
Other assets......................       10       729        658
                                    -------  --------   --------
   Total assets...................  $ 8,461  $  6,716   $ 24,019
                                    =======  ========   ========

<CAPTION>
   LIABILITIES AND STOCKHOLDERS'
         EQUITY (DEFICIT)

<S>                                 <C>      <C>       <C>         <C>
Current liabilities:
  Accounts payable................  $   429  $  1,464   $  1,910
  Borrowings under line of
   credit.........................      --        643        639
  Accrued payroll and related
   benefits.......................      145       420        558
  Deferred revenue................      --        367        559
  Other accrued liabilities.......      214       166        320
  Current portion of long-term
   obligations....................       66       789        789
                                    -------  --------   --------
Total current liabilities.........      854     3,849      4,775
Long-term obligations, less
 current portion..................        7     3,211      3,211
                                    -------  --------   --------
Total liabilities.................      861     7,060      7,986

Commitments

Stockholders' equity (deficit):
  Preferred stock, $0.0001 par
   value, issuable in series:
   30,000 shares authorized at
   April 30, 1998 and 1999 and
   July 31, 1999 (10,000 shares
   pro forma), respectively;
   9,970, 9,970, and 14,342 shares
   issued and outstanding at April
   30, 1998 and 1999 and July 31,
   1999 (none pro forma),
   respectively; aggregate
   liquidation preference of
   $14,457 at April 30, 1999 (none
   pro forma).....................        1         1          1      $   --
  Common stock, $0.0001 par value,
   60,000 shares authorized at
   April 30, 1998 and 1999 and
   July 31, 1999 (200,000 shares
   pro forma), respectively;
   6,017, 12,894 and 12,656 shares
   issued and outstanding at April
   30, 1998 and 1999 and July 31,
   1999 (26,998 shares pro forma),
   respectively...................        1         1          1            2
  Additional paid-in capital......   14,646    30,877     62,794       62,794
  Note receivable from
   stockholder....................      --     (1,004)    (1,017)      (1,017)
  Deferred stock compensation.....      (98)  (10,067)   (19,547)     (19,547)
  Accumulated deficit.............   (6,950)  (20,152)   (26,199)     (26,199)
                                    -------  --------   --------      -------
   Total stockholders' equity
    (deficit).....................    7,600      (344)    16,033       16,033
                                    -------  --------   --------      -------
   Total liabilities and
    stockholders' equity
    (deficit).....................  $ 8,461  $  6,716   $ 24,019      $24,019
                                    =======  ========   ========      =======
</TABLE>

          See Accompanying Notes to Consolidated Financial Statements

                                      F-3
<PAGE>

                                 CACHEFLOW INC.

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

<TABLE>
<CAPTION>
                                                                Three Months
                                     Year Ended April 30,      Ended July 31,
                                   --------------------------  ----------------
                                    1997     1998      1999     1998     1999
                                   -------  -------  --------  -------  -------
                                                                 (unaudited)
<S>                                <C>      <C>      <C>       <C>      <C>
Net sales........................  $   --   $   --   $  7,036  $   809  $ 3,612
Cost of goods sold...............      --       --      3,297      598    1,380
                                   -------  -------  --------  -------  -------
Gross profit.....................      --       --      3,739      211    2,232
Operating expenses:
  Research and development.......    1,055    2,396     4,034      755    1,613
  Sales and marketing............      130    1,655     6,865    1,335    3,481
  General and administrative.....      310    1,630     2,069      275      667
  Stock compensation.............        4       59     3,776      219    2,482
                                   -------  -------  --------  -------  -------
Total operating expenses.........    1,499    5,740    16,744    2,584    8,243
                                   -------  -------  --------  -------  -------
Operating loss...................   (1,499)  (5,740)  (13,005)  (2,373)  (6,011)
Interest income..................       82      258       160       73      131
Interest expense.................      (26)     (25)     (357)      (2)    (167)
                                   -------  -------  --------  -------  -------
Net loss.........................  $(1,443) $(5,507) $(13,202) $(2,302) $(6,047)
                                   =======  =======  ========  =======  =======
Basic and diluted net loss per
 common share....................  $ (1.54) $ (1.88) $  (3.06) $ (0.65) $ (0.97)
                                   =======  =======  ========  =======  =======
Shares used in computing basic
 and diluted net loss per common
 share...........................      939    2,936     4,316    3,517    6,214
                                   =======  =======  ========  =======  =======
Pro forma basic and diluted net
 loss per common share
 (unaudited).....................  $   --   $   --   $  (0.89) $   --   $ (0.30)
                                   =======  =======  ========  =======  =======
Shares used in computing pro
 forma basic and diluted net loss
 per common share (unaudited)....      --       --     14,849      --    19,946
                                   =======  =======  ========  =======  =======
</TABLE>


          See Accompanying Notes to Consolidated Financial Statements

                                      F-4
<PAGE>

                                CACHEFLOW INC.

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

<TABLE>
<CAPTION>
                           Preferred                                Note                                  Total
                             Stock     Common Stock   Additional Receivable    Deferred               Stockholders'
                         ------------- --------------  Paid-In      From        Stock     Accumulated     Equity
                         Shares Amount Shares  Amount  Capital   Stockholder Compensation   Deficit     (Deficit)
                         ------ ------ ------  ------ ---------- ----------- ------------ ----------- -------------
<S>                      <C>    <C>    <C>     <C>    <C>        <C>         <C>          <C>         <C>
 Issuance of common
 stock to founders......    --   $ --   6,600   $ 1    $    32     $   --      $    --     $    --      $     33
 Issuance of Series A
 preferred stock, net of
 issuance costs.........  5,831     1     --     --      5,101         --           --          --         5,102
 Issuance of common
 stock to third parties
 for services...........    --     --      84    --          4         --           --          --             4
 Exercise of stock
 options by employees...    --     --     500    --          6         --           --          --             6
 Net and comprehensive
 loss...................    --     --     --     --        --          --           --       (1,443)      (1,443)
                         ------  ----  ------   ---    -------     -------     --------    --------     --------
Balances at April 30,
1997....................  5,831     1   7,184     1      5,143         --           --       (1,443)       3,702
 Issuance of Series B
 preferred stock, net of
 issuance costs.........  4,139    --     --     --      9,329         --           --          --         9,329
 Exercise of stock
 options by employees...    --     --     340    --         25         --           --          --            25
 Issuance of common
 stock to third parties
 for services...........    --     --      93    --          7         --           --          --             7
 Repurchase of common
 stock..................    --     --  (1,600)   --         (8)        --           --          --            (8)
 Deferred stock
 compensation...........    --     --     --     --        150         --          (150)        --           --
 Amortization of
 deferred stock
 compensation...........    --     --     --     --        --          --            52         --            52
 Net and comprehensive
 loss...................    --     --     --     --        --          --           --       (5,507)      (5,507)
                         ------  ----  ------   ---    -------     -------     --------    --------     --------
Balances at April 30,
1998....................  9,970     1   6,017     1     14,646         --           (98)     (6,950)       7,600
 Exercise of stock
 options by employees...    --     --   6,843    --      2,049         --           --          --         2,049
 Issuance of common
 stock to third parties
 for services...........    --     --      34    --         20         --           --          --            20
 Stock compensation.....    --     --     --     --        156         --           --          --           156
 Issuance of warrants in
 connection with debt
 issuance...............    --     --     --     --        437         --           --          --           437
 Note receivable from
 stockholder for the
 exercise of stock
 options................    --     --     --     --        --         (999)         --          --          (999)
 Interest on note
 receivable from
 stockholder for the
 exercise of stock
 options................    --     --     --     --        --           (5)         --          --            (5)
 Deferred stock
 compensation...........    --     --     --     --     13,569         --       (13,569)        --           --
 Amortization of
 deferred stock
 compensation...........    --     --     --     --        --          --         3,600         --         3,600
 Net and comprehensive
 loss...................    --     --     --     --        --          --           --      (13,202)     (13,202)
                         ------  ----  ------   ---    -------     -------     --------    --------     --------
Balances at April 30,
1999....................  9,970     1  12,894     1     30,877      (1,004)     (10,067)    (20,152)        (344)
 Issuance of Series C
 preferred stock, net of
 issuance costs
 (unaudited)............  4,372    --     --     --     19,976         --           --          --        19,976
 Exercise of stock
 options by employees
 (unaudited)............    --     --      25    --          7         --           --          --             7
 Issuance of common
 stock to third parties
 for services
 (unaudited)............    --     --       8    --         16         --           --          --            16
 Repurchase of common
 stock from employees
 (unaudited)............                 (271)             (28)                                              (28)
 Interest on note
 receivable from
 stockholder for the
 exercise of stock
 options (unaudited)....    --     --     --     --        --          (13)         --          --           (13)
 Deferred stock
 compensation
 (unaudited)............    --     --     --     --     11,946                  (11,946)        --           --
 Amortization of
 deferred stock
 compensation
 (unaudited)............    --     --     --     --        --          --         2,466         --         2,466
 Net and comprehensive
 loss (unaudited).......    --     --     --     --        --          --           --       (6,047)      (6,047)
                         ------  ----  ------   ---    -------     -------     --------    --------     --------
Balances at July 31,
1999 (unaudited)........ 14,342  $  1  12,656   $ 1    $62,794     $(1,017)    $(19,547)   $(26,199)    $ 16,033
                         ======  ====  ======   ===    =======     =======     ========    ========     ========
</TABLE>

          See Accompanying Notes to Consolidated Financial Statements

                                      F-5
<PAGE>

                                 CACHEFLOW INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                               Three Months
                                    Year Ended April 30,      Ended July 31,
                                  --------------------------  ----------------
                                   1997     1998      1999     1998     1999
                                  -------  -------  --------  -------  -------
                                                                (unaudited)
<S>                               <C>      <C>      <C>       <C>      <C>
Operating activities
Net loss........................  $(1,443) $(5,507) $(13,202) $(2,302) $(6,047)
Adjustments to reconcile net
loss to net cash used in
operating activities:
 Depreciation and amortization..       13       91       261       45      117
 Stock compensation.............        4       59     3,776      219    2,482
 Interest on notes converted to
  preferred stock...............       22      --        --       --       --
 Interest on note receivable
  from stockholder..............      --       --         (5)     --       (13)
 Debt issuance costs............      --       --        437      --       --
 Changes in operating assets and
  liabilities:
  Accounts receivable...........      --       --     (1,353)    (741)    (604)
  Inventories...................      (38)    (369)     (525)     (51)    (789)
  Prepaid expenses and other
   current assets...............      (13)     (40)       (7)     (35)     (92)
  Other assets..................       (3)      (7)     (719)    (179)      71
  Accounts payable..............       67      362     1,035     (187)     446
  Accrued liabilities...........      --       359       594      278      484
                                  -------  -------  --------  -------  -------
Net cash used in operating
 activities.....................   (1,391)  (5,052)   (9,708)  (2,953)  (3,945)

Investing activities
Purchases of property and
 equipment......................     (123)    (623)     (971)    (151)    (472)
Purchases of short-term
 investments....................   (3,410)     --        --       --       --
Proceeds from sale of short-term
 investments....................      --     3,410       --       --       --
                                  -------  -------  --------  -------  -------
Net cash provided by (used in)
 investing activities...........   (3,533)   2,787      (971)    (151)    (472)
Financing activities
Proceeds from issuance of
 preferred stock................    4,095    9,329       --       --    19,976
Proceeds from issuance of common
 stock..........................       39       25     1,051      300        7
Repurchase of employee stock....      --        (8)      --       --       (28)
Borrowings from line of credit..      --       --        643      --       --
Proceeds from issuance of debt
 obligations....................      985      128     4,000      --       --
Payments on debt obligations....      --       (55)      (73)     (21)      (4)
                                  -------  -------  --------  -------  -------
Net cash provided by financing
 activities.....................    5,119    9,419     5,621      279   19,951
                                  -------  -------  --------  -------  -------
Net increase (decrease) in cash
 and cash equivalents...........      195    7,154    (5,058)  (2,825)  15,534
Cash and cash equivalents at
 beginning of period............      --       195     7,349    7,349    2,291
                                  -------  -------  --------  -------  -------
Cash and cash equivalents at end
 of period......................  $   195  $ 7,349  $  2,291  $ 4,524  $17,825
                                  =======  =======  ========  =======  =======

Supplemental disclosures of cash
 flow information
Cash paid for interest..........  $     4  $    10  $    375  $     2  $   167
                                  =======  =======  ========  =======  =======
Noncash financing activities
Warrants issued in connection
 with long-term debt agreements
 and strategic customer
 arrangements...................  $   --   $   --   $    437  $   --   $   --
                                  =======  =======  ========  =======  =======
Conversion of debt to preferred
 stock..........................  $   985  $   --   $    --   $   --   $   --
                                  =======  =======  ========  =======  =======
Issuance of note receivable to
 stockholder for the exercise of
 stock options and related
 interest.......................  $   --   $   --   $ (1,004) $   --   $   (13)
                                  =======  =======  ========  =======  =======
</TABLE>



          See Accompanying Notes to Consolidated Financial Statements

                                      F-6
<PAGE>

                                CACHEFLOW INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Information as of and for the three months
                       ended July 31, 1999 is unaudited)

1. Organization and Summary of Significant Accounting Policies

 Organization

   CacheFlow Inc. (the "Company") was organized and incorporated in the state
of Delaware on March 16, 1996. The Company operates in one segment to design,
develop, market and support high-performance Internet caching appliances.

 Unaudited Interim Financial Information

   The accompanying consolidated financial statements and related notes as of
July 31, 1999 and for the quarters ended July 31, 1998 and 1999 are unaudited,
but include all adjustments, consisting only of normal recurring adjustments,
that the Company considers necessary for a fair presentation of its
consolidated financial position, operating results, and cash flows for the
interim date and periods presented. Results for the quarter ended July 31,
1999 are not necessarily indicative of results for the entire fiscal year or
future periods.

 Basis of Presentation

   The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant 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.
The accompanying statements of operations, stockholders' equity (deficit), and
cash flows for the year ended April 30, 1997 include $33,000 received upon
issuance of the initial capital stock of the Company and $7,000 expended
during the period from March 13, 1996 (inception) to April 30, 1996 for
general and administrative expenses. Due to the insignificance of the balances
as of April 30, 1996 and activity for the period from March 13, 1996
(inception) to April 30, 1996, financial statements have not been presented.

 Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles 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 and Cash Equivalents

   The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. Cash
equivalents consisted of money market investments at April 30, 1998 and 1999.

 Concentrations of Credit Risk

   Financial instruments which potentially subject the Company to credit risk
consist of demand deposit accounts, money market accounts, and trade
receivables. The Company maintains its demand deposit accounts and its money
market accounts primarily with one financial institution. 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, 1999, three
customers individually accounted for over 10% of our net sales, for an
aggregate of approximately 33% of our net sales. For the three months ended
July 31, 1999, two customers individually accounted for over 10% of our net
sales, for an aggregate of approximately 22% of our net sales.

                                      F-7
<PAGE>

                                CACHEFLOW INC.

            NOTES TO 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 year ended
April 30, 1999 and three month period ended July 31, 1999.

 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 at the time of shipment,
net of allowances for estimated sales returns and uncollectible customer
accounts. Maintenance contract revenue is deferred and recorded evenly over
the term of the contract. Maintenance contract revenue for the year ended
April 30, 1999 and the three months ended July 31, 1999 was $25,000 and
$54,000, respectively.

 Warranty Reserves

   The Company's products generally carry a one-year warranty that includes
factory repair services as needed for replacement parts. Estimated expenses
for warranty obligations 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.

 Comprehensive Income (Loss)

   The Company reports comprehensive income (loss) in accordance with the
FASB's Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." The comprehensive net loss for the years ended April
30, 1997, 1998 and 1999 does not differ from the reported net loss.

                                      F-8
<PAGE>

                                CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 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 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 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.
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
No. 98, common stock and convertible preferred stock issued or granted for
nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of basic and diluted net
loss per common share as if they had been outstanding for all periods
presented. To date, the Company has not had any issuances or grants for
nominal consideration.

   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 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.


                                      F-9
<PAGE>

                                CACHEFLOW INC.

            NOTES TO 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>
                                                          Three Months Ended
                                Year Ended April 30,           July 31,
                              --------------------------  --------------------
                               1997     1998      1999      1998       1999
                              -------  -------  --------  ---------  ---------
                                                              (unaudited)
<S>                           <C>      <C>      <C>       <C>        <C>
Historical:
 Net loss.................... $(1,443) $(5,507) $(13,202) $  (2,302) $  (6,047)
                              =======  =======  ========  =========  =========
  Weighted-average shares of
   common stock outstanding..   5,530    6,574     9,085      8,269     12,669
  Less: Weighted-average
   shares subject to
   repurchase................   4,591    3,638     4,769      4,752      6,455
                              -------  -------  --------  ---------  ---------
  Weighted-average shares
   used in computing basic
   and diluted net loss per
   common share..............     939    2,936     4,316      3,517      6,214
                              =======  =======  ========  =========  =========
  Basic and diluted net loss
   per common share.......... $ (1.54) $ (1.88) $  (3.06) $   (0.65) $   (0.97)
                              =======  =======  ========  =========  =========
Pro forma:
 Shares used above...........     939    2,936     4,316      3,517      6,214
 Pro forma adjustment to
  reflect the weighted effect
  of the assumed conversion
  of preferred stock.........                      9,970                13,059
 Pro forma adjustment to
  reflect weighted effect of
  assumed exercise and
  conversion of preferred
  stock warrants.............                        563                   673
                                                --------             ---------
 Shares used in computing pro
  forma basic and diluted net
  loss per common share
  (unaudited)................                     14,849                19,946
                                                ========             =========
 Pro forma basic and diluted
  net loss per common share
  (unaudited)................                   $  (0.89)            $   (0.30)
                                                ========             =========
</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 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 were (in thousands)
7,244, 14,600, 12,707, 15,157, and 22,462 for the three years ended April 30,
1997, 1998 and 1999, and for the three months ended July 31, 1998 and 1999,
respectively.

 Advertising Costs

   The Company expenses advertising costs as incurred. Advertising expenses
for 1997, 1998 and 1999 were $13,000, $84,000 and $270,000, respectively, and
are included in sales and marketing expenses.

 Unaudited Pro Forma Stockholders' Equity (Deficit)

   If the offering contemplated by this prospectus is consummated, all of the
preferred stock outstanding will automatically be converted into common stock.
Unaudited pro forma stockholders' equity (deficit) at July 31, 1999, as
adjusted for the assumed conversion of preferred stock based on the shares of
preferred stock outstanding at July 31, 1999, is disclosed on the consolidated
balance sheet.

 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 segment to design, develop, market
and support high-performance Internet caching appliances.

                                     F-10
<PAGE>

                                CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Recent Accounting Pronouncements

   In June 1998, the FASB issued FAS 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.

2. Balance Sheet Details

   Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                           April 30,
                                                           ---------  July 31,
                                                           1998 1999    1999
                                                           ---- ---- -----------
                                                                     (unaudited)
   <S>                                                     <C>  <C>  <C>
   Raw materials.......................................... $407 $610   $1,263
   Work-in-process........................................   --   45      124
   Finished goods.........................................   --  277      334
                                                           ---- ----   ------
                                                           $407 $932   $1,721
                                                           ==== ====   ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                   April 30,
                                                                  -------------
                                                                  1998    1999
                                                                  -----  ------
   <S>                                                            <C>    <C>
   Computer and office equipment................................. $ 588  $1,224
   Furniture and fixtures........................................     2      23
   Software......................................................   156     469
                                                                  -----  ------
                                                                    746   1,716
   Less accumulated depreciation and amortization................  (104)   (365)
                                                                  -----  ------
                                                                  $ 642  $1,351
                                                                  =====  ======
</TABLE>

   Certain computer and office equipment are recorded under capital leases
that aggregated $29,000 as of April 30, 1999 (none were outstanding as of
April 30, 1998). Accumulated amortization on the assets recorded under capital
leases aggregated $8,000 as of April 30, 1999.

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.


                                     F-11
<PAGE>

                                CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Preferred Stock

   Preferred stock consisted of the following series (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
                                                   Shares Issued and
                             Shares Authorized at   Outstanding at         Per Share
                            ---------------------- ----------------- ----------------------  Aggregate
                              April 30,                April 30,                            Liquidation
                            ------------- July 31, -----------------                        Preference
                                                                     July 31, Noncumulative at July 31,  Liquidation
   Series                    1998   1999    1999   1998     1999       1999     Dividend       1999      Preference
   ------                   ------ ------ -------- ----- ----------- -------- ------------- -----------  -----------
                                                         (unaudited)                        (unaudited)
   <S>                      <C>    <C>    <C>      <C>   <C>         <C>      <C>           <C>          <C>
   A.......................  6,394  6,394   6,394  5,831    5,831      5,831     $0.070       $0.875       $ 5,102
   B.......................  4,400  4,400   4,400  4,139    4,139      4,139     $0.225       $2.260         9,355
   C.......................    --     --    4,500    --       --       4,372     $0.460       $4.575        20,000
   Undesignated............ 19,206 19,206  14,706    --       --         --         --           --            --
                            ------ ------  ------  -----    -----     ------                               -------
                            30,000 30,000  30,000  9,970    9,970     14,342                               $34,457
                            ====== ======  ======  =====    =====     ======                               =======
</TABLE>

   The holders of Series A, B, and C 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, and C 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, and C 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.

   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.

   Preferred shares automatically convert into shares of common stock at the
conversion price in effect upon the earlier of the Company's sale of its
common stock in a public offering with cash proceeds to the Company of at
least $20,000,000 or upon the agreement of both the holders of a majority of
the outstanding shares of Series A, B, and C preferred stock, voting together
as a class, and the holders of a majority of the outstanding shares of Series
C preferred stock. 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.

 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 expire at the earlier
of April 30, 2000 or at the completion of the Company's initial public
offering of its common stock.

   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 Company
calculated a value for the Series B warrants using the Black-Scholes valuation
model of approximately $507,000 and recorded this amount as deferred debt
issuance costs in other assets. This amount is being amortized over the term
of the agreement to interest expense.

                                     F-12
<PAGE>

                                CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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 were immediately exercisable and the
remaining warrants became exercisable in September 1999. The warrants expire
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 intends
to record an additional charge of approximately $604,000 in the three months
ending October 31, 1999, which represents the fair value of the warrants. The
fair value of the warrants was determined using the Black-Scholes model.

 Common Stock

   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 founder's and 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, 1998 and 1999 and July 31, 1999,
2,652,500, 7,310,671 and 6,015,498 shares, respectively, of common stock
issued under these agreements were subject to repurchase. 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,    July
                                                            -------------  31,
                                                             1998   1999   1999
                                                            ------ ------ ------
   <S>                                                      <C>    <C>    <C>
   Common stock reserved for:
     Preferred stock....................................... 10,794 10,794 15,294
     1996 stock option plan................................  7,841  9,241  9,643
     Preferred stock warrants..............................    563    814    814
                                                            ------ ------ ------
                                                            19,198 20,849 25,751
                                                            ====== ====== ======
</TABLE>

 Note Receivable from Stockholder

   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 13, 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 and is also secured by
all of the assets owned by the officer.

4. Stock Option Plan

   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 9,241,000. Under the 1996 Plan, nonstatutory
stock options may be granted to employees and consultants, and incentive stock
options (ISO) may

                                     F-13
<PAGE>

                                CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 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. At April 30, 1998 and 1999 and July 31, 1999, the Company
had 321,000, 6,008,000, and 2,047,445 shares, respectively, which were subject
to repurchase rights under the 1996 Plan. No shares were repurchased under the
1996 plan during fiscal 1997, 1998 and 1999. For the three months ended July
31, 1999, 271,000 shares were repurchased under the 1996 Plan at the original
issuance price.

   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.

   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.

   Stock option activity under the 1996 Plan and options issued outside the
1996 Plan 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>
     Options granted.................................     850        $0.06
                                                       ------
   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 (unaudited).....................   1,592        $2.00
     Options exercised (unaudited)...................     (25)       $0.28
     Options canceled (unaudited)....................     (34)       $0.75
                                                       ------
   Balance at July 31, 1999 (unaudited)..............   3,401        $1.21
                                                       ======
</TABLE>


                                     F-14
<PAGE>

                                CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   At July 31, 1999, 33,000 shares were available for future option grants
under the 1996 Plan.

   The following table summarizes information about stock options outstanding
at April 30, 1999 (in thousands except per share amounts).

<TABLE>
<CAPTION>
                      Options Outstanding                                Options exercisable
----------------------------------------------------------------- ----------------------------------
  Range of    Number of Options Weighted Average Weighted Average Number of Options Weighted Average
  Exercise     Outstanding at   Contractual Life     Exercise      Exercisable at       Exercise
   Prices      April 30, 1999        (Years)          Price        April 30, 1999        Price
  --------    ----------------- ---------------- ---------------- ----------------- ----------------
<S>           <C>               <C>              <C>              <C>               <C>
$0.075-$0.25          442             8.5             $0.15              263             $0.12
$0.375-$1.00        1,426             9.5              0.61              134              0.38
------------        -----             ---             -----              ---             -----
$0.075-$1.00        1,868             9.3             $0.51              397             $0.21
</TABLE>

   For the three years ended April 30, 1997, 1998 and 1999 and the three
months ended July 31, 1999, the Company recorded deferred stock compensation
of $150,000, $13,569,000, and $11,946,000, respectively, representing 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
years ended April 30, 1998 and 1999 and the three months ended July 31, 1999,
the Company recorded amortization of deferred stock compensation of $52,000,
$3,600,000 and $2,466,000, respectively. At April 30, 1998 and 1999 and July
31, 1999, the Company had $98,000, $10,067,000 and $19,547,000, 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 employee stock options
under the fair value method of FAS 123. The fair value for each option granted
was estimated at the date of grant using the minimum value option pricing
model with the following weighted-average assumptions: a risk-free interest
rate of 6.00%, no dividend yield, and an exercisable life of five years for
the years ended April 30, 1997, 1998 and 1999.

   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 options 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 options.

   For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting periods. Pro forma
information follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                      Year Ended April 30,
                                                    --------------------------
                                                     1997     1998      1999
                                                    -------  -------  --------
   <S>                                              <C>      <C>      <C>
   Pro forma net loss.............................  $(1,444) $(5,520) $(13,261)
                                                    -------  -------  --------
   Pro forma basic and diluted net loss per common
    share.........................................  $ (1.54) $ (1.88) $  (3.07)
                                                    =======  =======  ========
</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 $0.02, $0.02,
and $0.14 for options granted for the years ended April 30, 1997, 1998 and
1999, respectively.

                                     F-15
<PAGE>

                                CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The pro forma impact of options on the net loss for the years ended April
30, 1997, 1998 and 1999 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of
additional stock option grants.

5. Income Taxes

   There has been no provision for U.S. federal, state, or foreign income
taxes for any period as the Company has incurred operating losses in all
periods and for all jurisdictions.

   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,
                                                                 --------------
                                                                  1998    1999
                                                                 ------  ------
   <S>                                                           <C>     <C>
   Deferred tax assets:
     Net operating losses....................................... $2,148  $5,384
     Other......................................................    344     729
                                                                 ------  ------
   Total deferred tax assets....................................  2,492   6,113
   Valuation allowance.......................................... (2,492) (6,113)
                                                                 ------  ------
   Net deferred tax assets...................................... $  --   $  --
                                                                 ======  ======
</TABLE>

   Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $1,982,000 and $3,621,000 during 1998 and
1999, respectively.

   As of April 30, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $14,140,000, which expire in
fiscal years 2011 through 2019.

   The Company also had net operating loss carryforwards for state income tax
purposes of approximately $9,620,000, which expire in fiscal year 2006.

   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.

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 bear interest at the prime rate plus 2% (10.5% at April 30,
1998) and would have expired 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. A
portion of the credit line is 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 line of credit
expires in November 1999 and bears interest at the financial institution's
prime rate plus 0.75% (8.5% at April 30, 1999). As of April 30, 1999, the
outstanding balance under the amended line of credit was $643,000. The
remaining $500,000 of available credit, all of which is outstanding as of
April 30, 1999, is a three-year term loan which expires in November 2002 and
bears interest at the financial institution's prime rate plus 1.75% (9.5% at
April 30, 1999).

                                     F-16
<PAGE>

                                CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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 represents a $3,500,000 three-
year term loan, all of which is 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 is outstanding as of April 30, 1999. The term loan
and equipment line of credit are secured by substantially all of the Company's
assets, bear interest at 13% and 11.4% and mature in November 2002 and May
2000, respectively.

   The above agreements require the Company to maintain compliance with
certain financial covenants and prohibits the Company from paying dividends on
its common stock. As of April 30, and July 31, 1999 the Company was in
compliance with such financial covenants. As of April 30, and July 31, 1999,
the total amount available under the Company's financial arrangements was
$568,000 and $1,502,000, respectively.

   Future payments due on the long-term debt obligations as of April 30, 1999
are as follows (in thousands):

<TABLE>
<CAPTION>
   Year ending April 30,
   ---------------------
   <S>                                                                    <C>
     2000................................................................ $  789
     2001................................................................  1,675
     2002................................................................  1,289
     2003................................................................    247
                                                                          ------
   Total payments........................................................ $4,000
                                                                          ======
</TABLE>

7. 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,
   ---------------------
     2000............................................................... $1,384
     2001...............................................................  1,386
     2002...............................................................  1,431
     2003...............................................................  1,357
     2004 and thereafter................................................  1,922
                                                                         ------
   Total minimum lease payments......................................... $7,480
                                                                         ======
</TABLE>

   Rent expense for the three years ended April 30, 1997, 1998 and 1999 was
$33,000, $329,000 and $1,300,000, respectively.

8. 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. No intraenterprise sales
occurred during fiscal 1999 and no long-lived assets reside in the Company's
foreign locations. No geographical information was provided for 1997 and 1998
as the Company's operations were limited to North America.

                                     F-17
<PAGE>

                                CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following is a summary of revenues by geographic area for the year
ended April 30, 1999 (in thousands):

<TABLE>
<CAPTION>
                                         North
                                        America Europe Japan  Other Consolidated
                                        ------- ------ ------ ----- ------------
   <S>                                  <C>     <C>    <C>    <C>   <C>
   Revenues............................ $3,919  $1,376 $1,565 $175     $7,035
                                        ======  ====== ====== ====     ======
</TABLE>

9. Subsequent Events (Unaudited)

 Employee Stock Purchase Plan

   In September 1999, the Company's Board of Directors adopted the Employee
Stock Purchase Plan. The plan becomes effective upon completion of the
Company's initial public offering of its common stock. A total of 2,500,000
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 will automatically increase by 500,000 shares annually beginning
January 31, 2000. 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 have been
reserved for issuance. The plan becomes effective upon the completion of the
Company's initial public offering of its common stock. The number of shares
reserved under the Incentive Plan will automatically increase annually
beginning January 1, 2000 by the lesser of 5% of the total amount of common
stock shares 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 have
been reserved for issuance. The 1999 Director Option Plan became effective on
the date of its adoption. Each non-employee 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 will automatically
increase by 100,000 shares annually beginning January 1, 2000. The Company's
Board of Directors, at its discretion, may reduce the automatic annual
increase in reserved shares.

 Note Receivable from Stockholder

   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. The note is
secured by 2 million shares of the Company's common stock owned by the
officer.

                                     F-18
<PAGE>

                                CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Stock Option Grants

   Between August 1 and September 24, 1999, the Company granted options to
purchase 2,874,000 shares of common stock. The Company recorded additional
deferred stock compensation of approximately $17.6 million with respect to
stock option grants made during this period.

 Litigation

   On September 16, 1999, Nokia IP 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
allegations against the Company include misappropriation of trade secrets,
unfair competition and inducing breach of contract. Nokia's allegations
against these officers include breach of contract, misappropriation of trade
secrets and unfair competition and, with respect to one of the officers of the
Company, breach of fiduciary duty. Nokia's claims are based upon Nokia's
allegation that a certain officer of the Company violated a non-competition
and non-solicitation provision contained in his employment agreement with
Nokia and that another officer of the Company has violated a non-solicitation
clause. Nokia is seeking compensatory and punitive damages, a decree that the
defendants' alleged acts were and are unfair acts of competition, orders
restraining and enjoining the defendants from disclosing or using Nokia's
trade secrets or confidential or proprietary information and acting in a
manner that violates these officers' contractual and fiduciary duties to
Nokia, attorneys' fees and other specified damages. The Company believes that
there are meritorious defenses to Nokia IP's allegations and plans to defend
the litigation vigorously. Although the Company believes that the ultimate
outcome of the dispute with Nokia will not have a material adverse effect on
the Company's consolidated financial position, results of operations and cash
flows, there can be no assurance that Nokia IP will not prevail in this
dispute. If Nokia IP were to prevail in this dispute, it could have a material
adverse effect on the Company's consolidated financial position, results of
operations, and cash flows.

                                     F-19
<PAGE>




                                 [COMPANY LOGO]




<PAGE>

                                    PART II

                    INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.

<TABLE>
   <S>                                                                  <C>
   SEC Registration fee................................................ $13,900
   NASD fee............................................................   5,500
   Nasdaq National Market initial listing fee..........................      *
   Printing and engraving..............................................      *
   Legal fees and expenses of the Company..............................      *
   Accounting fees and expenses........................................      *
   Directors and Officers Liability Insurance..........................      *
   Blue sky fees and expenses..........................................      *
   Transfer agent fees.................................................      *
   Miscellaneous.......................................................      *
                                                                        -------
     Total.............................................................      *
                                                                        =======
</TABLE>
--------
  * To be filed by amendment.

Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article VI of the Registrant's Bylaws provides for mandatory
indemnification of its directors and officers and those serving at the
Registrant's request as directors, officers, employees or agents of other
organizations to the maximum extent permitted by the Delaware General
Corporation Law. The Registrant's Amended and Restated Certificate of
Incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of the directors' fiduciary duty as
directors to the Registrant and its stockholders. This provision in the
Amended and Restated Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a
form of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The Indemnification Agreements provide the Registrant's officers
and directors with further indemnification to the maximum extent permitted by
the Delaware General Corporation Law. The Registrant maintains liability
insurance for its directors and officers. Reference is also made to Sections 7
and 8 of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities, and Section 1.10 of the Amended and Restated Investors' Rights
Agreement contained in Exhibit 4.1 hereto, indemnifying certain of the
Company's stockholders, including controlling stockholders, against certain
liabilities.

                                     II-1
<PAGE>

Item 15. Recent Sales of Unregistered Securities

   Since our formation, we have issued and sold the following securities:

     (1) From inception through July 31, 1999, the Company granted stock
  options to purchase 10,198,980 shares of Common Stock at exercise prices
  ranging from $.005 to $2.00 per share to employees, consultants, directors
  and other service providers pursuant to its 1996 Stock Option Plan.
  Additionally, the Company granted stock options to purchase 1,000,000
  shares of its Common Stock at an exercise price of $.50 per share to a
  director outside of the 1996 Stock Option Plan.

     (2) From inception through July 31, 1999, the Company issued and sold an
  aggregate of 6,719,625 shares of its Common Stock to employees,
  consultants, directors and other service providers for aggregate
  consideration of approximately $535,000 pursuant to direct issuances or
  exercises of options granted outside of the 1996 Stock Option Plan.

     (3) From July 31, 1999 through September 24, 1999, the Company granted
  stock options to purchase 2,874,000 shares of its Common Stock at exercise
  prices ranging from $4.00 to $5.50 per share to employees, consultants and
  directors pursuant to its 1996 Stock Option Plan.

     (4) Between April 30, 1996 and June 21, 1996, the Company issued
  warrants to purchase 562,850 shares of its Series A Preferred Stock at an
  exercise price of $.875 per share.

     (5) On October 29, 1996, we issued and sold 5,483,252 shares of Series A
  Preferred Stock to a group of 18 investors for an aggregate purchase price
  of $4,797,845.50.

     (6) On November 13, 1996, we issued and sold an aggregate of 347,688
  shares of its Series A Preferred Stock to seven investors for an aggregate
  purchase price of $304,227.00

     (7) On December 24, 1997, we issued and sold 3,816,376 shares of Series
  B Preferred Stock to a group of 14 investors for an aggregate purchase
  price of $8,625,009.76.

     (8) On February 18, 1998, we issued and sold 323,010 shares of Series B
  Preferred Stock to a group of two investors for our aggregate purchase
  price of $730,002.60.

     (9) On November 18, 1998, the Company issued warrants to purchase
  141,842 shares of its Series B Preferred Stock at an exercise price of
  $3.4175 per share.

     (10) On April 30 1999, the Company issued warrants to purchase 110,000
  shares of its Series C Preferred Stock at an exercise price of $4.575 per
  share.

     (11) On May 28, 1999, we issued and sold 4,371,586 shares of Series C
  Preferred Stock to a group of 27 investors for an aggregate purchase price
  of $20,000,005.95.

   The sale of the above securities was deemed to be exempt from registration
under the Act in reliance upon Section 4(2) of the Act or Rule 701 promulgated
under Section 3(b) of the Act as transactions by an issuer not involving any
public offering or transactions pursuant to compensation benefit plans and
contracts relating to compensation as provided under Rule 701. The recipients
of securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us.

                                     II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits

<TABLE>
<CAPTION>
Exhibit
  No.                                       Description
-------                                     -----------
<S>      <C>
 1.1*    Form of Underwriting Agreement
 3.1     Certificate of Incorporation of the Registrant, as amended to date
 3.2     Form of Amended and Restated Certificate of Incorporation of the Registrant, to
         be filed upon the closing of the offering made pursuant to this Registration
         Statement
 3.3     Bylaws of the Registrant
 3.4     Form of Amended and Restated Bylaws of the Registrant to be effective upon the
         closing of the offering made pursuant to this Registration Statement
 4.1     Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
 4.2     Amended and Restated Investors' Rights Agreement, dated May 28, 1999
 4.3     Series C Preferred Stock Purchase Agreement, dated May 28, 1999
 4.4*    Specimen Certificate of the Registrant's Common Stock
 5.1*    Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
         to the Registrant
10.1*    Form of Indemnification Agreement
10.2     1996 Stock Option Plan
10.3     1999 Stock Incentive Plan
10.4     1999 Director Option Plan
10.5     1999 Employee Stock Purchase Plan
10.6     Commercial Lease Agreement between Registrant, the Arrillaga Foundation and the
         Perry Foundation, dated July 14, 1998
10.7     Commercial Lease Agreement between Registrant and Redmond Whitehall Associates,
         Inc., dated February 19, 1997
10.8     Commercial Lease Agreement between CacheFlow Canada and Wiebe Property
         Corporation Ltd., dated May 1, 1999
16.1     Letter from Deloitte and Touche LLP, former independent accountants to the
         Registrant
16.2     Letter from PricewaterhouseCoopers LLP, former independent accountants to the
         Registrant
21.1     Subsidiaries
23.1     Consent of Ernst & Young LLP, independent auditors
23.2*    Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
         to the Registrant. Reference is made to Exhibit 5.1
24.1     Power of Attorney. Reference is made to page II-5
27.1     Financial Data Schedule
</TABLE>
--------
*  To be supplied by amendment.
   (b) Financial Statement Schedule

Schedule II--Valuations and Qualifying accounts.

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

Item 17. Undertakings

   The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

                                     II-3
<PAGE>

   Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Amended and Restated
Certificate of Incorporation or the Bylaws of the Registrant, Indemnification
Agreements entered into between the Registrant and its officers and directors,
the Underwriting Agreement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.

   The Registrant hereby undertakes that:

   (1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.

   (2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

                                     II-4
<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on this 28th day of September, 1999.

                                          CACHEFLOW, INC.

                                                    /s/ Brian M. NeSmith
                                          By: _________________________________
                                                      Brian M. NeSmith
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Brian M. NeSmith and Michael J.
Johnson, and each of them, his or her true and lawful attorneys-in-fact and
agents with full power of substitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
sign any registration statement for the same offering covered by this
Registration Statement that is to be effective on filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or his or her or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.

   Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<S>                                    <C>                        <C>
         /s/ Brian M. NeSmith          President, Chief Executive September 28, 1999
______________________________________  Officer and Director
           Brian M. NeSmith             (Principal Executive
                                        Officer)

        /s/ Michael J. Johnson         Vice President, Chief      September 28, 1999
______________________________________  Financial Officer and
          Michael J. Johnson            Secretary (Principal
                                        Financial and Accounting
                                        Officer)

          /s/ David W. Hanna           Director                   September 28, 1999
______________________________________
            David W. Hanna

        /s/ Michael A. Malcolm         Chairman of the Board,     September 28, 1999
______________________________________  Director
          Michael A. Malcolm

        /s/ Stuart G. Phillips         Director                   September 28, 1999
______________________________________
          Stuart G. Phillips

        /s/ Andrew S. Rachleff         Director                   September 28, 1999
______________________________________
          Andrew S. Rachleff
</TABLE>

                                     II-5
<PAGE>

                                                                     SCHEDULE II

                                 CACHEFLOW INC.

                       VALUATION AND QUALIFYING ACCOUNTS
                   YEARS ENDED APRIL 30, 1997, 1998 AND 1999
                        AND QUARTER ENDED JULY 31, 1999

                   Allowance for Doubtful Accounts Receivable

<TABLE>
<CAPTION>
                                              Additions-
                                 Balance at    Charged                Balance at
Year Ended                      Beginning of to Costs and Deductions-   End of
 April 30,                         Period      Expenses   Write-offs    Period
----------                      ------------ ------------ ----------- ----------
<S>                             <C>          <C>          <C>         <C>
1997...........................      --             --         --           --
1998...........................      --             --         --           --
1999...........................      --        121,000         --      121,000
</TABLE>

<TABLE>
<CAPTION>
                                              Additions-
                                 Balance at    Charged                Balance at
Quarter Ended                   Beginning of to Costs and Deductions-   End of
   July 31,                        Period      Expenses   Write-offs    Period
-------------                   ------------ ------------ ----------- ----------
<S>                             <C>          <C>          <C>         <C>
1999...........................   121,000      264,000      85,000     300,000
</TABLE>

<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Exhibit No.                                      Exhibit
 -----------                                      -------
 <C>         <S>
  1.1*       Form of Underwriting Agreement
  3.1        Certificate of Incorporation of the Registrant, as amended to date
  3.2        Form of Amended and Restated Certificate of Incorporation of the Registrant, to
             be filed upon the closing of the offering made pursuant to this Registration
             Statement
  3.3        Bylaws of the Registrant
  3.4        Form of Amended and Restated Bylaws of the Registrant to be effective upon the
             closing of the offering made pursuant to this Registration Statement
  4.1        Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
  4.2        Amended and Restated Investors' Rights Agreement, dated May 28, 1999
  4.3        Series C Preferred Stock Purchase Agreement, dated May 28, 1999
  4.4*       Specimen Certificate of the Registrant's Common Stock
  5.1*       Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
             to the Registrant
 10.1*       Form of Indemnification Agreement
 10.2        1996 Stock Option Plan
 10.3        1999 Stock Incentive Plan
 10.4        1999 Director Option Plan
 10.5        1999 Employee Stock Purchase Plan
 10.6        Commercial Lease Agreement between Registrant, the Arrillaga Foundation and the
             Perry Foundation, dated July 14, 1998
 10.7        Commercial Lease Agreement between Registrant and Redmond Whitehall Associates,
             Inc., dated February 19, 1997
 10.8        Commercial Lease Agreement between CacheFlow Canada and Wiebe Property
             Corporation Ltd., dated May 1, 1999
 16.1        Letter from Deloitte and Touche LLP, former independent accountants to the
             Registrant
 16.2        Letter from PricewaterhouseCoopers LLP, former independent accountants to the
             Registrant
 21.1        Subsidiaries
 23.1        Consent of Ernst & Young LLP, independent auditors
 23.2*       Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
             to the Registrant. Reference is made to Exhibit 5.1
 24.1        Power of Attorney. Reference is made to page II-5
 27.1        Financial Data Schedule
</TABLE>
--------
*  To be supplied by amendment.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 354942}]
{"company-data": {"conformed-name": "CACHEFLOW INC", "cik": "0001095600", "assigned-sic": "", "irs-number": "911715963", "state-of-incorporation": "DE"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-87997", "film-number": "99719168"}, "business-address": {"street1": "650 ALMANOR AVENUE", "city": "SUNNYVALE", "state": "CA", "zip": "94086", "phone": "4082202200"}, "mail-address": {"street1": "650 ALMANOR AVE", "city": "SUNNYVALE", "state": "CA", "zip": "94086"}}
As filed with the Securities and Exchange Commission on September 28, 1999.
                                                       Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                ---------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                                ---------------
                                CACHEFLOW INC.
            (Exact name of Registrant as specified in its charter)
                                ---------------
         Delaware                    7373                    91-1715963
     (State or other          (Primary Standard           (I.R.S. Employer
     jurisdiction of              Industrial           Identification Number)
     incorporation or        Classification Code
      organization)                Number)

                              650 Almanor Avenue
                          Sunnyvale, California 94086
                                (408) 220-2200
              (Address, including zip code, and telephone number,
     including area code, of the Registrant's principal executive offices)
                                ---------------
                               BRIAN M. NESMITH
                     President and Chief Executive Officer
                                CacheFlow Inc.
                              650 Almanor Avenue
                          Sunnyvale, California 94086
                                (408) 220-2200
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                ---------------
                                  Copies to:
       Robert V. Gunderson, Jr.                William H. Hinman, Jr.
          Daniel E. O'Connor                     Shearman & Sterling
       Gunderson Dettmer Stough                  1550 El Camino Real
 Villeneuve Franklin & Hachigian, LLP       Menlo Park, California 94025
        155 Constitution Drive                     (650) 330-2200
     Menlo Park, California 94025
            (650) 321-2400

                                ---------------
   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

                                ---------------
                        CALCULATION OF REGISTRATION FEE

 ------------------------------------------------------------------------------
 ------------------------------------------------------------------------------
Proposed Maximum
  Title of Each Class of                         Aggregate        Amount of
Scurities to be Registerede                  Offering Price(1) Registration Fee
 ------------------------------------------------------------------------------
Common Stock, $.0001 par value per share...    $50,000,000        $13,900
 ------------------------------------------------------------------------------
 ------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(o).

   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and we are not soliciting offers to buy these  +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued    , 1999

                                       Shares
                                     [LOGO]
                                  COMMON STOCK

                                  -----------

CacheFlow Inc. is offering shares of its common stock. This is our initial
public offering and no public market currently exists for our shares. We
anticipate that the initial public offering price will be between $    and $
per share.

                                  -----------

We have filed an application for our common stock to be quoted on the Nasdaq
National Market under the symbol "CFLO."

                                  -----------

Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.

                                  -----------

                               PRICE $    A SHARE

                                  -----------
Underwriting
                                  Price to        Discounts and      Proceeds to
                                   Public          Commissions        CacheFlow
                                  --------        -------------      -----------
Per Share....................         $                 $                 $
Total........................       $                 $                 $
CacheFlow Inc. has granted the underwriters the right to purchase up to an
additional     shares to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on    , 1999.

                                  -----------

MORGAN STANLEY DEAN WITTER ___________________________CREDIT SUISSE FIRST BOSTON

                             DAIN RAUSCHER WESSELS
                    a division of Dain Rauscher Incorporated

     , 1999
INSIDE FRONT COVER

The heading for the page reads "A New Layer of the Internet Infrastructure."

In the center of the page is a graphic. The graphic is a triangle layered into
five horizontal sections. In the top section is the word "User." In the next
four sections from top to bottom are the words "Content," "Cache,"
"Router," and "Switch."

At the top left of the page runs the following text:

"The Internet cache appliance"

The text continues at the middle right of the page:

"manages content flow."

At the bottom of the page is our logo.
At the top of the page is our logo.

Immediately underneath our logo is the word "Solutions."

In the center of the page is a picture of one of our Internet caching
appliances.

Immediately underneath this picture and across the bottom of the page runs the
following text:

"The CacheFlow family of Internet caching appliances combines CacheOS embedded
software with purpose-built appliance hardware."

At the top left of the page is a graphic, with the words "Enterprise Caching"
immediately underneath.  The graphic is a picture of a cityscape at night.

Immediately below the words "Enterprise Caching" is the following text:

"Accomodate growth in mission critical Internet and intranet traffic without
sacrificing control; enhance employee productivity with response time
improvements; replace overloaded proxy servers to scale performance and reduce
operating costs; deliver performance equality to branch office employees."

At the bottom left of the page is a graphic, with the words "E-Commerce
Acceleration" immediately underneath. The graphic is a picture of a portion of a
computer keyboard.

Immediately below the words "E-Commerce Acceleration" is the following text:

"Increase transaction capacity while reducing operating costs; improve
consumer quality of service with faster response times; offload servers to
deliver accelerated performance and surge protection; offload overburdened
firewalls without sacrificing security."

At the top right of the page is a graphic, with the words "Broadband
Fulfillment" immediately underneath. The graphic is a picture of a person's
hand plugging a fiber-optic cable into a switch.

Immediately below the words "Broadband Fulfillment" is the following text:

"Enable the performance gains expected from broadband; reduce the effects of
Internet distance, congestion and latency; speed the delivery of popular
content; scale network capacity to meet growing demand."

At the bottom right of the page is a graphic, with the words "International
Access" immediately underneath.  The graphic is a picture of the Arc de
Triomphe, which is a monument in France.

Immediately below the words "International Access" is the following text:

"Improve bandwidth application; reduce the impact of Internet distance,
congestion and latency; increase network capacity while reducing operating
costs; attract and retain customers with response time improvements."
TABLE OF CONTENTS
Page
                                      ----
Prospectus Summary..................    4
Risk Factors........................    6
Special Note Regarding Forward-
 Looking Statements.................   19
Use of Proceeds.....................   20
Dividend Policy.....................   20
Capitalization......................   21
Dilution............................   22
Selected Consolidated Financial
 Data...............................   23
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   24
Page
                                     ----
Business...........................   33
Management.........................   45
Certain Transactions...............   55
Principal Stockholders.............   56
Description of Capital Stock.......   58
Shares Eligible for Future Sale....   61
Underwriters.......................   63
Legal Matters......................   66
Experts............................   66
Additional Information.............   66
Change in Independent Accountants..   66
Index to Consolidated Financial
 Statements........................  F-1
----------------

   We were incorporated in Delaware on March 13, 1996. Our principal executive
offices are located at 650 Almanor Avenue, Sunnyvale, California 94086, and
our telephone number is (408) 220-2200.

   You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.

   In this prospectus, "CacheFlow," "we," "us" and "our" refer to CacheFlow
Inc. Unless otherwise indicated, all information contained in this prospectus:

  .  assumes that the underwriters' over-allotment option is not exercised;
     and

  .  reflects the two-for-one split of our common stock and preferred stock
     effected in June 1999.

   Until      , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.

                                       3
PROSPECTUS SUMMARY

   You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes appearing
elsewhere in this prospectus.

                                   CACHEFLOW

   CacheFlow is a leading provider of Internet caching appliances that
accelerate and manage the flow of information over the Internet. We focus
exclusively on designing, developing, marketing and supporting products that
are specifically designed, or purpose-built, for high-performance Internet
caching. In its most basic form, a cache stores data physically closer to end
users, eliminating the need to retrieve data from its source each time it is
requested. All of our caching appliances are based on CacheOS, our proprietary
high-performance operating system. Our Internet caching appliances enable our
Internet service provider and enterprise customers to reduce web response
times, easily manage and administer their networks and reduce overall network
costs. In addition, our Internet caching appliances are designed to provide
better network security and more up-to-date content than traditional caching
solutions.

   The number of Internet users, Internet access devices and web pages
worldwide is expected to grow rapidly. This growth, coupled with the increasing
complexity of web content, is expected to significantly increase the volume of
data transmitted across the Internet and corporate intranets. The physical
infrastructure of the Internet must therefore accommodate sharply increased
volumes of data traffic, including a high degree of redundant data, as well as
highly unpredictable and event-driven usage patterns. Advances in
communications technology have improved the Internet's ability to transfer
packets of data, but these technologies do not reduce the volume of data that
must be moved from origin server to user, shorten the physical distance between
source and user, or enable the analysis or control of web content. Web servers
are becoming overloaded by a growing number of content requests, and slow web
response time remains a continuing problem that can have a significant
financial impact on corporate enterprises and Internet service providers. While
traditional caching solutions reduce the physical distance between content and
user and remove much of the redundant traffic from the network, these solutions
do not comprehensively address the disparate requirements of Internet service
providers, enterprises and users. Due to increasing network traffic volumes,
rising network complexity and heightened user expectations for Internet
performance, we believe that the market for Internet caching appliances will
grow rapidly. According to the GartnerGroup, this market is projected to grow
from $92 million in 1999 to over $1 billion in 2003.

   As of August 31, 1999, we had approximately 100 customers, including
Internet service providers such as Road Runner and germany.net, as well as
corporate enterprises such as Delta Airlines and Xerox. Our business strategy
is to be the leading provider of Internet caching solutions by continuing to
deliver high-performance, innovative Internet caching appliances. To implement
our strategy, we intend to leverage our Internet caching focus to target
specific markets that are particularly well-suited for our appliances. Using
our technological expertise, we intend to continue to develop both the software
and hardware elements of our appliances. We intend to extend our distribution
channels by expanding our direct sales force and establishing relationships
with additional resellers, systems integrators and original equipment
manufacturers. We also intend to increase our investments in a broad range of
marketing and educational programs to build and establish the CacheFlow brand.

                                ----------------

   We were incorporated in Delaware in March 1996. Our principal executive
offices are located at 650 Almanor Avenue, Sunnyvale, California 94086, and our
telephone number is (408) 220-2200.

                                       4
THE OFFERING
Common stock offered......     shares
Common stock to be
 outstanding after this
 offering.................     shares
Use of proceeds........... For working capital and general corporate purposes.
Proposed Nasdaq National
 Market symbol............ CFLO
The information above is based on shares outstanding as of July 31, 1999,
and assumes the conversion of all outstanding shares of preferred stock into
14,341,912 shares of common stock upon the completion of this offering. This
information also includes 672,850 shares issuable upon exercise of warrants
that expire upon the closing of this offering. This information does not
include 3,401,251 shares subject to outstanding options as of July 31, 1999,
and 141,842 shares issuable upon exercise of outstanding warrants as of July
31, 1999, which warrants do not expire upon the closing of this offering.
Between August 1, 1999 and September 24, 1999, we granted options to purchase
an additional 2,874,000 shares of common stock.

                      SUMMARY CONSOLIDATED FINANCIAL DATA
                     (in thousands, except per share data)
Year Ended      Three Months Ended
                                           April 30,            July 31,
                                        -----------------  --------------------
                                         1998      1999      1998       1999
                                        -------  --------  ---------  ---------
                                                               (unaudited)
Consolidated Statement of Operations
 Data:
  Net sales...........................  $    --  $  7,036  $     809  $   3,612
  Gross profit........................       --     3,739        211      2,232
  Operating expenses..................    5,740    16,744      2,584      8,243
  Operating loss......................   (5,740)  (13,005)    (2,373)    (6,011)
  Net loss............................   (5,507)  (13,202)    (2,302)    (6,047)
  Basic and diluted net loss per
   common share.......................  $ (1.88) $  (3.06) $    (.65) $    (.97)
  Weighted average shares used in
   computing basic and diluted net
   loss per common share..............    2,936     4,316      3,517      6,214
  Pro forma basic and diluted net loss
   per common share...................            $  (.89)            $    (.30)
  Shares used in computing pro forma
   basic and diluted net loss per
   common share.......................             14,849                19,946
The pro forma basic and diluted share calculations above and the pro forma
column below give effect to the conversion of all outstanding shares of
preferred stock into 14,341,912 shares of common stock upon the completion of
this offering, as if the conversion occurred at the date of original issuance.
The pro forma basic and diluted share calculations above and the pro forma
column below also reflect the cash exercise of warrants to purchase 672,850
shares at a weighted average exercise price of $1.48 per share prior to
completion of the offering. The pro forma as adjusted column below gives effect
to this offering and the application of the proceeds at an assumed initial
public offering price of $    per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
As of July 31, 1999
                                               -------------------------------
                                                                    Pro Forma
                                               Actual   Pro Forma  As Adjusted
                                               ------- ----------- -----------
                                                       (unaudited)
Consolidated Balance Sheet Data:
  Cash and cash equivalents................... $17,825   $18,821     $
  Working capital.............................  16,880    17,876
  Total assets................................  24,019    25,015
  Long-term obligations, net of current
   portion ...................................   3,211     3,211
  Total liabilities...........................   7,986     7,986
  Total stockholders' equity..................  16,033    17,029
5
RISK FACTORS

   An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors and the other information
in this prospectus before investing in our common stock. Our business,
financial condition and results of operations could be seriously harmed by any
of the following risks. The trading price of our common stock could decline
due to any of these risks, and you may lose all or part of your investment.

Risks Related to Our Business

   Our business is difficult to evaluate because we have a limited operating
history.

   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 "Risk Factors" 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 and we expect to incur future losses.

   We incurred net losses of $1.4 million from our inception in March 1996
through April 30, 1997, $5.5 million for the fiscal year ended April 30, 1998,
$13.2 million for the fiscal year ended April 30, 1999, and $6.0 million for
the quarter ended July 31, 1999. As of July 31, 1999, we had an accumulated
deficit of approximately $26.2 million. We have not had a profitable quarter
since our inception and we expect to continue to incur net losses in the
future. We may never achieve profitability. 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. In particular, we anticipate that our operating expenses will
increase substantially in the future as we:

  .  fund increased levels of research and development;

  .  enhance our existing products and create and market additional products;

  .  increase our direct sales and marketing activities, particularly by
     expanding our direct sales force;

  .  expand our indirect sales channels;

  .  make additional investments to develop our brand; and

  .  implement additional internal systems, develop additional infrastructure
     and hire additional employees.

   We expect to incur substantial non-cash costs relating to the amortization
of deferred compensation, which will contribute to our net losses. As of July
31, 1999, we had an aggregate of $19.5 million of deferred compensation to be
amortized. Between August 1, 1999 and September 24, 1999, we recorded
additional deferred compensation charges of $17.6 million with respect to
stock option grants made during this period.

   We expect our operating results to fluctuate, which makes the management of
our business more difficult.

   Our net sales and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:

  .  fluctuations in demand for Internet caching appliances;

  .  the timing and size of the shipment of individual orders;

                                       6
.  announcements of new products and product enhancements by us or by our
     competitors;

  .  the level of competition;

  .  unexpected delays in introducing new or enhanced products, including
     manufacturing delays;

  .  our ability to obtain sufficient supplies of limited source components
     for our products at acceptable prices, or at all;

  .  the mix of our products sold and the mix of distribution channels
     through which we sell our products;

  .  our ability to control expenses; and

  .  capital budget cycles of existing and potential customers and changes in
     these cycles.

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

  .  sales in any quarter are dependent on orders booked and shipped in that
     quarter, and we often operate with very little order backlog;

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

  .  we expect that, for the foreseeable future, most of our sales will come
     from a small number of customers, so 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.

   Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful. 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 will likely decrease significantly.

   We expect increased competition, and if we do not compete effectively our
business could be seriously harmed.

   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 public domain 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

                                       7
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.

   Our variable sales cycle makes it difficult to predict the timing of a sale
or whether a sale will be made.

   The timing of our sales is difficult to predict because of the variability
of the sales cycle for our products. 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
typically ranges from two to six months. Sales cycles for our products that
are sold to enterprises have traditionally been longer than sales cycles for
our products that are sold to 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. While our
customers are evaluating our products and before they place an order with us,
we may incur substantial sales and marketing expenses and expend significant
management efforts. In addition, product purchases are frequently subject to
unplanned processing and other delays, particularly with respect to larger
customers for whom our products represent a very small percentage of their
overall purchase activity. Large customers typically require approvals at a
number of management levels within their organizations, and, therefore,
frequently have longer sales cycles.

   We are entirely dependent on the success of our Internet caching appliance
product family and the introduction of future products.

   To date, our Internet caching appliance product family and related services
have accounted for all of our net sales. 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 achieve any significant degree of market
acceptance.

   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. Our inability to timely, cost-effectively and successfully
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, changing customer needs and evolving industry standards.
The introduction of products employing new technologies and emerging industry
standards could render our products obsolete and unmarketable.

   To be successful, we need to develop and introduce new products and
services and enhancements to existing products and services on a timely basis.
These products and services must keep pace with competitive offerings,
technological developments and emerging industry standards, address the ever-
changing and increasingly sophisticated needs of our customers, and achieve
market acceptance.

   In developing new products and services and enhancements to existing
products, we may:

  .  fail to develop and market products that respond to competitive
     offerings, technological changes or emerging industry standards in a
     timely or cost-effective manner;

                                       8
.  encounter products, capabilities or technologies developed by others
     that render our products and services obsolete or noncompetitive or that
     shorten the life cycles of our existing products and services;

  .  experience difficulties that could delay or prevent the successful
     development, introduction and marketing of these new products and
     services and enhancements to existing products; or

  .  fail to develop new products and services and enhancements to existing
     products that adequately meet the requirements of the marketplace or
     achieve market acceptance.

   We are dependent on several third-party manufacturers.

   We rely on several third-party manufacturers to build portions of our
products. 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. 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. 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 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 substantial assembly capacity constraints, which could
negatively affect our net sales.

   We currently conduct all final assembly and testing of our products at our
headquarters in Sunnyvale, California. We plan to transition final assembly to
third parties in the future. 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 we or any third-
party assembler 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. In
addition, if we are 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 such capital investments are required, our gross
margins, and as a result, our business could be seriously harmed.

   Some of the key components in our products come from limited sources of
supply.

   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 certain 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

                                       9
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.

   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 certain materials and components, which
could seriously harm our business.

   We are dependent upon key personnel and we must attract, assimilate and
retain other highly qualified personnel in the future.

   Our future success depends on the continued service of our senior
management, research and development and sales personnel. We have recently
experienced significant transition in our management team. Brian NeSmith, our
President and Chief Executive Officer, joined us in March 1999. Stuart Aaron,
our Vice President of Marketing and Product Management, joined us in April
1999. Terry Printy, our Vice President of Customer Support, joined us in June
1999. Alan Robin, our Senior Vice President of Sales, and Michael Johnson, our
Vice President and Chief Financial Officer, joined us in July 1999. 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. None of our employees is bound by an employment agreement and we
do not carry key-person life insurance. The loss of the services of one or
more of our key personnel could seriously harm our business.

   Our future success 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. We are particularly dependent
on hiring additional personnel to increase our direct sales and research and
development organizations. In addition, new hires frequently require extensive
training before they achieve desired levels of productivity. Competition for
such 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 business could be seriously harmed by the Nokia IP litigation.

   On September 16, 1999, Nokia IP filed a lawsuit in Santa Clara County
Superior Court naming CacheFlow Inc., Brian NeSmith, our President and Chief
Executive Officer and a director, and Alan Robin, our Senior Vice President of
Sales, as defendants. Messrs. NeSmith and Robin were officers and employees of
Ipsilon Networks, Inc., which was acquired by Nokia in December 1997.
Following the acquisition, Messrs. NeSmith and Robin became employees of
Nokia. Nokia's allegations against us include misappropriation of trade
secrets, unfair competition and inducing breach of contract. Nokia's
allegations against Messrs. NeSmith and Robin include breach of contract,
misappropriation of trade secrets and unfair competition and, with respect to
Mr. Robin only, breach of fiduciary duty. Nokia's claims are based upon
Nokia's allegation that Mr. NeSmith has violated a non-competition and non-
solicitation provision contained in his employment agreement with Nokia and
that Mr. Robin has violated a non-solicitation obligation to Nokia. Nokia is
seeking compensatory and punitive damages, a decree that the defendants'
alleged acts were and are unfair acts of competition, orders restraining and
enjoining the defendants from disclosing or using Nokia's trade secrets or
confidential and proprietary information and acting in a manner that violates
Messrs. NeSmith's and Robin's contractual and fiduciary duties to Nokia,
attorneys' fees and other specified damages. This litigation was only recently
filed and we are presently evaluating these claims. We and the other
defendants believe that there are meritorious defenses to the asserted claims
and intend to defend the litigation vigorously. However, the outcome of
litigation is inherently unpredictable and the results of the litigation may
not be favorable to us or the other defendants. In such case, our business
could be seriously harmed. Regardless of the ultimate outcome, the litigation
could result in substantial expense to us and significant diversion of effort
by our managerial and other personnel.

                                      10
In order to manage our growth and expansion, we will need to improve and
implement new systems, procedures and controls.

   We have expanded our operations rapidly since the inception of our company
and we currently intend to continue this expansion. The number of our
employees increased from 40 at April 30, 1998 to 126 at August 31, 1999, and
we plan to further increase our headcount. 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. 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. We believe that our existing
managerial and other systems will not be adequate to support our anticipated
growth, and we are currently planning to implement a new enterprise resource
planning software system that will replace substantially all of our business
and manufacturing systems. 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 are unable to effectively manage
future growth and expansion, our business will be seriously harmed.

   We depend on a limited number of customers.

   To date, a significant portion of our net sales has resulted from a small
number of customers placing relatively large orders. For the fiscal year ended
April 30, 1999, three customers accounted for approximately 33% of our net
sales. For the quarter ended July 31, 1999, two customers accounted for
approximately 22% of our net sales. We anticipate that our operating results
for any given period will continue to depend to a significant extent on large
orders from a small number of customers. As a result, our quarterly operating
results may fluctuate significantly if we are unable to complete one or more
substantial sales in a quarter.

  Some of our smaller customers may present credit and other risks.

   Some of our products are designed for use by smaller customers. Sales to
smaller customers entail certain risks, including increased credit risks and
the need for additional sales and support personnel to support an increased
volume of customers.

   If we fail to expand our direct and indirect sales channels, our growth
will be limited.

   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 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 depend on our indirect sales channels, which include resellers, systems
integrators and original equipment manufacturers, for a significant percentage
of our net sales. For the fiscal year ended April 30, 1999, approximately 41%
of our net sales resulted from sales through indirect sales channels. For the
quarter ended July 31, 1999, approximately 39% of our net sales resulted from
sales through indirect channels. We need to expand our indirect channels, and
if we fail to do so our business could be seriously harmed. Our agreements
with such indirect channel partners are generally not exclusive and in many
cases may be terminated by either

                                      11
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. In addition, any sales through
indirect channel partners will have lower gross margins than direct sales.

   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 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.

   Our dependence on international markets involves many risks.

   For the fiscal year ended April 30, 1999, we derived approximately 44% of
our net sales from customers outside of the United States and Canada. For the
quarter ended July 31, 1999, 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. To successfully expand international sales, we must
expand 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.

   The acceptance and use of the Internet in international markets 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. In addition, we may fail to maintain or increase
international market demand for our products.

   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 those markets. In addition, we rely significantly on our
indirect channel partners in international sales efforts. Since these partners
are not our employees and typically do not offer our products exclusively, we
can not be certain that they will continue to market our products.

   Additional risks inherent in our international business activities
generally include:

  .  government regulation regarding privacy issues for Internet users;

  .  expenses associated with customizing products for foreign countries;

  .  expenses associated with obtaining foreign regulatory approvals;

  .  protectionist laws and business practices that favor local competition;

  .  dependence on local vendors;

  .  multiple, conflicting and changing governmental laws and regulations;

  .  longer sales and accounts receivable cycles;

  .  increased difficulties in collecting accounts receivable;

  .  difficulties in managing operations across disparate geographic areas;

                                      12
.  difficulties associated with enforcing agreements through foreign legal
     systems;

  .  reduced or limited protection of our intellectual property rights in
     some countries;

  .  potentially adverse tax consequences, including restrictions on the
     repatriation of earnings;

  .  foreign currency exchange rate fluctuations; and

  .  political and economic instability.

   Undetected software or hardware errors could seriously harm us.

   Our products may contain undetected software or hardware errors. 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. 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.

   We could be subject to potential product liability.

   Our customers integrate our Internet caching appliances into their network
architectures. 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. Although our
license agreements typically contain provisions designed to limit our exposure
to claims, unfavorable judicial decisions could negate such limitation of
liability provisions. 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.

   Our business could be affected by Year 2000 issues.

   The "Year 2000 issue" refers generally to the problems that some software
and hardware may have in determining the correct century for the year. For
example, software with date-sensitive functions that is not Year 2000
compliant may not be able to distinguish whether "00" means 1900 or 2000,
which may result in failures or the creation of erroneous results.

   We believe that our current products are Year 2000 compliant when
configured and used in accordance with the related documentation, and provided
that the other network components in the host network and any other software
used with our products are Year 2000 compliant. However, we have not tested
for Year 2000 compliance the compatability of our products with the other
network components in the host network and any other software used by our
customers with our products. We continue to respond to customer questions
about prior versions of our products on a case-by-case basis.

   We have defined Year 2000 compliant as the ability to:

  .  correctly handle date information needed for the December 31, 1999 to
     January 1, 2000 date change;

  .  function according to the product documentation provided for this date
     change, without changes in operation resulting from the advent of a new
     century, assuming correct configuration;

  .  respond to two-digit date input in a way that resolves the ambiguity as
     to century in a disclosed, defined and predetermined manner;

  .  store and provide output of date information in ways that are
     unambiguous as to century if the date elements in interfaces and data
     storage specify the century; and

                                      13
.  recognize Year 2000 as a leap year.

   We have tested software obtained from third parties, including licensed
software, shareware, and freeware that is incorporated into our products, and
we are seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite testing by us and current and potential customers, and
assurances from developers of products incorporated into our products, our
products may contain undetected errors or defects associated with Year 2000
date functions. Known or unknown errors or defects in our products could
result in delay or loss of net sales, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of
which could seriously harm our business. Some commentators have predicted
significant litigation regarding Year 2000 compliance issues, and we are aware
of such lawsuits against software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent we may be
affected by it.

   We have initiated an assessment of our material internal information
technology systems, including both our own software products and third-party
software and hardware technologies, but we have not initiated an assessment of
our non-information technology systems. We are seeking assurances from our
third-party software vendors that their systems are Year 2000 compliant. In
addition, we intend to seek assurances from the vendors of any future software
purchased by us, including our planned purchase of a new enterprise resource
planning system. We are not currently aware of any material operational issues
or costs associated with preparing our internal information technology and
non-information technology systems for the Year 2000. However, we may
experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal information
technology and non-information technology systems.

   We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, financial
condition and results of operations could be seriously harmed.

   We have not separately accounted for Year 2000 costs in the past. To date,
these costs have not been material. We will incur additional costs related to
the Year 2000 efforts for administrative personnel to manage the project,
outside contractor assistance, technical support for our products, product
engineering and customer satisfaction. In addition, we may experience
significant problems and costs with Year 2000 compliance that could seriously
harm our business.

   We have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our
critical operations. The cost of developing and implementing such a plan may
itself be significant. Finally, we are also subject to external forces that
might generally affect industry and commerce, such as utility or
transportation company Year 2000 compliance failure interruptions.

   If the protection of our proprietary technology is inadequate, our
competitors may gain access to our technology, and our business could be
seriously harmed.

   We depend significantly on our ability to develop and maintain the
proprietary aspects of our technology. To protect our proprietary technology,
we rely primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, copyright and trademark laws and patents. Despite
our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to 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.

                                      14
We currently have four United States patent applications on file and
pending before the United States Patent and Trademark Office. We also
currently have four PCT International Applications on file to reserve rights
in foreign jurisdictions under appropriate international treaties. 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 such
patent will be enforceable or that any damages awarded to us will be
sufficient to adequately compensate us.

   In addition, we cannot assure you that any products, services or
technologies that we are developing, or will develop in the future, will
result in intellectual property that is protectable under law, whether in the
United States or a foreign jurisdiction, that such intellectual property will
produce competitive advantage for us or that the intellectual property of
competitors will not restrict our freedom to operate, or put us at a
competitive disadvantage.

   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 such
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.

   We may need additional capital, which may not be available.

   At July 31, 1999, we had approximately $17.8 million in cash and cash
equivalents. We believe that this amount, combined with proceeds from this
offering, 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 revenue, 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 are
unable to raise additional capital when we require it, our business would be
seriously harmed.

Risks Related to the Internet Caching Appliance Industry

   Sales of our products are dependent on demand for Internet caching
appliances.

   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 success in generating 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.

                                      15
The market for our products is characterized by rapid technological change.

   The market for our products is new and is characterized by rapid
technological change, frequent enhancements to existing products and new
product introductions, changes in customer requirements and evolving industry
standards. We may not be able to respond quickly or effectively to these
developments. To be successful, 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.

   The introduction of new products by competitors, market acceptance of
products based on new or alternative technologies, or the emergence of new
industry standards, could render our existing products obsolete, which would
seriously harm our business. 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.

   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.

   Internet-related laws could adversely affect our business.

   Laws and regulations which apply to communications and commerce over the
Internet are becoming more prevalent. For example, the European Union recently
enacted its own privacy regulations, and is currently considering copyright
legislation that may extend the right of reproduction held by copyright
holders to include the right to make temporary copies for any reason. In
addition, tax authorities at the international, federal, state and local
levels are currently reviewing the appropriate tax treatment of companies
engaged in Internet commerce. We cannot predict the result of current attempts
to impose taxes on commerce over the Internet, but any taxes imposed on our
customers may adversely impact their businesses and may result in order
cancellations or postponements of product purchases by our customers, which
would seriously harm our business. The law of the Internet, however, remains
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how exisitng laws such as those
governing intellectual property, privacy and libel apply to the Internet. The
adoption or modification of laws or regulations relating to the Internet, or
interpretations of existing law, could seriously harm our business.

   Sales of our products are dependent on the increased use and widespread
adoption of the Internet.

   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. Certain critical
issues concerning use of the Internet are unresolved and will likely affect
use of the Internet. These issues include security, reliability, bandwidth,
congestion, cost, ease of access and quality of service. 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.

                                      16
Our business may be adversely affected by government regulation of the
communications industry.

   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 certain 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 the Securities Markets

   Our stock price may be volatile.

   Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. We will negotiate and determine the initial
public offering price with the representatives of the underwriters based on
several factors. This price may vary from the market price of the common stock
after this offering. The market price of the common stock may 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;

  .  the limited number of shares of our common stock that is expected to be
     publicly traded;

  .  sales of common stock or other securities in the future; and

  .  fluctuations in stock market prices and volumes.

   Our business may be adversely affected by class action litigation due to
stock price volatility.

   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.

   Control by existing stockholders may limit your ability to influence the
outcome of director elections and certain transactions.

   Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will beneficially own     shares,
or approximately   %, of the outstanding shares of common stock, or   % if the
underwriters' over-allotment option is exercised in full. These stockholders,
if acting together, would be able to significantly influence all matters
requiring approval by our stockholders, including the election of directors
and the approval of mergers or other business combination transactions.

                                      17
Substantial sales of our common stock could adversely affect our stock
price.

   Sales of a substantial number of shares of our common stock after this
offering could adversely affect the market price of our common stock by
potentially introducing a large number of sellers of our common stock into a
market in which our common stock price is already volatile, thus driving our
common stock price down. In addition, the sale of these shares could impair
our ability to raise capital through the sale of additional equity securities.
Based on shares outstanding as of July 31, 1999, upon completion of this
offering, we will have        shares of common stock outstanding, or
shares if the underwriters' over-allotment option is exercised in full. Our
directors, executive officers and current stockholders have executed lock-up
agreements that limit their ability to sell shares of our common stock. These
stockholders have agreed not to sell or otherwise dispose of any shares of our
common stock for a period of at least 180 days after the date of this
prospectus without the prior written approval of Morgan Stanley & Co.
Incorporated. When these lock-up agreements expire, these shares and the
shares of common stock underlying any options held by these individuals will
become eligible for sale, in some cases pursuant only to the volume, manner of
sale and notice requirements of Rule 144. In addition, after this offering,
the holders of approximately   shares of common stock, or their transferees,
will be entitled to various rights with respect to the registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by
affiliates) immediately upon the effectiveness of such registration. See
"Shares Eligible for Future Sale."

   Investors will experience immediate dilution.

   The initial public offering price of our common stock is expected to be
substantially higher than the book value per share of our outstanding common
stock immediately after the offering. Accordingly, if you purchase our common
stock in this offering, you will incur immediate dilution of approximately
$    in the book value per share of our common stock from the price you pay
for our common stock, assuming an initial public offering price of $      per
share.

   Anti-takeover provisions in our charter documents and Delaware law could
prevent or delay a change in control of our company.

   Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult
for a third party to acquire us, even if doing so would be beneficial to our
stockholders. See "Description of Capital Stock--Antitakeover Effects of
Provisions of the Certificate of Incorporation and Delaware Law."

                                      18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus. These factors may cause our actual results to
differ materially from any forward-looking statement.

   In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "intends," "would," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue"
or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially.

   Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform such statements to
actual results.

                                      19
USE OF PROCEEDS

   The net proceeds to CacheFlow from the sale of the     shares of common
stock offered hereby are estimated to be $    million, at an assumed initial
public offering price of $    and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, the net proceeds of
this offering are estimated to be $    million. The primary purposes of this
offering are to obtain additional equity capital, create a public market for
our common stock, and facilitate future access to public markets. We expect to
use the net proceeds for general corporate purposes, including working
capital. A portion of the net proceeds may also be used to repay debt
obligations of CacheFlow, which totaled $4.6 million as of July 31, 1999. A
portion of the net proceeds may also be used for the acquisition of
businesses, products and technologies that are complementary to ours. We have
no current plans, agreements or commitments and are not currently engaged in
any negotiations with respect to any such transaction. Pending such uses, we
will invest the net proceeds of this offering in investment grade, interest-
bearing securities.

                                DIVIDEND POLICY

   We have not paid any cash dividends since our inception and do not intend
to pay any cash dividends in the foreseeable future. The terms of our line of
credit prohibit the payment of dividends on our capital stock.

                                      20
CAPITALIZATION

   The following table sets forth as of July 31, 1999:

  .  our actual capitalization;

  .  our capitalization on a pro forma basis, after giving effect to the
     conversion of all outstanding shares of preferred stock into 14,341,912
     shares of common stock upon the completion of this offering and the cash
     exercise of warrants to purchase 672,850 shares of preferred stock at a
     weighted average exercise price of $1.48 per share prior to completion
     of the offering and the conversion of these shares of preferred stock
     into common stock upon completion of the offering; and

  .  our capitalization on a pro forma as adjusted basis, to additionally
     reflect this offering and the application of the proceeds at an assumed
     initial public offering price of $    per share, after deducting the
     estimated underwriting discounts and commissions and estimated offering
     expenses.
July 31, 1999
                                                 ------------------------------
                                                                     Pro Forma
                                                 Actual   Pro Forma As Adjusted
                                                 -------  --------- -----------
                                                          (unaudited)
                                                        (in thousands)
Long-term obligations, net of current portion... $ 3,211   $ 3,211
Stockholders' equity............................
 Preferred stock, $.0001 par value; 30,000,000
  shares authorized actual; 10,000,000 shares
  authorized pro forma and pro forma as
  adjusted; 14,341,912 shares issued and
  outstanding actual; no shares issued and
  outstanding pro forma or pro forma as
  adjusted......................................       1        --
 Common stock, $.0001 par value; 60,000,000
  shares authorized actual; 200,000,000 shares
  authorized pro forma and pro forma as
  adjusted; 12,656,269 shares issued and
  outstanding actual; 27,671,031 shares issued
  and outstanding pro forma;     issued and
  outstanding pro forma as adjusted.............       1         2
 Additional paid-in capital.....................  62,794    63,790
 Note receivable from stockholder...............  (1,017)   (1,017)
 Deferred stock compensation.................... (19,547)  (19,547)
 Accumulated deficit............................ (26,199)  (26,199)
                                                 -------   -------
  Total stockholders' equity....................  16,033    17,029
                                                 -------   -------
    Total capitalization........................ $19,244   $20,240
                                                 =======   =======
The information above excludes 3,401,251 shares of common stock issuable
upon exercise of outstanding options under our 1996 Stock Option Plan as of
July 31, 1999 with a weighted average exercise price of $1.21 per share,
141,842 shares of common stock issuable upon exercise of outstanding warrants
as of July 31, 1999 (assuming the conversion of all outstanding shares of
preferred stock into common stock) with a weighted average exercise price of
$3.42 per share, and 33,217 shares of common stock reserved for issuance under
our 1996 Stock Option Plan as of July 31, 1999. On August 27, 1999, we amended
our 1996 Stock Option Plan to increase the number of shares authorized for
issuance thereunder by 3,000,000 shares. Between August 1 and September 24,
1999, we granted options to purchase 2,874,000 shares of common stock. On
September 24, 1999, we adopted our 1999 Stock Incentive Plan as a successor
plan to replace our 1996 Stock Option Plan, whereby 5,000,000 shares were
reserved for issuance thereunder. No options will be granted under the 1996
Stock Option Plan after this offering. In addition, on September 24, 1999, we
adopted our Employee Stock Purchase Plan and reserved 2,500,000 shares of
common stock for issuance under such plan and our 1999 Non-Employee Director
Option Plan and reserved 500,000 shares of common stock for issuance under
such plan. See "Management--1999 Stock Incentive Plan," "Employee Stock
Purchase Plan" and "--1999 Director Option Plan."

                                      21
DILUTION

   The pro forma net tangible book value of our common stock as of July 31,
1999 was $16.7 million, or $.60 per share. Pro forma net tangible book value
per share represents the amount of our stockholders' equity, less intangible
assets, divided by the pro forma number of shares of common stock outstanding
after giving effect to the conversion of all outstanding shares of preferred
stock into 14,341,912 shares of common stock upon the completion of this
offering and the cash exercise of warrants to purchase 672,850 shares of
preferred stock prior to completion of the offering and the conversion of
these shares of preferred stock into common stock.

   Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving
effect to our sale of     shares of common stock in this offering at an
assumed initial offering price of $    per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses and the
application of the net proceeds therefrom, our pro forma as adjusted net
tangible book value as of July 31, 1999, would have been $   , or $    per
share. This represents an immediate increase in net tangible book value of
$    per share to existing stockholders and an immediate dilution in net
tangible book value of $    per share to investors purchasing shares of common
stock in this offering, as illustrated in the following table:
Assumed initial public offering price per share.....................      $
 Pro forma net tangible book value per share as of July 31, 1999..... $.60
 Increase per share attributable to new investors....................
                                                                      ----
 Pro forma as adjusted net tangible book value per share after this
  offering...........................................................
                                                                           ----
 Net tangible book value dilution per share to new investors.........      $
                                                                           ====
The following table sets forth as of July 31, 1999, after giving effect to
the conversion of all outstanding shares of preferred stock into 14,341,912
shares of common stock upon the completion of this offering and the cash
exercise of warrants to purchase 672,850 shares of preferred stock prior to
completion of the offering and the conversion of these shares of preferred
stock into common stock, the difference between the existing stockholders and
the investors purchasing shares in this offering at the assumed initial
offering price of $   per share with respect to the number of shares purchased
from us, the total consideration paid and the average price per share paid:
Shares Purchased  Total Consideration
                            ------------------ ------------------- Average Price
                              Number   Percent   Amount    Percent   Per Share
                            ---------- ------- ----------- ------- -------------
Existing stockholders..  27,671,031       % $37,581,000       %     $1.36
   New investors..........
                            ----------  -----  -----------  -----
     Totals...............              100.0% $            100.0%
                            ==========  =====  ===========  =====
As of July 31, 1999, there were options outstanding to purchase a total of
3,401,251 shares of common stock at a weighted average exercise price of $1.21
per share under our 1996 Stock Option Plan. In addition, as of July 31, 1999,
there were outstanding warrants to purchase a total of 141,842 shares of
common stock (assuming the conversion of all of our preferred stock into
common stock) at a weighted average exercise price of $3.42 per share. Between
August 1, 1999 and September 24, 1999, we granted options to purchase
2,874,000 shares of common stock at a weighted average exercise price of $4.69
per share. To the extent outstanding options or warrants are exercised, there
will be further dilution to new investors.

                                      22
SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere
in this prospectus. The consolidated statement of operations data for the
period from inception (March 13, 1996) to April 30, 1997 and for each of the
two years in the period ended April 30, 1999, and the consolidated balance
sheet data at April 30, 1998 and 1999, are derived from, and are qualified by
reference to, the audited consolidated financial statements included in this
prospectus. The consolidated balance sheet data at April 30, 1997 are derived
from audited consolidated financial statements not included in this
prospectus. The selected consolidated financial data at July 31, 1999 and for
the three months ended July 31, 1998 and July 31, 1999 have been derived from
our unaudited consolidated financial statements included in this prospectus.
The unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements contained in this
prospectus and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of such
information. Consolidated results of operations for the three months ended
July 31, 1999 are not necessarily indicative of the results that may be
expected for the full fiscal year.
Period from                       Three Months
                             March 13, 1996    Year Ended           Ended
                             (Inception) to    April 30,          July 31,
                               April 30,    -----------------  ----------------
                                  1997       1998      1999     1998     1999
                             -------------- -------  --------  -------  -------
                                  (in thousands, except per share data)
Consolidated Statement of
 Operations Data:
Net sales..................     $   --      $   --   $  7,036  $   809  $ 3,612
Cost of goods sold.........         --          --      3,297      598    1,380
                                -------     -------  --------  -------  -------
Gross profit...............         --          --      3,739      211    2,232
Operating expenses:
 Research and development..       1,055       2,396     4,034      755    1,613
 Sales and marketing.......         130       1,655     6,865    1,335    3,481
 General and
  administrative...........         310       1,630     2,069      275      667
 Stock compensation........           4          59     3,776      219    2,482
                                -------     -------  --------  -------  -------
    Total operating
     expenses..............       1,499       5,740    16,744    2,584    8,243
                                -------     -------  --------  -------  -------
Operating loss.............      (1,499)     (5,740)  (13,005)  (2,373)  (6,011)
Other income (expense),
 net.......................          56         233      (197)      71      (36)
                                -------     -------  --------  -------  -------
Net loss...................     $(1,443)    $(5,507) $(13,202) $(2,302) $(6,047)
                                =======     =======  ========  =======  =======
Basic and diluted net loss
 per share.................     $ (1.54)    $ (1.88) $  (3.06) $  (.65) $  (.97)
Shares used in computing
 basic and diluted net loss
 per share.................         939       2,936     4,316    3,517    6,214
Pro forma basic and diluted
 net loss per share........                          $   (.89)          $  (.30)
Shares used in computing
 pro forma basic and
 diluted net loss per
 share.....................                            14,849            19,946
As of April 30,        As of
                                             -----------------------  July 31,
                                              1997    1998    1999      1999
                                             ------  ------  -------  --------
                                                     (in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short term
 investments................................ $3,605  $7,349  $ 2,291  $17,825
Working capital.............................  3,589   6,955      787   16,880
Total assets................................  3,769   8,461    6,716   24,019
Long-term obligations, net of current
 portion....................................    --        7    3,211    3,211
Total liabilities...........................    --      861    7,060    7,986
Accumulated deficit......................... (1,443) (6,950) (20,152) (26,199)
Total stockholders' equity (deficit)........  3,702   7,600     (344)  16,033
23
MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS

   You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with the consolidated
financial statements and notes to consolidated financial statements appearing
elsewhere in this prospectus. This discussion and analysis contains forward-
looking statements that involve risks, uncertainties and assumptions. Our
actual results may differ materially from those anticipated in these forward-
looking statements as a result of many factors, including, but not limited to,
those set forth under "Risk Factors" and elsewhere in this prospectus.

Overview

   We design, develop, market and support 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, bandwidth 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 July 31, 1999 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 future net sales for the foreseeable future.

   We market our products through our direct sales force, which is
complemented by indirect sales channels consisting of resellers, systems
integrators and original equipment manufacturers. Customers that purchase our
products through our direct sales force generally do so by delivering a
purchase order. Direct and indirect sales accounted for approximately 59% and
41% of our net sales for the fiscal year ended April 30, 1999, and
approximately 61% and 39% of our net sales for the quarter ended July 31,
1999. Sales through indirect channels have lower gross margin than direct
sales. As a result, we expect that our total gross margin on product sales
will decline if the portion of sales that are made through indirect channels
increases.

   Net sales from international operations were $3.1 million, or approximately
44% of net sales, for the fiscal year ended April 30, 1999, and $1.7 million,
or approximately 48% of net sales, for the quarter ended July 31, 1999. The
majority of international sales were made in Europe and Asia by a combination
of our direct sales force and indirect channels. We treat sales to customers
in Canada as part of North American sales, and not as international sales. Our
international sales are denominated in United States dollars.

   For the year ended April 30, 1999, Sumitronics, Global One Communications
and Nissho Electronics each accounted for more than ten percent of our net
sales, for an aggregate of approximately 33% of our net sales. For the quarter
ended July 31, 1999, Road Runner and Global One Communications each accounted
for more than ten percent of our net sales, for an aggregate of approximately
22% of our net sales.

   We generally record product revenue upon shipment, net of allowances for
estimated sales returns and uncollectable customer accounts. Maintenance
contract revenue is initially deferred when a maintenance contract is
purchased by the customer and recorded evenly over the life of the contract.
To date, maintenance contract revenue has not been a significant portion of
our net sales.

   We recorded deferred stock compensation of approximately $4,000, $157,000
and $13.7 million for the period from inception (March 13, 1996) to April 30,
1997 and for the years ended April 30, 1998 and 1999 and $12.0 million for the
quarter ended July 31, 1999. These amounts represent the difference between
the exercise price and the deemed fair value of certain stock option and
warrant grants to employees, consultants, directors and third parties. Related
stock compensation expense is recorded over the related option or warrant
vesting

                                      24
period, generally two to four years, or immediately if there is no vesting
period. We recorded stock compensation expense of approximately $4,000,
$59,000 and $3.8 million for the period from inception to April 30, 1997 and
for the years ended April 30, 1998 and 1999 and $2.5 million for the quarter
ended July 31, 1999 using a graded vesting method. Based on grants from August
1 through September 24, 1999, we expect to record additional stock
compensation charges of approximately $17.6 million. As a result of the
cumulative effect of stock compensation charges, we expect stock compensation
expense, which is primarily attributable to amortization of deferred
compensation charges, to impact our reported results through April 30, 2004.
In addition, we intend to record a charge of approximately $604,000 for the
quarter ended October 31, 1999 related to certain warrants.

   We have incurred net losses in each quarter since inception. As of July 31,
1999, we had an accumulated deficit of $26.2 million. Our net loss was $5.5
million for the fiscal year ended April 30, 1998, $13.2 million for the fiscal
year ended April 30, 1999, and $6.0 million for the quarter ended July 31,
1999. These losses resulted from significant costs incurred in the development
and sale of our products and services. We expect to experience significant
growth in our operating expenses, particularly research and development and
sales and marketing expenses. As a result, we expect to incur additional
losses and continued negative cash flow from operations for the foreseeable
future.

   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 state of development,
particularly companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties.

Selected Quarterly Results of Operations

   Because we have a limited operating history, we believe that year-to-year
comparisons prior to 1999 are less meaningful than an analysis of recent
quarterly operating results. Accordingly, we are first providing a discussion
and analysis of our results of operations for the five quarters ended July 31,
1999.

                                      25
The following tables set forth, in dollars and as a percentage of revenues,
consolidated statements of operations data for each of the five quarters ended
July 31, 1999. This information has been derived from our unaudited
consolidated financial statements. The unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements contained in this prospectus and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary
for a fair presentation of such information. You should read this information
in conjunction with our consolidated financial statements and notes thereto
appearing elsewhere in this prospectus.
Three Months Ended
                                  -------------------------------------------
                                   Jul.     Oct.     Jan.     Apr.     Jul.
                                    31,      31,      31,      30,      31,
                                   1998     1998     1999     1999     1999
                                  -------  -------  -------  -------  -------
                                          (amounts in thousands)
Consolidated Statements of
 Operations Data:
Net sales........................ $   809  $ 1,082  $ 2,201  $ 2,944  $ 3,612
Cost of goods sold...............     598      652      890    1,157    1,380
                                  -------  -------  -------  -------  -------
Gross profit.....................     211      430    1,311    1,787    2,232
Operating expenses:
 Research and development........     755      958      978    1,343    1,613
 Sales and marketing.............   1,335    1,719    1,654    2,157    3,481
 General and administrative......     275      685      510      599      667
 Stock compensation..............     219      587      871    2,099    2,482
                                  -------  -------  -------  -------  -------
    Total operating expenses.....   2,584    3,949    4,013    6,198    8,243
                                  -------  -------  -------  -------  -------
Operating loss...................  (2,373)  (3,519)  (2,702)  (4,411)  (6,011)
Other income (expense), net......      71       33     (115)    (186)     (36)
                                  -------  -------  -------  -------  -------
Net loss......................... $(2,302) $(3,486) $(2,817) $(4,597) $(6,047)
                                  =======  =======  =======  =======  =======
As a Percentage of Net Sales:
Net sales........................   100.0%   100.0%   100.0%   100.0%   100.0%
Cost of goods sold...............    73.9     60.3     40.4     39.3     38.2
                                  -------  -------  -------  -------  -------
Gross margin.....................    26.1     39.7     59.6     60.7     61.8
Operating expenses:
 Research and development........    93.3     88.5     44.4     45.6     44.7
 Sales and marketing.............   165.0    158.9     75.1     73.3     96.4
 General and administrative......    34.0     63.3     23.1     20.3     18.5
 Stock compensation..............    27.1     54.3     39.6     71.3     68.6
                                  -------  -------  -------  -------  -------
    Total operating expenses.....   319.4    365.0    182.2    210.5    228.2
                                  -------  -------  -------  -------  -------
Operating loss...................  (293.3)  (325.2)  (122.8)  (149.8)  (166.4)
Other income (expense), net......     8.8      3.0     (5.2)    (6.3)    (1.0)
                                  -------  -------  -------  -------  -------
Net loss......................... (284.5)% (322.2)% (128.0)% (156.1)% (167.4)%
                                  =======  =======  =======  =======  =======
Net Sales

   Net sales increased in each of the five quarters ended July 31, 1999, from
$809,000 for the quarter ended July 31, 1998 to $3.6 million for the quarter
ended July 31, 1999. The increase was primarily attributable to the
introduction of new products and their growing acceptance in the marketplace,
growth in our customer base, and the addition of individuals to our sales
force. We offer products in both fixed and expandable configurations. The
growth in net sales was attributable to a combination of higher unit sales
volumes and higher average selling prices associated with increased sales of
expandable configuration systems. We expect that prior growth rates of our net
sales will not be sustained in the future.

                                      26
Gross Profit

   Gross profit increased in each of the five quarters ended July 31, 1999,
from $211,000 for the quarter ended July 31, 1998 to $2.2 million for the
quarter ended July 31, 1999. Gross margin increased from approximately 26.1%
to 61.8% over the five quarters ended July 31, 1999. The increase in gross
profit was principally attributable to the introduction of new products and
their growing acceptance in the marketplace and higher sales volumes. The
increase in gross margin was primarily due to the resulting economies of scale
from higher unit production and cost savings achieved by outsourcing component
manufacturing.

   Our gross 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.

   Operating Expenses

   Research and Development. Research and development expenses consist
primarily of salaries and benefits, and prototype and test equipment costs.
Our research and development expenses increased in each of the five quarters
ended July 31, 1999, from $755,000 for the quarter ended July 31, 1998 to $1.6
million for the quarter ended July 31, 1999. The increases in research and
development expenses 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. 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.
Through July 31, 1999, 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. Our sales and marketing expenses generally
increased over the five quarters ended July 31, 1999, from $1.3 million for
the quarter ended July 31, 1998 to $3.5 million for the quarter ended July 31,
1999. The increases in sales and marketing expenses were primarily related to
the expansion of our sales and marketing organization, the increase in our
direct sales force, increased commission expenses related to higher sales
volumes, and the expansion of sales and support facilities worldwide. 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. Our general and administrative expenses
increased from $275,000 for the quarter ended July 31, 1998 to $667,000 for
the quarter ended July 31, 1999. The increases in general and administrative
expenses were primarily attributable to increased staffing and associated
expenses necessary to manage and support our growth. We expect general and
administrative expenses to increase in absolute dollars as we continue to
increase staffing to manage expanding operations and facilities and incur the
additional expenses associated with operating as a public company.

                                      27
Results of Operations

   For the period from our inception in March 1996 through 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:
Three Months
                                                                Ended July
                                                                    31,
                                                  Year Ended   ---------------
                                                April 30, 1999  1998     1999
                                                -------------- ------   ------
Consolidated Statements of Operations Data:
Net sales......................................      100.0%     100.0%   100.0%
Cost of goods sold.............................       46.9       73.9     38.2
                                                    ------     ------   ------
Gross margin...................................       53.1       26.1     61.8
Operating expenses:
 Research and development......................       57.3       93.3     44.7
 Sales and marketing...........................       97.6      165.0     96.4
 General and administrative....................       29.4       34.0     18.5
 Stock compensation............................       53.6       27.1     68.6
    Total operating expenses...................      237.9      319.4    228.2
                                                    ------     ------   ------
Operating loss.................................     (184.8)    (293.3)  (166.4)
Other income (expense), net....................       (2.8)       8.8     (1.0)
                                                    ------     ------   ------
Net loss.......................................     (187.6)%   (284.5)% (167.4)%
                                                    ======     ======   ======
Comparison of Quarters Ended July 31, 1999 and 1998

   Net Sales. Net sales increased from $809,000 for the quarter ended July 31,
1998 to $3.6 million for the quarter ended July 31, 1999. The increase was
primarily attributable to the introduction of new products and their growing
acceptance in the marketplace, growth in our customer base, and the addition
of individuals to our sales force. Growth in net sales was also attributable
to a combination of higher unit sales volumes and higher average selling
prices associated with increased sales of our expandable configuration
systems. During the quarter ended July 31, 1998, three customers accounted for
approximately 51% of our net sales, and during the quarter ended July 31,
1999, two customers accounted for approximately 22% of our net sales.

   Gross Profit. Gross profit increased from $211,000 for the quarter ended
July 31, 1998 to $2.2 million for the quarter ended July 31, 1999. Gross
margin increased from approximately 26.1% for the quarter ended July 31, 1998
to approximately 61.8% for the quarter ended July 31, 1999. The increase in
gross profit was primarily attributable to the introduction of new products
and their growing acceptance in the marketplace and higher sales volumes. The
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.

   Research and Development. Research and development expenses increased from
$755,000 for the quarter ended July 31, 1998 to $1.6 million for the quarter
ended July 31, 1999. The increase in research and development expenses was
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.

   Sales and Marketing. Sales and marketing expenses increased from $1.3
million for the quarter ended July 31, 1998 to $3.5 million for the quarter
ended July 31, 1999. The increase in sales and marketing expenses was
primarily related to the expansion of our sales and marketing organization,
the increase in our direct sales force, increased commission expenses related
to higher sales volumes, and the expansion of sales and support facilities
worldwide.

                                      28
General and Administrative. General and administrative expenses increased
from $275,000 for the quarter ended July 31, 1998 to $667,000 for the quarter
ended July 31, 1999. The increase in general and administrative expenses was
primarily attributable to increased staffing and associated expenses necessary
to manage and support our growth.

   Other Income (Expense), Net. Other income (expense), net consists of
interest income, interest expense and other non-operating expenses. Other
income (expense), net decreased from $71,000 for the quarter ended July 31,
1998, to $(36,000) for the quarter ended July 31, 1999. The decrease was
primarily attributable to increased interest costs as a result of incurring
additional borrowings.

  Comparison of Period from Inception (March 13, 1996) to April 30, 1997 and
   Fiscal Years Ended April 30, 1998 and 1999

   Net Sales. We did not generate any sales for the period from inception to
April 30, 1998. Net sales for the fiscal year ended April 30, 1999 were $7.0
million. The increase was primarily attributable to the introduction of new
products and their growing acceptance in the marketplace, higher unit sales
volumes, growth in our customer base, and the addition of individuals to our
sales force. During the fiscal year ended April 30, 1999, three customers
accounted for approximately 33% of our net sales.

   Gross Profit. We did not generate any sales for the period from inception
to April 30, 1998. The increase in gross profit and gross margin in the year
ended April 30, 1999 was attributable to generating sales in fiscal 1999.

   Research and Development. Research and development expenses increased from
$1.1 million for the period from inception to April 30, 1997 to $2.4 million
for the fiscal year ended April 30, 1998 to $4.0 million for the fiscal year
ended April 30, 1999. The increases in research and development expenses 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.

   Sales and Marketing. Sales and marketing expenses increased from $130,000
for the period from inception to April 30, 1997 to $1.7 million for the fiscal
year ended April 30, 1998 to $6.9 million for the fiscal year ended April 30,
1999. The increases in sales and marketing expenses were primarily related to
the expansion of our sales and marketing organization, the increase in our
direct sales force, increased commission expenses related to higher sales
volumes, and the expansion of sales and support facilities worldwide.

   General and Administrative. General and administrative expenses increased
from $310,000 for the period from inception to April 30, 1997 to $1.6 million
for the fiscal year ended April 30, 1998 to $2.1 million for the fiscal year
ended April 30, 1999. The increases in general and administrative expenses
were primarily attributable to increased staffing and associated expenses
necessary to manage and support our growth.

   Other Income (Expense), Net. Other income (expense), net increased from
$56,000 for the period from inception to April 30, 1997 to $233,000 for the
fiscal year ended April 30, 1998, and decreased to $(197,000) for the fiscal
year ended April 30, 1999. The increase from the period from inception to
April 30, 1997 to the fiscal year ended April 30, 1998 was primarily
attributable to increased investment income from cash received from equity
financings. The decrease from the fiscal year ended April 30, 1998 to the
fiscal year ended April 30, 1999 was primarily attributable to increased
interest costs as a result of incurring additional borrowings.

Income Taxes

   Income taxes consist of federal, state and local taxes, when applicable. We
expect significant consolidated net losses for the foreseeable future, which
should generate net operating loss carryforwards. However, our ability to use
net operating losses may be subject to annual limitations. Under the
provisions of the Internal Revenue Code, certain substantial changes in our
ownership may limit the amount of net operating loss

                                      29
carryforwards that could be utilized annually in the future to offset taxable
income. In addition, income taxes may be payable during this time due to
operating income and the imposition of federal or state minimum taxes. We
recognized no provision for taxes, because we operated at a loss throughout
the years ended April 30, 1997, 1998 and 1999, and for the quarter ended July
31, 1999.

Liquidity and Capital Resources

   Since inception, we have financed our operations and the purchase of
property and equipment through private sales of preferred stock, with net
proceeds of $33.4 million, as well as through bank loans and equipment leases.
At July 31, 1999, we had $17.8 million in cash and cash equivalents and
$16.9 million in working capital.

   Net cash used in operating activities was $1.4 million for the period from
inception to April 30, 1997, $5.1 million for the fiscal year ended April 30,
1998, $9.7 million for the fiscal year ended April 30, 1999, and $3.9 million
for the quarter ended July 31, 1999. We used cash primarily to fund our net
losses from operations.

   Net cash used in investing activities was $3.5 million for the period from
inception to April 30, 1997, $971,000 for the fiscal year ended April 30, 1999
and $472,000 for the quarter ended July 31, 1999. Net cash provided by
investing activities was $2.8 million for fiscal year ended April 30, 1998.
Net cash used in investing activities was primarily attributable to purchases
of property, plant and equipment and short-term investments. Net cash provided
by investing activities was primarily attributable to the proceeds from the
sale of short-term investments. We expect that, in the future, any cash in
excess of current requirements will be invested in investment grade, interest-
bearing securities.

   Net cash provided by financing activities was $5.1 million for the period
from inception to April 30, 1997, $9.4 million for the fiscal year ended April
30, 1998, $5.6 million for the fiscal year ended April 30, 1999 and $19.9
million for the quarter ended July 31, 1999.

   Capital expenditures were $123,000 for the period from inception to April
30, 1997, $623,000 for the fiscal year ended April 30, 1998, $971,000 for the
fiscal year ended April 30, 1999, and $472,000 for the quarter ended July 31,
1999. Our capital expenditures consisted of purchases of plant, equipment and
software. We expect that our capital expenditures will continue to increase in
the future.

   We currently have two credit facilities. In November 1998, we amended our
then existing credit facility to increase the amount available thereunder from
$400,000 to $3.0 million. This credit facility, which expires in November 1999
and bears interest at the prime interest rate plus .75%, had $1.2 million
available for borrowing as of July 31, 1999. In November 1998, we entered into
an additional credit facility consisting of a $3.5 million three year term
loan and a $350,000 equipment line of credit. The term loan and equipment line
of credit are secured by all of our assets and bear interest at 13.0% and
11.4% and mature in November 2002 and May 2000. As of July 31, 1999, all
amounts under the term loan had been borrowed, and all amounts under the
equipment line of credit were available for borrowing. Both of our credit
facilities require us to maintain compliance with certain financial covenants.

   We believe that working capital together with the net proceeds from the
sale of the common stock in this offering 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. In the event additional financing is required, we
may not be able to raise it on acceptable terms or at all.

Year 2000 Readiness

   The "Year 2000 issue" refers generally to the problems that some software
and hardware may have in determining the correct century for the year. For
example, software with date-sensitive functions that is not Year 2000
compliant may not be able to distinguish whether "00" means 1900 or 2000,
which may result in failures or the creation of erroneous results.

                                      30
We believe that our current products are Year 2000 compliant when
configured and used in accordance with the related documentation, and provided
that the other network components in the host network and any other software
used with our products are Year 2000 compliant. However, we have not tested
for Year 2000 compliance the compatability of our products with the other
network components in the host network and any other software used by our
customers with our products. We continue to respond to customer questions
about prior versions of our products on a case-by-case basis.

   We have defined Year 2000 compliant as the ability to:

  .  correctly handle date information needed for the December 31, 1999 to
     January 1, 2000 date change;

  .  function according to the product documentation provided for this date
     change, without changes in operation resulting from the advent of a new
     century, assuming correct configuration;

  .  respond to two-digit date input in a way that resolves the ambiguity as
     to century in a disclosed, defined and predetermined manner;

  .  store and provide output of date information in ways that are
     unambiguous as to century if the date elements in interfaces and data
     storage specify the century; and

  .  recognize Year 2000 as a leap year.

   We have tested software obtained from third parties, including licensed
software, shareware, and freeware that is incorporated into our products, and
we are seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite testing by us and current and potential customers, and
assurances from developers of products incorporated into our products, our
products may contain undetected errors or defects associated with Year 2000
date functions. Known or unknown errors or defects in our products could
result in delay or loss of net sales, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of
which could seriously harm our business. Some commentators have predicted
significant litigation regarding Year 2000 compliance issues, and we are aware
of such lawsuits against software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent we may be
affected by it.

   We have initiated an assessment of our material internal information
technology systems, including both our own software products and third-party
software and hardware technologies, but we have not initiated an assessment of
our non-information technology systems. We are seeking assurances from our
third-party software vendors that their systems are Year 2000 compliant. In
addition, we intend to seek assurances from the vendors of any future software
purchased by us, including our planned purchase of a new enterprise resource
planning system. We are not currently aware of any material operational issues
or costs associated with preparing our internal information technology and
non-information technology systems for the Year 2000. However, we may
experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal information
technology and non-information technology systems.

   We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, financial
condition and results of operations could be seriously harmed.

   We have not separately accounted for Year 2000 costs in the past. To date,
these costs have not been material. We will incur additional costs related to
the Year 2000 efforts for administrative personnel to manage the project,
outside contractor assistance, technical support for our products, product
engineering and customer

                                      31
satisfaction. In addition, we may experience significant problems and costs
with Year 2000 compliance that could seriously harm our business.

   We have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our
critical operations. The cost of developing and implementing such a plan may
itself be significant. Finally, we are also subject to external forces that
might generally affect industry and commerce, such as utility or
transportation company Year 2000 compliance failure interruptions.

Recently Issued Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," or FAS 133. The new standard establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. FAS 133
will be effective for the Company's fiscal year ending April 30, 2002. We do
not expect FAS 133 to have a material effect on our consolidated financial
condition or results of operations.

Qualitative and Quantitative Disclosures about Market Risk

   We develop products in the United States and sell them in North America,
Asia and Europe. 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. Our interest income is sensitive to
changes in the general level of United States interest rates, particularly
since the majority of our investments are cash and cash equivalents. Due to
the nature of our cash and cash equivalents, we have concluded that they do
not expose us to material risk.

                                      32
BUSINESS

   The prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements.

Overview

   We are a leading provider of Internet caching appliances that are
specifically designed, or purpose-built, to accelerate and manage the flow of
information over the Internet. Our products enable our customers to improve
the performance of their networks and reduce network costs, while enhancing
network security. As of August 31, 1999, we had approximately 100 customers
and 575 installations. End users of our products include large and small
Internet service providers, or ISPs, and corporate enterprises.

Industry Background

   The Internet has emerged as one of the fastest growing communications media
in history, and is dramatically changing the way businesses and individuals
communicate and conduct commerce. International Data Corporation, or IDC,
estimates that there were approximately 97 million users of the Internet at
the end of 1998, and projects that the number of Internet users will grow to
over 319 million by 2002. IDC also projects that the number of Internet access
devices worldwide will grow from an estimated 120 million in 1998 to over 515
million by the end of 2002. Similarly, the amount of content available on the
Internet is increasing rapidly. IDC estimates that the number of web pages
worldwide will grow from approximately 829 million in 1998 to over 7.7 billion
by 2002.

   The volume of data transmitted across the Internet and corporate intranets
is also growing as a result of increasingly complex content. Web sites and e-
mail messages, for example, increasingly incorporate graphics as well as audio
and video elements which require much larger files than simple text. Each time
an Internet user requests web page content, the request, access and
transmission of this content must follow a network path from user to origin
server and back. This process is repeated serially for each object that a web
page contains. Popular web pages typically contain ten to twenty objects,
requiring multiple transmissions per web page. This serial request of content
significantly lengthens web response time. In addition, with users anywhere
accessing information anywhere, traffic patterns are unpredictable.

   The physical infrastructure of the Internet today must therefore
accommodate sharply increased volumes of data traffic, which includes a high
degree of redundant data, as well as highly unpredictable and event-driven
usage patterns. Advances in communications technology such as high-speed
routers, switches and broadband access technologies have improved the Internet
infrastructure and its ability to transfer packets of data. However, these
technologies do not reduce the volume of data that must be moved from origin
server to user, nor the physical distance between source and user. Further,
these improvements do not allow for the analysis or control of the actual
content. As a result, servers are still overloaded by the growing number of
requests, and web response time remains a continuing problem despite the
advent of broadband technologies and other improvements in data transmission
capacity, or bandwidth.

   Slow web response time and web server outages can have a significant
financial impact on corporate enterprises and Internet service providers, or
ISPs. As enterprises increasingly depend on the Internet to conduct business,
web server availability and performance become increasingly important for
generating revenue and communicating with customers and vendors. The
availability and performance of web servers and the quality of a customer's
web site experience directly impact revenue for a business engaged in
electronic commerce, or e-commerce. Delayed web server response times decrease
productivity and can threaten the revenue-generating or communications
capabilities of the Internet. Users who have difficulty accessing a web site
may stop using it or find an alternative site. In the case of ISPs, slow web
response times may frustrate their customers, encouraging them to cancel their
service.

   In response to these problems, caching technologies based on proprietary
software solutions or open platforms were introduced. By storing frequently
requested Internet content physically closer to users, caching reduces the
distance over which web content must travel, and removes much of the redundant
traffic from the network. By saving bandwidth, these caching solutions are
able to modestly reinforce the extensive improvements in routing, switching
and transmission capacity. However, they do not adequately address the

                                      33
disparate requirements of ISPs, enterprises and users. Specifically, these
solutions have failed to address market demand for:

  .  reduced web response time, including download times for non-cached
     content;

  .  simple administration and management;

  .  reduced network costs;

  .  secure networks; and

  .  fresh web content.

   For example, traditional software-based caching solutions based on general-
purpose operating systems, where source code is widely available and well
understood, can be costly, difficult to implement and manage and vulnerable to
security breaches. Caching solutions based on publicly available software, or
freeware, generally provide inferior performance, security and features
because they lack consistent, dedicated programming efforts. More recently,
some vendors have chosen to modify hardware-based solutions, such as filers or
routers, from their original purpose to become caching solutions. Because
these hardware-based solutions were initially designed for other purposes,
they can be slower than other alternatives, more cumbersome to operate and
less efficient. Finally, these traditional hardware and software caching
solutions have had limited success in ensuring the freshness of content served
from the cache.

   In recent years, the increasing complexity within networks required the
introduction of dedicated routing and switching appliances in order to achieve
desired network performance and reliability levels. Similarly, increasing
traffic volumes, network complexity and user expectations for the performance
of the Internet require the introduction of a specifically-designed, dedicated
Internet caching appliance to reduce web response time, provide extensive
administration and management capabilities, reduce network costs, ensure data
security and deliver fresh content. As a result, the Internet caching
appliance market is expected to grow rapidly. According to the GartnerGroup,
this market is expected to grow from approximately $92 million in 1999 to over
$1 billion in 2003, representing a compounded annual growth rate of
approximately 85%.

The CacheFlow Solution

   CacheFlow designs, develops, markets and supports high-performance Internet
caching appliances that manage the flow of information over the Internet. We
are exclusively focused on developing appliances that are specifically
designed, or purpose-built, for Internet caching. At the foundation of each
CacheFlow product is CacheOS, our high-performance operating system designed
specifically to manage and accelerate the delivery of Internet content. As
purpose-built appliances, our products enhance network performance by reducing
the data burden on the network backbone, firewall and server. 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. 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 uncached content is
accelerated, since our appliances simultaneously retrieve numerous objects
from the origin server, in many cases doubling the speed of content delivery.
Designed to be intelligent pieces of network equipment, our appliances become
network-aware, content-aware elements of the network that improve network
efficiency and speed web response times.

   Ease of Installation and Management. Our products are designed for easy
installation and maintenance, reducing the cost and time required for
implementation and use. In many cases, our Internet caching appliances can be
installed in under thirty minutes. All of our products provide customers with
a range of management features, functions, user interfaces and modes of
operation. In addition, our appliances support relevant networking standards,
enabling our appliances to interact with existing networking equipment such as
routers, servers, switches and load balancers.

                                      34
Attractive Return on Investment. Our products are designed to reduce
bandwidth costs. 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 bandwidth and can
reduce data transmission costs. Our customers better utilize the bandwidth of
their existing network since redundant traffic is offloaded from the network
and served from the cache. Enterprises engaged in e-commerce can reduce the
need to purchase additional servers since our Internet caching appliances
offload 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. In addition, CacheOS employs
authentication and filtering capabilities that prohibit unauthorized users
from accessing or penetrating through the cache.

   Broad Product Suite. Enterprises and ISPs have varying bandwidth,
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
fresh. Internet caching appliances store content, but do not originate or own
that content, so in order to provide fresh content, caches must track the
content at its origin. Unlike traditional caches that are passive, our
Internet caching appliances are active, refreshing content through efficient
and sophisticated algorithms that monitor user activity and the frequency with
which source content is changed without requiring additional bandwidth 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 they interact with
the content being requested, the user requesting that content and the network
infrastructure itself. Our appliances are able to leverage their placement at
this network juncture to provide a range of additional value-added services,
including content filtering, user tracking and control of cached content.

The CacheFlow Strategy

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

   Leverage Internet Caching Focus to Target 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 intend to leverage 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 leverage our
technological expertise to meet the needs of the evolving Internet caching
market. We plan to continue to develop both the software and hardware elements
of our solution to gain and maintain a competitive advantage and expand the
market for our products. Our additional efforts to enhance the capabilities of
our appliances include adding more functionality to control

                                      35
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 caching appliance 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.

Products

   Our products are designed to meet the different price, performance,
bandwidth and reliability requirements of our customers and potential
customers. Embedded in each of our caching appliances is our CacheOS operating
system. Because CacheOS acts as a common platform across our product line, all
of our products support a consistent set of software features and functions, a
common easy-to-manage user interface and common operational characteristics.

   Internet Caching Appliances

   We began commercial shipment of our first Internet caching appliances in
May 1998. Our current product family is separated into four product series:

    .  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 Mbps, the equivalent of
       a T-1 line.

    .  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
       Mbps. The CacheFlow 500 Series is typically deployed in front of web
       servers and firewalls 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
       45Mbps, the equivalent of a T-3 line. Our 3000 Series provides 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 specifically for
       carrier-class scalability and reliability. The CacheFlow 5000 is
       highly scalable, designed to support traffic loads ranging from 45
       Mbps, or T-3, to more than 155 Mbps, the equivalent of OC-3. Our
       5000 Series can contain up to three separate AC or DC power supplies
       to allow uninterrupted operation and provides our customers with the
       ability to add capacity to the appliances as their needs grow.

                                      36
The following table describes the configurations of our Internet caching
appliances:
Maximum   Maximum   Fixed/
   Series                                          Disk Space Memory  Expandable
   ------                                          ---------- ------- ----------
CacheFlow 100..................................     4 Gb   128 Mb    Fixed
   CacheFlow 500..................................    36 Gb   768 Mb    Fixed
   CacheFlow 3000.................................    63 Gb     1 Gb  Expandable
   CacheFlow 5000.................................   243 Gb     4 Gb  Expandable
CacheOS

   CacheOS is the operating system that runs all of our Internet caching
appliances. Unlike general operating systems, such as Windows NT, UNIX and
NetWare, CacheOS was developed specifically to enable Internet caching and,
therefore, does not contain the millions of lines of code necessary to support
the many features required of a general operating system. As a result, our
Internet caching appliances run more efficiently. Because we developed CacheOS
internally, our Internet caching appliances are more secure than caching
devices that run on operating systems whose source code is more commonly
understood. In addition, our operating system enables redundancies, such as
storing multiple copies of images on each disk within the appliance and
keeping a copy of CacheOS on each disk, so that if one disk fails, the next
can automatically reboot the appliance. These redundancies allow our caching
appliances to be highly reliable.

   CacheOS is designed with a variety of features that improve network
performance and administration.

  .  Object Pipelining reduces web response time by enabling the simultaneous
     retrieval of multiple objects on a page.

  .  Adaptive Probabilistic Refresh improves content freshness without
     sacrificing response time by tracking and checking content freshness,
     independently of user requests, based on the probability that the
     content will be requested and the probability that the content has
     changed.

  .  Value-based Deletion reduces web response time and improves network
     efficiency by deleting excess content stored in the cache, based on the
     probability that the content will be requested and the time required to
     retrieve that content.

  .  Security is enhanced because CacheOS is a specialized, internally-
     developed operating system, which is designed to be less vulnerable to
     unauthorized entry than caches based on more commonly understood,
     general purpose operating systems. In addition, CacheOS enhances cache
     management security for network administrators.

  .  Transparent and Proxy Mode Support provides administrators with
     increased deployment flexibility by allowing CacheOS to simultaneously
     service direct requests from client browsers and redirected requests
     from routers or Layer 4 switches.

  .  Filtering prevents viewing of restricted content and provides increased
     security by allowing administrators to control the content that users
     can access.

  .  Authentication prevents unauthorized access to the cache and increases
     security by requiring users to identify themselves and verifying access
     privileges before granting users access to the cache.

  .  Easy Installation and Maintenance. CacheOS installs quickly and easily
     into customers' networks and is easy-to-maintain, is reliable and has a
     low cost of ownership.

Customers and Applications

   We began commercial shipment of our first Internet caching appliances in
May 1998 and, as of August 31, 1999, we had approximately 100 customers and
575 installations. Our customers include both large and small ISPs, as well as
enterprises. We sell our products both domestically and internationally. Net
sales from international operations were $3.1 million, or approximately 44% of
net sales, for the fiscal year ended April 30, 1999, and $1.7 million, or
approximately 48% of net sales, for the quarter ended July 31, 1999.

                                      37
The following end-user customers and resellers have purchased or leased
over $50,000 of our products:
Internet Service Providers      Enterprises                    Resellers
--------------------------      -----------------              ---------------
Clear Communications            Delta Airlines                 BTN Internetworking
Datacom Caribe                  Force 3                        Colt Telecom
germany.net                     Goldman Sachs                  Dynavar Networking
Global One Communications       Hewlett-Packard                Lidcam Technology
Helsinki Telephone              Hughes Network Systems         Lucent Technologies
Infonie                         Lucent Technologies            Nissho Electronics
MTS Advanced                    Xerox                          Phitech
Road Runner                                                    Solunet
Servint Corp. Internet Services                                Stark Technology
Swisscom                                                       Sumitronics
For the year ended April 30, 1999, Sumitronics, Global One Communications
and Nissho Electronics each accounted for over ten percent of our net sales,
for an aggregate of approximately 33% of our net sales. For the quarter ended
July 31, 1999, Road Runner and Global One Communications each accounted for
over ten percent of our net sales, for an aggregate of approximately 22% of
our net sales.

   Customers have purchased and used our products for a variety of different
applications. ISPs typically use our products to help meet the performance
potential of broadband technology, to achieve bandwidth savings and to gain
efficiencies in web and applications hosting. Enterprises typically use our
products for handling e-commerce related traffic and as a replacement for
proxy servers. The following are our principal target markets:

   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 and e-
commerce servers, 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.

   Customer Case Study: Delta Airlines. Delta Airlines, a leading worldwide
airline company, was looking for a solution to scale the performance of its
online travel service. Delta wanted to increase capacity for special
promotions, offer surge protection against peak traffic loads, and accommodate
an overall increase in usage of its e-commerce site without sacrificing
performance, manageability or control. Delta contemplated deploying additional
web servers and firewalls, but instead chose our Internet caching appliances.
Because of the level of security afforded by our proprietary operating system,
Delta was able to deploy our products outside its corporate firewall and in
front of its web site. By servicing user requests for content outside the
firewall, our products were able to reduce traffic on the servers, firewall
and intranet, helping to reduce operating costs. As a result, Delta was able
to increase the capacity of its site and improve the response time and content
freshness, without the need for additional firewalls or web servers. According
to Delta, approximately 92% of user requests for content from Delta's web site
are now being served from our products.

   Bandwidth Savings

   As the Internet has evolved as a network for shared data, content has
become accessible to end users throughout the world. In many cases, this
content does not originate from web sites located near the user requesting the
information, resulting in slower response times to end users and significant
bandwidth costs to

                                      38
ISPs. Because most Internet content originates in the United States, these
issues are particularly acute for international users.

   Customer Case Study: germany.net. germany.net, a large ISP in Germany,
needed a way to meet growing customer demand for faster access to the
Internet. germany.net found that much of the content its customers were
accessing was hosted on web servers located outside of Germany, resulting in
increasingly slow response times and high bandwidth costs. At the same time,
germany.net wanted to minimize its operating costs. germany.net had been
running cache software on Unix servers, which required daily maintenance. To
improve quality of service for existing customers and provide the
infrastructure to scale with new customer additions, while preserving valuable
bandwidth, germany.net deployed our Internet caching appliances. They reported
an immediate improvement in performance, including web sites where content was
being requested for the first time. Because our products request all objects
on a particular web site simultaneously, the host web server does not need to
be re-contacted each time a separate object is requested, enabling germany.net
to deliver noticeably reduced response times for its customers.

   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 bandwidth and
performance. Proxy servers offering user authentication and filtering
capabilities were originally put into networks to 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.

   Customer Case Study: Xerox. Xerox, a global leader in the document
processing business, was experiencing significant growth in the amount of data
traffic over its network, and wanted to enhance its ability to deliver
critical web-based data to its employees in a timely manner. Increasing
intranet and Internet usage by Xerox employees worldwide was resulting in
congestion in its network and slower response times for its employees. This
problem was compounded by the fact that Xerox was transporting several
terabytes of information every day. Recognizing that the moving and sharing of
data was critical in enhancing employee productivity, both at corporate
headquarters and among remote offices, Xerox needed a reliable solution that
would scale with its employees' growing usage and would enable it to better
manage traffic over its network. Xerox chose our Internet caching appliances
to accomplish these objectives. By placing our caching appliances between
their intranet and the Internet, Xerox was able to offload many of the
requests that otherwise would have been routed to its proxy servers. According
to Xerox, it has experienced immediate and significant productivity gains as
well as significant improvements in bandwidth efficiency and response time.

   Broadband

   Broadband ISPs offer high-speed Internet access, enabling the delivery of a
wide range of new content and the ability to make the Internet a truly
interactive medium. However, faster access speeds do not necessarily result in
significantly faster response time due to the distance, congestion and latency
of the Internet itself. Customer expectation of high-speed Internet access
remains largely unfulfilled, posing a challenge for broadband ISPs competing
to attract and retain customers.

   Customer Case Study: Road Runner. Road Runner, a leading provider of high-
speed Internet service delivered over cable infrastructure, was looking for
product solutions to enhance network performance. Because the broadband market
is viewed as new and highly competitive, it was critical for Road Runner to
continue to deliver high-quality service in order to attract new customers and
retain existing customers. In addition, Road

                                      39
Runner wanted to ensure a high level of performance for the web content that
Road Runner itself hosts. Road Runner also required a network infrastructure
product that was reliable and would enable them to scale with their growing
customer base. At the same time, Road Runner sought a product solution that
was easy to configure and deploy, and that was secure. As a result, Road
Runner chose our Internet caching appliances. According to Road Runner, the
speed of our appliances has helped Road Runner attract world-class content
providers and because Road Runner has been able to redirect much of its
traffic through our appliances, response time for its customers has improved
significantly.

Technology

   CacheFlow's Internet caching appliances are high-performance, self-tuning
systems that are easy to install and manage and are produced in a variety of
storage configurations. At the core of our technology is our proprietary
special-purpose operating system, CacheOS, which we created specifically to be
the foundation for a family of high-performance Internet caching appliances.
CacheOS is designed to enable our wide range of products, from small shared
caches to very large caches, to manage and accelerate the delivery of Internet
content. Our appliances' high performance, ease of installation and
management, security, and ability to deliver fresh content are made possible
by certain proprietary technologies.

   Efficient, Purpose-Built Operating System. CacheOS is designed to be faster
and more reliable than a general-purpose operating system. At the core of
CacheOS is a high-performance multitasking kernel that provides sub-
microsecond inter-process message passing. CacheOS operates at higher speeds
because it does not have the overhead of providing the general-purpose
services of a standard operating system, such as virtual memory, multiple
address spaces and memory protection. CacheOS uses a high-performance TCP/IP
stack based on the Berkeley Net/3 stack with modifications that support high
connection rates, fast recovery of lost packets and minimal data copying.
CacheOS is designed to be less vulnerable to security attacks than caches
based on more commonly understood, general-purpose operating systems such as
Windows NT, UNIX or NetWare. CacheOS can be remotely managed and monitored
using a Java-enabled browser or through a command-line interface. In addition,
geographically distributed caches can be centrally administered using custom-
designed scripts. CacheOS can be configured to automatically send e-mail
alerts and important operational statistics. New releases of CacheOS software
can be installed remotely over the network, with only a minimal interruption
of service. Additionally, CacheOS is designed to provide high availability. In
the event of a system failure, CacheOS detects the failure and is generally
able to restart in less than 20 seconds. If the appliance experiences a power
outage, it automatically restarts and becomes operational within a few
minutes.

   Web Object Storage System. CacheOS uses a high-performance specialized
object storage system designed specifically for storing and retrieving web
objects on disk. The method of storing objects on disk is critical for
achieving high performance with a large number of users. It determines how
quickly a cached object can be accessed when a client requests it, how rapidly
new objects can be acquired from the origin web server and the rate at which
client requests can be serviced. The web object storage system is an object
cache. A relatively small number of objects, such as system code,
configuration objects and log files, are stored on each disk within the cache.
These objects are stored on multiple disks to achieve fault tolerance. All
other stored objects are stored in such a way that they can be removed to
create space for new, incoming objects. The object cache is not a file system,
and uses no directories. Objects are located on disk using an efficient hash
table in RAM that ensures that any object can be accessed in a single disk
read. This design results in higher object throughput on each disk and better
response time.

   Object Pipelining. CacheOS uses a technology known as object pipelining to
speed the delivery of web content, even when it is not stored in the cache.
This technology improves web page response time and reduces page load times.
Without object pipelining, web browsers request embedded objects serially, a
few at a time. Pipelining reduces web page download times by retrieving all
web page objects from the origin web server simultaneously and in parallel.

                                      40
Adaptive Probabilistic Refresh. CacheOS utilizes asynchronous refresh
checks, which means that refresh checks are performed without increasing
response time for client requests. Thus, the delivery of web content is not
delayed by a "freshness" check of the content at the origin server prior to
delivery. CacheOS uses adaptive object refresh algorithms, which increase the
likelihood that objects being served from the cache are fresh. These
algorithms adapt to determine how often objects change and how popular each
object is. Because the cache actively maintains the freshness of its objects,
end users receive up-to-date web content with fast response times.

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 Lucent Technologies, Nissho Electronics
and Sumitronics. 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 been expanding our sales force
rapidly, and, as of August 31, 1999, we employed 69 persons in sales,
marketing and customer support.

   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. 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. As of August 31, 1999, we employed 36 persons in research and
development.

   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

  .  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 developed internally. However, we currently license certain
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 certain printed
circuit boards, custom power supplies, chassis, cables and

                                      41
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 leverage 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 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. As of August 31, 1999, we employed 7 persons in
manufacturing.

Competition

   The market for Internet caching solutions is intensely competitive,
evolving and subject to rapid technological change. Our competitors vary in
size and in the scope and breadth of the products and services they offer. Our
competitors' solutions are generally based on a hardware appliance, public
domain software or proprietary software. We primarily encounter competition
from Cisco Systems, Inktomi, Network Appliance, Novell and various others
using public domain software. In addition, because there are relatively low
barriers to entry in the Internet market, we expect additional competition
from other established and emerging companies as the market for Internet
caching continues to develop and expand.

   We believe that the principal competitive factors affecting our market are
product quality and performance, product features, ability to implement
solutions and customer service. We also believe that solutions specifically
designed for Internet caching have a competitive advantage over solutions that
are derived from products designed for other uses. Although we believe that
our products currently compete favorably with respect to these factors we may
not be able to maintain our competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.

Intellectual Property and Other Proprietary Rights

   We depend significantly on our ability to develop and maintain the
proprietary aspects of our technology. To protect our proprietary technology,
we rely primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, copyright and trademark laws and patents. Despite
our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to 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 currently have four United States patent applications on file and
pending before the United States Patent and Trademark Office. We also
currently have four PCT International Applications on file to reserve rights
in foreign jurisdictions under appropriate international treaties.

   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 such patent will be enforceable or that any damages awarded to us will be
sufficient to adequately compensate us.

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

                                      42
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 such
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.

   CacheFlow is a registered trademark in the United States. We also have
filed applications to register the following trademarks in the United States:
"CacheOS," "Content Aware Network Aware," "Content Aware," "Network Aware,"
"Accelerating the Intranet," "Accelerating the Web" and "Internet
Accelerator." The above mentioned trademark applications are subject to review
by the United States Patent and Trademark Office, may be opposed by private
parties and may not issue.

Litigation

   On September 16, 1999, Nokia IP filed a lawsuit in Santa Clara County
Superior Court naming CacheFlow Inc., Brian NeSmith, our President and Chief
Executive Officer and a director, and Alan Robin, our Senior Vice President of
Sales, as defendants. Messrs. NeSmith and Robin were officers and employees of
Ipsilon Networks, Inc., which was acquired by Nokia in December 1997.
Following the acquisition, Messrs. NeSmith and Robin became employees of
Nokia. Nokia's allegations against us include misappropriation of trade
secrets, unfair competition and inducing breach of contract. Nokia's
allegations against Messrs. NeSmith and Robin include breach of contract,
misappropriation of trade secrets and unfair competition and, with respect to
Mr. Robin only, breach of fiduciary duty. Nokia's claims are based upon
Nokia's allegation that Mr. NeSmith has violated a non-competition and non-
solicitation provision contained in his employment agreement with Nokia and
that Mr. Robin has violated a non-solicitation obligation to Nokia. Nokia is
seeking compensatory and punitive damages, a decree that the defendants'
alleged acts were and are unfair acts of competition, orders restraining and
enjoining the defendants from disclosing or using Nokia's trade secrets or
confidential and proprietary information and acting in a manner that violates
Messrs. NeSmith's and Robin's contractual and fiduciary duties to Nokia,
attorneys' fees and other specified damages. This litigation was only recently
filed and we are presently evaluating these claims. We and the other
defendants believe that there are meritorious defenses to the asserted claims
and intend to defend the litigation vigorously. However, the outcome of
litigation is inherently unpredictable and the results of the litigation may
not be favorable to us or the other defendants. In such case, our business
could be seriously harmed. Regardless of the ultimate outcome, the litigation
could result in substantial expense to us and significant diversion of effort
by our managerial and other personnel.

Employees

   As of August 31, 1999, we had a total of 126 employees, including 36 in
research and development, 69 in sales, marketing and customer support, 7 in
manufacturing and 14 in general and administrative. Of these employees, 111
were located in North America with 15 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.

                                      43
Our future operating results depend significantly upon the continued
service of our key technical, sales and senior management personnel, none of
whom is 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 such qualified
personnel.

Facilities

   We lease approximately 39,000 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 nine
metropolitan areas in North America as well as Dusseldorf, London, Stockholm,
Sydney, Taipei and Tokyo.

                                      44
MANAGEMENT

Executive Officers and Directors

   Our executive officers and directors and their ages as of August 31, 1999,
are as follows:
Name                     Age Position
----                     --- --------
Brian M. NeSmith........  37 President and Chief Executive Officer, Director
Michael A. Malcolm......  54 Chairman of the Board, Director
Stuart G. Aaron.........  29 Vice President, Marketing and Product Management
Douglas A. Crow.........  38 Vice President, Product Development
Michael J. Johnson......  46 Vice President, Chief Financial Officer and Secretary
Ray G. Myers............  64 Vice President, Manufacturing
Terry L. Printy.........  44 Vice President, Customer Support
Alan L. Robin...........  43 Senior Vice President, Sales
Ian Telford.............  58 President of CacheFlow Canada
Rangaswamy Vasudevan....  49 Chief Technology Officer
William S. Warner.......  40 Vice President, Business Development
David W. Hanna(2).......  60 Director
Stuart G.
 Phillips(1)(2).........  41 Director
Andrew S. Rachleff(1)...  40 Director
--------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee

   Brian NeSmith 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.

   Michael Malcolm has served as Chairman of the board of directors of
CacheFlow since March 1996. From June 1997 to December 1998, Mr. Malcolm also
served as President and Chief Executive Officer of CacheFlow. From April 1992
to October 1994, Mr. Malcolm served as President and Chief Executive Officer
of Network Appliance Inc., a network filer company. Mr. Malcolm holds a B.S.
in mechanical engineering from the University of Denver and M.A. and Ph.D.
degrees in computer science from Stanford University.

   Stuart Aaron has served as Vice President of Marketing and Product
Management of CacheFlow since April 1999. From July 1993 to April 1999, Mr.
Aaron held several marketing and product management positions at Newbridge
Networks Corporation, a networking equipment manufacturer. Prior to that time,
Mr. Aaron worked as an industry analyst with the Network Strategies Practice
of Ernst & Young LLP where he specialized in Internetworking and Network
Management. Mr. Aaron holds a B.S. in electrical engineering from Cornell
University.

   Douglas Crow has served as Vice President of Product Development of
CacheFlow since May 1996. From June 1992 to May 1996, Mr. Crow served as
Development Manager of Wall Data Inc., a host connectivity software company.
Mr. Crow holds a B.S. in computer science from the University of Washington.

   Michael Johnson 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.

                                      45
Ray Myers has served as Vice President of Manufacturing of CacheFlow since
October 1997. From May 1993 to April 1996, Mr. Myers served as Vice President
of Manufacturing of Network Appliance Inc., a network filer company. Mr. Myers
holds a B.S. in physics from Colorado College and a B.S. in business finance
from San Jose State University.

   Terry Printy has served as Vice President of Customer Support of CacheFlow
since June 1999. From January 1999 to May 1999, Mr. Printy served as Vice
President of Worldwide Services of Nokia IP, Inc., a security router company.
From October 1990 to April 1998, Mr. Printy served as Vice President and
General Manager of Worldwide Service at Network General Corporation, a
protocol analysis company.

   Alan Robin 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.

   Ian Telford has served as President of CacheFlow Canada since May 1, 1999.
From March 1995 to April 1999, Mr. Telford served as Chief Executive Officer
of Scaleable Software Solutions, Inc., a company he co-founded that
specializes in operating system and file development. From December 1983 to
January 1991, Mr. Telford held a variety of positions at Waterloo Microsystems
Inc., a software company specializing in the production of PC Network
Operating Systems, and then at Hayes Microcomputer Products (Canada) Limited,
which acquired the assets of Waterloo Microsystems in January of 1991. Mr.
Telford holds a B.S. in industrial chemistry from The City University, London,
England.

   Rangaswamy Vasudevan has served as Chief Technology Officer of CacheFlow
since August 1997. From April 1989 to July 1997, Mr. Vasudevan served as a
Senior Engineer and a Sun Distinguished Engineer at Sun Microsystems, Inc., a
manufacturer of network computing equipment. Mr. Vasudevan holds a Bachelor of
Technology in electrical engineering from the Indian Institute of Technology
and a Ph.D. in computer science from the University of Waterloo.

   William Warner has served as Vice President of Business Development of
CacheFlow since August 1999. He also served as Vice President of Sales at
CacheFlow from September 1997 to August 1999. From March 1987 to April 1997,
Mr. Warner served as Director of the Telecommunications Industry Group of
Silicon Graphics, Inc., a manufacturer of computer equipment. Mr. Warner holds
a B.S. in political science and business from the University of Kansas.

   David Hanna has served as a director of CacheFlow since October 1996. From
December 1998 to March 1999, Mr. Hanna also served as our President and Chief
Executive Officer. Since March 1998, Mr. Hanna has served as President and
Chief Executive Officer of Sage Software, Inc., a financial software company.
Mr. Hanna served as President and Chief Executive Officer of State of The Art,
Inc., a financial software developer, from November 1993 until March 1998. Mr.
Hanna currently serves as President of The Hanna Group, which provides
operational and strategic consulting to both small, high-tech companies and to
larger organizations requiring growth restoration and restructuring. In
addition, Mr. Hanna serves as Chairman of Hanna Capital Management Inc., which
provides financial management services to high-net-worth individuals. He is
Chief Executive Officer of Hanna Ventures, which invests in networking,
communications, and internet/intranet companies. Mr. Hanna also serves on the
boards of directors of several privately held companies. Mr. Hanna holds a
B.S. in business administration from the University of Arizona.

   Stuart Phillips has served as a director of CacheFlow since January 1997.
Since June 1997, Mr. Phillips has been a General Partner at U.S. Venture
Partners, a venture capital firm. From October 1993 to June 1997, Mr. Phillips
served as Vice President of Central Engineering at Cisco Systems Inc., an
internetworking company. Mr. Phillips also serves on the boards of directors
of several privately held companies. He holds a B.S. in electronics from the
University of Wales at Cardiff, U.K.

                                      46
Andrew Rachleff has served as a director of CacheFlow since October 1997.
In May 1995, Mr. Rachleff co-founded Benchmark Capital, a venture capital
firm, and has served as a general partner since that time. Prior to co-
founding Benchmark Capital, Mr. Rachleff spent ten years as a general partner
with Merrill, Pickard, Anderson & Eyre, a venture capital firm. Mr. Rachleff
also serves on the boards of directors of NorthPoint Communications Group,
Inc., a competitive local exchange carrier, and several privately held
companies. Mr Rachleff holds a B.S. in economics from the University of
Pennsylvania and an M.B.A. from Stanford University.

Board of Directors

   CacheFlow currently has authorized five directors. Each director holds
office until the next annual meeting of stockholders or until his or her
successor is duly elected and qualified. The officers serve at the discretion
of the board. There are no family relationships among the directors and
officers of CacheFlow.

Board Committees

  The audit committee consists of Stuart Phillips and Andrew Rachleff. The
audit committee makes recommendations to the board of directors regarding the
selection of independent accountants, reviews the results and scope of audit
and other services provided by our independent accountants and reviews and
evaluates the our audit and control functions.

   The compensation committee consists of David Hanna and Stuart Phillips. The
compensation committee makes recommendations regarding our stock plans and
makes decisions concerning salaries and incentive compensation for our
employees and consultants.

Compensation Committee Interlocks and Insider Participation

   No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee.

Director Compensation

   Directors currently do not receive any cash compensation from CacheFlow for
their services as members of the board of directors, although members are
reimbursed for expenses in connection with attendance at board of directors
and committee meetings. Directors are eligible to participate in CacheFlow's
stock plans, and beginning in 1999, employee directors will also be able to
participate in CacheFlow's 1999 Stock Incentive Plan and non-employee
directors will receive periodic option grants under CacheFlow's 1999 Director
Option Plan. See "Management--1999 Stock Incentive Plan" and "--1999 Director
Option Plan."

   Options were granted during the fiscal year to Messrs. Hanna and Malcolm
and those options are disclosed in the table below entitled Option Grants in
Last Fiscal Year.

                                      47
Executive Compensation

   The following table sets forth information with respect to compensation for
the fiscal year ended April 30, 1999 paid by us for services by each of the
individuals who served as our Chief Executive Officer during the fiscal year,
Mr. Hanna, who served as our Chief Executive Officer from December 11, 1998 to
March 2, 1999, and each of the four other executive officers whose total
salary and bonuses for the fiscal year exceeded $100,000, collectively
referred to as the Named Executive Officers:

                          Summary Compensation Table
Long-Term
                                                                  Compensation
                                                                     Awards
                                                                  ------------
                                                      Annual
                                                   Compensation    Securities
                                                 ----------------  Underlying
Name and Principal Position                       Salary   Bonus    Options
---------------------------                      -------- ------- ------------
Brian M. NeSmith, President and Chief Executive
 Officer........................................ $  8,978 $    --  2,000,000
Michael A. Malcolm, Chairman....................  197,854      --  1,000,000
Douglas A. Crow, Vice President, Product
 Development....................................  133,626      --         --
David Hanna, Director (1).......................   21,708      --    250,000
Kelly Herrell, Former Vice President,
 Marketing......................................  148,765      --         --
Rangaswamy Vasudevan, Chief Technical Officer...  149,907      --         --
William S. Warner, Vice President, Business
 Development....................................  149,889  40,000         --
--------
(1) Consulting fees were paid to Hanna Group for services rendered by Mr.
    Hanna.

Option Grants in Last Fiscal Year

   The following table sets forth each grant of stock options during the
fiscal year ended April 30, 1999 to each of the Named Executive Officers. We
have not granted stock appreciation rights. Each of the options listed in the
table is immediately exercisable. The shares purchasable thereunder are
subject to repurchase by CacheFlow at the original exercise price paid per
share upon the optionee's cessation of service prior to vesting in such
shares. For Mr. Malcolm, the repurchase right on half of his option shares
lapses and he vests as to these option shares in a series of 36 equal monthly
installments from October 14, 1998. The repurchase right on the second half of
his options lapses and he vests as to these option shares in a series of six
equal monthly installments from October 14, 1998. For Mr. NeSmith, the
repurchase right on his option lapses and he vests as to 25% of the option
shares upon completion of one year of service from the date of grant and the
balance in a series of equal monthly installments over the next 36 months of
service thereafter. In addition, he vests in an additional 25% of the option
shares upon a merger and certain other corporate transactions.

   We have calculated the percentage of total options granted to employees
based on an aggregate of 5,371,400 options granted to our employees during the
12 months ended April 30, 1999. The exercise price for each option was equal
to the fair market value of our common stock as determined by our board of
directors on the date of grant. The exercise price may be paid in cash, in
shares of our common stock valued at fair market value on the exercise date or
through a cashless exercise procedure involving a same-day sale of the
purchased shares. We may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by the
optionee in connection with such exercise.

   We have calculated the potential realizable value based on the term of the
option at the time of grant (ten years) and we assumed stock price
appreciation of 5% and 10% is assumed pursuant to rules promulgated by the
Securities and Exchange Commission; this does not represent our prediction of
our stock price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the exercise price on the date of
grant appreciates at the indicated rate for the entire term of the option and
that the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.

                                      48
Individual Grants
                         ----------------------------------------------
                                                                          Potential Realizable
                                                                            Value at Assumed
                         Number of    % of Total                             Annual Rates of
                         Securities     Options     Exercise            Stock Price Appreciation
                         Underlying     Granted      Price                   for Option Term
                          Options   to Employees in   Per    Expiration -------------------------
Name                      Granted     Fiscal Year    Share      Date        5%           10%
----                     ---------- --------------- -------- ---------- ----------- -------------
Brian M. NeSmith........ 2,000,000       37.0%        $.50      3/1/09  $   628,895 $   1,593,742
Michael A. Malcolm...... 1,000,000       18.4          .50    10/13/08      314,448       796,872
Douglas A. Crow.........       --         --           --          --           --            --
David Hanna.............   250,000        4.6          .50      3/1/09       78,612       199,218
Kelly Herrell...........       --         --           --          --           --            --
Rangaswamy Vasudevan....       --         --           --          --           --            --
William S. Warner.......       --         --           --          --           --            --
In addition to the options listed above, on July 26, 1999, Mr. Johnson, our
Vice President and Chief Financial Officer, received an option to purchase
250,000 shares and an option to purchase 65,000 shares at an exercise price of
$2.00 per share. On July 26, 1999, Mr. Robin, our Senior Vice President of
Sales, received an option to purchase 250,000 shares and an option to purchase
222,000 shares at an exercise price of $2.00 per share. On June 21, 1999, Mr.
Printy, our Vice President of Customer Support, received an option to purchase
75,000 shares at an exercise price of $2.00 per share. On August 27, 1999, we
granted options to Mr. Crow for 240,000 shares, Mr. Telford for 123,000
shares, and Mr. Printy for 37,500 shares at an exercise price of $4.00 per
share. On September 27, 1999, we granted an option to Mr. NeSmith for 200,000
shares at an exercise price of $5.50 per share. All of these options are
immediately exercisable and the shares purchasable thereunder are subject to
repurchase by us at the original exercise price paid per share upon the
optionee's cessation of service prior to vesting in such shares. The
repurchase right lapses as to 25% of the option shares upon completion of one
year of service from the date of grant and the balance in a series of equal
monthly installments over the next 36 months of service thereafter, except
that the option granted to Mr. Crow and certain of the options granted to Mr.
Telford begin to vest in 2000 or 2001.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

   The following table sets forth for each of the Named Executive Officers the
number of options exercised during the fiscal year ended April 30, 1999 and
the number and value of securities underlying unexercised options that are
held by the Named Executive Officers as of April 30, 1999. With respect to
options exercised, value realized refers to the fair market value of the
purchased shares on the option exercise date, less the exercise price paid for
such shares. Since our options are immediately exercisable at grant, any
shares purchased under those options will be subject to repurchase by us, at
the original exercise price paid per share, upon the optionee's cessation of
service with CacheFlow, prior to vesting in such shares. Accordingly, we have
chosen to report the number of the underlying shares that are vested and the
number unvested as of April 30, 1999. The heading "Vested" refers to shares no
longer subject to repurchase; the heading "Unvested" refers to shares subject
to repurchase as of April 30, 1999. Our board of directors determined that the
fair market value of our common stock on April 30, 1999 was $1.00 per share.
Value of
                                                    Number of             Unexercised
                                              Securities Underlying       in-the-Money
                                               Unexercised Options         Options at
                           Shares               at April 30, 1999        April 30, 1999
                         Acquired on  Value   ------------------------  ----------------
Name                      Exercise   Realized  Vested       Unvested    Vested  Unvested
----                     ----------- -------- ------------ -----------  ------- --------
Brian M. NeSmith........  2,000,000  $   --            --          --   $   --  $   --
Michael A. Malcolm......        --       --            --          --       --      --
Douglas A. Crow.........        --       --         20,000         --    15,000     --
David Hanna.............    250,000      --            --          --       --      --
Kelly Herrell...........    490,000   85,750           --          --       --      --
Rangaswamy Vasudevan....    470,000   82,250           --          --       --      --
William S. Warner.......    490,000   85,750           --          --       --      --
49
Change of Control Arrangements

   The compensation committee of the board of directors, as plan administrator
of the 1999 Stock Incentive Plan, has the authority to provide for accelerated
vesting of the shares of common stock subject to outstanding options held by
the Named Executive Officers and any other person in connection with certain
changes in control of CacheFlow. In connection with our adoption of the 1999
Stock Incentive Plan, we have provided that upon a change in control of
CacheFlow, each outstanding option and all shares of restricted stock will
generally become fully vested unless the surviving corporation assumes the
option or award or replaces it with a comparable award. In addition, an option
or award will become fully exercisable and fully vested if the holder's
employment or service is involuntarily terminated within 18 months following
the change in control.

   Except for Mr. NeSmith, Mr. Johnson, and Mr. Robin, none of the Named
Executive Officers has an employment agreement with CacheFlow, and their
employment may be terminated at any time. CacheFlow has entered into an
agreement with Mr. NeSmith, dated February 24, 1999 which provides that his
salary shall be $175,000 per year. The agreement provides for the grant of an
option to Mr. NeSmith to purchase shares of our common stock at the fair
market value on the grant date. The agreement also provides that we will
extend a loan to Mr. NeSmith of up to $800,000. The agreement also provides
for acceleration of vesting of option shares as if Mr. NeSmith remained
employed for one additional year in the event of certain changes in control of
CacheFlow.

   We have entered into an agreement with Mr. Johnson, our Vice President and
Chief Financial Officer, dated June 4, 1999 which provides that his salary
shall be $170,000 per year. The agreement provides for the grant of an option
to Mr. Johnson to purchase shares of common stock at the fair market value on
the grant date. The agreement also provides for acceleration of vesting of
option shares as if Mr. Johnson remained employed for one additional year in
the event that he is not offered the same or similar position following
certain changes in control of CacheFlow.

   CacheFlow has entered into an agreement with Mr. Robin, our Senior Vice
President of Sales, dated July 12, 1999 which provides for a salary of
$150,000 per year and a target commission of up to $125,000 per year. Under
the agreement, he is also eligible for cash bonuses of $200,000 each payable
60 days after his start date and on August 1, 2000. The agreement provides for
the grant of an option to Mr. Robin to purchase shares of our common stock at
the fair market value on the grant date. The agreement also provides for
payment of severance pay in the amount of six months base salary plus bonus in
the event that Mr. Robin's employment is terminated without cause. The
agreement also provides for acceleration of vesting of option shares as if Mr.
Robin remained employed for one additional year in the event that his
employment is terminated without cause; after three years of employment,
vesting acceleration declines by one month for each month of service and does
not apply after four years of employment. The agreement also provides for
acceleration of vesting of option shares as if Mr. Robin remained employed for
one additional year in the event that he is not offered the same or similar
position following certain changes in control of CacheFlow.

1999 Stock Incentive Plan

   Share Reserve. Our board of directors adopted our 1999 Stock Incentive Plan
on September 24, 1999 to be effective on the effective date of this offering.
We also intend to ask our stockholders to approve this plan. We have reserved
5,000,000 shares of our common stock for issuance under the 1999 Stock
Incentive Plan. This includes any shares not yet issued under our 1996 Stock
Option Plan on the date of this offering which will be available only under
the 1999 Stock Incentive Plan after this offering. On January 1 of each year,
starting with the year 2000, the number of shares in the reserve will
automatically increase by 5% of the total number of shares of common stock
that are outstanding at that time or, if less, by 2,000,000 shares. In
general, if options or shares awarded under the 1999 Stock Incentive Plan or
the 1996 Stock Option Plan are forfeited, then those options or shares will
again become available for awards under the 1999 Stock Incentive Plan. We have
not yet granted any options under the 1999 Stock Incentive Plan.

   Outstanding options under the 1996 Stock Option Plan will be incorporated
into the 1999 Stock Incentive Plan at the time of this offering and no further
option grants will be made under the 1996 Stock Option Plan.

                                      50
The incorporated options will continue to be governed by their existing terms,
unless the Board elects to extend one or more features of the 1999 Stock
Incentive Plan to those options or to other outstanding shares. The Board has
elected to extend the change in control acceleration feature of the 1999 Stock
Incentive Plan to all outstanding options and unvested shares. Previously,
options granted under the 1996 Stock Option Plan provided that vesting of the
shares would accelerate upon an acquisition only if not assumed by the
acquiring entity.

   Administration. The compensation committee of our board of directors
administers the 1999 Stock Incentive Plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operation
of our 1999 Stock Incentive Plan. The committee has the discretion to
determine who will receive an award, what type of award it will be, how many
shares will be covered by the award, what the vesting requirements will be (if
any), and what the other features and conditions of each award will be. The
compensation committee may also reprice outstanding options and modify
outstanding awards in other ways.

   Eligibility. The following groups of individuals are eligible to
participate in the 1999 Stock Incentive Plan:

  .  employees;

  .  members of our board of directors who are not employees; and

  .  consultants.

   Types of Award. The 1999 Stock Incentive Plan provides for the following
types of award:

  .  incentive stock options to purchase shares of our common stock;

  .  nonstatutory stock options to purchase shares of our common stock;

  .  restricted shares of our common stock;

  .  stock appreciation rights and stock units.

   Options and Stock Appreciation Rights. An optionee who exercises an
incentive stock option may qualify for favorable tax treatment under Section
422 of the Internal Revenue Code of 1986. On the other hand, nonstatutory
stock options do not qualify for such favorable tax treatment. The exercise
price for incentive stock options granted under the 1999 Stock Incentive Plan
may not be less than 100% of the fair market value of our common stock on the
option grant date. In the case of nonstatutory stock options, the minimum
exercise price is 85% of the fair market value of our common stock on the
option grant date. Optionees may pay the exercise price by using:

  .  cash;

  .  shares of common stock that the optionee already owns;

  .  a full-recourse promissory note, except that the par value of newly
     issued shares must be paid in cash;

  .  an immediate sale of the option shares through a broker designated by
     us; or

  .  a loan from a broker designated by us, secured by the option shares.

   A participant who exercises a stock appreciation right shall receive the
increase in value of our common stock over the base price. The base price for
stock appreciation rights granted under the 1999 Stock Incentive Plan shall be
determined by the compensation committee. The settlement value of the stock
appreciation right may be paid in cash or shares of common stock.

   Options and stock appreciation rights vest at the time or times determined
by the compensation committee. In most cases, our options and stock
appreciation rights will vest over a four-year period following the date of
grant. Options and stock appreciation rights generally expire 10 years after
they are granted. The Compensation Committee may provide for a longer term
except that options and stock appreciation rights generally expire earlier if
the participant's service terminates earlier. The 1999 Stock Incentive Plan
provides that no participant

                                      51
may receive options or stock appreciation rights covering more than 1,500,000
shares in the same year, except that a newly hired employee may receive
options or stock appreciation rights covering up to 2,000,000 shares in the
first year of employment.

   Restricted Shares. Restricted shares may be awarded under the 1999 Stock
Incentive Plan in return for:

  .  cash;

  .  a full-recourse promissory note, except that the par value of newly
     issued shares must be paid in cash;

  .  services already provided to us; and

  .  in the case of treasury shares only, services to be provided to us in
     the future.

   Restricted shares vest at the time or times determined by the compensation
committee. Stock units may be awarded under the 1999 Stock Incentive Plan. No
cash consideration shall be required of the award recipients. Stock units may
be granted in consideration of a reduction in the recipient's other
compensation or in consideration of services rendered. Each award of stock
units may or may not be subject to vesting and vesting, if any, shall occur
upon satisfaction of the conditions specified by the compensation committee.
Settlement of vested stock units may be made in the form of cash, shares of
common stock or a combination of both.

   Change in Control. If a change in control of CacheFlow occurs, an option or
restricted stock award under the 1999 Stock Incentive Plan will generally
become fully vested. However, if the surviving corporation assumes the option
or award or replaces it with a comparable award, then vesting will not
accelerate. An option or award will become fully exercisable and fully vested
if the holder's employment or service is involuntarily terminated within 18
months following the change in control. A change in control includes:

  .  a merger of CacheFlow after which our own stockholders own 50% or less
     of the surviving corporation (or its parent company);

  .  a sale of all or substantially all of our assets;

  .  a proxy contest that results in the replacement of more than one-half of
     our directors over a 24-month period; or

  .  an acquisition of 50% or more of our outstanding stock by any person or
     group, other than a person related to CacheFlow (such as a holding
     company owned by our stockholders).

   Amendments or Termination. Our board may amend or terminate the 1999 Stock
Incentive Plan at any time. If our board amends the plan, it does not need to
ask for stockholder approval of the amendment unless applicable law requires
it. The 1999 Stock Incentive Plan will continue in effect indefinitely, unless
the board decides to terminate the plan earlier.

Employee Stock Purchase Plan

   Share Reserve and Administration. Our board of directors adopted our
Employee Stock Purchase Plan on September 24, 1999, to be effective on the
effective date of this offering. We also intend to ask our stockholders to
approve this plan. Our Employee Stock Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code. We have reserved 2,500,000
shares of our common stock for issuance under the plan. In addition, on
January 31 of each year, starting with the year 2000, the number of shares in
the reserve will automatically increase by 500,000 shares or such lesser
number as our board of directors determines. The plan will be administered by
the compensation committee of our board of directors.

   Eligibility. All of our employees are eligible to participate if they are
employed by us for more than 20 hours per week and for more than five months
per year. Eligible employees may begin participating in the Employee Stock
Purchase Plan at the start of any offering period. Each offering period lasts
24 months. Overlapping offering periods start on August 1 and February 1 of
each year. However, the first offering period will start on the effective date
of this offering and end on January 31, 2002.

                                      52
Amount of Contributions. Our Employee Stock Purchase Plan permits each
eligible employee to purchase common stock through payroll deductions. Each
employee's payroll deductions may not exceed 15% of the employee's cash
compensation. Purchases of our common stock will occur on July 31 and January
31 of each year. Each participant may purchase up to 2,000 shares on any
purchase date. But the value of the shares purchased in any calendar year
(measured as of the beginning of the applicable offering period) may not
exceed $25,000.

   Purchase Price. The price of each share of common stock purchased under our
Employee Stock Purchase Plan will be 85% of the lower of:

  .  the fair market value per share of common stock on the date immediately
     before the first day of the applicable offering period, or

  .  the fair market value per share of common stock on the purchase date.

   In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:

  .  the price per share to the public in this offering, or

  .  the fair market value per share of common stock on the purchase date.

   Other Provisions. Employees may end their participation in the Employee
Stock Purchase Plan at any time. Participation ends automatically upon
termination of employment with CacheFlow. If a change in control of CacheFlow
occurs, our Employee Stock Purchase Plan will end and shares will be purchased
with the payroll deductions accumulated to date by participating employees,
unless the plan is assumed by the surviving corporation or its parent. Our
board of directors may amend or terminate the Employee Stock Purchase Plan at
any time. Our Chief Executive Officer may also amend the plan in certain
respects. If our board increases the number of shares of common stock reserved
for issuance under the plan (except for the automatic increases described
above), it must seek the approval of our stockholders.

1999 Director Option Plan

   Share Reserve. Our board of directors adopted our 1999 Director Option Plan
on September 24, 1999. The 1999 Director Option Plan became effective on the
date of its adoption. We also intend to ask our stockholders to approve this
plan. We have reserved 500,000 shares of our common stock for issuance under
the plan. In addition, on January 31 of each year, starting with the year
2000, the number of shares in the reserve will automatically increase by
100,000 shares or such lesser number as our board of directors determines. In
general, if options granted under the 1999 Director Option Plan are forfeited,
then those options will again become available for grants under the plan. The
Director Option Plan will be administered by the compensation committee of our
board of directors, although all grants under the plan are automatic and non-
discretionary.

   Initial Grants. Only the non-employee members of our board of directors
will be eligible for option grants under the 1999 Director Option Plan. Each
non-employee director who first joins our board after the effective date of
the 1999 Director Option Plan will receive an initial option for 25,000
shares. For new directors, that grant will occur when the director takes
office. The initial options vest in four equal annual installments over the
four-year period following the date of grant.

   Annual Grants. At the time of each of our annual stockholders' meetings,
beginning in 2000, each non-employee director who will continue to be a
director after that meeting will automatically be granted an annual option for
5,000 shares of our common stock. However, a new non-employee director who is
receiving the initial option will not receive the annual option in the same
calendar year. The annual options are fully vested on the first anniversary of
the date of grant.

   Other Option Terms. The exercise price of each non-employee director's
option will be equal to the fair market value of our common stock on the
option grant date. A director may pay the exercise price by using

                                      53
cash, shares of common stock that the director already owns, or an immediate
sale of the option shares through a broker designated by us. The non-employee
directors' options have a 10-year term, except that they expire one year after
a director leaves the board (if earlier). If a change in control of CacheFlow
occurs, a non-employee director's option granted under the 1999 Director
Option Plan will become fully vested.

   Amendments or Termination. Our board may amend or terminate the 1999
Director Option Plan at any time. If our board amends the plan, it does not
need to ask for stockholder approval of the amendment unless applicable law
requires it. The 1999 Director Option Plan will continue in effect
indefinitely, unless the board decides to terminate the plan.

                                      54
CERTAIN TRANSACTIONS

   Since our inception on March 13, 1996, we have sold preferred stock to the
following persons who are our principal stockholders, executive officers or
directors.
Shares of       Shares of       Shares of
                                  Series A        Series B        Series C
Investor                       Preferred Stock Preferred Stock Preferred Stock
--------                       --------------- --------------- ---------------
Entities affiliated with
 Benchmark Capital ...........    3,222,858         796,462         738,068
Entities affiliated with U.S.
 Venture Partners.............           --       2,654,868         455,622
Entities affiliated with
 Technology Crossover
 Ventures.....................           --              --       1,890,816
Michael A. Malcolm............      777,144         221,240         801,116
Persons and entities
 affiliated with David W.
 Hanna........................      800,002         367,258         209,432
Ray G. Myers..................       75,374              --          43,716
Joseph J. Pruskowski..........       58,572              --              --
Shares held by all affiliated persons and entities have been aggregated.
Share numbers and purchase price information are reflected on an as if
converted into shares of common stock basis. See "Principal Stockholders" for
more detail on shares held by these purchasers. The per share purchase price
for the Series A Preferred Stock was $.875. The per share purchase price for
the Series B Preferred Stock was $2.26. The per share purchase price for the
Series C Preferred Stock was $4.575. Andrew S. Rachleff, one of our directors,
is an affiliate of each of the entities affiliated with Benchmark Capital.
Stuart G. Phillips, one of our directors, is an affiliate of each of the
entities affiliated with U.S. Venture Partners.

   We loaned $999,900 to Brian M. NeSmith, our President and Chief Executive
Officer, on April 13, 1999, pursuant to a full-recourse promissory note that
is due April 12, 2004 and bears interest at the rate of 4.99% per annum. We
also loaned $800,000 to Mr. NeSmith on August 31, 1999, pursuant to a non-
recourse, interest free promissory note that is due August 30, 2004. The
promissory notes are secured by 2,000,000 shares of our common stock owned by
Mr. NeSmith.

   In addition, we have granted options to some of our directors and executive
officers. See "Management--Option Grants in the Last Fiscal Year" and
"Principal Stockholders."

   We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors on the board of directors, and
will continue to be on terms no less favorable to us than could be obtained
from unaffiliated third parties.

                                      55
PRINCIPAL STOCKHOLDERS

   The following table sets forth information regarding beneficial ownership
of our common stock as of July 31, 1999, and as adjusted to reflect the sale
of shares offered hereby held by:

  .  each person who we know to own beneficially more than five percent of
     our common stock;

  .  each of the Named Executive Officers;

  .  each of our directors; and

  .  all directors and executive officers as a group.

   The number of shares of common stock outstanding after this offering
includes      shares of common stock being offered for sale in this offering.
The percentage of beneficial ownership for the following table is based on
27,671,031 shares of common stock outstanding as of July 31, 1999, after
giving effect to the conversion of all outstanding shares of preferred stock
into common stock upon the completion of this offering and the cash exercise
of warrants to purchase 672,850 shares of preferred stock prior to completion
of the offering and the conversion of these shares of preferred stock into
common stock, and assuming no exercise of the underwriters' over-allotment
option. The number of shares beneficially owned and the percent beneficially
owned set forth in the table below assumes that existing stockholders,
officers and directors do not purchase any shares in the offering. See
"Underwriters."

   In accordance with the rules of the Securities and Exchange Commission,
beneficial ownership includes voting or investment power with respect to
securities and includes the shares issuable pursuant to stock options and
warrants that are exercisable within 60 days of July 31, 1999. Shares issuable
pursuant to stock options and warrants are deemed outstanding for computing
the percentage of the person holding such options and warrants but are not
outstanding for computing the percentage of any other person.

   To our knowledge, except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock.
Shares
                                           Beneficially       Percent
                                              Owned     Beneficially Owned
                                           ------------ ----------------------
                                                         Before        After
  Name and Address of Beneficial Owner        Number    Offering     Offering
  ------------------------------------     ------------ ---------    ---------
Michael A. Malcolm.......................    5,163,785         18.7%
 650 Almanor Avenue
 Sunnyvale, California 94086
Entities affiliated with Benchmark
 Capital(1)..............................    4,757,388         17.2
 2480 Sand Hill Road, Suite 200
 Menlo Park, California 94025
Entities affiliated with U.S. Venture
 Partners(2).............................    3,110,490         11.2
 2180 Sand Hill Road, Suite 300
 Menlo Park, California 94025
Joseph J. Pruskowski(3)..................    2,520,243          9.1
 18109 236th Avenue NE
 Woodinville, Washington 98072
Brian M. NeSmith(4)......................    2,000,000          7.2
 650 Almanor Avenue
 Sunnyvale, California 94086
Entities affiliated with Technology
 Crossover Ventures(5)...................    1,890,816          6.8
 56 Main Street, Suite 210
 Millburn, New Jersey 07041
Douglas A. Crow(6).......................      620,000          2.2
William S. Warner........................      490,000          1.8
Rangaswamy Vasudevan.....................      470,000          1.7
Andrew S. Rachleff(1)....................    4,757,388         17.2
Stuart G. Phillips(7)....................    3,280,490         11.9
David W. Hanna(8)........................    1,626,692          5.9
All directors and executive officers as a
 group (14 persons)(9)...................   19,556,065         70.7
56
--------
* Less than 1%.
(1) Consists of 4,176,178 shares held by Benchmark Capital Partners, L.P. and
    581,210 shares held by Benchmark Founders' Fund, L.P. Mr. Rachleff, one of
    our directors, is a managing member of Benchmark Capital Management Co.,
    L.L.C., which is the general partner of each of Benchmark Capital
    Partners, L.P. and Benchmark Founders' Fund, L.P. Mr. Rachleff disclaims
    beneficial ownership of the shares held by Benchmark Capital Partners,
    L.P. and Benchmark Founders' Fund, L.P. except to the extent of his
    pecuniary interest therein arising from his interest therein.
(2) Consists of 2,799,438 shares held by U.S. Venture Partners V, L.P.,
    155,526 shares held by USVP V International, L.P., 87,094 shares held by
    2180 Associates Fund V, L.P. and 68,432 shares held by USVP V Entrepreneur
    Partners, L.P. Mr. Phillips, one of our directors, is a general partner of
    Presidio Management Group V, L.L.C., which is the general partner of each
    of U.S. Venture Partners V, L.P., USVP V International, L.P., 2180
    Associates Fund V, L.P. and USVP V Entrepreneur Partners, L.P. Mr.
    Phillips disclaims beneficial ownership of the shares held by U.S. Venture
    Partners V, L.P., USVP V International, L.P., 2180 Associates Fund V, L.P.
    and USVP V Entrepreneur Partners, L.P., except to the extent of his
    pecuniary interest therein arising from his general partnership interest
    therein.
(3) Includes 33,100 shares held by Mr. Pruskowski's spouse.
(4)  Excludes options immediately exercisable for 200,000 shares granted after
     July 31, 1999.
(5) Consists of 13,730 shares held by TCV III (GP), 65,216 shares held by TCV
    III, L.P., 1,733,374 shares held by TCV III (Q), L.P. and 78,496 shares
    held by TCV III Strategic Partners, L.P.
(6) Includes options immediately exercisable for 20,000 shares.
(7) Includes 170,000 shares owned individually by Mr. Phillips, 2,799,438
    shares held by U.S. Venture Partners V, L.P., 155,526 shares held by USVP
    V International, L.P., 87,094 shares held by 2180 Associates Fund V, L.P.
    and 68,432 shares held by USVP V Entrepreneur Partners, L.P. Mr. Phillips,
    one of our directors, is a general partner of Presidio Management Group V,
    L.L.C., which is the general partner of each of U.S. Venture Partners V,
    L.P., USVP V International, L.P., 2180 Associates Fund V, L.P. and USVP V
    Entrepreneur Partners, L.P. Mr. Phillips disclaims beneficial ownership of
    the shares held by U.S. Venture Partners V, L.P., USVP V International,
    L.P., 2180 Associates Fund V, L.P. and USVP V Entrepreneur Partners, L.P.,
    except to the extent of his pecuniary interest therein arising from his
    general partnership interest therein.
(8) Consists of 928,384 shares owned individually by Mr. Hanna, 342,858 shares
    held by K-H Investors (1996-B), L.P., 101,770 shares held by K-H Investors
    (1998-A), L.P., 122,000 shares held by Hanna Ventures-CacheFlow III, L.P.,
    87,432 shares held by the David William Hanna Trust dated October 30,
    1989, and 44,248 shares held by Mr. Hanna's spouse. Mr. Hanna, one of our
    directors, is an affiliate of K-H Investors (1996-B), L.P., K-H Investors
    (1998-A), L.P. and Hanna Ventures-CacheFlow III, L.P. Mr. Hanna disclaims
    beneficial ownership of the shares held by these entities, except to the
    extent of his pecuniary interest therein.
(9) Includes options immediately exercisable for 630,800 shares.

                                      57
DESCRIPTION OF CAPITAL STOCK

   Our authorized capital stock will consist of 200,000,000 shares of common
stock, par value $.0001 per share, and 10,000,000 shares of preferred stock,
par value $.0001 per share, after giving effect to the amendment and
restatement of our amended and restated certificate of incorporation to delete
references to Series A, Series B and Series C Preferred Stock, which will
occur immediately following the closing of this offering.

Common Stock

   As of July 31, 1999, there were 27,671,031 shares of common stock
outstanding that were held of record by approximately 85 stockholders, after
giving effect to the conversion of all outstanding shares of preferred stock
into 14,341,912 shares of common stock upon the completion of this offering
and the cash exercise of warrants to purchase 672,850 shares of preferred
stock prior to completion of the offering and the conversion of these shares
of preferred stock into common stock. There will be     shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option
and assuming no exercise after July 31, 1999 of outstanding options, after
giving effect to the sale of the shares of common stock in this offering. Upon
the closing of this offering, our amended and restated certificate of
incorporation will authorize 200,000,000 shares of common stock.

   The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably dividends, if any, as may be declared from
time to time by the board of directors out of legally available funds. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up
of CacheFlow, the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable.

Preferred Stock

   Upon the closing of this offering, our amended and restated certificate of
incorporation will authorize 10,000,000 shares of preferred stock. The board
of directors has the authority to issue the preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting any series or the designation of such
series, without further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of CacheFlow without further action by the stockholders. For
example, the board of directors could issue preferred stock that has the power
to prevent a change of control transaction. The issuance of preferred stock
with voting and conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to others. We
currently have no plans to issue any of the preferred stock.

Warrants

   As of July 31, 1999, there were warrants outstanding to purchase 141,842
shares of common stock at an exercise price of $3.42 per share (assuming the
conversion of all of our preferred stock into common stock).

   Warrants to purchase 562,850 shares of Series A Preferred Stock at an
exercise price of $.875 expire upon the closing of this offering, and we
anticipate that these warrants will be exercised prior to this offering and
the

                                      58
underlying shares of preferred stock converted into common stock upon the
closing of this offering. Warrants to purchase 110,000 shares of Series C
Preferred Stock at an exercise price of $4.575 expire upon the closing of this
offering, and we anticipate that these warrants will be exercised prior to
this offering and the underlying shares of preferred stock converted into
common stock upon the closing of this offering.

Antitakeover Effects of Provisions of the Certificate of Incorporation and
Delaware Law

   Amended and Restated Certificate of Incorporation

   The amended and restated certificate of incorporation provides that all
stockholder actions must be effected at a duly called meeting and not by a
consent in writing. This provision could discourage potential acquisition
proposals and could delay or prevent a change of control of CacheFlow because
a potential acquisition of CacheFlow could not be approved by the stockholders
without a duly called meeting. See "Risk Factors--Effect of Certain Charter
Provisions; Antitakeover Effects of Certificate of Incorporation and Delaware
Law."

   Delaware Takeover Statute

   We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to various exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless: (A) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder; (B) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (1) by persons who are directors and also
officers and (2) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (C) on or subsequent
to such date, the business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.

   Section 203 defines business combination to include: (A) any merger or
consolidation involving the corporation and the interested stockholder; (B)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (C) subject to
various exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (D) any transaction involving the corporation that has the effect
of increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or (E) the
receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation. In general, Section 203 defines an interested stockholder as any
entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with or
controlling or controlled by such entity or person.

Registration Rights

   After this offering, the holders of approximately 23,284,762 shares of
outstanding common stock will be entitled to rights with respect to the
registration of such shares under the Securities Act. The holders of
registration rights are those investors that purchased shares of our Series A,
Series B and Series C Preferred Stock, as well as some of our present and
former officers. Under the terms of the agreements between us and the holders
of these registrable securities, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, the holders
are entitled to notice of the registration and are entitled to include these
shares in the registration. Certain of the stockholders benefiting from these
rights may also require us to file a registration statement under the
Securities

                                      59
Act at our expense with respect to their shares of common stock, and we are
required to use our best efforts to effect a registration. Further, holders
may require us to file additional registration statements on Form S-3. These
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration in certain circumstances.

Transfer Agent and Registrar

   The Transfer Agent and Registrar for the common stock is    .

                                      60
SHARES ELIGIBLE FOR FUTURE SALE

   Prior to this offering, there has been no market for our common stock.
Therefore, future sales of substantial amounts of our common stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of existing contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.

   Upon completion of this offering, we will have     shares of common stock
outstanding, assuming no exercise of options and warrants outstanding as of
July 31, 1999 other than warrants to purchase 672,850 shares of preferred
stock that we assume will be exercised prior to the closing of the offering
and the conversion of all these shares of preferred stock into common stock.
Of these shares, the     shares sold in this offering will be freely
transferable without restriction or registration under the Securities Act,
except for any shares purchased by one of our existing "affiliates," as that
term is defined by the Securities Act, which shares will be subject to the
resale limitations of Rule 144 adopted under the Securities Act. The remaining
27,671,031 shares of common stock existing are "restricted securities" as
defined in Rule 144. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144 or 701 of the Securities Act. As a result of the contractual
restrictions described below and the provisions of Rules 144 and 701,
additional shares will be available for sale in the public market as follows:
(A) no restricted securities will be eligible for immediate sale on the date
of this prospectus, (B) 22,626,595 restricted securities will be eligible for
sale upon expiration of lock-up agreements 180 days after the date of this
prospectus subject to Rule 144 or Rule 701, (C) 4,371,586 restricted
securities will be eligible for sale as of May 28, 2000, and (D) 672,850
restricted securities will be eligible for sale between August 24, 2000 and
the date that is one year after the effective date of the offering.

   Lock-Up Agreements

   We, our executive officers, directors and our stockholders have agreed not
to offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, or enter into any swap or
similar agreement that transfers, in whole or in part, the economic risk of
ownership of the common stock, for a period of 180 days after the date of this
prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated, subject to limited exceptions. However, these contractual
restrictions may be released prior to expiration of the lock-up period. In
addition, existing stockholders have agreed not to exercise any registration
rights they may have for a similar period of 180 days.

   Rule 144

   In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who owns shares that were purchased from us (or any affiliate) at
least one year previously, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of our then-
outstanding shares of common stock (    shares immediately after this
offering) or the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person (or persons whose shares are aggregated) who is not deemed to have been
one of our affiliates at any time during the three months preceding a sale,
and who owns shares within the definition of "restricted securities" under
Rule 144 that were purchased from us (or any affiliate) at least two years
previously, would be entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.

                                      61
Rule 701

   Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisers prior to the date we become subject to the reporting
requirements of the Securities Exchange Act of 1934, or the Exchange Act,
pursuant to written compensatory benefit plans or written contracts relating
to the compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements
of the Exchange Act, along with the shares acquired upon exercise of such
options (including exercises after the date of this prospectus). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this prospectus, may be sold by persons other than affiliates subject only to
the manner of sale provisions of Rule 144 and by affiliates under Rule 144
without compliance with its minimum holding period requirements.

   Registration Rights

   After this offering pursuant to this prospectus, the holders of
approximately 23,284,762 shares of common stock, or their transferees, will be
entitled to various rights with respect to the registration of such shares
under the Securities Act. Registration of such shares under the Securities Act
would result in such shares becoming freely tradable without restriction under
the Securities Act (except for shares purchased by affiliates) immediately
upon the effectiveness of such registration. See "Description of Capital
Stock--Registration Rights."

   Stock Options and Warrants

   As of July 31, 1999, options to purchase a total of 3,401,251 shares of
common stock pursuant to our 1996 Stock Option Plan were outstanding and
exercisable. All of the shares subject to options are subject to lock-up
agreements. As of July 31, 1999, warrants to purchase up to 141,842 shares of
common stock (assuming the conversion of all of our preferred stock into
common stock) were outstanding and exercisable. An additional 33,217 shares of
common stock were available for future option grants under our 1996 Stock
Option Plan. On August 27, 1999, we amended our 1996 Stock Option Plan to
increase the number of shares authorized for issuance thereunder by 3,000,000
shares. Between August 1, 1999 and September 24, 1999, we granted options to
purchase 2,874,000 shares of common stock. On September 24, 1999, we adopted,
subject to stockholder approval, our 1999 Stock Incentive Plan to replace the
1996 Stock Option Plan, and reserved 5,000,000 shares for issuance thereunder,
plus an additional number of shares equal to 5% of the shares outstanding on
the first day of January 2000 and each year thereafter. We will not grant any
options under our 1996 Stock Option Plan after the completion of this
offering. In addition, on September 24, 1999, we adopted, subject to
stockholder approval, our Employee Stock Purchase Plan, and reserved 2,500,000
shares of common stock for issuance thereunder, plus an additional 500,000
shares on January 31 of 2000 and each year thereafter and our 1999 Director
Option Plan, and reserved 500,000 shares of common stock for issuance
thereunder, plus an additional 100,000 shares on January 1 of 2000 and each
year thereafter. See "Management--1999 Stock Incentive Plan," "--Employee
Stock Purchase Plan," "--1999 Director Option Plan," "Description of Capital
Stock--Warrants" and Notes 3, 4 and 9 of Notes to Financial Statements.

   We intend to file registration statements under the Securities Act covering
approximately 5,000,000 shares of common stock subject to outstanding options
or issuable pursuant to our 1999 Stock Incentive Plan and 500,000 shares of
common stock issuable pursuant to our 1999 Director Option Plan, and 2,500,000
shares of common stock issuable pursuant to our Employee Stock Purchase Plan.
We expect to file the registration statement covering shares issuable pursuant
to the Employee Stock Purchase Plan within 5 days of the effective date of
this offering and to file the registration statement covering shares offered
pursuant to the 1999 Stock Incentive Plan and 1999 Director Option Plan within
approximately 30 days after the closing of this offering. Shares registered
under such registration statements will, subject to Rule 144 volume
limitations applicable to affiliates, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with us or the contractual restrictions described above. See
"Management--1999 Stock Incentive Plan," "--Employee Stock Purchase Plan" and
"--1999 Director Option Plan."

                                      62
UNDERWRITERS

   Under the terms and subject to conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation
and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, are
acting as representatives, have severally agreed to purchase, and CacheFlow
has agreed to sell to the underwriters, the respective number of shares of
common stock set forth opposite the names of such underwriters below:
Number
   Name                                                                of Shares
   ----                                                                ---------
Morgan Stanley & Co. Incorporated..................................
   Credit Suisse First Boston Corporation.............................
   Dain Rauscher Wessels..............................................
                                                                         ----
   Total..............................................................
                                                                         ====
The underwriters and the representatives are collectively referred to as
the underwriters and the representatives. The underwriters are offering the
shares of common stock subject to their acceptance of the shares from
CacheFlow. The underwriting agreement provides that the obligations of the
several underwriters to pay for and accept delivery of the shares of common
stock offered by us in this offering are subject to the approval of legal
matters by their counsel and to other conditions. The underwriters are
obligated to take and pay for all of the shares of common stock offered by us
in this offering, other than those covered by the over allotment option
described below, if any such shares are taken.

   The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $   per share under the public
offering price. Any underwriter may allow, and such dealers may reallow, a
concession not in excess of $   per share to other underwriters or to certain
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.

   CacheFlow has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set forth on
the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise such option solely for the purpose
of covering over-allotments, if any, made in connection with the offering of
the shares of common stock offered by this prospectus. To the extent such
option is exercised, each underwriter will become obligated, subject to
limited conditions to purchase approximately the same percentage of such
additional shares of common stock as the number set forth next to such
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of the underwriters in the
preceding table. If the underwriters' option is exercised in full, the total
price to the public would be $ million, the total underwriters' discounts and
commissions would be $ million and total proceeds to CacheFlow would be
$ million.

   The underwriters have informed CacheFlow that the underwriters do not
intend sales to discretionary accounts to exceed five percent of the total
number of shares of common stock offered by them.

   CacheFlow has filed an application for our common stock to be quoted on the
Nasdaq National Market under the symbol "CFLO."

   At the request of CacheFlow, the underwriters will reserve up to     shares
of common stock to be offered hereby for sale, at the initial public offering
price, to directors, officers, employees, business associates

                                      63
and related persons of CacheFlow. In addition, the underwriters have agreed to
reserve additional shares of common stock pursuant to an agreement we have
with the holders of our Series C Preferred Stock. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares which
are not so purchased will be offered by the underwriters to the general public
on the same basis as the other shares offered hereby.

   In connection with our Series C Preferred Stock financing, we agreed to use
our best efforts to cause the managing underwriters of our initial public
offering to establish a directed share program whereby the managing
underwriters would offer the Series C Preferred Stock investors the
opportunity to purchase shares of our common stock in our initial public
offering. The dollar amount of the common stock to be offered to the Series C
Preferred Stock investors pursuant to the directed share program is not to
exceed $5,000,000, and is subject to reduction under certain circumstances.
The Series C Preferred Stock investors have no obligation to purchase any of
the shares offered to them. We intend that all offers to purchase shares
pursuant to the directed share program will be made in compliance with all
federal and state securities laws, including Rule 134 of the Securities Act of
1933, as amended, and all applicable rules and regulations promulgated by the
National Association of Securities Dealers, Inc.

   CacheFlow, our directors and executive officers and our stockholders and
option holders have each agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated, on behalf of the underwriters, he, she or
it will not, for the period ending 180 days after the date of this prospectus:

  .  offer, pledge, sell, contract to sell, sell any option or contract to
     purchase, purchase any option or contract to sell, grant any option,
     right or warrant to purchase, lend, or otherwise transfer or dispose of,
     directly or indirectly, any shares of common stock or any securities
     convertible into or exercisable or exchangeable for common stock, or

  .  enter into any swap or similar agreement that transfers, in whole or in
     part, any of the consequences of ownership of the common stock.

   The restrictions described in the previous paragraph do not apply to:

  .  the issuance by CacheFlow of shares of common stock upon the exercise of
     an option or a warrant or the conversion of a security outstanding on
     the date of this prospectus of which the underwriters have been advised
     in writing;

  .  transactions by any person other than CacheFlow relating to shares of
     common stock or other securities acquired in open market transactions
     after the completion of the offering of the shares;

  .  the granting of stock options pursuant to existing CacheFlow employee
     benefit plans, provided that such options do not become exercisable and
     such options do not vest during the such 180-day period; or

  .  certain gifts, distributions or transfers to trusts, provided that
     transferees in transactions described in this clause enter into lock-up
     agreements similar to those described in the previous paragraph.

   In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may agree to sell or
allot more shares than the     shares of common stock CacheFlow has agreed to
sell them. This over-allotment would create a short position in the common
stock for the underwriters' account. To cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.

                                      64
CacheFlow and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.

Pricing of the Offering

   Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:

  .  the future prospects of CacheFlow and its industry in general;

  .  sales, earnings and certain other financial operating information of
     CacheFlow in recent periods; and

  .  the price earnings ratios, price sales ratios, market prices of
     securities and certain financial and operating information of companies
     engaged in activities similar to those of CacheFlow.

   The estimated public offering price range set forth on the cover page of
this prospectus is subject to change as a result of market conditions and
other factors.

                                      65
LEGAL MATTERS

   The validity of the issuance of the common stock offered hereby will be
passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, Menlo Park, California. Members of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP participating in the consideration of
legal matters relating to this offering beneficially own 91,452 shares of our
common stock (assuming the conversion of all of our preferred stock into
common stock). Legal matters in connection with this offering will be passed
upon for the underwriters by Shearman & Sterling, Menlo Park, California.

                                    EXPERTS

   Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of April 30, 1998 and 1999, and for each of the three
years in the period ended April 30, 1999 as set forth in their report dated
September 24, 1999. We have included our consolidated financial statements in
the prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report given on their authority as experts in auditing and
accounting.

                            ADDITIONAL INFORMATION

   We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
with respect to us and our common stock, reference is made to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of the contract or document
filed as an exhibit to the registration statement. Each such statement is
qualified in all respects by reference to that exhibit. The registration
statement, including exhibits and schedules, may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from such office after payment of fees
prescribed by the Commission. The Commission maintains a World Wide web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the site is http://www.sec.gov.

                       CHANGE IN INDEPENDENT ACCOUNTANTS

   Effective August 27, 1999, Ernst & Young LLP was engaged as our independent
auditors and replaced other auditors who were dismissed as our independent
accountants on the same date. The decision to change auditors was approved by
our board of directors on August 27, 1999. Prior to August 27, 1999, our
former auditors, which included two separate audit firms, issued reports on
the year ended April 30, 1998 and the period from inception (March 13, 1996)
to April 30, 1997. The reports of our former auditors did not contain an
adverse opinion or disclaimer of opinion qualified or modified as to audit
scope or accounting principle. The auditor's opinion for the year ended April
30, 1998 did contain an uncertainty as to substantial doubt regarding our
ability to continue as a going concern. In connection with the audits for the
period from inception (March 13, 1996) through April 30, 1997 and the year
ended April 30, 1998 and the period through August 27, 1999, there were no
disagreements with our former auditors on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of our former
auditors, would have caused them to make reference thereto in their report.
Our former auditors have not audited or reported on any of the financial
statements or information included in this prospectus. Prior to August 27,
1999, we have not consulted with Ernst & Young LLP on items that involved our
accounting principles or the form of audit opinion to be issued on our
financial statements. We have requested that our former auditors furnish us
with letters addressed to the Securities and Exchange Commission stating
whether or not they agree with the above statements. Copies of these letters
are filed as an exhibit to the registration statement of which this prospectus
forms a part.

                                      66
CACHEFLOW INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors............................................  F-2
Consolidated Balance Sheets...............................................  F-3
Consolidated Statements of Operations.....................................  F-4
Consolidated Statements of Stockholders' Equity (Deficit).................  F-5
Consolidated Statements of Cash Flows.....................................  F-6
Notes to Consolidated Financial Statements................................  F-7
F-1
REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
CacheFlow Inc.

   We have audited the accompanying consolidated balance sheets of CacheFlow
Inc. as of April 30, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended April 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated 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, 1998 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended April 30, 1999, in conformity with generally accepted accounting
principles.

                                                          /s/ Ernst & Young LLP
Walnut Creek, California
September 24, 1999

                                      F-2
CACHEFLOW INC.

                          CONSOLIDATED BALANCE SHEETS
                    (in thousands, except per share amounts)
Pro Forma
                                                                   Stockholders'
                                       April 30,                     Equity at
                                    -----------------   July 31,     July 31,
                                     1998      1999       1999         1999
                                    -------  --------  ----------- -------------
                                                       (unaudited)  (unaudited)
              ASSETS
Current assets:
  Cash and cash equivalents.......  $ 7,349  $  2,291   $ 17,825
  Accounts receivable, net of
   allowance for doubtful accounts
   and sales returns of $121 and
   $300 at April 30, and July 31,
   1999, respectively.............      --      1,353      1,957
  Inventories.....................      407       932      1,721
  Prepaid expenses and other
   current assets.................       53        60        152
                                    -------  --------   --------
Total current assets..............    7,809     4,636     21,655
Property and equipment, net.......      642     1,351      1,706
Other assets......................       10       729        658
                                    -------  --------   --------
   Total assets...................  $ 8,461  $  6,716   $ 24,019
                                    =======  ========   ========
LIABILITIES AND STOCKHOLDERS'
         EQUITY (DEFICIT)
Current liabilities:
  Accounts payable................  $   429  $  1,464   $  1,910
  Borrowings under line of
   credit.........................      --        643        639
  Accrued payroll and related
   benefits.......................      145       420        558
  Deferred revenue................      --        367        559
  Other accrued liabilities.......      214       166        320
  Current portion of long-term
   obligations....................       66       789        789
                                    -------  --------   --------
Total current liabilities.........      854     3,849      4,775
Long-term obligations, less
 current portion..................        7     3,211      3,211
                                    -------  --------   --------
Total liabilities.................      861     7,060      7,986

Commitments

Stockholders' equity (deficit):
  Preferred stock, $0.0001 par
   value, issuable in series:
   30,000 shares authorized at
   April 30, 1998 and 1999 and
   July 31, 1999 (10,000 shares
   pro forma), respectively;
   9,970, 9,970, and 14,342 shares
   issued and outstanding at April
   30, 1998 and 1999 and July 31,
   1999 (none pro forma),
   respectively; aggregate
   liquidation preference of
   $14,457 at April 30, 1999 (none
   pro forma).....................        1         1          1      $   --
  Common stock, $0.0001 par value,
   60,000 shares authorized at
   April 30, 1998 and 1999 and
   July 31, 1999 (200,000 shares
   pro forma), respectively;
   6,017, 12,894 and 12,656 shares
   issued and outstanding at April
   30, 1998 and 1999 and July 31,
   1999 (26,998 shares pro forma),
   respectively...................        1         1          1            2
  Additional paid-in capital......   14,646    30,877     62,794       62,794
  Note receivable from
   stockholder....................      --     (1,004)    (1,017)      (1,017)
  Deferred stock compensation.....      (98)  (10,067)   (19,547)     (19,547)
  Accumulated deficit.............   (6,950)  (20,152)   (26,199)     (26,199)
                                    -------  --------   --------      -------
   Total stockholders' equity
    (deficit).....................    7,600      (344)    16,033       16,033
                                    -------  --------   --------      -------
   Total liabilities and
    stockholders' equity
    (deficit).....................  $ 8,461  $  6,716   $ 24,019      $24,019
                                    =======  ========   ========      =======
See Accompanying Notes to Consolidated Financial Statements

                                      F-3
CACHEFLOW INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)
Three Months
                                     Year Ended April 30,      Ended July 31,
                                   --------------------------  ----------------
                                    1997     1998      1999     1998     1999
                                   -------  -------  --------  -------  -------
                                                                 (unaudited)
Net sales........................  $   --   $   --   $  7,036  $   809  $ 3,612
Cost of goods sold...............      --       --      3,297      598    1,380
                                   -------  -------  --------  -------  -------
Gross profit.....................      --       --      3,739      211    2,232
Operating expenses:
  Research and development.......    1,055    2,396     4,034      755    1,613
  Sales and marketing............      130    1,655     6,865    1,335    3,481
  General and administrative.....      310    1,630     2,069      275      667
  Stock compensation.............        4       59     3,776      219    2,482
                                   -------  -------  --------  -------  -------
Total operating expenses.........    1,499    5,740    16,744    2,584    8,243
                                   -------  -------  --------  -------  -------
Operating loss...................   (1,499)  (5,740)  (13,005)  (2,373)  (6,011)
Interest income..................       82      258       160       73      131
Interest expense.................      (26)     (25)     (357)      (2)    (167)
                                   -------  -------  --------  -------  -------
Net loss.........................  $(1,443) $(5,507) $(13,202) $(2,302) $(6,047)
                                   =======  =======  ========  =======  =======
Basic and diluted net loss per
 common share....................  $ (1.54) $ (1.88) $  (3.06) $ (0.65) $ (0.97)
                                   =======  =======  ========  =======  =======
Shares used in computing basic
 and diluted net loss per common
 share...........................      939    2,936     4,316    3,517    6,214
                                   =======  =======  ========  =======  =======
Pro forma basic and diluted net
 loss per common share
 (unaudited).....................  $   --   $   --   $  (0.89) $   --   $ (0.30)
                                   =======  =======  ========  =======  =======
Shares used in computing pro
 forma basic and diluted net loss
 per common share (unaudited)....      --       --     14,849      --    19,946
                                   =======  =======  ========  =======  =======
See Accompanying Notes to Consolidated Financial Statements

                                      F-4
CACHEFLOW INC.

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                (in thousands)
Preferred                                Note                                  Total
                             Stock     Common Stock   Additional Receivable    Deferred               Stockholders'
                         ------------- --------------  Paid-In      From        Stock     Accumulated     Equity
                         Shares Amount Shares  Amount  Capital   Stockholder Compensation   Deficit     (Deficit)
                         ------ ------ ------  ------ ---------- ----------- ------------ ----------- -------------
Issuance of common
 stock to founders......    --   $ --   6,600   $ 1    $    32     $   --      $    --     $    --      $     33
 Issuance of Series A
 preferred stock, net of
 issuance costs.........  5,831     1     --     --      5,101         --           --          --         5,102
 Issuance of common
 stock to third parties
 for services...........    --     --      84    --          4         --           --          --             4
 Exercise of stock
 options by employees...    --     --     500    --          6         --           --          --             6
 Net and comprehensive
 loss...................    --     --     --     --        --          --           --       (1,443)      (1,443)
                         ------  ----  ------   ---    -------     -------     --------    --------     --------
Balances at April 30,
1997....................  5,831     1   7,184     1      5,143         --           --       (1,443)       3,702
 Issuance of Series B
 preferred stock, net of
 issuance costs.........  4,139    --     --     --      9,329         --           --          --         9,329
 Exercise of stock
 options by employees...    --     --     340    --         25         --           --          --            25
 Issuance of common
 stock to third parties
 for services...........    --     --      93    --          7         --           --          --             7
 Repurchase of common
 stock..................    --     --  (1,600)   --         (8)        --           --          --            (8)
 Deferred stock
 compensation...........    --     --     --     --        150         --          (150)        --           --
 Amortization of
 deferred stock
 compensation...........    --     --     --     --        --          --            52         --            52
 Net and comprehensive
 loss...................    --     --     --     --        --          --           --       (5,507)      (5,507)
                         ------  ----  ------   ---    -------     -------     --------    --------     --------
Balances at April 30,
1998....................  9,970     1   6,017     1     14,646         --           (98)     (6,950)       7,600
 Exercise of stock
 options by employees...    --     --   6,843    --      2,049         --           --          --         2,049
 Issuance of common
 stock to third parties
 for services...........    --     --      34    --         20         --           --          --            20
 Stock compensation.....    --     --     --     --        156         --           --          --           156
 Issuance of warrants in
 connection with debt
 issuance...............    --     --     --     --        437         --           --          --           437
 Note receivable from
 stockholder for the
 exercise of stock
 options................    --     --     --     --        --         (999)         --          --          (999)
 Interest on note
 receivable from
 stockholder for the
 exercise of stock
 options................    --     --     --     --        --           (5)         --          --            (5)
 Deferred stock
 compensation...........    --     --     --     --     13,569         --       (13,569)        --           --
 Amortization of
 deferred stock
 compensation...........    --     --     --     --        --          --         3,600         --         3,600
 Net and comprehensive
 loss...................    --     --     --     --        --          --           --      (13,202)     (13,202)
                         ------  ----  ------   ---    -------     -------     --------    --------     --------
Balances at April 30,
1999....................  9,970     1  12,894     1     30,877      (1,004)     (10,067)    (20,152)        (344)
 Issuance of Series C
 preferred stock, net of
 issuance costs
 (unaudited)............  4,372    --     --     --     19,976         --           --          --        19,976
 Exercise of stock
 options by employees
 (unaudited)............    --     --      25    --          7         --           --          --             7
 Issuance of common
 stock to third parties
 for services
 (unaudited)............    --     --       8    --         16         --           --          --            16
 Repurchase of common
 stock from employees
 (unaudited)............                 (271)             (28)                                              (28)
 Interest on note
 receivable from
 stockholder for the
 exercise of stock
 options (unaudited)....    --     --     --     --        --          (13)         --          --           (13)
 Deferred stock
 compensation
 (unaudited)............    --     --     --     --     11,946                  (11,946)        --           --
 Amortization of
 deferred stock
 compensation
 (unaudited)............    --     --     --     --        --          --         2,466         --         2,466
 Net and comprehensive
 loss (unaudited).......    --     --     --     --        --          --           --       (6,047)      (6,047)
                         ------  ----  ------   ---    -------     -------     --------    --------     --------
Balances at July 31,
1999 (unaudited)........ 14,342  $  1  12,656   $ 1    $62,794     $(1,017)    $(19,547)   $(26,199)    $ 16,033
                         ======  ====  ======   ===    =======     =======     ========    ========     ========
See Accompanying Notes to Consolidated Financial Statements

                                      F-5
CACHEFLOW INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
Three Months
                                    Year Ended April 30,      Ended July 31,
                                  --------------------------  ----------------
                                   1997     1998      1999     1998     1999
                                  -------  -------  --------  -------  -------
                                                                (unaudited)
Operating activities
Net loss........................  $(1,443) $(5,507) $(13,202) $(2,302) $(6,047)
Adjustments to reconcile net
loss to net cash used in
operating activities:
 Depreciation and amortization..       13       91       261       45      117
 Stock compensation.............        4       59     3,776      219    2,482
 Interest on notes converted to
  preferred stock...............       22      --        --       --       --
 Interest on note receivable
  from stockholder..............      --       --         (5)     --       (13)
 Debt issuance costs............      --       --        437      --       --
 Changes in operating assets and
  liabilities:
  Accounts receivable...........      --       --     (1,353)    (741)    (604)
  Inventories...................      (38)    (369)     (525)     (51)    (789)
  Prepaid expenses and other
   current assets...............      (13)     (40)       (7)     (35)     (92)
  Other assets..................       (3)      (7)     (719)    (179)      71
  Accounts payable..............       67      362     1,035     (187)     446
  Accrued liabilities...........      --       359       594      278      484
                                  -------  -------  --------  -------  -------
Net cash used in operating
 activities.....................   (1,391)  (5,052)   (9,708)  (2,953)  (3,945)

Investing activities
Purchases of property and
 equipment......................     (123)    (623)     (971)    (151)    (472)
Purchases of short-term
 investments....................   (3,410)     --        --       --       --
Proceeds from sale of short-term
 investments....................      --     3,410       --       --       --
                                  -------  -------  --------  -------  -------
Net cash provided by (used in)
 investing activities...........   (3,533)   2,787      (971)    (151)    (472)
Financing activities
Proceeds from issuance of
 preferred stock................    4,095    9,329       --       --    19,976
Proceeds from issuance of common
 stock..........................       39       25     1,051      300        7
Repurchase of employee stock....      --        (8)      --       --       (28)
Borrowings from line of credit..      --       --        643      --       --
Proceeds from issuance of debt
 obligations....................      985      128     4,000      --       --
Payments on debt obligations....      --       (55)      (73)     (21)      (4)
                                  -------  -------  --------  -------  -------
Net cash provided by financing
 activities.....................    5,119    9,419     5,621      279   19,951
                                  -------  -------  --------  -------  -------
Net increase (decrease) in cash
 and cash equivalents...........      195    7,154    (5,058)  (2,825)  15,534
Cash and cash equivalents at
 beginning of period............      --       195     7,349    7,349    2,291
                                  -------  -------  --------  -------  -------
Cash and cash equivalents at end
 of period......................  $   195  $ 7,349  $  2,291  $ 4,524  $17,825
                                  =======  =======  ========  =======  =======

Supplemental disclosures of cash
 flow information
Cash paid for interest..........  $     4  $    10  $    375  $     2  $   167
                                  =======  =======  ========  =======  =======
Noncash financing activities
Warrants issued in connection
 with long-term debt agreements
 and strategic customer
 arrangements...................  $   --   $   --   $    437  $   --   $   --
                                  =======  =======  ========  =======  =======
Conversion of debt to preferred
 stock..........................  $   985  $   --   $    --   $   --   $   --
                                  =======  =======  ========  =======  =======
Issuance of note receivable to
 stockholder for the exercise of
 stock options and related
 interest.......................  $   --   $   --   $ (1,004) $   --   $   (13)
                                  =======  =======  ========  =======  =======
See Accompanying Notes to Consolidated Financial Statements

                                      F-6
CACHEFLOW INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Information as of and for the three months
                       ended July 31, 1999 is unaudited)

1. Organization and Summary of Significant Accounting Policies

 Organization

   CacheFlow Inc. (the "Company") was organized and incorporated in the state
of Delaware on March 16, 1996. The Company operates in one segment to design,
develop, market and support high-performance Internet caching appliances.

 Unaudited Interim Financial Information

   The accompanying consolidated financial statements and related notes as of
July 31, 1999 and for the quarters ended July 31, 1998 and 1999 are unaudited,
but include all adjustments, consisting only of normal recurring adjustments,
that the Company considers necessary for a fair presentation of its
consolidated financial position, operating results, and cash flows for the
interim date and periods presented. Results for the quarter ended July 31,
1999 are not necessarily indicative of results for the entire fiscal year or
future periods.

 Basis of Presentation

   The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant 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.
The accompanying statements of operations, stockholders' equity (deficit), and
cash flows for the year ended April 30, 1997 include $33,000 received upon
issuance of the initial capital stock of the Company and $7,000 expended
during the period from March 13, 1996 (inception) to April 30, 1996 for
general and administrative expenses. Due to the insignificance of the balances
as of April 30, 1996 and activity for the period from March 13, 1996
(inception) to April 30, 1996, financial statements have not been presented.

 Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles 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 and Cash Equivalents

   The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. Cash
equivalents consisted of money market investments at April 30, 1998 and 1999.

 Concentrations of Credit Risk

   Financial instruments which potentially subject the Company to credit risk
consist of demand deposit accounts, money market accounts, and trade
receivables. The Company maintains its demand deposit accounts and its money
market accounts primarily with one financial institution. 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, 1999, three
customers individually accounted for over 10% of our net sales, for an
aggregate of approximately 33% of our net sales. For the three months ended
July 31, 1999, two customers individually accounted for over 10% of our net
sales, for an aggregate of approximately 22% of our net sales.

                                      F-7
CACHEFLOW INC.

            NOTES TO 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 year ended
April 30, 1999 and three month period ended July 31, 1999.

 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 at the time of shipment,
net of allowances for estimated sales returns and uncollectible customer
accounts. Maintenance contract revenue is deferred and recorded evenly over
the term of the contract. Maintenance contract revenue for the year ended
April 30, 1999 and the three months ended July 31, 1999 was $25,000 and
$54,000, respectively.

 Warranty Reserves

   The Company's products generally carry a one-year warranty that includes
factory repair services as needed for replacement parts. Estimated expenses
for warranty obligations 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.

 Comprehensive Income (Loss)

   The Company reports comprehensive income (loss) in accordance with the
FASB's Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." The comprehensive net loss for the years ended April
30, 1997, 1998 and 1999 does not differ from the reported net loss.

                                      F-8
CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 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 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 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.
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
No. 98, common stock and convertible preferred stock issued or granted for
nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of basic and diluted net
loss per common share as if they had been outstanding for all periods
presented. To date, the Company has not had any issuances or grants for
nominal consideration.

   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 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.

                                      F-9
CACHEFLOW INC.

            NOTES TO 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):
Three Months Ended
                                Year Ended April 30,           July 31,
                              --------------------------  --------------------
                               1997     1998      1999      1998       1999
                              -------  -------  --------  ---------  ---------
                                                              (unaudited)
Historical:
 Net loss.................... $(1,443) $(5,507) $(13,202) $  (2,302) $  (6,047)
                              =======  =======  ========  =========  =========
  Weighted-average shares of
   common stock outstanding..   5,530    6,574     9,085      8,269     12,669
  Less: Weighted-average
   shares subject to
   repurchase................   4,591    3,638     4,769      4,752      6,455
                              -------  -------  --------  ---------  ---------
  Weighted-average shares
   used in computing basic
   and diluted net loss per
   common share..............     939    2,936     4,316      3,517      6,214
                              =======  =======  ========  =========  =========
  Basic and diluted net loss
   per common share.......... $ (1.54) $ (1.88) $  (3.06) $   (0.65) $   (0.97)
                              =======  =======  ========  =========  =========
Pro forma:
 Shares used above...........     939    2,936     4,316      3,517      6,214
 Pro forma adjustment to
  reflect the weighted effect
  of the assumed conversion
  of preferred stock.........                      9,970                13,059
 Pro forma adjustment to
  reflect weighted effect of
  assumed exercise and
  conversion of preferred
  stock warrants.............                        563                   673
                                                --------             ---------
 Shares used in computing pro
  forma basic and diluted net
  loss per common share
  (unaudited)................                     14,849                19,946
                                                ========             =========
 Pro forma basic and diluted
  net loss per common share
  (unaudited)................                   $  (0.89)            $   (0.30)
                                                ========             =========
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 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 were (in thousands)
7,244, 14,600, 12,707, 15,157, and 22,462 for the three years ended April 30,
1997, 1998 and 1999, and for the three months ended July 31, 1998 and 1999,
respectively.

 Advertising Costs

   The Company expenses advertising costs as incurred. Advertising expenses
for 1997, 1998 and 1999 were $13,000, $84,000 and $270,000, respectively, and
are included in sales and marketing expenses.

 Unaudited Pro Forma Stockholders' Equity (Deficit)

   If the offering contemplated by this prospectus is consummated, all of the
preferred stock outstanding will automatically be converted into common stock.
Unaudited pro forma stockholders' equity (deficit) at July 31, 1999, as
adjusted for the assumed conversion of preferred stock based on the shares of
preferred stock outstanding at July 31, 1999, is disclosed on the consolidated
balance sheet.

 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 segment to design, develop, market
and support high-performance Internet caching appliances.

                                     F-10
CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Recent Accounting Pronouncements

   In June 1998, the FASB issued FAS 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.

2. Balance Sheet Details

   Inventories consisted of the following (in thousands):
April 30,
                                                           ---------  July 31,
                                                           1998 1999    1999
                                                           ---- ---- -----------
                                                                     (unaudited)
Raw materials.......................................... $407 $610   $1,263
   Work-in-process........................................   --   45      124
   Finished goods.........................................   --  277      334
                                                           ---- ----   ------
                                                           $407 $932   $1,721
                                                           ==== ====   ======
Property and equipment, net consisted of the following (in thousands):
April 30,
                                                                  -------------
                                                                  1998    1999
                                                                  -----  ------
Computer and office equipment................................. $ 588  $1,224
   Furniture and fixtures........................................     2      23
   Software......................................................   156     469
                                                                  -----  ------
                                                                    746   1,716
   Less accumulated depreciation and amortization................  (104)   (365)
                                                                  -----  ------
                                                                  $ 642  $1,351
                                                                  =====  ======
Certain computer and office equipment are recorded under capital leases
that aggregated $29,000 as of April 30, 1999 (none were outstanding as of
April 30, 1998). Accumulated amortization on the assets recorded under capital
leases aggregated $8,000 as of April 30, 1999.

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.

                                     F-11
CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Preferred Stock

   Preferred stock consisted of the following series (in thousands, except per
share amounts):
Shares Issued and
                             Shares Authorized at   Outstanding at         Per Share
                            ---------------------- ----------------- ----------------------  Aggregate
                              April 30,                April 30,                            Liquidation
                            ------------- July 31, -----------------                        Preference
                                                                     July 31, Noncumulative at July 31,  Liquidation
   Series                    1998   1999    1999   1998     1999       1999     Dividend       1999      Preference
   ------                   ------ ------ -------- ----- ----------- -------- ------------- -----------  -----------
                                                         (unaudited)                        (unaudited)
A.......................  6,394  6,394   6,394  5,831    5,831      5,831     $0.070       $0.875       $ 5,102
   B.......................  4,400  4,400   4,400  4,139    4,139      4,139     $0.225       $2.260         9,355
   C.......................    --     --    4,500    --       --       4,372     $0.460       $4.575        20,000
   Undesignated............ 19,206 19,206  14,706    --       --         --         --           --            --
                            ------ ------  ------  -----    -----     ------                               -------
                            30,000 30,000  30,000  9,970    9,970     14,342                               $34,457
                            ====== ======  ======  =====    =====     ======                               =======
The holders of Series A, B, and C 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, and C 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, and C 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.

   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.

   Preferred shares automatically convert into shares of common stock at the
conversion price in effect upon the earlier of the Company's sale of its
common stock in a public offering with cash proceeds to the Company of at
least $20,000,000 or upon the agreement of both the holders of a majority of
the outstanding shares of Series A, B, and C preferred stock, voting together
as a class, and the holders of a majority of the outstanding shares of Series
C preferred stock. 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.

 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 expire at the earlier
of April 30, 2000 or at the completion of the Company's initial public
offering of its common stock.

   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 Company
calculated a value for the Series B warrants using the Black-Scholes valuation
model of approximately $507,000 and recorded this amount as deferred debt
issuance costs in other assets. This amount is being amortized over the term
of the agreement to interest expense.

                                     F-12
CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   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 were immediately exercisable and the
remaining warrants became exercisable in September 1999. The warrants expire
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 intends
to record an additional charge of approximately $604,000 in the three months
ending October 31, 1999, which represents the fair value of the warrants. The
fair value of the warrants was determined using the Black-Scholes model.

 Common Stock

   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 founder's and 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, 1998 and 1999 and July 31, 1999,
2,652,500, 7,310,671 and 6,015,498 shares, respectively, of common stock
issued under these agreements were subject to repurchase. 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):
April 30,    July
                                                            -------------  31,
                                                             1998   1999   1999
                                                            ------ ------ ------
Common stock reserved for:
     Preferred stock....................................... 10,794 10,794 15,294
     1996 stock option plan................................  7,841  9,241  9,643
     Preferred stock warrants..............................    563    814    814
                                                            ------ ------ ------
                                                            19,198 20,849 25,751
                                                            ====== ====== ======
Note Receivable from Stockholder

   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 13, 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 and is also secured by
all of the assets owned by the officer.

4. Stock Option Plan

   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 9,241,000. Under the 1996 Plan, nonstatutory
stock options may be granted to employees and consultants, and incentive stock
options (ISO) may

                                     F-13
CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 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. At April 30, 1998 and 1999 and July 31, 1999, the Company
had 321,000, 6,008,000, and 2,047,445 shares, respectively, which were subject
to repurchase rights under the 1996 Plan. No shares were repurchased under the
1996 plan during fiscal 1997, 1998 and 1999. For the three months ended July
31, 1999, 271,000 shares were repurchased under the 1996 Plan at the original
issuance price.

   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.

   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.

   Stock option activity under the 1996 Plan and options issued outside the
1996 Plan were as follows (in thousands except per share amounts):
Outstanding Options
                                                      --------------------------
                                                                Weighted-Average
                                                      Number of  Exercise Price
                                                       Shares      Per Share
                                                      --------- ----------------
Options granted.................................     850        $0.06
                                                       ------
   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 (unaudited).....................   1,592        $2.00
     Options exercised (unaudited)...................     (25)       $0.28
     Options canceled (unaudited)....................     (34)       $0.75
                                                       ------
   Balance at July 31, 1999 (unaudited)..............   3,401        $1.21
                                                       ======
F-14
CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   At July 31, 1999, 33,000 shares were available for future option grants
under the 1996 Plan.

   The following table summarizes information about stock options outstanding
at April 30, 1999 (in thousands except per share amounts).
Options Outstanding                                Options exercisable
----------------------------------------------------------------- ----------------------------------
  Range of    Number of Options Weighted Average Weighted Average Number of Options Weighted Average
  Exercise     Outstanding at   Contractual Life     Exercise      Exercisable at       Exercise
   Prices      April 30, 1999        (Years)          Price        April 30, 1999        Price
  --------    ----------------- ---------------- ---------------- ----------------- ----------------
$0.075-$0.25          442             8.5             $0.15              263             $0.12
$0.375-$1.00        1,426             9.5              0.61              134              0.38
------------        -----             ---             -----              ---             -----
$0.075-$1.00        1,868             9.3             $0.51              397             $0.21
For the three years ended April 30, 1997, 1998 and 1999 and the three
months ended July 31, 1999, the Company recorded deferred stock compensation
of $150,000, $13,569,000, and $11,946,000, respectively, representing 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
years ended April 30, 1998 and 1999 and the three months ended July 31, 1999,
the Company recorded amortization of deferred stock compensation of $52,000,
$3,600,000 and $2,466,000, respectively. At April 30, 1998 and 1999 and July
31, 1999, the Company had $98,000, $10,067,000 and $19,547,000, 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 employee stock options
under the fair value method of FAS 123. The fair value for each option granted
was estimated at the date of grant using the minimum value option pricing
model with the following weighted-average assumptions: a risk-free interest
rate of 6.00%, no dividend yield, and an exercisable life of five years for
the years ended April 30, 1997, 1998 and 1999.

   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 options 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 options.

   For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting periods. Pro forma
information follows (in thousands, except per share amounts):
Year Ended April 30,
                                                    --------------------------
                                                     1997     1998      1999
                                                    -------  -------  --------
Pro forma net loss.............................  $(1,444) $(5,520) $(13,261)
                                                    -------  -------  --------
   Pro forma basic and diluted net loss per common
    share.........................................  $ (1.54) $ (1.88) $  (3.07)
                                                    =======  =======  ========
The per share weighted average grant date fair value of options granted,
which is the value assigned to the options under FAS 123, was $0.02, $0.02,
and $0.14 for options granted for the years ended April 30, 1997, 1998 and
1999, respectively.

                                     F-15
CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The pro forma impact of options on the net loss for the years ended April
30, 1997, 1998 and 1999 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of
additional stock option grants.

5. Income Taxes

   There has been no provision for U.S. federal, state, or foreign income
taxes for any period as the Company has incurred operating losses in all
periods and for all jurisdictions.

   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):
April 30,
                                                                 --------------
                                                                  1998    1999
                                                                 ------  ------
Deferred tax assets:
     Net operating losses....................................... $2,148  $5,384
     Other......................................................    344     729
                                                                 ------  ------
   Total deferred tax assets....................................  2,492   6,113
   Valuation allowance.......................................... (2,492) (6,113)
                                                                 ------  ------
   Net deferred tax assets...................................... $  --   $  --
                                                                 ======  ======
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $1,982,000 and $3,621,000 during 1998 and
1999, respectively.

   As of April 30, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $14,140,000, which expire in
fiscal years 2011 through 2019.

   The Company also had net operating loss carryforwards for state income tax
purposes of approximately $9,620,000, which expire in fiscal year 2006.

   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.

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 bear interest at the prime rate plus 2% (10.5% at April 30,
1998) and would have expired 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. A
portion of the credit line is 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 line of credit
expires in November 1999 and bears interest at the financial institution's
prime rate plus 0.75% (8.5% at April 30, 1999). As of April 30, 1999, the
outstanding balance under the amended line of credit was $643,000. The
remaining $500,000 of available credit, all of which is outstanding as of
April 30, 1999, is a three-year term loan which expires in November 2002 and
bears interest at the financial institution's prime rate plus 1.75% (9.5% at
April 30, 1999).

                                     F-16
CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   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 represents a $3,500,000 three-
year term loan, all of which is 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 is outstanding as of April 30, 1999. The term loan
and equipment line of credit are secured by substantially all of the Company's
assets, bear interest at 13% and 11.4% and mature in November 2002 and May
2000, respectively.

   The above agreements require the Company to maintain compliance with
certain financial covenants and prohibits the Company from paying dividends on
its common stock. As of April 30, and July 31, 1999 the Company was in
compliance with such financial covenants. As of April 30, and July 31, 1999,
the total amount available under the Company's financial arrangements was
$568,000 and $1,502,000, respectively.

   Future payments due on the long-term debt obligations as of April 30, 1999
are as follows (in thousands):
Year ending April 30,
   ---------------------
2000................................................................ $  789
     2001................................................................  1,675
     2002................................................................  1,289
     2003................................................................    247
                                                                          ------
   Total payments........................................................ $4,000
                                                                          ======
7. 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):
Year ending April 30,
   ---------------------
     2000............................................................... $1,384
     2001...............................................................  1,386
     2002...............................................................  1,431
     2003...............................................................  1,357
     2004 and thereafter................................................  1,922
                                                                         ------
   Total minimum lease payments......................................... $7,480
                                                                         ======
Rent expense for the three years ended April 30, 1997, 1998 and 1999 was
$33,000, $329,000 and $1,300,000, respectively.

8. 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. No intraenterprise sales
occurred during fiscal 1999 and no long-lived assets reside in the Company's
foreign locations. No geographical information was provided for 1997 and 1998
as the Company's operations were limited to North America.

                                     F-17
CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The following is a summary of revenues by geographic area for the year
ended April 30, 1999 (in thousands):
North
                                        America Europe Japan  Other Consolidated
                                        ------- ------ ------ ----- ------------
Revenues............................ $3,919  $1,376 $1,565 $175     $7,035
                                        ======  ====== ====== ====     ======
9. Subsequent Events (Unaudited)

 Employee Stock Purchase Plan

   In September 1999, the Company's Board of Directors adopted the Employee
Stock Purchase Plan. The plan becomes effective upon completion of the
Company's initial public offering of its common stock. A total of 2,500,000
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 will automatically increase by 500,000 shares annually beginning
January 31, 2000. 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 have been
reserved for issuance. The plan becomes effective upon the completion of the
Company's initial public offering of its common stock. The number of shares
reserved under the Incentive Plan will automatically increase annually
beginning January 1, 2000 by the lesser of 5% of the total amount of common
stock shares 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 have
been reserved for issuance. The 1999 Director Option Plan became effective on
the date of its adoption. Each non-employee 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 will automatically
increase by 100,000 shares annually beginning January 1, 2000. The Company's
Board of Directors, at its discretion, may reduce the automatic annual
increase in reserved shares.

 Note Receivable from Stockholder

   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. The note is
secured by 2 million shares of the Company's common stock owned by the
officer.

                                     F-18
CACHEFLOW INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Stock Option Grants

   Between August 1 and September 24, 1999, the Company granted options to
purchase 2,874,000 shares of common stock. The Company recorded additional
deferred stock compensation of approximately $17.6 million with respect to
stock option grants made during this period.

 Litigation

   On September 16, 1999, Nokia IP 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
allegations against the Company include misappropriation of trade secrets,
unfair competition and inducing breach of contract. Nokia's allegations
against these officers include breach of contract, misappropriation of trade
secrets and unfair competition and, with respect to one of the officers of the
Company, breach of fiduciary duty. Nokia's claims are based upon Nokia's
allegation that a certain officer of the Company violated a non-competition
and non-solicitation provision contained in his employment agreement with
Nokia and that another officer of the Company has violated a non-solicitation
clause. Nokia is seeking compensatory and punitive damages, a decree that the
defendants' alleged acts were and are unfair acts of competition, orders
restraining and enjoining the defendants from disclosing or using Nokia's
trade secrets or confidential or proprietary information and acting in a
manner that violates these officers' contractual and fiduciary duties to
Nokia, attorneys' fees and other specified damages. The Company believes that
there are meritorious defenses to Nokia IP's allegations and plans to defend
the litigation vigorously. Although the Company believes that the ultimate
outcome of the dispute with Nokia will not have a material adverse effect on
the Company's consolidated financial position, results of operations and cash
flows, there can be no assurance that Nokia IP will not prevail in this
dispute. If Nokia IP were to prevail in this dispute, it could have a material
adverse effect on the Company's consolidated financial position, results of
operations, and cash flows.

                                     F-19
[COMPANY LOGO]
PART II

                    INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.
SEC Registration fee................................................ $13,900
   NASD fee............................................................   5,500
   Nasdaq National Market initial listing fee..........................      *
   Printing and engraving..............................................      *
   Legal fees and expenses of the Company..............................      *
   Accounting fees and expenses........................................      *
   Directors and Officers Liability Insurance..........................      *
   Blue sky fees and expenses..........................................      *
   Transfer agent fees.................................................      *
   Miscellaneous.......................................................      *
                                                                        -------
     Total.............................................................      *
                                                                        =======
--------
  * To be filed by amendment.

Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article VI of the Registrant's Bylaws provides for mandatory
indemnification of its directors and officers and those serving at the
Registrant's request as directors, officers, employees or agents of other
organizations to the maximum extent permitted by the Delaware General
Corporation Law. The Registrant's Amended and Restated Certificate of
Incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of the directors' fiduciary duty as
directors to the Registrant and its stockholders. This provision in the
Amended and Restated Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a
form of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The Indemnification Agreements provide the Registrant's officers
and directors with further indemnification to the maximum extent permitted by
the Delaware General Corporation Law. The Registrant maintains liability
insurance for its directors and officers. Reference is also made to Sections 7
and 8 of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities, and Section 1.10 of the Amended and Restated Investors' Rights
Agreement contained in Exhibit 4.1 hereto, indemnifying certain of the
Company's stockholders, including controlling stockholders, against certain
liabilities.

                                     II-1
Item 15. Recent Sales of Unregistered Securities

   Since our formation, we have issued and sold the following securities:

     (1) From inception through July 31, 1999, the Company granted stock
  options to purchase 10,198,980 shares of Common Stock at exercise prices
  ranging from $.005 to $2.00 per share to employees, consultants, directors
  and other service providers pursuant to its 1996 Stock Option Plan.
  Additionally, the Company granted stock options to purchase 1,000,000
  shares of its Common Stock at an exercise price of $.50 per share to a
  director outside of the 1996 Stock Option Plan.

     (2) From inception through July 31, 1999, the Company issued and sold an
  aggregate of 6,719,625 shares of its Common Stock to employees,
  consultants, directors and other service providers for aggregate
  consideration of approximately $535,000 pursuant to direct issuances or
  exercises of options granted outside of the 1996 Stock Option Plan.

     (3) From July 31, 1999 through September 24, 1999, the Company granted
  stock options to purchase 2,874,000 shares of its Common Stock at exercise
  prices ranging from $4.00 to $5.50 per share to employees, consultants and
  directors pursuant to its 1996 Stock Option Plan.

     (4) Between April 30, 1996 and June 21, 1996, the Company issued
  warrants to purchase 562,850 shares of its Series A Preferred Stock at an
  exercise price of $.875 per share.

     (5) On October 29, 1996, we issued and sold 5,483,252 shares of Series A
  Preferred Stock to a group of 18 investors for an aggregate purchase price
  of $4,797,845.50.

     (6) On November 13, 1996, we issued and sold an aggregate of 347,688
  shares of its Series A Preferred Stock to seven investors for an aggregate
  purchase price of $304,227.00

     (7) On December 24, 1997, we issued and sold 3,816,376 shares of Series
  B Preferred Stock to a group of 14 investors for an aggregate purchase
  price of $8,625,009.76.

     (8) On February 18, 1998, we issued and sold 323,010 shares of Series B
  Preferred Stock to a group of two investors for our aggregate purchase
  price of $730,002.60.

     (9) On November 18, 1998, the Company issued warrants to purchase
  141,842 shares of its Series B Preferred Stock at an exercise price of
  $3.4175 per share.

     (10) On April 30 1999, the Company issued warrants to purchase 110,000
  shares of its Series C Preferred Stock at an exercise price of $4.575 per
  share.

     (11) On May 28, 1999, we issued and sold 4,371,586 shares of Series C
  Preferred Stock to a group of 27 investors for an aggregate purchase price
  of $20,000,005.95.

   The sale of the above securities was deemed to be exempt from registration
under the Act in reliance upon Section 4(2) of the Act or Rule 701 promulgated
under Section 3(b) of the Act as transactions by an issuer not involving any
public offering or transactions pursuant to compensation benefit plans and
contracts relating to compensation as provided under Rule 701. The recipients
of securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us.

                                     II-2
Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits
Exhibit
  No.                                       Description
-------                                     -----------
1.1*    Form of Underwriting Agreement
 3.1     Certificate of Incorporation of the Registrant, as amended to date
 3.2     Form of Amended and Restated Certificate of Incorporation of the Registrant, to
         be filed upon the closing of the offering made pursuant to this Registration
         Statement
 3.3     Bylaws of the Registrant
 3.4     Form of Amended and Restated Bylaws of the Registrant to be effective upon the
         closing of the offering made pursuant to this Registration Statement
 4.1     Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
 4.2     Amended and Restated Investors' Rights Agreement, dated May 28, 1999
 4.3     Series C Preferred Stock Purchase Agreement, dated May 28, 1999
 4.4*    Specimen Certificate of the Registrant's Common Stock
 5.1*    Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
         to the Registrant
10.1*    Form of Indemnification Agreement
10.2     1996 Stock Option Plan
10.3     1999 Stock Incentive Plan
10.4     1999 Director Option Plan
10.5     1999 Employee Stock Purchase Plan
10.6     Commercial Lease Agreement between Registrant, the Arrillaga Foundation and the
         Perry Foundation, dated July 14, 1998
10.7     Commercial Lease Agreement between Registrant and Redmond Whitehall Associates,
         Inc., dated February 19, 1997
10.8     Commercial Lease Agreement between CacheFlow Canada and Wiebe Property
         Corporation Ltd., dated May 1, 1999
16.1     Letter from Deloitte and Touche LLP, former independent accountants to the
         Registrant
16.2     Letter from PricewaterhouseCoopers LLP, former independent accountants to the
         Registrant
21.1     Subsidiaries
23.1     Consent of Ernst & Young LLP, independent auditors
23.2*    Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
         to the Registrant. Reference is made to Exhibit 5.1
24.1     Power of Attorney. Reference is made to page II-5
27.1     Financial Data Schedule
--------
*  To be supplied by amendment.
   (b) Financial Statement Schedule

Schedule II--Valuations and Qualifying accounts.

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

Item 17. Undertakings

   The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

                                     II-3
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Amended and Restated
Certificate of Incorporation or the Bylaws of the Registrant, Indemnification
Agreements entered into between the Registrant and its officers and directors,
the Underwriting Agreement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.

   The Registrant hereby undertakes that:

   (1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.

   (2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

                                     II-4
SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on this 28th day of September, 1999.

                                          CACHEFLOW, INC.

                                                    /s/ Brian M. NeSmith
                                          By: _________________________________
                                                      Brian M. NeSmith
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Brian M. NeSmith and Michael J.
Johnson, and each of them, his or her true and lawful attorneys-in-fact and
agents with full power of substitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
sign any registration statement for the same offering covered by this
Registration Statement that is to be effective on filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or his or her or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.

   Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
/s/ Brian M. NeSmith          President, Chief Executive September 28, 1999
______________________________________  Officer and Director
           Brian M. NeSmith             (Principal Executive
                                        Officer)

        /s/ Michael J. Johnson         Vice President, Chief      September 28, 1999
______________________________________  Financial Officer and
          Michael J. Johnson            Secretary (Principal
                                        Financial and Accounting
                                        Officer)

          /s/ David W. Hanna           Director                   September 28, 1999
______________________________________
            David W. Hanna

        /s/ Michael A. Malcolm         Chairman of the Board,     September 28, 1999
______________________________________  Director
          Michael A. Malcolm

        /s/ Stuart G. Phillips         Director                   September 28, 1999
______________________________________
          Stuart G. Phillips

        /s/ Andrew S. Rachleff         Director                   September 28, 1999
______________________________________
          Andrew S. Rachleff
II-5
SCHEDULE II

                                 CACHEFLOW INC.

                       VALUATION AND QUALIFYING ACCOUNTS
                   YEARS ENDED APRIL 30, 1997, 1998 AND 1999
                        AND QUARTER ENDED JULY 31, 1999

                   Allowance for Doubtful Accounts Receivable
Additions-
                                 Balance at    Charged                Balance at
Year Ended                      Beginning of to Costs and Deductions-   End of
 April 30,                         Period      Expenses   Write-offs    Period
----------                      ------------ ------------ ----------- ----------
1997...........................      --             --         --           --
1998...........................      --             --         --           --
1999...........................      --        121,000         --      121,000
Additions-
                                 Balance at    Charged                Balance at
Quarter Ended                   Beginning of to Costs and Deductions-   End of
   July 31,                        Period      Expenses   Write-offs    Period
-------------                   ------------ ------------ ----------- ----------
1999...........................   121,000      264,000      85,000     300,000
INDEX TO EXHIBITS
Exhibit No.                                      Exhibit
 -----------                                      -------
1.1*       Form of Underwriting Agreement
  3.1        Certificate of Incorporation of the Registrant, as amended to date
  3.2        Form of Amended and Restated Certificate of Incorporation of the Registrant, to
             be filed upon the closing of the offering made pursuant to this Registration
             Statement
  3.3        Bylaws of the Registrant
  3.4        Form of Amended and Restated Bylaws of the Registrant to be effective upon the
             closing of the offering made pursuant to this Registration Statement
  4.1        Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
  4.2        Amended and Restated Investors' Rights Agreement, dated May 28, 1999
  4.3        Series C Preferred Stock Purchase Agreement, dated May 28, 1999
  4.4*       Specimen Certificate of the Registrant's Common Stock
  5.1*       Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
             to the Registrant
 10.1*       Form of Indemnification Agreement
 10.2        1996 Stock Option Plan
 10.3        1999 Stock Incentive Plan
 10.4        1999 Director Option Plan
 10.5        1999 Employee Stock Purchase Plan
 10.6        Commercial Lease Agreement between Registrant, the Arrillaga Foundation and the
             Perry Foundation, dated July 14, 1998
 10.7        Commercial Lease Agreement between Registrant and Redmond Whitehall Associates,
             Inc., dated February 19, 1997
 10.8        Commercial Lease Agreement between CacheFlow Canada and Wiebe Property
             Corporation Ltd., dated May 1, 1999
 16.1        Letter from Deloitte and Touche LLP, former independent accountants to the
             Registrant
 16.2        Letter from PricewaterhouseCoopers LLP, former independent accountants to the
             Registrant
 21.1        Subsidiaries
 23.1        Consent of Ernst & Young LLP, independent auditors
 23.2*       Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
             to the Registrant. Reference is made to Exhibit 5.1
 24.1        Power of Attorney. Reference is made to page II-5
 27.1        Financial Data Schedule
--------
*  To be supplied by amendment.