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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number: 001-33023





Riverbed Technology, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 03-0448754                             
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification Number)

199 Fremont Street

San Francisco, California 94105

(Address of Principal Executive Offices
including Zip Code)

(415) 247-8800

(Registrants Telephone Number, Including Area Code)





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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x     Accelerated filer   ̈     Non-accelerated
filer   ̈     Smaller reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ̈    No x

The number of shares of the registrants common stock, par value $0.0001, outstanding as of April 24, 2008 was:
71,707,419









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Riverbed Technology, Inc.

INDEX

PART I. FINANCIAL INFORMATION



|         |  |                                                                                                              |  |         
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | --------
|         |  |                                                                                                              |  | Page No.
|Item 1.  |  | Financial Statements                                                                                         |  |         
|         |  | Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007                             |  | 3       
|         |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and March 31, 2007 |  | 4       
|         |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and March 31, 2007 |  | 5       
|         |  | Notes to Condensed Consolidated Financial Statements                                                         |  | 6       
|         |  |                                                                                                             
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 17      
|         |  |                                                                                                             
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 27      
|         |  |                                                                                                             
|Item 4.  |  | Controls and Procedures                                                                                      |  | 28      
|         |  |                                                                                                             
|         |  | PART II. OTHER INFORMATION                                                                                   |  |         
|         |  |                                                                                                             
|         |  |                                                                                                              |  | Page No.
|Item 1.  |  | Legal Proceedings                                                                                            |  | 28      
|         |  |                                                                                                             
|Item 1A. |  | Risk Factors                                                                                                 |  | 28      
|         |  |                                                                                                             
|Item 6.  |  | Exhibits                                                                                                     |  | 40      



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Item 1  Financial Statements

RIVERBED TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2008 and December 31, 2007

(in thousands, except per share data)



|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                     |  | March 31,2008 |         |   | December 31,2007 |  
|                                                                                                                                                                                                     |  | (unaudited)   |         |   |                  |  
|ASSETS                                                                                                                                                                                               |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                            |  | $             | 148,216 |   |                  | $ | 162,979 |  
|Marketable securities                                                                                                                                                                                |  |               | 120,848 |   |                  |   | 83,103  |  
|Trade receivables, net of allowances of $651 and $734 as of March 31, 2008 and December 31, 2007, respectively                                                                                       |  |               | 42,170  |   |                  |   | 50,072  |  
|Other receivables                                                                                                                                                                                    |  |               | 1,119   |   |                  |   | 1,273   |  
|Inventory                                                                                                                                                                                            |  |               | 11,277  |   |                  |   | 9,413   |  
|Prepaid expenses and other current assets                                                                                                                                                            |  |               | 5,645   |   |                  |   | 5,136   |  
|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                                 |  |               | 329,275 |   |                  |   | 311,976 |  
|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Fixed assets, net                                                                                                                                                                                    |  |               | 19,847  |   |                  |   | 18,826  |  
|Other assets                                                                                                                                                                                         |  |               | 7,155   |   |                  |   | 6,800   |  
|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                         |  | $             | 356,277 |   |                  | $ | 337,602 |  
|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                 |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                                                 |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                                                     |  | $             | 18,944  |   |                  | $ | 20,325  |  
|Accrued compensation and benefits                                                                                                                                                                    |  |               | 14,087  |   |                  |   | 14,290  |  
|Other accrued liabilities                                                                                                                                                                            |  |               | 11,430  |   |                  |   | 9,381   |  
|Deferred revenue                                                                                                                                                                                     |  |               | 30,738  |   |                  |   | 26,845  |  
|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                                            |  |               | 75,199  |   |                  |   | 70,841  |  
|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Deferred revenue, non-current                                                                                                                                                                        |  |               | 7,380   |   |                  |   | 6,634   |  
|Other long-term liabilities                                                                                                                                                                          |  |               | 345     |   |                  |   | 409     |  
|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Total long-term liabilities                                                                                                                                                                          |  |               | 7,725   |   |                  |   | 7,043   |  
|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                                                                                |  |               |         |   |                  |   |         |  
|Preferred stock, $0.0001 par value  30,000 shares authorized, no shares outstanding                                                                                                                 |  |               |        |   |                  |   |        |  
|Common stock and additional paid-in-capital; $0.0001 par value  600,000 shares authorized; 71,707 and 71,332 shares issued and
outstanding as of March 31, 2008 and December 31, 2007, respectively |  |               | 307,584 |   |                  |   | 295,487 |  
|Deferred stock-based compensation                                                                                                                                                                    |  |               | (2,523  | ) |                  |   | (3,287  | )
|Accumulated deficit                                                                                                                                                                                  |  |               | (31,897 | ) |                  |   | (32,535 | )
|Accumulated other comprehensive income                                                                                                                                                               |  |               | 189     |   |                  |   | 53      |  
|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                           |  |               | 273,353 |   |                  |   | 259,718 |  
|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                           |  | $             | 356,277 |   |                  | $ | 337,602 |  
|                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  

See Notes to Condensed Consolidated Financial Statements.



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RIVERBED TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)



|                                                      |  |                             |        |   |      |   |       
|----------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------
|                                                      |  | Three months endedMarch 31,
|                                                      |  | 2008                        |        |   | 2007
|Revenue:                                              |  |                             |        |   |      |   |       
|Product                                               |  | $                           | 57,729 |   |      | $ | 35,639
|Support and services                                  |  |                             | 15,253 |   |      |   | 7,145 
|                                                      |  |                             |        |   |      |   |       
|Total revenue                                         |  |                             | 72,982 |   |      |   | 42,784
|                                                      |  |                             |        |   |      |   |       
|Cost of revenue:                                      |  |                             |        |   |      |   |       
|Cost of product                                       |  |                             | 13,936 |   |      |   | 10,168
|Cost of support and services                          |  |                             | 6,010  |   |      |   | 2,386 
|                                                      |  |                             |        |   |      |   |       
|Total cost of revenue                                 |  |                             | 19,946 |   |      |   | 12,554
|                                                      |  |                             |        |   |      |   |       
|Gross profit                                          |  |                             | 53,036 |   |      |   | 30,230
|                                                      |  |                             |        |   |      |   |       
|Operating expenses:                                   |  |                             |        |   |      |   |       
|Sales and marketing                                   |  |                             | 31,207 |   |      |   | 17,092
|Research and development                              |  |                             | 13,608 |   |      |   | 7,458 
|General and administrative                            |  |                             | 9,373  |   |      |   | 4,037 
|                                                      |  |                             |        |   |      |   |       
|Total operating expenses                              |  |                             | 54,188 |   |      |   | 28,587
|                                                      |  |                             |        |   |      |   |       
|Operating income (loss)                               |  |                             | (1,152 | ) |      |   | 1,643 
|                                                      |  |                             |        |   |      |   |       
|Other income, net                                     |  |                             | 2,300  |   |      |   | 1,719 
|                                                      |  |                             |        |   |      |   |       
|Income before provision for income taxes              |  |                             | 1,148  |   |      |   | 3,362 
|Provision for income taxes                            |  |                             | 510    |   |      |   | 103   
|                                                      |  |                             |        |   |      |   |       
|Net income                                            |  | $                           | 638    |   |      | $ | 3,259 
|                                                      |  |                             |        |   |      |   |       
|Net income per common share:                          |  |                             |        |   |      |   |       
|Basic                                                 |  | $                           | 0.01   |   |      | $ | 0.05  
|                                                      |  |                             |        |   |      |   |       
|Diluted                                               |  | $                           | 0.01   |   |      | $ | 0.05  
|                                                      |  |                             |        |   |      |   |       
|Shares used in computing net income per common share: |  |                             |        |   |      |   |       
|Basic                                                 |  |                             | 70,597 |   |      |   | 65,037
|                                                      |  |                             |        |   |      |   |       
|Diluted                                               |  |                             | 73,959 |   |      |   | 70,350
|                                                      |  |                             |        |   |      |   |       
|Stock-based compensation expense included in above:   |  |                             |        |   |      |   |       
|Cost of product                                       |  | $                           | 35     |   |      | $ | 8     
|Cost of support and services                          |  |                             | 1,031  |   |      |   | 372   
|Sales and marketing                                   |  |                             | 5,389  |   |      |   | 2,742 
|Research and development                              |  |                             | 2,901  |   |      |   | 1,456 
|General and administrative                            |  |                             | 1,852  |   |      |   | 798   
|                                                      |  |                             |        |   |      |   |       
|Total stock-based compensation expense                |  | $                           | 11,208 |   |      | $ | 5,376 
|                                                      |  |                             |        |   |      |   |       

See Notes to Condensed Consolidated Financial Statements.



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RIVERBED TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                      |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                      |  | Three months endedMarch 31, |        
|                                                                                      |  | 2008                        |         |   | 2007 |  
|Operating Activities:                                                                 |  |                             |         |   |      |   |         |  
|Net income                                                                            |  | $                           | 638     |   |      | $ | 3,259   |  
|Adjustments to reconcile net income to net cash provided by operating activities:     |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                         |  |                             | 2,117   |   |      |   | 979     |  
|Stock-based compensation                                                              |  |                             | 11,208  |   |      |   | 5,376   |  
|Excess tax benefit from employee stock plans                                          |  |                             | (391    | ) |      |   |        |  
|Changes in operating assets and liabilities:                                          |  |                             |         |   |      |   |         |  
|(Increase) decrease in trade receivables                                              |  |                             | 7,862   |   |      |   | (3,682  | )
|Increase in inventory                                                                 |  |                             | (2,719  | ) |      |   | (784    | )
|Increase in prepaid expenses and other assets                                         |  |                             | (565    | ) |      |   | (362    | )
|Decrease in accounts payable and other current liabilities                            |  |                             | (1,145  | ) |      |   | (804    | )
|Increase in income taxes payable                                                      |  |                             | 21      |   |      |   | 50      |  
|Increase in deferred revenue                                                          |  |                             | 4,639   |   |      |   | 2,987   |  
|                                                                                      |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                             |  |                             | 21,665  |   |      |   | 7,019   |  
|                                                                                      |  |                             |         |   |      |   |         |  
|Investing Activities:                                                                 |  |                             |         |   |      |   |         |  
|Capital expenditures                                                                  |  |                             | (512    | ) |      |   | (1,518  | )
|Purchase of available for sale securities                                             |  |                             | (50,561 | ) |      |   | (7,945  | )
|Proceeds from sales and maturities of available for sale securities                   |  |                             | 13,003  |   |      |   | 4,000   |  
|Increase in other assets                                                              |  |                             |        |   |      |   | (1,600  | )
|                                                                                      |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                                 |  |                             | (38,070 | ) |      |   | (7,063  | )
|                                                                                      |  |                             |         |   |      |   |         |  
|Financing Activities:                                                                 |  |                             |         |   |      |   |         |  
|Proceeds from public offering, net of expenses                                        |  |                             |        |   |      |   | 87,664  |  
|Proceeds from issuance of common stock under employee stock plans, net of repurchases |  |                             | 1,179   |   |      |   | 81      |  
|Excess tax benefit from employee stock plans                                          |  |                             | 391     |   |      |   |        |  
|                                                                                      |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                             |  |                             | 1,570   |   |      |   | 87,745  |  
|                                                                                      |  |                             |         |   |      |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                          |  |                             | 72      |   |      |   | 4       |  
|                                                                                      |  |                             |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                  |  |                             | (14,763 | ) |      |   | 87,705  |  
|Cash and cash equivalents at beginning of period                                      |  |                             | 162,979 |   |      |   | 105,330 |  
|                                                                                      |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                            |  | $                           | 148,216 |   |      | $ | 193,035 |  
|                                                                                      |  |                             |         |   |      |   |         |  

See Notes to Condensed Consolidated Financial Statements.



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RIVERBED TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



|1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------------

Organization

Riverbed Technology, Inc. was founded on May 23, 2002 and has developed a comprehensive solution to the fundamental problems of
wide-area distributed computing. Our products enable our customers simply and efficiently to improve the performance of their applications and access their data over wide area networks (WANs).

Public Offerings

In September 2006, we completed our
initial public offering, or IPO, of common stock in which we sold and issued 9,990,321 shares of our common stock at an issue price of $9.75 per share. We raised a total of $97.4 million in gross proceeds from the IPO, or approximately $87.5 million
in net proceeds after deducting underwriting discounts and commissions of $6.8 million and other offering costs of $3.1 million. Upon the closing of the IPO, all shares of convertible preferred stock outstanding automatically converted into
39,441,439 shares of common stock.

In February 2007, we completed a follow-on public offering of common stock in which we sold and issued
2,854,671 shares of our common stock at an issue price of $32.50 per share. As a result of the offering, we raised a total of $92.8 million in gross proceeds, or approximately $87.7 million in net proceeds after deducting underwriting discounts and
commissions of $4.2 million and other offering costs of $0.9 million.

Significant Accounting Policies

Basis of Presentation

The condensed
consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. Intercompany transactions and balances have been eliminated. The accompanying condensed consolidated balance sheet as of March 31, 2008,
the condensed consolidated statements of operations for the three months ended March 31, 2008 and March 31, 2007, and the condensed consolidated statements of cash flows for the three months ended March 31, 2008 and March 31,
2007 are unaudited. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2007.

The accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting
principles, or GAAP, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. They do not include all of the financial information and footnotes required by GAAP for complete financial statements. We believe the
unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments necessary for the fair presentation of our statement of financial position as of
March 31, 2008, and our results of operations and cash flows for the three months ended March 31, 2008 and March 31, 2007. All adjustments are of a normal recurring nature. Certain prior period amounts have been reclassified to
conform to the current period presentation. The results for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2008.

Other than the adoption of the provisions of Financial Accounting Standards Board Statement No. 157, Fair Value Measurement,
or SFAS 157, there have been no significant changes in our accounting policies during the three months ended March 31, 2008 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended
December 31, 2007.

Use of Estimates

GAAP requires us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of
revenue and expenses during the periods presented. Significant estimates and assumptions made by management include the determination of the fair value of stock awards issued, the allowance for doubtful accounts and



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inventory valuation. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that
these estimates and judgments were made. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected.

Revenue Recognition

Our software is integrated on appliance hardware and is essential to the
functionality of the product. As a result, we account for revenue in accordance with Statement of Position, or SOP, 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions, for all transactions involving the sale of software. We recognize product revenue when all of the following have occurred: (1) we have entered into a legally binding arrangement with a
customer; (2) delivery has occurred, which is when product title has transferred to the customer; (3) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is
probable.

Product revenue consists of revenue from sales of our appliances and software licenses. Product sales include a perpetual
license to our software. Product revenue is generally recognized upon transfer of title at shipment, assuming all other revenue recognition criteria are met. Shipping charges billed to customers are included in product revenue and the related
shipping costs are included in cost of product revenue. Product revenue on sales to resellers is recorded once we have received persuasive evidence of an end-user and all other revenue recognition criteria have been met. Substantially all of our
agreements do not provide for rights of return.

Substantially all of our product sales have been sold in combination with support
services, which consist of software updates and support. Software updates provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term of the support period. Support includes
internet access to technical content, telephone and internet access to technical support personnel and hardware support. Revenue for support services is recognized on a straight-line basis over the service contract term, which is typically one year.

We use the residual method to recognize revenue when a product agreement includes one or more elements to be delivered at a future date
and vendor specific objective evidence, or VSOE, of the fair value of all undelivered elements exists. Through March 31, 2008, in virtually all of our contracts, the only element that remained undelivered at the time of delivery of the product
was support and updates. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as product revenue. If evidence of the fair value of one or more undelivered
elements does not exist, all revenue is generally deferred and recognized when delivery of those elements occurs or when fair value can be established. When the undelivered element for which we do not have a fair value is support, revenue for the
entire arrangement is bundled and recognized ratably over the support period. VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately, and for support and
updates is additionally measured by the renewal rate offered to the customer.

Our fees are typically considered to be fixed or
determinable at the inception of an arrangement, generally based on specific products and quantities to be delivered. Substantially all of our contracts do not include rights of return or acceptance provisions. To the extent that our agreements
contain such terms, we recognize revenue once the acceptance provisions or right of return lapses. Payment terms to customers generally range from net 30 to 60 days. In the event payment terms are provided that differ from our standard business
practices, the fees are deemed to not be fixed or determinable and revenue is recognized when the payments become due, provided the remaining criteria for revenue recognition have been met.

We assess the ability to collect from our customers based on a number of factors, including credit worthiness of the customer and past transaction
history of the customer. If the customer is not deemed credit worthy, we defer all revenue from the arrangement until payment is received and all other revenue recognition criteria have been met.

Stock-Based Compensation

Prior to
January 1, 2006, we accounted for employee stock options using the intrinsic value method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, and Financial Accounting
Standards Board Interpretation, or FIN, 44, Accounting for Certain



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Transactions Involving Stock Compensation, an Interpretation of APB No. 25, and had adopted the disclosure only provisions of Statement of
Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation,and SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure.

In accordance with APB 25, stock-based compensation expense, which is a non-cash charge, resulted from stock option grants at exercise prices that, for
financial reporting purposes, were deemed to be below the estimated fair value of the underlying common stock on the date of grant. Through December 31, 2005, we recorded deferred stock-based compensation relative to these options of
approximately $9.9 million, which is being amortized over the service period, which generally corresponds to the vesting period of the applicable options on a straight-line basis. During the three months ended March 31, 2008 and 2007, we
amortized $524,000 and $575,000, respectively, of deferred compensation expense, net of reversals, relative to these options.

Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the prospective transition method, which requires us to apply the provisions of SFAS No. 123(R) to new awards
granted, and to awards modified, repurchased or cancelled, after the effective date. Under this method, stock-based compensation expense recognized beginning January 1, 2006 is based on a combination of the following: (a) the grant-date
fair value of stock option and employee stock purchase plan awards granted or modified after January 1, 2006; and (b) the amortization of deferred stock-based compensation related to stock option awards granted prior to January 1,
2006, which was calculated using the intrinsic value method as previously permitted under APB 25.

Under SFAS No. 123(R), we
estimated the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This model utilizes the estimated fair value of common stock and requires that, at the date of grant, we use the
expected term of the option, the expected volatility of the price of our common stock, risk free interest rates and expected dividend yield of our common stock. This fair value is then amortized on a straight-line basis over the requisite service
periods of the awards, which is generally the vesting period. Options typically vest either 25% of the shares one year after the options vesting commencement date and the remainder ratably on a monthly basis over the following three years, or
ratably on a monthly basis over four years. On September 20, 2006, we implemented our Employee Stock Purchase Plan, or Purchase Plan. Purchase Plan shares typically vest over 2 years, and include two purchase dates per year. The Purchase Plan
became effective on the effective date of the registration statement relating to our IPO. Under the Purchase Plan, employees may purchase shares of common stock through payroll deductions at a price per share that is 85% of the lesser of the fair
market value of our common stock as of the beginning of an applicable offering period or the applicable purchase date, with purchases generally every six months.

The fair value of options granted was estimated at the date of grant using the following assumptions:



|                                      |  |                                 |  |                                
|------------------------------------- |  | ------------------------------- |  | -------------------------------
|                                      |  | Three months endedMarch 31,2008 |  | Three months endedMarch 31,2007
|Employee and Director Stock Options   |  |                                 |  |                                
|Expected life in years                |  | 4.5                             |  | 4.5                            
|Risk-free interest rate               |  | 2.6%                            |  | 4.5%-4.7%                      
|Volatility                            |  | 51%                             |  | 62%                            
|Weighted average fair value of grants |  | $7.10 - $10.49                  |  | $14.55 - $18.80                

There were no new offering periods under the Purchase Plan in the three months ended
March 31, 2008 or 2007.

The expected term represents the period that stock-based awards are expected to be outstanding. For the three
months ended March 31, 2008 and March 31, 2007, we have elected to use the simplified method of determining the expected term as permitted by SEC Staff Accounting Bulletins 107 and 110. The computation of expected volatility for the three
months ended March 31, 2008 is based on the historical volatility of comparable companies from a representative peer group selected based on industry and market capitalization data. As required by SFAS No. 123(R), management estimated
expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

As of March 31, 2008, the
total compensation cost related to stock-based awards granted under SFAS No. 123(R) to employees and directors but not yet recognized was approximately $91.7 million, net of estimated forfeitures of $14.4 million. This cost will be amortized on
a straight-line basis over the vesting period, which is typically 4 years. Amortization in the three months ended March 31, 2008 and March 31, 2007, was $7.8 million and $2.2 million, respectively.



8



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As of March 31, 2008 there was $6.4 million, net of estimated forfeitures of approximately $576,000,
left to be amortized under our Purchase Plan, which will be amortized over the remaining Purchase Plan offering period, which is between 5 and 19 months. Amortization in the three months ended March 31, 2008 and March 31, 2007 was $2.9
million and $2.6 million, respectively.

Accounting for Income Taxes

We use the asset and liability method of accounting for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes,(SFAS 109). Under this method, income tax expenses or benefits are recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been
recognized in our consolidated financial statements or tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of currently enacted tax laws. The effects of future changes in tax laws or rates are not
contemplated.

As part of the process of preparing consolidated financial statements, we are required to estimate our income taxes and tax
contingencies in each of the tax jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. This process involves estimating actual current tax expense together with assessing temporary differences in the
treatment of items for tax purposes versus financial accounting purposes that may create net deferred tax assets and liabilities. We rely on management estimates and assumptions in preparing our provision including forecasted annual income.

We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In
assessing the need for a valuation allowance, we have considered our historical levels of income, expectations of future taxable income and on-going tax planning strategies. Because of the uncertainty of the realization of the deferred tax assets,
we have recorded a full valuation allowance against our deferred tax assets except for certain deferred tax assets which we can forecast to reverse within a period that will allow us to recover income taxes that were previously paid. The effect of
the potential reversal of these deferred tax assets is included in our annual estimated effective tax rate. Realization of our deferred tax assets is dependent primarily upon future U.S. taxable income.

Inventory Valuation

Inventory consists of
hardware and related component parts and is stated at the lower of cost (on a first-in, first-out basis) or market. A large portion of our inventory relates to evaluation units located at customer locations, as some of our customers test our
equipment prior to purchasing. Inventory that is obsolete or in excess of our forecasted demand is written down to its estimated realizable value based on historical usage, expected demand, and evaluation unit conversion rate and age. Inherent in
our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technological obsolescence of our products. Inventory write-downs are reflected as cost of product and
amounted to approximately $450,000 and $265,000 in the three months ended March 31, 2008 and March 31, 2007, respectively.

Warranty
Reserve

Upon shipment of products to our customers, we provide for the estimated cost to repair or replace products that may be
returned under warranty. Our warranty period is typically 12 months from the date of shipment to the end-user customer for hardware and 90 days for software. For existing products, the reserve is estimated based on actual historical experience.
For new products, the warranty reserve is based on historical experience of similar products until such time as sufficient historical data has been collected for the new product. Warranty reserves amounted to approximately $1.2 million and $1.1
million at March 31, 2008 and December 31, 2007, respectively.

The following is a summary of the warranty reserve activity for
the three months ended March 31, 2008:



|                                  |  |                  |       |                               |   |                       |  |   |               |   |  |   |      
|--------------------------------- |  | ---------------- | ----- | ----------------------------- | - | --------------------- |  | - | ------------- | - |  | - | -----
|(in thousands)                    |  | Beginningbalance |       | Additionscharged tooperations |   | Warrantycostsincurred |  |   | Endingbalance
|Three months ended March 31, 2008 |  | $                | 1,089 |                               | $ | 661                   |  | $ | (582          | ) |  | $ | 1,168
|                                  |  |                  |       |                               |   |                       |  |   |               |   |  |   |      



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Deferred Inventory Costs

When our products have been delivered, but the product revenue associated with the arrangement has been deferred as a result of not meeting the revenue recognition criteria in SOP 97-2, we also defer the related
inventory costs for the delivered items in accordance with Accounting Research Bulletin 43, Restatement and Revision of Accounting Research Bulletins. Deferred inventory costs amounted to approximately $2.1 million and $2.3 million at
March 31, 2008 and December 31, 2007, respectively, and are included in prepaid expenses and other current assets in the condensed consolidated balance sheets.

Spares

We hold spare parts to service our customers who purchase support. We classify spare
parts as other long term assets and amortize the spares over an estimated useful life of three years. At March 31, 2008 and December 31, 2007 our spare parts balance, net of accumulated amortization, was $2.8 million and $2.5 million,
respectively. In the three months ended March 31, 2008 and March 31, 2007, we amortized $353,000 million and $106,000, respectively, to cost of support and services related to spares.

Concentrations of Risk

Financial instruments
that are potentially subject to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities, and trade receivables. Investment policies have been implemented that limit investments to investment grade securities
and the average portfolio maturity of our investments is less than six months. The risk with respect to trade receivables is mitigated by credit evaluations we perform on our customers and by the diversification of our customer base. No customers
represented more than 10% of our revenue for the three months ended March 31, 2008. We derived 15% of our revenue, approximately $6.4 million, from one customer in the three months ended March 31, 2007.

We outsource the production of our hardware to third-party manufacturing facilities. We rely on purchase orders or long-term contracts with our contract
manufacturers. At March 31, 2008, we had no long-term contractual commitment with any manufacturer; however, we did have a 90 day commitment totaling $6.7 million.



|2. | NET INCOME PER COMMON SHARE
|-- | ---------------------------

Basic net income per
common share is computed by dividing net income by the weighted average number of vested common shares outstanding during the period. Diluted net income per common share is computed by giving effect to all potential dilutive common shares.

The following table sets forth the computation of income per share:



|                                                     |  |                             |        |      |   |       
|---------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                                     |  | Three months endedMarch 31,
|(in thousands, except per share data)                |  | 2008                        |        | 2007
|Net income                                           |  | $                           | 638    |      | $ | 3,259 
|                                                     |  |                             |        |      |   |       
|Weighted average common shares outstanding - basic   |  |                             | 70,597 |      |   | 65,037
|Dilutive effect of employee stock plans              |  |                             | 3,362  |      |   | 5,313 
|                                                     |  |                             |        |      |   |       
|Weighted average common shares outstanding - diluted |  |                             | 73,959 |      |   | 70,350
|                                                     |  |                             |        |      |   |       
|Basic net income per share                           |  | $                           | 0.01   |      | $ | 0.05  
|                                                     |  |                             |        |      |   |       
|Diluted net income per share                         |  | $                           | 0.01   |      | $ | 0.05  
|                                                     |  |                             |        |      |   |       



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The following weighted average outstanding options were excluded from the computation of diluted net
income per common share for the periods presented because including them would have had an anti-dilutive effect:



|                                 |  |                             |  |     
|-------------------------------- |  | --------------------------- |  | ----
|                                 |  | Three months endedMarch 31,
|(in thousands)                   |  | 2008                        |  | 2007
|Options to purchase common stock |  | 6,652                       |  | 398 



|3. | CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES AND RESTRICTED CASH
|-- | -----------------------------------------------------------------

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents consist primarily of highly liquid
investments in money market mutual funds, government sponsored enterprise obligations, treasury bills, commercial paper and other money market securities with remaining maturities at date of purchase of 90 days or less. The carrying value of cash
and cash equivalents at March 31, 2008 and December 31, 2007 was approximately $148.2 million and $163.0 million, respectively, and the weighted average interest rates were 3.3% and 5.0%, respectively. The carrying value
approximates fair value at March 31, 2008 and December 31, 2007.

Marketable securities, which are classified as available for
sale at March 31, 2008, are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders equity. Marketable securities consist of government sponsored enterprise obligations,
treasury bills and corporate bonds and notes. As of December 31, 2007, the marketable securities are recorded at amortized cost which approximates fair market value. As of March 31, 2008, the fair value of our marketable securities is
determined in accordance with SFAS No. 157, which defines fair value as the exit price in the principal market in which we would transact. Under SFAS No. 157, level 1 instruments are valued based on quoted market prices in active
markets and include treasury bills and money market funds. Level 2 instruments are valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price
transparency and include corporate bonds and notes and government sponsored enterprise obligations.

As of March 31, 2008, the fair
value measurements of our cash, cash equivalents and marketable securities consisted of the following:



|                                                       |  |       |         |         |   |         |  |   |        
|------------------------------------------------------ |  | ----- | ------- | ------- | - | ------- |  | - | -------
|(in thousands)                                         |  | Total |         | Level 1 |   | Level 2
|Government sponsored enterprise obligations            |  | $     | 117,025 |         | $ |        |  | $ | 117,025
|Corporate bonds and notes                              |  |       | 49,867  |         |   |        |  |   | 49,867 
|Treasury bills                                         |  |       | 37,834  |         |   | 37,834  |  |   |       
|Money market funds                                     |  |       | 56,481  |         |   | 56,481  |  |   |       
|                                                       |  |       |         |         |   |         |  |   |        
|Total cash equivalents and marketable securities       |  |       | 261,207 |         | $ | 94,315  |  | $ | 166,892
|                                                       |  |       |         |         |   |         |  |   |        
|Cash                                                   |  |       | 7,857   |         |   |         |  |   |        
|                                                       |  |       |         |         |   |         |  |   |        
|Total cash, cash equivalents and marketable securities |  | $     | 269,064 |         |   |         |  |   |        
|                                                       |  |       |         |         |   |         |  |   |        

Restricted Cash

Pursuant to certain lease agreements and as security for our merchant services agreement with our financial institution, we are required to maintain cash reserves, classified as restricted cash. Current restricted
cash totaled $56,000 and $142,000 at March 31, 2008 and December 31, 2007, respectively, and long-term restricted cash totaled $3.5 million at March 31, 2008 and December 31, 2007. Long-term restricted cash is included in other
assets in the condensed consolidated balance sheets and consists primarily of funds held as collateral for letters of credit for the security deposit on the leases of our corporate headquarters. The long-term restricted cash is restricted until the
end of the lease terms on August 30, 2010 and July 31, 2014.



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|4. | INVENTORY
|-- | ---------

Inventory consists primarily of hardware
and related component parts and is stated at the lower of cost (on a first-in, first-out basis) or market. Inventory is comprised of the following:



|               |  |               |        |                  |   |      
|-------------- |  | ------------- | ------ | ---------------- | - | -----
|(in thousands) |  | March 31,2008 |        | December 31,2007
|Raw materials  |  | $             | 725    |                  | $ | 513  
|Finished goods |  |               | 10,552 |                  |   | 8,900
|               |  |               |        |                  |   |      
|Total          |  | $             | 11,277 |                  | $ | 9,413
|               |  |               |        |                  |   |      



|5. | FIXED ASSETS
|-- | ------------

Fixed assets are stated at the lower
of cost or net realizable value. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, which is typically two to five years. Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or estimated useful life of the asset. Repair and maintenance costs are expensed as incurred.

Fixed assets consisted of the following:



|                                          |  |                      |  |               |        |   |                  |   |        |  
|----------------------------------------- |  | -------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|(in thousands)                            |  | EstimatedUsefulLives |  | March 31,2008 |        |   | December 31,2007 |  
|Computer hardware and equipment           |  | 3 years              |  | $             | 11,254 |   |                  | $ | 10,191 |  
|Leasehold improvements                    |  | 2-5 years            |  |               | 8,558  |   |                  |   | 8,039  |  
|Furniture and fixtures                    |  | 3 years              |  |               | 4,231  |   |                  |   | 3,796  |  
|Software                                  |  | 2-5 years            |  |               | 4,206  |   |                  |   | 3,552  |  
|                                          |  |                      |  |               |        |   |                  |   |        |  
|Total fixed assets                        |  |                      |  |               | 28,249 |   |                  |   | 25,578 |  
|Accumulated depreciation and amortization |  |                      |  |               | (8,402 | ) |                  |   | (6,752 | )
|                                          |  |                      |  |               |        |   |                  |   |        |  
|Fixed assets, net                         |  |                      |  | $             | 19,847 |   |                  | $ | 18,826 |  
|                                          |  |                      |  |               |        |   |                  |   |        |  



|6. | DEFERRED REVENUE
|-- | ----------------

Deferred revenue consisted of the
following:



|                              |  |               |        |                  |   |       
|----------------------------- |  | ------------- | ------ | ---------------- | - | ------
|(in thousands)                |  | March 31,2008 |        | December 31,2007
|Product                       |  | $             | 3,873  |                  | $ | 4,406 
|Support and services          |  |               | 26,865 |                  |   | 22,439
|                              |  |               |        |                  |   |       
|Deferred revenue, current     |  |               | 30,738 |                  |   | 26,845
|                              |  |               |        |                  |   |       
|Deferred revenue, non-current |  |               | 7,380  |                  |   | 6,634 
|                              |  |               |        |                  |   |       
|Total deferred revenue        |  | $             | 38,118 |                  | $ | 33,479
|                              |  |               |        |                  |   |       

Deferred product revenue relates to arrangements where not all revenue recognition criteria have
been met. Deferred support revenue represents customer payments made in advance for annual support contracts. Support contracts are typically billed on a per annum basis in advance and revenue is recognized ratably over the support period. Deferred
revenue, non-current consists primarily of customer payments made in advance for support contracts with terms of more than 12 months.



|7. | GUARANTEES
|-- | ----------

Our agreements with customers, as well
as our reseller agreements, generally include certain provisions for indemnifying customers and resellers and their affiliated parties against liabilities if our products infringe a third-partys intellectual property rights. To date, we have
not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in our condensed consolidated financial statements.



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As permitted or required under Delaware law and to the maximum extent allowable under that law, we have
certain obligations to indemnify our officers, directors and certain key employees for certain events or occurrences while the officer, director or employee is or was serving at our request in such capacity. These indemnification obligations are
valid as long as the director, officer or employee acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited; however, we have a director and officer insurance policy that
mitigates our exposure and enables us to recover a portion of any future amounts paid.



|8. | LEASE COMMITMENTS
|-- | -----------------

We lease our facilities under
non-cancelable operating lease agreements. Future minimum commitments for these operating leases in place as of March 31, 2008 with a remaining non-cancelable lease term in excess of one year are as follows:



|                                         |  |               |       
|---------------------------------------- |  | ------------- | ------
|(in thousands)                           |  | March 31,2008
|2008 (the nine months ended December 31) |  | $             | 3,776 
|2009                                     |  |               | 5,299 
|2010                                     |  |               | 4,849 
|2011                                     |  |               | 5,388 
|2012 and thereafter                      |  |               | 11,691
|                                         |  |               |       
|Total                                    |  | $             | 31,003
|                                         |  |               |       

The terms of certain lease agreements provide for rental payments on a graduated basis. We
recognize rent expense on the straight-line basis over the lease period and have accrued for rent expense incurred but not paid. Rent expense under operating leases was $1.8 million and $803,000 for the three months ended March 31, 2008 and
March 31, 2007, respectively.

On September 26, 2006, we entered into an Agreement of Sublease, or Sublease, for new corporate
headquarters, and on March 21, 2007 entered into another lease agreement to expand our corporate headquarters as well as extend the term of the existing Sublease. The terms of the leases are from February 1, 2007 and March 31, 2007,
respectively, to July 31, 2014. The aggregate minimum lease commitment for the combined leases is $20.8 million and is included in the table above. We have entered into two letters of credit totaling $3.0 million to serve as the security
deposit for the leases, which is included in other assets in the condensed consolidated balance sheet.

On July 3, 2007, we entered
into a lease agreement for office space in Sunnyvale, California. The lease commenced on January 1, 2008, and has a term of five years and seven months. The aggregate minimum lease commitment is $4.6 million and is reflected in the table above.
On July 2, 2007, we entered into a letter of credit in the amount of $500,000 to serve as the security deposit for the lease.



|9. | COMMON STOCK
|-- | ------------

In July 2002, our Board of Directors
adopted the 2002 Stock Plan, or 2002 Plan. In September 2006, all shares of common stock available for grant under the 2002 Plan transferred to the 2006 Equity Incentive Plan, or 2006 Plan.

In April and May 2006, our Board of Directors approved the 2006 Plan, the Purchase Plan and the 2006 Director Stock Option Plan, which became effective
upon our IPO.

The Plans provide for automatic replenishments as follows:



| |  |  | 2006 Planincreased on January 1 of each year for five years, beginning in 2007, by a number equal to the lesser of (i) 4,000,000 shares or
(ii) 5% of the shares of common stock outstanding at that time or (iii) the number of shares determined by the Board of Directors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 2006 Purchase Planincreased on January 1 of each year by a number of shares equal to the lesser of (i) 750,000 shares or (ii) 1% of the shares
of common stock outstanding at that time or (iii) the number of shares determined by the Board of Directors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 2006 Director Option Planincreased on January 1 of each year by 250,000 shares.
| | - |  | --------------------------------------------------------------------------------



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Options issued under our stock option plans are generally for periods not to exceed 10 years and are
issued at the fair value of the shares of common stock on the date of grant. The fair value of our common stock is determined by the last sale price of such stock on the Nasdaq Global Market. Options typically vest either 25% of the shares one year
after the options vesting commencement date and the remainder ratably on a monthly basis over the following three years, or ratably on a monthly basis over four years. Options granted under the 2002 Plan prior to May 31, 2006 have a
maximum term of ten years. Beginning May 31, 2006, options granted under the 2002 Plan had a maximum term of seven years. Options granted under the 2006 Plan had a maximum term of seven years and prior to March 4, 2008, options granted
under the 2006 Director Option Plan had a maximum term of ten years. Beginning March 4, 2008, options granted under the 2006 Director Option Plan had a maximum term of seven years. Prior to March 28, 2006, employees in the United States
had the right to exercise their options granted under the 2002 Plan prior to vesting. For options granted beginning March 28, 2006, optionees may only exercise vested shares. Any unvested stock issued under the 2002 Plan is subject to
repurchase by us. Grants made pursuant to the 2006 Plan do not provide for the early exercise of options.

The Purchase Plan became
effective on the effective date of the registration statement relating to our IPO. Under the Purchase Plan, employees may purchase shares of common stock through payroll deductions at a price per share that is 85% of the lesser of the fair market
value of our common stock as of the beginning of an applicable offering period or the applicable purchase date, with purchases generally every six months. Employees payroll deductions may not exceed 15% of their compensation. Employees
may purchase up to 2,000 shares per purchase period provided that the value of the shares purchased in any calendar year does not exceed IRS regulations. As of March 31, 2008, 1,428,033 shares were available under the Purchase Plan.

The following tables summarize information about stock options outstanding:



|                              |  |                                          |   |  |                    |   |  |                                         |      
|----------------------------- |  | ---------------------------------------- | - |  | ------------------ | - |  | --------------------------------------- | -----
|                              |  | SharesAvailable                          |   |  | OptionsOutstanding |   |  | WeightedAverage ExercisePrice Per Share
|                              |  | (in thousands, except per share amounts)
|Balance, December 31, 2007    |  | 1,570                                    |   |  | 10,835             |   |  | $                                       | 21.36
|Additional options authorized |  | 3,817                                    |   |  |                   |   |  |                                         |      
|Granted                       |  | (833                                     | ) |  | 833                |   |  | $                                       | 21.42
|Exercised                     |  |                                         |   |  | (417               | ) |  | $                                       | 2.89 
|Repurchased                   |  | 42                                       |   |  |                   |   |  |                                         |      
|Cancelled                     |  | 271                                      |   |  | (271               | ) |  | $                                       | 19.55
|                              |  |                                          |   |  |                    |   |  |                                         |      
|Balance, March 31, 2008       |  | 4,867                                    |   |  | 10,980             |   |  | $                                       | 22.11
|                              |  |                                          |   |  |                    |   |  |                                         |      

The range of exercise prices for options outstanding at March 31, 2008 was $0.05 to $48.50.



|                        |  |                                       |  |                                          |  |                                         |       |                         |   |       
|----------------------- |  | ------------------------------------- |  | ---------------------------------------- |  | --------------------------------------- | ----- | ----------------------- | - | ------
|Range of Exercise Price |  | OptionsOutstanding asof March 31,2008 |  | WeightedAverageRemainingContractual Life |  | WeightedAverage ExercisePrice Per Share |       | AggregateIntrinsicValue
|                        |  | (in thousands)                        |  | (in years)                               |  |                                         |       | (in thousands)         
|$ 0.05  $ 0.60         |  | 552                                   |  | 7.02                                     |  | $                                       | 0.36  |                         |   |       
|$ 0.61  $ 5.75         |  | 1,291                                 |  | 7.70                                     |  | $                                       | 3.45  |                         |   |       
|$ 5.76  $16.72         |  | 2,467                                 |  | 5.64                                     |  | $                                       | 7.13  |                         |   |       
|$16.73  $34.12         |  | 4,978                                 |  | 6.27                                     |  | $                                       | 29.55 |                         |   |       
|$34.13  $48.50         |  | 1,692                                 |  | 6.45                                     |  | $                                       | 43.40 |                         |   |       
|                        |  |                                       |  |                                          |  |                                         |       |                         |   |       
|$ 0.05  $48.50         |  | 10,980                                |  | 6.36                                     |  | $                                       | 22.11 |                         | $ | 42,082
|                        |  |                                       |  |                                          |  |                                         |       |                         |   |       

The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying stock option awards and the closing price of our common stock at March 31, 2008. During the three months ended March 31, 2008, the aggregate intrinsic value of stock option awards exercised was $7.2 million, determined at the
date of option exercise.



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At March 31, 2008 and December 31, 2007, there were 816,000 and 1,088,000 shares, respectively,
subject to repurchase under all common stock repurchase agreements. The cash received from the sale of these shares is initially recorded as a liability and is subsequently reclassified to common stock as the shares vest. At March 31, 2008 and
December 31, 2007, there was $263,000 and $346,000, respectively, recorded in accrued liabilities and other long-term liabilities related to the issuance of these shares.



|10. | INCOME TAXES
|--- | ------------

Based upon our estimated annual
effective tax rate and after consideration of discrete tax items in the quarter, our estimated tax provision for the three months ended March 31, 2008 consisted of federal, foreign and state provisions for income tax. Our effective tax rate was
44.4% and 3.1% for the three months ended March 31, 2008 and 2007, respectively. Our effective tax rate is and can be affected by such items as disqualifying dispositions of stock from the Purchase Plan and incentive stock options, by changes
in the valuation of our deferred tax assets or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof.

As of March 31, 2008, our tax provision includes a deferred tax benefit for the projected reduction in the valuation allowance as a result of forecasted taxable income and utilization of tax credit carryforwards.
In determining future taxable income, we make assumptions to forecast federal, state and international operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. The
assumptions require significant judgment regarding the forecasts of taxable income, and are consistent with our forecasts used to manage our business.



|11. | SEGMENT INFORMATION
|--- | -------------------

SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive
Officer. Our Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. We have
one business activity and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Accordingly, we are considered to be in a single reporting
segment and operating unit structure.

Revenue by geography is based on the billing address of the customer. The following table sets forth
revenue and long-lived assets by geographic area.

Revenue



|                      |  |                             |        |      |   |       
|--------------------- |  | --------------------------- | ------ | ---- | - | ------
|                      |  | Three months endedMarch 31,
|(in thousands)        |  | 2008                        |        | 2007
|Domestic revenue      |  | $                           | 40,502 |      | $ | 29,579
|International revenue |  |                             | 32,480 |      |   | 13,205
|                      |  |                             |        |      |   |       
|Total revenue         |  | $                           | 72,982 |      | $ | 42,784
|                      |  |                             |        |      |   |       

Long-lived Assets



|                                |  |               |        |                  |   |       
|------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|(in thousands)                  |  | March 31,2008 |        | December 31,2007
|Domestic long-lived assets      |  | $             | 18,877 |                  | $ | 17,805
|International long-lived assets |  |               | 970    |                  |   | 1,021 
|                                |  |               |        |                  |   |       
|Total long-lived assets         |  | $             | 19,847 |                  | $ | 18,826
|                                |  |               |        |                  |   |       



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|12. | LEGAL MATTERS
|--- | -------------

On October 9, 2007, Quantum
Corporation (Quantum) served us with a lawsuit, filed in the United States District Court, Northern District of California, alleging patent infringement of United States Patent No. 5,990,810 (the 810 Patent).
Quantum seeks unspecified damages and injunctive relief.

On November 13, 2007, we counterclaimed against Quantum and served Quantum
with a lawsuit, filed in the United States District Court, Northern District of California, alleging patent infringement of United States Patent No. 7,116,249 (the 249 Patent).

On January 9, 2008, we moved to dismiss Quantums complaint for infringement in the United States District Court, Northern District of
California, for lack of standing. Our motion was granted by the Court on February 4, 2008.

On March 4, 2008, Quantum served us
with a lawsuit, filed in the United States District Court, Northern District of California, alleging patent infringement of United States Patent No. 6,622,164 (the 164 Patent).

On March 4, 2008, the United States District Court, Northern District of California accepted and ordered Riverbeds and Quantums joint
stipulation, which, among other things, provides for (i) the consolidation of the cases involving the 810 Patent (despite that case having been dismissed by the court) and the 249 Patent into one action before the Court, and
(ii) Quantums agreement to pursue the action regarding the 164 Patent separately. Trial on the 810/249 case is currently scheduled to begin March 30, 2009.

We believe that Quantums actions against us are without merit and we intend to vigorously defend against these claims. We currently are unable to
estimate the possible loss or range of loss associated with these actions.

From time to time, we are involved in various legal
proceedings, claims and litigation arising in the ordinary course of business. There are no other currently pending legal proceedings at March 31, 2008 that, in the opinion of management, might have a material adverse effect on our financial
position, results of operations or cash flows.



|13. | NEW ACCOUNTING PRONOUNCEMENTS
|--- | -----------------------------

In June 2007, the
FASB ratified EITF 07-3, Accounting for Non-Refundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities.EITF 07-3 requires that non-refundable advance payments for goods or services that
will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF 07-3 is effective, on a prospective basis, for
fiscal years beginning after December 15, 2007. The adoption of EITF 07-3 did not have an impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157 became effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued Staff Position (FSP)
No. 157-2, which delayed the effective date of SFAS No. 157 one year for all non-financial assets and non-financial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. Assets
and liabilities measured at fair value under SFAS No. 157 in the quarter ended March 31, 2008 did not have a material impact on our condensed consolidated financial statements. In accordance with FSP No. 157-2, we will measure the
remaining assets and liabilities no later than the quarter ended March 31, 2009, and have not yet determined the impact of this standard on our consolidated financial statements.



|14. | SUBSEQUENT EVENTS
|--- | -----------------

On April 21, 2008, our
Board of Directors approved a share repurchase program that authorizes us to purchase up to $100 million of our common stock.

On
April 21, 2008, the Compensation Committee of the Board of Directors approved a stock option exchange program pursuant to which eligible employees would be able to exchange certain of their outstanding underwater options granted under the 2006
Equity Incentive Plan, whether vested or unvested, for a lesser number of new options with an exercise price equal to fair market value on the new date of grant.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this Form 10-Q. The information in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange
Act. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as
may, will, should, estimates, predicts, potential, continue, strategy, believes, anticipates, plans,
expects, intends and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this Form 10-Q in the section titled Risk Factors and the risks discussed in our other SEC filings. We
disclaim any obligation to publicly release any revisions to the forward-looking statements after the date of this Form 10-Q.

Overview

We were founded in May 2002 by experienced industry leaders with a vision to improve the performance of wide-area distributed
computing. Having significant experience in caching technology, our executive management team understood that existing approaches failed to address adequately all of the root causes of this poor performance. We determined that these performance
problems could be best solved by simultaneously addressing inefficiencies in software applications and wide area networks, or WANs, as well as insufficient or unavailable bandwidth. This innovative approach served as the foundation of the
development of our products. We began commercial shipments of our products in May 2004 and have since sold our products to over 4,000 customers worldwide. We now offer 13 models of our Steelhead appliances as well as our Central Management Console,
Interceptor and Steelhead Mobile product line.

In August 2007, we began selling our
new Steelhead® Mobile product line, which includes a software client version of our Steelhead appliances, which delivers LAN-like application performance to any employee laptop, whether on
the road, working from home or connected wirelessly in the office.

We are headquartered in San Francisco, California. Our personnel are
located throughout the United States and in over twenty countries worldwide. We expect to continue to add personnel in the United States and internationally to provide additional geographic sales, research and development, general and administrative
and technical support coverage.

In September 2006, we completed our initial public offering, or IPO, of common stock in which we sold and
issued 9,990,321 shares of our common stock at an issue price of $9.75 per share. We raised a total of $97.4 million in gross proceeds from the IPO, or approximately $87.5 million in net proceeds after deducting underwriting discounts and
commissions of $6.8 million and other offering costs of $3.1 million. Upon the closing of the IPO, all shares of convertible preferred stock outstanding automatically converted into 39,441,439 shares of common stock.

In February 2007, we completed a follow-on public offering of common stock in which we sold and issued 2,854,671 shares of our common shock at an issue
price of $32.50 per share. As a result of the offering, we raised a total of $92.8 million in gross proceeds, or approximately $87.7 million in net proceeds after deducting underwriting discounts and commissions of $4.2 million and other offering
costs of $0.9 million.

We believe that our current value proposition, which enables customers to improve the performance of their
applications and access to their data across WANs, while also offering the ability to simplify IT infrastructure and realize significant capital and operating cost savings, should allow us to grow our business. Our product revenue growth rate will
depend significantly on continued growth in the wide-area data services, or WDS, market and our ability to continue to attract new customers in that market and generate additional sales from existing customers. Our growth in support and services
revenue is dependent upon increasing the number of products under support contracts, which is dependent on both growing our installed base of customers and renewing existing support contracts. Our future profitability and rate of growth will be
directly affected by the continued acceptance of our products in the marketplace, as well as the timing and size of orders, product mix, average selling prices and costs of our products and general economic conditions. Our ability to maintain
profitability will also be affected by the extent to which we must incur additional expenses to expand our sales, support, marketing, development, and general and administrative capabilities to grow our business. The largest component of our
expenses is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for sales personnel and stock-based compensation.



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Revenue. We derive our revenue from sales of our products and support and services. Our
revenue has grown rapidly since we began shipping products in May 2004, increasing from $2.6 million in 2004 to $236.4 million in 2007. Revenue for the three months ended March 31, 2008 was $73.0 million compared to $42.8 million for the
three months ended March 31, 2007. As of March 31, 2008, our products had been sold to over 4,000 customers.

We sell our
products directly through our sales force and indirectly through resellers. We derived 89% of our revenue through indirect channels in the first quarter of 2008. We expect revenue from resellers to continue to constitute a substantial majority of
our future revenue.

Cost of Revenue. Cost of product revenue consists of costs of the appliance hardware, manufacturing
personnel, manufacturing, shipping and logistics costs, and expenses for inventory obsolescence and warranty obligations. We utilize third parties to assist in the design of and to manufacture our appliance hardware, embed our proprietary software
and perform shipping logistics. Cost of support and service revenue is primarily comprised of the personnel costs of providing technical support and professional services. As we expand internationally and into other sectors, we may incur additional
costs to conform our products to comply with local laws or local product specifications. In addition, as we expand internationally, we will continue to hire additional technical support personnel to support our growing international customer base.

Gross Margin. Our gross margin has been and will continue to be affected by a variety of factors, including the mix and
average selling prices of our products, new product introductions and enhancements, the cost of our appliance hardware, cost of support and services personnel, and the mix of distribution channels through which our products are sold.

Operating Expenses. Operating expenses consist of sales and marketing, research and development and general and administrative expenses.
Personnel-related costs are the most significant component of each of these expense categories. We grew from 623 employees at December 31, 2007 to 721 employees at March 31, 2008. The timing of hires has and could materially affect our
operating expenses, both in absolute dollars and as a percentage of revenue, in any particular period.

Sales and marketing expenses
represent the largest component of our operating expenses and include personnel costs, sales commissions, marketing programs and facilities costs. Marketing programs are intended to generate revenue from new and existing customers, and are expensed
as incurred. We expect sales and marketing expenses to increase as we hire additional personnel and spend more on marketing programs with the intent to grow our revenue. The majority of our international personnel are engaged in sales, marketing and
support activities. The percentage of sales and marketing expenses incurred internationally grew from 11% in 2004 to 18% in the three months ended March 31, 2008.

Research and development expenses primarily include personnel costs and facilities costs. Quality assurance, infrastructure, and related costs of product quality efforts are also included. We expense research and
development expenses as incurred. We are devoting substantial resources to the continued development of additional functionality for existing products and the development of new products. We intend to continue to invest significantly in our research
and development efforts because we believe they are essential to maintaining our competitive position. Investments in research and development personnel costs are expected to increase in total dollars.

General and administrative expenses consist primarily of personnel costs related to our executive, finance, human resource, information technology and
legal organizations, and fees for professional services. Professional services include outside legal, audit and information technology consulting costs.

Stock-Based Compensation Expense. Effective January 1, 2006, we began to measure and recognize compensation expense for all stock-based payments at fair value, in accordance with Statement of
Financial Accounting Standard No. 123 (revised 2004) Share-Based Payment, or SFAS No. 123(R). Prior to the adoption of SFAS No. 123 (R) we accounted for stock options under the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25. In the fourth quarter of 2006, we implemented the 2006 Employee Stock Purchase Plan, or Purchase Plan. Under the Purchase Plan, employees
may purchase shares of common stock at a price per share that is 85% of the lesser of the fair market value of our common stock as of the beginning or the end of a purchase period. The Purchase Plan is compensatory and results in compensation
expense to be accounted for under SFAS No. 123(R). We expect to continue to incur significant stock-based compensation expense.



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Other Income, net. Other income, net primarily includes interest income on cash and
marketable securities. Cash has historically been invested in money market mutual funds, government sponsored enterprise obligations, treasury bills, commercial paper and other money market securities with remaining maturities at date of purchase of
90 days or less.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, or GAAP. These accounting principles require us to make certain estimates and judgments
that can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. We believe that the estimates and judgments
upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our consolidated financial
statements could be adversely affected.

The accounting policies that reflect our more significant estimates and judgments and which we
believe are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition, stock-based compensation, inventory valuation and accounting for income taxes.

Revenue Recognition

Our software is
integrated on appliance hardware and is essential to the functionality of the product. As a result, we account for revenue in accordance with Statement of Position, or SOP, 97-2, Software Revenue Recognition, as amended by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, for all transactions involving the sale of software. We recognize product revenue when all of the following have occurred: (1) we have
entered into a legally binding arrangement with a customer; (2) delivery has occurred, which is when product title has transferred to the customer; (3) customer payment is deemed fixed or determinable and free of contingencies and
significant uncertainties; and (4) collection is probable.

Product revenue consists of revenue from sales of our appliances and
software licenses. Product sales include a perpetual license to our software. Product revenue is generally recognized upon transfer of title at shipment, assuming all other revenue recognition criteria are met. Shipping charges billed to customers
are included in product revenue and the related shipping costs are included in cost of product revenue. Product revenue on sales to resellers is recorded once we have received persuasive evidence of an end-user and all other revenue recognition
criteria have been met. Substantially all of our agreements do not provide for rights of return.

Substantially all of our product sales
have been sold in combination with support services, which consist of software updates and support. Software updates provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the
term of the support period. Support includes internet access to technical content, telephone and internet access to technical support personnel and hardware support. Revenue for support services is recognized on a straight-line basis over the
service contract term, which is typically one year.

We use the residual method to recognize revenue when a product agreement includes one
or more elements to be delivered at a future date and vendor specific objective evidence, or VSOE, of the fair value of all undelivered elements exists. Through March 31, 2008, in virtually all of our contracts, the only element that remained
undelivered at the time of delivery of the product was support and updates. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as product revenue. If evidence
of the fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized when delivery of those elements occurs or when fair value can be established. When the undelivered element for which we do not
have a fair value is support, revenue for the entire arrangement is bundled and recognized ratably over the support period. VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those
services when sold separately, and for support and updates is additionally measured by the renewal rate offered to the customer.



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Our fees are typically considered to be fixed or determinable at the inception of an arrangement,
generally based on specific products and quantities to be delivered. Substantially all of our contracts do not include rights of return or acceptance provisions. To the extent that our agreements contain such terms, we recognize revenue once the
acceptance provisions or right of return lapses. Payment terms to customers generally range from net 30 to 60 days. In the event payment terms are provided that differ from our standard business practices, the fees are deemed to not be fixed or
determinable and revenue is recognized when the payments become due, provided the remaining criteria for revenue recognition have been met.

We assess the ability to collect from our customers based on a number of factors, including credit worthiness of the customer and past transaction history of the customer. If the customer is not deemed credit worthy, we defer all revenue
from the arrangement until payment is received and all other revenue recognition criteria have been met.

Stock-Based Compensation

Prior to January 1, 2006, we accounted for employee stock options using the intrinsic value method in accordance with
Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, and Financial Accounting Standards Board Interpretation, or FIN, 44, Accounting for Certain Transactions Involving Stock Compensation,
an Interpretation of APB No. 25, and had adopted the disclosure only provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation,and SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure.

In accordance with APB 25, stock-based compensation expense, which is a
non-cash charge, resulted from stock option grants at exercise prices that, for financial reporting purposes, were deemed to be below the estimated fair value of the underlying common stock on the date of grant. Through December 31, 2005, we
recorded deferred stock-based compensation relative to these options of approximately $9.9 million, which is being amortized over the service period, which generally corresponds to the vesting period of the applicable options on a straight-line
basis. During the three months ended March 31, 2008 and March 31, 2007, we amortized $524,000 and $575,000, respectively, of deferred compensation expense, net of reversals, relative to these options.

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the
prospective transition method, which requires us to apply the provisions of SFAS No. 123(R) to new awards granted, and to awards modified, repurchased or cancelled, after the effective date. Under this method, stock-based compensation expense
recognized beginning January 1, 2006 is based on a combination of the following: (a) the grant-date fair value of stock option and employee stock purchase plan awards granted or modified after January 1, 2006; and (b) the
amortization of deferred stock-based compensation related to stock option awards granted prior to January 1, 2006, which was calculated using the intrinsic value method as previously permitted under APB 25.

Under SFAS No. 123(R), we estimated the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award
approach. This model utilizes the estimated fair value of common stock and requires that, at the date of grant, we use the expected term of the option, the expected volatility of the price of our common stock, risk free interest rates and expected
dividend yield of our common stock. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Options typically vest either 25% of the shares one year after
the options vesting commencement date and the remainder ratably on a monthly basis over the following three years, or ratably on a monthly basis over four years. On September 20, 2006, we implemented our Employee Stock Purchase Plan, or
Purchase Plan. Purchase Plan shares typically vest over 2 years, and include two purchase dates per year. The Purchase Plan became effective on the effective date of the registration statement relating to our IPO. Under the Purchase Plan, employees
may purchase shares of common stock through payroll deductions at a price per share that is 85% of the lesser of the fair market value of our common stock as of the beginning of an applicable offering period or the applicable purchase date, with
purchases generally every six months.



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The fair value of options granted was estimated at the date of grant using the following assumptions:



|                                      |  |                                 |  |                                
|------------------------------------- |  | ------------------------------- |  | -------------------------------
|                                      |  | Three months endedMarch 31,2008 |  | Three months endedMarch 31,2007
|Employee and Director Stock Options   |  |                                 |  |                                
|Expected life in years                |  | 4.5                             |  | 4.5                            
|Risk-free interest rate               |  | 2.6%                            |  | 4.5%-4.7%                      
|Volatility                            |  | 51%                             |  | 62%                            
|Weighted average fair value of grants |  | $7.10 - $10.49                  |  | $14.55 - $18.80                

There were no new offering periods under the Purchase Plan in the three months ended
March 31, 2008 or 2007.

The expected term represents the period that stock-based awards are expected to be outstanding. For the three
months ended March 31, 2008 and March 31, 2007, we have elected to use the simplified method of determining the expected term as permitted by SEC Staff Accounting Bulletins 107 and 110. The computation of expected volatility for the three
months ended March 31, 2008 is based on the historical volatility of comparable companies from a representative peer group selected based on industry and market capitalization data. As required by SFAS No. 123(R), management estimated
expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

As of March 31, 2008, the
total compensation cost related to stock-based awards granted under SFAS No. 123(R) to employees and directors but not yet recognized was approximately $91.7 million, net of estimated forfeitures of $14.4 million. This cost will be amortized on
a straight-line basis over the vesting period, which is typically 4 years. Amortization in the three months ended March 31, 2008 and March 31, 2007, was $7.8 million and $2.2 million, respectively.

As of March 31, 2008 there was $6.4 million, net of estimated forfeitures of approximately $576,000, left to be amortized under our Purchase Plan,
which will be amortized over the remaining Purchase Plan offering period, which is between 5 and 19 months. Amortization in the three months ended March 31, 2008 and March 31, 2007 was $2.9 million and $2.6 million, respectively.

Accounting for Income Taxes

We use the asset and liability method of accounting for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes, Accounting for Income Taxes(SFAS 109). Under this method, income tax expenses or
benefits are recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or
tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of currently enacted tax laws. The effects of future changes in tax laws or rates are not contemplated.

As part of the process of preparing consolidated financial statements, we are required to estimate our income taxes and tax contingencies in each of the
tax jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. This process involves estimating actual current tax expense together with assessing temporary differences in the treatment of items for tax
purposes versus financial accounting purposes that may create net deferred tax assets and liabilities. We rely on management estimates and assumptions in preparing our provision including forecasted annual income.

We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In assessing the need
for a valuation allowance, we have considered our historical levels of income, expectations of future taxable income and on-going tax planning strategies. Because of the uncertainty of the realization of the deferred tax assets, we have recorded a
full valuation allowance against our deferred tax assets except for certain deferred tax assets which we can forecast to reverse within a period that will allow us to recover income taxes that were previously paid. The effect of the potential
reversal of these deferred tax assets is included in our annual estimated effective tax rate. Realization of our deferred tax assets is dependent primarily upon future U.S. taxable income.



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Inventory Valuation

Inventory consists of hardware and related component parts and is stated at the lower of cost (on a first-in, first-out basis) or market. A large portion of our inventory relates to evaluation units located at
customer locations as some of our customers test our equipment prior to purchasing. Inventory that is obsolete or in excess of our forecasted consumption is written down to estimated realizable value based on historical usage, expected demand and
evaluation unit conversion rate and age. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technological obsolescence of our products. If future
demand or market conditions are less favorable than our projections, additional inventory write-downs could be required and would be reflected in cost of product in the period the revision is made. Inventory write-downs are reflected as cost of
product and amounted to approximately $450,000 and $265,000 for the three months ended March 31, 2008 and March 31, 2007, respectively.

Results of Operations

Revenue

We derive our revenue from sales of our appliances and software licenses and from support and services. Product revenue primarily consists of revenue from sales of our Steelhead products and is typically recognized
upon shipment. Support and services revenue includes unspecified software license updates and product support. Support revenue is recognized ratably over the contractual period, which is typically one year. Service revenue includes professional
services and training, which to date has not been significant, and is recognized as the services are performed.



|                                |  |                             |        |      |   |       
|------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                |  | Three months endedMarch 31,
|(dollars in thousands)          |  | 2008                        |        | 2007
|Total Revenue                   |  |                             |        |      |   |       
|Total Revenue by Type:          |  |                             |        |      |   |       
|Product                         |  | $                           | 57,729 |      | $ | 35,639
|Support and services            |  |                             | 15,253 |      |   | 7,145 
|% Revenue by Type:              |  |                             |        |      |   |       
|Product                         |  |                             | 79%    |      |   | 83%   
|Support and services            |  |                             | 21%    |      |   | 17%   
|Total Revenue by Geography:     |  |                             |        |      |   |       
|Domestic                        |  |                             | 40,502 |      |   | 29,579
|International                   |  |                             | 32,480 |      |   | 13,205
|% Revenue by Geography:         |  |                             |        |      |   |       
|Domestic                        |  |                             | 55%    |      |   | 69%   
|International                   |  |                             | 45%    |      |   | 31%   
|Total Revenue by Sales Channel: |  |                             |        |      |   |       
|Direct                          |  |                             | 8,063  |      |   | 4,023 
|Indirect                        |  |                             | 64,919 |      |   | 38,761
|% Revenue by Sales Channel:     |  |                             |        |      |   |       
|Direct                          |  |                             | 11%    |      |   | 9%    
|Indirect                        |  |                             | 89%    |      |   | 91%   

Quarter Ended March 31, 2008 Compared to the Quarter Ended March 31, 2007:
Product revenue increased in the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 due primarily to an increase in new customers and additional purchases by existing customers. As of March 31,
2008, our products had been sold to over 4,000 customers, compared to approximately 2,000 as of March 31, 2007. We believe the market for our products has grown due to increased market awareness of wide area data services and distributed
organizations, which increases dependence on timely access to data and applications.

Substantially all of our customers purchase support
when they purchase our products. The increase in support and services revenue on an absolute basis and as a percentage of total revenues is a result of increased product and first year support sales combined with the renewal of support contracts by
existing customers. As our customer base grows, we expect the proportion of revenue generated from support and services to increase.



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In the three months ended March 31, 2008, we derived 89% of our revenue from indirect channels
compared to 91% in the three months ended March 31, 2007. We expect indirect channel revenue to continue to be a significant portion of our revenue.

We generated 45% of our revenue in the three months ended March 31, 2008 from international locations, compared to 31% in the three months ended March 31, 2007. We continue to expand into international
locations and introduce our products in new markets and expect international revenue to increase in absolute dollars over time.

Cost of
Revenue and Gross Margin

Cost of product revenue consists of the costs of the appliance hardware, manufacturing, shipping and logistics
costs and expenses for inventory obsolescence and warranty obligations. Cost of support and service revenue consists of salary and related costs of technical support and professional services personnel.



|                                    |  |                             |        |      |   |       
|----------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                    |  | Three months endedMarch 31,
|(dollars in thousands)              |  | 2008                        |        | 2007
|Revenue:                            |  |                             |        |      |   |       
|Product                             |  | $                           | 57,729 |      | $ | 35,639
|Support and services                |  |                             | 15,253 |      |   | 7,145 
|                                    |  |                             |        |      |   |       
|Total revenue                       |  |                             | 72,982 |      |   | 42,784
|Cost of revenue:                    |  |                             |        |      |   |       
|Cost of product                     |  |                             | 13,936 |      |   | 10,168
|Cost of support and services        |  |                             | 6,010  |      |   | 2,386 
|                                    |  |                             |        |      |   |       
|Total cost of revenue               |  |                             | 19,946 |      |   | 12,554
|                                    |  |                             |        |      |   |       
|Gross profit                        |  | $                           | 53,036 |      | $ | 30,230
|                                    |  |                             |        |      |   |       
|Gross margin - product              |  |                             | 76%    |      |   | 71%   
|Gross margin - support and services |  |                             | 61%    |      |   | 67%   
|Total gross margin                  |  |                             | 73%    |      |   | 71%   

Quarter Ended March 31, 2008 Compared to the Quarter Ended March 31, 2007: The
increase in cost of product revenue was due primarily to increased hardware costs associated with higher revenue. Cost of support and services revenue increased as we added more technical support headcount domestically and abroad to support our
growing customer base. Technical support and services headcount was 83 employees as of March 31, 2008 compared to 39 employees as of March 31, 2007.

Gross margins increased to 73% in the three months ended March 31, 2008 from 71% in the three months ended March 31, 2007. Gross margin for product increased primarily due to higher margins on product
revenue as a result of lower unit product costs as well as favorable product mix. The increase in product gross margins was somewhat offset by decreasing margins on support and services revenue due to increased personnel and related costs, increased
costs related to management of our spare parts and increased spare part amortization.

Sales and Marketing Expenses

Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.



|                             |  |                             |        |      |   |       
|---------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                             |  | Three months endedMarch 31,
|(dollars in thousands)       |  | 2008                        |        | 2007
|Sales and marketing expenses |  | $                           | 31,207 |      | $ | 17,092
|Percent of total revenue     |  |                             | 43%    |      |   | 40%   



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Quarter Ended March 31, 2008 Compared to the Quarter Ended March 31, 2007: The increase
in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 336 employees as of March 31, 2008 from 175 employees as of March 31, 2007. The
increase in employees resulted in higher salary expense and employee related benefits. Additionally, commission expense increased in the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 due to the
substantial increase in revenue. Salaries, bonuses and commissions accounted for $5.9 million, marketing related activities accounted for $1.7 million, facilities and information technology expense accounted for $1.2 million and travel and
entertainment expenses accounted for $755,000 of the $14.1 million increase in sales and marketing expenses. Stock-based compensation, which was $5.4 million in the three months ended March 31, 2008 compared to $2.7 million in the three
months ended March 31, 2007, accounted for approximately $2.7 million of the increase in sales and marketing expenses.

We plan
to continue to make investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international
sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant
operating expense. Generally, sales personnel are not immediately productive and sales and marketing expenses do not immediately result in increased revenue. Hiring additional sales personnel reduces short-term operating margins until the sales
personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

Research and Development Expenses

Research and development expenses primarily consist of personnel costs and facilities costs. We expense research and development expenses as incurred.



|                                  |  |                             |        |      |   |      
|--------------------------------- |  | --------------------------- | ------ | ---- | - | -----
|                                  |  | Three months endedMarch 31,
|(dollars in thousands)            |  | 2008                        |        | 2007
|Research and development expenses |  | $                           | 13,608 |      | $ | 7,458
|Percent of total revenue          |  |                             | 19%    |      |   | 17%  

Quarter Ended March 31, 2008 Compared to the Quarter Ended March 31, 2007:
Research and development expenses increased in the three months ended March 31, 2008 compared to the three months ended March 31, 2007 due to an increase in personnel and facility-related costs as a result of research and development
headcount increasing to 208 employees as of March 31, 2008 from 119 employees as of March 31, 2007. Salaries and bonuses accounted for $2.4 million and facilities and information technology expense accounted for $914,000 of the $6.2
million increase in research and development expenses. Stock-based compensation, which was $2.9 million in the three months ended March 31, 2008 compared to $1.5 million in the three months ended March 31, 2007, accounted for $1.4 million
of the increase in research and development expenses. We plan to continue to invest in research and development as we develop new products and make further enhancements to existing models.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation for personnel and facilities costs related to our executive, finance, human resources, information technology and legal organizations, and fees for professional services.
Professional services include legal, audit and information technology consulting costs.



|                                    |  |                             |       |      |   |      
|----------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                    |  | Three months endedMarch 31,
|(dollars in thousands)              |  | 2008                        |       | 2007
|General and administrative expenses |  | $                           | 9,373 |      | $ | 4,037
|Percent of total revenue            |  |                             | 13%   |      |   | 9%   

Quarter Ended March 31, 2008 Compared to the Quarter Ended March 31, 2007: The
increase in general and administrative expenses for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 is due to an increase in personnel costs, primarily as a result of headcount increasing to 87
employees as of March 31, 2008 from 42 employees as of March 31, 2007, and an increase in professional services fees. Salaries and bonuses accounted for $940,000 and professional service fees accounted for approximately $2.1 million of the
$5.3 million increase in general and administrative expenses. Professional service fees increased due to increased audit and tax advisory fees and increased intellectual property related



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legal fees associated with IP litigation in the amount of $940,000. Stock-based compensation, which was $1.9 million in the three months ended March 31,
2008 compared to $798,000 in the three months ended March 31, 2007, accounted for approximately $1.1 million of the increase in general and administrative expenses.

Other Income, Net

Other income, net consists primarily of interest income, and foreign currency
exchange losses.



|                        |  |                             |       |   |      |   |       |  
|----------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                        |  | Three months endedMarch 31, |      
|(dollars in thousands)  |  | 2008                        |       |   | 2007 |  
|Interest income         |  | $                           | 2,349 |   |      | $ | 1,769 |  
|Other                   |  |                             | (49   | ) |      |   | (50   | )
|                        |  |                             |       |   |      |   |       |  
|Total other income, net |  | $                           | 2,300 |   |      | $ | 1,719 |  
|                        |  |                             |       |   |      |   |       |  

Quarter Ended March 31, 2008 Compared to the Quarter Ended March 31, 2007: Other
income, net, increased in the three months ended March 31, 2008 primarily due to interest income on higher cash and marketable securities balances.

Provision for Income Taxes

After applying our available tax credit carryforwards, considering our
remaining valuation allowance, and taking into account discrete tax items that occurred in the first quarter, our income tax expense for the three months ended March 31, 2008 was approximately $510,000 and consists of federal, foreign and state
provisions for income tax.

We expect our effective tax rate in 2008 to fluctuate significantly on a quarterly basis. The effective tax
rate could be affected by our stock-based compensation expense, by changes in the valuation of our deferred tax assets and liabilities, changes in actual results versus our estimates, or by changes in tax laws, regulations, accounting principles, or
interpretations thereof.

Liquidity and Capital Resources



|                                      |  |                             |         |   |                       |   |         |  
|------------------------------------- |  | --------------------------- | ------- | - | --------------------- | - | ------- | -
|(in thousands)                        |  | As ofMarch 31,2008          |         |   | As ofDecember 31,2007 |  
|Working capital                       |  | $                           | 254,076 |   |                       | $ | 241,135 |  
|Cash and cash equivalents             |  |                             | 148,216 |   |                       |   | 162,979 |  
|Marketable securities                 |  |                             | 120,848 |   |                       |   | 83,103  |  
|                                      | 
|                                      |  | Three months endedMarch 31, |        
|(in thousands)                        |  | 2008                        |         |   | 2007                  |  
|Cash provided by operating activities |  | $                           | 21,665  |   |                       | $ | 7,019   |  
|Cash used in investing activities     |  |                             | (38,070 | ) |                       |   | (7,063  | )
|Cash provided by financing activities |  |                             | 1,570   |   |                       |   | 87,745  |  

Cash and Cash Equivalents

Cash and cash equivalents consist of money market mutual funds, government sponsored enterprise obligations, treasury bills, commercial paper and other
money market securities with remaining maturities at date of purchase of 90 days or less.

Marketable securities consist of government
sponsored enterprise obligations, treasury bills and corporate bonds and notes. At December 31, 2007, the marketable securities are recorded at amortized cost, which approximates fair market value. As of March 31, 2008, the fair value of
marketable securities is determined in accordance with SFAS No. 157, which defines the fair value as the exit price in the principal market in which we would transact.



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Pursuant to certain lease agreements and as security for our merchant services agreement with our
financial institution, we are required to maintain cash reserves, classified as restricted cash. Current restricted cash totaled $56,000 at March 31, 2008 and $142,000 at December 31, 2007, and long-term restricted cash totaled $3.5
million at March 31, 2008 and December 31, 2007. Long-term restricted cash is included in other assets in the condensed consolidated balance sheets and consists primarily of funds held as collateral for letters of credit for the security
deposit on the leases of our corporate headquarters and is restricted until the end of the lease terms on August 30, 2010 and July 31, 2014.

Since the fourth quarter of 2004, we have expanded our operations internationally. Our sales contracts are principally denominated in United States dollars and as such the increase in our revenue derived from
international customers has not affected our cash flows from operations. As we fund our international operations, our cash and cash equivalents are affected by changes in exchange rates. To date, the foreign currency effect on our cash and cash
equivalents has not been material.

Cash Flows from Operating Activities

Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash from operating activities are for personnel
related expenditures, product costs, outside services and rent payments. Our cash flows from operating activities will continue to be affected principally by the extent to which we grow our revenue and spend on hiring personnel in order to grow our
business. The timing of hiring sales personnel in particular affects cash flows as there is a lag between the hiring of sales personnel and the generation of revenue and cash flows from sales personnel.

Cash provided by operating activities was $21.7 million in the three months ended March 31, 2008 compared to $7.0 million in the three months ended
March 31, 2007 primarily due to increased profitability after excluding the effects of non-cash stock-based compensation expense and lower accounts receivable balances due to increased collections.

Cash Flows from Investing Activities

Cash flows used in investing activities primarily relate to investments in marketable securities and capital expenditures to support our growth.

Cash used in investing activities increased in the three months ended March 31, 2008 compared to the three months ended March 31, 2007 due to additional purchases of marketable securities. Cash used for
capital expenditures in the three months ended March 31, 2008 decreased compared to the three months ended March 31, 2007. The three months ended March 31, 2007, included expenditures related to leasehold improvements for our
corporate office and software purchased for internal use associated with our ERP system.

Cash Flows from Financing Activities

Cash flows from financing activities in the three months ended March 31, 2008, consisted primarily of cash proceeds received from
the exercise of stock options and stock purchases under our Purchase Plan.

We believe that our net proceeds from operations, together with
our cash and marketable securities balances at March 31, 2008, will be sufficient to fund our projected operating requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of
revenue growth, the expansion of our sales and marketing activities, the timing and extent of expansion into new territories, the timing of introductions of new products and enhancements to existing products, and the continuing market acceptance of
our products. We may enter into arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which also could require us to seek additional equity or debt financing. Additional funds may not be
available on terms favorable to us or at all.

On April 21, 2008, our Board of Directors approved a share repurchase program that
authorizes us to purchase up to $100 million of our common stock.



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Contractual Obligations

The following is a summary of our contractual obligations as of March 31, 2008:



|                              |  |                |        |                             |   |        |  |      |       |      |   |                |  |   |       |  |   |       
|----------------------------- |  | -------------- | ------ | --------------------------- | - | ------ |  | ---- | ----- | ---- | - | -------------- |  | - | ----- |  | - | ------
|                              |  | Total          |        | Remainingnine months of2008 |   | 2009   |  | 2010 |       | 2011 |   | 2012 andbeyond
|                              |  | (in thousands)
|Contractual Obligations       |  |                |        |                             |   |        |  |      |       |      |   |                |  |   |       |  |   |       
|Operating leases              |  | $              | 31,003 |                             | $ | 3,776  |  | $    | 5,299 |      | $ | 4,849          |  | $ | 5,388 |  | $ | 11,691
|Purchase obligations (1)      |  |                | 7,432  |                             |   | 6,997  |  |      | 408   |      |   | 27             |  |   |      |  |   |      
|                              |  |                |        |                             |   |        |  |      |       |      |   |                |  |   |       |  |   |       
|Total contractual obligations |  | $              | 38,435 |                             | $ | 10,773 |  | $    | 5,707 |      | $ | 4,876          |  | $ | 5,388 |  | $ | 11,691
|                              |  |                |        |                             |   |        |  |      |       |      |   |                |  |   |       |  |   |       



|(1) | Represents amounts associated with agreements that are enforceable, legally binding and specify terms, including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of payment. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Off-Balance Sheet Arrangements

At March 31,
2008 and December 31, 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for
the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, nor did we have any undisclosed material transactions or commitments involving related persons or entities.

Other

At March 31, 2008 and December 31,
2007, we did not have commercial commitments under lines of credit, standby repurchase obligations or other such debt arrangements.

Recent Accounting
Pronouncements

See Note 13 of Notes to Consolidated Financial Statements for recent accounting pronouncements that could
have an effect on us.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Foreign Currency Risk

Our sales contracts are principally denominated in United States dollars and therefore our revenue is
not subject to foreign currency risk. We do incur certain operating expenses in currencies other than the U.S. dollar and therefore are subject to volatility in cash flows due to fluctuations in foreign currency exchange rates, particularly changes
in the British pound, Euro, Australian dollar and Singapore dollar. To date, we have not entered into any hedging contracts since exchange rate fluctuations have had minimal impact on our operating results and cash flows.

Interest Rate Sensitivity

We had
unrestricted cash and cash equivalents totaling $148.2 million and $163.0 million at March 31, 2008 and December 31, 2007, respectively. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into
investments for trading or speculative purposes. Cash and cash equivalents include highly liquid investments with a maturity of ninety days or less at the time of purchase. Cash equivalents consist primarily of money market mutual funds,
government sponsored enterprise obligations, treasury bills, and other money market securities. Due to the high investment quality and short duration of these investments, we do not believe that we have any material exposure to changes in the
fair market value as a result of changes in interest rates. In the first quarter of 2008, declines in interest rates did reduce our investment income. If overall interest rates had fallen by an additional 10% in the quarter ended March 31,
2008, our interest income on cash and cash equivalents would have declined approximately $135,000, assuming consistent investment levels.



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|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31,
2008, the end of the period covered by this report on Form 10-Q. This controls evaluation was done under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

Disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, such as this report on Form 10-Q, is recorded, processed, summarized and reported within the time
periods specified in the Securities Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed such that information is accumulated and communicated to our management,
including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Based upon the controls evaluation, our
CEO and CFO have concluded that as of March 31, 2008, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified by the Security Exchange Commission and to ensure that material information relating to us and our consolidated subsidiaries is made known to management, including the CEO and CFO.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the first quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting means a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles.

Inherent Limitations of Internal Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls over
financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

From time to time, we are
subject to various legal proceedings, claims and litigation arising in the ordinary course of business. Other than as discussed in Note 12 to the Condensed Consolidated Financial Statements, we do not believe we are party to any currently pending
legal proceedings the outcome of which may have a material adverse effect on our financial position, results of operations or cash flows.

There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our financial position, results of operations or cash flows.



|Item 1A. | Risk Factors
|-------- | ------------

Set forth below and elsewhere in
this Quarterly Report on Form 10-Q, and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this
Quarterly Report on Form 10-Q. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not
use historical trends to anticipate results or trends in future periods.



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Risks Related to Our Business and Industry

We compete in new and rapidly evolving markets and have a limited operating history, which make it difficult to predict our future operating results.

We were incorporated in May 2002 and shipped our first Steelhead appliance in May 2004. We have a limited operating history and offer a focused line of
products in an industry characterized by rapid technological change. It is very difficult to forecast our future operating results. You should consider and evaluate our prospects in light of the risks and uncertainty frequently encountered by early
stage companies in rapidly evolving markets characterized by rapid technological change, changing customer needs, evolving industry standards and frequent introductions of new products and services. As we encounter rapidly changing customer
requirements and increasing competitive pressures, we likely will be required to reposition our product and service offerings and introduce new products and services. We may not be successful in doing so in a timely and appropriately responsive
manner, or at all. Furthermore, because we compete in an early stage market, many of our target customers have not purchased products similar to ours and might not have a specific budget for the purchase of our products and services. All of these
factors make it difficult to predict our future operating results.

Our operating results may fluctuate significantly, which makes our future results
difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our quarterly and annual
operating results have varied significantly in the past and could vary significantly in the future, which makes it difficult for us to predict our future operating results. Our operating results may fluctuate due to a variety of factors, many of
which are outside of our control, including the changing U.S. and global economic environment, and any of which may cause our stock price to fluctuate. As a result, comparing our operating results on a period-to-period basis may not be meaningful.
You should not rely on our past results as an indication of our future performance. In addition, revenues in any quarter are largely dependent on customer contracts entered into during that quarter. Moreover, a significant portion of our quarterly
sales typically occurs during the last month of the quarter, which we believe reflects customer buying patterns of products similar to ours and other products in the technology industry generally. As a result, our quarterly operating results are
difficult to predict even in the near term and a delay in an anticipated sale past the end of a particular quarter may negatively impact our results of operations for that quarter, or in some cases, that year. A delay in the recognition of revenue,
even from just one account, may have a significant negative impact on our results of operations for a given period. If our revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may
provide to the market, as it did in the quarter ended March 31, 2008, the price of our common stock could decline substantially. Such a stock price decline could occur, and has occurred in the past, even when we have met our publicly stated
revenue and/or earnings guidance.

In addition to other risk factors listed in this Risk Factors section, factors that may
affect our operating results include, but are not limited to:



| |  |  | fluctuations in demand, including due to seasonality, for our products and services. For example, many companies in our industry experience adverse seasonal
fluctuations in customer spending patterns, particularly in the first and third quarters; we have experienced these seasonal fluctuations in the past and expect that this trend will continue in the future;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | fluctuations in sales cycles and prices for our products and services;
| | - |  | ----------------------------------------------------------------------



| |  |  | reductions in customers budgets for information technology purchases and delays in their purchasing cycles;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | general economic conditions in our domestic and international markets;
| | - |  | ----------------------------------------------------------------------



| |  |  | limited visibility into customer spending plans;
| | - |  | ------------------------------------------------



| |  |  | changing market conditions, including current and potential customer consolidation;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | customer concentration;
| | - |  | -----------------------



| |  |  | the timing of recognizing revenue in any given quarter as a result of software revenue recognition rules, including the extent to which sales transactions in a
given period are unrecognizable until a future period or, conversely, the satisfaction of revenue recognition rules in a given period resulting in the recognition of revenue from transactions initiated in prior periods;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the sale of our products in the timeframes we anticipate, including the number and size of orders, and the product mix within any such orders, in each quarter;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to develop, introduce and ship in a timely manner new products and product enhancements that meet customer requirements;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of product releases or upgrades by us or by our competitors;
| | - |  | -----------------------------------------------------------------------



| |  |  | any significant changes in the competitive dynamics of our markets, including new entrants or substantial discounting of products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to control costs, including our operating expenses and the costs of the components we purchase;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | volatility in our stock price, which may lead to higher stock compensation expenses pursuant to Statement of Financial Accounting Standards No. 123(R); and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unpredictable fluctuations in our effective tax rate due to disqualifying dispositions of stock from the employee stock purchase plan and stock options, changes in
the valuation of our deferred tax assets or liabilities, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles, or interpretations thereof.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We face intense competition that could reduce our revenue and adversely affect our financial results.

The market for our products is highly competitive and we expect competition to intensify in the future. Other companies may introduce new products in the
same markets we serve or intend to enter.

This competition could result in increased pricing pressure, reduced profit margins, increased
sales and marketing expenses and failure to increase, or the loss of, market share, any of which would likely seriously harm our business, operating results or financial condition.

Competitive products may in the future have better performance, more and/or better features, lower prices and broader acceptance than our products. Many
of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. Potential customers may prefer
to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. Currently, we face competition from a number of established companies, including Cisco Systems, Juniper Networks, Packeteer, Blue
Coat Systems, F5 Networks and Citrix Systems. We also face competition from a large number of smaller private companies and new market entrants.

We expect increased competition from other established and emerging companies if our market continues to develop and expand. For example, third parties currently selling our products could market products and services that compete with our
products and services. In addition, some of our competitors have made acquisitions or entered into partnerships or other strategic relationships with one another to offer a more comprehensive solution than they individually had offered. We expect
this trend to continue as companies attempt to strengthen or maintain their market positions in an evolving industry and as companies enter into partnerships or are acquired. Many of the companies driving this consolidation trend have significantly
greater financial, technical and other resources than we do and are better positioned to acquire and offer complementary products and technologies. The companies resulting from these possible consolidations may create more compelling product
offerings and be able to offer greater pricing flexibility, making it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or product functionality. Continued industry consolidation
may adversely impact customers perceptions of the viability of smaller and even medium-sized technology companies and consequently customers willingness to purchase from such companies. These pressures could materially adversely affect
our business, operating results and financial condition.

We also face competitive pressures from other sources. For example, Microsoft has
announced its intention to improve the performance of its software for remote office users. Our products are designed to improve the performance of many applications, including applications that are based on Microsoft protocols. Accordingly,
improvements to Microsoft application protocols may reduce the need for our products, adversely affecting our business, operating results and financial condition. Improvement in other application protocols or in the Transmission Control Protocol
(TCP), the underlying transport protocol for most WAN traffic, could have a similar effect. In addition, we market our products, in significant part, on the anticipated cost savings to be realized by



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organizations if they are able to avoid the purchase of costly IT infrastructure at remote sites by purchasing our products. To the extent other companies
are able to reduce the costs associated with purchasing and maintaining servers, storage or applications to be operated at remote sites, our business, operating results and financial condition could be adversely affected.

We rely heavily on indirect distribution partners to sell our products. Disruptions to, or our failure to effectively develop and manage, our distribution channels
and the processes and procedures that support them could harm our business.

Our future success is highly dependent upon establishing
and maintaining successful relationships with a variety of indirect distribution partners, including value-added resellers. A substantial majority of our revenue is derived through indirect channel sales and we expect indirect channel sales to
continue to account for a substantial majority of our total revenue. Accordingly, our revenue depends in large part on the effective performance of these channel partners, and the loss of or reduction in sales to our channel partners could
materially reduce our revenues. By relying on indirect channels, we may have little or no contact with the ultimate users of our products, thereby making it more difficult for us to establish brand awareness, ensure proper delivery and installation
of our products, service ongoing customer requirements and respond to evolving customer needs. In addition, we recognize a large portion of our revenue based on a sell-through model using information regarding the end user customers that is provided
by our channel partners. If those channel partners provide us with inaccurate or untimely information, the amount or timing of our revenues could be adversely impacted.

Recruiting and retaining qualified channel partners and training them in our technology and product offerings requires significant time and resources. In order to develop and expand our distribution channel, we must
continue to scale and improve our processes and procedures that support our distribution channel, including investment in systems and training, and those processes and procedures may become increasingly complex and difficult to manage. We have no
long-term contracts or minimum purchase commitments with any of our value-added resellers or other indirect distributors, and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours.
Our competitors may be effective in providing incentives to existing and potential channel partners to favor their products, to choose not to partner with us, or to prevent or reduce sales of our products. Our channel partners may choose not to
offer our products exclusively or at all. If we fail to maintain successful relationships with our channel partners, fail to develop new relationships with channel partners in new markets or expand the number of channel partners in existing markets,
fail to manage, train or motivate existing channel partners effectively or if these channel partners are not successful in their sales efforts, sales of our products may decrease and our business, operating results and financial condition would be
materially adversely affected.

Adverse economic conditions or reduced information technology spending may harm our business.

Our business depends on the overall demand for information technology, and in particular for Wide-area Data Services, and on the economic health and
general willingness to make capital commitments of our current and prospective customers. The market we serve is emerging and the purchase of our products involves material changes to established purchasing patterns and policies. The purchase of our
products is often discretionary and may involve a significant commitment of capital and other resources. In addition, our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses are, and will continue
to be, fixed in the short-term. Uncertainty about future economic conditions makes it difficult to forecast operating results and to make decisions about future investments. Weak economic conditions, or a reduction in information technology spending
even if economic conditions improve, would likely harm our business and operating results in a number of ways, including longer sales cycles, lower prices for our products and services and reduced unit sales.

We expect our gross margins to vary over time and our recent level of product gross margin may not be sustainable.

Our product gross margins vary from quarter to quarter and the recent level of gross margins may not be sustainable and may be adversely affected in the
future by numerous factors, including product or sales channel mix shifts, increased price competition, increases in material or labor costs, excess product component or obsolescence charges from our contract manufacturers, increased costs due to
changes in component pricing or charges incurred due to component holding periods if our forecasts do not accurately anticipate product demand, warranty related issues, or our introduction of new products or entry into new markets with different
pricing and cost structures.



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We rely on third parties to perform shipping and other logistics functions on our behalf. A failure or disruption
at a logistics partner would harm our business.

Currently, we use third-party logistics partners to perform storage, packaging,
shipment and handling for us. We intend to utilize additional logistics service providers in connection with any expansion of our international sales, including a new logistics partner that will begin shipping European orders in the second quarter.
Although the logistics services required by us may be readily available from a number of providers, it is time consuming and costly to qualify and implement these relationships. If one or more of our logistics partners suffers an interruption in its
business, or experiences delays, disruptions or quality control problems in its operations, or we choose to change or add additional logistics partners, our ability to ship products to our customers would be delayed and our business, operating
results and financial condition would be adversely affected.

We are susceptible to shortages or price fluctuations in our supply chain. Any shortages
or price fluctuations in components used in our products could delay shipment of our products.

Shortages in components that we use in
our products are possible and our ability to predict the availability of such components may be limited. Some of these components are available only from limited sources of supply. For example, our Steelhead appliances depend on network bypass cards
to provide a fail-to-wire capability. These bypass cards use high speed relays available only from a limited number of vendors. In addition, our ability to timely deliver products to our customers would be harmed if we needed to qualify replacements
for the systems, motherboards, chassis and storage adapters used in our appliances. We would be similarly impacted by shortages in the availability, or the complete unavailability, of the central processing units, bypass cards, disks, memory, fans
and power supplies that we use in our appliances. Specifically, the unavailability of any of these components would prevent us from shipping products because each of these components is necessary to the proper functioning of our appliances. In
addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantity requirements and delivery schedules.

Any growth in our business or the economy is likely to create greater pressures on us and our suppliers to project overall component demand accurately and to establish optimal component inventory levels. In addition, increased demand by
third parties for the components we use in our products may lead to decreased availability and higher prices for those components. We carry very little inventory of our product components, and we rely on our suppliers to deliver necessary components
to our contract manufacturers in a timely manner based on forecasts we provide. We rely on both purchase orders and long-term contracts with our suppliers. As a result, even if available, we may not be able to secure sufficient components at
reasonable prices or of acceptable quality to build products in a timely manner, which would seriously impact our ability to deliver products to our customers, and impact our revenue.

If we fail to predict accurately our manufacturing requirements, we could incur additional costs or experience manufacturing delays which would harm our business. We are dependent on contract manufacturers, and
changes to those relationships, expected or unexpected, may result in delays or disruptions that could harm our business.

We depend on
independent contract manufacturers to manufacture and assemble our products. We rely on purchase orders or long-term contracts with our contract manufacturers. Some of our contract manufacturers are not obligated to supply products to us for any
specific period, in any specific quantity or at any specific price. Our orders may represent a relatively small percentage of the overall orders received by our contract manufacturers from their customers. As a result, fulfilling our orders may not
be considered a priority by one or more of our contract manufacturers in the event the contract manufacturer is constrained in its ability to fulfill all of its customer obligations in a timely manner. We provide demand forecasts to our contract
manufacturers. If we overestimate our requirements, the contract manufacturers may assess charges or we may have liabilities for excess inventory, each of which could negatively affect our gross margins. Conversely, because lead times for required
materials and components vary significantly and depend on factors such as the specific supplier, contract terms and the demand for each component at a given time, if we underestimate our requirements, the contract manufacturers may have inadequate
materials and components required to produce our products, which could interrupt manufacturing of our products and result in delays in shipments and deferral or loss of revenue.

Although the contract manufacturing services required to manufacture and assemble our products may be readily available from a number of established
manufacturers, it is time consuming and costly to qualify and implement contract manufacturer relationships. Therefore, if one or more of our contract manufacturers suffers an interruption in its business, or experiences delays, disruptions or
quality control problems in its manufacturing operations, or we choose to change or add additional contract manufacturers, our ability to ship products to our customers would be delayed.



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If functionality similar to that offered by our products is incorporated into existing network infrastructure
products, organizations may decide against adding our products to their network, which would harm our business.

Other providers of
network infrastructure products are offering or announcing functionality aimed at addressing the problems addressed by our products. For example, Cisco Systems incorporates WAN optimization functionality into certain of its router blades. The
inclusion of, or the announcement of intent to include, functionality perceived to be similar to that offered by our products in products that are already generally accepted as necessary components of network architecture or in products that are
sold by more established vendors may have an adverse effect on our ability to market and sell our products. Furthermore, even if the functionality offered by other network infrastructure providers is more limited than our products, a significant
number of customers may elect to accept such limited functionality in lieu of adding additional appliances from an additional vendor. Many organizations have invested substantial personnel and financial resources to design and operate their networks
and have established deep relationships with other providers of network infrastructure products, which may make them reluctant to add new components to their networks, particularly from new vendors. In addition, an organizations existing
vendors or new vendors with a broad product offering may be able to offer concessions that we are not able to match because we currently offer a focused line of products and have fewer resources than many of our competitors. If organizations are
reluctant to add additional network infrastructure from new vendors or otherwise decide to work with their existing vendors, our business, operating results and financial condition will be adversely affected.

If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to
enforce our rights.

We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and
trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. Despite our efforts, the steps we have taken to protect our proprietary rights may not be adequate to preclude
misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain, particularly in countries outside of the United States. Further, with
respect to patent rights, we do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims, and even if patents are issued, they may be
contested, circumvented or invalidated over the course of our business. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages, and competitors may be able to develop similar or
superior technologies to our own now or in the future. Protecting against the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation has been necessary and may be
necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. For example, on November 13, 2007, we served Quantum
Corporation with a lawsuit, filed in the United States District Court, Northern District of California, alleging patent infringement. Such litigation could result in substantial costs and diversion of management resources, either of which could harm
our business, operating results and financial condition. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly,
despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Claims by others
that we infringe their proprietary technology could harm our business.

Our industry is characterized by the existence of a large number
of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In the ordinary course of our business, we are involved in disputes and licensing discussions with others regarding their claimed
proprietary rights and cannot assure you that we will always successfully defend ourselves against such claims. Third parties have claimed and may in the future claim that our products or technology infringe their proprietary rights. For example, on
October 9, 2007, Quantum Corporation served us with a lawsuit, filed in the United States District Court, Northern District of California, alleging patent infringement. This lawsuit, although dismissed by the Court on February 4, 2008, was
then consolidated on March 4, 2008 with our patent infringement lawsuit against Quantum Corporation in the United States District Court, Northern District of California. Also, on March 4, 2008, Quantum Corporation filed a lawsuit against
us in the United States District Court, Northern District of California, alleging patent infringement of an additional patent. We expect that infringement claims may increase as the number of products



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and competitors in our market increases and overlaps occur. In addition, as we have gained greater visibility and market exposure as a public company, we
face a higher risk of being the subject of intellectual property infringement claims. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, and could distract our
management from our business. Furthermore, we could be subject to a judgment or voluntarily enter into a settlement, either of which could require us to pay substantial damages. A judgment or settlement could also include an injunction or other
court order that could prevent us from offering our products. In addition, we might elect or be required to seek a license for the use of third-party intellectual property, which may not be available on commercially reasonable terms or at all, or if
available, the payments under such license may harm our operating results and financial condition. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be
successful. Any of these events pursuant to existing or future infringement claims could seriously harm our business, operating results and financial condition. Third parties may also assert infringement claims against our customers and channel
partners. Any of these claims would require us to initiate or defend potentially protracted and costly litigation on their behalf, regardless of the merits of these claims, because we generally indemnify our customers and channel partners from
claims of infringement of proprietary rights of third parties. If any of these claims succeed, or if we voluntarily enter into a settlement, we may be forced to pay damages on behalf of our customers or channel partners, which could have a material
adverse effect on our business, operating results and financial condition.

Our sales cycles can be long and unpredictable, and our sales efforts
require considerable time and expense. As a result, our revenue is difficult to predict and may vary substantially from quarter to quarter.

The timing of our revenue is difficult to predict. Our sales efforts involve educating our customers about the use and benefit of our products, including their technical capabilities and potential cost savings to an organization. Customers
typically undertake a significant evaluation process that has in the past resulted in a lengthy sales cycle, in some cases over twelve months. Also, as our distribution strategy has evolved into a channel model, utilizing value-added resellers,
distributors, systems integrators and service providers, the level of variability in the length of sales cycle across transactions may increase and make it more difficult to predict the timing of many of our sales transactions. We spend substantial
time, effort and money in our sales efforts without any assurance that our efforts will produce any sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and
other delays. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, revenue may be harmed and we may miss our stated guidance for that period.

If we lose key personnel or are unable to attract and retain personnel on a cost-effective basis, our business would be harmed.

Our success is substantially dependent upon the performance of our senior management and key technical and sales personnel. Our management and employees
can terminate their employment at any time, and the loss of the services of one or more of our executive officers or other key employees could harm our business. Our success also is substantially dependent upon our ability to attract additional
personnel for all areas of our organization, particularly in our sales, research and development and customer service departments. Competition for qualified personnel is intense, and we may not be successful in attracting and retaining such
personnel on a timely basis, on competitive terms, or at all. Additionally, fluctuations in the price of our stock could affect our ability to attract and retain key personnel. If we are unable to attract and retain the necessary technical, sales
and other personnel on a cost-effective basis, our business, operating results and financial condition would be adversely affected.

We may not generate
positive returns on our research and development investments.

Developing our products is expensive, and the investment in product
development may involve a long payback cycle or may not generate additional revenue at all. In the three months ended March 31, 2008, our research and development expenses were $13.6 million, or approximately 19% of our total revenue. Our
future plans include significant investments in research and development and related product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our
competitive position. These investments may take several years to generate positive returns, if ever.



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Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our
failure to offer high quality support and services would harm our operating results and reputation.

Once our products are deployed
within our customers networks, our customers depend on our support organization to resolve any issues relating to our products. A high level of support is critical for the successful marketing and sale of our products. If we or our channel
partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, and provide effective ongoing support, it would adversely affect our ability to sell our products to
existing customers and could harm our reputation with potential customers. In addition, as we expand our operations internationally, our support organization will face additional challenges including those associated with delivering support,
training and documentation in languages other than English. As a result, our failure to maintain high quality support and services would harm our operating results and reputation.

If we fail to manage future growth effectively, our business would be harmed.

We have expanded our
operations significantly since inception and anticipate that further significant expansion will be required. This future growth, if it occurs, will place significant demands on our management, infrastructure and other resources. To manage any future
growth, we will need to hire, integrate and retain highly skilled and motivated employees. We will also need to continue to improve our financial and management controls, reporting systems and procedures. We have an enterprise resource planning
software system that supports our finance, sales and inventory management processes. If we were to encounter delays or difficulties as a result of this system, including loss of data and decreases in productivity, our ability to properly run our
business could be adversely impacted. If we do not effectively manage our growth, our business would be harmed.

If we do not successfully anticipate
market needs and develop products and product enhancements that meet those needs, or if those products do not gain market acceptance, our business and operating results will be harmed.

We may not be able to anticipate future market needs or be able to develop new products or product enhancements to meet such needs, either on a timely
basis or at all. For example, our failure to address additional application-specific protocols, particularly if our competitors are able to provide such functionality, could harm our business. In addition, our inability to diversify beyond our
current product offerings could adversely affect our business. Any new products or product enhancements that we introduce may not achieve any significant degree of market acceptance or be accepted into our sales channel by our channel partners,
which would adversely affect our business and operating results.

Organizations are increasingly concerned with the security of their data, and to the
extent they elect to encrypt data being transmitted from the point of the end-user in a format that were not able to decrypt, rather than only across the WAN, our products will become less effective.

Our products are designed to remove the redundancy associated with repeated data requests over a WAN, either through a private network or a virtual
private network (VPN). The ability of our products to reduce such redundancy depends on our products ability to recognize the data being requested. Our products currently detect and decrypt some forms of encrypted data. Since most
organizations currently encrypt most of their data transmissions only between sites and not on the LAN, the data is not encrypted when it passes through our products. For those organizations that elect to encrypt their data transmissions from the
end-user to the server in a format that were not able to decrypt, our products will offer little performance improvement unless we are successful in incorporating additional functionality into our products that address those encrypted
transmissions. Our failure to provide such additional functionality could limit the growth of our business and harm our operating results.

If our
products do not interoperate with our customers infrastructure, installations could be delayed or cancelled, which would harm our business.

Our products must interoperate with our customers existing infrastructure, which often have different specifications, utilize multiple protocol standards, deploy products from multiple vendors, and contain
multiple generations of products that have been added over time. If we find errors in the existing software or defects in the hardware used in our customers infrastructure or problematic network configurations or settings, as we have in the
past, we may have to modify our software or hardware so that our products will interoperate with our



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customers infrastructure. Our products may be unable to provide significant performance improvements for applications deployed in our customers
infrastructure. These issues could cause longer installation times for our products and could cause order cancellations, any of which would adversely affect our business, operating results and financial condition. In addition, government and other
customers may require our products to comply with certain security or other certifications and standards. If our products are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve
compliance with these certifications and standards, we may be disqualified from selling our products to such customers, or at a competitive disadvantage, which would harm our business, operating results and financial condition.

Our products are highly technical and may contain undetected software or hardware errors, which could cause harm to our reputation and our business.

Our products, including software product upgrades and releases, are highly technical and complex and, when deployed, are critical to the operation of
many networks. Our products have contained and may contain undetected errors, defects or security vulnerabilities. Some errors in our products may only be discovered after a product has been installed and used by customers. Some of these errors may
be attributable to third-party technologies incorporated into our products, which makes us dependant upon the cooperation and expertise of such third parties for the diagnosis and correction of such errors. Any errors, defects or security
vulnerabilities discovered in our products after commercial release could result in loss of revenue or delay in revenue recognition, loss of customers and increased service and warranty cost, any of which could harm our reputation, business,
operating results and financial condition. Any such errors, defects or security vulnerabilities could also adversely affect the markets perception of our products and business. In addition, we could face claims for product liability, tort or
breach of warranty, including claims relating to changes to our products made by our channel partners. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a
lawsuit, regardless of its merit, is costly and may divert managements attention and harm the markets perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is
unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted.

We may engage in future
acquisitions that could disrupt our business and cause dilution to our stockholders.

In the future we may acquire other businesses,
products or technologies. We have not made any acquisitions to date. Our ability as an organization to make acquisitions is unproven. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on
favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, or the acquisition may be viewed negatively by customers, financial markets or investors. In addition, with
respect to any acquisitions that we make, we may encounter difficulties in integrating personnel and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Acquisitions may disrupt our ongoing
operations, divert management from day-to-day responsibilities and increase our expenses. Future acquisitions may reduce our cash available for operations and other uses and could result in an increase in amortization expense related to identifiable
assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt.

Our international sales and operations subject us to
additional risks that may harm our operating results.

In the year ended December 31, 2007, we derived approximately 37% of our
revenue from customers outside the United States; in the three months ended March 31, 2008, this number was 45%. We have personnel in numerous countries worldwide. We expect to continue to add personnel in additional countries. Our
international operations subject us to a variety of risks, including:



| |  |  | the difficulty and cost of managing and staffing international offices and the increased travel, infrastructure, legal and other compliance costs associated with
multiple international locations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | tariffs and trade barriers and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased exposure to foreign currency exchange rate risk; and
| | - |  | --------------------------------------------------------------



| |  |  | reduced protection for intellectual property rights in some countries.
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International customers may also require that we localize our products. The product development costs for
localizing the user interface of our products, both graphical and textual, could be a material expense to us if the software requires extensive modifications. To date, such changes have not been extensive and the costs have not been material.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively
manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations, reduce our international sales and harm our business, operating results and
financial condition.

Our use of open source and third-party software could impose limitations on our ability to commercialize our products.

We incorporate open source software into our products. Although we monitor our use of open source closely, the terms of many open
source licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such
event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis,
any of which could adversely affect our business, operating results and financial condition.

We also incorporate certain third-party
technologies, including software programs, into our products and may need to utilize additional third-party technologies in the future. However, licenses to relevant third-party technology may not continue to be available to us on commercially
reasonable terms, or at all. Therefore, we could face delays in product releases until equivalent technology can be identified, licensed or developed, and integrated into our current products. These delays, if they occur, could materially adversely
affect our business, operating results and financial condition. We currently use third-party software programs in our Steelhead appliances, our Interceptor appliances, our Central Management Console appliances and our recently available Steelhead
Mobile software client and controller. For example, in our Steelhead appliances, we use third-party software to configure a storage adapter for specific redundant disk setups as well as to initialize and diagnose hardware on certain models, and in
our Central Management Console and Steelhead Mobile Controller appliances we use third-party software to help manage statistics and reporting. Each of these software programs is currently available from only one vendor. As a result, any disruption
in our access to these software programs could result in significant delays in our product releases and could require substantial effort to locate or develop a replacement program. If we decide in the future to incorporate into our products any
other software program licensed from a third party, and the use of such software program is necessary for the proper operation of our appliances, then our loss of any such license would similarly adversely affect our ability to release our products
in a timely fashion.

We are subject to various regulations that could subject us to liability or impair our ability to sell our products.

Our products are subject to a variety of government regulations, including export controls, import controls, environmental laws and
required certifications. In particular, our products are subject to U.S. export controls and may be exported outside the U.S. only with the required level of export license or through an export license exception, because we incorporate encryption
technology into our products. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our products or could limit our customers ability to implement
our products in those countries. Changes in our products or changes in regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products
throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in regulations, shift in approach to the enforcement or scope of existing regulations, or change in the
countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. We must
comply with various and increasing environmental regulations, both domestic and international, regarding the manufacturing and disposal of our products. For example, we must comply with Waste Electrical and Electronic Equipment Directive laws, which
are being adopted by certain European Economic Area countries on a country-by-country basis. Failure to comply with these and similar laws on a timely basis, or at all, could have a material adverse effect on our business, operating results and
financial condition. This would also be true if we fail to comply, either on a timely basis or at all, with any U.S. environmental laws regarding the manufacturing or disposal of our products. Any decreased use of our products or limitation on our
ability to export or sell our products would harm our business, operating results and financial condition.



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We incur significant costs as a result of operating as a public company, and our management devotes substantial time
to new compliance initiatives.

We incur significant legal, accounting and other expenses as a public company, including costs resulting
from regulations regarding corporate governance practices and costs relating to compliance with Section 404 of the Sarbanes-Oxley Act. For example, the listing requirements of the Nasdaq Stock Markets Global Select Market require that we
satisfy certain corporate governance requirements relating to independent directors, audit committees, distribution of annual and interim reports, stockholder meetings, stockholder approvals, solicitation of proxies, conflicts of interest,
stockholder voting rights and codes of conduct. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and
will make some activities more time-consuming and costly. For example, these rules and regulations could make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as executive
officers.

While we believe that we currently have adequate internal control over financial reporting, we are exposed to risks from legislation
requiring companies to evaluate those internal controls.

The Sarbanes-Oxley Act requires that we test our internal control over
financial reporting and disclosure controls and procedures. In particular, for the year ended December 31, 2007, we performed system and process evaluation and testing of our internal control over financial reporting to allow management and our
independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 will require that we incur
substantial expense and expend significant management time on compliance-related issues. Moreover, if we are not able to comply with the requirements of Section 404 in the future, or if we or our independent registered public accounting firm
identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock may decline and we could be subject to sanctions or investigations by the Nasdaq Stock Markets
Global Select Market, the SEC or other regulatory authorities, which would require significant additional financial and management resources.

We are
required to expense equity compensation given to our employees, which has reduced our reported earnings, will harm our operating results in future periods and may reduce our stock price and our ability to effectively utilize equity compensation to
attract and retain employees.

We historically have used stock options and an employee stock purchase plan as a significant component of
our employee compensation program in order to align employees interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages. The Financial Accounting Standards Board has adopted
changes that require companies to record a charge to earnings for employee stock option grants and other equity incentives. We adopted this standard effective January 1, 2006. By causing us to record significantly increased compensation costs,
such accounting changes have reduced, and will continue to reduce, our reported earnings, will harm our operating results in future periods, and may require us to reduce the availability and amount of equity incentives provided to employees, which
could make it more difficult for us to attract, retain and motivate key personnel. Moreover, if securities analysts, institutional investors and other investors adopt financial models that include stock option expense in their primary analysis of
our financial results, our stock price could decline as a result of reliance on these models with higher expense calculations.

If we need additional
capital in the future, it may not be available to us on favorable terms, or at all.

We have historically relied on outside financing
and cash flow from operations to fund our operations, capital expenditures and expansion. We may require additional capital from equity or debt financing in the future to fund our operations or respond to competitive pressures or strategic
opportunities. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility. If we raise additional funds through further
issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have
rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to
respond to business challenges could be significantly limited.



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Our business is subject to the risks of earthquakes, fire, floods, pandemics and other natural catastrophic events,
and to interruption by manmade problems such as computer viruses or terrorism.

Our main operations are located in the San Francisco Bay
Area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or a flood, could harm our business, operating results and financial condition. In addition, our servers are vulnerable to computer viruses,
break-ins and similar disruptions from unauthorized tampering with our computer systems. In addition, acts of terrorism or war could cause disruptions in our or our customers business or the economy as a whole. To the extent that such
disruptions result in delays or cancellations of customer orders or the deployment of our products, our business, operating results and financial condition would be adversely affected.

Risks Related to Ownership of Our Common Stock

The trading price of our common stock has
been volatile and is likely to be volatile in the future.

The trading prices of the securities of technology companies have been highly
volatile. Further, our common stock has a limited trading history. Since our initial public offering in September 2006 through April 24, 2008, our stock price has fluctuated from a low of $10.84 to a high of $52.81. Factors that could affect
the trading price of our common stock include, but are not limited to:



| |  |  | variations in our operating results;
| | - |  | ------------------------------------



| |  |  | announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the gain or loss of significant customers;
| | - |  | ------------------------------------------



| |  |  | recruitment or departure of key personnel;
| | - |  | ------------------------------------------



| |  |  | changes in the estimates of our operating results, either by us or by any securities analysts who follow our common stock, or changes in recommendations by any
securities analysts who follow our common stock;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | significant sales, or announcement of significant sales, of our common stock by us or our stockholders, including our directors and executive officers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | announcements by or about us regarding events or news adverse to our business;
| | - |  | ------------------------------------------------------------------------------



| |  |  | market conditions in our industry, the industries of our customers and the economy as a whole;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | adoption or modification of regulations, policies, procedures or programs applicable to our business; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | an announced acquisition of a competitor or us.
| | - |  | -----------------------------------------------

If the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results
or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry or the stock market generally even if these events do not directly affect us. Each of these factors,
among others, could cause our stock price to decline. Some companies that have had volatile market prices for their securities have had securities class actions filed against them. If a suit were filed against us, regardless of its merits or
outcome, it could result in substantial costs and divert managements attention and resources.

If securities or industry analysts do not publish
research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The
trading market for our common stock will continue to depend in part on the research and reports that securities or industry analysts publish about us or our business. If we do not continue to maintain adequate research coverage or if one or more of
the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on
us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.



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Insiders have substantial control over us and will be able to influence corporate matters.

As of March 31, 2008, our directors and executive officers and their affiliates beneficially owned, in the aggregate, approximately 21.1% of our
outstanding common stock. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as
a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading
price of our common stock.

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may
discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control
would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and amended and restated bylaws contain provisions that may discourage, delay or prevent a change in our management or control over us that
stockholders may consider favorable.



|Item 6. | EXHIBITS
|------- | --------



|            |  |                                                                                                                                                                               
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                   
|3.2         |  | Restated Certificate of Incorporation. (1)                                                                                                                                    
|            | 
|3.4         |  | Amended and Restated Bylaws. (1)                                                                                                                                              
|            | 
|4.2         |  | Form of Common Stock Certificate. (1)                                                                                                                                         
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           
|            | 
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

The certification attached as Exhibit 32 that accompanies this Quarterly Report on Form 10-Q is
not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Riverbed Technology, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or
after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.



|(1) | Incorporated by reference to exhibit of same number filed with the Registrants Registration Statement on Form S-1 (No. 333-133437) on April 20, 2006, as amended.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



40



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##### Table of Contents

SIGNATURES

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

Dated: April 29, 2008



RIVERBED TECHNOLOGY, INC.By:

/s/ Jerry M. KennellyJerry M. Kennelly President and Chief Executive
Officer


Dated: April 29, 2008



RIVERBED TECHNOLOGY, INC.By:

/s/ Randy S. GottfriedRandy S. Gottfried Chief Financial Officer




41



---

##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                               
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                   
|            | 
|3.2         |  | Restated Certificate of Incorporation. (1)                                                                                                                                    
|            | 
|3.4         |  | Amended and Restated Bylaws. (1)                                                                                                                                              
|            | 
|4.2         |  | Form of Common Stock Certificate. (1)                                                                                                                                         
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           
|            | 
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

The certification attached as Exhibit 32 that accompanies this Quarterly Report on Form 10-Q is
not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Riverbed Technology, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or
after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.



|(1) | Incorporated by reference to exhibit of same number filed with the Registrants Registration Statement on Form S-1 (No. 333-133437) on April 20, 2006, as amended.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



42