Riverbed Technology (RVBD)

Cost of Revenue and Gross Margin

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

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Quarter Ended March 31, 2009 Compared to the Quarter Ended March 31, 2008: The cost of product revenue increased slightly primarily due to higher write-down of inventory and higher manufacturing overhead from higher personnel costs of $0.5 million, offset by lower product costs and lower cost of warranty. Cost of product revenue in the three months ended March 31, 2009 includes a $2.3 million write-down for inventory on hand in excess of forecasted demand. In the same period of the prior year, inventory obsolescence costs were $0.5 million. The increase in the provision for inventory is related to the write down of legacy inventory as we transition to the 50 series Steelhead appliances. Product costs decreased by $1.6 million, or 2.6% of revenue, in the current quarter due to improved margins on the 50 series products. Warranty costs were $0.5 million lower in Q1 2009 as compared to Q1 2008 primarily due to a reduction in estimated product returns in Q1 2009. Cost of product revenue in Q1 2009 includes $0.3 million in amortization of intangibles recognized in the Mazu acquisition. 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 120 employees as of March 31, 2009 compared to 83 employees as of March 31, 2008.

Gross margins increased to 74% in the three months ended March 31, 2009 from 73% in the three months ended March 31, 2008. Gross margin for product remains flat as higher margins on product revenue as a result of lower unit product costs from a change in product mix towards the 50 series models and a one-time benefit on warranty costs due to a change in estimate were offset by higher inventory write-downs and intangibles amortization. Gross margin for product in the three months ended March 31, 2009 was also negatively affected by approximately 3% due to the inventory obsolescence costs. Gross margin for support and services increased as a result of revenues increasing at a higher rate than support and services costs.

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. 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 consists of personnel costs of technical support and professional services personnel, spare parts and logistics 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.

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, expenses for inventory obsolescence and warranty obligations, cost of support and service personnel, and the mix of distribution channels through which our products are sold.

2008 Compared to 2007:    The increase in cost of product revenue was due primarily to increased unit volume associated with higher revenue. Cost of product revenue in the year ended December 31, 2008 also includes $6.0 million of a write-down of inventory on hand in excess of

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forecasted demand compared to inventory obsolescence costs in the year ended December 30, 2007 of $1.1 million. The increase in the write-down of inventory is related to the write down of legacy inventory as we transition to the 50 series Steelhead appliances. 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 110 employees as of December 31, 2008 compared to 69 employees as of December 31, 2007.

Gross margins increased to 73% in the year ended December 31, 2008 from 72% in the year ended December 31, 2007 primarily due to higher margins on product revenue primarily as a result of lower unit product costs as well as a favorable product mix partially offset by the write-down of inventory. Gross margins for support and services increased to 65% as a result of revenues increasing at a higher rate than support and services costs. This increase was slightly offset by a decrease in support margins of approximately 2% as a result of increased stock-based compensation, which was $4.5 million in the year ended December 31, 2008, compared to $2.6 million in the year ended December 31, 2007.

2007 Compared to 2006:    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 69 employees as of December 31, 2007 compared to 33 employees as of December 31, 2006.

Gross margins increased to 72% in the year ended December 31, 2007 from 67% in the year ended December 31, 2006 primarily due to higher margins on product revenue as a result of lower unit product costs and decreases in inventory valuation and warranty provisions as a percentage of product revenue.

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. 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 consists of personnel costs of technical support and professional services personnel, spare parts and logistics 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.

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, expenses for inventory obsolescence and warranty obligations, cost of support and service
personnel, and the mix of distribution channels through which our products are sold.

2008 Compared to 2007:    The increase in cost of product revenue was due
primarily to increased unit volume associated with higher revenue. Cost of product revenue in the year ended December 31, 2008 also includes $6.0 million of a write-down of inventory on hand in excess of

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forecasted demand compared to inventory obsolescence costs in the year ended December 30, 2007 of $1.1 million. The increase in the write-down of inventory is
related to the write down of legacy inventory as we transition to the 50 series Steelhead appliances. 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 110 employees as of December 31, 2008 compared to 69 employees as of December 31, 2007.

SIZE="2">Gross margins increased to 73% in the year ended December 31, 2008 from 72% in the year ended December 31, 2007 primarily due to higher margins on product revenue primarily as a result of lower unit product costs as well as a
favorable product mix partially offset by the write-down of inventory. Gross margins for support and services increased to 65% as a result of revenues increasing at a higher rate than support and services costs. This increase was slightly offset by
a decrease in support margins of approximately 2% as a result of increased stock-based compensation, which was $4.5 million in the year ended December 31, 2008, compared to $2.6 million in the year ended December 31, 2007.

2007 Compared to 2006:    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 69 employees as of
December 31, 2007 compared to 33 employees as of December 31, 2006.

Gross margins increased to 72% in the year ended December 31,
2007 from 67% in the year ended December 31, 2006 primarily due to higher margins on product revenue as a result of lower unit product costs and decreases in inventory valuation and warranty provisions as a percentage of product revenue.

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.

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.

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 personnel. Cost of ratable product and related support and services consists of hardware, support and service costs related to transactions for which the revenue is recognized ratably.

2007 Compared to 2006:    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 69 employees as of December 31, 2007 compared to 33 employees as of December 31, 2006.

Gross margins increased to 72% in the year ended December 31, 2007 from 67% in the year ended December 31, 2006 primarily due to higher margins on product revenue as a result of lower unit product costs and decreases in inventory valuation and warranty provisions as a percentage of product revenue.

2006 Compared to 2005:    The increase in cost of product revenue was due primarily to increased hardware costs associated with increased shipments of our products to customers. 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 headcount was 33 employees as of December 31, 2006 compared to 15 employees as of December 31, 2005. Cost of ratable product and related support and services increased due to more ratable reseller arrangements being amortized in the first half of 2006 partially offset by a decrease in the third quarter of 2006 as reseller arrangements entered into in the third quarter of 2005 were no longer recognized ratably and the one year amortization period for these contracts was complete.

Gross margins increased to 67% in the year ended December 31, 2006 from 63% in the year ended December 31, 2005 primarily due to increased margins on support and services as a result of growing our support installed base and support renewals at a greater rate than support personnel costs.

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Cost of Revenue and Gross Margin