Riverbed Technology (RVBD)

3. Income Taxes

The Company accounts for federal and state income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability method specified by SFAS No. 109, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities, as measured by the enacted tax rates assumed to be in effect when these differences reverse. The Company records a valuation allowance to reduce its deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. At September 30, 2008 and December 31, 2007 the deferred tax assets were fully reserved.

In July 2006 the Financial Accounting Standards Board (“FASB”) issued Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109. FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions taken or expected to be taken in a company’s income tax return. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. The Company is required to adopt FIN 48 on January 1, 2009. The Company does not expect that the adoption of FIN 48 will have a material impact the Company’s financial position or results of operations.

Since inception the Company has incurred operating losses and, accordingly, has not recorded a provision for income taxes for any of the periods presented.

3. Income Taxes

The Company accounts for federal and state income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability method specified by SFAS No. 109, a deferred tax asset or liability is determined based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates assumed to be in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

As of December 31, 2007, the Company has federal and state net operating loss carryforwards of approximately $43,303,000 and $32,864,000 respectively, which may be used to offset future taxable income. The Company also has federal and state research and development credits of approximately $799,000 and $341,000, respectively to offset future tax liability. The NOL and tax credit carryforwards will expire at various dates through 2027, and are subject to review and possible adjustment by the Internal Revenue Service (IRS). The Internal Revenue Code contains provisions that may limit the NOL and tax credit carryforwards available to be used in any given year in the event of certain changes in the ownership interests of significant stockholders.

At December 31, 2007 and 2006, the Company has recorded a full valuation allowance against its deferred tax assets due to the uncertainty surrounding the realizability of this asset. The components of the Company’s net deferred tax assets at December 31, 2007 and 2006 are as follows:

The increase in the valuation allowance in 2007 relates primarily to the net operating loss incurred by the Company.