Riverbed Technology (RVBD)

Provision for Income Taxes

The provision for income taxes for the three months ended September 30, 2008 and 2007 was $5.6 million and $2.0 million, respectively, and for the nine months ended September 30, 2008 and 2007 was $8.3 million and $2.9 million, respectively. Our income tax provision consists of federal, foreign, and state income taxes. Our effective tax rate was (81.4%) and 41.3% for the three months ended September 30, 2008 and 2007, respectively, and (193.0%) and 22.3% for the nine months ended September 30, 2008 and 2007, respectively.

Our effective tax rate differs from the federal statutory rate due to state taxes, significant permanent differences and the valuation allowance on our net deferred tax assets. Significant permanent differences arise from the portion of stock-based compensation expense that is not expected to generate a tax deduction, such as stock compensation expense on grants to foreign employees, our purchase plan and incentive stock options, offset by the actual tax benefits in the current periods from disqualifying dispositions of those shares. The valuation allowance on our net deferred tax assets relate to temporary difference between our taxable income in our financial statements and our expected taxable income on our tax returns. Significant temporary differences such as stock-based compensation related to unexercised non-qualified options and the litigation settlement generally do not receive a benefit in our tax provision due to the valuation allowance.

The entire tax effect of the litigation settlement, and the associated valuation allowance, was recorded in the tax provision for the three months ended September 30, 2008 and not included in our estimated annual effective tax rate. As a result, we recorded a significant current tax provision for both the three and nine months ended September 30, 2008 that was not offset by deferred tax benefits due to the valuation allowance. When compared to our pre-tax loss for the same period, this resulted in a negative effective tax rate.

Our tax provision in the three and nine months ended September 2007 benefited from federal and state net operating loss carryforwards and tax credit carryforwards.

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, changes in actual results versus our estimates, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In October of 2008, the federal research and development tax credit was reinstated. The impact of the credit on our effective tax rate will be reflected in the quarter ending December 31, 2008.

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 and expectations of future taxable income. 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.

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Because of the uncertainty of the realization of the deferred tax assets, we have recorded a valuation allowance against our deferred tax assets except for those items 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 expected reversal of these deferred tax assets is included in our estimated annual effective tax rate. Realization of our remaining deferred tax assets will be dependent primarily upon future U.S. taxable income.

In the future, we may conclude that it is more likely than not that our deferred tax assets will be realized based on expectations of taxable income and other factors. This would result in a reduction of the valuation allowance and a decrease to income tax expense for the period such determination is made.

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 and six months ended June 30, 2008 was $2.3 million and $2.8 million, respectively, 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.

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 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.

We review the amount of our valuation allowance on a quarterly basis. A release of all or part of our valuation allowance in a future quarter could materially affect our statement of operations and financial position in the period of such release.

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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.

Provision for Income Taxes

Prior to the first quarter of 2007, we had incurred operating losses and, accordingly, had not recorded a provision for income taxes for any of the periods presented other than foreign provisions for income tax. For the year ended December 31, 2007, we generated operating profits. After applying our available net operating loss and tax credit carryforwards, our tax provision accrued for the year ended December 31, 2007 consists of federal, foreign and state provisions for income tax.

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Since inception, we recorded a valuation allowance against our net deferred tax assets due to operating losses incurred. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets were fully offset by a valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2013 and 2026 while the foreign net operating losses do not expire. Utilization of the federal and state net operating losses and credit carryforwards is subject to annual limitation that are applicable when we experienced an “ownership change”, by a change in significant stockholder allocation or equity structure.

If our recent trend of profitability continues, we may determine that there is sufficient positive evidence to support a reversal of, or decrease in, the valuation allowance. If we were to reverse all or some part of our valuation allowance and recognize all or some part of our deferred tax assets, our financial statements in the period of reversal would likely reflect an increase in assets on our balance sheet and a corresponding tax benefit to our statement of operations in the amount of the reversal.

Our effective tax rate for 2007 has fluctuated on a quarterly basis. 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. In addition, we are subject to potential income tax audits on open tax years by any taxing jurisdiction for which we operate in. The taxing authorities of the most significant jurisdictions are the United States Internal Revenue Service, California Franchise Tax Board and HM Revenue and Customs in the United Kingdom. Since all filed federal and California franchise tax returns have shown operating losses, we do not anticipate any material adjustments to the provisions relating to these returns. The statute of limitations for federal, state, and UK tax purposes are generally three, four, and three years respectively; however, we continue to carryover tax attributes prior to these periods for federal and state purposes, which would still be open for examination by the respective tax authorities. All years since our inception are open to tax examinations.

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Provision for Income Taxes

Provision for Income Taxes

Prior to the first quarter of 2007, we had incurred operating losses and, accordingly, had not recorded a provision for income taxes for any of the periods presented other than foreign provisions for income tax. For the three and nine months ended September 30, 2007, we generated operating profits. After applying our available net operating loss and tax credit carryforwards and considering our remaining valuation allowance, our tax provision accrued for the three and nine months ended September 30, 2007 consists of federal, foreign and state provisions for income tax.

As of December 31, 2006, we recorded a valuation allowance against our net deferred tax assets due to operating losses incurred since inception. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets were fully offset by a valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2013 and 2026. Utilization of these net operating losses and credit carryforwards may be subject to an annual limitation due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable if we experience an “ownership change” that may occur, for example, by a change in significant shareholder allocation or equity structure.

For the three and nine months ended September 30, 2007, our tax provision includes a deferred tax benefit for the projected reduction in the valuation allowance as a result of forecasted taxable income and corresponding utilization of net operation losses and 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 future taxable income, and are consistent with our forecasts used to manage our business. We intend to maintain the remaining valuation allowance until sufficient further positive evidence exists to support a reversal of, or decrease, in the valuation allowance.

If our recent trend of profitability continues, we may determine that there is sufficient positive evidence to support a reversal of, or decrease in, the valuation allowance. If we were to reverse all or some part of our valuation allowance and recognize all or some part of our deferred tax assets, our financial statements in the period of reversal would reflect an increase in assets on our balance sheet and a corresponding tax benefit to our statement of operations in the amount of the reversal.

Our effective tax rate for 2007 has fluctuated on a quarterly basis and could continue to fluctuate in the fourth quarter of 2007. 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, changes in actual results versus our estimates, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are subject to potential income tax audits on open tax years by any taxing jurisdiction for which we operate in. The taxing authorities of the most significant jurisdictions are the United States Internal Revenue Service and California Franchise Tax Board. Since all filed federal and California franchise tax returns have shown operating losses, we do not anticipate any material adjustments to the provisions relating to these returns. Currently, in accordance with the general rules of the respective tax jurisdictions, the tax years open for potential examination are 2004-2006 for federal and 2003-2006 for California.

Provision for Income Taxes

Prior to the first quarter of 2007, we had incurred operating losses and, accordingly, had not recorded a provision for income taxes for any of the periods presented other than foreign provisions for income tax. For the three and six months ended June 30, 2007, we generated operating profits. After applying our available net operating loss and tax credit carryforwards and considering our remaining valuation allowance, our tax provision accrued for the three and six months ended June 30, 2007 consists of federal, foreign and state provisions for income tax.

As of December 31, 2006, we recorded a valuation allowance against our net deferred tax assets due to operating losses incurred since inception. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets were fully offset by a valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2013 and 2026. Utilization of these net operating losses and credit carryforwards may be subject to an annual limitation due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable if we experience an “ownership change” that may occur, for example, by a change in significant shareholder allocation or equity structure.

For the three and six months ended June 30, 2007, our tax provision includes a deferred tax benefit for the projected reduction in the valuation allowance as a result of forecasted taxable income and corresponding utilization of net operation losses and 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 future taxable income, and are consistent with our forecasts used to manage our business. We intend to maintain the remaining valuation allowance until sufficient further positive evidence exists to support a reversal of, or decrease, in the valuation allowance.

If our recent trend of profitability continues, we may determine that there is sufficient positive evidence to support a reversal of, or decrease in, the valuation allowance. If we were to reverse all or some part of our valuation allowance and recognize all or some part of our deferred tax assets, our financial statements in the period of reversal would reflect an increase in assets on our balance sheet and a corresponding tax benefit to our statement of operations in the amount of the reversal.

We expect our effective tax rate for 2007 to fluctuate significantly on a quarterly basis and could 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, changes in actual results versus our estimates, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are subject to potential income tax audits on open tax years by any taxing jurisdiction for which we operate in. The taxing authorities of the most significant jurisdictions are the United States Internal Revenue Service and California Franchise Tax Board. Since all filed federal and California franchise tax returns have shown operating losses, we do not anticipate any material adjustments to the provisions relating to these returns. Currently, in accordance to the general rules of the respective tax jurisdictions, the tax years open for potential examination are 2003-2005 for federal and 2002-2005 for California.

Provision for Income Taxes

Prior to the first quarter of 2007, we had incurred operating losses and, accordingly, had not recorded a provision for income taxes for any of the periods presented other than foreign provisions for income tax. For the three months ended March 31, 2007 we generated operating profits. After applying our available net operating loss and tax credit carryforwards, our tax provision accrued at March 31, 2007 relates primarily to foreign and state provisions for income tax.

As of December 31, 2006, we recorded a valuation allowance against our net deferred tax assets due to operating losses incurred since inception. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets were fully offset by a valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2013 and 2026. Utilization of these net operating losses and credit carryforwards may be subject to an annual limitation due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable if we experience an “ownership change” that may occur, for example, by a change in significant shareholder allocation or equity structure.

As of March 31, 2007, our tax provision includes a deferred tax benefit for the projected reduction in the valuation allowance as a result of forecasted taxable income and corresponding utilization of net operation losses and 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 future taxable income, and are consistent with our forecasts used to manage our business. We intend to maintain the remaining valuation allowance until sufficient further positive evidence exists to support a reversal of, or decrease, in the valuation allowance.

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If our recent trend of profitability continues, we may determine that there is sufficient positive evidence to support a reversal of, or decrease in, the valuation allowance. If we were to reverse all or some part of our valuation allowance and recognize all or some part of our deferred tax assets, our financial statements in the period of reversal would reflect an increase in assets on our balance sheet and a corresponding tax benefit to our statement of operations in the amount of the reversal.

We expect our effective tax rate in 2007 to be at or below 3%; however it could fluctuate significantly on a quarterly basis and could be affected by disqualifying dispositions of stock from the Purchase Plan and incentive stock options, by changes in the valuation of our deferred tax assets or liabilities, changes in actual results versus our estimates, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Provision for Income Taxes

Since inception, we have incurred operating losses and, accordingly, have not recorded a provision for income taxes for any of the periods presented other than foreign provisions for income tax. As of December 31, 2006, we had net operating loss carryforwards for federal and state income tax purposes of $29.7 million and $30.8 million, respectively. We also had federal and state research and development tax credit carryforwards of approximately $1.1 million. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2013 and 2026. Utilization of these net operating losses and credit carryforwards may be subject to an annual limitation due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable if we experience an “ownership change” that may occur, for example, by a change in significant shareholder allocation or equity structure.

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