Riverbed Technology (RVBD)

8. Warrants

As of September 30, 2008, the company had the following warrants vested outstanding:

In connection with the June 2006 amendment to the Company’s Loan Agreement (Note 4), the Company issued to the financing institution a warrant to purchase 271,125 shares of Series C Preferred Stock at a price per share of $0.2213. The value of the warrant, $29,000, was deferred and amortized as additional interest expense over the term of the Loan Agreement, as amended. The value was calculated using the Black-Scholes model with the following assumptions: 40% volatility, seven-year contractual term, 0% dividends, and 4.0% risk-free interest rate.

In December 2006, in connection with the drawdown on the Loan Agreement (Note 4), the Company issued to the financing institution a warrant to purchase 271,125 shares of Series C Preferred Stock at a price per share of $0.2213. The value of the warrant, $29,000, was deferred and amortized as additional interest expense over the term of the Loan Agreement, as amended. The value was calculated using the Black-Scholes model with the following assumptions: 40% volatility, seven-year contractual term, 0% dividends, and 4.0% risk-free interest rate.

In June 2007, the Company received additional debt financing in an amendment to the 2005 Line of Credit. In connection with this amendment, the Company issued a warrant to purchase 723,000 shares of Series D Preferred Stock at a price per share of $0.2213 to the financing institution. The value of these warrants, $78,000, and the unamortized balance from the previously issued warrants, $43,339, was recorded as a deferred financing cost, and is being amortized to interest expense over the amended repayment period. The value was calculated using the Black-Scholes model with the following assumptions: 40% volatility, seven-year contractual term, 0% dividends, and 4.0% risk-free interest rate.

During the nine months ended September 30, 2008 and 2007, the Company recognized non-cash interest expense related to the amortization of deferred financing costs of $20,612 and $12,445, respectively. As of September 30, 2008 and December 31, 2007, unamortized deferred financing costs of $78,948 and $99,560 are included as other assets in the accompanying balance sheet.

During 2006, the Company entered into an agreement with a reseller which contained provisions under which the reseller would receive up to 9,040,434 warrants to purchase Series D Preferred Stock. The Company accounts for these warrants in accordance with EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and EITF Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). In the nine months ended September 30, 2008 and 2007, the Company recorded a reduction in revenues of $17,414 and $77,000, respectively, for these warrants.

Effective January 1, 2006, the Company adopted FASB Staff Position FAS 150-5, Issuer’s Accounting Under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable (“FSP 150-5”), which requires that warrants to purchase redeemable preferred stock be classified as liabilities upon adoption. In the nine months ended September 30, 2008 and 2007 the Company recorded other income of $33,971 and $27,842 as a result of changes in the fair value of all outstanding warrants to purchase redeemable preferred stock.

Warrants

In October 2000, the Company issued a warrant to a bank in connection with a financing agreement. The warrant provides for the purchase of 10,000 shares of Series A Preferred Stock at $1.00 per share, and is immediately exercisable. The value of the warrant, $8,851, was included in the accompanying statement of operations as interest expense in the year issued. This warrant is still outstanding as of December 31, 2007.

In March 2001, the Company issued a warrant to a bank in connection with the security and loan agreement. The warrant provides for the purchase of 50,000 shares of Series A Preferred Stock at $1.00 per share and is immediately exercisable. The value of the warrant, $44,034, was amortized into interest expense over the life of the loan, which was repaid in 2005. This warrant is still outstanding as of December 31, 2007.

In February 2003, the Company issued a warrant to a bank in connection with the line of credit agreement. The warrant provides for the purchase of 86,667 shares of Series B Preferred Stock at $1.05 per share and is immediately exercisable. The value of the warrant, $56,953, was amortized into interest expense over the life of the loan, which was repaid and closed in 2005. This warrant is still outstanding as of December 31, 2007.

In July 2004, the Company issued a warrant to holders of promissory notes related to a bridge financing in exchange for cash consideration of $20,141. The warrant provided for the purchase of 1,351,610 shares of Series C Preferred Stock at $0.2213 per share and is immediately exercisable. The value of the warrant, $239,500, was amortized into interest expense over the life of the loan, which was converted into Series C Preferred Stock in November 2004. This warrant is still outstanding as of December 31, 2007.

In June 2005, the Company issued a warrant to the bank in connection with the Loan Agreement (Note 4) in exchange for cash consideration of $100. The warrant provides for the purchase of 406,688 shares of Series C Preferred Stock at $0.2213 per share and is immediately exercisable. The value of the warrant, $76,000, was amortized into interest expense over the life of the commitment term of the Loan Agreement. During the year ended December 31, 2006, $38,000 is included in the accompanying statement of operations as interest expense. This warrant is still outstanding as of December 31, 2007.

In connection with the June 2006 amendment to the Company’s Loan Agreement (Note 4), the Company issued to the financing institution a warrant to purchase 271,125 shares of Series C Preferred Stock at a price per share of $0.2213. The value of the warrant, $29,000, was deferred and amortized as additional interest expense over the term of the Loan Agreement, as amended. The value was calculated using the Black-Scholes model with the following assumptions: 40% volatility, seven-year contractual term, 0% dividends, and 4.0% risk-free interest rate.

In December 2006, in connection with the drawdown on the Loan Agreement (Note 4), the Company issued to the financing institution a warrant to purchase 271,125 shares of Series C Preferred Stock at a price per share of $0.2213. The value of the warrant, $29,000, was deferred and amortized as additional interest expense over the term of the Loan Agreement, as amended. The value was calculated using the Black-Scholes model with the following assumptions: 40% volatility, seven-year contractual term, 0% dividends, and 4.0% risk-free interest rate.

In June 2007, the Company received additional debt financing in an amendment to the 2005 Line of Credit. In connection with this amendment, the Company issued a warrant to purchase 723,000 shares of Series D Preferred Stock at a price per share of $0.2213 to the financing institution. The value of these warrants, $78,000, and the unamortized balance from the previously issued warrants, $43,339, was recorded as a deferred financing cost, and is being amortized to interest expense over the amended repayment period. The value was calculated using the Black-Scholes model with the following assumptions: 40% volatility, seven-year contractual term, 0% dividends, and 4.0% risk-free interest rate.

During the years ended December 31, 2007 and 2006, the Company recognized non-cash interest expense related to the amortization of deferred financing costs of $30,640 and $43,800, respectively. At December 31, 2007, unamortized deferred financing costs of $99,560 are included as other assets in the accompanying balance sheet.

During 2006, the Company entered into an agreement with a reseller which contained provisions under which the reseller would receive up to 9,040,434 warrants to purchase Series D Preferred Stock. The Company accounts for these warrants in accordance with EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. As of December 31, 2007, 723,235 warrants were issued, and valued at $77,000. The value of these warrants are recorded as a reduction in revenues in accordance with EITF Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).

Effective January 1, 2006, the Company adopted FASB Staff Position FAS 150-5, Issuer’s Accounting Under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable (“FSP 150-5”), which requires that warrants to purchase redeemable preferred stock be classified as liabilities upon adoption. In addition, the value of the warrants is remeasured to the then-current fair value upon adoption of FSP 150-5, and marked to market at each reporting date thereafter. The difference in fair value upon adoption is recorded as a cumulative effect adjustment in the Company’s statement of operations. Subsequent changes in fair value are recorded to other income.

Upon adoption of FSP 150-5 on January 1, 2006, the Company reclassified outstanding warrants to purchase redeemable preferred stock from equity to long-term liabilities and remeasured these warrants using the Black-Scholes option pricing model. The Company recorded a cumulative effect adjustment of $164,322 in the year ended December 31, 2006, and recorded other income of $34,523 and $20,947 in the years ended December 31, 2007 and 2006, respectively, as a result of changes in the fair value of all outstanding warrants to purchase redeemable preferred stock.