Riverbed Technology 10-Q 2013 Q1 Quarterly report

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, 2013

OR

o 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  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act).    Yes  o    No  x

The number of shares of the registrant’s common stock, par value $0.0001, outstanding as of April 29, 2013 was: 163,423,154.

RIVERBED TECHNOLOGY, INC.

INDEX

		Page No.
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2012	5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 6.	Exhibits	55

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Item 1. Financial Statements

RIVERBED TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2013 and December 31, 2012

(in thousands, except par value)

	March 31, 2013			December 31, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	227,347		$	280,509
Short-term investments	179,303			170,605
Trade receivables, net of allowances of $1,795 and $2,064 as of March 31, 2013 and December 31, 2012, respectively	101,042			113,190
Inventory	26,722			24,175
Deferred tax assets	12,707			11,185
Prepaid expenses and other current assets	61,403			50,245
Total current assets	608,524			649,909
Long-term investments	96,160			78,476
Fixed assets, net	49,383			49,244
Goodwill	700,962			699,785
Intangibles, net	481,532			506,842
Deferred tax assets, non-current	1,663			6,457
Other assets	31,011			33,626
Total assets	$	1,969,235		$	2,024,339
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	38,068		$	50,417
Accrued compensation and benefits	46,376			60,501
Other accrued liabilities	35,730			41,472
Current maturities of long-term borrowings	—			5,327
Deferred revenue	203,626			182,219
Total current liabilities	323,800			339,936
Deferred revenue, non-current	91,984			88,393
Borrowings, non-current, net of current maturities	522,236			566,814
Deferred tax liabilities, non-current	106,319			109,311
Other long-term liabilities	28,268			25,663
Total long-term liabilities	748,807			790,181
Commitments and contingencies
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; 163,155 and 163,336 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively	769,798			757,777
Retained earnings	129,603			137,713
Accumulated other comprehensive loss	(2,773		)	(1,268		)
Total stockholders’ equity	896,628			894,222
Total liabilities and stockholders’ equity	$	1,969,235		$	2,024,339

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 ended March 31,
	2013			2012
Revenue:
Product	$	148,040		$	117,034
Support and services	98,099			65,379
Total revenue	246,139			182,413
Cost of revenue:
Cost of product	40,900			27,889
Cost of support and services	28,042			18,782
Total cost of revenue	68,942			46,671
Gross profit	177,197			135,742
Operating expenses:
Sales and marketing	115,721			73,815
Research and development	48,961			34,111
General and administrative	19,114			14,634
Acquisition-related costs	4,136			556
Total operating expenses	187,932			123,116
Operating income (loss)	(10,735		)	12,626
Other expense, net	(6,364		)	(1,505		)
Income (loss) before provision for income taxes	(17,099		)	11,121
Provision (benefit) for income taxes	(8,989		)	4,172
Net income (loss)	$	(8,110	)	$	6,949
Net income (loss) per common share:
Basic	$	(0.05	)	$	0.04
Diluted	$	(0.05	)	$	0.04
Shares used in computing net income (loss) per common share:
Basic	163,367			157,856
Diluted	163,367			167,510

See Notes to Condensed Consolidated Financial Statements.

4

RIVERBED TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

	Three months ended March 31,
	2013			2012
Net income (loss)	$	(8,110	)	$	6,949
Unrealized loss on investments, net of tax	(159		)	(8		)
Foreign currency translation adjustment	(633		)	2,196
Derivative instruments gain (loss), net of tax	(713		)	22
Comprehensive income (loss)	$	(9,615	)	$	9,159

See Notes to Condensed Consolidated Financial Statements.

5

RIVERBED TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three months ended March 31,
	2013			2012
Operating Activities:
Net income (loss)	$	(8,110	)	$	6,949
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	31,363			8,678
Stock-based compensation	24,526			22,975
Deferred taxes	(895		)	(3,243		)
Excess tax benefit from employee stock plans	(1,806		)	(10,701		)
Changes in operating assets and liabilities:
Trade receivables	12,148			6,688
Inventory	(2,547		)	(7,330		)
Prepaid expenses and other assets	(8,668		)	(3,488		)
Accounts payable	(12,186		)	1,563
Accrued and other liabilities	(17,265		)	(30,219		)
Acquisition-related contingent consideration liability	—			235
Income taxes payable	1,713			10,742
Deferred revenue	24,998			12,270
Net cash provided by operating activities	43,271			15,119
Investing Activities:
Capital expenditures	(5,354		)	(6,649		)
Purchase of available for sale securities	(132,178		)	(171,496		)
Proceeds from maturities of available for sale securities	90,695			143,037
Proceeds from sales of available for sale securities	14,500			44,846
Acquisitions, net of cash and cash equivalents acquired	(1,000		)	(6,458		)
Net cash (used in) provided by investing activities	(33,337		)	3,280
Financing Activities:
Proceeds from issuance of common stock under employee stock plans, net of repurchases	10,815			8,910
Payments for repurchases of common stock	(25,030		)	(1,408		)
Payment of borrowings	(49,319		)	—
Excess tax benefit from employee stock plans	1,806			10,701
Net cash (used in) provided by financing activities	(61,728		)	18,203
Effect of exchange rate changes on cash and cash equivalents	(1,368		)	2,218
Net increase (decrease) in cash and cash equivalents	(53,162		)	38,820
Cash and cash equivalents at beginning of period	280,509			215,476
Cash and cash equivalents at end of period	$	227,347		$	254,296

See Notes to Condensed Consolidated Financial Statements.

6

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 innovative and comprehensive solutions to the fundamental problems associated with IT performance across wide area networks (WANs). Our portfolio of IT performance products enables our customers to simply and efficiently improve the performance of their applications and access to their data over WANs, and provides global application performance, reporting and analytics, application delivery control and cloud storage.

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, 2013, the condensed consolidated statements of operations for the three months endedMarch 31, 2013 and 2012, the condensed consolidated statements of comprehensive income (loss) for the three months endedMarch 31, 2013 and 2012, and the condensed consolidated statements of cash flows for the three months endedMarch 31, 2013 and 2012 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, 2012.

The accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission (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 balance sheet as of March 31, 2013, our results of operations and comprehensive income (loss) for the three months endedMarch 31, 2013 and 2012 and our cash flows for the three months endedMarch 31, 2013 and 2012. All adjustments are of a normal recurring nature. The results for the three months endedMarch 31, 2013 are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending December 31, 2013.

There have been no significant changes in our critical accounting policies during the three months endedMarch 31, 2013, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2012.

Use of Estimates

Our condensed consolidated financial statements are prepared in accordance with 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 condensed 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, inventory valuation, the accounting for income taxes, including the determination of the timing of the establishment or release of our valuation allowance related to our deferred tax asset balances and reserves for uncertain tax positions, the accounting for business combinations and the accounting for acquisition-related contingent consideration. 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 condensed consolidated financial statements will be affected.

Subsequent Events

We have evaluated subsequent events through the date these condensed consolidated financial statements were issued.

Revenue Recognition

We recognize revenue when all of the following have occurred: (1) we have entered into a legally binding arrangement with a customer; (2) delivery has occurred; (3) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is reasonably assured.

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The majority of our product revenue includes hardware appliances containing software components that function together to provide the essential functionality of the product. Therefore, our hardware appliances are considered non-software deliverables. Most non-software products and services qualify as separate units of accounting because they have value to the customer on a standalone basis and our revenue arrangements generally do not include a general right of return relative to delivered products. We account for non-software arrangements with multiple deliverables, which generally include support services sold with each of our hardware appliances, using the relative selling price method under the revenue recognition guidance for multiple deliverable arrangements.

Our product revenue also includes revenue from the sale of stand-alone software products. Stand-alone software may operate on our hardware appliance, but is not considered essential to the functionality of the hardware. Stand-alone software products generally include a perpetual license to our software. Stand-alone software sales are subject to the industry specific software revenue recognition guidance.

Certain arrangements with multiple deliverables may have stand-alone software deliverables that are subject to the software revenue recognition guidance along with non-software deliverables. The revenue for these multiple deliverable arrangements is allocated to the stand-alone software deliverables as a group and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement.

The amount of product and services revenue recognized for arrangements with multiple deliverables is impacted by our valuation of relative selling prices. We apply the selling price hierarchy using vendor specific objective evidence (VSOE) when available, third-party evidence of selling price (TPE) if VSOE does not exist, and estimated selling price (ESP) if neither VSOE nor TPE is available.

VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for a deliverable when sold separately, and VSOE for support services is further measured by the renewal rate offered to the customer. In determining VSOE, we require that a substantial majority of the selling prices fall within a reasonably narrow pricing range, generally evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range of the median rates. In addition, we consider major service groups, geographies, customer classifications, and other variables in determining VSOE.

We are typically not able to determine TPE for our products or services. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis.

When we are unable to establish the estimated stand-alone value of our non-software deliverables using VSOE or TPE, we use ESP in our allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine ESP for a product or service by considering multiple factors including, but not limited to, cost of products, gross margin objectives, pricing practices, geographies, customer classes and distribution channels.

For stand-alone software sales, we recognize revenue based on software revenue recognition guidance. Under the software revenue recognition guidance, we use the residual method to recognize revenue when an agreement includes one or more elements to be delivered at a future date and VSOE of the fair value of all undelivered elements exists. In the majority of our contracts, the only element that remains undelivered at the time of delivery of the product is support services. Under the residual method, the fair value of the undelivered stand-alone software, which is typically support services, 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 stand-alone software 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 stand-alone software for which we do not have VSOE of fair value is support, revenue for the entire arrangement is bundled and recognized ratably over the support period.

For our non-software deliverables, we allocate the arrangement consideration based on the relative selling price of the deliverables. For our hardware appliances we use the ESP of the deliverable. For our support and services, we generally use VSOE as our relative selling price. When we are unable to establish VSOE for our support and services, we use ESP in our allocation of arrangement consideration. We regularly review VSOE and ESP. As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in selling prices, including both VSOE and ESP.

For sales to direct end-users and channel partners, including value-added resellers, value-added distributors, service providers, and systems integrators, we recognize product revenue upon delivery, assuming all other revenue recognition criteria are met. For our hardware appliances, delivery occurs upon transfer of title and risk of loss, which is generally upon shipment.

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It is our practice to identify an end-user prior to shipment to a channel partner. For end-users and channel partners, we generally have no significant obligations for future performance such as rights of return or pricing credits. Shipping charges billed to customers are included in product revenue and the related shipping costs are included in cost of product revenue.

Support and services consist of support services, professional services, and training. Support services include repair and replacement of defective hardware appliances, software updates and access to technical support personnel. 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. Open-enrollment training services which are delivered on a when-and-if-available basis may be bundled with support services. Revenue for support services is recognized on a straight-line basis over the service contract term, which is typically one to three years. Professional services are recognized upon delivery or completion of performance. Professional service arrangements are typically short term in nature and are largely completed within 90 days from the start of service. Training services are recognized upon delivery of the training.

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 75 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 revenue from the arrangement until payment is received and all other revenue recognition criteria have been met.

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 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 with respect to evaluation units, the historical conversion rate, the age of the units, and the estimated loss of utility. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products, the timing of new product introductions and technological obsolescence of our products. Inventory write-downs are recognized as cost of product and amounted to $2.2 million and $1.8 million in the three months endedMarch 31, 2013 and 2012, respectively.

Service Inventory

We hold service inventory that is used to repair or replace defective hardware reported by our customers who purchase support services. We classify service inventory as Prepaid expenses and other current assets. At March 31, 2013 and December 31, 2012, our service inventory balance was $12.7 million and $12.5 million, respectively.

Stock-Based Compensation

Stock-based awards granted include stock options, restricted stock units (RSUs), and stock purchased under our Employee Stock Purchase Plan (the Purchase Plan). Stock-based compensation cost is measured at the grant date, based on the fair value of the awards, and is recognized as expense over the requisite service period only for those equity awards expected to vest.

The fair value of the RSUs is determined based on the stock price on the date of grant. The fair value of the RSUs is amortized on a straight-line basis over the requisite service period of the awards, which is generally three to four years. We estimated the fair value of stock options and stock purchased under our Purchase Plan using the Black-Scholes model. 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 grant, the expected volatility of the price of our common stock, risk-free interest rates and expected dividend yield of our common stock. The fair value is amortized on a straight-line basis over the requisite service periods of the awards, which is generally three to four years for stock options, and six months to two years for options to purchase stock under our Purchase Plan.

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Accounting for Income Taxes

We use the asset and liability method of accounting for income taxes. 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 expected tax consequences of temporary differences between the tax bases of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. 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 our consolidated financial statements, we are required to estimate our income tax expense and tax contingencies in each of the tax jurisdictions in which we operate. This process involves estimating current income 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 estimates and assumptions in preparing our income tax provision.

We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction, expectations of future taxable income, and the carryforward periods available to us for tax reporting purposes, as well as other relevant factors. We establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes in income tax law, or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.

As part of our accounting for business combinations, a portion of the purchase price was allocated to goodwill and intangible assets. Amortization expenses associated with acquired intangible assets are generally not tax deductible; however, deferred taxes have been recorded for non-deductible amortization expenses as a part of the purchase price allocation. In the event of an impairment charge associated with goodwill, such charges are generally not tax deductible and would increase the effective tax rate in the quarter any impairment is recorded.

We are subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain tax positions we have taken, such as the timing and amount of deductions and allocation of taxable income to the various tax jurisdictions. The accounting for income tax contingencies may require significant management judgment in estimating final outcomes. Actual results could differ materially from these estimates and could significantly affect the effective tax rate and cash flows in future years. We have elected to record interest and penalties in the financial statements as a component of income taxes.

Goodwill, Intangible Assets and Impairment Assessments

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill is tested for impairment at least annually (more frequently if certain indicators are present). In the event that we determine that the fair value of a reporting unit is less than the reporting unit’s carrying value, we will incur an impairment charge for the amount of the difference during the quarter in which the determination is made.

Intangible assets that are not considered to have an indefinite life are amortized over their useful lives. On a periodic basis, we evaluate the estimated remaining useful life of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. In the event that we determine certain assets are not fully recoverable, we will incur an impairment charge for those assets or portion thereof during the quarter in which the determination is made.

Recoverability of indefinite lived intangible assets is measured by comparison of the carrying amount of the asset to the future discounted cash flow the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets. No material impairments of intangible assets were identified during any of the periods presented.

Business Combinations

In our business combinations, we are required to recognize all the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. Further, acquisition-related costs are recognized separately from the acquisition and expensed as incurred; restructuring costs are generally expensed in periods

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subsequent to the acquisition date; changes in the estimated fair value of contingent consideration after the initial measurement on the acquisition date are recognized in earnings in the period of the change in estimate; and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. In addition, the fair value of in-process research and development (R&D) is recorded as an indefinite-lived intangible asset until the underlying project is completed, at which time the intangible asset is amortized over its estimated useful life, or abandoned, at which time the intangible asset is expensed.

Accounting for business combinations requires management to make significant estimates and assumptions, including the acquisition date fair value of intangible assets, estimated contingent consideration payments and pre-acquisition contingencies.

Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired company and are inherently uncertain. Examples of critical estimates in accounting for acquisitions include but are not limited to:

• the estimated fair value of the acquisition-related contingent consideration, which is performed using a probability-weighted discounted cash flow model based upon the forecasted achievement of post-acquisition bookings targets;

• the future expected cost to develop the in-process R&D into commercially viable products and the estimated cash flows from the products when completed;

• the future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts and acquired developed technologies and patents; and

• the discount rates.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Derivative Financial Instruments

We use derivative instruments to manage our short-term exposures to fluctuations in foreign currency exchange rates, which exist as part of ongoing business operations. Our general practice is to hedge a majority of transaction exposures denominated in British pounds, euros, and Singapore dollars. These instruments have maturities between one to three months in the future. We do not enter into any derivative instruments for trading or speculative purposes.

We account for our derivative instruments as either assets or liabilities on the balance sheet and carry them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. Derivatives that qualify for hedge accounting are initially included in Accumulated other comprehensive income (loss) and subsequently reclassified into earnings upon the occurrence of the forecasted transactions to which they hedge. Derivatives that do not qualify for hedge accounting are adjusted to fair value each period through earnings.

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. The average portfolio maturity is currently less than a year. 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 value-added distributors accounted for 10% or more of our trade receivable balance as of March 31, 2013. One value-added distributor, Avnet, Inc. (Avnet), accounted for 10% of our trade receivable balance as of December 31, 2012. Two value-added distributors, Arrow Electronics, Inc. (Arrow) and Avnet, represented 15% and 11%, respectively, of our revenue for the three months endedMarch 31, 2013. Two value-added distributors, Arrow and Avnet, represented 17% and 10%, respectively, of our revenue for the three months endedMarch 31, 2012.

We outsource the production of our inventory to third-party manufacturers. We rely on purchase orders or long-term contracts with our contract manufacturers. At March 31, 2013, we had no long-term contractual commitment with any manufacturer; however, we did have a 90 day commitment totaling $7.8 million.

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Changes in Accumulated Other Comprehensive Income (Loss)

The amounts reclassified out of accumulated other comprehensive income (loss) to net income (loss) is as follows:

(in thousands)	Unrealized gain (loss) on investments, net of tax			Foreign currency translation adjustment			Derivative instruments gain (loss), net of tax			Total
Balance as of December 31, 2012	$	8		$	(1,306	)	$	30		$	(1,268	)
Other comprehensive income (loss) before reclassifications	(142		)	(633		)	(921		)	(1,696		)
Amounts reclassified from accumulated other comprehensive income (loss)	(17		)	—			208			191
Net current-period other comprehensive income (loss)	(159		)	(633		)	(713		)	(1,505		)
Balance as of March 31, 2013	$	(151	)	$	(1,939	)	$	(683	)	$	(2,773	)

Amounts reclassified from accumulated other comprehensive income (loss) to income (loss) for unrealized gain (loss) on investments are recorded in Other expense, net. Amounts reclassified from accumulated other comprehensive income (loss) to income (loss) for derivatives instrument gain (loss) are recorded in Cost of support and services, and Operating expenses.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date (ASU 2013-04), which addresses the recognition, measurement, and disclosure of certain obligations resulting from joint and several arrangements including debt arrangements, other contractual obligations, and settled litigation and judicial rulings. ASU 2013-04 will be effective for us in fiscal 2014. We are evaluating the potential impact of this adoption on our consolidated financial statements.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05), which addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. ASU 2013-05 will be effective prospectively in fiscal 2014. We are evaluating the potential impact of this adoption on our consolidated financial statements.

2. ACQUISITIONS

Fiscal 2012 Acquisitions

OPNET Technologies, Inc.

On December 18, 2012, we completed our acquisition of OPNET Technologies, Inc. (OPNET) by means of a merger of one of our wholly-owned subsidiaries with and into OPNET such that OPNET became a wholly owned subsidiary of Riverbed. The addition of OPNET's broad-based family of Application Performance Management (APM) products enhances our position in the Network Performance Management (NPM) market and enables us to provide customers with an integrated solution that both monitors network and application performance and also accelerates it. We have included the financial results of OPNET in our consolidated financial statements from the acquisition date.

The total purchase price for OPNET was approximately $980.2 million and comprised of the following:

(in thousands)
Cash payment to OPNET shareholders	$	856,992
Fair market value of Riverbed common stock issued	122,590
Fair value of options assumed	641
Total purchase price	$	980,223

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The fair values of stock options assumed were estimated using the Black-Scholes-Merton option-pricing model. The stock options assumed were fully vested and their fair values were included in the total purchase price. The fair values of unvested OPNET restricted stock units and restricted stock awards as they relate to post-acquisition services will be recorded as operating expenses over the remaining service periods.

Preliminary Allocation of Consideration Transferred

Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed were recognized based on their estimated fair values as of December 18, 2012, the acquisition date. The excess of the acquisition date fair value of consideration transferred over estimated fair value of the net tangible and intangible assets was recorded as goodwill.

Based on estimated fair values, we have preliminarily recorded $583.4 million of goodwill, $458.5 million of identifiable intangible assets, $168.4 million of net deferred tax liabilities and $106.7 million of net other tangible assets. These estimated fair values were based upon a preliminary valuation and our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period, which is up to one year from the acquisition date. The primary areas of the estimated fair values that are not yet finalized relate to income and non-income based taxes and residual goodwill. Thus the provisional measurements of fair value are subject to change. Such changes could be significant.

Pre-Acquisition Contingencies

For a given acquisition, we may identify certain pre-acquisition contingencies that existed at the acquisition date and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we can reasonably determine the fair value of these contingencies by the end of the measurement period.

During the measurement period, we will recognize an asset or a liability with a corresponding adjustment to goodwill for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our results of operations and financial position.

Acquisition-related Costs

Acquisition-related costs include transaction costs, integration and other acquisition-related costs and changes in the fair value of the acquisition-related contingent consideration. During the three months endedMarch 31, 2013, we recorded acquisition-related costs of $4.1 million. During the three months ended March 31, 2012, we recorded transaction costs of $0.6 million related to the acquisition of Expand, and an expense of $1.1 million related to change in fair value of the acquisition-related contingent consideration to be paid directly to the Zeus Technology, Ltd. (Zeus) shareholders, which was offset by a credit of $1.1 million related to change in fair value of the acquisition-related contingent consideration to be paid directly to the Aptimize Ltd. (Aptimize) shareholders.

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3. NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of vested common shares outstanding during the period. Diluted net income (loss) per common share is computed by giving effect to all potential dilutive common shares, including stock awards. The following table sets forth the computation of net income (loss) per share:

	Three months ended March 31,
(in thousands, except per share data)	2013			2012
Net income (loss)	$	(8,110	)	$	6,949
Weighted average common shares outstanding - basic	163,367			157,856
Dilutive effect of employee stock plans	—			9,654
Weighted average common shares outstanding - diluted	163,367			167,510
Basic net income (loss) per share	$	(0.05	)	$	0.04
Diluted net income (loss) per share	$	(0.05	)	$	0.04

Stock options outstanding with an exercise price higher than our average stock price for the periods presented, represent out-of-the-money awards and are excluded from the calculations of the diluted net income (loss) per share since the effect would have been anti-dilutive under the treasury stock method.

In addition, stock options outstanding with an exercise price lower than our average stock price for the periods presented, that would otherwise have a dilutive effect under the treasury stock method, are excluded from the calculations of the diluted loss per share in periods with a loss since the effect in such periods would have been anti-dilutive.

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

	Three months ended March 31,
(in thousands)	2013	2012
Total potential anti-dilutive shares of common stock	17,355	4,216

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4. FAIR VALUE OF ASSETS

As of March 31, 2013, the fair value measurements of our cash, cash equivalents, investments, derivative assets and liabilities, and borrowings consisted of the following:

(in thousands)	Total		Level 1		Level 2
Assets:
Corporate bonds and notes	$	39,390	$	—	$	39,390
U.S. government backed securities	6,125		6,125		—
U.S. government-sponsored enterprise obligations	42,464		—		42,464
Money market funds	46,765		46,765		—
FDIC-backed certificates of deposit	240		—		240
Cash	92,363		—		—
Total cash and cash equivalents	$	227,347	$	52,890	$	82,094
Corporate bonds and notes	$	66,045	$	—	$	66,045
U.S. government backed securities	49,352		49,352		—
U.S. government-sponsored enterprise obligations	149,531		—		149,531
FDIC-backed certificates of deposit	10,535		—		10,535
Total investments	$	275,463	$	49,352	$	226,111
Derivative asset	$	23	$	—	$	23
Liabilities:
Derivative liabilities	$	618	$	—	$	618
Borrowings	$	525,000	$	—	$	525,000

As of December 31, 2012, the fair value measurements of our cash, cash equivalents, investments, derivative assets and liabilities, and borrowings consisted of the following:

(in thousands)	Total		Level 1		Level 2
Assets:
Corporate bonds and notes	$	41,091	$	—	$	41,091
U.S. government-sponsored enterprise obligations	73,090		—		73,090
Money market funds	34,518		34,518		—
Cash	131,810		—		—
Total cash and cash equivalents	$	280,509	$	34,518	$	114,181
Corporate bonds and notes	$	40,227	$	—	$	40,227
U.S. government backed securities	51,401		51,401		—
U.S. government-sponsored enterprise obligations	148,362		—		148,362
FDIC-backed certificates of deposit	9,091		—		9,091
Total investments	$	249,081	$	51,401	$	197,680
Derivative assets	$	87	$	—	$	87
Liabilities:
Derivative liabilities	$	68	$	—	$	68
Borrowings	$	575,000	$	—	$	575,000

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The following tables present the gross unrealized gains and gross unrealized losses as of March 31, 2013 and December 31, 2012:

(in thousands)	Fair Value		Unrealized Gains		Unrealized Losses
Corporate bonds and notes	$	54,954	$	1	$	—
Corporate bonds and notes	11,091		—		(7		)
U.S. government backed securities	34,056		4		—
U.S. government backed securities	15,296		—		(1		)
U.S. government-sponsored enterprise obligations	78,458		65		—
U.S. government-sponsored enterprise obligations	71,073		—		(26		)
FDIC-backed certificates of deposit	10,053		1		—
FDIC-backed certificates of deposit	482		—		(1		)
Total investments at March 31, 2013	$	275,463	$	71	$	(35	)
Corporate bonds and notes	$	24,750	$	4	$	—
Corporate bonds and notes	15,477		—		(2		)
U.S. government backed securities	21,911		4		—
U.S. government backed securities	29,490		—		(6		)
U.S. government-sponsored enterprise obligations	103,537		65		—
U.S. government-sponsored enterprise obligations	44,825		—		(17		)
FDIC-backed certificates of deposit	8,130		1		—
FDIC-backed certificates of deposit	961		—		(1		)
Total investments at December 31, 2012	$	249,081	$	74	$	(26	)

We have evaluated our investments as of March 31, 2013 and have determined that no investments with unrealized losses are other-than-temporarily impaired. No investments have been in a continuous loss position greater than one year.

Cash, Cash Equivalents and Investments

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, 2013 and December 31, 2012 was $227.3 million and $280.5 million, respectively. The carrying value approximates fair value at March 31, 2013 and December 31, 2012.

Investments, which are classified as available for sale at March 31, 2013, are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. Investments consist of government-sponsored enterprise obligations, treasury bills, FDIC-backed certificates of deposit and corporate bonds and notes. The fair value of our investments is determined as the exit price in the principal market in which we would transact. 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, municipal bonds, government-sponsored enterprise obligations and FDIC-backed certificates of deposit. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value. As of March 31, 2013 and December 31, 2012 we had no investments valued as Level 3 instruments. As of March 31, 2013 and December 31, 2012, the investments are recorded at amortized cost, which approximates fair market value. Generally, our investments have maturity dates up to two years from our date of purchase and active markets for these investments exist.

Restricted Cash

Restricted cash primarily represents collateralized letters of credit for the security deposits in connection with lease agreements for our facilities. Current restricted cash totaled $1.3 million and $1.1 million as of March 31, 2013 and December 31, 2012, respectively. Current restricted cash is included in Prepaid expenses and other current assets in the consolidated balance sheet. Long-term restricted cash totaled $7.2 million and $7.6 million at March 31, 2013 and December 31, 2012, respectively. Long-term restricted cash is included in Other assets in the consolidated balance sheets.

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Fair Value of Derivative Instruments

We use derivative instruments to partially offset our market exposures to fluctuations in certain foreign currency exchange rates, which exist as part of ongoing business operations. These derivatives are considered Level 2 instruments. Derivative assets are included in Prepaid expenses and other current assets in the consolidated balance sheet. Derivative liabilities are included in Other accrued liabilities in the consolidated balance sheet. Refer to Note 10 for additional derivative financial instrument disclosure.

Borrowings

Pursuant to the acquisition of OPNET, we entered into a credit agreement and related security and other agreements. These borrowings are considered Level 2 instruments. Refer to Note 11 for additional disclosures on our borrowings.

5. INVENTORY

Inventories consist primarily of hardware and related component parts and evaluation units located at customer locations, and are 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, 2013		December 31, 2012
Raw materials	$	2,942	$	2,613
Finished goods	18,124		16,682
Evaluation units	5,656		4,880
Total inventory	$	26,722	$	24,175

6. GOODWILL

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. We consider the acquired businesses as additions to our product portfolio. We record goodwill adjustments pursuant to changes to net assets acquired during the measurement period, which is generally up to one year from the date of acquisition. A portion of the goodwill associated with the acquisition of Global Protocols, LLC, Zeus and Aptimize, will be deductible for income tax purposes.

The change in goodwill consisted of the following:

(in thousands)
Balance as of December 31, 2012	$	699,785
Other adjustments	1,177
Balance as of March 31, 2013	$	700,962

7. DEFERRED REVENUE

Deferred revenue consisted of the following:

(in thousands)	March 31, 2013		December 31, 2012
Product	$	59,824	$	64,322
Support and services	235,786		206,290
Total deferred revenue	$	295,610	$	270,612
Reported as:
Deferred revenue, current	$	203,626	$	182,219
Deferred revenue, non-current	91,984		88,393
Total deferred revenue	$	295,610	$	270,612

Deferred product revenue relates to arrangements where not all revenue recognition criteria have been met. During the third quarter of 2012, we recorded $65.0 million to deferred product revenue related to cash received from Juniper Networks, Inc. (Juniper). The transaction was accounted for as a business combination, and there was no goodwill recorded as part of the

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transaction. The initial payment of $65.0 million is being recognized as revenue ratably over the four year support term, because we do not have VSOE of fair value for the undelivered nonstandard support services. As of March 31, 2013, $53.4 million of this transaction remained in deferred product revenue.

Deferred support revenue represents customer payments made in advance for 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 deferred revenue related to the Juniper transaction and customer payments made in advance for support contracts with terms of more than 12 months.

8. 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.

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.

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9. 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, 2013 with a remaining non-cancelable lease term in excess of one year are as follows:

Fiscal year	(in thousands)
2013 (the remaining nine months ending December 31)	$	14,363
2014	18,168
2015	20,157
2016	21,916
2017	20,784
Thereafter	102,557
Total	$	197,945

The terms of certain lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease period and have accrued for rent expense incurred but not paid. Rent expense under operating leases was $5.1 million and $3.1 million for the three months endedMarch 31, 2013 and 2012, respectively.

10. DERIVATIVE FINANCIAL INSTRUMENTS

We use derivative instruments to partially offset our market exposures to fluctuations in certain foreign currency exchange rates, which exist as part of ongoing business operations. Our general practice is to hedge a majority of transaction exposures denominated in British pounds, Euros, Australian dollars and Singapore dollars. These instruments have maturities between one to six months in the future. We do not enter into derivative instrument transactions for trading or speculative purposes.

Foreign currency contracts designated as cash flow hedges

We utilize foreign currency forward contracts to hedge certain forecasted foreign currency transactions relating to cost of service and operating expense. These contracts are designated and documented as cash flow hedges at their inception. All changes in time value are excluded from the cash flow hedge and recorded to Other income (expense), net in the period incurred. The effective portion of derivative's gains or losses on these hedges is initially included in Accumulated other comprehensive income (loss) and is subsequently reclassified into the cost of service or operating expense, to which the hedged transaction relates, upon the occurrence of the forecasted transaction. We record any ineffectiveness of the hedging instruments in Other income (expense), net in our condensed consolidated financial statements in the period incurred. No ineffectiveness was recorded during the three months ended March 31, 2013 and 2012.

The notional amount of these contracts was $45.1 million at March 31, 2013 and $39.7 million at December 31, 2012. Outstanding contracts are recognized as either assets or liabilities on the balance sheet at fair value. The amount remaining in Accumulated other comprehensive loss are expected to be recognized into earnings within the next three months. As of March 31, 2013 the amount remaining in Accumulated other comprehensive loss was $0.7 million. The amount remaining in Accumulated other comprehensive loss as of December 31, 2012 was not significant.

Derivatives not designated as hedging instruments

We use foreign currency forward contracts to reduce the variability in gains and losses generated from the re-measurement of certain monetary assets and liabilities denominated in foreign currencies. These hedges do not qualify for hedge accounting treatment. These derivatives are carried at fair value with gains and losses recognized as Other income (expense), net. Changes in the fair value of the derivatives are largely offset within the consolidated statement of operations by re-measurement of the underlying assets and liabilities. We had a notional value of $9.9 million in derivative instruments that were non-designated hedges at March 31, 2013 and $12.6 million at December 31, 2012.

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Fair Value of Derivative Instruments

The fair value of derivative instruments in our condensed consolidated balance sheet was as follows as of March 31, 2013 and 2012:

(in thousands)	March 31, 2013		December 31, 2012
Derivative assets:
Foreign currency contracts designated as cash flow hedges	$	14	$	1
Derivatives not designated as hedging instruments	9		86
Total Derivative assets	$	23	$	87
Derivative liabilities:
Foreign currency contracts designated as cash flow hedges	$	397	$	61
Derivatives not designated as hedging instruments	221		7
Total Derivative liabilities	$	618	$	68

The derivative assets and liabilities are recorded on a gross basis and included in other current assets and other accrued liabilities, respectively, in our condensed consolidated balance sheet. As of March 31, 2013, we do not post collateral for derivative instrument and we do not have master netting arrangements.

The effects of derivatives designated as hedging instruments on our condensed consolidated statements of operations were as follows for the three months endedMarch 31, 2013 and 2012:

	Three months ended March 31,
(in thousands)	2013			2012
Amount of gain (loss) recognized in Accumulated other comprehensive income (loss) on derivatives (effective portion)	$	(959	)	$	399
Amount and location of gain (loss) reclassified from Accumulated other comprehensive income (loss) into Income (effective portion)
Cost of support and services	37			(44		)
Sales and marketing	127			(264		)
Research and development	33			(16		)
General and administrative	11			(52		)
Total	$	208		$	(376	)
Amount and location of gain recognized in Income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Other income (expense), net	$	15		$	2

The effects of derivatives not designated as hedging instruments on our condensed consolidated statements of operations were as follows for the three months endedMarch 31, 2013 and 2012:

	Three months ended March 31,
(in thousands)	2013			2012
Amount and location of gain (loss) recognized in Income (loss) on derivative
Other income (expense), net	$	(229	)	$	144

11. BORROWINGS

In December 2012, we entered into a credit agreement and related security and other agreements for a seven year $575.0 million senior secured term loan facility to facilitate the acquisition of OPNET. The term loan carries an interest rate of Libor + 300 basis points, with a 1% Libor floor. Beginning in 2014, 1% of the initial loan value is to be paid annually in

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quarterly installments; additional prepayments based on a percentage of free cash flow of the preceding year will be required. As of March 31, 2013 the outstanding borrowings were $522.2 million.

The senior credit agreement governing the senior credit facility requires us to pay, subject to certain exceptions, outstanding term loans with:

• Up to 50% of annual excess cash flow (as defined in the senior credit facility agreement);

• 100% of the net cash proceeds of certain non-ordinary course asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions; and

• 100% of the net cash proceeds of the incurrence or issuance of certain debt, other than the net cash proceeds of certain debt permitted under the senior credit facility.

The term loan contains certain covenants that limit future borrowings and require that certain payments, investments and acquisitions meet defined leverage ratios. We were in compliance with all restrictive covenants of the term loan agreements as of March 31, 2013. Pursuant to the issuance of this term loan, we incurred debt issuance costs of approximately $11.7 million, which is recorded as a deferred asset and will be amortized, along with the original issuance discount, to interest expense using the effective interest rate method. For the three months ended March 31, 2013, interest incurred pursuant to the term loan was $6.3 million.

12. COMMON STOCK

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense for stock options, RSUs and the Purchase Plan recorded in our condensed consolidated statement of operations for the three months endedMarch 31, 2013 and 2012:

	Three months ended March 31,
(in thousands)	2013		2012
Cost of product	$	256	$	215
Cost of support and services	1,828		1,583
Sales and marketing	10,864		9,251
Research and development	7,547		7,178
General and administrative	4,031		4,748
Total	$	24,526	$	22,975

Share-Based Payments Valuation Assumptions

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

	Three months ended March 31,
	2013			2012
Employee Stock Options
Expected life in years	4.3			4.2
Risk-free interest rate	0.7		%	0.7		%
Volatility	62		%	66		%
Weighted average fair value of grants	$	7.77		$	14.04

No Purchase Plan shares were granted for the three months endedMarch 31, 2013 and 2012.

Stock Options

As of March 31, 2013, total compensation cost related to stock options granted to employees and directors but not yet recognized was $58.8 million. This cost will be recognized on a straight-line basis over the remaining weighted-average service period. Amortization in the three months endedMarch 31, 2013 and 2012 was $5.2 million and $6.3 million, respectively.

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As of March 31, 2013, 4,096,000 shares were available for grant under the 2006 Equity Incentive Plan. As of March 31, 2013, 3,092,000 shares were available for grant under the 2006 Director Option Plan. As of March 31, 2013, 81,000 shares were available for grant under the 2009 Inducement Equity Incentive Plan. As of March 31, 2013, 5,778,000 shares were available for grant under the 2012 Stock Incentive Plan.

Stock Purchase Plan

As of March 31, 2013, there was $28.7 million of total compensation cost, net of estimated forfeitures, left to be amortized under our Purchase Plan, which will be amortized over the remaining Purchase Plan offering period. Amortization in the three months endedMarch 31, 2013 and 2012 was $4.8 million and $2.9 million, respectively.

As of March 31, 2013, 2,753,000 shares were available under the Purchase Plan.

Restricted Stock Units

As of March 31, 2013, total unrecognized compensation cost related to non-vested RSUs to employees and directors was $177.0 million. This cost will be recognized over the remaining weighted-average service period. Amortization in the three months endedMarch 31, 2013 and 2012 was $14.5 million and $13.8 million, respectively.

Share Repurchase Program

On August 19, 2011, our Board of Directors authorized a Share Repurchase Program (the Program), which authorizes us to repurchase up to $150.0 million of our outstanding common stock. On May 17, 2012, the Board of Directors approved a $150.0 million increase to the Program. The Program does not require us to purchase a minimum number of shares, and may be suspended, modified or discontinued at any time without prior notice. For the three months endedMarch 31, 2013, we repurchased 1,613,064 shares of common stock under this Program on the open market for an aggregate purchase price of $25.0 million, or a weighted average of $15.52 per share. The timing and amounts of these purchases were based on market conditions and other factors, including price, regulatory requirements and capital availability. The share repurchases were financed by available cash balances and cash from operations. The maximum dollar value of shares of common stock that remain available for purchase under the Program is $112.8 million.

For the three months endedMarch 31, 2012, we repurchased 57,336 shares of common stock under a share repurchase program for an aggregate purchase price of $1.4 million, or weighted-average of $24.54 per share.

13. INCOME TAXES

Our provision (benefit) for income taxes is based on our estimated annual effective tax rate, adjusted for discrete tax items recorded in the period. The effective tax rate was 52.6% and 37.5% for the three months endedMarch 31, 2013 and 2012, respectively. Our income tax provision consists of federal, foreign, and state income taxes. The provision (benefit) for income taxes for the three months endedMarch 31, 2013 and 2012 was $(9.0) million, and $4.2 million, respectively.

Our effective tax rate for the three months ended March 31, 2012 differed from the federal statutory rate due to state taxes and significant permanent differences. Significant permanent differences included taxes in foreign jurisdictions with a tax rate different than the U.S. federal statutory rate, nondeductible stock-based compensation expense, and amortization of deferred tax charges related to our intercompany sales of intellectual property rights. The federal R&D tax credit expired on December 31, 2011. Accordingly, we did not record this benefit during any interim period in 2012.

Our effective tax rate for the three months ended March 31, 2013 differed from the federal statutory rate due to state taxes and significant permanent differences. Significant permanent differences included taxes in foreign jurisdictions with a tax rate different than the U.S. federal statutory rate, nondeductible stock-based compensation expense, amortization of deferred tax charges related to our intercompany sales of intellectual property rights, and the federal R&D tax credit. The federal R&D tax credit was retroactively reinstated and extended to December 31, 2013 during the first quarter of 2013. As a result of the reinstatement, we recorded a discrete tax benefit of $4.3 million related to 2012 in the first quarter of 2013.

14. SEGMENT INFORMATION

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. While our Chief Executive Officer evaluates the financial information for certain of our product lines, the information for all product lines is aggregated for analysis on a consolidated level as the primary basis for the allocation of resources and assessment of financial results. Accordingly, the consolidated business is considered to be one operating segment.

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Revenue by Product Line

We have two product lines: Application Acceleration and Performance Management. Application Acceleration includes our Steelhead Product Family (WAN Optimization), Granite Product Family (Storage Delivery), Stingray Product Family (Application Delivery Control) and Whitewater Product Family (Cloud Storage Delivery). Performance Management includes APM (formerly OPNET products) and NPM products (formerly our Cascade product family).

The following table presents revenue by product line:

	Three months ended March 31,
(in thousands)	2013		2012
Revenue:
Application Acceleration	$	184,962	$	170,235
Performance Management	61,177		12,178
Total revenue	$	246,139	$	182,413

Revenue by Geography

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

	Three months ended March 31,
(in thousands)	2013		2012
Americas
United States	$	150,597	$	96,177
Other Americas	7,545		7,480
Total Americas	158,142		103,657
Europe, Middle East and Africa
United Kingdom	28,176		28,189
Other Europe, Middle East and Africa	29,658		22,349
Total Europe, Middle East and Africa	57,834		50,538
Asia Pacific	30,163		28,218
Total revenue	$	246,139	$	182,413

15. LEGAL MATTERS

On June 1, 2011, we served Silver Peak Systems, Inc. with a lawsuit, filed in the United States District Court for the District of Delaware, alleging infringement of certain patents. The lawsuit seeks unspecified damages and injunctive relief. On July 22, 2011, Silver Peak Systems denied the allegations and requested declaratory judgments of invalidity and non-infringement.

On August 17, 2011, Silver Peak Systems amended its counterclaims against us, alleging infringement by Riverbed of three U.S. patents: 7,630,295, titled “Network Device Continuity”; 7,945,736, titled “Dynamic Load Management of Network Memory”; and 7,948,921, titled “Automatic Network Optimization.” The patents purport to cover certain features offered on the Riverbed Steelhead products. Silver Peak seeks unspecified damages and a permanent injunction prohibiting Riverbed from offering those features. On September 20, 2011, we denied Silver Peak Systems’ allegations and requested declaratory judgments of invalidity and non-infringement.

On December 21, 2011, we amended our lawsuit against Silver Peak Systems to allege infringement of an additional patent.

Our lawsuit against Silver Peak Systems currently alleges infringement of three patents.

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At this time we are unable to estimate any range of reasonably possible loss relating to these actions. Discovery is ongoing, and trial of our claims against Silver Peak Systems is currently scheduled to begin on September 30, 2013, though the trial judge has asked Silver Peak Systems and us to reschedule that date. Trial of Silver Peak Systems' claims against us is currently scheduled to begin on March 24, 2014. We believe that we have meritorious defenses to the counterclaims against us, and we intend to vigorously contest these counterclaims.

In connection with our July 2011 acquisition of the outstanding securities of Zeus Technology Limited (Zeus), the share purchase agreement provided for certain additional potential payments (acquisition-related contingent consideration) totaling up to $27.0 million in cash, based on achievement of certain bookings targets related to Zeus products for the period from July 20, 2011 through July 31, 2012 (the Zeus Earn-Out period). The share purchase agreement also provided for a potential $3.0 million payment as an incentive bonus to former employees of Zeus, based on achievement of certain bookings targets related to Zeus products for the Zeus Earn-Out period.

In October 2012 we served the representative of the Zeus shareholders, as lead defendant and proposed defendant class representative for all other similarly situated former shareholders of Zeus, with a lawsuit, filed in the Superior Court of the State of California, for declaratory relief.  The lawsuit seeks declaratory judgment that, among other things, (a) Riverbed is not in breach of the share purchase agreement, and (b) Riverbed does not owe any acquisition-related contingent consideration under the share purchase agreement because the necessary conditions precedent to the payment of acquisition-related contingent consideration did not occur. In November 2012, the representative of the Zeus shareholders filed a cross-complaint against Riverbed and Riverbed Technology Limited in the Superior Court of the State of California.  The cross-complaint claims breach of contract and breach of the covenant of good faith and fair dealing, and seeks declaratory judgment that Riverbed has breached the share purchase agreement and that the entire $27.0 million in contingent consideration is payable to Zeus shareholders. We believe that the contention of the representative of the Zeus shareholders is without merit and intend to vigorously defend our determination.

In November 2012 we received a grand jury subpoena issued by the United States District Court for the Eastern District of Virginia. The subpoena requests documents related to certain federal government contracting matters, including a $19 million transaction involving the sale of our products and services by a Riverbed reseller to an agency of the federal government in 2009. We are cooperating fully with this inquiry.

From time to time, we are involved in various legal proceedings, claims and litigation arising in the ordinary course of business. There are no currently pending legal proceedings at March 31, 2013 that, in the opinion of management, would have a material adverse effect on our financial position, results of operations or cash flows.

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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 condensed 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 forward-looking statements include statements related to: our business and strategy, trends affecting our business and financial results, international expansion plans, direct and indirect sales plans and strategies, growth of our revenue, costs and expenses (including sales and marketing expenses), gross margins, our share repurchase program, our acquisitions, the effect of fluctuations in exchange rates and our hedging activities on our financial results, our effective tax rate and our liquidity and capital requirements. 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,” “could,” “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 or updates 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. We began commercial shipments of our Steelhead products in May 2004 and have since sold our products to over 23,000 customers worldwide, including customers resulting from acquisitions. We have two product lines:

•our Application Acceleration product line, which includes our Steelhead appliances directed at the WAN optimization market, and our virtual application delivery controllers (ADCs), web content optimization (WCO), and storage delivery; and

•our Performance Management product line, which includes our application-aware network performance management (NPM) and application performance management (APM) products acquired from OPNET.

We are headquartered in San Francisco, California. Our personnel are located throughout the U.S. and in more than thirty-five countries worldwide. We expect to continue to add personnel in the U.S. and internationally to provide additional geographic sales, research and development, general and administrative and technical support coverage.

The Riverbed Strategy

Our goal is to develop solutions that are widely recognized as the preeminent performance and efficiency standard for organizations of all sizes and geographies. Key elements of our strategy include:

• Build a unified performance platform - Riverbed is the performance company. Our vision is to give customers the tools to create the highest performing IT environment possible, enabling users everywhere to be more productive while giving IT teams greater control over their enterprises' technology resources. Our vision focuses on the intersection of applications, networks, and storage, and brings customers a single, unified view of performance in their distributed environment.

• Maintain and extend our technological advantages - We believe that we offer the broadest ability to enable rapid, reliable access to applications and data for our customers. We intend to enhance our position as a leader and innovator in the WAN optimization, NPM, APM, and virtual ADC markets. We also intend to continue to sell new capabilities, such as our new cloud solutions, into our installed base and to new customers. Continuing investments in research and development are critical to maintaining our technological advantage.

• Enhance and extend our product lines - We plan to introduce enhancements to our product capabilities in order to address our customers' size and application requirements. We also plan to introduce new products to extend our market and utilize our technology platform to extend our capabilities.

• Extend our technology partner ecosystem - We plan to enhance our product capabilities via integration of partner technologies, in particular by increasing the selection of third-party applications on the Riverbed® Virtual Services Platform (VSP).

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• Increase market awareness - To generate increased demand for our products, we will continue to market the effectiveness of our comprehensive IT performance solutions.

• Scale our sales force and distribution channels - We will continue to innovate to grow our revenue and increase market share. We sell our products directly through our sales force and indirectly through channel partners. We intend to expand our direct sales force and leverage our indirect channels to extend our geographic reach and market penetration.

• Enhance and extend our support and services capabilities - On an ongoing basis, we plan to enhance and extend our support and services capabilities to continue to support our growing global customer base. For example, we recently launched Splash, a new feature-rich community site for customers.

Major Trends Affecting Our Financial Results

Company Outlook

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 continue to grow our business. Our product revenue growth rate will depend significantly on continued growth in the WAN optimization, APM, NPM, ADC and WCO markets, and our ability to continue to attract new customers in those markets 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 achieve profitability in the future 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.

Revenue

Our revenue has grown rapidly since we began shipping products in May 2004, increasing from $2.6 million in 2004 to $836.9 million in 2012. Revenue grew by 35% in the three months endedMarch 31, 2013 to $246.1 million from $182.4 million in the three months endedMarch 31, 2012. We believe that our revenue growth is a positive sign that our products have a significant value proposition to our customers and that the markets that we compete in are still expanding.

Costs and Expenses

Operating expenses consist of sales and marketing, research and development, general and administrative expenses, and acquisition-related costs. Personnel-related costs, including stock-based compensation, are the most significant component of each of these expense categories. As of March 31, 2013, we had 2,614 employees, an increase of 56% from 1,674 employees at March 31, 2012. The increase in employees is the most significant driver behind the increase in costs and operating expenses from the three months endedMarch 31, 2012 to the three months endedMarch 31, 2013. The increase in employees was required to support our increased revenue and is primarily due to our acquisitions during the period. The timing and number of additional hires has and could materially affect our operating expenses, both in dollar amount and as a percentage of revenue, in any particular period.

Stock-based Compensation Expense

Stock-based compensation expense and related payroll taxes were $24.9 million and $23.7 million in the three months endedMarch 31, 2013 and 2012, respectively. We expect to continue to incur significant stock-based compensation expense and anticipate further growth in stock-based compensation expense as our employee base grows because we expect stock-based compensation to continue to play an important part in the overall compensation structure for our employees.

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Stock-based compensation expense and related payroll tax was as follows:

(in thousands)	Three months ended March 31,
	2013		2012
Cost of product	$	259	$	254
Cost of support and services	1,861		1,643
Sales and marketing	10,965		9,503
Research and development	7,720		7,364
General and administrative	4,114		4,898
Total stock-based compensation expense and related payroll taxes	$	24,919	$	23,662

Acquisitions

On December 18, 2012, we completed our acquisition of OPNET Technologies, Inc. (OPNET) to extend our NPM business into the APM market. The addition of OPNET's broad-based family of APM products enhances our position in the NPM and APM markets and enables us to provide customers with an integrated solution that both monitors network and application performance and also accelerates it. The total acquisition date fair value of consideration transferred was $980.2 million, which included cash payments of $857.0 million, common stock issued of $122.6 million and the fair value of options assumed of $0.6 million.

The results of operations of OPNET are included in our condensed consolidated results for the periods subsequent to the acquisition date and are part of our Performance Management product line. In the three months endedMarch 31, 2013, we recognized $45.3 million in revenue, from the sale of the acquired company’s products and services and we recognized $41.7 million of operating expenses, which included $20.8 million of acquisition-related intangible amortization.

Seasonality

Our operating results may be affected by seasonal buying patterns. Historically, the third and fourth quarters have been the strongest for us. While the second quarter has traditionally been the weakest for OPNET.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (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 condensed 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 condensed consolidated financial statements could be adversely affected.

The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: revenue recognition, accounting for business combinations, stock-based compensation, accounting for income taxes, inventory valuation and allowances for doubtful accounts. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our year ended December 31, 2012 for a more complete discussion of our critical accounting policies and estimates including revenue recognition, accounting for business combinations including the fair value measurement of contingent consideration, goodwill, intangible assets and impairment assessments, stock-based compensation, accounting for income taxes, and inventory valuation. Our critical accounting policies have been discussed with the Audit Committee of the Board of Directors. We believe there have been no material changes to our critical accounting policies and estimates during the three months endedMarch 31, 2013, compared to those discussed in our Form 10-K for the year ended December 31, 2012.

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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, Performance Management, Stingray and Whitewater products and is typically recognized upon delivery. 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 and is recognized as the services are performed.

	Three months ended March 31,
(in thousands)	2013			2012
Total Revenue	$	246,139		$	182,413
Total Revenue by Type:
Product	$	148,040		$	117,034
Support and services	$	98,099		$	65,379
% Revenue by Type:
Product	60		%	64		%
Support and services	40		%	36		%
Total Revenue by Geography:
Americas	$	158,142		$	103,657
Europe, Middle East and Africa	$	57,834		$	50,538
Asia Pacific	$	30,163		$	28,218
% Revenue by Geography:
Americas	64		%	57		%
Europe, Middle East and Africa	23		%	28		%
Asia Pacific	12		%	15		%
Total Revenue by Product Line:
Application Acceleration	$	184,962		$	170,235
Performance Management	$	61,177		$	12,178
% Revenue by Product Line:
Application Acceleration	75		%	93		%
Performance Management	25		%	7		%
Total Revenue by Sales Channel:
Direct	$	48,969		$	10,815
Indirect	$	197,170		$	171,598
% Revenue by Sales Channel:
Direct	20		%	6		%
Indirect	80		%	94		%

Quarter Ended March 31, 2013 Compared to the Quarter Ended March 31, 2012: Product revenue increased by 26.5% in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, which was primarily due to acquisitions and an increase in unit volume from increasing sales to existing customers. We believe the market for our products has grown due to increased market awareness of WAN optimization, performance management and ADC, and an increase in distributed organizations, which increases dependence on timely access to data and applications. As of March 31, 2013, our products have been sold to over 23,000 customers, compared to 18,000 customers as of March 31, 2012. As a result of our strategic relationship with Juniper, we continue to recognize approximately $4.0 million of product revenue each quarter.

Substantially all of our customers purchase support when they purchase our products. Support and services revenue increased 50.0% in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. As our customer base grows, we expect our revenue generated from support and services to increase.

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In the three months ended March 31, 2013, we derived 80% of our revenue from indirect channels compared to 94% for the three months ended March 31, 2012. We expect indirect channel revenue to continue to be a substantial majority of our revenue.

We generated 39% of our revenue in the three months ended March 31, 2013 from international locations, compared to 47% in the three months ended March 31, 2012. We continue to expand into international locations and introduce our products in new markets and expect international revenue to increase in dollar amount over time.

Revenue by product line consists of Application Acceleration revenue and Performance Management revenue. Application Acceleration revenue increased by $14.0 million, or 8.2%, in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, due to an increase in unit volume from increasing sales to existing customers. We believe the market for our Application Acceleration products has grown due to increased market awareness of WAN optimization and an increase in distributed organizations. Performance Management revenue increased by $55.4 million, or 455%, in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. The increase was primarily due to our acquisition of OPNET, which accounted for $51.7 million of Performance Management revenue in the three months ended March 31, 2013, as well as continued adoption of our NPM products.

Cost of Revenue and Gross Margin

Cost of product revenue consists of the costs of the appliance hardware, manufacturing, shipping and logistics costs, expenses for inventory obsolescence, warranty obligations, and amortization of acquisition-related intangibles. 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.

	Three months ended March 31,
(in thousands)	2013			2012
Revenue:
Product	$	148,040		$	117,034
Support and services	98,099			65,379
Total revenue	246,139			182,413
Cost of revenue:
Cost of product	40,900			27,889
Cost of support and services	28,042			18,782
Total cost of revenue	68,942			46,671
Gross profit:	$	177,197		$	135,742
Gross margin for product	72		%	76		%
Gross margin for support and services	71		%	71		%
Total gross margin	72		%	74		%

Quarter Ended March 31, 2013 Compared to the Quarter Ended March 31, 2012: The total cost of product revenue increased $13.0 million, or 46.7%, in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, due primarily to an increase in revenue and associated increase in product costs of $4.3 million, or 28.0%, and an increase in the amortization of acquisition-related intangible assets of $8.2 million.

Cost of support and services revenue increased $9.3 million, or 49.3%, as we added more professional services headcount domestically and abroad coupled with increases in freight, duties and taxes, and repair costs to support our growing customer

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base. Support and services headcount was 366 employees, as of March 31, 2013 compared to 209 employees as of March 31, 2012. The increase in headcount was primarily the result of the OPNET acquisition.

Gross margins decreased slightly to 72% in the three months ended March 31, 2013 as compared to 74% in the three months ended March 31, 2012. Product gross margins decreased to 72% in the three months ended March 31, 2013 from 76% in the three months ended March 31, 2012 primarily as a result of an increase in amortization of acquisition-related intangible assets. Gross margins for support and services remained unchanged at 71% due to the elimination of certain redundant transportation and warehousing costs as we converted to a new logistics provider, which costs savings were offset by increased personnel costs primarily associated with increased headcount due to the OPNET acquisition.

Sales and Marketing Expenses

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 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.

	Three months ended March 31,
($ in thousands)	2013			2012
Sales and marketing expenses	$	115,721		$	73,815
Percent of total revenue	47		%	40		%

Quarter Ended March 31, 2013 Compared to the Quarter Ended March 31, 2012: Sales and marketing expenses increased by $41.9 million, or 56.8%, in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to increases in personnel costs of $23.4 million. The increase in personnel costs, which include salaries, commissions, bonuses and related benefits and stock-based compensation, primarily due to headcount increasing to 1,137 employees as of March 31, 2013 from 778 employees as of March 31, 2012, was primarily as a result of the OPNET acquisition. The sales and marketing expense is further attributed to increased marketing-related activities and travel and expense of $3.1 million. Intangibles amortization contributed $12.6 million to the increase in sales and marketing expense.

Research and Development Expenses

Research and development (R&D) expenses primarily include personnel costs and facilities costs. We expense R&D costs 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 R&D efforts because we believe they are essential to maintaining our competitive position.

	Three months ended March 31,
($ in thousands)	2013			2012
Research and development expenses	$	48,961		$	34,111
Percent of total revenue	20		%	19		%

Quarter Ended March 31, 2013 Compared to the Quarter Ended March 31, 2012: R&D expenses increased by $14.9 million, or 43.5%, in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to increases in personnel costs of $13.6 million. The increase in personnel costs, which include salaries, bonuses and related benefits and stock-based compensation, was due to headcount increasing to 803 employees as of March 31, 2013 from 471 employees as of March 31, 2012, primarily as a result of the OPNET acquisition.

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General and Administrative Expenses

General and administrative (G&A) 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 ended March 31,
($ in thousands)	2013			2012
General and administrative expenses	$	19,114		$	14,634
Percent of total revenue	8		%	8		%

Quarter Ended March 31, 2013 Compared to the Quarter Ended March 31, 2012: G&A expenses increased by $4.5 million, or 30.6%, in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to an increase in salaries, bonuses and related benefits of $2.9 million offset by a $0.7 million decrease in stock compensation expense. The overall increase was primarily due to headcount increasing to 275 employees as of March 31, 2013 from 187 employees as of March 31, 2012, primarily as a result of the OPNET acquisition.

Acquisition-Related Costs

Acquisition-related costs include changes in the fair value of the acquisition-related contingent consideration, transaction costs and integration-related costs.

	Three months ended March 31,
(in thousands)	2013		2012
Acquisition-related costs	$	4,136	$	556

Quarter Ended March 31, 2013 Compared to Quarter Ended March 31, 2012: During the three months ended March 31, 2013, we recorded acquisition-related costs of $4.1 million, primarily related to integration-related costs associated with our acquisition of OPNET. We expect to incur significant costs during the balance of 2013 associated with the integration of OPNET. During the three months ended March 31, 2012, we recorded transaction costs of $0.6 million related to the acquisition of Expand, and an expense of $1.1 million related to change in fair value of the acquisition-related contingent consideration to be paid directly to the Zeus shareholders, which was offset by a credit of $1.1 million related to change in fair value of the acquisition-related contingent consideration to be paid directly to the Aptimize shareholders.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income on our cash and investments, interest expense, and foreign currency exchange gains and losses. Cash has historically been invested in highly liquid investments such as time deposits held at major banks, commercial paper, U.S. government agency discount notes, money market mutual funds and other money market securities with average portfolio maturities at the date of purchase less than two years. Interest expense of $6.3 million in the three months ended March 31, 2013 relates to the $575 million senior secured term loan facility established in connection with our acquisition of OPNET.

	Three months ended March 31,
(in thousands)	2013			2012
Interest income	$	204		$	389
Interest expense	(6,280		)	—
Other	(288		)	(1,894		)
Total other expense, net	$	(6,364	)	$	(1,505	)

Quarter Ended March 31, 2013 Compared to the Quarter Ended March 31, 2012: Other expense, net, increased in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to increased interest expense resulting from the debt incurred pursuant to the acquisition of OPNET offset by decreased foreign exchanges losses. The foreign exchange losses in the first quarter of 2012 were related to the revaluation of the acquisition-related assets and liabilities.

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Provision for Income Taxes

Our provision (benefit) for income taxes is based on our estimated annual effective tax rate, adjusted for discrete tax items recorded in the period. The provision (benefit) for income taxes for the three months ended March 31, 2013 and 2012 was $(9.0) million and $4.2 million, respectively. Our income tax provision consists of federal, foreign, and state income taxes. Our effective tax rate was 52.6% and 37.5% for the three months ended March 31, 2013 and 2012, respectively.

Our effective tax rate for the three months ended March 31, 2012 differed from the federal statutory rate due to state taxes and significant permanent differences. Significant permanent differences included taxes in foreign jurisdictions with a tax rate different than the U.S. federal statutory rate, nondeductible stock-based compensation expense, and amortization of deferred tax charges related to our intercompany sales of intellectual property rights. The federal R&D tax credit expired on December 31, 2011. Accordingly, we did not record this benefit during any interim period in 2012.

Our effective tax rate for the three months ended March 31, 2013 differed from the federal statutory rate due to state taxes and significant permanent differences. Significant permanent differences included taxes in foreign jurisdictions with a tax rate different than the U.S. federal statutory rate, nondeductible stock-based compensation expense, amortization of deferred tax charges related to our intercompany sales of intellectual property rights, and the federal R&D tax credit. The federal R&D tax credit was retroactively reinstated and extended to December 31, 2013 during the first quarter of 2013. As a result of the reinstatement, we recorded a discrete tax benefit of $4.3 million related to 2012 in the first quarter of 2013. The reinstatement is the primary reason for the effective tax rate for the three months ended March 31, 2013 being higher when compared to the same period in the prior year.

Our effective tax rate in 2013 and in future periods may fluctuate on a quarterly basis. The effective tax rate could be affected by the geographic distribution of our worldwide earnings or losses, our stock-based compensation expense, changes in the valuation of our deferred tax assets, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles, or interpretations thereof. Starting in the second quarter of 2013, we expect our effective tax rate to be impacted by a transfer of certain OPNET intellectual property rights to our Singapore subsidiary.

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.

We are subject to income tax in the U.S. as well as numerous state and foreign jurisdictions. With the exception of several states, we are no longer subject to federal, state and local income tax examinations for years before 2009, although carryforward attributes that were generated prior to 2009 may still be adjusted upon examination by the California Franchise Tax Board if the attributes either have been or will be used in a future period. In addition, we file tax returns in multiple foreign taxing jurisdictions. In our most significant foreign jurisdictions, the United Kingdom and Singapore, the open tax years range from 2008 to 2011.

Liquidity and Capital Resources

(in thousands)	March 31, 2013		December 31, 2012
Working capital	$	284,724	$	309,973
Cash and cash equivalents	$	227,347	$	280,509
Short and long-term investments	$	275,463	$	249,081

	Three months ended March 31,
(in thousands)	2013			2012
Cash provided by operating activities	$	43,271		$	15,119
Cash (used in) provided by investing activities	$	(33,337	)	$	3,280
Cash (used in) provided by financing activities	$	(61,728	)	$	18,203

Cash and Cash Equivalents

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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.

Short and long-term investments consist of government-sponsored enterprise obligations, municipal bonds, treasury bills and corporate bonds and notes. The fair value of investments is determined as the exit price in the principal market in which we would transact. The fair value of our investments has not materially fluctuated from historical cost. The accumulated unrealized losses, net of tax, on investments recognized in accumulated other comprehensive loss in our stockholders’ equity as of March 31, 2013 are not significant.

Cash and cash equivalents, short-term investments and long-term investments decreased by $26.8 million in the three months endedMarch 31, 2013 to $502.8 million.

Restricted cash primarily represents collateralized letters of credit for the security deposits in connection with lease agreements for our facilities. Current restricted cash, which is included in the Prepaid expenses and other current assets in the condensed consolidated balance sheets, totaled $1.3 million and $1.1 million at March 31, 2013 and December 31, 2012, respectively. Long-term restricted cash totaled $7.2 million at March 31, 2013 and $7.6 million at December 31, 2012. Long-term restricted cash is included in Other assets in the condensed consolidated balance sheets.

We have significant international operations. Our sales contracts are principally denominated in U.S. dollars and therefore changes in foreign exchange rates have not materially affected our cash flows from operations. As we fund our international operations, our cash and cash equivalents are affected by changes in exchange rates. In 2011, we concluded acquisitions in international locations that increased our exposure to fluctuations in foreign currency exchange rates on certain foreign currency denominated assets and liabilities. During the three months ended March 31, 2012, we settled some of these foreign currency denominated assets and liabilities. To date, the foreign currency effect on our cash and cash equivalents has not been material.

Cash Provided by 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 related cash flows from their sales efforts.

Cash provided by operating activities was $43.3 million in the three months endedMarch 31, 2013, an increase of $28.2 million compared to $15.1 million in the three months endedMarch 31, 2012. Cash provided by operating activities associated with adjustments for certain non-cash items, including depreciation and amortization, and stock-based compensation, excess tax benefits from employee stock plans and deferred taxes in the three months endedMarch 31, 2013 was $45.1 million an increase of $20.4 million from the prior year period. Cash used in operating activities associated with changes in operating assets and liabilities in the three months endedMarch 31, 2013 was $1.8 million, a decrease of cash used in operating activities of $7.7 million from the prior year period.

Cash (Used in) Provided by Investing Activities

Cash used in investing activities primarily relate to purchases of investments, net of sales and maturities, capital expenditures, and acquisitions. Cash used in investing activities was $33.3 million in the three months endedMarch 31, 2013, a $36.6 million increase in cash used compared to $3.3 million of cash provided by investing activities in the three months endedMarch 31, 2012. The increase in cash used in investing activities is substantially attributable to reduced proceeds from the sale and maturities of investment securities of $82.7 million for the three months ended March 31, 2013 as compared to the prior year period, which more than offset reduced purchases of investment securities of $39.3 million, as well as decreased capital purchases of $1.3 million and acquisitions of $5.5 million.

Cash (Used in) Provided by Financing Activities

Cash used in financing activities in the three months endedMarch 31, 2013 totaled $61.7 million and consisted of cash used to pay down long-term borrowings of $49.3 million and cash used to repurchase shares of $25.0 million, which was offset by cash provided from the proceeds from the issuance of common stock of $10.8 million and excess tax benefit from employee stock plans of $1.8 million.

We believe that our net proceeds from operations, together with our cash balance at March 31, 2013, will be sufficient to fund our projected operating requirements, including the minimum payments due on our borrowings, 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

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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.

In December 2012, we entered into a credit agreement and related security and other agreements for a seven year $575.0 million senior secured term loan facility to facilitate the acquisition of OPNET. The senior credit agreement governing the senior credit facility requires Riverbed to pay, subject to certain exceptions, outstanding term loans with:

•Up to 50% of annual excess cash flow (as defined in the senior credit facility agreement);

•100% of the net cash proceeds of certain non-ordinary course asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions; and

•100% of the net cash proceeds of the incurrence or issuance of certain debt, other than the net cash proceeds of certain debt permitted under the senior credit facility.

This provision may result in the use of an increased portion of our cash flows from operations to pay principal payments on our senior credit facility (limiting our flexibility in planning for, or reacting to, changes in our business and industry) making the prepayments unavailable for operations, working capital, capital expenditures, expansion, acquisitions, or other purposes.

In the future, we may enter into other arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Contractual Obligations

The following is a summary of our contractual obligations as of March 31, 2013:

	Total		Remaining nine months of 2013		2014		2015		2016		2017		Thereafter
	(in thousands)
Contractual Obligations
Principal payments on borrowings (1)	$	525,000	$	—	$	—	$	—	$	—	$	—	$	525,000
Interest payments on borrowings (1)	149,422		22,376		21,291		21,291		21,291		21,233		41,940
Operating leases	197,945		14,363		18,168		20,157		21,916		20,784		102,557
Purchase obligations (2)	8,456		8,412		21		17		6		—		—
Total contractual obligations	$	880,823	$	45,151	$	39,480	$	41,465	$	43,213	$	42,017	$	669,497

(1) Refer to Note 13 of "Notes to Condensed Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2012 for borrowings detail.

(2) 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.

As of March 31, 2013, we had $34.4 million of unrecognized tax benefits, including interest and penalties, related to uncertain tax positions. Because of the high degree of uncertainty regarding the settlement of these liabilities, we are unable to estimate the years in which future cash outflows may occur. As a result, this amount is not included in the table above.

Off-Balance Sheet Arrangements

At March 31, 2013 and December 31, 2012, 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.

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Other

At March 31, 2013 and December 31, 2012, we did not have commercial commitments under lines of credit, standby repurchase obligations or other such debt arrangements.

Recent Accounting Pronouncements

See Note 1 of “Notes to Condensed 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 U.S. dollars and therefore our revenue and receivables are not subject to significant 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. We estimate a 5% devaluation of the U.S. dollar against these currencies would increase our operating expenses by approximately $1 million. We enter into forward contracts to manage our exposure to foreign currency volatility that exists as part of our ongoing business operations. We utilize cash flow hedges to reduce the exchange rate impact on a portion of our operating expenses. Contracts are denominated primarily in British pounds, Euros, Australian dollars, and Singapore dollars. We do not enter into any foreign exchange derivative instruments for trading or speculative purposes.

Interest Rate Sensitivity

We had unrestricted cash and cash equivalents, and investments totaling $502.8 million and $529.6 million at March 31, 2013 and December 31, 2012, respectively. Cash and cash equivalents of $227.3 million and $280.5 million at March 31, 2013 and December 31, 2012, respectively, are held for working capital purposes and 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. Investments of $275.5 million and $249.1 million at March 31, 2013 and December 31, 2012, respectively, consist of government-sponsored enterprise obligations, treasury bills, FDIC-backed certificates of deposit, municipal bonds and corporate bonds and notes.

We do not enter into investments for trading or speculative purposes. Due to the high investment quality and relative 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. Declines in interest rates, however, will reduce future investment income. Interest on highly liquid short-term investments such as U.S. Treasury bills remains low. In addition, the volatility in the credit markets increases the risk of write-downs of investments to fair market value.

The applicable interest rate on our senior secured term loan facility is equal to the 3-month adjusted LIBOR (with a minimum Libor rate of 1.0%) plus 3.0% per annum. The interest rate is currently estimated at approximately 4.0%. A change in the interest rate of 1% would result in an increase (or decrease) in annual interest expense of $5.3 million.

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 defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2013, the end of the period covered by this quarterly 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).

Disclosure controls and procedures 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 quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and 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.

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Based upon the controls evaluation, our CEO and CFO have concluded that as of March 31, 2013, 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 Securities and 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 2013 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

On June 1, 2011, we served Silver Peak Systems, Inc. with a lawsuit, filed in the United States District Court for the District of Delaware, alleging infringement of certain patents. The lawsuit seeks unspecified damages and injunctive relief. On July 22, 2011, Silver Peak Systems denied the allegations and requested declaratory judgments of invalidity and non-infringement.

On August 17, 2011, Silver Peak Systems amended its counterclaims against us, alleging infringement by Riverbed of three U.S. patents: 7,630,295, titled “Network Device Continuity”; 7,945,736, titled “Dynamic Load Management of Network Memory”; and 7,948,921, titled “Automatic Network Optimization.” The patents purport to cover certain features offered on the Riverbed Steelhead products. Silver Peak seeks unspecified damages and a permanent injunction prohibiting Riverbed from offering those features. On September 20, 2011, we denied Silver Peak Systems’ allegations and requested declaratory judgments of invalidity and non-infringement.

On December 21, 2011, we amended our lawsuit against Silver Peak Systems to allege infringement of an additional patent.

Our lawsuit against Silver Peak Systems currently alleges infringement of three patents.

At this time we are unable to estimate any range of reasonably possible loss relating to these actions. Discovery is ongoing, and trial of our claims against Silver Peak Systems is currently scheduled to begin on September 30, 2013, though the trial judge has asked Silver Peak Systems and us to reschedule that date. Trial of Silver Peak Systems' claims against us is currently scheduled to begin on March 24, 2014. We believe that we have meritorious defenses to the counterclaims against us, and we intend to vigorously contest these counterclaims.

In connection with our July 2011 acquisition of the outstanding securities of Zeus Technology Limited (Zeus), the share purchase agreement provided for certain additional potential payments (acquisition-related contingent consideration) totaling up to $27.0 million in cash, based on achievement of certain bookings targets related to Zeus products for the period from July 20, 2011 through July 31, 2012 (the Zeus Earn-Out period). The share purchase agreement also provided for a potential $3.0

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million payment as an incentive bonus to former employees of Zeus, based on achievement of certain bookings targets related to Zeus products for the Zeus Earn-Out period.

In October 2012 we served the representative of the Zeus shareholders, as lead defendant and proposed defendant class representative for all other similarly situated former shareholders of Zeus, with a lawsuit, filed in the Superior Court of the State of California, for declaratory relief. The lawsuit seeks declaratory judgment that, among other things, (a) Riverbed is not in breach of the share purchase agreement, and (b) Riverbed does not owe any acquisition-related contingent consideration under the share purchase agreement because the necessary conditions precedent to the payment of acquisition-related contingent consideration did not occur. In November 2012, the representative of the Zeus shareholders filed a cross-complaint against Riverbed and Riverbed Technology Limited in the Superior Court of the State of California. The cross-complaint claims breach of contract and breach of the covenant of good faith and fair dealing, and seeks declaratory judgment that Riverbed has breached the share purchase agreement and that the entire $27.0 million in contingent consideration is payable to Zeus shareholders. We believe that the contention of the representative of the Zeus shareholders is without merit and intend to vigorously defend our determination.

In November 2012 we received a grand jury subpoena issued by the United States District Court for the Eastern District of Virginia. The subpoena requests documents related to certain federal government contracting matters, including a $19 million transaction involving the sale of our products and services by a Riverbed reseller to an agency of the federal government in 2009. We are cooperating fully with this inquiry.

From time to time, we are subject to various legal proceedings, claims and litigation arising in the ordinary course of business. We do not believe we are party to any currently pending legal proceedings the outcome of which would 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.

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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 and in our other public statements. 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.

Risks Related to Our Business and Industry

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 and volatile U.S., European 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. Historically, the amount of customer orders that have not been shipped as of the end of a fiscal year has not been material. Moreover, a significant portion of our quarterly sales typically occurs during the last month of the quarter, and sometimes within the last few weeks or days of the quarter. 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 has occurred recently and at other times in the past, or if the guidance we provide to the market falls below the expectations of investors or securities analysts, as has occurred recently and at other times in the past, the price of our common stock could decline substantially. Such a stock price decline could occur, and has occurred recently and at other times in the past, even when we have met our publicly stated revenue and/or earnings guidance.

In addition to other risks 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 or political conditions in our domestic and international markets, including the recent deficit spending and government debt issues surrounding the U.S. and Eurozone economies;

• unpredictability in the development of core, new or adjacent markets, or a slowdown or reversal of growth in these markets, including the wide area network (WAN) optimization, network and application performance management, and public cloud computing markets and including any markets that we enter as a result of acquisitions;

• our ability to successfully and timely integrate, and realize the anticipated benefits of, our acquisition of OPNET Technologies;

• limited visibility into customer spending plans;

• changing market conditions, including current and potential customer consolidation;

• customer or partner concentration. For example, two value-added distributors represented more than 10% of our revenue for the three months ended March 31, 2013;

• variation in sales channels, product costs or mix of products sold;

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• the timing of recognizing revenue in any given quarter as a result of revenue recognition accounting 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;

• 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 and execution of product transitions or new product introductions, including any related or resulting inventory costs;

• delays in customer purchasing cycles in response to our introduction of new products or product transitions. For example, a product transition caused some of our customers to lengthen their purchasing decision in the first quarter of 2012 as they spent time evaluating new models. In addition, we experienced extended sales cycles in the first quarter of 2012 as some of our customers evaluated our new Granite product;

• customer acceptance of new product introductions. For example, in 2010, we introduced solutions for the public cloud, including a cloud-intelligent WAN optimization solution and a cloud storage accelerator targeting back-up and select archive workloads. In the first quarter of 2012 we introduced our Granite product, which delivers edge virtual server infrastructure. These new products may not achieve any significant degree of market acceptance or be accepted into our sales channel by our channel partners. Furthermore, many of our target customers have not purchased products similar to these and might not have a specific budget for the purchase of these products;

• in addition to OPNET, our ability to successfully integrate any other businesses that we acquire or have acquired, especially where those acquisitions result in our entering new markets. For example, in July 2011 we acquired Zeus Technology Ltd., a company that delivers high-performance software-based load balancing and traffic management solutions for virtual and cloud environments, and Aptimize Ltd., a web content optimization company;

• 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;

• any component shortages or price fluctuations in our supply chain. For example, we have been impacted by the limited availability and resulting price increases of disk drive components following the floods in Thailand;

• our ability to establish and maintain successful relationships with channel partners, and the effectiveness of any changes we make to our distribution model;

• any decision to increase or decrease operating expenses in response to changes in the marketplace or perceived marketplace opportunities;

• our ability to derive benefits from our investments in sales, marketing, engineering or other activities;

• our ability to successfully work with partners on combined solutions. For example, where our product features the Riverbed Services Platform (RSP) or Virtual Services Platform (VSP), we are required to work closely with our partners in product validation, marketing, selling and support;

• volatility in our stock price, which may lead to higher stock compensation expenses;

• unpredictable fluctuations in our effective tax rate due to the geographic distribution of our worldwide earnings or losses, 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; and

• the effects of natural disasters, including any effects on our supply chain or on the willingness of our customers or prospective customers to make capital commitments.

Adverse economic conditions make it difficult to predict revenues for a particular period and may lead to reduced information technology spending, which would harm our business and operating results. In addition, turmoil in credit

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markets during economic downturns increases our exposure to our customers' and partners' credit risk, which could result in reduced revenue or increased write-offs of accounts receivable.

Our business depends on the overall demand for information technology, and in particular for WAN optimization, and on the economic health and general willingness of our current and prospective customers, both enterprises and government organizations, to make capital commitments. These government organizations include non-U.S. as well as U.S. federal, state and local organizations. In some quarters, sales to government organizations have represented, and may in the future represent, a significant portion of overall sales. If the conditions in the U.S. and global economic environment, including the economies of any international markets that we serve, remain uncertain or continue to be volatile, or if they deteriorate further, our business, operating results, and financial condition would likely be materially adversely affected. For example, U.S. government deficit spending and debt levels, as well as actions taken by the U.S. Congress relating to these matters, could negatively impact the U.S. and global economies and adversely affect our financial results. In addition, our financial results could be negatively impacted by the continuing uncertainty surrounding, or any deterioration relating to, the debt levels or growth prospects for Eurozone economies.

Economic weakness, customer financial difficulties and constrained spending on IT initiatives have resulted, and may in the future result, in challenging and delayed sales cycles and could negatively impact our ability to forecast future periods. In addition, the markets we serve are 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 or volatile economic conditions would likely harm our business and operating results in a number of ways, including information technology spending reductions among customers and prospects, longer sales cycles, lower prices for our products and services and reduced unit sales. A reduction in information technology spending could occur or persist even if economic conditions improve. In addition, any increase in worldwide commodity prices may result in higher component prices and increased shipping costs, both of which may negatively impact our financial results.

Many of our customers and channel partners use third parties to finance their purchases of our products. Any freeze, or reduced liquidity, in the credit markets may result in customers or channel partners either delaying or entirely foregoing planned purchases of our products if they are unable to obtain the required financing. This would result in reduced revenues, and our business, operating results and financial condition would be harmed. In addition, these customers' and partners' ability to pay for products already purchased may be adversely affected by any credit market turmoil or an associated downturn in their own business, which in turn could harm our business, operating results and financial condition.

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, and has resulted in the past, 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 and 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, in the WAN Optimization market we face competition from a number of established companies, including Cisco Systems, Blue Coat Systems, Citrix Systems and F5 Networks. We also face competition from a large number of smaller private companies and new market entrants. In the Network Performance Management and Application Performance Management markets, our Riverbed Performance Management product line primarily competes with Netscout, Computer Associates (NetQos) and Compuware. As a result of our July 2011 acquisitions of Zeus and Aptimize, we face additional competition from F5 Networks and Citrix Systems.

We expect increased competition from our current competitors as well as 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

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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 improved, and has announced its intention to further 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 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 channel partners to sell our products. Disruptions to, or our failure to effectively implement, 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 channel partners, including value-added resellers, value-added distributors, service providers, and systems integrators. A substantial majority of our revenue (80% in the three months ended March 31, 2013) is derived from indirect channel sales and we expect indirect channel sales to continue to account for a substantial majority of our total revenue. We employ a two-tier distribution strategy, as part of a larger effort to scale our reach and better serve the needs of our channel. Our revenue depends in large part on the effective performance of these channel partners, and changes to our distribution model, the loss of a channel partner or the reduction in sales to our channel partners could materially reduce our revenues and gross margins. 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. For example, we have encountered delays with certain partners where internal processing issues have prevented that partner from providing a purchase order to us in a timely manner.

Recruiting and retaining qualified channel partners and training them in our technology and product offerings requires significant time and resources. These recruitment, retention and training efforts have assumed even greater importance as we have evolved into a multi-product company. 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. In particular, training and educating our channel partners has become more complex as we have introduced products that extend beyond core WAN optimization. We have no 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 would decrease and our business, operating results and financial condition would be materially adversely affected.

We expect our gross margins to vary over time and our recent level of product gross margin may not be sustainable. In addition, our product gross margins may be adversely affected by our introductions of new products.

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 but not limited to 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, write-downs for obsolete or excess inventory, increased costs due to changes in component pricing or

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charges incurred due to component holding periods if our forecasts do not accurately anticipate product demand, warranty-related issues, product discounting, freight charges, or our introduction of new products or new product platforms or entry into new markets with different pricing and cost structures.

Any introduction of, and transition to, a new product line requires us to forecast customer demand for both legacy and new product lines for a period of time, and to maintain adequate inventory levels to support the sales forecasts for both product lines. If new product line sales, or product line sales in general, exceed our sales forecast, we could possibly experience stock shortages, which would negatively affect our revenues. If legacy product line sales, or product lines sales in general, fall short of our sales forecast, we could have excess inventory, as has occurred from time to time. Any inventory charges would negatively impact our product gross margins.

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 channel model distribution strategy evolves, utilizing value-added resellers, value-added distributors, systems integrators and service providers, and as the breadth of our product offerings increases, 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 and money in our sales efforts without any assurance that these endeavors will produce any sales. Even after making the decision to purchase, customers may deploy our products slowly and deliberately. In addition, product purchases are frequently and increasingly subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays.

Customers may also defer purchases as a result of anticipated or announced releases of new products or enhancements by our competitors or by us. For example, in the first quarter of 2012 and in prior periods we have experienced delays in customer purchasing cycles in response to our introduction of new products or product transitions; we expect that this trend will continue in the future. Product purchases may be, and in the recent past have been, delayed by the volatile U.S. and global economic environment, which introduced additional risk into our ability to accurately forecast sales in a particular quarter. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, revenue will be harmed and we may miss our stated guidance for that period.

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, including by way of acquisitions, 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. In addition, the introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction, or may cause customers to defer purchasing our existing products in anticipation of the new or enhanced products, any of which could adversely affect our business and operating results.

Acquisitions could disrupt our business and cause dilution to our stockholders.

During 2012 we acquired OPNET Technologies, Inc. and certain assets of Expand Networks Ltd. In prior years we acquired Mazu Networks, Inc., CACE Technologies, Inc., Global Protocols LLC, Zeus Technology Ltd. and Aptimize Ltd. Also in 2012 we entered into multiple agreements contemporaneously with Juniper Networks, Inc. (Juniper) pursuant to which we acquired certain rights and licenses to Juniper's WX WAN optimization product line, entered into a technology integration agreement to integrate our Steelhead® Mobile technology into the Juniper Networks® Junos® Pulse client to enable a mobile acceleration solution for mobile phones and tablets, and granted Juniper a source code license for our application delivery controller (ADC) technology and related tools with rights to modify, create and distribute their own ADC product. In the future we may acquire other businesses, products or technologies. Our ability as an organization to integrate acquisitions is unproven. Any acquisitions that we complete 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, we may encounter difficulties in integrating personnel, operations, technologies or products from the acquired businesses and in retaining and motivating key personnel from these businesses. We may also encounter difficulties in maintaining uniform standards, controls, procedures and

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policies across locations, or in managing geographically or culturally diverse locations. We may experience significant problems or liabilities associated with acquired or integrated product quality or technology. Acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities and increase our expenses. 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. Certain of these risks relating specifically to our December 2012 acquisition of OPNET, including risks relating to our borrowing $575 million pursuant to the terms of a senior credit facility, are set forth in the section titled “Risks Related to Our Acquisition of OPNET Technologies”.

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. 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 or increase our costs and harm our operating results.

Our use of Riverbed-designed content in our hardware platforms has increased our susceptibility to scarcity or delivery delays for custom components within our systems. Shortages in components that we use in our products have occurred recently and may occur in the future and our suppliers' ability to predict the availability of such components may be limited. For example, the flooding in Thailand affected the availability of disk drive components and, consequently, increased our costs in procuring those components. Some components that we use are available only from limited sources of supply. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantity requirements and delivery schedules. The unavailability of any component that is necessary to the proper functioning of our appliances would prevent us from shipping products. Any inability to ship our products in a timely manner would delay sales and adversely impact our revenue, business, operating results and financial condition.

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 limited inventory of our product components, and we rely on suppliers to deliver components in a timely manner based on forecasts we provide. We rely on both purchase orders and long-term contracts with our suppliers, but we may not be able to secure sufficient components at reasonable prices or of acceptable quality, which would seriously impact our ability to deliver products to our customers and, as a result, adversely impact our revenue.

If we fail to accurately predict 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 and purchase orders to our contract manufacturers. To the extent that any such demand forecast or purchase order is binding, 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

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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 and our business, operating results and financial condition would be adversely affected.

In addition, a portion of our manufacturing is performed overseas and is therefore subject to risks associated with doing business in other countries.

We are dependent on various information technology systems, and failures of or interruptions to those systems could harm our business.

Many of our business processes depend upon our information technology systems (IT), the systems and processes of third parties, and on interfaces with the systems of third parties. For example, our order entry system provides information to the systems of our contract manufacturers, which enables them to build and ship our products. If those systems fail or are interrupted, or if our ability to connect to or interact with one or more networks is interrupted, our processes may function at a diminished level or not at all. This would harm our ability to ship products, and our financial results would likely be harmed.

In addition, reconfiguring our IT systems or other business processes in response to changing business needs, or in connection with integrating acquired businesses, including our recent acquisition of OPNET, may be time-consuming and costly. To the extent this impacted our ability to react timely to specific market or business opportunities, our financial results would likely be harmed.

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 U.S. 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. The invalidation of any of our key patents could benefit our competitors by allowing them to more easily design products similar to ours. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages, and competitors may in any event 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 in the past 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, we are currently engaged in patent infringement litigation against Silver Peak Systems, in which both we and Silver Peak Systems assert patent infringement by the other party. Intellectual property litigation has resulted, and may in the future result, in substantial costs and diversion of management resources, and may in the future 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, and any industry or market that we may enter in the future may be, 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 we 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, in the third quarter of 2011, Silver Peak Systems alleged that we infringe certain of its patents. We expect that infringement claims may increase as the number of products and competitors in any of our markets 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 legal 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

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

In the years ended December 31, 2012 and 2011, and in the three months ended March 31, 2013, we derived 45%, 45%, and 39%, respectively, of our revenue from customers outside the U.S. We have personnel in numerous countries worldwide. We expect to continue to add personnel in additional countries. Our international sales and operations makes us subject to various U.S. and international laws and regulations, including those relating to antitrust, data protection, and business dealings with both commercial and governmental officials and organizations. Our international sales and operations subject us to a variety of additional 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;

• the effects of any political instability on the general willingness of our current and prospective customers to make capital commitments;

• unfavorable changes in tax treaties or laws;

• increased exposure to foreign currency exchange rate risk; and

• reduced protection for intellectual property rights in some countries.

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 sales and operations. Our failure to manage any of these risks successfully, or to comply with these laws and regulations, could harm our operations, reduce our sales and harm our business, operating results and financial condition. For example, in certain foreign countries, particularly those with developing economies, certain business practices that are prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act, may be more commonplace. Although we implement policies and procedures with the intention of ensuring compliance with these laws and regulations, our employees, contractors and agents, as well as channel partners involved in our international sales, may take actions in violation of our policies. Any such violation could have an adverse effect on our business and reputation.

Some of our business partners also have international operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage these risks.

Foreign currencies periodically experience rapid fluctuations in value against the U.S. dollar. Any foreign currency devaluation against the U.S. dollar increases the real cost of our products to our customers and partners in foreign markets where we sell in U.S. dollars, which has resulted in the past and may result in the future in delayed or cancelled purchases of our products and, as a result, lower revenues. In addition, this increase in cost increases the risk to us that we will be unable to collect amounts owed to us by such customers or partners, which in turn would impact our revenues and could materially adversely impact our business and financial results. Any devaluation may also lead us to more aggressively discount our prices in foreign markets in order to maintain competitive pricing, which would negatively impact our revenues and gross margins. Conversely, a weakened U.S. dollar could increase the cost of local operating expenses and procurement of raw materials to the extent we purchase components in foreign currencies.

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Starting in the first quarter of fiscal 2012, we entered into forward contracts designated as cash flow hedges to protect against foreign currency exchange rate risks. The effectiveness of our hedges depends on our ability to accurately forecast expenses denominated in non-US dollar currencies. As a result, we could incur significant losses from our hedging activities if our forecasts are incorrect. In addition, our hedging activities may be ineffective or may not offset any or more than a portion of the adverse financial impact resulting from currency variations. Gains or losses associated with hedging activities also may impact our profitability.

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.

We are investing in engineering, sales, marketing, services and infrastructure, and these investments may achieve delayed or lower than expected benefits, which could harm our operating results.

We intend to continue to add personnel and other resources to our engineering, sales, marketing, services and infrastructure functions as we focus on developing new technologies, growing our market segment, capitalizing on existing or new market opportunities, increasing our market share, and enabling our business operations to meet anticipated demand. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our operating results may be adversely affected.

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 or a sustained decrease in the price of our stock could affect our ability to attract and retain key personnel. When our stock price declines, our equity incentive awards may lose retention value, which may negatively affect our ability to attract and retain such 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. For the three months ended March 31, 2013, our research and development expenses were $49.0 million or approximately 20% 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.

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 would 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. Any 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, both organically and through acquisitions of complementary businesses and technologies, including our December 2012 acquisition of OPNET, and anticipate that further significant expansion will be required. This growth is expected to continue to place significant demands on our management,

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infrastructure and other resources. To manage our growth, we 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.

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 WAN optimization products will become less effective.

Our WAN optimization 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 WAN optimization products to reduce such redundancy depends on our products' ability to recognize the data being requested. Our WAN optimization 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 WAN optimization products. For those organizations that elect to encrypt their data transmissions from the end-user to the server in a format that we are not able to decrypt, our WAN optimization products will offer limited 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 customers' infrastructure. In such cases, and others, 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, either 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.

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, including our partners, 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 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 broader product offering than ours may be able to offer concessions that we are not able to match because we currently offer a relatively focused line of products and have fewer resources than many of our competitors. If organizations are reluctant to add network infrastructure products from new vendors or otherwise decide to work with their existing vendors, our business, operating results and financial condition will be adversely affected.

Our products are highly technical and may contain undetected software or hardware errors. These errors, and any related claims against our products, 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. In particular, new products and product platforms may be subject to increased risk of hardware issues. Some errors in our products may be discovered only after a product has been installed and used by customers. Some of these

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errors may be attributable to third-party technologies incorporated into our products, which makes us dependent upon the cooperation and expertise of such third parties for the diagnosis and correction of such errors. The diagnosis and correction of third-party technology errors is particularly difficult where our product features the RSP or VSP, because it is not always immediately clear whether a particular error is attributable to a technology incorporated into our product or to third-party software deployed by our customers on our product. In addition, where we have incorporated technology from a third-party, the solutions may be more complex and may lead to new technical errors that may prove difficult to diagnose and support. Any delay or mistake in the initial diagnosis of an error will result in a delay in the formulation of an effective action plan to correct such error. 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.

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 U.S. 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. We could also be subject to similar conditions or restrictions should there be any changes in the licensing terms of the open source software incorporated into our products. In either 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 or successful 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 appliance and software products, some of which are currently available from only one vendor. Any disruption in our access to these or other software programs or third-party technologies 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 products, 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. For example, our products are subject to export controls of the U.S. and other countries and may be exported outside the U.S. and other countries 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 increase the cost of building and selling our products, 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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Our sales to the United States government customers subject us to special risks that could adversely affect our business.

We sell our products directly or indirectly to the United States government and, in connection with such sales, we must comply with complex federal procurement and related laws and regulations, which may impose added costs on our business. For the year ended December 31, 2012, approximately 11% of our sales constituted sales made directly or indirectly to the United States government. The federal government audits and reviews the performance of federal contractors regarding contract terms, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. Such an audit could result in an adverse finding, including a finding that we overcharged the government or failed to comply with applicable laws, regulations and standards. If a government audit or other investigation results in an adverse finding or uncovers improper or illegal activities, we may be required to restate previously reported operating results or we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with United States federal government agencies. We could face additional expense and delay if any of our competitors, or competitors of the prime contractors to which we serve as subcontractors, protest or challenge contract awards made to us or to our prime contractors pursuant to competitive bidding. In addition, United States government contracts contain provisions and are subject to laws and regulations that provide government customers with rights and remedies not typically found in commercial contracts; these remedies include rights to terminate for convenience on short notice, reduce or modify contracts or subcontracts, and claim rights in products and technology produced by us.

We compete in rapidly evolving markets and have a limited operating history, which makes 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 companies in rapidly evolving markets characterized by rapid technological change, changing customer needs, increasing competition, 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, 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.

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 and compensation committees, distribution of annual and interim reports, stockholder meetings, stockholder approvals, solicitation of proxies, conflicts of interest, stockholder voting rights and codes of conduct. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act contains various provisions applicable to the corporate governance functions of public companies. 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 controls 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 controls over financial reporting and disclosure controls and procedures. In particular, for the year ended December 31, 2012, we performed system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 requires 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 controls 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

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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.

Changes in financial accounting standards may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

A change in accounting policies can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New pronouncements and varying interpretations of existing pronouncements have occurred with frequency and may occur in the future. Changes to existing rules, or changes to the interpretations of existing rules, could lead to changes in our accounting practices, and such changes could adversely affect our reported financial results or the way we conduct our business.

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, restricted stock units (RSU), and an employee stock purchase plan as significant components 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 compensation charges that we are required to record related to these equity awards 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.

We may have exposure to greater than anticipated tax liabilities.

Our provision for income taxes is subject to volatility and could be adversely affected by nondeductible stock-based compensation, changes in the research and development tax credit laws, earnings being lower than anticipated in jurisdictions where we have lower statutory rates and being higher than anticipated in jurisdictions where we have higher statutory rates, transfer pricing adjustments, not meeting the terms and conditions of tax holidays or incentives, changes in the valuation of our deferred tax assets and liabilities, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, like other companies, we may be subject to examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. While we regularly assess the likelihood of adverse outcomes from such examinations and the adequacy of our provision for income taxes, there can be no assurance that such provision is sufficient and that a determination by a tax authority will not have an adverse effect on our results of operations.

If we fail to successfully manage our exposure to the volatility and economic uncertainty in the global financial marketplace, our operating results could be adversely impacted.

We are exposed to financial risk associated with the global financial markets, including volatility in interest rates and uncertainty in the credit markets. Our exposure to market rate risk for changes in interest rates relates primarily to our $575 million senior credit facility and our investment portfolio. The primary objective of our investment activities is to preserve principal, maintain adequate liquidity and portfolio diversification while at the same time maximizing yields without significantly increasing risk. However, the valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities that we hold, interest rate changes, the ongoing strength and quality, and recent instability, of the global credit market, and liquidity. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments. Additionally, instability and uncertainty in the financial markets, as has been recently experienced, could result in the incurrence of significant realized or impairment losses associated with certain of our investments, which would reduce our net income.

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, most recently through establishment of a $575 million senior secured term loan facility to facilitate our acquisition of OPNET. 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 our current senior secured term loan facility contain certain covenants that limit future borrowings and require that certain payments, investments and acquisitions meet defined leverage ratios, and any

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additional financing may place additional 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.

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, break-ins or terrorism.

Our main operations, including our primary data center, 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 disrupt our operations and therefore harm our business, operating results and financial condition. A natural disaster could also impact our ability to manufacture and deliver our products to customers, or provide support to our customers, any of which would 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, which could result in the theft of intellectual property, customer information or other sensitive data. Any of these incidents could result in both legal and reputational costs. Natural disasters, acts of unrest or terrorism or war could also cause disruptions in our or our customers' business, our domestic and international markets, 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 Our Acquisition of OPNET Technologies

The integration of the businesses and operations of Riverbed and OPNET involves risks, and the failure to integrate successfully the businesses and operations in the expected time frame may adversely affect our future results.

Any failure to meet the challenges involved in integrating the operations of Riverbed and OPNET successfully or to otherwise realize any of the anticipated benefits of the acquisition of OPNET could harm our results of operations. Our ability to realize the benefits of the acquisition will depend in part on the timely integration of organizations, operations, procedures, policies and technologies, as well as the harmonization of differences in the business cultures of the two companies and retention of key personnel. The integration of the companies will be a complex, time-consuming and expensive process that, even with proper planning and implementation, could significantly disrupt our business. The challenges involved in this integration include the following:

• combining our respective product offerings;

• preserving customer, supplier and other important relationships of both Riverbed and OPNET and resolving potential conflicts that may arise;

• minimizing the diversion of management attention from ongoing business concerns;

• addressing differences in the business cultures of Riverbed and OPNET to maintain employee morale and retain key employees; and

• coordinating and combining geographically diverse operations, relationships and facilities, which may be subject to additional constraints imposed by distance and local laws and regulations.

We may not successfully integrate the operations of Riverbed and OPNET in a timely manner, or at all. If we fail to manage the integration of these businesses effectively, our growth strategy and future profitability could be negatively affected, and we may fail to achieve the intended benefits of the acquisition.

We may not realize the anticipated benefits of the acquisition of OPNET.

We are acquiring OPNET to realize certain anticipated benefits. Our ability to realize these anticipated benefits depends, in part, on our ability to successfully combine the businesses of Riverbed and OPNET. We may not realize the anticipated benefits to the extent, or in the time frame, anticipated. The anticipated benefits are necessarily based on projections and assumptions, and assume, among other things, a successful integration of OPNET's business with our Cascade product line. If we do not realize the anticipated benefits, our growth strategy and future profitability could be negatively affected.

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We have taken on significant debt to finance the OPNET acquisition, which will decrease our business flexibility and increase our interest expense.

In connection with the acquisition of OPNET, we incurred approximately $575 million of debt. This debt, together with certain covenants imposed on us in connection with incurring this debt, will, among other things, reduce our flexibility to respond to changing business and economic conditions and will increase our interest expense. Our ability to pay interest and repay the principal for our indebtedness is dependent upon our ability to manage our business operations, generate sufficient cash flows to service such debt and the other factors discussed in this section. There can be no assurance that we will be able to manage any of these risks successfully. We may also need to refinance a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing may not be as favorable as the terms of our existing debt. Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. In addition, changes by any rating agency to our outlook or credit rating could negatively affect the value of both our debt and equity securities and increase the interest amounts we pay on outstanding or future debt. These risks could adversely affect our financial condition and results of operations.

The completion of the acquisition may cause customers or suppliers to terminate their relationships with us.

Certain of our customers or suppliers may be uncertain about the combined company or may have prior experience with OPNET that causes such customers or suppliers to be dissatisfied with OPNET. Likewise, certain customers or suppliers of OPNET may be uncertain about the combined company or may have prior experience with us that causes such customers or suppliers to be dissatisfied with us. This uncertainty or dissatisfaction may cause such customers or suppliers to terminate their existing relationships with or seek to change their existing agreements with us. These decisions could have an adverse effect on our business.

Uncertainty following the acquisition may cause customers, suppliers and channel partners to delay or defer decisions concerning us and adversely affect our business, financial condition and operating results.

Uncertainty following the acquisition of OPNET may cause customers, suppliers and channel partners to delay or defer decisions concerning us or our products, which could negatively affect our business. Customers, suppliers and channel partners may also seek to change existing agreements with us as a result of the acquisition. Any delay or deferral of those decisions or changes in existing agreements could adversely affect our business.

Failure to retain key employees could diminish the anticipated benefits of the acquisition.

The success of the acquisition of OPNET will depend in part on the retention of personnel critical to the business and operations of the combined company due to, for example, their technical skills or management expertise. Employees and consultants may experience uncertainty about their future roles with us until clear strategies are announced or executed. Riverbed and OPNET, while similar, do not have the same corporate cultures, and some employees or consultants may not want to work for the combined company. In addition, competitors may recruit employees during our integration of OPNET. If we are unable to retain personnel that are critical to the successful integration and future operation of the combined companies, we could face disruptions in our operations, loss of existing customers, key information, expertise or know-how, and unanticipated additional recruiting and training costs. In addition, the loss of key personnel could diminish the anticipated benefits of the acquisition of OPNET.

Our acquisition of OPNET could trigger certain provisions contained in OPNET's agreements with third parties that could permit such parties to terminate those agreements.

OPNET may be a party to agreements that permit a counter-party to terminate an agreement or receive payments because the acquisition would cause a default or violate an anti-assignment, change of control or similar clause in such agreement. If this happens, we may have to seek to replace that agreement with a new agreement or make additional payments under such agreement. However, we may be unable to replace a terminated agreement on comparable terms or at all. Depending on the importance of such agreement to our business, the failure to replace a terminated agreement on similar terms or at all, and requirements to pay additional amounts, may increase the costs to us of operating the combined business.

Integration of the OPNET sales organization into Riverbed and transition of OPNET's sales model may adversely affect our revenue during the integration and transition period.

We have started the integration of the OPNET sales organization into our sales organization in the second quarter of 2013. Integration of the OPNET sales organization into our sales organization may cause disruption for our respective sales personnel and customers, which may cause customers and channel partners to delay or defer decisions concerning us or our products, which could negatively affect our business and revenue. In addition, the transition to a more channel sales focused

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sales model may result in a reduced selling price from us for OPNET products and services to accommodate the channel, which could negatively affect our business and revenue.

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, including our own, have been highly volatile. Further, our common stock has a limited trading history. Since our initial public offering in September 2006 through March 31, 2013, our stock price, after adjusting for our 2:1 stock split in the form of a stock dividend effected in November 2010, has fluctuated from a low of $3.55 to a high of $44.70. The market price of our common stock has at times reflected a higher multiple of expected future earnings than many other companies. As a result, even small changes in investor expectations regarding our future growth and earnings, whether as a result of actual or rumored financial or operating results, changes in the mix of products and services sold, acquisitions, industry changes, or other factors, could result in, and have recently resulted in, significant fluctuations in the market price of our common stock.

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;

• providing estimates of our future operating results, or changes of these estimates, 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 purchases, or announcement of significant sales or purchases, 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;

• an announced acquisition of or by a competitor; and

• an announced acquisition of or by us. For example, our stock price declined immediately after the announcement by us of our intention to acquire OPNET.

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 announcements by, or events that affect, other companies in our industry, or the trading price might decline in reaction to events that affect the stock market generally even if these announcements or 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 such 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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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 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered securities during the three months endedMarch 31, 2013.

ISSUER PURCHASES OF EQUITY SECURITIES

The following table summarizes the stock repurchase activity for the three months ended March 31, 2013 and the approximate dollar value of shares that may yet be purchased pursuant to our stock repurchase program:

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1) (2)
January 1, 2013 – January 31, 2013	—	$	—	—	$	137,816,000
February 1, 2013 – February 28, 2013	—	—		—	137,816,000
March 1, 2013 – March 31, 2013	1,613,064	15.52		1,613,064	112,786,000
Total	1,613,064	$	15.52	1,613,064	$	112,786,000

(1) On August 19, 2011, our Board of Directors authorized a Share Repurchase Program, which authorizes us to repurchase up to $150.0 million of our outstanding common stock. On May 17, 2012, our Board of Directors authorized a $150.0 million increase to the Share Repurchase Program. The Share Repurchase Program will expire in August 2013.

(2) During the first quarter of 2013, we repurchased 1,613,064 shares of common stock under this Program for an aggregate purchase price of approximately $25.0 million, or a weighted average of $15.52 per share. These shares were purchased in open market transactions. The timing and amounts of these purchases were based on market conditions and other factors including price, regulatory requirements and capital availability. The share repurchases were financed by available cash balances and cash from operations. The maximum dollar value of shares of common stock that remain available for purchase under the Program is $112.8 million, subject to the terms under our credit agreement.

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Item 6. Exhibits

Exhibit No.	Description
3.1	Restated Certificate of Incorporation. (1)
3.2	Amended and Restated Bylaws. (2)
4.1	Form of Common Stock Certificate. (1)
31.1	Certifications
31.2	Certifications
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.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

The certification attached as Exhibit 32.1 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 Registrant’s Registration Statement on Form S-1 (No. 333-133437) filed with the SEC on April 20, 2006, as amended.

(2) Incorporated by reference to Registrant’s Current Report on Form 8-K (No. 001-33023) filed with the SEC on February 22, 2011.

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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.

Date: May 2, 2013

RIVERBED TECHNOLOGY, INC.
By:	/s/ Jerry M. Kennelly
	Jerry M. Kennelly
	Chief Executive Officer

Date: May 2, 2013

RIVERBED TECHNOLOGY, INC.
By:	/s/ Randy S. Gottfried
	Randy S. Gottfried
	Chief Operating Officer and Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
3.1	Restated Certificate of Incorporation. (1)
3.2	Amended and Restated Bylaws. (2)
4.1	Form of Common Stock Certificate. (1)
31.1	Certifications
31.2	Certifications
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.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

The certification attached as Exhibit 32.1 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 Registrant’s Registration Statement on Form S-1 (No. 333-133437) filed with the SEC on April 20, 2006, as amended.

(2) Incorporated by reference to Registrant’s Current Report on Form 8-K (No. 001-33023) filed with the SEC on February 22, 2011.

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