10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934

(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended February 28, 2011

OR

¨ 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: 001-33162

RED HAT, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State of Incorporation)

06-1364380

(I.R.S. Employer Identification No.)

1801 Varsity Drive, Raleigh, North Carolina 27606

(Address of principal executive offices, including zip code)

(919) 754-3700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $0.0001 par value	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:        None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x    No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨    No x

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 ¨

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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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    ¨
Non-accelerated filer    ¨ (Do not check if a smaller reporting company)	Smaller reporting company    ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the common equity held by non-affiliates of the registrant as of August 31, 2010 was approximately $5.5 billion based on the closing price of $34.55 of our common stock as reported by the New York Stock Exchange on August 31, 2010. For purposes of the immediately preceding sentence, the term “affiliate” consists of each director, executive officer and greater than 10% stockholder of the registrant. There were 193,024,423 shares of common stock outstanding as of April 14, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Red Hat, Inc.’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with its annual meeting of stockholders to be held on August 11, 2011 are incorporated by reference into Part III of this Form 10-K. With the exception of the portions of the Proxy Statement expressly incorporated into this Annual Report on Form 10-K by reference, such documents shall not be deemed filed as part of this Annual Report on Form 10-K.

TABLE OF CONTENTS

		Page No.
	PART I
Item 1.	Business		3
Item 1A.	Risk Factors		19
Item 1B.	Unresolved Staff Comments		35
Item 2.	Properties		35
Item 3.	Legal Proceedings		35
Item 4.	[Removed and Reserved]		37
	PART II
Item 5.	Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		38
Item 6.	Selected Financial Data		41
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		61
Item 8.	Financial Statements and Supplementary Data		63
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		102
Item 9A.	Controls and Procedures		102
Item 9B.	Other Information		102
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance		103
Item 11.	Executive Compensation		103
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		103
Item 13.	Certain Relationships and Related Transactions, and Director Independence		103
Item 14.	Principal Accountant Fees and Services		103
	PART IV
Item 15.	Exhibits and Financial Statement Schedules		104

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ITEM 1. BUSINESS

OVERVIEW

We are a global leader in providing open source software solutions to the enterprise, including our core enterprise operating system platform, Red Hat Enterprise Linux, our enterprise middleware platform, JBoss Enterprise Middleware, our virtualization and cloud solutions and other Red Hat enterprise technologies. We employ an open source software development and licensing model that uses the collaborative input of an international community of contributors to develop and enhance software. We actively participate in this community-oriented development process, often in a leadership role, and leverage it to create our Red Hat- and JBoss-branded enterprise technologies.

We believe the open source development and licensing models offer advantages over the proprietary software development and licensing models both for Red Hat and our customers. Through the open source development model, we leverage the community of developers and users, whose collective resources and knowledge supplement the developers we employ. As a result, we believe we are able to offer functionality enhancements and upgrades more quickly and with less development cost than is typical of many proprietary software vendors. In turn, our customers are able to take advantage of the quality and value of open source software, which we help develop, aggregate, integrate, test, certify, deliver, maintain and support for their enterprise use.

The collectively developed software is distributed under open source licenses, such as the GNU General Public License and GNU Lesser General Public License, permitting access to the human-readable software source code. These licenses also provide relatively broad rights for licensees to use, copy, modify and distribute open source software. These broad rights afford significant latitude for our customers to inspect, suggest changes, customize or enhance the software if they so choose.

Red Hat’s participation in the community-driven development process is illustrated by Red Hat’s sponsorship role in the Fedora Project and the JBoss.org communities. This participation enables us to leverage the efforts of these international communities, which we believe allows us to reduce both development cost and time and to enhance community acceptance and support of our products and technologies. Thus, we are able to use the Fedora Project and the JBoss.org communities as proving grounds and virtual laboratories for innovations that we can draw upon for inclusion in our enterprise technologies. Additionally, the open and transparent nature of these projects provides our customers and potential customers with access and insights into the future direction of Red Hat products and technologies.

We offer a choice of operating systems and virtualization options for mainframes, servers, work stations and desktops that support multiple application areas, including software as a service, cloud deployments, edge-of-network applications, information technology infrastructure (applications such as database, ERP and large web servers), mainframe computing, data centers, technical/developer workstations and corporate desktops.

JBoss Enterprise Middleware delivers a range of middleware products for developing, integrating, deploying and managing distributed composite and web-based applications. JBoss Enterprise Middleware is based on the Java programming language that enables the deployment of service-oriented architectures. JBoss Enterprise Middleware provides an application infrastructure for building and deploying distributed applications that are accessible via the Internet, corporate intranets, extranets, clouds and virtual private networks. Examples of applications deployed on JBoss Enterprise Middleware include hotel and airline reservations, online banking, credit card processing, securities trading, healthcare systems, customer and partner portals, retail and point-of-sale systems and telecommunications network infrastructure.

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We also provide other infrastructure enterprise technologies, including software development tools, higher availability clustering of systems and services, and directory services. We intend to continue to expand capabilities available under our open source architecture to help meet the performance, security, reliability and scalability requirements critical to the enterprise.

Our hosted content distribution offerings, such as Red Hat Network (“RHN”), permit these Red Hat enterprise technologies to be updated and configured. Our management offerings, Red Hat Network Satellite (“RHN Satellite”) and JBoss Operations Network (“JBoss ON”), permit our customers to provision, update, monitor and manage these and other technologies in an automated fashion. Red Hat’s Customer Portal provides customers with simplified and streamlined access to Red Hat support services and tools for knowledge and troubleshooting, software downloads and account management.

Our service offerings consist of training, consulting and support designed to meet the needs of the enterprise. Our service capabilities promote further adoption and use of open source solutions within the enterprise, as well as reinforce our Red Hat and JBoss brands. Our training services consist of an array of courses that are designed to cover the full range of Red Hat’s products and enable customers to leverage the benefits of our enterprise technologies in their IT environments. We also offer the services of experienced consultants to assist with the technology needs of our customers. In addition, we provide varying levels of technical support services to assist customers with installing, configuring and using Red Hat and JBoss enterprise technologies.

In addition to our development and licensing models, we believe that our business model differentiates Red Hat from many software companies. We provide Red Hat enterprise technologies under annual or multi-year subscriptions. Throughout the life of a subscription, a customer is entitled to specified levels of support as well as security updates, bug fixes, functionality enhancements and upgrades to the technology, when and if available, via the Red Hat Customer Portal. This business model allows the customer to access consistent improvements to and innovations in our technologies and the services it needs for the duration of the subscription.

We sell subscriptions to Red Hat enterprise technologies directly to customers and indirectly through various channels of distribution. We sell directly to customers through our sales force and our web store. Our indirect sales channels include distributors, systems integrators, value added resellers (“VARs”), telecom/network technology companies, cloud computing providers, hosting providers and independent software vendors (“ISVs”). In addition, leading global server and workstation hardware original equipment manufacturers (“OEMs”) support and pre-load Red Hat enterprise technologies on various servers and workstations and also sell their hardware together with Red Hat Enterprise Linux as part of pre-configured solutions. Red Hat Enterprise Linux and JBoss Enterprise Middleware technologies also have gained widespread support from many of the leading ISVs and independent hardware vendors (“IHVs”). With the support and tools we make available, many of these companies have engineered and certified that their offerings run on or with Red Hat Enterprise Linux, JBoss Enterprise Middleware technologies and Red Hat Enterprise Virtualization or, in the case of some IHVs and ISVs, have built their products using Red Hat Enterprise Linux, JBoss Enterprise Middleware and Red Hat Enterprise Virtualization. We believe widespread support from these companies helps to increase the level of market acceptance and adoption of our enterprise technologies.

As the benefits of open source software become more widely recognized, acceptance of open source software by mainstream enterprise users continues to grow. We see this growth in the number of Linux server operating systems in use today, the increasing number of JBoss Enterprise Middleware deployments and an increased level of interest in open source virtualization and cloud technologies.

Red Hat, Inc. was incorporated in Connecticut in March 1993 as ACC Corp., Inc., which subsequently changed its name to Red Hat Software, Inc. Red Hat Software, Inc. reincorporated in Delaware in September 1998 and changed its name to Red Hat, Inc. in June 1999. Except as otherwise indicated, all references in this report to “we”, “us”, “our”, the “Company”, the “registrant”, or “Red Hat” refers to Red Hat, Inc. and its subsidiaries.

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INDUSTRY BACKGROUND

Origins of open source software

The open source software development model originated in academic and research environments. The model is based on the collaborative development of the software’s source code, the human-readable code that is used to develop software based on open protocols and standards. Whether individually or in groups, and regardless of location, participating developers, many of whose projects are commercially funded, make their code available over the Internet, give and receive comments on open source code and modify it accordingly. This development model gives open source software an inherent level of transparency and choice that contrasts with the proprietary software development model.

Under the proprietary model of software development, a software vendor generally develops the code itself or acquires components from other vendors, without the input from a wider community of participants. The vendor generally licenses to the user only the machine-readable binary (or object) code, with no or limited rights to copy, modify or redistribute that code, and does not make the source code available to the user or other developers. Moreover, peer review and collaborative enhancements are not readily possible because of the lack of access to the source code. In contrast, under the open source development model, the software vendor provides users and other developers with access both to the binary code and the source code and permits the user to use, copy, modify and redistribute the code to others.

The growth of the Internet has greatly increased the scale and efficiency of open source software development through the availability of collaborative technologies such as email lists, news groups and websites. These technologies have enabled large communities of independent developers, located around the world, to collaborate on more complex open source projects.

We believe that open source software is a viable and arguably superior alternative to traditional proprietary software. As compared to the proprietary model, the open source model:

· allows a company’s in-house development team to collaborate and innovate with a global community of independent developers and testers;

· provides the user access to both binary and source code, and the right to inspect, copy, modify and redistribute the software;

· offers greater flexibility through open rather than proprietary protocols and formats; and

· permits the user ongoing access to improvements made to the software that are distributed by others.

Moreover, we believe open source software offers many potential benefits for software customers and vendors. Not only are customers able to take advantage of the quality and value of open source software, but they can inspect and help diagnose problems easily, and they also may choose to customize the software to suit their particular needs. Vendors are able to leverage the community of open source developers, reducing development costs, decreasing time-to-market and mitigating the risks associated with developing new software solutions.

Challenges to the widespread adoption of open source by the enterprise

Despite a strong initial market acceptance of Red Hat Enterprise Linux, JBoss Enterprise Middleware and other Red Hat enterprise technologies by large enterprises, a number of obstacles exist to the continued growth and adoption of these technologies within the enterprise, including:

· competition from well-established proprietary software industry participants such as Hewlett-Packard Company (“HP”), International Business Machines Corporation (“IBM”), Microsoft Corporation (“Microsoft”), Oracle Corporation (including Sun Microsystems, Inc., which Oracle acquired in early 2010) (“Oracle”) and VMware, Inc. (“VMware”);

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· a limited number of established, profitable and viable open source industry participants;

· uncertainty as to the long-term success of a development, licensing and business model not based on limiting access to proprietary technology; and

· potential concern over threats of intellectual property infringement claims.

OUR BUSINESS

We generally offer and provide our enterprise technologies with related services to our customers in the form of annual or multi-year subscriptions. Our subscription model is designed to provide customers with an all-inclusive software solution, incorporating product delivery, problem resolution, ongoing corrections, enhancements and new versions and compatibility with a portfolio of certified hardware and software applications. In addition, Red Hat customers are eligible to participate in our Open Source Assurance program, which provides certain assurances to customers in the event there is an intellectual property infringement issue with our enterprise products. We believe that the chief information officers of large enterprises select Red Hat enterprise technologies and choose to pay on a subscription basis because of the business value, flexibility and rapid innovation that we provide.

Our subscription business model contrasts with the typical proprietary software license model from a revenue recognition perspective. Under our subscription model, we generally defer revenue when we bill the customer and recognize revenue over the life of the subscription term. In contrast, under a proprietary software license model, the vendor typically recognizes license revenue in the period that the software is initially licensed.

We believe the success of our business model is influenced by:

· the extent to which we can expand the breadth and depth of our technology and service offerings;

· our ability to enhance the value of subscriptions for Red Hat enterprise technologies through frequent and continuing innovations to these technologies;

· our ability to generate increasing revenue from channel partner and other strategic relationships, including distributors, OEMs, other hardware vendors, ISVs, cloud computing providers, VARs and systems integrators;

· the acceptance and widespread deployment of open source solutions by small, medium and large enterprises and government agencies;

· our ability to generate subscription revenue for Red Hat enterprise technologies; and

· our ability to provide customers with consulting and training services that generate additional revenue.

Use of the open source development model

We have embraced the open source model in the development of our technology solutions and services. By developing under a collaborative model, we provide a mechanism for independent and commercial developers and our customers to influence our enterprise technologies and to receive the benefits of the collective contributions.

Our open source software operating system

One of the most widely known open source technologies is the Linux kernel, the operating system engine of Red Hat Enterprise Linux. An operating system is the software that allows a computer and its various hardware and software components to interact. A worldwide community of developers collaborates to improve the Linux kernel, and we believe we are able to integrate the best of those improvements into our stable, yet innovative and

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high-performance Red Hat Enterprise Linux platform. Moreover, as discussed below, Red Hat Enterprise Linux enjoys the support of major OEMs and ISVs, increasing the interest of developers in adding further enhancements to the Linux kernel.

We seek to engineer Red Hat Enterprise Linux to be a comprehensive, technically advanced, reliable and stable operating system. Red Hat Enterprise Linux is an integrated, open source operating system that is designed to meet the performance, reliability and scalability demands of chief information officers of large and small enterprises, from the edge of the network to cloud deployments to the data center.

Our operating system is intended to be:

· flexible and scalable—capable of running clusters of thousands of systems in a large enterprise on a single device;

· functional—able to handle discrete or multiple applications accessed by multiple users;

· adaptable—allowing the user to modify the software to meet particular needs and requirements;

· stable and reliable—constantly reviewed and fine-tuned by developers worldwide;

· secure—offering some of the highest levels of security in the commercial operating system market;

· cost-effective—lowering the total cost of ownership; and

· high performing—yielding an array of quality performance results using industry benchmarks.

Our virtualization solutions

Virtualization allows a single computer system to function as multiple virtual systems by abstracting operating systems and application software from the underlying hardware infrastructure, thereby allowing customers to use a common hardware infrastructure to run multiple operating systems and applications. A major component of our virtualization technology is the Kernel Virtual Machine (“KVM”) platform, which is integrated within the Linux kernel. Our current version of Red Hat Enterprise Linux includes integrated virtualization.

The Red Hat Enterprise Virtualization portfolio is a set of virtualization products that includes a standalone hypervisor and management tools. Our virtualization offerings are intended to permit customers to maximize resource allocation and operational flexibility. The combination of Red Hat Enterprise Virtualization and other Red Hat enterprise technologies provides a foundation for enterprises to deploy both public and private clouds.

Our middleware tools and platforms

Middleware generally refers to the software that enables the development, operation and integration of software programs and applications. JBoss Enterprise Middleware combines, integrates and refines features from the JBoss.org communities into stable, enterprise-class platform distributions for application and service hosting, content aggregation, data integration and application integration for both the development and deployment of applications.

Our middleware tools and platforms are intended to be:

· easily deployable—decreasing development complexity;

· intuitive—improving end-user experience;

· effective—reducing business process friction;

· flexible—working with many different applications and enterprise environments; and

· cost-effective—lowering the total cost of ownership.

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Our systems management solutions

RHN, RHN Satellite, Red Hat Customer Portal and JBoss ON provide software distribution and management solutions for Red Hat Enterprise Linux and JBoss Enterprise Middleware technologies. With a focus on open standards and scalability, our systems management solutions help organizations increase productivity, lower costs and enhance security by provisioning, managing, monitoring and updating systems.

These systems management solutions provide organizations with flexibility, security and scalability. Red Hat’s customers can manage their deployments by connecting to Red Hat’s hosted servers as part of a base subscription, or by implementing the enhanced on-site functionality of RHN Satellite and JBoss ON.

Our services

Our services offerings consist of training, consulting and support designed to meet the needs of the enterprise. With these services, our goal is to help promote customer success by sharing knowledge, experience and advice at all stages of the information technology (“IT”) life cycle.

By providing consulting and support services that help to enable infrastructure, application integration and middleware solutions, we facilitate the further adoption and use of our products in the enterprise. In addition, our training services help populate customers with skilled Red Hat certified architects, engineers and administrators who often serve as internal open source advocates, increasing opportunities for the successful adoption and use of our enterprise technologies. Our service capabilities promote and reinforce the use of open source solutions as well as our Red Hat and JBoss brands.

Support by leading independent software and hardware vendors and systems integrators

To facilitate the widespread deployment of Red Hat Enterprise Linux, JBoss Enterprise Middleware and Red Hat Enterprise Virtualization, we have focused on gaining broad support for our technologies from the providers of hardware, software and systems integrator services critical to the large enterprise. For example, leading software vendors with applications that run on, or with, our enterprise technologies include BMC Software, Inc. (“BMC”), CA, Inc. (“CA”), EMC Corporation (“EMC”), HP, IBM, Microsoft, Oracle, SAP AG (“SAP”), SAS Institute Inc. (“SAS”), Sybase, Inc. (“Sybase”), Symantec Corporation (“Symantec”) and VMware. In addition, we have certification and pre-load arrangements with leading hardware providers including HP, IBM and Dell Inc. (“Dell”), as well as Cisco Systems, Inc. (“Cisco”), Fujitsu Limited (“Fujitsu”), Hitachi, Ltd (“Hitachi”) and NEC Corporation (“NEC”), and certification agreements with leading networking and storage companies including Cisco, EMC, HP, NetApp, Inc., Nokia Corporation and Nokia Siemens Networks. We also have strategic alliance relationships with the leading semiconductor providers Advanced Micro Devices, Inc. (“AMD”) and Intel Corporation (“Intel”).

An online destination for the open source community

We are dedicated to helping serve the interests and needs of open source software users and developers online. Our websites, which include redhat.com, jboss.org, fedoraproject.org and opensource.com, serve as a substantial resource for information related to open source initiatives. These websites contain news we believe to be of interest to open source users and developers, features for the open source community, a commerce site and a point-of-access for software downloads and upgrades. Visitors to our websites can organize and participate in user groups, make available incremental code improvements and bug fixes and share knowledge regarding the use and development of open source software and methods. By acting as a publisher of open source information and by facilitating the interaction of developers, particularly through the Fedora and JBoss.org projects, we believe our websites have become community centers for open source. Additionally, redhat.com serves as a primary customer interface, web store and order mechanism for many of our products and services.

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Segment reporting

Red Hat is organized primarily on the basis of three geographic business units: the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific. These business units are aggregated into one reportable segment due to the similarity in the nature of products provided (e.g., Red Hat Enterprise Linux, JBoss Enterprise Middleware and Red Hat Enterprise Virtualization products), financial performance economics (e.g., revenue growth and gross margin), methods of distribution (direct and indirect) and customer classification and base (e.g., distributors, resellers and enterprise).

Geographic Areas

As of February 28, 2011, Red Hat had more than 70 locations around the world, including offices in North America, South America, Europe, Asia and Australia. As stated above, we manage our international business on the basis of three geographic business units: the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific. See NOTE 2 and NOTE 20 to our Consolidated Financial Statements for further discussion of our geographic areas of operation. See Item 1A, “Risk Factors”, for a discussion of some of the risks attendant to our operations.

Backlog

The total value of all non-cancellable subscription and service agreements at February 28, 2011, included deferred revenue classified as a current liability of $572.6 million, long-term deferred revenue of $199.6 million and backlog (the value of customer contracts to be billed in the future) not reflected in our financial statements in excess of $190.0 million. The total value of all non-cancellable subscription and service agreements at February 28, 2010, included deferred revenue classified as a current liability of $480.6 million, long-term deferred revenue of $165.3 million and backlog not reflected in our financial statements in excess of $190.0 million. The amount of backlog at February 28, 2011 that we expect to be billed during the fiscal year ending February 29, 2012 is in excess of $120.0 million.

BUSINESS STRATEGY

Our business strategy is designed to (i) gain widespread adoption of Red Hat enterprise technologies, including virtualization and cloud technologies, by enterprise users globally, (ii) generate increasing revenue from our existing customer base by renewing existing subscriptions and providing additional value to our customers, and by growing the number of enterprise technologies that comprise our open source architecture, (iii) generate increasing revenue by providing additional systems management, support and other targeted services and (iv) generate increasing revenue from channel partner and other strategic relationships, including distributors, OEMs, IHVs, ISVs, cloud computing providers, VARs and systems integrators and our own international expansion, among other means.

The key elements of our strategy aim to:

Increase the adoption of Red Hat enterprise technologies by enterprise users globally

A growing number of enterprise users view Red Hat Enterprise Linux as a mainstream operating system and JBoss Enterprise Middleware as a viable middleware platform for mission-critical areas of their information technology infrastructure. An increasing number of these users deploy JBoss Enterprise Middleware as a comprehensive middleware reference architecture and product portfolio for development, deployment and integration of distributed applications, business processes and web services used in a service-oriented architecture. In addition, we see increasing interest among enterprise users for our virtualization and virtualization management offerings. We seek to promote further adoption of our enterprise technologies by expanding the breadth and depth of our technology and service offerings (such as messaging, high performance

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computing, realtime and virtualization), bringing new management services to market, improving our technology infrastructure to ease the purchasing and renewal process, offering expanded services, focusing on new geographic markets, and capitalizing on the success of our existing strategic relationships. We believe the relationships with our strategic partners will continue to stimulate the technical advancement and widespread distribution of our enterprise technologies and the growth of existing third-party enterprise applications using Red Hat enterprise technologies. We believe that the low-cost, high-value offerings from Red Hat are a catalyst for change in the IT industry, enabling new deployments and migrations, which encourage a larger ecosystem of compatible hardware and software solutions.

Continue to expand cloud computing offerings

We intend to continue to expand our product offerings that optimize resource allocation and enhance performance and flexibility in cloud computing environments.

Continue to expand virtualization and other platform offerings

We intend to expand our enterprise virtualization suite of server, client and management product offerings to enable customers to increase their deployments of virtualization in enterprise and mission-critical environments. We also expect to continue to invest resources to further develop and market our messaging, realtime and grid product offerings.

Continue to expand routes to market

We intend to continue to grow our traditional distribution, VAR, OEM, IHV, ISV and channel partner networks on a global basis. In addition, we are enhancing our relationships with systems integrators in order to expand our reach into customers who traditionally rely on system integrators for advice and recommendations regarding their technology purchases.

Continue to pursue strategic acquisitions and alliances

We expect to continue to pursue a selective acquisition strategy as opportunities arise to complement and expand our offerings and service capabilities. We also intend to create and extend our strategic alliances where it is beneficial to our business.

Continue to grow our presence in international markets

We have operations in a number of countries in the Americas, EMEA and Asia Pacific, with over 70 offices worldwide. We expect to continue to expand our operations geographically.

We offer our technologies and documentation in various languages. See NOTE 2 and NOTE 20 to the Consolidated Financial Statements for a discussion of our revenue by geographic area.

Continue to invest in the development of open source technologies

We intend to continue to invest significant resources in the development of new open source technologies in areas that include messaging, virtualization, cloud computing, real-time computing, middleware, management, security and identity, capitalizing on our substantial experience working with the open source model and community. We expect this continued investment to take the form of expenditures on internal development efforts, as well as continued funding of third-party open source projects and the expansion of our developer services.

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PRODUCTS AND SERVICES

Red Hat’s software solutions, consisting of Red Hat enterprise technologies such as Red Hat Enterprise Linux, JBoss Enterprise Middleware and Red Hat Enterprise Virtualization are at the center of our subscription strategy and our open source architecture. Our services offerings, principally directed toward our medium and large enterprise customers and the leading hardware providers with whom we have strategic relationships, include technical support and maintenance, training, professional consulting services, engineering services and hardware certification.

Generally, we provide our enterprise technologies with related services in the form of annual or multi-year subscriptions. Our subscriptions include a bundle of services encompassing product delivery, problem resolution, ongoing corrections, enhancements and new versions, certified capability with a portfolio of hardware and software applications and Red Hat’s Open Source Assurance program. The subscriptions offer varying levels of support services as well as access to basic software updates and configuration management functionality via our integrated management technologies RHN, RHN Satellite, Red Hat Customer Portal and JBoss ON.

Red Hat Enterprise Linux technologies

Red Hat Enterprise Linux is an operating system built from various open source software packages including the Linux kernel, and is designed expressly for enterprise computing. Red Hat Enterprise Linux delivers the features required for commercial deployments, including:

· Support for a wide range of ISV applications from vendors such as BMC, CA, EMC, HP, IBM, Microsoft, Oracle, SAP, SAS, Sybase and Symantec;

· Certification on multiple architectures and leading OEM platforms, including Cisco, Dell, Fujitsu, HP, Hitachi, IBM, NEC and Oracle;

· Comprehensive technical support, with up to 24x7, one-hour response, available both from Red Hat and selected ISV/OEM partners;

· Performance and scalability in accordance with leading industry benchmarks;

· Stability based upon periodic upgrade cycles on a when-and-if-available basis and multiyear support lifecycle; and

· Virtualization capability incorporated into the core operating system.

The Red Hat Enterprise Linux platform is well-suited for a broad range of applications across the IT structure of an enterprise. In addition, Red Hat offers a portfolio of add-ons that extends the features of Red Hat Enterprise Linux. These add-ons, which are designed to tailor a customer’s computing environment to suit specific customer requirements, include:

· High Availability—provides on-demand failover services between nodes within a cluster intended to make applications highly available.

· Resilient Storage—enables a shared storage or clustered file system to access the same storage device over a network.

· Network Load Balancer—provides redundancy for web serving, databases, networking and storage.

· Scalable File System—provides support for file systems that are between 16 and 100 terabytes in size using advanced features such as 64-bit journaling and advanced locking algorithms.

· High Performance Network—delivers remote directory memory access over converged Ethernet helping improve network latency and capacity.

· Smart Management—includes Red Hat Network Satellite management and provisioning modules that allow a customer to provision, patch, configure and control Red Hat Enterprise Linux development, test and production systems.

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· Extended Update Support—extends the support period of a Red Hat Enterprise Linux update for up to 18 months and delivers overlapping release support to give enterprise customers more flexibility.

We believe that these add-ons provide customers with increased flexibility and choice.

JBoss Enterprise Middleware

JBoss Enterprise Middleware provides a suite of products for developing, deploying, integrating and managing distributed, composite and web-based applications and services. JBoss products are based on the Java programming language, are deployed on a variety of leading operating systems and support a distributed, modular, reusable and open standards-based “Service Oriented Architecture” or “SOA” deployment for applications and data. JBoss Enterprise Middleware offerings consist of a number of deployment platforms, tools and development frameworks, including:

· JBoss Enterprise Application Platform—provides an environment for building, hosting and deploying Java-based applications and services. It includes JBoss Application Server, Seam, Hibernate, JBoss Cache, JBoss Transactions, JBoss Messaging and JBoss Web services.

· JBoss Enterprise Web Platform—leverages the Java Enterprise Edition Web Profile concept to provide a standards-based environment for building light Java applications.

· JBoss Enterprise Web Server—a single enterprise open source solution for large scale websites and lightweight applications that utilize Apache Tomcat and Apache Web Server.

· JBoss Enterprise SOA Platform—provides the environment for deploying and integrating SOAs and business processes.

· JBoss Enterprise Portal Platform—provides a Java-based platform for deploying standards-based portals.

· JBoss Enterprise BRMS—a business rules management system that enables business policy and rules development, access and change management.

· JBoss Developer Studio—provides an Eclipse-based application development environment for developing Java applications and development tools for building rich web-based applications and SOA services.

· JBoss Enterprise Data Services Platform—provides an environment integrating distributed data sources and provides for data federation, data abstraction, data transformation and metadata management.

· JBoss Web Framework Kit—an integrated bundle of open source frameworks that are used for building light Java applications.

Red Hat Enterprise Virtualization

Red Hat Enterprise Virtualization for Servers is designed to enhance the capital and operational efficiencies of our customers by increasing server utilization and deployment flexibility. Our virtualization solution for servers includes the following components:

· Red Hat Enterprise Virtualization Hypervisor—a hypervisor based on KVM technology that essentially converts the Red Hat Enterprise Linux kernel into a virtualization platform.

· Red Hat Enterprise Virtualization Manager—a server virtualization management system that provides advanced capabilities for both host and guest operating systems, including high availability, live migration, power manager, storage manager and system scheduler.

Red Hat Enterprise Virtualization for Servers is designed to be compatible with Red Hat Enterprise Linux and its wide ecosystem of certified hardware systems and software applications. Our virtualization solution allows enterprises to centrally manage virtual environments.

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Additional Red Hat enterprise technologies

Red Hat enterprise technologies also include other technology infrastructure, including software for software development, high availability clusters of Linux systems and storage, directory server services and authentication of users. These applications broaden customer choice and are components of our open source architecture vision for the enterprise. These technologies include:

· Red Hat MRG—integrates open and scalable messaging, a real-time kernel with predictable performance and grid management tools for high-performance distributed computing solutions, including virtualization, cloud computing and bare-metal mission-critical applications.

· Red Hat Developer Offering—provides integrated development environments and support for application developers.

· Red Hat Directory Server—centralizes application settings, user profiles, group data, policies and access control information into an operating system-independent, network-based registry.

Red Hat systems management solutions

RHN, RHN Satellite, Red Hat Customer Portal and JBoss ON provide management and software delivery services for Red Hat Enterprise Linux and JBoss Enterprise Middleware technologies. With a focus on open standards and scalability, our management solutions help organizations increase productivity, lower costs and enhance security by provisioning, managing, monitoring and updating systems.

Services for Red Hat Enterprise Linux and JBoss Enterprise Middleware are available to provide organizations with flexibility, security and scalability based on their size and needs. Red Hat’s customers can manage their deployments by connecting to Red Hat’s hosted servers or by implementing the enhanced functionality of RHN Satellite and JBoss ON.

Red Hat Network—Through RHN, Red Hat provides an on-line method for its customers to obtain certified software and upgrades and to manage, provision and monitor deployments of Red Hat Enterprise Linux.

RHN Update Module—The RHN Update Module is an entry-level offering included with each subscription for Red Hat Enterprise Linux, providing functionality enhancements and upgrades to individual systems. The RHN Update Module includes functionality such as a graphical user interface, priority notification, errata information, and Red Hat Package Manager dependency checking and auto update. RHN Update Module also gives customers access to electronic delivery of software related to their Red Hat subscriptions. This is the default method for accessing subscription services for Red Hat Enterprise Linux.

Customers may purchase entitlements to the following additional RHN modules on an annual subscription basis:

RHN Satellite—RHN Satellite provides RHN functionality, such as managing system profiles and reporting data, locally on a customer’s system behind its IT firewall. A customer’s RHN Satellite server connects with RHN over the Internet to download updates and upgrades. RHN Satellite offers customers greater control and flexibility over the management of their Red Hat Enterprise Linux systems and may also be used to distribute custom or third party content to their Red Hat Enterprise Linux systems, and monitor the health of their systems. Additional RHN Proxy Servers can be added to an RHN Satellite deployment to improve performance and package downloads for remote locations.

RHN Smart Management—RHN Smart Management allows customers to provision and manage systems running Red Hat enterprise technology. Designed to enable scalable enterprise administration, RHN Smart Management features systems grouping, role-based administration and scheduled actions.

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RHN Monitoring Module—The RHN Monitoring Module, only available for RHN Satellite deployments, adds performance-tracking capabilities. Users can configure monitoring checks based on numerous pre-built probes, or they can create their own. Email or pager warnings send alerts when defined performance thresholds are crossed.

Red Hat Customer Portal—Through RHCP, Red Hat provides an online method for Red Hat Enterprise Linux and JBoss Enterprise Middleware customers to obtain certified software, access to a knowledge base and software update alerts and advisories, as well as interact with our technical support engineers.

JBoss ON—JBoss ON is deployed in a manner similar to RHN Satellite and allows the customer to manage its JBoss Enterprise Middleware environments. Similar to RHN Satellite, JBoss ON functionality includes inventory, software update, administration, configuration management and resource deployment. JBoss ON also provides an extended module for monitoring and alert notifications on the status of JBoss Enterprise Middleware deployments.

Red Hat training, consulting and support services

Red Hat offers a range of services that are designed to help our customers derive additional value from Red Hat enterprise technologies.

Training—Our training services consist of an array of performance-based courses designed to meet the diverse needs of our customers. We deliver more than 30 Red Hat Enterprise Linux and JBoss Enterprise Middleware courses worldwide in classroom, corporate on-site and online settings. These courses span topics such as system administration and advanced enterprise development, deployment security, middleware and role-based offerings. Certification paths include Red Hat Certified Technician, Red Hat Certified Engineer, Red Hat Certified Data Specialist, Red Hat Certified Security Specialist, Red Hat Certified Virtualization Administrator, Red Hat Certified Architect and JBoss Certified Application Administrator.

Consulting—We offer the services of experienced consultants to assist with the technology infrastructure needs of our customers. Our offerings include assessments, installations, upgrade planning, platform migrations, solution integration and application development.

Support—Our Red Hat subscriptions generally include varying levels of technical support to assist customers with installing, configuring and using Red Hat enterprise technologies. Additionally, we offer a technical account management (“TAM”) service for customers that require a more personalized support relationship. The TAM service is designed to offer a highly skilled, proactive support engineer who understands a customer’s IT infrastructure and serves as a primary point of contact for technical support that is tailored to the customer’s business.

COMPETITION

In the operating systems market, we compete with a number of large and well-established companies that have significantly greater financial resources, larger development staffs and more extensive marketing and distribution capabilities. These competitors include Microsoft and Oracle, each of which offers hardware-independent, multi-user operating systems, and various virtualization software for Intel platforms that competes with Red Hat’s offerings. Moreover, HP, IBM, Oracle and Unisys Corporation each offer the UNIX operating system. Many of these competitors bundle competitive operating systems, such as UNIX, with their own hardware and additional software offerings, thereby making it more difficult for us to penetrate their customer bases. In addition, with virtualization emerging as an important element of the operating environment, software companies like VMware, Microsoft and Citrix Systems, Inc. (“Citrix”) that offer virtualization solutions are also competitors to Red Hat. No assurance can be given that our efforts to compete effectively will be sufficient.

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Within the specific category of Linux operating systems, our chief competitor has historically been Novell, Inc. (“Novell”), with its SUSE brand of Linux. In 2006, Oracle, a large and well-capitalized company, also began to sell support for its version of the Linux operating system. See Item 1A, “Risk Factors”. Other, less well-capitalized, Linux brands include Ubuntu, Debian, Mandriva, and other regionally-specific distributions. The financial and legal barriers to creating a new Linux distribution are relatively low because the open source license governing Linux distributions permits copying, modification and redistribution.

In the middleware market, we compete with a number of large and well-established companies that have significantly greater financial resources, larger development staffs and more extensive marketing and distribution capabilities. These competitors include, but are not limited to, IBM, Microsoft, Oracle and VMware, all of which offer portfolios of enterprise Java and non-Java middleware products. All of these vendors offer the majority of their middleware products under a typical proprietary software license model. IBM and Oracle often bundle hardware and software for their customers, making it more difficult to penetrate these customer bases. Our middleware offering is heavily dependent on the Java programming language, which is controlled by Oracle.

In the virtualization market, we compete with a number of large and well-established companies that have significantly greater financial resources, larger development staffs and more extensive marketing and distribution capabilities. These competitors include, but are not limited to, VMware, Microsoft, Citrix, Novell and Oracle, and in the case of VMware and Microsoft, have virtualization technologies that are certified and supported with Red Hat Enterprise Linux operating system offerings.

With our services offerings, we face competition in the market for services related to the deployment of our enterprise technologies and the development and integration of applications. Our competitors in the market include HP, IBM and Oracle, as well as other technology consulting companies.

For our management offerings, we compete with a number of large companies that have significantly greater financial resources, larger development staffs and more extensive marketing and distribution capabilities. These competitors include, but are not limited to, BMC, CA, HP, IBM, Microsoft, Novell and Oracle, all of which offer support for heterogeneous operating system environments, such as Linux, Solaris, AIX, HP-UX and Windows. Many of these competitors have legacy client/server offerings that require relatively long implementation cycles and are difficult to displace in enterprise customers due to, among other reasons, switching costs. There are numerous other companies that focus exclusively on management offerings that are likely to support Linux-based systems as well as non-Linux-based systems.

The open source software market is not characterized by the traditional barriers to entry that are found in the proprietary software model due to the nature of open source technology. For example, anyone can use, copy, modify and redistribute Red Hat Enterprise Linux, JBoss Enterprise Middleware and our other open source products. However, they are not permitted to refer to these products as “Red Hat” or “JBoss” products unless they have a formal business relationship with us that allows such references. Moreover, as it relates to our enterprise technologies and management offerings, our customers agree that during their support relationship with Red Hat, they will purchase a support subscription for each computer system, CPU or other unit on which they deploy Red Hat’s software. In addition, the primary means by which customers can receive a certified version of Red Hat enterprise software and receive certified functionality enhancements and upgrades to a copy of Red Hat enterprise software is to purchase and maintain a current subscription directly from us or our partners with whom we have agreements.

We believe that the major factors affecting the competitive landscape for our products include:

· the name and reputation of the vendor;

· the ability to adapt development, sales, marketing and support to the open source model;

· the product price, performance, reliability and functionality;

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· the alliances of the vendor with major industry hardware and/or software providers;

· the quality of support and consulting services;

· the financial and value relationship of subscription services;

· the number of Global 2000 reference accounts;

· the number of cloud computing partners and reference accounts;

· the availability of third-party enterprise infrastructure applications that are compatible with the technology;

· the breadth of hardware and software ecosystem compatibility;

· the management framework for administering the software technologies;

· the distribution strength and number of distribution partners of the vendor; and

· the strength of the vendor’s relationships and reputation in the open source community.

Although we believe that overall we generally compete on par or favorably with many of our competitors in a number of respects, including product performance, price and breadth of hardware and software compatibility, we believe that a number of our key competitors currently have superior distribution capabilities. In addition, there are significantly more enterprise infrastructure applications available for competing operating systems technologies, such as Windows, than there are for Red Hat Enterprise Linux. An integral part of our strategy has been to help address these shortcomings by, among other methods, strengthening our existing strategic relationships and entering into new ones to expand our distribution capabilities and by attracting more attention to the open source movement. Also, increasing the volume of installed subscriptions of Red Hat enterprise technologies should create additional opportunities and incentives for software developers to write more applications that are compatible with Red Hat enterprise technologies.

SOFTWARE ENGINEERING AND DEVELOPMENT

We have invested, and intend to continue to invest, significant resources in product and technology development. We expended $171.3 million, $148.4 million and $130.2 million, in our fiscal years ended February 28, 2011, February 28, 2010 and February 28, 2009, respectively, in research and development costs. We focus and modify our product development efforts based on the needs of users and changes in the marketplace. We are currently focusing our development efforts on improving or adding the functionality to our offerings that are needed by the Global 2000 or required for leading third-party applications upon which the Global 2000 are dependent. However, any upgrades and enhancements are offered on a when-and-if-available basis.

Our software engineers collaborate with open source software development teams working across the Internet and through open source communities such as the Fedora Project and JBoss.org. This involvement enables us to remain abreast of, and in some instances lead, certain technical advances, plans for development of new features and timing of releases, as well as other information related to the development of open source projects.

Our software engineers make development contributions to many components comprising the Red Hat Enterprise Linux operating system, JBoss Enterprise Middleware and Red Hat Enterprise Virtualization and provide leadership within the various open source communities across many of the core components.

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Our software development engineers perform extensive testing of Red Hat Enterprise Linux, JBoss Enterprise Middleware, Red Hat Enterprise Virtualization, RHN, RHN Satellite, Red Hat Customer Portal, JBoss ON, JBoss Developer Studio and other Red Hat enterprise technologies. We use various industry methods of quality assurance testing to help ensure that our enterprise technologies are solidly engineered and ready for use by our customers when delivered. We also work closely with leading hardware and software vendors to help ensure that their hardware and applications will operate effectively with Red Hat enterprise platforms.

In addition, we continue to invest substantial resources in the development and commercialization of open source technologies that provide added value in addition to the operating system.

INTELLECTUAL PROPERTY

Most of our products, such as Red Hat Enterprise Linux and JBoss Enterprise Middleware, are built primarily from software components licensed to the general public under various open source licenses. While some components are developed by our own employees, Red Hat obtains many components from software developed and released by contributors to independent open source software development projects. Open source licenses grant the licensee broad permissions to use, copy, modify and distribute the software. Certain open source licenses, such as the GNU General Public License (“GPL”), impose significant limits on a distributor’s ability to license derivative works under more restrictive terms and generally require the distributor to disclose the source code of such works. The inclusion of software components governed by such licenses in our products limits our ability to use traditional proprietary commercial software licensing models for those products. As a result, while we have substantial copyright interests in our software products, open source development and product licensing practices may have the effect of limiting the value of our software copyright assets. Consequently, our trademarks may represent our most valuable intellectual property. We also generally enter into confidentiality and nondisclosure agreements with our employees and consultants and seek to control access to and distribution of our confidential documentation and other proprietary information.

We pursue registration of some of our trademarks in the United States and in other countries. We have registered the trademark “Red Hat” and the Red Hat Shadowman logo in countries in North America, South America, Europe, Asia and Africa as well as in Australia.

Despite our efforts to protect our trademark rights, unauthorized third parties have in the past attempted, and in the future may attempt, to misappropriate our trademark rights. We cannot be certain that we will succeed in preventing such misappropriation of our trade name and trademarks. The laws of some foreign countries do not protect or deter misappropriation of our trademark rights to the same extent as do the laws of the United States. In addition, while we engage in certain enforcement activity, policing unauthorized use of our trademark rights is difficult, expensive and time consuming, and our efforts may be inadequate. The loss of any material trademark or trade name could have a material adverse effect on our business, operating results and financial condition.

Red Hat also seeks patent protection of some of the innovative ideas of our software developers. Not all of these inventions are applicable to our current technologies. Some provide protection to new and other technologies. Moreover, our principal objectives in seeking patent protection are to provide a measure of deterrence against the potential patent infringement claims of third parties and to help ensure that new technologies and innovations covered by our patents remain open. As part of Red Hat’s commitment to the open source community, we provide our Patent Promise, an undertaking, subject to certain limitations, not to enforce our patent rights against users of open source software. This permits the development and distribution of open source applications by third parties that could otherwise infringe on our patents. For these reasons, it is unlikely that our patents will, of themselves, provide us substantial revenue. We are also a founding member and active participant, along with other industry leaders (including IBM, NEC, Philips, Sony and Novell) in the Open Invention Network LLC, which acquires patents with the goal of promoting innovation in open source for the Linux platform.

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Third parties have in the past asserted, and may in the future assert, infringement claims against us which may result in costly litigation or require us to obtain a license to third-party intellectual property rights. See Item 3, “Legal Proceedings”. There can be no assurance that such licenses will be available on reasonable terms or at all, which could have a material adverse effect on our business, operating results and financial condition. Red Hat regularly commits to its subscription customers that if portions of our enterprise products are found to infringe third-party intellectual property rights we will, at our expense and option: (i) obtain the right for the customer to continue to use the product consistent with their subscription agreement with us; (ii) modify the product so that its use is non-infringing; or (iii) replace the infringing component with a non-infringing component, and indemnify them against specified infringement claims. Although we cannot predict whether we will need to satisfy these commitments and often have limitations on these commitments, satisfying these commitments could be costly and time-consuming and could materially and adversely affect our business, operating results and financial condition.

EMPLOYEES

As of February 28, 2011, Red Hat had more than 3,700 employees. From time to time, we also employ independent contractors. Our employees are not represented by any labor union and are not recognized under a collective bargaining agreement, and we have never experienced a work stoppage. We believe our relations with our employees are generally good.

AVAILABLE INFORMATION

We maintain a website at www.redhat.com. We make available, free of charge on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), as soon as reasonably practicable after we electronically file those reports with, or furnish them to the Securities and Exchange Commission (the “SEC”). We also similarly make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Securities Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. We are not including the information contained at www.redhat.com, or at any other Internet address, as part of, or incorporating it by reference into, this Annual Report on Form 10K.

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ITEM 1A. RISK FACTORS

Set forth below are certain risks and cautionary statements, which supplement other disclosures in this report.

Moreover, certain statements contained in this report and the documents incorporated by reference in this report, including in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that is not strictly a historical statement (for example, statements regarding current or future financial performance, management’s plans and objectives for future operations, product plans and performance, management’s expectations regarding market risk and market penetration, management’s assessment of market factors or strategies, objectives and plans of Red Hat and its partners). Words such as “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans,” “projects,” and similar expressions, may also identify such forward-looking statements. Investors are cautioned that these forward-looking statements are not guarantees of Red Hat’s future performance and are subject to a number of risks and uncertainties that could cause Red Hat’s actual results to differ materially from those found in the forward-looking statements and from historical trends. These risks and uncertainties include the risks and cautionary statements detailed below and elsewhere in this report as well as in Red Hat’s other filings with the Securities and Exchange Commission (“SEC”), copies of which may be accessed through the SEC’s web site at http://www.sec.gov. Readers are urged to carefully review these risks and cautionary statements. The forward-looking statements included in this report represent our views as of the date of this report. We specifically disclaim any obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this report.

RISKS RELATED TO BUSINESS UNCERTAINTY

Ongoing uncertainty regarding the duration and extent of the recent economic downturn and in global economic and market conditions generally could adversely affect our business, financial condition and results of operations.

Economic weakness and uncertainty, tightened credit markets and constrained IT spending from time to time contribute to slowdowns in the technology industry, as well as in the specific segments and markets in which we operate, which may result in reduced demand and increased price competition for our products and services. Our operating results in one or more geographic regions may also be affected by uncertain or changing economic conditions within that region, such as the challenges that are currently affecting economic conditions in the United States and elsewhere. Continuing uncertainty about future economic conditions may, among other things, negatively impact our current and prospective customers and result in delays or reductions in technology purchases or lengthen our sales cycle. Adverse economic conditions also may negatively impact our ability to obtain payment for outstanding debts owed to us by our customers or other parties with whom we do business. In addition, these conditions may impact our investment portfolio, and we could determine that some of our investments have experienced an other-than-temporary decline in fair value, requiring an impairment charge that could adversely impact our financial condition and results of operations. Also, these conditions may make it more difficult to forecast operating results. If global economic and market conditions, or economic conditions in the United States or other key markets, remain uncertain or persist, spread or deteriorate further, companies may delay or reduce their IT spending, which could adversely affect our business, financial condition and results of operations.

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If we fail to continue to establish and maintain strategic distribution and other collaborative relationships with industry-leading companies, we may not be able to attract and retain a larger customer base.

Our success depends in part on our ability to continue to establish and maintain strategic distribution and other collaborative relationships with industry-leading hardware manufacturers, distributors, software vendors and enterprise solutions providers such as Cisco Systems, Inc. (“Cisco”), Dell Inc. (“Dell”), Fujitsu Limited (“Fujitsu”), Hewlett-Packard Co. (“HP”), International Business Machines Corporation (“IBM”), NEC Corporation (“NEC”), Oracle Corporation (“Oracle”), SAP AG (“SAP”) and others. These relationships allow us to offer our products and services to a much larger customer base than we would otherwise be able through our direct sales and marketing efforts. We may not be able to maintain these relationships or replace them on attractive terms. In addition, our existing strategic relationships do not, and any future strategic relationships may not, afford us any exclusive marketing or distribution rights. Some of our channel partners offer competing products and services. As a result of these factors, many of the companies with which we have strategic alliances may choose to pursue alternative technologies and develop alternative products and services in addition to or in lieu of our products and services, either on their own or in collaboration with others, including our competitors. Moreover, we cannot guarantee that the companies with which we have strategic relationships will market our products effectively or continue to devote the resources necessary to provide us with effective sales, marketing and technical support.

We rely, to a significant degree, on indirect sales channels for the distribution of our products and services, and disruption within these channels could adversely affect our business and results of operations.

We use a variety of different indirect distribution methods to sell our products and services, including channel partners such as OEMs, distributors and resellers. A number of these partners in turn distribute via their own networks of channel partners with whom we have no direct relationship. We rely, to a significant degree, on each of our channel partners to select, screen and maintain relationships with its distribution network and for the distribution of our products and services in a manner that is consistent with Red Hat’s quality standards. Our channel partners may not distribute and market our products and services effectively.

Recruiting and retaining qualified channel partners and training them in the use of our enterprise technologies requires significant time and resources. If we fail to devote sufficient resources to support and expand our network of channel partners, our results of operations may be adversely affected. In addition, because we rely on channel partners for the indirect distribution of our enterprise technologies, we may have little or no contact with the ultimate end-users of our products, thereby making it more difficult for us to establish brand awareness, ensure proper delivery and installation of our products, support ongoing customer requirements, estimate end-user demand, respond to evolving customer needs and obtain subscription renewals from end-users.

If our indirect distribution channel is disrupted, we may be required to devote more resources to distribute our products directly and support our customers, which may not be as effective and could lead to higher costs, reduced revenue and growth that is slower than expected.

We have entered into and may continue to enter into or seek to enter into business combinations and acquisitions, which may be difficult to complete and integrate, disrupt our business, divert management’s attention, adversely affect our financial condition or results of operations and dilute stockholder value.

As part of our business strategy, we have in the past entered into business combinations and acquisitions, and we may continue to do so in the future. Acquisitions present significant challenges and risks, including:

· The difficulty of integrating the operations, systems, technology and personnel of the acquired business;

· The difficulty of gathering full information regarding a company or technology prior to an acquisition, including the identification and assessment of liabilities, claims or other circumstances that could result in litigation or regulatory exposure, unfavorable accounting treatment, unexpected tax implications and other adverse effects on our business;

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· The maintenance of acceptable standards, controls, procedures and policies;

· The potential disruption of our ongoing business and distraction of management;

· The impairment of relationships with our employees and customers as a result of any integration of new management and other personnel;

· The inability to maintain relationships with customers of the acquired business;

· Cultural challenges associated with integrating employees from the acquired company into our organization;

· The potential loss of key employees of the acquired business;

· Challenges in maintaining good and effective relations with existing business partners or of those of the acquired business, including as a result of the changes in the competitive landscape effected by the acquisition;

· The difficulty and expense of incorporating and further developing acquired technology and rights into our products and services and of maintaining quality standards consistent with our brand;

· The potential failure to achieve the expected benefits of the combination or acquisition;

· Expenses related to the acquisition;

· Claims and liabilities we may assume from the acquired business or technology, or that are otherwise related to the acquisition;

· Operating expenses related to the acquired business or technology;

· The risk of entering new markets in which we have little or no experience;

· Potential impairment of tangible assets and intangible assets and goodwill acquired in acquisitions;

· For foreign transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political, and regulatory risks associated with specific countries; and

· The dilutive impact on our current stockholders’ percentage of ownership as a result of issuing shares of our common stock in connection with an acquisition or business combination.

There can be no assurance that we will manage these challenges and risks successfully. Moreover, if we are not successful in completing acquisitions that we have pursued or may pursue, our business may be adversely affected, and we may incur substantial expenses and divert significant management time and resources. In addition, in pursuing such acquisitions, we could use substantial portions of our available cash as all or a portion of the purchase price. We could also issue additional securities as consideration for these acquisitions, which could cause our stockholders to suffer significant dilution, or we may incur substantial debt. Any acquisition may not generate additional revenue or profit for us, which may adversely affect our operating results.

If we fail to effectively manage our growth, our operations and financial results could be adversely affected.

We have expanded our operations rapidly in recent years. For example, our total revenue increased from $748.2 million for the fiscal year ended February 28, 2010 to $909.3 million for the fiscal year ended February 28, 2011. Moreover, the total number of our employees increased from over 3,200 as of February 28, 2010 to over 3,700 as of February 28, 2011 and is expected to generally increase in the foreseeable future. In addition, we continue to explore ways to extend our product and service offerings and geographic reach. Our growth has placed and will likely continue to place a strain on our management systems, information systems, resources and internal controls. Our ability to successfully offer products and services and implement our business plan requires adequate information systems and resources and oversight from our senior management.

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As we expand in international markets, these challenges increase as a result of the need to support a growing business in an environment of multiple languages, cultures, customs, legal systems, dispute resolution systems, regulatory systems and commercial practices. As we grow, we must also continue to hire, train, supervise and manage new employees. We may not be able to adequately screen and hire or adequately train, supervise and manage sufficient personnel or develop management, or effectively manage and develop our controls and oversight functions and information systems to adequately manage our expansion effectively. If we are unable to adequately manage our growth and expansion, our business, operating results and financial condition could be materially adversely affected.

We include software licensed from other parties in our enterprise technology offerings, the loss of which could increase our costs and delay software shipments.

We utilize various types of software licensed from unaffiliated third parties in our enterprise technology offerings. Aspects of our business could be disrupted if any of the software we license from others or functional equivalents of this software were no longer available to us, no longer offered to us on commercially reasonable terms or changed in ways or included defects that made the third-party software unsuitable for our use. In these cases, we would be required to either redesign our products to function with software available from other parties, develop these components ourselves or eliminate the functionality, which could result in increased costs, the need to mitigate customer issues, delays in our product shipments and the release of new product offerings and limit the features available in our current or future products.

We may not be able to continue to attract and retain capable management.

Our future success depends on the continued services and effectiveness of a number of key management personnel, including our CEO, who assumed his role on January 1, 2008. Our ability to retain key management personnel or hire capable new management personnel as we grow may be challenged to the extent the technology sector performs well and/or if companies with more generous compensation packages or greater perceived growth opportunities compete for the same personnel. In addition, historically we have used share-based compensation as a key component of our compensation packages. Changes in the accounting for share-based compensation could adversely affect our earnings or force us to use more cash compensation to attract and retain capable personnel. If the price of our common stock falls, the value of our share-based awards to the recipient is reduced. Such events, or if we are unable to secure shareholder approval for increases in the number of shares eligible for share-based compensation grants, could adversely affect our ability to successfully attract and retain key management personnel. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key management personnel could hinder our strategic planning and execution.

We depend on our key non-management employees, the loss of which could adversely affect our business or stock price and diminish the Red Hat brand.

Competition in our industry for qualified employees, especially technical employees, is intense and from time to time our competitors directly target our employees. The loss of the technical knowledge and industry expertise of any of these individuals could seriously impede our success. Moreover, the loss of these individuals, particularly to a competitor, some of which may be in a position to offer greater compensation, and any resulting loss of customers could reduce our market share and diminish the Red Hat brand and adversely affect our business or stock price. We have from time to time in the past experienced, and we may experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications.

A number of our key employees have become, or will soon become, vested in a significant amount of their equity compensation awards. Employees may be more likely to leave us after a significant portion of their equity compensation awards fully vest, especially if the shares underlying the equity awards have significantly appreciated in value. If we do not succeed in retaining and motivating our key employees and attracting new key personnel, our business, its financial performance and our stock price may decline.

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Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.

We believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation, creativity and teamwork. As our organization grows, and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain beneficial aspects of our corporate culture. If we are unable to maintain our corporate culture, we may find it difficult to attract and retain motivated employees.

Our subscription-based contract model may encounter customer resistance or we may experience a decline in the demand for our products.

We provide Red Hat enterprise technologies under annual or multi-year subscriptions. Through the life of a subscription, a customer is entitled to specified levels of support as well as security updates, bug fixes, functionality enhancements and upgrades to the technology, when and if available, via the Red Hat Customer Portal. While we believe this practice complies with the requirements of the GNU General Public License, and while we have reviewed this practice with the Free Software Foundation, the organization that maintains and provides interpretations of the GNU General Public License, we may still encounter customer resistance to this distribution model or customers may fail to honor the terms of our subscription agreements. To the extent we are unsuccessful in promoting or defending this distribution model, our business and operating results could be materially and adversely affected. In addition, our customers generally undertake a significant evaluation process that may result in a lengthy sales cycle. We spend substantial time, effort, and money on our sales efforts without any assurance that our efforts will produce any sales. As technologies and the markets for our enterprise offerings change, our subscription-based contract model may no longer meet the needs of our customers. If we are unable to adapt our contract model to changes in the marketplace, our business and operating results could be adversely impacted.

If our current and future customers do not renew their subscription agreements with us, our operating results may be adversely impacted.

Our customers may not renew their subscriptions for our services after the expiration of their subscription agreements and in fact, some customers elect not to do so. In addition, our customers may opt for a lower-priced edition of our offerings or for fewer subscriptions. We have limited historical data with respect to rates of customer subscription renewals, so we cannot accurately predict customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services and their ability to continue their operations and spending levels. Government contracts could be subject to future funding that may affect the extension or termination of programs and generally are subject to the right of the government to terminate for convenience or non-appropriation. If we experience a decline in the renewal rates for our customers or they opt for lower-priced editions of our offerings or fewer subscriptions, our operating results may be adversely impacted.

If open source software programmers, most of whom we do not employ, do not continue to develop and enhance open source technologies, we may be unable to develop new products, adequately enhance our existing products or meet customer requirements for innovation, quality and price.

We rely to a significant degree on a number of largely informal communities of independent open source software programmers to develop and enhance our products. For example, Linus Torvalds, a prominent open source software developer, and a relatively small group of software engineers, many of whom are not employed by us, are primarily responsible for the development and evolution of the Linux kernel, which is the heart of the Red Hat Enterprise Linux operating system. If these groups of programmers fail to adequately further develop and enhance open source technologies, we would have to rely on other parties to develop and enhance our

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products or we would need to develop and enhance our products with our own resources. We cannot predict whether further developments and enhancements to these technologies would be available from reliable alternative sources. In either event, our development expenses could be increased and our product release and upgrade schedules could be delayed. Moreover, if third-party software programmers fail to adequately further develop and enhance open source technologies, the development and adoption of these technologies could be stifled and our products could become less competitive. Delays in developing, completing or shipping new or enhanced products could result in delayed or reduced revenue for those products and could also adversely affect customer acceptance of those offerings.

If third-party enterprise hardware and software providers do not continue to make offerings compatible with our offerings, our software may cease to be competitive and our business and financial performance may be adversely affected.

The competitive position of our offerings is dependent on their compatibility with offerings of third-party enterprise hardware and software companies. To the extent that a software or hardware vendor might have or develop products that compete with ours, the vendor may have an incentive to seek to limit the performance, functionality or compatibility of our offerings when used with one or more of the vendor’s offerings. In addition, these vendors may fail to support or issue statements of compatibility or certification of our offerings when used with their offerings. We intend to encourage the development of additional applications that operate on both current and new versions of our offerings by, among other means, attracting third-party developers to Red Hat Enterprise Linux and JBoss Enterprise middleware technologies, providing open source tools to create these applications and maintaining our existing developer relationships through marketing and technical support. We intend to encourage the compatibility of our software with various third-party hardware and software offerings by maintaining and expanding our relationships, both business and technical, with relevant independent hardware and software vendors. If we are not successful in achieving these goals, however, our products may not be competitive and our business and financial performance may be adversely affected.

We may be unable to predict the future course of open source technology development, which could reduce the market appeal of our products and damage our reputation.

We do not exercise control over many aspects of the development of open source technology. Different groups of open source software programmers compete with one another to develop new technology. Typically, the technology developed by one group will become more widely used than that developed by others. If we acquire or adopt new technology and incorporate it into our products but competing technology becomes more widely used or accepted, the market appeal of our products may be reduced and that could harm our reputation, diminish the Red Hat brand and result in decreased revenue.

Because of the characteristics of open source software, there are few technology barriers to entry in the open source market by new competitors and it may be relatively easy for competitors, some of which may have greater resources than we have, to enter our markets and compete with us.

One of the characteristics of open source software is that anyone can modify and redistribute the existing open source software and use it to compete with us. Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies. It is possible for new competitors with greater resources than ours to develop their own open source solutions, potentially reducing the demand for, and putting price pressure on, our solutions. For example, Oracle Corporation (“Oracle”) has developed its own version of the Linux operating system and sells support both for its version of the Linux operating system and for Red Hat Enterprise Linux. In addition, some competitors make their open source software available for free download and use on an ad hoc basis or may position their open source software as a loss leader. We cannot guarantee that we will be able to compete successfully against current and future competitors or that competitive pressure and/or the availability of open source software will not result in price reductions, reduced operating margins and loss of market share, any one of which could seriously harm our business.

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Industry consolidation may lead to increased competition and may harm our operating results.

There has been a trend in industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. For example, in early 2010, Oracle completed its acquisition of Sun Microsystems, Inc. (“Sun”). Oracle’s acquisition of Sun creates a large, integrated supplier of enterprise software that also provides hardware optimized for these software products. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could have a material adverse effect on our business, financial condition and results of operations.

Our continued success depends on our ability to adapt to a rapidly changing industry. Investment in new business strategies and initiatives could disrupt our ongoing business and may present risks not originally contemplated.

We operate in highly competitive markets that are characterized by rapid technological change and frequent new product and service announcements. We must continue to invest significant resources in research and development in order to enhance our existing products and services and introduce new high-quality products and services. If we are unable to ensure that our users and customers have a high-quality experience with our products and services, then they may become dissatisfied and move to competitors’ products and services. In addition, if we are unable to predict user preferences or industry changes, or if we are unable to modify our products and services on a timely basis, we may lose customers.

Our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to improve the performance and reliability of our services. Our failure to adapt to such changes could harm our business. In addition, the widespread adoption of other technological changes could require substantial expenditures to modify or adapt our services or infrastructure. Delays in developing, completing or shipping new or enhanced offerings and technologies could result in delayed or reduced revenue for those offerings and could also adversely affect customer acceptance of those offerings and technologies. The success of new and enhanced offering introductions depends on several factors, including our ability to develop and complete new products in a timely manner, successfully promote the offerings, manage the risks associated with the offerings, make sufficient resources available to support them and address any quality or other defects in the early stages of introduction.

Moreover, we believe that our continued success depends on our investing in new business strategies or initiatives that complement our strategic direction and product road map. Such endeavors may involve significant risks and uncertainties, including distraction of management’s attention away from other business operations, and insufficient revenue generation to offset liabilities and expenses undertaken with such strategies and initiatives. Because these endeavors may be inherently risky, no assurance can be given that such endeavors will not materially adversely affect our business, operating results or financial condition.

Our continued success depends on our ability to maintain and enhance a strong brand.

We believe that the brand identity that we have developed has contributed significantly to the success of our business. We also believe that maintaining and enhancing the Red Hat brand is important to expanding our customer base and attracting talented employees. In order to maintain and enhance our brand, we may be required to make substantial investments that may not be successful. If we fail to promote and maintain our brand, or if we incur excessive costs in doing so, our business, operating results and financial condition may be materially and adversely affected. Maintaining our brand will depend in part on our ability to remain a leader in open source technology and our ability to continue to provide high-quality products and services.

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Our Red Hat Enterprise Virtualization and cloud computing offerings are based on emerging technologies, and the potential market for these offerings remains uncertain.

Our Red Hat Enterprise Virtualization and cloud computing product offerings and related services are based on emerging technologies, the success of which will depend on the perceived technological and operational benefits and cost savings associated with the adoption of these technologies. The market for these products and services remains uncertain. In addition, we may make errors in predicting and reacting to relevant business trends. To the extent that the adoption of virtualization and cloud computing offerings occurs more slowly or less pervasively than we expect, the revenue growth associated with these products and services may be slower than currently expected, which could adversely affect our business, operating results and financial condition.

If our growth rate slows, our stock price could be adversely impacted.

As the markets for our products mature and the scale of our business increases, the rate of growth in our product sales will likely be lower than those we have experienced in earlier periods. In addition, to the extent that the adoption of our products and services occurs more slowly or is less pervasive than we expect, our revenue growth rates may slow materially or our revenue may decline substantially, which could adversely affect our stock price.

Security and privacy breaches may expose us to liability and harm our reputation and business.

Our security and testing measures may not prevent security breaches that could harm our business. Advances in computer capabilities, new discoveries in the field of cryptography, inadequate technology or facility security measures or other factors may result in a compromise or breach of our systems and the data we process. Our security measures may be breached as a result of actions by third parties or employee error or malfeasance. Any compromise of our systems or the data we process could harm our reputation or financial condition and, therefore, our business. In addition, a party who is able to circumvent our security measures or exploit inadequacies in our security measures, could, among other effects, misappropriate proprietary information, cause interruptions in our operations or expose customers to computer viruses or other disruptions or vulnerabilities. Actual or perceived vulnerabilities may lead to claims against us by customers, partners or other third parties, which could be material. While our customer agreements typically contain provisions that seek to limit our liability, there is no assurance these provisions will be enforceable and effective under applicable law. In addition, the cost and operational consequences of implementing further data protection measures could be significant.

We are vulnerable to system failures, which could harm our reputation and business.

We rely on our technology infrastructure for many functions, including selling our products and services, supporting our partners, fulfilling orders and billing, collecting and making payments. Our systems are vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, terrorist attacks, computer intrusions and viruses, software errors, computer denial-of-service attacks and other events. A significant number of our systems are not redundant, and our disaster recovery planning is not sufficient for every eventuality. Our systems are also subject to break-ins, sabotage and intentional acts of vandalism by internal employees, contractors and third parties. Despite any precautions we may take, such problems could result in, among other consequences, interruptions in our services, which could harm our reputation, business and financial condition. We do not carry business interruption insurance sufficient to protect us from all losses that may result from interruptions in our services as a result of system failures or to cover all contingencies. Any interruption in the availability of our websites and on-line interactions with customers and partners would create a large volume of user questions and complaints that would need to be addressed by our support personnel. If our support personnel cannot meet this demand, customer and partner satisfaction levels may fall, which in turn could cause additional claims, reduced revenue or loss of customers.

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A decline in or reprioritization of funding in the U.S. government budget or delays in the budget process could adversely affect our business and future financial performance.

We derive, and expect to continue to derive, a portion of our revenue from U.S. government agencies. Concerns about increased deficit spending, along with continued economic challenges, continue to place pressure on U.S. government spending. The termination of, or delayed or reduced funding for, programs or contracts from which we derive revenue could adversely affect our business and financial performance.

If we fail to comply with our customer contracts or government contracting regulations, our business could suffer.

Our contracts with our customers may include unique and specialized performance requirements. In particular, our contracts with federal, state, provincial and local governmental customers are subject to various procurements regulations, contract provisions and other requirements relating to their formation, administration and performance. Any failure by us to comply with the specific provisions in our customer contracts or any violation of government contracting regulations could result in the imposition of various civil and criminal penalties, which may include termination of contracts, forfeiture of profits, suspension of payments and, in the case of our government contracts, fines and suspension from future government contracting. In addition, we may be subject to qui tam litigation, the process by which a private individual sues or prosecutes on behalf of the government relating to government contracts and shares in the proceeds of any successful litigation or settlement, which could include claims for up to treble damages. Further, any negative publicity related to our customer contracts or any proceedings surrounding them, regardless of its accuracy, may damage our business and affect our ability to compete for new contracts. There is increased pressure for governments and their agencies, both domestically and internationally, to reduce spending. If our customer contracts are terminated, if we are suspended from government work, or if our ability to compete for new contracts is adversely affected, we could suffer an adverse effect on our business, operating results or financial condition.

RISKS RELATED TO LEGAL UNCERTAINTY

If our products are found or alleged to infringe third-party intellectual property rights, we could be required to redesign our products, replace components of our products, enter into license agreements with third parties and provide infringement indemnification.

We regularly commit to our subscription customers that if portions of our enterprise products are found to infringe any third-party intellectual property rights we will, at our expense and option: (i) obtain the right for the customer to continue to use the product consistent with their subscription agreement with us; (ii) modify the product so that it is non-infringing; or (iii) replace the infringing component with a non-infringing component, and indemnify them against specified infringement claims. Although we cannot predict whether we will need to satisfy these commitments and often have limitations on these commitments, satisfying the commitments could be costly and time consuming and could materially and adversely affect our operating results and financial condition. In addition, our insurance policies would likely not adequately cover our exposure to this type of claim.

We are vulnerable to claims that our products infringe third-party intellectual property rights because our products are comprised of software components, many of which are developed by numerous independent parties, and an adverse legal decision affecting our intellectual property could materially harm our business.

We are vulnerable to claims that our products infringe third-party intellectual property rights, including patent, copyright and trade secrets because our products are comprised of software components, many of which are developed by numerous independent parties. Moreover, because the scope of software patent protection is often not well defined or readily determinable, patent applications in the United States are not publicly disclosed

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at the time of filing, and the number of software patents that are issued each year is significant and growing, we may be unable to assess the relevance of patents to our products, or take appropriate responsive action, in a timely or economic manner. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims. In the past, our products have been subject to intellectual property infringement claims. We expect these claims to increase as the size of our business and market share grow, the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Defending patent infringement, copyright infringement and/or trade secret claims, even claims without significant merit, can be time consuming, expensive and divert the attention of technical and management personnel.

An adverse legal decision regarding the intellectual property in and to our technology and other offerings could harm our business and may do so materially. See “Legal Proceedings”.

Our activities, or the activities of our partners, may violate anticorruption laws and regulations that apply to us.

In many foreign countries, particularly in certain developing economies, it is not uncommon to engage in business practices that are prohibited by regulations that may apply to us, such as the U.S. Foreign Corrupt Practices Act and similar laws. Although we have policies and procedures designed to promote compliance with these laws, our employees, contractors, partners and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies and procedures. Any violation of our policies and procedures could result in a violation of applicable law and adversely affect our business and financial performance.

We could be prevented from selling or developing our software if the GNU General Public License and similar licenses under which our products are developed and licensed are not enforceable or are modified so as to become incompatible with other open source licenses.

A number of our offerings, including Red Hat Enterprise Linux, have been developed and licensed under the GNU General Public License and similar open source licenses. These licenses state that any program licensed under them may be liberally copied, modified and distributed. It is possible that a court would hold these licenses to be unenforceable or that someone could assert a claim for proprietary rights in a program developed and distributed under them. Any ruling by a court that these licenses are not enforceable, or that open source components of our product offerings may not be liberally copied, modified or distributed, may have the effect of preventing us from distributing or developing all or a portion of our products. In addition, licensors of open source software employed in our offerings may, from time to time, modify the terms of their license agreements in such a manner that those license terms may no longer be compatible with other open source licenses in our offerings or our end user license agreement, and thus could, among other consequences, prevent us from continuing to distribute the software code subject to the modified license.

Our products may contain defects that may be costly to correct, delay market acceptance of our products and expose us to claims and litigation.

Despite our testing procedures, errors have been and will continue to be found in our products after commencement of commercial shipments. This risk is exacerbated by the fact that much of the code in our products is developed by independent parties over whom we exercise no supervision or control. If errors are discovered, we may have to make significant expenditures of capital and devote significant technical resources to analyze, correct, eliminate or work around them and may not be able to successfully do so in a timely manner or at all. Errors and failures in our products could result in a loss of, or delay in, market acceptance of our products, loss of existing or potential customers and delayed or lost revenue and could damage our reputation and our ability to convince commercial users of the benefits of Linux-based operating systems and other open source software products.

In addition, failures in our products could cause system or other failures for our customers who may assert warranty and other claims for substantial damages against us. Although our agreements with our customers often

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contain provisions which seek to limit our exposure to potential product liability claims, it is possible that these provisions may not be effective or enforceable under the laws of some jurisdictions. In addition, our insurance policies may not adequately limit our exposure to this type of claim. These claims, even if unsuccessful, could be costly and time consuming to defend and could materially harm our business.

Our efforts to protect our trademarks may not be adequate to prevent third parties from misappropriating our intellectual property rights in our trademarks.

Our collection of trademarks is valuable and important to our business. The protective steps we have taken in the past have been, and may in the future continue to be, inadequate to protect and deter misappropriation of our trademark rights. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our trademark rights in a timely manner. We have registered some of our trademarks in countries in North America, South America, Europe, Asia, Africa and Australia and have other trademark applications pending in various countries around the world. Effective trademark protection may not be available in every country in which we offer or intend to offer our products and services. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights. Failure to adequately protect our trademark rights could damage or even destroy the Red Hat brand and impair our ability to compete effectively. Furthermore, defending or enforcing our trademark rights could result in the expenditure of significant financial and managerial resources.

Efforts to assert intellectual property ownership rights in our products could impact our standing in the open source community, which could limit our product innovation capabilities and adversely affect our business.

When we undertake actions to protect and maintain ownership and control over our intellectual property, including patents, copyrights and trademark rights, our standing in the open source community could be adversely affected, which in turn could limit our ability to continue to rely on this community, upon which we are dependent, as a resource to help develop and improve our products and further our research and development efforts, and could adversely affect our business.

We are, and may become, involved in disputes and lawsuits that could have a material adverse affect on our performance or stock price.

Lawsuits or legal proceedings may be commenced against us. These disputes and proceedings may involve significant expense and divert the attention of management and other employees. If we do not prevail in these matters, we could be required to pay substantial damages or settlement costs, which could have a material adverse affect on our financial condition or results of operations. See “Legal Proceedings” for additional information on this and other certain matters that may affect our performance or stock price.

Our business is subject to a variety of U.S. and international laws regarding data protection.

Our business is subject to federal, state and international laws regarding privacy and protection of user data. We post, on our website, our privacy policies and practices concerning the use and disclosure of user data. Any failure by us to comply with our posted privacy policies or other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others which could have a material adverse effect on our business, results of operations and financial condition.

It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines and penalties, a governmental order requiring that we change our data practices could result, which in turn could have a material adverse effect on our business. Compliance with these regulations may involve significant costs or require changes in business practices that result in reduced revenue. Noncompliance could result in penalties being imposed on us or orders that we cease conducting the noncompliant activity.

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RISKS RELATED TO FINANCIAL UNCERTAINTY

Our quarterly and annual operating results may not be a reliable indicator of our future financial performance.

Due to the unpredictability of the technology spending environment, among other reasons, our revenue and operating results have fluctuated and may continue to fluctuate. We base our current and projected future expense levels, in part, on our estimates of future revenue. Our expenses are, to a large extent, fixed in the short term. Accordingly, we may not be able to adjust our spending quickly enough to protect our projected operating results for a quarter if our revenue in that quarter falls short of our expectations. If, among other considerations, our future financial performance falls below the expectations of securities analysts or investors or we are unable to increase or maintain profitability, the market price of our common stock may decline.

Our stock price has been volatile historically and may continue to be volatile. Further, the sale of our common stock by significant stockholders may cause the price of our common stock to decrease.

The trading price of our common stock has been and may continue to be subject to wide fluctuations. Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, announcements relating to strategic decisions, announcements related to key personnel, customer purchase delays, service disruptions, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, news reports relating to trends in our markets, general economic conditions and other risks listed herein.

In addition, several of our stockholders own significant portions of our common stock. If these stockholders were to sell all or a portion of their holdings of our common stock, then the market price of our common stock could be negatively impacted. The effect of such sales, or of significant portions of our stock being offered or made available for sale, could result in strong downward pressure on our stock price. Investors should be aware that they could experience significant short-term volatility in our stock if such stockholders decide to sell all or a portion of their holdings of our common stock at once or within a short period of time.

We may lack the financial and operational resources needed to increase our market share and compete effectively.

In the market for operating systems, we face significant competition from larger companies with greater financial, operational and technical resources and name recognition than we have. Competitors, which offer hardware-independent multi-user operating systems for Intel platforms and/or Linux and UNIX-based operating systems, include Microsoft Corporation (“Microsoft”), Oracle, Novell, Inc. (“Novell”), IBM and HP.

In the market for middleware offerings, we face significant competition from larger companies with greater financial, operational and technical resources and name recognition than we have. These competitors include, but are not limited to, IBM, Microsoft and Oracle, all of which offer broad portfolios of enterprise Java and non-Java middleware products. IBM and Oracle bundle hardware and software for their customers, making it more difficult to penetrate these customer bases.

In the market for virtualization and cloud offerings, we face significant competition from larger companies with greater financial, operational and technical resources and name recognition than we have. These competitors include, but are not limited to, VMware, Microsoft, Citrix Systems, Inc. and Oracle.

In the market for services offerings, we face significant competition from larger companies with greater financial, operational and technical resources and name recognition than we have, including those that currently provide service and training related to the Linux operating system as well as other operating systems, particularly UNIX-based operating systems, due to the fact that Linux-and UNIX-based operating systems share many common features. These larger companies, including IBM, Oracle and HP, may be able to leverage their existing service organizations and provide higher levels of consulting and training on a more cost-effective basis than we can.

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We may lack the resources needed to compete successfully with our current competitors as well as potential new competitors. Moreover, we compete in certain areas with our strategic partners and potential strategic partners, and this may adversely impact our relationship with an individual partner or a number of partners. Competitive pressures could affect prices or demand for our products and services, resulting in reduced profit margins and loss of market opportunity. We may have to lower the prices of our products and services to stay competitive, which could affect our margins and financial condition. In addition, if our pricing and other factors are not sufficiently competitive, we may lose market share. Industry consolidation may also effect competition by creating larger and potentially stronger competitors in the markets in which we compete, which may have an adverse effect on our business.

We may not be able to meet the financial and operational challenges that we will encounter as our international operations, which represented approximately 43.7% of our total revenue for the fiscal year ended February 28, 2011, continue to expand.

Our international operations accounted for approximately 43.7% of total revenue for the fiscal year ended February 28, 2011. As we expand our international operations, we may have difficulty managing and administering a globally dispersed business and we may need to expend additional funds to, among other activities, reorganize our sales force and technical support services team, outsource or supplement general and administrative functions, staff key management positions, obtain additional information technology infrastructure and successfully localize software products for a significant number of international markets, which may negatively affect our operating results.

Additional challenges associated with the conduct of our business overseas that may negatively affect our operating results include:

· Fluctuations in exchange rates;

· Different pricing environments;

· Longer payment cycles and less financial stability of customers;

· Compliance with a wide variety of foreign laws;

· Difficulty selecting and monitoring channel partners outside of the United States;

· Lower levels of availability or use of the internet, through which our software is often delivered;

· Difficulty protecting our intellectual property rights overseas due to, among other reasons, the uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property rights;

· Difficulty in staffing, developing and managing foreign operations as a result of distance, language, legal, cultural and other differences;

· Difficulty maintaining quality standards consistent with the Red Hat brand;

· Export control regulations could prevent us from shipping our products into and out of certain markets;

· Public health risks and natural disasters, particularly in areas in which we have significant operations;

· Limitations on the repatriation and investment of funds and foreign currency exchange restrictions;

· Changes in import/export duties, quotas or other trade barriers could affect the competitive pricing of our products and services and reduce our market share in some countries; and

· Economic or political instability or terrorist acts in some international markets could result in the loss or forfeiture of some foreign assets and the loss of sums spent developing and marketing those assets and the revenue associated with them.

Any failure by us to effectively manage the challenges associated with the international expansion of our operations could adversely affect our business, operating results and financial condition.

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We may be subject to greater tax liabilities.

We are subject to income and other taxes in the U.S. and in numerous foreign jurisdictions. Our domestic and foreign tax liabilities are subject to the allocation of revenue and expenses in different jurisdictions. Additionally, the amount of taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we operate. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly subject to audits by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our financial statements in the period or periods for which that determination is made.

We earn a significant amount of our operating income from outside the U.S., and any repatriation of funds currently held in foreign jurisdictions may result in higher effective tax rates for the company. In addition, there have been proposals to change U.S. tax laws that would significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form this proposed legislation will pass, if enacted it could have a material adverse impact on our tax expense and cash flow.

Because we recognize revenue from subscriptions for our service over the term of the subscription, downturns or upturns in sales may not be immediately reflected in our operating results.

We generally recognize subscription revenue from customers ratably over the term of their subscription agreements, which are generally 12 to 36 months. As a result, much of the revenue we report in each quarter is deferred revenue from subscription agreements entered into during previous quarters. Consequently, a decline in subscriptions in any one quarter will not necessarily be fully reflected in the revenue in that quarter and will negatively affect our revenue in future quarters. In addition, we may be unable to adjust our cost structure to reflect this reduced revenue. Accordingly, the effect of significant downturns in sales and market acceptance of our service, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.

Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, reduced future cash flow estimates and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined resulting in an adverse impact on our results of operations.

We may be exposed to potential risks if we do not have an effective system of disclosure controls or internal controls

We must comply, on an on-going basis, with the requirements of the Sarbanes-Oxley Act of 2002, including those provisions that establish the requirements for both management and auditors of public companies with respect to reporting on internal control over financial reporting. We cannot be certain that measures we have taken, and will take, will be sufficient or timely completed to meet these requirements on an on-going basis, or that we will be able to implement and maintain adequate disclosure controls and controls over our financial

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processes and reporting in the future, particularly in light of our rapid growth, international expansion and changes in our products and services, which are expected to result in on-going changes to our control systems and areas of potential risk.

If we fail to maintain an effective system of disclosure controls or internal control over financial reporting, including satisfaction of the requirements of the Sarbanes-Oxley Act, we may not be able to accurately or timely report on our financial results or adequately identify and reduce fraud. As a result, the financial position of our business could be harmed; current and potential future shareholders could lose confidence in us and/or our reported financial results, which may cause a negative effect on our trading price; and we could be exposed to litigation or regulatory proceedings, which may be costly or divert management attention.

Changes in accounting principles and guidance, or their interpretation, could result in unfavorable accounting charges or effects, including changes to previously filed financial statements, which could cause our stock to decline.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have a significant effect on our reported results and may retroactively affect previously reported results.

Our investment portfolio is subject to credit and illiquidity risks and fluctuations in the market value of our investments and interest rates. These risks may result in an impairment in or the loss of all or a portion of the value of our investments, an inability to sell our investments or a decline in interest income.

We maintain an investment portfolio of various holdings, types and maturities. Our portfolio as of February 28, 2011 consisted primarily of money market funds, U.S. government securities, certificates of deposit, agency securities, corporate securities and equity securities. Although we follow an established investment policy and seek to minimize the risks associated with our investments by investing primarily in investment grade, highly liquid securities and by limiting the amounts invested with any one institution, type of security or issuer, we cannot give assurances that the assets in our investment portfolio will not lose value or become impaired, or that our interest income will not decline.

We may be required to record impairment charges for other-than-temporary declines in fair market value in our investments. Future fluctuations in economic and market conditions could adversely affect the market value of our investments, and we could record additional impairment charges and lose some or all of the principal value of investments in our portfolio. A total loss of an investment or a significant decline in the value of our investment portfolio could adversely affect our operating results and financial condition. For information regarding the sensitivity of and risks associated with the market value of portfolio investments and interest rates, see “Quantitative and Qualitative Disclosures About Market Risk”.

Our investments in private companies are subject to risk of loss of investment capital. Some of these investments may have been made to further our strategic objectives and support our key business initiatives. Our investments in private companies are inherently risky because the markets for the technologies they have under development are typically in the early stages and may never materialize. We could lose the value of our entire investment in these companies.

We are subject to risks of currency fluctuations and related hedging operations.

A portion of our business is conducted in currencies other than the U.S. dollar. Changes in exchange rates among other currencies and the U.S. dollar will affect our net revenue, operating expenses and operating margins. We cannot predict the impact of future exchange rate fluctuations. As we expand international

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operations, our exposure to exchange rate fluctuations increases. We use financial instruments, primarily forward purchase contracts, to economically hedge U.S. dollar and other currency commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations. If these hedging activities are not successful or we change or reduce these hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates. For information regarding our hedging activity, see “Quantitative and Qualitative Disclosures About Market Risk”.

Natural disasters and geo-political events could adversely affect our financial performance.

The occurrence of one or more epidemics or natural disasters, such as the recent earthquakes in Japan and related events, or geo-political events, such as civil unrest or terrorist attacks in a country in which we operate or in which our suppliers or our customers are located, could disrupt and adversely affect our operations and financial performance. Such events could result in physical damage to, or the complete loss of, one or more of our facilities, the lack of an adequate work force in a market, the inability of our associates to reach or have transportation to our facilities directly affected by such events, the evacuation of the populace from areas in which our facilities are located, changes in the purchasing patterns of our customers, the temporary or long-term disruption in the supply of computer hardware and related components, the disruption or delay in the manufacture and transport of goods overseas, the disruption of utility services to our facilities or to suppliers, partners or customers, and disruption in our communications with our customers.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our headquarters is currently located in a leased facility in Raleigh, North Carolina, which consists of approximately 120,000 square feet. In January 2002, we assumed this lease from an unrelated third-party. The lease, which has an original term of 20 years, will expire on June 10, 2020. The annual rental expense under this lease is approximately $1.7 million. In March 2006, we assumed a second lease in Raleigh, North Carolina as part of our headquarters facilities which consisted of approximately 25,000 square feet. In 2007, 2008, 2009 and 2010, we acquired under this second lease an additional 25,000 square feet, 10,000 square feet, 8,000 square feet and 5,500 square feet, respectively, further expanding our headquarters facilities. The term for this second lease, as amended, will expire on February 28, 2017. The term for 8,000 and 5,500 square feet on the second lease, as amended, will expire on January 31, 2015 and May 31, 2015 respectively. The annual rental expense under this second lease is approximately $1.8 million.

In addition to our headquarters, we have leased office facilities in 30 countries and more than 70 locations. Significant locations in North America include Atlanta, Georgia; Dallas, Texas; Mountain View, California; Richmond, Virginia; Toronto, Canada; Tyson’s Corner, Virginia and Westford, Massachusetts. Significant locations in Latin America include Buenos Aires, Argentina and Sao Paulo, Brazil. Significant locations in EMEA (Europe, Middle East and Africa) include Brno, Czech Republic; Cork, Ireland; Farnborough, United Kingdom; Madrid, Spain; Munich, Germany; Puteaux, France; Ra’anana, Israel; Stockholm, Sweden and Stuttgart, Germany. Significant locations in Asia Pacific include Beijing, China; Brisbane, Australia; Melbourne, Australia; Mumbai, India; Pune, India; Singapore; Sydney, Australia and Tokyo, Japan. We believe that in all material respects our properties have been satisfactorily maintained, are in good condition and are suitable for our operations.

ITEM 3. LEGAL PROCEEDINGS

Commencing on or about March 2001, the Company and certain of its officers and directors were named as defendants in a series of purported class action suits arising out of the Company’s initial public offering and secondary offering. Approximately 310 other IPO issuers were named as defendants in similar class action complaints (together, the “IPO Allocation Actions”). On August 8, 2001, Chief Judge Michael Mukasey of the U.S. District Court for the Southern District of New York issued an order that transferred all of the IPO Allocation Actions, including the complaints involving the Company, to one judge for coordinated pre-trial proceedings (Case No. 21 MC 92). The plaintiffs contend that the defendants violated federal securities laws by issuing registration statements and prospectuses that contained materially false and misleading information and failed to disclose material information. Plaintiffs also challenge certain IPO allocation practices by underwriters and the lack of disclosure thereof in initial public offering documents. On April 19, 2002, plaintiffs filed amended complaints in each of the 310 consolidated actions, including the Red Hat action. The relief sought consists of unspecified damages, attorneys’ and expert fees and other unspecified costs. In October of 2002, the individual director and officer defendants of the Company were dismissed from the case without prejudice. In October of 2004, the District Court certified a class in six of the 310 actions (the “focus cases”) and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. The Company’s action is not one of the focus cases. On December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated the District Court’s class certification with respect to the focus cases and remanded the matter for further consideration. In September 2007, discovery moved forward in the focus cases and plaintiff filed and amended complaints against the focus case issuer and underwriter defendants. Defendants in the focus cases filed motions to dismiss the second amended complaints in November 2007 and filed their oppositions to plaintiffs’ motion for class certification in December 2007. The motions to dismiss in the focus cases were granted in part. On April 2, 2009, the plaintiffs’ executive committee on behalf of the proposed class filed a

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motion for preliminary approval of a settlement agreement to resolve the lawsuit, to which the Company has consented and for which payments called for by the settlement agreement are to be paid by the defendant insurers. The trial court heard arguments on September 10, 2009 on the fairness of the settlement. In an opinion and order filed October 5, 2009, the trial court approved the class, granted plaintiffs’ motion for approval of the settlement and directed the clerk of the court to close the action. Appeals have been filed and briefed before the Court of Appeals for the Second Circuit.

In the summer of 2004, 14 class action lawsuits were filed against the Company and several of its former officers on behalf of investors who purchased the Company’s securities during various periods from June 19, 2001 through July 13, 2004. All 14 suits were filed in the U.S. District Court for the Eastern District of North Carolina. In each of the actions, plaintiffs sought to represent a class of purchasers of the Company’s common stock during some or all of the period from June 19, 2001 through July 13, 2004. All of the claims arose in connection with the Company’s announcement on July 13, 2004 that it would restate certain of its financial statements (the “Restatement”). One or more of the plaintiffs asserted that certain former officers (the “Individual Defendants”) and the Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), and Rule 10b-5 thereunder by issuing the financial statements that the Company subsequently restated. One or more of the plaintiffs sought unspecified damages, interest, costs, attorneys’ and experts’ fees, an accounting of certain profits obtained by the Individual Defendants from trading in the Company’s common stock, disgorgement by the Company’s former chief executive officer and former chief financial officer of certain compensation and profits from trading in the Company’s common stock pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and other relief. As of September 8, 2004, all of these class action lawsuits were consolidated into a single action referenced as Civil Action No. 5:04-CV-473BR and titled In re Red Hat, Inc. Securities Litigation. On May 6, 2005, the plaintiffs filed an amended consolidated class action complaint. On July 29, 2005, the Company, on behalf of itself and the Individual Defendants, filed a motion to dismiss the action for failure to state a claim upon which relief may be granted. Also on that date, PricewaterhouseCoopers LLP (“PwC”), another defendant, filed a separate motion to dismiss. On May 12, 2006, the Court issued an order granting the motion to dismiss the Securities Exchange Act claims against several of the Individual Defendants, but denying the motion to dismiss the Securities Exchange Act claims against the Company, its former chief executive officer and former chief financial officer. The Court dismissed the claims under the Sarbanes-Oxley Act in their entirety, and also granted PwC’s motion to dismiss. On November 6, 2006, the plaintiffs filed a motion for class certification. Subsequent to the filing of that motion, several plaintiffs withdrew as potential class representatives, and the Company opposed the certification of the remaining proposed class representatives. On May 11, 2007, the Court entered an order denying class certification and denying all other pending motions as moot. Thereafter, on July 13, 2007 Charles Gilbert filed a renewed motion for appointment as lead plaintiff and approval of selection of lead counsel. On November 13, 2007, the Court entered an Order allowing Gilbert’s motion, appointing him lead plaintiff, adding him as a party plaintiff and appointing lead counsel. On January 14, 2008, Gilbert’s counsel filed a motion to certify the action as a class action. On August 28, 2009, the Court entered an Order certifying the action as a class action, appointing Gilbert as the class representative, and defining the class as “all purchasers of the common stock of Red Hat, Inc. between December 17, 2002, and July 12, 2004, inclusive and who were damaged thereby,” excluding Company insiders. On December 15, 2009, the Company announced that it had reached an agreement in principle to settle this matter, subject, among other matters, to completion of a final written settlement agreement and court approval. The Company recorded, for its quarter ended November 30, 2009, an estimated liability in the amount of $8.8 million for its portion of the proposed settlement. On March 29, 2010, counsel for the class filed a Motion for Preliminary Approval of the Settlement and, on June 11, 2010, a United States Magistrate Judge issued a Memorandum and Recommendation to the presiding judge that the motion be approved. On July 8, 2010, the presiding judge approved the motion and set the hearing for the final fairness hearing on December 7, 2010. The settlement was approved by the District Court in an order dated December 10, 2010.

On December 9, 2009, the Company filed a complaint in the Eastern District of Texas (Civil Action No. 6:09-cv-00549) against Bedrock Computer Technologies LLC (“Bedrock”) seeking a declaratory judgment that United States Patent No. 5,893,120 (the “‘120 Patent”) is invalid, unenforceable and not infringed. The

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complaint states that Bedrock brought an action in which it wrongly accused some customers of the Company of infringing the ‘120 Patent based on their use of computer equipment configured with or utilizing software based on various versions of the Linux operating system. The complaint seeks a declaration that anyone’s use, sale, or offer for sale of the Linux kernel distributed by the Company has not and does not in any manner infringe any claim of the ‘120 patent or otherwise infringe or violate any rights of Bedrock and that the ‘120 Patent is invalid and unenforceable. On January 29, 2010, Bedrock responded denying the contentions in the complaint and asserting a counterclaim alleging that Red Hat has directly and indirectly infringed the ‘120 Patent. On February 22, 2010, Red Hat replied to the counterclaim denying the allegations of infringement and asserting affirmative defenses. On March 26, 2010, Bedrock filed its first amended answer and counterclaim with crossclaims against fifteen parties. The claim construction hearing has been scheduled for May 12, 2011 and trial in the case has been scheduled for October 11, 2011. Based on information available to date, the Company believes it has meritorious defenses to the counterclaims and intends to vigorously defend itself. There can be no assurance, however, that the Company will be successful in its defense, and an adverse resolution of the counterclaims could have a material adverse effect on its business, financial position and results of operations, including its ability to continue to commercialize the technologies implicated in the litigation.

The Company also experiences routine litigation in the normal course of its business, including patent litigation. The Company presently believes that the outcome of this routine litigation will not have a material adverse effect on its financial position and results of operations.

ITEM 4. [REMOVED AND RESERVED]

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock trades on the New York Stock Exchange under the symbol “RHT”. The chart below sets forth the high and low sales information for each of the quarters of the fiscal years ended February 28, 2011 and February 28, 2010.

	FY 2011				FY 2010
Quarter	High		Low		High		Low
First	$	32.19	$	26.69	$	20.39	$	12.98
Second	$	35.27	$	27.82	$	23.72	$	18.11
Third	$	43.79	$	35.04	$	28.94	$	22.20
Fourth	$	49.00	$	39.42	$	31.76	$	26.52

Holders

As of April 14, 2011, we estimate that there were 1,824 registered stockholders of record of our common stock.

Dividends

We have never declared or paid any cash dividends on our common stock. We anticipate that our future earnings will be retained for the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future.

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Stock Performance Graph

The following graph shows a comparison of cumulative total return (equal to dividends plus stock appreciation) during the period from February 28, 2006 through February 28, 2011 for:

· Red Hat, Inc.;

· A peer group consisting of Akamai Technologies, Inc., Ansys, Inc., Autodesk, Inc., BMC, Cadence Design Systems, Inc., Citrix, Compuware Corporation, Jack Henry & Associates, Inc., McAfee, Inc., Micros Systems, Inc., Novell, Progress Software Corporation, RealNetworks, Inc., Salesforce.com, Inc., TIBCO Software, Inc., VMWare, Inc. and Verisign, Inc. (the “Stock Performance Peer Group”); and

· the S&P 500 Index.

We are required to provide a line-graph presentation comparing cumulative, five-year stockholder returns on an indexed basis with a broad equity market index and either a published industry index or an index of peer companies selected by Red Hat. In our index of peer group companies, we have selected peer companies considered to be peers for purposes of benchmarking executive compensation during the fiscal year ending February 28, 2011.

COMPARISON OF FIVE-YEAR CUMULATIVE

TOTAL RETURN AMONG RED HAT,

STOCK PERFORMANCE PEER GROUP AND S&P 500 INDEX

	2/28/06		2/28/07		2/29/08		2/28/09		2/28/10		2/28/11
RED HAT, INC.	$	100.00	$	83.55	$	66.36	$	50.95	$	104.39	$	153.63
PEER GROUP	$	100.00	$	116.70	$	113.18	$	66.43	$	111.47	$	129.86
S&P 500 INDEX	$	100.00	$	111.96	$	107.93	$	61.21	$	93.99	$	115.22

Notes:

· Assumes initial investment of $100.00 on February 28, 2006. Total return includes reinvestment of dividends.

· The lines represent monthly index levels derived from compounded daily returns that include all dividends.

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· If the monthly interval, based on the fiscal year-end, ends on a day that is not a trading day, the preceding trading day is used.

· The index level for all series was set to $100.00 on February 28, 2006.

· The information included under the heading “Stock Performance Graph” in Item 5 of this Annual Report on Form 10-K is “furnished” and not “filed” and shall not be deemed to be “soliciting material” or subject to Rule 14A, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the limitations of that section, and shall not be deemed incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this report and irrespective of any general incorporation by reference language in any such filing.

· The stock price performance shown in the graph is not necessarily indicative of future price performance.

Issuer Purchases of Equity Securities

The table below sets forth information regarding the Company’s purchases of its common stock during its fourth fiscal quarter ended February 28, 2011:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased (1)		Weighted Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced  Plans or Programs (2)		Maximum Number (or Approximate Dollar Value) of Shares that May  Yet Be Purchased Under the Plans or Programs (2)
December 1, 2010 – December 31, 2010		—	$	—		—	$	230.4 million
January 1, 2011 – January 31, 2011		317,198	$	43.99		248,300	$	219.6 million
February 1, 2011 – February 28, 2011		4,700	$	39.52		4,700	$	219.4 million
Total		321,898	$	43.92		253,000	$	219.4 million

(1) During the three months ended February 28, 2011, the Company withheld an aggregate of 68,898 shares of common stock from employees to satisfy minimum tax withholding obligations relating to the vesting of restricted share awards. These shares were not withheld pursuant to the program described in Note 2 below.

(2) On March 24, 2010, the Company announced that its Board of Directors had authorized the repurchase of up to an aggregate of $300.0 million of the Company’s common stock from time to time in open market or privately negotiated transactions, as applicable. The program will expire on the earlier of (i) March 31, 2012 or (ii) a determination by the Board of Directors, Chief Executive Officer or Chief Financial Officer to discontinue the program. See NOTE 17 to the Consolidated Financial Statements for information regarding the Company’s $300.0 million stock repurchase program announced on March 24, 2010.

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data for each of the Company’s fiscal years in the five-year period ended February 28, 2011. The selected balance sheet data as of February 28, 2011 and February 28, 2010 and the selected statement of operations data for the fiscal years ended February 28, 2011, February 28, 2010 and February 28, 2009 are derived from our Consolidated Financial Statements contained in this Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein. The selected statement of operations data for the fiscal years ended February 29, 2008 and February 28, 2007 and the selected balance sheet data as of February 28, 2009, February 29, 2008 and February 28, 2007, are derived from our Consolidated Financial Statements contained in the Annual Reports on Form 10-K for the years ended February 28, 2009 and February 29, 2008.

	Year Ended
	February 28, 2011		February 28, 2010		February 28, 2009		February 29, 2008			February 28, 2007
	(in thousands, except per share data)
SELECTED STATEMENT OF OPERATIONS DATA
Revenue:
Subscriptions	$	773,404	$	638,654	$	541,210	$	449,811		$	341,206
Training and services		135,873		109,582		111,362		73,205			59,418
Total subscription and training and services revenue	$	909,277	$	748,236	$	652,572	$	523,016		$	400,624
Gross profit	$	758,990	$	634,391	$	546,446	$	442,363		$	335,888
Income from operations	$	145,676	$	100,349	$	82,521	$	70,372		$	52,289
Interest income	$	6,743	$	10,381	$	36,473	$	58,541		$	43,738
Other income (expense), net	$	1,275	$	10,772	$	2,538	$	(4,373	)	$	(5,568	)
Net income	$	107,278	$	87,253	$	78,721	$	76,667		$	59,907
Basic net income per common share	$	0.56	$	0.46	$	0.41	$	0.40		$	0.32
Diluted net income per common share	$	0.55	$	0.45	$	0.39	$	0.36		$	0.29
Weighted average shares outstanding
Basic		190,294		187,845		190,772		193,485			189,347
Diluted		196,353		193,546		211,344		221,313			218,823

(1) For the years ended February 28, 2009, February 29, 2008 and February 28, 2007, other income (expense), net included interest expense of $4.8 million, $6.3 million and $6.0 million, respectively, related to the Company’s then outstanding convertible debt.

	As of
	February 28, 2011		February 28, 2010		February 28, 2009		February 29, 2008		February 28, 2007
	(in thousands)
SELECTED BALANCE SHEET DATA
Total cash and investments in debt and equity securities (available-for-sale, short- and long-term)	$	1,192,391	$	970,185	$	846,089	$	1,331,943	$	1,156,094
Working capital (1)	$	504,757	$	436,852	$	444,183	$	222,608	$	706,702
Total assets	$	2,199,322	$	1,870,872	$	1,753,636	$	2,079,982	$	1,785,854
Convertible debentures (1)	$	—	$	—	$	—	$	570,000	$	570,000
Stockholders’ equity	$	1,290,699	$	1,111,052	$	1,106,053	$	951,191	$	821,236

(1) Convertible debentures with an aggregate face amount of $570.0 million were reclassified from non-current to current during the fourth quarter of the fiscal year ended February 29, 2008, and as a result are included in working capital as of February 29, 2008. All of the debentures were repurchased or redeemed by the Company during the fiscal year ended February 28, 2009 and as a result, no balance was outstanding as of February 28, 2009.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are a global leader in providing open source software solutions to the enterprise, including our core enterprise operating system platform, Red Hat Enterprise Linux (“RHEL”), our enterprise middleware platform, JBoss Enterprise Middleware, our virtualization and cloud solutions and other Red Hat enterprise technologies.

Open source software is an alternative to proprietary software and represents a different model for the development and licensing of commercial software code than that typically used for proprietary software. Because open source software code is often freely shared, there are customarily no licensing fees for the distribution of open source software. Therefore, we do not recognize revenue from the licensing of the code itself. We provide value to our customers through the aggregation, integration, testing, certification, delivery, maintenance and support of our Red Hat enterprise technologies, and by providing a level of scalability, stability and accountability for the enterprise technologies we package and distribute. Moreover, because communities of developers not employed by us assist with the creation of our open source offerings, opportunities for further innovation of our offerings are supplemented by these communities.

We sell our enterprise technologies through subscriptions, and we recognize revenue over the period of the subscription agreements with our customers. We market our offerings primarily to enterprise customers including large enterprises, government organizations, small- and medium-size businesses and educational institutions.

We have focused on introducing and gaining acceptance for Red Hat enterprise technologies that comprise our open source architecture. Since introducing our initial enterprise open source operating system platform, Red Hat Enterprise Linux, it has gained widespread independent software vendor (“ISV”) and independent hardware vendor (“IHV”) support. We have continued to build our open source architecture by expanding our enterprise offerings and introducing new systems management services, middleware, integrated virtualization and clustering capability, file management systems, directory and certificate technologies and enhanced security functionality. We intend to bring the value of open source technology to other key areas of the enterprise infrastructure as the development community efforts support and customer needs dictate.

We derive our revenue and generate cash from customers primarily from two sources: (i) subscription revenue and (ii) training and services revenue. The arrangements with our customers that produce this revenue and cash are explained in further detail under “Critical Accounting Policies and Estimates” below and in NOTE 2 to the Consolidated Financial Statements. These arrangements typically involve subscriptions to Red Hat enterprise technologies. Our revenue is affected by, among other factors, corporate, government and consumer spending levels. In evaluating the performance of our business, we consider a number of factors, including total revenue, deferred revenue, operating income, operating margin and cash flows from operations.

Revenue.    For the year ended February 28, 2011, total revenue increased 21.5% or $161.0 million to $909.3 million from $748.2 million for the year ended February 28, 2010. Subscription revenue increased 21.1% or $134.8 million, driven primarily by additional subscriptions related to our principal RHEL technologies, which continue to gain broader market acceptance in mission-critical areas of computing, and our expansion of sales channels and geographic footprint. The increase is, in part, a result of the continued migration of enterprises in industries such as telecommunications, government and financial services to our open source solutions from proprietary technologies. Training and services revenue increased 24.0% or $26.3 million for the year ended February 28, 2011 as compared to the year ended February 28, 2010. The increase is driven primarily by an improving economic environment in which enterprises are increasing discretionary spending in areas such as IT training and consulting.

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We believe the success of our business model is influenced by:

· the extent to which we can expand the breadth and depth of our technology and service offerings;

· our ability to enhance the value of subscriptions for Red Hat enterprise technologies through frequent and continuous innovations to these technologies;

· the acceptance and widespread deployment of open source solutions by small, medium and large enterprises and government agencies;

· our ability to generate increasing revenue from channel partner and other strategic relationships, including distributors, OEMs, other hardware partners, ISVs, cloud computing providers, VARs and system integrators;

· our ability to generate subscription revenue for Red Hat enterprise technologies; and

· our ability to provide customers with consulting and training services that generate additional revenue.

Deferred Revenue.     Our deferred revenue, current and long-term, balance at February 28, 2011 was $772.3 million. Because of our subscription model and revenue recognition policies, deferred revenue improves predictability of future revenue. Deferred revenue at February 28, 2011 increased $126.4 million or 19.6% as compared to the balance at February 28, 2010 of $645.9 million.

The change in deferred revenue reported on our Consolidated Balance Sheets of $126.4 million differs from the $112.7 million change in deferred revenue we reported on our Consolidated Statement of Cash Flows for the year ended February 28, 2011 due to changes in foreign currency exchange rates used to translate deferred revenue balances from our foreign subsidiaries’ functional currency into U.S. dollars.

Subscriptions.    Our enterprise technologies are sold under subscription agreements. These agreements typically have a one- or three-year subscription period. The subscription entitles the end user to maintenance, which generally consists of a specified level of support, as well as security updates, bug fixes, functionality enhancements and upgrades to the technology, when and if available, during the term of the subscription. Our customers have the ability to purchase higher levels of subscriptions that increase the level of support the customer is entitled to receive. Subscription revenue increased sequentially for each quarter of fiscal 2011, 2010 and 2009 and is being driven primarily by the increased market acceptance and use of open source software by the enterprise and our expansion of sales channels and geographic footprint during these periods.

Revenue by geography.    We operate our business in three geographic regions: the Americas (U.S., Latin America and Canada); EMEA (Europe, Middle East and Africa); and Asia Pacific (principally Japan, Singapore, India, Australia, South Korea and China). During the year ended February 28, 2011, approximately $397.0 million or 43.7% of our revenue was generated outside the United States compared to approximately $324.9 million or 43.4% for the year ended February 28, 2010. Our international operations are expected to continue to grow as our international sales force and channels become more mature and as we enter new locations or expand our presence in existing locations. As of February 28, 2011, we had offices in more than 70 locations throughout the world.

Gross profit margin.    Primarily as a result of investments made during our current fiscal year in process and technology infrastructure enhancements to support the delivery of our training and professional services across a growing geographic footprint, gross profit margin decreased to 83.5% for the year ended February 28, 2011 from 84.8% for the year ended February 28, 2010. For fiscal 2012, we intend to continue investing in our global training and professional services business.

Income from operations.    Operating income was 16.0% and 13.4% of total revenue for the years ended February 28, 2011 and February 28, 2010, respectively. Operating income as a percentage of revenue for the year ended February 28, 2010, includes the impact of an $8.8 million expense representing our portion of the settlement of a class action lawsuit brought on behalf of certain shareholders in connection with the restatement

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of our financial results announced in July 2004. Excluding the impact of the litigation settlement expense during the year ended February 28, 2010, the remaining increase in operating income as a percentage of revenue is a result of the decrease in operating expenses relative to revenue as we continued to focus on managing discretionary spending and leveraging existing resources within corporate functions. Overall operating expenses as a percentage of revenue decreased to 67.5% for the year ended February 28, 2011 from 71.4% for the year ended February 28, 2010.

Business combinations.    On November 19, 2010, we acquired Makara, a developer of deployment and management solutions for applications in the cloud. For further discussion, see NOTE 3 to the Consolidated Financial Statements.

On September 4, 2008, we announced our acquisition of Qumranet, including its Kernel Virtual Machine (“KVM”) and SolidICE virtualization technologies, for approximately $104.8 million in cash. The acquisition provides server and desktop virtualization technologies and expertise, related virtualization management capabilities, communities of development and use, and additional influence in, and acceptance of, virtualization technology in the Linux kernel, upon which our Red Hat Linux platform is based. For further discussion, see NOTE 3 to the Consolidated Financial Statements.

Cash, cash equivalents, investments in debt and equity securities and cash flow from operations.    Cash, cash equivalents and short-term and long-term available-for-sale investments in securities balances at February 28, 2011 totaled $1.2 billion. Cash generated from operating activities for the year ended February 28, 2011 totaled $290.7 million, primarily as a result of the increase in subscription revenue and billings during the same period. Additionally, employees’ exercise of stock options generated $84.4 million of cash proceeds for the year ended February 28, 2011.

Our significant cash balance gives us a measure of flexibility to take advantage of opportunities such as acquisitions, increasing investment in international areas and repurchasing our own common stock.

Foreign currency exchange rates’ impact on results of operations.    Approximately 43.7% of our revenue for the year ended February 28, 2011 was produced by sales outside the United States. We are exposed to significant risks of foreign currency fluctuation primarily from receivables denominated in foreign currency and are subject to transaction gains and losses, which are recorded as a component in determining net income. The income statements of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each applicable month in a period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign-currency-denominated transactions results in increased revenue and operating expenses from operations for our non-U.S. operations. Similarly, our revenue and operating expenses will decrease for our non-U.S. operations if the U.S. dollar strengthens against foreign currencies.

Using the average foreign currency exchange rates from our prior fiscal year ended February 28, 2010, our revenue and operating expenses from non-U.S. operations for the year ended February 28, 2011 would have been higher than we reported using the average exchange rates for the current fiscal year ending February 28, 2011 by approximately $0.9 million and $2.5 million, respectively, which would have resulted in income from operations being lower by $1.6 million.

In our fiscal year ended February 28, 2011, we have focused and expect in our fiscal year ending February 29, 2012 to continue to focus on, among other things, (i) gaining widespread acceptance and deployment of Red Hat enterprise technologies by enterprise users globally, (ii) generating increasing revenue from our existing customer base by renewing existing subscriptions, providing additional value to our customers and by growing the number of enterprise technologies that comprise our open source architecture, (iii) generating increased revenue by providing additional systems management, developer support and other targeted services and (iv) generating increasing revenue from additional market penetration through a broader and deeper set of channel partner relationships, including OEMs, VARs and systems integrators and our own international expansion, among other means.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies and estimates include the following:

· Revenue recognition;

· Impairment of goodwill and other long-lived assets;

· Share-based compensation; and

· Deferred taxes and uncertain tax positions.

Revenue recognition

We establish persuasive evidence of a sales arrangement for each type of revenue transaction based on either a signed contract with the end customer, a click-through contract on our website whereby the customer agrees to our standard subscription terms, signed or click-through distribution contracts with OEMs and other resellers, or, in the case of individual training seats, through receipt of payment which indicates acceptance of our training agreement terms.

Subscription revenue

Subscription revenue is comprised of direct and indirect sales of Red Hat enterprise technologies. Accounts receivable and deferred revenue are recorded at the time a customer enters into a binding subscription agreement for the purchase of a subscription, subscription services are made available to the customer and the customer is billed. The deferred revenue amount is recognized as revenue ratably over the life of the subscription. Red Hat enterprise technologies are generally offered with either one or three-year base subscription periods; the majority of our subscriptions have one-year terms. Under these subscription agreements, renewal rates are generally specified for one or three-year renewal terms. The base subscription generally entitles the end user to the technology itself and post-contract customer support (“PCS”), generally consisting of a specified level of customer support and security errata, bug fixes, functionality enhancements to the technology and upgrades to new versions of the technologies, each on a when-and-if available basis, during the term of the subscription. We sell our technology offerings through two principal channels: (1) direct, which includes sales by our sales force as well as web store sales, and (2) indirect, which includes distributors, resellers, systems integrators and OEMs. We recognize revenue from the sale of Red Hat enterprise technologies ratably over the period of the subscription beginning on the commencement date of the subscription agreement.

Subscription arrangements with large enterprise customers often have contracts with multiple elements (e.g., software technology, maintenance, training, consulting and other services). We allocate revenue to each element of the arrangement based on vendor-specific objective evidence of each element’s fair value when we can demonstrate sufficient evidence of the fair value of at least those elements that are undelivered. The fair value of each element in multiple element arrangements is created by either (i) providing the customer with the ability during the term of the arrangement to renew that element at the same rate paid for the element included in the initial term of the agreement or (ii) selling the element on a stand-alone basis.

Training and services revenue

Training and services revenue is comprised of revenue for consulting, engineering and customer training and education services. Consulting services consist of time-based arrangements, and revenue is recognized as these services are performed. Engineering services represent revenue earned under fixed fee arrangements with our OEM partners and other customers to provide for significant modification and customization of our Red Hat enterprise technologies. We recognize revenue for these fixed fee engineering services using the percentage of completion basis of accounting, provided we have the ability to make reliable estimates of progress towards completion, the fee for such services is fixed or determinable and collection of the resulting receivable is

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probable. Under the percentage of completion method, earnings under the contract are recognized based on the progress toward completion as estimated using the ratio of labor hours incurred to total expected project hours. Changes in estimates are recognized in the period in which they are known. Revenue for customer training and education services is recognized on the dates the services are complete.

Goodwill and other long-lived assets

We test goodwill for impairment annually and whenever events or circumstances indicate an impairment may exist. We test goodwill at least annually using a two-step process that begins with identifying any potential impairment. Potential impairment is identified if the fair value of the reporting unit to which goodwill applies is less than the recognized or book value of the related reporting entity, including such goodwill. Where the book value of a reporting entity, including related goodwill, is greater than the reporting entity’s fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. For the three years ended February 28, 2011, we did not identify any potential impairment related to our goodwill.

We evaluate the recoverability of our property and equipment and other long-lived assets whenever events or changes in circumstances indicate that an impairment may have occurred. An impairment loss is recognized when the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to the assets or the business to which the assets relate. Impairment losses are measured as the amount by which the carrying value exceeds the fair value of the assets. For the three years ended February 28, 2011, no significant impairment losses related to our long-lived assets were identified. For further discussion, see NOTE 2 to the Consolidated Financial Statements.

Share-based compensation

We account for share-based compensation under the provisions of FASB ASC Section 718 Compensation-Stock Compensation (formerly referenced as Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment) (“ASC 718). In applying ASC 718, we are required to make estimates and assumptions with regards to the number of share-based awards that we expect will ultimately vest and the amount of tax benefits we expect will ultimately be realized, among other things. The amount of share-based awards that actually vest and the amount of tax benefits from share-based awards actually realized may differ significantly from our estimates. For further discussion, see NOTE 2 and NOTE 13 to the Consolidated Financial Statements.

Deferred taxes and uncertain tax positions

We account for income taxes using the liability method in which deferred tax assets or liabilities are recognized for the temporary differences between financial reporting and tax bases of our assets and liabilities and for tax carryforwards at enacted statutory tax rates in effect for the years in which the differences are expected to reverse.

We continue to assess the realizability of our deferred tax assets, which primarily consist of share-based compensation expense deductions, tax credit carryforwards and deferred revenue. In assessing the realizability of these deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. As of February 28, 2011, deferred tax assets totaled $113.8 million, of which $5.8 million was offset by a valuation allowance. We continue to maintain a valuation allowance against our deferred tax assets with respect to certain foreign net operating loss (“NOL”) carryforwards. For further discussion regarding deferred income taxes see NOTE 2 and NOTE 11 to the Consolidated Financial Statements.

With respect to foreign earnings, it is our policy to invest the earnings of foreign subsidiaries indefinitely outside the U.S. From time to time, however, we may remit a portion of these earnings to the extent we incur no additional U.S. tax and it is otherwise feasible.

46

Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, we make certain estimates and assumptions, in (i) calculating our income tax expense, deferred tax assets and deferred tax liabilities, (ii) determining any valuation allowance recorded against deferred tax assets and (iii) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertain tax positions. Our estimates and assumptions may differ significantly from tax benefits ultimately realized. For further discussion regarding uncertain tax positions see NOTE 11 to the Consolidated Financial Statements.

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RESULTS OF OPERATIONS

Years ended February 28, 2011 and February 28, 2010

The following table is a summary of our results of operations for the years ended February 28, 2011 and February 28, 2010 (in thousands):

	Year Ended
	February 28, 2011			February 28, 2010			$ Change			% Change
Revenue:
Subscriptions	$	773,404		$	638,654		$	134,750			21.1	%
Training and services		135,873			109,582			26,291			24.0
Total subscription and training and services revenue	$	909,277		$	748,236		$	161,041			21.5	%
Cost of subscription and training and services revenue:
Cost of subscriptions		52,997			43,426			9,571			22.0
As a % of subscription revenue		6.9	%		6.8	%
Cost of training and services		97,290			70,419			26,871			38.2
As a % of training and services revenue		71.6	%		64.3	%
Total cost of subscription and training and services revenue	$	150,287		$	113,845		$	36,442			32.0	%
As a % of total revenue		16.5	%		15.2	%
Total gross profit	$	758,990		$	634,391		$	124,599			19.6	%
Operating expense:
Sales and marketing		327,408			272,705			54,703			20.1
Research and development		171,253			148,360			22,893			15.4
General and administrative		114,653			104,227			10,426			10.0
Litigation settlement		0			8,750			(8,750	)		(100.0	)
Total operating expense	$	613,314		$	534,042		$	79,272			14.8	%
Income from operations		145,676			100,349			45,327			45.2
Interest income		6,743			10,381			(3,638	)		(35.0	)
Other income, net		1,275			10,772			(9,497	)		(88.2	)
Income before provision for income taxes	$	153,694		$	121,502		$	32,192			26.4	%
Provision for income taxes		46,416			34,249			12,167			35.5
Net income	$	107,278		$	87,253		$	20,025			23.0	%
Gross profit margin—subscriptions		93.1	%		93.2	%
Gross profit margin—training and services		28.4	%		35.7	%
Gross profit margin		83.5	%		84.8	%
As a % of total revenue:
Subscription revenue		85.1	%		85.4	%
Training and services revenue		14.9	%		14.6	%
Sales and marketing expense		36.0	%		36.4	%
Research and development expense		18.8	%		19.8	%
General and administrative expense		12.6	%		13.9	%
Litigation settlement		0.0	%		1.2	%
Total operating expenses		67.5	%		71.4	%
Income from operations		16.0	%		13.4	%
Income before provision for income taxes		16.9	%		16.2	%
Net income		11.8	%		11.7	%
Effective income tax rate		30.2	%		28.2	%

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Revenue

Subscription revenue

Subscription revenue increased by 21.1% or $134.8 million to $773.4 million for the year ended February 28, 2011 from $638.7 million for the year ended February 28, 2010. The increase in subscription revenue is primarily due to increases in volumes sold, including additional subscriptions attributable to geographic expansion, and continuing innovation, which attracts new customers and helps to drive renewals from existing customers.

Training and services revenue

Total training and services revenue increased by 24.0% or $26.3 million to $135.9 million for the year ended February 28, 2011 from $109.6 million for the year ended February 28, 2010. Training revenue increased 8.8% or $3.7 million as some enterprises began to increase overall spending on discretionary items such as training and related travel in response to a better overall economic environment. Our services revenue increased by 33.3% or $22.6 million as a result of both a better overall economic environment and increased subscription sales. Combined training and services revenue as a percentage of total revenue was 14.9% and 14.6% for the year ended February 28, 2011 and February 28, 2010, respectively.

Cost of revenue

Cost of subscription revenue

Cost of subscription revenue increased by 22.0% or $9.6 million to $53.0 million for the year ended February 28, 2011 from $43.4 million for the year ended February 28, 2010. The increase is partially the result of continued additions to our technical support staff to meet the demands of our growing subscriber base for support and maintenance, and includes additional compensation of $4.3 million. The remaining increase relates primarily to process and technology infrastructure investments which increased by $4.1 million. As the number of open source technology subscriptions continues to increase, we expect associated support cost will continue to increase, although we anticipate this will occur at a overall slower rate than that of subscription revenue growth due to economies of scale. Gross profit margin on subscriptions was 93.1% and 93.2% for the year ended February 28, 2011 and February 28, 2010, respectively.

Cost of training and services revenue

Cost of training and services revenue increased by 38.2% or $26.9 million to $97.3 million for the year ended February 28, 2011 from $70.4 million for the year ended February 28, 2010. The cost to deliver training increased 21.1% or $5.6 million to $32.3 million for the year ended February 28, 2011 compared to $26.7 million for the year ended February 28, 2010. The increase in training costs was primarily due to the use of outside contractors and off-site training facilities to deliver training services, which increased training costs by $2.6 million for the year ended February 28, 2011. The remaining increase was primarily due to increased employee compensation and related travel expense of $0.9 million and investments in process and technology infrastructure enhancements which totaled approximately $2.0 million. Costs to deliver our services revenue increased by 47.8% or $21.3 million and primarily relate to the use of outside contractors and additional employee compensation expense associated with additions to our staff to support increased services revenue. Total costs to deliver training and services as a percentage of training and services revenue increased to 71.6% for the year ended February 28, 2011 from 64.3% for the year ended February 28, 2010.

Gross profit

Primarily as a result of investments made during our current fiscal year in process and technology infrastructure enhancements to support the delivery of our training and professional services across a growing geographic footprint, gross profit margin decreased to 83.5% for the year ended February 28, 2011 from 84.8% for the year ended February 28, 2010. For fiscal 2012, we intend to continue investing in our global training and professional services business.

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Operating expenses

Sales and marketing

Sales and marketing expense increased by 20.1% or $54.7 million to $327.4 million for the year ended February 28, 2011 from $272.7 million for the year ended February 28, 2010. Selling costs increased $43.2 million and includes $35.2 million of additional employee compensation and travel related expense attributable to the expansion of our sales force from the prior year. Marketing costs grew $11.5 million or 20.2% for the year ended February 28, 2011 as compared to the year ended February 28, 2010. The increase in marketing costs includes $6.0 million related to increased headcount to support our expanding marketing efforts. The remaining increase in sales and marketing costs primarily relates to incremental advertising costs and process and technology infrastructure enhancements which increased $2.1 million and $6.9 million, respectively for the year ended February 28, 2011 as compared to the year ended February 28, 2010. Sales and marketing expense as a percentage of revenue decreased to 36.0% for the year ended February 28, 2011 from 36.4% for the year ended February 28, 2010 as we continue to leverage our existing infrastructure to generate increased sales.

Research and development

Research and development expense increased by 15.4% or $22.9 million to $171.3 million for the year ended February 28, 2011 from $148.4 million for the year ended February 28, 2010. The increase in research and development costs primarily resulted from the expansion of our engineering group through direct hires. Employee compensation increased by $17.9 million. The remaining increase in research and development costs relates primarily to process and technology infrastructure enhancements, which increased $3.6 million. Research and development expense was 18.8% and 19.8% of total revenue for the year ended February 28, 2011 and February 28, 2010, respectively.

General and administrative

General and administrative expense increased by 10.0% or $10.4 million to $114.7 million for the year ended February 28, 2011 from $104.2 million for the year ended February 28, 2010. The increase in general and administrative expenses is due to outside professional services fees, which were primarily for outside legal services. General and administrative expense decreased as a percentage of revenue to 12.6% for the year ended February 28, 2011 from 13.9% for the year ended February 28, 2010 as we continued to leverage our corporate functions.

Litigation settlement

On December 15, 2009, we announced that we had reached an agreement in principle to settle the class action lawsuit, then pending in the United States District Court for the Eastern District of North Carolina, brought on behalf of a class of shareholders in connection with the restatement of our financial results announced in July 2004. The $8.8 million expense we recorded for the year ended February 28, 2010 represents our portion of the payment pursuant to such settlement.

Interest income

Interest income decreased by 35.0% or $3.6 million to $6.7 million for the year ended February 28, 2011 from $10.4 million for the year ended February 28, 2010. The decrease in interest income for the year ended February 28, 2011 is attributable to lower yields on our investments due to an overall lower interest rate environment.

Other income, net

Other income, net decreased $9.5 million for the year ended February 28, 2011 as compared to the year ended February 28, 2010. Gains realized from the sale of our investments in available-for-sale equity securities

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totaled $3.7 million for the year ended February 28, 2011 which was $9.0 million lower than the $12.7 million of gains realized from the sale of equity securities during the year ended February 28, 2010. The remaining decrease is the result of increased losses resulting from changes in foreign currency exchange rates for the year ended February 28, 2011.

Income taxes

During the year ended February 28, 2011 and February 28, 2010, the Company recorded $46.4 million and $34.2 million, respectively of income tax expense. Tax expense for the year ended February 28, 2011 of $46.4 million resulted in an effective tax rate of 30.2%. Our effective tax rate of 30.2% differs from the U.S. federal statutory rate of 35.0% primarily due to foreign income taxed at different rates and foreign tax credits which were partially offset by state income tax expense. The provision for income tax for the year ended February 28, 2011 consists of $35.7 million of U.S. income tax expense and $10.7 million of foreign income tax expense.

During the year ended February 28, 2010, we recorded $34.2 million of income tax expense, which resulted in an annual effective tax rate of 28.2%. Our income tax expense for the year ended February 28, 2010 includes a discrete tax benefit from research tax credits, net of a corresponding reduction of NOLs, which resulted in a net reduction of income tax expense of $7.3 million. Excluding the impact of the discrete tax benefit, our annual effective tax rate was 34.2%, which differs from the U.S. federal statutory rate of 35.0% primarily due to foreign income taxed at different rates and foreign tax credits which were partially offset by state income tax expense. The provision for income tax for the year ended February 28, 2010 consisted of $24.8 million of U.S. income tax expense and $9.4 million of foreign income tax expense.

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Years ended February 28, 2010 and February 28, 2009

The following table is a summary of our results of operations for the years ended February 28, 2010 and February 28, 2009 (in thousands):

	Year Ended
	February 28, 2010			February 28, 2009			$ Change			% Change
Revenue:
Subscriptions	$	638,654		$	541,210		$	97,444			18.0	%
Training and services		109,582			111,362			(1,780	)		(1.6	)
Total subscription and training and services revenue	$	748,236		$	652,572		$	95,664			14.7
Cost of subscription and training and services revenue:
Cost of subscriptions		43,426			37,267			6,159			16.5
As a % of subscription revenue		6.8	%		6.9	%
Cost of training and services		70,419			68,859			1,560			2.3
As a % of training and services revenue		64.3	%		61.8	%
Total cost of subscription and training and services revenue	$	113,845		$	106,126		$	7,719			7.3
As a % of total revenue		15.2	%		16.3	%
Total gross profit	$	634,391		$	546,446		$	87,945			16.1
Operating expense:
Sales and marketing		272,705			238,552			34,153			14.3
Research and development		148,360			130,177			18,183			14.0
General and administrative		104,227			95,196			9,031			9.5
Litigation settlement		8,750			—			8,750			—
Total operating expense	$	534,042		$	463,925		$	70,117			15.1
Income from operations		100,349			82,521			17,828			21.6
Interest income		10,381			36,473			(26,092	)		(71.5	)
Other income, net		10,772			2,538			8,234			324.4
Income before provision for income taxes	$	121,502		$	121,532		$	(30	)		—
Provision for income taxes		34,249			42,811			(8,562	)		(20.0	)
Net income	$	87,253		$	78,721		$	8,532			10.8	%
Gross profit margin—subscriptions		93.2	%		93.1	%
Gross profit margin—training and services		35.7	%		38.2	%
Gross profit margin		84.8	%		83.7	%
As a % of total revenue:
Subscription revenue		85.4	%		82.9	%
Training and services revenue		14.6	%		17.1	%
Sales and marketing expense		36.4	%		36.6	%
Research and development expense		19.8	%		19.9	%
General and administrative expense		13.9	%		14.6	%
Litigation settlement		1.2	%		—
Total operating expenses		71.4	%		71.1	%
Income from operations		13.4	%		12.6	%
Interest income		1.4	%		5.6	%
Other income, net		1.4	%		0.3	%
Income before provision for income taxes		16.2	%		18.6	%
Net income		11.7	%		12.1	%
Effective income tax rate		28.2	%		35.2	%

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Revenue

Subscription revenue

Subscription revenue increased by 18.0% or $97.4 million to $638.7 million for the year ended February 28, 2010 from $541.2 million for the year ended February 28, 2009. The increase in subscription revenue was primarily due to increases in volumes sold, including additional subscriptions attributable to geographic expansion, and continuing innovation, which attracted new customers and helped to drive renewals from existing customers.

Training and services revenue

Training and services revenue decreased by 1.6% or $1.8 million to $109.6 million for the year ended February 28, 2010 from $111.4 million for the year ended February 28, 2009. Training revenue decreased 8.3% or $3.7 million as some enterprises reduced overall spending on discretionary items such as training and related travel in response to the challenging overall economic environment. Services revenue, which increased 3.0% or $2.0 million over the prior year, partially offset the reduction in training revenue. Combined training and services revenue decreased as a percentage of total revenue to 14.6% for the year ended February 28, 2010 from 17.1% for the year ended February 28, 2009.

Cost of revenue

Cost of subscription revenue

Cost of subscription revenue increased by 16.5% or $6.2 million to $43.4 million for the year ended February 28, 2010 from $37.3 million for the year ended February 28, 2009. The increase was primarily the result of continued additions to our technical support staff to meet the demands of our growing subscriber base for support and maintenance. Gross profit margin on subscriptions increased to 93.2% for the year ended February 28, 2010 from 93.1% for the year ended February 28, 2009 as we leveraged existing infrastructure to deliver support and maintenance to our growing subscriber base.

Cost of training and services revenue

Cost of training and services revenue increased by 2.3% or $1.6 million to $70.4 million for the year ended February 28, 2010 from $68.9 million for the year ended February 28, 2009. The cost to deliver training decreased 2.8% or $0.8 million to $26.7 million for the year ended February 28, 2010 compared to $27.5 million for the year ended February 28, 2009. The overall decrease in training costs was driven by a decrease in external training costs such as rental expense for offsite training rooms and outsourced instructors in response to reduced demand for our training services during the first half of fiscal 2010. Costs to deliver our services revenue increased by 5.6% or $2.3 million primarily as a result of increased travel and internal facilities costs. Because a significant portion of our costs to deliver both training and professional services are fixed in nature, as compared to our training and services revenue, overall costs to deliver training and services as a percentage of training and services revenue increased to 64.3% for the year ended February 28, 2010 from 61.8% for the year ended February 28, 2009.

Gross profit

Primarily as a result of changes in mix, with a greater proportion of our total revenue generated by subscription revenue, gross profit margin increased to 84.8% for the year ended February 28, 2010 from 83.7% for the year ended February 28, 2009. Training and services revenue decreased as a percentage of total revenue to 14.6% for the year ended February 28, 2010 from 17.1% for the year ended February 28, 2009.

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Operating expenses

Sales and marketing

Sales and marketing expense increased by 14.3% or $34.2 million to $272.7 million for the year ended February 28, 2010 from $238.6 million for the year ended February 28, 2009. This increase was partially due to a $23.3 million increase in selling costs, primarily related to increased employee compensation attributable to the expansion of our sales force from the prior year. The remaining increase related to marketing costs, which grew $10.8 million or 23.4% for the year ended February 28, 2010 as compared to the year ended February 28, 2009. The increase in marketing costs included $6.3 million related to increased advertising and tradeshow expenditures. Sales and marketing expense as a percentage of revenue decreased to 36.4% for the year ended February 28, 2010 from 36.6% for the year ended February 28, 2009 as we leveraged our existing infrastructure to generate increased sales.

Research and development

Research and development expense increased by 14.0% or $18.2 million to $148.4 million for the year ended February 28, 2010 from $130.2 million for the year ended February 28, 2009. The increase in research and development costs primarily resulted from the expansion of our engineering group through direct hires and the acquisition of businesses and technologies. Employee compensation increased by $13.7 million. The remaining increase in research and development costs relates primarily to process and technology infrastructure enhancements, which increased $4.1 million. Research and development expense was 19.8% and 19.9% of total revenue for the year ended February 28, 2010 and February 28, 2009, respectively.

General and administrative

General and administrative expense increased by 9.5% or $9.0 million to $104.2 million for the year ended February 28, 2010 from $95.2 million for the year ended February 28, 2009. Increased headcount across all functions to help the business scale increased employee compensation costs by $2.4 million for the year ended February 28, 2010 as compared to the year ended February 28, 2009. The remaining net increase in general and administrative expenses of $6.6 million for the year ended February 28, 2010 as compared to the year ended February 28, 2009, relates to increased outside services fees of $3.1 million, which were primarily for outside legal services, and $3.6 million for process and technology infrastructure enhancements, including incremental depreciation and amortization charges. General and administrative expense decreased as a percentage of revenue to 13.9% for the year ended February 28, 2010 from 14.6% for the year ended February 28, 2009 as we continued to leverage our corporate functions.

Litigation settlement

On December 15, 2009, we announced that we had reached an agreement in principle to settle the class action lawsuit, then pending in the United States District Court for the Eastern District of North Carolina, brought on behalf of a class of shareholders in connection with the restatement of our financial results announced in July 2004. The $8.8 million expense we recorded for the year ended February 28, 2010 represents our portion of the payment pursuant to such settlement.

Interest income

Interest income decreased by 71.5% or $26.1 million to $10.4 million for the year ended February 28, 2010 from $36.5 million for the year ended February 28, 2009. The decrease in interest income for the year ended February 28, 2010 was attributable to (i) lower yields on our investments due to an overall lower interest rate environment and (ii) lower cash balances, which were reduced by outlays for acquisitions and the repurchase and redemption of our convertible debentures and repurchases of our common stock.

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Other income, net

Other income, net increased by 324.4% or $8.2 million to $10.8 million for the year ended February 28, 2010 from $2.5 million for the year ended February 28, 2009. The increase was primarily due to an increase in gains realized from the sale of our investments in available-for-sale equity securities for the year ended February 28, 2010 which increased $8.8 million as compared to gains realized during the year ended February 28, 2009.

Income taxes

During the year ended February 28, 2010, we recorded $34.2 million of income tax expense, which resulted in an annual effective tax rate of 28.2%. Our income tax expense for the year ended February 28, 2010 includes a discrete tax benefit from research tax credits, net of a corresponding reduction of NOLs, which resulted in a net reduction of income tax expense of $7.3 million. Excluding the impact of the discrete tax benefit, our annual effective tax rate was 34.2%, which differs from the U.S. federal statutory rate of 35.0% primarily due to foreign income taxed at different rates and foreign tax credits which were partially offset by state income tax expense.

The provision for income tax for the year ended February 28, 2010 consists of $24.8 million of U.S. income tax expense and $9.4 million of foreign income tax expense. During the year ended February 28, 2009, we recorded $42.8 million of income tax expense, which resulted in an annual effective tax rate of 35.2%. Our effective tax rate differed from the U.S. federal statutory rate of 35.0% primarily due to state income taxes which were partially offset by foreign income taxed at different rates and certain nonrecurring income tax deductions. The provision for income tax for the year ended February 28, 2009 consisted of $41.2 million of U.S. income tax expense and $1.6 million of foreign income tax expense.

LIQUIDITY AND CAPITAL RESOURCES

We have historically derived a significant portion of our liquidity and operating capital from cash flows from operations as well as the sale of equity securities, including private sales of preferred stock and the sale of common stock in our initial and follow-on public offerings, the issuance of convertible debentures and borrowings under working capital lines of credit. At February 28, 2011, we had total cash and investments of $1.2 billion, which was comprised of $642.6 million in cash and cash equivalents, $213.5 million of short-term, available-for-sale fixed-income investments, $2.7 million of available-for-sale equity securities, $331.8 million of long-term, available-for-sale fixed-income investments, and $1.8 million in certificates of deposit with maturity dates greater than 30 days. This compares to total cash and investments of $970.2 million at February 28, 2010.

With $642.6 million in cash and cash equivalents on hand, we believe our cash and cash equivalent balances should be sufficient to satisfy our cash requirements for the next twelve months and for the foreseeable future. We presently do not intend to liquidate our short and long-term investments in debt securities prior to their scheduled maturity dates. However, in the event that we did liquidate these investments prior to their scheduled maturities and there were adverse changes in market interest rates or the overall economic environment, we could be required to recognize a realized loss on those investments when we liquidate. At February 28, 2011, we have an accumulated unrealized loss of $0.5 million on our investments in debt securities compared to an accumulated unrealized gain of $1.7 million at February 28, 2010. At February 28, 2011 and February 28, 2010, accumulated unrealized gains related to short-term equity securities available for sale totaled $2.6 million and $4.4 million, respectively.

Year ended February 28, 2011

Cash flows—overview

At February 28, 2011, cash and cash equivalents totaled $642.6 million, an increase of $254.5 million as compared to February 28, 2010. The increase in cash and cash equivalents for the year ended February 28, 2011

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is primarily the result of cash provided by operations which generated $290.7 million. Also contributing to the increase in cash was proceeds from employees’ exercise of stock options which totaled $84.4 million for the year ended February 28, 2011. Partially offsetting cash provided by operating activities and stock option proceeds was cash used to repurchase 2,921,275 shares of our common stock at a total cost of $90.1 million and investments in tangible assets and a business which totaled $32.8 million and $31.4 million, respectively. Net cash generated by operating activities and used for investing and financing activities is further described below.

Cash flows from operations

Cash provided by operations of $290.7 million during the year ended February 28, 2011 includes net income of $107.3 million, adjustments to exclude the impact of non-cash revenues and expenses, which totaled $97.9 million net source of cash, and changes in working capital, which totaled an $85.6 million net source of cash. Cash provided by changes in operating assets and liabilities for the year ended February 28, 2011 was primarily the result of an increase in deferred revenue which generated operating cash flow of $112.7 million. The increase in deferred revenue is due to growth in billings as we generally bill our customers in advance of subscription periods. Cash generated from deferred income taxes of $33.8 million was primarily due to share-based compensation deductions which were in excess of amounts originally recognized in our consolidated statements of operations. Excess tax benefits from share-based compensation, which totaled $42.3 million, is considered a financing source of cash.

Cash flows from investing

Cash used in investing activities of $54.9 million for the year ended February 28, 2011 includes cash used to purchase Makara, a developer of deployment and management solutions for applications in the cloud, which totaled $31.4 million, net of cash acquired; investments in property and equipment, primarily related to process and information technology infrastructure enhancements, which totaled $32.8 million for the year ended February 28, 2011; and investments in other intangible assets, primarily patents, which totaled $14.1 million for the year ended February 28, 2011. Partially offsetting these uses were net maturities of debt securities which totaled $19.4 million for the year ended February 28, 2011.

Cash flows from financing

Cash provided by financing activities of $9.8 million for the year ended February 28, 2011 includes proceeds from employees’ exercise of common stock options which totaled $84.4 million and proceeds from excess tax benefits related to share-based employee compensation which totaled $42.3 million. Partially offsetting cash provided by employees’ exercise of stock options was cash of $90.1 million used to repurchase 2,921,275 shares of our common stock at an average price of $30.92 per share, including transaction costs. Payments made in return for common shares received from employees to satisfy employees’ minimum tax withholding obligations related to restricted share awards vesting during the year ended February 28, 2011 totaled $26.3 million.

Year ended February 28, 2010

Cash flows—overview

At February 28, 2010, cash and cash equivalents totaled $388.1 million, a decrease of $127.4 million as compared to February 28, 2009. The decrease in cash and cash equivalents for the year ended February 28, 2010 is a result of net cash used for investing and financing activities. During the year ended February 28, 2010, we repurchased 10,014,022 shares of our common stock at an average price of $23.61 per share totaling $236.4 million, including transaction costs. Purchases of available-for-sale debt securities, net of proceeds from sales and maturities, totaled $254.4 million for the year ended February 28, 2010. These investing and financing uses of cash were partially offset by cash generated from operating activities and equity transactions related to

56

employee share-based compensation awards, which totaled $255.2 million and $127.0 million, respectively for the year ended February 28, 2010. Net cash generated by operating activities and used for investing and financing activities is further described below.

Cash flows from operations

Cash provided by operations of $255.2 million during the year ended February 28, 2010 includes net income of $87.3 million, adjustments to exclude the impact of non-cash revenues and expenses, which totaled a $67.8 million net source of cash, and changes in working capital, which totaled a $100.2 million net source of cash. Cash provided by changes in operating assets and liabilities for the year ended February 28, 2010 was primarily the result of an increase in our deferred revenue which generated operating cash flow of $82.6 million. The increase in deferred revenue is due to growth in billings as we generally bill our customers in advance of subscription periods. This increase in deferred revenue of $82.6 million excludes the impact of foreign currency translation which increased our total consolidated deferred revenue by $20.2 million for the year ended February 28, 2010.

Cash flows from investing

Cash used in investing activities of $276.2 million for the year ended February 28, 2010 includes net purchases of investments in available-for-sale debt securities of $254.4 million. Investments in property and equipment, primarily related to process and information technology infrastructure enhancements, totaled $28.4 million for the year ended February 28, 2010. Investments in patents and externally developed technology totaled $4.7 million for the year ended February 28, 2010. Partially offsetting these investments were proceeds from the sale of available-for-sale equity securities which totaled $13.1 million for the year ended February 28, 2010.

Cash flows from financing

Cash used in financing activities of $110.2 million for the year ended February 28, 2010 includes $236.4 million used to repurchase 10,014,022 shares of our common stock at an average price of $23.61 per share, including transaction costs. Payments made in return for common shares received from employees to satisfy employees’ minimum tax withholding obligations related to restricted share awards vesting during the year ended February 28, 2010 totaled $11.9 million. Partially offsetting financing activities using cash were excess tax benefits related to share-based employee compensation which totaled $35.6 million and proceeds from employees’ exercise of common stock options which totaled $103.3 million. Payments on other borrowings totaled $0.9 million for the year ended February 28, 2010.

Year ended February 28, 2009

Cash flows—overview

At February 28, 2009, cash and cash equivalents totaled $515.5 million, a decrease of $162.2 million as compared to February 29, 2008. The decrease in cash and cash equivalents for the year ended February 28, 2009 was a result of net cash used for investing and financing activities. During the year ended February 28, 2009, we repurchased and redeemed for $565.6 million our convertible debentures with an aggregate face amount of $570.0 million and repurchased 2,875,052 million shares of our common stock at an average price of $14.70 per share totaling $42.3 million. Additionally, during the third quarter of fiscal 2009 we acquired Qumranet for net cash of $101.3 million. These significant investing and financing uses of cash were partially offset by cash generated from operating activities, which totaled $236.4 million for the year ended February 28, 2009, and proceeds from sales and maturities of our available-for-sale securities which, net of purchases, totaled $317.2 million for the year ended February 28, 2009. Net cash generated by operating activities and investing and used for financing activities are further described below.

57

Cash flows from operations

Cash provided by operations of $236.4 million during the year ended February 28, 2009 includes net income of $78.7 million, adjustments to exclude the impact of non-cash revenues and expenses, which totaled a $71.9 million net source of cash, and changes in working capital, which totaled a $85.8 million net source of cash. Cash provided by changes in operating assets and liabilities for the year ended February 28, 2009 was primarily the result of an increase in our deferred revenue which generated operating cash flow of $97.9 million. The increase in deferred revenue is due to growth in billings as we generally bill our customers in advance of subscription periods. This increase in deferred revenue of $97.9 million excludes the impact of foreign currency translation which reduced our total consolidated reported deferred revenue by $27.7 million for the year ended February 28, 2009.

Cash flows from investing

Cash provided by investing activities of $146.2 million for the year ended February 28, 2009 includes net proceeds from sales and maturities of investments in debt securities of $317.2 million and proceeds from the sale of investments in equity securities of $5.6 million. Partially offsetting these proceeds from the sale and maturity of investments were acquisitions of businesses and technologies which totaled $148.1 million, including our acquisition of Qumranet during the third quarter of fiscal 2009 for net cash of $101.3 million. The remaining $46.8 million of investment relates to businesses and technologies we acquired during the first and second quarters of fiscal 2009 to enhance our services capabilities in the middleware and security management markets. Investments in property and equipment, primarily related to process and information technology infrastructure enhancements, totaled $24.5 million for the year ended February 28, 2009. Investments in patents and externally developed technology totaled $3.9 million for the year ended February 28, 2009.

Cash flows from financing

Cash used in financing activities of $539.2 million for the year ended February 28, 2009 is comprised of $565.6 million used to repurchase and redeem our convertible debentures with an aggregate face amount of $570.0 million. Additionally, under our common stock repurchase program we repurchased 2,875,052 of our common stock at an average price of $14.70 per share using $42.3 million of cash. Purchases of treasury shares from employees to satisfy employee minimum tax withholding obligations related to restricted share awards vesting during the year ended February 28, 2009 totaled $2.7 million. Partially offsetting financing activities using cash were proceeds from excess tax benefits related to share-based employee compensation which totaled $51.1 million, proceeds from employees’ exercise of common stock options which totaled $18.4 million and proceeds from a structured stock repurchase transaction which totaled $2.0 million for the year ended February 28, 2009.

Investments in debt and equity securities

Our investments are comprised primarily of debt securities that are classified as available for sale and recorded at their fair market values. At February 28, 2011 and February 28, 2010, the vast majority of our investments were priced by pricing vendors. These pricing vendors use the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs. In the event observable inputs are not available, we assess other factors to determine the securities’ market value, including broker quotes or model valuations. Independent price verifications of all of our holdings are performed by the pricing vendors, which we review. In the event a price fails a pre-established tolerance check, it is researched so that we can assess the cause of the variance to determine what we believe is the appropriate fair market value.

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Capital requirements

We have experienced a substantial increase in our operating expenses since our inception in connection with the growth of our operations, the development of our enterprise technologies, the expansion of our services operations and our acquisition activity. Our capital requirements during the year ending February 29, 2012 will depend on numerous factors, including the amount of resources we devote to:

· funding the continued development of our enterprise technology offerings;

· accelerating the development of our systems management services;

· improving and extending our services and the technologies used to deliver these services to our customers and support our business;

· pursuing strategic acquisitions and alliances; and

· investing in businesses, products and technologies.

We have utilized, and will continue from time to time to utilize, cash and investments to fund, among other potential uses, purchases of our common stock, purchases of fixed assets and mergers and acquisitions.

Given our historically strong operating cash flow and the $1.2 billion of cash and investments held at February 28, 2011, we do not presently anticipate the need to raise cash to fund our operations, either through the sale of additional equity or through the issuance of debt, in the foreseeable future. However, we may take advantage of favorable capital market situations that may arise from time to time to raise additional capital.

We believe that cash flow from operations will continue to improve; however, there can be no assurances that we will improve our cash flow from operations from the current rate or that such cash flows will be adequate to fund other investments or acquisitions that we may choose to make. We may choose to accelerate the expansion of our business from our current plans, which may require us to raise additional funds through the sale of equity or debt securities or through other financing means. There can be no assurances that any such financing would occur in amounts or on terms favorable to us, if at all.

Off-balance sheet arrangements

As of February 28, 2011 and February 28, 2010, we have no off-balance sheet financing arrangements and do not utilize any “structured debt”, “special purpose” or similar unconsolidated entities for liquidity or financing purposes.

Contractual obligations

The following table summarizes our principal contractual obligations at February 28, 2011 (in thousands):

	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Operating lease obligations	$	87,426	$	21,851	$	28,595	$	18,010	$	18,970
Purchase obligations		—		—		—		—		—
Other debt obligations, including related interest		575		575		—		—		—
Total	$	88,001	$	22,426	$	28,595	$	18,010	$	18,970

Because we are unable to reasonably estimate the timing of settlements and any future payments related to uncertain tax positions, such liabilities are not included in the above table. However, as of February 28, 2011, we have recognized a total of $23.8 million related to such liabilities, which are included in other long-term obligations on our Consolidated Balance Sheet.

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RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued guidance amending disclosure requirements related to Fair Value Measurements and Disclosures-Overall Subtopic 820-10 of the FASB Accounting Standards Codification (“ASC 820-10”) originally issued as FASB Statement No. 157, Fair Value Measurements. The amended guidance requires companies to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for such transfers. These additional disclosure requirements were effective for reporting periods beginning March 1, 2010. For the year ended February 28, 2011, we did not have any transfers in and out of Level 1 and Level 2 fair value measurements. The amended guidance also requires additional disclosures related to Level 3 fair value measurements. We do not currently have Level 3 fair value measurements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes, foreign currency exchange rate fluctuations and changes in the market value of our investments.

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal and liquidity while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term and long-term investments in a variety of fixed-income securities, including both government and corporate obligations and money market funds. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in prevailing interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates or perceived credit risk related to the securities’ issuers. A hypothetical one percentage point change in interest rates, assuming a parallel shift of all interest rates, would result in an $8.0 million change in annual interest income derived from investments in our portfolio as of February 28, 2011. For further discussion related to our investments as of February 28, 2011 and February 28, 2010, see NOTE 2 and NOTE 18 to the Consolidated Financial Statements.

Investment Risk

The fair market value of our investment portfolio is subject to interest rate risk. Based on a sensitivity analysis performed on this investment portfolio, a hypothetical one percentage point increase in prevailing interest rates would result in an approximate $10.2 million decrease in the fair value of our available-for-sale investment securities as of February 28, 2011. For further discussion related to our investments as of February 28, 2011 and February 28, 2010, see NOTE 2 and NOTE 18 to the Consolidated Financial Statements.

Credit Risk

The fair market values of our investment portfolio and cash balances are exposed to counterparty credit risk. Accordingly, while we periodically review our portfolio in an effort to mitigate counterparty risk, the principal values of our cash balances, money market accounts and investments in available-for-sale securities could suffer a loss of value.

Foreign Currency Risk

Approximately 43.7% of our revenue for the year ended February 28, 2011 was produced by sales outside the United States. We are exposed to significant risks of foreign currency fluctuation primarily from receivables denominated in foreign currency and are subject to transaction gains and losses, which are recorded as a component in determining net income. The income statements of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each applicable month in a period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency statements results in increased revenue and operating expenses for our non-U.S. operations. Similarly, our revenue and operating expenses for our non-U.S. operations decreases if the U.S. dollar strengthens against foreign currencies.

Using the average foreign currency exchange rates from the year ended February 28, 2010, our revenue from non-U.S. operations for the year ended February 28, 2011 would have been higher than we reported using the average exchange rates for the year ending February 28, 2011 by approximately $0.9 million. Under the same assumptions, operating expenses would have been higher than we reported by approximately $2.5 million, which would have resulted in income from operations being lower by approximately $1.6 million. For further discussion, see NOTE 2 and NOTE 10 to the Consolidated Financial Statements.

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Derivative Instruments

We transact business in various foreign countries and are, therefore, subject to risk of foreign currency exchange rate fluctuations. We sometimes enter into forward contracts to economically hedge transactional exposure associated with commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations denominated in a currency other than the functional currency of the respective operating entity. All derivative instruments are recorded on the Consolidated Balance Sheets at their respective fair market values in accordance with FASB ASC Section 815 (formerly referenced as Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities). The Company has elected not to prepare and maintain the documentation required to qualify its forward contracts for hedge accounting treatment and, therefore, changes in fair value are recorded in the Consolidated Statements of Operations.

The aggregate notional amount of outstanding forward contracts at February 28, 2011 was $64.5 million. The fair value of these outstanding contracts at February 28, 2011 was a gross $0.4 million asset and a gross $0.1 million liability, and is recorded in other current assets and accrued expenses, respectively on the Consolidated Balance Sheets. The forward contracts generally expire within three months of the period ended February 28, 2011. The forward contracts will settle in Japanese yen, Swiss francs, Swedish krona, Czech koruna, Canadian dollars, Singapore dollars and Australian dollars.

The aggregate notional amount of outstanding forward contracts at February 28, 2010 was $8.4 million. The fair value of these outstanding contracts at February 28, 2010 was, gross, a less than $0.1 million asset and a less than $0.1 million liability, and is recorded in other current assets and accrued expenses, respectively on the Consolidated Balance Sheets.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Management on Internal Control Over Financial Reporting		64
Report of Independent Registered Public Accounting Firm		65
Financial Statements:
Consolidated Balance Sheets at February 28, 2011 and February 28, 2010		66
Consolidated Statements of Operations for the years ended February 28, 2011, February  28, 2010 and February 28, 2009		67
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended February 28, 2011, February 28, 2010 and February 28, 2009		68
Consolidated Statements of Cash Flows for the years ended February 28, 2011, February  28, 2010 and February 28, 2009		69
Notes to Consolidated Financial Statements		70

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REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate 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 is 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 accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of the end of the period covered by this report.

Our independent registered public accounting firm, which has audited the financial statements included in Part II, Item 8 of this report, has also audited the effectiveness of the Company’s internal control over financial reporting as of February 28, 2011, as stated in their report, which is included below.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Red Hat, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and comprehensive income and of cash flows present fairly, in all material respects, the financial position of Red Hat, Inc. and its subsidiaries at February 28, 2011 and February 28, 2010, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 28, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing in Item 8. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Raleigh, North Carolina

April 22, 2011

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RED HAT, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands—except share and per share amounts)

	February 28, 2011			February 28, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	642,630		$	388,118
Investments in debt and equity securities, short-term		217,970			372,656
Accounts receivable, net of allowances for doubtful accounts of $1,379 and $2,295, respectively		184,741			139,436
Deferred tax assets, net		75,720			57,951
Prepaid expenses		62,364			44,116
Other current assets		1,133			842
Total current assets	$	1,184,558		$	1,003,119
Property and equipment, net of accumulated depreciation and amortization of $139,753 and $116,971, respectively		75,558			71,708
Goodwill		463,673			438,749
Identifiable intangibles, net		109,932			108,213
Investments in debt securities, long-term		331,791			209,411
Other assets, net		33,810			39,672
Total assets	$	2,199,322		$	1,870,872
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	16,285		$	16,483
Accrued expenses		90,229			68,334
Deferred revenue		572,637			480,572
Other current obligations		650			878
Total current liabilities	$	679,801		$	566,267
Deferred lease credits		5,215			4,184
Long-term deferred revenue		199,617			165,288
Other long-term obligations		23,990			24,081
Commitments and contingencies (NOTE 14)
Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized, none outstanding		—			—
Common stock, $0.0001 per share par value, 300,000,000 shares authorized, 223,778,248 and 215,161,306 shares issued, 193,046,862 and 187,351,195 shares outstanding at February 28, 2011 and February 28, 2010, respectively		22			22
Additional paid-in capital		1,610,238			1,444,848
Retained earnings		245,050			137,772
Treasury stock at cost, 30,731,386 and 27,810,111 shares at February 28, 2011 and February 28, 2010, respectively		(562,792	)		(472,646	)
Accumulated other comprehensive (loss) income		(1,819	)		1,056
Total stockholders’ equity	$	1,290,699		$	1,111,052
Total liabilities and stockholders’ equity	$	2,199,322		$	1,870,872

The accompanying notes are an integral part of these consolidated financial statements.

66

RED HAT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands—except per share amounts)

	Year Ended
	February 28, 2011		February 28, 2010		February 28, 2009
Revenue:
Subscriptions	$	773,404	$	638,654	$	541,210
Training and services		135,873		109,582		111,362
Total subscription and training and services revenue	$	909,277	$	748,236	$	652,572
Cost of subscription and training and services revenue:
Cost of subscriptions		52,997		43,426		37,267
Cost of training and services		97,290		70,419		68,859
Total cost of subscription and training and services revenue	$	150,287	$	113,845	$	106,126
Gross profit	$	758,990	$	634,391	$	546,446
Operating expense:
Sales and marketing		327,408		272,705		238,552
Research and development		171,253		148,360		130,177
General and administrative		114,653		104,227		95,196
Litigation settlement		0		8,750		0
Total operating expense	$	613,314	$	534,042	$	463,925
Income from operations		145,676		100,349		82,521
Interest income		6,743		10,381		36,473
Other income, net		1,275		10,772		2,538
Income before provision for income taxes	$	153,694	$	121,502	$	121,532
Provision for income taxes		46,416		34,249		42,811
Net income	$	107,278	$	87,253	$	78,721
Basic net income per common share	$	0.56	$	0.46	$	0.41
Diluted net income per common share	$	0.55	$	0.45	$	0.39
Weighted average shares outstanding
Basic		190,294		187,845		190,772
Diluted		196,353		193,546		211,344

The accompanying notes are an integral part of these consolidated financial statements.

67

RED HAT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(in thousands)

	Preferred Stock				Common Stock				Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares		Amount		Shares		Amount
Balance at February 29, 2008		—		—		205,732	$	21	$	1,170,328		$	(28,202	)	$	(192,946	)	$	1,990		$	951,191
Net income		—		—		—		—		—			78,721			—			—			78,721
Other comprehensive income:
Unrealized gain on investments in marketable securities, net of tax		—		—		—		—		—			—			—			(272	)		—
Foreign currency translation adjustment, net of tax		—		—		—		—		—			—			—			8,609			—
Other comprehensive income		—		—		—		—		—			—			—			8,337			8,337
Comprehensive income		—		—		—		—		—			—			—			—			87,058
Exercise of common stock options		—		—		2,063		—		18,355			—			—			—			18,355
Common stock repurchase		—		—		—		—		—			—			(42,318	)		—			(42,318	)
Structured stock repurchase		—		—		—		—		1,989			—			—			—			1,989
Share-based compensation expense		—		—		—		—		48,315			—			—			—			48,315
Tax benefits related to share-based awards		—		—		—		—		44,161			—			—			—			44,161
Minimum tax withholdings paid by the Company on behalf of employees related to net settlement of employee share-based awards		—		—		—		—		(1,679	)		—			(1,019	)		—			(2,698	)
Balance at February 28, 2009		—		—		207,795	$	21	$	1,281,469		$	50,519		$	(236,283	)	$	10,327		$	1,106,053
Net income		—		—		—		—		—			87,253			—			—			87,253
Other comprehensive income:
Unrealized loss on investments in marketable securities, net of tax		—		—		—		—		—			—			—			(988	)		—
Foreign currency translation adjustment, net of tax		—		—		—		—		—			—			—			(8,283	)		—
Other comprehensive income (loss)		—		—		—		—		—			—			—			(9,271	)		(9,271	)
Comprehensive income		—		—		—		—		—			—			—			—			77,982
Exercise of common stock options		—		—		7,366		1		103,332			—			—			—			103,333
Common stock repurchase		—		—		—		—		—			—			(236,363	)		—			(236,363	)
Share-based compensation expense		—		—		—		—		48,288			—			—			—			48,288
Tax benefits related to share-based awards		—		—		—		—		23,614			—			—			—			23,614
Minimum tax withholdings paid by the Company on behalf of employees related to net settlement of employee share-based awards		—		—		—		—		(11,855	)		—			—			—			(11,855	)
Balance at February 28, 2010		—		—		215,161	$	22	$	1,444,848		$	137,772		$	(472,646	)	$	1,056		$	1,111,052
Net income		—		—		—		—		—			107,278			—			—			107,278
Other comprehensive income:
Unrealized loss on investments in marketable securities, net of tax		—		—		—		—		—			—			—			(2,566	)		—
Foreign currency translation adjustment, net of tax		—		—		—		—		—			—			—			(309	)		—
Other comprehensive income (loss)		—		—		—		—		—			—			—			(2,875	)		(2,875	)
Comprehensive income		—		—		—		—		—			—			—			—			104,403
Exercise of common stock options		—		—		8,617		—		84,443			—			—			—			84,443
Common stock repurchase		—		—		—		—		—			—			(90,146	)		—			(90,146	)
Share-based compensation expense		—		—		—		—		60,597			—			—			—			60,597
Tax benefits related to share-based awards		—		—		—		—		46,600			—			—			—			46,600
Minimum tax withholdings paid by the Company on behalf of employees related to net settlement of employee share-based awards		—		—		—		—		(26,250	)		—			—			—			(26,250	)
Balance at February 28, 2011		—		—		223,778	$	22	$	1,610,238		$	245,050		$	(562,792	)	$	(1,819	)	$	1,290,699

The accompanying notes are an integral part of these consolidated financial statements.

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RED HAT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended
	February 28, 2011			February 28, 2010			February 28, 2009
Cash flows from operating activities:
Net income	$	107,278		$	87,253		$	78,721
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		47,997			45,861			40,309
Deferred income taxes		33,848			20,636			38,979
Excess tax benefits from share-based payment arrangements		(42,291	)		(35,569	)		(51,137	)
Share-based compensation expense		60,597			48,288			48,315
Gain from repurchase of convertible debentures		0			0			(4,129	)
Amortization of debt issuance costs		0			0			2,319
Gain on sale of available-for-sale securities		(3,746	)		(12,656	)		(3,848	)
Other		1,505			1,248			1,094
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable		(41,512	)		(7,290	)		(2,341	)
Prepaid expenses		(17,220	)		(630	)		(18,606	)
Accounts payable		(381	)		6,569			(7,275	)
Accrued expenses		29,915			15,423			17,056
Deferred revenue		112,724			82,625			97,861
Other		2,034			3,491			(879	)
Net cash provided by operating activities	$	290,748		$	255,249		$	236,439
Cash flows from investing activities:
Purchase of investment in debt securities available-for-sale		(751,420	)		(666,890	)		(396,810	)
Proceeds from sales and maturities of investment in debt securities available-for-sale		770,860			412,514			714,015
Acquisitions of businesses, net of cash acquired		(31,381	)		0			(148,140	)
Proceeds from sales of investment in equity securities available for sale		3,938			13,053			5,568
Purchase of strategic equity investments		0			(1,768	)		0
Purchase of developed software and other intangible assets		(14,093	)		(4,692	)		(3,932	)
Purchase of property and equipment		(32,759	)		(28,420	)		(24,485	)
Net cash provided by (used in) investing activities	$	(54,855	)	$	(276,203	)	$	146,216
Cash flows from financing activities:
Excess tax benefits from share-based payment arrangements		42,291			35,569			51,137
Redemption and repurchase of convertible debentures		0			0			(565,558	)
Proceeds from exercise of common stock options		84,443			103,332			18,355
Purchase of treasury stock		(90,146	)		(236,393	)		(42,319	)
Structured stock repurchase		0			0			1,989
Proceeds from other borrowings		318			0			0
Payments on other borrowings		(876	)		(900	)		(69	)
Payments related to settlement of employee shared-based awards		(26,250	)		(11,855	)		(2,698	)
Net cash provided by (used in) financing activities	$	9,780		$	(110,247	)	$	(539,163	)
Effect of foreign currency exchange rates on cash and cash equivalents	$	8,839		$	3,771		$	(5,664	)
Net increase (decrease) in cash and cash equivalents	$	254,512		$	(127,430	)	$	(162,172	)
Cash and cash equivalents at beginning of year		388,118			515,548			677,720
Cash and cash equivalents at end of year	$	642,630		$	388,118		$	515,548
Supplemental cash flow information:
Cash paid during the year for:
Interest	$	122		$	129		$	2,475
Income taxes	$	8,121		$	5,730		$	4,950

The accompanying notes are an integral part of these consolidated financial statements.

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RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—Company

Red Hat, Inc., incorporated in Delaware, together with its subsidiaries (“Red Hat” or the “Company”) is a global leader in providing open source software solutions to the enterprise. The Company is also the market leader in providing enterprise-ready open source operating system platforms. The Company applies its technology leadership to create its: enterprise operating platform, Red Hat Enterprise Linux; enterprise middleware platform, JBoss Enterprise Middleware; virtualization solutions and other infrastructure technology solutions, based on open source technology. The Company’s enterprise solutions are intended to meet the functionality requirements and performance demands of the enterprise and third-party computer hardware and software applications that are critical to the enterprise. The Company provides these solutions through content distribution and management services, Red Hat Network, RHN Satellite and JBoss Operations Network, which allow various Red Hat enterprise technologies to be updated and configured and the performance of these and other technologies to be monitored in an automated fashion. These solutions reflect the Company’s continuing commitment to provide an enterprise-wide infrastructure platform and developer solutions based on open source technology. The Company derives its revenue and generates its cash from customers primarily from two sources: (i) subscriptions for its enterprise technologies and (ii) training and services revenue, as further described below in NOTE 2, Summary of Significant Accounting Policies.

NOTE 2—Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying Consolidated Financial Statements include the accounts of the Company and all of its wholly-owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation. There are no significant foreign exchange restrictions on the Company’s foreign subsidiaries.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from such estimates.

Revenue Recognition

The Company establishes persuasive evidence of a sales arrangement for each type of revenue transaction based on either a signed contract with the end customer, a click-through contract on the Company’s website whereby the customer agrees to the Company’s standard subscription terms, signed or click-through distribution contracts with original equipment manufacturers (“OEMs”) and other resellers, or, in the case of individual training seats, through receipt of payment which indicates acceptance of the Company’s training agreement terms.

Subscription Revenue

Subscription revenue is comprised of direct and indirect sales of Red Hat enterprise technologies. Accounts receivable and deferred revenue are recorded at the time a customer enters into a binding subscription agreement for the purchase of a subscription, subscription services are made available to the customer and the customer is billed. The deferred revenue amount is recognized as revenue ratably over the life of the subscription. Red Hat

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enterprise technologies are generally offered with either one or three-year base subscription periods; the majority of the Company’s subscriptions have one-year terms. Under these subscription agreements, renewal rates are generally specified for one or three-year renewal terms. Subscriptions generally entitle the end user to the technology itself and post-contract customer support (“PCS”), generally consisting of varying levels of support services as well as access to security errata, bug fixes, functionality enhancements to the technology and upgrades to new versions of the technologies, each on a when-and-if available basis, during the term of the subscription. The Company sells its offerings through two principal channels: (1) direct, which includes sales by the Company’s sales force as well as web store sales, and (2) indirect, which includes distributors, resellers, systems integrators and OEMs. The Company recognizes revenue from the sale of Red Hat enterprise technologies ratably over the period of the subscription beginning on the commencement date of the subscription agreement.

Subscription arrangements with large enterprise customers often have contracts with multiple elements (e.g., software technology, maintenance, training, consulting and other services). The Company allocates revenue to each element of the arrangement based on vendor-specific objective evidence of each element’s fair value when the Company can demonstrate sufficient evidence of the fair value of at least those elements that are undelivered. The fair value of each element in multiple element arrangements is created by either (i) providing the customer with the ability during the term of the arrangement to renew that element at the same rate paid for the element included in the initial term of the agreement or (ii) selling the element on a stand-alone basis.

Training and Services Revenue

Training and services revenue is comprised of revenue for consulting, engineering and customer training and education services. Consulting services consist of time-based arrangements, and revenue is recognized as these services are performed. Engineering services represent revenue earned under fixed fee arrangements with the Company’s OEM partners and other customers to provide for significant modification and customization of the Company’s Red Hat enterprise technologies. The Company recognizes revenue for these fixed fee engineering services using the percentage of completion basis of accounting, provided the Company has the ability to make reliable estimates of progress towards completion, the fee for such services is fixed or determinable and collection of the resulting receivable is probable. Under the percentage of completion method, earnings under the contract are recognized based on the progress toward completion as estimated using the ratio of labor hours incurred to total expected project hours. Changes in estimates are recognized in the period in which they are known. Revenue for customer training and education services is recognized on the dates the services are complete.

Deferred Commissions

Deferred commissions are the incremental costs that are directly associated with non-cancelable subscription contracts with customers and consist of sales commissions paid to the Company’s sales force. The commissions are deferred and amortized over a period that approximates the period of the subscription term. The commission payments are paid in full subsequent to the month in which the customer’s service commences. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. In addition, the Company has the ability and intent under the commission plans with its sales force to recover commissions previously paid to its sales force in the event that customers breach the terms of their subscription agreements and do not fully pay for their subscription agreements. Deferred commissions are included in prepaid expenses on the accompanying Consolidated Balance Sheets. Amortization of deferred commissions is included in sales and marketing expense in the accompanying Consolidated Statements of Operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Goodwill and Other Long-Lived Assets

The Company tests goodwill for impairment annually and whenever events or circumstances indicate that an impairment may have occurred. Accounting principles generally accepted in the U.S. require goodwill be tested at least annually using a two-step process that begins with identifying potential impairment. Potential impairment is identified if the fair value of the reporting unit to which goodwill applies is less than the recognized or book value of the related reporting entity, including such goodwill. Where the book value of a reporting entity, including related goodwill, is greater than the reporting entity’s fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The annual impairment test is performed during the Company’s fourth quarter. For the years ended February 28, 2011, February 28, 2010 and February 28, 2009, the Company did not identify any potential impairment related to its goodwill.

The Company evaluates the recoverability of its property and equipment and other long-lived assets whenever events or changes in circumstances indicate that an impairment may have occurred. An impairment loss is recognized when the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to the assets or the business to which the assets relate. Impairment losses, if any, are measured as the amount by which the carrying value exceeds the fair value of the assets. For the years ended February 28, 2011, February 28, 2010 and February 28, 2009, no significant impairment losses related to the Company’s long-lived assets were identified.

Cash and Cash Equivalents

The Company considers liquid investments purchased with a maturity period of three months or less at the date of purchase to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company determines it is probable the receivable will not be recovered. The Company does not have off-balance-sheet credit exposure related to its customers.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for the purchase of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for such asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3—Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.

The Company’s investments are comprised primarily of debt securities that are classified as available for sale and recorded at their fair market values. Liquid investments with effective original maturities of 90 days or less from the balance sheet date are classified as cash equivalents. Investments with remaining effective maturities of twelve months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than twelve months from the balance sheet date are classified as long-term investments. The Company’s Level 1 financial instruments are valued using quoted prices in active markets for identical instruments. The Company’s Level 2 financial instruments, including derivative instruments, are valued using quoted prices for identical instruments in less active markets or using other observable market inputs for comparable instruments.

Unrealized gains and temporary losses on investments classified as available for sale are included within accumulated other comprehensive income, net of any related tax effect. Upon realization, such amounts are reclassified from accumulated other comprehensive income to other income, net. Realized gains and losses and other than temporary impairments, if any, are reflected in the statements of operations as other income, net. The Company does not recognize changes in the fair value of its investments in income unless a decline in value is considered other-than-temporary. The vast majority of the Company’s investments are priced by pricing vendors. These pricing vendors use the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs. In the event observable inputs are not available, the Company assesses other factors to determine the security’s market value, including broker quotes or model valuations. Independent price verifications of all holdings are performed by pricing vendors which are then reviewed by the Company. In the event a price fails a pre-established tolerance check, it is researched so that the Company can assess the cause of the variance to determine what the Company believes is the appropriate fair market value. See NOTE 18 for further discussion on fair value measurements.

The Company minimizes its credit risk associated with investments by investing primarily in investment grade, liquid securities. The Company’s policy is designed to limit exposures to any one issuer depending on credit quality. Periodic evaluations of the relative credit standing of those issuers are considered in the Company’s investment strategy.

Internal Use Software

The Company capitalizes costs related to the development of internal use software for its website, enterprise resource planning system and systems management applications. The Company amortizes the costs of computer software developed for internal use on a straight-line basis over an estimated useful life of five years. The carrying value of internal use software is included in property and equipment on the Company’s Consolidated Balance Sheets.

Capitalized Software Costs

Capitalization of software development costs for products to be sold to third parties begins upon the establishment of technological feasibility and ceases when the product is available for general release. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management concerning certain external factors including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies. As a result of the Company’s practice of releasing source code

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that it has developed on a weekly basis for unrestricted download on the Internet, there is generally no passage of time between achievement of technological feasibility and the availability of the Company’s product for general release. Therefore, at February 28, 2011 and February 28, 2010, the Company had no internally developed capitalized software costs for products to be sold to third parties.

Property and Equipment

Property and equipment is primarily comprised of furniture, computer equipment, computer software and leasehold improvements which are recorded at cost and depreciated or amortized using the straight-line method over their estimated useful lives as follows: furniture and fixtures, seven years; computer equipment, three to four years; computer software, five years; leasehold improvements, over the lesser of the estimated remaining useful life of the asset or the remaining term of the lease. Expenditures for maintenance and repairs are charged to operations as incurred; major expenditures for renewals and betterments are capitalized and depreciated. Property and equipment acquired under capital leases are depreciated over the lesser of the estimated remaining useful life of the asset or the remaining term of the lease.

Share-Based Compensation

The Company measures share-based compensation cost at grant date, based on the estimated fair value of the award and recognizes the cost over the employee requisite service period typically on a straight-line basis, net of estimated forfeitures. The Company estimates the fair value of stock options using the Black-Scholes-Merton valuation model. The fair value of nonvested share awards, nonvested share units and performance share units are measured at their underlying closing share price on the date of grant. The Company’s share-based compensation is described further in NOTE 13.

Sales and Marketing Expenses

Sales and marketing expenses consist of costs, including salaries, sales commissions and related expenses, such as travel, of all personnel involved in the sales and marketing process. Sales and marketing expenses also include costs of advertising, sales lead generation programs, cooperative marketing arrangements and trade shows. Payments made to resellers or other customers are reported in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section 605-50 Customer Payments and Incentives (formerly referenced as Emerging Issues Task Force Issue Number 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)) (“ASC 605-50”). All costs of advertising, to the extent allowable by ASC 605-50, are expensed as incurred.

Advertising expense totaled $25.5 million, $23.5 million, and $18.1 million for the years ended February 28, 2011, February 28, 2010 and February 28, 2009, respectively.

Research and Development Expenses

Research and development expenses include all direct costs, primarily salaries for Company personnel and outside consultants, related to the development of new software products, significant enhancements to existing software products, and the portion of costs of development of internal use software required to be expensed. Research and development costs are charged to operations as incurred with the exception of those software development costs that may qualify for capitalization.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Deferred Taxes

The Company accounts for income taxes using the liability method in which deferred tax assets or liabilities are recognized for the temporary differences between financial reporting and tax bases of the Company’s assets and liabilities and for tax carryforwards at enacted statutory tax rates in effect for the years in which the differences are expected to reverse.

The Company continues to assess the realizability of its deferred tax assets, which primarily consist of share-based compensation expense deductions, tax credit carryforwards and deferred revenue. In assessing the realizability of these deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The Company continues to maintain a valuation allowance against its deferred tax assets with respect to certain foreign net operating loss (“NOL”) carryforwards.

With respect to foreign earnings, it is the Company’s policy to invest the earnings of foreign subsidiaries indefinitely outside the U.S. From time to time, however, the Company may remit a portion of these earnings to the extent it incurs no additional U.S. tax and it is otherwise feasible.

Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, the Company makes certain estimates and assumptions in (i) calculating its income tax expense, deferred tax assets and deferred tax liabilities, (ii) determining any valuation allowance recorded against deferred tax assets and (iii) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertain tax positions. The Company’s estimates and assumptions may differ significantly from tax benefits ultimately realized. The Company’s income tax expense and deferred taxes are described further in NOTE 11.

Foreign Currency Translation

The Euro has been determined to be the primary functional currency for the Company’s European operations and local currencies have been determined to be the functional currencies for the Company’s Asia Pacific and South American operations. Foreign exchange gains and losses, which result from the process of remeasuring foreign currency transactions into the appropriate functional currency, are included in other income, net in the Company’s Consolidated Statements of Operations.

The impact of changes in foreign currency exchange rates resulting from the translation of foreign currency financial statements into U.S. dollars for financial reporting purposes is included in other comprehensive income, which is a separate component of stockholders’ equity. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average rates for the period.

Significant Customers and Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, investments and trade receivables. The Company primarily places its cash, cash equivalents and investments with high-credit quality financial institutions which invest predominantly in U.S. government instruments, investment grade corporate bonds and certificates of deposit guaranteed by banks which are members of the FDIC. Cash deposits are primarily in financial institutions in the United States. However, cash for monthly operating costs of international operations are deposited in banks outside the United States.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company performs credit evaluations to reduce credit risk and generally requires no collateral from its customers. Management estimates the allowance for uncollectible accounts based on their historical experience and credit evaluation. The Company’s standard credit terms are net 30 days in North America, net 30 to 45 days in EMEA, Central America and South America, and range from net 30 to net 60 days in Asia Pacific.

Net Income Per Common Share

The Company computes basic net income per common share by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of shares issuable upon the exercise of stock options or vesting of share-based awards.

For the year ended February 28, 2009, the Company’s diluted net income was adjusted for interest expense and amortization of debt issuance costs associated with the Company’s convertible debentures which had been outstanding during the year ended February 28, 2009. Potential common share equivalents for the year ended February 28, 2009, consisted of shares issuable upon the exercise of stock options, vesting of share-based awards and conversion of convertible securities such as the Company’s convertible debentures. Diluted net income per share for the year ended February 28, 2009, assumes the conversion of the convertible debentures using the “if converted” method. See NOTE 19 for the reconciliation of the calculation of net income per common share.

Segment Reporting

The Company is organized primarily on the basis of three geographic business units: the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific. These business units are aggregated into one reportable segment due to the similarity in nature of products provided, financial performance economics (e.g., revenue growth and gross margin), methods of distribution (direct and indirect) and customer classification (e.g., distributors, resellers and enterprise).

The Company has offices in more than 70 locations around the world. The Company manages its international business on an Americas-wide, EMEA-wide and Asia Pacific-wide basis. See NOTE 20 for further discussion.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Recent Accounting Pronouncements

In January 2010, the FASB issued guidance amending disclosure requirements related to Fair Value Measurements and Disclosures-Overall Subtopic 820-10 of the FASB Accounting Standards Codification (“ASC 820-10”) originally issued as FASB Statement No. 157, Fair Value Measurements. The amended guidance requires companies to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for such transfers. These additional disclosure requirements were effective for reporting periods beginning March 1, 2010. For the year ended February 28, 2011, the Company did not have any transfers in and out of Level 1 and Level 2 fair value measurements. The amended guidance also requires additional disclosures related to Level 3 fair value measurements. The Company does not currently have Level 3 fair value measurements.

NOTE 3—Business Combinations

Acquisition of Qumranet, Inc.

On September 4, 2008, the Company completed its acquisition of Qumranet, Inc. (“Qumranet”), a privately held software company that produced and sold virtualization technologies. The acquisition of Qumranet broadened the Company’s technology solutions, communities of development and use, and additional influence in, and acceptance of, virtualization technology in the Linux kernel, upon which the Company’s Red Hat Enterprise Linux platform is based. Under the terms of the purchase agreement the Company paid approximately $104.8 million in cash. The total consideration paid by the Company in connection with the acquisition is summarized in the following table (in thousands):

	Total Consideration
Cash consideration paid to and/or on behalf of Qumranet stockholders	$	104,772
Transaction costs		703
Total consideration	$	105,475

The table below represents the allocation of the total consideration to the Company’s tangible and identifiable intangible assets and liabilities (in thousands) based on management’s assessment of their respective fair values as of the date of the acquisition:

	Total Consideration Allocated
Identifiable intangible assets at fair value (see detail below)	$	21,200
Cash		4,333
Accounts receivable at fair value		28
Fixed assets at fair value		959
Other assets at fair value		247
Accrued liabilities at fair value		(1,069	)
Goodwill		79,777
Total consideration allocated	$	105,475

The following table summarizes the allocation of estimated identifiable intangible assets resulting from the acquisition (in thousands). For purposes of this allocation, the Company has assessed a fair value of Qumranet identifiable intangible assets related to employee covenants not to compete, developed technology and tradenames and trademarks based on the net present value of the projected income stream of these identifiable

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intangible assets. The resulting fair value is being amortized over the estimated useful life of each identifiable intangible asset on a straight-line basis which approximates the economic pattern of benefits (in thousands):

	Expense Type		Estimated Life (Years)		Total
Developed technology		Research and development		6	$	17,000
Employee covenants not to compete		Research and development		3		2,600
Tradenames and trademarks		General and administrative		10		1,600
Total identifiable intangible assets					$	21,200

Pro forma consolidated financial information

The following unaudited pro forma consolidated financial information reflects the results of operations (in thousands, except per share amounts) of the Company for the year ended February 28, 2009 as if the acquisition of Qumranet had occurred at the beginning of the year, after giving effect to certain purchase accounting adjustments. These pro forma results are not necessarily indicative of what the Company’s operating results would have been had the acquisition actually taken place at the beginning of the year.

	Year Ended February 28, 2009
Revenue	$	652,697
Net income	$	73,048
Basic net income per common share	$	0.38
Diluted net income per common share	$	0.36

Goodwill and other business combinations

The Company completed its annual goodwill impairment test in February 2011. No goodwill impairment was deemed to have occurred. The following is a summary of goodwill for the years ended February 28, 2011, February 28, 2010 and February 28, 2009 (in thousands):

Balance at February 29, 2008	$	340,314
Add: acquisition of Qumranet		80,030
Add: acquisition of other businesses (1)		19,723
Impact of foreign currency fluctuations and other		(1,958	)
Balance at February 28, 2009	$	438,109
Less: adjustment to Qumranet purchase price for finalization of allocation		(253	)
Impact of foreign currency fluctuations		893
Balance at February 28, 2010	$	438,749
Add: acquisition of Makara (2)		24,681
Impact of foreign currency fluctuations		243
Balance at February 28, 2011	$	463,673

(1) During the year ended February 28, 2009, goodwill additions represent the excess of purchase price over tangible and identifiable intangible assets of businesses acquired which provide the Company additional services capability within the middleware and security management markets. The aggregate purchase price paid for these businesses, net of cash acquired, totaled $46.8 million.

(2) During the year ended February 28, 2011, goodwill additions represent the excess of purchase price over tangible and identifiable intangible assets of Makara, a developer of deployment and management solutions for applications in the cloud. The purchase price paid for the business, net of cash acquired, totaled $31.4 million.

78

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4—Accounts Receivable

Accounts receivable are presented net of an allowance for doubtful accounts. Activity in the Company’s allowance for doubtful accounts for the years ended February 28, 2011, February 28, 2010 and February 28, 2009 is presented in the following table (in thousands):

	Balance at beginning of period		Charged to (recovery of) expense			Adjustments (1)			Balance at end of period
2009	$	2,211	$	495		$	(319	)	$	2,387
2010	$	2,387	$	(295	)	$	203		$	2,295
2011	$	2,295	$	(260	)	$	(656	)	$	1,379

(1) Represents foreign currency translation adjustments and amounts written-off as uncollectible accounts receivable.

At February 28, 2011 and February 28, 2010, no individual customer accounted for more than 10% of the Company’s accounts receivable. For the years ended February 28, 2011, February 28, 2010 and February 28, 2009, there were no individual customers from which the Company generated 10% or greater revenue.

NOTE 5—Property and Equipment

The Company’s property and equipment is recorded at cost and consists of the following (in thousands):

	February 28, 2011			February 28, 2010
Computer equipment	$	88,626		$	75,354
Software, including software developed for internal use		80,046			74,742
Furniture and fixtures		13,201			11,645
Leasehold improvements		33,438			26,938
Property and Equipment	$	215,311		$	188,679
Less: accumulated depreciation		(139,753	)		(116,971	)
Property and equipment, net	$	75,558		$	71,708

The useful lives of property and equipment range from three to seven years. Depreciation expense recognized in the Company’s Consolidated Financial Statements for the years ended February 28, 2011, February 28, 2010 and February 28, 2009 is summarized as follows (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
Total depreciation expense	$	29,036	$	26,213	$	22,883

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RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 6—Identifiable Intangible Assets

Identifiable intangible assets consist primarily of purchased technologies, customer and reseller relationships, trademarks, copyrights and patents, which are amortized over the estimated useful life, generally on a straight-line basis with the exception of customer contracts and relationships which are generally amortized over the greater of straight-line or the related asset’s pattern of economic benefit. Useful lives range from three to ten years. As of February 28, 2011 and February 28, 2010, trademarks with an indefinite estimated useful life totaled $9.1 million and $9.0 million, respectively. The following is a summary of identifiable intangible assets (in thousands):

	February 28, 2011							February 28, 2010
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Trademarks, copyrights and patents	$	58,122	$	(16,817	)	$	41,305	$	52,204	$	(13,504	)	$	38,700
Purchased technologies		59,233		(32,081	)		27,152		44,483		(25,632	)		18,851
Customer and reseller relationships		80,768		(39,293	)		41,475		80,760		(30,098	)		50,662
Total identifiable intangible assets	$	198,123	$	(88,191	)	$	109,932	$	177,447	$	(69,234	)	$	108,213

Amortization expense associated with identifiable intangible assets recognized in the Company’s Consolidated Financial Statements for the years ended February 28, 2011, February 28, 2010 and February 28, 2009 is summarized as follows (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
Total amortization expense	$	18,961	$	19,648	$	17,426

As of February 28, 2011, amortization expense on existing intangibles for the next five fiscal years is as follows (in thousands):

2012	$	18,586
2013	$	16,046
2014	$	13,462
2015	$	10,560
2016	$	7,181

NOTE 7—Other Assets, Net

Other assets, net were comprised of the following (in thousands):

	February 28, 2011		February 28, 2010
Equity-method investment	$	15,815	$	17,252
Cost-basis investments		2,232		2,732
Net non-current deferred tax assets (see NOTE 11)		10,610		14,967
Security deposits		5,153		4,721
Total	$	33,810	$	39,672

80

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company reviews its non-marketable cost-basis investments in equity securities for other than temporary declines in fair value based on prices recently paid for shares in that company, as well as changes in market conditions. The carrying values are not necessarily representative of the amounts that the Company could realize in a current transaction. During the years ended February 28, 2011, February 28, 2010 and February 28, 2009, no significant losses were recognized for equity investments in other companies.

Equity-method investment represents the Company’s investment in Open Inventions Network LLC (“OIN”) and the related share of OIN’s accumulated deficit. The Company uses the equity method to account for its investment in OIN. The equity method requires the Company to increase or decrease the carrying amount of its investment in OIN to reflect the Company’s pro rata share of OIN’s gains and losses, respectively.

NOTE 8—Prepaid Expenses

Prepaid expenses include sales commissions, taxes and insurance. Sales commissions are the incremental costs that are directly associated with non-cancelable subscription contracts with customers and consist of sales commissions paid to the Company’s sales force. The commissions are deferred and amortized over a period to approximate the period of the subscription term. For further discussion on deferred commissions see NOTE 2 to the Consolidated Financial Statements. Prepaid expenses, including sales commissions, were comprised of the following (in thousands):

	February 28, 2011		February 28, 2010
Sales commissions	$	50,134	$	30,782
Taxes		5,034		4,598
Insurance		762		390
Other		6,434		8,346
Total	$	62,364	$	44,116

NOTE 9—Accrued Expenses

Accrued expenses were comprised of the following (in thousands):

	February 28, 2011		February 28, 2010
Wages and other compensation related expenses	$	59,400	$	41,990
Other trade payables		22,541		14,885
Income and other taxes payable		7,251		10,375
Other		1,037		1,084
Total accrued expenses	$	90,229	$	68,334

NOTE 10—Foreign Currency Exchange Rate Risk

The Company transacts business in various foreign countries and is, therefore, subject to risk of foreign currency exchange rate fluctuations. The Company from time to time enters into forward contracts to hedge transactional exposure associated with commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations denominated in a currency other than the functional currency of the respective operating entity. All derivative instruments are recorded on the Consolidated Balance

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Sheets at their respective fair market values. The Company has elected not to prepare and maintain the documentation required to qualify for hedge accounting treatment and, therefore, changes in fair value are recorded in the Consolidated Statements of Operations.

The effects of derivative instruments on the Company’s Consolidated Financial Statements are as follows as of February 28, 2011 and for the year then ended (in thousands):

								Year Ended February 28, 2011
	As of February 28, 2011							Location of Gain (Loss) Recognized in Income  on Derivative		Amount of Gain (Loss) Recognized in Income on Derivative
	Balance Sheet Location		Fair Value			Notional Value
Assets—foreign currency forward contracts not designated as hedges		Prepaid expenses and other current assets	$	434		$	47,457		Other income, net	$	1,631
Liabilities—foreign currency forward contracts not designated as hedges		Accrued expenses		(96	)		17,005		Other income, net		(1,583	)
TOTAL			$	338		$	64,462			$	48

The effects of derivative instruments on the Company’s Consolidated Financial Statements are as follows as of February 28, 2010 and for the year then ended (in thousands):

								Year Ended February 28, 2010
	As of February 28, 2010							Location of Gain (Loss) Recognized in Income  on Derivative		Amount of Gain (Loss) Recognized in Income on Derivative
	Balance Sheet Location		Fair Value			Notional Value
Assets—foreign currency forward contracts not designated as hedges		Prepaid expenses and other current assets	$	77		$	3,888		Other income, net	$	387
Liabilities—foreign currency forward contracts not designated as hedges		Accrued expenses		(4	)		4,548		Other income, net		(442	)
TOTAL			$	73		$	8,436			$	(55	)

NOTE 11—Income Taxes

The U.S. and foreign components of the Company’s income before provision for income taxes consisted of the following (in thousands):

	February 28, 2011		February 28, 2010		February 28, 2009
U.S.	$	109,044	$	92,130	$	116,293
Foreign		44,650		29,372		5,239
Income before provision for income taxes	$	153,694	$	121,502	$	121,532

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The components of the Company’s provision for income taxes consisted of the following (in thousands):

	February 28, 2011		February 28, 2010			February 28 2009
Current:
Foreign	$	7,675	$	10,445		$	3,206
Federal		14,553		13,615			(1,642	)
State		760		4,368			775
Current tax expense	$	22,988	$	28,428		$	2,339
Deferred:
Foreign		3,037		(998	)		(1,628	)
Federal		16,810		9,119			39,298
State		3,581		(2,300	)		2,802
Deferred tax expense	$	23,428	$	5,821		$	40,472
Net provision for income taxes	$	46,416	$	34,249		$	42,811

Significant components of the Company’s deferred tax assets and liabilities at February 28, 2011 and February 28, 2010, consist of the following (in thousands):

	February 28, 2011			February 28, 2010
Deferred tax assets:
Foreign net operating loss carryforwards	$	7,034		$	14,620
Domestic credit carryforwards		44,203			26,955
Goodwill		7,275			3,163
Share-based compensation		19,044			22,668
Deferred revenue and costs		33,318			34,396
Other		2,877			7,459
Total deferred tax assets	$	113,751		$	109,261
Valuation allowance for deferred tax assets		(5,751	)		(6,770	)
Total deferred tax assets, net of valuation allowance	$	108,000		$	102,491
Deferred tax liabilities:
Fixed and intangible assets		20,171			26,218
Other		1,499			3,355
Total deferred tax liabilities	$	21,670		$	29,573
Net deferred tax asset	$	86,330		$	72,918
Net current deferred tax asset	$	75,720		$	57,951
Net non-current deferred tax asset, recorded in other assets, net		10,610			14,967
Net deferred tax asset	$	86,330		$	72,918

83

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of February 28, 2011, the Company continues to maintain a valuation allowance against its deferred tax assets with respect to certain foreign NOLs. The following is a summary of the Company’s valuation allowance for the three years ended February 28, 2011 (in thousands):

Balance at February 29, 2008	$	58,805
Add: Provisions for valuation allowance		1,572
Less: Release of valuation allowance		(47,993	)
Balance at February 28, 2009	$	12,384
Add: Provisions for valuation allowance		2,622
Less: Release of valuation allowance		(8,236	)
Balance at February 28, 2010	$	6,770
Add: Provisions for valuation allowance		33
Less: Release of valuation allowance		(1,052	)
Balance at February 28, 2011	$	5,751

As of February 28, 2011, the Company had U.S. federal and state NOL carryforwards of $32.5 million and $83.1 million, respectively. These NOLs consist of share-based compensation expense deductions which were in excess of amounts recognized in the Company’s results from financial operations. Accordingly, the resulting excess tax benefit will be recognized as an increase to additional paid in capital when realized. The NOL carryforwards expire in varying amounts beginning in 2012. As of February 28, 2011, the Company had a U.S. research tax credit carryforward of $36.2 million and a U.S. foreign tax credit of $22.3 million. These tax credit carryforwards expire in varying amounts beginning in 2012.

Taxes computed at the statutory federal income tax rates are reconciled to the provision for income taxes for the years ended February 28, 2011, February 28, 2010 and February 28, 2009, respectively, as follows (in thousands):

	February 28, 2011			February 28, 2010			February 28, 2009
Effective rate		30.2	%		28.2	%		35.2	%
Provision at federal statutory rate, 35%	$	53,834		$	42,526		$	42,543
State tax (net of federal tax benefit)		4,341			2,068			3,576
Foreign rate differential		(5,280	)		(2,173	)		(2,276	)
Israel tax holiday (1)		(2,671	)		0			0
Deemed foreign dividend		5,348			0			0
Nondeductible items		5,625			875			832
Research and development tax credit		(3,690	)		(7,800	)		0
Foreign tax credit		(11,357	)		(1,577	)		(2,406	)
Other		266			330			542
Provision for income taxes	$	46,416		$	34,249		$	42,811

(1) The Company qualifies for a tax holiday in Israel which began during the fiscal year ended February 28, 2011 and is scheduled to terminate as of the fiscal year ending February 29, 2020. The tax holiday provides for an exemption from income tax in the first two years, and for a reduced rate of taxation on income generated in Israel for the subsequent eight years. Tax savings realized from this holiday for the year ended February 28, 2011 totaled $2.9 million, which increased the Company’s diluted earnings per share by $0.01.

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RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company has not provided U.S. deferred taxes on the cumulative earnings of foreign subsidiaries that have been reinvested outside the U.S. indefinitely; these earnings were $46.0 million at February 28, 2011. Determination of the deferred tax liability, if any, on these earnings reinvested indefinitely outside the U.S. is not practicable because of available foreign tax credits. It is the Company’s policy to invest the earnings of foreign subsidiaries indefinitely outside the U.S. From time to time, however, the Company remits a portion of these earnings to the extent it does not incur additional U.S. tax and it is otherwise feasible. The Company has provided U.S. income taxes on the earnings of certain foreign subsidiaries that are not considered as permanently reinvested outside the U.S. The U.S. income tax on such earnings is completely offset by U.S. foreign tax credits.

Unrecognized tax benefits

The following table reconciles unrecognized tax benefits for the three years ended February 28, 2011 (in thousands):

Balance at February 29, 2008	$	35,880
Additions based on tax positions related to the current year		2,627
Balance at February 28, 2009	$	38,507
Additions based on tax positions related to the current year		2,320
Additions based on tax positions related to prior years		2,977
Reductions related to settlements with tax authorities		(430	)
Balance at February 28, 2010	$	43,374
Additions based on tax positions related to the current year		3,782
Additions based on tax positions related to prior years		2,292
Reductions related to change in effective tax rate		(7,365	)
Balance at February 28, 2011	$	42,083

The Company’s unrecognized tax benefits as February 28, 2011 and February 28, 2010, which, if recognized, would affect the Company’s effective tax rate were $38.1 million and $36.1 million, respectively.

It is the Company’s policy to recognize interest and penalties related to uncertain tax positions as income tax expense. Accrued interest and penalties related to unrecognized tax benefits totaled $3.1 million and $1.1 million as of February 28, 2011 and February 28, 2010, respectively.

The results and timing of the resolution of tax audits is highly uncertain and the Company is unable to estimate the range of the possible changes to the balance of unrecognized tax benefits. However, the Company does not anticipate that within the next 12 months that the total amount of unrecognized tax benefits will significantly increase or decrease as a result of any such potential tax audit resolutions.

85

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The following table summarizes the tax years in the Company’s major tax jurisdictions that remain subject to income tax examinations by tax authorities as of February 28, 2011. Due to NOL carryforwards, in some cases the tax years continue to remain subject to examination with respect to such NOLs:

Tax Jurisdiction	Years Subject to Income Tax Examination
U.S. federal		1994 – Present
North Carolina		1999 – Present
Ireland		2006 – Present
Japan*		2008 – Present

* The Company has been examined for income tax for years through February 28, 2007. However, the statute of limitations remains open for five years.

An income tax examination by the U.S. Internal Revenue Service with respect to the Company’s fiscal year ended February 28, 2007 has been completed. There were no significant adjustments resulting from the examination.

The Company or one of its subsidiaries is currently undergoing income tax examinations in France, Germany and India.

The Company believes it has adequately provided for any reasonably foreseeable outcomes related to tax audits.

NOTE 12—Common and Preferred Stock

Common Stock

The Company has authorized 300,000,000 shares of common stock with a par value of $0.0001 per share. Holders of these shares have one vote per share. Upon the dissolution, liquidation or winding up of the Company, holders of common stock will be entitled to receive the assets of the Company after satisfaction of the preferential rights of any outstanding preferred stock or any other outstanding stock ranking on liquidation senior to or on parity with the common stock.

The Company purchased 2,921,275 shares, 10,014,022 shares and 2,875,052 shares of its common stock during the fiscal years ended February 28, 2011, February 28, 2010 and February 28, 2009, respectively, at an aggregate cost of $90.1 million, $236.4 million and $42.3 million, respectively. This amount is recorded as treasury stock on the Company’s Consolidated Balance Sheets.

Preferred Stock

At February 28, 2011, the Company has authorized 5,000,000 shares of preferred stock with a par value of $0.0001 per share. No shares of preferred stock were outstanding as of February 28, 2011 or February 28, 2010.

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RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 13—Share-based Awards

Overview

The Company’s 2004 Long-Term Incentive Plan, as amended and restated (the “2004 Plan”), provides for the granting of stock options, service-based share awards and performance-based share awards, among other awards. As of February 28, 2011, there were 6.7 million shares of common stock reserved for issuance under future share-based awards to be granted to any employee, officer or director or consultant of the Company at terms and prices to be determined by the Board of Directors.

The following table summarizes share-based awards, by type, granted during the years ended February 28, 2011, February 28, 2010 and February 28, 2009:

	Awards Granted Year Ended February 28, 2011				Awards Granted Year Ended February 28, 2010				Awards Granted Year Ended February 28, 2009
	Shares and Shares Underlying Awards		Weighted Average Per Share Award Fair Value		Shares and Shares Underlying Awards		Weighted Average Per Share Award Fair Value		Shares and Shares Underlying Awards		Weighted Average Per Share Award Fair Value
Stock options		83,891	$	19.92		100,080	$	10.63		84,460	$	4.66
Service-based shares and share units		2,542,479	$	37.98		2,598,916	$	27.71		3,557,434	$	14.21
Performance-based shares and share units—target		313,336	$	29.31		343,334	$	19.68		202,500	$	23.82
Total share-based awards		2,939,706	$	36.54		3,042,330	$	26.24		3,844,394	$	14.51

The following summarizes share-based compensation expense recognized in the Company’s Consolidated Financial Statements for the years ended February 28, 2011, February 28, 2010 and February 28, 2009 (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
Cost of revenue	$	6,053	$	3,630	$	3,065
Sales and marketing		18,971		14,041		13,826
Research and development		15,639		13,614		14,027
General and administrative		19,934		17,003		17,397
Total share-based compensation expense	$	60,597	$	48,288	$	48,315

Share-based compensation expense qualifying for capitalization was insignificant for each of the Company’s fiscal years ended February 28, 2011, February 28, 2010 and February 28, 2009. Accordingly, no share-based compensation expense was capitalized during these years.

Estimated annual forfeitures—During the fourth quarter of fiscal 2011, the Company reassessed its estimated forfeiture rate. Based on recent historical trends and management’s expectations regarding future trends, the Company has adjusted its estimated forfeiture rate to 10.0% per annum from 15.0% per annum. The impact of the adjustment on current year’s financial results totaled $0.6 million additional expense. The forfeiture rate is applied to awards of options and service-based share units. Award expense is adjusted to reflect actual forfeiture rates at vesting. The Company reassesses its estimated forfeiture rate annually.

87

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock Options

The 2004 Plan provides that the purchase price per share for each option shall not be less than the fair market value of the underlying share on the date of grant. Options granted under the 2004 Plan to date include contract terms of five years and generally vest 25% upon completion of one full year of service and 6.25% on the first day of each subsequent three-month period of service. The maximum contract term for an option granted under the 2004 Plan is seven years from the date of grant.

The total fair value of stock options recognized in the Consolidated Financial Statements for the years ended February 28, 2011, February 28, 2010 and February 28, 2009 was as follows (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
Total fair value of stock options recognized	$	6,038	$	11,381	$	20,124

The following table summarizes the activity for the Company’s stock options for the years ended February 28, 2011, February 28, 2010 and February 28, 2009:

	Shares Underlying Options			Weighted Average Exercise Price Per Share
Outstanding at February 29, 2008		18,439,416		$	15.73
Granted		84,460			13.15
Exercised		(1,583,329	)		11.59
Forfeited		(1,135,185	)		20.32
Outstanding at February 28, 2009		15,805,362		$	15.80
Granted		100,080			27.40
Exercised		(6,217,251	)		16.62
Forfeited		(463,882	)		62.97
Outstanding at February 28, 2010		9,224,309		$	13.03
Granted (1)		83,891			33.59
Exercised		(7,071,001	)		11.94
Forfeited		(207,711	)		19.25
Outstanding at February 28, 2011		2,029,488		$	16.88

(1) Amount includes 10,129 partially vested options assumed as part of a business combination.

As described above, options are typically granted with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. No options were granted during the three years ended February 28, 2011 with exercise prices less than the grant date fair value of the Company’s common stock.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following summarizes information, as of February 28, 2011, about the Company’s outstanding and exercisable stock options:

	Options Outstanding						Options Exercisable
Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$ 0.00 – $10.00		590,230		1.8	$	5.91		570,687	$	6.00
$10.01 – $20.00		954,525		1.7	$	19.09		788,072	$	19.20
$20.01 – $30.00		423,136		1.7	$	23.54		298,265	$	22.99
$30.01 and over		61,597		4.6	$	41.85		502	$	341.37
Total		2,029,488		1.8	$	16.88		1,657,526	$	15.43

The following summarizes the intrinsic value, as of February 28, 2011, of the Company’s outstanding, exercisable and expected to vest stock options:

Intrinsic Value of Stock Options	Number of Stock Options		Weighted Average Remaining Contractual Life		Intrinsic Value at February 28, 2011 (in thousands)
Outstanding		2,029,488		1.8	$	49,685
Exercisable		1,657,526		1.6	$	42,987
Expected to vest (assuming annual forfeiture rate of 10%)		330,780		2.9	$	6,054

The intrinsic value of stock options exercised during the years ended February 28, 2011, February 28, 2010 and February 28, 2009 was as follows (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
Total intrinsic value of stock options exercised	$	161,796	$	62,804	$	13,210

As of February 28, 2011, compensation cost related to unvested stock options not yet recognized in the Company’s Consolidated Financial Statements totaled $3.2 million. The weighted average period over which these unvested stock options are expected to be recognized is approximately 1.0 years.

The fair values of options granted during the years ended February 28, 2011, February 28, 2010 and February 28, 2009 were estimated on the date of grant using the Black-Scholes-Merton option-pricing model based on the following weighted average assumptions:

	Year Ended February 28, 2011			Year Ended February 28, 2010			Year Ended February 28, 2009
Expected dividend yield		0.00	%		0.00	%		0.00	%
Risk-free interest rate		0.70	%		1.59	%		2.01	%
Expected volatility (1)		46.84	%		53.51	%		47.45	%
Expected life (in years) (2)		3.27			3.27			3.27
Weighted average fair value of options granted during the period	$	17.32		$	10.63		$	4.66

(1) The expected volatility rates for options granted during the years ended February 28, 2011, February 28, 2010 and February 28, 2009 were estimated based on an approximate equal weighting of the historical

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

volatility of the Company’s common stock over a period of approximately 3.27 years and the implied volatility of publicly traded options for the Company’s common stock.

(2) The expected term for options granted during the years ended February 28, 2011, February 28, 2010 and February 28, 2009 was determined based on the Company’s historical exercise data. The Company reassesses its estimate of expected term annually or when new information indicates a change is appropriate.

Service-based Share Awards

Service-based share awards include nonvested shares, nonvested share units and deferred share units granted under the 2004 Plan. Nonvested shares and share units generally vest, subject to continued service to the Company, 25% on the first anniversary of the date of grant and (i) 6.25% on the first day of each subsequent three-month period for nonvested shares and (ii) 25% each year over a four-year period beginning on the date of grant for nonvested share units. Nonvested shares and nonvested share units are generally amortized to expense on a straight-line basis over four years. Deferred share units are awarded to directors and generally vest within one year when issued in lieu of annual share awards or immediately when issued in lieu of cash.

The total fair value of service-based share awards recognized in the Company’s Consolidated Financial Statements for the three years ended February 28, 2011 was as follows (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
Total fair value of service-based awards recognized	$	44,050	$	28,419	$	16,954

The following table summarizes the activity for the Company’s service-based share awards for the years ended February 28, 2011, February 28, 2010 and February 28, 2009:

	Nonvested Shares and Share Units			Weighted Average Grant-date Fair Value
Service-based share awards at February 29, 2008		2,014,367		$	20.57
Granted		3,557,434			14.21
Vested		(517,810	)		20.24
Forfeited		(191,942	)		18.55
Service-based share awards at February 28, 2009		4,862,049		$	16.06
Granted		2,598,916			27.71
Vested		(1,414,665	)		16.79
Forfeited		(261,374	)		17.92
Service-based share awards at February 28, 2010		5,784,926		$	21.03
Granted		2,542,479			37.98
Vested		(1,800,281	)		20.43
Forfeited		(733,786	)		21.52
Service-based share awards at February 28, 2011		5,793,338		$	28.60

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The following summarizes the intrinsic value, as of February 28, 2011, of the Company’s service-based awards outstanding and expected to vest:

Intrinsic Value of Service-based Awards	Number of Shares and Share Units		Weighted Average Remaining Vesting Period		Intrinsic Value at February 28, 2011 (in thousands)
Outstanding		5,793,338		1.6	$	239,149
Expected to vest (assuming annual forfeiture rate of 10%)		4,934,307		1.6	$	203,688

The intrinsic value of service-based awards vesting during the three years ended February 28, 2011 was as follows (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
Total fair value of service-based awards vesting	$	70,493	$	38,297	$	7,244

As of February 28, 2011, compensation cost related to service-based share awards not yet recognized in the Company’s Consolidated Financial Statements totaled $145.1 million. The weighted average period over which these nonvested awards are expected to be recognized is approximately 1.6 years.

Performance-based Share Awards

Under the 2004 Plan, certain executive officers were awarded a target number of performance share units (“PSUs”) PSUs. The PSU payouts are either based on (i) the Company’s financial performance (“performance condition”) or (ii) the performance of the Company’s common stock (“market condition”). Following are general descriptions of the two types of performance-based awards granted to certain executive officers.

PSUs with Performance Conditions

Depending on the Company’s financial performance relative to the financial performance of specified peer companies, executives may earn up to 200% of the target number of PSUs (the “Maximum PSUs”) over a performance period with three separate performance segments corresponding to three fiscal years of the Company. Up to 25% of the Maximum PSUs may be earned in respect of the first performance segment; up to 50% of the Maximum PSUs may be earned in respect of the second performance segment, less the amount earned in the first performance segment; and up to 100% of the Maximum PSUs may be earned in respect of the third performance segment, less the amount earned in the first and second performance segments.

PSUs with Market Conditions

Depending on the performance of the Company’s common stock over a performance period of approximately three years, executives may earn up to 200% of the target number of PSUs. The number of PSUs earned is determined based on a comparison of the performance of the Company’s stock price relative to the performance of the stock price of specified peer companies during the performance period. Each executive officer will receive a number of shares of common stock equal to the number of PSUs earned in a single payout following the end of the performance period.

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The following table summarizes the activity for the Company’s PSUs for the years ended February 28, 2011, February 28, 2010 and February 28, 2009:

	At Target					Potential
Activity	Shares Underlying Performance Share Units			Weighted Average Grant Date Fair Value		Underlying Shares Vesting and Available to Vest  (1)
Outstanding at February 29, 2008		232,625		$	21.00		465,250
Granted		202,500		$	23.82		405,000
Vested		(46,525	)	$	21.00		(93,050	)
Forfeited		0			—		0
Outstanding at February 28, 2009		388,600		$	22.47		777,200
Granted		343,334		$	19.68		686,668
Vested		(120,413	)	$	22.20		(190,200	)
Forfeited		0			—		0
Outstanding at February 28, 2010		611,521		$	20.96		1,273,668
Granted		313,336		$	29.31		626,672
Vested		(209,856	)	$	21.43		(451,725	)
Forfeited		0			—		(18,610	)
Outstanding at February 28, 2011		715,001		$	24.48		1,430,005

(1) Vested and forfeited amounts represent the actual number of shares vesting and forfeited during the year. Outstanding represents the remaining maximum potential shares available to vest as of the period ended.

The total fair value of performance-based share awards recognized in the Company’s Consolidated Financial Statements for the three years ended February 28, 2011 was as follows (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
Total fair value of performance-based awards recognized	$	10,509	$	8,488	$	11,237

The total fair value of performance-based share awards vesting during the three years ended February 28, 2011 was as follows (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
Total fair value of performance-based awards vesting	$	13,904	$	3,380	$	1,964

As of February 28, 2011, the number of shares subject to PSU awards expected to vest and the related intrinsic value was 1,390,838 and $57.4 million, respectively. Compensation expense related to PSUs expected to vest but not yet recognized in the Consolidated Financial Statements totaled $11.2 million as of February 28, 2011. The weighted average period over which these awards are expected to be recognized is approximately 1.0 year.

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NOTE 14—Commitments and Contingencies

As of February 28, 2011, the Company leased office space and certain equipment under various non-cancelable operating leases. Future minimum lease payments required under the operating leases at February 28, 2011 are as follows (in thousands):

Fiscal Year	Operating Leases
2012	$	21,851
2013		15,684
2014		12,911
2015		9,585
2016		8,425
Thereafter		18,970
Total minimum lease payments	$	87,426

Rent expense under operating leases for the fiscal years ended February 28, 2011, February 28, 2010 and February 28, 2009 is provided in the following table (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
Total operating lease expense	$	22,973	$	22,344	$	22,492

Product Indemnification

The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party from losses arising in connection with the Company’s services or products, or from losses arising in connection with certain events defined within a particular contract, which may include litigation or claims relating to intellectual property infringement, certain losses arising from damage to property or injury to persons or other matters. In each of these circumstances, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims. Further, the Company’s obligations under these agreements may in certain cases be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third-parties for certain payments made by the Company.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the facts and circumstances involved in each particular agreement. The Company does not record a liability for claims related to indemnification unless the Company concludes that the likelihood of a material claim is probable and estimable. Payments pursuant to these indemnification claims during the year ended February 28, 2011 were in the aggregate immaterial.

NOTE 15—Legal Proceedings

Commencing on or about March 2001, the Company and certain of its officers and directors were named as defendants in a series of purported class action suits arising out of the Company’s initial public offering and secondary offering. Approximately 310 other IPO issuers were named as defendants in similar class action complaints (together, the “IPO Allocation Actions”). On August 8, 2001, Chief Judge Michael Mukasey of the U.S. District Court for the Southern District of New York issued an order that transferred all of the IPO Allocation Actions, including the complaints involving the Company, to one judge for coordinated pre-trial

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proceedings (Case No. 21 MC 92). The plaintiffs contend that the defendants violated federal securities laws by issuing registration statements and prospectuses that contained materially false and misleading information and failed to disclose material information. Plaintiffs also challenge certain IPO allocation practices by underwriters and the lack of disclosure thereof in initial public offering documents. On April 19, 2002, plaintiffs filed amended complaints in each of the 310 consolidated actions, including the Red Hat action. The relief sought consists of unspecified damages, attorneys’ and expert fees and other unspecified costs. In October of 2002, the individual director and officer defendants of the Company were dismissed from the case without prejudice. In October of 2004, the District Court certified a class in six of the 310 actions (the “focus cases”) and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. The Company’s action is not one of the focus cases. On December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated the District Court’s class certification with respect to the focus cases and remanded the matter for further consideration. In September 2007, discovery moved forward in the focus cases and plaintiff filed and amended complaints against the focus case issuer and underwriter defendants. Defendants in the focus cases filed motions to dismiss the second amended complaints in November 2007 and filed their oppositions to plaintiffs’ motion for class certification in December 2007. The motions to dismiss in the focus cases were granted in part. On April 2, 2009, the plaintiffs’ executive committee on behalf of the proposed class filed a motion for preliminary approval of a settlement agreement to resolve the lawsuit, to which the Company has consented and for which payments called for by the settlement agreement are to be paid by the defendant insurers. The trial court heard arguments on September 10, 2009 on the fairness of the settlement. In an opinion and order filed October 5, 2009, the trial court approved the class, granted plaintiffs’ motion for approval of the settlement and directed the clerk of the court to close the action. Appeals have been filed and briefed before the Court of Appeals for the Second Circuit.

In the summer of 2004, 14 class action lawsuits were filed against the Company and several of its former officers on behalf of investors who purchased the Company’s securities during various periods from June 19, 2001 through July 13, 2004. All 14 suits were filed in the U.S. District Court for the Eastern District of North Carolina. In each of the actions, plaintiffs sought to represent a class of purchasers of the Company’s common stock during some or all of the period from June 19, 2001 through July 13, 2004. All of the claims arose in connection with the Company’s announcement on July 13, 2004 that it would restate certain of its financial statements (the “Restatement”). One or more of the plaintiffs asserted that certain former officers (the “Individual Defendants”) and the Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), and Rule 10b-5 thereunder by issuing the financial statements that the Company subsequently restated. One or more of the plaintiffs sought unspecified damages, interest, costs, attorneys’ and experts’ fees, an accounting of certain profits obtained by the Individual Defendants from trading in the Company’s common stock, disgorgement by the Company’s former chief executive officer and former chief financial officer of certain compensation and profits from trading in the Company’s common stock pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and other relief. As of September 8, 2004, all of these class action lawsuits were consolidated into a single action referenced as Civil Action No. 5:04-CV-473BR and titled In re Red Hat, Inc. Securities Litigation. On May 6, 2005, the plaintiffs filed an amended consolidated class action complaint. On July 29, 2005, the Company, on behalf of itself and the Individual Defendants, filed a motion to dismiss the action for failure to state a claim upon which relief may be granted. Also on that date, PricewaterhouseCoopers LLP (“PwC”), another defendant, filed a separate motion to dismiss. On May 12, 2006, the Court issued an order granting the motion to dismiss the Securities Exchange Act claims against several of the Individual Defendants, but denying the motion to dismiss the Securities Exchange Act claims against the Company, its former chief executive officer and former chief financial officer. The Court dismissed the claims under the Sarbanes-Oxley Act in their entirety, and also granted PwC’s motion to dismiss. On November 6, 2006, the plaintiffs filed a motion for class certification. Subsequent to the filing of that motion, several plaintiffs withdrew as potential class representatives, and the Company opposed the certification of the remaining

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proposed class representatives. On May 11, 2007, the Court entered an order denying class certification and denying all other pending motions as moot. Thereafter, on July 13, 2007 Charles Gilbert filed a renewed motion for appointment as lead plaintiff and approval of selection of lead counsel. On November 13, 2007, the Court entered an Order allowing Gilbert’s motion, appointing him lead plaintiff, adding him as a party plaintiff and appointing lead counsel. On January 14, 2008, Gilbert’s counsel filed a motion to certify the action as a class action. On August 28, 2009, the Court entered an Order certifying the action as a class action, appointing Gilbert as the class representative, and defining the class as “all purchasers of the common stock of Red Hat, Inc. between December 17, 2002, and July 12, 2004, inclusive and who were damaged thereby,” excluding Company insiders. On December 15, 2009, the Company announced that it had reached an agreement in principle to settle this matter, subject, among other matters, to completion of a final written settlement agreement and court approval. The Company recorded, for its quarter ended November 30, 2009, an estimated liability in the amount of $8.8 million for its portion of the proposed settlement. On March 29, 2010, counsel for the class filed a Motion for Preliminary Approval of the Settlement and, on June 11, 2010, a United States Magistrate Judge issued a Memorandum and Recommendation to the presiding judge that the motion be approved. On July 8, 2010, the presiding judge approved the motion and set the hearing for the final fairness hearing on December 7, 2010. The settlement was approved by the District Court in an order dated December 10, 2010.

On December 9, 2009, the Company filed a complaint in the Eastern District of Texas (Civil Action No. 6:09-cv-00549) against Bedrock Computer Technologies LLC (“Bedrock”) seeking a declaratory judgment that United States Patent No. 5,893,120 (the “’120 Patent”) is invalid, unenforceable and not infringed. The complaint states that Bedrock brought an action in which it wrongly accused some customers of the Company of infringing the ‘120 Patent based on their use of computer equipment configured with or utilizing software based on various versions of the Linux operating system. The complaint seeks a declaration that anyone’s use, sale, or offer for sale of the Linux kernel distributed by the Company has not and does not in any manner infringe any claim of the ‘120 patent or otherwise infringe or violate any rights of Bedrock and that the ‘120 Patent is invalid and unenforceable. On January 29, 2010, Bedrock responded denying the contentions in the complaint and asserting a counterclaim alleging that Red Hat has directly and indirectly infringed the ‘120 Patent. On February 22, 2010, Red Hat replied to the counterclaim denying the allegations of infringement and asserting affirmative defenses. On March 26, 2010, Bedrock filed its first amended answer and counterclaim with crossclaims against fifteen parties. The claim construction hearing has been scheduled for May 12, 2011 and trial in the case has been scheduled for October 11, 2011. Based on information available to date, the Company believes it has meritorious defenses to the counterclaims and intends to vigorously defend itself. There can be no assurance, however, that the Company will be successful in its defense, and an adverse resolution of the counterclaims could have a material adverse effect on its business, financial position and results of operations, including its ability to continue to commercialize the technologies implicated in the litigation.

The Company also experiences routine litigation in the normal course of its business, including patent litigation. The Company presently believes that the outcome of this routine litigation will not have a material adverse effect on its financial position and results of operations.

NOTE 16—Employee Benefit Plans

401(k) Plan

The Company provides a retirement plan qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended (“IRC”). Participants may elect to contribute a portion of their annual compensation to the plan, after complying with certain limitations set by the IRC. Employees are eligible to participate in the plan if they are over 21 years of age. The Company has the option to make contributions to the plan and contributed to

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the plan for the years ended February 28, 2011, February 28, 2010 and February 28, 2009 as follows (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
Total contributions to employee benefit plans	$	8,683	$	7,218	$	6,019

NOTE 17—Share Repurchase Program

On March 24, 2010, the Company announced that its Board of Directors had authorized the repurchase of up to an aggregate of $300.0 million of the Company’s common stock from time to time in open market or privately negotiated transactions, as applicable. The program will expire on the earlier of (i) March 31, 2012 or (ii) a determination by the Board of Directors, Chief Executive Officer or Chief Financial Officer to discontinue the program. During the year ended February 28, 2011, the Company repurchased 2,921,275 shares under the program for $90.1 million, including transaction costs. As of February 28, 2011, the remaining amount available under the program for the repurchase of common stock was $219.4 million.

NOTE 18—Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the composition and fair value hierarchy of the Company’s financial assets and liabilities at February 28, 2011 (in thousands):

	As of February 28, 2011			Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets:
Money markets (1)	$	532,537		$	532,537	$	0		$	0
Available-for-sale securities (1):
Certificates of deposit		1,840			0		1,840			0
Commercial paper		27,562			0		27,562			0
Agencies		312,136			0		312,136			0
Municipal bonds		13,249			0		13,249			0
Corporates		193,916			0		193,916			0
Equities (1)		2,677			2,677		0			0
Foreign currency derivatives (2)		434			0		434			0
Liabilities:
Foreign currency derivatives (3)		(96	)		0		(96	)		0
Total	$	1,084,255		$	535,214	$	549,041		$	0

(1) Included in either cash and cash equivalents or investments in debt and equity securities in the Company’s Consolidated Balance Sheet at February 28, 2011 in addition to $108.5 million of cash.

(2) Included in other current assets in the Company’s Consolidated Balance Sheet at February 28, 2011.

(3) Included in accrued expenses in the Company’s Consolidated Balance Sheet at February 28, 2011.

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The following table summarizes the composition and fair value hierarchy of the Company’s financial assets and liabilities at February 28, 2010 (in thousands):

	As of February 28, 2010			Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets:
Money markets (1)	$	216,624		$	216,624	$	0		$	0
Available-for-sale securities (1):
Treasuries		9,294			9,294		0			0
Certificates of deposit		133,810			0		133,810			0
Commercial paper		21,367			0		21,367			0
Agencies		349,338			0		349,338			0
Municipal bonds		11,754			0		11,754			0
Corporates		160,915			0		160,915			0
Equities (1)		4,687			4,687		0			0
Foreign currency derivatives (2)		77			0		77			0
Liabilities:
Foreign currency derivatives (3)		(4	)		0		(4	)		0
Total	$	907,862		$	230,605	$	677,257		$	0

(1) Included in either cash and cash equivalents or investments in debt and equity securities in the Company’s Consolidated Balance Sheet at February 28, 2010, in addition to $62.4 million of cash.

(2) Included in other current assets in the Company’s Consolidated Balance Sheet at February 28, 2010.

(3) Included in accrued expenses in the Company’s Consolidated Balance Sheet at February 28, 2010.

The following table represents the Company’s investments measured at fair value as of February 28, 2011 (in thousands):

										Balance Sheet Classification
	Amortized Cost		Gross Unrealized					Aggregate Fair Value		Cash Equivalent Marketable Securities		Short-term Marketable Securities		Long-term Marketable Securities
			Gains		Losses(1)
Money markets	$	532,537	$	0	$	0		$	532,537	$	532,537	$	0	$	0
Certificates of deposit		1,840		0		0			1,840		20		1,820		0
Commercial paper		27,558		4		0			27,562		1,600		25,962		0
Agencies		313,133		70		(1,067	)		312,136		0		85,350		226,786
Municipals		13,259		0		(10	)		13,249		0		13,249		0
Corporates		193,373		647		(103	)		193,917		0		88,912		105,005
Equities		85		2,592		0			2,677		0		2,677		0
Total	$	1,081,785	$	3,313	$	(1,180	)	$	1,083,918	$	534,157	$	217,970	$	331,791

(1) As of February 28, 2011, there were no accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table represents the Company’s investments measured at fair value as of February 28, 2010 (in thousands):

										Balance Sheet Classification
	Amortized Cost		Gross Unrealized					Aggregate Fair Value		Cash Equivalent Marketable Securities		Short-term Marketable Securities		Long-term Marketable Securities
			Gains		Losses(1)
Money markets	$	216,624	$	0	$	0		$	216,624	$	216,624	$	0	$	0
Treasury		9,253		41		0			9,294		0		9,294		0
Certificates of deposit		133,810		0		0			133,810		108,060		25,750		0
Commercial paper		21,367		0		0			21,367		0		21,367		0
Agencies		348,940		452		(54	)		349,338		0		196,524		152,814
Municipal bonds		11,739		15		0			11,754		0		11,754		0
Corporates		159,596		1,399		(80	)		160,915		1,038		103,280		56,597
Equities		278		4,409		0			4,687		0		4,687		0
Total	$	901,607	$	6,316	$	(134	)	$	907,789	$	325,722	$	372,656	$	209,411

(1) Accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer totaled less than $0.1 million at February 28, 2010.

The following table summarizes the stated maturities of the Company’s investment in debt securities at February 28, 2011 (in thousands):

	Total		Less than 1 Year		2-3 Years		4-5 Years		More than 5 Years
Maturity of short and long term debt securities	$	547,084	$	215,293	$	193,246	$	138,545	$	0

NOTE 19—Earnings Per Share

The following table reconciles the numerators and denominators of the earnings per share calculation for the years ended February 28, 2011, February 28, 2010 and February 28, 2009 (in thousands, except per share amounts):

	Year Ended
	February 28, 2011		February 28, 2010		February 28, 2009
Diluted net income per share computation:
Net income	$	107,278	$	87,253	$	78,721
Interest expense on convertible debt, net of related tax		0		0		1,413
Amortization of debt issuance costs, net of related tax		0		0		1,463
Net income—diluted	$	107,278	$	87,253	$	81,597
Weighted average common shares outstanding		190,294		187,845		190,772
Incremental shares attributable to assumed vesting or exercise of outstanding equity award shares		6,059		5,701		4,942
Incremental shares attributable to assumed conversion of convertible debentures		0		0		15,630
Diluted shares		196,353		193,546		211,344
Diluted net income per share	$	0.55	$	0.45	$	0.39

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The following share awards are not included in the computation of diluted earnings per share because the aggregate value of proceeds considered received upon either exercise or vesting was greater than the average market price of the Company’s common stock during the related periods and the effect of including such share awards in the computation would be anti-dilutive (in thousands):

	Year Ended
	February 28, 2011		February 28, 2010		February 28, 2009
Number of shares considered anti-dilutive for calculating diluted EPS		649		3,525		9,269

NOTE 20—Segment Reporting

The following summarizes revenue, net income (loss) and total assets by geographic segment at and for the years ended February 28, 2011, February 28, 2010 and February 28, 2009 (in thousands):

	Americas		EMEA		Asia Pacific			Total
	Year Ended February 28, 2011
Revenue from unaffiliated customers	$	583,795	$	199,646	$	125,836		$	909,277
Net income	$	65,526	$	42,437	$	(685	)	$	107,278
Total assets	$	1,737,946	$	329,455	$	131,921		$	2,199,322
	Year Ended February 28, 2010
Revenue from unaffiliated customers	$	474,633	$	168,134	$	105,469		$	748,236
Net income (loss)	$	62,849	$	20,263	$	4,141		$	87,253
Total assets	$	1,566,140	$	205,097	$	99,635		$	1,870,872
	Year Ended February 28, 2009
Revenue from unaffiliated customers	$	421,994	$	141,679	$	88,899		$	652,572
Net income (loss)	$	73,120	$	11,552	$	(5,951	)	$	78,721
Total assets	$	1,539,840	$	142,539	$	71,257		$	1,753,636

The following table lists, for the years ended February 28, 2011, February 28, 2010 and February 28, 2009, revenue from unaffiliated customers in the United States, the Company’s country of domicile, revenue from unaffiliated customers in Japan, which in terms of revenue was the only individual country outside the United States to generate 10% or more of revenue, and revenue from other foreign countries (in thousands):

	Year Ended February 28, 2011		Year Ended February 28, 2010		Year Ended February 28, 2009
United States, the Company’s country of domicile	$	512,288	$	423,295	$	385,556
Japan		74,807		60,725		50,531
Other foreign		322,182		264,216		216,485
Total revenue from unaffiliated customers	$	909,277	$	748,236	$	652,572

99

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Total tangible long-lived assets located in the United States, the Company’s country of domicile, and similar tangible long-lived assets held outside the United States are summarized in the following table for the years ended February 28, 2011 and February 28, 2010 (in thousands):

	As of February 28, 2011		As of February 28, 2010		As of February 28, 2009
United States, the Company’s country of domicile	$	53,722	$	51,523	$	53,106
Foreign		21,836		20,185		14,807
Total tangible long-lived assets	$	75,558	$	71,708	$	67,913

NOTE 21—Unaudited Quarterly Results

Below are unaudited condensed quarterly results for the year ended February 28, 2011:

	Year Ended February 28, 2011 Unaudited
	4th Quarter			3rd Quarter		2nd Quarter		1st Quarter
	(in thousands, except per share data)
Revenue:
Subscriptions	$	209,303		$	198,842	$	186,183	$	179,076
Training and services		35,493			36,734		33,578		30,068
Total subscription and training and services revenue	$	244,796		$	235,576	$	219,761	$	209,144
Gross profit	$	203,193		$	195,832	$	184,059	$	175,906
Income from operations	$	39,410		$	37,956	$	34,071	$	34,239
Interest income	$	1,697		$	1,608	$	1,775	$	1,663
Other income (expense), net	$	(865	)	$	462	$	548	$	1,130
Net income and diluted net income	$	33,534		$	26,017	$	23,656	$	24,071
Net income per common share (1):
Basic	$	0.17		$	0.14	$	0.13	$	0.13
Diluted	$	0.17		$	0.13	$	0.12	$	0.12
Weighted average shares outstanding:
Basic		192,996			191,296		189,027		187,926
Diluted		197,878			196,908		193,560		193,266

(1) Earnings per common share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per common share information may not equal the reported annual earnings per common share.

100

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Below are unaudited condensed quarterly results for the year ended February 28, 2010:

	Year Ended February 28, 2010 Unaudited
	4th Quarter		3rd Quarter		2nd Quarter		1st Quarter
	(in thousands, except per share data)
Revenue:
Subscriptions	$	169,159	$	164,432	$	156,273	$	148,790
Training and services		26,710		29,914		27,360		25,598
Total subscription and training and services revenue	$	195,869	$	194,346	$	183,633	$	174,388
Gross profit	$	166,530	$	164,748	$	155,193	$	147,920
Income from operations	$	27,958	$	19,793	$	27,542	$	25,056
Interest income	$	2,220	$	2,206	$	2,525	$	3,430
Other income (expense), net	$	4,331	$	3,253	$	3,191	$	(3	)
Net income and diluted net income	$	23,388	$	16,414	$	28,937	$	18,514
Net income per common share (1):
Basic	$	0.12	$	0.09	$	0.15	$	0.10
Diluted	$	0.12	$	0.08	$	0.15	$	0.10
Weighted average shares outstanding:
Basic		187,911		187,450		187,099		188,916
Diluted		193,822		193,733		192,659		194,382

(1) Earnings per common share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per common share information may not equal the reported annual earnings per common share.

101

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no changes in or disagreements with our accountants on accounting and financial disclosure matters.

ITEM 9A. CONTROLS AND PROCEDURES

Role of Controls and Procedures

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) or our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of the controls must be considered relative to their costs. 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 a 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 simple error and mistake. Controls can also 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 is based in part on certain assumptions about the likelihood of future events. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also projections of any evaluation of effectiveness of controls and procedures to future periods are subject to the risk that the controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls and procedures may have deteriorated.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.

Report of Management on Internal Control Over Financial Reporting

Report of Management on Internal Control Over Financial Reporting is set forth above under PART II, Item 8, “Financial Statements and Supplementary Data—Report of Management on Internal Control Over Financial Reporting.”

Changes in Internal Control Over Financial Reporting

No changes in our internal control over financial reporting occurred during the fiscal quarter ended February 28, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

102

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

We intend to file with the SEC a definitive proxy statement with respect to our Annual Meeting of Stockholders to be held on August 11, 2011 (the “2011 Annual Meeting”). The information under the sections entitled “Item No. 1—Election of Directors”, “Corporate Governance and Board of Directors Information”, “Compensation and Other Information Concerning Executive Officers” and “Other Matters” from the definitive proxy statement for the 2011 Annual Meeting, which is to be filed with the SEC not later than 120 days after the close of our fiscal year ended February 28, 2011 (the “2011 Proxy Statement”), is hereby incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information under the sections entitled “Compensation and Other Information Concerning Executive Officers” and “Corporate Governance and Board of Directors Information” from the 2011 Proxy Statement is hereby incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information under the sections entitled “Beneficial Ownership of Our Common Stock” and “Compensation and Other Information Concerning Executive Officers” from the 2011 Proxy Statement is hereby incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information under the section entitled “Corporate Governance and Board of Directors Information” from the 2011 Proxy Statement is hereby incorporated by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information under the section entitled “Item No. 2—Ratification of Selection of Independent Registered Public Accounting Firm” from the 2011 Proxy Statement is hereby incorporated by reference.

103

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Report under “Item 8—Financial Statements and Supplementary Data”:

1. Financial Statements:

Report of Independent Registered Public Accounting Firm	65
Consolidated Balance Sheets at February 28, 2011 and February 28, 2010	66
Consolidated Statements of Operations for the years ended February 28, 2011, February  28, 2010 and February 28, 2009	67
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended February 28, 2011, February 28, 2010 and February 28, 2009	68
Consolidated Statements of Cash Flows for the years ended February 28, 2011, February  28, 2010 and February 28, 2009	69
Notes to Consolidated Financial Statements	70

2. Financial Statement Schedules:

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

3. List of Exhibits:

Exhibit No.			Description of Exhibits
	3.1+		Third Amended and Restated Certificate of Incorporation, as amended, of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on July 10, 2007 (File no. 001-33162))
	3.2+		Amended and Restated By-Laws of the registrant dated April 21, 2010 (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed with the SEC on April 26, 2010 (File no. 001-33162))
	4.1+		Specimen certificate representing the common stock of the registrant (incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-1/A filed with the SEC on July 19, 1999 (File no. 333-94775))
	4.2+		See Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and By-Laws of the registrant defining the rights of holders of common stock of the registrant
	4.3+		First Amended and Restated Investor Rights Agreement by and among the registrant and the Investors and Founders listed therein, dated as of February 25, 1999, as amended (incorporated by reference to Exhibit 10.7 to the registrant’s Registration Statement on Form S-1 filed with the SEC on June 4, 1999 (File no. 333-80051))
	10.1+	*	Red Hat, Inc. 1998 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to the registrant’s Registration Statement on Form S-1 filed with the SEC on June 4, 1999 (File no. 333-80051))
	10.2+	*	Red Hat, Inc. 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.3 to the registrant’s Registration Statement on Form S-1 filed with the SEC on June 4, 1999 (File no. 333-80051))

104

Exhibit No.	Description of Exhibits
10.3+	GNU General Public License (incorporated by reference to Exhibit 10.13 to the registrant’s Registration Statement on Form S-1 filed with the SEC on June 4, 1999 ((File no. 333-80051))
10.4+*	Red Hat, Inc. 1999 Stock Option and Incentive Plan, as Amended and Restated August 2, 2001 (incorporated by reference to Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-Q filed with the SEC on October 10, 2008 (File no. 001-33162))
10.5*	Form of Long Term Incentive Plan Non-Qualified Stock Option Agreement for Directors pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated
10.6*	Form of Long Term Incentive Plan Restricted Stock Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated
10.7*	Form of Non-Qualified Stock Option Agreement pursuant to Red Hat, Inc. 1999 Stock Option and Incentive Plan, as amended
10.8*	Form of Incentive Plan and Stock Option Agreement pursuant to Red Hat, Inc. 1999 Stock Option and Incentive Plan, as amended
10.9-	Limited Liability Company Agreement of Open Inventions Network dated November 8, 2005
10.10*	Form of Long-Term Incentive Plan Restricted Stock Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated
10.11+*	2006 Performance Compensation Plan (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report filed on Form 8-K with the SEC on August 23, 2006 (File no. 000-26281))
10.12+*	Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q filed with the SEC on October 10, 2008 (File no. 001-33162))
10.13+*	Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report filed on Form 8-K with the SEC on February 28, 2007 (File No. 001-33162))
10.14+*	Form of Restricted Stock Award Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report filed on Form 8-K with the SEC on February 28, 2007 (File No. 001-33162))
10.15+*	Form of Non-Qualified Stock Option Agreement for Executive Employees pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report filed on Form 8-K with the SEC on February 28, 2007 (File No. 001-33162))
10.16+*	Form of Amendment to Equity Awards of Executive pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report filed on Form 8-K with the SEC on February 28, 2007 (File No. 001-33162))
10.17+*	Senior Management Change in Control Severance Policy (incorporated by reference to Exhibit 10.5 to the registrant’s Current Report filed on Form 8-K with the SEC on February 28, 2007 (File No. 001-33162))

105

Exhibit No.	Description of Exhibits
10.18+*	Executive Variable Compensation Plan (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report filed on Form 8-K with the SEC on May 16, 2007 (File No. 001-33162))
10.19+*	Form of Restricted Stock Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (Non-Executive, U.S. Participants) (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on October 10, 2007 (File No. 001-33162))
10.20+*	Form of Restricted Stock Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (Non-Executive, Non U.S. Participants) (incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on October 10, 2007 (File No. 001-33162))
10.21+*	Form of Performance Share Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report filed on Form 8-K with the SEC on October 15, 2007 (File No. 001-33162))
10.22+*	Executive Employment Agreement, dated December 19, 2007, between Red Hat, Inc. and James M. Whitehurst (incorporated by reference to Exhibit 10.5 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on January 9, 2008 (File No. 001-33162))
10.23+*	Form of Amendment to Performance Share Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.38 to the registrant’s Annual Report filed on Form 10-K with the SEC on April 29, 2008 (File No. 001-33162))
10.24+*	Form of Director Deferred Stock Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.39 to the registrant’s Annual Report filed on Form 10-K with the SEC on April 29, 2008 (File No. 001-33162))
10.25+*	2008 Independent Director Compensation Plan (incorporated by reference to Exhibit 10.42 to the registrant’s Annual Report filed on Form 10-K with the SEC on April 29, 2008 (File No. 001-33162))
10.26+*	Form of Performance Share Unit Agreement adopted May 2008 pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report filed on Form 8-K with the SEC on May 23, 2008 (File No. 001-33162))
10.27+*	Form of Director Deferred Stock Unit Agreement (Vested) pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on July 10, 2008 (File No. 001-33162))
10.28+*	Form of Director Deferred Stock Unit Agreement (With Vesting) pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on July 10, 2008 (File No. 001-33162))
10.29+*	Form of Director Restricted Stock Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.4 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on July 10, 2008 (File No. 001-33162))

106

Exhibit No.	Description of Exhibits
10.30+*	Senior Management Severance Plan (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report filed on Form 8-K with the SEC on December 29, 2008 (File No. 001-33162))
10.31+*	Form of Executive Agreement by and between Red Hat, Inc. and each Plan Participant (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report filed on Form 8-K with the SEC on December 29, 2008 (File No. 001-33162))
10.32+*	Form of Amendment to Equity Awards with Independent Directors (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on January 9, 2009 (File No. 001-33162))
10.33+*	Letter Agreement dated December 23, 2008 between Red Hat, Inc. and James M. Whitehurst amending the Executive Employment Agreement between the parties dated December 19, 2007 (incorporated by reference to Exhibit 10.4 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on January 9, 2009 (File No. 001-33162))
10.34+*	Employee Inventions Assignment Agreement and Restrictive Obligations Agreement dated January 1, 2008 between Red Hat, Inc. and James M. Whitehurst (incorporated by reference to Exhibit 10.5 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on January 9, 2009 (File No. 001-33162))
10.35+*	Executive Base Salaries and Target Award Amounts under Red Hat, Inc.’s Executive Variable Compensation Plan for the Fiscal Year Ending February 28, 2010 (incorporated by reference to Exhibit 99.1 to registrant’s Current Report filed on Form 8-K with the SEC on May 19, 2009 (File No. 001-33162))
10.36+*	Form of Performance Share Unit Agreement adopted May 13, 2009 (incorporated by reference to Exhibit 99.2 to the registrant’s Current Report filed on Form 8-K with the SEC on May 19, 2009 (File No. 001-33162))
10.37+*	Clawback Policy of Red Hat, Inc. adopted May 13, 2009 (incorporated by reference to Exhibit 99.3 to the registrant’s Current Report filed on Form 8-K with the SEC on May 19, 2009 (File No. 001-33162))
10.38+*	Form of Performance Share Unit Agreement (Fiscal Year 2010-SPP Form) adopted June 23, 2009 (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report filed on Form 8-K with the SEC on June 29, 2009 (File No. 001-33162))
10.39+*	Target Share Price Performance Units awarded to named executive officers on June 23, 2009 (incorporated by reference to Exhibit 99.2 to registrant’s Current Report filed on Form 8-K with the SEC on June 29, 2009 (File No. 001-33162))
10.40+*	Performance Compensation Plan as Amended and Restated Effective June 19, 2008 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on July 10, 2009 (File No. 001-33162))
10.41+*	Red Hat, Inc. 2010 Non-Employee Director Compensation Plan effective January 1, 2010 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on October 5, 2009 (File No. 001-33162))
10.42+*	Red Hat, Inc. Stock Ownership Policy for Directors and Senior Executives, amended and restated as of March 21, 2011 (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report filed on Form 8-K with the SEC on March 25, 2011 (File No. 001-33162))
10.43+*	Red Hat, Inc. 2010 Non-Employee Director Compensation Plan amended and restated effective March 1, 2010 (incorporated by reference to Exhibit 10.59 to the registrant’s Annual Report filed on Form 10-K with the SEC on April 29, 2010 (File No. 001-33162))

107

Exhibit No.	Description of Exhibits
10.44+*	Form of Performance Share Unit Agreement (Fiscal Year 2011 Operating Performance Form) adopted May 19, 2010 (incorporated by reference to Exhibit 99.2 to the registrant’s Current Report filed on Form 8-K with the SEC on May 25, 2010 (File No. 001-33162))
10.45+*	Form of Performance Share Unit Agreement (Fiscal Year 2011 Share Price Performance Form) adopted May 19, 2010 (incorporated by reference to Exhibit 99.3 to the registrant’s Current Report on Form 8-K filed with the SEC on May 25, 2010 (File No. 001-33162))
10.46+*	Form of Performance Restricted Stock Agreement adopted May 19, 2010 (incorporated by reference to Exhibit 99.4 to the registrant’s Current Report on Form 8-K filed with the SEC on May 25, 2010 (File No. 001-33162))
10.47+*	Form of Restricted Stock Unit Agreement (Non-executive) pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated, adopted August 11, 2010 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on October 8, 2010 (File No. 001-33162))
10.48+*	Executive Base Salaries and Target Award Amounts under Red Hat, Inc.’s Executive Variable Compensation Plan for the Fiscal Year Ending February 28, 2011 (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed with the SEC on May 25, 2010 (File No. 001-33162))
21.1	Subsidiaries of Red Hat, Inc.
23.1	Consent of PricewaterhouseCoopers LLP
31.1	Certification of the registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the registrant’s Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the registrant’s principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

* Indicates a management contract or compensatory plan, contract or arrangement.

+ Previously filed.

- Indicates confidential treatment requested as to certain portions of this exhibit which have been filed separately with the SEC.

108

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

RED HAT, INC.
By:	/S/    JAMES M. WHITEHURST
	James M. Whitehurst President and Chief Executive Officer

Date: April 29, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/S/    JAMES M. WHITEHURST         James M. Whitehurst	President, Chief Executive Officer and Director (principal executive officer)	April 29, 2011
/S/    CHARLES E. PETERS, JR.         Charles E. Peters, Jr.	Executive Vice President and Chief Financial Officer (principal financial officer)	April 29, 2011
/S/    MARK E. COOK         Mark E. Cook	Vice President Finance and Controller (principal accounting officer)	April 29, 2011
/S/    SOHAIB ABBASI         Sohaib Abbasi	Director	April 29, 2011
/S/    W. STEVE ALBRECHT         W. Steve Albrecht	Director	April 29, 2011
/S/    MICHELINE CHAU         Micheline Chau	Director	April 29, 2011
/S/    JEFFREY J. CLARKE         Jeffrey J. Clarke	Director	April 29, 2011
/S/    MARYE ANNE FOX         Marye Anne Fox	Director	April 29, 2011
/S/    NARENDRA K. GUPTA         Narendra K. Gupta	Director	April 29, 2011
/S/    WILLIAM S. KAISER         William S. Kaiser	Director	April 29, 2011
/S/    DONALD H. LIVINGSTONE         Donald H. Livingstone	Director	April 29, 2011
/S/    HENRY HUGH SHELTON         Henry Hugh Shelton	Chairman of the Board of Directors	April 29, 2011

109

Exhibit Index

Exhibit No.		Exhibit
	10.5	Form of Long Term Incentive Plan Non-Qualified Stock Option Agreement for Directors pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated
	10.6	Form of Long Term Incentive Plan Restricted Stock Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated
	10.7	Form of Non-Qualified Stock Option Agreement pursuant to Red Hat, Inc. 1999 Stock Option and Incentive Plan, as amended
	10.8	Form of Incentive Plan and Stock Option Agreement pursuant to Red Hat, Inc. 1999 Stock Option and Incentive Plan, as amended
	10.9	Limited Liability Company Agreement of Open Inventions Network dated November 8, 2005
	10.10	Form of Long-Term Incentive Plan Restricted Stock Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated
	21.1	Subsidiaries of Red Hat, Inc.
	23.1	Consent of PricewaterhouseCoopers LLP
	31.1	Certification of the registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of the registrant’s Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1	Certification of the registrant’s principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350
	101.INS	XBRL Instance Document
	101.SCH	XBRL Taxonomy Extension Schema
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase
	101.DEF	XBRL Taxonomy Extension Definition Linkbase
	101.LAB	XBRL Taxonomy Extension Label Linkbase
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase

EX-10.5

Exhibit 10.5

RED HAT, INC.

Red Hat, Inc. 2004 Long-Term Incentive Plan

Non-Qualified Stock Option Agreement for Directors

Cover Sheet

Red Hat, Inc., a Delaware corporation, hereby grants as of the date below (the “Grant Date”) to the person named below (the “Director”) and the Director hereby accepts, an option to purchase the number of shares (the “Option Shares”) listed below of the Company’s common stock, $.0001 par value per share, at the exercise price per share and with a vesting start date (the “Vesting Start Date”) listed below, such option to be on the terms and conditions specified in the Red Hat, Inc. 2004 Long-Term Incentive Plan and in the attached Exhibit A.

Director Name:	**
Grant Date:	**
Vesting Start Date:	**
Number of Option Shares:	**
Exercise Price Per Share:	$ **

IN WITNESS WHEREOF, the Company and the Director have caused this instrument to be executed as of the Grant Date set forth above.

	RED HAT, INC.
(Director Signature)	1801 Varsity Drive
	Raleigh, North Carolina 27606
	By:
(Street Address)	Name:
	Title:
(City/State/Zip Code)

PLEASE RETURN ONE SIGNED COVER SHEET

TO EMILY DEL TORO/ LEGAL DEPT.

CENTENNIAL CAMPUS

FAX NUMBER (919) 754-3715

EXHIBIT A

RED HAT, INC.

Red Hat, Inc. 2004 Long-Term Incentive Plan

Non-Qualified Stock Option Agreement for Directors

Terms and Conditions

1. Grant under Red Hat, Inc. 2004 Long-Term Incentive Plan. This option is granted pursuant to and is subject to and governed by the Company’s 2004 Long-Term Incentive Plan (the “Plan”) and, unless the context otherwise requires, terms used herein shall have the same meaning as in the Plan or shall be defined as on the cover sheet attached hereto. Determinations made in connection with this option pursuant to the Plan shall be governed by the Plan as it exists on the Grant Date.

2. Grant as Non-Qualified Stock Option. This option is a non-qualified stock option and is not intended to qualify as an incentive stock option under Section 422 of the Code.

3. Vesting of Option if Service Continues. All of the Option Shares initially shall be unvested shares. For so long as the Director maintains continuous service to the Company or its Subsidiaries or Affiliates as a director throughout the period beginning on the Grant Date and ending on the vesting date set forth below, the Option Shares shall become vested according to the schedule set forth below and the Director may exercise this option as to any vested shares, subject to Sections 4 and 5 hereof:

Vesting Date	Number of Vested Shares
One year from the Vesting Start Date (the “Anniversary Date”)	331/3% of the Option Shares
On the last day of each subsequent three-month period following the Anniversary Date	81/3% of the Option Shares

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Notwithstanding the foregoing, the Committee may, in its discretion, accelerate the date that any installment of this option becomes exercisable; provided that no installment of the option shall vest prior to the Anniversary Date. The foregoing rights are cumulative and (subject to Sections 4 or 5 hereof if the Director ceases service) may be exercised only before the date (the “Final Exercise Date”) which is five years from the Grant Date.

4. Termination of Service. Except as provided in Appendix A, if the Director’s service as a director ceases for any reason, no further installments of this option shall become exercisable, and this option shall expire (may no longer be exercised) after the passage of three months from the termination of the Director’s service, but in no event later than the Final Exercise Date. For purposes hereof, service shall not be considered as having terminated during any leave of absence if such leave of absence has been approved in writing by the Company; in the event of such leave of absence, vesting of this option shall be suspended (and the period of the leave of absence shall be added to all vesting dates) unless otherwise determined by the Company. This option shall not be affected by any change in the type of service the Director has within or among the Company and its Subsidiaries or Affiliates so long as the Director continuously maintains service with the Company.

5. Death; Disability.

(a) Death. If the Director dies while maintaining service with the Company, this option may be exercised, to the extent otherwise exercisable on the date of his or her death, by the Director’s estate, personal representative or beneficiary to whom this option has been transferred pursuant to Section 9, only at any time within one (1) year after the date of death, but not later than the Final Exercise Date.

(b) Disability. If the Director’s service with the Company terminates by reason of his or her disability, this option may be exercised, to the extent otherwise exercisable on the date of termination of service, only at any time within 180 days after such termination of service, but not later than the Final Exercise Date. For purposes hereof, “disability” means “permanent and total disability” as defined in Section 22(e)(3) of the Code.

6. Partial Exercise. This option may be exercised in part at any time and from time to time within the above limits, except that this option may not be exercised for a fraction of a share.

7. Payment of Exercise Price.

(a) Payment Options. The exercise price shall be paid by one or any combination of the following forms of payment that are applicable to this option:

(i) in cash, or by check payable to the order of the Company; or

(ii) delivery of an irrevocable and unconditional undertaking, satisfactory in form and substance to the Company, by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Director to the

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Company of a copy of irrevocable and unconditional instructions, satisfactory in form and substance to the Company, to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; or

(iii) subject to Section 7(b) below and in accordance with procedures established by the Committee, provided the Shares are then traded on a national securities exchange or on the Nasdaq Stock Market (or successor trading system), by delivery of Shares having a Fair Market Value equal as of the date of exercise to the exercise price.

(b) Limitations on Payment by Delivery of Shares. The Director may not pay any part of the exercise price hereof by transferring Shares to the Company unless such Shares have been owned by the Director free of any substantial risk of forfeiture for at least six months.

8. Method of Exercising Option. Subject to the terms and conditions of this Agreement, this option may be exercised by written notice to the Company or to such transfer agent as the Company shall designate. Such notice shall state the election to exercise this option and the number of Option Shares for which it is being exercised and shall be signed by the person or persons so exercising this option. Such notice shall be accompanied by payment of the full exercise price of such shares or evidence of satisfaction of the alternative payment methods set forth on Section 7, and the Company shall deliver a certificate or certificates representing such Shares as soon as practicable after the notice shall be received. Such certificate or certificates shall be registered in the name of the person or persons so exercising this option (or, if this option shall be exercised by the Director and if the Director shall so request in the notice exercising this option, shall be registered in the name of the Director and another person jointly, with right of survivorship). In the event this option shall be exercised, pursuant to Section 5 hereof, by any person or persons other than the Director, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise this option.

9. Option Not Transferable. This option is not transferable or assignable except by will or by the laws of descent and distribution. During the Director’s lifetime only the Director can exercise this option.

10. No Obligation to Exercise Option. The grant and acceptance of this option imposes no obligation on the Director to exercise it.

11. No Obligation to Continue Service. Neither the Plan, this Agreement, nor the grant of this option imposes any obligation on the Company, its Subsidiaries or Affiliates to continue a service relationship with the Director.

12. No Rights as Stockholder until Exercise. The Director shall have no rights as a stockholder with respect to the Option Shares until such time as the Director has exercised this option by delivering a notice of exercise and has paid in full the purchase price for the shares so exercised in accordance with Section 8. Except as is expressly provided in the Plan with respect to certain changes in the capitalization of the Company, no adjustment shall be made for dividends or similar rights for which the record date is prior to such date of exercise.

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13. Adjustment for Capital Changes. The Plan contains provisions covering the treatment of options in a number of contingencies such as stock split and mergers. Provisions in the Plan for such adjustment are hereby made applicable hereunder and are incorporated herein by reference.

14. Change in Control. Provisions regarding a Change in Control are set forth on Appendix A.

15. Taxes. The Director has reviewed with the Director’s own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. The Director is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Director understands that the Director (and not the Company) shall be responsible for the Director’s own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement.

16. Lock-up Agreement. The Director agrees that in the event that the Company effects an underwritten public offering of Shares registered under the Securities Act, the Option Shares may not be sold, offered for sale or otherwise disposed of, directly or indirectly, without the prior written consent of the managing underwriter(s) of the offering, for such period of time after the execution of an underwriting agreement in connection with such offering that all of the Company’s then directors and optionee officers agree to be similarly bound.

17. Provision of Documentation to Director. By executing this Agreement the Director acknowledges receipt of a copy of this Agreement (including the cover sheet) and a copy of the Plan.

18. Miscellaneous.

(a) Notices. All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail, postage prepaid, return receipt requested, if to the Director, to the address set forth on the cover sheet or at the most recent address shown on the records of the Company, and if to the Company, to the Company’s principal office, attention of the Corporate Secretary.

(b) Fractional Shares. If this option becomes exercisable for a fraction of a share because of the adjustment provisions contained in the Plan, such fraction shall be rounded down to the nearest whole share.

(c) Entire Agreement; Modification. This Agreement (including the cover sheet) and the Plan constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties, except that (i) to the extent there would not be adverse accounting consequences to the Company or adverse tax consequences to the Director under Section 409A of the Code, the Committee may amend this Agreement without the consent of the Director, to provide for the settlement of any

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exercise of this option (in whole or in part) by delivering Shares, the Fair Market Value of which is equal to the increase in the Fair Market Value of the Option Shares on the exercise date of the option over the aggregate exercise price of such Option Shares, and (ii) if the Committee determines that the award terms could result in adverse tax consequences to the Director, the Committee may amend this Agreement without the consent of the Director in order to minimize or eliminate such tax treatment.

(d) Severability. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision.

(e) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the limitations set forth in Section 9 hereof.

(f) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the Delaware, without giving effect to the principles of the conflicts of laws thereof.

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APPENDIX A

In the event the Director has continuously served as a director through a Change in Control event, all of the Options shall become vested.

For purposes of this Agreement:

“Change in Control” means the occurrence of any one of the following events:

(i) individuals who, on the Grant Date, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the initial public offering whose election or nomination for election was approved by a vote of at least a majority of the Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;

(ii) any “person” (as such term is defined in the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction, as defined in paragraph (iii), or (E) by any person of Voting Securities from the Company, if a majority of the Incumbent Board approves in advance the acquisition of beneficial ownership of 35% or more of Company Voting Securities by such person;

(iii) the consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more than 40% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business

Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 35% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least half of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”);

(iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or the consummation of a sale of all or substantially all of the Company’s assets; or

(v) the occurrence of any other event that the Board determines by a duly approved resolution constitutes a Change in Control.

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 35% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.

EX-10.6

Exhibit 10.6

RED HAT, INC.

Red Hat, Inc. 2004 Long-Term Incentive Plan

Restricted Stock Agreement

Cover Sheet

Red Hat, Inc., a Delaware corporation, hereby grants as of the date below (the “Grant Date”) to the person named below (the “Participant”) and the Participant hereby accepts, the number of restricted shares (the “Restricted Stock”) listed below of the Company’s common stock, $.0001 par value per share, with a vesting start date (the “Vesting Start Date”) listed below, such grant to be on the terms and conditions specified in the Red Hat, Inc. 2004 Long-Term Incentive Plan and in the attached Exhibit A.

Participant Name:	**
Grant Date:	**
Vesting Start Date:	**
Number of Shares of Restricted Stock:	**

IN WITNESS WHEREOF, the Company and the Participant have caused this instrument to be executed as of the Grant Date set forth above.

	RED HAT, INC.
(Participant Signature)	1801 Varsity Drive
	Raleigh, North Carolina 27606
	By:
(Street Address)	Name:
	Title:
(City/State/Zip Code)

PLEASE RETURN ONE SIGNED COVER SHEET

TO EMILY DEL TORO/ LEGAL DEPT.

CENTENNIAL CAMPUS

FAX NUMBER (919) 754-3715

EXHIBIT A

RED HAT, INC.

Red Hat, Inc. 2004 Long-Term Incentive Plan

Restricted Stock Agreement

Terms and Conditions

1. Grant under Red Hat, Inc. 2004 Long-Term Incentive Plan. The Restricted Stock is granted pursuant to and is subject to and governed by the Company’s 2004 Long-Term Incentive Plan (the “Plan”) and, unless the context otherwise requires, terms used herein shall have the same meaning as in the Plan or shall be defined as on the cover sheet attached hereto. Determinations made in connection with the Restricted Stock pursuant to the Plan shall be governed by the Plan as it exists on the Grant Date.

2. Vesting if Business Relationship Continues. All of the shares of Restricted Stock initially shall be unvested shares. For so long as the Participant maintains continuous service to the Company or its subsidiaries or affiliates as an employee, officer, director or consultant (a “Business Relationship”) throughout the period beginning on the Grant Date and ending on the vesting date set forth below, the Restricted Stock shall become vested according to the schedule set forth below, subject to Section 3 hereof:

Vesting Date	Number of Vested Shares
One year from the Vesting Start Date (the “Anniversary Date”)	25% of the Restricted Stock
On the last day of each subsequent three-month period following the Anniversary Date	6.25% of the Restricted Stock

Until the Restricted Stock vests, as provided in this Section and in Section 3, the Participant may not sell, assign, transfer, pledge, or otherwise dispose of the Restricted Stock.

3. Termination of Business Relationship. If the Participant’s Business Relationship is terminated for any reason, the shares of Restricted Stock that were not vested on the date of such termination will be forfeited. The shares of Restricted Stock that are forfeited will be cancelled and returned to the Company. For purposes hereof, a Business Relationship shall not be considered as having terminated during any leave of absence if such leave of absence has been approved in writing by the Company; in the event of such leave of absence, vesting of the Restricted Stock shall be suspended (and the period of the leave of absence shall be added to

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all vesting dates) unless otherwise determined by the Company. The vesting of the Restricted Stock shall not be affected by any change in the type of Business Relationship the Participant has within or among the Company and its Subsidiaries or Affiliates so long as the Participant continuously maintains a Business Relationship.

4. Legend. Each certificate issued in respect of shares of Restricted Stock under the Agreement shall be registered in the Participant’s name and deposited by the Participant, together with a stock power endorsed in blank, with the Company and shall bear the following (or a similar) legend:

“The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) contained in an Agreement entered into between the registered owner and Red Hat, Inc.”

When the Restricted Stock vests, the Company shall redeliver to the Participant (or the Participant’s legal representatives, beneficiaries or heirs) from the shares of Restricted Stock deposited with it the number of shares which have then vested. The Participant agrees that any resale of the shares of Restricted Stock received upon vesting shall be made in compliance with the registration requirements of the Securities Act of 1933 or an applicable exemption therefrom, including without limitation the exemption provided by Rule 144 promulgated thereunder (or any successor rule).

5. No Obligation to Continue Business Relationship. Neither the Plan, this Agreement, nor the grant of the Restricted Stock imposes any obligation on the Company, its Subsidiaries or Affiliates to have a Business Relationship with the Participant.

6. Rights as Stockholder. Except for the restrictions on transfer and vesting provisions in this Agreement, the Participant shall have all of the rights of a stockholder of the Company with respect to the Restricted Stock including but not limited to the right to receive dividends paid on the Restricted Stock and the right to vote the Restricted Stock.

7. Adjustments for Capital Changes. The Plan contains provisions covering the treatment of restricted stock in a number of contingencies such as stock split and mergers. Provisions in the Plan for such adjustments are hereby made applicable hereunder and are incorporated herein by reference.

8. Change in Control. Provisions regarding a Change in Control are set forth on Appendix A.

9. Withholding. No Restricted Stock will be redelivered pursuant to the vesting thereof unless and until the Participant pays to the Company, or makes satisfactory provision to the Company for payment of, any federal, state or local withholding taxes required by law to be held in respect of this Restricted Stock (the “Tax Amount”). The Participant hereby agrees that the Company may withhold from the Participant’s wages or other remuneration the Tax Amount. At the discretion of the Company, the Tax Amount may be withheld in cash from such wages or from other remuneration, or in kind from the shares or other property otherwise

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deliverable to the Participant on vesting of this Restricted Stock. The Participant further agrees that, if the Company does not withhold an amount from the Participant’s wages or other remuneration sufficient to satisfy the withholding obligation of the Company, the Participant agrees to indemnify the Company in full for the amount underwithheld and to make reimbursement on demand, in cash, for the amount underwithheld within thirty (30) days after the vesting of the Restricted Stock that gives rise to the withholding obligation. The Participant has reviewed with the Participant’s own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement.

The Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Participant understands that the Participant (and not the Company) shall be responsible for the Participant’s own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. The Participant understands that it may be beneficial in many circumstances to elect to be taxed at the time the Restricted Stock is granted rather than when and as the Restricted Stock vests by filing an election under Section 83(b) of the Code with the I.R.S. within 30 days from the date of grant.

10. Lock-up Agreement. The Participant agrees that in the event that the Company effects an underwritten public offering of Shares registered under the Securities Act, the Restricted Stock may not be sold, offered for sale or otherwise disposed of, directly or indirectly, without the prior written consent of the managing underwriter(s) of the offering, for such period of time after the execution of an underwriting agreement in connection with such offering that all of the Company’s then directors and executive officers agree to be similarly bound.

11. Provision of Documentation to Participant. By executing this Agreement the Participant acknowledges receipt of a copy of this Agreement (including the cover sheet) and a copy of the Plan.

12. Miscellaneous.

(a) Notices. All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail, postage prepaid, return receipt requested, if to the Participant, to the address set forth on the cover sheet or at the most recent address shown on the records of the Company, and if to the Company, to the Company’s principal office, attention of the Corporate Secretary.

(b) Payment of Par Value. Participant shall pay $.0001 par value per share, in cash or other method acceptable to the Company, for each share of Restricted Stock subject to this Agreement.

(c) Entire Agreement; Modification. This Agreement (including the cover sheet) and the Plan constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties, except that if the Committee determines that the award terms could result in adverse tax consequences

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to the Participant, the Committee may amend this Agreement without the consent of the Participant in order to minimize or eliminate such tax treatment.

(d) Severability. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision.

(e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the heirs, legatees, distributees, executors and administrators of the Participant and the successors and assigns of the Company.

(f) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the Delaware, without giving effect to the principles of the conflicts of laws thereof.

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APPENDIX A

Notwithstanding anything contained herein to the contrary, if (i) this grant of Restricted Stock is continued, assumed, converted or substituted for immediately following the Change in Control and (ii) within one year after a Change in Control the Participant’s Business Relationship is terminated by the Company or its successor without Good Cause or by the Participant for Good Reason, all of the Restricted Stock shall be vested. Furthermore and notwithstanding anything contained herein to the contrary, if this grant of Restricted Stock is not continued, assumed, converted or substituted for immediately following the Change in Control, all of the Restricted Stock shall be treated as vested immediately prior to the Change in Control. This grant of Restricted Stock shall be considered to be continued, assumed, converted or substituted for:

(A) if there is no change in the number of outstanding Shares and the Change in Control does not result from the consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction, there are no changes to the terms and conditions of this grant that materially and adversely affect this grant; or

(B) if there is a change in the number of outstanding Shares and/or the Change in Control does result from the consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction:

(1) the number of shares of Restricted Stock is adjusted (x) if the Shares are exchanged solely for the common stock of the Parent Corporation or, if there is no Parent Corporation, the Surviving Corporation (as such terms are defined in Appendix A) in a manner which is not materially less favorable than the adjustments made in such transaction to the other outstanding Shares, or (y) otherwise, based on the ratio on the day immediately prior to the date of the Change in Control of the fair market value of one share of common stock of the Parent Corporation or, if there is no Parent Corporation, the Surviving Corporation, to the Fair Market Value of one Share,

(2) if applicable, the shares of Restricted Stock are converted into the common stock of the Parent Corporation or, if there is no Parent Corporation, the Surviving Corporation (as such terms are defined below) and

(3) there are no other changes to the terms and conditions of this grant that materially and adversely affect this grant.

For purposes of this Agreement:

“Change in Control” means the occurrence of any one of the following events:

(i) individuals who, on the Grant Date, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the initial public offering whose election or nomination for election was approved by a vote of at least a majority of the Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;

(ii) any “person” (as such term is defined in the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction, as defined in paragraph

(iii), or (E) by any person of Voting Securities from the Company, if a majority of the Incumbent Board approves in advance the acquisition of beneficial ownership of 35% or more of Company Voting Securities by such person; (iii) the consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more than 40% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 35% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least half of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”);

(iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or the consummation of a sale of all or substantially all of the Company’s assets; or

(v) the occurrence of any other event that the Board determines by a duly approved resolution constitutes a Change in Control.

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 35% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.

“Good Cause” means conduct involving one or more of the following:

(i) the conviction of Participant, or plea of nolo contendere by the Participant to, a felony or misdemeanor involving moral turpitude;

(ii) the indictment of the Participant for a felony or misdemeanor involving moral turpitude under the federal securities laws;

(iii) the willful misconduct or gross negligence by Participant resulting in material harm to the Company;

(iv) fraud, embezzlement, theft or dishonesty by Participant against the Company or any subsidiary, or willful violation by Participant of a policy or procedure of the Company, resulting in any case in material harm to the Company; or

(v) the Participant’s material breach of any term of any agreement with the Company, including, without limitation, any violation of confidentiality and/or non-competition agreements.

“Good Reason” means:

(i) a reduction by the Company or its successor of more than 10% in Participant’s rate of annual base salary as in effect immediately prior to such Change in Control;

(ii) a reduction by the Company or its successor of more than 10% of the Participant’s individual annual target or bonus opportunity, except under circumstances where the Company or its successor implement changes to the bonus structure of similarly situated employees, including but not limited to changes to the bonus structure designed to integrate the Company’s personnel with other personnel of the Surviving Corporation;

(iii) a significant and substantial reduction by the Company or its successor of the Participant’s responsibilities and authority, as compared with the Participant’s responsibilities and authority in effect immediately prior to the Change in Control; or

(iv) any requirement of the Company that Participant be based anywhere more than fifty (50) miles from Participant’s primary office location at the time of the Change in Control.

EX-10.7

Exhibit 10.7

EXHIBIT A

RED HAT, INC.

Non-Qualified Stock Option Agreement

Terms and Conditions

1. Grant Under Red Hat, Inc. 1999 Stock Option and Incentive Plan. This option is granted pursuant to and is governed by the Company’s 1999 Stock Option and Incentive Plan (the “Plan”) and, unless the context otherwise requires, terms used herein shall have the same meaning as in the Plan. Determinations made in connection with this option pursuant to the Plan shall be governed by the Plan as it exists on the Grant Date.

2. Grant as Non-Qualified Stock Option. This option is a non-qualified stock option and is not intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the “Code”).

3. Vesting of Option if Business Relationship Continues. All of the option shares initially shall be unvested shares. For so long as the Optionee maintains a continuous service to the Company as an employee, officer, director or consultant (a “Business Relationship”) the option shares shall become vested according to the schedule set forth below and the Optionee may exercise this option as to any vested shares:

Vesting Date		Number or Vested Shares
One year from the Vesting Start Date	-	25% of the Option Shares
On the first day of each subsequent three month period following one year from the Vesting Start Date	-	6.25% of the Option Shares

Notwithstanding the foregoing, the Board may, in its discretion, accelerate the date that any installment of this option becomes exercisable. The foregoing rights are cumulative and (subject to Sections 4 or 5 hereof if the Optionee ceases to have a Business Relationship with the Company) may be exercised only before the date which is ten years from the date of this option grant.

4. Termination of Business Relationship.

(a.) Termination Other Than for Cause. If the Optionee ceases to maintain a Business Relationship with the Company, other than by reason of death or disability as defined in Section 5 or termination for Cause as defined in Section 4(c), no further installments of this option shall become exercisable, and this option shall expire (may no longer be exercised) after the passage of three months from the termination of the Optionee’s Business Relationship, but in no event later than the scheduled expiration date. For purposes hereof, a Business Relationship shall not be considered as having terminated during any leave of absence if such leave of absence has been approved in writing by the Company and if such written approval contractually obligates the Company to continue the Business Relationship of the Optionee after the approved period of absence; in the event of such an approved leave of absence, vesting of this option shall be suspended (and the period of the leave of absence shall be added to all vesting dates) unless otherwise provided in the Company’s written approval of the leave of absence. This option shall not be affected by any change in the type of Business Relationship the Optionee has within or among the Company and its Subsidiaries so long as the Optionee continuously maintains a Business Relationship with the Company or any Subsidiary.

(b) Termination for Cause. If the Business Relationship of the Optionee is terminated for Cause (as defined in Section 4 (c)), this option shall expire (that is, may no longer be exercised) upon the Optionee’s receipt of written notice of such termination and shall thereafter not be exercisable to any extent whatsoever.

(c) Definition of Cause. “Cause” shall mean conduct involving one or more of the following: (i) the substantial and continuing failure of the Optionee, after notice thereof, to render services to the Company in accordance with the terms or requirements of his or her Business Relationship; (ii) disloyalty, gross negligence, willful misconduct, dishonesty, fraud or breach of fiduciary duty to the Company; (iii) deliberate disregard of the rules or policies of the Company, or breach of an employment or other agreement with the Company, which results in direct or indirect loss, damage or injury to the Company; (iv) the unauthorized disclosure of any trade secret or confidential information of the Company; or (v) the commission of an act which constitutes unfair competition with the Company or which induces any customer or supplier to breach a contract with the Company.

5. Death: Disability.

(a) Death. If the Optionee dies while maintaining a Business Relationship with the Company, this option may be exercised, to the extent otherwise exercisable on the date of his or her death, by the Optionee’s estate, personal representative or beneficiary to whom this option has been transferred pursuant to Section 10, only at any time within 180 days after the date of death, but not later than the scheduled expiration date.

(b) Disability. If the Optionee’s Business Relationship with the Company is terminated by reason of his or her disability, this option may be exercised, to the extent otherwise exercisable on the date of cessation of the Business Relationship, only at any time within 180 days after such cessation of the Business Relationship, but not later than the scheduled expiration date. For purposes hereof, “disability” means “permanent and total disability” as defined in Section 22(e)(3) of the Code.

6. Partial Exercise. This option may be exercised in part at any time and from time to time within the above limits except that this option may not be exercised for a fraction of a share.

7. Payment of Exercise Price.

(a) Payment Options. The exercise price shall be paid by one or any combination of the following forms of payment that are applicable to this option:

(i) in cash, or by check payable to the order of the Company; or

(ii) delivery of an irrevocable and unconditional undertaking, satisfactory in form and substance to the Company, by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Optionee to the Company of a copy of irrevocable and unconditional instructions, satisfactory in form and substance to the Company, to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; or

(iii) subject to Section 7(b) below, if the Common Stock is then traded on a national securities exchange or on the Nasdaq National Market (or successor trading system), by delivery of shares of Common Stock having a fair market value equal as of the date of exercise to the option price; or

In the case of (iii) above, fair market value as of the date of exercise shall be determined as of the last business day for which such prices or quotes are available prior to the date of exercise and shall mean

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(x) the last reported sale price (on that date) of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (y) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market (or successor trading system), if the Common Stock is not then traded on a national securities exchange.

(b) Limitations on Payment by Delivery of Common Stock. If Section 7(a)(iii) is applicable, and if the Optionee delivers Common Stock held by the Optionee (“Old Stock”) to the Company in full or partial payment of the exercise price and the Old Stock so delivered is subject to restrictions or limitations imposed by agreement between the Optionee and the Company, an equivalent number of Option Shares shall be subject to all restrictions and limitations applicable to the Old Stock to the extent that the Optionee paid for the Option Shares by delivery of Old Stock, in addition to any restrictions or limitations imposed by this Agreement. Notwithstanding the foregoing, the Optionee may not pay any part of the exercise price hereof by transferring Common Stock to the Company unless such Common Stock has been owned by the Optionee free of any substantial risk of forfeiture for at least six months.

8. Securities Laws Restrictions on Resale. Until registered under the Securities Act of 1933, as amended, or any successor statute (the “Securities Act”), the Option Shares will be of an illiquid nature and will be deemed to be “restricted securities” for purposes of the Securities Act. Accordingly, such shares must be sold in compliance with the registration requirements of the Securities Act or an exemption therefrom. Unless the Option Shares have been registered under the Securities Act, each certificate evidencing any of the Option Shares shall bear a legend substantially as follows:

“The shares represented by this certificate are subject to restrictions on transfer and may not be sold, exchanged transferred pledged, hypothecated or other-wise disposed of except in accordance with and subject to all the terms and conditions of a certain Stock Option Agreement, a copy of which the Company will furnish to the holder of this certificate upon request and without charge.”

9. Method of Exercising Option. Subject to the terms and conditions of this Agreement, this option may be exercised by written notice to the Company at its principal executive office, or to such transfer agent as the Company shall designate Such notice shall state the election to exercise this option and the number of Option Shares for which it is being exercised and shall be signed by the person or persons so exercising this option. Such notice shall be accompanied by payment of the full purchase price of such shares, and the Company shall deliver a certificate or certificates representing such shares as soon as practicable after the notice shall be received. Such certificate or certificates shall be registered in the name of the person or persons so exercising this option (or if this option shall be exercised by the Optionee and if the Optionee shall so request in the notice exercising this option, shall be registered in the name of the Optionee and another person jointly, with right of survivorship). In the event this option shall be exercised, pursuant to Section 5 hereof, by any person or persons other than the Optionee, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise this option.

10. Option Not Transferable. This option is not transferable or assignable except by will or by the laws of descent and distribution. During the Optionee’s lifetime only the Optionee can exercise this option.

11. No Obligation to Exercise Option. The grant and acceptance of this option imposes no obligation on the Optionee to exercise it.

12. No Obligation to Continue Business Relationship. Neither the Plan, this Agreement, nor the grant of this option imposes any obligation on the Company to have a Business Relationship with the Optionee.

13. No Rights as Stockholder until Exercise. The Optionee shall have no rights as a stockholder with respect to the Option Shares until such time as the Optionee has exercised this option by delivering a notice of exercise and has paid in full the purchase price for the shares so exercised in accordance with Section 9. Except as is

3

expressly provided in the Plan with respect to certain changes in the capitalization of the Company, no adjustment shall be made for dividends or similar rights for which the record date is prior to such date of exercise.

14. Capital Changes and Business Successions. The Plan contains provisions covering the treatment of options in a number of contingencies such as stock split and mergers. Provisions in the Plan for adjustment with respect to stock subject to options and the related provisions with respect to successors to the business of the Company are hereby made applicable hereunder and are incorporated herein by reference.

15. Withholding. If the Company in its discretion determines that it is obligated by law to withhold from the Employee any tax or any other amount in connection with the exercise of this option, or in connection with the transfer of, or the lapse of restrictions on any Common Stock or other property acquired pursuant to this option, the Employee hereby agrees that the Company may withhold from the Employee’ s wages or other remuneration the appropriate amount. At the discretion of the Company, the amount required to be withheld may be withheld in cash from such wages or other remuneration or in kind from the Common Stock or other property otherwise deliverable to the Employee on exercise of this option. The Employee further agrees that, if the Company does not withhold an amount from the Employee’s wages or other remuneration sufficient to satisfy the withholding obligation of the Company the Employee agrees to indemnify the Company in full for the amount underwithheld and to make reimbursement on demand in cash for the amount underwithheld within thirty (30) days after the exercise of the option that gives rise to the withholding obligation.

16. Lock-up Agreement. The Optionee agrees that in the event that the Company effects an underwritten public offering of Common Stock registered under the Securities Act, the Option Shares may not be sold, offered for sale or otherwise disposed of directly or indirectly, without the prior written consent of the managing underwriter(s) of the offering, for such period of time after the execution of an underwriting agreement in connection with such offering that all of the Company’s then directors and executive officers agree to be similarly bound.

17. Provision of Documentation to Optionee. By signing this Agreement the Optionee acknowledges receipt of a copy of this Agreement and a copy of the Plan.

18. Miscellaneous.

(a) Notices. All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail postage prepaid, return receipt requested, if to the Optionee, to the address set forth below or at the address shown on the records of the Company, and if to the Company, to the Company’s principal executive offices, attention of the Corporate Secretary.

(b) Entire Agreement; Modification. This Agreement and the Plan constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties.

(c) Fractional Shares. If this option becomes exercisable for a fraction of a share because of the adjustment provisions contained in the Plan, such fraction shall be rounded down to the nearest whole share.

(d) Severability. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision.

(e) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the limitations set forth in Section 10 hereof.

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(f) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the Delaware without giving effect to the principles of the conflicts of laws thereof.

5

EX-10.8

Exhibit 10.8

EXHIBIT A

RED HAT, INC.

Incentive Stock Option Agreement

Terms and Conditions

1. Grant Under Red Hat, Inc. 1999 Stock Option and Incentive Plan. This option is granted pursuant to and is governed by the Company’s 1999 Stock Option and Incentive Plan (the “Plan”) and, unless the context otherwise requires, terms used herein shall have the same meaning as in the Plan. Determinations made in connection with this option pursuant to the Plan shall be governed by the Plan as it exists on the Grant Date.

2. Grant as Incentive Stock Option. This option is intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the “Code’”). However, to the extent that the aggregate fair market value of the stock with respect to which the Employee may exercise this option as an incentive stock option for the first time during any calendar year, together with any other incentive stock options that are exercisable for the first time during any such year exceeds one hundred thousand dollars ($100,000), such option in excess of such limitation shall not be treated as incentive stock options in accordance with Section 422 of the Code, but shall instead be treated as options not intended to be subject to Section 422 of the Code.

3. Vesting of Option if Employment Continues. All of the option shares initially shall be unvested shares For so long as the Employee remains continually employed by the Company the option shares shall become vested according to the schedule set forth below and the Employee may exercise this option as to any vested shares:

Vesting Date		Number of Vested Share
One year from the Vesting Start Date	-	25% of the Option Shares
On the first day of each subsequent three month period following one year from the Vesting Start Date	-	6.25% of the Option Shares

Notwithstanding the foregoing, the Board may, in its discretion, accelerate the date that any installment of this option becomes exercisable. The foregoing rights are cumulative and (subject to Sections 4 or 5 hereof if the Employee ceases to be employed by the Company) may be exercised only before the date which is ten years from the date of this option grant.

4. Termination of Employment.

(a) Termination Other Than for Cause. If the Employee ceases to be employed by the Company, other than by reason of death or disability as defined in Section 5 or termination for Cause as defined in Section 4(c), no further installments of this option shall become exercisable, and this option shall expire (may no longer be exercised) after the passage of three months from the Employee’s last day of employment, but in no event later than the scheduled expiration date. For purposes hereof employment shall not be considered as having terminated during any leave of absence if such leave of absence has been approved in writing by the Company and if such written approval contractually obligates the Company to continue the employment of the Employee after the approved period of absence; in the event of such an approved leave of absence vesting of this option shall be suspended (and the period of the leave of absence shall be added to all vesting dates) unless otherwise provided in the Company’s written approval of the

leave of absence. For purposes hereof, employment shall include a consulting arrangement between the Employee and the Company that immediately follows termination of employment, but only if so stated in a written consulting agreement executed by the Company that specifically refers to this option. This option shall not be affected by any change of employment within or among the Company and its Subsidiaries so long as the Employee continuously remains an employee of the Company or any Subsidiary (as defined in the Plan).

(b) Termination for Cause. If employment of the Employee is terminated for Cause (as defined in Section 4(c)), this option shall expire (that is, may no longer be exercised) upon the Employee’s receipt of written notice of such termination and shall thereafter not be exercisable to any extent whatsoever.

(c) Definition of Cause. “Cause” shall mean conduct involving one or more of the following: (i) the substantial and continuing failure of the Employee, after notice thereof, to render services to the Company in accordance with the terms or requirements of his or her employment; (ii) disloyalty, gross negligence, willful misconduct, dishonesty, fraud or breach of fiduciary duty to the Company; (iii) deliberate disregard of the rules or policies of the Company, or breach of an employment or other agreement with the Company, which results in direct or indirect loss, damage or injury to the Company; (iv) the unauthorized disclosure of any trade secret or confidential information of the Company; or (v) the commission of an act which constitutes unfair competition with the Company or which induces any customer or supplier to breach a contract with the Company.

5. Death; Disability.

(a) Death. If the Employee dies while in the employ of the Company, this option may be exercised, to the extent otherwise exercisable on the date of his or her death, by the Employee’s estate, personal representative or beneficiary to whom this option has been transferred pursuant to Section 10, only at any time within 180 days after the date of death, but not later than the scheduled expiration date.

(b) Disability. If the Employee ceases to be employed by the Company by reason of his or her disability, this option may be exercised, to the extent otherwise exercisable on the date of cessation of employment, only at any time within 180 days after such cessation of employment, but not later than the scheduled expiration date. For purposes hereof, “disability” means “permanent and total disability” as defined in Section 22(e)(3) of the Code.

6. Partial Exercise. This option may be exercised in part at any time and from time to time within the above limits, except that this option may not be exercised for a fraction of a share.

7. Payment of Exercise Price.

(a) Payment Options. The exercise price shall be paid by one or any combination of the following forms of payment that are applicable to this option:

(i) in cash, or by check payable to the order of the Company; or

(ii) delivery of an irrevocable and unconditional undertaking, satisfactory in form and substance to the Company, by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Employee to the Company of a copy of irrevocable and unconditional instructions, satisfactory in form and substance to the Company, to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; or

(iii) subject to Section 7(b) below, if the Common Stock is then traded on a national securities exchange or on the Nasdaq National Market (or successor trading system), by delivery of shares of Common Stock having a fair market value equal as of the date of exercise to the option price; or

2

In the case of (iii) above, fair market value as of the date of exercise shall be determined as of the last business day for which such prices or quotes are available prior to the date of exercise and shall mean (x) the last reported sale price (on that date) of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (y) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market (or successor trading system), if the Common Stock is not then traded on a national securities exchange.

(b) Limitations on Payment by Delivery of Common Stock. If Section 7(a)(iii) is applicable, and if the Employee delivers Common Stock held by the Employee (“Old Stock”) to the Company in full or partial payment of the exercise price and the Old Stock so delivered is subject to restrictions or limitations imposed by agreement between the Employee and the Company, an equivalent number of Option Shares shall be subject to all restrictions and limitations applicable to the Old Stock to the extent that the Employee paid for the Option Shares by delivery of Old Stock, in addition to any restrictions or limitations imposed by this Agreement. Notwithstanding the foregoing, the Employee may not pay any part of the exercise price hereof by transferring Common Stock to the Company unless such Common Stock has been owned by the Employee free of any substantial risk of forfeiture for at least six months.

8. Securities Laws Restrictions on Resale. Until registered under the Securities Act of 1933, as amended, or any successor statute (the “Securities Act”), the Option Shares will be of an illiquid nature and will be deemed to be “restricted securities” for purposes of the Securities Act. Accordingly, such shares must be sold in compliance with the registration requirements of the Securities Act or an exemption therefrom. Unless the Option Shares have been registered under the Securities Act each certificate evidencing any of the Option Shares shall bear a legend substantially as follows:

“The shares represented by this certificate are subject to restrictions on transfer and may not be sold, exchanged transferred pledged, hypothecated or other-wise disposed of except in accordance with and subject to all the terms and conditions of a certain Stock Option Agreement, a copy of which the Company will furnish to the holder of this certificate upon request and without charge.”

9. Method of Exercising Option. Subject to the terms and conditions of this Agreement, this option may be exercised by written notice to the Company at its principal executive office, or to such transfer agent as the Company shall designate. Such notice shall state the election to exercise this option and the number of Option Shares for which it is being exercised and shall be signed by the person or persons so exercising this option. Such notice shall be accompanied by payment of the full purchase price of such shares, and the Company shall deliver a certificate or certificates representing such shares as soon as practicable after the notice shall be received. Such certificate or certificates shall be registered in the name of the person or persons so exercising this option (or, if this option shall be exercised by the Employee and if the Employee shall so request in the notice exercising this option, shall be registered in the name of the Employee and another person jointly, with right of survivorship). In the event this option shall be exercised pursuant to Section 5 hereof, by any person or persons other than the Employee, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise this option.

10. Option Not Transferable. This option is not transferable or assignable except by will or by the laws of descent and distribution. During the Employee’s lifetime only the Employee can exercise this option.

11. No Obligation to Exercise Option. The grant and acceptance of this option imposes no obligation on the Employee to exercise it.

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12. No Obligation to Continue Employment. Neither the Plan, this Agreement, nor the grant of this option imposes any obligation on the Company to continue the Employee in employment.

13. No Rights as Stockholder until Exercise. The Employee shall have no rights as a stockholder with respect to the Option Shares until such time as the Employee has exercised this option by delivering a notice of exercise and has paid in full the purchase price for the shares so exercised in accordance with Section 9. Except as is expressly provided in the Plan with respect to certain changes in the capitalization of the Company, no adjustment shall be made for dividends or similar rights for which the record date is prior to such date of exercise.

14. Capital Changes and Business Successions. The Plan contains provisions covering the treatment of options in a number of contingencies such as stock split and mergers. Provisions in the Plan for adjustment with respect to stock subject to options and the related provisions with respect to successors to the business of the Company are hereby made applicable hereunder and are incorporated herein by reference.

15. Withholding. If the Company in its discretion determines that it is obligated by law to withhold from the Employee any tax or any other amount in connection with the exercise of this option, or in connection with the transfer of, or the lapse of restrictions on any Common Stock or other property acquired pursuant to this option, the Employee hereby agrees that the Company may withhold from the Employee’s wages or other remuneration the appropriate amount. At the discretion of the Company, the amount required to be withheld may be withheld in cash from such wages or other remuneration or in kind from the Common Stock or other property otherwise deliverable to the Employee on exercise of this option. The Employee further agrees that, if the Company does not withhold an amount from the Employee’s wages or other remuneration sufficient to satisfy the withholding obligation of the Company the Employee agrees to indemnify the Company in full for the amount underwithheld and to make reimbursement on demand in cash for the amount underwithheld within thirty (30) days after the exercise of the option that gives rise to the withholding obligation.

16. Early Disposition. The Employee agrees to notify the Company in writing immediately after the Employee transfers any Option Shares, if such transfer occurs on or before the later of (a) the date that is two years after the date of this Agreement or (b) the date that is one year after the date on which the Employee acquired such Option Shares. The Employee also agrees to provide the Company with any information concerning any such transfer required by the Company for tax purposes.

17. Lock-up Agreement. The Employee agrees that in the event that the Company effects an underwritten public offering of Common Stock registered under the Securities Act, the Option Shares may not be sold, offered for sale or otherwise disposed of directly or indirectly, without the prior written consent of the managing underwriter(s) of the offering, for such period of time after the execution of an underwriting agreement in connection with such offering that all of the Company’s then directors and executive officers agree to be similarly bound.

18. Provision of Documentation to Employee. By signing this Agreement the Employee acknowledges receipt of a copy of this Agreement and a copy of the Plan.

19. Miscellaneous.

(a) Notices. All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail postage prepaid, return receipt requested, if to the Employee, to the address set forth below or at the address shown on the records of the Company, and if to the Company, to the Company’s principal executive offices, attention of the Corporate Secretary.

(b) Entire Agreement; Modification. This Agreement and the Plan constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties.

4

(c) Fractional Shares. If this option becomes exercisable for a fraction of a share because of the adjustment provisions contained in the Plan, such fraction shall be rounded down to the nearest whole share.

(d) Severability. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision.

(e) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the limitations set forth in Section 10 hereof.

(f) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the Delaware without giving effect to the principles of the conflicts of laws thereof.

5

EX-10.9

Exhibit 10.9

EXECUTION COPY

Confidential Materials omitted and filed separately with the

Securities and Exchange Commission. Asterisks denote omissions.

LIMITED LIABILITY COMPANY AGREEMENT

OF

OPEN INVENTION NETWORK LLC

TABLE OF CONTENTS

		Page
ARTICLE I
Defined Terms
SECTION 1.01.	Definitions		1
SECTION 1.02.	Terms and Usage Generally		8
ARTICLE II
General Matters
SECTION 2.01.	Formation		8
SECTION 2.02.	Name		9
SECTION 2.03.	Term		9
SECTION 2.04.	Registered Agent and Registered Office		9
SECTION 2.05.	Principal Place of Business		9
SECTION 2.06.	Purposes and Powers		9
ARTICLE III
Members
SECTION 3.01.	Members		10
SECTION 3.02.	Representations, Warranties and Covenants of Members		10
SECTION 3.03.	Powers of Members		11
SECTION 3.04.	Member’s Membership Interests; No Right to Partition		11
SECTION 3.05.	Membership Interests		12
SECTION 3.06.	Resignation and Removal of Members		12
SECTION 3.07.	Cessation of Membership		15
SECTION 3.08.	Member Meetings		15
SECTION 3.09.	[**] Actions		17
ARTICLE IV
Management
SECTION 4.01.	Company Board		17
SECTION 4.02.	Meetings of the Company Board		18
SECTION 4.03.	Officers		20
SECTION 4.04.	Budgets and Business Plans		21
SECTION 4.05.	Investment of Funds		21

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ARTICLE V
Operations and Activities of the Company
SECTION 5.01.	Promotion of the Linux System	21
SECTION 5.02.	Licensing Activities	21
SECTION 5.03.	Acquisition of Patent Rights	22
SECTION 5.04.	Enforcement of Patent Rights; Counter-measures	22
SECTION 5.05.	Linux Definition Committee	22
SECTION 5.06.	No Member Right to License Company Patents	22
SECTION 5.07.	Independent Operations	23
ARTICLE VI
Capital Contributions and Commitments; Contributed Capital Accounts
SECTION 6.01.	Capital Contributions and Commitments	23
SECTION 6.02.	Status of Capital Contributions	24
SECTION 6.03.	Contributed Capital	25
ARTICLE VII
Tax Matters
SECTION 7.01.	Tax Allocations	25
SECTION 7.02.	Tax Matters	25
SECTION 7.03.	Taxation as Partnership	26
ARTICLE VIII
Distributions
SECTION 8.01.	Distributions	26
SECTION 8.02.	Limitations on Distribution	26
SECTION 8.03.	Withholding	27
ARTICLE IX
Books and Records; Accounting
SECTION 9.01.	Books, Records and Financial Statements	27
SECTION 9.02.	Accounting Method	28
SECTION 9.03.	Annual Audit	28
SECTION 9.04.	Banking	28

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ARTICLE X
Liability, Exculpation and Indemnification
SECTION 10.01.	Liability	29
SECTION 10.02.	Exculpation	29
SECTION 10.03.	Fiduciary Duty	30
SECTION 10.04.	Indemnification	30
SECTION 10.05.	Expenses	30
SECTION 10.06.	Insurance	31
SECTION 10.07.	[**]Claims	31
SECTION 10.08.	Other Procedures	31
ARTICLE XI
Transfer of Membership Interests
SECTION 11.01.	Transfer of Membership Interests Generally	31
SECTION 11.02.	Permitted Transfers	31
SECTION 11.03.	No Publicly Traded Partnership	32
SECTION 11.04.	Securities Law Matters	32
ARTICLE XII
Dissolution, Liquidation and Termination
SECTION 12.01.	No Dissolution	33
SECTION 12.02.	Events Causing Dissolution	33
SECTION 12.03.	Liquidation	33
SECTION 12.04.	Termination	34
SECTION 12.05.	Claims of the Members	34
ARTICLE XIII
Certificates Evidencing Membership Interests
SECTION 13.01.	Certificates	34
SECTION 13.02.	Register	34
SECTION 13.03.	New Certificates	34
SECTION 13.04.	Membership Interest as a Security	35
SECTION 13.05.	Legends	35

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ARTICLE XIV
Miscellaneous
SECTION 14.01.	Notices	35
SECTION 14.02.	Formation Expenses	36
SECTION 14.03.	Failure to Pursue Remedies	36
SECTION 14.04.	Cumulative Remedies	36
SECTION 14.05.	Parties in Interest	36
SECTION 14.06.	Outside Businesses	36
SECTION 14.07.	Equitable Relief	36
SECTION 14.08.	Headings	37
SECTION 14.09.	Severability	37
SECTION 14.10.	Counterparts	37
SECTION 14.11.	Entire Agreement	37
SECTION 14.12.	Governing Law	37
SECTION 14.13.	Confidentiality	37
SECTION 14.14.	Public Disclosure	37
SECTION 14.15.	Amendments	38
SECTION 14.16.	Absence of Presumption	38

EXHIBITS
Exhibit A	Form of Adoption Agreement
Exhibit B	Category 1 Linux Related Components
Exhibit C	Category 2 Linux Related Components
SCHEDULES
Schedule 2.02	Prohibited Names
Schedule 3.01	Members and Capital Contributions
Schedule 3.02(a)	License Agreements and Other Arrangements
Schedule 3.09(a)	[**] Actions
Schedule 3.09(b)	[**] Actions
Schedule 4.02(c)(i)	[**] Actions
Schedule 4.02(c)(ii)	[**] Actions

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LIMITED LIABILITY COMPANY AGREEMENT

OF

OPEN INVENTION NETWORK LLC

This Limited Liability Company Agreement (this “Agreement”) of OPEN INVENTION NETWORK LLC (the “Company”), dated and effective as of November 8, 2005, is entered into among INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York corporation, NOVELL, INC., a Delaware corporation, RED HAT, INC., a Delaware corporation, SONY CORPORATION OF AMERICA, a New York corporation, and ROYAL PHILIPS ELECTRONICS NORTH AMERICA CORPORATION, a Delaware corporation.

WHEREAS the Initial Members desire to enter into this Agreement to set forth certain agreements relating to the ownership, management and operation of the Company;

WHEREAS the Initial Members have made, simultaneously with the execution and delivery of this Agreement, the Initial Capital Contributions;

NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members hereby form a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act (6 Del. C. §§18-101, et seq.), as amended from time to time (the “Delaware Act”), as provided herein, and hereby agree as follows:

ARTICLE I

Defined Terms

SECTION 1.01. Definitions. Unless the context otherwise requires, the terms defined in this Article I shall, for the purposes of this Agreement, have the meanings herein specified.

“Additional Member” shall have the meaning set forth in Section 3.01(b).

“Additional Transferee Member” shall have the meaning set forth in Section 11.02(a).

“Additional Membership Interests” shall mean any Membership Interest that is acquired after the Initial Capital Contributions.

“Adoption Agreement” shall mean an agreement, substantially in the form of Exhibit A, confirming the agreement of a Person to be bound by the terms and provisions of this Agreement.

“Affiliate” shall mean, with respect to any Person, any other Person that directly or through one or more intermediaries, controls, is controlled by or is under common control with, the specified Person. As used in this definition, the term “control” (including with correlative meanings, “controls”, “controlled by” and “under common control with”) shall mean, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through ownership of securities or partnership, membership or other ownership interests, by contract or otherwise. An Affiliate of a Person includes, but is not limited to, a Specified Affiliate of such Person.

“Agreement” shall have the meaning set forth in the preamble hereof.

“Budget” shall have the meaning set forth in Section 4.04.

“Business” shall mean (a) the acquisition and maintenance of Patent Rights useful in protecting the Linux System or of potential value to the Pro-Linux Platform, (b) the management and licensing of such Patent Rights in furtherance of the Pro-Linux Platform, (c) the enforcement of such Patent Rights against Persons who may be, or whose Affiliates may be, infringing the Patent Rights of the Company, and the taking of counter-measures in the event the Company or a Subsidiary of the Company is sued, and (d) taking any other action that is determined [**] to be useful in protecting the Linux System or of potential value to the Pro-Linux Platform.

“Business Day” shall mean any day other than (a) a Saturday or Sunday and (b) any day on which banks located in New York City are authorized or required by Law to be closed for the conduct of regular banking business.

“Business Plan” shall have the meaning set forth in Section 4.04.

“Capital Contribution” shall mean, with respect to any Member, any Initial Capital Contribution and Subsequent Capital Contribution.

“Category 1 Linux Related Component” shall mean any of the software packages identified in Exhibit B whose released source code shall be identified on the Company website [**].

“Category 2 Linux Related Component” shall mean any of the software packages identified in Exhibit C whose released source code shall be identified on the Company website, [**].

“Certificate” means a certificate evidencing a Membership Interest.

“Certificate of Formation” shall mean the Certificate of Formation of the Company and any and all amendments thereto and restatements thereof filed on behalf of the Company with the office of the Secretary of State of the State of Delaware pursuant to the Delaware Act.

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“Change in Control” shall mean, with respect to any Member or Member Parent, the consummation of a sale of capital stock, business combination, merger, consolidation, joint venture or other transaction, or series of related transactions, as a result of which (a) any Person (other than a Person that, before consummation of such transaction or series of related transactions, controlled such Member or Member Parent, respectively) shall have become the beneficial owner, directly or indirectly, of in excess of 50% of [**] of such Member or Member Parent, respectively, or (b) a majority of such Member’s or Member Parent’s board of directors or other equivalent managing body shall consist of Persons other than (i) Persons who were members of such board or body continuously for a period of one year prior to such transaction or series of related transactions or (ii) Persons who were elected or nominated for election as members of such board or body by at least a majority of the members described in clause (i) who were still in office at the time such election or nomination was approved by such board or body.

“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time. A reference to a specific section (§) of the Code includes a reference to any corresponding provision of law enacted after the date of this Agreement.

[**]”Company” shall have the meaning set forth in the preamble hereto.

“Company Board” shall have the meaning set forth in Section 4.01.

“Company CEO” shall have the meaning set forth in Section 4.03.

“Company Licensing Agreement” shall mean a license agreement between the Company and any Person, substantially in the form of the Form Company Licensing Agreement.

“Company Patent Rights” shall mean Patent Rights owned by the Company and Patent Rights under which the Company has the right to grant licenses.

“Continuing Member” shall have the meaning set forth in Section 3.06(h).

“Contributed Capital” shall have the meaning set forth in Section 6.03(a).

“Covered Person” shall mean any Director of the Company, any Member and its Affiliates, and, if and to the extent determined by the Company Board, any Officer or employee of the Company.

“Delaware Act” shall have the meaning set forth in the preamble hereof.

“Director” shall have the meaning set forth in Section 4.01.

“Distributions” shall mean distributions of cash or other property made by the Company with respect to the Membership Interests.

“Fair Value” shall have the meaning set forth in Section 3.06(g).

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“Fiscal Quarter” shall mean (a) with respect to the Fiscal Year ending on December 31, 2005, the period commencing on the date of this Agreement and ending on December 31, 2005 and (b) with respect to any other Fiscal Year, the four consecutive three-month periods ending on March 31, June 30, September 30 and December 31.

“Fiscal Year” shall mean (a) the period commencing upon the date of this Agreement and ending on December 31, 2005 or (b) any subsequent twelve-month period commencing on January 1 and ending on December 31.

“Form Company Licensing Agreement” shall mean the form of Company Licensing Agreement adopted by the Company Board in writing as of the date hereof and designated as such, as such form may be amended or modified from time to time in accordance with this Agreement.

“GAAP” shall mean generally accepted accounting principles in the United States.

“GAAS” shall mean generally accepted auditing standards in the United States.

“Governmental Authority” shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

“IFRS” shall mean international financial reporting standards.

“Initial Capital Contribution” shall have the meaning set forth in Section 6.01(a).

“Initial Members” shall mean International Business Machines Corporation, a New York corporation, Novell, Inc., a Delaware corporation, Red Hat, Inc., a Delaware corporation, Sony Corporation of America, a New York corporation, and Philips Electronics North America Corporation, a Delaware corporation.

“Licensee” shall mean any Person who is a licensee of the Company’s Patent Rights pursuant to a Company Licensing Agreement.

“Limitation Election” means an election by a Licensee to limit the licenses granted under any Company Licensing Agreement [**].[**]”Linux Kernel” shall mean the software package within the Category 1 Linux Related Components.

“Linux System” shall mean a Category 1 Linux Related Component or a Category 2 Linux Related Component, or any combination of such components, [**].

“[**] Action” shall have the meaning set forth in Section 4.02(c).

“[**] Action” shall have the meaning set forth in Section 3.08(c).

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“Member” shall mean any Initial Member and any Additional Member until such Initial Member or Additional Member, as applicable, ceases to be a Member of the Company in accordance with the terms of this Agreement.

“Member Parent” shall mean, (a) with respect to any Initial Member, any Person designated as such with respect to such Member on the signature page to this Agreement and (b) with respect to any Additional Member, such other Person, if any, designated as a Member Parent by such Additional Member and the Company in an addendum to this Agreement in connection with the admission of such Additional Member, which other Person owns or controls, directly or indirectly, with one or more Affiliates, more than 50% of [**] of such Additional Member. “Member Parent” also includes a successor Member Parent designated pursuant to Section 3.02(e).

“Membership Interest” shall mean a unit of limited liability company interest in the Company, which represents a right to receive allocations of the profits and losses of the Company, a right to participate in the management of the Company and a right to receive Distributions, in each case in accordance with this Agreement and the Delaware Act.

“Officers” shall mean those Persons appointed by the Company Board or the Company CEO to participate in the management of the affairs of the Company pursuant to Section 4.03.

“Open Source License” shall mean a license that conforms to the Open Source Definition (Version 1.9) as published by the non-profit organization known as the Open Source Initiative (OSI) or any successor organization [**].

“Patent Acquisition and Operating Expenses” shall mean the costs and expenses that are incurred by the Company in the operation of the Company, including rent, salaries, the fees and expenses relating to legal, consulting and accounting expenses (including litigation expenses), expenses incurred in maintaining a registered office in the State of Delaware, taxes or other governmental charges payable by the Company, costs of reporting to the Members, costs of acquiring, maintaining and licensing Patent Rights, costs of promoting the understanding and use of the Linux System, and costs of winding up and liquidating the Company, except that “Patent Acquisition and Operating Expenses” shall not include Patent Litigation Expenses.

“Patent Litigation Expenses” shall mean the costs and expenses that are incurred in connection with the activities described in Section 5.04, including enforcement actions and counter-measures.

“Patent Rights” shall mean patents and patent applications in any jurisdiction, and inventions and discoveries patentable in any jurisdiction.

“Permitted Transferee” shall have the meaning set forth in Section 11.02.

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“Person” includes any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company or other legal entity or organization.

“Predecessor Release” shall mean, as to any Category 1 Linux Related Component or a Category 2 Linux Related Component, a previous release of such component [**].

“Pro-Linux Platform” shall mean the furtherance of the Linux System as a viable alternative to other operating systems and related software for consumers and other users, including by (a) enabling and encouraging the development of the Linux System and computers, computer systems and software around the Linux System; (b) helping to ensure that the Linux System is not unduly vulnerable to potential Patent Rights infringement claims that could harm the development of the Linux System or computers, computer systems and software around the Linux System; and (c) placing the Linux System on a similar footing as other operating systems and related software with respect to Patent Rights that could be used to further the resolution of claims made against the Linux System. “Pro-Linux Platform” also includes attracting Persons with and without Patent Rights to enter into Company Licensing Agreements.

“Pro Rata Portion” shall have the meaning set forth in Section 6.03(c).

“Specified Affiliate” shall mean, with respect to any Person, any other Person that (a) is a Subsidiary of such first Person, (b) owns or controls, directly or indirectly, more than 50% of [**] of such first Person, or (c) is a Subsidiary of another Person that owns or controls, directly or indirectly, more than 50% of [**] of such first Person. Such other Person shall be deemed to be a Specified Affiliate only so long as such ownership or control exists.

“Subsequent Capital Contribution” shall mean any capital contribution other than an Initial Capital Contribution.

“Subsidiary” shall mean, with respect to any Person, any other Person of which more than 50% of [**] is owned or controlled, directly or indirectly, by such first Person, but such other Person shall be deemed to be a Subsidiary only so long as such ownership or control exists.

“Successor Release” shall mean, as to any Category 1 Linux Related Component or Category 2 Linux Related Component, a later release of such component [**]

“[**] Action” shall have the meaning set forth in Section 4.02(c).

“[**] Vote” shall mean, subject to Sections 4.02(c) and 4.02(e), the votes of Directors designated by Members holding Membership Interests constituting at least [**]% of the [**], provided that if at any time the Company Board shall consist of less than five Directors, then “[**] Vote” shall mean the votes of at least a number of Directors [**].

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“[**] Action” shall have the meaning set forth in Section 3.09(a).

“[**] Vote” shall mean, subject to Sections 3.08(c) and 3.08(f), the votes of Members holding Membership Interests constituting at least [**]% of the [**], provided that if at any time the Company shall have less than five Members, the “[**] Vote” shall mean the votes of at least a number of Members [**].

“Suspended Director” shall mean a Director designated by a Suspended Member.

“Suspended Member” shall mean a Member with respect to which a Suspension Period is then in effect.

“Suspension Period” shall mean, with respect to any Member, (a) the period beginning on the date of the occurrence of any event or taking of any action which will or is reasonably likely to result in a Triggering Event with respect to such Member, and ending on the earlier of (i) a determination by the Company (by resolution of the Company Board in accordance with Section 3.06(c)) as to whether to redeem the Membership Interests of such Member (provided that if the Company determines to redeem such Membership Interests in accordance herewith, such Suspension Period shall end on the date of such redemption) and (ii) the date that is six months after the date the Company first becomes aware of the occurrence of the Triggering Event, or (b) the period beginning on the date that such Member provides written notice of its proposed resignation to the Company Board and ending on the earlier of (i) the date that such Member’s Membership Interests are redeemed or (ii) the date on which such Member provides written notice that it is withdrawing its proposed resignation.

“Tax Matters Partner” shall have the meaning set forth in Section 7.02(a).

“[**]” shall mean [**], with each Member entitled to one vote.

“Transfer” shall mean any sale, assignment, transfer, exchange, gift, bequest, pledge, hypothecation or other disposition or encumbrance, direct or indirect, by operation of law or otherwise. The terms “Transferred”, “Transferring”, “Transferor” and “Transferee” shall have meanings correlative to the foregoing.

“Treasury Regulations” shall mean the income tax regulations, including temporary regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

“Triggering Event” shall mean, with respect to any Member, [**]1 of this Agreement [**] by a Member or its Specified Affiliates of any Company Licensing Agreement between such Member or its Specified Affiliates, on the one hand, and the Company, on the other hand, if such Member or its Specified Affiliates, as applicable, [**] pursuant to this Agreement [**] advising the Member [**] under this Agreement [**], the Member [**] of the Company [**] by a Member of the terms of this Agreement [**] by a Member or its Specified Affiliates of any Company Licensing Agreement between such Member or its Specified Affiliates, on the one hand, and the Company, on

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the other hand, [**] with respect to such Member if such Member or its Specified Affiliates, as applicable, [**] pursuant to this Agreement [**] the Member [**] under this Agreement [**], the Member [**] of the Company [**], (c) the making [**] by such Member [**] pursuant to any Company Licensing Agreement, or (d) [**] by a Member or its Specified Affiliates [**] of its Specified Affiliates, [**] as described in Section 11.02).

“[**] Action” shall have the meaning set forth in Section 4.02(c).

“[**] Action” shall have the meaning set forth in Section 3.09(b).

“Withdrawing Member” shall mean a Member that elects or is required to resign or is removed from the Company pursuant to Section 3.06 or who otherwise ceases to be a Member pursuant to Section 3.07.

SECTION 1.02. Terms and Usage Generally. All references herein to an “Article” or a “Section”, “Exhibit” or “Schedule” shall refer to an Article or a Section of, or an Exhibit or a Schedule to, this Agreement. Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein shall mean such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent in writing and (in the case of statutes) by succession of comparable successor statutes and references to all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.

ARTICLE II

General Matters

SECTION 2.01. Formation. (a) Pursuant to the provisions of the Delaware Act, the Company was formed on October 31, 2005 by filing in the Office of the Secretary of State of the State of Delaware of a Certificate of Formation, and the Initial Members hereby agree that the rights, duties and liabilities of the Members shall be as provided in the Delaware Act, except as otherwise provided herein.

(b) Each Officer of the Company is hereby designated as an “authorized person”, within the meaning of Section 18-201 of the Delaware Act, to execute, deliver and file, or cause the execution, delivery and filing of, all certificates, notices or other

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instruments (and any amendments and/or restatements thereof) required or permitted by the Delaware Act to be filed in the office of the Secretary of State of the State of Delaware and any other certificates, notices or other instruments (and any amendments or restatements thereof) necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to conduct business. The Company shall provide to each Member, upon request, copies of each such document as filed and recorded.

SECTION 2.02. Name. The name of the Company shall be “Open Invention Network LLC”. The Company Board may change the name of the Company or adopt such trade or fictitious names as it determines in its sole discretion. Neither the Company nor any Subsidiary of the Company shall have a corporate name, or do business using a name, that includes the name of any Member or any initials referring to such Member or any name or initials confusingly similar thereto or that contains any abbreviation or derivative thereof, including such names, abbreviations and derivatives identified on Schedule 2.02, provided that the Company may disclose in publicly available materials the identity of the Members.

SECTION 2.03. Term. The term of the Company commenced on October 31, 2005, with the filing of the Certificate of Formation in the office of the Secretary of State of the State of Delaware, and shall continue perpetually unless the Company is dissolved pursuant to Section 12.02, which dissolution shall be carried out pursuant to the Delaware Act and this Agreement.

SECTION 2.04. Registered Agent and Registered Office. The Company’s registered agent for service of process shall be The Corporation Trust Company, and the address of the registered agent and the address of the registered office of the Company in the State of Delaware shall be Corporate Trust Center, 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801. Such registered agent and such registered office may be changed from time to time by the Company Board.

SECTION 2.05. Principal Place of Business. The principal place of business of the Company shall be in the New York metropolitan area or such other location as the Company Board may designate from time to time and embody in a writing to be filed in the records of the Company.

SECTION 2.06. Purposes and Powers. The Company is formed for the object and purpose of, and the nature of the business to be conducted and promoted by the Company is, engaging in any act or activity for which limited liability companies may be formed under the Delaware Act, including engaging in the Business, on the terms and subject to the conditions set forth in this Agreement, so long as and to the extent such act or activity is permitted under applicable law. The Company shall have the power and authority to take any and all actions necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purposes set forth in this Section 2.06.

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ARTICLE III

Members

SECTION 3.01. Members. (a) Upon the execution of this Agreement, the sole Members of the Company shall be the Initial Members. Following the execution of this Agreement, no Person shall be admitted as a Member and no Additional Membership Interests shall be issued by the Company except as expressly provided in this Agreement.

(b) After the date of this Agreement, a Person shall be admitted as a Member (such Person, an “Additional Member”) (i) if such Person is a Permitted Transferee of a Membership Interest in accordance with the terms of Article XI or (ii) in the event such Person is not a Permitted Transferee, if (A) the admission of such Person shall have been approved [**], and (B) such Person shall have executed and delivered an Adoption Agreement and such other instruments as the Company Board requests such Person to deliver to effectuate the admission of such Person as a Member. No Person, whether or not such Person holds any Membership Interests, shall be deemed a Member of the Company hereunder or under the Delaware Act unless admitted as such pursuant to the provisions of this Section 3.01(b).

(c) The name and mailing address of each Member, its Capital Contributions (including [**] Capital Contributions in the form of assets other than cash) and its Contributed Capital shall be listed on Schedule 3.01. The designated Officer shall update Schedule 3.01 from time to time as necessary to accurately reflect changes in the address, Capital Contributions and Contributed Capital of any Member, the admission of Additional Members pursuant to Section 3.01(b), the resignation or removal of Members pursuant to Section 3.06 or the making of Subsequent Capital Contributions pursuant to Section 6.01. Any amendment or revision to Schedule 3.01 made to reflect an action taken in accordance with this Agreement shall not be deemed an amendment to this Agreement. Any reference in this Agreement to Schedule 3.01 shall be deemed to be a reference to Schedule 3.01 as amended and in effect from time to time.

SECTION 3.02. Representations, Warranties and Covenants of Members. (a) Representations and Warranties. Each Member hereby represents and warrants to the Company and to the other Members that as of the date hereof (or, in the case of an Additional Member, as of the date of the applicable Adoption Agreement) (i)(A) it is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, (B) it has full right, power and authority to execute and deliver this Agreement and to perform its obligations, including the funding obligations under Section 6.01, hereunder, and (C) this Agreement has been duly authorized, executed and delivered by such Member and is enforceable against such Member in accordance with its terms; (ii) the Member is acquiring its Membership Interests for the Member’s own account as an investment and without an intent as of the date of such acquisition to distribute such Membership Interests; (iii) except as set forth on Schedule 3.02(a), neither it nor any of its Specified Affiliates is a party to any agreement, commitment, understanding or arrangement, whether written or oral, that (A) would purport to grant

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any counterparty to such agreement, commitment, understanding or arrangement any license to or interest in [**] Patent Rights or (B) could reasonably be expected to adversely affect the ability of any Director appointed or to be appointed by such Member to act in furtherance of the Pro-Linux Platform; (iv) neither the Member nor any of its Specified Affiliates has accepted any money or other value from a third party with the purpose or design of affecting the actions, resolutions or decisions to be taken by such Member or by the Director designated by such Member with respect to the Company; and (v) the Member (or, in the case of a Member with a Member Parent, such Member Parent) has entered (or, in the case of an Initial Member, shall within three days after the date hereof enter) into a Company Licensing Agreement.

(b) License. [**] Company Licensing Agreement [**] Patent Rights as and to the extent set forth therein.

(c) Payments by Third Parties. Each Member agrees not to, and to cause its Specified Affiliates not to, accept any money or other value from a third party with the purpose or design of affecting the actions, resolutions or decisions to be taken by such Member or by the Director designated by such Member with respect to the Company.

(d) No Inconsistent Agreements. Each Member agrees not to, and to cause its Specified Affiliates not to, enter into any agreement, commitment, understanding or other arrangement, whether written or oral, that (i) adversely affects or could reasonably be expected to adversely affect the ability of any Director appointed or to be appointed by such Member to act in furtherance of the Pro-Linux Platform or (ii) purports to grant any counterparty to such agreement, commitment, understanding or other arrangement any license to or interest in [**] Patent Rights (except as expressly set forth in the Company Licensing Agreement).

(e) Control of Member. Each Member Parent of a Member (if the Member has a Member Parent) shall at all times control, directly or indirectly, more than 50% of such Member’s [**]; provided that upon the consummation of a Change in Control of a Member Parent, the majority of the other then-existing Members may designate a new Member Parent with respect to such Member (which Member Parent shall control, directly or indirectly, more than 50% of such Member’s [**]).

SECTION 3.03. Powers of Members. The Members shall have the power to exercise any and all rights or powers granted to the Members pursuant to the express terms of this Agreement. Members shall not have the authority to transact any business in the Company’s name or bind the Company by virtue of their status as Members. For purposes of the Delaware Act, the Members shall constitute one class or group of members of the Company.

SECTION 3.04. Member’s Membership Interests; No Right to Partition. The Membership Interests shall for all purposes be personal property. No holder of a Membership Interest or Member shall have any interest in specific Company assets, including any assets contributed to the Company by such Member as part of any Capital Contribution. Each Member waives any and all rights that it may have to maintain an action for partition of the Company’s property.

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SECTION 3.05. Membership Interests. (a) Each Membership Interest shall have the same rights and privileges and shall rank equally and be identical in all respects as to all matters. Membership Interests cannot be divided into parts and shall constitute one class. Subject to the authority of the Company Board as set forth in this Agreement, each Membership Interest shall represent a right to receive allocations of profits and losses of the Company, a right to participate in the management of the Company and a right to Distributions, in each case in accordance with this Agreement and the Delaware Act.

(b) At each meeting of the Members of the Company, each Member shall be entitled to one vote, provided that during any Suspension Period with respect to any Member, such Member shall not be entitled to any votes.

(c) Each Member shall own only one Membership Interest, provided that if two or more Members become Specified Affiliates of each other, the Withdrawing Member(s) who shall have resigned or been removed from the Company in compliance with Section 3.06(h) shall Transfer its Membership Interests to the Continuing Member, and such Continuing Member, upon owning all Membership Interests owned previously by such Continuing Member and such Withdrawing Member(s), shall be entitled to the Contributed Capital with respect to all such Membership Interests (it being understood that such Continuing Member shall continue to have only one vote in total and be entitled to designate one Director in respect of such Membership Interests in accordance with Section 3.05(b)).

SECTION 3.06. Resignation and Removal of Members. (a) Except as otherwise provided in this Section 3.06, and except upon dissolution of the Company pursuant to Section 12.02, [**]. Upon any such resignation of a Member [**], the Company shall redeem all but not less than all the Membership Interests of the Withdrawing Member upon the terms and subject to the conditions [**] and otherwise in accordance with Section 3.06(i).

(b) After the [**]anniversary of the date of this Agreement, any Member may resign from the Company prior to its dissolution by giving prior written notice of such proposed resignation to the Company Board. In addition, on or before the [**] anniversary of the date of this Agreement, any Member may resign from the Company prior to its dissolution by giving prior written notice of such proposed resignation to the Company Board in anticipation of a Change in Control that the board of directors or other equivalent managing body of such Member determines in its sole discretion (i) is in the best interests of the shareholders or equivalent stakeholders of such Member and (ii) is unlikely to occur if such Member remains a Member after the Change in Control, provided that the resignation shall be conditioned on the occurrence of the Change in Control. Upon notice of any such voluntary resignation, the Company shall promptly provide the redemption notice referred to in Section 3.06(i) and redeem all but not less than all the Membership Interests of such Withdrawing Member [**] in

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accordance with Section 3.06(i) . Other than as provided in the preceding sentence, such Withdrawing Member shall not be entitled to any Distribution of cash or property in connection with such resignation and redemption, and the obligations of such Withdrawing Member under this Agreement to make any Capital Contributions (including any obligation to make any Subsequent Capital Contributions) arising prior to the date on which the Withdrawing Member provided notice of its proposed resignation shall survive the cessation of such Member’s status as a Member. The Company shall have no further rights or remedies against the Withdrawing Member as a result of its resignation from the Company in accordance with this Section 3.06(b), provided that nothing in this sentence shall affect the Withdrawing Member’s rights and obligations that specifically survive the cessation of membership pursuant to Sections 3.02(b), 11.04 and 14.13 or affect the Withdrawing Member’s rights and obligations under the Company Licensing Agreement.

(c) If there occurs a Triggering Event with respect to any Member, the Company shall have the right to redeem all but not less than all the Membership Interests of such Member [**] in accordance with Section 3.06(i), provided that the Company provides written notice of the proposed redemption within six months after the Company first becomes aware of the Triggering Event. Upon the consummation of such redemption, such Member shall be removed. The rights of the Company under this Section 3.06(c) shall not be exclusive and shall be in addition to any and all rights and remedies to which the Company or the other Members may be entitled with respect to such Triggering Event if such Triggering Event is a breach of this Agreement or the Company Licensing Agreement.

(d) If (i) there occurs a Change in Control with respect to a Member (unless the Person ultimately in control of such Member as a result of the Change in Control is an Initial Member) or (ii) an Additional Transferee Member becomes a Member, the Company shall have the right to redeem all but not less than all the Membership Interests of such Member [**] in accordance with Sections 3.06(g) and (i), provided that the Company provides written notice of the proposed redemption within six months after the Company first becomes aware of the Change in Control or Additional Transferee becoming a Member. Upon the consummation of such redemption, such Member shall be removed.

(e) Any exercise by the Company of its right to redeem a Member’s Membership Interests in accordance with Section 3.06 (c) or (d) shall require the approval [**], provided that (i) such Member shall not be entitled to any votes on (and shall abstain from voting with respect to) any action, resolution or decision regarding the redemption of such Member’s own Membership Interests, and (ii) in accordance with Section 3.08(c), and notwithstanding any other provision of this Agreement, such Member shall be disregarded and deemed not to be a Member solely for purposes of determining whether the requisite vote with respect to such action, resolution or decision of the Members has been obtained.

(f) A Member may be removed at any time, with or without cause, [**], and in such case the Company shall redeem all but not less than all the Membership Interests of such Member [**] in accordance with Sections 3.06(g) and (i) and, upon the consummation of such redemption, such Member shall be removed.

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(g) For purposes of this Section 3.06, [**] shall mean [**] the Membership Interests to be redeemed, taking into account the rights and obligations in respect of such Membership Interests pursuant to this Agreement. The Company Board shall determine [**] in good faith and provide written notice thereof to the Member whose Membership Interests are being redeemed pursuant to Section 3.06(d) or (f) within ten (10) Business Days of the Company Board’s determination. If the Member whose Membership Interests are being redeemed pursuant to Section 3.06(d) or (f) does not agree with the Company Board’s determination [**], such Member shall have thirty (30) Business Days following the receipt of notice of the Company Board’s determination [**] to express such disagreement in writing to the Company Board, which notice of disagreement shall set forth [**]. In the event such Member fails to express disagreement and provide such [**] within such thirty (30) Business Day period, the determination of the Company Board shall be final and binding on such Member. In the event such Member timely expresses such disagreement and provides such [**], the Company Board and such Member shall endeavor in good faith to resolve such disagreement and determine [**] by mutual agreement. In the event that the Company Board and such Member are unable to resolve such disagreement within thirty (30) Business Days following the date of the notice of disagreement, then [**] shall be determined as expeditiously as practicable by binding arbitration conducted in New York City in accordance with the rules of the American Arbitration Association. In making the determination [**], the arbitrator shall select [**] he or she has received from the parties (which [**] the parties have previously presented to each other in accordance with this Section 3.06(g)), and shall have no discretion to [**] (and no right or power to award any other remedy, including [**]), and such selection shall be made on the basis of the definition of [**] set forth in the first sentence of this Section 3.06(g) . Any award rendered by the arbitrator shall be final, binding and unappealable except as provided in the Federal Arbitration Act, 9 U.S.C. §1 et seq., and judgment may be entered on any such award by any state or federal court having competent jurisdiction. In its award the arbitrator shall allocate, in his or her discretion, among the parties to the arbitration all costs of the arbitration, including the fees and expenses of the arbitrator and any reasonable attorney’s fees, costs and expert witness expenses of the parties.

(h) Five Business Days prior to the consummation of a transaction or other event that will cause two or more Members to become Specified Affiliates of each other, such Members shall determine which one (and only one) Member shall continue as a Member of the Company (such Member, a “Continuing Member”) and which Member(s) shall resign from the Company, and the Members shall promptly notify the Company in writing of the resignation of the Withdrawing Member(s). If the Company does not receive such notice prior to the end of such five Business Day period, the Company Board may determine, in its sole discretion, which Person shall be the Continuing Member, and remove such other Members that are its Specified Affiliates.

(i) At any time the Company is required to or elects to redeem a Member’s Membership Interests in accordance with Section 3.06(a), (b), (c), (d) or (f),

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the Company shall provide written notice of the redemption to such Withdrawing Member, which notice shall state that all the Membership Interests of such Withdrawing Member shall be redeemed, the closing date of such redemption and, in the case of a redemption pursuant to Section 3.06(d) or (f), the Company’s determination [**] as required by Section 3.06(g) . The closing date for such redemption shall be no later than thirty (30) Business Days after the date of such notice (or, in the case of a redemption pursuant to Section 3.06(d) or (f), such later date as [**] may be determined in accordance with Section 3.06(g)) . At the closing for the redemption, which closing shall take place at the principal place of business of the Company, the Company shall deliver to the Withdrawing Member [**] as provided by the terms of this Section 3.06, and the Withdrawing Member shall deliver to the Company the Certificates evidencing all its Membership Interests, duly endorsed, or accompanied by written instruments of Transfer in form satisfactory to the Company Board, duly executed by such Withdrawing Member, free and clear of any liens, and a written notice to the Company notifying the Company of the Member’s resignation from the Company. The resignation of such Withdrawing Member shall become effective, and such Withdrawing Member shall cease to be a Member, as set forth in and in accordance with Section 3.07.

SECTION 3.07. Cessation of Membership. A Person shall cease to be a Member (a) upon the bankruptcy or dissolution of such Person (in which case such Person shall be deemed to have resigned pursuant to Section 3.06(b), regardless of whether such Person would have had the right to resign under such Section 3.06(b)) or (b) at the time such Person ceases to own any Membership Interests, and upon the cessation of its Member status, all rights of a Member under this Agreement shall terminate, provided that (i) if a Member has Transferred its Membership Interests to a Permitted Transferee, such Member shall not cease to be a Member until the Permitted Transferee is admitted to the Company as a Member pursuant to Section 3.01(b), and (ii) no such cessation of any Member’s status as a Member shall affect such Member’s rights or obligations that specifically survive such cessation pursuant to Sections 3.02(b), 11.04 and 14.13 or affect such Member’s rights and obligations under the Company Licensing Agreement.

SECTION 3.08. Member Meetings. (a) Regular and Special Meetings. A meeting of Members for the designation of Directors, and for such other business as may be stated in the notice of such meeting, shall be held at least annually at such date, time and place as is determined by the Company Board. At each annual meeting of the Members, the Members shall designate Directors in accordance with Section 4.01(b) and may transact such other business as shall be stated in the notice of the meeting. Special meetings of the Members for any purpose may be called only by a resolution of the Company Board.

(b) Quorum. Except as otherwise required by applicable law, at any meeting of the Members, the presence, in person or by proxy, of Members [**] shall constitute a quorum, without regard to whether or not any Member present at such meetings, in person or by proxy, abstains from voting at such meetings. If at any meeting of the Members there shall be less than a quorum present, Members [**] held by Members represented thereat, in person or by proxy, may adjourn the meeting from time

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to time, without notice other than announcement at the meeting, until the requisite number of Members shall be present. At any such adjourned meeting at which the requisite amount of Membership Interests shall be represented, any business may be transacted that might have been transacted at the meeting as originally noticed.

(c) Voting. Each Member entitled to vote in any action, resolution or decision of the Members in accordance with the terms of this Agreement may vote in person or by written proxy, provided that during any Suspension Period with respect to any Member, such Member shall not be entitled to attend any meetings of the Members and shall not be entitled to vote (or consent in writing) with respect to any action, resolution or decision of the Members. Except in the case of designation of Directors or as otherwise provided herein (including Section 3.09), any action, resolution or decision of the Members required under the terms of this Agreement or by applicable law, whether at a meeting of the Members or by written consent, may only be taken if approved [**] (a “[**] Action”). Any Member may abstain from voting with respect to any matter submitted to its approval, and, notwithstanding any other provision of this Agreement, any such abstaining Member shall be disregarded and deemed not to be a Member solely for purposes of determining whether the requisite vote with respect to any action, resolution or decision of the Members has been obtained (whether such action, resolution or decision is a [**] Action, [**] Action or [**] Action).

(d) Notice of Meetings. Written notice, stating the place, date and time of the meeting of the Members, shall be given to each Member, at such Member’s address as it appears on Schedule 3.01, not less than five Business Days before the date of such meeting unless such notice requirement is waived in writing by a Member or by the attendance of such Member at a meeting without protesting, prior thereto or at the commencement thereof, the lack of adequate notice.

(e) Action Without a Meeting. Any action required or permitted to be taken at any annual or special meeting of the Members may be taken without a meeting, without prior notice and without a vote, if a written consent, setting forth the action so taken, shall be signed by the number of Members as would be required to take such action at a meeting, notice of such action shall be given to those Members who have not so consented in writing to such action without a meeting and such written consent is filed with the minutes of proceedings of the Members.

(f) Suspension Periods. Notwithstanding any other provision of this Agreement (including Section 3.08(b), Section 3.08(c) and the definition of the term “[**] Vote”), during any Suspension Period with respect to any Member, such Suspended Member shall be disregarded and deemed not to be a Member solely for purposes of determining whether a quorum exists at any meeting of the Members or whether the requisite vote with respect to any action, resolution or decision of the Members has been obtained (whether such action, resolution or decision is a [**] Action, [**] Action or [**] Action). Notwithstanding the foregoing, the Company and each Member (including a Suspended Member) will be bound by all actions, resolutions and decisions of the Members taken during any Suspension Period.

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SECTION 3.09. [**] Actions. (a) Subject to Section 3.08(f), any action, resolution or decision relating to the matters listed on Schedule 3.09(a) (a “[**] Action”) shall require approval by a [**] Vote, and the Company shall not take any [**] Action in connection with such matter unless such approval has been obtained.

(b) Subject to Section 3.08(f), any action, resolution or decision relating to the matters listed on Schedule 3.09(b) (a “[**] Action”) shall require approval by each Member, and the Company shall not take any [**] Action in connection with such matter unless such approval has been obtained.

ARTICLE IV

Management

SECTION 4.01. Company Board. (a) Subject to Article V, the property, business and affairs of the Company shall be managed by or under the direction of a Board of Directors of the Company (the “Company Board”). The Company Board shall consist of a number of directors (each, a “Director”) equal to the number of Members, each such Director to be designated as provided in Section 4.01(b) . The Company CEO shall be invited to and shall attend each meeting of the Company Board except where determined otherwise by the Company Board, but shall not be entitled to vote on any matter considered by the Company Board. No Officer may take any action or make any decision without the approval of the Company Board if such action or decision is reserved for the Company Board under applicable law, under this Agreement or under any action, resolution or decision of the Members or the Company Board.

(b) Designation and Term of Directors. Each Member shall be entitled to designate one (and only one) Director to the Company Board. Upon the execution and delivery of this Agreement, each Initial Member shall designate one Director to the Company Board. Upon the admission of an Additional Member (other than a Permitted Transferee), the number of Directors constituting the Company Board shall be increased by one, effective upon the admission of such Additional Member. An Additional Member shall designate one Director to the Company Board, which designation, in the case of an Additional Member that is a Permitted Transferee, shall become effective upon the resignation of the Director designated by the Transferor whom such Additional Member is replacing. The Directors, designated in accordance with the foregoing, shall constitute the Company Board. Each Director shall be designated to serve until the earlier of (i) the designation and qualification of his or her successor, (ii) removal of such Director in accordance with Section 4.01(f) of this Agreement or (iii) such Director’s death or disability. The Chairman of the Company Board shall at all times be appointed from among the Directors.

(c) Committees Generally. The Company Board may, by resolution of the Company Board, designate one or more committees, each committee to consist of two or more Directors. Any such committee, to the extent provided in the resolution of the Company Board establishing such committee, shall have and may exercise all the powers and authority of the Company Board in the management of the business and affairs of the Company. Committees of the Company Board will not be used in a manner that usurps the overall responsibility of the Company Board pursuant to this Agreement.

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(d) Resignation of Directors. Any Director may resign at any time, provided that any Director who is designated by a Withdrawing Member must resign at the time such Withdrawing Member’s status as a Member ceases. Such resignation shall be made in writing, and shall take effect at the time specified therein, and, if no time is specified, at the time of its receipt by the Company CEO or another designated Officer. The acceptance of a resignation shall not be necessary to make it effective.

(e) Vacancies on the Company Board. Other than any removal contemplated by Section 4.01(f)(ii), upon any removal, resignation, death or disability of any Director, the Member who designated such Director shall designate a replacement in accordance with Section 4.01(b).

(f) Removal of a Director. (i) Any Director may be removed, by written notice to the Company Board, either with or without cause at any time by the Member who designated such Director.

(ii) Any Director who is designated by a Withdrawing Member, and who has not previously notified the Company of his or her resignation, must be removed by such Withdrawing Member at the time such Withdrawing Member ceases to be a Member, provided that if such Withdrawing Member fails to remove the Director designated by it at the time it ceases to be a Member, the Company Board shall be entitled to, and shall, remove such Director with effect from the time such Withdrawing Member ceased to be a Member.

(g) Compensation of Directors. Directors shall not receive any stated salary for their services as Directors or as members of committees of the Company Board, but, by resolution adopted by the Company Board, expenses of attendance may be provided for attendance at each meeting of the Company Board. Nothing herein contained shall be construed to preclude any Director from serving the Company in any other capacity as an officer, agent, employee or otherwise, and receiving compensation therefor or from serving a Member or its Specified Affiliates or any other Person in the capacity of an officer, agent, employee or otherwise and receiving compensation therefor.

(h) Duties of Directors. Nothing in this Agreement shall be deemed to prohibit any Director from (i) acting at any meeting of the Company Board or otherwise in furtherance of the interests of the Member that designated such Director or such Member’s Specified Affiliates or (ii) sharing information regarding the Company and its business with such Member or its Specified Affiliates.

SECTION 4.02. Meetings of the Company Board. (a) Regular and Special Meetings. The newly designated Directors may hold their first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after the formation of the Company, or the time and place of such meeting may be fixed by written consent of all the Directors. Each Director shall have received at

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least five Business Days’ prior notice of any meeting of the Company Board unless such notice requirement is waived in writing executed by such Director or by the attendance of such Director at a meeting without protesting, prior thereto or at the commencement thereof, the lack of adequate notice. Special meetings of the Company Board may be called at any time by any two or more Directors. The meetings of the Company Board shall be held at such place as shall be determined from time to time by resolution of the Company Board or as shall be stated in the notice for the meeting. Copies of agendas and minutes of all meetings of the Company Board shall be distributed to all Directors. Directors may participate in any meeting of the Company Board or any committee thereof by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. If it is anticipated that a Subsequent Capital Contribution will be considered at any meeting of the Company Board, the notice of such meeting shall note that such consideration is expected to be on the agenda for such meeting.

(b) Quorum. At any meeting of the Company Board, the presence, in person or by proxy, of a majority of the Directors shall constitute a quorum, without regard to whether or not any Director present at such meetings, in person or by proxy, abstains from voting at such meetings. If at any meeting of the Company Board there shall be less than a quorum present, a majority of Directors present may adjourn the meeting from time to time, without notice other than announcement at such meeting, until the requisite number of Directors shall be present. At any such adjourned meeting at which the requisite number of Directors shall be represented, any business may be transacted that might have been transacted at the meeting as originally noticed.

(c) Voting. Each Director shall have one vote with respect to any action, resolution or decision of the Company Board, provided that during any Suspension Period with respect to any Member, the Director designated by such Member shall not be entitled to attend any meetings of the Company Board and shall not be entitled to vote (or consent in writing) with respect to any matter considered by the Company Board. Directors may vote in person or may act at meetings of the Company Board by written proxy. Any action, resolution or decision of the Company Board, whether at a meeting of the Company Board or by written consent, may only be taken if approved by an affirmative vote of the majority of the Directors constituting the Company Board (a “Majority Board Action”), provided that (i) any action, resolution or decision relating to a matter set forth on Schedule 4.02(c)(i) [**] may not be taken unless approved pursuant to [**], and (ii) any action, resolution or decision relating to a matter set forth on Schedule 4.02(c) (ii) [**] may not be taken unless approved [**]. Nothing in this Section 4.02(c) shall affect the rights of Members under Section 3.09. Any Director may abstain from voting with respect to any matter submitted to the approval of the Company Board, and, notwithstanding any other provision of this Agreement (including this Section 4.02(c) and the definition of the term [**]), any such abstaining Director shall be disregarded and deemed not to be a Director solely for purposes of determining whether the requisite vote with respect to any action, resolution or decision of the Company Board has been obtained (whether such action, resolution or decision is [**]. If the Company Board determines in good faith that a particular matter is [**], any actions based on such

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determination may not subsequently be challenged (by a Member [**]) on the basis that subsequent developments indicate that a different level of approval of the Company Board [**].

(d) Action Without Company Board Meeting. Any action required or permitted to be taken at any meeting of the Company Board or of any committee thereof may be taken without a meeting if a written consent thereto is signed by the number of Directors as would be required to take such action at a meeting, and such written consent is filed with the minutes of proceedings of the Company Board or such committee.

(e) Suspension Periods. Notwithstanding any other provision of this Agreement (including Section 4.02(b), Section 4.02(c) and the definition of the term “[**] Vote”), during any Suspension Period with respect to any Suspended Member, a Suspended Director designated by such Suspended Member shall be disregarded and deemed not to be a Director solely for purposes of determining whether a quorum exists at any meeting of the Company Board or whether the requisite vote with respect to any action, resolution or decision of the Company Board has been obtained (whether such action, resolution or decision is a Majority Board Action, [**] Action or [**] Action). Notwithstanding the foregoing, the Company and each Member (including any Suspended Member) will be bound by all actions, resolutions and decisions of the Company Board taken during any Suspension Period.

SECTION 4.03. Officers. (a) The Company shall have a chief executive officer (the “Company CEO”). The Company Board may also establish additional or alternate offices of the Company as it deems advisable, and such offices shall be filled with such Officers, who shall perform such duties and serve such terms as the Company Board shall determine from time to time. Subject to Sections 3.09 and 4.01, Officers shall conduct the day-to-day operations of the Company. In no event may an Officer take any action for which approval is required under Section 3.08(c), 3.09 or 4.02 in the absence of such approval.

(b) Company CEO. The Company Board shall appoint the Company CEO from among qualified candidates who shall have extensive experience in licensing and management of Patent Rights or other areas related to the Business. Subject to Sections 3.09 and 4.01, the Company CEO shall be responsible for the day-to-day operations of the Company and shall sign, execute and acknowledge contracts and agreements relating thereto on behalf of the Company and shall perform such duties as are from time to time assigned by the Company Board, and may (unless otherwise determined by the Company Board) delegate such responsibilities to another Officer of the Company. The Company CEO may only be removed by a majority vote of the Company Board. The Company CEO shall employ and retain on behalf of the Company, subject to approval by the Company Board, such Persons as may be necessary or appropriate for the conduct of the Company’s business. The Company CEO will not (while serving as Company CEO) be a Director or an employee, agent or contractor of any Member.

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(c) Managers. All Officers shall be “managers” of the Company within the meaning of the Delaware Act.

SECTION 4.04. Budgets and Business Plans. (a) The initial budget and business plan for the Company shall be as adopted by the Company Board on the date hereof.

(b) Reasonably in advance of (and no later than October 1 preceding, commencing with October 1, 2006) the beginning of each Fiscal Year of the Company, the Company CEO shall present to the Company Board for review and approval a business plan for the next [**] Fiscal Years and shall present to the Company Board for review and approval an updated budget for the next Fiscal Year. Each business plan for the Company as may be in effect from time to time, whether the initial business plan or an updated business plan, is referred to herein as the “Business Plan”. Each budget for the Company as may be in effect from time to time, whether the initial budget or an updated budget, is referred to herein as the “Budget”.

SECTION 4.05. Investment of Funds. Funds held by the Company, including in respect of Capital Contributions, to the extent they are not being used to meet Patent Acquisition and Operating Expenses or Patent Litigation Expenses, shall be invested and reinvested by the Company in any investment as determined by the Company CEO pursuant to guidelines established by the Company Board. Periodic statements shall be provided to the Company Board reflecting transactions executed in respect of such funds. Any income received by the Company from investments of such funds shall become an asset of the Company. In the event of a Distribution of the assets of the Company, the Company shall sell or liquidate such investments promptly to the extent necessary to enable Distributions in accordance with this Agreement.

ARTICLE V

Operations and Activities of the Company

SECTION 5.01. Promotion of the Linux System. The Company intends to utilize its Patent Rights to further the Pro-Linux Platform. The Company will have an open licensing policy, offering non-exclusive licenses of its Patent Rights to all Persons, on a royalty-free basis, but requiring a license from such Persons, substantially as set forth in Section 3.02(b) and the Form Company Licensing Agreement, as the same may be amended or modified from time to time.

SECTION 5.02. Licensing Activities. The Company will license its Patent Rights on a royalty-free basis to any Person that enters into a Company Licensing Agreement. The Company CEO will, subject to the approval of the Company Board, be responsible for the negotiation and execution of each Company Licensing Agreement, provided that any license of the Company’s Patent Rights that is not substantially in the form of the Form Company Licensing Agreement (as the same may be amended or modified from time to time) shall (in accordance with Section 4.02(c)(i)) [**].

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SECTION 5.03. Acquisition of Patent Rights. (a) The Company CEO will identify and, subject to the approval of the Company Board, cause the Company to acquire Patent Rights that are useful in protecting the Linux System or of potential value to the Pro-Linux Platform. The Company will obtain the capability (either through its employees or through third parties) to evaluate, maintain and manage its Patent Rights.

(b) Prior to approving the acquisition of any Patent Right not contributed as part of the Initial Capital Contributions, the Company Board will cause the Company to obtain from an independent technical or industry expert or legal counsel selected by the Company Board a determination in form and substance satisfactory to the Company Board that the acquisition under consideration would further the Pro-Linux Platform. In connection with any acquisition of Patent Rights, to the extent necessary, the Company will enter into agreements with respect to invention disclosures to ensure such disclosures to the Company do not constitute divulgence or “destruction of novelty” under applicable law.

SECTION 5.04. Enforcement of Patent Rights; Counter-measures. (a) Subject to Sections 5.04(b) and 4.02(c), the Company may take enforcement actions against any Person if (i) such Person or any of its Affiliates [**] (in the case of this clause (2)) the Company Board determines that, if successful, such assertion of Patent Rights [**] or (B) in the good faith determination of the Company Board, [**] (in the case of this clause (2)) the Company Board determines that, if successful, such assertion of Patent Rights [**] and (ii) the Company Board has determined in good faith that [**]. It is understood that the initiation of any enforcement action intended to protect Persons other than Members, Licensees and their respective Affiliates, or any customers or distributors of any of the foregoing, is subject to [**] as provided in Section 4.02(c) . Subject to Sections 5.04(b) and 4.02(c), the Company may also take appropriate, good faith counter-measures within the scope of its Business, [**].

(b) The Company [**].

(c) Unless otherwise approved by [**] the Company Board, no enforcement action asserting the Company’s Patent Rights or counter-measure may be taken by the Company other than as provided in this Section 5.04. For the avoidance of doubt, the settlement or other disposition of enforcement actions or counter-measures contemplated by this Section 5.04 shall require only the affirmative vote of [**] the Directors constituting the Company Board.

SECTION 5.05. Linux Definition Committee. The Company shall have a committee to review [**] the definitions of “Linux System”,[**]. The committee shall [**]. The committee shall [**] as the committee shall [**].

SECTION 5.06. No Member Right to License Company Patents. In no event shall any Member have any right to (and in no event shall any Member) grant any license to or interest in any [**] Patent Rights (except as expressly set forth in the Company Licensing Agreement), regardless of the terms of any agreement, commitment, understanding or arrangement to which such Member may be subject.

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SECTION 5.07. Independent Operations. On the terms and subject to the conditions of this Agreement, the Company will operate as a stand-alone entity independently from its Members.

ARTICLE VI

Capital Contributions and Commitments; Contributed Capital Accounts

SECTION 6.01. Capital Contributions and Commitments. (a) Not later than seven days following the execution and delivery of this Agreement, each Initial Member shall make a capital contribution (each, an “Initial Capital Contribution”), in an amount [**]. The Initial Capital Contributions of the Members shall only be used to pay Patent Acquisition and Operating Expenses; provided that, except as otherwise provided in Schedule 4.02(c)(i) or Schedule 4.02(c)(ii), any portion of the Initial Capital Contributions may be used to pay Patent Litigation Expenses if approved by the affirmative vote of the [**] Directors constituting the Company Board.

(b) Upon the admission of an Additional Member . who is not a Permitted Transferee of a Member, such Additional Member shall make, concurrently with the effectiveness of the admission of such Additional Member, a capital contribution in an amount determined by the Company Board (unless, and as, otherwise determined by an action, resolution or decision of the Members), in exchange for the issuance by the Company of one Membership Interest.

(c) The Company Board shall determine, in accordance with and subject to the voting requirements set forth in Section 4.02(c), the amount, form, timing and terms of any Subsequent Capital Contributions to fund Patent Acquisition and Operating Expenses, and will notify the Members of such decision and the Members’ obligations in respect thereof. Any Subsequent Capital Contribution to fund Patent Acquisition and Operating Expenses shall be allocated on a pro rata basis among the Members, with each Member making an equal Capital Contribution regardless of the number of Membership Interests held by such Member. Each Member shall make Subsequent Capital Contributions as and when directed by the Company Board in accordance with this Section 6.01(c); provided that, except as specified in Section 6.01(f), (i) no Subsequent Capital Contributions to fund Patent Acquisition and Operating Expenses may be required until [**], (ii) Subsequent Capital Contributions of any Member pursuant to this Section 6.01(c) may not exceed, together with all Subsequent Capital Contributions made by such Member pursuant to Section 6.01 (d), $[**] in the aggregate in the period beginning on the date of this Agreement and ending on [**] and (iii) no Subsequent Capital Contributions may be required on or after [**]. Except as otherwise provided in Schedule 4.02(c)(i) or Schedule 4.02(c)(ii), any portion of the proceeds of any Subsequent Capital Contribution made pursuant to this Section 6.01(c) may be used to pay Patent Litigation Expenses if approved by the affirmative vote of the [**] Directors constituting the Company Board.

(d) Each Member shall make Subsequent Capital Contributions to fund Patent Litigation Expenses as and when directed by the Company Board in accordance

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with Section 5.04(b); provided that, except as specified in Section 6.01(f), (i) no Subsequent Capital Contributions to fund Patent Litigation Expenses may be required until [**], (ii) Subsequent Capital Contributions of any Member to fund Patent Litigation Expenses pursuant to this Section 6.01(d) may not exceed, together with all Subsequent Capital Contributions made by such Member pursuant to Section 6.01(c), $[**] in the aggregate in the period beginning on the date of this Agreement and ending on December 31, 2011 and (iii) no Subsequent Capital Contributions may be required on or after [**].[**] Any portion of the proceeds of any Subsequent Capital Contribution made pursuant to this Section 6.01(d) may be used to pay Patent Acquisition and Operating Expenses if approved by the affirmative vote of the [**] Directors constituting the Company Board.

(e) All Capital Contributions shall be irrevocable and shall be in the form of cash, in each case unless otherwise set forth on Schedule 3.01 or agreed to in writing by each Member. The cash equivalent of any Capital Contribution that is in the form of assets other than cash will be as set forth in Schedule 3.01 or as otherwise determined by written agreement of each Member. Except as otherwise provided by this Agreement or the Delaware Act, no Member shall have the right to withdraw, or receive any return of, all or a portion of such Member’s Capital Contribution, nor shall any Member have the right to demand and receive any cash or other property in return for its Capital Contribution. Notwithstanding the foregoing, nothing in this Section 6.01(e) shall limit the terms of Sections 3.06 and 12.03.

(f) With, [**], the limitations on Subsequent Capital Contributions set forth in Sections 6.01(c) and 6.01(d) may be increased or decreased. Except as provided in this Section 6.01 or as may otherwise be agreed to in writing by each Member, the Members shall have no right or obligation to make any Capital Contribution to the Company.

(g) The Company Board may not authorize any Subsequent Capital Contribution at a meeting of the Company Board unless (i) each Director is provided at least five (5) Business Days’ prior notice that a Subsequent Capital Contribution will be proposed at the meeting or (ii) such notice requirement is waived by each Director who did not receive such notice.

SECTION 6.02. Status of Capital Contributions. (a) No Member shall receive any interest, salary or drawing with respect to its Capital Contributions or for services rendered on behalf of the Company or otherwise in its capacity as a Member, except as otherwise specifically provided in this Agreement with respect to allocations and Distributions.

(b) The Members shall be liable only to make their Capital Contributions pursuant to Section 6.01, and no Member shall be required to lend any funds to the Company. No Member shall have any personal liability for the payment of any Capital Contribution of any other Member.

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SECTION 6.03. Contributed Capital. (a) The Company shall maintain for each Member an account to be designated its “Contributed Capital”. The Contributed Capital account of each Initial Member shall be equal to its Initial Capital Contribution (including the amount attributed to any non-cash assets provided as Capital Contributions, as set forth in Schedule 3.01) to which shall be added any Subsequent Capital Contributions. The Contributed Capital account of any Additional Member that is not a Permitted Transferee of a Member shall be equal to (x) its initial Capital Contribution (including the amount attributed to any non-cash assets provided as Capital Contributions) or (y) such other amount, if any, as may be determined by the Members at the time such Additional Member is admitted as a Member, to which shall be added any Subsequent Capital Contribution. A Member’s Contributed Capital account shall be reduced by (i) the amount of cash distributed to the Member by the Company and (ii) the fair market value of any property distributed to the Member by the Company (as such property and its fair market value are agreed to by such Member and the Company Board)[**].

(b) Each Member shall have a single Contributed Capital account which shall reflect all of its Membership Interests in the Company. If any Member transfers its Membership Interest in the Company pursuant to the terms of this Agreement, the transferee shall succeed to the Contributed Capital account of the transferor. The Company will maintain records to enable separate identification of Capital Contributions and Distributions to the extent related to separate Membership Interests.

(c) A Member’s “Pro Rata Portion” at any date of determination shall be the percentage obtained by dividing (A) the amount of such Member’s Contributed Capital account as of such date by (B) the aggregate amount of all Contributed Capital accounts of the Members as of such date, [**].

ARTICLE VII

Tax Matters

SECTION 7.01. Tax Allocations. Taxable income and loss and each item of taxable income, gain, loss, deduction or credit recognized by the Company shall be allocated among the Members in proportion to their respective Pro Rata Portions, subject to Section 704(c) of the Code (using the “traditional method” of Treasury Regulation Section 1.704 -3(b)). Allocations pursuant to this Section 7.01 are solely for purposes of United States federal, state and local taxes, and shall not affect other items or Distributions pursuant to any provision of this Agreement.

SECTION 7.02. Tax Matters. (a) The “Tax Matters Partner” of the Company for purposes of Section 6231(a)(7) of the Code shall be International Business Machines Corporation. The Tax Matters Partner shall have the power to manage and control, on behalf of the Company, any administrative proceeding at the Company level with the Internal Revenue Service or any other taxing authority relating to the determination of any tax liability of the Company or any item of Company income, gain, loss, deduction or credit for any tax purpose. The Tax Matters Partner shall take such

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action as may be reasonably necessary to constitute each other Member a “notice partner” within the meaning of Section 6231(a)(8) of the Code. The Tax Matters Partner shall notify each other Member of all material matters that come to its attention in its capacity as Tax Matters Partner. Within ten (10) days of the receipt of any notice from the Internal Revenue Service or any state, local or foreign tax authority in any administrative proceeding at the Company level relating to the determination of any Company item of income, gain, loss, deduction or credit, the Tax Matters Partner shall mail a copy of such notice to each Member.

(b) The Tax Matters Partner shall cause to be prepared and filed for each taxable year of the Company all tax and information returns which the Company is required to file. In preparing such returns, the Tax Matters Partner shall apply the provisions of Section 7.01 in such manner as it deems appropriate, shall cause the Company to make an election under Section 754 of the Code, and shall have the discretion to make such other tax elections and take such other tax positions as it deems appropriate. Each Member shall, upon request of the Company, supply any information necessary for the Company to prepare such tax returns. For each taxable year of the Company, the Tax Matters Partner shall cause the Members to be provided, on a timely basis, with information needed by them to file their own tax returns by reason of their interest in the Company, including the applicable Schedule K-1 to the Company’s federal partnership tax return for such taxable year. Each Member shall file its own tax returns in a manner consistent with the elections and positions taken by the Company on its own tax returns, including the information returns provided by the Company to the Member. The Tax Matters Partner shall be authorized to engage a third party to assist it in performing its obligations under this Article VII, and the costs and expenses of the Tax Matters Partner incurred in connection with its obligations shall be Patent Acquisition and Operating Expenses.

SECTION 7.03. Taxation as Partnership. The Members intend that the Company shall be treated as a partnership for United States federal, state, local and foreign tax purposes and agree to take all reasonable actions, including the amendment hereof (so long as such amendment does not materially adversely affect any Member or its Affiliates) and the execution of other documents, as may reasonably be required to qualify for and receive such treatment and further agree not to take any position or make any election, in a tax return or otherwise, inconsistent therewith.

ARTICLE VIII

Distributions

SECTION 8.01. Distributions. Subject to Section 4.02(c), the Company Board may, by resolution, at any regular or special meeting, declare Distributions to the Members in proportion to their respective Pro Rata Portions, at such times as it deems appropriate, in its sole discretion.

SECTION 8.02. Limitations on Distribution. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not make any

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Distribution if such Distribution would violate Section 18-607 of the Delaware Act or other applicable law, but shall instead make such Distribution as soon as practicable after the making of such Distribution would not cause such violation.

SECTION 8.03. Withholding. Notwithstanding anything in this Agreement to the contrary, the Tax Matters Partner and the Company are authorized to take any and all actions that are necessary or appropriate to ensure that the Company satisfies any and all withholding and tax payment obligations under Section 1441, 1445, 1446 or any other provision of the Code or other applicable law. Without limiting the generality of the foregoing, the Company may withhold any amount that the Tax Matters Partner determines is required to be withheld from Distributions to any Member; provided that such amount shall be deemed to have been distributed to such Member for all purposes of applying this Agreement. Each Member will timely provide any certification or file any agreement that is required by any taxing authority in order to avoid any withholding obligation that would otherwise be imposed on the Company, and shall indemnify the Company for any withholding tax liability imposed on the Company with respect to such Member.

ARTICLE IX

Books and Records; Accounting

SECTION 9.01. Books, Records and Financial Statements. (a) The Company shall at all times maintain, at its principal place of business, separate books of account for the Company that shall show a true and accurate record of all costs and expenses incurred, all charges made, all credits made and received and all income derived in connection with the operation of the Company in accordance with GAAP consistently applied, and, to the extent inconsistent therewith, in accordance with this Agreement. Such books of account, together with a copy of this Agreement, its Exhibits and Schedules, the Certificate of Formation, copies of the Company’s federal, state and local tax returns and reports, if any, for the three most recent years and financial statements of the Company for the three most recent years shall at all times be maintained at the principal place of business of the Company and shall be available for inspection, examination and copying at reasonable times by each Member and its duly authorized representatives for any purpose reasonably related to such Member’s interest in the Company. Any Member requesting access to books and records of the Company shall reimburse the Company for any costs reasonably incurred by it in connection therewith.

(b) The Officers shall prepare and maintain, or cause to be prepared and maintained, the books of account of the Company. The following financial information, prepared in accordance with GAAP and applied on a basis consistent with prior periods, which shall be audited in accordance with GAAS and certified to by an independent certified public accountant, shall be transmitted by the Company to each Member as soon as reasonably practicable and in no event later than fifty (50) days after the close of each Fiscal Year:

(i) balance sheet of the Company as of the beginning and close of such Fiscal Year;

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(ii) statement of profits and losses for such Fiscal Year;

(iii) statement of the Company’s cash flows during such Fiscal Year; and

(iv) to the extent that it can be produced without unreasonable burden or expense (in the good faith judgment of the Company CEO), a reconciliation of net income and equity into IFRS.

(c) Following the end of each of the Company’s Fiscal Quarters, the Company shall prepare and provide to each Member, as soon as reasonably practicable and in no event later than thirty (30) days after the close of each Fiscal Quarter, in order to permit each Member to comply with its public reporting requirements: (i) an unaudited balance sheet of the Company with respect to such Fiscal Quarter, (ii) an unaudited statement of the profits and losses of the Company for such Fiscal Quarter, (iii) an unaudited statement of cash flows during such Fiscal Quarter (each of which items (i) through (iii) shall be prepared in accordance with GAAP, applied on a basis consistent with prior periods), (iv) to the extent it can be produced without unreasonable burden or expense (in the good faith judgment of the Company CEO), an update of the reconcilitation of net income and equity into IFRS for such Fiscal Quarter and (v) a discussion of the results of operations of the Company for such Fiscal Quarter, in substantially the format determined by the Company Board. To the extent that the Company cannot provide final financial statements with respect to any Fiscal Quarter on a reasonably timely basis for a Member to comply with its reporting obligations, the Company shall provide estimates on a reasonably timely basis to permit such compliance.

(d) The Company shall promptly inform each Member of any material event or development not reflected in the Company’s financial information delivered as provided above in order to enable such Member to timely make an assessment of such Member’s disclosure obligations with respect to such event or development.

SECTION 9.02. Accounting Method. For both financial and tax reporting purposes, the books and records of the Company shall be kept on the accrual method of accounting and shall reflect all the Company’s transactions and be appropriate and adequate for the Company’s business.

SECTION 9.03. Annual Audit. The financial statements of the Company for each Fiscal Year shall be audited by an independent certified public accountant, selected by the Company Board, with such audit to be accompanied by a report of such accountant containing its opinion. The cost of such audit shall be a Patent Acquisition and Operating Expense.

SECTION 9.04. Banking. All funds of the Company received from any and all sources shall be deposited in the Company’s name in such separate accounts as shall be determined by the Company Board. In connection with the maintenance of such bank accounts, the Company Board shall designate those individuals who will have authority to disburse funds from such bank accounts on behalf of the Company in connection with its activities.

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SECTION 9.05. Changes in Accounting. The Company will inform the Members in a timely manner of any plans pertaining to a material change in the accounting policies and principles adopted by the Company.

SECTION 9.06. Engagement of Accountants. The Company will use commercially reasonable efforts not to engage any certified public accountants that a Member has engaged for the purpose of providing an opinion with respect to such Member’s consolidated financial statements in any way that would impair such certified public accountants’ independence with respect to the preparation of the Member’s consolidated financial statements under the rules of the U.S. Securities and Exchange Commission.

SECTION 9.07. Internal Controls. The Company shall maintain systems of internal disclosure controls and procedures and internal controls over financial reporting sufficient to enable the Members to satisfy their financial reporting requirements and to provide reasonable assurance of the adequacy of such controls and procedures on an annual basis in such form and detail as shall enable the Members to satisfy their financial reporting requirements, including if required by law or the applicable stock exchange or securities regulator, a statement that: (i) records are maintained in reasonable detail and in such a form as to fairly reflect any transactions and dispositions of assets, (ii) transactions are executed in accordance with management’s general or specific authorizations, (iii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iv) access to assets is permitted only in accordance with management’s general or specific authorization and (v) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

ARTICLE X

Liability, Exculpation and Indemnification

SECTION 10.01. Liability. Except as otherwise provided by the Delaware Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Member or other Covered Person shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member or other Covered Person. Except as expressly provided herein, no Member in its capacity as such, shall have liability to the Company, any other Member or the creditors of the Company.

SECTION 10.02. Exculpation. (a) No Covered Person shall be liable to the Company, any other Covered Person or any other Person who has an interest in the Company for any costs, expenses, damages or other liability incurred by reason of any act

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or omission (in relation to the Company or this Agreement) performed or omitted by such Covered Person in good faith on behalf of the Company, provided that a Member shall be liable for any such costs, expenses, damages or other liability resulting from any breach by such Member or its Specified Affiliates of this Agreement or the Company Licensing Agreement to which such Member or any of its Specified Affiliates is a party.

(b) A Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any Person as to matters the Covered Person reasonably believes are within such Person’s professional or expert competence, including information, opinions, reports or statements as to the validity, enforceability or infringement of Patent Rights and the value and amount of the assets, liabilities or any other facts pertinent to the existence and amount of assets from which Distributions to Members might properly be paid.

SECTION 10.03. Fiduciary Duty. To the fullest extent permitted by applicable law (including Section 18-1101 of the Delaware Act), at law or in equity, no Director, Member or Affiliate of a Member acting under this Agreement shall have any fiduciary or similar duty, at law or in equity, or any liability relating thereto, to the Company or any other Director, Member or Affiliate of a Member, with respect to or in connection with the Company or the Company’s business or affairs. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of a Director, Member or Affiliate of a Member otherwise existing at law or in equity, are agreed by the parties hereto to replace such other duties and liabilities of such Director, Member or Affiliate of a Member.

SECTION 10.04. Indemnification. To the fullest extent permitted by applicable law, a Covered Person shall be entitled to indemnification from the Company for (i) any cost, expense, damage or other liability incurred by such Covered Person by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of authority conferred on such Covered Person by this Agreement and (ii) any claim, demand, action, suit or proceeding seeking or otherwise relating to any such cost, expense, damage or other liability, except that no Covered Person shall be entitled to be indemnified in respect of any cost, expense, damage or other liability to the extent incurred by such Covered Person by reason of gross negligence, fraud or willful misconduct of such Covered Person; provided that any indemnity under this Section 10.04 shall be provided out of and to the extent of Company assets only, and no Covered Person shall have any personal liability on account thereof.

SECTION 10.05. Expenses. To the fullest extent permitted by applicable law, reasonable expenses (including reasonable legal fees) incurred by a Covered Person in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay such amount if it shall be determined that the Covered Person is not entitled to be indemnified as authorized in Section 10.04.

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SECTION 10.06. Insurance. The Company may purchase and maintain insurance, to the extent and in such amounts as the Company Board by resolution shall deem reasonable or appropriate, on behalf of Covered Persons and such other Persons as the Company Board by resolution shall determine, against any liability that may be asserted against or expenses that may be incurred by any such Person in connection with the activities of the Company or any indemnities provided by the Company, regardless of whether the Company would have the power to indemnify such Person against such liability under the provisions of this Agreement.

SECTION 10.07. [**] Claims. Prior to the initiation by any Member or any of its Affiliates of a claim, action, suit or proceeding [**] for patent infringement [**], the Member proposing (or whose Affiliate proposes, as the case may be) to initiate such claim, action, suit or proceeding shall provide [**] the basis for such proposed claim, action, suit or proceeding, in order to provide [**] a reasonable opportunity to [**] otherwise resolve the issue or issues underlying such proposed claim, action, suit or proceeding to the reasonable satisfaction [**] any claim, action, suit or proceeding [**] regarding the patent(s) identified in the notice [**] and software package(s) identified in such notice. Such Members shall act in good faith to resolve such issue or issues following delivery of such notice and [**] from the date of such notice.

SECTION 10.08. Other Procedures. The Members and the Company may enter into indemnity contracts with Covered Persons and such other Persons as the Company Board shall determine and adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under Sections 10.04 and 10.05 and containing such other procedures regarding indemnification as are appropriate.

ARTICLE XI

Transfer of Membership Interests

SECTION 11.01. Transfer of Membership Interests Generally. Except for a Transfer in accordance with this Agreement, a Member may not, directly or indirectly, Transfer any Membership Interests owned by such Member without the written consent of the other Members. Any purported Transfer of Membership Interests in breach of this Section 11.01 shall be null and void, and neither the Company nor the Members shall recognize the same, whether for the purpose of designating Directors, making allocations or Distributions or otherwise. Neither the Company nor the Members shall incur any liability as a result of refusing to recognize any such designated Director or make any such allocations or Distributions with respect to Transferred Membership Interests in breach of this Section 11.01. Any Member who Transfers or attempts to Transfer any Membership Interest except in compliance herewith shall be liable to, and shall indemnify and hold harmless, the Company and the other Members for all costs, expenses, damages and other liabilities resulting therefrom.

SECTION 11.02. Permitted Transfers. (a) A Member may at any time Transfer all but not less than all its Membership Interests to another Person (such a

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Transferee, a “Permitted Transferee”) if (i) such other Person is (A) a wholly owned Subsidiary of such Member, the Member Parent (if any) of such Member, or a wholly owned Subsidiary of such Member Parent, or (B) the successor (whether by sale, merger or otherwise) to all or substantially all of the assets of such Member’s business and the business of its Specified Affiliates, taken as a whole, relating to the Linux System taken as a whole, and (ii) such Transferee has executed and delivered an Adoption Agreement; provided that such Transfer shall not act as a novation and the Transferor shall remain responsible for and shall guarantee such Transferee’s performance of any obligations hereunder in existence as of the time of the Transfer. A Permitted Transferee described in the foregoing clause (a)(i)(B) that was not previously a Member or a Specified Affiliate of a Member is referred to as an “Additional Transferee Member”.

(b) Upon the consummation of an event that causes two or more Members to become Specified Affiliates, each Withdrawing Member, in connection with its resignation or removal from the Company in accordance with Section 3.06(h), may Transfer all but not less than all its Membership Interest to the Continuing Member if such Continuing Member shall have executed and delivered an instrument containing such Continuing Member’s undertaking to assume the obligations of each Withdrawing Member under this Agreement to be performed as the successor-in-interest of the Withdrawing Member, provided that such Transfer shall not act as a novation and the Transferor shall remain responsible for and shall guarantee such Continuing Member’s performance of its obligations hereunder in existence as of the time of the Transfer.

SECTION 11.03. No Publicly Traded Partnership. Notwithstanding anything in this Agreement to the contrary, no Transfer of a Membership Interest may be made if in the reasonable determination of the Tax Matters Partner such Transfer would result in the Company being treated as a “publicly traded partnership” within the meaning of Section 7704(b) of the Code.

SECTION 11.04. Securities Law Matters. Each Member understands that the Company has not registered the Membership Interests under any United States federal or state securities or blue sky laws. No Member shall Transfer any Membership Interest at any time if such action would constitute a violation of any United States Federal or state securities or blue sky laws or a breach of the conditions to any exemption from registration of the Membership Interests under any such laws or a breach of any undertaking or agreement of a Member entered into pursuant to such laws or in connection with obtaining an exemption thereunder, and the Company shall not Transfer upon its books any Membership Interests unless prior thereto the Company has received (or the Company Board has waived in writing the requirement that the Company receive) an opinion of counsel in form and substance satisfactory to the Company that such transaction is in compliance with this Section 11.04. Any Certificate representing a Membership Interest shall bear appropriate legends restricting the sale or other Transfer of such Membership Interest in accordance with applicable United States Federal or state securities or blue sky laws and in accordance with the provisions of this Agreement. This Section 11.04 shall survive termination of this Agreement for the maximum period permitted by applicable law.

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ARTICLE XII

Dissolution, Liquidation and Termination

SECTION 12.01. No Dissolution. The resignation, removal, bankruptcy or dissolution of any Member or the occurrence of any other event that terminates the continued membership of a Member in the Company shall not, in and of itself, cause the dissolution of the Company. In such event, the business of the Company shall be continued by the remaining Members.

SECTION 12.02. Events Causing Dissolution. The Company shall be dissolved and its affairs shall be wound up upon the occurrence of any of the following events:

(a) [**], provided that (i) at any time when the Company has only two Members, or at any time that events have occurred that will result in the Company having only two Members within ninety (90) days, either such Member shall have the right to require the Company to be dissolved and wound up in accordance with the terms of this Agreement and (ii) at any time on or after [**], if the Company Board requests a Subsequent Capital Contribution and such Capital Contribution [**] within thirty (30) days of the date of the Company Board approval, then dissolution may be required [**]; or

(b) the entry of a decree of judicial dissolution under Section 18-802 of the Delaware Act.

SECTION 12.03. Liquidation. Upon dissolution of the Company, the Person or Persons approved by the Members to carry out the winding up of the Company shall immediately commence to wind up the Company’s affairs, provided that a reasonable time shall be allowed for the orderly liquidation of the assets of the Company and the satisfaction of liabilities to creditors so as to enable the Members to minimize the normal losses attendant upon a liquidation. The proceeds of liquidation shall be distributed in the following order and priority:

(a) to creditors of the Company, in satisfaction of the liabilities of the Company (whether by payment or the making of reasonable provision for payment thereof), all as and to the extent specified by applicable law or contract; and

(b) to the Members in proportion to their respective Pro Rata Portions, either in cash or in the form of assets (as determined by the Board) valued at their fair market value. If a Member has contributed Patent Rights to the Company as part of its Capital Contributions, such Member will have the right, at its option, to a return of such Patent Rights as part of the proceeds of liquidation payable to such Member in accordance with this Section 12.03, provided that if the fair market value (as reasonably determined by the Board) of such Patent Rights exceeds the portion of such proceeds payable to such Member, such Member shall pay to the Company (for distribution to other Members) the amount of such excess.

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SECTION 12.04. Termination. The Company shall terminate when all of the assets of the Company, after payment, or due provision for all debts, liabilities and obligations of the Company, shall have been distributed to the Members in the manner provided for in this Article XII and the Certificate of Formation shall have been canceled in the manner required by the Delaware Act.

SECTION 12.05. Claims of the Members. The Members and former Members shall look solely to the Company’s assets for the return of their Capital Contributions, and if the assets of the Company remaining after payment of or due provision for all debts, liabilities and obligations of the Company are insufficient to return such Capital Contributions, the Members and former Members shall have no recourse against the Company or any other Member.

ARTICLE XIII

Certificates Evidencing Membership Interests

SECTION 13.01. Certificates. Each Membership Interest shall be evidenced by one Certificate. Each Certificate shall be executed by such Officers of the Company as the Company Board shall designate.

SECTION 13.02. Register. The Company shall keep or cause to be kept a register in which, subject to such regulations as the Company Board may adopt, the Company will provide for the registration of the Membership Interests and the registration of Transfers of Membership Interests. Upon surrender for registration of Transfer of any Certificate, and subject to the further provisions of this Section 13.02 and Section 13.03 and the limitations on Transfer contained elsewhere in this Agreement, the Company will cause the execution, in the name of the registered holder or the designated Transferee, of a new Certificate, evidencing the Membership Interest represented by the Certificate surrendered. Every Certificate surrendered for registration of Transfer shall be duly endorsed, or be accompanied by a written instrument of Transfer in form satisfactory to the Company Board, duly executed by the registered holder thereof or such holder’s authorized attorney.

SECTION 13.03. New Certificates. The Company shall issue a new Certificate in place of any Certificate previously issued if the record holder of the Certificate (a) makes proof by affidavit, in form and substance satisfactory to the Company Board, that a previously issued Certificate has been lost, destroyed or stolen, (b) requests the issuance of a new Certificate before the Company has received notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim, (c) if requested by the Company Board, delivers to the Company a bond, in form and substance satisfactory to the Company Board, with such surety or sureties and with fixed or open liability as the Company Board may direct, to indemnify the Company, as registrar, against any claim that may be made on account of the alleged loss, destruction or theft of the Certificate, and (d) satisfies any other reasonable requirements imposed by the Company Board.

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SECTION 13.04. Membership Interest as a Security. A Membership Interest in the Company evidenced by a Certificate shall constitute a security for all purposes of Article 8 of the Uniform Commercial Code promulgated by the National Conference of Commissioners on Uniform State Laws, as in effect in the State of Delaware or any other applicable jurisdiction. Delaware law shall constitute the local law of the Company’s jurisdiction in its capacity as the issuer of the Membership Interests.

SECTION 13.05. Legends. Each of the Members hereby agrees that each outstanding Certificate shall bear a conspicuous legend reading substantially as follows:

The Membership Interest represented by this Certificate has not been registered under the Securities Act of 1933 or applicable state and other securities laws and may not be sold, pledged, hypothecated, encumbered, disposed of or otherwise transferred without compliance with the Securities Act of 1933 or any exemption thereunder and applicable state and other securities laws. The Membership Interest represented by this Certificate is subject to the restrictions on transfer and other provisions of a Limited Liability Company Agreement dated as of November 8, 2005 (as amended from time to time, the “Agreement”) by and among the Company and its Members, and may not be sold, pledged, hypothecated, encumbered, disposed of or otherwise transferred except in accordance therewith. A copy of the Agreement is on file at the principal place of business of the Company.

The foregoing legend shall be in addition to any and all other legends required by applicable law or contract to be placed on the Certificates.

ARTICLE XIV

Miscellaneous

SECTION 14.01. Notices. All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be hand delivered, faxed or mailed by registered or certified mail or overnight courier service, as follows:

(a) if given to the Company, to the address (and fax number) specified by the Company Board in a notice to the Members, to the attention of the Company CEO.

(b) if given to any Member, to the person and at the address (and, if applicable, fax number) set forth opposite its name on Schedule 3.01 attached hereto, or at such other address (and, if applicable, fax number) as such Member may hereafter designate by written notice to the Company.

All such notices shall be deemed to have been given when received.

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SECTION 14.02. Formation Expenses. Each party shall pay its own expenses incurred in connection with the formation of the Company.

SECTION 14.03. Failure to Pursue Remedies. The failure of any party to seek redress for breach of, or to insist upon the strict performance of, any provision of this Agreement shall not prevent a subsequent act, which would have originally constituted a breach, from having the effect of an original breach.

SECTION 14.04. Cumulative Remedies. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise.

SECTION 14.05. Parties in Interest. This Agreement shall be binding upon and inure to the benefit of all the parties hereto and, to the extent provided by this Agreement, their Affiliates, their permitted successors and assigns, and their legal representatives. Nothing in this Agreement, express or implied, is intended to confer upon any Person other than the Members or their respective permitted successors or assigns or, to the extent provided by this Agreement, the Members’ respective Affiliates, any rights or remedies under or by reason of this Agreement.

SECTION 14.06. Outside Businesses. Any Member or Affiliate thereof may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Company, and the Company and the Members shall have no rights by virtue of this Agreement (or the relationships or activities contemplated by this Agreement) in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Company, shall not be deemed wrongful or improper. Subject to the licenses and related obligations in the Company Licensing Agreement, nothing contained herein or in the Company Licensing Agreement shall prohibit any Member or any of its Affiliates from licensing, selling, transferring or otherwise granting rights in any of its patents at prices and terms and conditions that it sets in its sole discretion without the agreement or permission of any other Member or any of its Affiliates. No Member or Affiliate thereof shall be obligated to present any particular investment opportunity to the Company even if such opportunity is of a character that, if presented to the Company, could be taken by the Company, and any Member or Affiliate thereof shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment opportunity.

SECTION 14.07. Equitable Relief. Each party acknowledges that money damages would be inadequate to protect against any actual or threatened breach of this Agreement by any party hereto and that each party hereto shall be entitled to equitable relief, including specific performance and injunction, without posting bond or other security, in order to enforce or prevent any breaches of the provisions of this Agreement.

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SECTION 14.08. Headings. The headings and subheadings in this Agreement are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof.

SECTION 14.09. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted.

SECTION 14.10. Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one instrument.

SECTION 14.11. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto.

SECTION 14.12. Governing Law. This Agreement and the rights of the parties hereunder shall be interpreted in accordance with the laws of the State of Delaware, and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws. In the event of a conflict between any provision of this Agreement and any non-mandatory provision of the Delaware Act, the provisions of this Agreement shall control and take precedence.

SECTION 14.13. Confidentiality. Each Member expressly acknowledges that such Member will receive confidential and proprietary information relating to the Company, including information relating to the Company’s financial condition and business plans, and that the disclosure of such confidential information to a third party would cause irreparable injury to the Company. Except with the prior written consent of the Company or as required by law, no Member shall disclose any such information to a third party (other than on a “need to know” basis to any Affiliate or any employee, agent, representative or contractor of such Member or its Affiliates (each of whom shall agree to maintain the confidentiality of such information)), and each Member shall use reasonable efforts to preserve the confidentiality of such information. The obligations of a Member under this Section 14.13 shall survive the termination of this Agreement or cessation of a Member’s status as a Member for a period of five years. Information exchanged between Members shall be non-confidential unless exchanged pursuant to a separate confidentiality agreement executed between such Members.

SECTION 14.14. Public Disclosure. Each Member hereby agrees that, except as may be required to comply with the requirements of any applicable law or the rules and regulations of any exchange upon which its securities (or the securities of one of its Affiliates) are traded, it shall not make or permit to be made any press release or similar public announcement or communication concerning the execution or performance of this Agreement unless specifically approved in advance by each Member, which

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approval shall not be unreasonably withheld, conditioned or delayed. In the event that, in the absence of such approval, legal counsel for any party is of the opinion that a press release or similar public announcement or communication is required by law or by the rules and regulations of any exchange on which such party’s securities (or the securities of one of its Affiliates) are traded, then such party may issue a public announcement limited solely to that which legal counsel for such party advises is required under such law or such rules and regulations (and the party making any such announcement shall provide a copy thereof to the other parties for review reasonably in advance of issuing such announcement).

SECTION 14.15. Amendments. Subject to Section 3.09(b), no provision of this Agreement may be waived, amended or modified except pursuant to an agreement in writing entered into by Members holding votes [**]. Notwithstanding the foregoing, revisions to the Form Company Licensing Agreement shall [**], in accordance with Section 4.02(c)(i), and subject to item (vii) of Schedule 4.02(c)(ii), shall be subject to approval [**].

SECTION 14.16. Absence of Presumption. The parties hereto have participated jointly in the negotiation and drafting of this Agreement and, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by such parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above stated.

MEMBERS:
INTERNATIONAL BUSINESS MACHINES CORPORATION
By	/s/ David L. Johnson
Name:	David L. Johnson
Title:	VP Corporate Development
NOVELL, INC.
By	/s/ Joseph A. LaSaia, Jr.
Name:	Joseph A. LaSaia, Jr.
Title:	Senior Vice President,
	General Counsel and Secretary
RED HAT, INC.
By	/s/ Charles Peters, Jr.
Name:	Charles Peters, Jr.
Title:	Exec. Vice President and
	Chief Financial Officer
SONY CORPORATION OF AMERICA
By	/s/ Steven E. Kober
Name:	Steven E. Kober
Title:	Sr. Vice President and Controller
Sony Corporation, a Japan corporation, is hereby designated as Member Parent of Sony Corporation of America

39

PHILIPS ELECTRONICS NORTH AMERICA CORPORATION
By	/s/ Wilco Groenhuysen
Name:	Wilco Groenhuysen
Title:	CFO
	Royal Philips Electronics, a Netherlands corporation, is hereby designated as Member Parent of Philips Electronics North America Corporation

40

Exhibit A

Form of Adoption Agreement

This ADOPTION AGREEMENT (this “Adoption Agreement”) is executed pursuant to the terms of the Limited Liability Company Agreement of Open Invention Network LLC (the “Company”) dated as of November 8, 2005, a copy of which is attached hereto and is incorporated herein by reference (the “LLC Agreement”), by the undersigned (the “Additional Member”). By execution and delivery of this Adoption Agreement, the Additional Member agrees as follows:

SECTION 1. Acknowledgment. The Additional Member acknowledges that the Additional Member is acquiring Membership Interests in the Company subject to the terms and conditions of the LLC Agreement. Capitalized terms used herein without definition are defined in the LLC Agreement and are used herein with the same meanings set forth therein.

SECTION 2. Agreement. The Additional Member (a) agrees that all Membership Interests in the Company acquired by the Additional Member shall be bound by and subject to the terms of the LLC Agreement, and (b) hereby adopts the LLC Agreement with the same force and effect as if it were originally a party thereto.

SECTION 3. Company Licensing Agreement. Concurrently herewith or prior hereto, the Additional Member (or, if the Additional Member has a Member Parent, such Member Parent) has entered into a Company Licensing Agreement.

SECTION 4. Notice. Any notice required to be provided by the LLC Agreement shall be given to the Additional Member at the address listed beside the Additional Member’s signature below.

SECTION 5. Member Parent. If the Additional Member has a Member Parent, such Member Parent, concurrently herewith, has entered into a guaranty of the Additional Member’s obligations under this Adoption Agreement and the LLC Agreement in form and substance reasonably satisfactory to the Company.

Executed and dated this      day of                  .

Additional Member:

Address for Notices:

Exhibit B

Category 1 Linux Related Components

The Category 1 Linux Related Components consist of the software packages identified below, as such packages’ currently released source code as of [**] is identified on the Company website.

To the extent that any of the software packages identified in this Exhibit [**] unless expressly set forth below:

1.	[**]
2.	[**]
3.	[**]
4.	[**]
5.	[**]
6.	[**]
7.	[**]
8.	[**]
9.	[**]
10.	[**]
11.	[**]
12.	[**]
13.	[**]
14.	[**]
15.	[**]
16.	[**]
17.	[**]
18.	[**]
19.	[**]
20.	[**]
21.	[**]
22.	[**]
23.	[**]
24.	[**]
25.	[**]
26.	[**]
27.	[**]
28.	[**]
29.	[**]
30.	[**]
31.	[**]
32.	[**]
33.	[**]
34.	[**]
35.	[**]
36.	[**]
37.	[**]
38.	[**]

To the extent that any of the software packages identified in this Exhibit [**]. For purposes of the foregoing, [**] designed to implement such capability.

	Package Name
1	[**]
2	[**]
3	[**]
4	[**]
5	[**]
6	[**]
7	[**]
8	[**]
9	[**]
10	[**]
11	[**]
12	[**]
13	[**]
14	[**]
15	[**]
16	[**]
17	[**]
18	[**]
19	[**]
20	[**]
21	[**]
22	[**]
23	[**]
24	[**]
25	[**]
26	[**]
27	[**]
28	[**]
29	[**]
30	[**]
31	[**]
32	[**]
33	[**]
34	[**]
35	[**]
36	[**]
37	[**]
38	[**]
39	[**]
40	[**]
41	[**]

2

42	[**]
43	[**]
44	[**]
45	[**]
46	[**]
47	[**]
48	[**]
49	[**]
50	[**]
51	[**]
52	[**]
53	[**]
54	[**]
55	[**]
56	[**]
57	[**]
58	[**]
59	[**]
60	[**]
61	[**]
62	[**]
63	[**]
64	[**]
65	[**]
66	[**]
67	[**]
68	[**]
69	[**]
70	[**]
71	[**]
72	[**]
73	[**]
74	[**]
75	[**]
76	[**]
77	[**]
78	[**]
79	[**]
80	[**]
81	[**]
82	[**]
83	[**]
84	[**]
85	[**]
86	[**]

3

87	[**]
88	[**]
89	[**]
90	[**]
91	[**]
92	[**]
93	[**]
94	[**]
95	[**]
96	[**]
97	[**]
98	[**]
99	[**]
100	[**]
101	[**]
102	[**]
103	[**]
104	[**]
105	[**]
106	[**]
107	[**]
108	[**]
109	[**]
110	[**]
111	[**]
112	[**]
113	[**]
114	[**]
115	[**]
116	[**]
117	[**]
118	[**]
119	[**]
120	[**]
121	[**]
122	[**]
123	[**]
124	[**]
125	[**]
126	[**]
127	[**]
128	[**]
129	[**]
130	[**]
131	[**]

4

132	[**]
133	[**]
134	[**]
135	[**]
136	[**]
137	[**]
138	[**]
139	[**]
140	[**]
141	[**]
142	[**]
143	[**]
144	[**]
145	[**]
146	[**]
147	[**]
148	[**]
149	[**]
150	[**]
151	[**]

5

Exhibit C

Category 2 Linux Related Components

The Category 2 Linux Related Components consist of the software packages identified below, as such packages’ currently released source code as of [**] is identified on the Company website.

To the extent that any of the software packages identified in this Exhibit contain [**] unless expressly set forth below:

1.	[**]
2.	[**]
3.	[**]
4.	[**]
5.	[**]
6.	[**]
7.	[**]
8.	[**]
9.	[**]
10.	[**]
11.	[**]
12.	[**]
13.	[**]
14.	[**]
15.	[**]
16.	[**]
17.	[**]
18.	[**]
19.	[**]
20.	[**]
21.	[**]
22.	[**]
23.	[**]
24.	[**]
25.	[**]
26.	[**]
27.	[**]
28.	[**]
29.	[**]
30.	[**]
31.	[**]
32.	[**]
33.	[**]
34.	[**]
35.	[**]
36.	[**]
37.	[**]
38.	[**]

To the extent that any of the software packages identified in this Exhibit [**]. For purposes of the foregoing, [**] designed to implement such capability.

	Package Name
1	[**]
2	[**]
3	[**]
4	[**]
5	[**]
6	[**]
7	[**]
8	[**]
9	[**]
10	[**]
11	[**]
12	[**]
13	[**]
14	[**]
15	[**]
16	[**]
17	[**]
18	[**]
19	[**]
20	[**]
21	[**]
22	[**]
23	[**]
24	[**]
25	[**]
26	[**]
27	[**]
28	[**]
29	[**]
30	[**]
31	[**]
32	[**]
33	[**]
34	[**]
35	[**]
36	[**]
37	[**]
38	[**]
39	[**]
40	[**]
41	[**]

2

42	[**]
43	[**]
44	[**]
45	[**]
46	[**]
47	[**]
48	[**]
49	[**]
50	[**]
51	[**]
52	[**]
53	[**]
54	[**]
55	[**]
56	[**]
57	[**]
58	[**]
59	[**]
60	[**]
61	[**]
62	[**]
63	[**]
64	[**]
65	[**]
66	[**]
67	[**]
68	[**]
69	[**]
70	[**]
71	[**]
72	[**]
73	[**]
74	[**]
75	[**]
76	[**]
77	[**]
78	[**]
79	[**]
80	[**]
81	[**]
82	[**]
83	[**]
84	[**]
85	[**]
86	[**]

3

87	[**]
88	[**]
89	[**]
90	[**]
91	[**]
92	[**]
93	[**]
94	[**]
95	[**]
96	[**]
97	[**]
98	[**]
99	[**]
100	[**]
101	[**]
102	[**]
103	[**]
104	[**]
105	[**]
106	[**]
107	[**]
108	[**]
109	[**]
110	[**]
111	[**]
112	[**]
113	[**]
114	[**]
115	[**]
116	[**]
117	[**]
118	[**]
119	[**]
120	[**]
121	[**]
122	[**]
123	[**]
124	[**]
125	[**]
126	[**]
127	[**]
128	[**]
129	[**]
130	[**]
131	[**]

4

132	[**]
133	[**]
134	[**]
135	[**]
136	[**]
137	[**]
138	[**]
139	[**]
140	[**]
141	[**]
142	[**]
143	[**]
144	[**]
145	[**]
146	[**]
147	[**]
148	[**]
149	[**]
150	[**]
151	[**]
152	[**]
153	[**]
154	[**]
155	[**]
156	[**]
157	[**]
158	[**]
159	[**]
160	[**]
161	[**]
162	[**]
163	[**]
164	[**]
165	[**]
166	[**]
167	[**]
168	[**]
169	[**]
170	[**]
171	[**]
172	[**]
173	[**]
174	[**]
175	[**]
176	[**]

5

177	[**]
178	[**]
179	[**]
180	[**]
181	[**]
182	[**]
183	[**]
184	[**]
185	[**]
186	[**]
187	[**]
188	[**]
189	[**]
190	[**]
191	[**]
192	[**]
193	[**]
194	[**]
195	[**]
196	[**]
197	[**]
198	[**]
199	[**]
200	[**]
201	[**]
202	[**]
203	[**]
204	[**]
205	[**]
206	[**]
207	[**]
208	[**]
209	[**]
210	[**]
211	[**]
212	[**]
213	[**]
214	[**]
215	[**]
216	[**]
217	[**]
218	[**]
219	[**]
220	[**]
221	[**]

6

222	[**]
223	[**]
224	[**]
225	[**]
226	[**]
227	[**]
228	[**]
229	[**]
230	[**]
231	[**]
232	[**]
233	[**]
234	[**]
235	[**]
236	[**]
237	[**]
238	[**]
239	[**]
240	[**]
241	[**]
242	[**]
243	[**]
244	[**]
245	[**]
246	[**]
247	[**]
248	[**]
249	[**]
250	[**]
251	[**]
252	[**]
253	[**]
254	[**]
255	[**]
256	[**]
257	[**]
258	[**]
259	[**]
260	[**]
261	[**]
262	[**]
263	[**]
264	[**]
265	[**]
266	[**]

7

267	[**]
268	[**]
269	[**]
270	[**]
271	[**]
272	[**]
273	[**]
274	[**]
275	[**]
276	[**]
277	[**]
278	[**]
279	[**]
280	[**]
281	[**]
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283	[**]
284	[**]
285	[**]
286	[**]
287	[**]
288	[**]
289	[**]
290	[**]
291	[**]
292	[**]
293	[**]
294	[**]
295	[**]
296	[**]
297	[**]
298	[**]
299	[**]
300	[**]
301	[**]
302	[**]
303	[**]
304	[**]
305	[**]
306	[**]
307	[**]
308	[**]
309	[**]
310	[**]
311	[**]

8

312	[**]
313	[**]
314	[**]
315	[**]
316	[**]
317	[**]
318	[**]
319	[**]
320	[**]
321	[**]
322	[**]
323	[**]
324	[**]
325	[**]
326	[**]
327	[**]
328	[**]
329	[**]
330	[**]
331	[**]
332	[**]
333	[**]
334	[**]
335	[**]
336	[**]
337	[**]
338	[**]
339	[**]
340	[**]
341	[**]
342	[**]
343	[**]
344	[**]
345	[**]
346	[**]
347	[**]
348	[**]
349	[**]
350	[**]
351	[**]
352	[**]
353	[**]
354	[**]
355	[**]
356	[**]

9

357	[**]
358	[**]
359	[**]
360	[**]
361	[**]
362	[**]
363	[**]
364	[**]
365	[**]
366	[**]
367	[**]
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384	[**]
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391	[**]
392	[**]
393	[**]
394	[**]
395	[**]
396	[**]
397	[**]
398	[**]
399	[**]
400	[**]
401	[**]

10

402	[**]
403	[**]
404	[**]
405	[**]
406	[**]
407	[**]
408	[**]
409	[**]
410	[**]
411	[**]
412	[**]
413	[**]
414	[**]
415	[**]
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430	[**]
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436	[**]
437	[**]
438	[**]
439	[**]
440	[**]
441	[**]
442	[**]
443	[**]
444	[**]
445	[**]
446	[**]

11

447	[**]
448	[**]
449	[**]
450	[**]
451	[**]
452	[**]
453	[**]
454	[**]
455	[**]
456	[**]
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487	[**]
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489	[**]
490	[**]
491	[**]

12

492	[**]
493	[**]
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527	[**]
528	[**]
529	[**]
530	[**]
531	[**]
532	[**]
533	[**]
534	[**]
535	[**]
536	[**]

13

537	[**]
538	[**]
539	[**]
540	[**]
541	[**]
542	[**]
543	[**]
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570	[**]
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573	[**]
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577	[**]
578	[**]
579	[**]
580	[**]
581	[**]

14

582	[**]
583	[**]
584	[**]
585	[**]
586	[**]
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588	[**]
589	[**]
590	[**]
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600	[**]
601	[**]
602	[**]
603	[**]
604	[**]
605	[**]
606	[**]
607	[**]
608	[**]
609	[**]
610	[**]
611	[**]
612	[**]
613	[**]
614	[**]
615	[**]
616	[**]
617	[**]
618	[**]
619	[**]
620	[**]
621	[**]
622	[**]
623	[**]
624	[**]
625	[**]
626	[**]

15

627	[**]
628	[**]
629	[**]
630	[**]
631	[**]
632	[**]
633	[**]
634	[**]
635	[**]
636	[**]
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638	[**]
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661	[**]
662	[**]
663	[**]
664	[**]
665	[**]
666	[**]
667	[**]
668	[**]
669	[**]
670	[**]
671	[**]

16

672	[**]
673	[**]
674	[**]
675	[**]
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677	[**]
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680	[**]
681	[**]
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712	[**]
713	[**]
714	[**]
715	[**]
716	[**]

17

717	[**]
718	[**]
719	[**]
720	[**]
721	[**]
722	[**]
723	[**]
724	[**]
725	[**]
726	[**]
727	[**]
728	[**]
729	[**]
730	[**]
731	[**]
732	[**]
733	[**]
734	[**]
735	[**]
736	[**]
737	[**]
738	[**]
739	[**]
740	[**]
741	[**]
742	[**]
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760	[**]
761	[**]

18

762	[**]
763	[**]
764	[**]
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766	[**]
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769	[**]
770	[**]
771	[**]
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790	[**]
791	[**]
792	[**]
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795	[**]
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797	[**]
798	[**]
799	[**]
800	[**]
801	[**]
802	[**]
803	[**]
804	[**]
805	[**]
806	[**]

19

807	[**]
808	[**]
809	[**]
810	[**]
811	[**]
812	[**]
813	[**]
814	[**]
815	[**]
816	[**]
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819	[**]
820	[**]
821	[**]
822	[**]
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824	[**]
825	[**]
826	[**]
827	[**]
828	[**]
829	[**]
830	[**]
831	[**]
832	[**]
833	[**]
834	[**]
835	[**]
836	[**]
837	[**]
838	[**]
839	[**]
840	[**]
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842	[**]
843	[**]
844	[**]
845	[**]
846	[**]
847	[**]
848	[**]
849	[**]
850	[**]
851	[**]

20

852	[**]
853	[**]
854	[**]
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857	[**]
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860	[**]
861	[**]
862	[**]
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865	[**]
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870	[**]
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890	[**]
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892	[**]
893	[**]
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895	[**]
896	[**]

21

897	[**]
898	[**]
899	[**]
900	[**]
901	[**]
902	[**]
903	[**]
904	[**]
905	[**]
906	[**]
907	[**]
908	[**]
909	[**]
910	[**]
911	[**]
912	[**]
913	[**]
914	[**]
915	[**]
916	[**]
917	[**]
918	[**]
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920	[**]
921	[**]
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927	[**]
928	[**]
929	[**]
930	[**]
931	[**]
932	[**]
933	[**]
934	[**]
935	[**]
936	[**]
937	[**]
938	[**]
939	[**]
940	[**]
941	[**]

22

942	[**]
943	[**]
944	[**]
945	[**]
946	[**]
947	[**]
948	[**]
949	[**]
950	[**]
951	[**]
952	[**]
953	[**]
954	[**]
955	[**]
956	[**]
957	[**]
958	[**]
959	[**]
960	[**]

23

Schedule 2.02

Prohibited Names

INTERNATIONAL BUSINESS MACHINES CORPORATION

IBM

NOVELL, INC.

Novell

Netware

Brainshare

Zenworks

Partnernet

Groupwise

Mono

Ximian

SUSE

RED HAT, INC.

Red Hat

RH

Shadowman

RHCE

RHCT

RHCA

RHCSS

Fedora

Bluecurve

Stronghold

Redboot

Sistina

SONY CORPORATION OF AMERICA

Sony

PHILIPS ELECTRONICS NORTH AMERICA CORPORATION

Philips

Schedule 3.01

Members and Capital Contributions

Member	Contributed Capital		Capital Contributions
International Business		$[**]		$[**]
Machines Corporation
Attn: General Counsel
1 New Orchard Road
Armonk, NY 10504
U.S.A.
Fax: (914) 499-7372
Novell, Inc.		$[**]		$[**]
Attn: Senior Vice President,
General Counsel and Secretary
404 Wyman Street, Suite 500
Waltham, MA 02451
U.S.A.
Fax: (781) 464-8100
Red Hat, Inc.		$20.0 million		$20.0 million in cash
Attn: General Counsel
1801 Varsity Drive
Raleigh, NC 27606
U.S.A.
Fax: (919) 754-3704
Sony Corporation of America		$[**]		$[**]
Attn: General Manager
IP Strategy and Alliance
Department
Gate City Osaki, East Tower
1-11-1 Osaki, Shinagawa-ku
Tokyo 141-0032
Japan
Fax: 81-3-5435-3094
and a copy to:
Vice President, IP Counsel
Attn: Peter C. Toto
Sony Corporation of America
1 Sony Drive
Park Ridge, NJ 07677
Fax: (201) 930-6854
Philips Electronics North		$[**]		$[**]
America Corporation
Attn: General Counsel
1251 Avenue of the Americas
New York, NY 10020-1004
U.S.A.

Schedule 3.02(a)

License Agreements and Other Arrangements

None, as to Initial Members.

Schedule 3.09(a)

[**] Actions

(i) except as provided in [**] the LLC Agreement; and

(ii) except as provided [**] Exhibit B or Exhibit C.

Schedule 3.09(b)

[**] Actions

(i) [**] with respect to, the Company and its Subsidiaries, taken as a whole; [**] with respect to, the Company and its Subsidiaries, taken as a whole; ([**] the Company [**] by the Company;

(ii) [**] the Company [**] the Company), except as contemplated by the LLC Agreement;

(iii) [**] of the LLC Agreement;

(iv) [**] (other than [**] (other than [**]);

(v) [**], as set forth in [**], as set forth in [**];

(vi) [**] the LLC Agreement, [**] the Members or the Company Board, [**] as of the date of the Agreement to which this Schedule 3.09(b) is attached or [**] the Company; and

(vii) [**].

Schedule 4.02(c)(i)

[**] Actions

(i) [**];

(ii) [**] a Member or an Affiliate of a Member or a customer or distributor of a Member or an Affiliate of a Member) [**] the Company Board);

(iii) any [**];

(iv) any [**];

(v) [**] the Company or any of its Subsidiaries [**];

(vi) any [**];

(vii) any [**];

(viii) any [**] the Company; and

(ix) [**] the Company or any of its Subsidiaries [**] pursuant to a Company Licensing Agreement.

Schedule 4.02(c)(ii)

[**] Actions

(i) [**] the Company, [**];

(ii) [**] Members, Licensees or their respective Affiliates, or any customers or distributors of any of the foregoing, [**];

(iii) [**] the Company or any of its Subsidiaries, or [**] of the Company or any of its Subsidiaries;

(iv) [**] the Company and its Subsidiaries, on the one hand, and any Member and its Affiliates, on the other hand, [**];

(v) [**] the Company or any of its Subsidiaries [**];

(vi) [**] the Company [**]; and

(vii) for the purposes of any Company Licensing Agreement, [**] as set forth in the Form Company Licensing Agreement.

EX-10.10

Exhibit 10.10

RED HAT, INC.

Red Hat, Inc. 2004 Long-Term Incentive Plan

Restricted Stock Agreement

Cover Sheet

Red Hat, Inc., a Delaware corporation, hereby grants as of the date below (the “Grant Date”) to the person named below (the “Participant”) and the Participant hereby accepts, the number of restricted shares (the “Restricted Stock”) listed below of the Company’s common stock, $.0001 par value per share, with a vesting start date (the “Vesting Start Date”) listed below, such grant to be on the terms and conditions specified in the Red Hat, Inc. 2004 Long-Term Incentive Plan and in the attached Exhibit A.

Participant Name:	**
Grant Date:	**
Vesting Start Date:	**
Number of Shares of Restricted Stock:	**

IN WITNESS WHEREOF, the Company and the Participant have caused this instrument to be executed as of the Grant Date set forth above.

	RED HAT, INC.
(Participant Signature)	1801 Varsity Drive
	Raleigh, North Carolina 27606
(Street Address)	By:
	Name:
(City/State/Zip Code)	Title:

PLEASE RETURN ONE SIGNED COVER SHEET

TO EMILY DEL TORO/ LEGAL DEPT.

CENTENNIAL CAMPUS

FAX NUMBER (919) 754-3715

EXHIBIT A

RED HAT, INC.

Red Hat, Inc. 2004 Long-Term Incentive Plan

Restricted Stock Agreement

Terms and Conditions

1. Grant under Red Hat, Inc. 2004 Long-Term Incentive Plan. The Restricted Stock is granted pursuant to and is subject to and governed by the Company’s 2004 Long-Term Incentive Plan (the “Plan”) and, unless the context otherwise requires, terms used herein shall have the same meaning as in the Plan or shall be defined as on the cover sheet attached hereto.

Determinations made in connection with the Restricted Stock pursuant to the Plan shall be governed by the Plan as it exists on the Grant Date.

2. Vesting if Business Relationship Continues. All of the shares of Restricted Stock initially shall be unvested shares. For so long as the Participant maintains continuous service to the Company or its subsidiaries or affiliates as an employee, officer, director or consultant (a “Business Relationship”) throughout the period beginning on the Grant Date and ending on the vesting date set forth below, the Restricted Stock shall become vested according to the schedule set forth below, subject to Section 3 hereof:

Vesting Date	Number of Vested Shares
One year from the Vesting Start Date (the “Anniversary Date”)	25% of the Restricted Stock
On the last day of each subsequent three-month period following the Anniversary Date	6.25% of the Restricted Stock

Until the Restricted Stock vests, as provided in this Section and in Section 3, the Participant may not sell, assign, transfer, pledge, or otherwise dispose of the Restricted Stock.

3. Termination of Business Relationship. If the Participant’s Business Relationship is terminated for any reason, the shares of Restricted Stock that were not vested on the date of such termination will be forfeited. The shares of Restricted Stock that are forfeited will be cancelled and returned to the Company. For purposes hereof, a Business Relationship shall not be considered as having terminated during any leave of absence if such leave of absence has been approved in writing by the Company; in the event of such leave of absence, vesting of the Restricted Stock shall be suspended (and the period of the leave of absence shall be added to all vesting dates) unless otherwise determined by the Company. The vesting of the Restricted Stock shall not be affected by any change in the type of Business Relationship the Participant has within or among the Company and its Subsidiaries or Affiliates so long as the Participant continuously maintains a Business Relationship.

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4. Legend. Each certificate issued in respect of shares of Restricted Stock under the Agreement shall be registered in the Participant’s name and deposited by the Participant, together with a stock power endorsed in blank, with the Company and shall bear the following (or a similar) legend:

“The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) contained in an Agreement entered into between the registered owner and Red Hat, Inc.”

When the Restricted Stock vests, the Company shall redeliver to the Participant (or the Participant’s legal representatives, beneficiaries or heirs) from the shares of Restricted Stock deposited with it the number of shares which have then vested. The Participant agrees that any resale of the shares of Restricted Stock received upon vesting shall be made in compliance with the registration requirements of the Securities Act of 1933 or an applicable exemption therefrom, including without limitation the exemption provided by Rule 144 promulgated thereunder (or any successor rule).

5. No Obligation to Continue Business Relationship. Neither the Plan, this Agreement, nor the grant of the Restricted Stock imposes any obligation on the Company, its Subsidiaries or Affiliates to have a Business Relationship with the Participant.

6. Rights as Stockholder. Except for the restrictions on transfer and vesting provisions in this Agreement, the Participant shall have all of the rights of a stockholder of the Company with respect to the Restricted Stock including but not limited to the right to receive dividends paid on the Restricted Stock and the right to vote the Restricted Stock.

7. Adjustments for Capital Changes. The Plan contains provisions covering the treatment of restricted stock in a number of contingencies such as stock split and mergers. Provisions in the Plan for such adjustments are hereby made applicable hereunder and are incorporated herein by reference.

8. Change in Control. Provisions regarding a Change in Control are set forth on Appendix A.

9. Withholding. No Restricted Stock will be redelivered pursuant to the vesting thereof unless and until the Participant pays to the Company, or makes satisfactory provision to the Company for payment of, any federal, state or local withholding taxes required by law to be held in respect of this Restricted Stock (the “Tax Amount”). The Participant hereby agrees that the Company may withhold from the Participant’s wages or other remuneration the Tax Amount. At the discretion of the Company, the Tax Amount may be withheld in cash from such wages or from other remuneration, or in kind from the shares or other property otherwise deliverable to the Participant on vesting of this Restricted Stock. The Participant further agrees that, if the Company does not withhold an amount from the Participant’s wages or other remuneration sufficient to satisfy the withholding obligation of the Company, the Participant agrees to indemnify the Company in full for the amount underwithheld and to make reimbursement on demand, in cash, for the amount underwithheld within thirty (30) days after the vesting of the Restricted Stock that gives rise to

-2-

the withholding obligation. The Participant has reviewed with the Participant’s own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement.

The Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Participant understands that the Participant (and not the Company) shall be responsible for the Participant’s own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. The Participant understands that it may be beneficial in many circumstances to elect to be taxed at the time the Restricted Stock is granted rather than when and as the Restricted Stock vests by filing an election under Section 83(b) of the Code with the I.R.S. within 30 days from the date of grant.

10. Lock-up Agreement. The Participant agrees that in the event that the Company effects an underwritten public offering of Shares registered under the Securities Act, the Restricted Stock may not be sold, offered for sale or otherwise disposed of, directly or indirectly, without the prior written consent of the managing underwriter(s) of the offering, for such period of time after the execution of an underwriting agreement in connection with such offering that all of the Company’s then directors and executive officers agree to be similarly bound.

11. Provision of Documentation to Participant. By executing this Agreement the Participant acknowledges receipt of a copy of this Agreement (including the cover sheet) and a copy of the Plan.

12. Miscellaneous.

(a) Notices. All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail, postage prepaid, return receipt requested, if to the Participant, to the address set forth on the cover sheet or at the most recent address shown on the records of the Company, and if to the Company, to the Company’s principal office, attention of the Corporate Secretary.

(b) Entire Agreement; Modification. This Agreement (including the cover sheet) and the Plan constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties, except that if the Committee determines that the award terms could result in adverse tax consequences to the Participant, the Committee may amend this Agreement without the consent of the Participant in order to minimize or eliminate such tax treatment.

-3-

(c) Severability. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision.

(d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the heirs, legatees, distributees, executors and administrators of the Participant and the successors and assigns of the Company.

(e) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the Delaware, without giving effect to the principles of the conflicts of laws thereof.

-4-

APPENDIX A

Notwithstanding anything contained herein to the contrary, if (i) this grant of Restricted Stock is continued, assumed, converted or substituted for immediately following the Change in Control and (ii) within one year after a Change in Control the Participant’s Business Relationship is terminated by the Company or its successor without Good Cause or by the Participant for Good Reason, all of the Restricted Stock shall be vested. Furthermore and notwithstanding anything contained herein to the contrary, if this grant of Restricted Stock is not continued, assumed, converted or substituted for immediately following the Change in Control, all of the Restricted Stock shall be treated as vested immediately prior to the Change in Control. This grant of Restricted Stock shall be considered to be continued, assumed, converted or substituted for:

(A) if there is no change in the number of outstanding Shares and the Change in Control does not result from the consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction, there are no changes to the terms and conditions of this grant that materially and adversely affect this grant; or

(B) if there is a change in the number of outstanding Shares and/or the Change in Control does result from the consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction:

(1) the number of shares of Restricted Stock is adjusted (x) if the Shares are exchanged solely for the common stock of the Parent Corporation or, if there is no Parent Corporation, the Surviving Corporation (as such terms are defined in Appendix A) in a manner which is not materially less favorable than the adjustments made in such transaction to the other outstanding Shares, or (y) otherwise, based on the ratio on the day immediately prior to the date of the Change in Control of the fair market value of one share of common stock of the Parent Corporation or, if there is no Parent Corporation, the Surviving Corporation, to the Fair Market Value of one Share,

(2) if applicable, the shares of Restricted Stock are converted into the common stock of the Parent Corporation or, if there is no Parent Corporation, the Surviving Corporation (as such terms are defined below) and

(3) there are no other changes to the terms and conditions of this grant that materially and adversely affect this grant.

For purposes of this Agreement:

“Change in Control” means the occurrence of any one of the following events:

(i) individuals who, on the Grant Date, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a

director subsequent to the initial public offering whose election or nomination for election was approved by a vote of at least a majority of the Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;

(ii) any “person” (as such term is defined in the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction, as defined in paragraph (iii), or (E) by any person of Voting Securities from the Company, if a majority of the Incumbent Board approves in advance the acquisition of beneficial ownership of 35% or more of Company Voting Securities by such person;

(iii) the consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more than 40% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 35% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least half of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”);

(iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or the consummation of a sale of all or substantially all of the Company’s assets; or

(v) the occurrence of any other event that the Board determines by a duly approved resolution constitutes a Change in Control. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 35% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.

“Good Cause” means conduct involving one or more of the following:

(i) the conviction of Participant, or plea of nolo contendere by the Participant to, a felony or misdemeanor involving moral turpitude;

(vi) the indictment of the Participant for a felony or misdemeanor involving moral turpitude under the federal securities laws;

(vii) the willful misconduct or gross negligence by Participant resulting in material harm to the Company;

(viii) fraud, embezzlement, theft or dishonesty by Participant against the Company or any subsidiary, or willful violation by Participant of a policy or procedure of the Company, resulting in any case in material harm to the Company; or

(ix) the Participant’s material breach of any term of any agreement with the Company, including, without limitation, any violation of confidentiality and/or non-competition agreements.

“Good Reason” means:

(ii) a reduction by the Company or its successor of more than 10% in Participant’s rate of annual base salary as in effect immediately prior to such Change in Control;

(x) a reduction by the Company or its successor of more than 10% of the Participant’s individual annual target or bonus opportunity, except under circumstances where the Company or its successor implement changes to the bonus structure of similarly situated employees, including but not limited to changes to the bonus structure designed to integrate the Company’s personnel with other personnel of the Surviving Corporation;

(xi) a significant and substantial reduction by the Company or its successor of the Participant’s responsibilities and authority, as compared with the Participant’s responsibilities and authority in effect immediately prior to the Change in Control; or

(xii) any requirement of the Company that Participant be based anywhere more than fifty (50) miles from Participant’s primary office location at the time of the Change in Control.

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT

The following is a list that includes our subsidiaries as of February 28, 2011.

Entity Name	Jurisdiction
Amentra, Inc.	Virginia
Makara, Inc.	Delaware
Qumranet, Inc.	Delaware
Red Hat (Switzerland) Sàrl	Switzerland
Red Hat AB	Sweden
Red Hat Asia Pacific Pte Ltd	Singapore
Red Hat Asia Pacific Pty Ltd	Australia
Red Hat B.V.	Netherlands
Red Hat, bvba	Belgium
Red Hat Brasil Limitada	Brazil
Red Hat Canada Limited	Canada
Red Hat Czech, s.r.o.	Czech Republic
Red Hat de Argentina SA	Argentina
Red Hat France SARL	France
Red Hat FZ-LLC	United Arab Emirates - Dubai
Red Hat GmbH	Germany
Red Hat India Pvt. Ltd.	India- Mumbai
Red Hat Israel Ltd.	Israel
Red Hat KK	Japan
Red Hat Limited	Ireland
Red Hat New Zealand Limited	New Zealand
Red Hat Middleware LLC	Delaware
Red Hat Professional Consulting, Inc.	Georgia
Red Hat S.R.L.	Italy
Red Hat S de RL de CV	Mexico
Red Hat SA I, LLC	Delaware
Red Hat SA II, LLC	Delaware
Red Hat Software (Beijing) Co., Ltd.	China
Red Hat Software Services (India) Pvt. Ltd.	India- Pune
Red Hat UK Limited	United Kingdom
RH Financial Holdings, Inc.	Delaware
RH Subsidiary, Inc.	Delaware
Round Pond Limited	Ireland
Varsity Gateway LLC	Delaware
Varsity Gateway, Inc.	Delaware

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-153680, 333-137904, 333-135273, 333-121507, 333-112557, 333-71912, 333-59306, 333-55968, 333-45980, 333-45042, 333-37884, 333-96163, 333-88159 and 333-171021) and Form S-3 (No. 333-135323) of Red Hat, Inc. of our report dated April 22, 2011 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Raleigh, North Carolina

April 29, 2011

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF JAMES M. WHITEHURST, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, PURSUANT TO RULE 13a-14(a)/RULE 15d-14(a)

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, James M. Whitehurst, certify that:

1. I have reviewed this Annual Report on Form 10-K of Red Hat, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 29, 2011

By:	/S/    JAMES M. WHITEHURST
	James M. Whitehurst President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHARLES E. PETERS, JR., EXECUTIVE VICE PRESIDENT AND

CHIEF FINANCIAL OFFICER, PURSUANT TO RULE 13a-14(a)/RULE 15d-14(a)

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Charles E. Peters, Jr., certify that:

1. I have reviewed this Annual Report on Form 10-K of Red Hat, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 29, 2011

By:	/S/    CHARLES E. PETERS, JR.
	Charles E. Peters, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATIONS OF JAMES M. WHITEHURST, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, AND CHARLES E. PETERS, JR., EXECUTIVE VICE PRESIDENT 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

Each of the undersigned hereby certifies, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Red Hat, Inc. (“Red Hat”), that, to his knowledge, the Annual Report of Red Hat on Form 10-K for the year ended February 28, 2011 (the “Report”), as filed with the Securities and Exchange Commission, fully complies with the requirements of Section13(a) of the Securities and Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Red Hat.

Date: April 29, 2011
	By:	/S/    JAMES M. WHITEHURST
		James M. Whitehurst President and Chief Executive Officer (Principal Executive Officer)
Date: April 29, 2011
	By:	/S/    CHARLES E. PETERS, JR.
		Charles E. Peters, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer)