S-1

As filed with the Securities and Exchange Commission on August 20, 2004

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

ARCSOFT, INC.

(Exact name of registrant as specified in its charter)

California (prior to reincorporation) Delaware (after reincorporation)	7373	77-0370297
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

46601 Fremont Boulevard

Fremont, CA 94538

(510) 440-9901

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Hui (Michael) Deng

Chief Executive Officer

ArcSoft, Inc.

46601 Fremont Boulevard

Fremont, CA 94538

(510) 440-9901

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Jorge del Calvo, Esq. Davina K. Kaile, Esq. Pillsbury Winthrop LLP 2475 Hanover Street Palo Alto, California 94304-1115 (650) 233-4500 David J. Johnson, Jr., Esq. O’Melveny & Myers LLP 400 South Hope Street Los Angeles, CA 90071 (213) 430-6000

Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨

CALCULATION OF REGISTRATION FEE

Title of each class of securities to be registered	Proposed maximum aggregate offering price(1)(2)		Amount of registration fee
Common Stock, $0.0001 par value per share	$	46,000,000	$	5,829

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

(2) Includes shares the underwriters have the option to purchase to cover over-allotments, if any.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to completion, dated August 20, 2004

PROSPECTUS

                     Shares

Common Stock

This is ArcSoft, Inc.’s initial public offering. ArcSoft, Inc. is selling all of the shares of common stock.

We expect the public offering price to be between $             and $             per share. Currently, no public market exists for the shares. After pricing the offering, we expect the common stock will be quoted on the Nasdaq National Market under the symbol “ARCT.”

Investing in the common stock involves risks. See “ Risk Factors” beginning on page 5.

PRICE $     PER SHARE

	Per Share	Total
Initial public offering price	$	$
Underwriting discounts and commissions	$	$
Proceeds, before expenses, to ArcSoft, Inc.	$	$

The underwriters may also purchase up to an additional                      shares of common stock from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.

The underwriters expect to deliver the shares on or about                     , 2004.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

RBC CAPITAL MARKETS

NEEDHAM & COMPANY, INC.

A.G. EDWARDS

                    , 2004

TABLE OF CONTENTS

	Page
Prospectus Summary	1
Risk Factors	5
Special Note Regarding Forward-Looking Statements	28
Use of Proceeds	29
Dividend Policy	29
Capitalization	30
Dilution	32
Selected Historical Consolidated Financial Data	34
Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

	Page
Business	53
Management	68
Related Party Transactions	79
Principal Stockholders	81
Description of Capital Stock	83
Shares Eligible for Future Sale	88
Underwriting	91
Legal Matters	94
Experts	94
Where You Can Find Additional Information	94
Index to Consolidated Financial Statements	F-1

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

ArcSoft, ArcSoft Collage Creator, ArcSoft Funhouse, ArcSoft Greeting Card Creator, ArcSoft Panorama Maker, ArcSoft PhotoBase, ArcSoft PhotoImpression, ArcSoft PhotoMontage, ArcSoft PhotoPrinter, ArcSoft ShowBiz, ArcSoft VideoImpression, PhotoStudio and the ArcSoft logo are our registered trademarks. ArcSoft DVD SlideShow, ArcSoft Media Card Companion, ArcSoft MediaMirror, ArcSoft Multimedia Email, ArcSoft QuickDVD, ArcSoft ShowBiz designs, ArcSoft TotalMedia and ArcSoft VideoStabilizer are our trademarks. This prospectus also includes trade names, trademarks and service marks of other companies and organizations.

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PROSPECTUS SUMMARY

You should read the following summary together with the entire prospectus, including the more detailed information regarding us and the common stock being sold in this offering and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in the section entitled “Risk Factors.” In this prospectus, “ArcSoft,” “we,” “us” and “our” refer to ArcSoft, Inc. and its subsidiaries and not to the underwriters.

ArcSoft

Our Business

We are a leading developer and provider of digital media software and firmware solutions for PC, PC-peripheral, mobile phone, consumer electronics and home entertainment manufacturers to bundle with, or embed within their products. We offer an extensive portfolio of software, firmware and media compression technologies that address each stage of the digital media lifecycle, enabling consumers to capture, create, edit, store, present and distribute digital photo, music and videos. Our products are designed to enable original equipment manufacturers, or OEMs, to meet customer demands for easy-to-use photo, video and audio functionality. We are able to deliver high-quality, cost-effective customized solutions by leveraging our development centers in China.

We began our operations in 1994 and introduced our first digital imaging software product in 1995. Examples of our major products for PC and mobile devices include PhotoImpression, a photo editing application, PhotoBase, a digital media management and presentation application, and ShowBiz DVD, a video editing and DVD authoring application. In addition, we also provide customized solutions that are incorporated into high-volume PC-peripherals, consumer electronics devices and home entertainment products such as printers, digital still and video cameras, mobile phones, set-top boxes and DVD players and recorders.

We derive substantially all of our revenue from license fees from our OEM customers. We collaborate closely with many large device manufacturers such as Canon, Epson, Hewlett-Packard, Matsushita (Panasonic brands), Motorola, Nikon and palmOne (formerly known as Palm). We design and develop software and firmware for our OEM customers, which we believe enables them to differentiate their products from those of their competitors through price and features.

Market Opportunity

There has been a significant increase in consumer and business demand for digital technologies that provide flexibility in the creation, editing, storage, presentation and distribution of media content. While PCs have traditionally served as the primary platform for digital media technologies, the increased capacity and performance and decreased size and costs of storage media and microprocessors have enabled users to access digital media content on and share information among smaller devices, such as mobile phones, consumer electronics and home entertainment devices. Communication between these devices and use of the digital media content on these devices requires enabling technologies that can support all forms of digital media content, including photo, video and audio.

Device manufacturers have responded to these consumer demands by adding new photo, video and audio functionality to their products. Few leading device manufacturers currently choose to develop digital

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media software in-house because it is complex and difficult to develop or continuously update, particularly in the rapidly changing consumer electronics and home entertainment device markets. Most manufacturers outsource development to third parties and expect these suppliers to help differentiate their products by developing high-quality software and firmware more efficiently and cost-effectively. We believe there is an opportunity for a single provider with the technological expertise to provide a comprehensive and cost-effective OEM solution.

The ArcSoft Solution

Key elements of our solution include the following:

Ÿ Comprehensive Portfolio of Solutions for the Entire Digital Media Lifecycle.    We have built an extensive product portfolio, providing functionality at each point of the digital media lifecycle that enables capturing, creating, editing, storing, presenting and distributing of digital media.

Ÿ Reliable and High-Quality Solutions Based on Core Technologies.    Our experience and focus on development and deliverability enables us to provide reliable, high-quality software applications, firmware and media compression and decompression technologies, or codecs.

Ÿ Rapid Time to Market and Cost-Effective Engineering to Address OEM and Consumer Demands. Our highly qualified engineering team based in China enables us to rapidly deliver solutions at attractive price points through a proven development and distribution system.

Ÿ Focus on Ease-of-Use Reduces Costs.    Our products and technologies are designed to address customer needs and market trends, incorporate an easy-to-use interface and require a minimal number of actions to perform a particular task.

Ÿ Close Collaboration With Customers and Extensive Customization Services.    We collaborate closely with our OEM customers to ensure that our products enhance the functionality of each specific device and are delivered on schedule to meet timing objectives and to help reduce customer returns and support.

Our Strategy

The principal elements of our strategy are to:

Ÿ Expand our customer base and leverage our relationships;

Ÿ Extend our product portfolio and core technologies in our existing markets;

Ÿ Extend our core technologies into next-generation embedded and wireless markets;

Ÿ Continue to develop talented engineering personnel and efficient processes; and

Ÿ Pursue strategic relationships and acquisitions.

Principal Executive Offices

We were incorporated in California in May 1994 and intend to reincorporate in Delaware prior to completion of this offering. Our headquarters are located at 46601 Fremont Boulevard, Fremont, California 94538 and our telephone number is (510) 440-9901. Our website address is www.arcsoft.com. The information in our website is not part of this prospectus.

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The Offering

Common stock we are offering                      shares

Common stock to be outstanding after this offering                      shares

Use of proceeds after expenses We intend to use the net proceeds from this offering for general corporate purposes, including working capital. We may also use a portion of the net proceeds to expand our research and development and sales and marketing activities and to acquire complementary technologies or businesses. See “Use of Proceeds.”

Proposed Nasdaq National Market symbol “ARCT”

Unless otherwise stated, all information in this prospectus assumes:

Ÿ our reincorporation in Delaware upon completion of this offering;

Ÿ the automatic conversion of all outstanding shares of our convertible preferred stock into common stock upon completion of this offering;

Ÿ the exercise of warrants outstanding as of June 30, 2004, to purchase 60,000 shares of our preferred stock at an exercise price of $1.50 per share; and

Ÿ no exercise of the over-allotment option granted to the underwriters.

The number of shares of common stock to be outstanding immediately after this offering is based upon 26,300,399 shares of common stock outstanding as of June 30, 2004 and excludes:

Ÿ 4,187,547 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2004, at a weighted average exercise price of $1.49 per share;

Ÿ the conversion of all outstanding convertible promissory notes and interest accrued as of                     , 2004 into shares of common stock, which notes are convertible at the election of the noteholder. Assuming an initial public offering price of $                     per share, a conversion price of $                     per share and the completion of this offering prior to                     , 2004, these promissory notes would convert into                      shares of common stock; and

Ÿ                      shares of common stock reserved for future issuance under our 2004 stock incentive plan and 2004 employee stock purchase plan.

As of June 30, 2004, 664,329 shares remained available for future issuance under our 2000 stock option plan. Upon completion of this offering, no shares of common stock will remain available for option grants under this plan.

For additional information regarding these shares, see “Management — Employee Benefit Plans.”

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Summary Consolidated Financial Data

The following table presents our summary consolidated historical financial information. You should read this information together with the consolidated financial statements and related notes, unaudited as adjusted financial information and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

	Fiscal Years Ended June 30,
	2000			2001			2002			2003			2004
	(in thousands, except per share amounts)
Consolidated Statements of Operations Data:
Revenue:
Product revenue	$	8,846		$	12,429		$	13,360		$	14,574		$	19,043
Internet services revenue		—			2,224			5,580			4,252			3,044
Total revenue		8,846			14,653			18,940			18,826			22,087
Costs and expenses:
Cost of product revenue		2,084			1,531			1,717			2,388			3,932
Cost of internet services revenue		—			1,848			2,868			2,744			1,877
Engineering and development		2,527			3,846			6,606			6,630			6,811
Selling and marketing		2,546			4,917			5,902			4,927			6,067
General and administrative		2,852			4,149			5,761			3,034			3,030
Total costs and expenses		10,009			16,291			22,854			19,723			21,717
Income (loss) from operations	$	(1,163	)	$	(1,638	)	$	(3,914	)	$	(897	)	$	370
Net loss	$	(1,275	)	$	(1,985	)	$	(4,251	)	$	1,908		$	(536	)
Basic and diluted loss per share	$	(0.06	)	$	(0.10	)	$	(0.21	)	$	(0.09	)	$	(0.02	)
Shares used in computation of basic and diluted net loss per share (1)		19,859			19,890			20,139			21,772			21,961

	As of June 30, 2004
	Actual			Pro Forma As Adjusted
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	2,732		$
Working capital (deficiency)		(533	)
Total assets		8,537
Convertible notes payable and capital lease obligations		2,141
Total stockholders’ equity		609

The preceding table presents a summary of our balance sheet data as of June 30, 2004:

Ÿ on an actual basis; and

Ÿ on a pro forma basis to give effect to the conversion of all of our outstanding shares of convertible preferred stock and the exercise of all outstanding warrants to purchase preferred stock, as adjusted to further reflect the sale of                  shares of common stock in this offering at an assumed initial public offering price of $                 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(1) The diluted net loss per share computation excludes potential shares of common stock issuable upon conversion of convertible preferred stock and exercise of options and warrants to purchase common stock, as well as common stock subject to repurchase rights held by us, as their effect would be antidilutive. See notes 1 and 7 of notes to consolidated financial statements for a detailed explanation of the determination of the shares used in computing basic and diluted net loss per share.

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RISK FACTORS

You should carefully consider the risks described below before making a decision to buy our common stock. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occur, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock. You should also refer to the other information set forth in this prospectus, including our consolidated financial statements and the related notes. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks Related To Our Business

We have incurred losses since inception and may not achieve profitability in the future.

We have incurred significant net losses on an annual basis since our inception and, at June 30, 2004, we had accumulated losses of approximately $11.9 million. We intend to significantly increase our engineering and development and sales and marketing expenses as we expand our operations. In addition, we expect general and administrative expenses to increase as we expand our operations and assume the responsibilities of a public company. If we do not achieve profitability or if we fail to meet the expectations of securities analysts or investors, the market price of our common stock will likely decline. The revenue and income potential of our business and market are unproven. In addition, our revenue may not continue to increase at historical rates.

If we fail to develop and introduce new products and product enhancements rapidly and successfully, our ability to attract and retain customers could be impaired, and our competitive position and operating results may be harmed.

We operate in a highly competitive, rapidly changing business environment. Our future success depends on our ability to develop and introduce new products and product enhancements in a timely and cost-effective manner. The development of new products can be highly complex. We have experienced delays in completing the development and introduction of new products in the past. For example, in 2003, we experienced a delay in the introduction of our dual layer DVD product. As our products integrate new, more advanced functions, they become more complex and increasingly difficult to design and develop. Successful software product development and introduction by us depends on a number of factors, including:

Ÿ accurate prediction of market requirements and evolving standards, including input standards and operating systems for consumer electronics and other devices;

Ÿ development of advanced technologies and capabilities;

Ÿ compatibility of our products with multiple operating systems and processor types and across multiple devices;

Ÿ timely completion and introduction of new product designs that successfully incorporate market requirements;

Ÿ our ability to recruit and retain highly qualified cost-effective engineers and scientists for our development centers in China; and

Ÿ market acceptance of the new products.

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Any delays in the timely release of our new products and product enhancements could harm our competitive position. In addition, we have limited resources and must make strategic decisions about how best to allocate our resources to position ourselves for changes in our target markets. We may, from time to time, allocate resources to projects or markets that do not develop as rapidly or fully as we expect. We may not develop or introduce new products or product enhancements in time to take advantage of market opportunities or achieve a significant or sustainable level of acceptance in new or existing markets. If any of these were to occur, our competitive position, results of operations and financial condition would be harmed.

We have experienced market-driven pricing pressures as our customers attempt to reduce their costs. We expect these pricing pressures to continue, which could result in a decline in license fees for our products. To offset these declines, we intend to develop and introduce new products that incorporate more advanced technology and include more advanced features that we can license at higher prices. However, if we are unable to successfully develop and introduce these new products, or if our customers are unwilling to license these products or to pay higher prices for these products, our operating results will be harmed.

We have relied, and expect to continue to rely, on a limited number of customers for a significant portion of our revenue, and our revenue could decline due to a delay in sales by or the loss of any of these customers.

Our operating results depend on sales to a limited number of large customers. We expect to continue to depend on a relatively small number of customers for a substantial portion of our total revenue for the foreseeable future. The table below presents the percentage of total revenue during the fiscal year ended June 30, 2004 for our customers that each accounted for more than 10% of our total revenue:

	Fiscal Year Ended June 30, 2004
Hewlett-Packard	25.3	%
Matsushita	11.2
Canon	10.6

In fiscal 2003, our ten largest customers together accounted for approximately 77.3% of our total revenue. In fiscal 2004, our ten largest customers together accounted for approximately 78.5% of our total revenue. If we fail to successfully sell our products to one or more of our significant customers in any particular period, if we lose a significant customer or if a significant customer does not renew its license of our products, our revenue would be negatively impacted and our operating results would be harmed. For example, a division of Hewlett-Packard recently elected not to renew its license agreement for our ShowBiz-related products. As a result, we expect our revenue from Hewlett-Packard may decline significantly.

Because a larger portion of our revenue is derived from a limited number of customers, our accounts receivables are also generally concentrated among a limited number of customers. If our customers dispute the accounts receivables, suffer financial difficulties or are otherwise unable to pay the balance, our results of operations would be harmed. If consolidation occurs among the personal computer, mobile device, consumer electronics and home entertainment original equipment manufacturers, or OEMs, our revenue may become even more concentrated among a small number of customers.

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We have historically depended, and expect to continue to depend, on a limited number of products for a substantial portion of our revenue. If any of these products fails to gain or maintain broad market acceptance or if a competitor is successful in selling a competing product to our customers, our revenue will suffer.

We have historically generated a substantial portion of our revenue from a limited number of products. The table below presents the percentage of total revenue during the fiscal year ended June 30, 2004 for our products that each accounted for more than 10% of our total revenue.

	Fiscal Year Ended June 30, 2004
ShowBiz	21.4	%
PhotoImpression	19.6

We expect that a limited number of products will continue to account for a substantial portion of our revenue. Any decline in demand for any one of these products, or the failure of any one of these products to achieve market acceptance, would reduce our operating results and harm our business.

In addition, our website design and management business has in the past accounted for a large portion of our revenue. For the fiscal years ended June 30, 2002, 2003 and 2004, these services accounted for approximately 29.5%, 22.6% and 13.8% of our total revenue, respectively. Although we have maintained a limited team to maintain these services, we have refocused our resources on the development of digital media software and firmware and expect to continue to experience a significant decline in revenue from these services.

If we fail to maintain or expand our relationships with our existing OEM customers, or establish relationships with new customers, our business would suffer.

The industries in which our OEM customers operate are highly concentrated. As a result there are a limited number of potential new large OEM customers in each of our market segments. Our success is dependent upon our ability to maintain and expand our customer relationships with our large OEM customers and establish relationships with those that are not currently our customers. If we are unable to maintain or expand our relationships with existing customers or are unable to develop relationships with new customers, our business and results of operations will suffer. In addition, if our competitors offer our OEM customers more favorable terms than we do, or if their products are superior to ours, we may be unable to maintain, expand and establish customer relationships with these large OEM customers. The loss of any of our large OEM customers, or a significant decrease in revenue from these customers, would harm our business and results of operations.

If our OEM customers are unable to successfully sell their products incorporating our software or technology, our business and operating results would suffer.

We derive substantially all of our revenue from license fees generated from our OEM customers. License fees are based on the number of products they sell that contain our software or technology. Generally, our agreements with our customers do not contain minimum purchase commitments and are of limited duration or are terminable with little or no notice. As a result, even if a customer selects our software or technology to incorporate into its product, if the customer is not successful in selling its product, we will receive little or no revenue from that customer with respect to our software or technology.

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A cancellation or change in plans by a customer, whether due to lack of market acceptance of its products or otherwise, could cause us to lose sales that we had anticipated. In addition, certain of our license agreements provide that if we charge another customer a lower royalty fee for the same product that is the subject of the license, the licensee may have the right to obtain the lower royalty fee for the licensing of the product. Also, our business and operating results could suffer if a significant customer reduces or delays orders during our sales cycle or chooses not to release products that contain our software or technology. Any significant decline in unit sales by our customers, as a result of changing markets, competition or for any other reason, would reduce our revenue and harm our business.

We face risks related to our operations in China, including risks associated with operating in an uncertain political, economic and legal environment.

Our development centers in China are subject to the laws of the People’s Republic of China, which exposes us to political, economic and legal uncertainties and risks. For example, enforcement of contracts based on existing law may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement of a judgment of a Chinese court or an arbitration award. China does not have treaties or arrangements providing for the recognition and enforcement of judgments of the courts of the United States or most Western countries, and therefore recognition and enforcement in China of judgments obtained in those jurisdictions may be impossible. Further, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. Moreover, some rules or policies are not published and thus it may be difficult for foreign investors to be aware of these rules or policies. With the promulgation and implementation of the PRC Administrative License, the transparency of China’s governmental administration may improve. However, as this law has only been in effect since July 1, 2004, we cannot predict when or if it will result in significant improvements.

China has adopted a broad range of related laws, administrative rules and regulations that govern the conduct and operations of foreign investment enterprises, including our development centers in China, and restrict the ability of foreign companies, such as us, to conduct business in China. These laws, rules and regulations subject foreign companies and foreign investment enterprises to a set of restrictions which may not always apply to domestic companies in China. Although China is increasingly according foreign companies and foreign investment enterprises established in China the same rights and privileges as Chinese domestic companies as a result of China’s entry into the World Trade Organization, these special laws, administrative rules and regulations governing foreign companies and foreign investment enterprises may still impose additional restrictions on the ability of foreign companies to conduct business in China and place us at a competitive disadvantage in relation to Chinese domestic companies. Moreover, as China’s legal system develops, the promulgation of new laws, changes to existing laws and the preemption of local regulations by national laws may adversely affect foreign investors and companies.

The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although the Chinese government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies.

In October 2000, China’s Ministry of Information Industry issued a regulation that prohibits the production or sale of software, either imported or domestically produced, unless the software is registered with the Chinese government. Our software licensing activity in China is subject to this regulation and we

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have registered our software that we sell in China with the Chinese government. If the government prohibits licenses of our software in China pending registration, or if we fail in our efforts to register our software, we could be prohibited from developing or licensing our software in China, which would harm our business and financial condition.

The Chinese government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

We rely on our engineering team and development centers in China, and if the costs associated with our operations in China increase or if we are required to relocate our development centers outside of China, our competitive position could be harmed.

Our engineering organization consists of an engineering management team in our U.S. headquarters as well as our development centers in China. We rely heavily on our China development centers and intend to continue to expand our engineering base in China. If we are unable to continue to attract qualified engineers in China, the costs associated with our development centers increase, or we are required to relocate our development centers outside of China, our research and development expenses would substantially increase and our competitive position, results of operations and financial condition would be harmed.

Fluctuations in our quarterly and annual operating results could cause the market price of our common stock to decline.

Our revenue and operating results have fluctuated in the past, and will likely fluctuate in the future. Our operating results in some quarters may not meet the expectations of stock market analysts or investors, which could cause the market price for our stock to decline. Fluctuations in our operating results would likely result in volatility in the market price of our common stock. A number of factors may cause our operating results to fluctuate or fall short of our expectations, including:

Ÿ the announcement, introduction or delay of new or enhanced products or services by us, our competitors or both;

Ÿ changing consumer preferences and needs;

Ÿ the development of replacement technologies or devices;

Ÿ delays in signing contracts with customers;

Ÿ delays in recognizing revenue as a result of delays in receiving reports from our customers detailing their product sales and our related royalties;

Ÿ our customers’ failure to ship and sell products incorporating our software, whether because of their inability to obtain components to manufacture their products, lack of end-user demand for their products or for any other reason;

Ÿ pricing changes by us, our competitors or our customers;

Ÿ changes in the portion of our revenue attributable to particular products or particular customers;

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Ÿ any decision not to renew a customer contract or an inability to renew a customer contract on acceptable terms;

Ÿ fluctuations in our costs and expense levels;

Ÿ foreign currency exchange rate fluctuations, including the exchange rate between U.S. dollars and Chinese renminbi, which we use to pay our employees in China;

Ÿ sales cycle fluctuations;

Ÿ unexpected events such as war, terrorism or health concerns, such as SARS, that affect business activity and consumer spending; and

Ÿ general economic and political conditions.

Fluctuations in our operating results may cause fluctuations in the market price of our common stock.

Our sales cycle is lengthy and unpredictable, which in turn may affect our operating results in any given period.

Although our customers generally need to react quickly to changing market demands, an OEM’s decision as to which products to integrate into is significant. The development of a business relationship with a potential customer can be a lengthy process, spanning three months or more. The sales cycle often involves multiple divisions within a potential customer’s organization and multiple layers of management, thus making our sales process relatively complicated and long. Additionally, negotiating the terms of a new license agreement can be a protracted process. Due to the length and complicated nature of our sales cycle, predicting the fiscal period in which a new license agreement will be entered into, if at all, the time period during which we will recognize revenue from such contract and the financial terms of such an agreement is difficult to calculate.

We depend on a limited number of key executives, each of whom would be difficult to replace.

Our success depends, in significant part, on the continued services of our senior management, including Hui (Michael) Deng, our co-founder, president and chief executive officer, Todd J. Rumaner, our senior vice president and chief operating officer, and Hua (James) Zhong, our vice president and the general manager of our subsidiary in Hangzhou, China. The loss of one or more of our key executives could harm our operating results and could result in a loss of strategic vision or focus. Although we have employment agreements with most of our key executives, they are free to leave and compete against us at any time. We may not be able to retain our key executives and employees, and we may not be able to adequately replace any of them if we lose their services for any reason. Even if we were able to replace any of these individuals, it would be difficult to replace the significant company-specific knowledge possessed by them. Our compensation packages, including stock option plans, may not provide the incentives necessary to keep our employees from leaving us.

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We recently refocused our resources primarily on providing digital media software and firmware solutions to personal computer, mobile phone, consumer electronics and home entertainment manufacturers and, as a result, we have experienced and expect to continue to experience a decline in revenue from our photo website design and management services.

Since our incorporation in 1994, we have been engaged in the design and delivery of digital media software and firmware solutions to OEMs of personal computers, mobile devices, consumer electronics and home entertainment devices. From 1999 to 2002, we were also engaged in the design and management of websites relating to photo and video sharing. In 2002, we decided to focus on our core competencies in providing digital media software and firmware solutions to our OEM customers. As a result of this, and as many customers are choosing to close these sites, this business has represented a decreasing portion of our total revenue over time. We currently maintain a limited team to maintain these websites for a limited number of key customers who are also our OEM customers. However, we expect to experience a decline in revenue from our website design and management services as we continue to focus our resources on the design and delivery of digital media software and firmware solutions.

We may not obtain sufficient patent protection, which could harm our competitive position, increase our costs and reduce our revenue.

Our success and ability to compete depends in part upon the protection of our proprietary technology. We have one issued patent and a number of patent applications pending in the United States and in one international patent application pending which reserves our right to file applications in multiple foreign jurisdictions. Our patent and patent applications are based primarily on unique image and video processing algorithms and digital media content manipulation in low-profile systems, such as consumer electronics devices. Our patent and any patents subsequently issued from our applications have a typical duration of 20 years from application date. Our patent and any future patent applications may not provide protection of all competitive aspects of our technology, and our patent applications may not result in issued patents. As technologies, customer needs and products change, our patents and other intellectual property may not provide us with the competitive advantages we anticipate. Also, patent and other intellectual property protection in foreign countries, in particular in the Asia/Pacific region, may be limited or unavailable. For example, we have not yet obtained, and may not be able to obtain, patents in China related to the development activities at our China development center. In addition, we determine on a case-by-case basis whether to pursue patent protection in foreign jurisdictions, including the European Union, of the patent applications we file in the United States. To date, we have not filed any patent applications in the European Union. It is possible that competitors may independently develop similar technologies, design around our patents and other intellectual property or successfully challenge the validity of any issued patent.

We also rely upon trademark, copyright and trade secret laws and contractual restrictions to protect our proprietary rights, and, if these rights are not sufficiently protected, it could harm our ability to compete and generate revenue.

We also rely on a combination of trademark, copyright and trade secret laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and grow our business could suffer if these rights are not adequately protected. We seek to protect our source code for our software, and design code, documentation and other written materials for our software, under trade secret and copyright laws. We license our software under license agreements, which impose restrictions on the licensee’s ability to utilize the software. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary

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information to execute confidentiality agreements. The steps taken by us to protect our intellectual property and proprietary information may not be adequate to prevent misappropriation of our technology. In addition, our intellectual property may not be adequately protected because:

Ÿ laws and contractual restrictions may not prevent misappropriation of our intellectual property or deter others from developing similar technologies;

Ÿ policing unauthorized use of our intellectual property is difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use; and

Ÿ we have at times entered into source code escrow agreements, which can provide our customers access to our source code for limited purposes and in limited circumstances.

The laws of other countries in which we develop our technologies and sell our products, such as some countries in the Asia/Pacific region, may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our intellectual property and proprietary technologies could enable third parties to benefit from our technologies without compensating us for doing so, which would harm our competitive position and could result in lower prices for our products and reduced market share.

Intellectual property litigation, which is common in our industry, could be time-consuming and expensive to prosecute and defend, harm our reputation and limit our ability to license or sell our products.

Intellectual property litigation is costly, time-consuming and can divert management’s attention and resources away from running our business. We are in an industry in which a number of companies aggressively defend their patent portfolios and other intellectual property rights. In addition, in recent years, there has been an increase in the filing of nuisance suits alleging infringement of intellectual property, which pressure defendants into entering settlement arrangements to dispose quickly of these suits, regardless of their merits. From time to time, we have received from others letters that have alleged that we infringed their intellectual property and in some cases inviting us to license their technology. We have in the past and may in the future, when appropriate, enter into licenses with third parties for additional technologies. We may become a party to litigation in the future to protect our intellectual property or as a result of an alleged infringement of others’ intellectual property. We may become subject to infringement claims regarding patents of which we are unaware. These lawsuits could subject us to significant liability for damages and invalidate our patent or other intellectual property rights. These lawsuits, regardless of their success or merit, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any intellectual property litigation could also force us to do one or more of the following:

Ÿ stop selling products or using technology that contains the allegedly infringing intellectual property;

Ÿ pay monetary damages, which may be substantial;

Ÿ attempt to obtain a license to the relevant intellectual property, which may not be available on reasonable terms or at all; or

Ÿ attempt to redesign those products to remove the allegedly infringing intellectual property, which may not be feasible.

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We are currently involved in a dispute with The Massachusetts Institute of Technology and Electronics for Imaging, Inc. in which those parties allege that we, along with over 200 other companies, infringe a patent owned by Massachusetts Institute of Technology and licensed to Electronics for Imaging. Although this patent expired in May 2002, we may be subject to monetary damages in the event we were to be found in violation of the Massachusetts Institute of Technology and Electronics for Imaging’s patent rights. We cannot predict the outcome of this litigation.

If we were found to have infringed the patents of a third party, we could be required to pay damages, obtain a license or cease using the technology, any of which could harm our financial condition, results of operations and competitive position and could require us to spend significant time and resources to develop alternative technologies. If we were found to have willfully infringed the patents of a third party, we may be held liable for three times the amount of damages we would otherwise have to pay. In addition, if we were to choose to settle any such litigation, the terms of such settlement may include restrictions or prohibitions on our ability to sell products incorporating the other party’s technology, the payment of damages and a license involving royalties or other license fees.

Various other third parties are actively engaging in litigation involving technologies used on our industry, in particular with respect to DVD specifications. Some of these third parties are consortia of companies that have pooled their patent portfolios, and include groups such as 6C, 3C and Nissim Corporation. While we generally do not participate in the licensing programs of these companies and groups, we will seek to enter into license arrangements with the companies and groups that we believe are necessary to carry on our business. As a result of the litigation activities of these third parties, if we are found to have infringed their intellectual property or if we enter into any settlement agreements, we may be required to enter into additional licenses, pay damages or develop new technology, any of which would increase our costs and adversely impact our results of operations, our financial condition and our business.

Any intellectual property claim could also include our customers, which could trigger our indemnification obligations to them and result in substantial cost to us.

In any intellectual property claim involving our products, our licensees could also become the target of litigation. Our license agreements, including the agreements we have entered into with our large OEM customers, generally contain warranties of non-infringement and commitments to indemnify our customers against liability arising from infringement of third-party intellectual property rights by our products. These commitments may require us to indemnify or pay damages to our customers for all or a portion of any license fees or other damages, including attorneys’ fees, our customers are required to pay, or agree to pay, to these third parties. If we are required to pay damages to our customers or indemnify our customers for damages they incur, our business and financial condition could be harmed. In some instances, our products are designed for use in devices that could potentially be used by millions of consumers, such as mobile phones and personal digital assistants, which could subject us to considerable exposure should an infringement claim occur. If our customers are required to pay license fees in the amounts that are currently published by some claimants, and we are required to pay damages to our customers or indemnify our customers for these amounts, these payments could exceed our revenue from these customers. Even if a particular claim falls outside of our indemnity or warranty obligations to our customers, our customers may cease doing business with us and/or pursue other remedies against us. Some of our customers are

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co-defendants in the Massachusetts Institute of Technology and Electronics for Imaging litigation, and if they lose, we may have to indemnify them.

In addition, we have at times declined to renew a contract with a customer or to do business with a potential customer because we believed the indemnification provisions required by that customer or potential customer would expose us to unlimited or excessive indemnification obligations. As a result, we have decided to forego business opportunities and revenue that we may otherwise have enjoyed.

At times we rely on third-party technologies, and our inability to use or integrate third-party technologies could delay product development.

From time to time we license technologies from third parties which are integrated into our products and services. For example, we license certain technology from Dolby, MPEG-LA and Thompson Licensing S.A. Our inability to obtain or integrate any of these technologies with our own products could delay our product development efforts until equivalent technology can be either created internally by us or identified, licensed and integrated from another third-party provider. Technologies we license from third parties may not continue to be available to us on commercially reasonable terms or at all. We may fail to successfully integrate any licensed technology into our products or services, which would harm our business and operating results. Third-party licenses also expose us to increased risks that include:

Ÿ product errors and defects resulting from unsuccessful integration;

Ÿ product malfunction after new technology is integrated;

Ÿ the diversion of resources from the development of our own proprietary technology; and

Ÿ our inability to generate sufficient revenue from the products incorporating the third-party technology to offset the license fees, royalties or other costs associated with the licensing of the technology.

If we do not successfully establish strong brand identity among consumers of digital devices, we may be unable to successfully sell our products to personal computer, PC-peripheral, mobile phone, consumer electronics and home entertainment manufacturers.

We believe that establishing and strengthening the ArcSoft brand among consumers of digital devices is critical to our sales growth and increasing market acceptance of our products. We believe the importance of brand recognition will increase as competition increases. Our ability to promote and position our brand depends largely on our ability to provide high-quality, highly reliable products with the features required by consumers of our OEM customers’ products. We have traditionally focused our resources on trade events and marketing directly to OEMs, and we have rarely marketed directly to consumers. If we fail to establish and maintain our brand, we may be unable to attract new OEM customers and compete effectively.

Our customer relationships are essential to our ability to design competitive products and keep pace with consumer requirements and evolving industry standards.

We must design our products to operate effectively with a variety of hardware and software products, including personal computers, DVD drives and other home entertainment devices, mobile phones, digital still and video cameras and other consumer electronics devices and operating system products. We also

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design software to operate without an underlying operating system. We depend on our licensees to provide us with information concerning their customers’ evolving preferences and their products to assist us in developing solutions that interoperate successfully with their products and provide the functionality required by their customers. We regularly communicate with our customers on these topics. However, we generally do not have any agreements with our customers to ensure that such information will be provided to us, and these relationships may not continue in the future, which would harm our competitive position and our ability to design quality, market-driven products in a timely manner.

Defects in our products could harm our reputation, decrease our revenue and the market acceptance of our products and lead to unexpected expenses.

Our software and firmware products may contain errors, viruses or defects, particularly when new products or product enhancements are released. In addition, we may not discover defects until after our products are in use by consumers. Our licensees often sell millions of units and rely on us to provide them with products free of errors, viruses or defects. Any defects in our software or technologies could damage our reputation, cause our customers to terminate relationships with us or to initiate product liability suits against us, divert our engineering resources, delay the introduction or market acceptance of our products, increase our costs or cause our revenue to decline.

Our revenue is derived from royalties, which has inherent risks.

A substantial majority of our total revenue is derived from royalties paid by licensees of our technology. We depend on our ability to structure, negotiate and enforce agreements for the determination and payment of royalties. We face risks inherent in a royalty-based business model, many of which are outside of our control, including, but not limited to, the following:

Ÿ the rate of adoption and incorporation of our technology by our OEM customers;

Ÿ the technical challenges unrelated to our products that are faced by our customers in developing and manufacturing their products;

Ÿ the time between entering into a licensing agreement with an OEM customer and when that customer begins shipping and selling its products incorporating our products, and thus generating royalty revenue for us;

Ÿ the demand for products incorporating our licensed technology; and

Ÿ the cyclicality of supply and demand for products using our licensed technology.

The standard terms of our license agreements require our licensees to document the manufacture and sale of products that incorporate our technology and report this data to us on a quarterly basis. Although our standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time-consuming and potentially detrimental to our ongoing business relationship with our licensees. As a result, to date, we have relied exclusively on the accuracy of reports supplied by our licensees without independently verifying the information in them. Any significant delay or inaccuracy in the reporting by our licensees or our failure to audit our licensees’ books and records may result in our receiving less royalty revenue than we are entitled to under the terms of our license agreements.

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We intend to evaluate acquisitions or investments in complementary technologies and businesses, and we may not realize the anticipated benefits from, and may have to pay substantial costs related to, any acquisitions or investments that we undertake.

As part of our business strategy, we plan to evaluate acquisitions of, or investments in, complementary technologies and businesses. For example, we recently entered into an alliance with Zoran Corporation, a semiconductor company. Pursuant to this alliance, we acquired rights for certain software and hardware technologies from Zoran. We have very little experience in this area. We may be unable to identify suitable acquisition candidates in the future or be able to make these acquisitions on reasonable terms, or at all. If we complete an acquisition or investment, we may not realize the benefits we expect to derive from the transaction. Any future acquisitions and investments would have several risks, including:

Ÿ our inability to successfully integrate acquired technologies or operations;

Ÿ diversion of management’s attention;

Ÿ problems maintaining uniform standards, procedures, controls and policies;

Ÿ potentially dilutive issuances of equity securities or the incurrence of debt or contingent liabilities;

Ÿ expenses related to amortization of intangible assets;

Ÿ risks associated with operating a business or in a market in which we have little or no prior experience;

Ÿ potential write-offs of acquired assets;

Ÿ loss of key employees of acquired businesses; and

Ÿ our inability to recover the costs of acquisitions or investments.

If we fail to manage our growth or to successfully integrate new members of our management team, our business may not succeed.

We have recently expanded our management team. For example, Alfred V. Larrenaga, our senior vice president and chief financial officer, joined us in March 2004. If the integration of new members to our management team does not go as smoothly as anticipated, it could negatively affect our ability to execute our business plan.

We have also significantly expanded our operations in the United States and internationally, and we plan to continue to expand the geographic scope of our operations. To manage our growth, we must implement and improve additional and existing administrative, financial and operations systems, procedures and controls. Our failure to manage our growth could increase our costs and create inefficiencies in our management structure, result in employee morale problems and excessive turnover, disrupt our operations and limit our ability to pursue potential market opportunities and respond to competitive pressures, any of which would harm our business.

As we grow our business it may be necessary to implement new business processes and internal controls. For example, we hired a chief financial officer in March 2004 and a director of finance in August

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2004. We intend to continue to evaluate, improve and document our accounting systems, processes and internal controls.

In addition, because of the evolving nature of the markets in which we compete and our limited operating history in these markets, we may not accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us, which could result in inaccurate financial forecasts. Our profitability depends on our success in continuing to implement our business strategy, and if we are unsuccessful, our results of operations and financial condition would be harmed.

We depend on attracting and retaining qualified personnel in our industry and in our geographic regions, and we may not be able to recruit and retain necessary personnel, which could impact the development or sales of our products.

Our success depends on our ability to identify, attract and retain qualified technical, sales and managerial personnel. Competition for qualified personnel has been particularly intense in our industry near our headquarters in the Silicon Valley as well as locations near our regional offices. This competition makes it difficult to retain key personnel and to recruit new qualified personnel. In addition, in the region surrounding our development center in Hangzhou, China, there is a limited pool of qualified technical personnel. We rely on Zhejiang University as a major source of engineers and scientists for our Hangzhou development center. This source of engineers and scientists may not always be available. We have experienced, and may continue to experience, difficulty in hiring and retaining qualified engineering personnel in the United States and China. If we do not succeed in hiring and retaining qualified personnel, our business could be seriously harmed. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity to develop and market our products. Most of our key employees are employed on an “at will” basis, subject to our payment of severance packages to certain key executives for terminations without cause. The loss of any of these key employees could slow our product development processes and sales efforts or harm investors’ perception of our business. We may also incur increased operating expenses and be required to divert the attention of other senior executives to recruit replacements for key personnel. Also, we may have more difficulty attracting personnel after we become a public company because of the perception that the stock option component of our compensation package may not be as valuable.

We face foreign business, political, regulatory, operational, financial and economic risks because we license our products and conduct operations outside of the United States.

A significant portion of our business is conducted outside of the United States. As a result, we are subject to foreign business, political, regulatory, operational, financial and economic risks. Sales outside of the United States accounted for 50.6% and 45.9% of our total revenue for the fiscal years ended June 30, 2003 and 2004, respectively. Sales in Japan accounted for 35.8% and 32.7% of our total revenue for the fiscal years ended June 30, 2003 and 2004, respectively. No other country or region accounted for more than 10% of our total revenue. In addition, although some of our licensees based in the United States distribute their products outside of the United States, we do not include the revenue associated with those customers as international sales because we attribute revenue to countries based on the invoicing location of each customer. Most of our international sales for the fiscal year ended June 30, 2004 were to customers based in Japan, which distributed their products throughout the world. In addition, we conduct engineering and development activities in China and have sales and marketing personnel in China, Japan, Taiwan and

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the United Kingdom. We anticipate that sales outside of the United States will continue to account for a significant portion of our total revenue in future periods. Accordingly, we are subject to international risks, including:

Ÿ multiple, conflicting and changing laws and regulations, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses;

Ÿ difficulties and costs of staffing and managing foreign operations;

Ÿ changes in import/export duties;

Ÿ potentially adverse tax consequences, such as withholding tax obligations on license revenue that we may not be able to offset against our U.S. tax obligations, including the further risk that foreign tax authorities may recharacterize license fees or license tax rates, which could result in increased tax withholdings and penalties;

Ÿ work stoppages or other changes in labor conditions;

Ÿ trade restrictions, tariffs, laws and business practices that favor domestic companies;

Ÿ political and economic instability, including wars, acts or perceived threats of terrorism, political unrest, health risks, boycotts, uncertainties of trade and other business restrictions;

Ÿ difficulties protecting our intellectual property outside the United States, including China; and

Ÿ financial risks, such as longer sales and payment cycles, greater difficulty collecting accounts receivable and exposure to foreign currency exchange rate fluctuations.

We intend to continue to expand our international operations and changes in policies and/or laws of the United States or foreign governments resulting in, among other things, higher taxation, currency conversion limitations, restrictions on fund transfers or the expropriation of private enterprises, could reduce the anticipated benefits of our international expansion. Furthermore, any actions by countries in which we conduct business to reverse policies that encourage foreign trade or investment could adversely affect our business. If we fail to realize the anticipated revenue growth of our future international operations, our business and operating results could suffer. In particular, we are largely dependent on the engineering and development activities of our operations in China.

We have significant operations concentrated in California and China, and any disruption in the operation of our facilities could harm our business and operating results.

Our business operations depend on our ability to maintain and protect our facilities, design systems and personnel, which are primarily located in Fremont, California and Hangzhou, China. As a result, any prolonged disruption in the operations of our facilities, whether due to technical difficulties, loss of communications, or computer systems due to computer viruses or similar disruptions, power failures, health concerns, such as SARS, or destruction or damage to the facilities as a result of a natural disaster, earthquake or fire could harm our operating results and financial condition. For example, the California energy crisis in 2001 and the SARS outbreak in the Asian/Pacific region in early 2003 affected our ability to conduct our business and meet our customer obligations.

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Changes to financial accounting standards may affect our results of operations and cause us to change our business practices.

We prepare our financial statements in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, accounting policies affecting many aspects of our business, including rules relating to employee stock option grants, have recently been revised or are under review. We have accounted for employee stock options in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and comply with the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosures.” Under APB Opinion No. 25, no compensation expense is recognized for options granted to employees where the exercise price equals the market price of the underlying stock on the date of grant. There has been ongoing public debate whether employee stock options and employee stock purchase plan shares should be treated as compensation expense and, if so, how to properly value these charges. If we elected or were required to record an expense for our stock-based compensation plans using the fair value method, we could have significant accounting charges. Although standards have not been finalized and the timing of a final statement has not been established, the Financial Accounting Standards Board has announced its support for recording expense for the fair value of stock options granted.

Accounting standards for software revenue recognition are complex and subject to change, and if we fail to accurately apply these standards, or if these standards are modified, our operating results could suffer.

We account for product revenue in accordance with American Institute of Certified Public Accountants Statement of Position 97-2, “Software Revenue Recognition.” The accounting standards for software revenue recognition are complex and subject to change. If we incorrectly apply these standards, our operating results would be affected, which in turn would harm our reputation, business and financial position. In addition, changes in software revenue recognition standards could require us to change our accounting policies. These changes could cause us to defer revenue recognized in current periods to subsequent periods or accelerate the recognition of deferred revenue to current periods. Either of these events could cause shortfalls in meeting securities analysts’ and investors’ expectations, which in turn could cause our stock price to fall.

If actual results differ materially from our estimates and assumptions, our reported financial condition and results of operation for future periods could be materially affected.

The preparation of the consolidated financial statements and related disclosure in conformity with accounting principles generally accepted in the United States of America requires management to establish policies that contain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our notes to our consolidated financial statements describe the significant accounting policies essential to preparing our consolidated financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. We base our estimates on historical

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experience and assumptions that we believe to be reasonable under the circumstances. Actual future results may differ materially from these estimates. We evaluate, on an ongoing basis, our estimates and assumptions.

The success of our recently introduced MaestroLink/MediaMirror technology depends on Zoran’s ability to provide us with a sufficient supply of semiconductors incorporating this technology, and if they do not provide us with sufficient supply, our business will suffer.

In March 2004, we acquired rights for certain software and hardware technologies from Zoran Corporation related to our home connectivity and digital media playback technology. MaestroLink/MediaMirror is an embedded, application-specific integrated circuit solution that includes a PC software application and enables consumer electronics and home entertainment devices such as DVD players to receive and play digital content through a wired or wireless home network. The success of the MaestroLink/MediaMirror technology depends on Zoran’s ability to provide sufficient supplies of semiconductors which incorporate this technology. Zoran’s ability to provide us with sufficient supply depends on their independent foundries. Our agreements with Zoran do not provide for a minimum commitment by Zoran to provide us with semiconductors. If Zoran is unable to provide us with a sufficient supply of these semiconductors, we may be unable to meet demand for the MaestroLink/MediaMirror technology. This in turn would harm our operating results and could cause our financial results to be below the expectations of financial analysts or investors and cause our stock price to decline.

Our dependence on Zoran exposes us to risks related to Zoran’s reliance on independent foundries and contractors for the manufacture, assembly and testing of its semiconductors and other hardware products.

Zoran depends on independent foundries to manufacture substantially all of its semiconductors. From time to time, there are manufacturing capacity shortages in the semiconductor industry. Zoran does not have long-term supply contracts with any of its suppliers, including its principal supplier, Taiwan Semiconductor Manufacturing Company, or TSMC. Therefore, TSMC and Zoran’s other suppliers are not obligated to manufacture products for Zoran for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order. These suppliers may allocate their capacity to other customers with which they do a greater amount of business or have better terms than they do with Zoran, causing disruptions in supply to Zoran.

Our dependence on Zoran for the semiconductors incorporating the MaestroLink/MediaMirror technology exposes us indirectly to risks related to Zoran’s reliance on independent foundries, including:

Ÿ the inability to obtain adequate manufacturing capacity;

Ÿ the unavailability of or interruption in access to certain process technologies necessary for manufacture of our products;

Ÿ lack of control over delivery schedules;

Ÿ lack of control over quality assurance; and

Ÿ lack of control over manufacturing yields and cost.

In addition, TSMC and some of the other foundries used by Zoran are located in areas of the world that are subject to natural disasters such as earthquakes. The inability of Zoran to obtain timely and adequate

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deliveries from its suppliers due to a natural disaster or any other reason could in turn delay or reduce our shipments of the MaestroLink/MediaMirror technology.

Zoran also relies on a limited number of independent contractors for the assembly and testing of its semiconductors. This reliance limits its control over delivery schedules, quality assurance and product cost. Disruptions in the services provided by these assembly or testing houses could lead to supply constraints or delays in the delivery of Zoran’s products, which in turn could negatively impact our business and financial results.

In addition, the fabrication of silicon wafers is a complex process and many different factors, and defects can cause a substantial portion of the semiconductors on a wafer to be non-functional, resulting in lower yields. Poor yields from the independent foundries which manufacture the semiconductors Zoran supplies to us would reduce our ability to deliver the MaestroLink/MediaMirror technology, which in turn would harm our business.

Product supply and demand in the semiconductor industry is subject to cyclical variations.

Because the MaestroLink/MediaMirror technology is an integrated circuit incorporating our software, we are subject to risks associated with the cyclicality of the semiconductor industry. The semiconductor industry is subject to cyclical variations in product supply and demand. Downturns in the industry often occur in connection with, or anticipation of, maturing product cycles for both semiconductor companies and their customers and declines in general economic conditions. These downturns have been characterized by abrupt fluctuations in product demand, production over-capacity and accelerated decline of average selling prices. In some cases, these downturns have lasted more than one year. A downturn in the semiconductor industry could harm our business.

Risks Related To Our Industry

We operate in a rapidly evolving industry, and we may be unable to accurately forecast our revenue or customer behavior or predict changes in our markets.

Any evaluation of our business and prospects must be made in light of the risks and difficulties encountered by companies offering products or services in new and rapidly evolving markets. The market for software and firmware based digital video and audio solutions for incorporation in products in the personal computer, mobile device, consumer electronics and home entertainment device markets is rapidly evolving, and it is difficult to forecast the future growth rate, if any, or size of the market for our products. We may not accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us, and, therefore, we may fail to make accurate financial forecasts. Our current and future expense levels are based largely on our investment plans and estimates of future revenue and are, to a large extent, fixed. As a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which would harm our operating results.

The market for digital media software and firmware products is highly competitive and if we cannot compete successfully, our revenue will decline and we will be unable to gain or retain market share.

The market for digital media software and firmware products is highly competitive. We expect competition in our markets to increase. Many of our competitors have longer operating histories, greater

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presence in key markets, greater name recognition, access to large customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and customer requirements and devote greater resources to the promotion and sale of their products than we can.

While we do not compete with any single entity with respect to all aspects of our business, we compete with various public and private companies in each of our target markets. In the photo device market, our competitors include Adobe, Roxio and Ulead Systems. In the video device market, our main competitors include CyberLink, InterVideo, Pinnacle and Sonic Solutions. We also compete with various private companies focused on the mobile device and consumer electronics markets. In addition, developers of operating system software, including Microsoft and Apple Computer, may include features and functionality within new product releases that might compete with our products.

We also face increasing competition from companies outside the United States. These companies’ business practices may not be governed by the same standards or restrictions as ours, which in turn may make it more difficult for us to compete.

We also face competition for all of our products and technologies from the internal research and development departments of other software companies and personal computer, consumer and home entertainment device manufacturers, including some of our current customers. Some of our customers have the capability to integrate their operations vertically by developing their own software-based digital media solutions or by acquiring our competitors or the rights to develop competitive products or technologies, which may allow these customers to reduce their purchases or cease purchasing from us completely. Operating system providers with an established customer base, such as Microsoft, already offer products in the digital photo, video and audio software markets. Some photo, video and audio capabilities are built directly into their operating systems or are offered as upgrades to those operating systems at no additional charge. If Microsoft or other operating system providers develop or license digital photo, video and audio solutions that compete directly with ours and incorporate the solutions into their operating systems, we could lose market share. We may not be able to compete successfully against current or potential competitors.

Our competitors may announce new products or technologies that have the potential to replace our existing or new product offerings. The introduction of these new products by competitors may cause our current customers as well as potential customers to cancel or defer purchases of our products. If we fail to compete successfully, our results of operations will suffer and our business will fail. Increased competition may result in price reductions, decreased market share, reduced profit margins and decreased sales of devices incorporating our products, any of which would harm our business and results of operations.

A decline in the growth of the digital device market would harm our business.

Sales of our software and related products depend in large part on the continued growth of the market for digital devices, including digital still and video cameras, mobile telephones, personal digital assistants and other consumer electronic and home entertainment products. Because our products are incorporated into such electronics products and our royalty revenue is based on the number of units sold, unit sales of digital media products by our customers directly impact our revenue. Any significant downturn in our OEM customers’ markets or in general economic conditions, new replacement technologies, changing consumer requirements or any other reason would result in a reduction in sales of our software and would harm our business. In addition, if our OEM customers delay new product introductions or the market for digital devices does not grow, our operating results would suffer.

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Our success in generating revenue depends on growth in the use of software solutions to add features and functionality to these devices. Market acceptance of these software products, including our products, may be impacted by the performance, cost and availability of semiconductors that perform similar functions and increases in microprocessing power and storage capacity in these devices. Any delay in the growth of demand for digital media functionality in these devices would negatively affect our growth.

If the economy declines as a result of the recent economic, political and social turmoil, we may experience decreases in the demand for our products and services, which may harm our operating results.

The United States economy has recently emerged from a recession. The timing of a full economic recovery is uncertain. External factors such as geopolitical and social turmoil in many parts of the world could prevent or hinder our ability to do business, increase costs and decrease demand for our products. For example, increased instability may adversely impact the desire of employees and customers to travel, the reliability and cost of transportation, our ability to obtain adequate insurance at reasonable rates or require us to incur increased costs for security measures for our domestic and international operations. If the economy declines as a result of the recent economic, political and social turmoil, we may experience decreases in the demand for our products and services, which may harm our operating results.

Risks Related To This Offering

Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid, or at all.

Prior to this offering, our common stock has not been sold in a public market. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The trading price of our common stock could be subject to wide fluctuations due to the factors discussed in this Risk Factors section and elsewhere in this prospectus. In addition, the stock market in general, and the Nasdaq National Market and the stock prices of technology companies in particular, has experienced extreme price and volume fluctuations. At times, these broad market fluctuations have resulted in significant price and volume fluctuations in the trading prices of technology companies unrelated or disproportionate to the operating performance of these companies. Any significant fluctuations in the future could result in a significant decline in the market price of our common stock, regardless of our operating performance.

In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Substantial future sales of our common stock in the public market could cause our stock price to fall.

Additional sales of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Upon completion of this offering, we will have                      shares of common stock outstanding. All shares sold in this offering

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will be freely transferable without restriction or additional registration under the Securities Act of 1933. The remaining shares of common stock outstanding after this offering will be available for sale, assuming the effectiveness of lock-up agreements under which our directors, executive officers and most of our stockholders have agreed not to sell or otherwise dispose of their shares of common stock in the public market, as follows:

Number of shares	Date of availability for sale
	Prior to 180 days after the date of this prospectus
	180 days after the date of this prospectus, subject to volume limitations and other limits as applicable
	At various times thereafter

Any or all of these shares may be released prior to expiration of the 180-day lock-up period at the discretion of RBC Capital Markets Corporation. When these shares are sold into the market, whether after the expiration of the 180-day lock-up period or prior to such expiration if released from the lock-up restrictions, the market price of our common stock could decline. Immediately following the 180-day lock-up period,                      shares of our common stock outstanding after this offering will become available for sale as described under “Shares Eligible for Future Sale.”

In addition, after this offering, the holders of approximately                      shares of common stock will be entitled to cause us to register the sale of those shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares, other than shares purchased by our affiliates, becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration.

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growth strategy.

We believe that our existing cash and cash equivalents and the net proceeds from this offering will be sufficient to meet our anticipated cash needs for at least the next 12 months. The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:

Ÿ market acceptance of our products;

Ÿ the need to adapt to changing technologies and technical requirements;

Ÿ the existence of opportunities for expansion; and

Ÿ access to and availability of sufficient management, technical, marketing and financial personnel.

If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing and there is no assurance that financing, if required, will be available in amounts or on terms acceptable to us, if at all.

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Purchasers in this offering will immediately experience substantial dilution in net tangible book value.

Because our common stock has in the past been sold at prices substantially lower than the initial public offering price that you will pay, you will suffer immediate dilution of $              per share in net tangible book value, based on an assumed initial offering price of $              per share of common stock. In addition, if the holder of our convertible promissory notes elects to convert these notes into shares of our common stock you will suffer further dilution. The exercise of outstanding options may result in further dilution.

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Our management will have broad discretion over the use of proceeds from this offering.

The net proceeds from this offering will be used for general corporate purposes, including working capital. We may also use a portion of the net proceeds to acquire businesses, products and technologies that we believe will complement our business. We have not reserved or allocated specific amounts for these purposes, and we cannot specify with certainty how we will use the net proceeds. Accordingly, our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce income or that lose value.

Our corporate actions are substantially controlled by officers, directors, principal stockholders and affiliated entities.

After this offering, our directors, executive officers and their affiliated entities will beneficially own approximately         % of our outstanding common stock. These stockholders, if they acted together, could exert substantial influence over matters requiring approval by our stockholders, including electing directors and approving mergers or other business combination transactions. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by our other stockholders, including those who purchase shares in this offering.

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Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of incorporation, as amended and restated upon the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

Ÿ the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors;

Ÿ the establishment of a classified board of directors providing that only some of our directors are elected each year;

Ÿ the prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of stockholders to elect director candidates;

Ÿ the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

Ÿ the ability of the board of directors to alter our bylaws without obtaining stockholder approval;

Ÿ the ability of the board of directors to issue, without stockholder approval, up to 5,000,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of common stock;

Ÿ the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action;

Ÿ the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to remove directors for cause; and

Ÿ the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would without these provisions.

We will incur a significant increase in costs as a result of being a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the Securities and Exchange Commission and Nasdaq have required changes in corporate

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governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, in anticipation of becoming a public company, we have added two independent directors and created additional board committees. In addition, we will incur additional costs associated with our public company reporting requirements. We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

Ÿ our expectations regarding our expenses and international sales and operations;

Ÿ our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing;

Ÿ plans for future products and services and for enhancements of existing products and services, including the Maestro Link/MediaMirror technology;

Ÿ our anticipated growth strategies;

Ÿ our intellectual property;

Ÿ anticipated trends and challenges in our business and the markets in which we operate;

Ÿ statements regarding our legal proceedings;

Ÿ our ability to attract customers; and

Ÿ new sources of revenue.

In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” “is designed to” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains statistical data that we obtained from industry publications and reports generated by In-Stat/MDR. These industry publications generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. Although we believe that the publications are reliable, we have not independently verified their data.

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of                      shares of our common stock in this offering will be approximately $             million at an assumed initial public offering price of $             per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $             million.

We intend to use the net proceeds for general corporate purposes, including working capital, and to increase our research and development and sales and marketing activities. We do not have more specific plans for the net proceeds from this offering. We may also use a portion of the net proceeds to acquire businesses, products and technologies that we believe will complement our business. We are not currently engaged in any negotiations for any acquisitions.

The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. We will retain broad discretion in the allocation of the net proceeds of this offering.

Pending the uses described above, we will invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities. Our investments may not yield a favorable return.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our common stock in the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. Our board of directors will determine future dividends, if any.

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CAPITALIZATION

The following table describes our capitalization as of June 30, 2004:

Ÿ on an actual basis;

Ÿ on a pro forma basis to give effect to the automatic conversion of all of our outstanding shares of convertible preferred stock into common stock upon and the exercise of outstanding warrants to purchase shares of our preferred stock upon completion of this offering, as adjusted to further reflect the sale of              shares of common stock in this offering at an assumed initial public offering price of $             per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.

	Actual			Pro Forma As Adjusted
	(in thousands)
	(unaudited)
Long-term lease obligations	$	88		$
Convertible notes payable		1,961			—
Convertible preferred stock, no par value per share; 10,000,000 shares authorized, 5,499,392 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted		8,688			—
Stockholders’ equity:
Preferred stock, $.0001 par value per share; no shares authorized, issued and outstanding, actual; 5,000,000 shares authorized, no shares issued and outstanding as adjusted		—
Common stock, no par value per share; 100,000,000 shares authorized, 20,741,007 shares issued and outstanding, actual; $.0001 par value per share; 250,000,000 shares authorized,                      shares issued and outstanding, pro forma as adjusted		4,129
Deferred stock compensation		(288	)
Accumulated deficit		(11,910	)
Accumulated other comprehensive loss		(10	)
Total stockholders’ equity		609
Total capitalization	$	2,658

The table above is based on 26,300,399 shares of our common stock outstanding as of June 30, 2004, and excludes:

Ÿ 4,187,547 shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2004, at a weighted average exercise price of $1.49 per share;

Ÿ 60,000 shares of preferred stock issuable upon the exercise of warrants outstanding as of June 30, 2004 at an exercise price of $1.50 per share;

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Ÿ the conversion of all outstanding convertible promissory notes and interest accrued as of                      , 2004 into shares of common stock, which notes are convertible at the election of the noteholder. Assuming an initial public offering price of $         per share, a conversion price of $         per share and the completion of this offering prior to                      , 2004, these promissory notes would convert into                 shares of common stock; and

Ÿ                  shares of common stock reserved for future issuance under our 2004 stock incentive plan and 2004 employee stock purchase plan.

As of June 30, 2004, 664,329 shares remained available for future issuance under our 2000 stock option plan. Upon completion of this offering, no shares of common stock will remain available for option grants under this plan.

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DILUTION

Our net tangible book value as of June 30, 2004 was a deficit of approximately $876,000, or $             per share of common stock. Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding, assuming the conversion of all shares of all outstanding convertible preferred stock into shares of our common stock and the exercise of outstanding warrants to purchase shares of our preferred stock upon completion of this offering. Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after completion of this offering. After giving effect to the sale of the              shares of common stock by us at an assumed initial public offering price of $             per share, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value as of June 30, 2004 would have been $            , or $             per share of common stock. This represents an immediate increase in net tangible book value of $             per share of common stock to existing common stockholders and an immediate dilution in net tangible book value of $             per share to new investors purchasing shares of common stock in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per share		$
Net tangible book value per share before this offering	$
Increase in net tangible book value per share attributable to new investors
Net tangible book value per share after this offering
Dilution in net tangible book value per share to new investors		$

The following table summarizes as of June 30, 2004, on the basis described above, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing and new investors purchasing shares of common stock in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses.

	Total Shares			Total Consideration				Average Price per Share
	Number	Percent		Amount		Percent
Existing stockholders	26,240,399	%		$	10,311,268	%		$	0.39
New investors
Total		100.0	%	$		100.0	%	$

The table above assumes no exercise of any outstanding stock options or warrants. As of June 30, 2004, there were 4,187,547 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $1.49 per share and 60,000 shares of preferred stock issuable upon the exercise of warrants at an exercise price of $1.50 per share. In addition, there are                  shares of common stock reserved for future issuance under our 2004 stock incentive plan and 2004 employee stock purchase plan. As of June 30, 2004, 664,329 shares remained available for future issuance under our 2000 stock option plan. Upon the completion of this offering, no shares of common stock will remain available for option grants under this plan. To the extent that any of these options or warrants are exercised, there will be further dilution to new investors. In addition, the table above assumes no conversion of all outstanding convertible promissory notes and interest accrued as of                      , 2004 into shares of common stock, which notes are convertible at the election of the noteholder. Assuming an initial public offering price of $         per share, a conversion price of $         per share and the completion of this offering prior to                      , 2004, these promissory notes would convert into                 shares of common stock.

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At June 30, 2004, assuming exercise and payment of all outstanding options and warrants, and after giving effect to this offering, net tangible book value would have been approximately $                 million, representing dilution of $                 per share to new investors. The table below assumes the exercise of all stock options and warrants to purchase shares of our common stock outstanding at June 30, 2004:

	Shares Purchased			Total Consideration				Average Price Per Share
	Number	Percent		Amount		Percent
Existing stockholders	26,240,399	%		$	10,311,268	%		$	0.39
Shares subject to options and warrants	4,247,547				6,316,705				1.49
Subtotal	30,487,946				16,627,973				0.55
New investors
Total		100.0	%	$		100.0	%	$

If the underwriters’ over-allotment option is exercised in full, and assuming no exercise of any such outstanding stock options or warrants to purchase our common stock, the number of shares of common stock held by existing stockholders will be reduced to         % of the total number of shares of common stock to be outstanding after this offering; and the number of shares of common stock held by the new investors will be increased to              shares or         % of the total number of shares of common stock outstanding after this offering.

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The selected consolidated balance sheet data as of June 30, 2003 and 2004 and the selected consolidated statements of operations data for the fiscal years ended June 30, 2002, 2003 and 2004 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of June 30, 2000, 2001 and 2002 and the selected consolidated statements of operations data for the fiscal years ended June 30, 2000 and 2001 have been derived from our audited consolidated financial statements that are not included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future.

	Fiscal Years Ended June 30,
	2000			2001			2002			2003			2004
	(Dollars in thousands, except per share amounts)
Consolidated Statements of Operations Data:
Revenue:
Product revenue	$	8,846		$	12,429		$	13,360		$	14,574		$	19,043
Internet services revenue		—			2,224			5,580			4,252			3,044
Total revenue		8,846			14,653			18,940			18,826			22,087
Costs and expenses:
Cost of product revenue		2,084			1,531			1,717			2,388			3,932
Cost of internet services revenue		—			1,848			2,868			2,744			1,877
Engineering and development		2,527			3,846			6,606			6,630			6,811
Selling and marketing		2,546			4,917			5,902			4,927			6,067
General and administrative		2,852			4,149			5,761			3,034			3,030
Total costs and expenses		10,009			16,291			22,854			19,723			21,717
Income (loss) from operations		(1,163	)		(1,638	)		(3,914	)		(897	)		370
Total other income (expense), net		8			137			12			(437	)		(167	)
Income (loss) before income taxes and minority interest		(1,155	)		(1,501	)		(3,902	)		(1,334	)		203
Provision for income taxes		118			380			539			574			739
Minority interest in earnings (losses) of affiliate		2			104			(190	)		—			—
Net loss	$	(1,275	)	$	(1,985	)	$	(4,251	)	$	(1,908	)	$	(536	)
Basic and diluted net loss per share	$	(0.06	)	$	(0.10	)	$	(0.21	)	$	(0.09	)	$	(0.02	)
Shares used in computation of basic and diluted net loss per share (1)		19,859			19,890			20,139			21,772			21,961
	As of June 30,
	2000			2001			2002			2003			2004
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	3,620		$	7,095		$	1,800		$	1,949		$	2,732
Working capital (deficiency)		4,087			4,783			(852	)		(2,512	)		(533	)
Total assets		6,884			12,204			8,031			6,240			8,537
Convertible notes payable and capital lease obligations		130			470			300			191			2,141
Total stockholders’ equity (deficit)		4,189			5,076			1,498			(145	)		609

(1) The diluted net loss per share computation excludes potential shares of common stock issuable upon conversion of convertible preferred stock and exercise of warrants to purchase preferred stock and options to purchase common stock, as well as common stock subject to repurchase rights held by us, as their effect would be antidilutive. See notes 1 and 7 of notes to consolidated financial statements for a detailed explanation of the determination of the shares used in computing basic and diluted net loss per share.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included elsewhere in this prospectus. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this prospectus. We undertake no obligation to update any information in our forward-looking statements.

Overview

We are a leading developer and provider of digital media software and firmware solutions for PC, PC-peripheral, mobile phone, consumer electronics and home entertainment manufacturers to bundle with, or embed within, their products. We offer an extensive portfolio of software, firmware and media compression technologies that address each stage of the digital media lifecycle, enabling consumers to capture, create, edit, store, present and distribute digital media. Our products are designed to enable original equipment manufacturers, or OEMs, to meet customers’ increasing demand for easy-to-use photo, video and audio-related functionality. Our major products include ShowBiz DVD, a video editing and DVD authoring application, PhotoImpression, a photo editing application, and PhotoBase, a digital media management and presentation application.

We derive substantially all of our revenue from license fees generated from our OEM customers. These customers include many large device manufacturers such as Canon, Epson, Hewlett-Packard, Matsushita (Panasonic brands), Motorola, Nikon and palmOne (formerly known as Palm). We recently expanded our product offerings to include customized digital media solutions that are incorporated in the firmware of consumer electronics devices such as digital still and video cameras, printers, mobile phones, set-top boxes and DVD players and recorders. Our wholly-owned offshore development centers in China enable us to deliver high-quality, customized solutions to our customers at attractive prices.

We began our operations in 1994 and introduced our first digital imaging software product in 1995. We subsequently introduced digital media software and firmware solutions for new forms of digital media on a variety of devices, including PCs, personal digital assistants, or PDAs, and mobile phones, as well as consumer electronic devices such as DVD recorders, set-top boxes and televisions. We intend to continue to work with our OEM customers and technology partners to expand our product portfolio and library of core technologies to support next-generation consumer devices and digital media technologies.

From 1999 to 2002, we were also engaged in the design and management of websites for our customers relating to photo and video sharing. In 2002, we decided to refocus our resources on the development of digital media software and firmware solutions for our OEM customers. We currently employ a small team to maintain websites for a limited number of our key OEM customers. However, we have experienced, and expect to continue to experience, a decline in revenue from our photo website design and management services.

In March 2004, we entered into agreements with Zoran Corporation to acquire and develop certain hardware and software technologies related to our home connectivity and digital media playback

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technology. Pursuant to these agreements, we acquired, for $900,000, a perpetual license for certain rights to the intellectual property developed by Zoran, and will pay Zoran royalties for future sales of the products incorporating the MaestroLink/MediaMirror technology. The cost of the license is recorded as an intangible asset, and is expected to be amortized when such products are available for general release to customers which we currently expect to begin at the end of calendar 2004. We expect to record amortization over the estimated life of the product based on the greater of the straight-line method or the ratio of product revenue in relation to total expected product revenue. In addition, we have granted a license to Zoran for the sale and distribution of products incorporating the MaestroLink/MediaMirror technology under which Zoran will pay us royalties for future sales of these products. Zoran has the right to terminate our license in the event it does not accept our software development milestones.

As part of this alliance, Zoran agreed to loan us $4.0 million, including $2.0 million upon execution of the agreements and additional amounts upon our attainment of certain software development milestones. In addition, under certain circumstances Zoran may elect to loan us these additional amounts regardless of whether or not we attain these milestones. As of June 30, 2004, we had received $2.8 million from Zoran under convertible promissory notes. The amounts outstanding under the notes can be converted to shares of our common stock if we close an initial public offering, at conversion prices that are at a discount to the initial public offering price, which discounts range from a minimum of 30% to a maximum of 50%, based on the closing date of the offering. In the event that an initial public offering has not been completed prior to September 1, 2005, or five days prior to a change in control transaction, amounts outstanding under these notes, plus accrued interest, are no longer convertible into common stock but can be converted into shares of series B preferred stock at a price per share of $1.50. These notes bear interest at 5% per annum and are due and payable on the earlier of the closing of the initial public offering or March 31, 2006, if not converted prior to such time.

In connection with these convertible promissory notes, we recorded a $933,000 beneficial conversion discount on notes payable and an offsetting credit to preferred stock for the fair value of the preferred stock at the date the notes were issued in excess of the $1.50 conversion price of the preferred stock. We are amortizing the discount on the convertible promissory notes which amounted to $69,000 of additional interest expense during fiscal 2004.

Total Revenue.    Our total revenue includes product revenue and internet services revenue.

Product Revenue

Our product revenue includes:

Ÿ software license revenue generated from both unit-based royalties and upfront fixed fee license arrangements with OEMs that bundle our software products into their products;

Ÿ upfront non-recurring engineering, or NRE, fees to incorporate software into and develop customized modifications for certain OEM products; and

Ÿ to a much lesser extent, sales of software licenses directly to retailers and end users.

Revenue from our direct consumer sales has been minimal and we do not expect this to change in the foreseeable future.

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Our licensing agreements generally have terms of one to three years and can be renewed automatically for periods ranging from one to three years. Most of these agreements are subject to standard termination provisions, including termination for breach or insolvency by either party to the agreement.

Customer payments received in advance of meeting revenue recognition criteria are classified as deferred revenue in the accompanying consolidated balance sheets.

Internet Services Revenue

Our internet services revenue includes fees generated from developing, managing and hosting customized imaging websites for a few of our OEM customers. Revenue from managed website hosting arrangements includes fees for non-recurring engineering services, IP licensing, storage, the purchase and resale of products and services and overall web management services.

International Revenue.    International sales accounted for approximately 45.9% of our total revenue for the fiscal year ended June 30, 2004, approximately 50.6% of our total revenue for the fiscal year ended June 30, 2003 and approximately 52.4% of our total revenue for the fiscal year ended June 30, 2002. We attribute sales to particular countries based on the invoicing location of each customer. Revenue from our OEM customers in the United States that distribute their products outside of the United States is attributed to the United States. Revenue from our OEM customers based outside the United States that distribute their products throughout the world, including the United States, is considered international revenue. Substantially all of our international sales are denominated in U.S. dollars. We anticipate that international sales will continue to account for a significant portion of our total revenue for the forseeable future. Our international sales subject us to additional risks, including political and economic instability, difficulty protecting our intellectual property and difficulty collecting accounts receivable from customers.

Our operating results depend on our sales to a limited number of large customers. We expect to continue to be dependent on a relatively small number of customers for a substantial portion of our total revenue for the foreseeable future. The table below presents the percentage of our total revenue during the fiscal year ended June 30, 2004 and 2003 from our customers that accounted for more than 10% of our total revenue during these periods:

Fiscal 2004			Fiscal 2003
Customer	% of Total Revenue		Customer	% of Total Revenue
Hewlett-Packard	25.3	%	Hewlett-Packard	21.3	%
Matsushita	11.2		Epson	12.7
Canon	10.6		Matsushita	11.8
			Canon	11.7

In fiscal 2004, our ten largest customers together accounted for approximately 78.5% of our total revenue. In fiscal 2003, our ten largest customers together accounted for approximately 77.3% of our total revenue. If we fail to successfully sell our products to one or more of our significant customers in any particular period or if we lose a significant customer or if a significant customer does not renew its license of our products, our revenue would be negatively impacted and our operating results would be harmed. For example, a division of Hewlett-Packard, recently elected not to renew its license agreement for our ShowBiz-related products. As a result, we expect our revenue from Hewlett-Packard may decline significantly.

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Cost of Revenue and Gross Margin.    Cost of revenue includes the costs of third-party licensed intellectual property, compensation and benefits for employees engaged in technical support, non-recurring engineering costs, maintenance of hosted websites, equipment depreciation and overhead allocation, third-party data center expenses, language translation and other production costs. Our gross margin from product revenue is generally significantly higher than that of our internet services revenue. We may experience future fluctuations in our gross margin based on the relative mix of our product and internet services revenue and as a result of potential pricing pressures.

Engineering and Development.    Engineering and development expense includes compensation and benefits for employees engaged in research, design, development and engineering projects, as well as consulting fees, equipment depreciation and overhead allocation both in the United States and at our development centers in China. We expense engineering and development costs as incurred. To date, software development costs that were eligible for capitalization have not been significant because the process for developing software is essentially completed concurrently with the establishment of technological feasibility. We expect our engineering and development expense to increase in absolute dollars as we continue to invest in the development of new products.

Selling and Marketing.    Selling and marketing expense includes compensation, commissions and benefits for employees engaged in selling and marketing, as well as consulting and professional services fees and overhead allocation. Our selling and marketing expenses also include expenditures specific to the marketing group, such as public relations and advertising, travel and trade shows, and marketing materials. Since we do not emphasize promotions to end-users, we generally have minimal advertising expenses. We expect selling and marketing expenses to increase in absolute dollars as we expand our sales and marketing efforts, including branding and awareness activities.

General and Administrative.    General and administrative expenses include compensation and benefits for employees engaged in finance, accounting, human resources, legal and corporate activities, as well as consulting and professional services fees, equipment depreciation and overhead allocation. We expect that general and administrative expenses will increase in absolute dollars in future periods as we hire additional personnel and incur costs related to our operations as a public company.

Stock-based Compensation.    For the fiscal year ended June 30, 2004, we recorded $144,000 in stock-based compensation with a remaining balance of $288,000 at June 30, 2004 to be amortized in subsequent periods. This amount represents the difference between the deemed fair value of our common stock at the time certain stock options were granted and the exercise prices of these options. We are amortizing stock-based compensation on a straight line basis over the vesting periods of the applicable options, which is generally four years. The amortization of stock-based compensation, based upon options granted through June 30, 2004, is expected to be $128,000 in fiscal 2005, $98,000 in fiscal 2006 and $62,000 in fiscal 2007.

Provision for Income Taxes.    No provision for federal and state income taxes was recorded as we incurred net operating losses for fiscal 2002, 2003 and 2004. Income tax expense represents income taxes paid in foreign countries on sales made in those countries. At June 30, 2004, we had $2.1 million of federal and $3.0 million state net operating loss carryforwards available to offset future taxable income which expire in varying amounts beginning in 2019 for federal and 2009 for state carryforwards. As of June 30, 2004, we had research and development credit carryforwards of approximately $1.1 million and $842,000 available to offset future federal and state income taxes, respectively. The federal credit carryforwards expire at various dates through 2023, and the state credit carryforwards have no expiration date. As of June

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30, 2004, we also had available approximately $2.2 million in foreign tax credit carryforwards for federal income tax purposes and approximately $61,000 in California manufacturers investment credits which expire in 2008 and 2013, respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in some circumstances. For example, the amount of net operating losses that we may utilize in any one year would be limited in the presence of a cumulative ownership change of more than 50% over a three-year period. Because there is significant doubt as to whether we will realize any benefit from this deferred tax asset, we have established a full valuation allowance of $5.7 million as of June 30, 2004. As a result of California legislation, the utilization of our California state net operating loss carryforwards was suspended for fiscal 2003 and may be similarly limited in the future.

Minority Interest in Affiliate.    In August 1998, we co-founded a joint venture development center in Hangzhou, China. We owned a 60% controlling interest in this joint venture until October 2001, when we acquired the remaining 40% interest in the joint venture for $850,000. The acquisition was accounted for as a purchase. The $850,000 purchase price has been allocated to the assets acquired and liabilities assumed based on their respective fair values, which resulted in the recording of $265,000 in net assets and $585,000 of goodwill at October 2001, the acquisition date. From July 1, 2001 through the acquisition date, the 40% minority interest in the net income (loss) of the joint venture was reflected as minority interest in earnings (losses) of affiliate in our consolidated statements of operations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our most critical policies include: (a) revenue recognition, (b) accounting for income taxes; (c) valuation of accounts receivable, (d) valuation of goodwill and intangibles, (e) stock-based compensation and (f) loss contingencies. We also have other key accounting policies that are less subjective and, therefore, their application would not have a material impact on our reported results of operations. The following is a discussion of our most critical policies, as well as the estimates and judgments involved.

Revenue Recognition.    Product revenue includes software license revenue generated from: (a) both unit-based royalty and upfront fixed fee license arrangements with customers that incorporate our software and firmware products into their products; (b) upfront non-recurring engineering, or NRE, fees to develop custom applications and/or to incorporate software into certain OEM products; and (c) sales of software licenses directly to retailers and end users. All software arrangements contain post delivery telephone support to the OEM and end user and certain arrangements include a right for the OEM to receive unspecified additional products, or post customer support.

We record revenue generated from these sales in accordance with SOP 97-2, “Software Revenue Recognition,” as amended. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectibility is reasonably assured. We have not established vendor-specific objective evidence of fair value for any

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elements within our software arrangements. For unit-based royalty sales, we recognize product revenue upon receipt of reports from our customers documenting product shipments made to their customers. For NRE work on unit-based royalty arrangements, we recognize revenue ratably over the term of the expected unit sales. For upfront fixed fee arrangements, we recognize revenue upon delivery of the gold master to the customer or over the term of the license agreement, depending on the circumstances discussed below. For NRE work on upfront fixed fee arrangements, we recognize revenue upon delivery of the gold master to the customer or over the term of the license agreement depending on the circumstances discussed below. For our sales of software licenses directly to retailers and end users, either through our website or otherwise, we recognize revenue upon shipment of the product to the retailer or end-user. We recognize revenue from sales through our websites upon delivery of product.

For unit-based royalty arrangements, our customers pay a license fee based on the number of copies of licensed software included in the products sold to their customers, or sell-through. Customers are required to provide us with a royalty report within 45 days after the end of the quarter in which the sales occur. Product revenue is recognized upon receipt of the report, which is received in the same quarter as the post-contract customer support is delivered.

In addition, certain customer agreements also include upfront fixed fees and/or NRE fees primarily for porting our software to the customer’s hardware and software configurations. Revenue on these arrangements is recognized on delivery of the gold master to the customer when (1) we have established a history of providing substantially all the telephone support within one year of the licensing or sale of the software, (2) the estimated cost of providing post-customer support during the arrangement is insignificant, (3) unspecified upgrades/enhancements offered during the term of the post-contract customer support arrangements have been and are expected to be minimal and infrequent, and (4) all other criteria of SOP 97-2 have been met. When these criteria have not been met, we recognize revenue on a straight-line basis over the contract term, which approximates the expected post-contract customer support period.

Customer payments received in advance of meeting revenue recognition criteria are classified as deferred revenue on our consolidated balance sheet.

Internet services revenue includes fees generated from the design, development, management and hosting of customer websites that promote our customers’ products and our own software.

In circumstances where the arrangement requires significant production, modification, or customization of our software, we recognize revenue under the percentage of completion method as defined in AICPA SOP 81-1, “Accounting for the Performance of Construction Type and Certain Production Type Contracts.” Alternatively, where the arrangement does not require significant production, modification or customization of our software, we account for these transactions in accordance with Emerging Issues Task Force Issue No. 00-3, “Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware,” and internet services revenue is recognized ratably over the term of the service arrangement.

Accounting for Income Taxes.    As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation

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allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the tax provision in our consolidated statements of operations.

Judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. As of June 30, 2004, we had net deferred tax assets of approximately $5.7 million, consisting primarily of tax credit carryforwards, net operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Realization of such deferred tax assets is dependent on our ability to generate sufficient future taxable income. We recorded a valuation allowance for the entire balance of our net deferred tax assets at June 30, 2004 due to uncertainties related to our ability to utilize them in the future. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates, we will adjust these estimates in future periods.

Valuation of Accounts Receivable.    We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed. In determining the provision for invoices not specifically reviewed, we analyze historical collection experience, customer concentrations, customer credit-worthiness and current economic trends. If the historical data used to calculate the allowance provided for doubtful accounts does not reflect our future ability to collect outstanding receivables or if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an increase in the provision for doubtful accounts may be required.

Valuation of Goodwill and Intangibles.    We record goodwill and intangible assets when we acquire companies. The cost of the acquisition is allocated to the assets and liabilities acquired, including identifiable intangible assets, with the remaining amount being classified as goodwill. Goodwill on our balance sheet includes our existing assembled workforce in China resulting from our purchase of the remaining minority interest in a subsidiary in fiscal 2002, and is subject to periodic review for impairment. Purchased identifiable intangible asset represents a license for certain rights to intellectual property developed by a third party which is expected to be amortized when such products are available for general release to customers. We will periodically review the estimated remaining useful life of such intangible asset. A reduction in the estimated remaining useful life could result in accelerated amortization expense or a write-down in future periods. As such, any future write-downs of these assets would adversely affect our operating margins and results of operations.

We evaluate the impairment of goodwill and purchased intangible assets on an annual basis, or sooner if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Triggering events for impairment reviews include indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market capitalization. Evaluations of possible impairment and, if applicable, adjustments to carrying values, require us to estimate, among other factors, future cash flows, useful lives and fair market values of our reporting units and assets. Accordingly, goodwill and intangible assets recorded may significantly affect our future operating results to the extent impaired, but the magnitude and timing of any such impairment is uncertain. When we conduct our annual evaluation of goodwill, or if in the interim impairment indicators are identified with respect to goodwill, the fair value of goodwill is re-assessed using valuation techniques that require management judgment. Should conditions be different than management’s last assessment, write-downs of goodwill may be required. Any future write-downs of goodwill would adversely affect our operating results.

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Stock-Based Compensation.    We have elected to follow the intrinsic value-based method prescribed by Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees,” or APB 25, and related interpretations in accounting for employee stock options rather than adopting the alternative fair value accounting provided under Statement of Financial Accounting Standards, or SFAS, No. 123, “Accounting for Stock Based Compensation.” Therefore, we record deferred compensation expense for stock options we grant to our employees where the exercise price is less than the deemed fair value of the stock on the date of grant. We comply with the disclosure requirements of SFAS No. 123 and SFAS No. 148, which require that we disclose our pro forma net income or loss and net income or loss per common share as if we had expensed the fair value of the options. In calculating such fair value, there are certain assumptions that we use, as disclosed in note 6 of the notes to our consolidated financial statements. We grant options and warrants to employees and consultants. Stock-based compensation includes the fair value of instruments issued to consultants and the amortization of deferred stock compensation associated with options to employees. The fair value of instruments to consultants is based on management’s estimates using the Black-Scholes option pricing model. Instruments to consultants which are not fully vested are subject to periodic revaluation using variable accounting over the vesting term. These fair value estimates are based on a number of variables, including the fair value of the stock underlying the instrument, which are subject to change over the lives of the instruments.

We record deferred stock-based compensation, which consists of the amounts by which the estimated fair value of the stock underlying the employee option exceeds the exercise price at the date of grant or other measurement date, if applicable. During fiscal 2004, we granted stock options to purchase 288,000 shares of common stock with an exercise price of $1.50 and stock options to purchase 659,800 shares of common stock with an exercise price of $2.00. During the period from July 2003 to June 2004, we determined that the fair value of our common stock increased from $1.70 to $2.00. In the absence of a public trading market or third-party valuations of our common stock, we considered numerous objective and subjective factors and methodologies in determining the fair value of our common stock. One of the significant methods we used to determine the fair values for the shares underlying options is through a comparison of price multiples of our historical and forecasted revenues and earnings to certain public companies involved in the same or similar lines of business, an approach used by the underwriters we engaged for our initial public offering. We also considered our financial performance and growth, primarily since July 2003. Our revenue growth rate primarily contributed to the increase in the fair values of our shares. In addition, we also considered the sale of our preferred stock to third parties in prior years, the terms of our preferred stock including the liquidation preference accorded to these securities, our progress in achieving our business plan, and other events, such as the hiring of our executive team including Alfred V. Larrenaga as our senior vice president and chief financial officer in March 2004. Given these and other factors, we determined that the fair value of our common stock increased from $1.70 in July 2003 to $2.00 in June 2004. The value of our common stock cannot be determined with precision or certainty until after our initial public offering occurs and a market is established for our shares.

Loss Contingencies.    We periodically record the estimated impacts of various uncertain outcomes. These events are called contingencies and our accounting for these events is prescribed by SFAS No. 5, “Accounting for Contingencies.” SFAS No. 5 defines a contingency as “an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.” Contingent losses must be accrued if:

Ÿ available information indicates it is probable that the loss has been or will be incurred, given the likelihood of the uncertain future events; and

Ÿ the amount of the loss can be reasonably estimated.

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The accrual of a contingency involves considerable judgment on the part of management. Legal proceedings have elements of uncertainty, and in order to determine the amount of any reserves required, we assess the likelihood of any adverse judgments or outcomes to pending and threatened legal matters, as well as potential ranges of probable losses. We use internal expertise and outside experts, as necessary, to help estimate the probability that a loss has been incurred and the amount or range of the loss. A determination of the amount of reserves required for these contingencies is made after analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of our total revenue represented by selected items from our consolidated statements of operations. The results from any interim period are not indicative of results for any future period.

	Fiscal Years Ended June 30,
	2002		2003		2004
As a Percentage of Total Revenue:
Revenue:
Product revenue	70.5	%	77.4	%	86.2	%
Internet services revenue	29.5		22.6		13.8
Total revenue	100.0		100.0		100.0
Costs and expenses:
Cost of product revenue	9.1		12.7		17.8
Cost of internet services revenue	15.1		14.6		8.5
Engineering and development	34.9		35.2		30.8
Selling and marketing	31.2		26.2		27.5
General and administrative	30.4		16.1		13.7
Total costs and expenses	120.7		104.8		98.3
Income (loss) from operations	(20.7	)	(4.8	)	1.7
Total other income (expense), net	0.1		(2.3	)	(0.8	)
Income (loss) before income taxes and minority interest	(20.6	)	(7.1	)	0.9
Provision for income taxes	2.8		3.0		3.3
Minority interest in losses of affiliate	(1.0	)	—		—
Net loss	(22.4	)%	(10.1	)%	(2.4	)%
Product gross margin	87.1	%	83.6	%	79.4	%
Service gross margin	48.6	%	35.5	%	38.3	%

Fiscal Years Ended June 30, 2002, 2003 and 2004

Total Revenue.    Total revenue decreased from $18.9 million in fiscal 2002 to $18.8 million in fiscal 2003 and increased to $22.1 million in fiscal 2004, a decrease of 0.6% and an increase of 17.3%, respectively.

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Product revenue increased from $13.4 million in fiscal 2002 to $14.6 million in fiscal 2003, and to $19.0 million in fiscal 2004, increases of 9.1% and 30.7%, respectively. The increase from fiscal 2002 to fiscal 2003 was primarily due to increased revenue from new products, including Showbiz DVD, VideoImpression 2.0, PhotoImpression 5 and PhotoBase 4.5, and increased revenue through our Taiwan sales operation that was established in 2002. The increase from fiscal 2003 to fiscal 2004 was primarily due to increased revenue from a major personal computer manufacturer and a major mobile device manufacturer located in the United States, as well as increased revenue through our Taiwan sales operation.

Internet services revenue decreased from $5.6 million in fiscal 2002 to $4.3 million in fiscal 2003 and further decreased to $3.0 million in fiscal 2004, decreases of 23.8% and 28.4%, respectively. These decreases were primarily due to our decision to focus on providing digital media software and firmware solutions to our OEM customers and to de-emphasize our website design and management services.

Cost of Product Revenue.    Cost of product revenue increased from $1.7 million, or 12.9% of product revenue, in fiscal 2002 to $2.4 million, or 16.4% of product revenue, in fiscal 2003, and to $3.9 million, or 20.7% of product revenue, in fiscal 2004. The increase from fiscal 2002 to fiscal 2003 was primarily due to increases in the cost of third-party licensed intellectual property and increased costs associated with the formation of product management and quality assurance engineering groups in late fiscal 2003. The increase from fiscal 2003 to fiscal 2004 was primarily due to increases in the cost of third-party licensed intellectual property and an increase in payroll-related expenses, primarily from the addition of technical support personnel. The increased cost of the third-party licensed intellectual property was the primary reason for the increase of the cost of product revenue as a percentage of product revenue.

Cost of Internet Services Revenue.    Cost of internet services revenue decreased from $2.9 million, or 51.4% of internet services revenue, in fiscal 2002 to $2.7 million, or 64.5% of internet services revenue in fiscal 2003, and further decreased to $1.9 million, or 61.7% of internet services revenue, in fiscal 2004. The decreases from fiscal 2002 to fiscal 2003 and again in fiscal 2004 were primarily due to our reducing these activities and services as we began to focus on product sales and to de-emphasize website design and management services.

Engineering and Development.    Engineering and development expense was $6.6 million in fiscal 2002 and $6.6 million in fiscal 2003, and increased to $6.8 million in fiscal 2004, increases of 0.4% and 2.7%, respectively. The increase from fiscal 2002 to fiscal 2003 was not significant even though total engineering and development headcount increased by 38%. This headcount increase occurred in our development centers in China and the cost of this increase was significantly offset by a headcount reduction in the United States in connection with our decision to refocus our efforts on providing software and firmware solutions. This shift was primarily due to our focus on product revenue and our de-emphasis of website design and management services. The increase in fiscal 2004 over fiscal 2003 was due to costs associated with a headcount increase at our research and development centers in China.

Selling and Marketing.    Selling and marketing expense decreased from $5.9 million in fiscal 2002 to $4.9 million in fiscal 2003, and increased to $6.1 million in fiscal 2004, a decrease of 16.5% and an increase of 23.1%, respectively. The decrease from fiscal 2002 to fiscal 2003 was primarily due to decreased payroll-related expenses, decreased travel and trade show participation in the United States and the replacement, in Asia, of higher cost consultants with employees. The increase from fiscal 2003 to fiscal 2004 was primarily due to increased payroll-related expenses associated with the expansion of our sales activities in the United States and Asia, the establishment of our sales office in the United Kingdom and costs associated with increased participation in trade shows.

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General and Administrative.    General and administrative expense decreased from $5.8 million in fiscal 2002 to $3.0 million in fiscal 2003 and in fiscal 2004. The 47.3% decrease from fiscal 2002 to fiscal 2003 was primarily due to $1.0 million of professional fees in fiscal 2002 related to the preparation of an initial public offering that was subsequently delayed, $340,000 for severance to a former employee in fiscal 2002, a $419,000 reduction in stock-based compensation in fiscal 2003, a $535,000 charge for doubtful accounts in fiscal 2002 for amounts that were deemed to be uncollectible in 2002 and a 15% reduction in personnel-related expenses in fiscal 2003, partially offset by an increase in legal fees relative to an intellectual property lawsuit.

Total Other Income (Expense), Net.    Total other income (expense), net, was income net, of $12,000 in fiscal 2002, a net expense of $437,000 in fiscal 2003, and a net expense of $167,000 in fiscal 2004. During fiscal 2003, we had average borrowings, in addition to the capitalized lease obligation, of approximately $1.8 million at a 20% per annum interest rate, which resulted in a higher interest expense. The decrease of net expense from fiscal 2003 to fiscal 2004 was primarily due to the reduction in the average outstanding balance of the note payable that bears interest at the rate of 20% per annum and a research and development grant from the Chinese government in the amount of $197,000.

Provision for Income Taxes.    The provision for income taxes was $539,000 in fiscal 2002, $574,000 in fiscal 2003, and $739,000 in fiscal 2004 and represents income taxes paid in foreign countries. The increase in taxes paid is due to an increase in international sales and activities at our international operations.

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Unaudited Quarterly Results of Operations

The following table sets forth our consolidated statement of operations data for the eight quarters ended June 30, 2004. This unaudited quarterly information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of this data. This information should be read together with the consolidated financial statements and related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of our future results.

	Quarters Ended
	Sept. 30, 2002			Dec. 31, 2002			Mar. 31, 2003			June 30, 2003			Sept. 30, 2003			Dec. 31, 2003			Mar. 31, 2004			June 30, 2004
	(in thousands)
Revenue:
Product revenue	$	3,335		$	4,246		$	3,432		$	3,561		$	4,081		$	5,346		$	4,631		$	4,985
Internet services revenue		734			1,078			1,267			1,173			521			1,185			500			838
Total revenue		4,069			5,324			4,699			4,734			4,602			6,531			5,131			5,823
Costs and expenses:
Cost of product revenue		405			550			600			833			815			996			1,099			1,022
Cost of internet services revenue		765			670			773			536			442			479			356			600
Engineering and development		1,770			1,650			1,772			1,438			1,623			1,498			1,833			1,857
Selling and marketing		1,174			1,254			1,182			1,317			1,186			1,513			1,783			1,585
General and administrative		680			838			723			793			837			587			807			799
Total costs and expenses		4,794			4,962			5,050			4,917			4,903			5,073			5,878			5,863
Income (loss) from operations		(725	)		362			(351	)		(183	)		(301	)		1,458			(747	)		(40	)
Total other income (expense), net		(113	)		(170	)		(69	)		(85	)		(84	)		(38	)		(100	)		55
Income (loss) before income taxes		(838	)		192			(420	)		(268	)		(385	)		1,420			(847	)		15
Provision for income taxes		109			128			104			233			136			172			168			263
Net income (loss)	$	(947	)	$	64		$	(524	)	$	(501	)	$	(521	)	$	1,248		$	(1,015	)	$	(248	)

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The following table sets forth our historical results, for the periods indicated, as a percentage of total revenue.

	Quarters Ended
	Sept. 30, 2002		Dec. 31, 2002		Mar. 31, 2003		June 30, 2003		Sept. 30, 2003		Dec. 31, 2003		Mar. 31, 2004		June 30, 2004
Revenue:
Product revenue	82.0	%	79.8	%	73.0	%	75.2	%	88.7	%	81.9	%	90.3	%	85.6	%
Internet services revenue	18.0		20.2		27.0		24.8		11.3		18.1		9.7		14.4
Total revenue	100.0		100.0		100.0		100.0		100.0		100.0		100.0		100.0
Costs and expenses:
Cost of product revenue	10.0		10.3		12.8		17.6		17.7		15.3		21.4		17.6
Cost of internet services revenue	18.8		12.6		16.5		11.3		9.6		7.3		6.9		10.3
Engineering and development	43.5		31.0		37.7		30.4		35.3		22.9		35.7		31.9
Selling and marketing	28.9		23.6		25.1		27.8		25.8		23.2		34.7		27.2
General and administrative	16.6		15.7		15.4		16.8		18.1		9.0		15.9		13.7
Total costs and expenses	117.8		93.2		107.5		103.9		106.5		77.7		114.6		100.7
Income (loss) from operations	(17.8	)	6.8		(7.5	)	(3.9	)	(6.5	)	22.3		(14.6	)	(0.7	)
Total other income (expense), net	(2.8	)	(3.2	)	(1.5	)	(1.8	)	(1.8	)	(0.5	)	(1.9	)	0.9
Income (loss) before income taxes	(20.6	)	3.6		(9.0	)	(5.7	)	(8.3	)	21.8		(16.5	)	0.2
Provision for income taxes	2.7		2.4		2.2		4.9		3.0		2.6		3.3		4.5
Net income (loss)	(23.3	)%	1.2	%	(11.2	)%	(10.6	)%	(11.3	)%	19.2	%	(19.8	)%	(4.3	)%

Total Revenue

Product Revenue.    Product revenue for the quarter ended December 31, 2002 was greater than any other quarter in fiscal 2003 primarily due to our receipt of a royalty report from a major customer that included activity for previous quarters. Starting with the quarter ended June 30, 2003, product revenue started to increase as a result of our decision to focus on providing digital media software and firmware solutions to our OEM customers. Product revenue for the quarter ended December 31, 2003 included a large portion of license revenue from a Japanese OEM customer resulting from the completion and delivery of the last deliverable in the related license agreement.

Internet Services Revenue.    Internet services revenue for the quarters ended March 31, 2003, June 30, 2003 and December 31, 2003 were higher than many of the later quarters presented due to the completion of projects. Internet services revenue for the quarter ended June 30, 2004 was higher than some of the previous quarters due to the sale of fixed assets associated with the service to our customers.

Costs and Expenses

The general increase in cost of product revenue is due to increased costs of third-party royalties and increased costs associated with formation of product management and quality assurance engineering groups. The decrease in cost of product revenue during the quarter ended September 30, 2003 was primarily due to the temporary assignment of product managers and quality assurance engineers to research and development activities. We believe cost of internet services revenue will fluctuate consistent with fluctuations in our internet services revenue due to our cost-plus model in place with our most active customer.

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For the quarter ended June 30, 2003, engineering and development decreased as a result of a reduction-in-force that occurred in March 2003, and selling and marketing increased primarily due to fiscal year-end commissions and bonuses. Engineering and development expense for the quarter ended September 30, 2003 includes expenses associated with the opening of our Beijing research and development center. Engineering and development expense for the quarter ended March 31, 2004 includes expenses associated with the opening of a research and development center in Shanghai and additional payroll-related expenses for our research and development centers in China. In addition, general and administrative expense decreased for the quarter ended December 31, 2003 as a result of a reduction in legal and professional fees.

Our quarterly revenue and operating results are difficult to predict, and have in the past and may in the future fluctuate from quarter to quarter. We base our planned operating expenses in part on our expectations of future revenue, and our expenses are relatively fixed in the short term. If revenue for a particular quarter is lower than we expect, we may be unable to proportionately reduce our operating expenses for that quarter, which could harm our operating results for that quarter. We believe that period-to-period comparisons of our operating results should not be relied upon as an indication of future performance. In future periods, the market price of our common stock could decline if our revenue and results of operations are below the expectations of analysts and investors. For additional discussion of factors that may cause our revenue and operating results to fluctuate, please see those discussed in the “Risk Factors” section of this prospectus.

Liquidity and Capital Resources

Since inception, we have financed our operations through private sales of our common and convertible preferred stock for approximately $10.3 million, borrowings and revenue. As of June 30, 2004, we had approximately $2.7 million in cash and cash equivalents. In connection with our agreements with Zoran Corporation, in April and June 2004, we issued a total of $2.8 million in principal amount of convertible promissory notes to Zoran. In addition, we are entitled to borrow up to an additional $1.2 million from Zoran in two installments based on the completion of certain software development milestones. The notes accrue interest at a rate of 5.0% per annum and are due and payable on March 31, 2006, if not converted. If outstanding, the convertible promissory notes and accrued interest will convert, at the election of the holder, into (a) shares of our common stock in connection with this offering at a discount to the offering price or (b) shares of our series B preferred stock if we are acquired prior to the completion of this offering. The discount to the initial public offering price at which the convertible promissory notes and accrued interest will convert into shares of common stock is initially 30% and increases on October 1, 2004, November 1, 2004 and December 1, 2004, up to a maximum of 50%, if this offering has not been completed prior to those dates. In the event we complete an equity financing, other than our initial public offering, the holder may elect to have the amounts outstanding under the notes, plus accrued interest, convert into shares of stock sold in the financing at a 20% discount. In addition, in the event that we do not complete our initial public offering prior to September 1, 2005, or in the event of a change in control of ArcSoft, the amounts outstanding under the notes, plus accrued interest, can be converted into shares of our series B preferred stock at a price of $1.50 per share.

In July 2004, we entered into an agreement with a bank for a $3.0 million line of credit. Amounts borrowed under this line of credit bear interest at prime plus 1.5% (5.75% as of July 2004) per annum and may be repaid and reborrowed at any time prior to the maturity date. The line expires in July 2005. The line of credit is secured by all of our assets and requires that we maintain a minimum liquidity, as defined as either $1.0 million or four months of liquidity, whichever is higher. As of July 31, 2004, we had an outstanding balance of $1.0 million under the credit line.

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Operating Activities.    Net cash used in operating activities was approximately $3.0 million in fiscal 2002, $827,000 in fiscal 2003 and $526,000 in fiscal 2004 and resulted primarily from net losses from operations in the periods.

Investing Activities.    Net cash used in investing activities was $2.1 million in fiscal 2002, $322,000 in fiscal 2003 and $1.2 million in fiscal 2004 and was due primarily to the purchases of property and equipment in the periods, the purchase of the minority interest in a subsidiary in fiscal 2002 and the purchase of a license in fiscal 2004.

Financing Activities.    In fiscal 2002, net cash used in financing activities was $167,000 and was primarily due to payment of capital lease obligations. Net cash provided by financing activities was $1.3 million in fiscal 2003 and $2.5 million in fiscal 2004, primarily from a net increase in borrowings and the issuance of convertible promissory notes.

We currently have no significant commitments for capital expenditures. We anticipate that we will increase our capital expenditures consistent with our anticipated growth in personnel and infrastructure, including facilities and systems.

We expect to experience growth in our operating expenses for the foreseeable future in order to execute our business strategy. As a result, we anticipate that operating expenses, as well as planned capital expenditures, will constitute a material use of our cash resources. We intend to fund these activities primarily with cash generated from operations.

As of June 30, 2004, our contractual obligations, including future minimum commitments under capitalized lease obligations and operating leases, are as follows:

	Payments Due by Period
	(in thousands)
Contractual Obligations	Total		Less than 1 Year		1-3 Years			3-5 Years		>5 Years
Capital leases	$	208	$	110	$	91		$	7	$	—
Minimum royalty payments		314		314		—			—		—
Operating leases		1,904		677		669			558		—
Purchase commitments		168		168		—			—		—
Notes payable		3,950		1,150		2,800	(1)		—		—
Total	$	6,544	$	2,419	$	3,560		$	565	$	—

(1) Represents principal amounts payable upon maturity of convertible promissory notes, which notes become due and payable upon the earlier of (a) our initial public offering or (b) March 2006 and may be converted into common stock or preferred stock, in accordance with the terms of the notes, at such time at the election of the holder thereof.

We believe that the net proceeds from the sale of common stock in this offering, our existing cash and cash equivalents, the cash generated from operations and our bank line of credit will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities. The sale of additional equity or convertible debt securities could result in more dilution to our stockholder, or, in the case of debt, subject us to restrictive covenants and require us to make periodic payments of principal and interest. Financing arrangements may not be available to us, or may not be available in amounts or on terms acceptable to us.

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Recent Accounting Pronouncements

In June 2002, Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally The Emerging Issues Task Force, or EITF, Issue No. 94-3. We adopted the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of our commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The adoption of SFAS No. 146 on January 1, 2003 did not have a material effect on our consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation specifies the disclosures to be made by a guarantor in its interim and annual financial statements concerning its obligations under certain guarantees that it has issued. FIN 45 also requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations it has undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002. The initial recognition and initial measurement requirements of FIN 45 are effective for guarantees issued or modified after December 31, 2002. The adoption of these provisions did not have a material impact on our consolidated financial statements.

In December 2002, the EITF reached a consensus on EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” This issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (that is, there are separate units of accounting). In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. This issue does not change otherwise applicable revenue recognition criteria. The guidance in this issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material impact on our consolidated financial statements.

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment to FASB Statement 123.” SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting of stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123, “Accounting for Stock-Based Compensation,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted the disclosure provisions of SFAS 148 effective June 30, 2003.

In December 2003, FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,” and a revised interpretation of FIN 46 (FIN 46-R) in January 2003. FIN 46 requires certain variable interest entities (“VIEs”) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial

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support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, we have not invested in any entities we believe are variable interest entities for which we are the primary beneficiary. For all arrangements entered into after January 31, 2003, we are required to continue to apply FIN 46 through April 30, 2004. We were required to adopt the provisions of FIN 46-R for those arrangements on May 1, 2004. For arrangements entered into prior to February 1, 2003, we are required to adopt the provisions of FIN 46-R on May 1, 2004. The adoption of FIN 46-R did not have an impact on our consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and hedging relationships designated after June 30, 2003, except for those provisions of SFAS No. 149 which related to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003. For those issues, the provisions that are currently in effect should continue to be applied in accordance with their respective effective dates. In addition, certain provisions of SFAS No. 149, which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. We are currently evaluating the impact of adopting SFAS No. 149. However, we do not believe that we have entered into any contracts that would fall within the scope of SFAS No. 149.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which requires that certain financial instruments be presented as liabilities that were previously presented as equity or as temporary equity. Such instruments include mandatory redeemable preferred and common stock, and certain options and warrants. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and was effective at the beginning of the first interim period beginning after June 15, 2003. Our adoption of SFAS No. 150 did not have an impact on our consolidated financial statements.

In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin, or SAB, No. 104, “Revenue Recognition.” SAB 104 updates portions of existing interpretive guidance consistent with current authoritative accounting auditing guidance and SEC rules and regulations. The adoption of SAB 104 did not have a material impact on our consolidated financial statements.

In March 2004, the EITF reached a final consensus on Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” to provide additional guidance in determining whether investment securities have an impairment which should be considered other-than-temporary. We expect that the adoption of Issue 03-01 will not have an effect on our operating results or financial condition.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We have limited exposure to financial market risks, including interest rates. Our exposure to market risks for changes in interest rates relates primarily to our cash equivalents, which consist of time deposits and money market funds. Due to the short-term nature of our cash equivalents and to the limited amount of our cash equivalents, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio. Since we believe we have the ability to liquidate this

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portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by the effect of a sudden change in market interest rates on our cash equivalents.

Foreign Currency Exchange Risk

Our exposure to adverse movements in foreign currency exchange rates is primarily related to our subsidiaries’ operating expenses, primarily in the People’s Republic of China, the United Kingdom, Japan and Taiwan, denominated in the respective local currency. A hypothetical change of 10% in foreign currency exchange rates would not have a material impact on our consolidated financial statements or results of operations. Substantially all of our sales are transacted in U.S. dollars.

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BUSINESS

Overview

We are a leading developer and provider of digital media software and firmware solutions for PC, PC-peripheral, mobile phone, consumer electronics and home entertainment manufacturers to bundle with, or embed within, their products. We offer an extensive portfolio of software, firmware and media compression technologies that address each stage of the digital media lifecycle, enabling consumers to capture, create, edit, store, present and distribute digital media. Our products are designed to enable original equipment manufacturers, or OEMs, to meet consumers’ increasing demand for easy-to-use photo, video and audio-related functionality. We are able to deliver high-quality, cost-effective customized solutions by leveraging our development centers in China.

Our major products for PC and mobile devices include PhotoImpression, a photo editing application, PhotoBase, a digital media management and presentation application and ShowBiz DVD, a video editing and DVD authoring application. We also provide customized solutions that are incorporated into high-volume PC-peripherals, consumer electronics devices and home entertainment products such as printers, digital still and video cameras, mobile phones, set-top boxes and DVD players and recorders.

We derive substantially all of our revenue from license fees from our OEM customers. We collaborate closely with many large device manufacturers such as Canon, Epson, Hewlett-Packard, Matsushita (Panasonic brands), Motorola, Nikon and palmOne (formerly known as Palm). We design and develop software and firmware for our OEM customers, which we believe enables them to differentiate their products from those of their competitors through price and features.

Example uses of our products include:

Ÿ A mother on vacation takes a series of pictures with her mobile phone. Using our PhotoBase Mobile Edition software, which is bundled with her mobile phone, she crops one photo and rotates another. She can add decorative borders to the pictures, save them as a slideshow and use our MMS Composer Mobile Edition to send the slideshow to friends. In addition, she can download a song to her mobile phone, as well as a ring tone of the same song. Using our AMR Codec, her mobile phone is now capable of playing the entire song as well as play the ring tone when she receives a call.

Ÿ A mother takes a picture of her family with a digital camera. Using our PhotoImpression software on her PC, she can remove the red-eye, adjust the brightness and crop and resize the picture. She can then print a copy for herself and also email the photo to her entire family.

Ÿ A father records a video of his son. Using our ShowBiz DVD software, he can create his own movie on his home PC. He can use the software’s storyboard feature to script the video, delete a portion of the video, incorporate transitions and add credits to the end of the video along with his favorite music. He can also burn the movie to a DVD and send it to his parents so they can see their grandson on their television.

We began our operations in 1994 and introduced our first digital imaging software product in 1995. Since then we have consistently introduced solutions for new high-volume PC, PC-peripheral, consumer electronics and home entertainment devices. We intend to continue to work with our OEM customers and technology partners to expand our product portfolio and library of core technologies in our existing markets, as well as new markets driven by consumers’ demands for next-generation devices and technologies.

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In March 2004, we entered into agreements with Zoran Corporation to acquire and develop certain hardware and software technologies related to our home connectivity and digital medial playback technology . Pursuant to these agreements, we acquired a license for certain rights to the intellectual property developed by Zoran, and will pay Zoran royalties for future sales of the products incorporating the MaestroLink/MediaMirror technology. In addition, we have granted a license to Zoran for the sale and distribution of products incorporating the MaestroLink/MediaMirror technology under which Zoran will pay us royalties for future sales of these products. Under these agreements, we and Zoran have also agreed to indemnify each other against claims related to the MaestroLink/MediaMirror technology. The agreements continue until terminated by either party for cause, including termination for material breach if such breach is not cured within 45 days.

Industry Background

Transition from Analog to Digital Technology

Media content has traditionally been created, stored and distributed using analog processes. Analog technology is still used to process the majority of photo, video and music content today. However, analog technology is expensive and requires specialized equipment as well as professional service providers, which allows little flexibility in the creation, editing, storage, presentation and distribution of media content. As a result, there has been a significant increase in consumer and business demand for digital technologies that can perform these functions more efficiently and cost-effectively. For example, In-Stat/MDR expects the digital still camera market to grow approximately 229% from approximately 24.8 million units in 2002 to approximately 81.7 million units in 2007. While PCs have traditionally served as the primary platform for digital media technologies, the increased capacity and performance and decreased size and cost of hard disk drives and microprocessors has enabled users to access digital media content on smaller devices, such as mobile phones and personal digital assistants, or PDAs, and share information among various devices. Communication between these devices requires enabling technologies that can support all forms of digital media content, including photo, video and audio.

Digital media offers significant advantages over analog media, such as easy and inexpensive editing and special effects, Internet-based accessibility and distribution, flexible formatting, durable storage, personalization, easy duplication and rapid wired or wireless transmission without loss of quality. For these reasons, digital technology has become the preferred means of creating, editing, storing, presenting and distributing media for both consumers and professionals. Consumers are increasingly expecting cost-effective, easy-to-use software solutions to be bundled with, or embedded in, devices instead of having to select, purchase and install complex, expensive software products from a retail store. Providing comprehensive solutions requires core fundamental technologies and features that address the spectrum of the digital media lifecycle, which have traditionally been difficult for any single software developer to provide.

The Digital Media Software Industry

With the proliferation of devices incorporating digital technology, consumers are demanding more expansive features and capabilities. Digital media software solutions are typically offered either separately through retailers, or bundled with, or embedded in the device. Typically, the digital media software available at retailers is expensive, difficult to use and often incompatible with the consumer’s device.

Device manufacturers have responded to these consumer demands by adding new photo, video and audio features and functionality to their products. Few leading device manufacturers currently choose to

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develop digital media software in-house because it is complex and difficult to develop or continuously update, particularly in the rapidly changing consumer electronics and home entertainment device markets. Most device manufacturers outsource development to third parties and expect these parties to help differentiate their products by developing high-quality software and firmware more quickly, efficiently and cost-effectively.

Third-party software and firmware developers have historically focused on providing targeted and specific applications, rather than comprehensive solutions due to the technology and integration challenges associated with providing such a solution. As a result, OEMs are required to work with numerous vendors to complete a comprehensive solution, which requires significant integration and costs in order to meet consumer demand, as well as increasing the risk of product delays. This creates an opportunity for a single provider with the technological expertise to provide a comprehensive and cost-effective OEM solution.

PC and PC-peripherals

Consumers are increasingly demanding lower cost, more powerful and easy-to-use software solutions to create, edit, store, present and distribute digital media content on PCs and PC-peripherals such as printers, scanners and CD/DVD burners without the need to install a software product purchased in the aftermarket. To address this demand, and to create a cost-effective and enhanced experience for consumers, OEMs increasingly incorporate digital media solutions within PCs and PC-peripherals to expand the core functionality of these products. As the functionality of hardware and software increases, we believe the need for OEMs to bundle or embed digital media software solutions within these devices will continue to grow.

Mobile Devices

The mobile device market, which includes devices such as camera phones, PDAs and MP3 players, is experiencing significant growth. According to In-Stat/MDR, the camera phone market is expected to grow from approximately 18.2 million units in 2002 to approximately 465 million units in 2007. We believe this growth is due to lower prices combined with increasing consumer demand for new features and functionality to be incorporated within mobile devices, as well as the expectation that their photo, video, audio and data will be accessible anywhere and at anytime. Recent examples of this trend are the picture messaging and media streaming capabilities of mobile phones to deliver photos, video and music. While the growth of mobile devices is significant, third-party software developers face challenges in addressing this market, including the need for significant engineering resources to develop software and firmware solutions across multiple operating systems and central processing units and the ability to service multiple carriers and manufacturers.

Consumer Photo and Video Electronics

The consumer photo and video electronics market, which includes digital still cameras, digital video cameras and flash memory cards, has shown strong growth rates the past few years, and is expected to continue to grow over the next several years. According to In-Stat/MDR, the digital still camera market is expected to grow from approximately 24.8 million units in 2002 to approximately 81.7 million units in 2007, for an approximate 27% compound annual growth rate. As consumers continue to migrate from film-based cameras and tape-based video recorders to digital consumer electronics devices, we believe the demand and expectation for enhanced functionality on these devices will continue to increase. The broad and expanding range of home electronics devices is creating opportunities for a provider of enabling software and technologies to enhance consumers’ digital media experience.

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Home Entertainment Electronics

The home entertainment market, which includes digital televisions, DVD players, DVD recorders, set-top boxes and personal video recorders, is large, growing and becoming networked with the home PC. We believe the DVD player, which can be used for playing both CDs and DVDs, is one of the fastest growing home entertainment products. The next-generation of these devices, the DVD recorder, is expected to grow from approximately 1.3 million units in 2002 to approximately 51.1 million units in 2007, according to In-Stat/MDR. These devices as well as other devices such as set-top boxes and personal video recorders have emerged as platforms for digital media technologies primarily due to improvements in storage technology, advances in microprocessor technology and developments in digital media applications. The convergence of home entertainment devices and computers is generating opportunities for a provider of enabling software to supply technologies for the broad and expanding range of devices available today.

Market Opportunity for Digital Media Solutions

Consumers increasingly expect to be able to distribute media content throughout the home and on the road, requiring their devices to communicate with each other. Software and firmware solutions have transformed these products from boxes with limited functionality to devices with flexible operating environments serving multiple functions. We believe OEMs will continue to leverage innovative solutions to differentiate their products from those of their competitors and improve profitability. We believe that these trends will create significant market opportunities for providers of digital media software and firmware solutions that:

Ÿ offer a diverse and comprehensive portfolio of digital media technologies and solutions addressing each point of the digital media lifecycle;

Ÿ deliver cost-effective solutions within a short development cycle providing increased flexibility for OEM customers;

Ÿ provide products that are easy for the consumer to use;

Ÿ are built on reliable, high-quality technology developed by highly skilled engineers; and

Ÿ can be customized quickly to meet the needs of each individual OEM customer.

The ArcSoft Solution

We are a leading developer and provider of digital media software, firmware and codec solutions for PC, PC-peripheral, mobile device and home entertainment manufacturers to bundle, or embed within their products. Our product offerings are designed to allow our OEM customers to cost-effectively enable and enhance the functionality of their devices, thus differentiating their offerings from competitors and improving profit margins. Key benefits of our solution include:

Comprehensive Portfolio of Solutions for the Digital Media Lifecycle. We offer a comprehensive portfolio of software, firmware and codec solutions designed to enable consumers to manage photo, video and audio media content on digital media devices. We have built an extensive product portfolio providing functionality at each point of the digital media lifecycle that enables capturing, creating, editing, storing,

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presenting and distributing digital media. Our technologies are designed to work across a broad range of PC, PC-peripheral, mobile device and consumer electronics and home entertainment device operating systems and to communicate with multiple hardware components and devices. We believe this interoperability enables our OEM customers to reduce technology integration costs and product risks and to deliver products on time.

Reliable and High-Quality Solutions Based on Core Technologies. Our experience and focus on development and deliverability enables us to provide reliable, high-quality software applications, firmware and codecs. We have created an extensive library of core technologies that form the basis of our product development efforts with an engineering team dedicated exclusively to the development and modification of our core technologies. We use platform-independent solutions that can be adapted or ported to various platforms quickly and easily, enabling us to meet the specific needs of each OEM customer.

Rapid Time to Market and Cost-Effective Engineering to Address OEM and Consumer Demands. We have built an experienced engineering team and a disciplined development process that allows us to respond rapidly to deliver solutions that address new customer and market demands. We believe our highly qualified engineering team based in China enables us to deliver solutions at attractive price points. Currently, we have approximately 235 media scientists and engineers in Hangzhou, nine in Beijing and 29 in Shanghai. We also have relationships with universities such as Zhejiang University in China. These relationships enable us to access research and engineering talent for both collaborative purposes and for recruiting highly qualified personnel. Our development process is structured to provide project tracking and delivery status projections, performance assessment and resource usage and forecasting that gives management a comprehensive view throughout the entire development process. We believe our engineering personnel and processes enable us to respond quickly and cost-effectively to our customers’ requests for new or modified products.

Focus on Ease-of-Use Reduces Costs and Designed to Enhance OEM Margins. Our products and technologies are designed to address customer needs and market trends, incorporate an easy-to-use interface and require a minimal number of actions to perform a particular task. We believe easy-to-use and automated solutions are critical to our OEMs, as this functionality reduces the complexity of their device, simplifies and enhances the user experience and minimizes service calls and returns to the OEM.

Close Collaboration With Customers and Extensive Customization Services. We collaborate closely with our OEM customers to ensure that our products enhance the functionality of each specific device, and are delivered on schedule to meet timing objectives. We have established a client services group, which works together with our customers’ product teams as well as our internal product and engineering groups to ensure we are providing high quality products and services to our customers. We believe our major OEM customers choose to work with us in large part because of our track record of consistently delivering high-quality software and firmware.

Our Strategy

Our objective is to become the global leader in the design and delivery of digital media software, firmware and codec solutions to leading PC, mobile device and consumer electronic and home entertainment device manufacturers. The principal elements of our strategy are to:

Expand our Customer Base and Leverage Relationships. We intend to pursue additional PC, mobile device and consumer electronics and home entertainment manufacturers to increase our market share. We also intend to leverage our relationships with our current OEM customers to expand into additional product lines. For example, we originally licensed software solutions to Hewlett-Packard for their printers and have

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subsequently developed and licensed software solutions for Hewlett-Packard scanners, PCs, digital still and video cameras and PDAs. We plan to work with our customers to develop software to enable next-generation digital devices, and with component manufacturers to anticipate and develop innovative solutions to incorporate into the firmware for digital devices.

Extend our Product Portfolio and Core Technologies in Existing Markets. We intend to further expand our product portfolio to provide additional solutions to our current customers and markets. We intend to leverage our library of core technologies and applications to provide our customers with incremental solutions to meet their needs. For example, we made minor modifications to PhotoBase to extend its portability for use with PDAs and mobile phones, and we intend to incorporate it into DVD players and set-top boxes. We believe that our wide range of solutions can be leveraged across multiple OEM product categories through the application and customization of our core technologies. We believe leveraging our core technologies with low-cost modifications will enable us to continue to develop new products rapidly and cost-effectively.

Extend our Core Technologies into Next Generation Embedded and Wireless Markets. We intend to expand our solutions based on our core technologies into next generation embedded and wireless markets. For example, we have also recently released mobile editions of PhotoImpression and PhotoBase. In addition, we are developing MaestroLink/MediaMirror, an embedded technology that is designed to enable consumer electronics and home entertainment devices such as DVD players to receive and play digital content in any room in the home. We believe that our library of core technologies and our ability to provide significant customization services will allow us to expand our presence in the wireless and embedded markets. We intend to continue to offer new products to expand upon our early position in these markets.

Continue to Develop Talented Engineering Personnel and Efficient Processes. We intend to continue to expand our engineering base in China to access high-level, cost-effective engineering talent. We also plan to continue to expand our relationships with leading universities such as Zhejiang University in China, as well as establish new relationships with other universities. We plan to leverage these relationships to develop technologies that can be incorporated into our products and to recruit highly qualified engineering personnel. We also intend to continue to improve the efficiency of our research and development processes to develop customized software using low-cost methodologies with rapid time to market. We believe this will enable us to further expand our product portfolio and our customer base, as well as continue to deliver solutions rapidly in a cost-effective manner.

Pursue Strategic Relationships and Acquisitions

We intend to continue to establish strategic relationships to license third-party technologies and to provide complementary applications and solutions. We intend to continue to build relationships with semiconductor manufacturers and developers of operating systems and related technologies to enable compatibility with our products and enable us to further expand our customer base. We also plan to evaluate and pursue opportunities to make investments in, or acquire, complementary businesses and technologies and to expand our distribution channels. For example, in March 2004, we acquired from Zoran Corporation, a semiconductor company, rights for certain software and hardware technologies related to our home connectivity and digital media playback technology.

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Our Products

We offer an extensive portfolio of software, firmware and codec technologies to address each type of digital media content, including photos, videos and audio, for each stage of the digital media lifecycle. Our software products are designed to enable consumers to capture, create, edit, store, present and distribute digital media. Our major software products for digital photos include PhotoImpression, a photo editing application, and PhotoBase, a digital media management and presentation application. Our major software product for video includes ShowBiz DVD, a video editing and DVD authoring application. Our new mobile software products include PhotoBase Mobile Edition, a photo editing application for mobile devices, MMS Composer Mobile Edition, a mobile media management and email application, and PhotoPrinter Mobile Edition, a mobile printing application.

Our firmware products are designed to allow our OEM customers to expand the functionality of their devices by embedding our core technologies, enabling these devices for advanced photo, video and audio capabilities. Our embedded solutions include our Digital Camera Suite, which offers photo viewing, editing panorama creation and printing, DVD Recorder Suite, which enables consumers to import, view, edit and archive photos on a DVD player, Set-top Box Suite, which brings personal photo and video imaging to the television, and Printer Suite, which provides photo enhancing, cropping and printing.

Our codec technologies are based on open standards and provide an enabling platform for our OEM customers to enhance their products. Our codecs are designed to provide digital devices with the ability to play audio, video, voice and playback. Our major codec products include Mobile Media Codec, or MMC, which empowers mobile devices with imaging and audio functionality, and MPEG-1 Codec, MPEG-2 Codec and MPEG-4 Codec, which are designed to provide advanced video capabilities.

Our products are engineered for digital media devices in four main categories, including PCs and PC-peripherals, mobile devices, consumer electronics and home entertainment devices.

PCs and PC-Peripherals

We develop cost-effective, easy-to-use software and firmware solutions that enable users to capture, edit, store, display and transfer digital media assets on desktop computers including Windows and Macintosh operating systems, as well as on PC-peripherals, such as printers, scanners, webcams and CD/DVD burners.

Mobile Devices

We develop software, firmware and codec solutions that are incorporated by our OEM customers into the operating systems of mobile devices, such as camera phones, PDAs and MP3 players. These solutions provide enhanced text, image and video features for these devices.

Consumer Photo and Video Electronics

We develop software solutions designed to enable users to migrate the functionality traditionally deployed on PCs such as editing, storing, displaying and transferring digital media to be incorporated into consumer photo and video electronics devices, including digital still cameras, digital video cameras and flash memory cards.

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Home Entertainment

We are developing software, firmware and codec solutions that will be incorporated into home entertainment products, including digital televisions, DVD players, DVD recorders, set-top boxes and PVRs. We are designing these solutions to enable consumers to share images and video in any room in the home through home entertainment devices that incorporate the MaestroLink/MediaMirror technology.

The following diagram illustrates how we believe our software products can be bundled with, or embedded within, a broad array of consumer devices:

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The following table identifies our products that accounted for at least $500,000 of our total revenue during the fiscal year ended June 30, 2004:

Products	Description	Device Category
ArcSoft ShowBiz DVD	ŸEnables capture, edit and design of video presentations, creation of custom DVD movies and photo slideshows, and customization of DVD menus.	PC & PC-peripherals
ArcSoft PhotoImpression product family	ŸEnables photo editing with project templates and printing capabilities.	PC & PC-peripherals Mobile devices
PhotoStudio	ŸEnables photo editing, such as red-eye removal, color correction and image cloning. Also includes tools for batch image processing, image file management and creation of animated 3D text.	PC & PC-peripherals
ArcSoft VideoImpression	ŸEnables capture, edit and design of video presentations and works with photos and videos to create slideshows for sending via email or burning to CD.	PC & PC-peripherals Mobile devices
ArcSoft PhotoBase product family	ŸDigital media management and presentation application enabling sorting, sharing and archiving of digital media collections and editing and printing of digital photos.	PC & PC-peripherals Mobile devices Consumer electronics Home entertainment devices
ArcSoft Panorama Maker	ŸEnables creation of panoramic images by automatically stitching multiple images, requiring little or no post-process modification.	PC & PC-peripherals Mobile devices Consumer electronics
ArcSoft Funhouse	ŸEnables creation, printing and email of photo scenes with built-in or custom templates.	PC & PC-peripherals
ArcSoft PhotoPrinter product family	ŸEnables printing of multiple photos on a single page and multiple pages at one time, as well as image editing and enhancement features.	PC & PC-peripherals Mobile devices Consumer electronics Home entertainment devices

In March 2004, we acquired from Zoran Corporation rights for certain software and hardware technologies related to our home connectivity and digital media playback technology. MaestroLink/MediaMirror is an embedded, application-specific integrated circuit solution that includes a PC software application and enables consumer electronics and home entertainment devices such as DVD players to receive and play digital content through a wired or wireless home network. This product line incorporates two main components: IP that resides within the firmware of electronic devices such as DVD players and software that resides on the user’s PC. The MaestroLink/MediaMirror product is not yet in commercial product and we do not currently expect to begin shipping this product in volume until the end of calendar 2004.

Our Customers

We license our software solutions to OEMs in the PC, PC-peripheral, mobile device, consumer electronics and home entertainment markets. We also provide website design and management services for a limited number of key customers. The following is a representative list of our OEM customers which accounted for at least $500,000 of our total revenue during the fiscal year ended June 30, 2004.

Canon	Nikon
Epson	palmOne
Hewlett-Packard	World Wide Licenses (Polaroid brands)
Matsushita (Panasonic brands)	Zomax (Lexmark brands)

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For the fiscal year ended June 30, 2004, Hewlett-Packard, Matsushita and Canon accounted for approximately 25.3%, 11.2% and 10.6% of our total revenue, respectively. No other single customer accounted for more than 10% of our total revenue in fiscal 2004.

Our license agreements generally have terms of one to three years and can be renewed automatically for periods ranging from one to three years. Most of these agreements are subject to standard termination provisions, including termination for breach or insolvency by either party to the agreement. Under these agreements, we generally have the right to audit the records of our licensees to verify compliance with royalty payments. In addition, certain of our license agreements provide that if we charge another customer a lower royalty fee for the same product that is the subject of the license, the licensee may have the right to obtain the lower royalty fee for the product.

Our Technology

We have developed a library of technologies that can be leveraged across multiple platforms for multiple devices. Our core technologies can be customized quickly and easily, thus enabling us to cost-effectively develop software solutions tailored to meet the specific needs of our OEM customers.

Our core technologies include the following design principles:

Ÿ Flexible architecture that can be leveraged to expand and enhance product lines;

Ÿ Device and platform independent technologies and modular architecture for greater platform independence; and

Ÿ Utilization of industry standards whenever possible to promote market acceptance of our products.

Our modular architecture enables us to create new products with fewer resources and in less time than would be required to design them using entirely new components. For example, we originally licensed PhotoBase, a successful desktop application, for PCs, and with minor modifications we expanded its application for use in PDAs and mobile phones and intend to incorporate it into DVD players and set-top boxes. As new functionality becomes necessary or available for a specific platform, we intend to develop the appropriate modules to continue to expand our products to deliver additional technology under a single product or as specialized products for that platform.

The flexible architecture of our software supports a significant number of PC, PC-peripheral, mobile, consumer electronics and home entertainment platforms. A significant portion of the software code that is used to implement our products is platform-independent. Each software module contains a platform-independent core that is surrounded by a customized application program interface that interacts with the devices on a broad range of platforms. For example, we have developed a technology that allows red-eye removal, which can be incorporated into multiple products or sold independently to meet the particular needs of our OEM manufacturers. As a result, we can efficiently create new products with existing modules and incorporate these products into new operating systems or hardware platforms and cost-effectively support many customers and varied product lines.

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Sales, Marketing and Technical Support

Our global sales force is focused on obtaining new OEM customers and maintaining relationships with current licensees. As of June 30, 2004, our sales force, consisting of 25 sales professionals, is located in Japan, Taiwan, the United Kingdom and throughout the United States and China. We motivate our sales force through commission-based compensation plans. Our marketing efforts are focused on obtaining new OEM customers and maintaining relationships with our existing OEM customers.

We offer customer support directly to our OEM customers as well as to the purchasers of our OEM customers’ products. We offer web-based support, including email and a frequently asked questions search engine. We also provide telephone support directly to consumers as well as indirectly through our OEM customers. This coverage is available in Europe, Japan, Taiwan, China and the United States and is available in many languages. These services are provided directly by us or by a third party subcontracted by us.

We also have a separate engineering team focused on developing customized solutions for our OEM customers. We work closely with our OEM customers to ensure that our products maximize the potential of the device and meet timing objectives. We have established a client services group to work with our customers’ product teams and our internal product and engineering organizations, to provide these services to our key customers.

Research and Development

Engineering organization

Our engineering and development efforts focus on the design and implementation of new products and upgrades to existing products, client product customization and research on technologies for new markets. Our engineering organization consists of an engineering management team in our U.S. headquarters as well as development centers in China. Our development center in Hangzhou, China, established in 1998, develops PC, mobile device and consumer electronics and home entertainment products and technologies and includes an independent quality assurance team. Our development center in Beijing was established in 2002 and focuses on providing solutions for digital media content management for wireless networks. We recently established a third development center in Shanghai focusing on consumer electronics products and mobile technology and applications. As of June 30, 2004, we had 301 research and development employees, including 28 employees in California, 235 employees in Hangzhou, 9 in Beijing and 29 in Shanghai. Our research and development expenditures were approximately $6.6 million in fiscal 2002, $6.6 million in fiscal 2003 and $6.8 million in fiscal 2004.

Our U.S. engineering team is responsible for overall product management and quality assurance. Our quality assurance team in the United States is responsible for user acceptance verification of all deliverables from our China teams. The Hangzhou team also provides product localization and user interface service across the development centers.

We also have a relationship with Zhejiang University in China. This relationship enables us to access research and engineering talent for both collaborative purposes and for recruiting highly qualified personnel. Through this relationship, we develop and own certain technologies for integration into our products.

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Engineering process

Our engineering process includes continuous tracking of project and delivery status, performance assessment, resource usage and forecasting, providing management visibility through the development process. A typical engineering project involves 14 steps with a team leader assigned specific responsibility for each of these steps. This individual is responsible for transitioning the project to the next step in the process. For each project, we deploy a client service manager, project manager and quality assurance staff both in the United States and in China. Upon completion of the development of the product, our quality assurance team in the United States conducts a final review and testing before the product is shipped.

To provide predictability to our engineering, we have implemented the following practices:

Ÿ Project Size Control.    To ensure that the size of the project is manageable, we implement a project plan in several phases. If necessary, each engineering project is divided into subprojects to ensure that the size of the project is manageable.

Ÿ Feature-Based Development.    Each project is broken down into a set of features, with each feature treated as a separate unit for specifications, design, coding, testing, verification and sign-off. While features may be related, the engineering team completes the project feature by feature.

Ÿ Incremental Delivery.    We continually measure the progress of the project by the percentage of features that have been completed. At any time in the life cycle of the project, our team is only working on a limited number of features simultaneously. Features are specified in the delivery plan to coordinate the efforts between our coding team and our quality assurance team.

Competition

The market for our products is highly competitive and rapidly evolving. We expect competition to increase, which may result in price reductions, reduced margins or loss of market share. We may be unable to compete successfully against current or future competitors. While we do not compete with any single entity with respect to all aspects of our business, we compete with various public and private companies in each of our target markets. In addition, developers of operating system software, including Microsoft and Apple Computer, may include features and functionality within new product releases that might compete with our products. We also face competition from the internal research and development departments of other software companies and OEM manufacturers, including some of our current customers. Many of our current competitors and potential competitors have longer operating histories and significantly greater financial, technical, sales and marketing resources and greater name recognition than we do. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products.

We believe the primary competitive factors impacting our business are:

Ÿ ability to offer products that balance performance and cost;

Ÿ ability to provide high-quality, cost-effective engineering;

Ÿ timeliness of introduction of new products that address customer needs;

Ÿ the quality, reputation and breadth of product offerings;

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Ÿ the quality of the engineering expertise and technical innovations;

Ÿ relationships with OEMs;

Ÿ compatibility with emerging industry standards;

Ÿ scope and responsiveness of service and technical support;

Ÿ timeliness and quality of modifications and enhancements to existing products to comply with new and evolving hardware and software; and

Ÿ price structure.

Although we believe our products compete favorably with respect to each of these factors, the market for our products is rapidly evolving and we may not be able to maintain our competitive position against current and potential competitors.

Intellectual Property

Our success depends on our ability to protect our proprietary rights. We rely on a combination of patent, copyright, trade secret, trademark and contractual provisions to establish and protect our proprietary rights, and we enter into confidentiality agreements with our employees and consultants. As of June 30, 2004, we had one issued patent, 35 patent applications pending in the United States and one international patent application pending which reserves our right to file applications in multiple foreign jurisdictions. Our patent and patent applications are based primarily on unique image and video processing algorithms and digital media content manipulation in systems, such as consumer electronics devices. We do not know if our current or future patent applications will result in a patent being issued with the scope of the claims we seek, if at all, or whether any patents we may receive will be challenged or invalidated. The following are our registered trademarks: ArcSoft, ArcSoft Collage Creator, ArcSoft Funhouse, ArcSoft Greeting Card Creator, ArcSoft Panorama Maker, ArcSoft PhotoBase, ArcSoft PhotoImpression, ArcSoft PhotoMontage, ArcSoft PhotoPrinter, ArcSoft ShowBiz, ArcSoft VideoImpression, PhotoStudio and the ArcSoft logo. The following are our trademarks: ArcSoft DVD SlideShow, ArcSoft MediaMirror, ArcSoft Multimedia Email, ArcSoft QuickDVD, ArcSoft ShowBiz designs, ArcSoft TotalMedia and ArcSoft VideoStablizer. In addition, we have registered copyrights in the areas of digital media management, video editing and DVD authoring.

We license certain software from third-party vendors, enabling us to integrate current and emerging technologies into our software and hardware solutions. We purchase, or license, these third-party technologies from companies including MPEG LA, Dolby Laboratories and Thompson Licensing S.A. In March 2004, we acquired from Zoran Corporation rights for certain software and hardware technologies related to our home connectivity and digital media playback technology.

We generally require our employees, consultants and customers to enter into confidentiality and nondisclosure agreements before we disclose any confidential information regarding our products, technology or business plans. Despite our efforts to protect our proprietary rights through confidentiality and license agreements, employees, consultants and customers may violate these agreements, and unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. It is difficult to monitor unauthorized use of technology, particularly outside the United States where the laws may not protect our proprietary rights as fully as in the United States. In addition, our competitors may

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independently develop technology similar to ours. Any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in the loss of revenue and competitive advantage. Infringement claims and lawsuits to protect our proprietary rights would likely be expensive to resolve and would require management’s time and resources, and, therefore, could harm our business.

We have from time to time received notices of claims of infringement of other parties’ proprietary rights. Intellectual property litigation is expensive and time-consuming and could divert management’s attention away from running our business. Litigation could also require us to develop non-infringing technology or enter into royalty or license agreements or require us to pay damages or prohibit us from selling certain products in the future. In addition, our license agreements, including the agreements we have entered into with our large OEM customers, generally contain warranties of non-infringement and commitments to indemnify our customers against liability arising from infringement of third-party intellectual property rights. These commitments may require us to indemnify or pay damages to our customers for all or a portion of any license fees or other damages, including attorneys’ fees, our customers are required to pay, or agree to pay, third parties.

Employees

As of June 30, 2004, we had 394 full-time employees, including 301 in research and development, 57 in sales, marketing and technical support and 36 in general and administrative. None of our employees is covered by a collective bargaining agreement. We believe our relations with our employees are good.

Facilities

The following table describes our principal facilities:

Location	Use	Approximate Square Footage	Lease Expiration Date
Fremont, California	Corporate headquarters	26,000	June 2009
Hangzhou, China	Engineering and development	40,290	October 2005
Beijing, China	Engineering and development	8,629	September 2005
Shanghai, China	Engineering and development	3,143	September 2004 with right to renew until September 2005
Tokyo, Japan	Regional Sales Office	1,329	July 2005
Taipei, Taiwan	Regional Sales Office	2,953	May 2006
London, United Kingdom	Regional Sales Office	482	Month to month

We believe that our current facilities are adequate for our needs for the foreseeable future. We believe that we will be able to find adequate space upon the expiration of our headquarters lease. However, we cannot assure you that additional space will be available on commercially reasonable terms, if at all.

Legal Proceedings

On December 30, 2001, we, along with over 200 other companies, were named as a defendant in a lawsuit filed by The Massachusetts Institute of Technology and Electronics for Imaging. The complaint was filed in the United States District Court, Eastern District of Texas, and alleges infringement of U.S. patent

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No. 4,500,919 owned by The Massachusetts Institute of Technology and licensed to Electronics for Imaging. The first amended complaint seeks unspecified damages, attorneys’ fees and an injunction against further infringement. We are currently participating in a joint defense agreement with several of the defendants. We, along with our other joint defense members, filed an answer to the first amended complaint on July 1, 2002. On November 24, 2003, we filed a motion for summary judgment, seeking the court’s ruling on whether the plaintiffs had sufficiently complied with the marking requirements of 35 U.S.C. § 287(a). On August 4, 2004, the magistrate judge issued a report and recommendation that the motion for summary judgment be denied except with respect to the issue of actual notice. The report and recommendation states that filing an action for infringement constitutes actual notice. Although this finding may limit our exposure, the plaintiffs will likely challenge the report and recommendation. We cannot be certain that the report and recommendation will be adopted by the court or what impact this will have on our exposure or the litigation. No trial date has been set for this case. Although we intend to vigorously defend against these claims, we cannot predict the outcome of this litigation.

We may also be subject to various claims and legal actions arising in the ordinary course of business.

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MANAGEMENT

Executive Officers and Directors

The following table shows information about our executive officers, key employees and directors and their ages as of June 30, 2004:

Name	Age	Position(s)
Hui (Michael) Deng	42	President, Chief Executive Officer and Director
Alfred V. Larrenaga	57	Senior Vice President and Chief Financial Officer
Todd J. Rumaner	35	Senior Vice President and Chief Operating Officer
Liangkui (Frank) Feng	38	Vice President of Engineering
Hua (James) Zhong	38	Vice President of ArcSoft, Inc., and General Manager, ArcSoft (Hangzhou) Company, Limited
David C. Nagel	59	Chairman of the Board
Gregory K. Hinckley	57	Director
Timothy C. Lin	52	Director
Ronald J. Smith	54	Director

(1) Member of the audit committee

(2) Member of the compensation committee

(3) Member of the nominating and corporate governance committee

Hui (Michael) Deng is our president, chief executive officer and a member of our board of directors. Mr. Deng co-founded ArcSoft in May 1994. Mr. Deng holds both B.S. and master’s degrees in physics from Beijing University, China, and a Ph.D. in physics from Washington University.

Alfred V. Larrenaga has served as our senior vice president of finance and chief financial officer since March 2004. Prior to joining us, Mr. Larrenaga served as vice president and chief financial officer of Vega Vista, Inc., a fabless semiconductor company from April 2001 to June 2003. From June 1999 to March 2001, Mr. Larrenaga served as senior vice president and chief financial officer for InVision Technologies, Inc., a manufacturer of detection products. From August 1997 to May 1999, Mr. Larrenaga served as executive vice president and chief financial officer of Integrated Package Assembly Corporation, an independent semiconductor packaging and assembly foundry. Mr. Larrenaga is a certified public accountant and holds a B.S. in accounting from Santa Clara University.

Todd J. Rumaner served as our vice president of sales and marketing from December 1998 to June 2002, as our senior vice president of sales and marketing from December 2002 to present, and he became our senior vice president and chief operating officer in March 2004. From August 2002 to November 2002, Mr. Rumaner served as director of business development at Concord Camera Corporation, a digital camera manufacturing company.

Liangkui (Frank) Feng has served as our vice president of engineering since May 2003. Mr. Feng joined us in February 1999, as a senior engineer working on various ArcSoft photo and Internet applications. Prior to joining us, Mr. Feng served as a director for ArcSoft ZDQ Software Development

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Company in China, a joint venture between ArcSoft and Hanzhou ZDQ Software Company, from August 1998 to February 1999. Prior to joining ArcSoft ZDQ Software Development, Mr. Feng served as a research and development director for Qware Corporation of Zhejiang University in China. Mr. Feng holds B.S. and master’s degrees in computer science from Zhejiang University, China.

Hua (James) Zhong has served as a vice president since April 2004 and has served as general manager of our subsidiary ArcSoft Hangzhou in China since January 2003. From December 2001 to January 2003, Mr. Zhong served as deputy general manager and from October 2001 to December 2001 as the engineering director at ArcSoft Hangzhou. From March 2001 to October 2001, Mr. Zhong served as the engineering director and from August 1998 to March 2001 as a department manager of ArcSoft ZDQ Software Development Company in China, a joint venture between ArcSoft and Hangzhou ZDQ Software Company. Prior to joining ArcSoft ZDQ Software Development Company, Mr. Zhong served as vice director of research and development for Qware Corporation of Zhejiang University in China from December 1992 to August 1998. Mr. Zhong holds a B.S. degree in computer science from Zhejiang University, China.

David C. Nagel has served as our chairman since September 2000. Mr. Nagel has served as the president and chief executive officer of PalmSource, Inc., a software company, since September 2001. Prior to joining PalmSource, Mr. Nagel served as president and chief technology officer of AT&T Labs, a telecommunications company, from April 1996 to September 2001. Prior to joining AT&T, Mr. Nagel served as senior vice president at Apple Computer, a personal computer and peripheral company, from 1988 to 1996. Mr. Nagel serves as a member of the board of directors and a member of the compensation committee of Liberate Technologies, Inc., a software company. Mr. Nagel holds a B.A. in engineering, a master’s degree in engineering and a Ph.D. in experimental psychology from the University of California, Los Angeles. Mr. Nagel serves a member of the board of directors for palmSource, Inc. and Liberate Technologies, a software company, and is a member of the Board of Trustees of the UCLA Foundation.

Gregory K. Hinckley has served as one of our directors since April 2004. Mr. Hinckley has served as president of Mentor Graphics Corporation, an electronic design automation company, since March 2000. From January 1997 to March 2000, Mr. Hinckley served as executive vice president, chief operating officer and chief financial officer of Mentor Graphics. From November 1995 until January 1997, Mr. Hinckley served as senior vice president of VLSI Technology, Inc., a manufacturer of complex integrated circuits. Mr. Hinckley serves as a member of the board of directors and a member of the audit committee of Amkor Technology, Inc., a semiconductor contract manufacturing company, and as a member of the board of directors and a member of the audit committee and compliance committee of UNOVA, Inc., an industrial technologies company. Mr. Hinckley holds a B.A. in physics from Claremont McKenna College, a master’s degree in applied physics from the University of California, San Diego, and an MBA from Harvard Business School.

Timothy Lin has served as one of our directors since September 2000. Mr. Lin has served as president of Catalyst Venture Capital, a venture capital firm, since September 1996. In January 1990, Mr. Lin co-founded Champion Consulting Group, Inc., a venture capital fund management company, and served as its executive vice president until August 1996. Mr. Lin holds a B.S. in electro-physics from National Chial Tung University and an MBA from National Cheng-Chi University.

Ronald J. Smith has served as one of our directors since April 2004. Dr. Smith has served as senior vice president since January 2001, and vice president of the Wireless Communications and Computing Group, of Intel Corporation, a semiconductor company, from March 1996 to January 2001. Dr. Smith has also served as a director for Integrated Device Technology, Inc., a semiconductor company, since April 2004. Dr. Smith received a B.A. degree in physics from Gettysburg College and a M.S. and Ph.D. in physics from the University of Minnesota.

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Board of Directors

Our bylaws currently provide for a board of directors consisting of not less than three nor more than five members. We currently have authorized three directors. Upon completion of this offering, the board of directors will be divided into three classes, each serving staggered three-year terms:

Ÿ Our Class I directors will include                                        , and their terms will expire at the first annual meeting of stockholders following the date of this prospectus;

Ÿ Our Class II directors will include                                         , and their terms will expire at the second annual meeting of stockholders following the date of this prospectus; and

Ÿ Our Class III directors will include                                         , and their terms will expire at the third annual meeting of stockholders following the date of this prospectus.

As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective terms. Each officer is elected by the board of directors and serves at its discretion. This classification of the board of directors may delay or prevent a change in control of ArcSoft or in our management.

Each of our executive officers and directors, other than non-employee directors, devotes his or her full time to our affairs. Our non-employee directors devote the amount of time to our affairs as is necessary to discharge their duties.

There are no family relationships among any of our directors or executive officers.

Board Committees

As of the closing of this offering, our board of directors will have an audit committee, a compensation committee and a nominating and corporate governance committee, each of which will have the composition and responsibilities described below:

Audit Committee.    The audit committee provides assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management. Upon completion of this offering, the audit committee will consist of at least three directors, each of whom will be a non-management member of our board of directors and at least one of whom will be audit committee financial expert as currently defined under Securities and Exchange Commission rules. We believe that the composition of our audit committee will meet the criteria for independence under, and the functioning of our audit committee will comply with, the applicable requirements of, the Sarbanes-Oxley Act of 2002, the current rules of the Nasdaq Stock Market and Securities and Exchange Commission rules and regulations. We intend to comply with future audit committee requirements as they become applicable to us.

Compensation Committee.    The compensation committee determines our general compensation policies and the compensation provided to our directors and officers. The compensation committee also

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reviews and determines bonuses for our officers and other employees. In addition, the compensation committee reviews and determines equity-based compensation for our directors, officers, employees and consultants and administers our stock option plans and employee stock purchase plan. Upon completion of this offering, the compensation committee will consist of at least three directors, each of whom will be a non-management member of our board of directors. We believe that the composition of our compensation committee will meet the criteria for independence under, and the functioning of our compensation committee will comply with, the applicable requirements of, the Sarbanes-Oxley Act of 2002, the current rules of the Nasdaq Stock Market and Securities and Exchange Commission rules and regulations. We intend to comply with future compensation committee requirements as they become applicable to us.

Nominating and Corporate Governance Committee.    The nominating and corporate governance committee is responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate governance matters. Upon completion of this offering, the nominating and governance committee will consist of at least three directors, each of whom will be a non-management member of our board of directors. We believe that the composition of our nominating and governance committee will meet the criteria for independence under, and the functioning of our nominating and corporate governance committee will comply with, the applicable requirements of, the Sarbanes-Oxley Act of 2002, the Nasdaq Stock Market and Securities and Exchange Commission rules and regulations. We intend to comply with future nominating and corporate governance committee requirements as they become applicable to us.

Director Compensation

Each outside member of our board of directors receives an annual cash retainer fee of $34,000 and an additional $             for each committee meeting attended. In addition, each committee chair receives an annual retainer of $            . We reimburse the directors for reasonable expenses in connection with attendance at board and committee meetings. Directors also are eligible to receive and have received stock options under our 2000 stock plan. The exercise price of stock options to directors is based on the fair market value as determined by our board of directors on the date of grant. The following non-employee directors have received stock options under our 2000 stock plan as follows:

Name	Number Of Shares Underlying Options Granted	Exercise Price Per Share		Date of Grant
Gregory K. Hinckley	40,000	$	2.00	7/10/04
David C. Nagel	150,000	$	0.50	10/20/00
Ronald J. Smith	40,000	$	2.00	7/10/04

Outside directors will receive nondiscretionary, automatic grants of nonstatutory stock options under our 2004 stock incentive plan. An outside director will be automatically granted an initial option to purchase              shares upon first becoming a member of our board of directors. The initial option vests and becomes exercisable over four years, with the first 25% of the shares subject to the initial option vesting on the first anniversary of the date of grant and the remainder vesting monthly thereafter. Immediately after each of our regularly scheduled annual meetings of stockholders, each outside director will be automatically granted a nonstatutory option to purchase                     shares of our common stock, provided the director has served on our board for at least six months. Each annual option to outside directors who have received

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an initial option under either of our stock option plans shall vest and become exercisable ratably over 48 months and to the other outside directors shall vest and become exercisable ratably over 12 months. The options granted to outside directors will have a per share exercise price equal to 100% of the fair market value of the underlying shares on the date of grant, and will become fully vested if we are subject to a change in control. See “Employee benefit plans — 2004 Stock Incentive Plan.”

Compensation Committee Interlocks and Insider Participation

No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other entity, nor has any interlocking relationship existed in the past.

Executive Compensation

The following table summarizes all compensation paid to our Chief Executive Officer and to our other most highly compensated executive officer who was the only executive officer whose total annual salary and bonus exceeded $100,000, for services rendered in all capacities to us during the fiscal year ended June 30, 2004. We refer to these officers as our named executive officers.

Summary Compensation Table

	Annual Compensation							Long-Term Compensation
Name and Title	Salary($)		Bonus($)		Other($)			Shares Underlying Options(#)
Hui (Michael) Deng President and Chief Executive Officer	$	250,000	$	100,000		—		—
Todd J. Rumaner Senior Vice President and Chief Operating Officer		200,000		155,000	$	6,000	(1)	140,000

(1) Consists of payments made pursuant to a car allowance.

Alfred V. Larrenaga became our Senior Vice President and Chief Financial Officer in March 2004. Mr. Larrenaga’s salary for fiscal 2004 on an annualized basis was $200,000. In August 2004, Mr. Rumaner received a bonus of $110,000 for extraordinary services to the Company to date.

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Stock Options

The following tables set forth certain information for the fiscal year ended June 30, 2004 with respect to stock options granted to and exercised by the individuals named in the Summary Compensation Table above. The percentage of total options granted is based on an aggregate of 947,800 options granted in fiscal 2004.

Option Grants in Fiscal 2004

	Individual Grants
Name	Number of Shares Underlying Options Granted(#)	Individual Grants % of Total Options Granted to Employees in Fiscal 2004		Exercise price Per Share($)(1)		Expiration Date(2)	Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term($)(3)
							5%		10%
Hui (Michael) Deng	—	—			—	—		—		—
Todd J. Rumaner	140,000	14.8	%	$	2.00	4/15/14	$		$

(1) The exercise price for each grant is equal to 100% of the fair market value of our common stock on the date of grant as determined by our Board of Directors.

(2) The options have a term of 10 years, subject to earlier termination in certain events related to termination of employment.

(3) Potential realizable values are calculated by:

Ÿ multiplying the number of shares of our common stock subject to a given option by the mid-point of the initial public offering price range of $             per share;

Ÿ assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rates shown in the table for the entire 10-year term of the option; and

Ÿ subtracting from that result the total option exercise price.

The 5% and 10% assumed rates of appreciation are suggested by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of the future common stock price. There can be no assurance that any of the values reflected in the table will be achieved.

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Aggregated Option Exercises in Fiscal 2004 and Year-End Option Values

The following table assumes a per-share fair market value equal to $            , the mid-point of the estimated initial public offering price range.

Name	Shares Acquired on Exercise(#)	Value Realized($)	Number of Unexercised Options at Fiscal Year-End		Value of Unexercised In-The-Money Options at Fiscal Year-End
			Exercisable	Unexercisable	Exercisable	Unexercisable
Hui (Michael) Deng	80,000		1,019,116	467,469	$	$
Todd J. Rumaner	—	—	225,000	515,000

Employee Benefit Plans

1997 Stock Plan

Our board of directors and stockholders adopted our 1997 Stock Plan in January 1997 and December 1997, respectively. A total of 3,500,000 shares of common stock were originally reserved for issuance under the 1997 Stock Plan. On September 16, 2000, our board of directors discontinued grants under our 1997 Stock Plan. As of June 30, 2004, we had issued 762,650 shares of common stock upon the exercise of options granted under the 1997 Stock Plan. There are no outstanding options to purchase shares of common stock and no shares remain available for grant under the 1997 Stock Plan.

2000 Stock Plan

Our board of directors and stockholders adopted our 2000 Stock Plan in May 2000. A total of 5,000,000 shares of common stock were reserved for issuance under the 2000 Stock Plan. Effective upon the closing of this offering, our board of directors will discontinue grants under our 2000 Stock Plan as to future grants. However, options outstanding under the 2000 Stock Plan will continue to be governed by the terms of the 2000 Stock Plan.

As of June 30, 2004, we had issued 148,124 shares of common stock upon the exercise of options granted under the 2000 Stock Plan, and we had outstanding options to purchase 4,187,547 shares of common stock at a weighted average exercise price of $1.49 per share. Effective upon the closing of this offering, no shares will be available for grant under the 2000 Stock Plan.

2004 Stock Incentive Plan

General.    Our 2004 stock incentive plan was adopted by our board of directors in                     2004, and subject to stockholder approval, will become effective upon the completion of this offering.

Administration.     The 2004 stock incentive plan will be administered by our compensation committee. The 2004 stock incentive plan provides for the grant of options to purchase shares of common stock, restricted stock, stock appreciation rights and stock units. Incentive stock options may be granted only to employees. Nonstatutory stock options and other stock-based awards may be granted to employees, non-employee directors, advisors and consultants.

The board of directors will be able to amend or modify the 2004 stock incentive plan at any time, with stockholder approval, if required or desirable.

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Authorized Shares.                    shares of common stock have been authorized for issuance under the 2004 stock incentive plan. However, no participant in the 2004 stock incentive plan can receive option grants or stock appreciation rights for more than                      shares total in any calendar year, or for more than shares total in the first year of service. The number of shares reserved for issuance under the 2004 stock incentive plan will be increased on the first day of each of our fiscal years from 2005 through 2014 by the lesser of:

Ÿ                      shares;

Ÿ         % of our outstanding common stock on the last day of the immediately preceding fiscal year; or

Ÿ the number of shares determined by the board of directors.

Plan Features.    Under the 2004 stock incentive plan:

Ÿ We expect that options granted to optionees other than outside directors will generally vest as to                 % of the shares one year after the date of grant and as to                          of the shares each month thereafter.

Ÿ Nondiscretionary, automatic grants of nonstatutory stock options will be made to outside directors. An outside director will be granted automatically an initial option to purchase                      shares upon first becoming a member of our board of directors. The initial option vests and becomes exercisable over four years, with the first 25% of the shares subject to the initial option vesting on the first anniversary of the date of grant and the remainder vesting monthly thereafter. Immediately after each of our regularly scheduled annual meetings of stockholders, each outside director will be automatically granted a nonstatutory option to purchase                      shares of our common stock, provided the director has served on our board for at least six months. Each annual option to outside directors who have received an initial option under either of our stock option plans shall vest and become exercisable ratably over 48 months and to the other outside directors shall vest and become exercisable ratably over 12 months. The options granted to outside directors will have a per share exercise price equal to 100% of the fair market value of the underlying shares on the date of grant, and will become fully vested if we are subject to a change of control.

Ÿ Generally, if we merge with or into another corporation, we may accelerate the vesting or exercisability of outstanding options and terminate any unexercised options unless they are assumed or substituted for by any surviving entity or a parent or subsidiary of the surviving entity. Stock options automatically granted to outside directors fully vest if we merge with or into another corporation.

Ÿ The plan terminates 10 years after its initial adoption, unless earlier terminated by the board. Our board of directors may amend or terminate the plan at any time, subject to stockholder approval where required by applicable law. Any amendment or termination may not impair the rights of holders of outstanding awards without their consent.

The number of shares or other benefits granted under the 2004 stock incentive plan may be subject to the attainment of performance goals.

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2004 Employee Stock Purchase Plan

General.    Subject to stockholder approval, the board of directors adopted our 2004 employee stock purchase plan in                     2004, to be effective on completion of this offering. A total of                      shares of common stock have been reserved for issuance under our employee stock purchase plan. The number of shares reserved for issuance under the employee stock purchase plan will be increased on the first day of each of our fiscal years from 2005 through 2013 by the lesser of:

Ÿ                      shares;

Ÿ         % of our outstanding common stock on the last day of the immediately preceding fiscal year; or

Ÿ the number of shares determined by the board of directors.

Administration.    Our 2004 employee stock purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code, will be administered by the board of directors or by a committee appointed by the board. Employees, including our officers and employee directors but excluding 5% or greater stockholders, are eligible to participate if they are customarily employed for more than 20 hours per week and for more than five months in any calendar year. Our 2004 employee stock purchase plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 15% of an employee’s total compensation. The maximum number of shares a participant may purchase during a single purchase period is                      shares.

Offering and Participation Periods.    The 2004 employee stock purchase plan will be implemented by a series of overlapping offering periods of 24 months’ duration, with new offering periods, other than the first offering period, beginning on                  and                  of each year except as otherwise determined by our board of directors. The board of directors will establish purchase periods for our 2004 employee stock purchase plan, none of which will exceed six months. During each purchase period, payroll deductions will accumulate, without interest. On the purchase dates set by the board of directors for each purchase period, accumulated payroll deductions will be used to purchase common stock. The initial offering period is expected to begin on the date of this offering and end on                     , 2005. The initial purchase period is expected to begin on the date of this offering and end on                     , 2004.

The purchase price will be equal to 85% of the fair market value per share of common stock on either the first day of the offering period or on the last day of the purchase period, whichever is less. Employees may withdraw their accumulated payroll deductions at any time. Participation in our 2004 employee stock purchase plan ends automatically on termination of employment with us. Immediately before a corporate reorganization, the offering period and purchase period then in progress shall terminate and stock will be purchased with the accumulated payroll deductions, unless the 2004 employee stock purchase plan is assumed by the surviving corporation or its parent corporation under the plan of merger or consolidation.

401(k) Plan

In December 1997, we adopted a 401(k) plan covering our full-time employees located in the United States. The 401(k) plan is intended to qualify under Section 401(k) of the Internal Revenue Code, so that contributions to the 401(k) plan by employees or by us, and the investment earnings thereon, are not taxable to employees until withdrawn from the 401(k) plan, and so that we can deduct our contributions, if any, when made. Pursuant to the 401(k) plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit and to have the amount of such reduction contributed to the 401(k)

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plan. The 401(k) plan permits, but does not require, that we provide additional matching contributions to the 40l(k) plan on behalf of all participants in the 401(k) plan. To date, we have not made any contributions to the 401(k) plan.

Employment Agreements and Change in Control Arrangements

Hui (Michael) Deng

General.    On January 1, 1998, Dr. Deng entered into an employment agreement with us to serve as our President and Chief Executive Officer, which agreement was amended and restated effective July 1, 2002. Under the terms of the agreement, as amended and restated, we agreed to pay Dr. Deng an annual salary of $250,000 for a period of four years, ending on June 30, 2006, to be increased each year subject to annual review by our board of directors and in light of our performance and financial situation. We also gave Dr. Deng the opportunity to earn an incentive bonus of up to 40% of his base salary for each fiscal year, which is not subject to the discretion of our board of directors.

Options.    On March 5, 2003, we granted Dr. Deng an option to purchase 1,246,585 shares of common stock at an exercise price of $1.65 per share. Of those shares, 50% vested immediately and 12.5% will vest on every June 30, 2003 through 2006.

Termination.    The agreement further provides that Dr. Deng’s employment relationship with us may be terminated (1) by us without cause upon notice to Dr. Deng; (2) by us with cause at any time; or (3) by Dr. Deng with good reason, 180 days after written notice of cause is provided to us; or (4) by Dr. Deng without any good reason at any time with notice to us. If we terminate Dr. Deng’s employment without cause, or if Dr. Deng voluntarily terminates his employment with us for good reason, under the terms of his agreement, Dr. Deng is entitled to receive a lump sum payment from us equal to (1) four years of his base salary, as adjusted pursuant to any authorization by our board of directors, plus (2) any incentive bonus earned by Dr. Deng in the year in which termination occurs, prorated to the date of termination, plus (3) any unreimbursed expenses accruing to the date of termination. Dr. Deng’s stock option will become fully vested and exercisable within 24 months from the date of termination. If Dr. Deng voluntarily terminates his employment with us without good reason, we must make a lump sum payment to Dr. Deng equal to (1) the greater of two years worth of base salary or the salary owed to him for the remaining term of his employment contract, plus (2) any incentive bonus earned by Dr. Deng in the year in which termination occurs, prorated to the date of termination, plus (3) any unreimbursed expenses accruing to the date of termination. In addition, 50% of Dr. Deng’s stock option will become fully vested and exercisable within 12 months from the date of termination.

Change of Control.    Pursuant to Dr. Deng’s employment agreement, upon a change of control Dr. Deng shall have the right to terminate his employment contract and receive (1) a single lump sum payment equal to the greater of two years worth of his base salary, as adjusted pursuant to any authorization by our board of directors or the salary owed to him for the remaining term of his employment contract, plus (2) 50% of his remaining unvested shares shall be immediately vested and exercisable for 12 months and any forfeiture provisions shall lapse immediately and (3) any earned but unpaid bonus. Upon a change of control, Dr. Deng shall have the right to terminate his employment contract if we are not able to obtain a comparable position with the surviving or new company or if the company does not assume the employment agreement in its entirety. If Dr. Deng terminates his employment upon those terms, he shall receive (1) a single lump sum payment equal to four years of his base salary, as adjusted pursuant to any authorization by our board of directors, plus (2) acceleration of the vesting and exercisability for 24 months from the date of termination of all unvested and unexercised stock options under the employment agreement

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or granted to him thereafter and the lapse of any forfeiture provisions, plus (3) any earned but unpaid bonus for the preceding fiscal year and bonus for the current fiscal year and (4) financial aid to subsidize the exercise of any exercisable option.

Todd J. Rumaner

On November 14, 2002, Mr. Rumaner entered into an employment agreement with us to serve as our senior vice president, sales and marketing. Under the terms of the agreement, we agreed to pay Mr. Rumaner an annual salary of $200,000 for a period of four years, ending on November 15, 2006, to be reviewed annually by our chief executive officer and may be adjusted in light of our performance and financial situation. The agreement provides for a signing bonus of $20,000 to be paid to Mr. Rumaner five days after starting with ArcSoft and an incentive bonus of $200,000 to be paid in equal quarterly installments over the first eight quarters of Mr. Rumaner’s employment with us. The agreement also provides that after the payment of the initial incentive bonus, future bonuses would be reviewed annually by our chief executive officer. In connection with this agreement, on March 5, 2003, we granted Mr. Rumaner an option to purchase up to 600,000 shares of common stock at an exercise price of $1.50 per share. The shares subject to the option vest with respect to 25% of the shares on the first anniversary of his employment with us, and thereafter in equal quarterly installments for 12 quarters. Pursuant to the terms of the agreement, Mr. Rumaner will be entitled to receive certain additional benefits, including an insurance policy for which we pay the monthly premiums. If we terminate Mr. Rumaner’s employment without cause, Mr. Rumaner is entitled to receive 12 additional months of his base salary, paid semi-monthly. Finally, the agreement provides for the reimbursement of up to $40,000 in relocation costs paid by Mr. Rumaner.

Alfred V. Larrenaga

On March 30, 2004, Mr. Larrenaga entered into an employment agreement with us to serve as our senior vice president and chief financial officer. Under the terms of the agreement, we agreed to pay Mr. Larrenaga an annual salary of $200,000 for a period of four years, ending March 29, 2008, to be reviewed annually by our chief executive officer or compensation committee and may be adjusted in light of our performance and financial situation. Mr. Larrenaga has an opportunity to earn an incentive bonus of up to 30% of his base salary for each fiscal year upon achievement of certain performance milestones established for each fiscal year. In connection with this agreement, we granted Mr. Larrenaga an option to purchase up to 180,000 shares of common stock at an exercise price of $2.00 per share. The shares subject to the option vest with respect to 25% of the shares on the first anniversary of his employment with us, and thereafter in equal quarterly installments from 2005 to 2008 during his continued employment with us. Pursuant to the terms of the agreement, Mr. Larrenaga is also entitled to receive certain additional benefits, including an insurance policy for which we pay the monthly premiums. If Mr. Larrenaga’s employment is terminated by us without cause or by him for good reason, Mr. Larrenaga is entitled to receive, among other things, a lump sum payment of up to 12 additional months of his base salary.

Indemnification Agreements and Director and Officer Insurance

We intend to enter into agreements to indemnify our directors and executive officers. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. We also intend to obtain insurance that insures our directors and officers against certain losses and which insures us against our obligations to indemnify the directors and officers. Our certificate of incorporation and our bylaws contain provisions that limit the liability of our directors. A description of these provisions is contained under the heading “Description of Capital Stock — Limitation of Liability and Indemnification Matters.”

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RELATED PARTY TRANSACTIONS

Other than compensation agreements and other arrangements, which are described in “Management,” and the transactions described below, since December 2002 there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party:

Ÿ in which the amount involved exceeded or will exceed $60,000; and

Ÿ in which any director, executive officer, holder of more than 5% of our common stock on an as-converted basis or any member of their immediate family had or will have a direct or indirect material interest.

Transactions with Management and 5% Stockholders

In December 2002, we borrowed $1,500,000 from Mr. Xu-Sheng Zhang, the brother-in-law of our president and chief executive officer, Mr. Hui (Michael) Deng. The promissory note bears an interest rate of 20% per annum. We repaid the outstanding balance due under the promissory note in August 2004.

Matsushita-Kotobuki Electronics, Ltd., which owns approximately 5.1% of our outstanding stock, is one of our largest customers. During fiscal 2004, sales to Matsushita-Kotobuki Electronics, Ltd. total approximately $2,500,000 or approximately 11.2% of our total revenue.

In December 2002 and 2003, we made two loans to Hui (Michael) Deng, our chief executive officer, in connection with the exercise of stock options. The loans were made pursuant to two secured full recourse promissory notes in the principal amounts of $44,000 each, with interest at a rate of 5% and 4% per year. The largest aggregate amount outstanding under these notes was $88,000 in fiscal 2004. These notes were repaid in April 2004.

Indebtedness of Management

In October 2003, we lent Todd Rumaner, our senior vice president and chief operating officer, $94,000 in connection with the exercise of stock options. The promissory note bears interest at a rate of 4% per annum on the unpaid balance with the interest to be accumulated unless deducted from Mr. Rumaner’s salary. The principal of the note will be due and payable upon the termination of Mr. Rumaner’s employment with us, a change in control as a result of a merger, acquisition or other change in control in which we are not the surviving entity or we have less than 50% of the voting shares of the surviving entity or upon completion of an initial public offering. The largest aggregate amount outstanding under the promissory note was approximately $96,634 in fiscal 2004. This loan and all accrued interest were repaid in August 2004.

Registration Rights

We have entered into an investors’ rights agreement with each of the purchasers of preferred stock listed above. Under this agreement, these and other stockholders are entitled to registration rights with respect to their shares of common stock issuable upon the automatic conversion of their convertible preferred stock upon completion of this offering. For additional information, see “Description of Capital Stock — Registration Rights.”

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Indemnification Agreements and Director and Officer Insurance

We intend to enter into indemnification agreements with each of our current directors and executive officers. These agreements will require us to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. We intend to obtain insurance that insures our directors and officers against certain losses and which insures us against our obligations to indemnify the directors and officers. We also intend to enter into indemnification agreements with our future directors and executive officers.

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PRINCIPAL STOCKHOLDERS

The following table sets forth information as of June 30, 2004 about the number of shares of common stock beneficially owned and the percentage of common stock beneficially owned before and after the completion of this offering by:

Ÿ each person known to us to be the beneficial owner of more than 5% of our common stock;

Ÿ each of our named executive officers;

Ÿ each of our directors; and

Ÿ all of our directors and executive officers as a group.

Unless otherwise noted below, the address of each beneficial owner listed in the table is c/o ArcSoft, Inc., 46601 Fremont Boulevard, Fremont, California 94538.

We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.

Applicable percentage ownership is based on 26,300,399 shares of common stock outstanding on June 30, 2004, which assumes the conversion of all outstanding shares of preferred stock and exercise of all outstanding warrants and does not include the conversion of all outstanding promissory notes and accrued interest as of                 , 2004 into shares of common stock. For purposes of the table below, we have assumed that              shares of common stock will be outstanding upon completion of this offering. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of June 30, 2004. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

	Shares Beneficially Owned	Percentage of Shares Beneficially Owned
Name and Address of Beneficial Owner		Before Offering		After Offering
5% Stockholders:
Pacific One International Ltd.(1)	3,440,000	13.1	%	%
Sam (Juneng) Zheng(2)	3,220,000	12.2
Pacific Smile Limited(3)	1,750,000	6.7
Matsushita-Kotobuki Electronics, Ltd.(4)	1,333,333	5.1
Moon-Yee Wang(5)	1,320,000	5.0
Directors and Executive Officers:
Hui (Michael) Deng(6)	5,034,939	18.3
Todd J. Rumaner(7)	406,500	1.5
Gregory K. Hinckley	—	*
Timothy C. Lin(8)	272,727	1.0
David C. Nagel(9)	150,000	*
Ronald J. Smith	—	*
All directors and executive officers as a group (7 persons)(10)	5,864,166	21.0	%	%

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* Represents beneficial ownership of less than 1%.

(1) Principal address is No. 27, Alley 12, Lane 194, Kao Fong Road, Hsin Chu, Taiwan. Rise Resources Ltd. is the sole shareholder of Pacific One International Ltd. Mr. Chu-Rin Lin, the managing director of Rise Resources Ltd., holds voting and dispositive power over the shares held by Pacific One International Ltd.

(2) Principal address is 44912 Lynx Drive, Fremont, California 94539. Includes 120,000 shares held in trust for Mr. Zheng’s minor children.

(3) Principal address is Room 1101-1105, 11/F Grand Centre, 8 Hampheys Ave. T.S.T., Kowloon, Hong Kong. Mr. Tung Wun Liu, the managing director of Pacific Smile Limited, holds voting and dispositive power over the shares held by Pacific Smile Limited.

(4) Principal address is 2131-1 Minamigata, Kawauchi-cho, Onsen, Ehime, 791-0395, Japan. Matsushita Electric Industry Co., Ltd. is the majority shareholder of Matsushita-Kotobuki Electronics, Ltd. Mr. Yoichi Morishita is the chairman of the board of Matsushita Electric Industry Co., Ltd. and has voting and dispositive power over the shares held by Matsushita-Kotobuki Electronics, Ltd.

(5) Principal address is 48866 Green Valley Road, Fremont, California 94539.

(6) Includes 1,174,939 shares subject to options exercisable within 60 days of June 30, 2004 and 40,000 shares held in trust for Dr. Deng’s minor children.

(7) Includes 262,500 shares subject to options exercisable within 60 days of June 30, 2004.

(8) Represents 272,727 shares held by Alliance III Venture Capital Corporation. Mr. Lin is the president of Alliance III Venture Capital Corporation and holds voting and dispositive power over these shares.

(9) Represents 150,000 shares subject to options exercisable within 60 days of June 30, 2004.

(10) Includes 1,587,439 shares subject to options exercisable within 60 days of June 30, 2004.

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DESCRIPTION OF CAPITAL STOCK

General

When this offering is completed and our restated certificate of incorporation has been filed, our authorized capital stock will consist of 250,000,000 shares of common stock, par value $.0001 per share and 5,000,000 shares of preferred stock, par value $.0001 per share. The following information assumes the filing of our restated certificate of incorporation and the conversion of all outstanding shares of preferred stock into shares of common stock upon completion of this offering.

As of June 30, 2004, there were 26,300,399 shares of common stock outstanding held by approximately 110 stockholders of record, assuming the automatic conversion of each outstanding share of preferred stock and the exercise of all outstanding warrants and does not include the conversion of all outstanding promissory notes and accrued interest as of                     , 2004 into shares of common stock upon completion of this offering. The shares of common stock to be outstanding after this offering, including the shares of common stock to be sold in this offering, will be fully paid and non-assessable.

Common Stock

Dividend Rights

Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available at the times and in the amounts that our board of directors may determine from time to time.

Voting Rights

Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. We have not provided for cumulative voting for the election of directors in our certificate of incorporation. This means that the holders of a majority of the shares voted can elect all of the directors then standing for election. In addition, our certificate of incorporation and bylaws provide that certain actions require the approval of two-thirds, rather than a majority, of the shares entitled to vote. For a description of these actions, see “— Anti-Takeover Effects of Delaware Law and our Certificate of Incorporation and Bylaws.”

No Preemptive, Conversion or Redemption Rights

Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption.

Right to Receive Liquidation Distributions

Upon our liquidation, dissolution or winding-up, the holders of common stock are entitled to share in all assets remaining after payment of all liabilities and the liquidation preferences of any outstanding preferred stock. Each outstanding share of common stock is, and all shares of common stock to be issued in this offering when they are paid for will be, fully paid and nonassessable.

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Preferred Stock

Upon completion of this offering, each outstanding share of our preferred stock will be converted into one share of common stock. Upon completion of this offering, our board of directors will be authorized, subject to limitations imposed by Delaware law, to issue up to a total of 5,000,000 shares of preferred stock in one or more series, without stockholder approval. Our board of directors will be authorized to establish from time to time the number of shares to be included in each series, and to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. Our board of directors will also be able to increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by the stockholders.

The board of directors may authorize the issuance of preferred stock with voting or conversion rights that could harm the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of us and might harm the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plans to issue any shares of preferred stock.

Warrants

As of June 30, 2004, we had warrants to purchase 60,000 shares of series B preferred stock at an exercise price of $1.50. Warrants to purchase 20,000 shares expire upon the earlier of (a) January 31, 2011, (b) the merger of ArcSoft or the sale of substantially all of our assets, or (c) the closing of our initial offering of common stock to the public. Warrants to purchase 40,000 shares expire upon the earlier of (a) July 15, 2005, (b) the merger of ArcSoft or the sale of substantially all of our assets or (c) the closing of our initial public offering of common stock to the public.

Convertible Promissory Notes

In April and June 2004, we issued a total of approximately $2.8 million in principal amount of convertible promissory notes to Zoran. In addition, we are entitled to borrow up to an additional $1.2 million from Zoran in two equal installments based on the completion of certain software development milestones. The notes accrue interest at a rate of 5.0% per annum and are due and payable on March 31, 2006, if not converted. If outstanding, the convertible promissory notes and accrued interest will convert, at the election of the holder, into (a) shares of our common stock in connection with this offering at a discount to the offering price or (b) shares of our series B preferred stock in the event that this offering has not been completed prior to the earlier of September 1, 2005 or five days before we are acquired. The discount to the initial public offering price at which the convertible promissory notes and accrued interest will convert into shares of common stock is initially 30% and increases on October 1, 2004, November 1, 2004 and December 1, 2004, up to a maximum of 50%, if this offering has not been completed prior to those dates. In the event we complete an equity financing, other than our initial public offering, the holder may elect to have the amounts outstanding under the notes, plus accrued interest, convert into shares of stock sold in the financing at a 20% discount. In addition, in the event that we do not complete our initial public offering prior to September 1, 2005, or in the event of a change in control of ArcSoft, the amounts outstanding under the notes, plus accrued interest, can be converted into shares of our series B preferred stock at a price of $1.50 per share.

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Registration Rights

Holders of 5,559,392 shares of common stock issuable upon conversion of our series A and B preferred stock, including shares of series B preferred stock issuable upon exercise of outstanding warrants, and the shares of series B preferred stock of common stock issuable pursuant to outstanding convertible promissory notes may require us to register their shares under the Securities Act. We must register these shares:

Ÿ one time if we receive a written request, but only if such request is six months after the date of this prospectus and the aggregate offering amount is at least $10.0 million;

Ÿ if we are eligible to use a short form registration statement (such as Form S-3 under the Securities Act), on such a short form registration statement, but no more than once during any 12-month period and only if the aggregate offering amount is at least $1.0 million; or

Ÿ if we register our own securities or those of another securityholder, but if requested by the underwriters to decrease the number of shares registered by the other securityholder, we can reduce the number of shares included in the registration statement.

Registration of shares of common stock because of the exercise of demand registration rights, piggyback registration rights or S-3 registration rights under the Securities Act would result in the holders being able to trade these shares without restriction under the Securities Act when the registration statement is declared effective. We will pay all registration expenses, other than underwriting discounts and commissions, related to any registration. These registration rights terminate 5 years after this offering is completed.

Anti-Takeover Effects of Delaware Law and our Certificate of Incorporation and Bylaws

The provisions of Delaware law, our certificate of incorporation and our bylaws described below may have the effect of delaying, deferring or discouraging another party from acquiring control of us.

Delaware Law

We will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, those provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:

Ÿ the transaction is approved by the board before the date the interested stockholder attained that status;

Ÿ upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or

Ÿ on or after the date the business combination is approved by the board and authorized at a meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

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Section 203 defines “business combination” to include the following:

Ÿ any merger or consolidation involving the corporation and the interested stockholder;

Ÿ any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

Ÿ subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

Ÿ any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or

Ÿ the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons.

A Delaware corporation may opt out of this provision either with an express provision in its original certificate of incorporation or in an amendment to its certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out, and do not currently intend to opt out, of this provision. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.

Charter and Bylaws

Following the completion of this offering, our certificate of incorporation and bylaws will provide that:

Ÿ no action can be taken by stockholders except at an annual or special meeting of the stockholders called in accordance with our bylaws, and stockholders may not act by written consent;

Ÿ the approval of holders of two-thirds of the shares entitled to vote at an election of directors will be required to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action;

Ÿ our board of directors will be expressly authorized to make, alter or repeal our bylaws;

Ÿ stockholders may not call special meetings of the stockholders or fill vacancies on the board;

Ÿ our board of directors will be divided into three classes serving staggered three-year terms. This means that only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective terms;

Ÿ our board of directors will be authorized to issue preferred stock without stockholder approval;

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Ÿ directors may only be removed for cause by the holders of two-thirds of the shares entitled to vote at an election of directors; and

Ÿ we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures.

Limitation of Liability and Indemnification Matters

We have adopted provisions in our certificate of incorporation that limit the liability of our directors for monetary damages for breach of their fiduciary duty as directors, except for liability that cannot be eliminated under the Delaware General Corporation Law. Delaware law provides that directors of a company will not be personally liable for monetary damages for breach of their fiduciary duty as directors, except for liabilities:

Ÿ for any breach of their duty of loyalty to us or our stockholders;

Ÿ for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;

Ÿ for unlawful payment of dividend or unlawful stock repurchase or redemption, as provided under Section 174 of the Delaware General Corporation Law; or

Ÿ for any transaction from which the director derived an improper personal benefit.

Any amendment or repeal of these provisions requires the approval of the holders of shares representing at least 66 ²/3% of the shares entitled to vote in the election of directors, voting as one class.

Our certificate of incorporation and bylaws also provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. Our bylaws also permit us to purchase insurance on behalf of any officer, director, employee or other agent for any liability arising out of his actions as our officer, director, employee or agent, regardless of whether the bylaws would permit indemnification. We have entered into separate indemnification agreements with our directors and executive officers that could require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. We believe that the limitation of liability provision in our certificate of incorporation and the indemnification agreements will facilitate our ability to continue to attract and retain qualified individuals to serve as directors and officers.

Nasdaq National Market Listing Symbol

We have applied to list our common stock for quotation on the Nasdaq National Market under the symbol “ARCT.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is                     .

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock. We cannot predict the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after the restrictions lapse, or the perception that those sales may occur, could cause the prevailing market price to decrease or to be lower than it might be in the absence of those sales or perceptions.

Sale of Restricted Shares

Upon completion of this offering, we will have outstanding              shares of common stock. The shares of common stock being sold in this offering will be freely tradable, other than by any of our “affiliates” as defined in Rule 144(a) under the Securities Act, without restriction or registration under the Securities Act. All remaining shares were issued and sold by us in private transactions and are eligible for public sale if registered under the Securities Act or sold in accordance with Rule 144 or Rule 701 under the Securities Act. These remaining shares are “restricted securities” within the meaning of Rule 144 under the Securities Act.

As a result of the lock-up agreements and the provisions of Rules 144, 144(k) and 701 described below, the restricted securities will be available for sale in the public market as follows:

Ÿ                      shares will be eligible for sale prior to 180 days after the date of this prospectus;

Ÿ                      shares will be eligible for sale upon the expiration of the lock-up agreements, described below, beginning 180 days after the date of this prospectus and when permitted under Rule 144, 144(k) or 701; and

Ÿ                      shares will be eligible for sale at various times thereafter.

Lock-up Agreements

Our directors, executive officers and most of our stockholders, who collectively hold an aggregate of                  shares of common stock, have agreed that they will not sell any common stock owned by them without the prior written consent of RBC Capital Markets for a period of 180 days from the date of this prospectus. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our common stock could decline. Immediately following the 180-day lock-up period, if not extend pursuant its terms,                      shares of our common stock outstanding after this offering will become available for sale. Pursuant to the terms of the lock-up agreement with RBC Capital Markets Corporation, if (a) during the period that begins on the date that is 15 calendar days plus three business days before the last day of the 180-day lock-up period and ends on the last day of the 180-day lock-up period, we issue an earnings release or material news or a material event relating to us; or (b) prior to the expiration of the 180-day lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day lock-up period, the restrictions imposed by the lock-up agreement will continue to apply until the expiration of the date that is 15 calendar days plus three business days after the date on which the issuance of the earnings release or the material news or material event occurs.

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Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person deemed to be our affiliate, or a person holding restricted shares who beneficially owns shares that were not acquired from us or our affiliate within the previous one year, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

Ÿ 1% of the then outstanding shares of common stock, or approximately                     shares immediately after this offering, assuming no exercise of the underwriters’ over-allotment option; or

Ÿ the average weekly trading volume of the common stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission.

Sales under Rule 144 are subject to requirements relating to manner of sale, notice and availability of current public information about us.

Rule 144(k)

A person, or persons whose shares are aggregated, who is not deemed to have been our affiliate at any time during the 90 days immediately preceding the sale, and who beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner who is not an affiliate, may sell restricted securities after this offering under Rule 144(k) without complying with the volume limitations, manner of sale provisions, public information or notice requirements of Rule 144.             shares will qualify as “Rule 144(k) shares” within 180 days after the date of this prospectus.

Rule 701

Subject to various limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from us by our employees, directors, officers, consultants or advisers prior to the closing of this offering, pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Securities and Exchange Commission has indicated that Rule 701 will apply to stock options granted by us before this offering, along with the shares acquired upon exercise of those options. Securities issued in reliance on Rule 701 are deemed to be restricted securities and, beginning 90 days after the date of this prospectus, unless subject to the contractual restrictions described above, may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with the minimum holding period requirements.

Stock Options

We intend to file a registration statement under the Securities Act covering approximately shares of common stock reserved for issuance under our stock plans. This registration statement is expected to be filed soon after the date of this prospectus and will automatically become effective upon filing. Accordingly, shares registered under this registration statement will be available for sale in the open market, unless those shares are subject to vesting restrictions with us or the contractual restrictions described above.

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Registration Rights

In addition, after this offering, the holders of approximately 5,559,392 shares of common stock issuable upon conversion of our series A and B preferred stock, including shares of series B preferred stock issuable upon exercise of outstanding warrants, and the shares of series B preferred stock of common stock issuable pursuant to outstanding convertible promissory notes will be entitled to rights to cause us to register the sale of those shares under the Securities Act. Immediately after this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of common stock under outstanding options under our 2000 stock plan and shares reserved for future issuance under our 2004 stock incentive plan and our 2004 employee stock purchase plan. This registration statement will automatically become effective upon filing. Shares registered under this registration statement will be available for sale in the open market, subject to the lock-up agreements described above, although sales of shares held by our affiliates will be limited by Rule 144 volume limitations. Based on the number of shares subject to outstanding options under our 2000 stock plan as of June 30, 2004 and the number of shares reserved for issuance under our 2004 stock incentive plan and 2004 employee stock purchase plan, this registration statement would cover approximately              shares.

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UNDERWRITING

We and the underwriters named below have entered into an underwriting agreement concerning the shares we are offering. Subject to conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. RBC Capital Markets Corporation, Needham & Company, Inc. and A.G. Edwards & Sons, Inc. are the representatives of the underwriters.

Underwriters	Number of Shares
RBC Capital Markets Corporation
Needham & Company, Inc.
A.G. Edwards & Sons, Inc.
Total

If the underwriters sell more shares than the total number set forth in the table above, the underwriters have a 30-day option to buy from us up to an additional                      shares at the public offering price less the underwriting discounts and commissions. If any shares are purchased under this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional                      shares.

	No Exercise	Full Exercise
Per share	$	$
Total

We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $                    . Expenses include the Securities and Exchange Commission and NASD filing fees, Nasdaq National Market listing fees, printing, legal, accounting and transfer agent and registrar fees and other miscellaneous fees and expenses.

Shares sold by the underwriters to the public will initially be offered at the public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $                     per share from the public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $                     per share from the public offering price. If all the shares are not sold at the public offering price, the representatives may change the offering price and the other selling terms. Sales of shares made outside of the United States may be made by affiliates of the underwriters.

Our company and each of our directors, executive officers and substantially all of our current stockholders have agreed with the underwriters not to offer, sell, contract to sell, hedge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable for shares of common stock until after the date that is 180 days after the date of this prospectus, or such later date, if such lock-up period is extended pursuant to its terms, without the prior written consent of RBC

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Capital Markets Corporation. Although it has advised us that it has no current intent or understanding to do so, RBC Capital Markets Corporation, in its sole discretion, may permit early release of the shares of our common stock subject to the restrictions detailed above prior to the expiration of the 180-day lock-up period. Pursuant to the terms of the lock-up agreement, if (a) during the period that begins on the date that is 15 calendar days plus three business days before the last day of the 180-day lock-up period and ends on the last day of the 180-day lock-up period, the we issue an earnings release or material news or a material event relating to us; or (b) prior to the expiration of the 180-day lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day lock-up period, the restrictions imposed by the lock-up agreement will continue to apply until the expiration of the date that is 15 calendar days plus three business days after the date on which the issuance of the earnings release or the material news or material event occurs.

At our request, certain of the underwriters have reserved for sale, at the public offering price, up to              shares of our common stock being offered for sale to some of our directors, officers, employees and business affiliates. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares.

Prior to this offering, there has been no public market for our common stock. The public offering price will be determined by negotiation by us and the representatives of the underwriters. The principal factors to be considered in determining the public offering price include:

Ÿ the information set forth in this prospectus and otherwise available to the representatives;

Ÿ the history and the prospects for the industry in which we compete;

Ÿ the ability of our management;

Ÿ our prospects for future earnings, the present state of our development and our current financial position;

Ÿ the general condition of the securities markets at the time of this offering; and

Ÿ the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies.

In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include stabilizing transactions. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. These transactions may also include short sales and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering.

Short sales may be either “covered short sales” or “naked short sales.” Covered short sales are sales made in an amount not greater than the underwriters’ over-allotment option to purchase additional shares in the offering. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares

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through the over-allotment option. Naked short sales are in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions.

These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise.

We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make in respect thereof.

We have applied for quotation on the Nasdaq National Market under the symbol “ARCT.”

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LEGAL MATTERS

Selected legal matters with respect to the validity of the common stock offered by this prospectus will be passed upon for us by Pillsbury Winthrop LLP, Palo Alto, California. Selected legal matters relating to the offering will be passed upon for the underwriters by O’Melveny & Myers LLP, Menlo Park, California.

EXPERTS

The consolidated financial statements as of June 30, 2003 and 2004, and for each of the three years in the period ended June 30, 2004, included in this prospectus have been audited by Deloitte & Touche LLP, independent registered public accounting firm, as stated in their report appearing herein and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 with respect to the common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Please refer to the registration statement, exhibits and schedules for further information with respect to the common stock offered by this prospectus. Statements contained in this prospectus regarding the contents of any contract or other document are only summaries. With respect to any contract or document filed as an exhibit to the registration statement, you should refer to the exhibit for a copy of the contract or document, and each statement in this prospectus regarding that contract or document is qualified by reference to the exhibit. A copy of the registration statement and its exhibits and schedules may be inspected without charge at the Securities and Exchange Commission’s public reference room, located at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC’s website at www.sec.gov.

Upon completion of this offering, we will be subject to the information reporting requirements of the Securities Exchange Act of 1934, and we intend to file reports, proxy statements and other information with the SEC.

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ARCSOFT, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of June 30, 2003 and 2004	F-3
Consolidated Statements of Operations for the Years Ended June 30, 2002, 2003 and 2004	F-4
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss for the Years Ended June 30, 2002, 2003 and 2004	F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 2002, 2003 and 2004	F-6
Notes to Consolidated Financial Statements	F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

    ArcSoft, Inc.:

We have audited the accompanying consolidated balance sheets of ArcSoft, Inc. and its subsidiaries (the “Company”) as of June 30, 2003 and 2004, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive loss, and cash flows for each of the three years in the period ended June 30, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ArcSoft, Inc. and its subsidiaries as of June 30, 2003 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2004, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

August 12, 2004

F-2

ARCSOFT, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	June 30,						Pro Forma June 30, 2004
	2003			2004
							(Note 1)
							(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,949		$	2,732
Accounts receivable, net		1,431			1,760
Prepaid expenses and other current assets		388			593
Total current assets		3,768			5,085
Property and equipment, net		1,419			932
Goodwill		585			585
Intangible asset		—			900
Other assets		468			1,035
Total assets	$	6,240		$	8,537
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	887		$	1,093
Accrued expenses and other liabilities		1,896			1,538
Deferred revenue		1,911			1,745
Note payable to related party		1,500			1,150
Current portion of capital lease obligations		86			92
Total current liabilities		6,280			5,618
Deferred revenue		—			261
Convertible notes payable and accrued interest		—			1,961
Capital lease obligations		105			88
Total liabilities		6,385			7,928
Commitments and contingencies (Notes 5 and 13)
Stockholders’ equity (deficit):
Convertible preferred stock; 10,000,000 shares authorized;
Series A; no par value; 2,000,000 shares designated; 1,832,726 shares outstanding in 2003, 2004 and none pro forma; liquidation preference of $2,016 in 2003, 2004 and none pro forma		2,016			2,016		$	—
Series B; no par value; 4,000,000 shares designated; shares issued and outstanding: 3,666,666 in 2003, 2004 and none pro forma; liquidation preference of $5,500 in 2003, 2004 and none pro forma		5,739			6,672
Common stock; no par value; 100,000,000 shares authorized; issued and outstanding: 20,489,633 in 2003, 20,741,007 in 2004 and 26,240,399 pro forma		3,815			4,129			12,817
Note receivable from stockholder		(45	)		—			—
Deferred stock compensation		(286	)		(288	)		(288	)
Accumulated deficit		(11,374	)		(11,910	)		(11,910	)
Accumulated other comprehensive loss		(10	)		(10	)		(10	)
Total stockholders’ equity (deficit)		(145	)		609			609
Total liabilities and stockholders’ equity (deficit)	$	6,240		$	8,537		$	8,537

See notes to consolidated financial statements.

F-3

ARCSOFT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Years Ended June 30,
	2002			2003			2004
Revenue:
Product revenue	$	13,360		$	14,574		$	19,043
Internet services revenue		5,580			4,252			3,044
Total revenue		18,940			18,826			22,087
Costs and expenses:
Cost of product revenue		1,717			2,388			3,932
Cost of internet services revenue		2,868			2,744			1,877
Engineering and development		6,606			6,630			6,811
Selling and marketing		5,902			4,927			6,067
General and administrative		5,761			3,034			3,030
Total costs and expenses		22,854			19,723			21,717
Income (loss) from operations		(3,914	)		(897	)		370
Other income (expense):
Interest income		73			17			14
Interest expense on beneficial conversion feature of convertible notes payable		—			—			(69	)
Interest expense and other, net		(61	)		(454	)		(112	)
Total other income (expense), net		12			(437	)		(167	)
Income (loss) before income taxes and minority interest		(3,902	)		(1,334	)		203
Provision for income taxes		539			574			739
Loss before minority interest		(4,441	)		(1,908	)		(536	)
Minority interest in losses of affiliate		(190	)		—			—
Net loss	$	(4,251	)	$	(1,908	)	$	(536	)
Basic and diluted net loss per share:	$	(0.21	)	$	(0.09	)	$	(0.02	)
Shares used in computing basic and diluted net loss per share:		20,139			21,772			21,961
Pro forma basic and diluted net loss per share (unaudited):							$	(0.02	)
Shares used in computing pro forma basic and diluted net loss per share (unaudited):								26,085

See notes to consolidated financial statements.

F-4

ARCSOFT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE LOSS

(In thousands, except share amounts)

	Convertible Preferred Stock										Note Receivable From Stockholder			Deferred Stock Compen- sation			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stock- holders’ Equity (Deficit)			Compre- hensive Income (Loss)
	Series A			Series B			Common Stock
	Shares	Amount		Shares	Amount		Shares	Amount
BALANCES, June 30, 2001	1,832,726	$	2,016	3,666,666	$	5,690	19,908,833	$	3,073		$	—		$	(488	)	$	(5,215	)	$	—		$	5,076
Exercise of stock options	—		—	—		—	360,050		90			(38	)		—			—			—			52
Repayment on notes receivable from stockholder	—		—	—		—	—		—			11			—			—			—			11
Deferred stock compensation	—		—	—		—	—		191			—			(191	)		—			—			—
Amortization of deferred stock compensation	—		—	—		—	—		—			—			177			—			—			177
Remeasurement of employee stock compensation	—		—	—		—	—		302			—			—			—			—			302
Stock-based compensation to nonemployees for services	—		—	—		—	—		120			—			—			—			—			120
Foreign currency translation adjustment	—		—	—		—	—		—			—			—			—			11			11		$	11
Net loss	—		—	—		—	—		—			—			—			(4,251	)		—			(4,251	)		(4,251	)
Comprehensive loss																										$	(4,240	)
BALANCES, June 30, 2002	1,832,726		2,016	3,666,666		5,690	20,268,883		3,776			(27	)		(502	)		(9,466	)		11			1,498
Issuance of warrants on note payable	—		—	—		49	—		—			—			—			—			—			49
Exercise of employee stock options	—		—	—		—	220,750		110			(44	)		—			—			—			66
Repayment on notes receivable from stockholder	—		—	—		—	—		—			26			—			—			—			26
Deferred stock compensation, net of cancellations	—		—	—		—	—		(125	)		—			125			—			—			—
Amortization of deferred stock compensation	—		—	—		—	—		—			—			91			—			—			91
Stock-based compensation to nonemployees for services	—		—	—		—	—		54			—			—			—			—			54
Foreign currency translation adjustment	—		—	—		—	—		—			—			—			—			(21	)		(21	)	$	(21	)
Net loss	—		—	—		—	—		—			—			—			(1,908	)		—			(1,908	)		(1,908	)
Comprehensive loss																										$	(1,929	)
BALANCES, June 30, 2003	1,832,726		2,016	3,666,666		5,739	20,489,633		3,815			(45	)		(286	)		(11,374	)		(10	)		(145	)
Beneficial conversion feature of convertible notes payable	—		—	—		933	—		—			—			—			—			—			933
Exercise of employee stock options	—		—	—		—	251,374		180			(44	)		—			—			—			136
Repayment on notes receivable from stockholder	—		—	—		—	—		—			89			—			—			—			89
Deferred stock compensation, net of cancellations	—		—	—		—	—		112			—			(112	)		—			—			—
Amortization of deferred stock compensation	—		—	—		—	—		—			—			110			—			—			110
Stock-based compensation to nonemployees for services	—		—	—		—	—		22			—			—			—			—			22
Net loss	—		—	—		—	—		—			—			—			(536	)		—			(536	)	$	(536	)
Comprehensive loss																										$	(536	)
BALANCES, June 30, 2004	1,832,726	$	2,016	3,666,666	$	6,672	20,741,007	$	4,129		$	—		$	(288	)	$	(11,910	)	$	(10	)	$	609

See notes to consolidated financial statements.

F-5

ARCSOFT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Years Ended June 30,
	2002			2003			2004
Cash flows from operating activities:
Net loss	$	(4,251	)	$	(1,908	)	$	(536	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,489			1,122			934
Minority interest		(190	)		—			—
Loss on disposal of property and equipment		—			28			61
Interest expense on beneficial conversion feature of convertible notes payable		—			—			69
Warrant issued in connection with note payable		—			49			—
Stock-based compensation		599			145			132
Changes in operating assets and liabilities:
Accounts receivable		(3	)		885			(329	)
Prepaid expenses and other current assets		(413	)		405			(203	)
Other assets		(305	)		(14	)		(622	)
Accounts payable		(57	)		(21	)		206
Accrued expenses and other liabilities		746			(10	)		(333	)
Deferred revenue		(660	)		(1,508	)		95
Net cash used in operating activities		(3,045	)		(827	)		(526	)
Cash flows from investing activities:
Repayment of notes receivable from stockholder		11			26			89
Purchase of minority interest in subsidiary		(850	)		—			—
Purchase of intangible asset		—			—			(900	)
Purchases of property and equipment		(1,254	)		(348	)		(419	)
Proceeds from sales of property and equipment		—			—			58
Net cash used in investing activities		(2,093	)		(322	)		(1,172	)
Cash flows from financing activities:
Exercise of stock options		53			67			136
Proceeds from note payable to related party		—			1,500			—
Proceeds from convertible notes payable		—			—			2,800
Proceeds from note payable		—			2,000			—
Repayment of note payable to related party		—			—			(350	)
Repayment of note payable		—			(2,000	)		—
Repayments of capital lease obligations		(220	)		(247	)		(105	)
Net cash provided by (used in) financing activities		(167	)		1,320			2,481
Effect of exchange rates on cash and cash equivalents		10			(22	)		—
Net increase (decrease) in cash and cash equivalents		(5,295	)		149			783
Cash and cash equivalents, beginning of year		7,095			1,800			1,949
Cash and cash equivalents, end of year	$	1,800		$	1,949		$	2,732
Supplemental disclosure of cash flow information:
Cash paid for interest	$	53		$	372		$	324
Cash paid for income taxes	$	538		$	424		$	756
Supplemental disclosure of noncash investing and financing activities:
Equipment acquired under capital leases	$	50		$	138		$	93
Beneficial conversion feature of convertible notes payable	$	—		$	—		$	933
Deferred stock compensation, net of cancellations	$	191		$	(125	)	$	112
Exercise of stock options with notes receivable	$	38		$	44		$	44

See notes to consolidated financial statements.

F-6

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2002, 2003 and 2004

1.    Description of Business and Significant Accounting Policies

Business — ArcSoft, Inc. (“the Company”) was founded in 1994 and is based in Fremont, California. The Company designs, develops, manufactures and licenses digital imaging software to original equipment manufacturers (OEMs) of digital imaging equipment and to individual end users. Beginning in 2001, the Company began developing and licensing digital imaging software designed for the creation of business graphics, consumer photo editing, multimedia and internet publishing to communications service providers, internet service providers and other wireless service providers. In addition, in 2001, as an extension of its relationships with certain OEMs and communications service providers, the Company began designing, developing and managing websites that promote its customers’ products and the Company’s software.

In August 1998, the Company entered into an agreement to form a joint venture, ArcSoft Hangzhou Co. Ltd. (ArcSoft Hangzhou), formerly known as ZDQ Software Development Company, in Zhejiang, China, by investing $300,000 for a 60% controlling interest. In April 2001, the Company contributed an additional $300,000 to ArcSoft Hangzhou in order to maintain its 60% controlling interest in the subsidiary. On October 26, 2001, the Company finalized its purchase of the remaining 40% minority interest in ArcSoft Hangzhou from the minority stockholder for $850,000, a People’s Republic of China company.

In fiscal 2002, the Company formed ArcSoft KK, a wholly owned subsidiary located in Tokyo, Japan; ArcSoft Taiwan, a wholly owned subsidiary located in Taipei, Taiwan; ArcSoft Technology (Beijing) Company, Ltd., and ArcSoft (Beijing) Information Technology Company, Ltd., wholly owned subsidiaries located in Beijing, China. In fiscal 2003, the Company formed ArcSoft Shanghai, a wholly owned subsidiary located in Shanghai, China and, in fiscal 2004, formed ArcSoft Shanghai Company, Ltd., a wholly owned subsidiary located in Shanghai, China and ArcSoft Europe, a wholly owned subsidiary located in London, England.

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of ArcSoft, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

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 as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain Significant Risks and Uncertainties — The Company operates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company’s future consolidated financial position, results of operations and cash flows: ability to develop and introduce new products and new product enhancements rapidly and successfully; ability to obtain additional financing; adverse changes in domestic and international business, economic and/or political conditions or regulations; fundamental changes in the technology underlying the Company’s software products; market acceptance of the Company’s products under development; loss of significant customers; changes in the overall demand for products offered by the Company; changes in certain strategic relationships or customer relationships; successful and timely completion of product development efforts;

F-7

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

competitive pressures in the form of new product introductions by competitors or price reductions on current products; changes in the mix of product and internet services revenue; development of sales channels; litigation or other claims against the Company based on intellectual property, patent, product, regulatory or other factors; failure to adequately protect the Company’s intellectual property; and the hiring, training and retention of key employees.

Cash and Cash Equivalents — The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include amounts held in bank demand accounts, highly liquid money market funds and certificates of deposit of high credit quality financial institutions. The carrying amount of money market funds and certificates of deposit approximates their fair value due to the short maturities of these instruments.

Concentrations of Credit Risk — Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and accounts receivable. The Company’s policy is to place its cash and cash equivalents on deposit in high credit quality instruments in financial institutions in the United States.

The Company primarily sells its products and services to OEMs and communications service providers in North America, Europe and Asia. The Company provides unsecured credit to its customers in the normal course of business and, to reduce credit risk, performs credit evaluations of its customers, and establishes and regularly reviews allowances for doubtful accounts on an ongoing basis.

Accounts receivable and the allowance for doubtful accounts for the years ended June 30, 2002, 2003 and 2004 consist of the following (in thousands):

	Years Ended June 30,
	2002			2003			2004
Accounts receivable, gross (end of the year)	$	2,371		$	1,473		$	1,841
Allowance for doubtful accounts:
Balance at beginning of the year		192			55			42
Add: Charged to costs and expenses		535			49			67
Less: Deductions		(672	)		(62	)		(28	)
Balance at end of the year		55			42			81
Accounts receivable, net (end of the year)	$	2,316		$	1,431		$	1,760

Property and Equipment — Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of two to seven years. Leasehold improvements and equipment under capital lease agreements are amortized over the shorter of the lease term or the estimated useful lives of the related assets.

Goodwill and Purchased Intangible Asset — Goodwill and identifiable intangibles are accounted for in accordance with SFAS No. 141 Business Combinations and SFAS No. 142 Goodwill and Other Intangible

F-8

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

Assets. The Company recorded goodwill related to the acquisition of ArcSoft Hangzhou and evaluates for impairment on an annual basis, or sooner if events or changes in circumstances indicate that carrying values may not be recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with these assets would be compared to their carrying amount to determine if a write-down to fair market value or discounted cash flow value is required. No impairment charge has been recorded in any of the periods presented.

Purchased intangible asset includes a license for certain rights to intellectual property (see Note 3), which is carried at cost and is expected to be amortized when such products are available for general release to customers.

Long-Lived Assets — The Company evaluates long-lived assets for impairment in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When the sum of the undiscounted future net cash flow is expected to result from the use of the asset and its eventual disposition is less than its carrying amount, an impairment loss would be measured based on the fair value compared to the carrying amount. No impairment charge has been recorded in any of the periods presented.

Income Taxes — The Company accounts for income taxes under an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes, and net operating loss and tax credit carryforwards measured by applying currently enacted tax laws. Valuation allowances are provided to reduce gross deferred tax assets to an amount that is more likely than not to be realized.

Product Warranty — The Company sells certain of its software products with warranties generally ranging up to thirty days. Historically, the costs of such warranties have not been significant.

Revenue Recognition — The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectibility is reasonably assured. The Company generates revenue from product licenses and internet services.

Product Revenue — The Company accounts for product revenue in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended. Product revenue includes software license revenues generated from: (i) both unit based royalty and upfront fixed fee license arrangements with original equipment manufacturers (OEM) that incorporate the Company’s software products into their products; (ii) upfront non-recurring engineering (NRE) fees to incorporate software into certain OEM products; and (iii) sales of software licenses directly to retailers and end users. All software arrangements contain post delivery telephone support (PCS). The Company has not established vendor specific objective evidence (VSOE) of fair value for any elements within its software arrangements.

F-9

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

PCS revenue is recognized together with the licensing fee on delivery of the software to the OEM, when the criteria of paragraph 59 of SOP 97-2 have been met. These criteria include arrangements where, PCS is included with the initial licensing fee, the Company has established a history of providing substantially all the telephone support within one year of the licensing or sale of the software, the estimated cost of providing PCS during the arrangement is insignificant and unspecified upgrades/enhancements offered during the term of the PCS arrangements have been and are expected to continue to be minimal and infrequent.

When the criteria of paragraph 59 of SOP 97-2 have not been met, product revenue is recognized as follows: (i) for unit based royalty sales to OEM, upon receipt of reports documenting product shipments by the OEM; and (ii) for upfront fixed fee and NRE arrangements with OEM, over the contract term, which approximates the expected PCS term.

Internet Services Revenue — Internet services revenue includes fees generated from the design, development, management and hosting of customer web sites that promote its customers’ products and the Company’s own software. In circumstances where the arrangement requires significant production, modification, or customization of the Company’s software, the Company recognizes revenue under the percentage of completion method as defined in AICPA SOP 81-1, Accounting for the Performance of Construction Type and Certain Production Type Contracts. Alternatively, where the arrangement does not require significant production, modification, or customization of the Company’s software, the Company accounts for these transactions in accordance with Emerging Issues Task Force Issue No. 00-3, Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware, and as such, internet services revenue is recognized ratably over the term of the service arrangement.

Customer payments received in advance of meeting revenue recognition criteria are classified as deferred revenue in the accompanying consolidated balance sheets.

Engineering and Development — Engineering and development costs are expensed as incurred and include compensation and other direct and indirect expenses of personnel engaged in research, design, development and engineering projects.

Software Development Costs — Software development costs are accounted for in accordance with SFAS No. 86, Accounting for Computer Software to be Sold, Leased or Otherwise Marketed, under which capitalization of software development costs begins upon the establishment of technological feasibility of the product, which management defines as the development of a working model and further defines as the development of a beta version of the software. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenue, estimated economic life and changes in technology. Such costs are reported at the lower of cost or net realizable value. To date, software development costs that were eligible for capitalization have not been significant because the process for developing software is essentially completed concurrently with the establishment of technological feasibility, which occurs upon the completion of a working model.

F-10

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

Stock-based Compensation — The Company accounts for its employee stock option plans in accordance with provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosures. The Company accounts for equity instruments issued to non-employees in accordance with the provision of SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Connection with Selling, Goods, or Services, which requires that the fair value of such instruments be recognized as an expense over the period in which the related services are provided. Such expenses are measured using the value of the equity instruments issued, as this is more readily determinable than the fair value of the services received.

The Company amortizes deferred stock-based compensation ratably over the vesting periods of the stock options, generally four years, on a straight-line basis. Had compensation expense been determined based on the fair value at the grant date for all employee awards, consistent with the provisions of SFAS No. 123, the Company’s pro forma net loss and net loss per share would have been as follows (in thousands, except per share amounts):

	Years Ended June 30,
	2002			2003			2004
Net loss, as reported	$	(4,251	)	$	(1,908	)	$	(536	)
Add: total stock-based employee compensation included in reported net loss		599			145			132
Less: total stock-based compensation determined under the fair value method for all awards		(271	)		(160	)		(231	)
Pro forma net loss	$	(3,923	)	$	(1,923	)	$	(635	)
Basic and diluted net loss per share, as reported:	$	(0.21	)	$	(0.09	)	$	(0.02	)
Pro forma basic and diluted net loss per share:	$	(0.19	)	$	(0.09	)	$	(0.03	)

Under SFAS No. 123, the fair value of stock-based awards is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. The Company used the minimum value method to estimate the fair value of options granted to employees. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. These models also require subjective assumptions, including expected time to exercise, which greatly affect the calculated values. The Company’s fair value calculation on stock-based awards to employees was estimated using following weighted average assumptions:

	Years Ended June 30,
	2002		2003		2004
Expected life (in years)	4		4		4
Risk-free interest rate	3.9	%	2.4	%	3.3	%
Expected dividend	0	%	0	%	0	%

F-11

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

Foreign Currency — The functional currency of the Company’s wholly owned foreign subsidiary, ArcSoft Hangzhou, is the U.S. dollar. For those subsidiaries whose books and records are not maintained in the functional currency, all monetary assets and liabilities are translated at the current exchange rate as of the balance sheet date, nonmonetary assets and liabilities are translated at historical exchange rates, and revenues and expenses are translated at average exchange rates in effect during the period. Transaction and remeasurement gains and losses were not significant for any of the periods presented.

The functional currencies of all other wholly-owned subsidiaries are the local foreign currencies and, accordingly, all assets and liabilities are translated at the current exchange rate as of the balance sheet date, and revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as components of other comprehensive income (loss).

Comprehensive Loss — In accordance with SFAS No. 130, Reporting Comprehensive Income, the Company reports by major components and as a single total, the change in its net assets during the period from nonowner sources in a consolidated statement of comprehensive loss, which has been included with the consolidated statements of stockholders’ equity.

Net Loss Per Share — Basic net loss per share (“EPS”) excludes the effects of dilution and is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (convertible preferred stock, convertible preferred stock warrants and common stock options using the treasury stock method) were exercised or converted into common stock. Potential common shares in the diluted EPS computation are excluded in net loss periods as their effect would be antidilutive.

Unaudited Pro Forma Net Loss Per Share — Pro forma net loss per share, basic and diluted, is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period and the weighted average number of common shares outstanding for the period resulting from the assumed automatic conversion of all outstanding shares of convertible preferred stock occurring upon an initial public offering.

Unaudited Pro Forma Balance Sheet Information — The unaudited pro forma information in the accompanying consolidated balance sheet assumes the automatic conversion of the outstanding shares of convertible preferred stock into 5,499,392 shares of common stock resulting from the completion of an initial public offering as if it had actually occurred on June 30, 2004. Common shares to be issued in such an initial public offering and its related estimated net proceeds, as well as common shares to be issued upon conversion of the convertible notes payable, are excluded from the pro forma information.

Recently Issued Accounting Standards — In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally EITF Issue No. 94-3. The Company adopted the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was

F-12

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

recognized at the date of the Company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The adoption of SFAS No. 146 on January 1, 2003 did not have a material effect on the Company’s consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation specifies the disclosures to be made by a guarantor in its interim and annual financial statements concerning its obligations under certain guarantees that it has issued. FIN 45 also requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations it has undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002. The initial recognition and initial measurement requirements of FIN 45 are effective for guarantees issued or modified after December 31, 2002. The adoption of these provisions did not have a material impact on the Company’s consolidated financial statements.

In December 2002, the EITF reached a consensus on EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. This issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (that is, there are separate units of accounting). In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. This issue does not change otherwise applicable revenue recognition criteria. The guidance in this issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on the Company’s consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment to FASB Statement No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting of stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure provisions of SFAS No. 148 effective June 30, 2003.

In December 2003, FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, and in December 2003, issued a revised interpretation of FIN 46 (“FIN 46-R”). FIN 46 requires certain variable interest entities (“VIEs”) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, the Company has not invested in any entities it believes

F-13

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

are variable interest entities for which the Company is the primary beneficiary. For all arrangements entered into after January 31, 2003, the Company is required to continue to apply FIN 46 through April 30, 2004. The Company is required to adopt the provisions of FIN 46-R for those arrangements on May 1, 2004. For arrangements entered into prior to February 1, 2003, the Company is required to adopt the provisions of FIN 46-R on May 1, 2004. The Company’s adoption of FIN 46-R did not have an impact on the financial position, results of operations or cash flows of the Company.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and hedging relationships designated after June 30, 2003, except for those provisions of SFAS No. 149 which related to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003. For those issues, the provisions that are currently in effect should continue to be applied in accordance with their respective effective dates. In addition, certain provisions of SFAS No. 149, which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. We do not believe that we have entered into any contracts that would fall within the scope of SFAS No. 149.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which requires that certain financial instruments be presented as liabilities that were previously presented as equity or as temporary equity. Such instruments include mandatory redeemable preferred and common stock, and certain options and warrants. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and was effective at the beginning of the first interim period beginning after June 15, 2003. The Company’s adoption of SFAS No. 150 did not have an impact on the Company’s consolidated financial statements.

In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition. SAB 104 updates portions of existing interpretive guidance consistent with current authoritative accounting auditing guidance and SEC rules and regulations. The adoption of SAB 104 did not have a material effect on the Company’s consolidated financial statements.

In March 2004, the EITF reached a final consensus on Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, to provide additional guidance in determining whether investment securities have an impairment which should be considered other-than-temporary. Management expects that the adoption of Issue 03-01 will not have an effect on our operating results or financial condition.

F-14

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

2.    Property and Equipment

Property and equipment consists of the following (in thousands):

	June 30,
	2003			2004
Computers, software and equipment	$	3,600		$	3,203
Furniture and fixtures		183			198
Leasehold improvements		247			338
		4,030			3,739
Accumulated depreciation and amortization		(2,611	)		(2,807	)
Property and equipment, net	$	1,419		$	932

At June 30, 2003 and 2004, property and equipment includes equipment acquired under capital leases with a cost of approximately $344,000, and $275,000 and accumulated amortization of approximately, $232,000 and $122,000, respectively.

3.    Notes Payable

In July 2002, the Company borrowed €2,000,000 (approximately $2,000,000) under a promissory note carrying an interest rate of 20% per annum. The note was repaid in December 2002.

Note Payable to Related Party

On December 10, 2002, the Company borrowed $1,500,000 from a stockholder under a promissory note which bears an interest rate of 20% per annum. During the years ended June 30, 2003 and 2004, the Company paid interest of approximately $172,000 and $280,000, respectively, to this stockholder. During fiscal year 2004, the Company repaid $350,000 outstanding under the note payable and repaid the balance of $1,150,000 in August 2004 (see Note 14).

Convertible Notes Payable

In March 2004, the Company entered into a number of Agreements (Agreements) with an unrelated third party to acquire and develop certain technology for future sale and distribution, and has agreed to complete the development of the product pursuant to terms of the Agreements. Pursuant to the Agreements, the Company acquired, for $900,000, a perpetual license for certain rights to the intellectual property developed by the third party, and will pay the third party royalties for future sales of the product. The cost of the license is recorded an intangible asset, and is expected to be amortized when such products are available for general release to customers, over the estimated life of the product based on the greater of the straight-line method or the ratio of product revenue in relation to total expected product revenue. In addition, the Company has granted a license to the third party for the sale and distribution of the product under which the third will pay the Company royalties for future sales of the products.

F-15

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

As part of the Agreements discussed above, in April 2004, the Company borrowed $2,000,000 from the third party under a convertible note payable, and is entitled to borrow an additional $2,000,000 in three installments if certain software development milestones are met. In June 2004, the Company met such development milestones for the first installment, and received $800,000 under a convertible note. Amounts outstanding under the notes can be converted to common stock of the Company, if the Company closes an initial public offering (“IPO”), at conversion prices that are at a discount to the initial public offering price, which discounts range from a minimum of thirty (30%) to a maximum of fifty percent (50%), based on the closing date of the IPO. In the event that an IPO has not been completed prior to September 1, 2005, or five days prior to a change in control transaction, amounts outstanding under the note, plus accrued interest, are no longer convertible into common stock but can be converted into shares of Series B preferred stock at a price per share of $1.50. The notes bear interest at five percent (5%) per annum and are due and payable on March 31, 2006, if not converted.

In connection with the convertible notes payable, the Company recorded a $933,000 discount on notes payable for the beneficial conversion feature and an offsetting credit to preferred stock for the fair value of the preferred stock at the dates the notes were issued in excess of the $1.50 conversion price of the preferred stock. The Company is amortizing the discount on the convertible notes payable as interest expense using the effective interest method over the term of the convertible notes payable which amounted to $69,000 of additional interest expense during the fiscal year ended June 30, 2004.

The convertible notes payable and related accrued interest have been classified as noncurrent because they will either be converted into common or preferred stock, or repaid on March 31, 2006, if not converted.

4.    Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of (in thousands):

	June 30,
	2003		2004
Accrued compensation and related benefits	$	390	$	472
Taxes payable		315		299
Accrued settlements		590		250
Accrued professional fees		191		178
Other		410		339
Total accrued expenses and other liabilities	$	1,896	$	1,538

F-16

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

5.    Commitments and Contingencies

Leases

The Company leases facilities and certain equipment under noncancelable capital and operating leases. The Company leases its primary facilities under a noncancelable operating lease that expires in June 2009. The Company also leases office space in various foreign locations. Rent expense was approximately $936,000, $1,381,000 and $1,380,000 in the years ended June 30, 2002, 2003, and 2004, respectively. Future minimum lease payments under the Company’s capital and operating leases as of June 30, 2004 are as follows (in thousands):

Years Ending     June 30,	Capital Leases			Operating Leases
2005	$	110		$	677
2006		76			402
2007		15			267
2008		5			275
2009		2			283
Future minimum lease payments		208		$	1,904
Less amounts representing interest		(28	)
Present value of future minimum lease payments		180
Less current portion of capital lease obligations		(92	)
Capital lease obligations	$	88

Licensing Agreements

During fiscal 2004, the Company entered into certain licensing arrangements, as a licensee, that provide for minimum annual royalty payments and additional royalty payments based on customers’ product sales over a specified amount. As of June 30, 2004, the Company was obligated under these licensing agreements to provide minimum royalty payments of $314,000 for the fiscal year ending 2005.

Contingencies

Under the indemnification provisions of the Company’s standard software license agreements, the Company agrees to defend the customer/licensee against certain third party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the customer/licensee. Except for the claim by The Massachusetts Institute of Technology and Electronics for Imaging (see Note 13), there have been no other claims under such indemnification provisions through June 30, 2004.

F-17

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

6.    Stockholders’ Equity

At June 30, 2004, the Company was authorized to issue 10,000,000 shares of preferred stock, of which 1,832,726 Series A shares and 3,666,666 Series B shares were issued and outstanding.

Convertible Preferred Stock

Significant terms of the convertible preferred stock are as follows:

Ÿ Voting Rights — Each share has a number of votes equal to the number of shares of common stock into which it is convertible.

Ÿ Conversion Rights — Each share is convertible at any time, at the option of the holder, into one share of common stock, subject to adjustments for events of dilution. In addition, all shares will automatically convert into common stock upon the consummation of: (i) a public offering with aggregate proceeds of at least $25,000,000; (ii) a shares-for-shares merger or consolidation of the Company into or with another company or any other company reorganization in which the Company will not be the continuing or surviving entity; or (iii) at the election of the holders of at least a majority of the shares of convertible preferred stock, with respect to each series.

Ÿ Dividend Rights — Series A and Series B convertible preferred stockholders are entitled to receive the same dividends as common stockholders on a noncumulative basis, when and if declared by the Company’s Board of Directors.

Ÿ Liquidation Preference — In the event of a liquidation, dissolution or winding up of the Company, Series A and Series B convertible preferred stockholders are entitled to receive, prior and in preference to any distribution to common stockholders, $1.10 and $1.50 per share (subject to adjustments for events of dilution), respectively, plus any declared and unpaid dividends.

Convertible Preferred Stock Warrants

In January 2001, in connection with a modification of the existing operating lease for its corporate headquarters, the Company issued warrants to purchase 20,000 shares of Series B convertible preferred stock at a price of $1.50 per share. The warrants are exercisable at any time until expiration in January 2011 and remained outstanding at June 30, 2004. The $23,000 fair value of the warrants was determined based on the Black-Scholes option pricing model using the following weighted average assumptions: an expected life equal to the contractual life of ten years; 60% expected volatility; 5.3% risk-free interest rate; and no dividends during the expected life. The fair value is recorded as additional rent expense on a straight-line basis over the 46-month term of the operating lease.

In connection with the borrowing of the €2,000,000 note in July 2002, the Company issued a warrant for 40,000 shares of Series B convertible preferred stock at $60,000 with an exercise price of $1.50 per share, with a term of three years. This warrant remained outstanding at June 30, 2004. The Company determined the fair value of the warrants to be approximately $49,000, based on the Black-Scholes option

F-18

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

pricing model using the following weighted average assumptions: an expected life equal to the contractual life of three years; 60% volatility; 2.68% risk-free interest rate; and no dividends during the expected life. The fair value was recorded as additional interest expense over the term of the promissory note.

Common Stock

At June 30, 2004, the Company has reserved shares of common stock for issuance as follows:

Conversion of convertible preferred stock	5,499,392
Convertible preferred stock warrants	60,000
Issuance under stock option plans	4,851,876
Conversion of convertible notes payable and accrued interest (1)	2,910,000
	13,321,268

(1) Assumes principal on convertible notes payable of $4,000,000 and accrued interest as of March 31, 2006, the maturity date, and based on a conversion price of $1.50 per share.

Stock Option Plans

Under the Company’s 1997 Stock Option Plan (1997 Option Plan), which was terminated in 2000, the Company could grant options to purchase up to 3,500,000 shares of common stock to employees, directors and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of fair market value at the date of grant for nonstatutory stock options. These options generally expired five years from the date of grant and were exercisable as they vested, generally over a four-year period. Upon termination of the 1997 Option Plan, the remaining share reserve was canceled and options outstanding under the plan remained outstanding and continued to be governed by their existing terms.

In 2000, the Company adopted the 2000 Stock Option Plan (2000 Option Plan). Under the 2000 Option Plan, 2,000,000 shares were initially reserved for issuance as option grants under terms comparable to those provided on options granted under the 1997 Option Plan except that options granted under the 2000 Option Plan expire ten years from the date of grant. In September 2000 and February 2004, stockholders approved the reserve of an additional 2,000,000 and 1,000,000 shares, respectively, for issuance under the 2000 Option Plan.

F-19

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

Activity under the stock option plans is as follows:

	Outstanding Options
	Number of Shares		Weighted Average Exercise Price
Balances, June 30, 2001 (2,169,787 exercisable at a weighted average exercise price of $0.47 per share)	4,406,550		$	0.58
Granted (weighted average fair value of $0.52 per share)	960,100			1.82
Exercised	(360,050	)		0.25
Canceled	(1,028,000	)		0.94
Balances, June 30, 2002 (2,198,876 exercisable at a weighted average exercise price of $0.58 per share)	3,978,600			0.82
Granted (weighted average fair value of $0.25 per share)	2,226,585			1.61
Exercised	(220,750	)		0.50
Canceled	(2,236,250	)		0.74
Balances, June 30, 2003 (1,707,610 exercisable at a weighted average exercise price of $1.11 per share)	3,748,185			1.35
Granted (weighted average fair value of $0.38 per share)	947,800			1.84
Exercised	(251,374	)		0.71
Canceled	(257,064	)		1.64
Balances, June 30, 2004	4,187,547		$	1.49

As of June 30, 2004, the Company had available 664,329 options for future issuance.

Additional information regarding options outstanding as of June 30, 2004 is as follows:

Range of Exercise Prices	Number Outstanding	Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$        0.50	503,750	6.15	$	0.50	479,811	$	0.50
$        0.55	240,000	2.82		0.55	240,000		0.55
$        1.00	143,250	6.92		1.00	102,965		1.00
$        1.50	1,085,000	8.87		1.50	309,325		1.50
$        1.65	1,246,585	3.68		1.65	779,116		1.65
$        2.00	659,800	9.79		2.00	—		—
$        2.25	309,162	7.59		2.25	188,487		2.25
	4,187,547	6.64	$	1.49	2,099,704	$	1.26

Remeasurement of Employee Stock Compensation

During 2002, the Company issued $38,400 of zero interest notes to two employees for the exercise of 160,000 fully vested stock options. In accordance with FASB Interpretation No. 44, Accounting for Certain

F-20

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

Transactions Involving Stock Compensation, the Company remeasured the stock options and recorded the intrinsic value, measured as the difference between the fair value of the note and the fair value of the underlying stock on the exercise date as stock compensation expense aggregating $301,000. Both loans have been repaid prior to June 30, 2003.

Deferred Stock Compensation

During the fiscal years 2002, 2003 and 2004, the exercise price of certain common stock options granted to employees was less than the deemed fair value of the Company’s stock. Accordingly, the Company recorded deferred stock compensation of $191,000, $244,000 and $144,000, respectively, on these grants which are being amortized to expense under the single award approach over the vesting period of the underlying options. During the years ended June 30, 2002, 2003 and 2004 the Company’s amortization of deferred stock compensation expense totaled $177,000, $91,000 and $110,000, respectively.

Nonemployee Stock Options Issued for Services

During 2000 and 2001, the Company issued nonstatutory options to nonemployees for the purchase of 52,000 and 110,000 shares of common stock, respectively, at a weighted average exercise price of $0.50 per share. Such options were issued for services provided and vest over a period of four years. In accordance with SFAS No. 123, and its related interpretations, the Company accounted for these awards under the fair value method, and as the Company’s stock price changes, the fair value of unvested awards will be subject to change. Accordingly, the Company recorded estimated compensation expense in 2001, 2002 and 2003 equal to the fair value of the options as amortized over the vesting period. For the years ended June 30, 2002, 2003 and 2004, such compensation expense aggregated $120,000, $54,000, and $22,000, respectively. The Black-Scholes option pricing model was used to determine the fair value of the awards using the following weighted average assumptions: an expected life equal to the contractual life of ten years; risk-free interest rates of 3.9%, 4.3%, 5.6%; expected volatility of 65%, 80% and 80%, respectively, in 2002, 2003 and 2004; no dividends during the expected life.

7.    Net Loss Per Share

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

	Years Ended June 30,
	2002			2003			2004
Net loss (numerator)	$	(4,251	)	$	(1,908	)	$	(536	)
Denominator for basic and diluted net loss per share:
Weighted average common shares outstanding		20,139			21,772			21,961
Basic and diluted net loss per share	$	(0.21	)	$	(0.09	)	$	(0.02	)

F-21

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

During all periods presented, the Company had securities outstanding that could potentially dilute basic income per share in the future, but were excluded in the computation of diluted income per share in such periods as their effect would have been antidilutive due to the net loss reported in such periods. At March 31, 2004, such outstanding securities consist of 5,499,392 shares of convertible preferred stock, warrants to purchase 60,000 shares of Series B convertible preferred stock and options to purchase 4,187,547 shares of common stock.

8.    Income Taxes

The provision for income taxes consists of the following (in thousands):

	Years Ended June 30,
	2002			2003		2004
Current:
Federal	$	(41	)	$	—	$	32
State		1			1		1
Foreign		579			573		706
Total current		539			574		739
Deferred		—			—		—
Provision for income taxes	$	539		$	574	$	739

Differences between income taxes computed by applying the statutory federal income tax rate to loss before income taxes and the provision for income taxes consist of the following (in thousands):

	Years Ended June 30,
	2002			2003			2004
Income tax expense (benefit) computed at the federal statutory rate of 35%	$	(1,365	)	$	(467	)	$	71
State tax benefit		1			1			1
Foreign taxes		579			573			706
Change in valuation allowance		1,549			942			(181	)
Nondeductible stock compensation		168			27			19
Research and development credits		(280	)		(327	)		(144	)
Foreign tax credits		(498	)		(513	)		(726	)
Foreign income taxed at other than the statutory federal rate		271			173			884
Other		114			165			109
Provision for income taxes	$	539		$	574		$	739

F-22

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

Significant components of the Company’s deferred tax assets are as follows (in thousands):

	June 30,
	2003			2004
Deferred tax assets:
Net operating loss carryforwards	$	1,503		$	1,304
Tax credit carryforwards		2,999			3,972
Accruals and reserves		1,073			471
Total gross deferred tax assets		5,575			5,747
Valuation allowance		(5,575	)		(5,747	)
Net deferred tax assets	$	—		$	—

Based on available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable; accordingly, management has established a full valuation allowance for all deferred tax assets.

As of June 30, 2004, the Company had available for carryforward, net operating losses for federal and state income tax purposes of approximately $2,087,000 and $2,965,000, respectively. Federal net operating loss carryforwards will expire, if not utilized beginning in 2019 through 2023. State net operating loss carryforwards will expire if not utilized beginning in 2009 through 2012.

As of June 30, 2004, the Company had research and development credit carryforwards of approximately $1,132,000 and $842,000 available to offset future federal and state income taxes, respectively. The federal credit carryforwards expire at various dates through 2023, and the state credit carryforwards have no expiration date. As of June 30, 2004, the Company also had available approximately $2,219,000 in foreign tax credit carryforwards for federal income tax purposes and approximately $61,000 in California manufacturers investment credits which expire in 2008 and 2013, respectively.

Current federal and California tax laws include substantial restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an ownership change of a corporation, as defined. Accordingly, the Company’s ability to utilize net operating loss and tax credit carryforwards may be limited as a result of such ownership change. Such a limitation could result in the expiration of some or all of the carryforwards before they are utilized.

9.    Employee Benefit Plan

The Company has a defined contribution retirement plan that has been determined by the Internal Revenue Service (IRS) to be qualified under Section 401(k) of the Internal Revenue Code of 1986. The plan covers essentially all full-time employees. Eligible employees may make voluntary contributions to the plan of up to 20% of their eligible annual compensation, subject to IRS limits. Employer contributions are discretionary, and the Company has not made any such employer contributions to the plan.

F-23

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

10.    Segment and Geographic Information

Segment information is presented in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Based on SFAS No. 131, the Company has determined that there are two operating and reportable segments: Products and Internet services. The Products segment designs, develops, manufactures and markets digital imaging software to OEM customers for incorporation into their products. The Internet Services segment designs, develops, manages and hosts customer websites that promote the customers’ products and the Company’s software.

The information used by the Company’s chief operating decision maker (its Chief Executive Officer) to assess performance and allocate resources to these two segments, and a reconciliation of such segment information to income (loss) before income taxes and minority interest are presented in the following table (in thousands):

	Years Ended June 30,
	2002			2003			2004
Product:
Revenue	$	13,360		$	14,574		$	19,043
Cost of revenue		1,717			2,388			3,932
Gross profit		11,643			12,186			15,111
Internet services:
Revenue		5,580			4,252			3,044
Cost of revenue		2,868			2,744			1,877
Gross profit		2,712			1,508			1,167
Costs and expenses:
Engineering and development		6,606			6,630			6,811
Selling and marketing		5,902			4,927			6,067
General and administrative		5,761			3,034			3,030
Total		18,269			14,591			15,908
Income (loss) from operations		(3,914	)		(897	)		370
Other income (expense), net		12			(437	)		(167	)
Income (loss) before income taxes and minority interest	$	(3,902	)	$	(1,334	)	$	203

The Company does not allocate assets to its segments since they cannot be directly attributable to each segment; accordingly, asset information by segment is not readily available.

For the years ended June 30, 2002, 2003 and 2004, the Company recorded revenue from customers throughout the United States, Mexico, Argentina, Canada, the United Kingdom, France, Spain, Norway, Sweden, Finland, the Netherlands, Belgium, the Czech Republic, Germany, Japan, China, Hong Kong, Singapore, Taiwan and Australia. The following table presents total revenue for the years ended June 30,

F-24

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

2002, 2003 and 2004 and long-lived assets as of June 30, 2002, 2003 and 2004 attributed to significant countries (in thousands):

	2002				2003				2004
	Total Revenue*		Long-Lived Assets		Total Revenue*		Long-Lived Assets		Total Revenue*		Long-Lived Assets
United States	$	9,024	$	2,715	$	9,292	$	1,901	$	11,940	$	2,755
Japan		7,543		22		6,738		50		7,231		59
United Kingdom		1,327		—		1,005		—		423		9
All other (each less than 10%)		1,046		385		1,791		521		2,493		629
Total	$	18,940	$	3,122	$	18,826	$	2,472	$	22,087	$	3,452

* Total revenue is attributed to countries based on location of customer.

11.    Major Customers

The following table summarizes total revenue and accounts receivable for customers which accounted for 10% or more of total revenue or accounts receivable:

	Accounts Receivable				Total Revenue
	June 30,				Years Ended June 30,
Customer	2003		2004		2002		2003		2004
A	8	%	0	%	16	%	13	%	9	%
B	15	%	5	%	24	%	21	%	25	%
C	6	%	0	%	11	%	12	%	11	%
D	1	%	1	%	6	%	12	%	11	%
E	14	%	14	%	0	%	2	%	4	%
F	0	%	11	%	0	%	0	%	2	%
G	0	%	16	%	1	%	1	%	2	%

12.    Related Party Transactions

On December 10, 2002, the Company borrowed $1,500,000 from a stockholder under a promissory note which bears an interest rate of 20% per annum. During the years ended June 30, 2003 and 2004, the Company paid interest of approximately $172,000 and $280,000, respectively, to this stockholder. During fiscal year 2004, the Company repaid $350,000 outstanding under the note payable and repaid the balance of $1,150,000 in August 2004 (see Note 3).

In December 2000, the Company sold Series B convertible preferred stock to two of its customers for $2,500,000. The Company recorded revenue of $4,266,000, $4,616,000 and $4,488,000 from sales to these preferred stockholders in the years ended June 30, 2002, 2003 and 2004, respectively.

F-25

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

In October 14, 2003, the Company made a loan to an officer pursuant to a recourse promissory note in the principal amount of $94,000, with interest at a rate of 4% per year. The promissory note is due November 16, 2006, the expiration date of the employment agreement, a change in control of the Company or the completion of an IPO. As of June 30, 2004, the amount receivable under the promissory note was included in other current assets.

In December 2002 and 2003, the Company made two loans to its Chief Executive Officer, in connection with the exercise of stock options. The loans were made pursuant to two secured full recourse promissory notes in the principal amounts of $44,000 each, with interest at a rate of 5% and 4% per year. These notes were repaid in April 2004.

13.    Legal Proceedings

On December 30, 2001, the Company, along with over 200 other companies, was named as a defendant in a lawsuit filed by The Massachusetts Institute of Technology and Electronics for Imaging, Inc. The complaint was filed in the United States District Court, Eastern District of Texas, and alleges infringement of U.S. patent No. 4,500,919 owned by The Massachusetts Institute of Technology and licensed to Electronics for Imaging. The first amended complaint seeks unspecified damages, attorneys’ fees and an injunction against further infringement. The Company is currently participating in a joint defense agreement with several of the defendants. The Company, along with its other joint defense members, filed an answer to the first amended complaint on July 1, 2002. On November 24, 2003, the Company filed a motion for summary judgment, seeking the court’s ruling on whether the plaintiffs had sufficiently complied with the marking requirements of 35 U.S.C. §287(a). On August 4, 2004, the magistrate judge issued a report and recommendation that the motion for summary judgment be denied except with respect to the issue of actual notice. The report and recommendation states that filing an action for infringement constitutes actual notice. Although this finding may limit the Company’s exposure, the plaintiffs will likely challenge the report and recommendation. The Company cannot be certain that the report and recommendation will be adopted by the court and what impact this will have on its exposure or the litigation. No trial date has been set for this case. Although the Company intends to vigorously defend itself against these claims, it cannot predict the outcome of this litigation. Management believes the ultimate outcome will not have a material adverse affect on the business, the financial position, results of operations or cash flows of the Company.

In January 2004, the Company settled a claim with a former employee for $340,000 that had alleged breach of contract in a lawsuit filed in May 2002. The Company recorded the claim in general and administrative expenses in its statement of operations for the year ended June 30, 2002.

The Company is subject to various other legal proceedings and claims which may arise in the normal course of business. Management does not believe that any current litigation or claims will have a material adverse affect on the business, the financial position, results of operations or cash flows of the Company.

F-26

ARCSOFT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Years Ended June 30, 2002, 2003 and 2004

14.    Subsequent Events

In July 2004, the Company entered into an agreement with a bank for a $3,000,000 asset based line-of-credit. The line provides for borrowings up to $3,000,000 based upon a percentage of accounts receivable, an interest rate of prime plus 1.5% (5.75% as of July 2004) and matures in July 2005. The line is secured by all of the Company’s assets and requires that the Company maintain a minimum liquidity, as defined, of $1,000,000 or four months of liquidity, whichever is higher.

Upon obtaining the above line, the Company borrowed $1,000,000 under the line and, in August 2004, repaid the $1,150,000 of borrowings from a stockholder (see Note 3).

*  *  *  *  *

F-27

Through and including                     , 2004 (the 25^th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

                     Shares

Common Stock

PRICE $     PER SHARE

RBC CAPITAL MARKETS

NEEDHAM & COMPANY, INC.

A.G. EDWARDS

PROSPECTUS

                    , 2004

Part II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.    Other Expenses of Issuance and Distribution

The following table sets forth the various expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. filing fee and the Nasdaq National Market listing fee.

Securities and Exchange Commission registration fee	$	5,829
National Association of Securities Dealers, Inc. filing fee		5,100
Nasdaq National Market listing fee		100,000
Blue Sky fees and expenses		10,000
Accounting fees and expenses		*
Legal fees and expenses		*
Printing and engraving fees		*
Registrar and Transfer Agent’s fees		*
Miscellaneous fees and expenses		*
Total	$	*

* To be filed by amendment

Item 14.    Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law provides for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the “Act”). Article VIII of the Registrant’s Amended and Restated Certificate of Incorporation (Exhibit 3(i).2 hereto) and Article 6 of the Registrant’s Amended and Restated Bylaws (Exhibit 3(ii).2 hereto) provide for indemnification of the Registrant’s directors, officers, employees and other agents to the extent and under the circumstances permitted by the Delaware General Corporation Law. The Registrant also intends to enter into agreements with its directors and officers that will require the Registrant, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers to the fullest extent allowed. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the underwriters of the Registrant, its directors and officers, and by the Registrant of the underwriters, for certain liabilities, including liabilities arising under the Act and affords certain rights of contribution with respect thereto.

Item 15.    Recent Sales of Unregistered Securities

From January 1, 1997, we have sold and issued the following securities:

(1) Between January 15, 1997 and June 30, 2004, the Registrant granted options to purchase an aggregate of 10,320,985 shares of common stock at exercise prices ranging from $0.12 to $2.25

II-1

per share and sold an aggregate of 910,774 shares of common stock to directors, officers, employees, former employees and consultants at prices ranging from $0.12 to $2.25 per share, for aggregate cash consideration of approximately $414,721.25.

(2) Between April 26, 1999 and June 2, 1999, the Registrant issued and sold an aggregate of 1,832,726 shares of series A preferred stock to 20 accredited investors for an aggregate of $2,016,000.

(3) Between March 22, 2000 and April 6, 2001, the Registrant issued and sold an aggregate of 3,666,666 shares of series B preferred stock to three accredited investors for an aggregate of $5,500,000, and issued warrants to purchase up to 20,000 shares of series B preferred stock to two investors at an exercise price of $1.50 per share.

(4) In November 2003, the Registrant issued warrants to purchase up to 40,000 shares of series B preferred stock to one investor at an exercise price of $1.50 per share.

(5) In April and June 2004, the Registrant issued a total of $2,800,000 in principal amount of convertible promissory notes to one accredited investor.

The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D or Regulation S promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationship with the Registrant, to information about the Registrant.

Item 16.    Exhibits and Financial Statement Schedules

Exhibit Number	Description
1.1*	Form of Underwriting Agreement.
3(i).1	Amended and Restated Articles of Incorporation of the Registrant and Certificate of Correction of Amended Restated Articles of Incorporation.
3(i).2	Form of Restated Certificate of Incorporation of the Registrant, to be effective upon the closing of the offering to which this Registration Statement relates.
3(ii).1	Bylaws of the Registrant.
3(ii).2	Form of Amended and Restated Bylaws of the Registrant, to be effective upon the closing of the offering to which this Registration Statement relates.
4.1*	Specimen Common Stock Certificate.
4.2	Investors Rights Agreement, dated December 22, 2000, by and among the Registrant and certain stockholders of the Registrant including amendments thereto.
5.1*	Opinion of Pillsbury Winthrop LLP.
10.1	Form of Indemnification Agreement between the Registrant and its officers and directors.

II-2

Exhibit Number	Description
10.2	2000 Stock Option Plan and form of agreements thereunder.
10.3	Form of 2004 Stock Incentive Plan and form of agreements thereunder.
10.4	Form of 2004 Employee Stock Purchase Plan.
10.5	Amended and Restated Executive Employment Agreement, dated July 1, 2002, between the Registrant and Hui (Michael) Deng, as amended.
10.6	Executive Employment Agreement, dated November 14, 2002, between the Registrant and Todd J. Rumaner.
10.7	Executive Employment Agreement, dated March 30, 2004, between the Registrant and Alfred V. Larrenaga.
10.8	Standard Multi-Tenant Lease Form, dated January 7, 1998, between the Registrant and Pen Associates No. 2, LLC, a California limited liability company, and Lakehouse, LLC, a California limited liability company, including amendments thereto.
10.9	International Garden Lease, dated September 24, 2001, between Hangzhou ArcSoft ZDQ Software Co. Ltd. and Hangzhou West Lake Estate Operating Co. including amendments thereto.
10.10*	Master Agreement by and between Zoran Corporation and the Registrant dated March 31, 2004
21.1	List of Subsidiaries.
23.1	Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.
23.2*	Consent of Pillsbury Winthrop LLP (included in Exhibit 5.1).
24.1	Power of Attorney (see page II-5 of this Registration Statement).

* To be filed by amendment.

(b) Financial Statement Schedule

Not applicable.

Item 17.    Undertakings

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Act”), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

II-3

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) It will provide to the underwriters at the closing(s) specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

II-4

Signatures

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on the 20th day of August, 2004.

ARCSOFT, INC.
By	/s/    HUI DENG
	Hui (Michael) Deng
	President and Chief Executive Officer

Power of Attorney

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Hui (Michael) Deng and Alfred V. Larrenaga, and each of them, his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

Name	Title	Date
/s/    HUI DENG         Hui (Michael) Deng	President and Chief Executive Officer (Principal Executive Officer) and Director	August 20, 2004
/s/    ALFRED V. LARRENAGA         Alfred V. Larrenaga	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	August 20, 2004
/s/    DAVID C. NAGEL         David C. Nagel	Chairman of the Board	August 20, 2004
/s/    GREGORY K. HINCKLEY         Gregory K. Hinckley	Director	August 20, 2004
/s/    TIMOTHY C. LIN         Timothy C. Lin	Director	August 20, 2004
/s/    RONALD J. SMITH         Ronald J. Smith	Director	August 20, 2004

II-5

Exhibit Index

Exhibit Number	Description
1.1*	Form of Underwriting Agreement.
3(i).1	Amended and Restated Articles of Incorporation of the Registrant and Certificate of Correction of Amended Restated Articles of Incorporation.
3(i).2	Form of Restated Certificate of Incorporation of the Registrant, to be effective upon the closing of the offering to which this Registration Statement relates.
3(ii).1	Bylaws of the Registrant.
3(ii).2	Form of Amended and Restated Bylaws of the Registrant, to be effective upon the closing of the offering to which this Registration Statement relates.
4.1*	Specimen Common Stock Certificate.
4.2	Investors Rights Agreement, dated December 22, 2000, by and among the Registrant and certain stockholders of the Registrant including amendments thereto.
5.1*	Opinion of Pillsbury Winthrop LLP.
10.1	Form of Indemnification Agreement between the Registrant and its officers and directors.
10.2	2000 Stock Option Plan and form of agreements thereunder.
10.3	Form of 2004 Stock Incentive Plan and form of agreements thereunder.
10.4	Form of 2004 Employee Stock Purchase Plan.
10.5	Amended and Restated Executive Employment Agreement, dated July 1, 2002, between the Registrant and Hui (Michael) Deng, as amended.
10.6	Executive Employment Agreement, dated November 14, 2002, between the Registrant and Todd J. Rumaner.
10.7	Executive Employment Agreement, dated March 30, 2004, between the Registrant and Alfred V. Larrenaga.
10.8	Standard Multi-Tenant Lease Form, dated January 7, 1998, between the Registrant and Pen Associates No. 2, LLC, a California limited liability company, and Lakehouse, LLC, a California limited liability company, including amendments thereto.
10.9	International Garden Lease, dated September 24, 2001, between Hangzhou ArcSoft ZDQ Software Co. Ltd. and Hangzhou West Lake Estate Operating Co. including amendments thereto.
10.10*	Master Agreement by and between Zoran Corporation and the Registrant dated March 31, 2004
21.1	List of Subsidiaries.
23.1	Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.
23.2*	Consent of Pillsbury Winthrop LLP (included in Exhibit 5.1).
24.1	Power of Attorney (see page II-5 of this Registration Statement).

* To be filed by amendment.

EX-3.(I)1

Exhibit 3(i).1

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

OF

ARCSOFT, INC.

Michael Hui Deng and Nai-Yu Pai hereby certify that:

1. They are the President and the Secretary, respectively, of ArcSoft, Inc., a California corporation.

2. The Articles of Incorporation of the corporation are hereby amended and restated to read as follows:

“I. NAME

The name of the corporation is ArcSoft, Inc.

II. PURPOSE

The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code.

III. SHARES

(a)(i) This corporation is authorized to issue two classes of shares to be designated respectively Preferred Stock (“Preferred”) and Common Stock (“Common”). The total number of shares of Common this corporation shall have authority to issue is 100,000,000 and the total number of shares of Preferred Stock the corporation shall have authority to issue is 10,000,000.

The corporation shall from time to time in accordance with the laws of the State of California increase the authorized amount of its Common if at any time the number of Common shares remaining unissued and available for issuance shall not be sufficient to permit conversion of the Preferred.

(ii) The Preferred authorized by this Articles of Incorporation shall be issued in one or more series. The first series of Preferred is designated as Series A Preferred Stock (“Series A Preferred”) and consists of Two Million (2,000,000) shares of the Preferred. The second series of Preferred is designated as Series B Preferred Stock (“Series B Preferred”) and consists of Two Million (2,000,000) shares of the Preferred. The shares of each series of Preferred shall have the rights, preferences, privileges and restrictions set forth in paragraph (b) below.

(b) The relative rights, preferences, privileges and restrictions granted to or imposed upon the respective classes and series of the shares of capital stock or the holders thereof are as follows:

Section 1. General Definitions. For purposes of this Article, the following definitions shall apply:

A. “Junior Shares” shall mean all Common and any other shares of this corporation other than the Preferred.

B. “Subsidiary” shall mean any corporation at least 50% of whose outstanding voting shares shall at the time be owned by the corporation and/or one or more of such subsidiaries.

Section 2. Dividend Rights of Preferred. The holders of the Preferred shall be entitled to receive, out of any funds legally available therefor, cash dividends on each outstanding share of Preferred at the same amount as may be declared for Common if, when, and as declared by the Board of Directors on an as-converted basis. The right to such dividends on the Preferred shall not be cumulative, and no right shall accrue to holders of Preferred by reason of the fact that dividends on such shares are not declared or paid in any prior year.

Section 3. Liquidation Preference.

(a) In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, the holders of shares of Series A Preferred and Series B Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Junior Shares by reason of their ownership of such stock, an amount equal to $1.10 per share for each share of Series A Preferred then held by them and an amount equal to $1.50 per share for each share of Series B Preferred then held by them, adjusted for any combinations, consolidations, or stock distributions or dividends with respect to the Common and, in addition, an amount equal to all declared but unpaid dividends on the Series A Preferred and Series B Preferred, respectively, to be paid out of the corporation’s assets legally available for distribution to its shareholders. If, upon the occurrence of such event, the assets and funds thus distributed among the holders of the Preferred shall be insufficient to permit the payment of the full preferential amount to such holders, then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Preferred in proportion to the respective preferential amounts fixed for each such holder upon a liquidation, dissolution or winding up of the corporation. After full payment has been made to the holders of the Preferred of the foregoing amounts to which they shall be entitled, the holders of Junior Shares and the Preferred shall share pro rata in all remaining assets of the corporation on a share for share as-converted basis.

(b) For purposes of this Section 3, a liquidation, dissolution or winding up of the corporation shall be deemed to be occasioned by, or to include, the corporation’s sale of all or substantially all of its assets, or the acquisition of the corporation by another entity by means of merger or consolidation resulting in the exchange of the outstanding shares of the corporation for securities or consideration issued, or caused to be issued, by the acquiring corporation or its subsidiary, provided that the shareholders of the corporation immediately prior to such sale, merger,

2

consolidation or other transaction or series of such transactions own immediately thereafter, and by virtue of their ownership of capital stock of the corporation, less than 50% of the surviving entity or its parent.

(c) For purposes of this Section 3, if the distributions or consideration received by the shareholders of the corporation is other than cash, its value will be deemed to be its fair market value as determined in good faith by the Board of Directors of the corporation. In the case of publicly traded securities listed on an exchange, fair market value shall mean the average last closing sale price as reported by such exchange or by a consolidated transaction reporting system for the five-day period immediately preceding the date of such distribution. In the case of publicly traded securities not listed on an exchange, fair market value shall mean the average last closing bid price as reported by the National Association of Securities Dealers Automatic Quotation System, Inc. or such successor or similar organization, for the five-day period immediately preceding the date of such distribution.

Section 4. Redemption.

The shares of Preferred are not redeemable in whole or in part.

Section 5. Conversion. The holders of Preferred shall have conversion rights as follows (the “Conversion Rights”):

(a) Right to Convert. Each share of Preferred, at the option of its holder, at the office of the corporation or any transfer agent for the Preferred, at any time after the date of issuance of such share, shall be convertible into such number of fully paid and nonassessable shares of Common as is determined by dividing (i) $1.10 for each share of Series A Preferred and (ii) $1.50 for each share of Series B Preferred by the conversion price in effect at the time of the conversion for each such series (“Conversion Price”). The initial Conversion Price shall be $1.10 for each share of Series A Preferred and $1.50 for each share of Series B Preferred per share of Common. Such initial Conversion Price shall be subject to adjustment as hereinafter provided.

(b) Automatic Conversion. Each share of Preferred automatically shall be converted into shares of Common at the then effective Conversion Price (i) on the effective date of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, or a listing of Common of the corporation upon any “designated offshore securities market” as defined under Rule 902 of the Securities Act of 1933, as amended, with an aggregate offering price of at least US$ 25,000,000.00, (ii) a shares-for-shares merger or consolidation of the corporation into or with another company (other than with a wholly owned subsidiary of the corporation) or any other company reorganization in which the corporation shall not be the continuing or surviving entity of such merger, consolidation or reorganization, or (iii) with respect to each series of the Preferred at the election of the holders of at least a majority of the shares of such series of Preferred.

(c) Mechanics of Conversion. No fractional shares of Common shall be issued upon conversion of any share of Preferred. In lieu of any fractional share to which the holder would otherwise be entitled (after aggregating all shares into which shares of Preferred held by such holder could be converted), the corporation shall either pay cash equal to such fraction multiplied by the

3

then fair market value of the Common, as determined by the Board of Directors, or round such number of shares to the nearest whole share. Before any holder of Preferred shall be entitled to convert the same into full shares of Common, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or of any transfer agent for the Preferred, and shall give written notice to the corporation at such office that such holder elects to convert the same. The corporation shall, as soon as practicable thereafter, issue and deliver at such office, to such holder of Preferred, a certificate or certificates for the number of shares of Common to which such holder shall be entitled, together with a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common (unless such shares are rounded to the nearest whole share). Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred to be converted, or in the case of automatic conversion, on the effective date of the offering/listing as provided in Section 5(b) above, and the person or persons entitled to receive the shares of Common issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common on such date.

(d) Adjustment for Stock Splits and Combinations. If the corporation at any time or from time to time effects a subdivision of the outstanding Common, the Conversion Price then in effect immediately before that subdivision shall be proportionately decreased, and conversely, if the corporation at any time or from time to time combines the outstanding shares of Common, the Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 5(d) shall become effective at the close of business on the date the subdivision or combination becomes effective.

(e) Adjustment for Certain Dividends and Distributions. In the event the corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common entitled to receive, a dividend or other distribution payable in additional shares of Common, then and in each such event the Conversion Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction (1) the numerator of which is the total number of shares of Common issued and outstanding immediately prior to the time of such issuance on the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common issued and outstanding immediately prior to the time of such issuance on the close of business on such record date, plus the number of shares of Common issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Section 5(e) as of the time of actual payment of such dividends or distributions.

(f) Adjustments for Other Dividends and Distributions. In the event the corporation shall declare a distribution to holders of Common payable in securities of other persons, evidences of indebtedness issued by the corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Sections (d) and (e), then, in each such case for the purpose of this Section 5(f), the holders of the Preferred shall be entitled to a proportionate share of any such distribution as though they were holders of the number of shares of Common of the

4

corporation into which their shares of Preferred are convertible as of the record date fixed for the determination of holders of Common of the corporation entitled to receive such distribution.

(g) Adjustments for Reclassification, Exchange and Substitution. If the Common issuable upon the conversion of the Preferred is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or a stock dividend or a reorganization, merger, consolidation or sale of assets, as provided for elsewhere in this Section 5), then and in any such event each holder of Preferred shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common into which such shares of Preferred might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein.

(h) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 5, the corporation at its expense promptly shall compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred a Certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The corporation shall, upon the written request at any time of any holder of Preferred, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred.

(i) Notices of Record Date. In the event that the corporation shall propose at any time:

(i) to declare any dividend or distribution upon its Common, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus;

(ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights;

(iii) to effect any reclassification or recapitalization of its outstanding Common involving a change in the Common; or

(iv) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up;

then, in connection with each such event, the corporation shall send to the holders of the Preferred:

(1) at least ten (10) days’ prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights and a description thereof (and specifying the date on which the holders of Common shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (iii) and (iv) above; and

5

(2) in the case of the matters referred to in (iii) and (iv) above, at least ten (10) days’ prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common shall be entitled to exchange their Common for securities or other property deliverable upon the occurrence of such event).

Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of Preferred at the address for each such holder as shown on the books of the corporation.

Section 6. Voting Rights. Except as otherwise required by law in this Section 6, each share of Common issued and outstanding shall have one vote and each share of Preferred issued and outstanding shall have the number of votes equal to the number of Common shares into which the Preferred is convertible, as adjusted from time to time pursuant to Section 5 hereof; provided, that all shares of Preferred held by a holder shall be aggregated and rounded down to the nearest whole share for this purpose.

Section 7. Covenants. In addition to any other rights provided by law, so long as any shares of Preferred shall be outstanding, this corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of such outstanding shares of Preferred voting separately as a class (except in the case of Sections 7(a), (b) and (c) below where the holders of not less than a majority of such outstanding shares of the series affected shall vote separately as a class):

(a) amend or repeal any provision of, or add any provision to, this corporation’s Articles of Incorporation which adversely affects a series of Preferred;

(b) adversely alter or change the rights, preferences, and privileges of a series of Preferred;

(c) authorize or issue shares of any class or series having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of a particular series of the Preferred; or

(d) cause any merger or sale of all or substantially all assets of the corporation as a result of which the holders of the corporation will hold less than 50% of voting stock of the surviving entity.

Section 8. Consent for Certain Repurchases of Common Stock Deemed to be Distributions. Each holder of an outstanding share of Preferred shall be deemed to have consented, for purposes of Sections 502, 503 and 506 of the General Corporation Law, to distributions made by the corporation in connection with the repurchase of shares of Common issued to or held by employees or consultants upon termination of their employment or services pursuant to agreements providing for the right of said repurchase between the corporation and such persons.

Section 9. Residual Rights. All rights accruing to the outstanding shares of the corporation not expressly provided for to the contrary herein shall be vested in the Common.

6

IV. DIRECTOR LIABILITY

Section 1. Limitation of Directors’ Liability. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law.

Section 2. Indemnification of Corporate Agents. The corporation is authorized to indemnify the directors and officers of the corporation to the fullest extent permissible under California law.

Section 3. Repeal Or Modification. Any repeal or modification of the forgoing provisions of this Article IV shall not adversely affect any right of indemnification or limitation of liability of an agent of the Corporation relating to acts or omissions occurring prior to such repeal or modification.”

3. The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the Board of Directors.

4. The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of this corporation is 19,878,083 shares of Common Stock, 1,832,726 shares of Series A Preferred and 2,000,000 shares of Series B Preferred. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%) of each of the outstanding shares of Common Stock, Series A Preferred and Series B Preferred, each voting as a separate class.

The undersigned declare under penalty of perjury that the matters set forth in the foregoing amended and restated articles are true of their own knowledge.

7

Executed at Fremont, California on December 8, 2000.

/s/ Michael Hui Deng

Michael Hui Deng, President

/s/ Nai-Yu Pai

Nai-Yu Pai, Secretary

8

CERTIFICATE OF CORRECTION

OF

AMENDED AND RESTATED ARTICLES OF INCORPORATION

OF

ARCSOFT, INC.

Michael Deng and Nai-Yu Pai hereby certify that:

1. They are the President and the Secretary, respectively, of ArcSoft, Inc.

2. The name of the corporation is ArcSoft, Inc., and it is a California corporation.

3. The instrument being corrected is entitled “Amended and Restated Articles of Incorporation of ArcSoft, Inc.”, and said instrument was filed with the Secretary of the State of California on December 8, 2000.

4. Article III, section (ii) of said Amended and Restated Articles of Incorporation; as corrected, should read as follows:

“(ii) The Preferred authorized by this Articles of Incorporation shall be issued in one or more series. The first series of Preferred is designated as Series A Preferred Stock (“Series A Preferred”) and consists of Two Million (2,000,000) shares of the Preferred. The second series of Preferred is designated as Series B Preferred Stock (“Series B Preferred”) and consists of Four Million (4,000,000) shares of the Preferred. The shares of each series of Preferred shall have the rights, preferences, privileges and restrictions set forth in paragraph (b) below.”

5. That said Article II, section (ii), as corrected, conforms the wording of the amended article to that adopted by the board of directors and shareholders.

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

1

Executed effective as of the 16^th day of December, 2000 in the State of California.

/s/ Michael Hui Deng

Michael Hui Deng, President

/s/ Nai-Yu Pai

Nai-Yu Pai, Secretary

2

EX-3.(I)2

Exhibit 3(i).2

RESTATED CERTIFICATE OF INCORPORATION

OF ARCSOFT, INC.

ArcSoft, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows:

FIRST: The name of the corporation is ArcSoft, Inc.

SECOND: The original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on                 , 2004. The name under which the corporation was originally incorporated was ArcSoft Delaware, Inc. A Certificate of Merger whereby ArcSoft, Inc., a California corporation, was merged with and into the corporation was filed with the Secretary of State of the State of Delaware on                 , 2004. A Certificate of Amendment to the Certificate of Incorporation was filed on                 , 2004.

THIRD: Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates, integrates and further amends the provisions of the Certificate of Incorporation of the corporation.

FOURTH: The Certificate of Incorporation of the corporation shall be amended and restated to read in full as follows:

ARTICLE I

The name of the corporation is ArcSoft, Inc.

ARTICLE II

The address of the registered office of the corporation in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Services Company.

ARTICLE III

The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the “DGCL”).

ARTICLE IV

A. Classes of Stock. The total number of shares of all classes of classes of capital stock that the corporation shall have authority to issue is two hundred fifty-five million (255,000,000), of which two hundred fifty million (250,000,000) shares of the par value of one one-hundredth of one cent ($0.0001) each shall be Common Stock (the “Common Stock”) and five million (5,000,000) shares of the par value of one one-hundredth of one cent ($0.0001) each shall be Preferred Stock (the “Preferred Stock”). The number of authorized shares of Common

Stock or Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the then outstanding shares of Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such Preferred Stock holders is required pursuant to the provisions established by the Board of Directors of the corporation (the “Board of Directors”) in the resolution or resolutions providing for the issue of such Preferred Stock, and if such holders of such Preferred Stock are so entitled to vote thereon, then, except as may otherwise be set forth in this Restated Certificate of Incorporation, the only stockholder approval required shall be the affirmative vote of a majority of the combined voting power of the Common Stock and the Preferred Stock so entitled to vote.

B. Preferred Stock. The Preferred Stock may be issued from time to time in one or more series, as determined by the Board of Directors. The Board of Directors is expressly authorized to provide for the issue, in one or more series, of all or any of the remaining shares of Preferred Stock and, in the resolution or resolutions providing for such issue, to establish for each such series the number of its shares, the voting powers, full or limited, of the shares of such series, or that such shares shall have no voting powers, and the designations, preferences and relative, participating, optional or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof. The Board of Directors is also expressly authorized (unless forbidden in the resolution or resolutions providing for such issue) to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issuance of shares of that series. In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series.

C. Common Stock.

1. Relative Rights of Preferred Stock and Common Stock. All preferences, voting powers, relative, participating, optional or other special rights and privileges, and qualifications, limitations, or restrictions of the Common Stock are expressly made subject and subordinate to those that may be fixed with respect to any shares of the Preferred Stock.

2. Voting Rights. Except as otherwise required by law or this Restated Certificate of Incorporation, each holder of Common Stock shall have one vote in respect of each share of stock held by such holder of record on the books of the corporation for the election of directors and on all matters submitted to a vote of stockholders of the corporation.

3. Dividends. Subject to the preferential rights of the Preferred Stock, the holders of shares of Common Stock shall be entitled to receive, when and if declared by the Board of Directors, out of the assets of the corporation which are by law available therefor, dividends payable either in cash, in property or in shares of capital stock.

4. Dissolution, Liquidation or Winding Up. In the event of any dissolution, liquidation or winding up of the affairs of the corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred Stock, holders of Common Stock shall be entitled, unless otherwise provided by law or this Restated

Certificate of Incorporation, to receive all of the remaining assets of the corporation of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively.

ARTICLE V

In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware:

A. The Board of Directors is expressly authorized to adopt, amend or repeal the bylaws of the corporation, provided, however, that the bylaws may only be amended in accordance with the provisions thereof.

B. Elections of directors need not be by written ballot unless the bylaws of the corporation shall so provide.

C. The books of the corporation may be kept at such place within or without the State of Delaware as the bylaws of the corporation may provide or as may be designated from time to time by the Board of Directors.

ARTICLE VI

A. Number of Directors. The authorized number of directors of the corporation shall be determined from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors at any regular or special meeting of such Board, within any limits prescribed in the bylaws of the corporation.

B. Classes of Directors. The Board of Directors, other than those directors elected by the holders of any series of Preferred Stock as provided for or fixed pursuant to the provisions of Article IV of this Restated Certificate of Incorporation, shall be divided into three classes, designated Class I, Class II and Class III, as nearly equal in number as possible, and the term of office of directors of one class shall expire at each annual meeting of stockholders, and in all cases as to each director until his or her successor shall be elected and shall qualify or until his or her earlier resignation, removal from office, death or incapacity. Additional directorships resulting from an increase in number of directors shall be apportioned among the classes as equally as possible. The initial term of office of directors of Class I shall expire at the annual meeting of stockholders in 2005, the initial term of office of directors of Class II shall expire at the annual meeting of stockholders in 2006, and the initial term of office of directors of Class III shall expire at the annual meeting of stockholders in 2007. At each annual meeting of stockholders the number of directors equal to the number of directors of the class whose term expires at the time of such meeting (or, if less, the number of directors properly nominated and qualified for election) shall be elected to hold office until the third succeeding annual meeting of stockholders after their election.

C. Vacancies. Except as otherwise provided for or fixed pursuant to the provisions of Article IV of this Restated Certificate of Incorporation relating to the rights of the holders of any series of Preferred Stock to elect additional directors, and subject to the provisions hereof, newly created directorships resulting from any increase in the authorized number of

directors, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other cause, may be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or in which the vacancy occurred, and until such director’s successor shall have been duly elected and qualified or until his or her earlier resignation, removal from office, death or incapacity. Subject to the provisions of this Restated Certificate of Incorporation, no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

ARTICLE VII

No action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. Special meetings of the stockholders of the corporation may be called only by the Chairman of the Board or the Chief Executive Officer of the corporation or by a resolution adopted by the affirmative vote of a majority of the Board of Directors.

ARTICLE VIII

A. Limitation on Liability. To the fullest extent permitted by the DGCL, as the same exists or as may hereafter be amended, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.

B. Indemnification. Each person who is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, employee benefit plan or other enterprise (including the heirs, executors, administrators or estate of such person), shall be indemnified and advanced expenses by the corporation, in accordance with the bylaws of the corporation, to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment) or any other applicable laws as presently or hereinafter in effect. The right to indemnification and advancement of expenses hereunder shall not be exclusive of any other right that any person may have or hereafter acquire under any statute, provision of the Restated Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise.

C. Insurance. The corporation may, to the fullest extent permitted by law, purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of such person’s status as such, whether or not the

corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL.

D. Repeal and Modification. Any repeal or modification of the foregoing provisions of this Article VIII shall not adversely affect any right or protection existing hereunder immediately prior to such repeal or modification.

ARTICLE IX

Notwithstanding any other provision of this Restated Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend in any respect or repeal this Article IX, or Articles VI, VII and VIII.

*   *   *

FIFTH: This Restated Certificate of Incorporation was duly adopted by the Board of Directors of the corporation.

SIXTH: This Restated Certificate of Incorporation was duly adopted by the stockholders in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware. Written consent of the stockholders has been given with respect to this Restated Certificate of Incorporation in accordance with Section 228 of the General Corporation Law of the State of Delaware, and written notice has been given as provided in Section 228.

IN WITNESS WHEREOF, the corporation has caused this certificate to be signed by its President and attested by its Secretary this          day of                 , 2004.

ARCSOFT, INC.
By
	Michael (Hui) Deng, President

Attest:
By
	Alfred V. Larrenaga, Secretary

EX-3.(II)1

Exhibits 3(ii).1

BY-LAWS

OF

ArcSoft, Inc.

A CALIFORNIA CORPORATION

ARTICLE I

OFFICES

Section 1. PRINCIPAL OFFICE. The principal office for the transaction of business of the corporation is hereby fixed and located at 1512 Centre Pointe Drive, County of Santa Clara, State of California. The location may be changed by approval of a majority of the authorized Directors, and additional offices may be established and maintained at such other place or places, either within or without California, as the Board of Directors may from time to time designate.

Section 2. OTHER OFFICES. Branch or subordinate offices may at any time be established by the Board of Directors at any place or places where the corporation is qualified to do business.

ARTICLE II

DIRECTORS - MANAGEMENT

Section 1. RESPONSIBILITY OF BOARD OF DIRECTORS. Subject to the provisions of the General Corporation Law and to any limitations in the Articles of Incorporation of the corporation relating to action required to be approved by the Shareholders, as that term is defined in Section 153 of the California Corporations Code, or by the outstanding shares, as that term is defined in Section 152 of the Code, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person, provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board.

Section 2. STANDARD OF CARE. Each Director shall perform the duties of a Director, including the duties as a member of any committee of the Board upon which the Director may serve, in good faith, in a manner such Director believes to be in the best interests of the corporation, and with such care, including reasonable inquiry, as an ordinary prudent person in a like position would use under similar circumstances. (Sec. 309)

Section 3. EXCEPTION FOR CLOSE CORPORATION. Notwithstanding the provisions of Section 1, in the event that this corporation shall elect to become a close corporation as defined in Sec. 158, its Shareholders may enter into a Shareholders’ Agreement as defined in Sec. 186. Said Agreement may provide for the exercise of corporate powers and the management of the business and affairs of this corporation by the Shareholders, provided, however, such agreement shall, to the extent and so long as the discretion or the powers of the Board in its management of corporate affairs is controlled by such agreement, impose upon each Shareholder who is a party thereof, liability for managerial acts performed or omitted by such person pursuant thereto otherwise imposed upon Directors as provided in Sec. 300 (d); and the Directors shall be relieved to that extent from such liability.

Section 4. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of Directors shall be four (4 ) until changed by a duly adopted amendment to the Articles of Incorporation or by an amendment to this by-law adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote, as provided in Sec. 212.

Section 5. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of the Shareholders to hold office until the next annual meeting. Each Director, including a Director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified.

Section 6. VACANCIES. Vacancies in the Board of Directors may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, except that a vacancy created by the removal of a Director by the vote or written consent of the Shareholders or by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each Director so elected shall hold office until the next annual meeting of the Shareholders and until a successor has been elected and qualified.

A vacancy or vacancies in the Board of Directors shall be deemed to exist in the event of the death, resignation, or removal of any Director, or if the Board of Directors by resolution declares vacant the office of a Director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of Directors is increased, or if the shareholders fail, at any meeting of shareholders at which any Director or Directors are elected, to elect the number of Directors to be voted for at that meeting.

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The Shareholders may elect a Director or Directors at any time to fill any vacancy or vacancies not filled by the Directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote.

No reduction of the authorized number of Directors shall have the effect of removing any Director before that Director’s term of office expires.

Section 7. REMOVAL OF DIRECTORS. The entire Board of Directors or any individual Director may be removed from office as provided by Secs. 302, 303 and 304 of the Corporations Code of the State of California. In such case, the remaining Board members may elect a successor Director to fill such vacancy for the remaining unexpired term of the Director so removed.

Section 8. NOTICE, PLACE AND MANNER OF MEETINGS. Meetings of the Board of Directors may be called by the Chairman of the Board, or the President, or any Vice President, or the Secretary, or any two (2) Directors and shall be held at the principal executive office of the corporation, unless some other place is designated in the notice of the meeting. Members of the Board may participate in a meeting through use of a conference telephone or similar communications equipment so long as all members participating in such a meeting can hear one another. Accurate minutes of any meeting of the Board or any committee thereof, shall be maintained as required by Sec. 1500 of the Code by the Secretary or other Officer designated for that purpose.

Section 9. ORGANIZATION MEETINGS. The organization meetings of the Board of Directors shall be held immediately following the adjournment of the annual meetings of the Shareholders.

Section 10. OTHER REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at the corporate offices, or such other place as may be designated by the Board of Directors, as follows:

Time of Regular Meeting: 12:00 p.m.

Date of Regular Meeting: March-1

If said day shall fall upon a holiday, such meetings shall be held on the next succeeding business day thereafter. No notice need to be given of such regular meetings.

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Section 11. SPECIAL MEETINGS - NOTICES - WAIVERS. Special meetings of the Board may be called at any time by any of the aforesaid officers, i.e., by the Chairman of the Board or the President or any Vice President or the Secretary or any two (2) Directors.

At least forty-eight (48) hours notice of the time and place of special meetings shall be delivered personally to the Directors or personally communicated to them by a corporate officer by telephone or telegraph. If the notice is sent to a Director by letter, it shall be addressed to him or her at his or her address as it is shown upon the records of the corporation, or if it is not so shown on such records or is not readily ascertainable, at the place in which the meetings of the Directors are regularly held. In case such notice is mailed, it shall be deposited in the United States mail, postage prepaid, in the place in which the principal executive office of the corporation is located at least four (4) days prior to the time of the holding of the meeting. Such mailing, telegraphing, telephoning or delivery as above provided shall be due, legal and personal notice to such Director.

When all of the Directors are present at any Directors’ meeting, however called or noticed, and either (i) sign a written consent thereto on the records of such meeting, or, (ii) if a majority of the Directors are present and if those not present sign a waiver of notice of such meeting or a consent to holding the meeting or an approval of the minutes thereof, whether prior to or after the holding of such meeting, which said waiver, consent or approval shall be filed with the Secretary of the corporation, or, (iii) if a Director attends a meeting without notice but without protesting, prior thereto or at its commencement, the lack of notice, then the transactions thereof are as valid as if had at a meeting regularly called and noticed.

Section 12. SOLE DIRECTOR PROVIDED BY ARTICLES OF INCORPORATION OR BY-LAWS. In the event only one (1) Director is required by the By-Laws or Articles of Incorporation, then any reference herein to notices, waivers, consents, meetings or other actions by a majority or quorum of the Directors shall be deemed to refer to such notice, waiver, etc., by such sole Director, who shall have all the rights and duties and shall be entitled to exercise all of the powers and shall assume all the responsibilities otherwise herein described as given to a Board of Directors.

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Section 13. DIRECTORS ACTION BY UNANIMOUS WRITTEN CONSENT. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting and with the same force and effect as if taken by a unanimous vote of Directors, if authorized by a writing signed individually or collectively by all members of the Board. Such consent shall be filed with the regular minutes of the Board.

Section 14. QUORUM. A majority of the number of Directors as fixed by the Articles of Incorporation or By-Laws shall be necessary to constitute a quorum for the transaction of business, and the action of a majority of the Directors present at any meeting at which there is a quorum, when duly assembled, is valid as a corporate act; provided that a minority of the Directors, in the absence of a quorum, may adjourn from time to time, but may not transact any business. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of Directors, if any action taken is approved by a majority of the required quorum for such meeting.

Section 15. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given to absent Directors if the time and place be fixed at the meeting adjourned and held within twenty-four (24) hours, but if adjourned more than twenty-four (24) hours, notice shall be given to all Directors not present at the time of the adjournment.

Section 16. COMPENSATION OF DIRECTORS. Directors, as such, shall not receive any stated salary for their services, but by resolution of the Board a fixed sum and expense of attendance, if any, may be allowed for attendance at each regular and special meeting of the Board; provided that nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity and receiving compensation therefor.

Section 17. COMMITTEES. Committees of the Board may be appointed by resolution passed by a majority of the whole Board. Committees shall be composed of two (2) or more members of the Board, and shall have such powers of the Board as may be expressly delegated to it by resolution of the Board of Directors, except those powers expressly made non-delegable by Sec. 311.

Section 18. ADVISORY DIRECTORS. The Board of Directors from time to time may elect one or more persons to be Advisory Directors who shall not by such appointment be members of the Board of Directors. Advisory Directors shall be available from time to time to perform special assignments specified by the President, to attend meetings of the Board of Directors upon invitation and to furnish consultation to the Board. The period during which the title shall be held may be prescribed by the Board of Directors. If no period is prescribed, the title shall be held at the pleasure of the Board.

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Section 19. RESIGNATIONS. Any Director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective.

ARTICLE III

OFFICERS

Section 1. OFFICERS. The Officers of the corporation shall be a President, a Secretary, and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other Officers as may be appointed in accordance with the provisions of Section 3 of this Article III. Any number of offices may be held by the same person.

Section 2. ELECTION. The Officers of the corporation, except such Officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by the Board of Directors, and each shall hold office until he or she shall resign or shall be removed or otherwise disqualified to serve, or a successor shall be elected and qualified.

Section 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint such other Officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the By-Laws or as the Board of Directors may from time to time determine.

Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an Officer under any contract of employment, any Officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting to the Board, or, except in case of an Officer chosen by the Board of Directors, by any Officer upon whom such power of removal may be conferred by the Board of Directors.

Any Officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall, not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the Officer is a party.

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Section 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the By-Laws for regular appointments to that office.

Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an officer be elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned by the Board of Directors or prescribed by the By-Laws. If there is no President, the Chairman of the Board shall in addition be the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article III.

Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an Officer, the President shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and Officers of the corporation. He or she shall preside at all meetings of the Shareholders and in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. The President shall be ex officio a member of all the standing committees, including the Executive Committee, if any, and shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the By-Laws.

Section 8. VICE PRESIDENT. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to, all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the By-Laws.

Section 9. SECRETARY. The Secretary shall keep, or cause to be kept, a book of minutes at the principal office or such other place as the Board of Directors may order, of all meetings of Directors and Shareholders, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at Directors’ meetings, the number of shares present or represented at Shareholders’ meetings and the proceedings thereof.

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The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation’s transfer agent, a share register, or duplicate share register, showing the names of the Shareholders and their addresses; the number and classes of shares held by each; the number and date of certificates issued for the same; and the number and date of cancellation of every certificate surrendered for cancellation.

The Secretary shall give, or cause to be given, notice of all the meetings of the Shareholders and of the Board of Directors required by the By-Laws or by law to be given. He or she shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the By-Laws.

Section 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained in accordance with generally accepted accounting principles, adequate and correct accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, earnings (or surplus) and shares. The books of account shall at all reasonable times be open to inspection by any Director.

This Officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. He or she shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and Directors, whenever they request it, an account of all of his or her transactions and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the By-Laws.

ARTICLE IV

SHAREHOLDERS’ MEETINGS

Section 1. PLACE OF MEETINGS. All meetings of the Shareholders shall be held at the principal executive office of the corporation unless some other appropriate and convenient location be designated for that purpose from time to’ time by the Board of Directors.

Section 2. ANNUAL MEETINGS. The annual meetings or the Shareholders shall be held, each year, at the time and on the day following:

Time of Meeting: 12:00 p.m.

Date of Meeting: March 1

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If this day shall be a legal holiday, then the meeting shall be held on the next succeeding business day, at the same hour. At the annual meeting, the Shareholders shall elect a Board of Directors, consider reports of the affairs of the corporation and transact such other business as may be properly brought before the meeting.

Section 3. SPECIAL MEETINGS. Special meetings of the Shareholders may be called at any time by the Board of Directors, the Chairman of the Board, the President, a Vice President, the Secretary, or by one or more Shareholders holding not less than one-tenth (1/10) of the voting power of the corporation. Except as next provided, notice shall be given as for the annual meeting.

Upon receipt of a written request addressed to the Chairman, President, Vice President, or Secretary, mailed or delivered personally to such Officer by any person (other than the Board) entitled to call a special meeting of Shareholders, such Officer shall cause notice to be given, to the Shareholders entitled to vote, that a meeting, will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of such request. If such notice is not given within twenty (20) days after receipt of such request, the persons calling the meeting may give notice thereof in the manner provided by these By-Laws or apply to the Superior Court as provided in Sec. 305 (c).

Section 4. NOTICE OF MEETINGS - REPORTS. Notice of meetings, annual or special, shall be given in writing not less than ten (10) nor more than sixty (60) days before the date of the meeting to Shareholders entitled to vote thereat. Such notice shall be given by the Secretary or the Assistant Secretary, or if there be no such Officer, or in the case of his or her neglect or refusal, by any Director or Shareholder.

Such notices or any reports shall be given personally or by mail or other means of written communication as provided in Sec. 601 of the Code and shall be sent to the Shareholder’s address appearing on the books of the corporation, or supplied by him or her to the corporation for the purpose of notice, and in the absence thereof, as provided in Sec. 601 of the Code.

Notice of any meeting of Shareholders shall specify the place, the day and the hour of meeting, and (1) in case of a special meeting, the general nature of the business to be transacted and no other business may be transacted, or (2) in the case of an annual meeting, those matters which the Board at date of mailing, intends to present for action by the Shareholders. At any meetings where Directors are to be elected, notice shall include the names of the nominees, if any, intended at date of notice to be presented by management for election.

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If a Shareholder supplies no address, notice shall be deemed to have been given if mailed to the place where the principal executive office of the corporation, in California, is situated, or published at least once in some newspaper of general circulation in the County of said principal office.

Notice shall be deemed given at the time it is delivered personally or deposited in the mail or sent by other means of written communication. The Officer giving such notice or report shall prepare and file an affidavit or declaration thereof.

When a meeting is adjourned for forty-five (45) days or more, notice of the adjourned meeting shall be given as in case of an original meeting. Save, as aforesaid, it shall not be necessary to give any notice of adjournment or of the business to be transacted at an adjourned meeting other than by announcement at the meeting at which such adjournment is taken.

Section 5. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transactions of any meeting of Shareholders, however called and noticed, shall be valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the Shareholders entitled to vote, not present in person or by proxy, sign a written waiver of notice, or a consent to the holding of such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance shall constitute a waiver of notice, unless objection shall be made as provided in Sec. 601 (e).

Section 6. SHAREHOLDERS ACTING WITHOUT A MEETING - DIRECTORS. Any action which may be taken at a meeting of the Shareholders, may be taken without a meeting or notice of meeting if authorized by a writing signed by all of the Shareholders entitled to vote at a meeting for such purpose, and filed with the Secretary of the corporation, provided, further, that while ordinarily Directors can only be elected by unanimous written consent under Sec. 603 (6), if the Directors fail to fill a vacancy, then a Director to fill that vacancy may be elected by the written consent of persons holding a majority of shares entitled to vote for the election of Directors.

Section 7. OTHER ACTIONS WITHOUT A MEETING. Unless otherwise provided in the California Corporations Code or the Articles, any action which may be taken at any annual or special meeting of Shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, signed by the holders of outstanding shares

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having not less than the minimum number of votes that would be necessary to authorized or take such action at a meeting at which all shares entitled to vote thereon were present and voted.

Unless the consents of all Shareholders entitled to vote have been solicited in writing,

(1) Notice of any Shareholder approval pursuant to Secs. 310, 317, 1201 or 2007 without a meeting by less than unanimous written consent shall be given at least ten (10) days before the consummation of the action authorized by such approval, and

(2) Prompt notice shall be given of the taking of any other corporate action approved by Shareholders without a meeting by less than unanimous written consent, to each of those Shareholders entitled to vote who have not consented in writing.

Any Shareholder giving a written consent, or the Shareholder’s proxyholders, or a transferee of the shares of a personal representative of the Shareholder or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation.

Section 8. QUORUM. The holders of a majority of the shares entitled to vote thereat, present in person, or represented by proxy, shall constitute a quorum at all meetings of the Shareholders for the transaction of business except as otherwise provided by law, by the Articles of Incorporation, or by these By-Laws. If, however, such majority shall not be present or represented at any meeting of the Shareholders, the Shareholders entitled to vote thereat, present in person, or by proxy, shall have the power to adjourn the meeting from time to time, until the requisite amount of voting shares shall be present. At such adjourned meeting at which the requisite amount of voting shares shall be represented, any business may be transacted which might have been transacted at a meeting as originally notified.

If a quorum be initially present, the Shareholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough Shareholders to leave less than a quorum, if any action taken is approved by a majority of the Shareholders required to initially constitute a quorum.

Section 9. VOTING. Only persons in whose names shares entitled to vote stand on the stock records of the corporation on the day of any meeting of Shareholders, unless some other day be

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fixed by the Board of Directors for the determination of Shareholders of record, and then on such other day, shall be entitled to vote at such meeting.

Provided the candidate’s name has been placed in nomination prior to the voting and one or more Shareholder has given notice at the meeting prior to the voting of the Shareholder’s intent to cumulate the Shareholder’s votes, every Shareholder entitled to vote at any election for Directors of any corporation for profit may cumulate their votes and give one candidate a number of votes equal to the number of Directors to be elected multiplied by the number of votes to which his or her shares are entitled, or distribute his or her votes on the same principle among as many candidates as he or she thinks fit.

The candidates receiving the highest number of votes up to the numbers of Directors to be elected are elected.

The Board of Directors may fix a time in the future not exceeding sixty (60) days preceding the date of any meeting of Shareholders or the date fixed for the payment of any dividend or distribution, or for the allotment or rights, or when any change or conversion or exchange of shares shall go into effect, as a record date for the determination of the Shareholders entitled to notice of and to vote at any such meeting, or entitled to receive any such dividend or distribution, or any allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. In such case only Shareholders of record on the date so fixed shall be entitled to notice of and to vote at such meeting, or to receive such dividends, distribution or allotment of rights, or to exercise such rights, as the case may be notwithstanding any transfer of any share on the books of the corporation after any record date fixed as aforesaid. The Board of Directors may close the books of the corporation against transfers of shares during the whole or any part of such period.

Section 10. PROXIES. Every Shareholder entitled to vote, or to execute consents, may do so, either in person or by written proxy, executed in accordance with the provisions of Secs. 604 and 705 of the Code and filed with the Secretary of the corporation.

Section 11. ORGANIZATION. The President, or in the absence of the President, any Vice President, shall call the meeting of the Shareholders to order, and shall act as chairman of the meeting. In the absence of the President and all of the Vice Presidents, Shareholders shall appoint a chairman for such meeting. The Secretary of the corporation shall act as Secretary of all meetings of the Shareholders, but in the absence of the

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Secretary at any meeting of the Shareholders, the presiding Officer may appoint any person to act as Secretary of the meeting.

Section 12. INSPECTORS OF ELECTION. In advance of any meeting of Shareholders the Board of Directors may, if they so elect, appoint inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election be not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any such meeting may, and on the request of any Shareholder or his or her proxy shall, make such appointment at the meeting in which case the number of inspectors shall be either one (1) or three (3) as determined by a majority of the Shareholders represented at the meeting.

Section 13. (A) SHAREHOLDERS’ AGREEMENTS. Notwithstanding the above provisions, in the event this corporation elects to become a close corporation, an agreement between two (2) or more Shareholders thereof, if in writing and signed by the parties thereof, may provide that in exercising any voting rights the shares held by them shall be voted as provided therein or in Sec. 706, and may otherwise modify these provisions as to Shareholders’ meetings and actions.

(B) EFFECT OF SHAREHOLDERS’ AGREEMENTS. Any Shareholders’ Agreement authorized by Sec. 300 (b), shall only be effective to modify the terms of these By-Laws if this corporation elects to become a close corporation with appropriate filing of or amendment to its Articles as required by Sec. 202 and shall terminate when this corporation ceases to be a close corporation. Such an agreement cannot waive or alter Secs. 158, (defining close corporations), 202 (requirements of Articles of Incorporation), 500 and 501 relative to distributions, 111 (merger), 1201 (e) (reorganization) or Chapters 15 (Records and Reports) or 16 (Rights of Inspection), 18 (Involuntary Dissolution) or 22 (Crimes and Penalties). Any other provisions of the Code or these By-Laws may be altered or waived thereby, but to the extent they are not so altered or waived, these By-Laws shall be applicable.

ARTICLE V

CERTIFICATES AND TRANSFER OF SHARES

Section 1. CERTIFICATES FOR SHARES. Certificates for shares shall be of such form and device as the Board of Directors may designate and shall state the name of the record holder of the shares represented thereby; its number; date of issuance; the number of shares for which it is issued; a statement of the rights, privileges, preferences and restrictions, if any; a statement as to the redemption or conversion, if any; a statement of liens or restrictions upon transfer or voting, if any; if the shares be assessable or, if assessments are collectible by personal action, a plain statement of such facts.

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All certificates shall be signed in the name of the corporation by the Chairman of the Board or Vice Chairman of the Board or the President or Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the Shareholder.

Any or all of the signatures on the certificate may be facsimile. In case any Officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that Officer, transfer agent, or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an Officer, transfer agent, or registrar at the date of issue.

Section 2. TRANSFER ON THE BOORS. Upon surrender to the Secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

Section 3. LOST OR DESTROYED CERTIFICATES. Any person claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of the fact and shall, if the Directors so require, give the corporation a bond of indemnity, in form and with one or more sureties satisfactory to the Board, in at least double the value of the stock represented by said certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to be lost or destroyed.

Section 4. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, which shall be an incorporated bank or trust company, either domestic or foreign, who, shall be appointed at such times and places as the requirements of the corporation may necessitate and the Board of Directors may designate.

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Section 5. CLOSING-STOCK TRANSFER BOOKS - RECORD DATE. In order that the corporation may determine the Shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days prior to the date of such meeting nor more than sixty (60) days prior to any other action.

If no record date is fixed; the record date for determining Shareholders entitled to notice of or to vote at a meeting of Shareholders shall be at the close of business on the business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. The record date for determining Shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board is necessary, shall be the day on which, the first written consent is given.

The record date for determining Shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later.

Section 6. LEGEND CONDITION. In the event any shares of this corporation are issued pursuant to a permit or exemption therefrom requiring the imposition of a legend condition, the person or persons issuing or transferring said shares shall make sure said legend appears on the certificate and shall not be required to transfer any shares free of such legend unless an amendment to such permit or a new permit be first issued so authorizing such a deletion.

Section 7. CLOSE CORPORATION CERTIFICATES. All certificates representing shares of this corporation, in the event it shall elect to become a close corporation, shall contain the legend required by Sec. 418 (c).

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ARTICLE VI

RECORDS - REPORTS - INSPECTION

Section 1. RECORDS. The corporation shall maintain, in accordance with generally accepted accounting principles, adequate and correct accounts, books and records of its business and properties. All of such books, records and accounts shall be kept at its principal executive office in the State of California, as fixed by the Board of Directors from time to time.

Section 2. INSPECTION OF BOOKS AND RECORDS. All books and records provided for in Sec. 1500 shall be open to inspection of the Directors and Shareholders from time to time and in the manner provided in said Sec. 1600 - 1602.

Section 3. CERTIFICATION AND INSPECTION OF BY-LAWS. The original or a copy of these By-Laws, as amended or otherwise altered to date, certified by the Secretary, shall be kept at the corporation’s principal executive office and shall be open to inspection by the Shareholders of the corporation at all reasonable times during office hours, as provided in Sec. 213 of the Corporations Code.

Section 4. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as shall be determined from time to time by resolution of the Board of Directors.

Section 5. CONTRACTS, ETC. — HOW EXECUTED. The Board of Directors, except as in the By-Laws otherwise provided, may authorize any Officer or Officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation. Such authority may be general or confined to specific instances. Unless so authorized by the Board of Directors, no Officer, agent or employee shall have any power or authority to bind the corporation by any contract or agreement, or to pledge its credit, or to render it liable for any purpose or to any amount, except as provided in Sec. 313 of the Corporations Code.

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ARTICLE VII

ANNUAL REPORTS

Section 1. REPORT TO SHAREHOLDERS, DUE DATE. The Board of Directors shall cause an annual report to be sent to the Shareholders not later than one hundred twenty (120) days after the close of the fiscal or calendar year adopted by the corporation. This report shall be sent at least fifteen (15) days before the annual meeting of Shareholders to be held during the next fiscal year and in the manner specified in Section 4 of Article IV of these By-Laws for giving notice to Shareholders of the corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized Officer of the corporation that the statements were prepared without audit from the books and records of the corporation.

Section 2. WAIVER. The annual report to Shareholders referred to in Section 1501 of the California General Corporation Law is expressly dispensed with so long as this corporation shall have less than one hundred (100) Shareholders. However, nothing herein shall be interpreted as prohibiting the Board of Directors from issuing annual or other periodic reports to the Shareholders of the corporation as they consider appropriate.

ARTICLE VIII

AMENDMENTS TO BY-LAWS

Section 1. AMENDMENT BY SHAREHOLDERS. New By-Laws may be adopted or these By-Laws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the corporation set forth the number of authorized Directors of the corporation, the authorized number of Directors may be changed only by an amendment of the Articles of Incorporation.

Section 2. POWERS OF DIRECTORS. Subject to the right of the Shareholders to adopt, amend or repeal By-Laws, as provided in Section 1 of this Article VIII, and the limitations of Sec. 204 (a) (5) and Sec. 212, the Board of Directors may adopt, amend or repeal any of these By-Laws other than a By-Law or amendment thereof changing the authorized number of Directors.

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Section 3. RECORD OF AMENDMENTS. Whenever an amendment or new By-Law is adopted, it shall be copied in the book of By-Laws with the original By-Laws, in the appropriate place. If any By-Law is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or written assent was filed shall be stated in said book.

ARTICLE IX

CORPORATE SEAL

The corporate seal shall be circular in form, and shall have inscribed thereon the name of the corporation, the year or date of its incorporation, and the word “California”.

ARTICLE X

MISCELLANEOUS

Section 1. REFERENCES TO CODE SECTIONS. “Sec.” references herein refer to the equivalent Sections of the California Corporations Code effective January 1, 1977, as amended.

Section 2. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of other corporations standing in the name of this corporation may be voted or represented and all incidents thereto may be exercised on behalf of the corporation by the Chairman of the Board, the President or any Vice President and the Secretary or an Assistant Secretary.

Section 3. SUBSIDIARY CORPORATIONS. Shares of this corporation owned by a subsidiary shall not be entitled to vote on any matter. A subsidiary for these purposes is defined as a corporation, the shares of which possessing more than 25% of the total combined voting power of all classes of shares entitled to vote, are owned directly or indirectly through one (1) or more subsidiaries.

Section 4. INDEMNIFICATION AND LIABILITY. The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law.

The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) for breach of duty to the corporation and shareholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code.

Section 5. ACCOUNTING YEAR. The accounting year of the corporation shall be fixed by resolution of the Board of Directors.

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CERTIFICATE OF ADOPTION OF BY-LAWS

ADOPTION BY INCORPORATOR (S) OR FIRST DIRECTOR(S)

The undersigned person(s) named in the Articles of Incorporation as the Incorporator(s) or First Director(s) of the above named corporation hereby adopt the same as the By-Laws of said corporation.

Executed this July 31, 1994

/s/ Hui Deng

Hui Deng, Incorporator

CERTIFICATE BY SECRETARY

I DO HEREBY CERTIFY AS FOLLOWS:

That I am the duly elected, qualified and acting Secretary of the above named corporation, that the foregoing By-Laws were adopted as the By-Laws of said corporation on the date set forth above by the person(s) named in the Articles of Incorporation as the Incorporator(s) or First Director(s) of said corporation.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal this July 31, 1994.

/s/ Moo-Yee Wang

Moo-Yee Wang, Secretary

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CERTIFICATE OF AMENDMENT OF BYLAWS

OF

ARCSOFT, INC.

Article II, Section 4 of the BYLAWS for ARCSOFT, INC., a California Corporation (the “Corporation”), is hereby amended to read as follows:

“The number of directors of the corporation shall be not less than three (3) nor more than seven (7). The exact number of directors shall be three (3) until changed, within the limits specified above, by a bylaw amending this Section 4, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote.

No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.”

The undersigned does hereby certify:

1. That I am the duly elected and acting Secretary of the Corporation;

2. That the foregoing BYLAWS shall constitute the BYLAWS of the Corporation and be adopted by the shareholders of the Corporation.

IN WITNESS WHEREOF, I have executed this Certificate as Secretary of the Corporation.

Dated: June 28, 1998	/s/ Moon-Yee Wang
	Moon-Yee Wang, Secretary

CERTIFICATE OF AMENDMENT OF BYLAWS

OF

ARCSOFT, INC.

Article II, Section 4 of the BYLAWS for ARCSOFT, INC., a California Corporation (the “Corporation”), is hereby amended to read as follows:

“The number of directors of the corporation shall be not less than three (3) nor more than seven (7). The exact number of directors shall be three (3) until changed, within the limits specified above, by a bylaw amending this Section 4, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote.

No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.”

The undersigned does hereby certify:

1. That I am the duly elected and acting Secretary of the Corporation;

2. That the foregoing BYLAWS shall constitute the BYLAWS of the Corporation and be adopted by the shareholders of the Corporation.

IN WITNESS WHEREOF, I have executed this Certificate as Secretary of the Corporation.

Dated: June 28, 1998	/s/ Moon-Yee Wang
	Moon-Yee Wang, Secretary

CERTIFICATE OF SECRETARY

AMENDMENT OF BYLAWS OF ARCSOFT, INC.

The undersigned, being the Secretary of ArcSoft, Inc. (the “Corporation”), hereby certifies that Article II, Section 4. of the Bylaws of this Corporation was amended effective the      day of August, 2000 by the Board of Directors of the Corporation to change the paragraph to read as follows:

“Section 4. Number of Directors. The number of directors of the corporation shall be not less than three (3) nor more than seven (7). The exact number of directors shall be five (5) until changed, within the limits specified above, by an amendment to these bylaws, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to these bylaws duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote.

No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.”

IN WITNESS WHEREOF, I have executed this Certificate as Secretary of the Corporation.

Dated: August     , 2000

/s/ Nai-Yu Pai

Nai-Yu Pai, Secretary

CERTIFICATE OF SECRETARY

AMENDMENT TO BYLAWS OF ARCSOFT, INC.

The undersigned, being the Secretary of ArcSoft, Inc. (the “Corporation), hereby certifies that Section 10 of Article II of the Bylaws of the Corporation is hereby amended and restated to read in its entirety as follows:

“Section 10. REGULAR MEETINGS. Regulation meetings of the Board of Directors shall be held at the corporate offices, or such other place as may be designated by the Board of Directors, on a date and at a time designated by the Board of Directors. Regular meetings of the Board of Directors may be held without notice of the time and place of such meetings are fixed by the Board of Directors or the Bylaws.”

Section 2 of Article IV of the Bylaws of the Corporation is hereby amended and restated to read in its entirety as follows:

“Section 2. ANNUAL MEETINGS. The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. In the absence of such designation, the annual meeting of shareholders shall be held on the first day of August in each year at 12:00 p.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted.”

IN WITNESS WHEREOF, I have executed this Certificate as Secretary of the Corporation.

Date: October 31, 2001

/s/ Alfred V. Larrenaga

Alfred V. Larrenaga

CERTIFICATE OF SECRETARY

AMENDMENT TO BYLAWS OF ARCSOFT, INC.

The undersigned, being the Secretary of ArcSoft, Inc. (the “Corporation”), hereby certifies that Articles II, Section 4 of the Bylaws of the Corporation is amended to read in its entirety as follows:

“Section 4. Number and Qualification of Directors. The number of directors of the corporation shall not be less than three (3) nor more than five (5) until changed by amendment of the Articles of Incorporation or by a Bylaw amending this Section 4 duly adopted by the vote or written consent of holders of a majority of the outstanding shares, provided that if the minimum number of directors is five or more, any proposal to reduce the minimum number of directors to a number less than five cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote. The exact number of directors shall be fixed from time to time, within the limits specified in the Articles of Incorporation or in this Section 4, by a bylaw or amendment thereof duly adopted by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of the holders of a majority of the outstanding shares entitled to vote, or by the Board of Directors.

Subject to the foregoing provisions for changing the number of directors, the number of directors of the corporation has been fixed at three (3).”

IN WITNESS WHEREOF, I have executed this Certificate as Secretary of the Corporation.

Date: August 19, 2003

/s/ Nai-Yu Pai

Nai-Yu Pai, Secretary

EX-3.(II)2

Exhibit 3(ii).2

AMENDED AND RESTATED

B Y L A W S

OF

ARCSOFT, INC.

(a Delaware corporation)

TABLE OF CONTENTS

		Page
ARTICLE 1 Offices		1
1.1	Registered Office	1
1.2	Other Offices	1
ARTICLE 2 Meeting of Stockholders		1
2.1	Place of Meeting	1
2.2	Annual Meeting	1
2.3	Special Meetings	2
2.4	Notice of Meetings	3
2.5	List of Stockholders	3
2.6	Organization and Conduct of Business	3
2.7	Quorum	4
2.8	Adjournments	4
2.9	Voting Rights	4
2.10	Majority Vote	4
2.11	Record Date for Stockholder Notice and Voting	4
2.12	Proxies	5
2.13	Inspectors of Election	5
2.14	Action Without a Meeting	5
ARTICLE 3 Directors		5
3.1	Number, Election, Tenure and Qualifications	5
3.2	Enlargement and Vacancies	6
3.3	Resignation and Removal	7
3.4	Powers	7
3.5	Chairman of the Board	7
3.6	Place of Meetings	7
3.7	Annual Meetings	7
3.8	Regular Meetings	7
3.9	Special Meetings	7
3.10	Quorum, Action at Meeting, Adjournments	8
3.11	Action Without Meeting	8
3.12	Telephone Meetings	8
3.13	Committees	8
3.14	Fees and Compensation of Directors	9
ARTICLE 4 Officers		9
4.1	Officers Designated	9
4.2	Election	9
4.3	Tenure	9
4.4	The Chief Executive Officer	9

i

TABLE OF CONTENTS

(continued)

		Page
4.5	The President	10
4.6	The Vice President	10
4.7	The Secretary	10
4.8	The Assistant Secretary	10
4.9	The Chief Financial Officer	11
4.10	The Treasurer and Assistant Treasurers	11
4.11	Bond	11
4.12	Delegation of Authority	11
ARTICLE 5 Notices		11
5.1	Delivery	11
5.2	Waiver of Notice	12
ARTICLE 6 Indemnification and Insurance		12
6.1	Indemnification	12
6.2	Advance Payment	13
6.3	Non-Exclusivity and Survival of Rights; Amendments	14
6.4	Insurance	14
6.5	Severability	15
6.6	Definitions	15
6.7	Notices	16
ARTICLE 7 Capital Stock		17
7.1	Certificates for Shares	17
7.2	Signatures on Certificates	17
7.3	Transfer of Stock	17
7.4	Registered Stockholders	17
7.5	Lost, Stolen or Destroyed Certificates	17
ARTICLE 8 Certain Transactions		18
8.1	Transactions with Interested Parties	18
8.2	Quorum	18
ARTICLE 9 General Provisions		18
9.1	Dividends	18
9.2	Dividend Reserve	19
9.3	Checks	19
9.4	Corporate Seal	19
9.5	Execution of Corporate Contracts and Instruments	19
9.6	Representation of Shares of Other Corporations	19

ii

TABLE OF CONTENTS

(continued)

ARTICLE 10 Amendments 19

iii

AMENDED AND RESTATED

B Y L A W S

OF

ARCSOFT, INC.

(a Delaware corporation)

ARTICLE 1

Offices

1.1 Registered Office. The registered office of the corporation shall be set forth in the certificate of incorporation of the corporation.

1.2 Other Offices. The corporation may also have offices at such other places, either within or without the State of Delaware, as the board of directors of the corporation (the “Board”) may from time to time designate or the business of the corporation may require.

ARTICLE 2

Meeting of Stockholders

2.1 Place of Meeting. Meetings of stockholders may be held at such place, either within or without of the State of Delaware, as may be designated by or in the manner provided in these bylaws, or, if not so designated, at the registered office of the corporation or the principal executive offices of the corporation.

2.2 Annual Meeting. Annual meetings of stockholders shall be held each year at such date and time as shall be designated from time to time by the Board or the Chief Executive Officer and stated in the notice of the meeting. At each such annual meeting, the stockholders shall elect by a plurality vote [the Board] [the number of directors equal to the number of directors of the class whose term expires at such meeting (or, if fewer, the number of directors properly nominated and qualified for election) to hold office until the third succeeding annual meeting of stockholders after their election]. The stockholders shall also transact such other business as may properly be brought before the meeting.

To be properly brought before the annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board or the Chief Executive Officer, (b) otherwise properly brought before the meeting by or at the direction of the Board or the Chief Executive Officer, or (c) otherwise properly brought before the meeting by a stockholder of record. A motion related to business proposed to be brought before any stockholders’ meeting may be made by any stockholder entitled to vote if the business proposed is otherwise proper to be brought before the meeting. However, any such stockholder may propose business to be brought before a meeting only if such stockholder has given timely notice to the Secretary of the corporation in proper written form of the stockholder’s intent to propose

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such business. To be timely, the stockholder’s notice must be delivered by a nationally recognized courier service or mailed by first class United States mail, postage or delivery charges prepaid, and received at the principal executive offices of the corporation addressed to the attention of the Secretary of the corporation not earlier than ninety (90) days nor more than one hundred twenty (120) days in advance of the date the corporation’s proxy statement was released to the stockholders in connection with the previous year’s annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year’s proxy statement, notice by the stockholder must be received by the Secretary of the corporation not later than the close of business on the later of (x) the ninetieth (90th) day prior to such annual meeting and (y) the seventh (7th) days following the day on which public announcement of the date of such meeting is first made. For the purposes of these bylaws, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of stockholder’s notice as described above. A stockholder’s notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Bylaws of the Corporation, the language of the proposed amendment), and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class, series and number of shares of the corporation that are owned beneficially and of record by the stockholder and such beneficial owner, (iv) any material interest of the stockholder in such business, and (v) any other information that is required to be provided by the stockholder pursuant to Section 14 of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder (collectively, the “1934 Act”) in such stockholder’s capacity as a proponent of a stockholder proposal.

Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section; provided, however, that nothing in this Section shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting.

The Chairman of the Board (or such other person presiding at the meeting in accordance with these bylaws) shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section, and if he or she should so determine, he or she shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

2.3 Special Meetings. Special meetings of the stockholders may be called for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, by the Secretary only at the request of the Chairman of the Board, the Chief Executive Officer or by a resolution duly adopted by the affirmative vote of a majority of the Board. Such request

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shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting shall be limited to matters relating to the purpose or purposes stated in the notice of meeting.

2.4 Notice of Meetings. Except as otherwise provided by law, written notice of each meeting of stockholders, annual or special, stating the place, if any, date and time of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which such special meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting.

When a meeting is adjourned to another place, date or time, notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, if any, date, time and means of remote communications, if any, of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted that might have been transacted at the original meeting.

2.5 List of Stockholders. The officer in charge of the stock ledger of the corporation or the transfer agent shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least ten days prior to the meeting, (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the principal place of business of the corporation. If the meeting is to be held at a place, then the list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to gain access to such list shall be provided with the notice of the meeting.

2.6 Organization and Conduct of Business. The Chairman of the Board or, in his or her absence, the Chief Executive Officer or President of the corporation or, in their absence, such person as the Board may have designated or, in the absence of such a person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the corporation, the secretary of the meeting shall be such person as the chairman of the meeting appoints.

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The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her in order.

2.7 Quorum. Except where otherwise provided by law or the certificate of incorporation of the corporation or these bylaws, the holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented in proxy, shall constitute a quorum at all meetings of the stockholders.

2.8 Adjournments. Any meeting of stockholders may be adjourned from time to time to any other time and to any other place at which a meeting of stockholders may be held under these bylaws, which time and place shall be announced at the meeting, by a majority of the stockholders present in person or represented by proxy at the meeting and entitled to vote, though less than a quorum, or, if no stockholder is present or represented by proxy, by any officer entitled to preside at or to act as secretary of such meeting, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

2.9 Voting Rights. Unless otherwise provided in the certificate of incorporation of the corporation, each stockholder shall at every meeting of the stockholders be entitled to one vote for each share of the capital stock having voting power held by such stockholder.

2.10 Majority Vote. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation of the corporation or of these bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question.

2.11 Record Date for Stockholder Notice and Voting. For purposes of determining the stockholders entitled to notice of, or to vote at, any meeting of stockholders or any adjournment thereof, [or to express consent to corporate action in writing without a meeting,] or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any right in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty (60) days nor fewer than ten (10) days before the date of any such meeting nor more than sixty (60) days before any other action to which the record date relates. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. If the Board does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting

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is held. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed.

2.12 Proxies. Each stockholder entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. All proxies must be filed with the Secretary of the corporation at the beginning of each meeting in order to be counted in any vote at the meeting. Subject to the limitation set forth in the last clause of the first sentence of this Section 2.12, a duly executed proxy that does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted.

2.13 Inspectors of Election. The corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. The corporation may designate one or more persons to act as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability.

2.14 Action Without a Meeting. No action required or permitted to be taken at any annual or special meeting of the stockholders of the corporation may be taken without a meeting and the power of the stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied.

ARTICLE 3

Directors

3.1 Number, Election, Tenure and Qualifications. The number of directors that shall constitute the entire Board shall be not less than          nor more than         . Within such limit, the number of directors that shall constitute the entire Board shall be fixed from time to time by resolution adopted by a majority of the entire Board. The classes of directors that shall constitute the entire Board shall be as provided in the certificate of incorporation.

At each annual meeting of the stockholders, except as otherwise provided in Section 3.2, and each director so elected shall hold office until such director’s successor is duly elected and qualified or until such director’s earlier resignation, removal, death or incapacity.

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Subject to the rights of holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation, nominations of persons for election to the Board, by or at the direction of the Board may be made by any nominating committee or person appointed by the Board; nominations may also be made by any stockholder of record of the corporation entitled to vote for the election of directors at the applicable meeting who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder’s notice shall be delivered by a nationally recognized courier service or mailed by first class United States mail, postage or delivery charges prepaid, and received at the principal executive offices of the corporation addressed to the attention of the Secretary of the corporation not earlier than ninety (90) days nor more than one hundred twenty (120) days in advance of the date the corporation’s proxy statement was released to the stockholders in connection with the previous year’s annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year’s proxy statement, notice by the stockholder must be received by the Secretary of the corporation not later than the close of business on the later of (x) the ninetieth (90th) day prior to such annual meeting and (y) the seventh (7th) day following the day on which public announcement of the date of such meeting is first made. Such stockholder’s notice to the Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class, series and number of shares of capital stock of the corporation that are owned beneficially by the person, (iv) a statement as to the person’s citizenship, and (v) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Section 14 of the 1934 Act, and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder and (ii) the class, series and number of shares of capital stock of the corporation that are owned beneficially by the stockholder. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as director of the corporation. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth herein.

In connection with any annual meeting of the stockholders (or, if and as applicable, any special meeting of the stockholders), the Chairman of the Board (or such other person presiding at such meeting in accordance with these bylaws) shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded.

3.2 Enlargement and Vacancies. The number of members of the Board may be increased at any time as provided in Section 3.1 above. Sole power to fill vacancies and newly created directorships resulting from any increase in the authorized number of directors shall be vested in the Board through action by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and each director so chosen shall hold office until the next annual election at which the term of the class to which they have been elected expires and

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until such director’s successor is duly elected and qualified or until such director’s earlier resignation, removal from office, death or incapacity. If there are no directors in office, then an election of directors may be held in the manner provided by statute. In the event of a vacancy in the Board, the remaining directors, except as otherwise provided by law or these bylaws, may exercise the powers of the full board until the vacancy is filled.

3.3 Resignation and Removal. Any director may resign at any time upon written notice to the corporation at its principal place of business or to the Chief Executive Officer or the Secretary. Such resignation shall be effective upon receipt of such notice unless the notice specifies such resignation to be effective at some other time or upon the happening of some other event. Any director or the entire Board may be removed, but only for cause, by the holders of a majority of the shares then entitled to vote at an election of directors, unless otherwise specified by law or the certificate of incorporation of the corporation.

3.4 Powers. The business of the corporation shall be managed by or under the direction of the Board, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation of the corporation or by these bylaws directed or required to be exercised or done by the stockholders.

3.5 Chairman of the Board. If the Board appoints a Chairman of the Board, such Chairman shall, when present, preside at all meetings of the stockholders and the Board. The Chairman shall perform such duties and possess such powers as are customarily vested in the office of the Chairman of the Board or as may be vested in the Chairman by the Board.

3.6 Place of Meetings. The Board may hold meetings, both regular and special, either within or without the State of Delaware.

3.7 Annual Meetings. The annual meetings of the Board shall be held immediately following the annual meeting of stockholders, and no notice of such meeting shall be necessary to the Board, provided a quorum shall be present. The annual meetings shall be for the purposes of organization, and an election of officers and the transaction of other business.

3.8 Regular Meetings. Regular meetings of the Board may be held without notice at such time and place as may be determined from time to time by the Board; provided that any director who is absent when such a determination is made shall be given prompt notice of such determination.

3.9 Special Meetings. Special meetings of the Board may be called by the Chairman of the Board, the Chief Executive Officer, the President or the Secretary, or on the written request of two or more directors, or by one director in the event that there is only one director in office. Notice of the time and place, if any, of special meetings shall be delivered personally or by telephone to each director, or sent by first-class mail or commercial delivery service, facsimile transmission, or by electronic mail or other electronic means, charges prepaid, sent to such director’s business or home address as they appear upon the records of the corporation. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of holding of the meeting. In case such notice is delivered personally or by telephone or by commercial delivery service, facsimile transmission, or electronic mail or other

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electronic means, it shall be so delivered at least twenty-four (24) hours prior to the time of the holding of the meeting. A notice or waiver of notice of a meeting of the Board need not specify the purposes of the meeting.

3.10 Quorum, Action at Meeting, Adjournments. At all meetings of the Board, a majority of directors then in office, but in no event less than one-third (1/3) of the entire Board, shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board, except as may be otherwise specifically provided by law or by the certificate of incorporation of the corporation. For purposes of this Section, the term “entire Board” shall mean the number of directors last fixed by directors in accordance with these bylaws; provided, however, that if fewer than all the number of directors so fixed have been elected (by the stockholders or the Board), the “entire Board” shall mean the greatest number of directors so elected to hold office at any one time pursuant to such authorization. If a quorum shall not be present at any meeting of the board of directors, a majority of the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

3.11 Action Without Meeting. Unless otherwise restricted by the certificate of incorporation of the corporation or these bylaws, any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee.

3.12 Telephone Meetings. Unless otherwise restricted by the certificate of incorporation of the corporation or these bylaws, any member of the Board or any committee thereof may participate in a meeting of the Board or of any committee, as the case may be, by means of conference telephone or by any form of 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.

3.13 Committees. The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not the member or members present constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval or (ii) adopting, amending or repealing any of these bylaws. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board. Each committee shall keep regular

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minutes of its meetings and make such reports to the Board as the Board may request. Except as the Board may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these bylaws for the conduct of its business by the Board.

3.14 Fees and Compensation of Directors. Unless otherwise restricted by the certificate of incorporation of the corporation or these bylaws, the Board shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board and may be paid a fixed sum for attendance at each meeting of the Board or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

ARTICLE 4

Officers

4.1 Officers Designated. The officers of the corporation shall be chosen by the Board and shall be a Chief Executive Officer, a President, a Secretary and a Chief Financial Officer or Treasurer. The Board may also choose a Chief Operating Officer, one or more Vice Presidents, and one or more assistant Secretaries or assistant Treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation of the corporation or these bylaws otherwise provide.

4.2 Election. The Board at its first meeting after each annual meeting of stockholders shall choose a Chief Executive Officer, a President, a Secretary and a Chief Financial Officer or Treasurer. Other officers may be appointed by the Board of Directors at such meeting, at any other meeting, or by written consent or may be appointed by the Chief Executive Officer pursuant to a delegation of authority from the Board.

4.3 Tenure. Each officer of the corporation shall hold office until such officer’s successor is elected and qualified, unless a different term is specified in the vote choosing or appointing such officer, or until such officer’s earlier death, resignation, removal or incapacity. Any officer elected or appointed by the Board or by the Chief Executive Officer may be removed with or without cause at any time by the affirmative vote of a majority of the Board or a committee duly authorized to do so, except that any officer appointed by the Chief Executive Officer may also be removed at any time by the Chief Executive Officer. Any vacancy occurring in any office of the corporation may be filled by the Board, at its discretion. Any officer may resign by delivering such officer’s written resignation to the corporation at its principal place of business or to the Chief Executive Officer or the Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event.

4.4 The Chief Executive Officer. Subject to such supervisory powers, if any, as may be given by the Board to the Chairman of the Board, the Chief Executive Officer shall preside at

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all meetings of the stockholders and in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the Board are carried into effect. He or she shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board to some other officer or agent of the corporation.

4.5 The President. The President shall, in the event there be no Chief Executive Officer or in the absence of the Chief Executive Officer or in the event of his or her disability or refusal to act, perform the duties of the Chief Executive Officer, and when so acting, shall have the powers of and be subject to all the restrictions upon the Chief Executive Officer. The President shall perform such other duties and have such other powers as may from time to time be prescribed for such person by the Board, the Chairman of the Board, the Chief Executive Officer or these bylaws.

4.6 The Vice President. The Vice President (or in the event there be more than one, the Vice Presidents in the order designated by the directors, or in the absence of any designation, in the order of their election), shall, in the absence of the President or in the event of his or her disability or refusal to act, perform the duties of the President, and when so acting, shall have the powers of and be subject to all the restrictions upon the President. The Vice President(s) shall perform such other duties and have such other powers as may from time to time be prescribed for them by the Board, the President, the Chairman of the Board or these bylaws.

4.7 The Secretary. The Secretary shall attend all meetings of the Board and the stockholders and record all votes and the proceedings of the meetings in a book to be kept for that purpose and shall perform like duties for the standing committees, when required. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board, and shall perform such other duties as may from time to time be prescribed by the Board, the Chairman of the Board or the Chief Executive Officer, under whose supervision he or she shall act. The Secretary shall have custody of the seal of the corporation, and the Secretary, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and, when so affixed, the seal may be attested by his or her signature or by the signature of such Assistant Secretary. The Board may give general authority to any other officer to affix the seal of the corporation and to attest the affixing thereof by his or her signature. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation’s transfer agent or registrar, as determined by resolution of the Board, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation.

4.8 The Assistant Secretary. The Assistant Secretary, or if there be more than one, any Assistant Secretaries in the order designated by the Board (or in the absence of any designation, in the order of their election) shall assist the Secretary in the performance of his or her duties and, in the absence of the Secretary or in the event of his or her inability or refusal to

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act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board.

4.9 The Chief Financial Officer. The Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer and the Board, at its regular meetings, or when the Board so requires, an account of all his or her transactions as Chief Financial Officer and of the financial condition of the corporation. The Chief Financial Officer shall perform such other duties and have other powers as may from time to time be prescribed by the Board of Directors or the Chief Executive Officer.

4.10 The Treasurer and Assistant Treasurers. The Treasurer (if one is appointed) shall have such duties as may be specified by the Chief Financial Officer to assist the Chief Financial Officer in the performance of his or her duties and to perform such other duties and have other powers as may from time to time be prescribed by the Board or the Chief Executive Officer. It shall be the duty of any Assistant Treasurers to assist the Treasurer in the performance of his or her duties and to perform such other duties and have other powers as may from time to time be prescribed by the Board or the Chief Executive Officer.

4.11 Bond. If required by the Board, any officer shall give the corporation a bond in such sum and with such surety or sureties and upon such terms and conditions as shall be satisfactory to the Board, including without limitation a bond for the faithful performance of the duties of such officer’s office and for the restoration to the corporation of all books, papers, vouchers, money and other property of whatever kind in such officer’s possession or under such officer’s control and belonging to the corporation.

4.12 Delegation of Authority. The Board may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof.

ARTICLE 5

Notices

5.1 Delivery. Whenever, under the provisions of law, or of the certificate of incorporation of the corporation or these bylaws, written notice is required to be given to any director or stockholder, such notice may be given by mail, addressed to such director or stockholder, at such person’s address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail or delivered to a nationally recognized courier service. Unless written notice by mail is required by law, written notice may also be given by commercial delivery service, facsimile transmission, electronic means or similar means addressed to such director or stockholder at such person’s address as it appears on the records of the corporation, in which case such notice shall be deemed to be given when delivered into the control of the

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persons charged with effecting such transmission, the transmission charge to be paid by the corporation or the person sending such notice and not by the addressee. Oral notice or other in-hand delivery, in person or by telephone, shall be deemed given at the time it is actually given.

5.2 Waiver of Notice. Whenever any notice is required to be given under the provisions of law or of the certificate of incorporation of the corporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. In addition to the foregoing, notice of a meeting need not be given to any director who signs a waiver of notice or a consent, or electronically transmits the same, to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

ARTICLE 6

Indemnification and Insurance

6.1 Indemnification.

(a) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit, or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director or officer of the corporation (or any predecessor) or is or was serving at the request of the corporation (or any predecessor) as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, employee benefit plan sponsored or maintained by the corporation, or other enterprise (or any predecessor of any of such entities), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided, however, that except as provided in Section 6.1(c), the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in this Section 6.1 shall be a contract right.

(b) To obtain indemnification under this Section 6.1, a claimant shall submit to the corporation a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Upon written request by a claimant for

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indemnification pursuant to the preceding sentence, a determination, if required by applicable law, with respect to the claimant’s entitlement thereto shall be made as follows: (i) if requested by the claimant, by Independent Counsel (as hereinafter defined), or (ii) if no request is made by the claimant for a determination by Independent Counsel, (A) by the Board by a majority vote of the Disinterested Directors (as hereinafter defined), even though less than a quorum, or (B) by a committee of Disinterested Directors designated by majority vote of the Disinterested Directors, even though less than a quorum, or (C) if there are no Disinterested Directors or the Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to the claimant, or (D) if a quorum of Disinterested Directors so directs, by the stockholders of the corporation. In the event the determination of entitlement to indemnification is to be made by Independent Counsel at the request of the claimant, the Independent Counsel shall be selected by the Board unless there shall have occurred within two years prior to the date of the commencement of the proceeding for which indemnification is claimed a “Change of Control” (as hereinafter defined), in which case Independent Counsel shall be selected by the claimant unless the claimant shall request that such selection be made by the Board. If it is so determined that the claimant is entitled to indemnification, payment to the claimant shall be made within ten (10) days after such determination.

(c) If a claim for the indemnification under this Section 6.1 is not paid in full by the corporation within thirty (30) days after a written claim pursuant to Section 6.1(b) has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the corporation) that the claimant has not met the standard of conduct that makes it permissible under the General Corporation Law of the State of Delaware for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, Independent Counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the corporation (including its board of directors, Independent Counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

(d) If a determination shall have been made pursuant to this Section 6.1 that the claimant is entitled to indemnification, the corporation shall be bound by such determination in any judicial proceeding commenced pursuant to Section 6.1(c). The corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to the Section 6.1(c) that the procedures and presumptions of this Article 6 are not valid, binding and enforceable and shall stipulate in such proceeding that the corporation is bound by all the provisions of this Article 6.

6.2 Advance Payment. The right to indemnification under this Article 6 shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in

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advance of its final disposition, such advances to be paid by the corporation within twenty (20) days after the receipt by the corporation of a statement or statements from the claimant requesting such advance or advances from time to time; provided, however, that if the General Corporation Law of the State of Delaware requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the corporation of an undertaking by or on behalf of such director or officer to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under Section 6.1 or otherwise.

Notwithstanding the foregoing, unless otherwise determined pursuant to Section 6.3, no advance shall be made by the corporation to an officer of the corporation (except by reason of the fact that such officer is or was a director of the corporation, in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the Board by a majority vote of the Disinterested Directors, even though less than a quorum, or (B) by a committee of Disinterested Directors designated by majority vote of the Disinterested Directors, even though less than a quorum, or (C) if there are no Disinterested Directors or the Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to the claimant, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation.

6.3 Non-Exclusivity and Survival of Rights; Amendments. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article 6 shall not be deemed exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the certificate of incorporation of the corporation, bylaws, agreement, vote of stockholders or Disinterested Directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent of the corporation and shall inure to the benefit of the heirs, executors and administrators of such a person. Any repeal or modification of the provisions of this Article 6 shall not in any way diminish or adversely affect the rights of any director, officer, employee or agent of the corporation hereunder in respect of any occurrence or matter arising prior to any such repeal or modification.

6.4 Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any expense, liability or loss asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of the General Corporation Law of State of Delaware.

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6.5 Severability. If any word, clause, provision or provisions of this Article 6 shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Article 6 (including, without limitation, each portion of any section or paragraph of this Article 6 containing any such provision held to be invalid, illegal or unenforceable, that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (ii) to the fullest extent possible, the provisions of this Article 6 (including, without limitation, each such portion of any section or paragraph of this Article 6 containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

6.6 Definitions. For the purpose of this Article 6:

“Change of Control” shall mean:

(1) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act (a “Person”)), directly or indirectly, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of either (i) the then outstanding shares of common stock of the corporation (the “Outstanding Corporation Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of the corporation entitled to vote generally in the election of directors (the “Outstanding Corporation Voting Securities”); provided, however, that for purposes of this part (1), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the corporation or any acquisition from other stockholders where (A) such acquisition was approved in advance by the Board and (B) such acquisition would not constitute a Change of Control under part (2) or part (4) of this definition, (ii) any acquisition by the corporation, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the corporation or any corporation controlled by the corporation, or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of part (4) of this definition; or

(2) the acquisition by any Person, directly or indirectly, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 50% or more of either (i) the Outstanding Corporation Common Stock or (ii) the Outstanding Corporation Voting Securities; or

(3) individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (or such committee thereof that shall then have the authority to nominate persons for election as directors) shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the

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election or removal of directors or other actual or threatened solicitation of proxies of consents by or on behalf of a Person other than the Board; or

(4) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the corporation (a “Business Combination”), in each case, unless, immediately following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the corporation or all or substantially all of the corporation’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(5) approval by the stockholders of a complete liquidation or dissolution of the corporation.

“Disinterested Director” shall mean a director of the corporation who is not and was not a party to the matter in respect of which indemnification is sought by the claimant.

“Independent Counsel” shall mean a law firm, a member of a law firm, or an independent practitioner, that is experienced in matters of corporation law and shall include any person who, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the corporation or the claimant in an action to determine the claimant’s rights under this Article 6.

6.7 Notices. Any notice, request or other communication required or permitted to be given to the corporation under this Article 6 shall be in writing and either delivered in person or sent by telecopy, telex, telegram, overnight mail or courier service, or certified or registered mail, postage or charges prepaid, return copy requested, to the Secretary of the corporation and shall be effective only upon receipt by the Secretary.

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ARTICLE 7

Capital Stock

7.1 Certificates for Shares. The shares of the corporation shall be represented by certificates or shall be uncertificated. Certificates shall be signed by, or in the name of the corporation by, the Chairman of the Board, the Chief Executive Officer, the President or a Vice President and by the Chief Financial Officer, the Treasurer or an Assistant Treasure, or the Secretary or an Assistant Secretary of the corporation. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified.

Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required by the General Corporation Law of the State of Delaware or a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

7.2 Signatures on Certificates. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

7.3 Transfer of Stock. Upon surrender to the corporation or the transfer agent of the corporation of a certificate of shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, and proper evidence of compliance of other conditions to rightful transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions and proper evidence of compliance of other conditions to rightful transfer from the registered owner of uncertificated share, such uncertificated shares shall be canceled and issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the corporation.

7.4 Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

7.5 Lost, Stolen or Destroyed Certificates. The corporation may direct that a new certificate or certificates be issued to replace any certificate or certificates theretofore issued by

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the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed and on such terms and conditions as the corporation may require. When authorizing the issue of a new certificate or certificates, the corporation may, in its discretion and as a condition precedent to the issuance thereof, require the owner of the lost, stolen or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as it shall require, to indemnify the corporation in such manner as it may require, and/or to give the corporation a bond or other adequate security in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

ARTICLE 8

Certain Transactions

8.1 Transactions with Interested Parties. No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee thereof which authorizes the contract or transaction or solely because the vote or votes of such director or officer are counted for such purpose, if:

(a) the material facts as to such director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or

(b) the material facts as to such director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or

(c) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board, a committee thereof or the stockholders.

8.2 Quorum. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction.

ARTICLE 9

General Provisions

9.1 Dividends. Dividends upon the capital stock of the corporation, subject to any restrictions contained in the General Corporation Law of the State of Delaware or the provisions

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of the certificate of incorporation of the corporation, if any, may be declared by the Board at any regular or special meeting or by unanimous written consent. Dividends may be paid in cash, in property or in shares of capital stock, subject to the provisions of the certificate of incorporation of the corporation.

9.2 Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.

9.3 Checks. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board may from time to time designate.

9.4 Corporate Seal. The Board of Directors may, by resolution, adopt a corporate seal. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the word “Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. The seal may be altered from time to time by the Board.

9.5 Execution of Corporate Contracts and Instruments. The Board, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.

9.6 Representation of Shares of Other Corporations. The Chief Executive Officer, the President or any Vice President, the Chief Financial Officer or the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant Secretary of the corporation is authorized to vote, represent and exercise on behalf of the corporation all rights incident to any and all shares of any corporation or corporations standing in the name of the corporation. The authority herein granted to said officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers.

ARTICLE 10

Amendments

The Board is expressly empowered to adopt, amend or repeal these bylaws; provided, however, that any adoption, amendment or repeal of these bylaws by the Board shall require the approval of at least a majority of the total number of authorized directors (whether or not there

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exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend or repeal these bylaws; provided, however, that in addition to any vote of the holders of any class or series of stock of the corporation required by law or by the certificate of incorporation of the corporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for such adoption, amendment or repeal by the stockholders of any provision of these bylaws.

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EX-4.2

Exhibit 4.2

ARCSOFT, INC.

INVESTORS RIGHTS AGREEMENT

This INVESTORS RIGHTS AGREEMENT (this “Agreement”) is made as of the 22nd day of December 2000, by and among ArcSoft, Inc., a California corporation (the “Company”), the holders of the Company’s Series A Preferred Stock listed on Exhibit A (the “Series A Holders”) and the holders of the Company’s Series B Preferred Stock listed on Exhibit B (the “Series B Holders”). The Series A Holders and the Series B Holders are referred to collectively as the “Holders”.

RECITALS

A. The Company and the Series A Holders are parties to that certain Series A Preferred Stock Purchase Agreement (the “Series A Preferred Purchase Agreement”), and under which, among other things, certain registration rights were granted by the Company to the Series A Holders.

B. The Company and the Series B Holders are parties to that certain Series B Preferred Stock Purchase Agreement (the “Series B Preferred Purchase Agreement”), under which, among other things, certain registration rights were granted by the Company to the Series B Holders.

C. The Company has determined to issue and sell additional shares of its Series B Preferred Stock to certain additional Series B Holders and has entered into a Second Series B Preferred Stock Purchase Agreement dated the date hereof (the “Second Series B Preferred Purchase Agreement”, together with Series A Preferred Purchase Agreement and the Series B Preferred Purchase Agreement are referred to as “Purchase Agreements”). It is a condition to the closing of such transaction that the Holders execute this Investors Rights Agreement.

D. Pursuant to the Series A Preferred Purchase Agreement, any term thereof may be amended only with the written consent of the Company and the holders of a majority of the then-outstanding shares of Preferred (as defined therein) including any shares of Common Stock (as defined herein) of the Company into which such Preferred have been converted and that any such amendment shall be binding upon each transferee of any Preferred, and Common Stock issuable upon conversion of any share of such Preferred, each future holder of all such securities and the Company.

E. Pursuant to the Series B Preferred Purchase Agreement, any term thereof may be amended only with the written consent of the Company and the holders of a majority of the then-outstanding shares of Preferred (as defined therein) including any shares of Common Stock of the Company into which such Preferred Stock have been converted and that any such amendment shall be binding upon each transferee of any Preferred, and Common Stock issuable upon conversion of any share of such Preferred, each future holder of all such securities and the Company.

F. The Company has determined it to be in the best interests of the Company and its shareholders that the Company and the Holders enter into this Investors Rights Agreement and the Series A Preferred Purchase Agreement be amended by deleting Sections 4, 5 and 7, and Series B Preferred Purchase Agreement be amended by deleting Section 6 thereof, and to provide certain integrated registration rights and other provisions as described herein.

In consideration of the foregoing and the promises and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

SECTION 1

CERTAIN DEFINITIONS

As used in this Agreement, the following terms shall have the following respective meanings:

1.1 “Affiliate” shall mean any entity who is controlled by, who controls or who is under common control with a person.

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1.2 “Commission” shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.

1.3 “Common Stock” shall mean the Common Stock of the Company.

1.4 “Conversion Shares” means the Common Stock issued or issuable upon conversion of the Preferred Stock.

1.5 “Holder” or “Holders” shall mean any person or persons owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 2.12 hereof.

1.6 “Initiating Holders” shall mean Holders of at least forty percent (40%) of Registrable Securities held by the Major Holders.

1.7 “IPO” shall mean the closing of the first sale of the Company’s securities to the public pursuant to (i) a registration statement under the Securities Act (as defined below), or (ii) the listing requirements of an exchange which is qualified as a “designated offshore securities market” under Rule 902 of the Securities Act.

1.8 “Major Holder” shall mean a Holder, individually or together with its Affiliates, who holds at least 750,000 shares of Registrable Securities (adjusted to reflect subdivisions, stock splits, stock dividends, combinations, consolidations, recapitalizations and the like of the Company).

1.9 “Preferred Stock” shall mean the shares of the Company’s Series A Preferred Stock (“Series A Preferred Stock”) and Series B Preferred Stock (“Series B Preferred Stock”), issued pursuant to the Purchase Agreements.

1.10 “Purchase Agreements” shall have the meaning set forth in Recital B.

1.11 “Qualified IPO” shall mean an IPO that (a) is made at a price of at least $10 per share (adjusted to reflect subdivisions, stock splits, stock dividends, combinations, consolidations, recapitalizations and the like of the Company) and (b) results in gross proceeds to the Company of at least $10,000,000.

1.12 “Register”, “Registered” and “Registration” refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement.

1.13 “Registrable Securities” shall mean (i) Conversion Shares, (ii) any Common Stock issued in respect of, in exchange for or in replacement of the Conversion Shares or other securities issued pursuant to the conversion of the Preferred Stock or upon any subdivision, stock split, stock dividend, combination, consolidation, recapitalization or the like, and (iii) any other shares of Common Stock now or later held by any holder of Registrable Securities acquired by such Holder pursuant to the Purchase Agreements or herein. Securities previously sold to the public pursuant to a registered public offering or Rule 144 of the Securities Act shall cease to be Registrable Securities

1.14 “Registration Expenses” shall mean all expenses incurred in complying with registrations, filings or qualifications under Sections 2.4, 2.5 and 2.6 hereof, including, without limitation, all registration, qualification and filing fees, accounting fees, printing expenses, exchange listing fees, escrow fees, fees of transfer agents and registrars, fees and disbursements of counsel for the Company and independent public accountants to the Company, blue sky fees and expenses, the fees and disbursements of a single special counsel to the Holders not to exceed $15,000, the expense of any special audits incident to or required by any such registration.

1.15 “Restricted Securities” shall mean the securities of the Company required to bear the legend set forth in Section 2.2 hereof (or any similar legend).

1.16 “Securities Act” shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.

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1.17 “Securities Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.

1.18 “Selling Expenses” shall mean all underwriting discounts and selling commissions applicable to the sale of the Registrable Securities and the fees and disbursements of any counsel for the Holders, other than the fees and disbursements of special counsel included in the definition of Registration Expenses.

SECTION 2

RESTRICTIONS ON TRANSFERABILITY OF SECURITIES;

COMPLIANCE WITH SECURITIES ACT

2.1 Restrictions on Transferability. The Preferred Stock and the Conversion Shares shall not be transferable except upon the conditions specified in Sections 2.2 and 2.3, which conditions are intended to ensure compliance with the provisions of the Securities Act, or, in the case of Section 2.14 hereof, which is intended to assist in an orderly distribution. Until such time as the restrictive legend set forth in Section 2.2 is no longer required to be placed on Registrable Securities pursuant to Section 2.3(a) and under Section 2.14, each Holder will cause any proposed transferee of the Preferred Stock and the Conversion Shares held by such Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section 2 (including the “market stand-off” provisions of Section 2.14).

2.2 Restrictive Legend. Each certificate representing the Preferred Stock (and the Conversion Shares), and any securities issued in respect thereof or exchange therefor, shall (unless otherwise permitted by the provisions of Section 2.3 below) be stamped or otherwise imprinted with a legend in substantially the following form (in addition to any legend required under applicable state securities laws):

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICE.”

2.3 Notice of Proposed Transfers.

(a) The Holder of each certificate representing Restricted Securities agrees to comply in all respects with the provisions of this Section 2.3. Prior to any proposed transfer of any Restricted Securities (unless there is in effect a registration statement under the Securities Act covering the proposed transfer), the Holder thereof shall give written notice to the Company of such Holder’s intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and (except in transactions in compliance with Rule 144) if reasonably requested by the Company shall be accompanied by either (i) a written opinion of legal counsel, who shall be reasonably satisfactory to the Company, addressed to the Company and reasonably satisfactory in form and substance to the Company’s counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a “no action” letter from the Commission to the effect that the transfer of such Restricted Securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the Holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the Holder to the Company. Each certificate evidencing the Restricted Securities transferred pursuant to the above shall bear the legend set forth in Section 2.2 above, except that such certificate shall not bear such restrictive legend if such transfer occurred pursuant to an effective registration statement or Rule 144 or, in the opinion of counsel for the Company, such legend is not required in order to establish compliance with any provision of the Securities Act.

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(b) Notwithstanding the provisions of Section 2.3(a), no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interest in the corporation or to any Affiliate of the corporation, (C) a limited liability company to its members or former members in accordance with their interest in the limited liability company, or (D) to the Holder’s family member or trust for the benefit of an individual Holder; provided that in each case the transferee will be subject to the terms of this Agreement to the same extent as if such transferee were an original Holder hereunder.

2.4 Company Registration.

(a) Registration. If at any time or from time to time, the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders exercising their respective demand registration rights, other than (i) a registration on Form S-8 (or a similar or successor form) relating solely to employee stock option, stock purchase or other benefit plans, or (ii) a registration on Form S-4 (or similar or successor form) relating solely to a Commission Rule 145 transaction, the Company will:

(i) promptly give to each Holder written notice thereof (and, in the case of any Holder located outside the continental United States, simultaneously provide a copy of such notice by fax); and

(ii) include in such registration, any related qualification or other compliance, and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within twenty (20) days after mailing of written notice by the Company by first-class mail, postage prepaid, by any Holder or Holders (with a copy by fax as provided above), except as set forth in Section 2.4(b) below.

(b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 2.4(a)(i). In such event, the right of any Holder to registration pursuant to Section 2.4 shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein.

All Holders proposing to distribute their Registrable Securities through such underwriting shall (together with the Company and the other Holders distributing their Registrable Securities through such underwriting) enter into an underwriting agreement in customary form with the Underwriter’s Representative selected for such underwriting by the Company. Notwithstanding any other provision of this Section 2.4, if the Underwriter’s Representative (or the Company after consultation with the Holders if the offering is not underwritten) determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the Underwriter’s Representative may limit the number of Registrable Securities to be included in the registration and underwriting. The Company shall so advise all Holders and other holders distributing their securities through such underwriting and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated pro rata among all the Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holder at the time of filing the Registration Statement. In no event will shares of any other selling shareholder be included in such registration which would reduce the number of shares which may be included by Holders without the written consent of Holders of not less than a majority of the Registrable Securities proposed to be sold in the offering. The number of securities includable by any Holder or other person may, in the discretion of the underwriter, be rounded to the nearest one hundred (100) shares. No securities excluded from the underwriting by reason of the Underwriter’s Representative marketing limitation shall be included in such registration.

If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration.

If the Underwriter’s Representative has not limited the number of shares to be underwritten for the Company’s account and the account of the Holders, the Company may include securities for the account of employees, officers, directors and consultants.

2.5 Requested Registration.

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(a) Request for Registration. In case the Company shall receive from Initiating Holders a written request that the Company effect any registration, qualification or compliance with respect to all or a part of the Registrable Securities, and only in the event that (i) the request is six (6) months after the date of the Company’s IPO and (ii) the aggregate offering price of the Registrable Securities proposed to be registered equals or exceeds $10,000,000, the Company will:

(i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and

(ii) use its best efforts to effect such registration, qualification or compliance as soon as practicable, as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request in writing received by the Company within thirty (30) days after mailing of such written notice from the Company by first-class mail, postage prepaid; provided, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 2.5:

(A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;

(B) Prior to six (6) months after the effective date of the Company’s Qualified IPO;

(C) After the Company has effected one (1) such registration pursuant to this Section 2.5 and such registration has been declared or ordered effective;

(D) If the Company is eligible to use a Form S-3;

(E) Within one hundred eighty days (180) days after the consummation of the Company’s initial firm commitment underwritten offering of its securities to the general public; or

(F) Within one hundred eighty (180) days after the effective date of any registration under Section 2.5 or 2.6.

Subject to the foregoing clauses (A) through (F), the Company shall file a registration statement covering the Registrable Securities so requested pursuant to this Section 2.5(a); provided, however, that if the Company shall furnish to the Initiating Holders a certificate signed by the President of the Company stating that the Board of Directors of the Company (the “Board of Directors”) has determined in its good faith judgment, that it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed at such time, the Company shall have the right to defer such filing for a period of not more than one hundred twenty (120) days after receipt of the request of the Initiating Holders (provided that such right shall not be used more than once in any twelve month period).

(b) Underwriting. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as part of their request made pursuant to Section 2.5 and the Company shall include such information in the written notice referred to in Section 2.5(a)(i). The right of any Holder to registration pursuant to Section 2.5 shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein.

The underwriter shall be selected by a majority in interest of the Initiating Holders, subject to the reasonable consent of the Company, such consent not to be unreasonably withheld. The Company shall (together with all Holders and other parties proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative(s) of the underwriter(s) (collectively, the “Underwriter’s Representative”) selected for such underwriting by the Initiating Holders. Notwithstanding any other provision of this Section 2.5, if the Underwriter’s Representative (or the Company after consultation with the Initiating Holders if the offering is not underwritten) advises the Initiating Holders in writing that it has determined in good faith

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that the marketing factors require a limitation of the number of shares to be underwritten, the Company and the Underwriter’s Representative shall so advise the Initiating Holders and all Holders of Registrable Securities, and the Underwriter’s Representative may limit the number of shares of Registrable Securities to be included in the registration and underwriting on a pro rata basis based upon the total number of Registrable Securities entitled to registration held by the Holders exercising their respective registration rights under Section 2.5(a); provided, however, that the number of shares of Registrable Securities to be included in such underwriting by the Holders shall not be reduced unless all other securities proposed to be sold by the Company or persons other than the Holders are first entirely excluded from the underwriting. The number of securities includable by any Holder or other person may, in the discretion of the underwriters, be rounded to the nearest one hundred (100) shares. No securities excluded from the underwriting by reason of the underwriter’s marketing limitation shall be included in such registration.

If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the Underwriter’s Representative and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration; provided, however, that, if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other participating Holders may be included in such registration (up to the maximum of any limitation imposed by the Underwriter’s Representative), then the Company shall allocate such greater number of Registrable Securities to such Holders in proportion, as nearly as practicable, to the respective amount of Registrable Securities held by such participating Holders.

If the Underwriter’s Representative has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account or for the account of other stockholders of the Company in such registration if the Underwriter’s Representative so agrees.

2.6 S-3 Registrations. If the Company is requested (and qualifies under applicable Commission rules) to undertake a registration on Form S-3 (or a similar or successor form) and any related qualification or compliance, of its securities by the Holders of Registrable Securities which will be reasonably estimated to result in aggregate gross proceeds of at least $1,000,000, the Company shall promptly give notice of such proposed registration to all Holders of Registrable Securities (and, in the case of any Holder located outside the continental United States, simultaneously provide a copy of such notice by fax) and the Company shall, as expeditiously as possible, use its best efforts to effect the registration on Form S-3 (or a similar or successor form) of the Registrable Securities which the Company has been requested to register (i) in each request and (ii) in any response given within twenty (20) days after mailing of the written notice by the Company by first-class mail, postage prepaid, of the foregoing notice from the Company. Notwithstanding the foregoing, however, such registration shall be subject to the following:

(a) The Company shall not be required to effect more than one (1) such registrations pursuant to this Section 2.6 in any twelve (12) month period.

(b) The Company shall not be required to effect a registration pursuant to this Section 2.6 within one hundred eighty (180) days of the effective date of any registration referred to in Section 2.5.

The Company may include in the registration under this Section 2.6 any other shares of Common Stock (including issued and outstanding shares of Common Stock as to which the holders thereof have contracted with the Company for “piggyback” registration rights) so long as the inclusion in such registration of such shares will not, in the opinion of the Underwriter’s Representative (or in the reasonable opinion of the Company after consultation with the Holders in the event that the offering is not underwritten), interfere with the successful marketing in accordance with the intended method of sale or other disposition of all the shares of Registrable Securities sought to be registered by the Holder or Holders of Registrable Securities pursuant to this Section 2.6. If it is determined as provided above that there will be such interference, the other shares of Common Stock sought to be included by the Company shall be excluded to the extent deemed necessary by such Underwriter’s Representative (or the Company after consultation with the Holders if the offering is not underwritten), and all other shares of Common Stock held by other parties shall be excluded before the exclusion of any shares of Registrable Securities held by the Holders who desire to have their shares included in the registration and offering. If, as contemplated above, and after excluding all other shares of Common Stock held by other parties, Registrable Securities of the Holders are to be excluded, the number of Registrable Securities of each participating Holder which are to be excluded shall be proportionate to the number of shares which such party is seeking to register.

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2.7 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Sections 2.4, 2.5 and 2.6 shall be borne by the Company; and, unless otherwise stated, all Selling Expenses relating to securities registered by the Holders, shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered; provided, that unless otherwise agreed, any Holder that retains its own counsel (in addition to the single special counsel for all Holders) shall be solely responsible for the fees and expenses of such counsel.

2.8 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 2, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. The Company will:

(a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for a period of one hundred and twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever occurs first.

(b) Furnish to the Holders and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons may reasonably request in order to facilitate the intended disposition of the Registrable Securities covered by such registration statement.

(c) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for the period set forth in paragraph (a) above.

(d) Use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act.

(e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement.

(f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and promptly prepare and file with the Commission such amendments and supplements to such prospectus and registration statement as may be required such that such registration statement and prospectus, as so amended and supplemented, will no longer include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing.

(g) Use its best efforts to furnish, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or on the effective date of such registration statement, if such offering is not underwritten, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the selling Holders, and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering addressed to the underwriters and to the selling Holders.

2.9 Indemnification.

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(a) The Company will, and does hereby undertake to, indemnify and hold harmless each Holder, each of its officers, directors, employees and agents and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 2, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including settlement of any litigation, commenced or threatened, or any rule or regulation under the Securities Act or other applicable law, to which they may become subject, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus (preliminary or final), offering circular or other document or amendments thereto, or arising out of or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or arising out of, or based on any violation or alleged violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will promptly reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in the Company’s reliance on and in conformity with written information furnished to the Company by an instrument executed by such Holder or managing underwriter expressly for use in connection with such registration statement, prospectus, offering circular or other document.

(b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify and hold harmless the Company, each of its directors and officers, agents and employees, each underwriter, if any, of the Company’s securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers, directors, employees, agents and partners and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities, joint or several, (or actions in respect thereof to which they may become subject) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or amendments thereto, or any omission (or alleged omission) to state therein a material fact required to be stated therein in light of the circumstances in which they were made, or necessary to make the statements therein, not misleading, and will promptly reimburse the Company, each such other Holder, such directors, officers, employees and agents, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument executed by such Holder expressly for use in connection with such registration statement, prospectus, offering circular or other document; provided, however, that the aggregate liability of Holder hereunder and under Section 2.9(d) below shall be limited to an amount equal to the net proceeds to such Holder of Registrable Securities from the sale of such Registrable Securities as contemplated herein.

(c) Each party entitled to indemnification under this Section 2.9 (the “Indemnified Party”) shall give notice to the party required to provide indemnification (the “Indemnifying Party”) promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall deliver written notice to the Indemnifying Party of commencement thereof. The Indemnifying Party, at its sole option, may participate in or assume the defense of any such claim or any litigation resulting therefrom with counsel reasonably satisfactory to the Indemnified Party, and the Indemnified Party may participate in such defense at the Indemnified Party’s expense, provided, that if the defendants in any such action include both the Indemnified Party and the Indemnifying Party and the Indemnified Party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the Indemnifying Party or if the interests of the Indemnified Party reasonably may be deemed to conflict with the interests of the Indemnifying Party, the Indemnified Party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the Indemnifying Party as incurred. The failure of any Indemnified Party to give notice as provided

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herein shall not relieve the Indemnifying Party of its obligations under this Section 2 except to the extent that such failure to give notice shall materially adversely affect the Indemnifying Party in the defense of any such litigation. No Indemnifying Party, in the defense of any such claim or litigation shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term a release from all liability in respect to such claim or litigation by the claimant or plaintiff to such Indemnified Party.

(d) If the indemnification provided for in this Section 2.9 is applicable by its terms but is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any losses, claims, damages or liabilities referred to herein, the Indemnifying Party, in lieu of indemnifying such Indemnified Party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party; provided, that in no event shall the sum of any contribution by a Holder hereunder and any amount payable by such Holder under Section 2.9(b) above exceed in the aggregate the net proceeds from the offering received by such Holder.

(e) The obligations of the Company and Holders under this Section 2.9 shall survive completion of any offering of Registrable Securities in a registration statement and the termination of this Agreement. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation.

2.10 Information by Holder. Each Holder included in any registration shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 2.

2.11 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, the Company agrees to:

(a) Register its Common Stock under Section 12(g) of the Securities Exchange Act, as soon as practicable, but in any event not later than ninety (90) days after the close of the Company’s first fiscal year following the effective date of the first registration statement filed by the Company relating to a public offering other than to employees of the Company under an employee option plan or employee stock purchase plan;

(b) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the first registration under the Securities Act filed by the Company;

(c) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act (at any time after it has become subject to such reporting requirements); and

(d) Furnish to the Holders, so long as the Holders own any Restricted Securities, written notice of the Company’s qualification as a registrant, as soon as practicable after such qualification; the Company further shall furnish forthwith upon request a written statement as to its compliance with the reporting requirements of Rule 144 and of its compliance with the Securities Act and the Securities Exchange Act (at any time after it has become subject to such reporting requirements); the Company shall provide forthwith upon written request a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as the Holders of Restricted Securities may reasonably request in availing itself of any rule or regulation of the Commission allowing Holders to sell any such securities without registration.

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2.12 Assignment of Registration Rights. The rights to cause the Company to register securities and related rights granted each Holder under Section 2 may not be assigned except: (i) to a purchaser of more than 250,000 shares of Registrable Securities or in the case of an assignment under Section 2.5 hereof, to a purchaser of more than 750,000 shares of Registrable Securities (in both cases adjusted to reflect subdivisions, stock splits, stock dividends, combinations, consolidations, recapitalizations, and the like), (ii) to a successor entity to a Holder pursuant to a reorganization or recapitalization of a Holder, (iii) to an Affiliate of a Holder, (iv) to the partners, members or shareholders of a Holder or (v) pursuant to an inter vivos transfer to a Holder’s ancestors or descendants or spouse or to a trustee for their benefit; provided, that the Company receives a written notice within twenty (20) days following any such assignment.

2.13 Termination of Registration Rights. The registration rights and related rights granted pursuant to Section 2 shall terminate as to each Holder (and permitted transferee under Section 2.12 above) upon the earlier of (i) such time as all Restricted Securities held by such Holder or permitted transferee can be sold within a given three (3) month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144 (or its successor provision) or (ii) five (5) years after the effective date of the Company’s Qualified IPO.

2.14 “Market Stand-Off” Agreement. Any Holder of Conversion Shares, if required by the Company and the managing underwriter of Common Stock, shall agree not to sell, make any short sale of, loan, grant any option for the purchase of or otherwise transfer or dispose of any Conversion Shares held by such Holder (other than transfers to any partners or former partners of such Holder, or any spouse or family member of any such partner or retired partner, or any trust for the benefit of any such person, or any Affiliate of any Holder, if the transferee shall agree in writing to be bound by the provisions of this Section, and other than resales of any securities acquired in the public markets), during the period not to exceed one hundred and eighty (180) days following the effective date of the Company’s Qualified IPO, provided that all officers, and directors of the Company and all other holders of one percent (1%) or more of the Company’s Common Stock enter into similar agreements. Such agreement shall be in writing in the form reasonably satisfactory to the Company and such managing underwriter. The obligations described in this Section 2.14 shall not apply to a registration relating solely to employee benefit plans on Form S-8 or a similar form that may be promulgated in the future, or a registration relating solely to a transaction under Rule 145 of the Securities Act or Form S-4 or a similar form that may be promulgated in the future. The Company may impose a stop-transfer instruction with respect to such Conversion Shares subject to the foregoing restriction until the end of such period.

SECTION 3

NEW ISSUANCE RIGHT OF FIRST REFUSAL

3.1 Right. Subject to Section 3.5, if, at any time prior to the expiration of the period set forth in Section 3.6 below, the Company should desire to issue any new equity securities, the Company shall give each Major Holder the first right to purchase up to its pro rata share of all of such equity securities on the same terms and same price as the Company is willing to sell such equity securities to any other person. Such “pro rata share,” for the purpose of this provision, is the ratio of the number of shares of Conversion Stock owned by such Major Holder immediately prior to such issuance of new equity securities, assuming full conversion of the shares and exercise of any option or warrant held by such Major Holder, to the total number of shares of Common Stock outstanding immediately prior to such issuance of new equity securities, assuming full conversion of all outstanding convertible securities, and exercise of all vested and exercisable rights, options and warrants to acquire Common Stock of the Company (“Pro Rata Share”).

3.2 Notification. Prior to any sale or issuance by the Company of any equity securities, the Company shall notify each Major Holder, in writing by first-class mail, postage prepaid (and, in the case of any Holder located outside the continental United States, simultaneously provide a copy of such notice by fax), of its intention to issue or sell such equity securities, setting forth in reasonable detail the terms, price and description under which it proposes to make such issuance or sale. Within twenty (20) days thereafter, each Major Holder shall notify the Company of its intention to exercise such option and election to purchase all or any portion of its Pro Rata Share (or any part thereof) of the equity securities so offered.

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3.3 Waiver. If, within fifteen (15) days after the Company gives notice pursuant to Section 3.2 above, if any Major Holder does not notify the Company that it desires to purchase any of its Pro Rata Share of the equity securities described in such notice upon the terms and conditions set forth therein, the Company may, during a period of ninety (90) days following the end of such fifteen (15) day period, sell and issue such equity securities as to which any Major Holder does not indicate a desire to purchase to another person upon the same terms and conditions as those set forth in the notice but at a price at least as great as the price offered to the Major Holders; provided, that failure by a Major Holder to exercise its option to purchase with respect to one offering, sale or issuance shall not affect its option to purchase equity securities in any subsequent offering, sale, issuance or transfer. In the event the Company has not sold the equity securities, or entered into a binding agreement to sell the equity securities, within such ninety (90) day period, the Company shall not thereafter issue or sell any equity securities without first offering such equity securities to each Major Holder in the manner provided above.

3.4 Issuance. If a Major Holder gives the Company notice that it desires to purchase any of the equity securities offered, payment for the equity securities shall be by check or wire transfer, against delivery of the equity securities at the executive offices of the Company within ten (10) days after giving the Company such notice, or if later, the closing date for the sale of such equity securities. The Company shall take all such action as may be required by any regulatory authority in connection with the exercise by each Major Holder of the right to purchase equity securities as set forth in this Section 3, but the right of any Major Holder is subject to the Company’s reasonable compliance with regulatory requirements.

3.5 Excluded Securities. The right of first offer in this Section 3 shall not be applicable to the issuance or sale of (i) Common Stock to officers, directors or employees of, or consultants to, the Company pursuant to stock grant, option plan or purchase plan or other stock incentive program or agreement approved by the Board of Directors; (ii) securities pursuant to any bank, lease financing or leasing arrangement approved by the Board of Directors and not having equity financing as a primary purpose; (iii) securities pursuant to any merger or acquisition approved by the Board of Directors, in which the shareholders of the Company immediately prior to such transaction will hold more than fifty percent (50%) of the surviving entity; (iv) securities pursuant to strategic relationships approved by the Board of Directors and not having equity financing as a primary purpose; (v) securities pursuant to a Qualified IPO; (vi) shares of Common Stock upon conversion of Preferred Stock, or securities pursuant to the conversion or exercise of securities which were not subject to the right of first refusal in this Section 3 or for which the right was not exercised; (vii) securities in connection with any stock split, stock dividend or recapitalization by the Company.

3.6 Termination. The right of first refusal contained in this Section 3 shall terminate as to any Major Holder upon the earlier of: (i) the time when such Holder ceases to be a Major Holder; (ii) the closing of the Qualified IPO; or (iii) an acquisition of the Company that constitutes a liquidation for purposes of the Company’s Articles.

3.7 Assignment. The rights specified in this Section 3 may not be assigned except: (i) to a purchaser who will hold at least 750,000 shares of Registrable Securities (adjusted to reflect subdivisions, stock splits, stock dividends, combinations, consolidations, recapitalizations, and the like), (ii) to an Affiliate, (iii) to a successor entity of a Major Holder pursuant to a reorganization or recapitalization of such Major Holder, or (iv) pursuant to an inter vivos transfer to a Major Holder’s ancestors or descendants or spouse or to a trustee for their benefit; provided, that the Company receives a written notice within twenty (20) days following any such assignment.

SECTION 4

TRANSFER RIGHT OF FIRST REFUSAL

4.1 The Company has the right of first refusal to purchase the Preferred Stock or the Conversion Stock before the Holder, the Holder’s heirs, personal representatives, successors, or assigns, may sell such person’s stock to competitor of the Company as determined by the Company (the “Competitor”) on the same terms and conditions as that offered to the Competitor.

4.2 In the event the Holder proposes to sell the Preferred Stock or the Conversion Stock, Holder shall give the Company written notice of such Holder’s intention, describing the price and other terms and conditions upon which the Holder proposes to sell the stock and the name of such party. If the Company determines that such

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proposed transferee is a Competitor, then the Company shall have thirty (30) days from the date of receipt of any such notice to agree to purchase part or all of the Holder’s stock for the price and upon the general terms specified in the notice by giving written notice to the Holder and stating therein the quantity of stock to be purchased.

4.3 In the event the Company fails to exercise the right of first refusal within such thirty (30) day period, then the Holder may dispose of some or all of the shares for sale to such third party but only within a period of ninety (90) days from the date of such Holder’s first notice to the Company. However, the Holder shall not sell or transfer any of the shares for sale at a lower price or on terms more favorable to the purchaser or transferee than those specified in the notice to the Company. After the ninety (90) day period, the procedure for first offering to the Company shall again apply.

4.4 Transfer by Gift or at Death. The requirements of this Section that no transfer of the Holder’s shares shall be valid until it is first offered to the Company shall not apply to transfers by inter vivos gift or by intestate succession or testamentary disposition on the Holder’s death. However, the transferee shall be bound by this Section 4 and any subsequent transfer by the donee, estate, representative or beneficiary transferee must be made in accordance with the provisions of this Section 4.

4.5 Termination. The right of first refusal shall expire upon the first to occur of the following: (a) the Company is merged with or into, or sells its assets to, or exchanges stock with, another corporation where the shareholders of Company do not own in excess of fifty percent (50%) of the voting shares of the surviving corporation, or (b) the Company completes an IPO.

4.6 Assignment. The right of first refusal hereunder is not assignable except by the Company to any shareholder of the Company.

SECTION 5

INFORMATION REQUIREMENTS

5.1 Financial Information. The Company will mail the following reports to a Major Holder:

(a) Within one-hundred twenty (120) days after the end of each fiscal year, consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of income and consolidated statements of cash flows of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles, all in reasonable detail and audited by a nationally recognized independent public accountant selected by the Company.

(b) Within forty-five (45) days after the end of the first, second and third quarter of each fiscal year, consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such quarter, and consolidated statements of income and cash flows of the Company and its subsidiaries, if any, for such quarter, prepared in accordance with generally accepted accounting principles and certified by the Chief Financial Officer of the Company.

5.2 Termination. The right to information contained in this Section 5 shall terminate as to any Major Holder upon the earlier of: (i) the time when such Holder ceases to be a Major Holder; (ii) the closing of the Qualified IPO; or (iii) the acquisition of the Company that constitutes a liquidation for purposes of the Company’s charter.

5.3 Assignment. The rights specified in this Section 5 may not be assigned except: (i) to a purchaser who will hold at least 750,000 shares of Registrable Securities (adjusted to reflect subdivisions, stock splits, stock dividends, combinations, consolidations, recapitalizations, and the like), (ii) to an Affiliate, (iii) to a successor entity to a Major Holder pursuant to a reorganization or recapitalization of such Major Holder, or (iv) pursuant to an inter vivos transfer to a Major Holder’s ancestors or descendants or spouse or to a trustee for their benefit; provided, that the Company receives a written notice within twenty (20) days following any such assignment.

12

SECTION 6

MISCELLANEOUS

6.1 Amendment to Purchase Agreements.

(a) Pursuant to Section 9.12 of the Series A Stock Purchase Agreement, effective upon the execution of this Agreement by the Company and the holders of a majority of the then-outstanding “Preferred” (as defined therein) including any shares of Common Stock of the Company into which such Preferred have been converted, the Series A Preferred Stock Purchase Agreement will be amended by deleting Sections 4, 5 and 7 thereof.

(b) Pursuant to Section 7.4 of the Series B Stock Purchase Agreement, effective upon the execution of this Agreement by the Company and the holders of a majority of the then-outstanding “Preferred” (as defined therein) including any shares of Common Stock of the Company into which such Preferred have been converted, the Series B Preferred Stock Purchase Agreement will be amended by deleting Section 6 thereof.

6.2 Transfer; Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

6.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California.

6.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

6.5 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

6.6 Notices. All notices and other communications required or permitted under this Agreement shall be effective upon receipt and shall be in writing and may be delivered in person, by telecopy, or overnight or international courier service, addressed to the Company, the Holders, as the case may be, at their respective addresses as the Company, the Holders, shall have furnished to the other parties in writing. All notices and other communications shall be effective upon the earlier of actual receipt thereof by the person to whom notice is directed or (i) in the case of notices and communications sent by personal delivery or telecopy, one business day after such notice or communication arrives at the applicable address or was successfully sent to the applicable telecopy number, (ii) in the case of notices and communications sent by overnight courier service, at noon (local time) on the second business day following the day such notice or communication was sent, and (iii) in the case of notices and communications sent by international courier service, at noon (local time) on the third business day following the day such notice or communication was sent.

6.7 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the then-outstanding shares of Series A Preferred Stock and Series B Preferred Stock, including any shares of Common Stock into which the Preferred Stock have been converted (but excluding in all cases shares that have been sold to the public), voting as separate classes. Any amendment or waiver effected in accordance with this Section shall be binding upon each transferee of any Preferred Stock, and Common Stock issuable upon conversion of any Preferred Stock, each future holder of all such securities, and the Company.

6.8 Severability. If any provision of this Agreement is held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

13

6.9 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements existing between the parties hereto relating to the subject matter hereof (including, without limitation, any provisions of the Purchase Agreements relating to registration rights or pre-emptive rights) are expressly canceled and superseded.

14

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ H. M. Chiu
(Individual)
Name:	Huang Mi-Mei Chiu
by Shan Shuong Chan FPOA

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
/s/ Nobuo Inami
Global Alliance Inc.
Name:	Nobuo Inami
Title:	President
(Individual)
Name:

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ Jiaming Wang
(Individual)
Name:	Jiaming Wang

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ Michael Yan Li
(Individual)
Name:	Michael Yan Li

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
/s/ Creative Data Products, Inc.
(Entity)
Name:	Timony Ten
Title:	President
	04/20/01
(Individual)
Name:

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
TLin
(Entity)
Name:	Alliance III Venture Capital Corp.
Title:	President
TLin
(Individual)
Name:	Timothy Lin

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
/s/ Shang-Te Chan
(Entity)
Name:	Technology Partners Venture Capital Co.
Title:	Shang-Te Chan/President
(Individual)
Name:

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ Samson Huang
(Individual)
Name:	Samson Huang

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
Hsun K. Chou
(Entity)
Name:	Hsun K. Chou
Title:	Trustee, Hsun Kwei Chou and Aiko Chou
	Living Trust
(Individual)
Name:

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:

/s/ Samuel Ng

(Entity)

Name:

Title:

/s/ Samuel Ng

(Individual)

Name:

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ Ye Xun Guang
(Individual)
Name:	Xun Guang Ye

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ Yang, Yong Mei
(Individual)
Name:	Yang, Yong Mei

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ Mu Zhen. Yan
(Individual)
Name:	Mu Zhen. Yan

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ Qi Xiong Lin
(Individual)
Name:	Qi Xiong Lin

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ Run Qing Li
(Individual)
Name:	Run Qing Li

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ Cai Ying Kun
(Individual)
Name:	Cai Ying Kun

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ Yu Lian, Qui
(Individual)
Name:	Yu Lian, Qui

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
(Entity)
Name:
Title:
/s/ Pang Wai
(Individual)
Name:	Pang Wai

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
	/s/ S. Hamaguchi
	(Entity)
		Matsushita-Kotobuki Electronics Industries, Ltd.
	Name:	Sachihiko Hamaguchi
	Title:	President
	(Individual)
	Name:

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:
	Title:

HOLDER:	Seiko Epson Corporation
	/s/ Seiji Hanaoka
	Name:	Seiji Hanaoka
	Title:	Managing Director, Deputy Chief Executive, Imaging & Information Products Div
	(Individual)
	Name:

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer

HOLDER:
	/s/ Marc Chan
	CHINA CYBER HOLDINGS, LIMITED
	Name:	Marc Chan
	Title:	Director
	/s/ Marc Chan
	(Individual)
	Name:

15

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMPANY:	ARCSOFT, INC.
	By:	/s/ William E. O’Connor
	Name:	William E. O’Connor
	Title:	Chief Financial Officer
	HOLDER:	/s/ Chun P. Chiu
	Chiu Living Trust
	(Entity)
	Name:	Chun P. Chiu
	Title:	Trustee
	(Individual)
	Name:

15

Exhibit A

SERIES A HOLDERS

Name	No. of Shares
Alliance III Venture Capital Corp.	272,727
Ying Kun Cai	350,000
Huang Mi-Mei Chiu	45,454
Chiu Living Trust	20,000
Hsun & Aiko Chou Living Trust	20,000
Creative Data Products, Inc.	454,545
Global Alliance Inc.	100,000
Samson Huang	45,000
Michael Yan Li	35,000
Run Qing Li	20,000
Qi Xiong Lin	80,000
Samuel Wai Ng	30,000
Wai Pang	35,000
Yu Lian Qiu	40,000
Tech Partners VC Corp.	100,000
Jiaming Wang	20,000
David C. Weng Living Trust	20,000
Mu Zhen Yan	35,000
Yong Mei Yang	90,000
Xun Guang Ye	20,000

16

Exhibit B

SERIES B HOLDERS

Name	No. of Shares
China Cyber Holdings Ltd.	2,000,000
Matsushita-Kotobuki Electronics Industries, Ltd.	1,333,333
Seiko-Epson	333,333

17

EX-10.1

Exhibit 10.1

ARCSOFT, INC.

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (this “Agreement”) is entered into as of    , 2004 (the “Effective Date”), by and between ARCSOFT, INC., a Delaware corporation (the “Company”), and (“Indemnitee”).

RECITALS

A. Indemnitee is either a member of the board of directors of the Company (the “Board of Directors”) or an officer of the Company, or both, and in such capacity or capacities, or otherwise as an Agent (as hereinafter defined) of the Company, is performing a valuable service for the Company.

B. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he or she be indemnified as herein provided.

C. It is intended that Indemnitee shall be paid promptly by the Company all amounts necessary to effectuate in full the indemnity provided herein.

NOW, THEREFORE, in consideration of the premises and the covenants in this Agreement, and of Indemnitee continuing to serve the Company as an Agent and intending to be legally bound hereby, the parties hereto agree as follows:

1. Services by Indemnitee. Indemnitee agrees to serve (a) as a director or an officer of the Company, or both, so long as Indemnitee is duly appointed or elected and qualified in accordance with the applicable provisions of the Certificate of Incorporation and bylaws of the Company, and until such time as Indemnitee resigns or fails to stand for election or is removed from Indemnitee’s position, or (b) as an Agent of the Company. Indemnitee may from time to time also perform other services at the request or for the convenience of, or otherwise benefiting, the Company. Indemnitee may at any time and for any reason resign or be removed from such position (subject to any other contractual obligation or other obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in any such position.

2. Indemnification. Subject to the limitations set forth herein and in Section 7 hereof, the Company hereby agrees to indemnify Indemnitee as follows:

The Company shall, with respect to any Proceeding (as hereinafter defined) associated with Indemnitee’s being an Agent of the Company, indemnify Indemnitee to the fullest extent permitted by applicable law and the Certificate of Incorporation of the Company in effect on the date hereof or as such law or Certificate of Incorporation may from time to time be amended (but, in the case of any such amendment, only to the extent such amendment permits the Company to provide broader indemnification rights than the law or Certificate of Incorporation permitted the Company to provide before such amendment). The right to indemnification conferred herein and in the Certificate of Incorporation shall be presumed to have been relied upon by Indemnitee in serving or continuing to serve the Company as an Agent and shall be enforceable as a contract right. Without in any way diminishing the scope of the indemnification provided by this Section 2, the Company will indemnify Indemnitee to the full extent permitted by law if and wherever Indemnitee is or was a party or is threatened to be made a party to any Proceeding, including any Proceeding brought by or in the right of the Company, by reason of the fact that Indemnitee is or was an Agent or by reason of anything done or not done by Indemnitee in such capacity, against Expenses (as hereinafter defined) and Liabilities (as hereinafter defined) actually and reasonably incurred by Indemnitee or on his or her behalf in connection with the investigation, defense, settlement or appeal of such Proceeding. In addition to, and not as a limitation of, the foregoing, the rights of indemnification of Indemnitee provided under this Agreement shall include those rights set forth in Sections 3 and 9 below. Notwithstanding the foregoing, the Company shall be required to indemnify Indemnitee in connection with a Proceeding commenced by

ARCSOFT, INC.

INDEMNIFICATION AGREEMENT

1

Indemnitee (other than a Proceeding commenced by Indemnitee to enforce Indemnitee’s rights under this Agreement) only if the commencement of such Proceeding was authorized by the Board of Directors.

3. Advancement of Expenses. All reasonable Expenses incurred by or on behalf of Indemnitee (including costs of enforcement of this Agreement) shall be advanced from time to time by the Company to Indemnitee within thirty (30) days after the receipt by the Company of a written request for an advance of Expenses, whether prior to or after final disposition of a Proceeding (except to the extent that there has been a Final Adverse Determination (as hereinafter defined) that Indemnitee is not entitled to be indemnified for such Expenses), including, without limitation, any Proceeding brought by or in the right of the Company. The written request for an advancement of any and all Expenses under this paragraph shall contain reasonable detail of the Expenses incurred by Indemnitee. In the event that such written request shall be accompanied by an affidavit of counsel to Indemnitee to the effect that such counsel has reviewed such Expenses and that such Expenses are reasonable in such counsel’s view, then such expenses shall be deemed reasonable in the absence of clear and convincing evidence to the contrary. By execution of this Agreement, Indemnitee shall be deemed to have made whatever undertaking as may be required by law at the time of any advancement of Expenses with respect to repayment to the Company of such Expenses. In the event that the Company shall breach its obligation to advance Expenses under this Section 3, the parties hereto agree that Indemnitee’s remedies available at law would not be adequate and that Indemnitee would be entitled to specific performance.

4. Surety Bond.

(a) In order to secure the obligations of the Company to indemnify and advance Expenses to Indemnitee pursuant to this Agreement, the Company shall obtain at the time of any Change in Control (as hereinafter defined) a surety bond (the “Bond”). The Bond shall be in an appropriate amount not less than one million dollars ($1,000,000), shall be issued by a commercial insurance company or other financial institution headquartered in the United States having assets in excess of $10 billion and capital according to its most recent published reports equal to or greater than the then applicable minimum capital standards promulgated by such entity’s primary federal regulator and shall contain terms and conditions reasonably acceptable to Indemnitee. The Bond shall provide that Indemnitee may from time to time file a claim for payment under the Bond, upon written certification by Indemnitee to the issuer of the Bond that (i) Indemnitee has made written request upon the Company for an amount not less than the amount Indemnitee is drawing under the Bond and that the Company has failed or refused to provide Indemnitee with such amount in full within thirty (30) days after receipt of the request, and (ii) Indemnitee believes that he or she is entitled under the terms of this Agreement to the amount that Indemnitee is drawing upon under the Bond. The issuance of the Bond shall not in any way diminish the Company’s obligation to indemnify Indemnitee against Expenses and Liabilities to the full extent required by this Agreement.

(b) Once the Company has obtained the Bond, the Company shall maintain and renew the Bond or a substitute Bond meeting the criteria of Section 4(a) during the term of this Agreement so that the Bond shall have an initial term of five (5) years, be renewed for successive five-year terms, and always have at least one (1) year of its term remaining.

5. Presumptions and Effect of Certain Proceedings. Upon making a request for indemnification, Indemnitee shall be presumed to be entitled to indemnification under this Agreement and the Company shall have the burden of proof to overcome that presumption in reaching any contrary determination. The termination of any Proceeding by judgment, order, settlement, arbitration award or conviction, or upon a plea of nolo contendere or its equivalent shall not affect this presumption or, except as determined by a judgment or other final adjudication adverse to Indemnitee, establish a presumption with regard to any factual matter relevant to determining Indemnitee’s rights to indemnification hereunder. If the person or persons so empowered to make a determination pursuant to Section 6 hereof shall have failed to make the requested determination within ninety (90) days after any judgment, order, settlement, dismissal, arbitration award, conviction, acceptance of a plea of nolo contendere or its equivalent, or other disposition or partial disposition of any Proceeding or any other event that could enable the Company to determine Indemnitee’s entitlement to indemnification, the requisite determination that Indemnitee is entitled to indemnification shall be deemed to have been made.

ARCSOFT, INC.

INDEMNIFICATION AGREEMENT

2

6. Procedure for Determination of Entitlement to Indemnification.

(a) Whenever Indemnitee believes that Indemnitee is entitled to indemnification pursuant to this Agreement, Indemnitee shall submit a written request for indemnification to the Company. Any request for indemnification shall include sufficient documentation or information reasonably available to Indemnitee for the determination of entitlement to indemnification. In any event, Indemnitee shall submit Indemnitee’s claim for indemnification within a reasonable time, not to exceed five (5) years after any judgment, order, settlement, dismissal, arbitration award, conviction, acceptance of a plea of nolo contendere or its equivalent, or final determination, whichever is the later date for which Indemnitee requests indemnification. The Secretary or other appropriate officer shall, promptly upon receipt of Indemnitee’s request for indemnification, advise the Board of Directors in writing that Indemnitee has made such request. Determination of Indemnitee’s entitlement to indemnification shall be made not later than ninety (90) days after the Company’s receipt of Indemnitee’s written request for such indemnification, provided that any request for indemnification for Liabilities, other than amounts paid in settlement, shall have been made after a determination thereof in a Proceeding.

(b) The Company shall be entitled to select the forum in which Indemnitee’s entitlement to indemnification will be heard; provided, however, that if there is a Change in Control of the Company, Independent Legal Counsel (as hereinafter defined) shall determine whether Indemnitee is entitled to indemnification. The forum shall be any one of the following:

(i) the stockholders of the Company;

(ii) a majority vote of Disinterested Directors (as hereinafter defined), even though less than a quorum;

(iii) Independent Legal Counsel, whose determination shall be made in a written opinion; or

(iv) a panel of three (3) arbitrators, one selected by the Company, another by Indemnitee and the third by the first two arbitrators; or if for any reason three (3) arbitrators are not selected within thirty (30) days after the appointment of the first arbitrator, then selection of additional arbitrators shall be made by the American Arbitration Association. If any arbitrator resigns or is unable to serve in such capacity for any reason, the American Arbitration Association shall select such arbitrator’s replacement. The arbitration shall be conducted pursuant to the commercial arbitration rules of the American Arbitration Association now in effect.

7. Specific Limitations on Indemnification. Notwithstanding anything in this Agreement to the contrary, the Company shall not be obligated under this Agreement to make any payment to Indemnitee with respect to any Proceeding:

(a) To the extent that payment is actually made to Indemnitee under any insurance policy, or is made to Indemnitee by the Company or an affiliate otherwise than pursuant to this Agreement. Notwithstanding the availability of such insurance, Indemnitee also may claim indemnification from the Company pursuant to this Agreement by assigning to the Company any claims under such insurance to the extent Indemnitee is paid by the Company;

(b) Provided there has been no Change in Control, for Liabilities in connection with Proceedings settled without the Company’s consent, which consent, however, shall not be unreasonably withheld;

(c) For an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or similar provisions of any state statutory or common law; or

ARCSOFT, INC.

INDEMNIFICATION AGREEMENT

3

(d) To the extent it would be otherwise prohibited by law, if so established by a judgment or other final adjudication adverse to Indemnitee.

8. Fees and Expenses of Independent Legal Counsel or Arbitrators. The Company agrees to pay the reasonable fees and expenses of Independent Legal Counsel or a panel of three arbitrators should such Independent Legal Counsel or such arbitrators be retained to make a determination of Indemnitee’s entitlement to indemnification pursuant to Section 6(b) of this Agreement, and to fully indemnify such Independent Legal Counsel or arbitrators against any and all expenses and losses incurred by any of them arising out of or relating to this Agreement or their engagement pursuant hereto.

9. Remedies of Indemnitee.

(a) In the event that (i) a determination pursuant to Section 6 hereof is made that Indemnitee is not entitled to indemnification, (ii) advances of Expenses are not made pursuant to this Agreement, (iii) payment has not been timely made following a determination of entitlement to indemnification pursuant to this Agreement or (iv) Indemnitee otherwise seeks enforcement of this Agreement, Indemnitee shall be entitled to a final adjudication in the Court of Chancery of the State of Delaware of the remedy sought. Alternatively, unless (x) the determination was made by a panel of arbitrators pursuant to Section 6(b)(iv) hereof, or (y) court approval is required by law for the indemnification sought by Indemnitee, Indemnitee at Indemnitee’s option may seek an award in arbitration to be conducted by a single arbitrator pursuant to the commercial arbitration rules of the American Arbitration Association now in effect, which award is to be made within ninety (90) days following the filing of the demand for arbitration. The Company shall not oppose Indemnitee’s right to seek any such adjudication or arbitration award. In any such proceeding or arbitration, Indemnitee shall be presumed to be entitled to indemnification and advancement of Expenses under this Agreement and the Company shall have the burden of proof to overcome that presumption.

(b) In the event that a determination that Indemnitee is not entitled to indemnification, in whole or in part, has been made pursuant to Section 6 hereof, the decision in the judicial proceeding or arbitration provided in paragraph (a) of this Section 9 shall be made de novo and Indemnitee shall not be prejudiced by reason of a determination that Indemnitee is not entitled to indemnification.

(c) If a determination that Indemnitee is entitled to indemnification has been made pursuant to Section 6 hereof, or is deemed to have been made pursuant to Section 5 hereof or otherwise pursuant to the terms of this Agreement, the Company shall be bound by such determination in the absence of a misrepresentation or omission of a material fact by Indemnitee in connection with such determination.

(d) The Company shall be precluded from asserting that the procedures and presumptions of this Agreement are not valid, binding and enforceable. The Company shall stipulate in any such court or before any such arbitrator that the Company is bound by all of the provisions of this Agreement and is precluded from making any assertion to the contrary.

(e) Expenses reasonably incurred by Indemnitee in connection with Indemnitee’s request for indemnification under, seeking enforcement of or to recover damages for breach of this Agreement shall be borne by the Company when and as incurred by Indemnitee irrespective of any Final Adverse Determination that Indemnitee is not entitled to indemnification.

10. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (a) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (b) the

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INDEMNIFICATION AGREEMENT

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relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).

11. Maintenance of Insurance. Upon the Company’s purchase of directors’ and officers’ liability insurance policies covering its directors and officers, then, subject only to the provisions within this Section 11, the Company agrees that so long as Indemnitee shall have consented to serve or shall continue to serve as a director or officer of the Company, or both, or as an Agent of the Company, and thereafter so long as Indemnitee shall be subject to any possible Proceeding (such periods being hereinafter sometimes referred to as the “Indemnification Period”), the Company will use all reasonable efforts to maintain in effect for the benefit of Indemnitee one or more valid, binding and enforceable policies of directors’ and officers’ liability insurance from established and reputable insurers, providing, in all respects, coverage both in scope and amount which is no less favorable than that provided by such preexisting policies. Notwithstanding the foregoing, the Company shall not be required to maintain said policies of directors’ and officers’ liability insurance during any time period if during such period such insurance is not reasonably available or if it is determined in good faith by the then directors of the Company either that:

(a) The premium cost of maintaining such insurance is substantially disproportionate to the amount of coverage provided thereunder; or

(b) The protection provided by such insurance is so limited by exclusions, deductions or otherwise that there is insufficient benefit to warrant the cost of maintaining such insurance.

Anything in this Agreement to the contrary notwithstanding, to the extent that and for so long as the Company shall choose to continue to maintain any policies of directors’ and officers’ liability insurance during the Indemnification Period, the Company shall maintain similar and equivalent insurance for the benefit of Indemnitee during the Indemnification Period (unless such insurance shall be less favorable to Indemnitee than the Company’s existing policies).

12. Modification, Waiver, Termination and Cancellation. No supplement, modification, termination, cancellation or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver.

13. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.

14. Notice by Indemnitee and Defense of Claim. Indemnitee shall promptly notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any matter, whether civil, criminal, administrative or investigative, but the omission so to notify the Company will not relieve it from any liability that it may have to Indemnitee if such omission does not prejudice the Company’s rights. If such omission does prejudice the Company’s rights, the Company will be relieved from liability only to the extent of such prejudice. Notwithstanding the foregoing, such omission will not relieve the Company from any liability that it may have to Indemnitee otherwise than under this Agreement. With respect to any Proceeding as to which Indemnitee notifies the Company of the commencement thereof:

(a) The Company will be entitled to participate therein at its own expense; and

(b) The Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee; provided, however, that the Company shall not be entitled to assume the defense of any Proceeding if there has been a Change in Control or if Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee with respect to such Proceeding. After notice from the Company to Indemnitee of its election to assume

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INDEMNIFICATION AGREEMENT

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the defense thereof, the Company will not be liable to Indemnitee under this Agreement for any Expenses subsequently incurred by Indemnitee in connection with the defense thereof, other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ Indemnitee’s own counsel in such Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of Indemnitee unless:

(i) the employment of counsel by Indemnitee has been authorized by the Company;

(ii) Indemnitee shall have reasonably concluded that counsel engaged by the Company may not adequately represent Indemnitee due to, among other things, actual or potential differing interests; or

(iii) the Company shall not in fact have employed counsel to assume the defense in such Proceeding or shall not in fact have assumed such defense and be acting in connection therewith with reasonable diligence; in each of which cases the fees and expenses of such counsel shall be at the expense of the Company.

(c) The Company shall not settle any Proceeding in any manner that would impose any penalty or limitation on Indemnitee without Indemnitee’s written consent; provided, however, that Indemnitee will not unreasonably withhold his or her consent to any proposed settlement.

15. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, (b) delivered by facsimile with telephone confirmation of receipt or (c) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:

(i) If to Indemnitee, to the address or facsimile number set forth on the signature page hereto.

(ii) If to the Company, to:

ArcSoft, Inc.

46601 Fremont Boulevard

Fremont, CA 94538

Attn: Corporate Secretary

or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

16. Nonexclusivity. The rights of Indemnitee hereunder shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under applicable law, the Company’s Certificate of Incorporation or bylaws, or any agreements, vote of stockholders, resolution of the Board of Directors or otherwise, and to the extent that during the Indemnification Period the rights of the then existing directors and officers are more favorable to such directors or officers than the rights currently provided to Indemnitee thereunder or under this Agreement, Indemnitee shall be entitled to the full benefits of such more favorable rights.

17. Certain Definitions.

(a) “Agent” shall mean any person who is or was, or who has consented to serve as, a director, officer, employee, agent, fiduciary, joint venturer, partner, manager or other official of the Company or a subsidiary or an affiliate of the Company, or any other entity (including without limitation, an employee benefit plan) either at the request of, for the convenience of, or otherwise to benefit the Company or a subsidiary of the Company.

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(b) “Change in Control” shall mean the occurrence of any of the following:

(i) Both (A) any “person” (as defined below) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing at least twenty percent (20%) of the total voting power represented by the Company’s then outstanding voting securities and (B) the beneficial ownership by such person of securities representing such percentage has not been approved by a majority of the “continuing directors” (as defined below);

(ii) Any “person” is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing at least fifty percent (50%) of the total voting power represented by the Company’s then outstanding voting securities;

(iii) A change in the composition of the Board of Directors occurs, as a result of which fewer than two-thirds of the incumbent directors are directors who either (A) had been directors of the Company on the “look-back date” (as defined below) (the “Original Directors”) or (B) were elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority in the aggregate of the Original Directors who were still in office at the time of the election or nomination and directors whose election or nomination was previously so approved (the “continuing directors”);

(iv) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, if such merger or consolidation would result in the voting securities of the Company outstanding immediately prior thereto representing (either by remaining outstanding or by being converted into voting securities of the surviving entity) fifty percent (50%) or less of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or

(v) The stockholders of the Company approve (A) a plan of complete liquidation of the Company or (B) an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.

For purposes of Subsection (i) above, the term “person” shall have the same meaning as when used in Sections 13(d) and 14(d) of the Exchange Act, but shall exclude (x) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or of a parent or subsidiary of the Company or (y) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company.

For purposes of Subsection (iii) above, the term “look-back date” shall mean the later of (x) the Effective Date and (y) the date twenty-four (24) months prior to the date of the event that may constitute a “Change in Control.”

Any other provision of this Section 17(b) notwithstanding, the term “Change in Control” shall not include a transaction, if undertaken at the election of the Company, the result of which is to sell all or substantially all of the assets of the Company to another corporation (the “surviving corporation”); provided that the surviving corporation is owned directly or indirectly by the stockholders of the Company immediately following such transaction in substantially the same proportions as their ownership of the Company’s common stock immediately preceding such transaction; and provided, further, that the surviving corporation expressly assumes this Agreement.

(c) “Disinterested Director” shall mean a director of the Company who is not or was not a party to or otherwise involved in the Proceeding in respect of which indemnification is being sought by Indemnitee.

(d) “Expenses” shall include all direct and indirect costs (including, without limitation, attorneys’ fees, retainers, court costs, transcripts, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, all other disbursements or out-of-pocket expenses

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and reasonable compensation for time spent by Indemnitee for which Indemnitee is otherwise not compensated by the Company or any third party) actually and reasonably incurred in connection with either the investigation, defense, settlement or appeal of a Proceeding or establishing or enforcing a right to indemnification under this Agreement, applicable law or otherwise; provided, however, that “Expenses” shall not include any Liabilities.

(e) “Final Adverse Determination” shall mean that a determination that Indemnitee is not entitled to indemnification shall have been made pursuant to Section 6 hereof and either (1) a final adjudication in the Court of Chancery of the State of Delaware or decision of an arbitrator pursuant to Section 9(a) hereof shall have denied Indemnitee’s right to indemnification hereunder, or (2) Indemnitee shall have failed to file a complaint in a Delaware court or seek an arbitrator’s award pursuant to Section 9(a) for a period of one hundred twenty (120) days after the determination made pursuant to Section 5 hereof.

(f) “Independent Legal Counsel” shall mean a law firm or a member of a firm selected by the Company and approved by Indemnitee (which approval shall not be unreasonably withheld) or, if there has been a Change in Control, selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld), that neither is presently nor in the past five (5) years has been retained to represent: (i) the Company or any of its subsidiaries or affiliates, or Indemnitee or any corporation of which Indemnitee was or is a director, officer, employee or agent, or any subsidiary or affiliate of such a corporation, in any material matter, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Legal Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s right to indemnification under this Agreement.

(g) “Liabilities” shall mean liabilities of any type whatsoever including, but not limited to, any judgments, fines, ERISA excise taxes and penalties, penalties and amounts paid in settlement (including all interest assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties or amounts paid in settlement) of any Proceeding.

(h) “Proceeding” shall mean any threatened, pending or completed action, claim, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative, that is associated with Indemnitee’s being an Agent of the Company.

18. Binding Effect; Duration and Scope of Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. This Agreement shall continue in effect during the Indemnification Period, regardless of whether Indemnitee continues to serve as an Agent.

19. Severability. If any provision or provisions of this Agreement (or any portion thereof) shall be held to be invalid, illegal or unenforceable for any reason whatsoever:

(a) the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby; and

(b) to the fullest extent legally possible, the provisions of this Agreement shall be construed so as to give effect to the intent of any provision held invalid, illegal or unenforceable.

20. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within the State of Delaware, without regard to conflict of laws rules.

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21. Consent to Jurisdiction. The Company and Indemnitee each irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding that arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Delaware.

22. Entire Agreement. This Agreement represents the entire agreement between the parties hereto, and there are no other agreements, contracts or understandings between the parties hereto with respect to the subject matter of this Agreement, except as specifically referred to herein or as provided in Section 16 hereof.

23. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer and Indemnitee has executed this Agreement as of the date first above written.

ARCSOFT, INC.,

a Delaware corporation

By

Print Name

Title

INDEMNITEE

Signature

Print Name

Address

Telephone  

Facsimile

E-mail

ARCSOFT, INC.

INDEMNIFICATION AGREEMENT

9

EX-10.2

Exhibit 10.2

ARCSOFT, INC.

2000 STOCK OPTION PLAN

1. Purposes of this Plan. The purposes of this 2000 Stock Option Plan are to attract, and retain the best available personnel, to provide additional incentive to the Employees of the Company and its Subsidiaries, to promote the success of the Company’s business and to enable the Employees to share in the growth and prosperity of the Company by providing them with an opportunity to purchase stock in the Company.

Options granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options, at the discretion of the Board and as reflected in the terms of the written stock option agreement.

2. Definitions. As used herein, the following definitions shall apply:

(a) “Board” shall mean the Board of Directors of the Company.

(b) “Code” shall mean the Internal Revenue Code of the 1986, as amended.

(c) “Common Stock” shall mean the Common Stock of the Company.

(d) “Company” shall mean ARCSOFT, INC., a California corporation.

(e) “Committee” shall mean the Committee appointed by the Board in accordance with Section 4 of this Plan, if one is appointed.

(f) “Continuous Employment” or “Continuous Status as an Employee” shall mean the absence of any interruption or termination of employment or service as an Employee by or to the Company or any Parent or Subsidiary of the Company which now exists or is hereafter organized or acquired by or acquires the Company. Continuous Employment shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Board or in the event of transfers between locations of the Company or between the Company, its Parent, any of its Subsidiaries or its successors.

(g) “Employee” shall mean any person, including officers and directors, employed by the Company, its Parent, any of its Subsidiaries or its successors; or, for purposes of eligibility for Nonstatutory Stock Options, any person employed by the Company, including officers and directors, or any consultant to, or director of, the Company, or any Parent or Subsidiary of the Company, whether or not such consultant or director is an employee of such entities.

(h) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, or any successor legislation.

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(i) “Incentive Stock Option” shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(j) “Non-Employee Director” shall mean a director who is a “Non-Employee Director,” as such term is defined -under Rule 16b-3 (b)(3)(i) promulgated pursuant to the Exchange Act and any applicable releases and opinions or the Securities and Exchange Commission.

(k) “Nonstatutory Stock Option” shall mean an Option which is not an Incentive Stock Option.

(l) “Option” shall mean a stock option granted pursuant to this Plan.

(m) “Option Agreement” shall mean a written agreement in such form or forms as the Board (subject to the terms and conditions of this Plan) may from time to time approve, evidencing an Option.

(n) “Optioned Stock” shall mean the Common Stock subject to an Option.

(o) “Optionee” shall mean an Employee who is granted an Option.

(p) “Parent” shall mean a “parent corporation,” whether now or hereafter existing, as defined in Sections 424(e) and (g) of the Code.

(q) “Plan” shall mean this 2000 Stock Option Plan, as amended.

(r) “Registration Date” shall mean the effective date of the first registration statement which is filed by the Company and declared effective pursuant to Section 12(g) of the Exchange Act, with respect to any class of the Company’s securities.

(s) “Securities Act” shall mean the Securities Act of 1933, as amended, or any successor legislation.

(t) “Share” or “Shares” shall mean the Common Stock, as adjusted in accordance with Section 11 of this Plan.

(u) “Stock Purchase Agreement” shall mean an agreement in such form or forms as the Board (subject to the terms and conditions of this Plan) may from time to time approve, which is to be executed as a condition of purchasing Optioned Stock upon exercise of an Option.

(v) “Subsidiary” shall mean a subsidiary corporation, whether now or hereafter existing, as defined in Sections 424(f) and (g) of the Code.

3. Stock Subject to this Plan. Subject to the provisions of Section 11 of this Plan, the maximum aggregate number of Shares which may be optioned and sold under this Plan is Four Million (4,000,000) Shares. The Shares may be authorized, but unissued or reacquired

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Shares other than reacquired Shares delivered pursuant to Section 7(c)(iv) hereof as payment of consideration in the exercise of an option.

If (a) an Option should expire or become unexercisable for any reason without having been, exercised in full or (b) if the Company repurchases Shares from the Optionee pursuant to the terms of a Stock Purchase Agreement (provided that the Optionee did not receive benefits of ownership, such as dividends, which would destroy the exemption from the provisions of Section 16(b) of the Exchange Act provided by Rule 16b-3 promulgated pursuant to the Exchange Act), the unpurchased Shares or repurchased Shares, respectively, which were subject thereto shall ‘ unless this Plan shall have been terminated, return to this Plan and become available for other Options under this Plan.

The Company intends that as long as it is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, and is not an investment company registered or required to be registered under the Investment Company Act of 1940, as amended, all offers and sales of Options and Common Stock issuable upon exercise of any Option shall be exempt from registration under the provisions of Section 5 of the Securities Act, and this Plan shall be administered in such a manner so as to preserve such exemption. The Company intends for this Plan to constitute a written compensatory benefit plan within the meaning of Rule 701 (b) of 17 CFR Section 230.701 (“Rule 701”) promulgated by the Securities and Exchange Commission pursuant to the Securities Act. Unless otherwise designated by the Committee at the time an Option is granted, all options granted under this Plan by the Company, and the issuance of any Shares upon exercise thereof, are intended to be granted in reliance on Rule 701.

4. Administration of this Plan.

(a) Procedure. This Plan shall be administered by the Board. The Board may appoint a Committee consisting of two (2) or more members of the Board (or such greater number as is required to qualify for the exemption from the provisions of Section 16(b) of the Exchange Act provided by Rule 16b-3 promulgated pursuant to the Exchange Act) to administer this Plan on behalf of the Board, subject to such terms and conditions as the Board may prescribe. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time, the Board may increase the size of the Committee and appoint additional members of the Board thereto, remove members (with or without cause) and appoint new members of the Board in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and, thereafter, directly administer this Plan. Members of the Board or Committee who are either eligible for Options or have been granted Options may vote on any matters affecting the administration of this Plan or the grant of Options pursuant to this Plan, except that no such member shall act upon the granting of an Option to such person nor shall any such member’s presence at a meeting of the Board of Directors establish the existence of a quorum at any meeting of the Board or the Committee during which action is taken with respect to the granting of an Option to him.

(b) Procedure After Registration Date. Notwithstanding the provisions of subsection 4(a) above, after the Registration Date this Plan shall be administered either by: (i) the fall Board, provided that at all times each member of the Board is a Non-Employee Director; or (ii) a Committee which at all times consists solely of Board members who are Non-Employee

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Directors. After the Registration Date, the Board shall take all action necessary to administer this Plan in accordance with the then-effective provisions of Rule 16b-3 promulgated under the Exchange Act, provided that any amendment to this Plan required for compliance with such provisions shall be made in accordance with Section 13 of this Plan.

(c) Powers of the Board and/or Committee. Subject to the provisions of this Plan, the Committee or the Board, as appropriate, shall have the authority, in its discretion: (i) to grant Incentive Stock Options and Nonstatutory Stock Options; (ii) to determine, upon review of relevant information and in accordance with Section 7 of this Plan, the fair market value per Share; (iii) to determine the exercise price of the Options, which exercise price and type of consideration shall be determined in accordance with Section 7 of this Plan; (iv) to determine the Employees to whom, and the time or times at which, Options shall be granted, and the number of Shares to be subject to each Option; (v) to prescribe, amend and rescind rules and regulations relating to this Plan; (vi) to determine the terms and provisions of each Option Agreement and each Stock Purchase Agreement (each of which need not be identical with the terms of other Option Agreements and Stock Purchase Agreements) and, with the consent of the holder thereof, to modify or amend each Option Agreement and Stock Purchase Agreement; (vii) to determine whether a stock repurchase agreement or other agreement will be required to be executed by any Employee as a condition to the exercise of an Option, and to determine the terms and provisions of any such agreement (which need not be identical with the terms of any other such agreement) and, with the consent of the Optionee, to amend any such agreement; (viii) to interpret this Plan, the Option Agreements, the Stock Purchase Agreements or any agreement entered into with respect to the grant or exercise of Options; (ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board or to take such other actions as may be necessary or appropriate with respect to the Company’s rights pursuant to Options or agreements relating to the grant or exercise thereof, and (x) to make such other determinations and establish such other procedures as it deems necessary or advisable for the administration of this Plan.

(d) Effect of the Board’s or Committee’s Decision. All decisions, determinations and interpretations of the Board or the Committee shall be final and binding on all Optionees and any other holders of Options.

5. Eligibility. Options may be granted only to Employees. An Employee who has been granted an Option may, if such Employee is otherwise eligible, be granted additional Options.

6. Term of Plan. This Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by vote of a majority of the outstanding shares of the Company’s capital stock entitled to vote on the adoption of this Plan. This Plan shall continue in effect for a term of ten (10) years unless sooner terminated in accordance with the terms and provisions of this Plan.

7. Option Price and Consideration.

(a) Exercise Price. The exercise price per Share for the Shares to be issued pursuant to the exercise of an Option shall be such price as is determined by the Board; provided,

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however, that such price shall in no event be less than eighty-five percent (85%) with respect to Nonstatutory Stock Options, and one hundred percent (100%) with respect to Incentive Stock Options, of the fair market value per Share on the date of grant. In the case of an Option granted to an Employee who, at the time the Option is granted, owns stock (as determined under Section 424(d) of the Code) constituting more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its Parent or Subsidiaries, the exercise price per Share shall be no less than one hundred ten percent (I 10%) of the fair market value per Share on the date of grant.

(b) Fair Market Value. The fair market value per Share on the date of grant shall be determined by the Board in its sole discretion, exercised in good faith; provided, however, that where there is a public market for the Common Stock, the fair market value per Share shall be the average of the closing bid and asked prices of the Common Stock on the date of grant, as reported in The Wall Street Journal (or, if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotations (“NASDAQ”) System), or, in the event the Common Stock is listed on a stock exchange or on the NASDAQ System, the fair market value per Share shall be the closing price on the exchange or on the NASDAQ System as of the date of grant of the Option, as reported in The Wall Street Journal.

(c) Payment of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory notes, Shares held by the Optionee for the requisite period necessary to avoid a charge to the Company’s earnings for financial reporting purposes which have a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or any combination of such methods of payment. Subject to subparagraphs (i) through (iv) hereto, utilization of Shares as the method of payment may be completed by either (a) the tender of Shares then held by the Optionee, or (b) the withholding of Shares which would otherwise be issued pursuant to an Option pursuant to broker-dealer sale and remittance procedure described in subparagraph (iii) hereto. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration is deemed to be such as may be reasonably expected to benefit the Company.

(i) If the consideration for the exercise of an Option is a promissory note, it shall be a fall recourse promissory note executed by the Optionee, bearing interest at a rate which shall be sufficient to preclude the imputation of interest under the applicable provisions of the Code. Until such time as the promissory note has been paid in full, the Company may retain the Shares purchased upon exercise of the Option in escrow as security for payment of the promissory note.

(ii) If the consideration for the exercise of an Option is the surrender of previously acquired and owned Shares, the Optionee will be required to make representations and warranties satisfactory to the Company regarding his title to the Shares used to effect the purchase, including, without limitation, representations and warranties that the Optionee has good and marketable title to such Shares free and clear of any and all liens, encumbrances, charges, equities, claims, security interests, options or restrictions and has full power to deliver such Shares without obtaining the consent or approval of any person or governmental authority other

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than those which have already given consent or approval in a form satisfactory to the Company. The value of the Shares used to effect the purchase shall be the fair market value of those Shares as determined by the Board in its sole discretion, exercised in good faith.

(iii) If the consideration for the exercise of an Option is to be paid through a broker-dealer sale and remittance procedure, the Optionee shall provide (1) irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased shares and to remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate option price payable for the purchased Shares plus all applicable Federal and State income and employment taxes required to be withheld by the Company in connection with such purchase and (2) written instructions to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction.

(iv) If an Optionee is permitted to exercise an Option by delivering shares of the Company’s Common Stock, the option agreement covering such Option may include provisions authorizing the Optionee to exercise the Option, in whole or in part, by: (1) delivering whole shares of the Company’s Common Stock previously owned by such Optionee (whether or not acquired through the prior exercise of a stock option) having a fair market value equal to the option price; and/or (2) directing the Company to withhold from the Shares that would otherwise be issued upon exercise of the Option that number of whole Shares having a fair market value equal to the option price. Shares of the Company’s Common Stock so delivered or withheld shall be valued at their fair market value on the date of exercise of the Option, as determined by the Committee and/or the Board, as appropriate. Any balance of the exercise price shall be paid in cash or by check or a promissory note, each in accordance with the terms of this Section 7. Any Shares delivered or withheld in accordance with this provision shall again become available for purposes of this Plan and for Options subsequently granted thereunder to the extent permissible pursuant to Section 3 of this Plan.

8. Options.

(a) Terms and Provisions of Options. As provided in Section 4 of this Plan and subject to any limitations specified herein, the Board and/or Committee shall have the authority to determine the terms and provisions of any Option granted under this Plan or any agreement required to be executed in connection with the grant or exercise of an Option. Each Option granted pursuant to this Plan shall be evidenced by an Option Agreement. Options granted pursuant to this Plan are conditioned upon the Company obtaining any required permit or order from appropriate governmental agencies authorizing the Company to issue such Options and Shares issuable upon exercise thereof

(b) Term of Option. The term of each Option may be up to ten (10) years from the date of grant thereof as determined by the Board upon the grant of the Option and specified in the Option Agreement, except that the term of an Option granted to an Employee who, at the time the Option is granted, owns stock comprising more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its Parent or Subsidiaries, shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement.

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(c) Exercise of Option

(i) Procedure for Exercise; Rights as a Shareholder. Any Option shall be exercisable at such times, in such installments and under such conditions as may be determined by the Board and specified in the Option Agreement, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of this Plan.

An Option may be exercised in accordance with the provisions of this Plan as to all or any portion of the Shares then exercisable under an Option, from time to time during the term of the Option. An Option may not be exercised for a fraction of a Share.

An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company at its principal business office in accordance with the terms of the Option Agreement by the person entitled to exercise the Option and, except when the broker-dealer sale and remittance procedure described in Section 7(c)(iii) hereto is used, full payment for the Shares with respect to which the Option is exercised has been received by the Company, accompanied by an executed Stock Purchase Agreement and any other agreements required by the terms of this Plan and/or the Option Agreement. Full payment may consist of such consideration and method of payment allowable under Section 7 of this Plan. Until the Option is properly exercised in accordance with the terms of this paragraph, no right to vote or receive dividends or any other rights as a stockholder exist with respect to the Optioned Stock. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Option is exercised, except as provided in Section 11 of this Plan.

As soon as practicable after any proper exercise of an Option in accordance with the provisions of this Plan, the Company shall, without transfer or issue tax to the Optionee, deliver to the Optionee at the principal executive office of the Company or such other place as shall be mutually agreed upon between the Company and the Optionee, a certificate or certificates representing the Shares for which the Option shall have been exercised. The time of issuance and delivery of the certificate(s) representing the Shares for which the Option shall have been exercised may be postponed by the Company for such period as may be required by the Company, with reasonable diligence, to comply with any applicable listing requirements of any national or regional securities exchange or any law or regulation applicable to the issuance or delivery of such Shares. No Option may be exercised unless this Plan has been duly approved by the shareholders of the Company in accordance with applicable law. Notwithstanding anything to the contrary herein, the terms of a Stock Purchase Agreement required to be executed and delivered in connection with the exercise of an Option may require the certificate or certificates representing the Shares purchased upon exercise of an Option to be delivered and deposited with the Company as security for the Optionee’s faithful performance of the terms of his Stock Purchase Agreement.

Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of this Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

7

(ii) Termination of Status as an Employee. If an Optionee ceases to serve as an Employee for any reason other than death or disability and thereby terminates his Continuous Status as an Employee, such Optionee shall have the right to exercise the Option at any time within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Board at the time of granting the Option), following the date such Optionee ceases his Continuous Status as an Employee of the Company to the extent that such Optionee was entitled to exercise the Option at the date of such termination; provided, however, that no Option shall be exercisable after the expiration of the term set forth in the Option Agreement. To the extent that such Optionee was not entitled to exercise the Option at the date of such termination, or if such Optionee does not exercise such Option (which such Optionee was entitled to exercise) within the time specified herein, the Option shall terminate.

(iii) Death or Disability of Optionee. If an Optionee ceases to serve as an Employee due to death or disability and thereby terminates his Continuous Status as an Employee, the Option may be exercised at any time within six (6) months following the date of death or termination of employment due to disability, in the case of death, by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, or, in the case of disability, by the Optionee, but in any case only to the extent the Optionee was entitled to exercise the Option at the date of his termination of employment by death or disability; provided, however, that no Option shall be exercisable after the expiration of the Option term set forth in the Option Agreement. To the extent that such Optionee was not entitled to exercise such Option at the date of his termination of employment by death or disability or if such Option is not exercised (to the extent it could be exercised) within the time specified herein, the Option shall terminate.

(iv) Extension of Time to Exercise. Notwithstanding anything to the contrary in this Section 8, the Board may at any time and from time to time prior to the termination of a Nonstatutory Stock Option, with the consent of the Optionee, extend the period of time during which the Optionee may exercise his Nonstatutory Stock Option following the date the Optionee ceases such Optionee’s Continuous Status as an Employee; provided, however, that (1) the maximum period of time during which a Nonstatutory Stock Option shall be exercisable following such termination date shall not exceed an aggregate of six (6) months, (2) the Nonstatutory Stock Option shall not become exercisable after the expiration of the term of such Option as set forth in the Option Agreement as a result of such extension, and (3) notwithstanding any extension of time during which the Nonstatutory Stock Option may be exercised, such Option, unless otherwise amended by the Board, shall only be exercisable to the extent to which the Optionee was entitled to exercise it on the date Optionee ceased Continuous Status as an Employee. To the extent that such Optionee was not entitled to exercise the Option at the date of such termination, or if such Optionee does not exercise an Option which Optionee was entitled to exercise within the time specified herein, the Option shall terminate.

9. Limit on Value of Optioned Stock. No Incentive Stock Option may be granted to an Employee if, as a result of such grant, the aggregate fair market value (determined at the time an Incentive Stock Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year under all incentive stock option plans of the Company, its Parents or its Subsidiaries, if any, exceeds One Hundred Thousand Dollars ($100,000).

8

10. Non-transferability of Options. Options granted under this Plan may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner, either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of the Optionee only by such Optionee.

11. Adjustments Upon Changes in Capitalization or Merger.

(a) Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under this Plan but as to which no Options have yet been granted or which have been returned to this Plan upon cancellation or expiration of an Option or repurchase of shares from an Optionee upon termination of employment or service, as well as the exercise or purchase price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, combination or reclassification of the Common Stock, or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company (other than stock bonuses to Employees, including, without limitation, officers and directors); provided, however, that the conversion of any convertible securities of the Company shall not be deemed to have been effected without the receipt of consideration. Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to this Plan or an Option.

(b) In the event of the merger, consolidation or reorganization of the Company with or into another corporation as a result of which the Company is not the surviving corporation or as a result of which the outstanding Shares are exchanged for or converted into cash or property or securities not of the Company, the Board may (i), make provision for the assumption of all outstanding Options by the successor corporation or a Parent or a Subsidiary thereof, or (ii) declare that outstanding Options shall terminate as of a date fixed by the Board which is at least thirty (30) days after the notice thereof to the Optionee, unless such thirty (30) days period is waived by the Optionee. In the event of a dissolution or liquidation of the Company or the sale of all or substantially all of the assets of the Company, the Company’s outstanding Options shall terminate as to an Optionee upon termination of Continuous Status as an Employee.

(c) No fractional shares of Common Stock shall be issuable on account of any action described in this Section, and the aggregate number of shares into which Shares then covered by the Option, when changed as the result of such action, shall be reduced to the largest number of whole shares resulting from such action, unless the Board, in its sole discretion, shall determine to issue scrip certificates in respect to any fractional shares, which scrip certificates, in such event, shall be in a form and have such terms and conditions as the Board in its discretion shall prescribe.

9

12. Time of Granting Options. The date of grant of an Option shall be the date on which the Board makes the determination granting such Option; provided, however, that if the Board determines that such grant shall be as of some future date, the date of grant shall be such future date. ‘ Notice of the determination shall be given to each Employee to whom an Option is so granted within a reasonable time after the date of such grant.

13. Amendment and Termination of this Plan.

(a) Amendment and Termination. The Board may amend or terminate this Plan from time to time in such respects as the Board may deem advisable and shall make any amendments which may be required so that Options intended to be Incentive Stock Options shall at all times continue to be Incentive Stock Options for the purpose of the Code, except that, without approval of the holders of a majority of the outstanding shares of the Company’s capital stock, no such revision or amendment shall:

(i) Increase the number of Shares subject to this Plan, other than in connection with an adjustment under Section 11 of this Plan;

(ii) Materially change the designation of the class of Employees eligible to be granted Options;

(iii) Remove the administration of this Plan from the Board (other than to the Committee);

(iv) Materially increase the benefits accruing to participants under this Plan; or

(v) Extend the term of this Plan.

(b) Effect of Amendment or Termination. Except as otherwise provided in Section 11, any amendment or termination of this Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Company, which agreement must be in writing and signed by the Optionee and the Company.

14. Conditions Upon Issuance of Shares.

(a) Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, applicable state securities laws, the rules and regulations promulgated thereunder, and the requirement of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b) As a condition to the exercise of an Option, the Board may require the person exercising such Option to execute an agreement with, and/or may require the person exercising such Option to make any representation and warranty to, the Company as may in the

10

judgment of counsel to the Company be required under applicable law or regulation, including but not limited to a representation and warranty that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is appropriate under any of the aforementioned relevant provisions of law.

15. Reservation of Shares. The Company, during the term of this Plan, at all times shall reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of this Plan.

The Company, during the term of this Plan, shall use diligent efforts to seek to obtain from appropriate regulatory agencies any requisite authorization in order to issue and sell such number of Shares as shall be sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain the requisite authorization(s) deemed by the Company’s counsel to be necessary for the lawful issuance and sale of any Shares hereunder, or the inability of the Company to confirm to its satisfaction that any issuance and sale of any Shares hereunder will meet applicable legal requirements, shall relieve the Company of any liability in respect to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

16. Stock Option and Stock Purchase Agreements. Options shall be evidenced by written stock option agreements in such form or forms as the Board shall approve from time to time. Upon the exercise of an Option, the Optionee shall sign and deliver to the Company a Stock Purchase Agreement (if required to be executed and delivered to the Company by an Optionee as a condition to the exercise of an Option) in such form or forms as the Board shall approve from time to time.

17. Shareholder Approval. Continuance of this Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date this Plan is adopted by the Board. If such shareholder approval is obtained at a duly held shareholders’ meeting, it may be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company entitled to vote thereon. All Options granted prior to shareholder approval of this Plan are subject to such approval, and if such approval is not obtained within twelve (12) months before or after the date this Plan is adopted by the Board all such Options shall expire and shall be of no further force or effect.

18. Taxes, Fees, Expenses and Withholding of Taxes.

(a) The Company shall pay all original issue and transfer taxes (but not income taxes, if any) with respect to the grant of Options and/or the issue and transfer of Shares pursuant to the exercise thereof, and all other fees and expenses necessarily incurred by the Company in connection therewith, and will from time to time use diligent efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

(b) The grant of Options hereunder and the issuance of Shares pursuant to the exercise thereof is conditioned upon the Company’s reservation of the right to withhold, in accordance with any applicable law, from any compensation payable to the Optionee any taxes

11

required to be withheld by federal, state or local law as a result of the grant or exercise of such Option or the sale of the Shares issued upon exercise thereof. To the extent that compensation or other amounts, if any, payable to the Optionee are insufficient to pay any taxes required to be so withheld, the Company may, in its sole discretion, require the Optionee, as a condition of the exercise of an Option, to pay in cash to the Company an amount sufficient to cover such tax liability or otherwise to make adequate provision for the Company’s satisfaction of its withholding obligations under federal and state law.

(c) The Board or the Committee may, in its discretion and upon such terms and conditions as it may deem appropriate (including the applicable safe-harbor provisions of SEC Rule 16b-3 and interpretations thereof by the staff of the Securities and Exchange Commission) provide any or all holders of outstanding option grants under this Plan with the election to have the Company withhold, from the shares of Common Stock otherwise issuable upon the exercise of such options, one or more of such shares with an aggregate fair market value equal to the designated percentage (any multiple of 5% specified by the optionee) of the Federal and State income taxes (“Taxes”) incurred in connection with the acquisition of such Shares. In lieu of such direct withholding, one or more optionees may also be granted the right to deliver shares of Common Stock to the Company in satisfaction of such Taxes. The withheld or delivered shares shall be valued at the Fair Market Value on the applicable determination date for such Taxes or such other date required by the applicable safe-harbor provisions of SEC Rule 16b-3.

19. Liability of Company. The Company, its Parent or any Subsidiary which is in existence or hereafter comes into existence shall not be liable to an Optionee or other person if it is determined for any reason by the Internal Revenue Service or any court having jurisdiction that any Options intended to be Incentive Stock Options granted hereunder do not qualify as incentive stock options within the meaning of Section 422 of the Code.

20. Information to Optionee. The Company shall provide without charge at least annually to each Optionee during the period his Option is outstanding a balance sheet and income statement of the Company. In the event that the Company provides annual reports or periodic reports to its shareholders during the period in which an Optionee’s Option is outstanding, the Company shall provide to each Optionee a copy of each such report.

21. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail, as first class, registered or certified mail, with postage and fees prepaid and addressed (i) if to the Company, at its principal place of business, attention: Secretary, or (ii) if to the Optionee at his address as set forth on the signature page of his Option Agreement, or at such other address as either party may from time to time designate in writing to other. It shall be the obligation of each Optionee and each transferee holding Shares purchased upon exercise of an Option to provide the Secretary of the Company, by letter mailed as provided hereinabove, with written notice of his direct mailing address.

22. No Enlargement of Employee Rights. This Plan is purely voluntary on the part of the Company, and the continuance of this Plan shall not be deemed to constitute a contract between the Company and any Employee, or to be consideration for or a condition of the employment or service of any Employee. Nothing contained in this Plan shall be deemed to give

12

any Employee the right to be retained in the employ or service of the Company, its Parent, Subsidiary or a successor corporation, or to interfere with the right of the Company or any such corporations to discharge or retire any Employee at any time with or without cause and with or without notice. No Employee shall have any right to or interest in Options authorized hereunder prior to the grant thereof to such Employee, and upon such grant such Employee shall have only such rights and interests as are expressly provided herein, subject, however, to all applicable provisions of the Company’s Articles of Incorporation, as the same may be amended from time to time.

23. Legends on Certificates.

(a) Federal Law. Unless an appropriate registration statement is filed pursuant to the Securities Act with respect to the Options and Shares issuable under this Plan, each document or certificate representing such Options or Shares shall be endorsed thereon with a legend substantially as follows:

“THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION, THEREOF. NO SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.”

(b) California Legend. If required by the California Commissioner of Corporations, each document or certificate representing the Options or Shares issuable under this Plan shall be endorsed thereon with a legend substantially as follows:

“IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS OPTION, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER’S RULES.”

(c) Additional Legends. Each document or certificate representing the Options or Shares issuable under this Plan shall also contain legends as may be required under applicable blue sky laws or by any Stock Purchase Agreement or other agreement the execution of which is a condition to the exercise of an Option under this Plan.

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24. Availability of Plan. A copy of this Plan shall be delivered to the Secretary of the Company and shall -be shown by him to any eligible person making reasonable inquiry concerning it.

25. Compliance with Exchange Act Rule 16b-3. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3, promulgated pursuant to the Exchange Act, or its successors. To the extent any provision of this Plan or action by the Board or any Committee fails so to comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Board or any Committee.

26. Invalid Provisions. In the event that any provision of this Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein as invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid or unenforceable provision was not contained herein.

27. Applicable Law. This Plan shall be governed by and construed in accordance with the laws of the State of California.

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EX-10.3

Exhibit 10.3

ARCSOFT, INC.

2004 STOCK INCENTIVE PLAN

(Adopted by the Board on             , 2004)

Table of Contents

			Page
SECTION 1. ESTABLISHMENT AND PURPOSE			1
SECTION 2. DEFINITIONS			1
	(a)	“Affiliate”	1
	(b)	“Award”	1
	(c)	“Board of Directors”	1
	(d)	“Change in Control”	1
	(e)	“Code”	2
	(f)	“Committee”	2
	(g)	“Company”	2
	(h)	“Consultant”	3
	(i)	“Employee”	3
	(j)	“Exchange Act”	3
	(k)	“Exercise Price”	3
	(l)	“Fair Market Value”	3
	(m)	“ISO”	3
	(n)	“Nonstatutory Option” or “NSO”	3
	(o)	“Offeree”	4
	(p)	“Option”	4
	(q)	“Optionee”	4
	(r)	“Outside Director”	4
	(s)	“Parent”	4
	(t)	“Participant”	4
	(u)	“Plan”	4
	(v)	“Purchase Price”	4
	(w)	“Restricted Share”	4
	(x)	“Restricted Share Agreement”	4
	(y)	“SAR”	4
	(z)	“SAR Agreement”	4
	(aa)	“Service”	4
	(bb)	“Share”	4
	(cc)	“Stock”	4
	(dd)	“Stock Option Agreement”	4
	(ee)	“Stock Unit”	5
	(ff)	“Stock Unit Agreement”	5
	(gg)	“Subsidiary”	5
SECTION 3. ADMINISTRATION			5
	(a)	Committee Composition	5
	(b)	Committee for Non-Officer Grants	5
	(c)	Committee Procedures	5

ARCSOFT, INC.

2004 STOCK INCENTIVE PLAN

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	(d)	Committee Responsibilities	5
SECTION 4. ELIGIBILITY			7
	(a)	General Rule	7
	(b)	Automatic Grants to Outside Directors	7
	(c)	Ten-Percent Stockholders	8
	(d)	Attribution Rules	8
	(e)	Outstanding Stock	8
SECTION 5. STOCK SUBJECT TO PLAN			8
	(a)	Basic Limitation	8
	(b)	Award Limitation	9
	(c)	Additional Shares	9
SECTION 6. RESTRICTED SHARES			9
	(a)	Restricted Stock Agreement	9
	(b)	Payment for Awards	9
	(c)	Vesting	9
	(d)	Voting and Dividend Rights	10
	(e)	Restrictions on Transfer of Shares	10
SECTION 7. TERMS AND CONDITIONS OF OPTIONS			10
	(a)	Stock Option Agreement	10
	(b)	Number of Shares	10
	(c)	Exercise Price	10
	(d)	Withholding Taxes	10
	(e)	Exercisability and Term	11
	(f)	Exercise of Options	11
	(g)	Effect of Change in Control	11
	(h)	Leaves of Absence	11
	(i)	No Rights as a Stockholder	11
	(j)	Modification, Extension and Renewal of Options	12
	(k)	Restrictions on Transfer of Shares	12
	(l)	Buyout Provisions	12
SECTION 8. PAYMENT FOR SHARES			12
	(a)	General Rule	12
	(b)	Surrender of Stock	12
	(c)	Services Rendered	12
	(d)	Cashless Exercise	13
	(e)	Exercise/Pledge	13
	(f)	Promissory Note	13
	(g)	Other Forms of Payment	13
	(h)	Limitations under Applicable Law	13

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2004 STOCK INCENTIVE PLAN

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SECTION 9. STOCK APPRECIATION RIGHTS			13
	(a)	SAR Agreement	13
	(b)	Number of Shares	13
	(c)	Exercise Price	13
	(d)	Exercisability and Term	13
	(e)	Effect of Change in Control	14
	(f)	Exercise of SARs	14
	(g)	Modification or Assumption of SARs	14
SECTION 10. STOCK UNITS			14
	(a)	Stock Unit Agreement	14
	(b)	Payment for Awards	14
	(c)	Vesting Conditions	14
	(d)	Voting and Dividend Rights	15
	(e)	Form and Time of Settlement of Stock Units	15
	(f)	Death of Recipient	15
	(g)	Creditors’ Rights	15
SECTION 11. ADJUSTMENT OF SHARES			15
	(a)	Adjustments	15
	(b)	Dissolution or Liquidation	16
	(c)	Reorganizations	16
	(d)	Reservation of Rights	17
SECTION 12. DEFERRAL OF AWARDS			17
	(a)	Committee Powers.	17
	(b)	General Rules.	17
SECTION 13. AWARDS UNDER OTHER PLANS			18
SECTION 14. PAYMENT OF DIRECTOR’S FEES IN SECURITIES			18
	(a)	Effective Date	18
	(b)	Elections to Receive NSOs, Restricted Shares or Stock Units	18
	(c)	Number and Terms of NSOs, Restricted Shares or Stock Units	18
SECTION 15. LEGAL AND REGULATORY REQUIREMENTS			18
SECTION 16. WITHHOLDING TAXES			18
	(a)	General	18
	(b)	Share Withholding	19
SECTION 17. OTHER PROVISIONS APPLICABLE TO AWARDS			19
	(a)	Transferability	19
	(b)	Qualifying Performance Criteria	19

ARCSOFT, INC.

2004 STOCK INCENTIVE PLAN

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SECTION 18. NO EMPLOYMENT RIGHTS			20
SECTION 19. DURATION AND AMENDMENTS			20
	(a)	Term of the Plan	20
	(b)	Right to Amend or Terminate the Plan	20
	(c)	Effect of Termination	20
SECTION 20. EXECUTION			21

ARCSOFT, INC.

2004 STOCK INCENTIVE PLAN

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ArcSoft, INC.

2004 STOCK INCENTIVE PLAN

SECTION 1. ESTABLISHMENT AND PURPOSE.

The Plan was adopted by the Board of Directors on August 11, 2004, effective as of the date of the initial offering of Stock to the public pursuant to a registration statement filed by the Company with the Securities and Exchange Commission (the “Effective Date”). The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of restricted shares, stock units, options (which may constitute incentive stock options or nonstatutory stock options) or stock appreciation rights.

SECTION 2. DEFINITIONS.

(a) “Affiliate” shall mean any entity other than a Subsidiary, if the Company and/or one of more Subsidiaries own not less than 50% of such entity.

(b) “Award” shall mean any award of an Option, a SAR, a Restricted Share or a Stock Unit under the Plan.

(c) “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time.

(d) “Change in Control” shall mean the occurrence of any of the following events:

(i) A change in the composition of the Board of Directors occurs, as a result of which fewer than one-half of the incumbent directors are directors who either:

(A) Had been directors of the Company on the “look-back date” (as defined below) (the “original directors”); or

(B) Were elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority of the aggregate of the original directors who were still in office at the time of the election or nomination and the directors whose election or nomination was previously so approved (the “continuing directors”); or

(ii) Any “person” (as defined below) who by the acquisition or aggregation of securities, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange

ARCSOFT, INC.

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Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the “Base Capital Stock”); except that any change in the relative beneficial ownership of the Company’s securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person’s ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person’s beneficial ownership of any securities of the Company; or

(iii) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity; or

(iv) The sale, transfer or other disposition of all or substantially all of the Company’s assets.

For purposes of subsection (d)(i) above, the term “look-back” date shall mean the later of (1) the Effective Date or (2) the date 24 months prior to the date of the event that may constitute a Change in Control.

For purposes of subsection (d)(ii)) above, the term “person” shall have the same meaning as when used in Sections 13(d) and 14(d) of the Exchange Act but shall exclude (1) a trustee or other fiduciary holding securities under an employee benefit plan maintained by the Company or a Parent or Subsidiary and (2) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the Stock.

Any other provision of this Section 2(d) notwithstanding, a transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction, and a Change in Control shall not be deemed to occur if the Company files a registration statement with the Securities and Exchange Commission for the initial offering of Stock to the public.

(e) “Code” shall mean the Internal Revenue Code of 1986, as amended.

(f) “Committee” shall mean the Compensation Committee as designated by the Board of Directors, which is authorized to administer the Plan, as described in Section 3 hereof.

(g) “Company” shall mean ArcSoft, Inc.

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(h) “Consultant” shall mean a consultant or advisor who provides bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor or a member of the board of directors of a Parent or a Subsidiary who is not an Employee.

(i) “Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.

(j) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(k) “Exercise Price” shall mean, in the case of an Option, the amount for which one Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. “Exercise Price,” in the case of a SAR, shall mean an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Share in determining the amount payable upon exercise of such SAR.

(l) “Fair Market Value” with respect to a Share, shall mean the market price of one Share, determined by the Committee as follows:

(i) If the Stock was traded over-the-counter on the date in question but was not traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last transaction price quoted for such date by the OTC Bulletin Board or, if not so quoted, shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which the Stock is quoted or, if the Stock is not quoted on any such system, by the Pink Sheets LLC;

(ii) If the Stock was traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last reported sale price quoted for such date by The Nasdaq Stock Market;

(iii) If the Stock was traded on a United States stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported for such date by the applicable composite-transactions report; and

(iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate.

In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons.

(m) “ISO” shall mean an employee incentive stock option described in Section 422 of the Code.

(n) “Nonstatutory Option” or “NSO” shall mean an employee stock option that is not an ISO.

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(o) “Offeree” shall mean an individual to whom the Committee has offered the right to acquire Shares under the Plan (other than upon exercise of an Option).

(p) “Option” shall mean an ISO or Nonstatutory Option granted under the Plan and entitling the holder to purchase Shares.

(q) “Optionee” shall mean an individual or estate who holds an Option or SAR.

(r) “Outside Director” shall mean a member of the Board of Directors who is not a common-law employee of, or paid consultant to, the Company, a Parent or a Subsidiary.

(s) “Parent” shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be a Parent commencing as of such date.

(t) “Participant” shall mean an individual or estate who holds an Award.

(u) “Plan” shall mean this 2004 Stock Incentive Plan of ArcSoft, Inc., as amended from time to time.

(v) “Purchase Price” shall mean the consideration for which one Share may be acquired under the Plan (other than upon exercise of an Option), as specified by the Committee.

(w) “Restricted Share” shall mean a Share awarded under the Plan.

(x) “Restricted Share Agreement” shall mean the agreement between the Company and the recipient of a Restricted Share which contains the terms, conditions and restrictions pertaining to such Restricted Shares.

(y) “SAR” shall mean a stock appreciation right granted under the Plan.

(z) “SAR Agreement” shall mean the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR.

(aa) “Service” shall mean service as an Employee, Consultant or Outside Director.

(bb) “Share” shall mean one share of Stock, as adjusted in accordance with Section 8 (if applicable).

(cc) “Stock” shall mean the Common Stock of the Company.

(dd) “Stock Option Agreement” shall mean the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his Option.

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(ee) “Stock Unit” shall mean a bookkeeping entry representing the equivalent of one Share, as awarded under the Plan.

(ff) “Stock Unit Agreement” shall mean the agreement between the Company and the recipient of a Stock Unit which contains the terms, conditions and restrictions pertaining to such Stock Unit.

(gg) “Subsidiary” shall mean any corporation, if the Company and/or one or more other Subsidiaries own not less than 50% of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

SECTION 3. ADMINISTRATION.

(a) Committee Composition. The Plan shall be administered by the Committee. The Committee shall consist of two or more directors of the Company, who shall be appointed by the Board. In addition, the composition of the Committee shall satisfy (i) such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and (ii) such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under Section 162(m)(4)(C) of the Code.

(b) Committee for Non-Officer Grants. The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not satisfy the requirements of Section 3(a), who may administer the Plan with respect to Employees who are not considered officers or directors of the Company under Section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and may determine all terms of such grants. Within the limitations of the preceding sentence, any reference in the Plan to the Committee shall include such committee or committees appointed pursuant to the preceding sentence. The Board of Directors may also authorize one or more officers of the Company to designate Employees, other than officers under Section 16 of the Exchange Act, to receive Awards and/or to determine the number of such Awards to be received by such persons; provided, however, that the Board of Directors shall specify the total number of Awards that such officers may so award.

(c) Committee Procedures. The Board of Directors shall designate one of the members of the Committee as chairman. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee.

(d) Committee Responsibilities. Subject to the provisions of the Plan, the Committee shall have full authority and discretion to take the following actions:

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(i) To interpret the Plan and to apply its provisions;

(ii) To adopt, amend or rescind rules, procedures and forms relating to the

Plan;

(iii) To authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan;

(iv) To determine when Awards are to be granted under the Plan;

(v) To select the Offerees and Optionees;

(vi) To determine the number of Shares to be made subject to each Award;

(vii) To prescribe the terms and conditions of each Award, including (without limitation) the Exercise Price and Purchase Price, and the vesting or duration of the Award (including accelerating the vesting of Awards, either at the time of the Award or thereafter, without the consent of the Participant), to determine whether an Option is to be classified as an ISO or as a Nonstatutory Option, and to specify the provisions of the agreement relating to such Award;

(viii) To amend any outstanding Award agreement, subject to applicable legal restrictions and to the consent of the Participant if the Participant’s rights or obligations would be materially impaired;

(ix) To prescribe the consideration for the grant of each Award or other right under the Plan and to determine the sufficiency of such consideration;

(x) To determine the disposition of each Award or other right under the Plan in the event of a Participant’s divorce or dissolution of marriage;

(xi) To determine whether Awards under the Plan will be granted in replacement of other grants under an incentive or other compensation plan of an acquired business;

(xii) To correct any defect, supply any omission, or reconcile any inconsistency in the Plan or any Award agreement;

(xiii) To establish or verify the extent of satisfaction of any performance goals or other conditions applicable to the grant, issuance, exercisability, vesting and/or ability to retain any Award; and

(xiv) To take any other actions deemed necessary or advisable for the administration of the Plan.

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Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of or the granting of Options or other rights under the Plan to persons subject to Section 16 of the Exchange Act. All decisions, interpretations and other actions of the Committee shall be final and binding on all Offerees, all Optionees, and all persons deriving their rights from an Offeree or Optionee. No member of the Committee shall be liable for any action that he has taken or has failed to take in good faith with respect to the Plan, any Option, or any right to acquire Shares under the Plan.

SECTION 4. ELIGIBILITY.

(a) General Rule. Only Employees shall be eligible for the grant of ISOs. Only Employees, Consultants and Outside Directors shall be eligible for the grant of Restricted Shares, Stock Units, Nonstatutory Options or SARs.

(b) Automatic Grants to Outside Directors.

(i) Each Outside Director who first joins the Board of Directors on or after the Effective Date, and who was not previously an Employee, shall receive a Nonstatutory Option, subject to approval of the Plan by the Company’s stockholders, to purchase [            ] Shares (subject to adjustment under Section 11) on the date of his or her election to the Board of Directors. The number of Shares in the immediately preceding sentence shall be increased to [            ] in the case of an Outside Director who joins the Board as Chairman. Twenty-five percent (25%) of the Shares subject to each Option granted under this Section 4(b)(i) shall vest and become exercisable on the first anniversary of the date of grant. The balance of the Shares subject to such Option (i.e. the remaining seventy-five percent (75%)) shall vest and become exercisable in twelve calendar quarter installments over a three-year period beginning on the day which is three months after the first anniversary of the date of grant, at a calendar quarterly rate of 6.25% of the total number of Shares subject to such Options. Notwithstanding the foregoing, each such Option shall become vested if a Change in Control occurs with respect to the Company during the Optionee’s Service.

(ii) On the first business day following the conclusion of each regular annual meeting of the Company’s stockholders, commencing with the annual meeting occurring after the Effective Date, each Outside Director who was not elected to the Board for the first time at such meeting and who will continue serving as a member of the Board of Directors thereafter shall receive an Option to purchase [            ] Shares (subject to adjustment under Section 11), provided that such Outside Director has served on the Board of Directors for at least six months. Each Option granted under this Section 4(b)(ii) shall vest and become exercisable as to 50% of the Shares subject to the Option on the first anniversary of the date of grant (or immediately prior to the next regular annual meeting of the Company’s stockholders following the date of grant in the event such meeting occurs prior to the first anniversary date), and as to the remaining 50% of the Shares subject to the Option on the second anniversary of the date of grant (or immediately

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prior to the second regular annual meeting of the Company’s stockholders following the date of grant in the event such meeting occurs prior to the second anniversary date). Notwithstanding the foregoing, each Option granted under this Section 4(b)(ii) shall become vested if a Change in Control occurs with respect to the Company during the Optionee’s Service.

(iii) The Exercise Price of all Nonstatutory Options granted to an Outside Director under this Section 4(b) shall be equal to 100% of the Fair Market Value of a Share on the date of grant, payable in one of the forms described in Section 8(a), (b) or (d).

(iv) All Nonstatutory Options granted to an Outside Director under this Section 4(b) shall terminate on the earlier of (A) the day before the tenth anniversary of the date of grant of such Options or (B) the date twelve months after the termination of such Outside Director’s Service for any reason; provided, however, that any such Options that are not vested upon the termination of the Outside Director’s Service for any reason shall terminate immediately and may not be exercised.

(c) Ten-Percent Stockholders. An Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, a Parent or Subsidiary shall not be eligible for the grant of an ISO unless such grant satisfies the requirements of Section 422(c)(5) of the Code.

(d) Attribution Rules. For purposes of Section 4(c) above, in determining stock ownership, an Employee shall be deemed to own the stock owned, directly or indirectly, by or for such Employee’s brothers, sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its stockholders, partners or beneficiaries.

(e) Outstanding Stock. For purposes of Section 4(c) above, “outstanding stock” shall include all stock actually issued and outstanding immediately after the grant. “Outstanding stock” shall not include shares authorized for issuance under outstanding options held by the Employee or by any other person.

SECTION 5. STOCK SUBJECT TO PLAN.

(a) Basic Limitation. Shares offered under the Plan shall be authorized but unissued Shares or treasury Shares. The aggregate number of Shares authorized for issuance as Awards under the Plan shall not exceed [            ] Shares, plus an annual increase on the first day of each fiscal year during the term of the Plan, beginning January 1, [2006], in each case in an amount equal to the lesser of (i) [                    ] Shares, (ii) [    %] of the outstanding Shares on the last day of the immediately preceding year, or (iii) an amount determined by the Board. The limitations of this Section 5(a) shall be subject to adjustment pursuant to Section 11. The number of Shares that are subject to Options or other Awards outstanding at any time under the Plan shall not exceed the number of Shares which then remain available for issuance under the Plan.

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The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan.

(b) Award Limitation. Subject to the provisions of Section 11, no Participant may receive Options, SARs, Restricted Shares or Stock Units under the Plan in any calendar year that relate to more than [                    ] Shares. The aggregate number of Shares issued pursuant to ISOs shall not exceed the aggregate number of Shares authorized for issuance as Awards under the Plan pursuant to Section 5(a), subject to adjustment pursuant to Sections 5(c) and 11 only to the extent that such adjustment is consistent with adjustments permitted of a plan authorizing ISOs under Section 422 of the Code.

(c) Additional Shares. If Restricted Shares or Shares issued upon the exercise of Options are forfeited, then such Shares shall again become available for Awards under the Plan. If Stock Units, Options or SARs are forfeited or terminate for any other reason before being exercised, then the corresponding Shares shall again become available for Awards under the Plan. If Stock Units are settled, then only the number of Shares (if any) actually issued in settlement of such Stock Units shall reduce the number available under Section 5(a) and the balance shall again become available for Awards under the Plan. If SARs are exercised, then only the number of Shares (if any) actually issued in settlement of such SARs shall reduce the number available in Section 5(a) and the balance shall again become available for Awards under the Plan.

SECTION 6. RESTRICTED SHARES.

(a) Restricted Stock Agreement. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Stock Agreement between the recipient and the Company. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements entered into under the Plan need not be identical.

(b) Payment for Awards. Subject to the following sentence, Restricted Shares may be sold or awarded under the Plan for such consideration as the Committee may determine, including (without limitation) cash, cash equivalents, full-recourse promissory notes, past services and future services. To the extent that an Award consists of newly issued Restricted Shares, the Award recipient shall furnish consideration with a value not less than the par value of such Restricted Shares in the form of cash, cash equivalents, or past services rendered to the Company (or a Parent or Subsidiary), as the Committee may determine.

(c) Vesting. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock Agreement. A Restricted Stock Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events. The Committee may determine, at the time of granting Restricted Shares of thereafter, that all or part of such

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Restricted Shares shall become vested in the event that a Change in Control occurs with respect to the Company.

(d) Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other stockholders. A Restricted Stock Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid.

(e) Restrictions on Transfer of Shares. Restricted Shares shall be subject to such rights of repurchase, rights of first refusal or other restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Restricted Stock Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares.

SECTION 7. TERMS AND CONDITIONS OF OPTIONS.

(a) Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee’s other compensation.

(b) Number of Shares. Each Stock Option Agreement shall specify the number of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 11.

(c) Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price of an ISO shall not be less than 100% of the Fair Market Value of a Share on the date of grant, except as otherwise provided in 4(c), and the Exercise Price of an NSO shall not be less 85% of the Fair Market Value of a Share on the date of grant. Notwithstanding the foregoing, a Stock Option Agreement may specify that the exercise price of an NSO may vary in accordance with a predetermined formula. Subject to the foregoing in this Section 7(c), the Exercise Price under any Option shall be determined by the Committee at its sole discretion. The Exercise Price shall be payable in one of the forms described in Section 8.

(d) Withholding Taxes. As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such exercise. The Optionee shall also make such arrangements as the Committee may require for the

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satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option.

(e) Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10 years from the date of grant (five years for Employees described in Section 4(c)). A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability, or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s Service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. Subject to the foregoing in this Section 7(e), the Committee at its sole discretion shall determine when all or any installment of an Option is to become exercisable and when an Option is to expire.

(f) Exercise of Options. Upon Termination of Service. Each Stock Option Agreement shall set forth the extent to which the Optionee shall have the right to exercise the Option following termination of the Optionee’s Service with the Company and its Subsidiaries, and the right to exercise the Option of any executors or administrators of the Optionee’s estate or any person who has acquired such Option(s) directly from the Optionee by bequest or inheritance. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.

(g) Effect of Change in Control. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become exercisable as to all or part of the Shares subject to such Option in the event that a Change in Control occurs with respect to the Company.

(h) Leaves of Absence. An Employee’s Service shall cease when such Employee ceases to be actively employed by, or a Consultant to, the Company (or any subsidiary) as determined in the sole discretion of the Board of Directors. For purposes of Options, Service does not terminate when an Employee goes on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. However, for purposes of determining whether an Option is entitled to ISO status, an Employee’s Service will be treated as terminating 90 days after such Employee went on leave, unless such Employee’s right to return to active work is guaranteed by law or by a contract. Service terminates in any event when the approved leave ends, unless such Employee immediately returns to active work. The Company determines which leaves count toward Service, and when Service terminates for all purposes under the Plan.

(i) No Rights as a Stockholder. An Optionee, or a transferee of an Optionee, shall have no rights as a stockholder with respect to any Shares covered by his Option until the date of

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the issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided in Section 11.

(j) Modification, Extension and Renewal of Options. Within the limitations of the Plan, the Committee may modify, extend or renew outstanding options or may accept the cancellation of outstanding options (to the extent not previously exercised), whether or not granted hereunder, in return for the grant of new Options for the same or a different number of Shares and at the same or a different exercise price, or in return for the grant of the same or a different number of Shares. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, materially impair his or her rights or obligations under such Option.

(k) Restrictions on Transfer of Shares. Any Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares.

(l) Buyout Provisions. The Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish.

SECTION 8. PAYMENT FOR SHARES.

(a) General Rule. The entire Exercise Price or Purchase Price of Shares issued under the Plan shall be payable in lawful money of the United States of America at the time when such Shares are purchased, except as provided in Section 8(b) through Section 8(g) below.

(b) Surrender of Stock. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by surrendering, or attesting to the ownership of, Shares which have already been owned by the Optionee or his representative. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes.

(c) Services Rendered. At the discretion of the Committee, Shares may be awarded under the Plan in consideration of services rendered to the Company or a Subsidiary prior to the award. If Shares are awarded without the payment of a Purchase Price in cash, the Committee shall make a determination (at the time of the award) of the value of the services rendered by the Offeree and the sufficiency of the consideration to meet the requirements of Section 6(b).

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(d) Cashless Exercise. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price.

(e) Exercise/Pledge. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker or lender to pledge Shares, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of the aggregate Exercise Price.

(f) Promissory Note. To the extent that a Stock Option Agreement or Restricted Stock Agreement so provides, payment may be made all or in part by delivering (on a form prescribed by the Company) a full-recourse promissory note. However, the par value of the Common Shares being purchased under the Plan, if newly issued, shall be paid in cash or cash equivalents.

(g) Other Forms of Payment. To the extent that a Stock Option Agreement or Restricted Stock Agreement so provides, payment may be made in any other form that is consistent with applicable laws, regulations and rules.

(h) Limitations under Applicable Law. Notwithstanding anything herein or in a Stock Option Agreement or Restricted Stock Agreement to the contrary, payment may not be made in any form that is unlawful, as determined by the Committee in its sole discretion.

SECTION 9. STOCK APPRECIATION RIGHTS.

(a) SAR Agreement. Each grant of a SAR under the Plan shall be evidenced by a SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee’s other compensation.

(b) Number of Shares. Each SAR Agreement shall specify the number of Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Section 11.

(c) Exercise Price. Each SAR Agreement shall specify the Exercise Price. A SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding.

(d) Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. A SAR Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement or other events and may provide for expiration

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prior to the end of its term in the event of the termination of the Optionee’s service. SARs may be awarded in combination with Options, and such an Award may provide that the SARs will not be exercisable unless the related Options are forfeited. A SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. A SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control.

(e) Effect of Change in Control. The Committee may determine, at the time of granting a SAR or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such SAR in the event that a Change in Control occurs with respect to the Company.

(f) Exercise of SARs. Upon exercise of a SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Shares, (b) cash or (c) a combination of Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Shares subject to the SARs exceeds the Exercise Price.

(g) Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of a SAR shall, without the consent of the holder, materially impair his or her rights or obligations under such SAR.

SECTION 10. STOCK UNITS.

(a) Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the recipient and the Company. Such Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the recipient’s other compensation.

(b) Payment for Awards. To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of the Award recipients.

(c) Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement. A Stock Unit Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events. The Committee may determine, at the time of granting Stock Units or thereafter, that all or part of

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2004 STOCK INCENTIVE PLAN

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such Stock Units shall become vested in the event that a Change in Control occurs with respect to the Company.

(d) Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions (including without limitation, any forfeiture conditions) as the Stock Units to which they attach.

(e) Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Shares or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Section 11.

(f) Death of Recipient. Any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient’s death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s estate.

(g) Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Agreement.

SECTION 11. ADJUSTMENT OF SHARES.

(a) Adjustments. In the event of a subdivision of the outstanding Stock, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the price of Shares, a combination or consolidation of

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the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of:

(i) The number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Section 5;

(ii) The limitations set forth in Sections 5(a) and (b);

(iii) The number of NSOs to be granted to Outside Directors under Section 4(b);

(iv) The number of Shares covered by each outstanding Option and SAR;

(v) The Exercise Price under each outstanding Option and SAR; or

(vi) The number of Stock Units included in any prior Award which has not yet been settled.

Except as provided in this Section 11, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class.

(b) Dissolution or Liquidation. To the extent not previously exercised or settled, Options, SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Company.

(c) Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Awards shall be subject to the agreement of merger or reorganization. Such agreement shall provide for:

(i) The continuation of the outstanding Awards by the Company, if the Company is a surviving corporation;

(ii) The assumption of the outstanding Awards by the surviving corporation or its parent or subsidiary;

(iii) The substitution by the surviving corporation or its parent or subsidiary of its own awards for the outstanding Awards;

(iv) Full exercisability or vesting and accelerated expiration of the outstanding Awards; or

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(v) Settlement of the full value of the outstanding Awards in cash or cash equivalents followed by cancellation of such Awards.

(d) Reservation of Rights. Except as provided in this Section 11, an Optionee or Offeree shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets.

SECTION 12. DEFERRAL OF AWARDS.

(a) Committee Powers. The Committee (in its sole discretion) may permit or require a Participant to:

(i) Have cash that otherwise would be paid to such Participant as a result of the exercise of a SAR or the settlement of Stock Units credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company’s books;

(ii) Have Shares that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR converted into an equal number of Stock Units; or

(iii) Have Shares that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR or the settlement of Stock Units converted into amounts credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company’s books. Such amounts shall be determined by reference to the Fair Market Value of such Shares as of the date when they otherwise would have been delivered to such Participant.

(b) General Rules. A deferred compensation account established under this Section 12 may be credited with interest or other forms of investment return, as determined by the Committee. A Participant for whom such an account is established shall have no rights other than those of a general creditor of the Company. Such an account shall represent an unfunded and unsecured obligation of the Company and shall be subject to the terms and conditions of the applicable agreement between such Participant and the Company. If the deferral or conversion of Awards is permitted or required, the Committee (in its sole discretion) may establish rules, procedures and forms pertaining to such Awards, including (without limitation) the settlement of deferred compensation accounts established under this Section 12.

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SECTION 13. AWARDS UNDER OTHER PLANS.

The Company may grant awards under other plans or programs. Such awards may be settled in the form of Shares issued under this Plan. Such Shares shall be treated for all purposes under the Plan like Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Shares available under Section 5.

SECTION 14. PAYMENT OF DIRECTOR’S FEES IN SECURITIES.

(a) Effective Date. No provision of this Section 14 shall be effective unless and until the Board has determined to implement such provision.

(b) Elections to Receive NSOs, Restricted Shares or Stock Units. An Outside Director may elect to receive his or her annual retainer payments and/or meeting fees from the Company in the form of cash, NSOs, Restricted Shares or Stock Units, or a combination thereof, as determined by the Board. Such NSOs, Restricted Shares and Stock Units shall be issued under the Plan. An election under this Section 14 shall be filed with the Company on the prescribed form.

(c) Number and Terms of NSOs, Restricted Shares or Stock Units. The number of NSOs, Restricted Shares or Stock Units to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the Board. The terms of such NSOs, Restricted Shares or Stock Units shall also be determined by the Board.

SECTION 15. LEGAL AND REGULATORY REQUIREMENTS.

Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations and the regulations of any stock exchange on which the Company’s securities may then be listed, and the Company has obtained the approval or favorable ruling from any governmental agency which the Company determines is necessary or advisable. The Company shall not be liable to a Participant or other persons as to: (a) the non-issuance or sale of Shares as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares under the Plan; and (b) any tax consequences expected, but not realized, by any Participant or other person due to the receipt, exercise or settlement of any Award granted under the Plan.

SECTION 16. WITHHOLDING TAXES.

(a) General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The

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Company shall not be required to issue any Shares or make any cash payment under the Plan until such obligations are satisfied.

(b) Share Withholding. The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Shares that he or she previously acquired. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. In no event may a Participant have Shares withheld that would otherwise be issued to him or her in excess of the number necessary to satisfy the legally required minimum tax withholding.

SECTION 17. OTHER PROVISIONS APPLICABLE TO AWARDS.

(a) Transferability. Unless the agreement evidencing an Award (or an amendment thereto authorized by the Committee) expressly provides otherwise, no Award granted under this Plan, nor any interest in such Award, may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner (prior to the vesting and lapse of any and all restrictions applicable to Shares issued under such Award), other than by will or the laws of descent and distribution; provided, however, that an ISO may be transferred or assigned only to the extent consistent with Section 422 of the Code. Any purported assignment, transfer or encumbrance in violation of this Section 17(a) shall be void and unenforceable against the Company.

(b) Qualifying Performance Criteria. The number of Shares or other benefits granted, issued, retainable and/or vested under an Award may be made subject to the attainment of performance goals for a specified period of time relating to one or more of the following performance criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit or Subsidiary, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group or index, in each case as specified by the Committee in the Award: (a) cash flow, (b) earnings per share, (c) earnings before interest, taxes and amortization, (d) return on equity, (e) total stockholder return, (f) share price performance, (g) return on capital, (h) return on assets or net assets, (i) revenue, (j) income or net income, (k) operating income or net operating income, (l) operating profit or net operating profit, (m) operating margin or profit margin, (n) return on operating revenue, (o) return on invested capital, or (p) market segment shares (“Qualifying Performance Criteria”). The Committee may appropriately adjust any evaluation of performance under a Qualifying Performance Criteria to exclude any of the following events that occurs during a performance period: (i) asset write-downs, (ii) litigation or claim judgments or settlements, (iii) the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results, (iv) accruals for reorganization and restructuring programs and (v) any extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in managements’ discussion and analysis of financial condition and results of operations appearing in the Company’s annual report to stockholders for

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the applicable year. If applicable, the Committee shall determine the Qualifying Performance Criteria not later than the 90^th day of the performance period, and shall determine and certify, for each Participant, the extent to which the Qualifying Performance Criteria have been met. The Committee may not in any event increase the amount of compensation payable under the Plan upon the attainment of a Qualifying Performance Goal to a Participant who is a “covered employee” within the meaning of Section 162(m) of the Code.

SECTION 18. NO EMPLOYMENT RIGHTS.

No provision of the Plan, nor any right or Option granted under the Plan, shall be construed to give any person any right to become, to be treated as, or to remain an Employee. The Company and its Subsidiaries reserve the right to terminate any person’s Service at any time and for any reason, with or without notice.

SECTION 19. DURATION AND AMENDMENTS.

(a) Term of the Plan. The Plan, as set forth herein, shall terminate automatically on August 10, 2014 and may be terminated on any earlier date pursuant to Subsection (b) below.

(b) Right to Amend or Terminate the Plan. The Board of Directors may amend the Plan at any time and from time to time. Rights and obligations under any Award granted before amendment of the Plan shall not be materially impaired by such amendment, except with consent of the Participant. An amendment of the Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable laws, regulations or rules.

(c) Effect of Termination. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan shall not affect Awards previously granted under the Plan.

[Remainder of this page intentionally left blank]

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SECTION 20. EXECUTION.

To record the adoption of the Plan by the Board of Directors, the Company has caused its authorized officer to execute the same.

ARCSOFT, INC.

By

Name

Title

ARCSOFT, INC.

2004 STOCK INCENTIVE PLAN

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ARCSOFT, INC.

2004 STOCK INCENTIVE PLAN

NOTICE OF STOCK OPTION GRANT

You have been granted the following Option to purchase Common Stock of ARCSOFT, INC. (the “Company”) under the Company’s 2004 Stock Incentive Plan (the “Plan”):

Name of Optionee:	[Name of Optionee]
Total Number of Option Shares Granted:	[Total Number of Shares]
Type of Option:	¨  Incentive Stock Option ¨  Nonstatutory Stock Option
Exercise Price Per Share:	$
Grant Date:	[Date of Grant]
Vesting Commencement Date:	[Vesting Commencement Date]
Vesting Schedule:	This Option becomes exercisable with respect to the first 1/4th of the shares subject to this Option when you complete 12 months of continuous “Service” (as defined in the Plan) from the Vesting Commencement Date. Thereafter, this Option becomes exercisable with respect to an additional 1/48th of the shares subject to this Option when you complete each additional month of Service.
Expiration Date:	[Expiration Date] This Option expires earlier if your Service terminates earlier, as described in the Stock Option Agreement.

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STOCK OPTION AGREEMENT

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By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the term and conditions of the Plan and the Stock Option Agreement, both of which are attached to and made a part of this document.

OPTIONEE:	ARCSOFT, INC.
	By:
Optionee’s Signature
	Title:
Optionee’s Printed Name

ARCSOFT, INC.

STOCK OPTION AGREEMENT

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ARCSOFT, INC.

2004 STOCK INCENTIVE PLAN

STOCK OPTION AGREEMENT

Tax Treatment	This Option is intended to be an incentive stock option under Section 422 of the Internal Revenue Code or a nonstatutory option, as provided in the Notice of Stock Option Grant. Even if this Option is designated as an incentive stock option, it shall be deemed to be an nonstatutory option to the extent required by the $100,000 annual limitation under Section 422(d) of the Internal Revenue Code.
Vesting	This Option becomes exercisable in installments, as shown in the Notice of Stock Option Grant. This Option will in no event become exercisable for additional shares after your Service has terminated for any reason.
Term	This Option expires in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Grant Date, as shown on the Notice of Stock Option Grant (fifth anniversary for a more than 10% stockholder as provided under the Plan if this is an incentive stock option). This Option may expire earlier if your Service terminates, as described below.
Regular Termination	If your Service terminates for any reason except death or “Total and Permanent Disability” (as defined in the Plan), then this Option will expire at the close of business at Company headquarters on the date three (3) months after the date your Service terminates (or, if earlier, the Expiration Date). The Company has discretion to determine when your Service terminates for all purposes of the Plan and its determinations are conclusive and binding on all persons.
Death	If you die, then this Option will expire at the close of business at Company headquarters on the date 12 months after the date your Service terminates (or, if earlier, the Expiration Date). During that period of up to 12 months, your estate or heirs may exercise the Option.
Disability	If your Service terminates because of your Total and Permanent Disability, then this Option will expire at the close of business at Company headquarters on the date 12 months after the date your Service terminates (or, if earlier, the Expiration Date).

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STOCK OPTION AGREEMENT

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Leaves of Absence	For purposes of this Option, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing and if continued crediting of Service is required by the terms of the leave or by applicable law. But your Service terminates when the approved leave ends, unless you immediately return to active work. If you go on a leave of absence, then the vesting schedule specified in the Notice of Stock Option Grant may be adjusted in accordance with the Company’s leave of absence policy or the terms of your leave. If you commence working on a part-time basis, then the vesting schedule specified in the Notice of Stock Option Grant may be adjusted in accordance with the Company’s part-time work policy or the terms of an agreement between you and the Company pertaining to your part-time schedule.
Restrictions on Exercise	The Company will not permit you to exercise this Option if the issuance of shares at that time would violate any law or regulation. The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of the Company stock pursuant to this Option shall relieve the Company of any liability with respect to the non-issuance or sale of the Company stock as to which such approval shall not have been obtained. However, the Company shall use its best efforts to obtain such approval.
Notice of Exercise	When you wish to exercise this Option you must notify the Company by completing the attached “Notice of Exercise of Stock Option” form and filing it with the Human Resources Department of the Company. You notice must specify how many shares you wish to purchase. Your notice must also specify how your shares should be registered. The notice will be effective when it is received by the Company. If someone else wants to exercise this Option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.
Form of Payment	When you submit your notice of exercise, you must include payment of the Option exercise price for the shares you are purchasing. Payment may be made in the following form(s):
	•     Your personal check, a cashier’s check or a money order.

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STOCK OPTION AGREEMENT

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	•     Certificates for shares of Company stock that you own, along with any forms needed to effect a transfer of those shares to the Company. The value of the shares, determined as of the effective date of the Option exercise, will be applied to the Option exercise price. Instead of surrendering shares of Company stock, you may attest to the ownership of those shares on a form provided by the Company and have the same number of shares subtracted from the Option shares issued to you. However, you may not surrender, or attest to the ownership of shares of Company stock in payment of the exercise price if your action would cause the Company to recognize a compensation expense (or additional compensation expense) with respect to this Option for financial reporting purposes.
	•     By delivering on a form approved by the Committee of an irrevocable direction to a securities broker approved by the Company to sell all or part of your Option shares and to deliver to the Company from the sale proceeds in an amount sufficient to pay the Option exercise price and any withholding taxes. The balance of the sale proceeds, if any, will be delivered to you. The directions must be given by signing a special “Notice of Exercise” form provided by the Company.
	•     Irrevocable directions to a securities broker or lender approved by the Company to pledge Option shares as security for a loan and to deliver to the Company from the loan proceeds an amount sufficient to pay the Option exercise price and any withholding taxes. The directions must be given by signing a special “Notice of Exercise” form provided by the Company.
	Notwithstanding the foregoing, payment may not be made in any form that is unlawful, as determined by the Company in its sole discretion.
Withholding Taxes and Stock Withholding	You will not be allowed to exercise this Option unless you make arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the Option exercise. These arrangements may include withholding shares of Company stock that otherwise would be issued to you when you exercise this Option. The value of these shares, determined as of the effective date of the Option exercise, will be applied to the withholding taxes.

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STOCK OPTION AGREEMENT

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Restrictions on Resale

By signing this Agreement, you agree not to sell any Option shares at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale (e.g., a lock-up period after the Company goes public). This restriction will apply as long as you are an employee, consultant or director of the Company or a subsidiary of the Company.

Transfer of Option

In general, only you can exercise this Option prior to your death. You cannot transfer or assign this Option, other than as designated by you by will or by the laws of descent and distribution, except as provided below. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may in any event dispose of this Option in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your Option in any other way. However, if this Option is designated as a nonstatutory stock option in the Notice of Stock Option Grant, then the “Committee” (as defined in the Plan) may, in its sole discretion, allow you to transfer this Option as a gift to one or more family members. For purposes of this Agreement, “family member” means a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law or sister-in-law (including adoptive relationships), any individual sharing your household (other than a tenant or employee), a trust in which one or more of these individuals have more than 50% of the beneficial interest, a foundation in which you or one or more of these persons control the management of assets, and any entity in which you or one or more of these persons own more than 50% of the voting interest. In addition, if this Option is designated as a nonstatutory stock option in the Notice of Stock Option Grant, then the Committee may, in its sole discretion, allow you to transfer this option to your spouse or former spouse pursuant to a domestic relations order in settlement of marital property rights. The Committee will allow you to transfer this Option only if both you and the transferee(s) execute the forms prescribed by the Committee, which include the consent of the transferee(s) to be bound by this Agreement.

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STOCK OPTION AGREEMENT

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Retention Rights	Neither your Option nor this Agreement gives you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at any time, with or without cause.
Stockholder Rights	You, or your estate or heirs, have no rights as a stockholder of the Company until you have exercised this Option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this Option, except as described in the Plan.
Adjustments	In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this Option and the exercise price per share may be adjusted pursuant to the Plan.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions).
The Plan and Other Agreements	The text of the Plan is incorporated in this Agreement by reference. All capitalized terms in the Stock Option Agreement shall have the meanings assigned to them in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superseded. This Agreement may be amended only by another written agreement, signed by both parties.

BY SIGNING THE COVER SHEET OF THIS AGREEMENT,

YOU AGREE TO ALL OF THE TERMS AND CONDITIONS

DESCRIBED ABOVE AND IN THE PLAN.

ARCSOFT, INC.

STOCK OPTION AGREEMENT

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EX-10.4

Exhibit 10.4

ARCSOFT, INC.

2004 EMPLOYEE STOCK PURCHASE PLAN

(Adopted by the Board on                     , 2004)

Table of Contents

		Page
SECTION 1	Purpose Of The Plan	1
SECTION 2	Definitions.	1
(a)	“Accumulation Period”	1
(b)	“Board”	1
(c)	“Code”	1
(d)	“Committee”	1
(e)	“Company”	1
(f)	“Compensation”	1
(g)	“Corporate Reorganization”	1
(h)	“Eligible Employee”	2
(i)	“Exchange Act”	2
(j)	“Fair Market Value”	2
(k)	“IPO”	2
(l)	“Offering Period”	3
(m)	“Participant”	3
(n)	“Participating Company”	3
(o)	“Plan”	3
(p)	“Plan Account”	3
(q)	“Purchase Price”	3
(r)	“Stock”	3
(s)	“Subsidiary”	3
SECTION 3	Administration Of The Plan	3
(a)	Committee Composition	3
(b)	Committee Responsibilities	3
SECTION 4	Enrollment And Participation	3
(a)	Offering Periods	3
(b)	Accumulation Periods	4
(c)	Enrollment	4
(d)	Duration of Participation	4
(e)	Applicable Offering Period	4
SECTION 5	Employee Contributions	5
(a)	Frequency of Payroll Deductions	5
(b)	Amount of Payroll Deductions	5
(c)	Changing Withholding Rate	5
(d)	Discontinuing Payroll Deductions	5
(e)	Limit on Number of Elections	5
SECTION 6	Withdrawal From The Plan	5
(a)	Withdrawal	5

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2004 EMPLOYEE STOCK PURCHASE PLAN

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(b)	Re-enrollment After Withdrawal	6
SECTION 7	Change In Employment Status	6
(a)	Termination of Employment	6
(b)	Leave of Absence	6
(c)	Death	6
SECTION 8	Plan Accounts And Purchase Of Shares	6
(a)	Plan Accounts	6
(b)	Purchase Price	6
(c)	Number of Shares Purchased	7
(d)	Available Shares Insufficient	7
(e)	Issuance of Stock	7
(f)	Unused Cash Balances	7
(g)	Stockholder Approval	7
SECTION 9	Limitations On Stock Ownership	8
(a)	Five Percent Limit	8
(b)	Dollar Limit	8
SECTION 10	Rights Not Transferable	9
SECTION 11	No Rights As An Employee	9
SECTION 12	No Rights As A Stockholder	9
SECTION 13	Securities Law Requirements	9
SECTION 14	Stock Offered Under The Plan	9
(a)	Authorized Shares	9
(b)	Antidilution Adjustments	10
(c)	Reorganizations	10
SECTION 15	Amendment Or Discontinuance	10
SECTION 16	Execution	10

ARCSOFT, INC.

2004 EMPLOYEE STOCK PURCHASE PLAN

-ii-

ARCSOFT, INC.

2004 EMPLOYEE STOCK PURCHASE PLAN

SECTION 1     Purpose Of The Plan.

The Plan was adopted by the Board on August 11, 2004, effective as of the date of the IPO. The purpose of the Plan is to provide Eligible Employees with an opportunity to increase their proprietary interest in the success of the Company by purchasing Stock from the Company on favorable terms and to pay for such purchases through payroll deductions. The Plan is intended to qualify under section 423 of the Code.

SECTION 2    Definitions.

(a) “Accumulation Period” means an approximately six-month period during which contributions may be made toward the purchase of Stock under the Plan, as determined pursuant to Section 4(b), or such other period as the Committee may determine in its sole discretion.

(b) “Board” means the Board of Directors of the Company, as constituted from time to time.

(c) “Code” means the Internal Revenue Code of 1986, as amended.

(d) “Committee” means a the Compensation Committee of the Board, as described in Section 3.

(e) “Company” means ArcSoft, Inc., a Delaware corporation.

(f) “Compensation” means (i) the compensation paid in cash to a Participant by a Participating Company, including salaries, wages, incentive compensation, bonuses, commissions, overtime pay and shift premiums, plus (ii) any pre-tax contributions made by the Participant under section 401(k) or 125 of the Code. “Compensation” shall exclude all non-cash items, moving or relocation allowances, cost-of-living equalization payments, car allowances, tuition reimbursements, imputed income attributable to cars or life insurance, severance pay, fringe benefits, contributions or benefits received under employee benefit plans, income attributable to the exercise of stock options, and similar items. The Committee shall determine whether a particular item is included in Compensation.

(g) “Corporate Reorganization” means:

(i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization in which the Company’s stockholders immediately prior thereto own less than 50% of the voting securities of the Company (or its successor or parent) immediately thereafter; or

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(ii) The sale, transfer or other disposition of all or substantially all of the Company’s assets or the complete liquidation or dissolution of the Company.

(h) “Eligible Employee” means any employee of a Participating Company whose customary employment is for more than five months per calendar year and for more than 20 hours per week.

The foregoing notwithstanding, an individual shall not be considered an Eligible Employee if his or her participation in the Plan is prohibited by the law of any country which has jurisdiction over him or her or if he or she is subject to a collective bargaining agreement that does not provide for participation in the Plan.

(i) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(j) “Fair Market Value” with respect to a share of Stock, shall mean the market price of one share of Stock, determined by the Committee as follows:

(i) If the Stock was traded over-the-counter on the date in question but was not traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last transaction price quoted for such date by the OTC Bulletin Board or, if not so quoted, shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which the Stock is quoted or, if the Stock is not quoted on any such system, by the Pink Sheets LLC;

(ii) If the Stock was traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last reported sale price quoted for such date by The Nasdaq Stock Market;

(iii) If the Stock was traded on a United States stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported for such date by the applicable composite-transactions report; and

(iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate.

In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons.

(k) “IPO” means the initial offering of Stock to the public pursuant to a registration statement filed by the Company with the Securities and Exchange Commission.

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(l) “Offering Period” means an approximately 24-month period with respect to which the right to purchase Stock may be granted under the Plan, as determined pursuant to Section 4(a), or such other period as the Committee may determine in its sole discretion.

(m) “Participant” means an Eligible Employee who elects to participate in the Plan, as provided in Section 4(c).

(n) “Participating Company” means (i) the Company and (ii) each present or future Subsidiary designated by the Board or the Committee as a Participating Company.

(o) “Plan” means this ArcSoft, Inc. 2004 Employee Stock Purchase Plan, as it may be amended from time to time.

(p) “Plan Account” means the account established for each Participant pursuant to Section 8(a).

(q) “Purchase Price” means the price at which Participants may purchase Stock under the Plan, as determined pursuant to Section 8(b).

(r) “Stock” means the Common Stock of the Company.

(s) “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

SECTION 3     Administration Of The Plan.

(a) Committee Composition. The Plan shall be administered by the Committee. The Committee shall consist exclusively of one or more directors of the Company, who shall be appointed by the Board.

(b) Committee Responsibilities. The Committee shall interpret the Plan and make all other policy decisions relating to the operation of the Plan. The Committee may adopt such rules, guidelines and forms as it deems appropriate to implement the Plan. The Committee’s determinations under the Plan shall be final and binding on all persons.

SECTION 4    Enrollment And Participation.

(a) Offering Periods. While the Plan is in effect, two Offering Periods shall commence in each calendar year. The Offering Periods shall consist of 24-month periods, unless otherwise determined by the Committee, commencing on May 5 and November 5 of each year, except that the first Offering Period shall commence on the date of the IPO and end on November 4, 2006, unless otherwise determined by the Committee. The next Offering Period

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shall commence on May 5, 2005 and will end on May 4, 2007. Employees may participate in only one Offering Period at a time.

(b) Accumulation Periods. While the Plan is in effect, two Accumulation Periods shall commence in each calendar year. The Accumulation Periods shall consist of the six-month periods commencing on May 5 and November 5, except that the first Accumulation Period shall commence on the date of the IPO and end on May 4, 2005, unless otherwise determined by the Committee.

(c) Enrollment. Any individual who, on the day preceding the first day of an Offering Period (other than the initial Offering Period), qualifies as an Eligible Employee may elect to become a Participant in the Plan for such Offering Period by executing the enrollment form prescribed for this purpose by the Committee. The enrollment form shall be filed with the Company at the prescribed location not later than 15 days prior to the commencement of such Offering Period. All Eligible Employees shall be automatically enrolled in the initial Offering Period under the Plan.

(d) Duration of Participation. Once enrolled in the Plan, a Participant shall continue to participate in the Plan until he or she ceases to be an Eligible Employee, withdraws from the Plan under Section 6(a) or reaches the end of the Offering Period in which his or her employee contributions were discontinued under Section 5(d) or Section 9(b). A Participant who discontinued employee contributions under Section 5(d) or withdrew from the Plan under Section 6(a) may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Subsection (c) above. A Participant whose employee contributions were discontinued automatically under Section 9(b) shall automatically resume participation at the beginning of the earliest Offering Period ending in the next calendar year, if he or she then is an Eligible Employee.

(e) Applicable Offering Period. For purposes of calculating the purchase price under Section 8(b), the applicable Offering Period shall be determined as follows:

(i) Once a Participant is enrolled in the Plan for an Offering Period, such Offering Period shall continue to apply to him or her until the earliest of: (A) the end of such Offering Period; (B) the end of his or her participation under Subsection (d) above; and (C) re-enrollment in a subsequent Offering Period under Paragraph (ii) below.

(ii) In the event that the Fair Market Value of Stock on the first trading day of the Offering Period in which the Participant is enrolled is higher than on the first trading day of any subsequent Offering Period, the Participant shall automatically be re-enrolled for such subsequent Offering Period.

(iii) When a Participant reaches the end of an Offering Period but his or her participation is to continue, then such Participant shall automatically be re-enrolled for

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the Offering Period that commences immediately after the end of the prior Offering Period.

SECTION 5    Employee Contributions.

(a) Frequency of Payroll Deductions. A Participant may purchase shares of Stock under the Plan solely by means of payroll deductions; provided, however, that in the initial Accumulation Period, Participants may also purchase shares of Stock by making a lump sum cash payment at the end of the Accumulation Period. Payroll deductions, as designated by the Participant pursuant to Subsection (b) below, shall occur on each payday during participation in the Plan.

(b) Amount of Payroll Deductions. An Eligible Employee shall designate on the enrollment form the portion of his or her Compensation that he or she elects to have withheld for the purchase of Stock. Such portion shall be a whole percentage of the Eligible Employee’s Compensation, but not less than 1% nor more than 15%. During the initial Accumulation Period, no payroll deduction will be made unless a Participant timely files the proper form with the Company after a registration statement covering the Stock is filed and effective under the Securities Act of 1933, as amended.

(c) Changing Withholding Rate. If a Participant wishes to change the rate of payroll withholding, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. The new withholding rate shall be effective as soon as reasonably practicable after such form has been received by the Company. The new withholding rate shall be a whole percentage of the Eligible Employee’s Compensation, but not less than 1% nor more than 15%.

(d) Discontinuing Payroll Deductions. If a Participant wishes to discontinue employee contributions entirely, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. Payroll withholding shall cease as soon as reasonably practicable after such form has been received by the Company. In addition, employee contributions may be discontinued automatically pursuant to Section 9(b). A Participant who has discontinued employee contributions may resume such contributions by filing a new enrollment form with the Company at the prescribed location. Payroll withholding shall resume as soon as reasonably practicable after such form has been received by the Company.

(e) Limit on Number of Elections. The Committee may limit the number of elections that a Participant may make under Subsection (c) or (d) above during any Accumulation Period.

SECTION 6    Withdrawal From The Plan.

(a) Withdrawal. A Participant may elect to withdraw from the Plan by filing the prescribed form with the Company at the prescribed location at any time before the last day of an

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Accumulation Period. In addition, in the initial Accumulation Period, Participants may be deemed to withdraw from the Plan by declining or failing to remit timely payment to the Company for the shares of Stock. As soon as reasonably practicable thereafter, payroll deductions shall cease and the entire amount credited to the Participant’s Plan Account shall be refunded to him or her in cash, without interest. No partial withdrawals shall be permitted.

(b) Re-enrollment After Withdrawal. A former Participant who has withdrawn from the Plan shall not be a Participant until he or she re-enrolls in the Plan under Section 4(c). Re-enrollment may be effective only at the commencement of an Offering Period.

SECTION 7    Change In Employment Status.

(a) Termination of Employment. Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under Section 6(a). A transfer from one Participating Company to another shall not be treated as a termination of employment.

(b) Leave of Absence. For purposes of the Plan, employment shall not be deemed to terminate when the Participant goes on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. Employment, however, shall be deemed to terminate 90 days after the Participant goes on a leave, unless a contract or statute guarantees his or her right to return to work. Employment shall be deemed to terminate in any event when the approved leave ends, unless the Participant immediately returns to work.

(c) Death. In the event of the Participant’s death, the amount credited to his or her Plan Account shall be paid to a beneficiary designated by him or her for this purpose on the prescribed form or, if none, to the Participant’s estate. Such form shall be valid only if it was filed with the Company at the prescribed location before the Participant’s death.

SECTION 8    Plan Accounts And Purchase Of Shares.

(a) Plan Accounts. The Company shall maintain a Plan Account on its books in the name of each Participant. Whenever an amount is deducted from the Participant’s Compensation under the Plan, such amount shall be credited to the Participant’s Plan Account. Amounts credited to Plan Accounts shall not be trust funds and may be commingled with the Company’s general assets and applied to general corporate purposes. No interest shall be credited to Plan Accounts.

(b) Purchase Price. The Purchase Price for each share of Stock purchased at the close of an Accumulation Period shall be the lower of:

(i) 85% of the Fair Market Value of such share on the last trading day in such Accumulation Period; or

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(ii) 85% of the Fair Market Value of such share on the first trading day of the applicable Offering Period (as determined under Section 4(e)) or, in the case of the first Offering Period under the Plan, 85% of the price at which one share of Stock is offered to the public in the IPO.

(c) Number of Shares Purchased. As of the last day of each Accumulation Period, each Participant shall be deemed to have elected to purchase the number of shares of Stock calculated in accordance with this Subsection (c), unless the Participant has previously elected to withdraw from the Plan in accordance with Section 6(a). The amount then in the Participant’s Plan Account shall be divided by the Purchase Price, and the number of shares that results shall be purchased from the Company with the funds in the Participant’s Plan Account. The foregoing notwithstanding, no Participant shall purchase more than [            ] shares of Stock with respect to any Accumulation Period nor more than the amounts of Stock set forth in Section 9(b) and Section 14(a). Any fractional share, as calculated under this Subsection (c), shall be rounded down to the next lower whole share. For each Accumulation Period, the Committee shall have the authority to establish additional limits on the number of shares purchasable by each Participant or by all Participants in the aggregate.

(d) Available Shares Insufficient. In the event that the aggregate number of shares that all Participants elect to purchase during an Accumulation Period exceeds the maximum number of shares remaining available for issuance under Section 14(a), then the number of shares to which each Participant is entitled shall be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the number of shares that such Participant has elected to purchase and the denominator of which is the number of shares that all Participants have elected to purchase.

(e) Issuance of Stock. Certificates representing the shares of Stock purchased by a Participant under the Plan shall be issued to him or her as soon as reasonably practicable after the close of the applicable Accumulation Period, except that the Committee may determine that such shares shall be held for each Participant’s benefit by a broker designated by the Committee (unless the Participant has elected that certificates be issued to him or her). Shares may be registered in the name of the Participant or jointly in the name of the Participant and his or her spouse as joint tenants with right of survivorship or as community property.

(f) Unused Cash Balances. An amount remaining in the Participant’s Plan Account that represents the Purchase Price for any fractional share shall be carried over in the Participant’s Plan Account to the next Accumulation Period. Any amount remaining in the Participant’s Plan Account that represents the Purchase Price for whole shares that could not be purchased by reason of Subsection (c) above, Section 9(b) or Section 14(a) shall be refunded to the Participant in cash, without interest.

(g) Stockholder Approval. Any other provision of the Plan notwithstanding, no shares of Stock shall be purchased under the Plan unless and until the Company’s stockholders have approved the adoption of the Plan.

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SECTION 9    Limitations On Stock Ownership.

(a) Five Percent Limit. Any other provision of the Plan notwithstanding, no Participant shall be granted a right to purchase Stock under the Plan if such Participant, immediately after his or her election to purchase such Stock, would own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any parent or Subsidiary of the Company. For purposes of this Subsection (a), the following rules shall apply:

(i) Ownership of stock shall be determined after applying the attribution rules of section 424(d) of the Code;

(ii) Each Participant shall be deemed to own any stock that he or she has a right or option to purchase under this or any other plan; and

(iii) Each Participant shall be deemed to have the right to purchase up to the maximum number of shares of Stock that may be purchased by a Participant under this Plan under the individual limit specified in Section 8(c) with respect to each Accumulation Period.

(b) Dollar Limit. Any other provision of the Plan notwithstanding, no Participant shall purchase Stock with a Fair Market Value in excess of the following limit:

(i) In the case of Stock purchased during an Offering Period that commenced in the current calendar year, the limit shall be equal to (A) $25,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased in the current calendar year (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company).

(ii) In the case of Stock purchased during an Offering Period that commenced in the immediately preceding calendar year, the limit shall be equal to (A) $50,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company) in the current calendar year and in the immediately preceding calendar year.

(iii) In the case of Stock purchased during an Offering Period that commenced in the second preceding calendar year, the limit shall be equal to (A) $75,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company) in the current calendar year and in the two preceding calendar years.

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For purposes of this Subsection (b), the Fair Market Value of Stock shall be determined in each case as of the beginning of the Offering Period in which such Stock is purchased. Employee stock purchase plans not described in section 423 of the Code shall be disregarded. If a Participant is precluded by this Subsection (b) from purchasing additional Stock under the Plan, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Accumulation Period ending in the next calendar year (if he or she then is an Eligible Employee).

SECTION 10    Rights Not Transferable.

The rights of any Participant under the Plan, or any Participant’s interest in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or in any other manner other than by beneficiary designation or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by beneficiary designation or the laws of descent and distribution, then such act shall be treated as an election by the Participant to withdraw from the Plan under Section 6(a).

SECTION 11    No Rights As An Employee.

Nothing in the Plan or in any right granted under the Plan shall confer upon the Participant any right to continue in the employ of a Participating Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Participating Companies or of the Participant, which rights are hereby expressly reserved by each, to terminate his or her employment at any time and for any reason, with or without cause.

SECTION 12    No Rights As A Stockholder.

A Participant shall have no rights as a stockholder with respect to any shares of Stock that he or she may have a right to purchase under the Plan until such shares have been purchased on the last day of the applicable Offering Period.

SECTION 13    Securities Law Requirements.

Shares of Stock shall not be issued under the Plan unless the issuance and delivery of such shares comply with (or are exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company’s securities may then be traded.

SECTION 14    Stock Offered Under The Plan.

(a) Authorized Shares. The maximum aggregate number of shares of Stock available for purchase under the Plan is [                    ] shares, plus an annual increase to be added on the first day of the Company’s fiscal years beginning January 1, 2006 through and including January

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1, 2014, in an amount equal to the lesser of (i) [                    ] shares, (ii) [    %] of the outstanding shares of stock on the last day of the immediately preceding fiscal year, or (iii) an amount determined by the Board. The aggregate number of shares available for purchase under the Plan shall at all times be subject to adjustment pursuant to Section 14.

(b) Antidilution Adjustments. The aggregate number of shares of Stock offered under the Plan, the individual Participant share limitation described in Section 8(c) and the price of shares that any Participant has elected to purchase shall be adjusted proportionately by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, any other increase or decrease in such shares effected without receipt or payment of consideration by the Company, the distribution of the shares of a Subsidiary to the Company’s stockholders or a similar event.

(c) Reorganizations. Any other provision of the Plan notwithstanding, immediately prior to the effective time of a Corporate Reorganization, the Offering Period then in progress shall terminate and shares shall be purchased pursuant to Section 8, unless the Plan is assumed by the surviving corporation or its parent corporation pursuant to the plan of merger or consolidation. The Plan shall in no event be construed to restrict in any way the Company’s right to undertake a dissolution, liquidation, merger, consolidation or other reorganization.

SECTION 15    Amendment Or Discontinuance.

The Board shall have the right to amend, suspend or terminate the Plan at any time and without notice. Except as provided in Section 14, any increase in the aggregate number of shares of Stock to be issued under the Plan shall be subject to approval by a vote of the stockholders of the Company. In addition, any other amendment of the Plan shall be subject to approval by a vote of the stockholders of the Company to the extent required by an applicable law or regulation.

Section 16    Execution.

To record the adoption of the Plan by the Board, the Company has caused its authorized officer to execute the same.

ARCSOFT, INC.

By

Name

Title

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EX-10.5

Exhibit 10.5

AMENDED AND RESTATED

EXECUTIVE EMPLOYMENT AGREEMENT

This Amended and Restated Executive Employment Agreement (the “Agreement”) is entered into as of July 1, 2002 (the “Effective Date”) by and between ArcSoft, Inc., a California corporation (“ArcSoft”), as the employer; and Mr. Michael Hui Deng, an individual (“Executive”), as the employee. ArcSoft and Executive may be referred to collectively in this Agreement as the “Parties”.

RECITALS

A. ArcSoft and Executive entered into an Executive Employment Agreement dated January 1, 1998 (the “Original Agreement”);

B. Executive is the co-founder of ArcSoft and has served as its Chief Executive Officer, President and Board member since 1994;

C. The non-management directors of ArcSoft have noted the unique and singular contribution that the Executive has made to ArcSoft. They have also noted that paramount to ArcSoft’s interest is insuring the Executive’s retention and securing that his skills and abilities remain focused on the continued growth and leadership of ArcSoft. They noted that the vision and energetic commitment that the Executive has demonstrated during his tenure as the above positions has been and continues to be a fundamental and essential asset of ArcSoft. They noted the efforts of the Executive are recognized as profoundly and positively impacting on the long-term value of the shareholders’ interests in ArcSoft. The Executive has left an indelible mark on ArcSoft’s culture and its values. In particular, the directors have also made note of management’s ability to achieve the performance expectations for ArcSoft in both positive and negative market conditions during the past eight years.

D. In recognition of these accomplishments and in order to continue to achieve ambitious goals for the performance of ArcSoft, the Parties modified certain terms of the Original Agreement and added certain other terms to the Original Agreement.

Therefore, in consideration of the promises and the mutual covenants and agreements set forth herein, the Parties agree to enter into this Amended and Restated Employment Agreement as follows:

TERMS AND CONDITIONS

1. Position, Authorities and Responsibilities

(a) Executive shall be employed by ArcSoft as its Chief Executive Officer and President, and member of Board of Directors (“Board”). Executive shall report directly and solely to ArcSoft’s Board. The Board agrees to nominate Executive for election to the Board as a member at each annual shareholders’ meeting. Executive agrees to serve on the Board if elected.

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(b) As Chief Executive Officer and President, Executive shall have duties and responsibilities that are customary to such offices and positions in a California corporation, including general supervision, direction, and control of the business and officers of ArcSoft, subject to the supervision of the Board and its committees (if any, and to the extent the Board has delegated authorities to such committees), and the Bylaws of ArcSoft and California Corporate Law.

(c) All other executive officers and employees of ArcSoft and its subsidiaries shall report directly to Executive or his designees.

(d) Executive shall also have right to appoint or employ and remove or terminate the personnel described in Section 1(c).

(e) Executive acknowledges and agrees that Executive owes a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of Arc Soft, and not to do any act which would injure the business, interests, or reputation of ArcSoft or any of its subsidiaries.

2. Termination of Original Agreement

The Original Agreement shall be terminated and be of no further force and effect as of the Effective Date of this Agreement.

3. Term

The Term of this Agreement and Executive’s employment under this Agreement shall be effective as of the Effective Date and shall continue for a Term ending on June 30, 2006. This Agreement and Executive’s employment shall automatically continue for successive one-year period at the end of the Term, unless either party gives written notice to the other party of its intent to terminate this Agreement and Executive’s employment no later than 180 days prior to the commencement of any such one-year renewal period.

4. Compensation

In consideration of, and in exchange for, the services to be provided by Executive, Executive shall receive the amounts and benefits set for in this Section 4 as of Effective Date of this Agreement unless otherwise specified:

(a) Base Salary Executive’s annual Base Salary shall be $250,000 paid semi-monthly, on ArcSoft’s regular payday (15^th and the last day of each month), less all applicable taxes, social security payments and other items that ArcSoft is required by law to withhold or deduct therefrom. The Base Salary shall be subject to annual review by the Board or its Compensation Committee and may be increased in light of the size and performance of ArcSoft. After any such change, Executive’s new level of Base Salary shall be Executive’s Base Salary for purpose of this Agreement.

(b) Incentive Bonus During the Term of this Agreement, Executive shall receive an Incentive Bonus for each of ArcSoft’s fiscal years ending on June 30^th in an amount equal to 40% of the Base Salary (or the adjusted Base Salary as described in this Section 4(a)). The Incentive Bonus shall be paid within 60 days following the close of each fiscal year. The

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amount payable under this Section 4(b) shall not be subject to the further discretion of ArcSoft Board or its Compensation Committee and shall not be reduced except as specifically provided in this Section 4, or as otherwise mutually agreed by the Parties in writing.

(c) Stock Option Executive shall be eligible to participate in the Stock Option Plans of ArcSoft and any additional or successor plans including any equity plans.

(i) Option Grant Upon execution of this Agreement, in addition to the options Executive now has under the Original Agreement, Executive shall be granted an additional option to purchase ArcSoft’s common stock (the “Stock Option” or “Option”) for a number of equal to 4% of the shares of ArcSoft, on the date of Effective Date of this Agreement, calculated on a fully-diluted basis assuming convertibility of all other forms of security into common stock, including but not limited to the shares owned or controlled by ArcSoft and the amount expected to set aside for option pool for its employees, directors and consultant, pursuant to ArcSoft Stock Option Plan and its amendment, estimated at 31,164,625 shares. The estimated number to be granted to Executive accordingly shall be 1,246,585 shares.

(ii) Option Price The Option shall have an exercise price of 110% of the Fair Market Value of ArcSoft’s stock option price set forth by the Board as of the Effective Date of this Agreement to be qualified as Incentive Stock Option, as long as Executive is still a 10% and more shareholder of ArcSoft.

(iii) Vesting The Option shall be vested in the following schedule, provided that Executive maintains the status of full-time employee of ArcSoft during the Term of this Agreement:

• 50% of the Option shall become vested and fully exercisable on and after the Effective Date of this Agreement;

• 12.5% of the Option shall become vested and fully exercisable on and June 30, 2003;

• 12.5% of the Option shall become vested and fully exercisable on and June 30, 2004;

• 12.5% of the Option shall become vested and fully exercisable on and June 30, 2005;

• 12.5% of the Option shall become vested and fully exercisable on and June 30, 2006.

ArcSoft shall provide financial aid to Executive to subsidize the exercise of all the options that Executive now has under the Original Agreement and the Option under this Agreement, and any option that may be granted to him thereafter.

(iv) Repurchase By mutual written consent, ArcSoft or its successor in the event of Change of Control as defined hereunder will have the right to repurchase the Option and other options Executive now has and may be granted thereafter (and any shares acquired upon exercise of the Option and other options) by paying Executive the Fair Market Value (at the time of repurchase) of the stock covered by the Option, minus the exercise price otherwise paid or payable.

(v) Additional Grants Executive shall also be entitled to additional option grants from time to time upon approval of Board.

5. Other Benefits

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During the Term of this Agreement and for services rendered hereunder, Executive shall also be entitled to receive all other benefits which are, and may be in the future, generally available to members of ArcSoft’s senior management, including but not limited to the followings:

(a) Group Insurance Executive shall be automatically covered by ArcSoft group insurance programs including Health, Dental, Vision, Disability, and Life. Executive’s spouse and children under 18 (or otherwise determined by the plans) can join the insurance programs subject to ArcSoft policies and applicable laws. The premium of such insurance program(s) shall be paid by ArcSoft.

(b) 401(k) and Other Retirement Plans Executive shall be eligible to participate in employee benefit plans maintained by ArcSoft and in other benefits provided by ArcSoft to its employees and senior executives, now and in the future, including 401(k) and other retirement plans, deferred compensation and similar benefits subject to change from time to time at the reasonable discretion of ArcSoft.

(c) Other Benefits Executive shall also be entitled to other benefits provided by ArcSoft to its employees and senior executives from time to time, including but not limited to annual vacation, paid holiday, sick leave, and other similar benefits. Executive shall be entitled to paid vacation up to 4 weeks per calendar year.

(d) Executive Term Life Insurance ArcSoft has purchased and shall continue maintain during the Term of this Agreement a key person term insurance on Executive’s life in the face amount of at least $1,000,000 in the event that Executive dies or becomes Permanently Disabled defined under Section 8(b) during the Term of this Agreement and Executive’s employment hereunder. ArcSoft and the beneficiaries designated by Executive shall each receive half of the proceeds (50%), and ArcSoft shall bear the expense of such insurance policy and be the holder and owner of such policy.

(e) Reimbursement of Other Business Related Expenses ArcSoft agrees to reimburse Executive membership dues and related ongoing costs of appropriate professional organizations.

ArcSoft agrees to make a favorable tax treatment for any tax consequences imposed on Executive in association with any of the benefits described above under the Internal Revenue Code of 1986, as amended (the “Code”), or provide a “Gross-up” payment to cover such taxes. ArcSoft shall borne the charges by an accountant for services thereof.

6. Obligations and Restrictive Covenants

(a) Obligations During the Term of this Agreement and Executive’s employment hereunder, Executive shall devote his substantial business effort and time to ArcSoft and its subsidiaries or affiliates, or through such personnel he shall designate in accordance with the Bylaws of ArcSoft and the laws of California. Executive agrees, during the Term of this Agreement and Executive’s employment hereunder, not to actively engage in any other employment, occupation or consulting activity for any direct or indirect remuneration without prior approval of the Board. This obligation shall not preclude Executive from (i) serving in any capacity with any professional, community, industry, civic, educational or charitable

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organization; (ii) serving as a member of corporate boards of directors, provided that the Board has consented (which consent shall not be unreasonably withheld or delayed), so long as these activities or services do not materially interfere or conflict with Executive’s responsibilities to, or ability to perform his duties of employment by ArcSoft under this Agreement.

(b) Non-Competition; Non-Solicitation The Parties hereto recognize that Executive’s services are unique and the Restrictive Covenants on Executive set forth in this Section 6 are essential to protect the business (including trade secret and other confidential information disclosed by ArcSoft to, learned or developed by Executive during the course of employment by ArcSoft) and good will of ArcSoft. As part of the consideration for the compensation and benefits to be paid to Executive hereunder, Executive agrees that during the Term of this Agreement and employment hereunder, and for a period of 12 months thereafter (the “Covenant Period”), Executive shall not:

(i) Engage in any business similar or related to or competitive with the business conducted by ArcSoft or any of its subsidiaries or affiliates described from time to time in ArcSoft Annual Report to its shareholders and Board (the “Core Business of ArcSoft”);

(ii) Render advice or services to, or otherwise assist, any other person, association, or entity that is engaged, directly or indirectly, in any business similar or related to or competitive with the Core Business of ArcSoft;

(iii) Transact any business in any manner pertaining to suppliers or customers of ArcSoft or any of its subsidiaries affiliates which, in any manner, would have, or is likely to have, an adverse effect upon the Core Business of ArcSoft or any of its subsidiaries affiliates;

(iv) Induce any employee of ArcSoft or any of its subsidiaries affiliates to terminate his or her employment with ArcSoft or any of its subsidiaries affiliates, or hire or assist in the hiring of any such employee by any person or entity not affiliated with, ArcSoft.

For purposes of this Agreement, “affiliate” shall mean any entity which owns or controls, is owned or controlled by, or is under common ownership or control, with ArcSoft.

Notwithstanding the foregoing, if ArcSoft abandons a particular aspect of the Core Business, that is, ceases such aspect of its business with the intention to permanently refrain from such aspect of its business, then this post-employment non-competition covenant shall not apply to such former aspect of ArcSoft’s business.

7. Confidentiality

Executive acknowledges that it is the policy of ArcSoft and its subsidiaries or affiliates to maintain as secret and confidential all valuable and unique information herebefore or hereafter acquired, developed or used by ArcSoft and its subsidiaries relating to the business, operations, employees and customers of ArcSoft and its subsidiaries or affiliates, which information gives ArcSoft and its subsidiaries or affiliates a competitive advantage in the industry, and which information includes technical knowledge, know-how or trade secrets and information concerning the operations, sales, personnel, suppliers, customers, costs, profits, markets, pricing policies, and other confidential materials (the “Confidential Information”).

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(a) Non-Disclosure Executive recognizes that the services to be performed by Executive are special and unique, and that by reason of his duties he will acquire or learn Confidential Information. Executive recognizes that all such Confidential Information is the sole and exclusive property of ArcSoft and its subsidiaries or affiliates. As part of consideration of the compensation and benefits to be paid to Executive under this Agreement, Executive agrees not to disclose the Confidential Information to anyone outside ArcSoft, either during or after the employment by ArcSoft, except as authorized by ArcSoft in connection with performance of the duties set forth in this Agreement, or other duties assigned by ArcSoft from time to time.

(b) Return of Confidential Information Executive agrees to deliver promptly upon termination of employment with ArcSoft, or at any time requested by ArcSoft, all memos, notes, records, reports, manuals, drawings, and any other documents containing any Confidential Information, including all copies of such materials which Executive may then possess or have under his control.

(c) Injunctive Relief Executive acknowledges that any breach or violation of the provisions of this section of the Agreement will result in immediate and irreparable harm to ArcSoft and its subsidiaries or affiliates for which ArcSoft and its subsidiaries or affiliates would have no adequate remedy at law. In the event of a breach by Executive of any of such provisions, in addition to any and all other rights and remedies it may have under this Agreement or otherwise, ArcSoft and its subsidiaries or affiliates may immediately seek any judicial action deemed necessary, including, without limitation, temporary and preliminary injunctive relief.

(d) Ownership of Trade Secrets; Assignment of Rights Excluding those brought to ArcSoft and its subsidiaries or affiliates by Executive and disclosed by Executive in ArcSoft standard Employee Confidentiality Agreement executed as of the Effective Date, Executive agrees that all know-how, documents, reports, plans, proposals, marketing and sales plans, client lists, client files and materials made by him or by ArcSoft and its subsidiaries (the “Work Product”) are the property of ArcSoft and its subsidiaries and shall not be used by him in any way adverse to the interests of ArcSoft and its subsidiaries or affiliates. Executive assigns to ArcSoft and its subsidiaries any rights which Executive may have in any such Work Product; provided, however, that such assignment does not apply to any right which qualifies fully under California Labor Code Section 2870. This paragraph shall survive any termination of the employment relationship. Executive shall not deliver, reproduce or in any way allow such documents or things to be delivered or used by any third party without specific direction or consent of the Board. Executive assigns to ArcSoft and its subsidiaries or affiliates any rights, which he may have in any such trade secret or proprietary information. Likewise, Executive shall not disclose to ArcSoft and its subsidiaries or affiliates, use in ArcSoft and its subsidiaries or affiliates business, or cause ArcSoft and its subsidiaries or affiliates to use, any information or material that is a trade secret of others.

8. Termination

Notwithstanding any other term or provision contained in this Agreement, this Agreement and the employment hereunder may be terminated prior to the expiration under the following circumstances:

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(a) Upon Executive’s death.

(b) Disability Upon Executive becoming “Permanently Disabled”, which, for purposes of this Agreement, shall mean Executive’s incapacity due to physical or mental illness or cause, which results in the Executive being unable to perform his duties on a fulltime basis for 6 consecutive months in a period of 12 months.

(c) Termination by ArcSoft for Cause ArcSoft may terminate this Agreement with notice, for Cause, which, for purpose of this Agreement, shall mean termination by action of the Board because of Executive’s:

(i) Willful refusal without proper legal cause to perform (other than reason of physical or mental disability or death) the duties set forth in this Agreement or delegated in writing by the Board from time to time, which remains uncorrected for 30 days following written notice to Executive by ArcSoft;

(ii) Willfully engaging in conduct that Executive knows or should know may be materially injurious to ArcSoft or its subsidiaries or affiliates;

(iii) Fraud, dishonesty or material misappropriation of ArcSoft business and assets that is intended to result in substantial personal benefits of Executive and harming the business of ArcSoft and its subsidiaries or affiliates;

(iv) Conviction of a felony or entry into a plea of guilty with all appeal exhausted that negatively reflects on Executive’s fitness to perform the duties or harms ArcSoft’s reputation or business;

(v) Any willful violation of this Agreement and other material employment policy of ArcSoft.

(d) Termination by ArcSoft without Cause In sole discretion of the Board, with notice, this Agreement and Executive’s employment hereunder may be terminated without any Cause.

(e) Termination by Executive with Good Reason Executive shall also have the right to terminate this Agreement and the employment hereunder, with notice to ArcSoft, within 180 days after occurrence of the following “Good Reason”:

(i) Material reduction without Executive’s prior written consent in the nature of Executive’s title, duties, authorities and responsibilities set forth in this Agreement and delegated by the Board in writing from time to time;

(ii) Reduction without Executive’s prior written consent in the nature of Executive’s compensation as established in Sections 4 and 5 of this Agreement and any other benefits thereafter provided to Executive from time to time including subsequent increases. This Section 8(e)(ii) does not apply to any reduction by ArcSoft with respect to a general readjustment of all executive officers’ compensation level for reasonable business purposes;

(iii) Failure to provide any benefits at least equal to those provided to other senior executives;

(iv) Change in reporting structure without prior written consent by Executive requiring that (A) Executive no longer reports directly and solely to the Board, (B) the executive officers and employees of ArcSoft and its subsidiaries are no longer required to report directly to Executive or through his designees;

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(v) Failure to obtain Executive’s nomination to be elected as a member of the Board;

(vii) A material breach by ArcSoft of any material sections of this Agreement which remains uncorrected for 30 days after following written notice of by Executive to ArcSoft;

(viii) Failure of ArcSoft to obtain assumption of this Agreement by any successor of ArcSoft upon Change of Control (as defined in Section 10) or other form of transactions as a result of which ArcSoft is not the surviving company, unless Executive remains in a comparable position with the new company and this Agreement is assumed in its entirety.

(f) Termination by Executive without Good Reason Executive may, with notice, terminate this Agreement and resign from Executive’s employment hereunder without any Good Reason by written notice to ArcSoft.

(g) Notice of Termination If ArcSoft or Executive desires to terminate this Agreement and Executive’s employment hereunder prior to the expiration of the Term of this Agreement, pursuant to this Section 8 (b) through (f) respectively, a written notice shall be given to the other party stating the effective date and reason (if any) for such termination 30 days prior to the stated effective date. ArcSoft shall consult in good faith with Executive and provide a reasonable opportunity for Executive to be heard prior to the effective date of termination of the employment hereunder for Cause. It is expressly understood and agreed that the decision as to whether Cause exists for termination of this Agreement and the employment hereunder by ArcSoft is delegated to the Board for determination subject the Bylaws of ArcSoft and the laws of California, and in accordance with the requirements set forth below.

Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause without any of (A) advance written notice set forth in this Section 8, (B) an opportunity for Executive, together with his counsel, to be heard before the Board at least 10 days prior to the proposed date of termination after the giving of Notice of Termination, (C) a duly adopted resolution of the Board with written determination described in the next subsection (D) of this Section 8 stating the actions of Executive constituted Cause and the basis thereof, and (D) a written determination by the Board made by the affirmative vote of at least a super majority (2/3) of all of the members of the Board (other than Executive).

9. Severance Benefits

Upon termination of this Agreement and Executive’s employment hereunder, Executive will receive payment for all salary and vacation accrued but unpaid as of the date of termination, and the benefits will be continued under the terms of such plans and policies in accordance with applicable law. Notwithstanding, Executive shall be entitled to receive severance benefits described below:

(a) Termination by ArcSoft for Cause If this Agreement and Executive’s employment hereunder is terminated by ArcSoft before the expiration of the Term for Cause pursuant to Sections 8(c) and (g), Executive shall not entitled to any additional payments or benefits hereunder, other than, including but not limited to:

(i) Executive’s then Base Salary paid as of the date of termination; and

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(ii) Any then vested Stock Option and other options as of the date of termination; and

(iii) Vacation accrued but unpaid as of the date of termination; and

(iv) Continuance of group insurance program in accordance with COBRA; and

(v) Any unreimbursed business expenses or dues described in this Agreement.

(b) Termination by ArcSoft without Cause; Termination by Executive with Good Reason If this Agreement and Executive’s employment hereunder is terminated by ArcSoft before the expiration of the Term without Cause pursuant to Section 8 (d), or any reason other than with Cause, or by Executive for Good Reason as defined in Section 8 (e), within 5 business days after the end of Notice of Termination period, Executive shall receive:

(i) Any vacation accrued but unpaid;

(ii) The earned but unpaid Bonus for the preceding fiscal year before the date of termination, and Bonus for the current fiscal year;

(iii) A single lump sum severance payment equal to 4 full years of Executive’s then Base Salary;

(iv) Any forfeiture provision of any Restricted Stock (if any) shall lapse and such Restricted Stock shall become fully vested;

(v) Acceleration of the vesting and exercisability of all unvested or unexercisable Stock Options, including any option Executive has under this Agreement and the Original Agreement, and any options granted to him thereafter, that shall become fully vested and immediately exercisable for 24 months from the date of termination;

(vi) Continuance coverage and premium payment by ArcSoft under ArcSoft’s group insurance programs for Executive and his family members for the greater term of (A) 24 months after the date of termination, (B) the remainder of the Term of this Agreement;

(vii) Any unreimbursed business expenses or dues described in this Agreement;

(viii) Financial aids to subsidize the exercise of all options Executive has under this Agreement and the Original Agreement, and any options granted to him thereafter.

(c) Termination by Executive without Good Reason If this Agreement and Executive’s employment hereunder is terminated by Executive without any Good Reason pursuant to Section 8(f) by written notice to ArcSoft before the expiration of the Term pursuant to Section 8(g), Executive shall receive:

(i) Executive’s then Base Salary paid as of the date of termination; and

(ii) A single lump sum severance payment equal to the greater amount of (A) Executive’s then Base Salary for 2 full years, (B) Executive’s then Base Salary for the remainder Term of this Agreement; and

(iii) 50% of any then unvested Stock Options including Options under this Agreement and Original Agreement, and any further grants thereafter, for 12 months after the date of termination. Any forfeiture provisions of any Restricted Stocks (if any) shall lapse immediately; and

(iv) Financial aids to subsidize the exercise of all options Executive has under this Agreement and the Original Agreement, and any options granted to him thereafter; and

(v) Any earned but unpaid Bonus for the preceding fiscal year; and

(vi) Vacation accrued but unpaid as of the date of termination; and

(vii) Continuance coverage and premium payment by ArcSoft under ArcSoft’s group insurance programs for Executive and his family members for 6 months; and

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(viii) Any unreimbursed business expenses or dues described in this Agreement.

(d) Termination because of Death and Disability of Executive ArcSoft shall pay to the Executive’s surviving spouse, children and/or family trust (or estate, if none), in the event of the death of Executive, pay to Executive in the event of Disability, the payment described under Section 9 (b). Executive’s rights under the benefit plans of ArcSoft shall be determined under the provisions of the plans.

(e) No Mitigation; No Setoff Executive shall not be required to seek other employment or otherwise mitigate the value of any severance benefits described under this Agreement. The amounts payable hereunder shall not be subject to setoff, counterclaim, defense or other right which ArcSoft may have against Executive.

10. Change of Control

(a) Change of Control For purposes of this Agreement, Change of Control shall mean:

(i) ArcSoft merges or consolidates with any other corporation (other than one of ArcSoft’s wholly owned subsidiaries), as a result of which ArcSoft is not the surviving company, or the shares of ArcSoft voting stock outstanding immediately prior to such transaction do not constitute, become exchanged for or converted into more than 50% of the Voting Shares of the merged or consolidated company (as defined below);

(ii) Through transactions other than a merger or consolidation, as a result of which ArcSoft is not the surviving company, or the shares of ArcSoft voting stock outstanding immediately prior to such transaction do not constitute, become exchanged for or converted into more than 50% of the Voting Shares of the new surviving company;

(ii) ArcSoft sells or disposes all or substantially all of its assets to any other person or entity;

(iii) The approval by ArcSoft’s shareholders of a plan of complete liquidation of ArcSoft;

(iv) Any third person or entity together with its affiliates and associates shall become directly or indirectly the Beneficial Owner, as defined by Rule 13(d)-3 under Securities Exchange Act of 1934, of at least 35% of the Voting Shares of ArcSoft’s then outstanding voting securities.

For purposes of this Agreement, Voting Shares shall mean the combined voting securities entitled to vote in election of directors of a corporation, including ArcSoft, the merged or consolidated, or the new surviving company.

(b) Severance for Termination by Executive upon Change of Control Executive shall have the right to terminate this Agreement and his employment hereunder with notice upon occurrence of any event set forth in Section 10 (a), provided that a comparable position is secured with and this Agreement is assumed by the surviving or new company and Executive elects not to take it. Executive shall receive the followings upon such termination:

(i) On the date of such Change of Control, 50% of any remaining unvested shares subject to the Stock Option and other equity plans shall be immediately vested and

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exercisable for 12 months, and any forfeiture provisions of any Restricted Stocks (if any) shall lapse immediately;

(ii) Financial aids to subsidize the exercise of the above exercisable options;

(iii) A single lump sum severance payment equal to the greater amount of (A) Executive’s then Base Salary for 2 full years, (B) Executive’s then Base Salary for the remainder Tenn of this Agreement;

(iv) Any earned but unpaid Bonus for the preceding fiscal year;

(v) Any accrued but unpaid vacation;

(vi) Continuance coverage and premium payment by ArcSoft or the surviving company under the group insurance programs of ArcSoft or the surviving company for Executive and his family members for 6 months;

(vii) Any unreimbursed business expenses or dues described in this Agreement.

(c) Termination and Constructive Termination upon Change of Control Executive shall have the right to terminate this Agreement and his employment hereunder with notice upon occurrence of any event set forth in Section 10 (a), if ArcSoft fails to obtain a comparable position with the surviving or new company, and/or it does not assume this Agreement in its entirety. And, if ArcSoft or the surviving or new company elects to terminate this Agreement and Executive’s employment hereunder upon occurrence of any event set forth in Section 10 (a), Executive shall receive the followings upon such termination:

(i) Any vacation accrued but unpaid;

(ii) The earned but unpaid Bonus for the preceding fiscal year before the date of termination, and Bonus for the current fiscal year;

(iii) A single lump sum severance payment equal to 4 full years of Executive’s then Base Salary;

(iv) Any forfeiture provision of any Restricted Stock (if any) shall lapse and such Restricted Stock shall become fully vested;

(v) Acceleration of the vesting and exercisability of all unvested or unexercisable Stock Options and any options he has under this Agreement or the Original Agreement, or granted to him thereafter, that shall become fully vested and immediately exercisable for 24 months from the date of termination;

(vi) Financial aids to subsidize the exercise of the above exercisable options;

(vii) Continuance coverage by the surviving or new company under its group insurance programs for Executive and his family members for the greater term of (A) 24 months after the date of termination, (B) the remainder of the Term;

(viii) Any unreimbursed business expenses or dues described in this Agreement.

If all or any portion of the amounts payable to Executive on his behalf under this Agreement or otherwise subject to any tax imposed by the Code (or similar state tax and/or assessment), ArcSoft or its successor shall pay Executive an amount necessary to place him in the same after-tax position as he would have been in had no such excise tax been imposed. The amount payable pursuance to the preceding sentence shall be increased to the extent necessary to pay income and excise taxes due on such amount. The determination of the amount of any such tax equalization shall be made by the independent accounting firm employed by ArcSoft or its successor. ArcSoft or its successor shall be responsible for all charges of any Accountant or alike.

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11. Liability Insurance

(a) Directors and Officers Liability Insurance ArcSoft shall maintain a directors and officers liability insurance in the amount of no less than $5 Million to cover Executive both during and, while potential liability exists, after the Term of this Agreement in the same amount and to the same extent, as ArcSoft covers its other officers and directors.

(b) Indemnification ArcSoft shall during and after the Term of this Agreement indemnify and hold harmless Executive to the fullest extent permitted by applicable law with regard to actions or inactions taken by Executive in performance his duties as an officer, director and employee of ArcSoft and its subsidiaries or affiliates or as a fiduciary of any benefit plan of ArcSoft and its subsidiaries or affiliates.

12. Arbitration

(a) Agreement The Parties agree that any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be settled by confidential, final and binding arbitration conducted in Santa Clara, California or such other location agreed by the Parties hereto, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association. The decisions of the arbitrator shall be final, conclusive and binding on the Parties to the arbitration. Judgment may be entered on the arbitrator’s decision in any court having jurisdiction. The Parties will be entitled to reasonable discovery of essential matters as determined by the arbitrator. In the arbitration, the Parties will be entitled to all remedies that would have been available if the matter were litigated in a court of law.

(b) Governing Law The arbitrator shall apply California law to the merits of dispute or claim, without reference to rules of conflicts of law.

(c) Costs and Fees of Arbitration The Parties hereby agree that all of the fees, if any, and expenses of such arbitration, and Executive’s expenses, including attorneys’ fees, incurred in connection with the arbitration regardless of the final outcome, shall be borne by ArcSoft. The Parties further agree that the prevailing party may seek court judgment to enforce the arbitral decision against the other party and the other party shall bear the costs and fees incurred hereof.

13. Miscellaneous

(a) Entire Agreement This Agreement represents the entire understanding and agreement between ArcSoft and Executive concerning Executive’s employment relationship with ArcSoft, and supersedes and replaces any and all prior agreements and understanding concerning Executive’s employment relationship with ArcSoft entered into prior to the date hereof. This Agreement may not be amended or modified except in writing by the Parties.

(b) Notices Any notices or other communications under this Agreement shall be in writing, signed by the party making the same, and shall be delivered by personally or sent by certified or registered mail, postage prepaid, addressed as follows:

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If to Executive:	At the last residential address known by ArcSoft
If to ArcSoft:	ArcSoft, Inc. 46601 Fremont Blvd. Fremont, CA 94538 Attn.: Chairman of Board

(c) Severability In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision.

(d) Governing Law This Agreement shall be interpreted and enforced in accordance with the laws of the State of California, except that any arbitration shall be governed by the Federal Arbitration Act.

IN WITNESS WHEREOF, the undersigned have executed this Agreement.

ARCSOFT, INC.		EXECUTIVE
By:	/s/ David C. Nagel	By:	/s/ Michael Hui Deng
	David C. Nagel, Chairman of Board		Michael Hui Deng
		Address:	5465 Ridgewood Drive Fremont, CA 94555

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EX-10.6

Exhibit 10.6

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”) is entered into as of November 14, 2002 by and between ArcSoft, Inc., a California corporation (“ArcSoft”), as the employer; and Todd Jason Rumaner, an individual (“Employee”), as the employee. ArcSoft and Employee may be referred to collectively in this Agreement as the “Parties”.

RECITALS

WHEREAS, ArcSoft desires to obtain the services of Employee as its Senior Vice President, Sales and Marketing in the manner hereinafter specified; and

WHEREAS, Employee is willing to be employed by ArcSoft as its Senior Vice President, Sales and Marketing and to perform the duties incident to such employment upon the terms and subject to the conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the promises and the mutual covenants and agreements set forth herein, the Parties agree to enter into this Agreement as follows:

TERMS AND CONDITIONS

1. Position, Starting Date, Authorities and Responsibilities

(a) Position and Starting Date Employee shall be employed by ArcSoft as its Senior Vice President, Sales and Marketing. Employee shall report directly and solely to ArcSoft’s Chief Executive Officer, or other personnel designated by the Chief Executive Officer upon Employee’s written consent as described in Section 6 (a). Upon the effectiveness of this Agreement, the employment shall commence on the first day when Employee officially reports to ArcSoft.

(b) Duties As Senior Vice President, Sales and Marketing, Employee shall render such business and professional services in the performance of his duties, consistent with his position within ArcSoft, as shall reasonably be assigned to him by the Chief Executive Officer. The period of Employee’s employment under this Agreement is referred to herein as the “Employment Term.”

(c) Obligations Employee, in his capacity as an employee of ArcSoft, shall be responsible to and obey the reasonable and lawful directives of the Chief Executive Officer. During the Employment Term, Employee will perform his duties faithfully and to the best of his ability and will devote his full business efforts and time to ArcSoft. Employee shall use his best efforts during the Term of Employment to protect, encourage, and promote the interests of ArcSoft. For the duration of the Employment Term, Employee agrees not to actively engage in any other employment, occupation or consulting activity for any direct or indirect remuneration without the prior written approval of the Board of Directors of ArcSoft (“the “Board”), or the Chief Executive Officer as the Board delegated. Notwithstanding the foregoing, Employee may serve on the board of directors of any other companies that are not directly or indirectly in competition with ArcSoft, or work in non-profit pursuits as long as such service does not materially interfere with the performance of his duties to ArcSoft.

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(d) Fiduciary Duty Employee acknowledges and agrees that Employee owes a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of ArcSoft, and not to do any act which would injure the business, interests, or reputation of ArcSoft or any of its subsidiaries.

2. Compensation

In consideration of, and in exchange for, the services to be provided by Employee, Employee shall receive the amounts and benefits set for in this Section 2 as of Starting Date of this Agreement unless otherwise specified:

(a) Base Salary Employee’s annual Base Salary shall be $200,000 paid semi-monthly, on ArcSoft’s regular payday (15^th and the last day of each month), less all applicable taxes, social security payments and other items that ArcSoft is required by law to withhold or deduct therefrom.

(b) Incentive Bonus During the first two years of the Employment Term, provided the employment is not terminated pursuant to Section 6, Employee shall receive an Incentive Bonus of $200,000 in total, less any applicable withholdings required by law. The said amount shall be paid out in eight (8) installments of $25,000 each, payable at the end of each calendar quarter.

The Incentive Bonus Program shall be subject to annual review by the Chief Executive Officer by the end of the 24^th month after the Starting Date, and may be adjusted after completion of two (2) years of consecutive employment in light of the performance of Employee and the size and financial situation of ArcSoft.

$20,000 shall be paid to Employee as sign-on bonus within five (5) business days after the Starting Date, less any applicable withholding required by law.

(c) Stock Option Employee shall be eligible to participate in the Stock Option Plans of ArcSoft and any additional or successor plans including any equity plans.

(i) Option Grant Upon execution of this Agreement, Employee shall be granted an option to purchase 600,000 shares of ArcSoft’s common stock (the “Stock Option” or “Option”). The Option shall be vested in accordance to ArcSoft standard vesting schedule, which is 25% shall become vested and exercisable at the end of twelfth (12^th) month of continuous full-time employment, and 6.25% for each three (3) consecutive months of full-time employment for the remaining twelve (12) quarters.

(ii) Option Price The exercise price (or “option price”) shall be equal to the price set forth by the Board at the date of grant.

3. Other Benefits

During the Employment Term and for services rendered hereunder, Employee shall also be entitled to receive all other benefits which are, and may be in the future, generally available to ArcSoft employees and members of ArcSoft’s senior management:

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(a) Group Insurance Employee shall be covered by ArcSoft group insurance programs including Health, Dental, Vision, Disability, and Life. Employee’s spouse and children under 18 (or otherwise determined by the plans) can join the insurance programs subject to ArcSoft policies and applicable laws. The premium of such insurance program(s) shall be paid by ArcSoft.

(b) 401(k) and Other Retirement Plans Employee shall be eligible to participate in employee benefit plans maintained by ArcSoft and in other benefits provided by ArcSoft to its employees and senior Employees, now and in the future, including 401(k) and other retirement plans, deferred compensation and similar benefits subject to change from time to time at the reasonable discretion of ArcSoft.

(c) Other Benefits Employee shall also be entitled to other benefits provided by ArcSoft to its employees and senior Employees from time to time, including but not limited to annual vacation, paid holiday, sick leave, and other similar benefits. Employee shall be entitled to paid vacation up to 3 weeks per calendar year.

(d) Employee Term Life Insurance ArcSoft shall purchase a key person term insurance on Employee’s life in the face amount of at least $1,000,000 in. the event that Employee dies or becomes permanently disabled defined in the policy or applicable laws. ArcSoft and the beneficiaries designated by Employee shall each receive half of the proceeds (50%), and ArcSoft shall bear the expense of such insurance policy and be the holder and owner of such policy.

(e) Relocation ArcSoft agrees to reimburse Employee for moving his home from Pennsylvania to San Francisco Bay Area, California up to $40,000 subject to the requirements set forth in the Internal Revenue Code regulating moving and relocation expenses. Any unused balance of the said reimbursement amount will be paid to Employee in twelve (12) installments, payable at the end of each month in accordance with ArcSoft payroll practice, less any applicable withholding of tax required by law.

4. Employment Term

The term of Employee’s Employment with ArcSoft shall be four (4) year, from Starting Date to November 15, 2006.

5. Restrictive Covenants

(a) Non-Competition; Non-Solicitation The Parties hereto recognize that Employee’s services are unique and the Restrictive Covenants on Employee set forth in this Section 5 are essential to protect the business (including trade secret and other confidential information disclosed by ArcSoft to, learned or developed by Employee during the course of employment by ArcSoft) and good will of ArcSoft. As part of the consideration for the compensation and benefits to be paid to Employee hereunder, Employee agrees that during the Employment Term, and for a period of twelve (12) months thereafter (the “Covenant Period”), Employee shall not:

(i) Engage in any business similar or related to or competitive with the business conducted by ArcSoft or any of its subsidiaries or affiliates described from time to time

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in ArcSoft Annual Report to its shareholders and Board (the “Core Business of ArcSoft”);

(ii) Render advice or services to, or otherwise assist, any other person, association, or entity that is engaged, directly or indirectly, in any business similar or related to or competitive with the Core Business of ArcSoft;

(iii) Transact any business in any manner pertaining to suppliers or customers of ArcSoft or any of its subsidiaries affiliates which, in any manner, would have, or is likely to have, an adverse effect upon the Core Business of ArcSoft or any of its subsidiaries affiliates;

(iv) For himself, or others, directly or indirectly, induce, or in any manner of this nature, any employee of ArcSoft or any of its subsidiaries affiliates to terminate his or her employment with ArcSoft or any of its subsidiaries affiliates, or hire or assist in the hiring of any such employee by any person or entity not affiliated with, ArcSoft;

(v) Conduct any other activities that are prohibited in ArcSoft Employee Manual and Confidentiality Agreement.

For purposes of this Agreement, “affiliate” shall mean any entity which owns or controls, is owned or controlled by, or is under common ownership or control, with ArcSoft.

Notwithstanding the foregoing, if ArcSoft abandons a particular aspect of the Core Business, that is, ceases such aspect of its business with the intention to permanently refrain from such aspect of its business, then this post-employment non-competition covenant shall not apply to such former aspect of ArcSoft’s business.

(b) Confidentiality Employee acknowledges that it is the policy of ArcSoft and its subsidiaries or affiliates to maintain as secret and confidential all valuable and unique information herebefore or hereafter acquired, developed or used by ArcSoft and its subsidiaries relating to the business, operations, employees and customers of ArcSoft and its subsidiaries or affiliates, which information gives ArcSoft and its subsidiaries or affiliates a competitive advantage in the industry, and which information includes technical knowledge, know-how or trade secrets and information concerning the operations, sales, personnel, suppliers, customers, costs, profits, markets, pricing policies, and other confidential materials (the “Confidential Information”).

(c) Non-Disclosure Employee recognizes that the services to be performed by Employee are special and unique, and that by reason of his duties he will acquire or learn Confidential Information. Employee recognizes that all such Confidential Information is the sole and exclusive property of ArcSoft and its subsidiaries or affiliates. As part of consideration of the compensation and benefits to be paid to Employee under this Agreement, Employee agrees not to disclose the Confidential Information to anyone outside ArcSoft, either during or after the employment by ArcSoft, except as authorized by ArcSoft in connection with performance of the duties set forth in this Agreement, or other duties assigned by ArcSoft from time to time.

(d) Return of Confidential Information Employee agrees to deliver promptly upon termination of his employment with ArcSoft, or at any time requested by ArcSoft, all memos, notes, records, reports, manuals, drawings, and any other documents containing any Confidential Information, including all copies of such materials which Employee may then possess or have under his control.

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(e) Injunctive Relief Employee acknowledges that any breach or violation of the provision of this section of the Agreement will result in immediate and irreparable harm to ArcSoft and its subsidiaries or affiliates for which ArcSoft and its subsidiaries or affiliates would have no adequate remedy at law. In the event of a breach by Employee of any of such provisions, in addition to any and all other rights and remedies it may have under this Agreement or otherwise, ArcSoft and its subsidiaries or affiliates may immediately seek any judicial action deemed necessary, including, without limitation, temporary and preliminary injunctive relief.

(f) Ownership of Trade Secrets; Assignment of Rights Employee is required to executed ArcSoft standard Employee Confidentiality Agreement on the Starting Date, which shall remain in full force throughout the Employment Term and thereafter. Excluding those brought to ArcSoft and its subsidiaries or affiliates by Employee and disclosed by Employee in the said ArcSoft standard Employee Confidentiality Agreement, Employee agrees that all know-how, documents, reports, plans, proposals, marketing and sales plans, client lists, client files and materials made by him or by ArcSoft and its subsidiaries (the “Work Product”) are the property of ArcSoft and its subsidiaries and shall not be used by him in any way adverse to the interests of ArcSoft and its subsidiaries or affiliates. Employee assigns to ArcSoft and its subsidiaries any rights which Employee may have in any such Work Product; provided, however, that such assignment does not apply to any right which qualifies fully under California Labor Code Section 2870. This paragraph shall survive any termination of the employment relationship. Employee shall not deliver, reproduce or in any way allow such documents or things to be delivered or used by any third party without specific direction or consent of the Board. Employee assigns to ArcSoft and its subsidiaries or affiliates any rights, which he may have in any such trade secret or proprietary information. Likewise, Employee shall not disclose to ArcSoft and its subsidiaries or affiliates, use in ArcSoft and its subsidiaries or affiliates business, or cause ArcSoft and its subsidiaries or affiliates to use, any information or material that is a trade secret of others.

6. Termination and Severance Benefits

(a) Termination without Cause If Employee’s employment with ArcSoft terminates other than for “Cause” (as defined below), and Employee signs and does not revoke a standard release of claims with ArcSoft, then, in addition to payment for all salary and vacation accrued but unpaid as of the date of termination, and the benefits will be continued under the terms of such plans and policies in accordance with applicable law, subject to the Conditions set out below, Employee shall be entitled to receive continuing payments of severance pay (less applicable withholding taxes) at a rate equal to his Base Salary rate, as then in effect, for a period of twelve (12) months from the date of such termination, to be paid, periodically in accordance with ArcSoft’s normal payroll policies.

In the event that Employee is no longer required to report directly and solely to the present Chief Executive Officer of ArcSoft, ArcSoft shall obtain Employee’s written consent on such change. Nevertheless, when Employee does not consent, he may elect to resign from the position offered herein. This Section 6(a) shall apply to such termination.

(b) Termination for Cause If Employee’s employment with ArcSoft terminates for Cause by ArcSoft, then Employee will only be eligible for (i) Employee’s then Base Salary paid as of the date of termination; (ii) Any then vested Stock Option and other options as of

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the date of termination; (iii) Vacation accrued but unpaid as of the date of termination; (iv) Continuance of group insurance program in accordance with COBRA; and (v) Any un-reimbursed business expenses or dues described in this Agreement.

For purpose of this Agreement, Cause shall be defined as follows:

(i) Willful refusal without proper legal cause to perform (other than reason of physical or mental disability or death) the duties set forth in this Agreement or delegated by the Chief Executive Officer or other personnel the Chief Executive Officer designated from time to time, which remains uncorrected for fifteen (15) days following written notice to Employee by ArcSoft;

(ii) Willfully engaging in conduct that Employee knows or should know may be materially injurious to ArcSoft or its subsidiaries or affiliates;

(iii) Fraud, dishonesty or material misappropriation of Arc business and assets that is intended to result in substantial personal benefits of Employee and harming the business of ArcSoft and its subsidiaries or affiliates;

(iv) Conviction of a felony or entry into a plea of guilty that negatively reflects on Employee’s fitness to perform the duties or harms ArcSoft’s reputation or business;

(v) Any willful violation of this Agreement and other material ArcSoft employment policies, and breach of fiduciary duties.

(c) Voluntary Termination by Employee If Employee’s employment with ArcSoft is voluntarily terminated by Employee, then Employee will only be eligible for (i) Employee’s then Base Salary paid as of the date of termination; (ii) Any then vested Stock Option and other options as of the date of termination; (iii) Vacation accrued but unpaid as of the date of termination; (iv) Continuance of group insurance program in accordance with COBRA; and (v) Any un-reimbursed business expenses or dues described in this Agreement.

(d) Severance Payment Condition Employee acknowledges that the nature of ArcSoft’s business is such that if Employee were to become employed by, or substantially involved in, the business of a competitor of ArcSoft during the Restrictive Period set forth in Section 5 of this Agreement, it would be very difficult for Employee not to rely on or use ArcSoft’s trade secrets and Confidential Information. Thus, to avoid the inevitable disclosure of ArcSoft’s trade secrets and Confidential Information, Employee agrees and acknowledges that Employee’s right to receive the severance payments set forth in this Section 6 (to the extent Employee is otherwise entitled to such payments) shall be conditioned upon Employee’s full compliance with the Restrictive Covenants set forth in Section 5 of this Agreement. Upon any breach of the Restrictive Covenants, all severance payments pursuant to this Agreement shall immediately cease, and ArcSoft reserves its rights to pursue legal actions against Employee.

7. Liability Insurance

ArcSoft shall maintain a directors and officers liability insurance in the amount of no less than $5 Million to cover Employee both during and, while potential liability exists, the Term of this Agreement in the same amount and to the same extent, as ArcSoft covers its other officers and directors.

8. Arbitration

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(a) Agreement The Parties agree that any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be settled by confidential, final and binding arbitration conducted in Santa Clara, California or such other location agreed by the Parties hereto, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association. The decisions of the arbitrator shall be final, conclusive and binding on the Parties to the arbitration. Judgment may be entered on the arbitrator’s decision in any court having jurisdiction. The Parties will be entitled to reasonable discovery of essential matters as determined by the arbitrator. In the arbitration, the Parties will be entitled to all remedies that would have been available if the matter were litigated in a court of law.

(b) Governing Law The arbitrator shall apply California law to the merits of dispute or claim, without reference to rules of conflicts of law.

(c) Costs and Fees of Arbitration The Parties hereby agree the prevailing party shall be entitled to the costs and fees incurred hereof and enforcing the decisions of the arbitrator.

9. Miscellaneous

(a) Entire Agreement This Agreement represents the entire understanding and agreement between ArcSoft and Employee concerning Employee’s employment relationship with ArcSoft, and supersedes and replaces any and all prior agreements and understanding concerning Employee’s employment relationship with ArcSoft entered into prior to the date hereof. This Agreement may not be amended or modified except in writing by the Parties.

(b) Severability In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision.

(c) Governing Law This Agreement shall be interpreted and enforced in accordance with the laws of the State of California, except that any arbitration shall be governed by the Federal Arbitration Act.

(d) Acknowledgment Employee acknowledges that he has had the opportunity to discuss this matter with and obtain advice from his private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, and is knowingly and voluntarily entering into this Agreement.

[INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the undersigned have executed this Agreement.

ARCSOFT, INC.		EMPLOYEE:
By:	/s/ Michael Deng	By:	/s/ Todd Rumaner
	Michael Hui Deng		Todd Jason Rumaner
	Chief Executive Officer		Address:	409 Partridgeberry Lane Chester Springs, PA 19425
Date:	November 15, 2002	Date:	11/15/02

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EX-10.7

Exhibit 10.7

EXECUTIVE EMPLOYMENT AGREEMENT

This Executive Employment Agreement (the “Agreement”) is entered into as of March 30, 2004 (the “Effective Date”) by and between ArcSoft, Inc., a California corporation (“ArcSoft”), as the employer; and Alfred V. Lerrenaga, a resident of 50 Hudson Street, Redwood City, California, an individual (“Executive”), as the employee. ArcSoft and Executive may be referred to collectively in this Agreement as the “Parties”.

RECITALS

ArcSoft has agreed to employ the Executive and the Executive has agreed to accept such employment, subject to the terms and conditions set forth herein.

Therefore, in consideration of the promises and the mutual covenants and agreements set forth herein, the Parties agree to enter into this Agreement as follows:

1. Position and Duties

(a) ArcSoft hereby employs Executive as its Vice President of Finance and Chief Financial Officer, and Executive agrees to serve ArcSoft as such, upon the terms and conditions hereof.

(b) Executive shall report to the Chief Executive Officer of ArcSoft, and Executive’s primary responsibilities shall be to (i) lead the development of ArcSoft’s financial procedures, (ii) manage financial operations, financial reporting, administrations, and information systems; and (iii) any other duties customary to the positions offered. Executive will be a member of the Executive Team with responsibility for determining the long-term direction and goals of ArcSoft, and for developing strategies and tactics to meet those goals, along with all other duties as assigned by ArcSoft. Executive shall also discharge such duties and authority as are generally incident to such position, or in such other senior management position as ArcSoft shall determine, provided that such other position shall be comparable in authority and responsibility to the position specified above.

(c) Executive agrees that he will devote substantially all of his employment time and attention to the affairs of ArcSoft and use his best efforts to promote the business and interests of ArcSoft and that he will not engage, directly or indirectly, in any other occupation during the term of employment. Executive further acknowledges and agrees that Executive owes a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of ArcSoft, and not to do any act which would injure the business, interests, or reputation of ArcSoft or any of its subsidiaries.

2. Term

The term of employment hereunder (“Term”) shall commence on the Effective Date hereof and continue until March 29, 2008, unless otherwise terminated in accordance with the provisions hereof.

3. Compensation

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In consideration of, and in exchange for, the services to be provided by Executive (including, without limitation, all services to be rendered by him as an officer and/or other duties may be assigned by ArcSoft), Executive shall receive the amounts and benefits set for hereunder.

(a) Base Salary Executive’s annual Base Salary shall be $200,000 paid semi-monthly, on ArcSoft’s regular payday (15^th and the last day of each month), less all applicable taxes, social security payments and other items that ArcSoft is required by law to withhold or deduct therefrom. The Base Salary shall be subject to annual review by the Chief Executive Officer or ArcSoft Compensation Committee, if applicable, and may be adjusted in light of the size and performance of ArcSoft. After any such change, Executive’s new level of Base Salary shall be Executive’s Base Salary for purpose of this Agreement.

(b) Incentive Bonus During the Term of this Agreement, Executive shall receive an Incentive Bonus for each of ArcSoft’s fiscal years ending on June 30^th in an amount equal to 30% of the Base Salary (or the adjusted Base Salary) upon the achievement of the management objective set out for each fiscal year. The Incentive Bonus shall be paid after 60 days following the close of each fiscal year. Nothing contained hereunder shall prohibit the Board of Directors of ArcSoft from suspending or declining to bonus payment deemed necessary by the Board for all executive officers, or by the Chief Executive Officer with authority custom to the position or as delegated by the Board for all employees.

(c) Stock Option Executive shall be eligible to participate in the Stock Option Plans of ArcSoft and any additional or successor plans including any equity plans. Upon execution of this Agreement, Executive shall be granted an option to purchase 180,000 shares ArcSoft common stock (the “Stock Option” or “Option”) at the exercise price set by the Board of Directors of ArcSoft at the date of grant and in accordance with the standard vesting schedule. The standard vesting schedule is that one-fourth (1/4) of the shares granted will become vested and exercisable at the end of the first full twelve months of continuous status as an employee of ArcSoft following the vesting commencement date, and thereafter one-sixteenth (1/16) of the shares will become vested and exercisable at the end of each successive three-month period of continuous employment. Specific terms and conditions will be included in a definitive stock option agreement and will include optionee’s right to purchase the shares according to a vesting schedule.

4. Other Benefits

During the Term of this Agreement and for services rendered hereunder, Executive shall also be entitled to receive other benefits which are, and may be in the future, generally available to ArcSoft full-time employees and members of ArcSoft’s Executive Team.

(a) Group Insurance Executive shall be automatically covered by ArcSoft group insurance programs including Health, Dental, Vision, Disability, and Life. Executive’s spouse and children under 18 (or otherwise determined by the plans) can join the insurance programs subject to ArcSoft policies and applicable laws. The premium of such insurance program(s) shall be paid by ArcSoft.

(b) 401(k) and Other Retirement Plans Executive shall be eligible to participate in employee benefit plans maintained by ArcSoft and in other benefits provided by ArcSoft to its employees and senior executives, now and in the future, including 401(k) and other retirement plans, deferred

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compensation and similar benefits subject to change from time to time at the reasonable discretion of ArcSoft.

(c) Other Benefits Executive shall also be entitled to other benefits provided by ArcSoft to its employees and senior executives from time to time, including but not limited to annual vacation, paid holiday, sick leave, and other similar benefits. Executive shall be entitled to paid vacation up to 3 weeks per calendar year.

(d) Executive Term Life Insurance ArcSoft has purchased and shall continue maintain during the Term of this Agreement a key person term insurance on Executive’s life in the face amount of $1,000,000 (or other amount as ArcSoft determines from time to time in connection with such policy provided to other executive officers) in the event that Executive dies or becomes Permanently Disabled defined hereunder during the Term of this Agreement and Executive’s employment hereunder. ArcSoft and the beneficiaries designated by Executive shall each receive half of the proceeds (50%), and ArcSoft shall bear the expense of such insurance policy and be the holder and owner of such policy.

(e) Reimbursement of Business Related Expenses Executive shall be entitled to receive prompt reimbursement for reasonable expenses incurred by him in performing services hereunder during the Term of this Agreement in accordance with the policies and procedures then in effect and established by ArcSoft for its employees), provided that Executive properly accounts therefore in accordance with ArcSoft policy. Executive may also be entitled to reimbursement of Executive membership dues and related ongoing costs of appropriate professional organizations.

(f) Notwithstanding the foregoing, ArcSoft may, in its discretion, at any time and from time to time, change or revoke any of its employee benefits plans, programs or policies and Executive shall not be deemed, by virtue of this Agreement, to have any vested interest in any such plans, programs or policies.

5. Obligations and Restrictive Covenants

(a) Obligations Executive agrees, during the Term of this Agreement and Executive’s employment hereunder, not to engage in any other employment, occupation or consulting activity for any direct or indirect remuneration. This obligation shall not preclude Executive from (i) serving in any capacity with any professional, community, industry, civic, educational or charitable organization; (ii) serving as a member of corporate boards of directors, provided that the Chief Executive Officer has provided his written consent, so long as these activities or services do not materially interfere or conflict with Executive’s responsibilities to, or ability to perform his duties of employment by ArcSoft under this Agreement; or (iii) engaging in personal investment activities for himself and his family, which do not interfere with the performance of his duties hereunder.

(b) Non-Competition; Non-Solicitation The Parties hereto recognize that Executive’s services are unique and the Restrictive Covenants on Executive set forth in this Section 5 are essential to protect the business (including trade secret and other confidential information disclosed by ArcSoft to, learned or developed by Executive during the course of employment by ArcSoft) and good will of ArcSoft. As part of the consideration for the compensation and benefits to be paid to Executive hereunder, Executive agrees that during the Term of this Agreement, and for a period of 12 months thereafter (the “Covenant Period”), Executive shall not:

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(i) Engage in any business similar or related to or competitive with the business conducted by ArcSoft or any of its subsidiaries or affiliates described from time to time in ArcSoft Annual Report to its shareholders and Board (the “Core Business of ArcSoft”);

(ii) Render advice or services to, or otherwise assist, any other person, association, or entity that is engaged, directly or indirectly, in any business similar or related to or competitive with the Core Business of ArcSoft;

(iii) Transact any business in any manner pertaining to suppliers or customers of ArcSoft or any of its subsidiaries affiliates which, in any manner, would have, or is likely to have, an adverse effect upon the Core Business of ArcSoft or any of its subsidiaries affiliates;

(iv) Induce any employee of ArcSoft or any of its subsidiaries or affiliates to terminate his or her employment with ArcSoft or any of its subsidiaries affiliates, or hire or assist in the hiring of any such employee by any person or entity not affiliated with ArcSoft.

For purposes of this Agreement, “affiliate” shall mean any entity which owns or controls, is owned or controlled by, or is under common ownership or control, with ArcSoft.

6. Confidentiality

Executive acknowledges that it is the policy of ArcSoft and its subsidiaries or affiliates to maintain as secret and confidential all valuable and unique information herebefore or hereafter acquired, developed or used by ArcSoft and its subsidiaries relating to the business, operations, employees and customers of ArcSoft and its subsidiaries or affiliates, which information gives ArcSoft and its subsidiaries or affiliates a competitive advantage in the industry, and which information includes technical knowledge, know-how or trade secrets and information concerning the operations, sales, personnel, suppliers, customers, costs, profits, markets, pricing policies, and other confidential materials (the “Confidential Information”).

(a) Non-Disclosure Executive recognizes that the services to be performed by Executive are special and unique, and that by reason of his duties he will acquire or learn Confidential Information. Executive recognizes that all such Confidential Information is the sole and exclusive property of ArcSoft and its subsidiaries or affiliates. As part of consideration of the compensation and benefits to be paid to Executive under this Agreement, Executive agrees not to disclose the Confidential Information to anyone outside ArcSoft, and not to use the Confidential Information other than for the performance his duties hereunder, either during or after the employment by ArcSoft, except as authorized by ArcSoft in connection with performance of the duties set forth in this Agreement, or other duties assigned by ArcSoft from time to time.

(b) Return of Confidential Information Executive agrees to deliver promptly upon termination of employment with ArcSoft, or at any time requested by ArcSoft, all memos, notes, records, reports, manuals, drawings, and any other documents containing any Confidential Information, including all copies of such materials which Executive may then possess or have under his control.

(c) Ownership of Trade Secrets; Assignment of Rights Excluding those brought to ArcSoft and its subsidiaries or affiliates by Executive and disclosed by Executive in ArcSoft standard Employee Confidentiality Agreement executed as of the Effective Date, Executive agrees that all know-how,

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documents, reports, plans, proposals, marketing and sales plans, client lists, client files and materials made by him or by ArcSoft and its subsidiaries (the “Work Product”) are the property of ArcSoft and its subsidiaries and shall not be used by him in any way adverse to the interests of ArcSoft and its subsidiaries or affiliates. Executive assigns to ArcSoft and its subsidiaries any rights which Executive may have in any such Work Product; provided, however, that such assignment does not apply to any right which qualifies fully under California Labor Code Section 2870. This paragraph shall survive any termination of the employment relationship. Executive shall not deliver, reproduce or in any way allow such documents or things to be delivered or used by any third party without specific direction or consent of the Board. Executive assigns to ArcSoft and its subsidiaries or affiliates any rights, which he may have in any such trade secret or proprietary information. Likewise, Executive shall not disclose to ArcSoft and its subsidiaries or affiliates, use in ArcSoft and its subsidiaries or affiliates business, or cause ArcSoft and its subsidiaries or affiliates to use, any information or material that is a trade secret of others.

7. Termination

Notwithstanding any other term or provision contained in this Agreement, this Agreement and the employment hereunder may be terminated prior to the expiration under the following circumstances:

(a) Upon Executive’s death.

(b) Disability Upon Executive becoming “Permanently Disabled”, which, for purposes of this Agreement, shall mean Executive’s incapacity due to physical or mental illness or cause, which results in the Executive being unable to perform his duties on a full-time basis for 6 consecutive months in a period of 12 months.

(c) Termination by ArcSoft for Cause Upon a written notice stating the effective date 30 days prior to the stated effective date, ArcSoft shall terminate this Agreement for Cause, which, for purpose of this Agreement, shall mean termination by action of the Board because of Executive’s:

(i) Willful refusal without proper cause to perform (other than reason of physical or mental disability or death) the duties set forth in this Agreement or delegated from time to time in writing by the Chief Executive Officer, which remains uncorrected for 30 days following written notice to Executive by the Chief Executive Officer;

(ii) Gross negligence, self dealing or willful misconduct of Executive in connection with the performance of his duties hereunder, including without limitation, misappropriation of funds or property of ArcSoft, securing or attempting to secure personally any profit in connection with any transaction entered into on behalf of ArcSoft or any willful act or gross negligence having the effect of injuring the reputation, business or business relationships of ArcSoft and its subsidiaries or affiliates;

(iii) Fraud, dishonesty or misappropriation of ArcSoft business and assets that is intended to result in substantial personal benefits of Executive and harming the business of ArcSoft and its subsidiaries or affiliates;

(iv) Insobriety, abuse of alcohol or use of drugs;

(v) Engaging in any criminal enterprise involving moral turpitude;

(vi) Indictment or being held for trial in connection with misdemeanor involving moral turpitude or any felony;

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(vii) Conviction of a felony or entry into a guilty plea that negatively reflects on Executive’s fitness to perform the duties or harms ArcSoft’s reputation or business;

(viii) Any material breach of any covenants under this Agreement and other material policy of ArcSoft, which remains uncorrected for 30 days following written notice to Executive by the Chief Executive Officer.

(d) Termination by ArcSoft without Cause Upon a written notice stating the effective date 30 days prior to the stated effective date, ArcSoft may terminate this Agreement without any Cause.

(e) Termination by Executive with Good Reason Upon a written notice stating the effective date 30 days prior to the stated effective date, Executive shall also have the right to terminate this Agreement and the employment hereunder, within 180 days after occurrence of the following “Good Reason”:

(i) Material change in the nature of Executive’s title, duties, authorities and responsibilities set forth in this Agreement by ArcSoft unless Executive expressly consents;

(ii) Material reduction in the nature of Executive’s compensation as established under this Agreement unless Executive expressly consents. This Section 8(e)(ii) does not apply to any reduction by ArcSoft with respect to a general readjustment of all executive officers’ compensation level for reasonable business purposes;

(iii) Change in reporting structure without prior written consent by Executive;

(iv) A material breach by ArcSoft of any material sections of this Agreement which remains uncorrected for 30 days after following written notice of by Executive to ArcSoft;

(f) Termination by Executive without Good Reason Upon a written notice stating the effective date 30 days prior to the stated effective date, Executive may terminate this Agreement and resign from Executive’s employment hereunder without any Good Reason.

8. Severance Benefits

Upon termination of this Agreement, Executive will receive payment for all salary and vacation accrued but unpaid as of the effective date of termination, and the benefits will be continued under the terms of such plans and policies in accordance with applicable law. Notwithstanding, Executive shall be entitled to receive severance benefits described below:

(a) Termination by ArcSoft for Cause If this Agreement and Executive’s employment hereunder is terminated by ArcSoft before the expiration of the Term for Cause pursuant to Sections 7(c), Executive shall not entitled to any additional payments or benefits hereunder, other than:

(i) Executive’s then Base Salary paid as of the effective date of termination;

(ii) Any then vested Stock Option as of the effective date of termination;

(iii) Any vacation accrued but unused and unpaid as of the effective date of termination;

(iv) Continuance of group insurance program in accordance with COBRA; and

(v) Any unreimbursed legitimate business expenses described in this Agreement.

(b) Termination by ArcSoft without Cause; Termination by Executive with Good Reason If this Agreement and Executive’s employment hereunder is terminated by ArcSoft before the expiration

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of the Term without Cause pursuant to Section 7 (d), or by Executive for Good Reason as defined in Section 7 (e), within 30 business days after the effective date of termination, Executive shall receive:

(i) Any vacation accrued but unused and unpaid;

(ii) A lump sum payment equal to one full year of Executive’s then Base Salary, or the Base Salary for the remaining Term of this Agreement, whichever is less;

(iii) The earned but unpaid Bonus for the preceding fiscal year before the effective date of termination, and prorated Bonus for the current fiscal year;

(iv) Continuance coverage and premium payment by ArcSoft under ArcSoft’s group insurance programs for Executive and his family members for twelve months after the effective date of termination;

(v) Any unreimbursed business expenses or dues described in this Agreement.

(c) Termination by Executive without Good Reason If this Agreement and Executive’s employment hereunder is terminated by Executive without any Good Reason pursuant to Section 7(f), Executive shall receive:

(i) Executive’s then Base Salary paid as of the effective date of termination;

(ii) Any earned but unpaid Bonus for the preceding fiscal year;

(iii) Any vacation accrued but unused and unpaid as of the date of termination;

(iv) Continuance of group insurance program in accordance with COBRA; and

(v) Any unreimbursed business expenses or dues described in this Agreement.

(d) Termination because of Death and Disability of Executive ArcSoft shall pay to the Executive’s surviving spouse, children and/or family trust (or estate, if none), in the event of the death of Executive, pay to Executive in the event of Disability, the payment described under Section 8 (c). Executive’s rights under the benefit plans of ArcSoft shall be determined under the provisions of the plans.

(e) Change in Control In the event of a Change in Control (as defined below), as a result of which Executive is not offered the same or comparable position in the surviving company, Executive may, within 60 days of the effective date of such Change in Control, terminate this Agreement, with written notice stating the effective date 30 days prior to the such effective date, with the effects as provided herein for a termination by Executive with Good Reason. In addition the Severance Benefits provided in the above Section 8 (b), the Stock Option offered to Executive under this Agreement shall accelerate and become vested and exercisable immediately as of the effective date of termination.

For purposes of this Agreement, Change of Control shall mean:

(i) ArcSoft merges or consolidates with any other corporation (other than one of ArcSoft’s subsidiaries), as a result of which ArcSoft is not the surviving company, or the shares of ArcSoft voting stock outstanding immediately after such transaction do not constitute, become exchanged for or converted into more than 50% of the Voting Shares of the merged or consolidated company (as defined below);

(ii) ArcSoft sells or disposes all or substantially all of its assets to any other person or entity;

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(iii) Any third person or entity shall become directly the Beneficial Owner, as defined by Rule 13(d)-3 under Securities Exchange Act of 1934, of at least 50% of the Voting Shares of ArcSoft’s then outstanding voting securities.

(iv) For purposes of this Agreement, Voting Shares shall mean the combined voting securities entitled to vote in election of directors of a corporation, including ArcSoft, the merged or consolidated, or the new surviving company.

(v) The foregoing does not include any transfers among present stockholders of ArcSoft or among ArcSoft and its subsidiaries, public offerings or debt or equity funding of ArcSoft in which ArcSoft receives the proceeds of such sale.

9. Liability Insurance

ArcSoft shall maintain a directors and officers liability insurance in the amount of no less than $5 million to cover Executive during the Term of this Agreement. Upon close of ArcSoft initial public offering, such coverage shall be increased to no less than $20 million or other amount deemed adequate by the Board.

10. Arbitration

(a) Agreement Except as otherwise provided in this Agreement, the Parties agree that any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be settled by confidential, final and binding arbitration conducted in Santa Clara, California or such other location agreed by the Parties hereto, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association. In the arbitration, the Parties will be entitled to all remedies that would have been available if the matter were litigated in a court of law. The decisions of the arbitrator shall be final, conclusive and binding on the Parties to the arbitration. Judgment may be entered on the arbitrator’s decision in any court having jurisdiction. The Parties will be entitled to reasonable discovery of essential matters as determined by the arbitrator. The fees and expenses of the arbitration, including but not limited to legal fees and arbitrator’s fees, shall be borne as the arbitrators may determine to be appropriate. A judgment on the arbitration award may be entered in any court of competent subject matter jurisdiction in Santa Clara County.

(b) Governing Law This Agreement and its validity, construction and performance shall be governed by California law, without reference to rules of conflicts of law.

(c) Equitable Remedies Executive acknowledges that he has been employed for his unique talents and that his leaving the employment of ArcSoft would seriously hamper the business of ArcSoft and that ArcSoft will suffer irreparable damage if any provisions of Sections 5 and 6 hereof are not performed strictly in accordance with their terms or are otherwise breached. Executive hereby expressly agrees that ArcSoft shall be entitled as a matter of right to injunctive or other equitable relief, in addition to all other remedies permitted by law, to prevent a breach or violation by Executive and to secure enforcement of the provisions of Sections 5 and 6 hereof. Resort to such equitable relief, however, shall not constitute a waiver or any other rights or remedies which ArcSoft may have.

11. Miscellaneous

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(a) Governing Law This Agreement shall be interpreted and enforced in accordance with the laws of the State of California, except that any arbitration shall be governed by the Federal Arbitration Act.

(b) Entire Agreement This Agreement represents the entire understanding and agreement between ArcSoft and Executive concerning Executive’s employment relationship with ArcSoft. This Agreement may not be amended or modified except in writing by the Parties.

(c) Notices Any notices or other communications under this Agreement shall be in writing, signed by the party making the same, and shall be delivered by personally or sent by certified or registered mail, postage prepaid, addressed as follows:

If to Executive:	At the last residential address known by ArcSoft
If to ArcSoft:	ArcSoft, Inc. 46601 Fremont Blvd. Fremont, CA 94538 Attn.: Chief Executive Officer

(d) Severability In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision.

IN WITNESS WHEREOF, the undersigned have executed this Agreement.

ARCSOFT, INC.		EXECUTIVE
By:		By:
	Michael Deng		Print name:
Title:	Chief Executive Officer and President	Address:

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EX-10.8

Exhibit 10.8

STANDARD MULTI-TENANT LEASE FORM

(NET LEASE FORM)

THIS LEASE, dated January 7, 1998, for reference purposes only, is made by and between PEN ASSOCIATES NO. 2, LLC, a California limited liability company, and LAKEHOUSE, LLC, a California limited liability company as Tenants in Common (“Landlord”) and ArcSoft, Inc., a California Corporation (“Tenant”), to be effective and binding upon the parties as of the date the last of the designated signatories to this Lease shall have executed this Lease (the “Effective Date of this Lease”).

ARTICLE 1

REFERENCES

1.1 REFERENCES: All references in this Lease (subject to any further clarifications contained in this Lease) to the following terms shall have the following meaning or refer to the respective address, person, date, time period, amount, percentage, calendar year or fiscal year as below set forth:

A.	Tenant’s Address for Notices:	46601 – 46605 Fremont Blvd., Fremont, CA 94538
B.	Tenant’s Representative:	Michael Deng
	Business Phone Number:	(510) 440-9901
	Home Phone Number:	(510) 713-9784
	Home Address:	5465 Ridgewood Dr. Fremont
C.	Landlord’s Address for Notice:	1285 Oakmead Parkway, Sunnyvale, CA 94086
D.	Landlord’s Representative:	William N. Neidig
	Phone Number:	(408) 730-5500
E.	Intended Commencement Date:	February 15, 1998 /s/ [initials illegible]
F.	Intended Term:	Five (5) Years
G.	Lease Expiration Date:	Five (5) years following the Actual Lease Commencement Date
H.	Tenant’s Punchlist Period:	Five business days from delivery of The Premises to Tenant
I.	First Month’s Prepaid Rent:	$24,576.00
J.	Last Month’s Prepaid Rent:	None
K.	Tenant’s Security Deposit:	$78,730.00
L.	Late Charge Amount:	Ten (10%) Percent of the late amount(s)
M.	Tenants Liability Coverage:	Three Million ($3,000,000) Dollar Single Limit
N.	Undesignated and non-exclusive number of Parking Spaces: 65

O. Leased Premises: That certain space which is a portion of the combination of buildings containing 108,757 square feet of leasable area referred to as Renco 60 (the “Project” or the “Property”), which space is shown outlined in red on the Floor Plan attached hereto as Exhibit ”B” consisting of approximately 16,674 square feet of leasable area measuring to the outside edge of the outside walls and drip lines, including a prorata share of the electrical room and other common spaces and, for purposes of this Lease, agreed between Landlord and Tenant to contain said number of square feet. The Leased Premises are commonly known by address as follows: 46601 - 46605 Fremont Blvd., Fremont California, 94538.

P. Base Monthly Rent: The term “Base Monthly Rent” shall mean the amount of rent due and payable on the first day of each month of the Lease Term which for purposes of this Lease is agreed to be the monthly sum of Twenty Four Thousand Five Hundred Seventy Six Dollars ($24,576.00) for each full month of the first year of the Lease Term, Twenty Five Thousand Four Hundred Ten Dollars ($25,410.00) for each full month of the second year of the Lease Term, Twenty Six Thousand Two Hundred Forty Three Dollars ($26,243.00) for each full month of the third year of the Lease Term, Twenty Seven Thousand Seventy Seven Dollars ($27,077.00) for each full month of the fourth Lease Year, and Twenty Seven Thousand Nine Hundred Ten Dollars ($27,910.00) for each full month of the fifth Lease Year. Any partial month shall be prorated on the basis of a 30 day month.

Q. Permitted Use: The term “Permitted Use” shall mean that Landlord and Tenant agree that Tenant shall use the Premises for: manufacture, assembly, repair, sales, and distribution of electronic parts and components, and related office and support functions and for no other use

R.	Exhibits:	The term “Exhibits” shall mean the Exhibits to this Lease which are described as follows:
	Exhibit “A” -	Site Plan showing the “Project” (or “Property”) and delineating the Building in which the Leased Premises are located.
	Exhibit “B” -	Floor Plan outlining the Leased Premises.
	Exhibit “C” -	Subordination Agreement
	Exhibit “D” -	Estoppel Certificate
	Exhibit “E” -	Acceptance Agreement
	Exhibit “F” -	Tenant Improvements
	Exhibit “G” -	Sign Criteria
S.	Addenda:	The term “Addenda” shall mean the Addendum (or Addenda) to this Lease which is (or are) described as follows:

ARTICLE 2

LEASED PREMISES, TERM AND POSSESSION

2.1 LEASE OF PREMISES: Landlord hereby leases to Tenant and Tenant hereby leases from Landlord that certain interior space described above as the Leased Premises (or “Premises”). Landlord reserves the right to install, maintain, use and replace ducts, wires, conduits and pipes leading through the Leased Premises in locations which will not materially interfere with Tenant’s use of the Leased Premises. Tenant’s use of the Leased Premises, together with the appurtenant right to use the Common Areas shall be conditioned upon and be subject to the continuing

compliance by Tenant with (i) all the terms and conditions of the Lease, (ii) all Laws governing the use of the Leased Premises and the Project, (iii) all Private Restrictions, easements and other matters now of public record respecting the use of the Leased Premises and the Project, and (iv) all reasonable rules and regulations from time to time established by Landlord.

2.2 RIGHT TO USE COMMON AREAS: As an appurtenant right to Tenant’s right to the use of the Leased Premises, Tenant shall have the non-exclusive right to use the Common Areas in conjunction with other tenants of the Project and their invitees. Landlord has entered into a short term lease with the County of Alameda which lease permits Landlord to use a portion of the County flood control channel for active and passive recreational uses. The land leased to Landlord by the County is identified on Exhibit A as “Alameda County Property”. The Alameda County property is not a part of the Property or Project that is the subject of this Lease. Tenant, may use the Alameda County Property for recreational purposes on a non exclusive basis in conjunction with other tenants of the Project, their invitees, and other parties who Landlord permits to so use the Alameda County Property. Landlord may, at any time in its sole discretion, impose rules for the use of the Alameda County Property, with which rules Tenant shall comply. Landlord may, at any time, in its sole discretion, revoke Tenant’s right to use the Alameda County Property. Landlord may continue to permit others to use the Alameda County Property even if Landlord terminates Tenant’s right to use the Alameda County Property. Tenant acknowledges that the improvements constructed on the Alameda County Property may be removed at any time, and that either Landlord or the County of Alameda may terminate Landlord’s lease of the Alameda County Property at any time, and Tenant acknowledges that revocation of Tenant’s right to use the Alameda County Property shall not alter or diminish any of Tenant’s obligations under this Lease.

2.3 LEASE COMMENCEMENT DATE AND LEASE TERM: The term of this Lease shall begin, and the Lease Commencement Date shall be deemed to have occurred, on the Intended Commencement Date (as set forth in Article 1.1 unless Landlord is unable to deliver possession of the Leased Premises to Tenant on the Intended Commencement Date, in which case the Lease Commencement Date shall be as determined pursuant to Article 2.4 below.

2.4 DELIVERY OF POSSESSION: Landlord shall use its best efforts to deliver to Tenant possession of the Leased Premises on or before the Intended Commencement Date in its presently existing condition, broom clean and ready to occupy. If Landlord is unable to so deliver possession of the Leased Premises to Tenant on or before the Intended Commencement Date, for whatever reason, Landlord shall not be in default under this Lease, nor shall this Lease be void, voidable or cancelable by Tenant until the lapse of sixty days after the Intended Commencement Date (the “delivery grace period”) however, the Lease Commencement Date shall not be deemed to have occurred until such date as Landlord notifies Tenant that the Leased Premises are ready for occupancy. The term of the Lease shall be extended by the delay time. If Landlord is unable to deliver possession of the Leased Premises to Tenant within the described delivery grace period, then Tenant’s sole remedy shall be to cancel and terminate this Lease in which case Landlord shall refund all of Tenants deposits (less costs incurred by Landlord for commissions or interior improvements) provided the delay shall not have been caused by Tenant, and in no event shall Landlord be liable to Tenant for such delay. Tenant may not cancel this Lease at any time after the date Landlord notifies Tenant the Leased Premises are Ready for Occupancy.

2.5 ACCEPTANCE OF POSSESSION: Upon the expiration of Tenant’s Punchlist Period, Tenant shall be conclusively deemed to have accepted the condition of the Leased Premises in their then-existing condition as so delivered by Landlord to Tenant, except as to those items reasonably set forth in the punchlist submitted to Landlord prior to the expiration of said period. Landlord agrees to correct all items reasonably set forth in Tenant’s punchlist, provided that such punchlist was submitted to Landlord within Tenant’s Punchlist Period. Additionally, Landlord agrees to place in good working order all existing plumbing, lighting, heating, ventilating and air conditioning systems within the Leased Premises and all man doors and roll-up truck doors serving the Leased Premises to the extent that such systems and/or items are not in good operating condition as of the date Tenant accepts possession of the Leased Premises; provided that, and only if, Tenant notifies Landlord in writing of such failures or deficiencies within five business days from the date Tenant so accepts possession of the Leased Premises.

2.6 SURRENDER OF POSSESSION: Immediately prior to the expiration or sooner termination of this Lease, Tenant shall remove all of Tenant’s signs from the exterior of the Building and shall remove all of Tenant’s equipment, trade fixtures, furniture, supplies, wall decorations and other personal property from the Leased Premises, and shall vacate and surrender the Leased Premises to Landlord in the same condition, broom clean and freshly repainted, as existed at the Lease Commencement Date. Landlord, at Tenant’s expense, shall retain a mechanical contractor to service all heating, ventilation and air conditioning equipment, and Tenant shall pay the cost to restore (or replace as required), said equipment to good working order. Tenant shall repair all damage to the Leased Premises caused by Tenant or by Tenant’s removal of Tenant’s property and all damage to the exterior of the Building caused by Tenant’s removal of Tenant’s signs. Tenant shall patch and refinish, to Landlord’s reasonable satisfaction, all penetrations made by Tenant or its employees to the floor, walls or ceiling of the Leased Premises, whether such penetrations were made with Landlord’s approval or not. Tenant shall replace all stained or damaged ceiling tiles and shall repair or replace, as necessary, all wall coverings and clean or replace, as may be required, floor coverings to the reasonable satisfaction of Landlord. Tenant: shall replace all burned out light bulbs and damaged or stained light lenses, and shall repaint all painted walls. Tenant shall repair all damage caused by Tenant to the exterior surface of the Building and the paved surfaces of the outside areas adjoining the Leased Premises and, where necessary, replace or resurface same. Additionally, Tenant shall, prior to the expiration or sooner termination of this Lease, remove any improvements constructed or installed by Tenant which Landlord requests be so removed by Tenant and repair all damage caused by such removal. If the Leased Premises are not surrendered to Landlord in the condition required by this Article at the expiration or sooner termination of this Lease, Landlord may, at Tenant’s expense, so remove Tenant’s signs, property and/or improvements not so removed and make such repairs and replacements not so made or hire, at Tenant’s expense, independent contractors to perform such work. Tenant shall be liable to Landlord for all

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costs incurred by Landlord in returning the Leased Premises to the required condition and Tenant shall be deemed to have impermissibly held over until such time as such required work is completed. Tenant shall pay Base Monthly Rent and Additional Rent in accordance with the terms of Section 13.2 (Holding Over) until such work is completed.

ARTICLE 3

RENT, LATE CHARGES AND SECURITY DEPOSITS

3.1 BASE MONTHLY RENT: Commencing on the Lease Commencement Date and continuing throughout the Lease Term, Tenant shall pay to Landlord, without prior written or oral demand in advance on the first day of each calendar month, as base monthly rent, the amount set forth as “Base Monthly Rent” in Article 1

3.2 ADDITIONAL RENT: Commencing on the Lease Commencement Date and continuing throughout the Lease Term, in addition to the Base Monthly Rent, Tenant shall pay to Landlord as additional rent (the “Additional Rent”) Tenant’s Proportionate Share of all Building Operating Expenses (as defined in Article 13). Payment shall be made by one of the following methods: Landlord may bill to Tenant, on a periodic basis not more frequently than monthly, Tenant’s Proportionate Share of such expenses (or group of expenses) as paid or incurred by Landlord, and Tenant shall pay such share of such expenses within ten days after receipt of a written bill therefore from Landlord; and/or Landlord may budget the annual projected expenses and bill to Tenant on a monthly basis, one-twelfth of the annual amount. If Landlord elects the latter of the alternatives, Landlord shall reconcile the budgeted amounts with the actual amounts on an annual basis during the first quarter of the subsequent year and bill Tenant for any additional amounts or credit Tenant any overpayments against future Additional Rent amounts.

3.3 LATE CHARGE AND INTEREST ON RENT IN DEFAULT: Tenant acknowledges that the late payment by Tenant of any monthly installment of Base Monthly Rent or any Additional Rent will cause Landlord to incur certain costs and expense not contemplated under this Lease, the exact amounts of which are extremely difficult or impractical to fix. Such costs and expenses will include, without limitation, administration and collection costs and processing and accounting expenses. If any installment of Base Monthly Rent or Additional Rent is not received by Landlord from Tenant within six calendar days after the same becomes due, Tenant shall immediately pay to Landlord a late charge in an amount equal to ten percent of the amounts due and not so paid. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the anticipated loss Landlord would suffer by reason of Tenant’s failure to make timely payment. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any rental installment or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant’s failure to pay each rental installment due under this Lease when due. If any rent remains delinquent for a period in excess of six calendar days, then, in addition to such late charge, Tenant shall pay to Landlord interest on any rent that is not so paid from said sixth day at the then maximum rate of interest not prohibited by Law until paid.

3.4 PAYMENT OF RENT: All rent shall be paid without any abatement, deduction or offset for any reason whatsoever, to Landlord at such address as Landlord may designate from time to time. Tenant’s obligation to pay Base Monthly Rent and all Additional Rent shall be prorated at the commencement and expiration of the Lease Term. The failure by Tenant to pay any Additional Rent as required pursuant to this Lease when due shall be treated the same as a failure by Tenant to pay Base Monthly Rent when due, and Landlord shall have the same rights and remedies against Tenant as Landlord would have if Tenant failed to pay the Base Monthly Rent when due.

3.5 SECURITY DEPOSIT: Upon signing this Lease, Tenant shall immediately deposit with Landlord the amount set forth in Article 1 as the “Security Deposit” as security for the performance by Tenant of the terms of this Lease and not as prepayment of rent. Landlord may apply such portion or portions of the Security Deposit as are reasonably necessary for the following purposes: (i) to remedy any default by Tenant in the payment of Base Monthly Rent or Additional Rent or a late charge or interest on defaulted rent; (ii) to repair damage to the Leased Promises caused by Tenant; (iii) to clean and repair the Leased Promises following their surrender to Landlord if not surrendered in the condition required pursuant to the provisions of Article 2; and (iv) to remedy any other default of Tenant to the extent permitted by Law including, without limitation, paying in full on Tenant’s behalf any sums claimed by materialmen or contractors of Tenant to be owing to them by Tenant for work done or improvements made at Tenant’s request to the Leased Premises. Tenant shall not be entitled to any interest on the Security Deposit. If Landlord transfers the Building during the Lease Term, Landlord may pay the Security Deposit to any subsequent owner in conformity with the California Civil Code, in which event the transferring landlord shall be released from all liability for the return of the Security Deposit. In no event shall the Security Deposit, or any portion thereof, be considered prepaid rent.

ARTICLE 4

USE OF LEASED PREMISES AND COMMON AREAS

4.1 PERMITTED USE: Tenant shall be entitled to use the Leased Promises solely for the “Permitted Use” as set forth in Article 1 and for no other purpose whatsoever. Subject to the limitations contained in this Article 4, Tenant shall have the right to use the Common Areas, in conjunction with other tenants and during normal business hours, solely for the purposes for which they were intended and for no other purposes whatsoever. Tenant shall not have the right to use the exterior surfaces of exterior walls.

4.2 GENERAL LIMITATIONS ON USE: Tenant shall not do or permit anything to be done in or about the Leased Promises, the Building, the Common Areas or the Project which does or could (i) interfere with the rights of other tenants or occupants of the Building or the Project, (ii) jeopardize the structural integrity of the Building or the Project, or (iii) cause damage to any part of the Building or the Project. Tenant shall not operate any equipment within the Leased Premises which does or could (i) injure, vibrate or shake the Leased Promises or the Building, (ii) damage, overload, corrode, or impair the efficient operation of any electrical, plumbing, sewer, heating, ventilating

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or air conditioning systems within or servicing the Leased Premises or the Building or (iii) damage or impair the efficient operation of the sprinkler system (if any) within or servicing the Leased Premises or the Building. Tenant shall not install any equipment or antennas on or make any penetrations of the exterior walls or roof of the Building. Tenant shall not affix any equipment to or make any penetrations or cuts in the floor, ceiling or walls of the Leased Premises. Tenant shall not place any loads upon the floors, walls, ceiling or roof systems which could endanger the structural integrity of the Building or damage its floors, foundations or supporting structural components. Tenant shall not place any explosive, flammable or harmful fluids, including Hazardous Materials in any sanitary or storm sewer or place any waste materials in the storm drainage systems of the Building or the Project. Tenant shall not drain or discharge any fluids in the landscaped areas or across the paved areas of the Project. Tenant shall not use any area located outside the Leased Premises for the storage of its materials, supplies, inventory or equipment, and all such materials, supplies, inventory and equipment shall at all times be stored within the Leased Premises. Tenant shall not commit nor permit to be committed any waste in or about the Leased Premises, the Common Areas or the Project.

4.3 NOISE AND EMISSIONS: All noise generated by Tenant in its use of the Leased Premises shall be confined or muffled so that it does not interfere with the businesses of or annoy other tenants of the Building or the Project. All dust, fumes, odors and other emissions generated by Tenant’s use of the Leased Premises shall be sufficiently dissipated in accordance with sound environmental practices and exhausted from the Leased Premises in such a manner so as not to interfere with the businesses of or annoy other tenants of the Building or the Project, or cause any damage to the Leased Premises or the Building or any component part thereof or the property of other tenants of the Building or the Project.

4.4 TRASH DISPOSAL: Tenant shall provide trash and garbage disposal facilities inside the Leased Premises for all of its trash, garbage and waste requirements unless Landlord shall have provided fenced areas for “dumpsters” and shall cause such trash, garbage and waste to be regularly removed from the Leased Premises at Tenant’s sole cost. Tenant shall keep all areas outside the Leased Premises and all fire corridors and mechanical equipment rooms in or about the Leased Premises free and clear of all trash, garbage, waste and boxes containing same at all times.

4.5 PARKING: Tenant and its employees and invitees shall have the non-exclusive right to use, only the number of parking spaces set forth in Article 1 as “Tenant’s Number of Parking Spaces”. Tenant shall not, at any time, use or permit its employees or invitees to use more parking spaces than the number so allocated to Tenant. Tenant shall not have the exclusive right to use any specific parking space, and Landlord reserves the right to designate from time to time the location of the parking spaces allocated for Tenant’s use. In the event Landlord elects or is required by any Law to limit or control parking within the Project, whether by validation of parking tickets or any other method, Tenant agrees to participate in such validation or other program as reasonably established by Landlord. Tenant shall not, at any time, park or permit to be parked any trucks or vehicles adjacent to entryways or loading areas within the Project so as to interfere in any way with the use of such areas, nor shall Tenant, at any time, park or permit the parking of Tenant’s trucks or other vehicles, or the trucks and vehicles of Tenant’s suppliers or others, in any portion of the Common Areas not designated by Landlord for such use. Tenant shall not, at any time, park or permit to be parked any recreational vehicles, inoperative vehicles or equipment on any portion of the common parking area or other Common Areas of the Project. Tenant agrees to assume responsibility for compliance by its employees and invitees with the parking provisions contained herein. Tenant hereby authorizes Landlord, at Tenant’s sole expense, to tow away from the Project and store until redeemed by its owner any vehicle belonging to Tenant or Tenant’s employees parked in violation of these provisions.

4.6 SIGNS: Tenant shall not place or install on or within any portion of the Leased Premises, the Building, the Common Areas or the Project any sign (other than a business identification sign first approved by Landlord in accordance with this Article), advertisements, banners, placards or pictures which are visible from the exterior of the Leased Premises. Tenant shall not place or install on or within any portion of the Leased Premises, the Building, the Common Areas or the Project any business identification sign which is visible from the exterior of the Leased Premises until Landlord shall have first approved in writing the location, size, content, design, method of attachment and material to be used in the making of such sign. Any signs, once approved by Landlord, shall be installed only in strict compliance with Landlord’s approval, at Tenant’s expense, using a person first approved by Landlord to install same. Landlord may remove any signs (not first approved in writing by Landlord), advertisements, banners, placards or pictures so placed by Tenant on or within the Leased Premises, the Building, the Common Areas or the Project and charge to Tenant the cost of such removal, together with any costs incurred by Landlord to repair any damage caused thereby, including any cost incurred to restore the surface upon which such sign was so affixed to its original condition. Tenant shall remove any such signs, repair any damage caused thereby, and restore the surface upon which the sign was affixed to its original condition, all to Landlord’s reasonable satisfaction, upon the termination of this Lease.

4.7 LANDLORD’S RIGHT TO ENTER: Landlord and its agents shall have the right to enter the Leased Premises during normal business hours and subject to Tenant’s reasonable security measures for the purpose of (i) inspecting the same; (ii) supplying any services to be provided by Landlord to Tenant; (iii) showing the Leased Premises to prospective purchasers, mortgagees or tenants: (iv) making necessary alterations, additions or repairs; (v) performing any of Tenant’s obligations when Tenant has failed to do so after giving Tenant reasonable written notice of its intent to do so; and (vi) posting notices of non-responsibility or “For Lease” or “For Sale” signs. Additionally, Landlord shall have the right to enter the Leased Premises without notice to Tenant at times of emergency.

4.8 CONTROL OF COMMON AREAS: Landlord shall at all times have exclusive control of the Common Areas including without limitation, the right to prohibit mobile food and beverage or other vendors from entering the Property.

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4.9 RULES AND REGULATIONS: Landlord shall have the right from time to time to establish reasonable rules and regulations regarding the use of the Common Areas. Upon delivery to Tenant of a copy of such reasonable rules and regulations, Tenant shall comply with such rules and regulations.

4.10 OUTSIDE AREAS: No materials, pallets, supplies, tanks or containers whether above or below ground level, equipment, finished products or semi-finished products, raw materials, inoperable vehicles or articles of any nature shall be stored upon or permitted to remain outside of the Leased Premises except in fully fenced and screened areas outside the Building which have been designed for such purpose and have been approved in writing by Landlord for such use by Tenant.

4.11 HAZARDOUS MATERIALS: Landlord and Tenant agree that with respect to the existence or use of Hazardous Materials (as defined as such under current laws or regulations as may be amended from to time) on the Property, any handling, transportation, storage, treatment, disposal or use of Hazardous Materials, in any amount, by Tenant, Tenant’s agents, or any other party associated with Tenant must be absolutely and completely disclosed to and approved in writing by Landlord prior to its arrival in the Premises. Landlord may uncontestably withhold Landlord’s approval at Landlord’s sole discretion. Any withholding from Landlord of information relating to Hazardous Materials used or stored by Tenant shall constitute a material default under the terms of the Lease and shall be cause for lease termination at Landlord’s option. Any use or storage of any disclosed Hazardous Materials in or about the Property, which use or storage shall have been approved by Landlord, shall strictly comply with all applicable Hazardous Materials laws. Tenant shall, upon request by Landlord, provide proof of approvals by the governing authorities. Landlord’s consent or approval once given shall not constitute approval for any subsequent bringing of Hazardous Materials onto the Premises or Project. Tenant shall indemnify, defend upon demand with counsel reasonably acceptable to Landlord, and hold harmless Landlord from and against any and all liabilities, losses, claims, damages, lost profits, consequential damages, interest, penalties, fines, court costs, remediation costs, investigation costs, and other expenses which result from or arise in any manner whatsoever out of the use, storage, treatment, transportation, release, or disposal of Hazardous Materials on or about the Leased Premises or the Property by Tenant, Tenant’s agents, permitees, or invitees. If the presence of Hazardous Materials on the Leased Premises, the Building, or the Project caused or permitted by Tenant’ Tenant’s agents, permitees, or invitees result in contamination or deterioration to any extent of water, soil, or any part of the Leased Premises, the Building, or the Project, then Tenant shall promptly take any and all action necessary to remove said Hazardous Materials and to return the Project (and any other property of whatever nature) to their condition existing prior to the appearance of such Hazardous Materials. Landlord may at any time and at Tenant’s sole cost perform any tests or investigations (including the installation of testing wells) it deems appropriate to determine the presence of Hazardous Materials on the Project. The terms of this clause shall survive the expiration or sooner termination of this Lease. In the event that any containers of Hazardous Materials appear upon the Property or the Premises, or materials are spilled upon the Property or the Premises, the responsibility for which cannot be reasonably determined, Landlord is hereby authorized to remove the containers or the spilled materials, and Tenant shall, upon demand by Landlord, reimburse Landlord for any costs associated with such removal and any repairs required by virtue of such removal. If such removal and subsequent cost associated with such removal cannot be reasonably attributed to a specific space within the Project, the costs shall be apportioned on a pro-rata basis among all tenants in the Project.

ARTICLE 5

REPAIRS, MAINTENANCE, SERVICES AND UTILITIES

5.1 REPAIR AND MAINTENANCE: The parties shall have the following obligations and responsibilities with respect to the repair and maintenance of the Leased Premises, the Building and the Common Areas.

A. Tenant’s Obligation: Tenant shall, at all times during the Lease Term and at its sole cost and expense, regularly clean and continuously keep and maintain in good order, condition and repair the Leased Premises and every part thereof and all appurtenances thereto, including, without limiting the generality of the foregoing, (i) all interior walls, floors and ceilings, (ii) all windows, doors and skylights, (iii) all electrical wiring, conduits, connectors and fixtures, (iv) all plumbing, pipes, sinks, toilets, faucets and drains, (v) all lighting fixtures, bulbs and lamps, (vi) all heating, ventilating and air conditioning equipment located within the Leased Premises or located outside the Leased Premises (e.g. rooftop compressors) and serving the Leased Premises and (vii) all entranceways to the Leased Premises. Tenant, if requested to do so by Landlord, shall hire, at Tenant’s sole cost and expense, a licenscd heating, ventilating and air conditioning contractor to regularly, and periodically inspect (not less frequently than every three months) and perform required maintenance on the heating, ventilating and air conditioning equipment and systems serving the Leased Premises, or alternatively, Landlord may, at its election, contract in its own name for such regular and periodic inspections of and maintenance on such heating, ventilating and air conditioning equipment and systems and charge to Tenant, as Additional Rent, the cost thereof. Tenant shall, at its sole cost and expense, repair all damage to the Building, the Common Areas or the Project caused by the activities of Tenant, its employees, invitees or contractors promptly following written notice from Landlord to so repair such damage. If Tenant shall fail to perform the required maintenance or fail to make repairs required of it pursuant to this Article within a reasonable period of time following notice from Landlord to do so, then Landlord may, at its election and without waiving any other remedy it may otherwise have under this Lease or at Law, perform such maintenance or make such repairs and charge to Tenant, as Additional Rent, the costs so incurred by Landlord for same. All glass within or a part of the Leased Premises, both interior and exterior, is at the sole risk of Tenant and any broken glass shall promptly be replaced by Tenant at Tenant’s expense with glass of the same kind, size and quality.

B. Landlord’s Obligation: Landlord shall, during the Lease Term or any extensions thereof, repair the exterior structural parts of the Building (including the foundation, concrete walls, and roof structure). Landlord shall, also maintain in good condition and repair: the Common Areas, the roof membrane, the exterior finishes including paint, the glazing, the landscaping, the paving (including driving surfaces, curbs and gutters), and the

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electrical and plumbing systems located outside the Leased Premises which service the Building. Landlord shall charge Tenant, as Additional Rent, the costs incurred by Landlord in making such repairs and maintenance.

5.2 SERVICES AND UTILITIES: The parties shall have the following responsibilities and obligations with respect to obtaining and paying the cost of providing the following utilities and other services to the Leased Premises.

A. Gas and Electricity: Tenant shall arrange, at its sole cost and expense and in its own name, for the supply of gas and electricity to the Leased Premises. Tenant shall be responsible for determining if the local supplier of gas and/or electricity can supply the needs of Tenant and whether or not the existing gas and/or electrical distribution systems within the Building and the Leased Premises are adequate for Tenant’s needs. Tenant shall pay all charges for gas and electricity as so supplied to the Leased Premises.

B. Water: Landlord shall provide the Leased Premises with water for lavatory and drinking purposes only. Tenant shall pay, as Additional Rent, the cost to Landlord of providing water to the Leased Premises.

C. Security Service: Tenant acknowledges that Landlord is not responsible for the security of the Leased Premises or the protection of Tenant’s property or Tenant’s employees, invitees or contractors, and that to the extent Tenant determines that such security or protection services are advisable or necessary, Tenant shall arrange for and pay the costs of providing same.

D. Trash Disposal: Tenant acknowledges that Landlord is not responsible for the disposal of Tenant’s waste, garbage or trash and that Tenant shall arrange, in its own name and at its sole cost, for the regular and periodic removal of such waste, garbage or trash from the Leased Premises. In no event shall Landlord be required to provide trash bins for the disposal of Tenant’s waste, garbage or trash.

5.3 LIMITATION OF LANDLORD’S LIABILITY: Landlord shall not be liable to Tenant for injury to Tenant, its employees, agents, invitees or contractors, damage to Tenant’s property or loss of Tenant’s business or profits, nor shall Tenant be entitled to terminate this Lease or to any reduction in or abatement of rent by reason of (i) Landlord’s failure to perform any maintenance or repairs to the Project subject to the provisions of Article #12.3, or (ii) any failure, interruption, rationing or other curtailment in the supply of water, electric current, gas or other utility service to the Leased Premises, the Building or the Project from whatever cause (other than Landlord’s active negligence or willful misconduct), or (iii) the unauthorized intrusion or entry into the Leased Premises by third parties.

ARTICLE 6

ALTERATIONS AND IMPROVEMENTS

6.1 BY TENANT: Tenant shall not make any alterations to or modifications of the Leased Premises or construct any improvements to or within the Leased Premises without Landlord’s prior written approval, and then not until Landlord shall have first approved, in writing, the plans and specifications therefore, which approval shall not be unreasonably withheld. All such modifications, alterations or improvements, once so approved, shall be made, constructed or installed by Tenant at Tenant’s expense, using a licensed contractor first approved by Landlord, in substantial compliance with the Landlord-approved plans and specifications therefore. All work undertaken by Tenant shall be done in accordance with all Laws and in a good and workmanlike manner using new materials of good quality that match or complement the original improvements existing as of the Lease Commencement Date. Tenant shall not commence the making of any such modifications or alterations or the construction of any such improvements until (i) all required governmental approvals and permits shall have been obtained, (ii) all requirements regarding insurance imposed by this Lease have been satisfied, (iii) Tenant shall have given Landlord at least five business days prior written notice of its intention to commence such work so that Landlord may post and file notices of non-responsibility, and (iv) if requested by Landlord, Tenant shall have obtained contingent liability and broad form builder’s risk insurance in an amount satisfactory to Landlord to cover any perils relating to the proposed work not covered by insurance carried by Tenant pursuant to Article 9. In no event shall Tenant make any modifications, alterations or improvements to the Common Areas or any areas outside of the Leased Premises. As used in this Article, the term “modifications, alterations and/or improvements” shall include, without limitation, the installation of additional electrical outlets, overhead lighting fixtures, drains, sinks, partitions, doorways, or the like. As a part of granting Landlord’s approval for Tenant to make alterations or modifications Landlord may require Tenant to increase the amount of it’s Security Deposit to cover the cost of removing Tenant’s alterations or modifications and to restore the condition of the Premises to it’s prior condition. Tenant shall pay Landlord’s reasonable costs to inspect the construction of Tenant’s alterations or modifications and to have Landlord’s architect revise Landlord’s drawings to show the work performed by Tenant.

6.2 OWNERSHIP OF IMPROVEMENTS: All modifications, alterations or improvements made or added to the Leased Premises by Tenant (other than Tenant’s inventory, equipment, movable furniture, wall decorations and trade fixtures) shall be deemed real property and a part of the Leased Premises, but shall remain the property of Tenant during the Lease Term. Any such modifications, alterations or improvements, once completed, shall not be altered or removed from the Leased Premises during the Lease Term without Landlord’s written approval first obtained in accordance with the provisions of the Article above. At the expiration or sooner termination of the Lease, all such modifications, alterations and improvements (other than Tenant’s inventory, equipment, movable furniture, wall decorations and trade fixtures) shall automatically become the property of Landlord and shall be surrendered to Landlord as a part of the Leased Premise as required pursuant to Article 2, unless Landlord shall require Tenant to remove any of such modifications, alterations or improvements, in which case Tenant shall so remove same. Landlord shall have no obligation to reimburse to Tenant all or any portion of the cost or value of any such modifications, alterations or improvements so surrendered to Landlord. All modifications, alterations or improvements which are installed or constructed on or attached to the Leased Premises by Landlord at Landlord’s expense shall he deemed real property, and a part of the Leased Premises and shall be the property of Landlord. All lighting, plumbing, electrical, heating, ventilating and air conditioning fixtures, partitioning, window coverings, wall coverings and floor coverings installed by Tenant shall be deemed improvements to the Leased Premises and not trade Fixtures of Tenant.

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6.3 ALTERATIONS: Throughout the term of this Lease or any extensions thereof, at its sole cost, Tenant shall make all modifications, alterations and improvements to the Leased Premises that are required by any Law.

6.4 LIENS: Tenant shall keep the Leased Premises, the Building and the Property free from any liens and shall pay when due all bills arising out of any work performed, materials furnished, or obligations incurred by Tenant, its agents, employees or contractors relating to the Leased Premises.

ARTICLE 7

ASSIGNMENT AND SUBLETTING BY TENANT

7.1 BY TENANT: Tenant shall not sublet the Leased Premises (or any portion thereof) or assign or encumber its interest in this Lease, whether voluntarily or by operation of Law, without Landlord’s prior written consent first obtained in accordance with the provisions of this Article 7. Any attempted subletting, assignment or encumbrance without Landlord’s prior written consent, at Landlord’s election, shall constitute a default by Tenant under the terms of this Lease. The acceptance of rent by Landlord from any person or entity other than Tenant, or the acceptance of rent by Landlord from Tenant with knowledge of a violation of the provisions of this Article, shall not be deemed to be a waiver by Landlord of any provision of this Article or this Lease or to be a consent to any subletting by Tenant or any assignment or encumbrance of Tenant’s interest in this Lease.

7.2 MERGER OR REORGANIZATION: If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or the sale or other transfer in the aggregate over the Lease Terms of a controlling percentage of the capital stock of Tenant, shall be deemed a voluntary assignment of Tenant’s interest in this Lease. The phrase “controlling percentage” means the ownership of and the right to vote stock possessing more than fifty percent of the total combined voting power of all classes of Tenant’s capital stock issued, outstanding and entitled to vote for the election of directors. If Tenant is a partnership, a withdrawal or change, whether voluntary, involuntary or by operation of Law, of any general partner, or the dissolution of the partnership, shall be deemed a voluntary assignment of Tenant’s interest in this Lease.

7.3 LANDLORD’S ELECTION: If Tenant or Tenant’s successors shall desire to assign its interest under this Lease or to sublet the Leased Premises, Tenant and Tenant’s successors must first notify Landlord, in writing, of its intent to so assign or sublet, at least thirty days in advance of the date it intends to so assign its interest in this Lease or sublet the Leased Premises but not sooner than sixty days in advance of such date, specifying in detail the terms of such proposed assignment or subletting, including the name of the proposed assignee or sublessee, the proposed assignees or Sublessee’s intended use of the Leased Premises, a current financial statement of such proposed assignee or sublessee and the form of documents to be used in effectuating such assignment or subletting. Landlord shall have a period of fifteen days following receipt of such notice and receipt of all information requested by Landlord regarding the proposed assignee or sublessee within which to do one of the following: (a) terminate this Lease or, in the case of a sublease of less than all of the Leased Premises, terminate this Lease as to that part of the Leased Premises proposed to be so sublet, either (i) on the condition that the proposed Transferee immediately enter into a direct lease of the Leased Premises with Landlord (or, in the case of a partial sublease, a lease for the portion proposed to be so sublet) on the same teens and conditions contained in Tenant’s (or Tenant’s successors’) notice, or (ii) so that Landlord is thereafter free to lease the Leased Premises (or, in the case of a partial sublease, the portion proposed to be so sublet) to whomever it pleases on whatever terms are acceptable to Landlord. In the event Landlord elects to so terminate this Lease, then (i) if such termination is conditioned upon the execution of a lease between Landlord and the proposed Transferee, Tenant’s and Tenant’s successors’ obligations under this Lease shall not be terminated until such Transferee executes a new lease with Landlord, enters into possession, and commences the payment of rent, and (ii) if Landlord elects simply to terminate this Lease (or, in the case of a partial sublease, terminate this Lease as to the portion to be so sublet), the Lease shall so terminate in its entirety (or as to the space to be so sublet) fifteen (15) days after Landlord has notified Tenant and Tenant’s successors in writing of such election. In the case of a partial termination of the Lease, the Base Monthly Rent and Tenant’s or Tenant’s successors’ proportionate share shall be reduced to an amount which bears the same relationship to the original amount thereof as the area of that part of the Leased Premises which remains subject to the Lease bears to the original area of the Leased Premises. Landlord and Tenant or Tenant’s successors shall execute a cancellation agreement with respect to the Lease to effect such termination or partial termination, or (b) if Landlord shall not have elected to cancel and terminate this Lease, to either (i) consent to such requested assignment or subletting subject to Tenant’s and Tenant’s successors’ compliance with the conditions set forth in Article 7.4 below or (ii) refuse to so consent to such requested assignment or subletting, provided that such consent shall not be unreasonably refused. It shall not be unreasonable for Landlord to withhold its consent to any proposed assignment or subletting if (i) the proposed assignee’s or subtenant’s anticipated use of the Premises involves the storage, use or disposal of a Hazardous Material; (ii) if the proposed assignee or subtenant has been required by any prior landlord, tender or governmental authority to clean up Hazardous Materials unlawfully discharged by the proposed assignee or subtenant; or (iii) if the proposed assignee or subtenant is subject to investigation or enforcement order or proceeding by any governmental authority in connection with the use, disposal or storage of a Hazardous Material. Tenant and Tenant’s successors covenant and agree to supply to Landlord, upon request, with all necessary or relevant information which Landlord may reasonably request respecting such proposed assignment or subletting and/or the proposed assignee or sublessee. Landlord’s review period shall not commence until Landlord has received all information requested by Landlord.

7.4 CONDITIONS TO LANDLORD’S CONSENT: If Landlord elects to consent, or shall have been ordered to so consent by a court of competent jurisdiction, to such requested assignment, subletting or encumbrance, such consent shall be expressly conditioned upon the occurrence of each of the conditions below set forth, and any purported assignment, subletting or encumbrance made or ordered prior to the full and complete satisfaction of each of the following conditions shall be void and, at the election of Landlord, which election may be exercised at any

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time following such a purported assignment, subletting or encumbrance shall constitute a material default by Tenant under this Lease giving Landlord the absolute right to terminate this Lease. The conditions are as follows:

A. Landlord having approved in form and substance the assignment or sublease agreement (or the encumbrance agreement), which approval shall not be unreasonably withheld by Landlord if the requirements of this Article 7 are otherwise complied with.

B. Each such sublessee or assignee having agreed, in writing satisfactory to Landlord and its counsel and for the benefit of Landlord, to assume, to be bound by, and to perform the obligations of this Lease to be performed by Tenant (or, in the case of an encumbrance, each such encumbrancer having similarly agreed to assume, be bound by and to perform Tenant’s obligations upon a foreclosure or transfer in lieu thereof).

C. Tenant having fully and completely performed all of its obligations under the terms of this Lease through and including the date of the requested consent, as well as through and including the date such assignment or subletting is to become effective.

D. Tenant having reimbursed to Landlord all reasonable costs and attorneys fees incurred by Landlord in conjunction with the processing and documentation of any such requested subletting, assignment or encumbrance.

E. Tenant having delivered to Landlord a complete and fully-executed duplicate original of such sublease agreement, assignment agreement or encumbrance (as applicable) and all related agreements.

F. Tenant having paid, or having agreed in writing to pay as to future payments, to Landlord one hundred percent of all assignment consideration or excess rentals to be paid to Tenant or to any other on Tenant’s behalf or for Tenant’s benefit for such assignment or subletting as follows:

(1) If Tenant assigns its interest under the Lease and if all or a portion of the consideration for such assignment is to be paid by the assignee at the time of the assignment, that Tenant shall have paid to Landlord and Landlord shall have received an amount equal to one hundred percent of the assignment consideration so paid or to be paid whichever is the greater) at the time of the assignment by the assignee; or

(2) If Tenant assigns its interest under this Lease and if Tenant is to receive all or a portion of the consideration for such assignment in future installments, that Tenant and Tenant’s assignee shall have entered into a written agreement with and for the benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant and Tenant’s assignee jointly agree to pay to Landlord an amount equal to one hundred percent of all such future assignment consideration installments to be paid by such assignee as and when such assignment consideration is so paid.

(3) If Tenant subleases the Leased Premises, that Tenant and Tenant’s sublessee shall have entered into a written agreement with and for the benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant and Tenant’s sublessee jointly agree to pay to Landlord one hundred percent of all excess rentals to be paid by such sublessee as and when such excess rentals are so paid.

7.5 ASSIGNMENT CONSIDERATION AND EXCESS RENTALS DEFINED: For purposes of this article, the term “Assignment Consideration” shall mean all consideration to be paid by the Assignee as consideration for such assignment, and the term “Excess Rentals” shall mean all consideration to be paid by the Sublessee in excess of the rent to be paid by said Sublessee/Sublessor for the premises subleased for the same period. It is specifically intended and agreed that this provision is intended to be a one hundred percent profit sharing clause, such that neither Tenant nor any successor to Tenant shall make any profit whatsoever as a result of any transfer of an interest in the Lease or the Leased Premises or any other property, as more particularly described herein. Assignment Considerations and/or “Excess Rentals” shall include all payments made or to be made by any Assignee or Sublessee relating in any way to any transfer of an interest in the Lease or the Leased Premises including, but not limited to, any payment made with respect to property which would or shall become Landlord’s property upon the expiration or earlier termination of the lease, whether such property was installed or paid for by Landlord or by Tenant or Tenant’s successors. In the event Tenant or Tenant’s successors sublease a portion of the Leased Premises, “Excess Rentals” shall he calculated by subtracting the rent payable by the Sublessor for the portion of the Leased Premises so sublet from all consideration to be paid by such Sublessee. Rent payable by the Sublessor for the portion of the Leased Premises so sublet shall be calculated by multiplying the Base Monthly Rent payable by the Sublessor for the Leased Premises leased by such Sublessor by a fraction, the numerator of which is the area in square feet subleased and the denominator of which is the total floor area of the Leased Premises leased by such Sublessor also in square feet. Tenant and Tenant’s Successors agree that any Assignment Consideration and/or Excess Rentals hereunder shall be the property of Landlord and not the property of Tenant.

7.6 PAYMENTS: All payments required by this Article to be made to Landlord shall be made in cash in full as and when they become due. At the time Tenant, Tenant’s assignee or sublessee makes each such payment to Landlord, Tenant or Tenant’s assignee or sublessee, as the case may be, shall deliver to Landlord an itemized statement in reasonable detail showing the method by which the amount due Landlord was calculated and certified by the party making such payment as true and correct. Landlord may require that all payments of Excess Rentals and/or Assignment Consideration to be made hereunder be made directly to Landlord by such Transferee.

7.7 GOOD FAITH: The rights granted to Tenant by this Article are granted in consideration of Tenant’s express covenant that all pertinent allocations which are made by Tenant between the rental value of the Leased Premises and the value of any of Tenant’s personal property which may be conveyed or leased concurrently with and which may reasonably be considered a part of the same transaction as the permitted assignment or subletting shall be made fairly, honestly and in good faith. If Tenant shall breach this Covenant of Good Faith, Landlord may immediately declare Tenant to be in default under the terms of this Lease and terminate this Lease and/or exercise any other rights and remedies Landlord would have under the terms of this Lease in the case of a material default by Tenant under this Lease.

7.8 EFFECT OF LANDLORD’S CONSENT: No subletting, assignment or encumbrance, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay rent and to perform all of the obligations to be performed by Tenant hereunder. Consent by Landlord to one or more assignments or encumbrances of Tenant’s interest in this Lease or to one or more sublettings of the Leased Premises shall not be deemed to be a

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consent to any subsequent assignment, encumbrance or subletting. If Landlord shall have been ordered by a court of competent jurisdiction to consent to a requested assignment or subletting, or such an assignment or subletting shall have been ordered over the objection of Landlord, such assignment or subletting shall not be binding between the assignee (or sublessee) and Landlord until such time as all conditions set forth in Article 7.4 above have been fully satisfied (to the extent not then satisfied) by the assignee or sublessee, including, without limitation, the payment to landlord of all agreed assignment considerations and/or excess rentals then due Landlord.

ARTICLE 8

LIMITATION ON LANDLORD’S LIABILITY AND INDEMNITY

8.1 LIMITATION ON LANDLORD’S LIABILITY AND RELEASE: Landlord shall not be liable to Tenant for, and Tenant hereby releases Landlord and its partners and officers from, any and all liability, whether in contract, tort or on any other basis, for any injury to or any damage sustained by Tenant, its agents, employees, contractors or invitees; any damage to Tenant’s property; or any loss to Tenant’s business, loss of Tenant’s profits or other financial loss of Tenant resulting from or attributable to the condition of, the management of, the maintenance of, or the protection of the Leased Premises or the failure of any component of the Premises, the Building, the Project or the Common Areas, including, without limitation, any such injury, damage or loss resulting from (i) the failure, interruption, rationing or other curtailment or cessation in the supply of electricity, water, gas or other utility service to the Project, the Building or the Leased Premises; (ii) the vandalism or forcible entry into the Building or the Leased Premises; (iii) the penetration of water into or onto any portion of the Leased Premises through roof leaks or otherwise; (iv) the failure to provide security and/or adequate lighting in or about the Project, the Building or the Leased Premises; (v) the existence of any design or construction defects within the Project, the Building or the Leased Premises; (vi) the failure of any mechanical systems to function properly (such as the HVAC systems); or (vii) the blockage of access to any portion of the Project, the Building or the Leased Premises.

8.2 TENANT’S INDEMNIFICATION OF LANDLORD: Tenant shall defend Landlord, with competent counsel reasonably satisfactory to Landlord, against any claims made or legal actions filed or threatened by third parties against Landlord which result from the death, bodily injury, personal injury, damage to property or interference with contractual or other rights suffered by any third party, (including other Tenants within the Project) which (i) occurred within the Leased Premises or the Common Areas or (ii) resulted from Tenants use or occupancy of the Leased Premises or the Common Areas or (iii) resulted from Tenant’s activities in or about the Leased Premises, the Building or the Project, and Tenant shall indemnify and hold Landlord, Landlord’s principals, employees and agents harmless from any loss (including loss of rents by reason of vacant space which otherwise would have been leased but for such activities), liabilities, penalties, or expense whatsoever (including all legal fees incurred by Landlord with respect to defending such claims) resulting therefrom. The terms of this indemnity agreement pertain to events which shall have occurred during the term of this Lease but the indemnity shall survive the expiration or sooner termination of this Lease.

ARTICLE 9

INSURANCE

9.1 TENANT’S INSURANCE: Tenant shall maintain insurance complying with all of the following:

A. Tenant shall procure, pay for and keep in full force and effect, at all times during the Lease Term, the following:

(1) Commercial General Liability insurance insuring Tenant against liability for bodily injury, death, property damage and personal injury occurring at the Leased Premises, or resulting from Tenant’s use or occupancy of the Leased Premises or the Building, Outside Areas, Property, or Common Areas or resulting from Tenant’s activities in or about the Leased Premises. Such insurance shall be on an occurrence basis with a combined single limit of liability of not less than the amount of Tenant’s Required Liability Coverage (as set forth in Article 1). The policy or policies shall be endorsed to name Landlord and such others as are designated by Landlord as additional insureds and shall contain the following additional endorsement: “The insurance afforded to the additional insureds is primary insurance. If the additional insureds have other insurance which is applicable to the loss on a contributing, excess or contingent basis, the amount of this insurance company’s liability under this policy shall not be reduced by the existence of such other insurance. Any insurance carried by the additional insureds shall be excess and non contributing with the insurance provided by the Tenant.” The policy shall not be canceled or reduced without at least 30 days written notice to additional insureds. If the policy insures more than one location, it shall be endorsed to show that the limits and aggregate apply per location. Tenant’s policy shall also contain the severability of interest and cross-liability endorsement or clauses.

(2) Fire and property damage insurance in so-called Special Form plus earthquake and flood insuring Tenant against loss from physical damage to Tenant’s personal property, inventory, stock, trade fixtures and improvements within the Leased Premises with coverage for the full actual replacement cost thereof;

(3) Plate-glass insurance, at actual replacement cost;

(4) Product Liability insurance (including without limitation Liquor Liability insurance for liability arising out of the distribution, sale, or consumption of food and/or beverages including alcoholic beverages at the Leased Premises for not less than the Tenant’s Required Liability Coverage as set forth in Article 1;

(5) Workers’ compensation insurance and any other employee benefit insurance sufficient to comply with all Laws which policy shall be endorsed to provide thirty (30) days written notice of cancellation to Landlord.

(6) Comprehensive Auto Liability insurance with a combined single limit coverage of not less than the amount of Tenant’s Required Liability Coverage (as set forth in Article 1.1 M. Each policy of liability insurance required to be carried by Tenant pursuant to this Article or actually carried by Tenant with respect to the Leased Premises or the Property (i) shall be in a form satisfactory to Landlord, (ii) Shall be provided by carriers admitted to do business in the state of California, with a Best rating of “A/VI” or better and/or acceptable to Landlord. Property insurance shall contain a waiver and/or a permission to waive by the insurer any right of

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subrogation against Landlord, its principals, employees, agents and contractors which might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its principals, employees, agents or contractors.

(7) Business Interruption Insurance which shall adequately compensate Tenant for any losses incurred due to Tenant’s inability to use the Premises whether caused by the act or failure to act by Landlord or any other reason Tenant shall have been denied the full and normal use of the Premises or any portion thereof.

C. Prior to the time Tenant or any of its contractors enters the Leased Premises, Tenant shall deliver to the Landlord with respect to each policy of insurance required to be carried by Tenant pursuant to this Article, a certificate of the insurer certifying, in a form reasonably satisfactory to the Landlord, that the policy has been issued and premium paid providing the coverage required by this Article and containing the provisions herein. Attached to such a certificate shall be endorsements naming Landlord as additional insured, and including the wording under primary insurance above. Landlord may at any time and from time-to-time inspect and/or copy any and all insurance policies required to be carried by Tenant pursuant to this article. If Landlord’s lender, insurance broker or advisor or counsel reasonably determines at any time that the form or amount of coverage set forth in Article 9.1.(A) for any policy of insurance Tenant is required to carry pursuant to this Article is not adequate, then Tenant shall increase the amount of coverage for such insurance to such greater amount or change the form as Landlord’s lender, insurance broker or advisor or counsel reasonably deems adequate (provided however such increase level of coverage may not exceed the level of coverage for such insurance commonly carried by comparable businesses similarly situated and operating under similar circumstances).

D. The Commercial General Liability insurance carried by Tenant shall specifically insure the performance by Tenant of the Indemnification provisions set forth in Article 8.2 of this lease provided, however, nothing contained in this Article 9 shall be construed to limit the liability of Tenant under the Indemnification provisions set forth in said Article 8.2.

E. Notwithstanding anything contained herein to the contrary, all insurance policies and coverages required under the terms of this Lease shall require a minimum notice to Landlord of Thirty (30) days prior to a cancellation, change, or revision of such coverages or providers.

F. In the event that Tenant shall not have acquired all of the insurance coverages and policies as required above, by the Lease Commencement Date, Landlord shall have the right but not the obligation to acquire such coverages and policies on behalf of Tenant at Tenant’s sole cost and expense, and Tenant shall, upon demand by Landlord, reimburse to Landlord, all costs associated with the premiums, acquisition, and administration of such coverages and policies, and such costs shall be a Building Operating Expense.

9.2 LANDLORD’S INSURANCE: With respect to insurance maintained by Landlord:

A. Landlord shall maintain, as the minimum coverage required of it by this Lease, property insurance insuring Landlord (and such others as Landlord may designate) against loss from physical damage to the Building with coverage of not less than one hundred percent of the full actual replacement cost thereof and against loss of rents for a period of not less than twelve months. Such property damage insurance, at Landlord’s election but without any requirement on Landlord’s behalf to do so, (i) may be written in so-called Special Form, excluding only those perils commonly excluded from such coverage by Landlord’s then property damage insurer, (ii) may provide coverage for physical damage to the improvements so insured for up to the entire full actual replacement cost thereof; (iii) may be endorsed to include (or separate policies which may be carried to cover) loss or damage caused by any additional perils against which Landlord may elect to insure, including earthquake and/or flood; (iv) may provide coverage for loss of rents for a period of up to twelve months; and/or (v) may contain “deductibles” per occurrence in an amount reasonably acceptable to Landlord. Landlord shall not be required to cause such insurance to cover any of Tenant’s personal property, inventory and trade fixtures, or any modifications, alterations or improvements made or constructed by Tenant to or within the Leased Premises.

B. Landlord shall maintain Commercial General Liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death, and damage to property occurring in, on or about, or resulting from the use or occupancy of the Project, or any portion thereof, with combined single limit coverage of at least Two Million Dollars. Landlord may carry such greater coverage as Landlord or Landlord’s Lender, insurance broker or advisor or counsel may from time to time determine is reasonably necessary for the adequate protection of Landlord and the Project.

C. Landlord may maintain any other insurance which in the opinion of its lender, insurance broker or advisor, or legal counsel is reasonably prudent to carry under the given circumstances.

9.3 MUTUAL WAIVER OF SUBROGATION: Landlord hereby releases Tenant, and Tenant hereby releases Landlord and its respective partners and officers, agents, employees and servants, from any and all liability for loss, damage or injury to the property of the other in or about the Leased Premises which is caused by or results from a peril or event or happening which would be covered by insurance required to be carried under the terms of this Lease, or is covered by insurance actually carried and in force at the time of the loss, by the party sustaining such loss; provided, however, that such waiver shall be effective only to the extent permitted by the insurance covering such loss and to the extent such insurance is not prejudiced thereby.

ARTICLE 10

DAMAGE TO LEASED PREMISES

10.1 LANDLORD’S DUTY TO RESTORE: If the Leased Premises are damaged by any peril after the Effective Date of this Lease, Landlord shall restore the Leased Premises, as and when required by this Article, unless this Lease is terminated by Landlord pursuant to Article 10.2 or by Tenant pursuant to Article 10.3. All insurance proceeds available from the fire and property damage insurance carried by Landlord shall be paid to and become the property of Landlord. If this Lease is terminated pursuant to either Article 10.2 or 10.3, all insurance proceeds available from insurance carried by Tenant which cover loss to property that is Landlord’s property or would become Landlord’s property on termination of this Lease shall be paid to and become the property of Landlord, and the remainder of such proceeds shall he paid to and become the property of Tenant. If this Lease is not terminated

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pursuant to either Article 10.2 or 10.3, all insurance proceeds available from insurance carried by Tenant which cover loss to property that is Landlord’s property shall be paid to and become the property of Landlord, and all proceeds available which cover loss to property which would become the property of Landlord upon the termination of this Lease shall be paid to and remain the property of Tenant provided that Tenant agrees to restore such property. If this Lease is not so terminated, then upon receipt of the insurance proceeds (if the loss is covered by insurance) and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Leased Premises, to the extent then allowed by Law, to substantially the same condition in which the Leased Premises existed as of the Lease Commencement Date. Landlord’s obligation to restore shall be limited to the Leased Premises and interior improvements constructed by Landlord. Landlord shall have no obligation to restore any other improvements to the Leased Premises or any of Tenant’s personal property, inventory or trade fixtures. Upon completion of the restoration by Landlord, Tenant shall forthwith replace or fully repair all of Tenant’s personal property, inventory, trade fixtures and other improvements constructed by Tenant to like or similar condition as existed at the time of such damage or destruction.

10.2 LANDLORD’S RIGHT TO TERMINATE: Landlord shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Tenant of a written notice of election to terminate within thirty days after the date of such damage or destruction:

A. The Building is damaged by any peril covered by valid and collectible insurance actually carried by Landlord and in force at the time of such damage or destruction (an “insured peril”) to such an extent that the estimated cost to restore the Building exceeds the lesser of (i) the insurance proceeds available from insurance actually carried by Landlord, or (ii) seventy-five percent of the then actual estimated replacement cost thereof;

B. The Building is damaged by an uninsured peril.

D. The Building is damaged by any peril and, because of the Laws then in force, the Building (i) can not be restored at reasonable cost or (ii) if restored, can not be used for the same use being made thereof before such damage.

10.3 TENANT’S RIGHT TO TERMINATE: If the Leased Premises are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to this Article, then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord’s architect or construction consultant as to when the restoration work required of Landlord may be complete. Tenant shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised in the case of A or B below only by delivery to Landlord of a written notice of election to terminate within seven days after Tenant receives from Landlord the estimate of the time needed to complete such restoration:

A. The Leased Premises are damaged by any peril and, in the reasonable opinion of Landlord’s architect or construction consultant, the restoration of the Leasedl Premises cannot be substantially completed within nine (9) months after the date of such notice from Landlord; or

B. The Leased Premises are damaged by any peril within nine months of the last day of the Lease Term and, in the reasonable opinion of Landlord’s architect or construction consultant, the restoration of the Leased Premises cannot be substantially completed within ninety days after the date such restoration is commenced.

10.4 TENANT’S WAIVER: Landlord and Tenant agree that the provisions of Article 10.3 above, captioned “Tenant’s Right to Terminate”, are intended to supersede and replace the provisions contained in California Civil Code, Section 1932, Subdivision 2, and California Civil Code, Section 1934, and accordingly, Tenant hereby waives the provisions of said Civil Code Sections and the provisions of any successor Code Sections or similar Laws hereinafter enacted.

10.5 ABATEMENT OF RENT: In the event of damage to the Leased Premises which does not result in the termination of this Lease, the Base Monthly Rent (and any Additional Rent) shall be temporarily abated during the period of restoration in proportion to the degree to which Tenant’s use of the Leased Premises is impaired by such damage.

ARTICLE 11

CONDEMNATION

11.1 LANDLORD’S RIGHT TO TERMINATE: Subject to Article 11.3, Landlord shall have the option to terminate this Lease if, as a result of a taking by means of the exercise of the power of eminent domain, any part of the Leased Premises are condemned.

11.2 TENANT’S RIGHT TO TERMINATE: Subject to Article 11.3, Tenant shall have the option to terminate this Lease if, as a result of any taking by means of the exercise of the power of eminent domain, thirty-three and one-third percent or more of the Leased Premises is so taken and the part of the Leased Premises that remains cannot, within a reasonable period of time, be made reasonably suitable for the continued operation of the Tenant’s business.

11.3 TEMPORARY TAKING: If any portion of the Leased Premises is temporarily taken for one year or less, this Lease shall remain in effect. If more than 33% of the Leased Premises is temporarily taken for a period which either exceeds one year or which extends beyond the natural expiration of the lease Term, then Landlord and Tenant shall each independently have the option to terminate this Lease, effective on the date possession is taken by the condemnor.

11.4 RESTORATION AND ABATEMENT OF RENT: If any part of the Leased Premises is taken by condemnation and this Lease is not terminated, then Landlord shall repair any damage occasioned thereby to the remainder of the Leased Premises to a condition reasonably suitable for Tenant’s continued operations, to the extent practicable. As of the date possession is taken by the condemning authority, (i) the Base Monthly Rent shall be reduced in the same proportion that the area of that part of the Leased Premises so taken bears to the area of the

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Leased Premises immediately prior to such taking, and (ii) Tenant’s Proportionate Share shall be appropriately adjusted.

11.5 DIVISION OF CONDEMNATION AWARD: Any award made for any condemnation of the Project, the Building, the Common Areas or the Leased Premises, or any portion thereof, shall belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any such award.

ARTICLE 12

DEFAULT AND REMEDIES

12.1 EVENTS OF TENANT’S DEFAULT: The occurrence of any of the following shall constitute a default by Tenant: (a) failure to pay rent or other charges when due; (b) failure to perform any other provision of this Lease within the time periods provided.

12.2 LANDLORD’S REMEDIES: Landlord shall have the following remedies (which are cumulative and not exclusive and are in addition to any remedies now or later allowed by law) if Tenant is in default. Landlord may terminate Tenant’s right to possession of the Premises at any time. No act by Landlord other than giving notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord’s initiative to protect Landlords interest under the terms of this Lease shall not constitute a termination of Tenants right to possession. Upon termination of Tenant’s right to possession, Landlord has the right to recover from Tenant: (1) the worth of the unpaid rent that had been earned at the time of termination of Tenant’s right to possession; (2) the worth of the amount of the unpaid rent that world have been earned after the date of termination of Tenant’s right to possession; (3) any other amount, including but not limited to expenses incurred to relet the premises, court, attorney and collection costs, necessary to compensate Landlord for any all losses caused by Tenant’s default. “The worth,” as used in this article, is to be computed by allowing interest at the maximum legal interest rate permitted by law.

12.3 LANDLORD’S DEFAULT AND TENANT’S REMEDIES: In the event Landlord fails to perform any of its obligations under this Lease, Landlord shall nevertheless not be in default under the terms of this Lease until such time as Tenant shall have first given Landlord written notice specifying the nature of such failure to perform its obligations, and then only after Landlord shall have had a reasonable period of time following its receipt of such notice within which to perform such obligations. In the event of Landlord’s default as above set forth, then, and only then, Tenant may then proceed at law to compel Landlord to perform its obligations and/or to recover damages proximately caused by such failure to perform.

12.4 LIMITATION ON TENANT’S RECOURSE: Tenant agrees that the obligations of Landlord under this Lease shall not constitute personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders, or other principals of any business entity which holds title to the Project. Tenant shall have recourse only to the assets of the Project (as shown on the Site Plan) for the satisfaction of such obligations and not to the other assets of any individual owner such officers, directors, trustees, partners, joint venturers, members, owners, stockholders or principals. Additionally, if Landlord is a corporation, partnership or limited liability corporation, then Tenant covenants and agrees:

A. No partner, stockholder, or officer of Landlord shall be sued or named as a party in any suit or action brought by Tenant with respect to any alleged breach of this Lease (except to the extent necessary to secure jurisdiction over the entity and then only for that sole purpose);

B. No service of process shall be made against any partner, stockholder, or officer of Landlord except for the sole purpose of securing jurisdiction over the entity; and

C. No writ of execution shall be levied against the assets of any partner or officer of Landlord other than to the extent of his interest in the assets of the Project. Tenant further agrees that each of the foregoing covenants and agreements shall be enforceable by Landlord and by any partner or officer of Landlord and shall he applicable to any actual or alleged misrepresentation or non-disclosure made respecting this Lease or the Leased Premises or any actual or alleged failure, default or breach of any covenant or agreement either expressly or implicitly contained in this Lease or imposed by statute or at common law.

12.5 TENANT’S WAIVER: Landlord and Tenant agree that the provisions of Article 12.3 above are intended to supersede and replace the provisions of California Civil Code 1932(1), 1941 and 1942, and accordingly, Tenant hereby waives the provisions of Section 1932(1), 1941 and 1942 of the California Civil Code and/or any similar or successor Law regarding Tenant’s right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under this Lease. Tenant hereby waives any right of redemption or relief from forfeiture under the Laws of the State of California, or under any other present or future Law, in the event Tenant is evicted or Landlord takes possession of the Leased Premises by reason of any default by Tenant.

ARTICLE 13

GENERAL PROVISIONS

13.1 TAXES ON TENANT’S PROPERTY: Tenant shall pay before delinquency any and all taxes, assessments, license fees, use fees, permit fees and public charges of whatever nature or description levied, assessed or imposed against Tenant or Landlord by a governmental agency arising out of, caused by reason of or based upon Tenant’s estate in this Lease, Tenant’s ownership of property, improvements made by Tenant to the Leased Premises, improvements made by Landlord for Tenant’s use within the Leased Premises, Tenant’s use (or estimated use) of public facilities or services or Tenant’s consumption (or estimated consumption) of public utilities, energy, water or other resources. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. If any such taxes, assessments, fees or public charges are levied against Landlord, Landlord’s property, the Building or the Project, or if the assessed value of the Building or the Project is increased by the inclusion therein of a value

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placed upon same, then Landlord, after giving written notice to Tenant, shall have the right, regardless of the validity thereof, to pay such taxes, assessment, fee or public charge and bill Tenant, as Additional Rent, the amount of such taxes, assessment, fee or public charge so paid on Tenant’s behalf. Tenant shall, within ten days from the date it receives an invoice from Landlord setting forth the amount of such taxes, assessment, fee or public charge so levied, pay to Landlord, as Additional Rent, the amount set forth in said invoice. Failure by Tenant to pay the amount so invoiced within said ten day period shall be conclusively deemed a default by Tenant under this Lease. Tenant shall have the right, and with Landlord’s full cooperation if Tenant is not then in default under the terms of this Lease, to bring suit in any court of competent jurisdiction to recover from the taxing authority the amount of any such taxes, assessment, fee or public charge so paid.

13.2 HOLDING OVER: This Lease shall terminate without further notice on the Lease Expiration Date (as set forth in Article 1). Any holding over after the expiration of the Lease shall be deemed an unlawful detainer of the Leased Premises unless Landlord has consented to same in writing. Any holding over by Tenant with written permission of Landlord shall be construed to be a tenancy from month to month, on the same terns and conditions herein specified insofar as applicable, except that the Base Monthly Rent shall be increased to an amount equal to one hundred fifty percent of the Base Monthly Rent payable during the last full month immediately preceding such period of holding over.

13.3 SUBORDINATION TO MORTGAGES: This Lease is subject and subordinate to all underlying ground leases and to all mortgages and deeds of trust which affect the Building and are of public record as of the Effective Date of this Lease, and to all renewals, modifications, consolidations, replacements and extensions thereof. However, if the lessor under any such ground lease or any Lender holding any such mortgage or deed of trust shall advise Landlord that it desires or requires this Lease to be made prior and superior thereto, then, upon written request of Landlord to Tenant, Tenant shall promptly execute, acknowledge and deliver any and all documents or instruments which Landlord and such lessor or Lender deem necessary or desirable to make this Lease prior thereto. Tenant hereby consents to Landlord’s ground leasing the land underlying the Building and/or encumbering the Building as security for future loans on such terms as Landlord shall desire, all of which future ground leases, mortgages or deeds of trust shall be subject and subordinate to this Lease. However, if any lessor under any such future ground lease or any Lender holding such future mortgage or deed of trust shall desire or require that this Lease be made subject and subordinate to such future ground lease, mortgage or deal of trust, then Tenant agrees, within ten days after Landlord’s written request therefore, to execute, acknowledge and deliver to Landlord any and all documents or instruments (including but not limited to the enclosed Exhibit D) as requested by Landlord or such lessor or lender as may be necessary or proper to assure the subordination of this Lease to such future ground lease, mortgage or deed of trust; but only if such lessor or Lender agrees to recognize Tenant’s rights under this Lease and not to disturb Tenant’s quiet possession of the Leased Premises so long as Tenant is not in default under this Lease. Tenant’s failure to execute and deliver such subordination agreement within ten days after Landlord’s request therefore shall be a material default by Tenant under this Lease, and Landlord shall have all of the rights and remedies available to Landlord as Landlord would otherwise have in the case of any other material default by Tenant, including the right to terminate this Lease and sue for damages proximately caused thereby, it being agreed and understood by Tenant that Tenant’s failure to so deliver such subordination agreement in a timely manner could result in Landlord being unable to perform committed obligations to other third parties which were made by Landlord in reliance upon this covenant of Tenant. Landlord and Tenant intend that any statement delivered pursuant to this Article may be relied upon by any Lender or purchaser or prospective Lender or purchaser of the Building, the Project, or any interest therein.

13.4 TENANT’S ATTORNMENT UPON FORECLOSURE: Tenant shall, upon request, attorn (i) to any purchaser of the Building at any foreclosure sale or private sale conducted pursuant to any security instrument encumbering the Building, (ii) to any grantee or transferee designated in any deal given in lieu of foreclosure of any security interest encumbering the Building, or (iii) to the lessor under any underlying ground lease of the land underlying the Building, should such ground lease be terminated; provided that such purchaser, grantee or lessor recognizes tenant’s rights under this Lease.

13.5 MORTGAGEE PROTECTION: In the event of any default on the part of Landlord, Tenant will give notice by registered mail to any Lender or lessor under any underlying ground lease who shall have requested, in writing, to Tenant that it be provided with such notice, and Tenant shall offer such Lender or lessor a reasonable opportunity to cure the default, including time to obtain possession of the Leased Premises by power of sale or judicial foreclosure or other appropriate legal proceedings if reasonably necessary to effect a cure.

13.6 ESTOPPEL CERTIFICATES: Tenant will, following any request(s) by Landlord, promptly execute and deliver to Landlord an estoppel certificate (i) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect, (ii) stating the date to which the rent and other charges are paid in advance, if any, (iii) acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (iv) certifying such other information about this Lease as may be reasonably requested by Landlord. Tenant’s failure to execute and deliver such estoppel certificate within ten days after Landlord’s request therefore shall be a material default by Tenant under this Lease, and Landlord shall have all of the rights and remedies available to Landlord as Landlord would otherwise have in the case of any other material default by Tenant, including the right to terminate this Lease and sue for damages proximately caused thereby, it being agreed and understood by Tenant that Tenant’s failure to so deliver such estoppel certificate in a timely manner could result in Landlord being unable to perform committed obligations to other third parties which were made by Landlord in reliance upon this covenant of Tenant. Landlord and Tenant intend that any statement delivered pursuant to this Article may be relied upon by any Lender or purchaser or prospective Lender or purchaser of the Building, the Project, or any interest therein.

13.7 TENANT’S FINANCIAL INFORMATION: Tenant shall, within ten business days after Landlord’s request therefore, deliver to Landlord a copy of a current financial statement certified by Tenant in writing as to its

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accuracy) including an income statement and balance sheet, and any such other information, including but not limited to Tenant’s tax returns, reasonably requested by Landlord regarding Tenant’s financial condition.

13.8 FORCE MAJEURE: The obligations of each of the parties under this Lease (other than the obligation to pay money) shall be temporarily excused if such party is prevented or delayed in performing such obligation by reason of any strikes, lockouts or labor disputes; inability to obtain labor, materials, fuels or reasonable substitutes therefore; governmental restrictions, regulations, controls, action or inaction; civil commotion; inclement weather, fire or other acts of God; or other causes (except financial inability) beyond the reasonable control of the party obligated to perform (including acts or omissions of the other party for a period equal to the period of any such prevention, delay or stoppage.

13.9 NOTICES: Any notice required or desired to be given by a party regarding this Lease shall be in writing and shall be personally served, or in lieu of personal service may be given by depositing such notice in the United States mail, postage prepaid, addressed to the other party at the address specified in Article 1.1 above. Notices may also be given by electronic facsimile transmission or commercial carrier and shall be deemed received on the date of confirmation documented by the transmission or carrier.

13.10 ATTORNEYS’ FEES: In the event any party shall bring any action, arbitration proceeding or legal proceeding alleging a breach of any provision of this Lease to recover rent, to terminate this Lease, or to enforce, protect, determine or establish any term or covenant of this Lease or rights or duties hereunder of either party, the prevailing party shall be entitled to recover from the non-prevailing party as a part of such action or proceeding, or in a separate action for that purpose brought within one year from the determination of such proceeding, all reasonable expenses incurred by the prevailing party. In the event that Landlord shall be required to retain counsel to enforce any provision of this Lease; or if Tenant defaults under this Lease and thereafter cures (or desires to cure) such default with Landlord’s consent, Tenant shall pay to Landlord all reasonable expenses so incurred by Landlord promptly upon demand. Landlord may enforce this provision by requiring Tenant to pay such fees and costs as a condition to curing its default.

13.11 DEFINITIONS: Any term that is given a special meaning by any provision in this Lease shall, unless otherwise specifically stated, have such meaning whenever used in this Lease or in any Addenda or amendment hereto. In addition to the terms defined in Article 1, the following terms shall have the following meanings:

A. REAL PROPERTY TAXES: The term “Real Property Tax” or “Real Property Taxes” shall each mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership or new construction), now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed for whatever reason against the Project or any portion thereof, or Landlord’s interest therein, or the fixtures, equipment and other property of Landlord that is an integral part of the Project and located thereon, or Landlord’s business of owning, leasing or managing the Project or the gross receipts, income or rentals from the Project; (ii) all charges, levies or fees imposed by any governmental authority against Landlord by reason of or based upon the use of or number of parking spaces within the Project, the amount of public services or public utilities used or consumed (e.g. water, gas, electricity, sewage or surface water disposal) at the Project, the number of persons employed by tenants of the Project, the size (whether measured in area, volume or number of tenants) or the value of the Project, or the type of use or uses conducted within the Project; and (iii) all costs and fees (including reasonable attorneys’ fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If, at any time during the Lease Term, the taxation or assessment of the Project prevailing as of the Effective Date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate, substitute, or additional tax or charge (i) on the value, size, use or occupancy of the Project or Landlord’s interest therein or (ii) on or measured by the gross receipts, income or rentals from the Project, or on Landlord’s business of owning, leasing or managing the Project or (iii) computed in any manner with respect to the operation of the Project, then any such tax or charge, however designated, shall be included within the meaning of the terms “Real Property Taxes” for purposes of this Lease. If any Real Property Tax is partly based upon property or rents unrelated to the Project, then only that part of such Real Property Tax that is fairly allocable to the Project shall be included within the meaning of the terms “Real Property Taxes”. Notwithstanding the foregoing, the term “Real Property Taxes” shall not include estate, inheritance, transfer, gift or franchise taxes of Landlord or the federal or state income tax imposed on Landlord’s income from all sources.

B. LANDLORD’S INSURANCE COSTS: The term “Landlord’s Insurance Costs” shall mean the costs to Landlord to carry and maintain the policies of fire and property damage insurance, including earthquake and flood, for the Project and Landlord’s general liability insurance carried by Landlord pursuant to Article 9, together with any deductible amounts paid by Landlord upon the occurrence of any insured casualty or loss.

C. PROJECT MAINTENANCE COSTS: The term “Project Maintenance Costs” shall mean all costs and expenses (except Landlord’s Insurance Costs and Real Property Taxes) paid or incurred by Landlord in protecting, operating, maintaining, repairing and preserving the Project and all parts thereof, including without limitation, (i) professional management fees equal to five percent of the annualized Base Monthly Rent, (ii) the amortizing portion of any costs incurred by Landlord in the making of any modifications, alterations or improvements which are so amortized during the Lease Term, (iii) costs of complying with ADA standards imposed upon Landlord, governmental regulations governing Tenant’s use of Hazardous Materials, and Landlord’s costs of monitoring Tenant’s use of Hazardous Materials including fees charged by Landlord’s consultants to periodically inspect the Premises and the Property, all costs associated with the maintaining and repairing of the parts of the drainage district, and (v) such other costs as may be paid or incurred with respect to operating, maintaining and preserving the Project, such as repairing replacing and resurfacing the exterior surfaces of the buildings (including roofs), repairing, replacing, and resurfacing paved areas, repairing structural parts of the buildings, cleaning, maintaining, repairing, or replacing the interior of the Leased Premises both during the Lease Term and upon the

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termination of the Lease, and maintaining, repairing or replacing, when necessary electrical, plumbing, sewer, drainage, heating, ventilating and air conditioning systems serving the buildings, providing utilities to the common areas, maintenance, repair, replacement or installation of lighting fixtures, directional or other signs and signals, irrigation or drainage systems, trees, shrubs, materials, maintenance of all landscaped areas, and any rental paid for machinery and equipment (if leased).

D. READY FOR OCCUPANCY: The term “Ready for Occupancy” shall mean the date upon which (i) the Leased Premises are available for Tenant’s occupancy in a broom clean condition and (ii) the improvements, if any, to be made to the Leased Premises by Landlord as a condition to Tenant’s obligation to accept possession of the Leased Premises have been substantially completed and the building department of the City of Fremont shall have approved the construction of the improvements as substantially complete or is willing to so approve the construction of such improvements as substantially complete subject only to compliance with specified conditions which are the responsibility of Tenant to satisfy or is willing to allow Tenant to occupy subject to its receiving assurances by either Landlord or Tenant that specified work will be completed.

E. TENANT’S PROPORTIONATE SHARE: The term “Tenant’s Proportionate Share” or “Tenant’s Share”, as used with respect to an item pertaining to the Building, shall each mean that percentage obtained by dividing the leasable square footage contained within the Leased Premises (as set forth in Article 1) by the total leasable square footage contained within the Building as the same from time to time exists or, as used with respect to an item pertaining to the Project, shall each mean that percentage obtained by dividing the leasable square footage contained within the Leased Premises (as set forth in Article 1) by the total leasable square footage contained within the Project as the same from time to time exists, unless, as to any given item, such a percentage allocation unfairly burdens or benefits a given tenant(s), in which case Landlord shall have the exclusive right to equitably and reasonably allocate such item so as to not unfairly burden or benefit any given tenant(s). Landlord’s reasonable determination of any such special allocation shall be final and binding upon Tenant.

F. BUILDING’S PROPORTIONATE SHARE: The term “Building’s Proportionate Share” or “Building’s Share” shall each mean that percentage which is obtained by dividing the leasable square footage contained in the Building by the leasable square footage contained in all buildings located within the Project, unless, as to any given item, such a percentage allocation unfairly burdens or benefits a given building(s), in which case Landlord shall have the exclusive right to reasonably and equitably allocate such item so as to not unfairly burden or benefit any given building(s). Landlord’s determination of any such special allocation shall be final and binding upon Tenant.

G. BUILDING OPERATING EXPENSES: The term “Building Operating Expenses” shall mean and include the Building’s Proportionate Share of all Real Property Taxes, all Insurance Costs including Landlord’s general liability costs and any insurance costs relating to Article [9.1 F] herein contained, all Project Maintenance Costs, and an accounting fee equal to five percent of the combined total of all such costs.

H. LAW: The term “Law” shall mean any judicial decision and any statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any municipal, county, state, federal, or other governmental agency or authority having jurisdiction over the parties to this Lease, the Leased Premises, the Building or the Project, or any of them in effect either at the Effective Date of this Lease or at any time during the Lease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body (e.g. a board of fire examiners or a public utility or special district).

I. LENDER: The term “Lender” shall mean the holder of any note or other evidence of indebtedness secured by the Project or any portion thereof.

J. PRIVATE RESTRICTIONS: The term “Private Restrictions” shall mean all recorded covenants, conditions and restrictions, private agreements, casements, and any other recorded instruments affecting the use of the Project, as they may exist from time to time.

K. RENT: The term “rent” shall mean collectively Base Monthly Rent and all Additional Rent, and all other amounts owed by Tenant to Landlord.

13.12 GENERAL WAIVERS: One party’s consent to or approval of any act by the other party, requiring the first party’s consent or approval shall not be deemed to waive or render unnecessary the first party’s consent to or approval of any subsequent similar act by the other party. No waiver of any provision hereof shall be effective unless in writing and signed by the waiving party. The receipt by Landlord of any rent or payment with or without knowledge of the breach of any provision hereof shall not be deemed a waiver of any such breach. No waiver of any provision of this Lease shall be deemed a continuing waiver unless such waiver specifically states so in writing and is signed by both Landlord and Tenant. No delay or omission in the exercise of any right or remedy accruing to either party upon any breach by the other party under this Lease shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by either party of any breach of any provision of this Lease shall not be deemed to be a waiver of any subsequent breach of the same or any other provisions herein contained.

13.13 MISCELLANEOUS: Should any provision of this Lease prove to be invalid or illegal, such invalidity or illegality shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. Any copy of this Lease which is executed by the parties shall be deemed an original for all purposes. This Lease shall, subject to the provisions regarding assignment, apply to and bind the respective heirs, successors, executors, administrators and assigns of Landlord and Tenant. The term “party” shall mean Landlord or Tenant as the context implies. If Tenant consists of more than one person or entity, then all members of Tenant shall be jointly and severally liable hereunder. This Lease shall be construed and enforced in accordance with the Laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning, and not strictly for or against either Landlord or Tenant. The captions used in this Lease are for convenience only and shall not be considered in the construction or interpretation of any provision hereof. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. The terms “must”, “shall”, “will” and “agree” are mandatory . The term “may” is permissive. When a party is required to do something by this Lease, it shall do so at its sole cost and expense without right of reimbursement from the other party unless

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specific provision is made therefore. Where Tenant is obligated not to perform any act or is not permitted to perform any act, Tenant is also obligated to restrain any others reasonably within its control, including agents, invitees, contractors, subcontractors and employees, from performing said act. Landlord shall not become or be deemed a partner or a joint venturer with Tenant by reason of any of the provisions of this Lease.

ARTICLE 14

CORPORATE AUTHORITY

14.1 CORPORATE AUTHORITY: If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that Tenant is validly formed and duly authorized and existing, that Tenant is qualified to do business in the State of California, that Tenant has the full right and legal authority to enter into this Lease, that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant in accordance with the bylaws and/or a board of directors’ resolution of Tenant, and that this Lease is binding upon Tenant in accordance with its terms.

14.2 ENTIRE AGREEMENT: This Lease, the Exhibits (as described in Article 1) and the Addenda (as described in Article 1), which Exhibits and Addenda are by this reference incorporated herein, constitute the entire agreement between the parties, and there are no other agreements, understandings or representations between the parties relating to the lease by Landlord of the Leased Premises to Tenant, except as expressed herein. No subsequent changes, modifications or additions to this Lease shall be binding upon the parties unless in writing and signed by both Landlord and Tenant.

14.3 LANDLORD’S REPRESENTATIONS: Tenant acknowledges that neither Landlord nor any of its agents made any representations or warranties respecting the Project, the Building or the Leased Premises, upon which Tenant relied in entering into this Lease, which are not expressly set forth in this Lease. Tenant further acknowledges that neither Landlord nor any of its agents made any representations as to (i) whether the Leased Premises may be used for Tenant’s intended use under existing Law or (ii) the suitability of the Leased Premises for the conduct of Tenant’s business or (iii) the exact square footage of the Leased Premises, that Tenant relied solely upon its own investigations respecting said matters and that upon its execution of this Lease, accepts the leasable area as specified herein. Tenant expressly waives any and all claims for damage by reason of any statement, representation, warranty, promise or other agreement of Landlord or Landlord’s agent(s), if any, not contained in this Lease or in any Addenda hereto.

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the respective dates below set forth with the intent to be legally bound thereby as of the Effective Date of this Lease.

AS LANDLORD:			AS TENANT:
PEN ASSOCIATES NO. 2, LLC		ArcSoft, Inc.
a California limited liability company		a California corporation
By:	RENCO PROPERTIES, INC.
	a California corporation
	Its Managing Member

BY:	/s/ Donald E. Vermeil	BY:	/s/ [signature illegible]
TITLE:	[illegible]	TITLE:	CEO
BY:	William N. Neidig	BY:
TITLE:	Executive Vice President	TITLE:

LAKEHOUSE, LLC a California limited liability company
BY:	/s/ William N. Neidig
	William N. Neidig
	Managing Member

DATE: January 13, 1998 DATE: January 12, 1998

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EXHIBIT “A”

[GRAPHIC OMITTED]

[GRAPHIC OMITTED]

EXHIBIT B

FIRST ADDENDUM TO LEASE

THIS FIRST ADDENDUM TO LEASE (“Addendum”) is made to that Standard Multi-Tenant Lease Form dated as of January 7, 1998, (the “Lease”) by and between PEN ASSOCIATES NO. 2, LLC, a California limited liability company, and LAKEHOUSE, LLC, a California limited liability company as Tenants in Common (“Landlord”) and ArcSoft, Inc., a California Corporation (as “Tenant”), for the lease of space located at 46601—46605 Fremont Boulevard in Fremont California (the “Leased Premises”). The parties hereto agree that the Lease is amended, changed and modified by the following provisions, which are hereby added to the Lease:

Unless otherwise expressly provided herein, all terms which are given a special definition by the Lease that are used herein are intended to be used with the definition given to them by the Lease. The provisions of the Lease shall remain in full force and effect except as specifically amended hereby. In the event of any inconsistency between the Lease and this Addendum, the terms of this Addendum shall prevail.

3.5 Security Deposit: Notwithstanding anything to the contrary in Article 3.5 of the Lease, provided that Tenant has not been in default under the terms of the Lease at any time during the first twelve (12) months of the Lease Term, Landlord shall return to Tenant the amount of Twenty Four Thousand Five Hundred Seventy Six ($24,576.00) Dollars from the Security Deposit. In the event that Tenant is in default under any terms of the Lease during any portion of the first twelve (12) months of the Lease, Landlord shall retain the entire amount of the Security Deposit until the termination of the Lease and then the return of the Security Deposit shall be governed by Article 3.5 of the Lease.

Furthermore, provided that Tenant has not been in default under the terms of the Lease at any time during the first twenty four (24) months of the Lease Term, and Tenant shall have established through audited financial reports and statements that Tenant shall have earned a net profit in excess of Three Million ($3,000,000.00) Dollars for the year ending December 31, 1999, Landlord shall return to Tenant the amount of Twenty Five Thousand Four Hundred Ten ($25,410.00) Dollars from the remaining Security Deposit such that commencing with the first day of the third year of the Lease, the remaining Security Deposit shall be the sum of Twenty Eight Thousand, Seven Hundred Forty Four ($28,744.00) Dollars. In the event that Tenant is in default under any terms of the Lease during any portion of the second twelve (12) months of the Lease, Landlord shall retain the entire remaining amount of the Security Deposit until the termination of the Lease and then the return of the Security Deposit shall be governed by Article 3.5 of the Lease.

Landlord and Tenant each agree to equally split the cost of installing two doors (one normal 3’ door and one double door) between the spaces being leased to Tenant and that Landlord shall bear the cost of removing the wall sepaprting the two lobbies of the spaces and of creating a 3’ 6’ opening behind the restrooms to allow access between the two spaces and of aligning the lobby walls with one another.

IN WITNESS WHEREOF, Landlord and Tenant have executed this First Addendum To Lease with the intent to be legally bound thereby, to be effective as of the date the second party signs this First Addendum To Lease.

AS LANDLORD:		AS TENANT:
PEN ASSOCIATES NO. 2, LLC		ArcSoft, Inc.
a California limited liability company		a California corporation
By:	RENCO PROPERTIES, INC.
	a California corporation
	Its Managing Member

BY:	/s/ Donald E. Vermeil	BY:	/s/ [signature illegible]
TITLE:	[illegible]	TITLE:	CEO
BY:	William N. Neidig	BY:
TITLE:	Executive Vice President	TITLE:

LAKEHOUSE, LLC a California limited liability company
BY:	/s/ William N. Neidig
	William N. Neidig
	Managing Member
DATE: January 13, 1998		DATE: January 12, 1998

D/T (8-81)

RECORDING REQUESTED BY AND

WHEN RECORDED RETURN TO:

SUBORDINATION,

NON-DISTURBANCE AND ATTORNMENT AGREEMENT

NOTICE: THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT RESULTS IN YOUR LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN THE LIEN OF SOME OTHER OR LATER SECURITY INSTRUMENT.

THIS AGREEMENT is entered into by and among Tenant, Landlord, and Beneficiary and affects the Property described in Exhibit A attached hereto. The terms “Tenant”, “Landlord”, “Beneficiary”, “Premises”, “Lease”, “Property”, “Loan”, “Note”, and “Mortgage” are defined in the Schedule of Definitions attached hereto as Exhibit B. This Agreement is entered into with reference to the following facts:

A. Landlord and Tenant have entered into the Lease covering the Premises in the Property.

B. Beneficiary has agreed to make the Loan to Landlord to be evidenced by the Note, which Note is to be secured by the Mortgage covering the Property, provided that the Lease is subordinated to the lien of the Mortgage.

C. For the purposes of completing the Loan, the parties hereto desire expressly to subordinate the Lease to the lien of the Mortgage, it being a condition precedent to Beneficiary’s obligation to consummate the Loan that the lien of the Mortgage be unconditionally and at all times prior and superior to the leasehold interests and estates created by the Lease.

D. Tenant has requested that Beneficiary agree not to disturb Tenant’s possessory rights in the Premises in the event Beneficiary should foreclose the Mortgage; provided that Tenant is not then in default under the Lease and provided further that Tenant attorns to Beneficiary or the purchaser at any foreclosure or trustees sale of the Property.

NOW THEREFORE, in consideration of the mutual covenants contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Subordination. Notwithstanding anything to the contrary set forth in the Lease, the Lease and the leasehold estate created thereby and all of Tenant’s rights thereunder shall be and shall at all times remain subject, subordinate and inferior to the Mortgage and the lien thereof, and all rights of Beneficiary thereunder and to any and all renewals, modifications, consolidations, replacements and extensions thereof.

2 Acknowledgment and Agreement by Tenant. Tenant acknowledges and agrees that:

(a) Beneficiary would not make the Loan without this Agreement;

EXHIBIT C

(b) It consents to the Mortgage and the agreements evidencing and securing the Loan; and

(c) Beneficiary, in making any disbursements to Landlord, is under no obligation or duty to oversee or direct the application of the proceeds of such disbursements, and such proceeds may be used by Landlord for purposes other than improvement of the Property.

(d) From and after the date hereof, in the event of any act or omission by Landlord which would give Tenant the right, either immediately or after the lapse of time, to terminate the Lease or to claim a partial or total eviction, Tenant will not exercise any such right:

(i) until it has given written notice of such act or omission to Beneficiary; and

(ii) until the same period of time as is given to Landlord under the Lease to cure such act or omission shall have elapsed following such giving of notice to Beneficiary and following the time when Beneficiary shall have become entitled under the Mortgage to remedy the same.

(e) It has notice that the Lease and the rent and all other sums due thereunder have been assigned or are to be assigned to Beneficiary as security for the Loan secured by the Mortgage. In the event that Beneficiary notifies Tenant of a default under the Mortgage and demands that Tenant pay its rent and all other sums due under the Lease to Beneficiary, Tenant shall honor such demand and pay its rent and all other sums due under the Lease directly to Beneficiary or as otherwise required pursuant to such notice.

(f) It shall send a copy of any notice or statement under the Lease to Beneficiary at the same time such notice or statement is sent to Landlord.

(g) It has no right or option of any nature whatsoever, whether pursuant to the Lease or otherwise, to purchase the Premises or the Property, or any portion thereof or any interest therein, and to the extent that Tenant has had, or hereafter acquires, any such right or option, the same is hereby acknowledged to be subject and subordinate to the Mortgage and is hereby waived and released as against Beneficiary.

(h) This Agreement satisfies any condition or requirement in the Lease relating to the granting of a non-disturbance agreement.

3. Foreclosure and Sale. In the event of foreclosure of the Mortgage, or upon a sale of the Property pursuant to the trustee’s power of sale contained therein, or upon a transfer of the Property by conveyance in lieu of foreclosure, then:

(a) Non-Disturbance. So long as Tenant complies with this Agreement and is not in default under any of the terms, covenants, or conditions of the Lease, the Lease shall continue in full force and effect as a direct lease between the succeeding owner of the Property and Tenant, upon and subject to all of the terms, covenants and conditions of the Lease, except as set forth in Exhibits C and D attached hereto, for the balance of the term of the Lease. Tenant hereby agrees to adhere to and accept any such successor owner as landlord under the Lease, and to be bound by and perform all of the obligations imposed by the Lease, and Beneficiary, or any such successor owner of the Property, will not disturb the possession of Tenant, and will be bound by all of the obligations imposed on the Landlord by the Lease, except as set forth in Exhibits C and D attached hereto; provided, however, that Beneficiary, or any purchaser at a trustees or sheriff’s sale or any successor owner of the Property shall not be:

(i) liable for any act or omission of a prior landlord (including Landlord); or

EXHIBIT C

2

(ii) subject to any offsets or defenses which Tenant might have against any prior landlord (including Landlord); or

(iii) bound by any rent or additional rent which Tenant might have paid in advance to any prior landlord (including Landlord) for a period in excess of one month or by any security deposit, cleaning deposit or other prepaid charge which Tenant might have paid in advance to any prior landlord (including Landlord); or

(iv) bound by any agreement or modification of the Lease made without the written consent of Beneficiary.

(b) New Lease. Upon the written request of either Beneficiary or Tenant to the other given at the time of any foreclosure, trustee’s sale or conveyance in lieu thereof, the parties agree to execute a lease of the Premises upon the same terms and conditions as the Lease between Landlord and Tenant, with the changes set forth in Exhibits C and D attached hereto, which lease shall cover any unexpired term of the Lease existing prior to such foreclosure, trustee’s sale or conveyance in lieu of foreclosure.

(c) The provisions of the Lease set forth in Exhibit C shall be of no force or effect and shall not be binding upon Beneficiary or any purchaser or transferee acquiring the Property as a result of such foreclosure, trustee’s sale or conveyance in lieu thereof, and in the event of such foreclosure, trustee’s sale, or conveyance in lieu thereof, the provisions set forth in Exhibit D shall be added to the Lease and shall be effective and binding upon Tenant.

(d) See paragraph 8.

(e) Beneficiary shall have no liability to Tenant or any other party for any conflict between the provisions of the Lease and the provisions of any other lease affecting the Property, including, but not limited to any provisions relating to renewal options and options to expand, and in the event of such a conflict, Tenant shall have no right to cancel the Lease or take any other remedial action against Beneficiary or action against any other party for which Beneficiary would be liable.

4. Acknowledgment and Agreement by Landlord. Landlord, as landlord under the Lease and mortgagor or trustor under the Mortgage, acknowledges and agrees for itself and its heirs, successors and assigns, that:

(a) This Agreement does not:

(i) constitute a waiver by Beneficiary of any of its rights under the Mortgage; and/or

(ii) in any way release Landlord from its obligations to comply with the terms, provisions, conditions, covenants, agreements and clauses of the Mortgage;

(b) The provisions of the Mortgage remain in full force and effect and must be complied with by Landlord; and

(c) In the event of a default under the Mortgage, Tenant may pay all rent and all other sums due under the Lease to Beneficiary as provided in this Agreement.

EXHIBIT C

3

5. No Obligation of Beneficiary. Beneficiary shall have no obligation or incur any liability with respect to the erection or completion of the improvements in which the Premises are located or for completion of the Premises or any improvements for Tenant’s use and occupancy, either at the commencement of the term of the Lease or upon any renewal or extension thereof or upon the addition of additional space, pursuant to any expansion rights contained in the Lease.

6. Notice. All notices hereunder to Beneficiary shall be deemed to have been duly given if mailed by United States registered or certified mail, with return receipt requested, postage prepaid to Beneficiary at its address set forth in Exhibit B attached hereto (or at such other address as shall be given in writing by Beneficiary to Tenant) and shall be deemed complete upon any such mailing.

7. Miscellaneous.

(a) This Agreement supersedes any inconsistent provision of the Lease.

(b) Nothing contained in this Agreement shall be construed to derogate from or in any way impair or affect the lien and charge or provisions of the Mortgage.

(c) Beneficiary shall have no obligations nor incur any liability with respect to any warranties of any nature whatsoever, whether pursuant to the lease or otherwise, including, without limitation, any warranties respecting use, compliance with zoning, Landlord’s title, Landlord’s authority, habitability, fitness for purpose or possession.

(d) In the event that Beneficiary shall acquire title to the Premises or the Property, Beneficiary shall have no obligation, nor incur any liability, beyond Beneficiary’s then equity interest, if any, in the Premises, and Tenant shall look exclusively to such equity interest of Beneficiary, if any, in the Premises for the payment and discharge of any obligations imposed upon Beneficiary hereunder or under the Lease, and Beneficiary is hereby released and relieved of any other obligations hereunder and under the Lease.

(e) This Agreement shall inure to the benefit of the parties hereto, their respective successors and permitted assigns; provided however, that in the event of the assignment or transfer of the interest of Beneficiary, all obligations and liabilities of Beneficiary under this Agreement shall terminate, and thereupon all such obligations and liabilities shall be the responsibility of the party to whom Beneficiary’s interest is assigned or transferred; and provided further that the interest of Tenant under this Agreement may not be assigned or transferred without the prior written consent of Beneficiary.

(f) This Agreement shall be governed by and construed in accordance with the laws of the State in which the Property is located.

8. In the event of foreclosure of the Mortgage, or [illegible] a sale of the property pursuant to the trustee’s power of sale contained therein, or upon a transfer of the Property [illegible] conveyance in lieu of foreclosure, Beneficiary shall have no responsibility to provide (or liability for not providing) any additional space for which Tenant has any option or right under the Lease in the event that (a) Beneficiary does not own and control such additional space, (b) Beneficiary’s providing such additional space to Tenant will conflict with the rights of another tenant under or the provisions of any other lease affecting the Property or such additional space and/or (c) Beneficiary’s providing such additional space to Tenant could give rise, in Beneficiary’s good faith discretion, to a claim against Beneficiary by any third party, and Tenant hereby releases Beneficiary from any obligation it may otherwise have to provide the same under any or all of such circumstances and agrees that Tenant shall have no right to cancel the Lease, abate rent or assert any claim against Beneficiary as a result of the failure to provide any option space under any or all of such circumstances.

EXHIBIT C

4

TENANT ESTOPPEL CERTIFICATE

                        , 1996

To: Lender

Gentlemen:

The undersigned,                                 , (“Tenant”), as tenant under a lease (the “Lease”) of certain premises dated                  executed by Tenant and                      (“Landlord”) does hereby state, declare, represent and warrant as follows:

1. The copy of the Lease attached hereto as Exhibit A is a true and correct copy of the Lease and the Lease is in full force and effect and has not been amended, supplemented or changed, except as follows [if none, so state]:                                                                                                                                                                                                                                                                            

2. Tenant has accepted possession of the premises demised under the Lease, and all items of an executory nature have been completed under the terms of the Lease, including, but not limited to, completion of construction of the demised premises (and all other improvements required under the Lease) in accordance with applicable plans and specifications and within the time periods set forth in the Lease and otherwise in accordance with the Lease, and payment of any improvement allowance or other funds owing by Landlord to Tenant. Tenant further acknowledges that the term commenced on                  and shall expire on                 , unless sooner terminated or extended in accordance with the terms of the Lease.

3. No default or event that with the passing of time or the giving of notice, or both, would constitute a default (referred to herein collectively as a “default”) on the part of the undersigned exists under the Lease in the performance of the terms, covenants and conditions of the Lease required to performed on the part of the undersigned.

4. No default on the part of Landlord exists under the Lease in the performance of the terms, covenants and conditions of the Lease required to be performed on the part of Landlord.

5. Tenant has no option to renew the Lease or to expand and no right to purchase the property of which the premises are a part, or any part thereof.

6. No rentals are accrued and unpaid under the Lease.

7. No prepayments of rentals due under the Lease have been made and no security or deposits as security have been made thereunder, except as set forth in the Lease.

EXHIBIT D

Page 1.

8. The undersigned has no defense as to its obligations under the Lease and claims no setoff or counterclaim against Landlord.

9. The undersigned has not received notice of any assignment, hypothecation, mortgage, or pledge of Landlord’s interest in the Lease or the rents or other amounts payable thereunder.

10. The undersigned agrees to notify you of any default on the part of Landlord under the Lease which would entitle the undersigned to cancel the Lease or the abate the rent payable thereunder, and further agrees that, notwithstanding any provisions of the Lease, no notice or cancellation thereof shall be effective unless you have received said notice and have failed within thirty (30) days after the expiration of the cure period provided to Landlord under the Lease to cure or commence to cure the default which gave rise to the notice of cancellation.

11. The undersigned understands and acknowledges that you are about to make a loan to Landlord and receive as part of the security for such loan (i) a Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing encumbering Landlord’s fee interest in the property of which the leased premises are a portion and the rents, issues and profits of the Lease and (ii) an Assignment of Leases which affects the Lease, and that you are relying upon the representations and warranties contained herein in making such loan.

TENANT
By
	Its:

By
	Its:

EXHIBIT D

Page 2.

EXHIBIT E

ACCEPTANCE AGREEMENT

This Acceptance Agreement is made as of                      19     by and between the parties hereto with regard to that Lease dated                     , by and between PEN Associates No. 2, LLC, and Lakehouse, LLC, as Tenants in Common, as Landlord (“Landlord”), and                      a                      corporation, as Tenant (“Tenant”), affecting those premises commonly known as Renco 60, located at                      Fremont Boulevard in the City of Fremont, State of California (the “Premises”). The parties agree as follows:

1. All improvements required to be constructed by Landlord by the Lease have been completed in accordance with the terms of the Lease and are hereby accepted by Tenant, subject to the completion of punchlist items identified on Exhibit “A” attached hereto.

2. Possession of the Premises has been delivered to Tenant and Tenant has accepted and taken possession of the Premises.

3. The Lease Commencement Date is:                     .

4. The Lease Term shall expire on                     , unless sooner terminated according to the terms of the Lease or by mutual agreement.

5. The Base Monthly Rent due pursuant to the Lease is as follows:

_________	through	$
_________	through	$

6. Landlord has received a Security Deposit in the amount of                      ($                    ).

7. Landlord has received Prepaid Rent in the amount                      ($                    ) which shall be applied to the first installment(s) of Base Monthly Rent.

8. The Lease is in full force and effect, neither party is in default of its obligations under the Lease, and Tenant has no setoffs, claims, or defenses to the enforcement of the Lease.

AS LANDLORD:		AS TENANT:
PEN Associates No. 2, LLC		__________________________
a California limited liability company		a ____________ corporation
By:	Renco Properties, Inc.
	a California corporation
	Managing Member

By:	By:
Title:	Title:
By:	By:
Title:	Title:

Lakehouse, LLC
a California limited liability company
By:
	William N. Neidig
	Managing Member
Dated:		Dated:

[GRAPHIC OMITTED]

EXHIBIT F

EXHIBIT “G”

[LOGO]

RENCO PROPERTIES, INC. BAYSIDE CENTER - EXTERIOR SIGN STANDARDS

Scaled plans showing sizes, square footage used, placement, colors and materials must be submitted to RENCO PROPERTIES, INC. for approval by the review board or their sign advisors, Sign Classics prior to obtaining City Sign Permits.

(A) BUILDING MOUNTED SIGNS: FRONT OF BUILDING

(1) General Information

(a) Each tenant may have one sign over the lobby entrance, on the front of the building.

(b) Businesses with additional departments or divisions, having separate lobbies, and entrances may be allowed a second sign on the front. The tenant’s logo may be repeated on the additional sign, and the sign must clearly identify the division or department.

(c) The content of the Wall Sign is limited to the Corporate or Company name, Logo, Trademark, and/or Division Name. No description of products or services, slogans, phone numbers, banners, or any other type of sign is permitted. Any tenant with two company names under one street address, will be required to combine both business names on the same sign.

(2) Removable Sign Panel Backgrounds

(a) RENCO PROPERTIES requires that all sign backgrounds mounted on the fronts of the buildings be made of a sturdy, weather resistant material, measuring at most, 30” x 132”, wood is not allowed. The minimum dimensions for the signs are 30” x 72” Signs to be attached with no more than (4) molly bolts with #10 bolts.

(b) Sign panels are to have mounting systems which provide that no visible fasteners will show on the sign face are preferred.

(3) Letters and Logos

(a) Cut out or routed letters and logos are the standard for the park. No illuminated signs will be allowed on the fronts of the buildings.

(b) All letters, cut outs, logos and panels over 2” tall should be made from materials which are a minimum of 1/4” thick, and a maximum of 3/4” thick. Cut out letters which are 2” tall or less can be 1/8” thick.

(c) Materials such as aluminum, acrylic, and expanded PVC, (brand names commonly called Cellec, Sintra, Komatex, Trovicel ), are acceptable. Medex is commonly used for cut outs, but is not recommended for long exterior life. A sign which is not holding up to the elements will be required to be removed.

(d) Vinyl copy is not allowed for the main portion of the sign. The Logo and/or Letters must be made from cut outs, and vinyl may be used on the face of a cut out, but not on the face of the sign panel.

(e) Your logo colors will be allowed, but no fluorescent colors will be permitted. All colors must be approved by Renco Properties or Sign Classics. Very bright colors are unlikely to be approved

(B) BUILDING MOUNTED SHIPPING AND RECEIVING SIGNS

(1) One sign is permitted for every shipping entrance, and is to be located on or near the personal door.

(2) The sign should be a maximum size of 20” wide, x 32” tall.

(3) Signs should be made of 1/8” aluminum, copy material is open (vinyl is ok).

SIGN CLASSICS, INC.

1014 TIMOTHY DRIVE, SAN JOSE, CA 95133 (408) 298-1600

[LOGO]

(C) DIRECTIONAL SIGNS

No additional directional signs will permitted in any berm, parking, or driveway area.

(D) Approval

All sign layouts, colors and materials must be approved by Renco Properties or Sign Classics, before permits are pulled.

(E) Inquiries

For more information or questions contact Sign Classics, atten. Ken Fisher at (408) 298-1600 Fax (408) 298-3177.

SIGN CLASSICS, INC.

1014 TIMOTHY DRIVE SAN JOSE, CA 95133 (408) 298-1600

This Right of First Offer (“First Offer”) is entered into by and between PEN ASSOCIATES NO. 2, LLC, a California limited liability company, and LAKEHOUSE, LLC, a California limited liability company (“Landlord”) and ArcSoft, Inc., A California Corporation (“Tenant”) to be effective as of the Lease Commencement Date related to the lease as noted below.

That certain Lease dated as of January 7, 1998, by and between Landlord and Tenant for the lease of approximately 16,674 square feet in that certain building consisting of 108575 square feet, more or less, located at 46601 and 46605 Fremont Boulevard, Fremont, Calif.

1. For and in consideration of Tenant entering into the Lease and other valuable consideration, Landlord hereby grants to Tenant this Right of First Offer.

Landlord hereby grants to Tenant a Right of First Offer to be effective in the event that any portion or portions of the Building of which the Leased Premises are a part, should become available during the term of this Lease. At such time as said portion(s) is/are determined by Landlord to be available for lease, Landlord shall first offer said portion(s) to Tenant together with the terms and conditions upon which the space is to be offered to the general public or any other tenant in the Project. Tenant shall then have Five (5) business days during which to evaluate the offer from Landlord and to make an election as to whether or not Tenant shall lease said space upon the terms offered or upon terms which are acceptable to Landlord. In the event that Tenant responds in the negative or does not respond to Landlord’s offer within the time hereby specified, it shall be conclusively deemed that Tenant shall not have exercised its Right of First Offer and thereafter Landlord shall be free to offer said space on the general market or to other tenants within the Project and to enter into a lease transaction with another tenant without further obligation to Tenant. If Tenant accepts the Premises, the Lease shall be on all of the terms and conditions of Tenant’s Lease as noted above except for the Base Monthly Rent and any other terms specifically set forth in Landlord’s notice.

AS LANDLORD:		AS TENANT:
PEN ASSOCIATES NO. 2, LLC		ArcSoft, Inc.
a California limited liability company		a California corporation
By:	RENCO PROPERTIES, INC.
	a California corporation
	Its Managing Member

BY:	/s/ Donald E. Vermeil	BY:	/s/ [signature illegible]
TITLE:	[illegible]	TITLE:	CEO
BY:	William N. Neidig	BY:
TITLE:	Executive Vice President	TITLE:
LAKEHOUSE, LLC
a California limited liability company
BY:	/s/ William N. Neidig
	William N. Neidig
	Managing Member
DATE: January 13, 1998		DATE: January 12, 1998

May 7, 1998

By Certified Mail-Return Receipt Requested

ArcSoft

46601 Fremont Boulevard

Fremont. CA 94538

Attn: Mike Lin

NOTICE OF LEASE ASSIGNMENT

Premises: 46601 Fremont Boulevard

Fremont, California

Lease: Lease entered into by and between Renco Investment Company, Lakehouse LLC and PEN Associates No. 2, LLC, as Landlord and ArcSoft as Tenant, dated as of January 7,1998 covering the Premises, as amended.

This is to notify you that in accordance with the terms of assignment of Leases which was recorded in the Official Records of Alameda County, California on May 7, 1998, there has been duly assigned by the undersigned to Metropolitan Life Insurance Company, a New York corporation, whose address is 101 Lincoln Centre Drive, Sixth Floor, Foster City, California 94404-1121, the entire interest of the Landlord in the above-mentioned Lease.

The Assignment of Leases sets forth the following provisions:

Assignor irrevocably authorizes and directs the lessees and any successors to the respective interests of the lessees, upon receipt of any written request of Assignee stating that an Event of Default (as defined in the Deed of Trust) exists, to pay to Assignee the rents due and to become due under the Leases. Assignor agrees that the lessees shall have the right to rely upon any such statement and request by Assignee, that the lessees shall pay such rents to Assignee without any obligation or right to inquire as to whether an Event of Default actually exists and notwithstanding any notice from or claim against the lessees for any such rents so paid by the lessees to Assignee. Upon the curing of all Events of Default, Assignee shall give written notice thereof to the lessees and thereafter, until the receipt of any further similar written requests of Assignee, if any, the lessees shall pay the rents to Assignor. It is understood and agreed that neither the assignment of income, rents, issues, profits and proceeds to Assignee nor the exercise by Assignee of any of its rights or remedies under this Assignment shall be deemed to make Assignee a “mortgagee-in-possession” or otherwise responsible or liable in any manner with respect to the Property or the use, occupancy, enjoyment or operation of all or any portion thereof, unless and until Assignee, in person or by agent, assumes actual possession thereof, nor shall appointment of a receiver for the Property by any court at the request of Assignee or by agreement with Assignor or the entering into possession of the Property or any part thereof by such receiver be deemed to make Assignee a “mortgagee-in-possession” or otherwise responsible or liable in any manner with respect to the Property of the use, occupancy, enjoyment or operation of all or any portion thereof.

You are further notified that all rental payments under your Lease shall continue to be paid as hereto for in accordance with the terms of your Lease unless you are otherwise notified in writing by Metropolitan Life Insurance Company pursuant to the above provision.

The interest of the Landlord in the Lease has been assigned to Metropolitan Life Insurance Company solely as security for the purposes specified in such Assignment, and Metropolitan Life Insurance Company assumes no duty, liability or obligation under the Lease or any extension or renewal of the Lease either by virtue of such Assignment or by any subsequent receipt or collection of rents under the Assignment.

Very truly yours,
Lakehouse, LLC,
a California limited liability company
By:	/s/ William N. Neidig
	William N. Neidig
	Managing Member
	Lakehouse, LLC
PEN Associates No. 2. LLC.
a California limited liability company
By:	/s/ Donald E. Vermeil
	DONALD E. VERMEIL
	SECRETARY/TREASURER
	RENCO PROPERTIES, INC.

[GRAPHIC OMITTED]

FIRST AMENDMENT TO LEASE

ArcSoft, Inc.

THIS FIRST AMENDMENT TO LEASE (“Amendment”) dated for reference purposes as of October 19, 2000, is made to that Standard Multi-Tenant Lease Form Lease dated as of December 17, 1998, (the “Lease”) by and between ArcSoft Inc. a California corporation as (“Tenant”), and PEN Associates No. 2., LLC, a California limited liability company and Lakehouse, LLC, a California limited liability company, as Tenants in Common as (“Landlord”), for the lease of space located at 46601 - 46605 Fremont Boulevard, Fremont, California (the “Leased Premises”).

The parties hereto agree that the Lease is amended, changed and modified by the following provisions, which are hereby added to the Lease:

Unless otherwise expressly provided herein, all terms which are given a special definition by the Lease that are used herein are intended to be used with the definition given to them by the Lease. The provisions of the Lease shall remain in full force and effect except as specifically amended hereby. In the event of any inconsistency between the Lease and this Amendment, the terms of this Amendment shall prevail.

Effective as of August 15, 2000, the following terms of the Lease are amended:

1.1 G Lease Expiration Date: No Change, March 19, 2003.

1.1 K Tenant’s Security Deposit: Tenant’s Security Deposit shall increase by fifteen thousand four hundred forty three dollars ($15,443.00) from fifty four thousand one hundred fifty four dollars ($54,154.00) to sixty nine thousand five hundred ninety seven dollars ($69,597.00).

1.1 N. Undesignated and non-exclusive number of parking spaces: 80

1.1 O. Leased Premises. That certain space shown in red on Exhibit B attached hereto and incorporated herein by this reference consisting of approximately 21,343 square feet, including three spaces located at 46601, 46605 and 46613 Fremont Boulevard, Fremont, California.

1.1 P. Base Monthly Rent: August 1, 2000, through August 31, 2000, thirty three thousand two hundred forty six dollars ($33,246.00). September 1, 2000, through March 19, 2001, forty thousand two hundred fifty dollars ($40,250.00) per month, March 20, 2001, through March 19, 2002, forty one thousand seven hundred eighty five dollars ($41,785.00) per month, March 20, 2002, through March 19, 2003, forty three thousand three hundred fifty three dollars ($43,353.00) per month.

Fourth Amendment To Lease

Page 2

6.1 Alterations By Landlord: The additional space is leased “As Is”.

14.4 Warrants: As a consideration of Landlord entering into this Amendment, Tenant shall deliver to Landlord a warrant in a form and substance acceptable to Landlord to purchase ten thousand (10,000.00) shares of Tenant’s preferred B stock for a purchase price of $1.50 per share which warrant shall be delivered to Landlord within three days following the filing of an Amendment to Articles of Incorporation increasing Series B preferred stock reservation. The warrant shall have a minimum term of ten years and Series B preferred stock issuable upon exercise of the warrant, shall have the same rights and privileges as other series B preferred stock.

IN WITNESS WHEREOF, Landlord and Tenant have executed this First Amendment To Lease with the intent to be legally bound thereby, to be effective as of the date the second party signs this First Amendment To Lease.

[GRAPHIC OMITTED]

EXHIBIT B

Fourth Amendment To Lease

Page 3

AS LANDLORD:		AS TENANT:
PEN ASSOCIATES NO. 2, LLC a California limited liability company		ArcSoft, Inc. a California corporation
By:	RENCO PROPERTIES, INC.
	a California corporation
	Its Managing Member
BY:	/s/ Donald E. Vermeil	BY:	/s/ [signature illegible]
	DONALD E. VERMEIL
	SECRETARY/TREASURER
TITLE:	RENCO PROPERTIES, INC.	TITLE:	President
BY:	/s/ William N. Neidig	BY:
TITLE:	Exec. V.P. & Asst. Secy.	TITLE:
	Renco Properties
LAKEHOUSE, LLC a California limited liability company
BY:	/s/ William N. Neidjg
	William N. Neidjg
	Managing Member
DATE: 11/1/2000		DATE: 10/30/2000

SECOND AMENDMENT TO LEASE

ArcSoft, inc.

THIS SECOND AMENDMENT TO LEASE (“Amendment”) dated for reference purposes as of November 28, 2000, is made to that Standard Multi-Tenant Lease Form Lease dated as of December 17, 1998, (the “Lease”) by and between ArcSoft, Inc. a California corporation as (“Tenant”), and PEN Associates No. 2., LLC, a California limited liability company and Lakehouse, LLC, a California limited liability company, as Tenants in Common as (“Landlord”), for the lease of space located on Fremont Boulevard, Fremont, California (the “Leased Premises”).

The parties hereto agree that the Lease is amended, changed and modified by the following provisions, which are hereby added to the Lease:

Unless otherwise expressly provided herein, all terms which are given a special definition by the Lease that are used herein are intended to be used with the definition given to them by the Lease. The provisions of the Lease shall remain in full force and effect except as specifically amended hereby. In the event of any inconsistency between the Lease and this Amendment, the terms of this Amendment shall prevail.

Effective as of December 1, 2000, the following terms of the Lease are amended:

1.1 G Lease Expiration Date: November 30, 2004.

1.1 K Tenant’s Security Deposit Tenant’s Security Deposit shall increase by seventeen thousand three hundred seventy four dollars ($17,374.00) from sixty nine thousand five hundred ninety seven dollars ($69,597.00) to eighty six thousand nine hundred seventy one dollars ($86,971.00)

1.1 N. Undesignated and non-exclusive number of parking spaces: 100

1.1 O. Leased Premises. That certain space shown in red on Exhibit B attached hereto and incorporated herein by this reference consisting of approximately 26,200 square feet, including four spaces located at 46601, 46605, 46609, and 46613 Fremont Boulevard, Fremont, California.

1.1 P. Base Monthly Rent: December 1, 2000 through March 19, 2001 fifty four thousand eight hundred twenty one dollars ($54,821.00), March 20, 2001, through March 19, 2002, fifty six thousand seven hundred ninety-three dollars ($56,793.00), March 20, 2002, through March 29, 2003, fifty nine thousand one hundred twelve dollars ($59,112.00), March 20, 2003 through March 19, 2004, sixty two thousand sixty seven dollars ($62,067.00), March 20, 2004, through November 30, 2004, sixty five thousand one hundred seventy dollars ($65,170.00). Monthly rent shall be prorated on a daily basis for partial months.

2.6 Surrender Of Possession: Immediately prior to the expiration or sooner termination of the Lease Tenant at its sole cost shall pay to Landlord the cost to install demising walls between each of the four spaces occupied by Tenant as

Second Amendment To Lease

Page 2

shown on Exhibit B and perform any other work required so that Landlord may lease the Premises to four separate occupants with no additional work required of Landlord.

3.5 Security Deposit: section 3.5 of the First Addendum To Lease is hereby void.

6.1 Alterations By Landlord: The additional space is leased “As Is”.

14.4 Warrants: As a consideration of Landlord entering into this Amendment, Tenant shall deliver to Landlord a warrant in a form and substance acceptable to Landlord to purchase ten thousand (10,000) shares of Tenant’s preferred B stock for a purchase price of $1.50 per share which warrant shall be delivered to Landlord prior to Tenant s occupancy of the Premises. The form of the warrant shall be acceptable to Landlord. In the event that Tenant does not deliver the warrant to Landlord by December 1, 2000, Tenant shall pay rent for the expansion space but shall not occupy it until the warrant has been delivered to Landlord.

IN WITNESS WHEREOF, Landlord and Tenant have executed this Second Amendment To Lease with the intent to be legally bound thereby, to be effective as of the date the second party signs this First Amendment To Lease.

AS LANDLORD:		AS TENANT:
PEN ASSOCIATES NO. 2, LLC a California limited liability company		ArcSoft, Inc. a California corporation
By:	RENCO PROPERTIES, INC.
	a California corporation
	Its Managing Member
BY:	/s/ Donald E. Vermeil	BY:	/s/ Joe Bollentini
	DONALD E. VERMEIL
	SECRETARY/TREASURER
	RENCO PROPERTIES, INC.
TITLE:		TITLE:	Joe Bollentini, Exec. V.P & C.O.O.
BY:	William N. Neidig	BY:	/s/ [signature illegible]
TITLE:	Exec. V.P. & Asst. Secy.	TITLE:	Corporate Controller
	Renco Properties, Inc.
LAKEHOUSE, LLC a California limited liability company
BY:	/s/ William N. Neidig
	William N. Neidig
	Managing Member
DATE: 4/4/2000		DATE: Dec. 1, 2000

[GRAPHIC OMITTED]

EXHIBIT B

EX-10.9

Exhibit 10.9

International Garden Lease

On an equal, willing and honest basis, both parties, complying with the Contract Law of the People’s Republic of China, the Urban Real Estate Management Law of the People’s Republic of China and other governing laws, agree on the following terms concerning Party A’s leasing of the above-mentioned property to Party B.

Location of the property and its floor plan:¹

Party A agrees to rent the West Wing of the International Garden at #42² Tianmushan Road Hangzhou to Party B on the conditions specified in this lease.

This property has approx. 2,000.75 square meters in construction area.

The ownership certification number of this property is 0058148. The land use right is granted through remising, with a certification number of 002186 in 2000.

Refer to the attachment for the floor plan and boundaries of this property, whose area is measured by the metering authority.

1. Purpose of the leasing

1.1 Party B warrants that the purpose of the leasing is only for scientific research, operation and commercial.

1.2 During the leasing period, Party B shall not alter the purpose without a written consent from Party A.

2. Delivery of the property

2.1 Terms on handing over the property

Party A agrees to comply with the following conditions before the delivery date on November 1, 2001:

a. Set the eighth axis as the border by building a brick wall and painting it

b. Even the floor

c. Renovate the ceiling

d. Install independent meters to record the consumption of power and water.

e. Ensure the normal function of cable TV, telephone line and other communication facilities.

f. Provide Party B with one set of copies about the floor plan, structure plan, circuit and sewerage diagrams, and TV and telephone line diagrams of the fifth floor.

g. Renovate water sprays, smoke detectors and other fire-fighting equipments and make sure they function properly.

h. Test the circuit and water pipelines, air-conditioners to ensure their normal use.

¹ ArcSoft Hangzhou also rents the East Wing of the International Garden for identical lease terms. The size of East Wing is about 1,742.31 square meters in construction area. The ownership certification number of this property is 0099274. The land use right is granted through remising, with a certification number of 002186 in 2000.

² It is 160 Tianmushan Road after the zoning and renumbering by City of Hangzhou in 2002.

i. Rights and responsibilities on property management will be transferred to Party B with the leasing of the property. Party A shall handle the transfer procedures.

3. Trans-leasing Restrictions

3.1 Without a written consent from Party A, Party B has no right to leasing this property to a third party. Subsidiaries, share-holding companies and branches of Party A are allowed to use this property with the legal representative unchanged.

3.2 If Party A has agreed Party B to sublet the property to a third party, in addition to the leasing procedures to go through, Party B must ensure that the sublet lease will terminate before the expiration date of this lease and that the sublesse is not allowed to sublet this property.

4. Termination of this lease, rent and it payment

4.1 Party B agrees to lease this property from October 1, 2001 through April 5, 2004.

4.2 Both sides agree that Party B shall not make any rent payment during the 3-month decoration period, from September 25, 2001 to November 5, 2001, except for the property management fee and other expenses incurred by Party B.

4.3 Both parties agree on a net rent of RMB 1.58/M² per day (excluding the management fee, water, electricity fee and air-conditioning fees) and the total rent shall be limited to RMB 2,790,532.00.

4.4 Party B shall pay the rent once every six months based on the principle of “pay before use”. Therefore, the payment schedule is:

The first payment of RMB 578718.00 shall be paid before October 30, 2001. The second payment of RMB 578718.00 shall be paid before May 5, 2002. The third payment of RMB 578718.00 shall be paid before November 6, 2002. The fourth payment of RMB 578718.00 shall be paid before May 5, 2003. The last payment of RMB 578718.00 shall be paid before November 6, 2003.

5. Property management fee, water and electricity fee, air-conditioning fee

5.1 Starting from the handover of the property to Party B and until the termination of this contract, all the fees charged for property management, water and power supply and air-conditioning shall be paid by Party B, Party A shall not have any responsibility.

5.2 All the fees charged for property management, water and power supply and air-conditioning before the delivery of the property shall be paid by Party A, Party B shall not have any responsibility.

6. Termination and renewal of this contract

6.1 Within 10 days after the termination of this contract, Party B shall move out of and Party B has no responsibility to restore it to the state in which Party A has delivered it, provided that no structural changes have been made.

6.2 Upon the expiration, Party B shall have the right of first refusal to renew this lease. If Party B wants to renew the contract, it shall send a letter of renewal intent to Party A. The rent shall remain at RMB 1.58/M² per day (excluding the

management fee, water, electricity fee and air-conditioning fees) from April 6, 2004 to April 5, 2005. The rent and leasing size are to be negotiated thereafter according to the market changes, for increase no more than 10%.

7. Other restrictions

7.1 During the leasing period, Party B, if approved by Party A and the applicable government authorities, has the right to decorate the property. Party B shall not interfere in Party A’s choice of the decoration company and equipment suppliers under any pretext.

7.2 If Party B needs partition, alter or decorate the property during the leasing period, Party B shall be responsible for all the costs. In addition, Party B must ensure that the re-engineering abides by China’s fire-fighting regulations and that the structure of the architecture is not altered. Otherwise all consequences shall be borne by Party B.

7.3 Party A will offer a certain area of the terrace to Party B for free (refer to the technical drawings for details). Party A will hedge the terrace. Party B shall install security equipments by itself that observe the regulations worked out by the property management operation.

7.4 Party B shall not use this property as an external guarantee, mortgage or likewise.

7.5 Any damages, injuries or mortalities due to the defects in the property itself shall be compensated by Party A.

7.6 Attachment One: floor plan

8. Breach

One party shall pay a penalty of RMB 92,906 to the other upon breaching the lease, which equals to 2-month rent.

Party B’s Obligations

8.1 Party A has right to terminate the lease, reclaim the property and claim for compensation, should there be any consequent loss or damage, if Party B has following wrongdoings during the leasing period:

a. Sublet, transfer, lend the property to others without an written authorization from Party A.

b. Alter structure of the property, damage the property without authorization from Party A and refuse to fix or restore it after receiving a written notice from Party A.

c. Alter the use of the property or use it as a place for illegal conducts.

d. Delay the due payment of the rent by one month or longer.

e. Other conditions prescribed in governing laws and regulations as reclaiming by Party A

8.2 Party B shall pay the rent on time, except for the due date falls into weekend and legal holidays. If Party A refuses the payment without good reasons, Party B has no obligation to compensate for the delay of payment.

8.3 During the leasing period, Party B shall not terminate the lease prior to the expiration date without consent from Party A. Otherwise the deposit will not be refunded, in addition to penalty for breach of the contract.

8.4 If Party B has good reasons to terminate the lease prior to the expiration date, it

shall inform Party A in writing. If Party A agrees, Party A shall return the advance payment to Party B. Other issues are to be settled through future discussion.

8.5 Party B shall return the property to Party A after the termination or expiration of this lease. If it fails to return it within ten days after the termination of the lease, Party A has right to charge a double rent on each delaying day.

Obligations on Party A

8.6 Party B has right to terminate the contract, reclaim the property and claim for compensation, should there be any consequent loss or damage if Party B has following wrongdoings during the leasing period:

a. Sublet the property to a third party without a written consent from Party B

b. Due to the misconducts by Party A, Party B is unable to enjoy the quiet use of the property.

8.7 If Party A terminates the lease prior to the expiration date without approval from Party B, Party A shall refund the deposit to Party B and responsible for any losses or consequential damages suffered by Party B as a result of the breach.

8.8 Party A promises that the property is free of any financial dispute or mortgage, and title is free of any defect. If such disputes arise during the leasing period which interfere Party B’s continuous use the property, Party B has right to claim for any current and consequent damages from Party A.

8.9 If Party A fails to deliver the property to Party B on the above delivery date, Party B shall be entitled to receiving a doubled rent for each delaying day.

8.10 Party A is responsible for the natural depreciation of the property itself during the leasing period. Party B has right to terminate the lease if Party A fails to renovate the property in time of major natural depreciation and tilting risks.

9. Disclaimers

Either party shall not be liable for any breach caused by force majeure.

10. Settlement of disputes

10.1 Issues unspecified in the contract shall be settled by both parties through friendly and sincere talks.

10.2 Should negotiations yield no result, either party can appeal to the People’s Court in the district where the property stands.

Party A: Hangzhou West Lake Real Estate Operating Co.

Representative:

Through agency of:

Hangzhou Kaichuang Real Estate Agency Co Ltd

Representative

Party B: Hangzhou ArcSoft ZDQ Software Co Ltd.³

³ ArcSoft (Hangzhou) assumed all assets and outstanding agreements and lease after conversion of the joint

Representative:

Date: September 24, 2001

venture into a wholly ArcSoft owned entity.

EX-21.1

Exhibit 21.1

ArcSoft, Inc.

List of Subsidiaries

1. ArcSoft Hangzhou Co. Ltd. (People’s Republic of China)

2. ArcSoft KK (Japan)

3. ArcSoft Taiwan (Taiwan)

4. ArcSoft Technology (Beijing) Company, Ltd. (People’s Republic of China)

5. ArcSoft (Beijing) Information Technology Company, Ltd. (People’s Republic of China)

6. ArcSoft Shanghai (People’s Republic of China)

7. ArcSoft Shanghai Company, Ltd. (People’s Republic of China)

8. ArcSoft Europe (England)

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Registration Statement of ArcSoft, Inc. on Form S-1 of our report dated August 12, 2004 appearing in this Prospectus, which is part of this Registration Statement.

We also consent to the references to us under the heading “Experts” in such Prospectus.

/S/ DELOITTE & TOUCHE LLP

San Jose, California

August 19, 2004