-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WrbkGt3GS5joxMgV15CpT0Chu52w2mlpAKjX1XbpQCcNrz03izG6AuY5VFxctln9 ly/oHamg8NR5kJKmdOibFw== 0000950134-07-019818.txt : 20080331 0000950134-07-019818.hdr.sgml : 20080331 20070911080901 ACCESSION NUMBER: 0000950134-07-019818 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 20070911 DATE AS OF CHANGE: 20080214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ArcSight Inc CENTRAL INDEX KEY: 0001368582 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-145974 FILM NUMBER: 071110046 BUSINESS ADDRESS: STREET 1: 5 Results Way CITY: Cupertino STATE: CA ZIP: 95014 BUSINESS PHONE: 408-864-2600 MAIL ADDRESS: STREET 1: 5 Results Way CITY: Cupertino STATE: CA ZIP: 95014 S-1 1 f28075orsv1.htm FORM S-1 sv1
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As filed with the Securities and Exchange Commission on September 11, 2007
Registration No. 333-          
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form S-1
Registration Statement Under The Securities Act of 1933
 
 
 
 
 
ArcSight, Inc.
(Exact name of Registrant as specified in its charter)
 
         
Delaware
(State or other jurisdiction of
incorporation or organization)
  7372
(Primary Standard Industrial
Classification Code Number)
  52-2241535
(I.R.S. Employer
Identification Number)
 
 
ArcSight, Inc.
5 Results Way
Cupertino, California 95014
(408) 864-2600
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
 
Robert W. Shaw
Chief Executive Officer and
Chairman of the Board
ArcSight, Inc.
5 Results Way
Cupertino, California 95014
(408) 864-2600
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
Please send copies of all communications to:
 
         
David A. Bell, Esq.
Daniel J. Winnike, Esq.
Yoonie Y. Chang, Esq.
Michael J. Hopp, Esq.
Fenwick & West LLP
801 California Street
Mountain View, California 94041
(650) 988-8500
  Trâm T. Phi, Esq.
Vice President and General Counsel
ArcSight, Inc.
5 Results Way
Cupertino, California 95014
(408) 864-2600
  Bruce K. Dallas, Esq.
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, California 94025
(650) 752-2000
 
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, check the following box:  o
 
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.  o
 
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.  o
 
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.  o
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
    Amount of
Title of Each Class of
    Aggregate
    Registration
Securities to be Registered     Offering Price(1)(2)     Fee
Common Stock, $0.00001 par value
    $74,750,000     $2,294.83
             
 
(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.
 
(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.
 


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The information in this 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 prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
 
 
PROSPECTUS (Subject to Completion)
Issued September 11, 2007
               Shares
 
(ARCSIGHT LOGO)
 
 
COMMON STOCK
 
 
 
 
ArcSight, Inc. is offering           shares of its common stock and the selling stockholders are offering           shares of common stock. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price will be between $      and $      per share.
 
 
 
 
We will apply to have our common stock listed on The NASDAQ Global Market under the symbol “ARST.”
 
 
 
 
Investing in the common stock involves risks. See “Risk Factors” beginning on page 7.
 
 
 
PRICE $      A SHARE
 
 
 
                                 
          Underwriting
          Proceeds to
 
    Price to
    Discounts and
    Proceeds to
    Selling
 
    Public     Commission     ArcSight     Stockholders  
 
Per Share
    $           $           $           $      
Total
    $              $                 $              $         
 
We have granted the underwriters the right to purchase an additional           shares of common stock to cover over-allotments.
 
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock to purchasers on          , 2007.
 
 
 
 
MORGAN STANLEY LEHMAN BROTHERS
 
WACHOVIA SECURITIES RBC CAPITAL MARKETS
 
, 2007


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Computer viruses seek out your cell phone As cell phones get The Trojan responsible for stealing more than 1.6 million personal records from Online Applicant uses that infor—mation to build targeted spam that offers recipients lucrative, but illegal, money            laundering            jobs, effectively ArcSight Pharmaceutical firm confirms third breach involving employee data since June As many as 34,000 workers may be vulnerable to ID theft Pharmaceutical company appears to be having an especially hard time of late keeping its employee data secure. many as 34,000 of its employees may be at risk of read an download
2.6 million cdedit cards exposed at electronics retailer smarter, they also Computer viruses seek out your cell phone As cell phones get become a target for malicious code. Here’s how to protect yourself When it comes to cell phones, the smarter they are, the harder they for for viruses. Almost one in phones so
Stolen Online Applicant Data Put to Bad Use The Trojan horse used to steal personal data from Online Applicant sends targeted spam seeking recruits for money-laundering jobs mated searches that have collected information on hundreds of thousands who have posted their resumes on the job search site. Criminals then used the stolen names, e-mail addresses, address, phone numbers identification into
victin
contain accomplices, said Symantec Corp. Wednesday. Online Applicant, mean-while while, said Wednesday it had shut down the server used to store the stolen resume information. week,
Are you protecting your business? Employee Walks Away With $400 Million In Trade Secrets Company scientist downloaded 22,000 sensitive documents and accessed 16,000 others as he got ready to take a job with a competitor
Office in Delaware last week revealed a massive insider data scientist stole $400 million worth of trade secrets from the aces up to 10 years in prison, a fine of $250,000, and restitu- 2.6 Million Credit Cards Exposed at Electronics Retailer Estonia Computers Blitzed, Possibly by the Russians Current and former account holders of Electronic Retailer credit card are being notified that their personal information was exposed As end users at different companies conduct more business with one another via the Web, corporate information security strategies are being
That realization is being by the accelerating nies to collaborate online ers, business partners; The “de-perimeterizati networks that has re collaboration is forcir completely            rethink entrenched security The computer attacks, apparently originating in Russia, first hit the Web site of Estonia’s prime minister on April 27, the day the country was mired in protest and violence. The president’s site went down, too, and soon so did those of several departments in a wired country that touts its paperless government and likes to call itself E-stonia. Then the attacks, coming in waves, began to strike newspapers and televi—sion stations, then schools and finally banks, raising fears that The attacks have peaked and tapered off since then, but they have not ended, prompting officials there to declare Estonia the first country to fall victim to a virtual war. “If you have a missile attack against, let’s say, an airport, it is an act of war,” a spokesman for the Estonian Defense Ministry, Madis Mikko, said Friday in a telephone interview. “If the same result is caused by computers, then how else do you describe that kind of attack?”

 


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Fraud Data Theft Cyber-Crime Frau Policy Viotatto MaIware Identity T
Cyber-Crime
Firewall VPN delware
cyber-Crime
Malware
F28075 02
offices
Platform

 


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ArcSight’s Platefrom
Protects Your Business Detect and respond to external attacks, insider threats and compliance violations by centrally monitoring and analyzing events across your enterprise business and technology infrastructure

 


 

 
TABLE OF CONTENTS
 
         
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  F-1
 EXHIBIT 3.1
 EXHIBIT 3.3
 EXHIBIT 4.2
 EXHIBIT 10.2
 EXHIBIT 10.3
 EXHIBIT 10.4
 EXHIBIT 10.5
 EXHIBIT 10.17
 EXHIBIT 23.1
 EXHIBIT 99.1
 EXHIBIT 99.2
 
 
You should rely only on the information contained in this prospectus or in any free-writing prospectus we may specifically authorize to be delivered or made available to you. We have not, the selling stockholders have not and the underwriters have not authorized anyone to provide you with additional or different information. We and the selling stockholders 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 or a free-writing prospectus is accurate only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
 
Until          , 2007 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
 
For investors outside the United States: We have not, the selling stockholders have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read this summary together with the more detailed information, including our financial statements and the related notes, provided elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in “Risk Factors.”
 
ARCSIGHT, INC.
 
We are a leading provider of security and compliance management solutions that intelligently mitigate business risk for enterprises and government agencies. Much like a “mission control center,” our ArcSight ESM platform delivers a centralized, real-time view of disparate digital alarms, alerts and status messages, which we refer to as events, across geographically dispersed and heterogeneous business and technology infrastructures. Our software correlates massive numbers of events from thousands of security point solutions, network and computing devices and applications, enabling intelligent identification, prioritization and response to external threats, insider threats and compliance and corporate policy violations. We also provide complementary software that delivers pre-packaged analytics and reports tailored to specific security and compliance initiatives, as well as appliances that streamline threat response, event log archiving and network configuration.
 
We have designed our platform to support the increasingly complex business and technology infrastructure of our customers. As of April 30, 2007, we have sold our products to more than 350 customers across multiple industries and government agencies in the United States and internationally, including companies in the Fortune Top 5 of the aerospace and defense, energy and utilities, financial services, food production and services, healthcare, high technology, insurance, media and entertainment, retail and telecommunications industries, and more than 20 major U.S. government agencies.
 
As enterprises and government agencies increasingly utilize an interconnected information technology and business infrastructure to enhance efficiency, exchange information and conduct business with partners, customers and suppliers, these organizations expose their infrastructure and data to heightened security risks and are subject to increasing compliance requirements. The large number of heterogeneous devices and applications in a geographically distributed corporate infrastructure generates massive amounts of event data that is challenging to monitor or analyze at an enterprise-wide scale for security vulnerabilities and compliance violations. Vendor-specific management consoles and traditional systems management tools are limited in scope or are not equipped to handle a large volume of data. In addition, organizations have difficulty identifying events that are threatening in nature because they are unable to distinguish threats from the “white noise” of normal event activity, to recognize risks by correlating events reported by disparate systems, to understand the context in which the events arise or to appropriately prioritize responses according to risk level or corporate policy.
 
The need for a highly scalable, holistic and intelligent solution that can help organizations address these challenges in real-time is growing. The market for security and compliance management solutions today includes security information and event management, forensics and incident investigation, policy and compliance management and network change and configuration management. According to a report by International Data Corporation, or IDC, the security information and event management, forensics and incident investigation, and policy and compliance management markets are projected to grow, in aggregate, from $993.6 million in 2007 to $2.2 billion in 2011, representing a compound annual growth rate of 22.1%. In separate reports, IDC projects that the network change and configuration management market will grow from $157.1 million in 2007 to $372.6 million in 2011, representing a compound annual growth rate of 24.1%, and the compliance infrastructure software market, in which we also compete, will grow from $6.2 billion in 2007 to $10.6 billion in 2010, representing a compound annual growth rate of 19.5%.
 
Our Solutions
 
Our ESM platform identifies and prioritizes high-risk activity and presents a consolidated view of threats to the business and technology infrastructure in rich, graphical displays. Our platform collects streaming data from event sources, translates the streaming data into a common format, and then processes this data with our correlation


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engine in which complex algorithms determine if events taking place conform to normal patterns of behavior, established security policies and compliance regulations. Once threats are identified, our ArcSight TRM (Threat Response Manager) and ArcSight NCM (Network Configuration Manager) appliance products help our customers easily re-configure network devices to remediate threats and prevent recurrence. In addition, through our new Logger appliance, we enable efficient and scalable storage, preservation and management of terabytes of enterprise log data for compliance requirements or forensic analysis. Our customers enhance the value of individual security products in their business and technology infrastructure by integrating them with our platform. Key benefits of our solutions include:
 
  •  Enterprise-Class Technology and Architecture.  We design our solutions to serve the needs of even the largest organizations, which typically have highly complex, geographically dispersed and heterogeneous business and technology infrastructures.
 
  •  Interoperability.  We provide off-the-shelf software connectors for over 240 products, including security devices, end-user devices, networking equipment, computing infrastructure, other IP-enabled devices, and enterprise applications and databases, from approximately 100 vendors, allowing our customers to rapidly deploy our platform in their existing business and technology infrastructures.
 
  •  Flexibility.  In addition to providing off-the-shelf connectors, our ESM platform is designed to enable customers to rapidly build interfaces to new products, proprietary applications and legacy systems.
 
  •  Scalability.  Our ESM platform enables customers to collect and correlate millions of events per day from a large number of heterogeneous devices and applications in real-time, and may be expanded by the customer over time to incorporate additional departments, branch offices or geographies, as well as additional categories of devices and applications, while maintaining the overall performance of the platform.
 
  •  Archiving.  Our solution helps customers store event data to satisfy regulatory recordkeeping requirements by providing cost-effective and centralized event log archiving.
 
  •  Intelligent Correlation.  Our correlation engine distills a large number of events occurring daily into intelligence that allows customers to identify, prioritize and respond to specific threats or compliance violations.
 
  •  Streamlined Response and Seamless Workflow.  Our products simplify the management of the broad range of notifications and actions that must take place to remediate a threat and prevent recurrence across the technology infrastructure, thus narrowing the period of vulnerability.
 
  •  Reporting and Visualization.  We present threat information through a rich and intuitive graphical user interface, through which customers can view risk across their organization in a variety of ways, address internal and external compliance requirements and communicate the value and effectiveness of the organization’s security operations.
 
Our Strategy
 
Our objective is to be the leading provider of security and compliance management solutions that intelligently mitigate business risk for enterprises and government agencies. The key elements of our strategy to achieve this objective include:
 
  •  Grow Our Customer Base.  We plan to increase our presence globally by expanding our direct sales force and building additional relationships with channel partners. We also plan to further penetrate the mid-market through an expanded network of channel partners and continued development of appliance-based products.
 
  •  Deepen Our Penetration of Existing Customers.  We intend to facilitate expanded deployments of our products with, and to introduce new solutions to, our existing customers. We expect our appliance-based products to generate opportunities for additional sales to our installed base as customers build on their existing implementations.


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  •  Extend Our Partner Network.  We will continue to work with technology partners, including CA, Cisco Systems, IBM, Juniper Networks, McAfee, Oracle, SAP and Symantec, and other vendors, such as Check Point Software Technologies, Trend Micro and Websense, to provide for compatibility between our platform and their latest products.
 
  •  Extend Our Expertise in Security Best Practices.  We will continue to develop pre-packaged software solutions that are tailored to address specific security and regulatory concerns, as we have done with our existing IT governance, Sarbanes-Oxley compliance, Payment Card Industry (PCI) compliance and Insider Threat packages.
 
  •  Extend Our Value Proposition to More Event Sources and Business Use Cases Beyond Traditional IT Security.  We intend to create new sales opportunities by developing solutions that address high-value additional use cases for our platform. In addition to using our software to mitigate risk from external or insider threats and to satisfy compliance requirements, we believe that enterprises are increasingly finding value in leveraging our highly scalable, real-time event correlation platform for applications beyond security.
 
Risks Affecting Us
 
Our business is subject to numerous risks, which are highlighted in “Risk Factors” immediately following this prospectus summary. These risks represent challenges to the successful implementation of our strategy and to the growth and future profitability of our business. Some of these risks are:
 
  •  we have a limited operating history and have incurred significant losses since inception, including losses from operations of $16.8 million in fiscal 2006 and $0.3 million in fiscal 2007, and as of April 30, 2007, we had an accumulated deficit of $44.6 million;
 
  •  our quarterly operating results are likely to vary significantly and be unpredictable, in part because of the length and unpredictability of our sales cycle, as well as the purchasing and budgeting practices of our customers;
 
  •  if we are unsuccessful in managing and further developing our distribution channels, our revenues could decline and our growth prospects could suffer;
 
  •  our sales are concentrated in our ESM platform, we have limited experience with the sale, manufacture, delivery, service and support for our appliance products, and we may be unable to successfully develop new products, make enhancements to our existing products or expand our offerings into new markets; and
 
  •  the market in which we operate is highly competitive, and many of our established competitors have significantly greater resources than we do and have other potential advantages; our customers may also choose to develop their own customized solutions rather than purchase products such as ours.
 
For further discussion of these and other risks you should consider before making an investment in our common stock, see “Risk Factors” immediately following the prospectus summary.
 
Corporate Information
 
We were incorporated in Delaware on May 3, 2000 as Wahoo Technologies, Inc. On March 30, 2001, we changed our name to ArcSight, Inc. Our principal executive offices are located at 5 Results Way, Cupertino, California 95014, and our telephone number is (408) 864-2600. Our website address is www.arcsight.com. The information on, or that can be accessed through, our website is not part of this prospectus.
 
Except where the context requires otherwise, in this prospectus “Company,” “ArcSight,” “Registrant,” “we,” “us” and “our” refer to ArcSight, Inc., and where appropriate, its subsidiaries.
 
“ArcSight” and the ArcSight logo are registered trademarks of ArcSight in the United States and in some other countries. Where not registered, these marks and “ArcSight Console,” “ArcSight Manager,” “ArcSight Web,” “FlexConnector,” “Logger,” “NCM” “SmartConnector” and “TRM” are trademarks of ArcSight. Other service marks, trademarks and tradenames referred to in this prospectus are the property of their respective owners.


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THE OFFERING
 
Shares of common stock offered by us
           shares
 
Shares of common stock offered by the selling stockholders
           shares
 
Shares of common stock to be outstanding after this offering
           shares
 
Use of proceeds
We plan to use the net proceeds of this offering for general corporate purposes, including working capital and potential acquisitions. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. See “Use of Proceeds.”
 
NASDAQ Global Market Symbol
“ARST”
 
The number of shares of common stock that will be outstanding after this offering is based on 98,430,496 shares of our common stock outstanding as of April 30, 2007, and excludes:
 
  •  23,091,296 shares of common stock issuable upon the exercise of options outstanding as of April 30, 2007, at a weighted-average exercise price of approximately $0.99 per share;
 
  •  2,431,938 shares of common stock issuable upon the exercise of options granted after April 30, 2007, at a weighted-average exercise price of $2.50 per share;
 
  •  76,820 shares of common stock issuable upon exercise of warrants outstanding as of April 30, 2007, including a warrant to purchase 25,185 shares of common stock and warrants to purchase an aggregate of 51,635 shares of convertible preferred stock that will convert into warrants to purchase the same number of shares of common stock upon completion of this offering, at a weighted-average exercise price of approximately $0.0003 per share;
 
  •             shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan, which will become effective on the first day that our common stock is publicly traded and contains provisions that will automatically increase its share reserve each year, as more fully described in “Management—Employee Benefit Plans”; and
 
  •             shares of common stock reserved for future issuance under our 2007 Employee Stock Purchase Plan, which will be become effective on the first day that our common stock is publicly traded and contains provisions that will automatically increase its share reserve each year, as more fully described in “Management—Employee Benefit Plans.”
 
Unless otherwise indicated, all information in this prospectus assumes:
 
  •  the conversion of all outstanding shares of our convertible preferred stock into 55,950,192 shares of common stock effective upon the closing of this offering;
 
  •  the conversion of all outstanding warrants to purchase shares of our convertible preferred stock into warrants to purchase an aggregate of 51,635 shares of common stock effective upon closing of this offering; and
 
  •  no exercise by the underwriters of their right to purchase up to an additional           shares of common stock to cover over-allotments.


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SUMMARY OF CONSOLIDATED FINANCIAL DATA
 
The following table summarizes our consolidated financial data. We have derived the following summary of our consolidated statements of operations data for the fiscal years ended April 30, 2005, 2006 and 2007 and the consolidated balance sheet data as of April 30, 2007 from our audited consolidated financial statements appearing elsewhere in this prospectus. Our historic results are not necessarily indicative of the results that may be expected in the future. The summary of our financial data set forth below should be read together with our consolidated financial statements and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this prospectus. The pro forma balance sheet data give effect to the conversion of all outstanding shares of convertible preferred stock into common stock effective upon the closing of this offering, and the pro forma as adjusted balance sheet data also reflect the sale of shares of our common stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the range reflected on the cover page on this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds as described in “Use of Proceeds.”
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
    (in thousands, except per share data)  
 
Consolidated Statement of Operations Data:
                       
Revenues
  $  32,822     $ 39,435     $  69,833  
Cost of revenues(1)
    4,494       6,796       9,588  
                         
Gross profit
    28,328       32,639       60,245  
                         
Operating expenses(1)
                       
Research and development
    7,583       12,154       14,535  
Sales and marketing
    14,647       24,309       36,587  
General and administrative
    8,725       12,978       9,453  
                         
Total operating expenses
    30,955       49,441       60,575  
                         
Loss from operations
    (2,627 )     (16,802 )     (330 )
Other income (expense), net
    (49 )     219       462  
                         
Income (loss) before provision for income taxes
    (2,676 )     (16,583 )     132  
Provision for income taxes
    137       163       389  
                         
Net loss
  $ (2,813 )   $  (16,746 )   $ (257 )
                         
Net loss per common share, basic and diluted
  $ (0.11 )   $ (0.56 )   $ (0.01 )
                         
Shares used in computing basic and diluted net loss per common share
    24,647       29,874       40,169  
                         
Pro forma net loss per common share, basic and diluted (unaudited)
                  $ (0.00 )
                         
Shares used in computing pro forma basic and diluted net loss per common share (unaudited)
                    96,106  
                         
 
(1) Includes stock-based compensation expense as follows:
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
    (in thousands)  
 
Cost of maintenance and services revenues
  $ 7     $ 10     $ 17  
Research and development
     1,642        1,950        501  
Sales and marketing
    746       210       661  
General and administrative
    4,838       5,948       350  
                         
Total stock-based compensation expense
  $ 7,233     $ 8,118     $ 1,529  
                         
 
Revenues in fiscal 2006 excluded revenues related to multiple element sales transactions consummated in that year that were deferred because we did not have vendor-specific objective evidence of fair value, or VSOE, for some product elements that were not delivered in 2006. In fiscal 2007, we either delivered such product elements, or we


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and our customers amended the contractual terms of these sales transactions to remove the undelivered product elements. Fiscal 2007 revenues included a substantial portion of the revenues so deferred from fiscal 2006, as well as a small amount of revenues similarly deferred from prior years. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Sources of Revenues, Cost of Revenues and Operating Expenses” for additional details, including the net amounts involved. We do not expect revenues in future periods to be favorably impacted to the same extent by similar transactions consummated in fiscal 2007 and prior periods.
 
                         
    As of April 30, 2007  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted(1)  
    (in thousands, except per share data)  
          (unaudited)     (unaudited)  
 
Consolidated Balance Sheet Data:
                       
Cash and cash equivalents
  $  16,917     $  16,917     $    
Working capital deficit
    (3,192 )     (3,192 )        
Total assets
    48,990       48,990          
Current and long-term debt
                 
Convertible preferred stock
    26,758              
Total stockholders’ equity
  $ 5,130     $ 5,130     $  
 
(1) A $1.00 increase (decrease) in the assumed public offering price of $      per share would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and following closing of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.


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RISK FACTORS
 
Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose part or even all of your investment.
 
Risk Related to Our Business and Industry
 
We have limited operating history in an emerging market and a history of losses, and we are unable to predict the extent of any future losses or when, if ever, we will achieve consistent profitability in the future.
 
We launched our ESM products in January 2002, our TRM and NCM products in June 2006 and our Logger product in December 2006. Because we have a limited operating history, and the market for our products is rapidly evolving, it is difficult for us to predict our operating results and ultimate size of the market for our products. We have a history of losses from operations, incurring losses from operations of $16.8 million and $0.3 million for the fiscal years ended April 30, 2006 and 2007, respectively. As of April 30, 2007, our accumulated deficit was $44.6 million. We expect our operating expenses to increase over the next several years as we hire additional sales and marketing personnel, expand our channel sales program and develop our technology and new products. In addition, as a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. If our revenues do not increase to offset these expected increases in operating expenses, we will continue to incur significant losses and will not become profitable. Our revenue growth in recent periods should not be considered indicative of our future performance. In future periods, our revenues could decline and, accordingly, we may not be able to achieve profitability and our losses may increase. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a consistent basis, which may result in a decline in our common stock price.
 
Our future operating results may fluctuate significantly and may not be a good indication of our future performance.
 
Our revenues and operating results could vary significantly from period to period as a result of a variety of factors, many of which are outside of our control. As a result, comparing our revenues and operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. For example, revenues in fiscal 2006 excluded revenues related to multiple element sales transactions consummated in that year that were deferred because we did not have vendor-specific objective evidence of fair value, or VSOE, for some product elements that were not delivered in 2006. In fiscal 2007, we either delivered such product elements, or we and our customers amended the contractual terms of these sales transactions to remove the undelivered product elements. Fiscal 2007 revenues included a substantial portion of the revenues so deferred from fiscal 2006, as well as a small amount of revenues similarly deferred from prior years. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Sources of Revenues, Cost of Revenues and Operating Expenses.” We do not expect revenues in future periods to be favorably impacted to the same extent by similar transactions consummated in fiscal 2007 and prior periods. We may not be able to accurately predict our future revenues or results of operations. We base our current and future expense levels on our operating plans and sales forecasts, and our operating costs are relatively fixed in the short term. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect financial results for that quarter. In addition, sales to some customers or resellers are recognized when cash is received, which may be delayed because of changes or issues with those customers or resellers. If our revenues or operating results fall below the expectations of investors or any securities analysts that may choose to cover our stock, the price of our common stock could decline substantially.
 
In addition to other risk factors listed in this section, factors that may affect our operating results include:
 
  •  the number, size and pricing of sales transactions during the period;


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  •  the timing of our sales during the quarter, particularly since a substantial majority of our sales occurs in the last few weeks of the quarter and loss or delay of a few large contracts may have a significant adverse impact on our operating results;
 
  •  changes in the mix of revenues attributable to higher-margin revenues from ESM products as opposed to lower-margin revenues from sales of our appliance products;
 
  •  our ability to accurately predict sales of our appliance products to ensure sufficient inventory to achieve timely delivery and to avoid excess inventory;
 
  •  the timing of development and release of new products by us and our competitors;
 
  •  any downturn in our customers’ and potential customers’ businesses;
 
  •  any significant change in the competitive dynamics of our markets, including new entrants to our markets;
 
  •  changes in the mix of revenues attributable to direct sales compared to sales by channel partners, the latter of which are more likely to involve revenue recognition upon receipt of payment due to collectibility concerns at the time of contract execution and product delivery, and are more likely to have lower margins;
 
  •  changes in the renewal rate of maintenance agreements;
 
  •  strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;
 
  •  our ability to estimate warranty claims accurately;
 
  •  the timing or failure of delivery of our appliance products from our equipment vendor, including as a result of a failure to manufacture our appliance products or fulfill orders in required volumes, in a timely manner, at a sufficient level of quality, or at all;
 
  •  the timing of satisfying revenue recognition criteria, including establishing VSOE for new products and maintaining VSOE for maintenance and services;
 
  •  volatility in our stock price, which may lead to higher stock compensation expenses for future grants under applicable accounting standards;
 
  •  the budgeting, procurement and work cycles of our customers, including customers in the public sector, which may cause seasonal variation as our business and the market for security and compliance management software solutions matures; and
 
  •  general economic conditions, both domestically and in our foreign markets.
 
Our sales cycle is long and unpredictable, and our sales efforts require considerable time and expense. As a result, our revenues are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate.
 
Our operating results may fluctuate, in part, because of the intensive nature of our sales efforts, the length and variability of the sales cycle of our ESM product and the short-term difficulty in adjusting our operating expenses. Because decisions to purchase products such as our ESM product involve significant capital commitments by customers, potential customers generally have our software evaluated at multiple levels within an organization, each often having specific and conflicting requirements. Enterprise customers make product purchasing decisions based in part on factors not directly related to the features of the products, including but not limited to the customers’ projections of business growth, capital budgets and anticipated cost savings from implementation of the software. As a result of these factors, licensing our software products often requires an extensive sales effort throughout a customer’s organization. In addition, we have limited experience with sales of our TRM, Logger and NCM products. In particular, sales of our TRM and NCM products and to some extent our Logger product involve approvals from different functional areas of an organization than our ESM products. As a result, the sales cycle for these products may be lengthy or may vary significantly. Our sales efforts involve educating our customers, who are often relatively unfamiliar with our products and the value of our products, including their technical capabilities and


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potential cost savings to the enterprise. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce any sales.
 
The length of our sales cycle, from initial evaluation to delivery of software, tends to be long and varies substantially from customer to customer. Our sales cycle is typically three to six months but can extend up to over a year for certain sales. We typically recognize a substantial majority of our product revenues in the last few weeks of a quarter. It is difficult to predict exactly when, or even if, we will actually make a sale with a potential customer. As a result, large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or delay of one or more large product transactions in a quarter could impact our operating results for that quarter and any future quarters into which revenues from that transaction is delayed. As a result of these factors, it is difficult for us to accurately forecast product revenues in any quarter. Because a substantial portion of our expenses are relatively fixed in the short term, our operating results will suffer if revenues fall below our expectations in a particular quarter which could cause the price of our common stock to decline significantly.
 
If we fail to further develop and manage our distribution channels, our revenues could decline and our growth prospects could suffer.
 
We derive a portion of our revenues from sales of our products and related services through channel partners, such as resellers and systems integrators. In particular, systems integrators are an important source of sales leads for us in the U.S. public sector, as government agencies often rely on them to meet information technology, or IT, needs, and we use resellers to augment our internal resources in international markets and, to a lesser extent, domestically. We may be required by our U.S. government customers to utilize particular resellers who may not meet our criteria for creditworthiness, and revenues from those resellers may not be recognizable until receipt of payment. We also anticipate that we will derive a substantial portion of our TRM, Logger and NCM sales through channel partners, including parties with whom we have not yet developed relationships. We expect that channel sales will represent a substantial portion of our U.S. government and international revenues for the foreseeable future and, we believe, a growing portion of our U.S. commercial revenues. We may be unable to recruit additional channel partners and successfully expand our channel sales program. If we do not successfully execute our strategy to increase channel sales, particularly to further penetrate the mid-market and sell our appliance products, our growth prospects may be materially and adversely affected.
 
Our agreements with our channel partners are generally non-exclusive and many of our channel partners have more established relationships with our competitors. If our channel partners do not effectively market and sell our products, if they choose to place greater emphasis on products of their own or those offered by our competitors, or if they fail to meet the needs of our customers, our ability to grow our business and sell our products may be adversely affected, particularly in the public sector, the mid-market and internationally. Similarly, the loss of a substantial number of our channel partners, who may cease marketing our products and services with limited or no notice and with little or no penalty and our possible inability to replace them, the failure to recruit additional channel partners, or any reduction or delay in their sales of our products and services or conflicts between channel sales and our direct sales and marketing activities could materially and adversely affect our results of operations.
 
We have limited experience with sale, manufacture, delivery, service and support of our TRM, Logger and NCM products, and we may be unable to successfully forecast demand or fulfill orders for these appliance products.
 
We introduced our appliance-based products in fiscal 2007. Prior to that time, we offered only software products and related services, and as a result have limited experience with sales of appliance-based products. Fulfillment of sales of our appliance products involves hardware manufacturing, inventory, import certification and return merchandise authorization processes with which we have limited experience. For example, if we fail to accurately predict demand and maintain insufficient hardware inventory or excess inventory, we may be unable to timely deliver ordered products or may have substantial inventory expense. If we underestimate warranty claims for our appliance products, our operating expenses may be higher than we anticipate which in turn may adversely affect our results of operations. In addition, if we change our hardware configuration or manufacturer, some countries may require us to reinitiate their import certification process. Because our appliance products are new, we have limited experience with warranty claims, resulting in limited ability to forecast warranty expense. If we are unable to


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successfully perform these functions or develop a relationship with a fulfillment partner that does so for us, our sales, operating results and financial condition may be harmed.
 
Because we derive a substantial majority of our revenues from ArcSight ESM and related products and services, any failure of this product to continue to satisfy customer demands or to achieve more widespread market acceptance will harm our business, operating results, financial condition and growth prospects.
 
A substantial majority of our revenues is derived from ArcSight ESM and related products and services, and we expect this to continue for the foreseeable future. As a result, although we introduced our complementary appliance products in fiscal 2007 to more fully serve the enterprise security and compliance management market, our revenues and operating results will continue to depend substantially on the demand for our ArcSight ESM product. Demand for ArcSight ESM is affected by a number of factors beyond our control, including the timing of development and release of new products by us and our competitors, technological change, and lower-than-expected growth or a contraction in the worldwide market for enterprise security and compliance management solutions or other risks described in this prospectus. If we are unable to continue to meet customer demands or achieve more widespread market acceptance of ArcSight ESM, our business, operating results, financial condition and growth prospects will be adversely affected.
 
If we are unable to successfully market our recently introduced products, successfully develop new products, make enhancements to our existing products or expand our offerings into new markets, our business may not grow as expected and our operating results may suffer.
 
We introduced our TRM, Logger and NCM products in fiscal 2007 and are currently developing new versions of these products, our ESM platform and new complementary products. Our growth strategy and future financial performance will depend, in part, on our ability to market and sell these products and to diversify our offerings by successfully developing, timely introducing and gaining customer acceptance of new products.
 
The software in our products is especially complex because it must recognize, effectively interact with and manage new devices and applications, and effectively identify and respond to new and increasingly sophisticated security threats and other risks, while not impeding the high network performance demanded by our customers. The typical development cycle for a patch to our ESM software is one to three months, a service pack is four to six months and a new version or major sub-version is 12 to 18 months. Although customers and industry analysts expect speedy introduction of software to respond to new threats and risks and add new functionality, we may be unable to meet these expectations. Since developing new products or new versions of, or add-ons to, existing products is complex, the timetable for their commercial release is difficult to predict and may vary from our historical experience, which could result in delays in their introduction from anticipated or announced release dates. While we offer an enhanced maintenance offering to provide customers with access to newly developed content that addresses new threats and risks, we may not offer updates as rapidly as the threat affects our customers. If we do not quickly respond to the rapidly changing and rigorous needs of our customers by developing and introducing on a timely basis new and effective products, upgrades and services that can respond adequately to new security threats, our competitive position, business and growth prospects will be harmed.
 
Diversifying our product offerings and expanding into new markets will require significant investment and planning, will bring us more directly into competition with software providers which may be better established or have greater resources than we do, may complicate our relationships with channel and strategic partners and entails significant risk of failure. Sales of our Logger product and other products that we may develop and market may reduce revenues of our flagship ESM product and our overall margin by offering a subset of features or capabilities at a reduced price with a lower gross margin. Moreover, increased emphasis on the sale of our appliance products, add-on products or new product lines could distract us from sales of our core ArcSight ESM offering, negatively affecting our overall sales. If we fail or delay in diversifying our existing offerings or expanding into new markets, or we are unsuccessful competing in these new markets, our business, operating results and prospects may suffer.
 
If we are not able to maintain and enhance our brand, our business and operating results may be harmed.
 
We believe that maintaining and enhancing our brand identity is critical to our relationships with, and to our ability to attract, new customers and partners. The successful promotion of our brand will depend largely upon our marketing and public relations efforts, our ability to continue to offer high-quality products and services, and our


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ability to successfully differentiate our products and services from those of our competitors, especially to the extent that our competitors integrate or bundle competitive offerings with a broader array of products and services that they may offer. Our brand promotion activities may not be successful or yield increased revenues. In addition, extension of our brand to products and uses different from our traditional products and services may dilute our brand, particularly if we fail to maintain the quality of our products and services in these new areas. Moreover, it may be difficult to maintain and enhance our brand in connection with sales through channel or strategic partners. The promotion of our brand will require us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive and as we expand into new markets. To the extent that these activities yield increased revenues, such revenues may not offset the expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors with stronger brands, and we could lose customers and channel partners, all of which would harm our business, operating results and financial condition.
 
In addition, independent industry analysts often provide reviews of our products and services, as well as those of our competitors, and perception of our products in the marketplace may be significantly influenced by these reviews. We have no control over what these industry analysts report, and because industry analysts may influence current and potential customers, our brand could be harmed if they do not provide a positive review of our products and services or view us as a market leader.
 
We face intense competition in our market, especially from larger, better-known companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position.
 
The market for enterprise security and compliance management, log archiving and response products is intensely competitive, and we expect competition to increase in the future. A significant number of companies have developed, or are developing, products that currently, or in the future are likely to, compete with some or all of our products. We may not compete successfully against our current or potential competitors, especially those with significantly greater financial resources or brand name recognition. Companies competing with us may introduce products that are more competitively priced, have greater performance or functionality or incorporate technological advances that we have not yet developed or implemented.
 
Our competitors include large software companies, software or hardware network infrastructure companies, smaller software companies offering more narrowly focused enterprise security and compliance management, log archiving and response products and small and large companies offering point solutions that compete with components of our platform or individual products offered by us. Existing competitors for a security and compliance management software platform solution such as our ESM platform primarily are specialized, privately-held companies, such as Intellitactics and NetForensics, as well as larger companies such as CA and Symantec, and EMC, IBM and Novell, through their acquisitions of Network Intelligence, Micromuse and Consul, and e-Security, respectively. Competitors for sales of our TRM and NCM products include: privately-held companies that provide network configuration management products, such as Alterpoint and Voyence; larger providers of IT automation software products, such as Opsware, which Hewlett-Packard has agreed to acquire; and diversified IT security vendors. Current competitors for sales of our Logger product include specialized, privately-held companies, such as LogLogic and Sensage. In addition to these current competitors, we expect to face competition for our appliance products from both existing large, diversified software and hardware companies, from specialized, smaller companies and from new companies that may seek to enter this market.
 
A greater source of competition is represented by the custom efforts undertaken by potential customers to analyze and manage the information produced from their existing devices and applications to identify and remediate threats. Many companies, in particular large corporate enterprises, have developed internally software that is an alternative to our enterprise security and compliance management, log archiving and response products. Wide adoption of our Common Event Format, which we are promoting as a standard for event logs generated by security and other products, may facilitate this internal development. It may also allow our competitors to offer products with a degree of compatibility similar to ours or may facilitate new entrants into our business. New competitors may emerge and rapidly acquire significant market share due to factors such as greater brand name recognition, a larger installed customer base and significantly greater financial, technical, marketing and other


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resources and experience. If these new competitors are successful, we would lose market share and our revenues would likely decline.
 
Mergers or consolidations among these competitors, or acquisitions of our competitors by large companies, present heightened competitive challenges to our business. For example, in recent years IBM has acquired Internet Security Systems, Inc., Micromuse and Consul, Novell acquired e-Security, EMC acquired Network Intelligence and Hewlett-Packard recently agreed to acquire Opsware. We believe that the trend toward consolidation in our industry will continue. These acquisitions will make these combined entities potentially more formidable competitors to us if their products and offerings are effectively integrated. Continued industry consolidation may impact customers’ perceptions of the viability of smaller or even medium-sized software firms and consequently customers’ willingness to purchase from such firms.
 
Many of our existing and potential competitors enjoy substantial competitive advantages, such as:
 
  •  greater name recognition and longer operating histories;
 
  •  larger sales and marketing budgets and resources;
 
  •  the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products;
 
  •  broader distribution and established relationships with distribution partners;
 
  •  access to larger customer bases;
 
  •  greater customer support;
 
  •  greater resources to make acquisitions;
 
  •  lower labor and development costs; and
 
  •  substantially greater financial, technical and other resources.
 
As a result, they may be able to adapt more quickly and effectively to new or emerging technologies and changing opportunities, standards or customer requirements. In addition, these companies have reduced and could continue to reduce, the price of their enterprise security and compliance management, log archiving and response products and managed security services, which intensifies pricing pressures within our market.
 
Increased competition could result in fewer customer orders, price reductions, reduced operating margins and loss of market share. Our larger competitors also may be able to provide customers with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, geographic presence, the ability to provide a broader range of services and products, and price. In addition, large competitors may have more extensive relationships within large enterprises, the federal government or foreign governments, which may provide them with an advantage in competing for business with those potential customers. Our ability to compete will depend upon our ability to provide better performance than our competitors at a competitive price. We may be required to make substantial additional investments in research, development, marketing and sales in order to respond to competition, and we cannot assure you that we will be able to compete successfully in the future.
 
We may not be able to compete effectively with companies that integrate or bundle products similar to ours with their other product offerings.
 
Many large, integrated software companies offer suites of products that include software applications for security and compliance management. In addition, hardware vendors, including diversified, global concerns, offer products that address the security and compliance needs of the enterprises and government agencies that comprise our target market. Further, several companies currently sell software products that our customers and potential customers have broadly adopted, which may provide them a substantial advantage when they sell products that perform functions substantially similar to some of our products. Competitors that offer a large array of security or software products may be able to offer products or functionality similar to ours at a more attractive price than we can by integrating or bundling them with their other product offerings. The trend toward consolidation in our industry increases the likelihood of competition based on integration or bundling. Customers may also increasingly seek to consolidate their enterprise level software purchases with a small number of larger companies that can purport to


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satisfy a broad range of their requirements. If we are unable to sufficiently differentiate our products from the integrated or bundled products of our competitors, such as by offering enhanced functionality, performance or value, we may see a decrease in demand for those products, which would adversely affect our business, operating results and financial condition. Similarly, if customers seek to concentrate their software purchases in the product portfolios of a few large providers, we may be at a competitive disadvantage notwithstanding the superior performance that we believe our products can deliver.
 
We face risks related to customer outsourcing to managed security service providers.
 
Some of our customers have outsourced the management of their IT departments or the network security operations function to large system integrators or managed security service providers, or MSSPs. If this trend continues, our established customer relationships could be disrupted and our products could be displaced by alternative system and network protection solutions offered by system integrators or MSSPs. Significant product displacements could impact our revenues and have a negative effect on our business. While to date we have developed a number of successful relationships with MSSPs, they may develop or acquire their own technologies rather than purchasing our products for use in provision of managed security services.
 
Our business depends, in part, on sales to the public sector and significant changes in the contracting or fiscal policies of the public sector could have a material adverse effect on our business.
 
We derive a portion of our revenues from contracts with federal, state, local and foreign governments and government agencies, and we believe that the success and growth of our business will continue to depend on our successful procurement of government contracts. For example, we have historically derived, and expect to continue to derive, a significant portion of our revenues from sales to agencies of the U.S. federal government, either directly by us or through systems integrators and other resellers. In fiscal 2006 and 2007, we derived 38% and 32% of our revenues, respectively, from contracts with agencies of the U.S. federal government. Accordingly:
 
  •  changes in fiscal or contracting policies or decreases in available government funding;
 
  •  changes in government programs or applicable requirements;
 
  •  the adoption of new laws or regulations or changes to existing laws or regulations;
 
  •  changes in political or social attitudes with respect to security issues;
 
  •  potential delays or changes in the government appropriations process; and
 
  •  delays in the payment of our invoices by government payment offices,
 
could cause governments and governmental agencies to delay or refrain from purchasing the products and services that we offer in the future or otherwise have an adverse effect on our business, financial condition and results of operations.
 
Failure to comply with laws or regulations applicable to our business could cause us to lose U.S. government customers or our ability to contract with the U.S. government.
 
We must comply with laws and regulations relating to the formation, administration and performance of U.S. government contracts, which affect how we and our channel partners do business in connection with U.S. federal agencies. Such laws and regulations may impose added costs on our business and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, penalties, termination of contracts and suspension or debarment from government contracting for a period of time. Any such damages, penalties, disruption or limitation in our ability to do business with the U.S. federal government could have a material adverse effect on our business, operating results and financial condition.
 
Our government contracts may limit our ability to move development activities overseas, which may impair our ability to optimize our software development costs and compete for non-government contracts.
 
Increasingly, software development is being shifted to lower-cost countries, such as India. However, some contracts with U.S. government agencies require that at least 50% of the components of each of our products be of


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U.S. origin. Consequently, our ability to optimize our software development by conducting it overseas may be hampered. Some of our competitors do not rely on contracts with the U.S. government to the same degree as we do and may develop software off-shore. If we are unable to develop software cost-effectively in comparison with our competitors, our ability to compete for our non-government customers may be reduced and our customer sales may decline, resulting in decreased revenues.
 
Real or perceived errors, failures or bugs in our products could adversely affect our operating results and growth prospects.
 
Because we offer very complex products, undetected errors, failures or bugs may occur, especially when products are first introduced or when new versions are released. Our products are often installed and used in large-scale computing environments with different operating systems, system management software and equipment and networking configurations, which may cause errors or failures in our products or may expose undetected errors, failures, or bugs in our products. Despite testing by us, errors, failures, or bugs may not be found in new products or releases until after commencement of commercial shipments. In the past, we have discovered software errors, failures, and bugs in certain of our product offerings after their introduction.
 
In addition, our products could be perceived to be ineffective for a variety of reasons outside of our control. Hackers could circumvent our customers’ security measures and customers may misuse our products resulting in a security breach or perceived product failure. We provide a top-level enterprise security and compliance management solution that integrates a wide variety of other elements in a customer’s IT and security infrastructure, and may receive blame for a security breach that was the result of the failure of one of the other elements.
 
Real or perceived errors, failures, or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our products, loss of competitive position, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. Although we maintain product liability insurance, it may not be adequate. Further, although our license agreements with our end-user customers typically contain provisions to limit our exposure to liabilities arising from such claims, such provisions may not be enforceable in some circumstances or may not fully protect us against such claims and related liabilities and costs. Defending a lawsuit, regardless of its merit, could be costly and could limit the amount of time that management has available for day-to-day execution and strategic planning or other matters.
 
Many of our end-user customers use our products in applications that are critical to their businesses and may have a greater sensitivity to defects in our products than to defects in other, less critical, software products. In addition, if an actual or perceived breach of information integrity or availability occurs in one of our end-user customer’s systems, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. Alleviating any of these problems could require significant expenditures of our capital and other resources and could cause interruptions, delays or cessation of our product licensing, which could cause us to lose existing or potential customers and could adversely affect our operating results and growth prospects.
 
In addition, because we are a leading provider of enterprise security products and services, “hackers” and others may try to access our data or compromise our systems. If we are the subject of a successful attack, then our reputation in the industry and with current and potential customers may be compromised and our sales and operating results could be adversely affected.
 
Incorrect or improper use of our complex products, our failure to properly train customers on how to utilize our products or our failure to properly provide consulting and implementation services could result in customer dissatisfaction and negatively affect our results of operations and growth prospects.
 
Our ESM, TRM and NCM products are complex and are deployed in a wide variety of network environments. The proper use of our products, particularly our ESM platform, requires training of the end user. If our software products are not used correctly or as intended, inadequate performance may result. For example, among other things, deployment of our ESM platform requires categorization of IT assets and assignment of business or criticality values for each, selection or configuration of one of our pre-packaged rule sets, user interfaces and network utilization parameters, and deployment of connectors for the various devices and applications from which


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event data is to be collected. Our customers or our professional services personnel may incorrectly implement or use our products. Our products may also be intentionally misused or abused by customers or their employees or third parties who obtain access and use of our products. For example, a person obtaining inappropriate access to our TRM product could use it to shut down network resources or open breaches in network security. Because our customers rely on our product, services and maintenance offerings to manage a wide range of sensitive security, network and compliance functions, the incorrect or improper use of our products, our failure to properly train customers on how to efficiently and effectively use our products or our failure to properly provide consulting and implementation services and maintenance to our customers may result in negative publicity or legal claims against us.
 
In addition, if customer personnel are not well trained in the use of our products, customers may defer the deployment of our products and may not deploy them at all. If there is substantial turnover of the personnel responsible for implementation and use of our ESM products at a customer, our product may go unused and our ability to make additional sales may be substantially limited.
 
If we are unable to maintain effective relationships with our technology partners, we may not be able to support the interoperability of our software with a wide variety of security and other products and our business may be harmed.
 
A key feature of ArcSight ESM is that it provides out-of-the-box support for many third-party devices and applications that the customer may use in its business and technology infrastructure. To provide effective interoperability, we work with individual product vendors to develop our SmartConnectors, which allow our ESM platform to interface with these products. In addition, we are promoting the adoption of our Common Event Format as a standard way to format system log events. Some of these technology partners are also current or potential competitors of ours. To date, we have not experienced significant difficulty in enlisting the assistance of our competitors as technology partners, due in part to their desire to maintain good relationships with our mutual customers; however, if we are unable to develop and maintain effective relationships with a wide variety of technology partners, if companies adopt more restrictive policies with respect to, or impose unfavorable terms and conditions on, access to their products, or if our Common Event Format is not widely adopted, we may not be able to continue to provide our customers with a high degree of interoperability with their existing IT and business infrastructure, which could reduce our sales and adversely affect our business, operating results and financial condition.
 
Our international sales and operations subject us to additional risks that can adversely affect our operating results.
 
In fiscal 2006 and 2007, we derived 21% and 23% of our revenues, respectively, from customers outside the United States, and we are continuing to expand our international operations as part of our growth strategy. We currently have sales personnel and sales and support operations in Canada, Germany, Hong Kong, Japan, Singapore, South Korea and the United Kingdom and we are establishing sales and support operations in China. Our international operations subject us to a variety of risks, including:
 
  •  the difficulty of managing and staffing foreign offices;
 
  •  differing regulatory and legal requirements and employment schemes;
 
  •  longer payment cycles;
 
  •  difficulties in collecting accounts receivable, especially in emerging markets, and the likelihood that revenues from international resellers and customers may need to be recognized when cash is received, at least until satisfactory payment history has been established;
 
  •  increased travel, infrastructure and legal compliance costs associated with having multiple international operations;
 
  •  the need to localize our products and licensing programs for international customers;
 
  •  significant reliance on distribution partners who may not offer our products exclusively, and who may have more direct interaction and closer relationships with overseas customers and potential customers;


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  •  enactment of additional regulations or restrictions on the use, import or export of encryption technologies and our appliance-based products, which could delay or prevent the sale or use of our products in certain jurisdictions;
 
  •  political and economic instability in some countries, including terrorism and wars;
 
  •  seasonal reductions in business activity during the summer months in Europe and certain other regions;
 
  •  tariffs and trade barriers and other regulatory limitations on our ability to sell or develop our products in certain foreign markets;
 
  •  reduced protection for intellectual property rights in some countries;
 
  •  overlapping of different tax regimes; and
 
  •  fluctuations in currency exchange rates.
 
Any of these risks could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition and growth prospects.
 
Our business in countries with a history of corruption and transactions with foreign governments increase the risks associated with our international activities.
 
As we operate and sell internationally, we are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. and other business entities for the purpose of obtaining or retaining business. We have operations, deal with and make sales to governmental customers in countries known to experience corruption, particularly certain emerging countries in East Asia, Eastern Europe and the Middle East, and further expansion of our international selling efforts may involve additional regions, including Africa and South America. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents, or channel partners that could be in violation of various laws including the FCPA, even though these parties are not always subject to our control. We have implemented safeguards to discourage these practices by our employees, consultants, sales agents and channel partners. However, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents or channel partners may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, including suspension or debarment from U.S. government contracting, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.
 
Failure to protect our intellectual property rights could adversely affect our business.
 
Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under patent and other intellectual property laws of the United States, so that we can prevent others from using our inventions and propriety information. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business might be harmed. In addition, defending our intellectual property rights might entail significant expenses. Any of our patents, copyrights, trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. We have two issued patents in the United States, and have filed 30 patent applications, including three provisional applications, in the United States, and 11 pending patent applications in foreign countries based on two U.S. patent applications. Nevertheless, our issued patents may not provide us with any competitive advantages or may be challenged by third parties, and our patent applications may never issue at all. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain.
 
Any patents that are issued may subsequently be invalidated or otherwise limited, enabling other companies to better develop products that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition. In addition, issuance of a patent does not guarantee that we have a right


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to practice the patented invention. Patent applications in the U.S. are typically not published until 18 months after filing, or in some cases not at all, and publications of discoveries in industry-related literature lag behind actual discoveries. We cannot be certain that we were the first to make the inventions claimed in our issued patents or pending patent applications or otherwise used in our products, that we were the first to file for protection in our patent applications, or that third parties do not have blocking patents that could be used to prevent us from marketing or practicing our patented products or technology. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our products and services are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.
 
We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may adversely affect our business, operating results and financial condition.
 
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
 
In order to protect our proprietary technology, processes and methods, we rely in part on confidentiality agreements with our corporate partners, employees, consultants, advisors and others. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such party. Costly and time consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
 
We may in the future be subject to intellectual property rights claims, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.
 
Companies in the software, networking and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenues and against whom our potential patents may provide little or no deterrence. We have received, and may in the future receive, notices that claim we have misappropriated or misused other parties’ intellectual property rights, and, to the extent we gain greater visibility, we face a higher risk of being the subject of intellectual property infringement claims, which is not uncommon with respect to software technologies in general and network security technology in particular. There may be third-party intellectual property rights, including issued or pending patents that cover significant aspects of our technologies or business methods. Any intellectual property claims, with or without merit, could be very time consuming, expensive to settle or litigate and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. Such claims could also result in our having to stop using technology found to be in violation of a third party’s rights. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of one or more of our products or product features and may be unable to compete effectively. Any of these results would harm our business, operating results and financial condition.


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We rely on software licensed from other parties, the loss of which could increase our costs and delay software shipments.
 
We utilize various types of software licensed from unaffiliated third parties in order to provide certain other elements of our product offering. Any errors or defects in the third-party software that we use could result in errors that could harm our business. In addition, licensed software may not continue to be available on commercially reasonable terms, or at all. While we believe that there are currently adequate replacements for such third-party software, any loss of the right to use any of this software could result in delays in producing or delivering our software until equivalent technology is identified and integrated, which could harm our business. Our business would be disrupted if any of the software we license from others or functional equivalents of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required to either redesign our products to function with software available from other parties or develop these components ourselves, which would result in increased costs and could result in delays in our product shipments and the release of new product offerings. Furthermore, we might be forced to limit the features available in our current or future products. If we fail to maintain or renegotiate any of these software licenses, we could face significant delays and diversion of resources in attempting to license and integrate a functional equivalent of the software.
 
Some of our products contain “open source” software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
 
Certain of our products are distributed with software licensed by its authors or other third parties under “open source” licenses. Some of these licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software, and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software. We have established processes to help alleviate these risks, including a review process for screening requests from our development organization for the use of open source and we plan to implement the use of software tools to review our source code for potential inclusion of open source, but we cannot be sure that all open source is submitted for approval prior to use in our products or that such software tools will be effective. In addition, open source license terms may be ambiguous and many of the risks associated with usage of open source cannot be eliminated, and could, if not properly addressed, negatively affect our business. If we were found to have inappropriately used open source software, we may be required to re-engineer our products, to release proprietary source code, to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, operating results and financial condition.
 
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
 
Our agreements with customers and channel partners include indemnification provisions, whereby we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement and, in some cases, for damages caused by us to property or persons. The term of these indemnity provisions is generally perpetual after execution of the corresponding product sale agreement. Large indemnity payments could harm our business, operating results and financial condition.
 
Changes or reforms in the law or regulatory landscape could diminish the demand for our solutions, and could have a negative impact on our business.
 
One factor that drives demand for our products and services is the legal and regulatory framework in which our customers operate. Laws and regulations are subject to drastic changes and these could either help or hurt the demand for our products. Thus, certain changes in the law and regulatory landscape, such as legislative reforms that limit corporate compliance obligations, could significantly harm our business.


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If we are unable to attract and retain personnel, our business would be harmed.
 
We depend on the continued contributions of our senior management and other key personnel, the loss of whom could harm our business. All of our executive officers and key employees are at-will employees, which means they may terminate their employment relationship with us at any time. None of our California-based employees is bound by a contractual non-competition agreement, which could make us vulnerable to recruitment efforts by our competitors. Outside of California, while some employees and contractors are bound by non-competition agreements, we may experience difficulty in enforcing these agreements. We do not maintain a key-person life insurance policy on any of our officers or other employees.
 
Our future success also depends on our ability to identify, attract and retain highly skilled technical, managerial, finance and other personnel, particularly in our sales and marketing, research and development and professional service departments. We face intense competition for qualified individuals from numerous security, software and other technology companies. In addition, competition for qualified personnel is particularly intense in the San Francisco Bay Area, where our headquarters are located. Often, significant amounts of time and resources are required to train technical, sales and other personnel. Qualified individuals are in high demand. We may incur significant costs to attract and retain them, and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerial requirements, on a timely basis or at all, and we may be required to pay increased compensation in order to do so. If we are unable to attract and retain the qualified personnel we need to succeed, our business would suffer. The time and expense of identifying, hiring and training our employees may limit our ability to grow by limiting the number of trained sales, customer support and research and development staff who are able effectively to contribute to our business operations.
 
Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key employees. Many of our senior management personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of our common stock. If we are unable to retain our employees, our business, operating results and financial condition would be harmed.
 
If we fail to manage future growth effectively, our business would be harmed.
 
We operate in an emerging market and have experienced, and may continue to experience, significant expansion of our operations. In particular, we grew from 204 employees at April 30, 2006 to 287 employees at April 30, 2007. This growth has placed, and will continue to place, a strain on our employees, management systems and other resources. We anticipate that further expansion will be required. Continued growth could strain our ability to:
 
  •  develop and improve our operational, financial and management capabilities, including our reporting systems, procedures and controls;
 
  •  recruit, train and retain highly skilled personnel;
 
  •  maintain our quality standards; and
 
  •  develop customer relationships and maintain end-user satisfaction.
 
Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.
 
Future acquisitions could disrupt our business and harm our financial condition and results of operations.
 
We completed the acquisition of substantially all of the assets of Enira Technologies, LLC in June 2006, and may pursue additional acquisitions in the future, any of which could be material to our business, operating results


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and financial condition. Our ability as an organization to successfully acquire and integrate technologies or businesses on a larger scale is unproven. Acquisitions involve many risks, including the following:
 
  •  an acquisition may negatively impact our results of operations because it may require us to incur charges and substantial debt or liabilities, may cause adverse tax consequences, substantial depreciation or deferred compensation charges, or may result in acquired in-process research and development expenses or in the future may require the amortization, write down or impairment of amounts related to deferred compensation, goodwill and other intangible assets;
 
  •  we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of companies that we acquire, particularly if key personnel of the acquired company decide not to work for us;
 
  •  acquisitions may not enhance our results of operations in the near-term;
 
  •  an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;
 
  •  an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company;
 
  •  we may be required to incur costs to implement or improve internal controls, procedures and policies appropriate for a public company at a business that prior to the acquisition lacked such controls, procedures and policies;
 
  •  the acquired businesses, products or technologies may not generate sufficient financial return to offset acquisition costs;
 
  •  we may have to incur indebtedness or issue equity securities to complete an acquisition, which would dilute our stockholders’ ownership and could adversely affect the market price of our common stock;
 
  •  we may acquire a competitor of one of our strategic partners, and any perceived or actual conflict with one of these partners could adversely affect our relationship with that partner and harm our business; and
 
  •  acquisitions may involve the entry into geographic or business markets in which we have little or no prior experience.
 
Establishing, maintaining and improving our financial controls and the requirements of being a public company may strain our resources and divert management’s attention, and if we fail to establish and maintain proper internal controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.
 
As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of The NASDAQ Stock Market. The requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.
 
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Given our history of material weaknesses, achieving and maintaining effective controls may be particularly challenging for us. See “—A material weakness in our internal control over financial reporting was identified during the audit of our most recent financial statements that, if not remediated, could affect our ability to prepare timely and accurate financial reports, which could cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our stock.”
 
While we are in the process of remediating the material weakness identified during the audit of our fiscal 2007 financial statements, we cannot estimate how long it will take to reach a determination that our internal control over financial reporting is effective. Further, we are in the early stages of developing our disclosure controls and procedures – the controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported, within the time


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periods specified in SEC’s rules and forms. Even if we develop effective controls, these new controls and our currently effective controls may become inadequate because of changes in conditions, and the degree of compliance with the policies or procedures may deteriorate. Further, additional weaknesses in our internal controls may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our prior period financial statements. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that we will be required to include in our periodic reports filed with the SEC, beginning for our fiscal year ending April 30, 2009 under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.
 
In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we will need to expend significant resources and provide significant management oversight. We have a substantial effort ahead of us to implement appropriate processes, document our system of internal control over relevant processes, assess their design, remediate any deficiencies identified and test their operation. As a result, management’s attention may be diverted from other business concerns, which could harm our business, operating results and financial condition. These efforts will also involve substantial accounting-related costs. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on The NASDAQ Global Market.
 
Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.
 
We also have not yet implemented a complete disaster recovery plan or business continuity plan for our accounting and related information technology systems. Any disaster could therefore materially impair our ability to maintain timely accounting and reporting.
 
The Sarbanes-Oxley Act and the rules and regulations of The NASDAQ Stock Market will make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain or increase coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors who may be considered independent for purposes of The NASDAQ Stock Market rules, and officers may be curtailed.
 
A material weakness in our internal control over financial reporting was identified during the audit of our most recent annual financial statements that, if not remediated, could affect our ability to prepare timely and accurate financial reports, which could cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our stock.
 
Effective internal control over financial reporting is necessary for us to provide reliable financial reports, to effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our operating results may be misstated and our reputation may be harmed.
 
During the audit of our financial statements for the fiscal years ended April 30, 2004, 2005, 2006 and 2007, “material weaknesses” in our internal control over financial reporting were identified, and, in the future, we may identify additional material weaknesses or other areas of our internal control over financial reporting that need improvement. The material weakness identified in connection with the preparation of our financial statements for


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the fiscal year ended April 30, 2007 relates to internal review, primarily due to failure of the review process of accounting computations and reconciliations prepared by third-parties as part of the preparation of our fiscal 2007 financial statements. This weakness led to four adjustments to our financial statements. The largest such adjustment resulted from a failure to detect an overstatement of stock-based compensation expense of $0.3 million under SFAS 123R in calculations prepared by a third-party service provider.
 
We are in the process of remediating the material weakness identified during the audit of our fiscal 2007 financial statements, but have not yet been able to complete our remediation efforts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” It will take additional time to design, implement and test the controls and procedures required to enable our management to conclude that our disclosure controls and our internal control over financial reporting are effective. We cannot at this time estimate how long it will take to complete our remediation efforts. In addition, we cannot assure you that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to remediate the material weakness that has been identified or to implement and maintain effective disclosure controls and internal control over financial reporting could cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements.
 
We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.
 
In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities for other reasons. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.
 
We may not be able to utilize a significant portion of our net operating loss carry-forwards, which could adversely affect our operating results.
 
We have generated a significant amount of net operating loss carry-forwards due to prior period losses, which expire beginning in fiscal 2013 and fiscal 2021 for state and federal net operating loss carry-forwards, respectively. U.S. federal and state income tax laws limit the amount of these carry-forwards we can utilize upon a greater than 50% cumulative shift of stock ownership over a three-year period, including such shifts due to the issuance of additional shares of our common stock, or securities convertible into our common stock. We have previously experienced a greater than 50% shift in our stock ownership, which has limited our ability to use a portion of our net operating loss carry-forwards, and we may experience subsequent such shifts in our stock ownership. Accordingly, there is a risk that our ability to use our existing carry-forwards in the future could be further limited and unavailable to offset future income tax liabilities, which would adversely affect our operating results.
 
Governmental export or import controls could subject us to liability or limit our ability to compete in foreign markets.
 
Our products incorporate encryption technology and may be exported outside the U.S. only if we obtain an export license or qualify for an export license exception. While we believe we currently meet applicable regulatory requirements regarding the export of our products, continued compliance with export regulations with respect to new releases of our products may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export of our products to certain countries altogether. In addition, various countries regulate the import of our appliance-based products and have enacted laws that could limit our ability to distribute products


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or could limit our customers’ ability to implement our products in those countries. Any new export or import restrictions, new legislation or shifting approaches in the enforcement or scope of existing regulations, or in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by existing customers with international operations, declining adoption of our products by new customers with international operations and decreased revenues. If we fail to comply with export and import regulations, we may be denied export privileges, be subjected to fines or other penalties and our products may be denied entry into other countries.
 
Risks Related to this Offering and Ownership of Our Common Stock
 
There has been no prior market for our common stock, our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.
 
There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon completion of this offering or, if it does develop, it may not be sustainable. The trading prices of the securities of technology companies have been highly volatile. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
 
  •  price and volume fluctuations in the overall stock market;
 
  •  changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
 
  •  actual or anticipated fluctuations in our operating results;
 
  •  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
 
  •  changes in financial estimates by any securities analysts who follow our company, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our stock;
 
  •  ratings changes by any securities analysts who follow our company;
 
  •  announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
  •  the public’s response to our press releases or other public announcements, including our filings with the SEC;
 
  •  market conditions or trends in our industry or the economy as a whole;
 
  •  the loss of key personnel;
 
  •  lawsuits threatened or filed against us;
 
  •  future sales of our common stock by our directors, executive officers and significant stockholders; and
 
  •  other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
 
In addition, the stock markets, and in particular The NASDAQ Global Market on which our common stock will be listed, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to


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become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, operating results and financial condition.
 
A significant portion of our total outstanding shares may be sold into the market in the near future. If there are substantial sales of shares of our common stock, the price of our common stock could decline.
 
The price of our common stock could decline if there are substantial sales of our common stock or if there is a large number of shares of our common stock available for sale. After this offering, we will have outstanding 98,430,496 shares of our common stock based on the number of shares outstanding as of April 30, 2007. This includes the shares that we and the selling stockholders are selling in this offering, which may be resold in the public market immediately. The remaining           shares, or     % of our outstanding shares after this offering, are currently restricted as a result of market standoff and/or lock-up agreements but will be able to be sold in the near future as set forth below.
 
     
Date Available for Sale
  Number of Shares and
into Public Market   % of Total Outstanding
 
Immediately after the date of this prospectus
  No shares, or 0%
181 days after the date of this prospectus                shares, or     %, of which             , or     %, shares will be subject to limitations under Rules 144 and 701
 
After this offering, the holders of an aggregate of 49,174,139 shares of our common stock and shares subject to warrants to purchase our common stock outstanding as of April 30, 2007 will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. All of these shares are subject to market standoff and/or lock-up agreements restricting their sale for 180 days after the date of this prospectus. We also intend to register shares of common stock that we have issued and may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing market standoff and/or lock-up agreements. Morgan Stanley & Co. Incorporated may, in its sole discretion, permit our officers, directors, employees and current stockholders who are subject to the 180-day contractual lock-up to sell shares prior to the expiration of the lock-up agreements. The 180-day lock-up period is subject to extension in some circumstances.
 
The market price of the shares of our common stock could decline as a result of sales of a substantial number of our shares in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.
 
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
 
We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including working capital, possible acquisitions and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.
 
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
 
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently do not have and may never obtain research coverage by securities analysts, and industry analysts that currently cover us may cease to do so. If no securities analysts commence coverage of our company, or if industry analysts cease coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities analyst coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish


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reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
 
Our directors, executive officers and principal stockholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control.
 
After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate,     % of our outstanding common stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:
 
  •  delaying, deferring or preventing a change in control of us;
 
  •  impeding a merger, consolidation, takeover or other business combination involving us; or
 
  •  discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
 
Delaware law and provisions in our amended and restated certificate of incorporation and bylaws could make a merger, tender offer or proxy contest difficult, therefore depressing the trading price of our common stock.
 
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws that will become effective immediately following the completion of this offering will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including the following:
 
  •  our board of directors will be classified into three classes of directors with staggered three-year terms;
 
  •  only our chairman of the board, our lead independent director, if any, our chief executive officer, our president or a majority of our board of directors will be authorized to call a special meeting of stockholders;
 
  •  our stockholders will only be able take action only at a meeting of stockholders and not by written consent;
 
  •  vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;
 
  •  directors may be removed from office only for cause;
 
  •  our restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval; and
 
  •  advance notice procedures will apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.
 
For information regarding these and other provisions, see “Description of Capital Stock.”


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
 
This prospectus includes forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend” and “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.
 
This prospectus also contains estimates and other information concerning our industry, including market size and growth rates of the markets in which we participate, that are based on industry publications, surveys and forecasts generated by International Data Corporation and TheInfoPro (TIP). The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications, surveys and forecasts.


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USE OF PROCEEDS
 
We estimate that our net proceeds from the sale of the common stock that we are offering will be approximately $      million, assuming an initial public offering price of $      per share (the midpoint of the range listed on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) the net proceeds to us from this offering by $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.
 
The principal purposes of this offering are to create a public market for our common stock, obtain additional capital, facilitate our future access to the public equity markets, increase awareness of our company among potential customers and improve our competitive position. We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes. Additionally, we may choose to expand our current business through acquisitions of or investments in other complementary businesses, products or technologies, using cash or shares of our common stock. However, we have no negotiations, agreements or commitments with respect to any such acquisitions or investments at this time.
 
Pending use of proceeds from this offering, we intend to invest the proceeds in a variety of short-term, interest-bearing, investment grade securities. Our management will have broad discretion in the application of the net proceeds from this offering to us, and investors will be relying on the judgment of our management regarding the application of the proceeds.
 
DIVIDEND POLICY
 
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to declare or pay any dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers relevant.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and capitalization as of April 30, 2007, as follows:
 
  •  On an actual basis;
 
  •  On a pro forma basis to give effect to the automatic conversion of all outstanding shares of our convertible preferred stock into common stock upon the closing of this offering; and
 
  •  On a pro forma as adjusted basis to give effect to (1) the issuance and sale by us of           shares of common stock in this offering, and the receipt of the net proceeds from our sale of these shares at an assumed initial public offering price of $      per share (the midpoint of the range listed on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (2) the automatic conversion of all outstanding shares of our convertible preferred stock into common stock upon the closing of this offering, and (3) the amendment and restatement of our certificate of incorporation immediately following the completion of this offering.
 
You should read this table in conjunction with the sections titled “Selected Consolidated Financial Data” and “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.
 
                         
    As of April 30, 2007  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted(1)  
    (in thousands, except share and per share data)  
          (unaudited)     (unaudited)  
 
Cash and cash equivalents
  $ 16,917     $ 16,917     $             
                         
Stockholders’ equity:
                       
Convertible preferred stock, par value $0.00001, 86,407,009 authorized and 52,130,024 shares issued and outstanding (actual);           shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted
                       
Series A: 14,727,649 shares designated; 14,727,649 shares issued and outstanding; $14,439 liquidation preference, actual; no shares issued or outstanding, pro forma and pro forma as adjusted
  $ 14,439     $     $  
Series B: 33,679,360 shares designated; 29,664,461 shares issued and outstanding; $9,504 liquidation preference, actual; no shares issued or outstanding, pro forma and pro forma as adjusted
    9,185              
Series C: 8,000,000 shares designated; 7,737,914 shares issued and outstanding; $2,975 liquidation preference, actual; no shares issued or outstanding, pro forma and pro forma as adjusted
    3,134              
Common stock, par value $0.00001, 130,000,000 shares authorized, 42,480,304 shares issued and outstanding (actual);           shares authorized, 98,430,496 shares issued and outstanding, pro forma; and           shares issued and outstanding, pro forma as adjusted
          1          
Additional paid-in capital
    23,479       50,236          
Deferred stock-based compensation
    (554 )     (554 )     (554 )
Accumulated other comprehensive income
    13       13       13  
Accumulated deficit
    (44,566 )     (44,566 )     (44,566 )
                         
Total stockholders’ equity
    5,130       5,130          
                         
Total capitalization
  $ 5,130     $ 5,130     $  
                         
 
(footnote appears on following page)


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(1) A $1.00 increase (decrease) in the assumed public offering price of $      per share would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and following closing of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
 
The table above excludes the following shares:
 
  •   23,091,296 shares of common stock issuable upon the exercise of options outstanding as of April 30, 2007, at a weighted-average exercise price of approximately $0.99 per share;
 
  •   2,431,938 shares of common stock issuable upon the exercise of options granted after April 30, 2007, at a weighted-average exercise price of $2.50 per share;
 
  •   76,820 shares of common stock issuable upon exercise of warrants outstanding as of April 30, 2007, including a warrant to purchase 25,185 shares of common stock and warrants to purchase an aggregate of 51,635 shares of convertible preferred stock that will convert into warrants to purchase the same number of shares of common stock upon completion of this offering, at a weighted-average exercise price of approximately $0.0003 per share;
 
  •             shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan, which will become effective on the first day that our common stock is publicly traded and contains provisions that will automatically increase its share reserve each year, as more fully described in “Management—Employee Benefit Plans”; and
 
  •             shares of common stock reserved for future issuance under our 2007 Employee Stock Purchase Plan, which will become effective on the first day that our common stock is publicly traded and contains provisions that will automatically increase its share reserve each year, as more fully described in “Management—Employee Benefit Plans.”


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DILUTION
 
If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.
 
Our pro forma net tangible book value as of April 30, 2007 was $      million, or $      per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of April 30, 2007, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into common stock upon the closing of this offering.
 
After giving effect to our sale in this offering of           shares of common stock at an assumed initial public offering price of $      per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of April 30, 2007 would have been approximately $      million, or $      per share of common stock. This represents an immediate increase in pro forma net tangible book value of $      per share to our existing stockholders and an immediate dilution of $      per share to investors purchasing shares in this offering. The following table illustrates this per share dilution:
 
                 
Assumed initial offering price per share
                $          
Pro forma net tangible book value per share as of April 30, 2007
  $            
Increase in pro forma net tangible book value per share attributable to investors purchasing shares in this offering
               
                 
Pro forma as adjusted net tangible book value per share after this offering
               
                 
Dilution in pro forma net tangible book value per share to investors in this offering
          $    
                 
 
If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share after giving effect to this offering would be approximately $      per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be approximately $      per share.
 
The following table summarizes, as of April 30, 2007, the differences between the number of shares of common stock purchased from us, after giving effect to the conversion of our convertible preferred stock into common stock, the total cash consideration paid and the average price per share paid by our existing stockholders and by our new investors purchasing shares in this offering at the assumed initial public offering price of $      per share (the midpoint of the range set forth on the cover page of this prospectus), before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
 
                                         
    Shares Purchased     Total Consideration     Average
 
    Number     Percent     Amount     Percent     Price Per Share  
 
Existing stockholders
            %   $         %   $             
New investors
                                       
                                         
Totals
  $          100 %   $          100 %        
                                         
 
A $1.00 increase (decrease) in the assumed public offering price of $      per share would increase (decrease) total consideration paid by new investors by $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
If the underwriters exercise their over-allotment option in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding after this offering.
 
Sales of shares of common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to          , or approximately     % of the total shares of common


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stock outstanding after this offering, and will increase the number of shares held by new investors to          , or approximately     % of the total shares of common stock outstanding after this offering.
 
The table and discussion above exclude the following shares:
 
  •  23,091,296 shares of common stock issuable upon the exercise of options outstanding as of April 30, 2007, at a weighted-average exercise price of approximately $0.99 per share;
 
  •  2,431,938 shares of common stock issuable upon the exercise of options granted after April 30, 2007, at a weighted-average exercise price of $2.50 per share;
 
  •  76,820 shares of common stock issuable upon exercise of warrants outstanding as of April 30, 2007, including a warrant to purchase 25,185 shares of common stock and warrants to purchase an aggregate of 51,635 shares of convertible preferred stock that will convert into warrants to purchase the same number of shares of common stock upon completion of this offering, at a weighted-average exercise price of approximately $0.0003 per share;
 
  •            shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan, which will become effective on the first day that our common stock is publicly traded and contains provisions that will automatically increase its share reserve each year, as more fully described in “Management—Employee Benefit Plans”; and
 
  •            shares of common stock reserved for future issuance under our 2007 Employee Stock Purchase Plan, which will become effective on the first day that our common stock is publicly traded and contains provisions that will automatically increase its share reserve each year, as more fully described in “Management—Employee Benefit Plans.”
 
To the extent outstanding options or warrants are exercised, there will be further dilution to new investors.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The following selected consolidated financial data should be read in conjunction 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. Following the completion of our fiscal year ended December 31, 2002, we changed our fiscal year end to April 30. As a result of the change, the first full fiscal year in which we sold our products and services was the fiscal year ended April 30, 2004. The consolidated statement of operations data for the fiscal years ended April 30, 2005, 2006 and 2007, and the balance sheet data as of April 30, 2006 and 2007, are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statement of operations data for the fiscal year ended December 31, 2002, the four months ended April 30, 2003 and the fiscal year ended April 30, 2004, and the balance sheet data as of April 30, 2003, 2004 and 2005, are derived from our audited consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any future period.
 
                                                 
    Fiscal Year Ended December 31,   Four-Months Ended April 30,   Fiscal Year Ended April 30,
Consolidated Statement of Operations Data:
  2002   2003   2004   2005   2006   2007
    (in thousands, except per share data)
Revenues:
                                               
Products
  $ 152     $ 511     $ 12,442     $ 22,357     $ 22,859     $ 43,989  
Maintenance and services
    43       101       2,857       10,465       16,576       25,844  
                                                 
Total revenues
    195       612       15,299       32,822       39,435       69,833  
Cost of revenues:
                                               
Products
    64       41       526       1,084       1,769       2,569  
Maintenance and services(1)
          11       772       3,410       5,027       7,019  
                                                 
Total cost of revenues
    64       52       1,298       4,494       6,796       9,588  
                                                 
Gross profit
    131       560       14,001       28,328       32,639       60,245  
Operating expenses(1):
                                               
Research and development
    3,221       1,034       4,068       7,583       12,154       14,535  
Sales and marketing
    2,736       1,382       8,041       14,647       24,309       36,587  
General and administrative
    2,845       818       3,480       8,725       12,978       9,453  
                                                 
Total operating expenses
    8,802       3,234       15,589       30,955       49,441       60,575  
                                                 
Loss from operations
    (8,671 )     (2,674 )     (1,588 )     (2,627 )     (16,802 )     (330 )
Other income (expense), net
    56       19       106       (49 )     219       462  
                                                 
Income (loss) before provision for income taxes
    (8,615 )     (2,655 )     (1,482 )     (2,676 )     (16,583 )     132  
Provision for income taxes
                23       137       163       389  
                                                 
Net loss
  $ (8,615 )   $ (2,655 )   $ (1,505 )   $ (2,813 )   $ (16,746 )   $ (257 )
                                                 
Net loss per common share, basic and diluted
  $ (0.51 )   $ (0.14 )   $ (0.07 )   $ (0.11 )   $ (0.56 )   $ (0.01 )
                                                 
Shares used in computing basic and diluted net loss per common share
    16,805       19,442       21,488       24,647       29,874       40,169  
                                                 
                                               
(1) Stock-based compensation is included above as follows:
                                                 
Cost of maintenance and services revenues
  $     $     $ 1     $ 7     $ 10     $ 17  
Research and development
                143       1,642       1,950       501  
Sales and marketing
                14       746       210       661  
General and administrative
                424       4,838       5,948       350  
                                                 
Total stock-based compensation expense
  $     $     $ 582     $ 7,233     $ 8,118     $ 1,529  
                                                 
 
Revenues in fiscal 2006 excluded revenues related to multiple element sales transactions consummated in that year that were deferred because we did not have vendor-specific objective evidence of fair value, or VSOE, for some product elements that were not delivered in 2006. In fiscal 2007, we either delivered such product elements, or we and our customers amended the contractual terms of these sales transactions to remove the undelivered product


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elements. Fiscal 2007 revenues included a substantial portion of the revenues so deferred from fiscal 2006, as well as a small amount of revenues similarly deferred from prior years. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Sources of Revenues, Cost of Revenues and Operating Expenses” for additional details, including the net amounts involved. We do not expect revenues in future periods to be favorably impacted to the same extent by similar transactions consummated in fiscal 2007 and prior periods.
 
                                         
    As of April 30,  
    2003     2004     2005     2006     2007  
    (in thousands)  
 
Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 6,036     $ 7,976     $ 13,493     $ 16,443     $ 16,917  
Working capital (deficit)
    3,762       4,990       11,756       5,377       (3,192 )
Total assets
    8,521       13,162       26,541       32,926       48,990  
Current and long-term debt
                             
Convertible preferred stock
    25,602       26,362       26,928       26,758       26,758  
Common stock and additional paid-in capital
    2,548       2,950       11,301       19,383       23,479  
Total stockholders’ equity
  $ 4,556     $ 4,460     $ 9,713     $ 1,433     $ 5,130  


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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis in conjunction with the information set forth under “Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, and other non-historical statements in this discussion, are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” and elsewhere in the prospectus. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
 
Overview
 
We are a leading provider of security and compliance management software solutions that intelligently mitigate business risk for enterprises and government agencies. Much like a “mission control center,” our ESM platform delivers a centralized, real-time view of disparate digital alarms, alerts and status messages, which we refer to as events, across geographically dispersed and heterogeneous business and technology infrastructures. Our software correlates massive numbers of events from thousands of security point solutions, network and computing devices and applications, enabling intelligent identification, prioritization and response to external threats, insider threats and compliance and corporate policy violations. We also provide complementary software that delivers pre-packaged analytics and reports tailored to specific security and compliance initiatives, as well as appliances that streamline threat response, event log archiving and network configuration.
 
We were founded in May 2000 and first sold our initial ESM product in June 2002. Our revenues have grown from $32.8 million in the fiscal year ended April 30, 2005 to $69.8 million in the fiscal year ended April 30, 2007.
 
We achieved positive cash flows from operations in the fiscal years 2004 through 2007. We initially funded our operations primarily through equity financings of convertible preferred stock that raised a total of $26.8 million. As of April 30, 2007, we had cash and cash equivalents and accounts receivable of $32.5 million, and an aggregate of $13.9 million in accounts payable and accrued liabilities. In June 2006, we acquired substantially all of the assets of Enira Technologies, LLC, primarily consisting of the predecessors to our TRM and NCM products, for cash and stock consideration with an aggregate value of $8.7 million, including acquisition costs of $0.2 million.
 
Important Factors Affecting Our Operating Results and Financial Condition
 
We believe that the market for our products is in the early stages of development. We have identified factors that we expect to play an important role in our future growth and profitability. These factors are:
 
Sales of ESM Platform and Appliance Products to New Customers.  The market for security and compliance management software solutions is rapidly expanding, with new purchases often driven by corporate compliance initiatives. We typically engage in a proof of concept with our customers to demonstrate the capabilities of our ESM platform in their specific environment. A new sale usually involves the sale of licenses for one or more ESM Managers, a bundle of connectors, depending on the number and type of devices the customer intends to manage with ArcSight ESM, licenses for our console and web interfaces, installation services, training and an initial maintenance arrangement. In many cases, customers will also purchase one of our complementary software modules which enable them to implement specific sets of off-the-shelf rules for our event correlation engine that address specific security and compliance issues and business risks. In addition, customers may purchase our TRM, Logger and NCM appliances to address their threat response, log archiving and network configuration needs. Our growth depends on our ability to sell our products to new customers.
 
Continued Sales to Our Installed Base.  Many customers make an initial purchase from us and then decide whether to use our products with respect to a larger portion of their business and technology infrastructure or buy additional complementary products from us. As such, a key component of our growth will be our ability to successfully maintain and further develop the relationships with our existing customers.
 
Development and Introduction of New Products.  We believe that it is important that we continue to develop or acquire new products and services that will help us capitalize on opportunities in the security and compliance


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management market. Examples of new product introductions to date include our TRM, Logger and NCM appliances and our ArcSight Insider Threat Package and ArcSight Compliance Insight Package for PCI products in fiscal 2007, as well as enhancements to our ESM platform such as the May 2007 introduction of features such as identity correlation and role-based management.
 
Development of an Expanded Channel Network for Our Products.  We currently sell our products primarily through our direct sales force, although we do sell to government purchasers and internationally through resellers and system integrators. We believe further development of our sales channel will assist us in penetrating the mid-market, particularly as we expand our appliance-based offerings. In addition, it is likely that new appliance-based products that we develop will be sold more effectively through resellers and, if we are successful in introducing these new products, we will become more dependent on the development of an effective channel network. Further, motivating our channel partners to promote our products will be a key factor in the success of this strategy.
 
Sources of Revenues, Cost of Revenues and Operating Expenses
 
Our sales transactions typically include the following elements: a software license fee paid for the use of our products in perpetuity or, in limited circumstances, for a specified term; an arrangement for first-year support and maintenance, which includes unspecified software updates and upgrades; and professional services for installation, implementation and training. We derive the majority of our revenues from sales of software products. We introduced complementary appliance products in fiscal 2007, and they have not contributed a significant portion of our revenues to date. We sell our products and services primarily through our direct sales force. Additionally, we utilize resellers and systems integrators, particularly in sales to government agencies and international customers.
 
We recognize revenues pursuant to American Institute of Certified Public Accountants Statement of Position, or SOP, No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Software Revenue Recognition with Respect to Certain Arrangements, or collectively, SOP 97-2, which, if revenues are to be recognized upon product delivery, requires among other things vendor-specific objective evidence of fair value, or VSOE, for each undelivered element of multiple element customer contracts.
 
Fiscal 2007 revenues included revenues related to sales transactions consummated in prior fiscal years for which revenue recognition was deferred as a result of undelivered product elements for which we did not have VSOE. In fiscal 2007, we either delivered such product elements, or we and our customers amended the contractual terms of these sales transactions to remove the undelivered product elements, resulting in recognition of revenues in fiscal 2007. Similarly, but to a lesser extent, revenues related to sales transactions consummated in fiscal 2007 were deferred and will be recognized in future years. The net impact of these transactions was to reduce revenues in fiscal 2006 by $6.3 million and increase fiscal 2007 revenues by $1.8 million, causing our fiscal 2006-2007 revenue growth rate to appear greater than it otherwise would. As of April 30, 2007, deferred revenues included $5.4 million related to transactions such as these.
 
Product Revenues
 
Product revenues consists of licenses for our software products and, beginning in fiscal 2007, also includes revenues for sales of our TRM, Logger and NCM appliance products. License fees are based on a number of factors, including the type and number of devices that our customer intends to monitor using our software as well as the number of users and locations. In addition to our core solution, some of our customers purchase additional licenses for optional extension modules that provide enhanced discovery and analytics capabilities. Sales of our appliance products consist of sale of the appliance hardware and an associated perpetual license to the embedded software. We first introduced our TRM and NCM appliance products in June 2006 and our Logger appliance product in December 2006, and these products have not represented a significant portion of our total revenues through April 30, 2007. Appliance fees are based on the number of appliances purchased and, in some cases, on the number of network devices with which our customer intends to use the appliances. We generally recognize product revenues at the time of product delivery, provided all other revenue recognition criteria have been met. We recognize revenues associated with products sold through distribution partners on a sell-through basis once either we or our distribution partner has a contractual agreement in place with the end user, the products have been delivered to the end user, collectibility is probable and all other revenue recognition criteria have been met.


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Historically, we have engaged in long sales cycles with our customers, typically three to six months and up to over a year for certain sales, and many customers make their purchase decisions in the last few weeks of a fiscal quarter, following procurement trends in the industry. Further, average deal size can vary considerably depending on our customers’ configuration requirements, implementation plan and budget availability. As a result, it is difficult to predict timing or size of product sales on a quarterly basis. In addition, we may fail to forecast sufficient production of our appliance products due to our limited experience with them, or we may be unable to physically deliver appliances within the quarter, depending on the proximity of the order to the end of the quarter. These situations may lead to delay of revenues until we can deliver products. The loss or delay of one or more large sales transactions in a quarter could impact our operating results for that quarter and any future quarters into which revenues from that transaction is delayed.
 
As of April 30, 2007, deferred product revenues were $10.3 million. Included in deferred product revenues as of April 30, 2007 are $4.9 million related to multiple element arrangements where one or more product elements for which we did not have VSOE remained undelivered. The remainder of deferred product revenues primarily relates to $3.0 million of product revenues to be recognized ratably over the term of the maintenance arrangements and $1.8 million related to prepayments in advance of delivery. We expect $8.1 million of deferred product revenues to be recognized in the next 12 months.
 
Maintenance and Services Revenues
 
Maintenance includes rights to unspecified software product updates and upgrades, maintenance releases and patches released during the term of the support period and internet and telephone access to maintenance personnel and content. Maintenance revenues are generated both from maintenance that we agree to provide in connection with initial sales of software and hardware products and from maintenance renewals. We generally sell maintenance on an annual basis. We offer two levels of maintenance – standard and, for customers that require 24-hour coverage seven days a week, premium. In most cases, we provide maintenance for sales made through channel partners. In addition, we sell an enhanced maintenance offering that provides frequent security content updates for our software. Maintenance fees are deferred at the time the maintenance agreement is initiated and recognized ratably over the term of the maintenance agreement. As our customer base expands, we expect maintenance revenues to continue to grow. For the fiscal years ended April 30, 2005, 2006 and 2007, the maintenance renewal rate was 93%, 94% and 96%, respectively.
 
Services revenues are generated from sales of services to our customers, including installation and implementation of our software, consulting and training. Professional services are not essential to the functionality of the associated software products. We generally sell our services on a time-and-materials basis and recognize revenues as the services are performed.
 
As of April 30, 2007, deferred maintenance and services revenues were $19.3 million, of which $16.7 million are expected to be recognized in the next 12 months. Deferred maintenance revenues are related to advanced payments for support contracts that are recognized ratably, and deferred services revenues relate to customer payments in advance of services being performed.
 
Cost of Revenues
 
Cost of revenues for our software products consists of third-party royalties and license fees for licensed technology incorporated into our software product offerings. Cost of revenues for appliance products consists of the hardware costs of the appliances and, for certain appliance products, third-party royalties for licensed technology. Sales of our appliance products are generally at a lower margin than sales of our software products.
 
Cost of maintenance and services revenues consists primarily of salaries and benefits related to maintenance and professional services personnel; travel and other out-of-pocket expenses; facilities and other related overhead; and cost of services provided by subcontractors for professional services. Gross margins for maintenance are higher than for professional services.
 
We intend to increase sales to the mid-market, a goal that we believe will be aided by our recent introduction of our appliance products. We expect an increasing percentage of our mid-market sales to be made through our distribution channel than has been the case to date. We also expect a high percentage of our international sales to


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continue to be made through our distribution channel. Sales through the channel tend to be at a lower margin than direct sales. As a result, we may report lower margins in future periods than has been the case for prior periods.
 
Operating Expenses
 
Research and Development.  Research and development expenses consist primarily of salaries and benefits of personnel engaged in the development of new products; the enhancement of existing products; quality assurance activities; and facilities and other related overhead. We expense all of our research and development costs as they are incurred. We expect research and development expenses to increase in absolute dollars for the foreseeable future as we continue to invest in the development of our products.
 
Sales and Marketing.  Sales and marketing expenses consist primarily of salaries, commissions and benefits related to sales and marketing personnel and consultants; travel and other out-of-pocket expenses; expenses for marketing programs, such as for trade shows and our annual users conference, marketing materials and corporate communications; and facilities and other related overhead. Commissions on sales of software products and initial maintenance are typically earned and expensed when revenue recognition for the respective revenue elements commences and for services when the customer is invoiced. In fiscal 2008, we will also pay commissions for channel sales to our direct sales force, as well as our channel sales force, to minimize channel conflicts as we develop our channel network. We intend to hire additional sales personnel, initiate additional marketing programs and build additional relationships with resellers, systems integrators and strategic partners on a global basis. Accordingly, we expect that our sales and marketing expenses will continue to increase for the foreseeable future in absolute dollars.
 
General and Administrative.  General and administrative expenses consist primarily of salaries and benefits related to general and administrative personnel and consultants; accounting and legal professional fees; and facilities and other related overhead. We expect that in the future, general and administrative expenses will increase in absolute dollars as we add personnel and incur additional professional fees and insurance costs related to the growth of our business and additional legal, accounting and other expenses in connection with our reporting and compliance obligations as a public company.
 
Other Income (Expense), Net.  Other income (expense), net consists of interest earned on our cash investments and foreign currency-related gains and losses. Our interest income will vary each reporting period depending on our average cash balances during the period and the current level of interest rates. Similarly, our foreign currency-related gains and losses will also vary depending upon movements in underlying exchange rates.
 
Income Tax Provision.  Income tax provision consists of tax expense related to current period earnings, while income tax benefit consists of a recoupment of historical tax expenses due to losses in the then current reporting period. We have previously experienced a greater than 50% shift in our stock ownership, which creates annual limitations on our ability to use a portion of our net operating loss carry-forwards. As a result, our income tax provision and our resulting effective tax rate may be greater than if our net operating loss carry-forwards were available without limitation. In addition, our net operating loss carry-forwards may expire before we fully utilize them.
 
Internal Control Over Financial Reporting
 
We have a history of “material weaknesses” in our internal control over financial reporting as defined by the standards established by the Public Company Accounting Oversight Board. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. During the audit of our financial statements for the fiscal years ended April 30, 2004, 2005, 2006 and 2007, material weaknesses in our internal control over financial reporting were identified.
 
Specifically, in fiscal 2006 we did not have adequate controls to provide reasonable assurance that revenues were being recorded in accordance with generally accepted accounting principles. The inadequate internal control over financial reporting resulted in the premature recognition of revenues from sales transactions that included undelivered product elements for which we did not have VSOE. As a result of this error, an adjustment was recorded to our financial statements to defer, until later periods, revenues previously recorded. As discussed above in “—Sources of Revenues, Cost of Revenues and Operating Expenses,” we either delivered the applicable product


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elements, or we and our customers amended the contractual terms of these sales transactions to remove the undelivered product elements, resulting in recognition of the associated revenues in fiscal 2007, and to a lesser extent in future fiscal years. We determined as of April 30, 2007 that we no longer have material weaknesses in the areas identified as material weaknesses in connection with the preparation of our fiscal 2004, 2005 and 2006 financial statements.
 
The material weakness identified during the audit of our fiscal 2007 financial statements relates to internal review, primarily due to failure of the review process of accounting computations and reconciliations prepared by third parties as part of the preparation of our fiscal 2007 financial statements. This weakness led to four adjustments to our financial statements. The largest such adjustment resulted from a failure to detect an overstatement of stock-based compensation expense of $0.3 million under SFAS No. 123(R), Share-Based Payment, or SFAS 123R, in calculations prepared by a third-party service provider.
 
We are in the process of remediating the material weakness identified in connection with the preparation of our fiscal 2007 financial statements but have not yet been able to complete our remediation efforts. For example, we recently hired three senior management personnel in our finance and accounting function. It will take additional time to design, implement and test the controls and procedures required to enable our management to conclude that our disclosure controls and our internal control over financial reporting are effective. We cannot at this time estimate how long it will take to complete our remediation efforts. In addition, we cannot assure you that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to remediate the material weakness that has been identified or to implement and maintain effective disclosure controls and internal control over financial reporting could cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements.
 
Critical Accounting Policies, Significant Judgments and Estimates
 
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on our historical experience, knowledge of current conditions and our beliefs regarding likely occurrences in the future, given available information. Estimates are used for, but are not limited to, revenue recognition, determination of fair value of stock awards, valuation of goodwill and intangible assets acquired in business combinations, impairment of goodwill and other intangible assets, amortization of intangible assets, contingencies and litigation, allowances for doubtful accounts, and accrued liabilities. Actual results may differ from those estimates, and such differences may be material to our financial statements. Further, if we applied different factors, or changed the method in which we applied the various factors that are used, in making our critical estimates and judgments, our reported operating results and financial condition could be materially affected.
 
Revenue Recognition
 
We recognize revenues in accordance with SOP 97-2. As such, we exercise judgment and use estimates in connection with the determination of the amount of product and maintenance and services revenues to be recognized in each accounting period.
 
We derive revenues primarily from two sources: (i) sales of our software and hardware products, and (ii) fees for maintenance and services, including professional services for product installation and training and maintenance to provide unspecified upgrades and customer technical support. Our appliance products contain software which is more than incidental to the functionality of the product. In accordance with SOP 97-2, we recognize revenues when the following conditions have been met:
 
  •  persuasive evidence of an arrangement exists;
 
  •  the fee is fixed or determinable;
 
  •  delivery has occurred or services have been rendered; and
 
  •  collection is considered probable.


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Signed contracts and binding purchase orders, depending on the nature of the transaction, are used as evidence of an arrangement. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or forfeiture, concession or other adjustment. We do not generally grant rights of return or price protection to our distribution partners or end users, other than limited rights of return during the warranty period in some cases. We use shipping documents, contractual terms and conditions and customer acceptance, when applicable, to verify product delivery to the customer. For perpetual software license fees in arrangements that do not include customization, or services that are not considered essential to the functionality of the licenses, delivery is deemed to occur when the product is delivered to the customer. Services and consulting arrangements that are not essential to the functionality of the licensed product are recognized as revenues as these services are provided. Delivery of maintenance is considered to occur on a straight-line basis over the life of the contract. We consider probability of collection based on a number of factors, such as creditworthiness of the customer as determined by credit checks and analysis, past transaction history, the geographic location and financial viability. We do not request, nor do we require, collateral from customers. If we determine that collectibility is not reasonably assured, we defer the revenues until collectibility becomes reasonably assured, generally upon receipt of cash.
 
Our sales of software products to date have typically been multiple element arrangements, which have included software licenses and corresponding maintenance, and have also generally included some amount of professional services. Our sales of appliance products to date have been multiple element arrangements as well, which included hardware, software licenses and corresponding maintenance, and have also generally included some amount of professional services. We allocate the total arrangement fee among these multiple elements based upon their respective fair values as determined by VSOE or, if applicable, by the residual method under SOP 97-2. VSOE is established for maintenance and support services based on maintenance renewals to other customers or upon renewal rates quoted in contracts when the quoted renewal rates are deemed substantive. VSOE for professional services is established based on prices charged to customers when such services are sold separately. If we cannot objectively determine the fair value of any undelivered element in a multiple element arrangement, we defer revenues for each element until all elements have been delivered, or until VSOE can objectively be determined for any remaining undelivered element. If VSOE for maintenance and services does not exist, and these are the only undelivered elements, then revenues for the entire arrangement are recognized ratably over the longest performance period commencing with delivery of both elements. When VSOE of a delivered element has not been determined, but the fair value for all undelivered elements has, we use the residual method to record revenues for the delivered element. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element and recognized immediately as revenues.
 
Our agreements generally do not include acceptance provisions. However, if acceptance provisions exist, we deem delivery to have occurred upon customer acceptance.
 
We recognize revenues associated with products and professional services sold through our channel partners once either we or our channel partner has a contractual agreement in place with the end user, delivery has occurred to the end user and all other revenue recognition criteria have been met.
 
We assess whether fees are collectible and fixed or determinable at the time of the sale, and recognize revenues if all other revenue recognition criteria have been met. Our standard payment terms are net 30 days and are considered normal up to net three months, while payment terms beyond three months are considered to be extended terms. Payments that are due within three months are generally deemed to be fixed or determinable based on our successful collection history on such agreements.


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Stock-Based Compensation
 
The following table summarizes by grant date the number of shares of our common stock subject to options granted in fiscal 2006 and 2007 and the associated per share exercise price. We have determined that the exercise price equaled the fair value of our common stock for each of these grants.
 
                 
          Per Share Exercise
 
    Number
    Price and
 
    of Shares
    Fair Value of
 
Grant Date
  Granted     Common Stock  
 
May 26, 2005
    4,030,000     $ 1.00  
June 15, 2005
    122,500       1.00  
July 12, 2005
    269,000       1.00  
August 11, 2005
    227,500       1.00  
August 22, 2005
    430,000       1.00  
September 15, 2005
    1,039,000       1.00  
October 28, 2005
    490,000       1.00  
March 8, 2006
    1,849,750       1.52  
June 5, 2006
    1,517,750       1.52  
June 19, 2006
    419,094       1.52  
December 14, 2006
    1,437,800       1.70  
January 24, 2007
    4,647,753       1.70  
April 19, 2007
    811,000       2.33  
 
Prior to May 1, 2006, we accounted for our stock-based awards to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25 and related interpretations. Under the intrinsic value method, compensation expense is measured on the date of the grant as the difference between the fair value of our common stock and the exercise or purchase price multiplied by the number of stock options or restricted stock awards granted. We recorded deferred stock-based compensation of $1.1 million related to employee stock options granted in fiscal 2005, because the fair value of our common stock determined in connection with preparation of our financial statements exceeded the fair value of our common stock as had been determined by our board of directors at the time of grant. We had no deferred stock-based compensation for fiscal 2006. We amortize deferred stock-based compensation using the multiple option method as prescribed by FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, or FIN 28, over the option vesting period using an accelerated amortization schedule. We expensed employee stock-based compensation of $0.3 million, $0.6 million and $0.3 million in fiscal 2005, 2006 and 2007, respectively.
 
Effective May 1, 2006, we adopted SFAS 123R which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. SFAS 123R requires nonpublic companies that used the minimum value method under SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS 123, for either recognition or pro forma disclosures to apply SFAS 123R using the prospective-transition method. As such, we will continue to apply APB 25 in future periods to unvested equity awards outstanding at the date of adoption of SFAS 123R that were measured using the minimum value method. In addition, we are continuing to amortize those awards granted prior to May 1, 2006 utilizing an accelerated amortization schedule. In accordance with SFAS 123R, we will recognize the compensation cost of employee stock-based awards granted subsequent to April 30, 2006 in the statement of operations using the straight line method over the vesting period of the award.
 
To determine the fair value of stock options granted we have elected to use the Black-Scholes option pricing model, which requires, among other inputs, an estimate of the fair value of the underlying common stock on the date of grant and assumptions as to volatility of our stock over the expected term of the related options, the expected term of the options, the risk-free interest rate and the option forfeiture rate. As there has been no public market for our common stock prior to this offering, we have determined the volatility for options granted in fiscal 2007 based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The


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expected volatility of options granted has been determined using weighted average measures of the implied volatility and the historical volatility for this peer group of companies for a period equal to the expected life of the option. The expected volatility for options granted during the fiscal year ended April 30, 2007 was 66%. The expected life of options has been determined considering the expected life of options granted by a group of peer companies and the average vesting and contractual terms of options granted to our employees. The expected life of options granted during the fiscal year ended April 30, 2007 was 5.25 years. For the fiscal year ended April 30, 2007, the weighted-average risk free interest rate used was 5.00%. The risk-free interest rate is based on a zero coupon United States treasury instrument whose term is consistent with the expected life of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, SFAS 123R requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas SFAS 123 permitted companies to record forfeitures based on actual forfeitures, which was our historical policy under SFAS 123. As a result, we applied an estimated annual forfeiture rate of 5% in the fiscal year ended April 30, 2007 in determining the expense recorded in our consolidated statement of operations.
 
For the fiscal year ended April 30, 2007, we recorded expense of $0.9 million in connection with stock-based awards accounted for under SFAS 123R. Unrecognized stock-based compensation expense of non-vested stock options of $7.4 million is expected to be recognized using the straight line method over the next four years. We expect stock-based compensation expenses to increase in absolute dollars as a result of the adoption of SFAS 123R. The actual amount of stock-based compensation expense we record in any fiscal period will depend on a number of factors, including the number of stock options issued and the volatility of our stock price over time. In future periods, stock-based compensation expense may increase as we issue additional equity-based awards to continue to attract and retain key employees. Additionally, SFAS 123R requires that we recognize compensation expense only for the portion of stock options that are expected to vest. If the actual number of forfeitures differs from that estimated by management, we will be required to record adjustments to stock-based compensation expense in future periods.
 
Given the absence of an active market for our common stock, our board of directors, the members of which we believe had extensive business, finance or venture capital experience, was required to estimate the fair value of our common stock for purposes of determining exercise prices for the options it granted. Prior to February 1, 2006, our board of directors determined the estimated fair value of our common stock, based in part on an analysis of relevant metrics, including the following:
 
  •  the prices for our convertible preferred stock sold to outside investors in arms-length transactions;
 
  •  the rights, preference and privileges of that convertible preferred stock relative to those of our common stock;
 
  •  our operating and financial performance;
 
  •  the hiring of key personnel;
 
  •  the introduction of new products;
 
  •  our stage of development and revenue growth;
 
  •  the fact that the options grants involved illiquid securities in a private company;
 
  •  the risks inherent in the development and expansion of our products and services; and
 
  •  the likelihood of achieving a liquidity event, such as an initial public offering or sale of the company, for the shares of common stock underlying the options given prevailing market conditions.
 
Commencing on February 1, 2006, a third party valuation specialist performed a contemporaneous valuation of our common stock for income tax considerations, which was considered as a factor by our board of directors when it determined the fair market value of our common stock when making new grants. The valuation specialist issued reports as of February 1, 2006, November 1, 2006, March 15, 2007 and June 1, 2007 valuing our common stock at $1.50 - $1.55, $1.70, $2.33 and $2.50 per share, respectively.
 
We also have incurred stock-based compensation expenses related to stock options that were exercised with the proceeds from loans that we made to the employee option holders. Our forgiveness of a portion of one of these


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employee loans in May 2002 resulted in a requirement to use variable accounting for all other options exercised with outstanding employee loans. As the value of our stock increased in the fiscal years ended April 30, 2005 and 2006, the impact of the variable accounting treatment resulted in stock-based compensation expense. The stock-based compensation expenses resulting from the variable accounting were $7.0 million and $7.5 million in fiscal 2005 and 2006, respectively. The last of these employee loans was repaid in January 2006, which ended the related stock-based compensation expenses. Subsequent to the fiscal year ended April 30, 2007, options to purchase 2,431,938 shares with an exercise price of $2.50 have been granted to employees.
 
Assuming the sale of shares contemplated by this offering is consummated at $      per share, which is the midpoint of the range set forth on the cover page of this prospectus, the aggregate intrinsic value of vested and unvested options to purchase shares of our common stock outstanding as of April 30, 2007 would be $      million and $      million respectively.
 
Business Combinations
 
We account for business combinations in accordance with SFAS No. 141, Business Combinations, or SFAS 141, which requires the purchase method of accounting for business combinations. In accordance with SFAS 141, we determine the recognition of intangible assets based on the following criteria: (i) the intangible asset arises from contractual or other rights; or (ii) the intangible asset is separable or divisible from the acquired entity and capable of being sold, transferred, licensed, returned or exchanged. In accordance with SFAS 141, we allocate the purchase price of our business combinations to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. We record the excess of the purchase price over those fair values as goodwill.
 
We must make valuation assumptions that require significant estimates, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer contracts, customer lists, distribution agreements and discount rates. We estimate fair value based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from our estimates.
 
Goodwill and Intangible Assets
 
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS 142, we do not amortize goodwill or other intangible assets with indefinite lives but rather test them for impairment. SFAS 142 requires us to perform an impairment review of our goodwill balance at least annually and also whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The allocation of the acquisition cost to intangible assets and goodwill requires the extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and amortization of intangible assets, other than goodwill. Further, when impairment indicators are identified with respect to previously recorded intangible assets, the values of the assets are determined using discounted future cash flow techniques. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of the projected discounted cash flows and should different conditions prevail, material write-downs of net intangible assets could occur. We review periodically the estimated remaining useful lives of our acquired intangible assets. A reduction in our estimate of remaining useful lives, if any, could result in increased amortization expense in future periods. Future goodwill impairment tests could result in a charge to earnings.
 
Allowance for Doubtful Accounts
 
We maintain an allowance for doubtful accounts based on a periodic review of customer accounts, payment patterns and specific collection issues. Where account-specific collection issues are identified, we record a specific allowance based on the amount that we believe will be uncollected. For accounts where specific collection issues are not identified, we record a reserve based on the age of the receivables. As of April 30, 2007, accounts receivable from one customer represented 12% of net accounts receivable, which receivable was fully paid subsequent to the end of fiscal 2007.


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Accounting for Income Taxes
 
As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions in which we operate. We estimate actual current tax exposure together with assessing temporary differences between our financial reporting and our tax filings resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carry-forwards are utilized. Accordingly, realization of our deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized. We must 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 must establish a valuation allowance.
 
Management 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. We recorded a full valuation allowance as of April 30, 2007, because, based on the available evidence, we believed at that time it was more likely than not that we would not be able to utilize all of our deferred tax assets in the future. We intend to maintain the full valuation allowances until sufficient evidence exists to support the reversal of all or some portion of these allowances. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted.
 
We have previously experienced a greater than 50% shift in our stock ownership, which creates annual limitations on our ability to use a portion of our net operating loss carry-forwards.
 
Results of Operations
 
The following table presents selected items in our consolidated statements of operations in dollars and the percentage change in those items for the periods indicated:
 
                                         
    Fiscal Year Ended April 30,     % Change Increase (Decrease)  
    2005     2006     2007     2005 - 2006     2006 - 2007  
    (in thousands, except for percentages)  
 
Revenues:
                                       
Products
  $ 22,357     $ 22,859     $ 43,989       2.2 %     92.4 %
Maintenance and services
    10,465       16,576       25,844       58.4       55.9  
                                         
Total revenues
    32,822       39,435       69,833       20.1       77.1  
                                         
Cost of revenues:
                                       
Products
    1,084       1,769       2,569       63.2       45.2  
Maintenance and services(1)
    3,410       5,027       7,019       47.4       39.6  
                                         
Total cost of revenues
    4,494       6,796       9,588       51.2       41.1  
                                         
Gross profit
    28,328       32,639       60,245       15.2       84.6  
Operating expenses(1):
                                       
Research and development
    7,583       12,154       14,535       60.3       19.6  
Sales and marketing
    14,647       24,309       36,587       66.0       50.5  
General and administrative
    8,725       12,978       9,453       48.7       (27.2 )
                                         
Total operating expenses
    30,955       49,441       60,575       59.7       22.5  
                                         
Loss from operations
    (2,627 )     (16,802 )     (330 )     *         *    
Other income (expense), net
    (49 )     219       462       *         111.0  
                                         
Income (loss) before provision for income taxes
    (2,676 )     (16,583 )     132       *         *    
Provision for income taxes
    137       163       389       19.0       138.7  
                                         
Net loss
  $ (2,813 )   $ (16,746 )   $ (257 )     *         *    
                                         
 
 
* Percentage change information is not meaningful.
(footnote appears on following page)


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    Fiscal Year Ended April 30,     % Change Increase (Decrease)  
    2005     2006     2007     2005 - 2006     2006 - 2007  
    (in thousands, except for percentages)  
 
(1) Stock-based compensation is included above as follows:
Cost of maintenance and services revenues
  $ 7     $ 10     $ 17       42.9 %     70.0 %
Research and development
    1,642       1,950       501       18.8       (74.3 )
Sales and marketing
    746       210       661       (71.8 )     214.8  
General and administrative
    4,838       5,948       350       22.9       (94.1 )
                                         
Total stock-based compensation expense
  $ 7,233     $ 8,118     $ 1,529       12.2 %     (81.2 )%
                                         
 
 
The table below presents selected items in our consolidated statements of operations as a percentage of total revenues for the periods indicated:
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
    %     %     %  
 
Revenues:
                       
Products
    68.1       58.0       63.0  
Maintenance and services
    31.9       42.0       37.0  
                         
Total revenues
    100.0       100.0       100.0  
Cost of revenues:
                       
Products
    3.3       4.5       3.7  
Maintenance and services
    10.4       12.7       10.0  
                         
Total cost of revenues
    13.7       17.2       13.7  
                         
Gross margin
    86.3       82.8       86.3  
Operating expenses:
                       
Research and development
    23.1       30.8       20.8  
Sales and marketing
    44.6       61.7       52.4  
General and administrative
    26.6       32.9       13.6  
                         
Total operating expenses
    94.3       125.4       86.8  
                         
Loss from operations
    (8.0 )     (42.6 )     (0.5 )
                         
 
Comparison of Fiscal Year 2007 and Fiscal Year 2006
 
Revenues
 
Product Revenues.  Product revenues in fiscal 2007 included revenues of $25.5 million from sales to 120 new customers and revenues of $18.5 million from sales to existing customers. New customer revenues in fiscal 2007 increased by $11.5 million from new customer revenues in fiscal 2006. Existing customer revenues in fiscal 2007 increased by $9.6 million compared to existing customer revenues in fiscal 2006. As a result of the timing of revenue recognition for sales transactions that included an undelivered product element for which we did not have VSOE, there was a net deferral of $6.0 million of product revenues in fiscal 2006 and a net recognition of $1.7 million of product revenues in fiscal 2007. This accounted for $0.3 million of the increase in product revenues from new customers, and $7.4 million of the increase in product revenues from existing customers, in fiscal 2007 compared with fiscal 2006. As of April 30, 2007, deferred product revenues included $4.9 million related to similar transactions. See the related discussion in “—Sources of Revenues, Cost of Revenues and Operating Expenses.”


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Maintenance and Services Revenues.  Maintenance and services revenues for fiscal 2006 and 2007 are detailed in the following table:
 
                                 
    Fiscal Year Ended April 30,     Change in
    Change in
 
    2006     2007     Dollars     Percent  
    (in thousands, except for percentages)  
 
Maintenance revenues
  $ 11,473     $ 18,762     $ 7,289       63.5 %
Services revenues
    5,103       7,082       1,979       38.8  
                                 
Maintenance and services revenues
  $ 16,576     $ 25,844     $ 9,268       55.9 %
                                 
 
Maintenance revenues increased $7.3 million in fiscal 2007 as a result of providing support services to a larger installed base as well as the incremental maintenance revenues from increased product sales. Services revenues increased by $2.0 million in fiscal 2007 as a result of providing services to a larger installed base. As a result of the timing of revenue recognition for sales transactions that included an undelivered product element for which we did not have VSOE, there was a net deferral of $0.3 million of maintenance and services revenues in fiscal 2006 and a net recognition of $0.1 million of maintenance and services revenues in fiscal 2007. This accounted for $0.4 million of the increase in maintenance and services revenues in fiscal 2007 compared to fiscal 2006. As of April 30, 2007, deferred maintenance and services revenues included $0.5 million related to similar transactions. See the related discussion in “—Sources of Revenues, Cost of Revenues and Operating Expenses.”
 
Cost of Revenues and Gross Margin
 
Cost of Product Revenues and Gross Margin.  Product gross margin as a percentage of product revenues increased to 94.2% in fiscal 2007 from 92.3% in fiscal 2006. The increase of 1.9 percentage points in product gross margin as a percentage of product revenues in fiscal 2007 compared to fiscal 2006 was primarily a result of the timing of revenue recognition for sales transactions that included an undelivered product element for which we did not have VSOE.
 
Cost of Maintenance and Services Revenues and Gross Margin.  Cost of maintenance and services revenues for fiscal 2006 and 2007 is detailed in the following table:
 
                                 
    Fiscal Year Ended April 30,     Change in
    Change in
 
    2006     2007     Dollars     Percent  
    (in thousands, except for percentages)  
 
Cost of maintenance revenues
  $ 2,085     $ 3,498     $ 1,413       67.8 %
Cost of services revenues
    2,942       3,521       579       19.7  
                                 
Cost of maintenance and services revenues
  $ 5,027     $ 7,019     $ 1,992       39.6 %
                                 
 
Maintenance gross margin remained essentially constant at 81.4% and 81.8% in fiscal 2007 and 2006, respectively. Services gross margin increased to 50.3% in fiscal 2007 from 42.3% in fiscal 2006 due to a decreased volume of lower margin services revenues in fiscal 2007, including fewer services for which we used a third-party service provider related to certain government contracts.
 
Operating Expenses
 
Research and Development Expenses.  The increase in research and development expenses in fiscal 2007 of $2.4 million compared to fiscal 2006 was primarily attributable to an increase of $2.8 million in compensation expenses associated with an increase in research and development personnel from 71 to 89 at the respective period ends, and to our incurrence of stock-based compensation expense of $0.1 million as a result of our adoption of SFAS 123R in fiscal 2007, offset by the decrease in stock-based compensation of $1.9 million in fiscal 2007 as a result of the repayment of an employee loan in fiscal 2006 and the associated cessation of variable accounting. Research and development expense as a percentage of revenue was 20.8% in fiscal 2007, compared to 30.8% in fiscal 2006. The timing of revenue recognition for sales transactions that included an undelivered product element for which we did not have VSOE contributed to 4.8% of the 10.0% reduction in research and development expenses as a percentage of revenues.


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Sales and Marketing Expenses.  The increase in sales and marketing expenses in fiscal 2007 of $12.3 million compared to fiscal 2006 was primarily attributable to an increase of $8.9 million in compensation and related expense associated with an increase in sales and marketing personnel from 74 to 104 at the respective period ends. The increase in compensation and related expense included $0.6 million as a result of our adoption in fiscal 2007 of SFAS 123R. In addition, marketing expenses related to trade shows, public relations and advertising increased by $1.6 million and travel expenses increased $0.9 million. Sales and marketing expense as a percentage of revenues was 52.4% in fiscal 2007, compared to 61.7% in fiscal 2006. The reduction in sales and marketing expenses as a percentage of revenues was due to the timing of revenue recognition for sales transactions that included an undelivered product element for which we did not have VSOE.
 
General and Administrative Expenses.  The decrease in general and administrative expenses of $3.5 million in fiscal 2007 compared to fiscal 2006 was primarily associated with a decrease in compensation and related expenses of $4.0 million, offset in part by an increase of $0.3 million associated with professional service provider fees. The decrease in compensation and related expenses is primarily a result of the decreased stock-based compensation expense of $5.6 million in fiscal 2007 as a result of the repayment of an employee loan in fiscal 2006, offset by an increase of $1.6 million associated with an increase in personnel from 22 to 32 at the respective period ends. Fiscal 2007 stock-based compensation expense included $0.2 million from our adoption in fiscal 2007 of SFAS 123R. General and administrative expense as a percentage of revenues declined to 13.6% in fiscal 2007, compared to 32.9% in fiscal 2006. The timing of revenue recognition for sales transactions that included an undelivered product element for which we did not have VSOE contributed to 4.8% of the 19.3% reduction in general and administrative expenses as a percentage of revenues.
 
Other Income (Expense), Net.  The increase in other income (expense), net in fiscal 2007 is primarily a result of higher invested cash balances generated from operations, as our foreign currency related gains and losses remained comparable year over year.
 
Provision for Income Taxes.  The provision for income taxes for fiscal 2006 and 2007 was primarily related to foreign income taxes.
 
Comparison of Fiscal Year 2006 and Fiscal Year 2005
 
Revenues
 
Product Revenues.  Product revenues in fiscal 2006 included revenues of $13.9 million from sales to 92 new customers and revenues of $8.9 million from sales to existing customers. New customer revenues in fiscal 2006 remained constant compared to fiscal 2005. Existing customer revenues in fiscal 2006 increased by $0.6 million compared to existing customer revenues in fiscal 2005. Product revenues in fiscal 2005 and 2006 excluded $0.2 million and $6.0 million, respectively, of revenues related to sales transactions consummated in fiscal 2006 and prior years that included undelivered product elements for which we did not have VSOE, resulting in a deferral until future periods. Of the $6.0 million deferral from fiscal 2006, $1.0 million was related to transactions with new customers and $5.0 million was related to transactions with existing customers.
 
Maintenance and Services Revenues.  Maintenance and services revenues for fiscal 2005 and 2006 are detailed in the following table:
 
                                 
    Fiscal Year Ended April 30,     Change in
    Change in
 
    2005     2006     Dollars     Percent  
    (in thousands, except for percentages)  
 
Maintenance revenues
  $ 5,947     $ 11,473     $ 5,526       92.9 %
Services revenues
    4,518       5,103       585       12.9  
                                 
Maintenance and services revenues
  $ 10,465     $ 16,576     $ 6,111       58.4 %
                                 
 
Maintenance revenues increased $5.5 million in fiscal 2006 as a result of providing support services to a larger installed base as well as the incremental maintenance revenues from increased product sales. Services revenues increased by $0.6 million as a result of providing services to a larger installed base.


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Cost of Revenues and Gross Margin
 
Cost of Product Revenues and Gross Margin.  Product gross margin as a percentage of product revenues decreased to 92.3% in fiscal 2006 from 95.2% in fiscal 2005. The decrease of 2.9 percentage points in product gross margin as a percentage of revenues in fiscal 2006 is primarily a result of the impact from the deferral of $6.0 million of revenues in fiscal 2006 for undelivered product elements for which we did not have VSOE.
 
Cost of Maintenance and Services Revenues and Gross Margin.  Cost of maintenance and services revenues for fiscal 2005 and 2006 is detailed in the following table:
 
                                 
    Fiscal Year Ended
             
    April 30,     Change in
    Change in
 
    2005     2006     Dollars     Percent  
    (in thousands, except for percentages)  
 
Cost of maintenance revenues
  $ 850     $ 2,085     $ 1,235       145.3 %
Cost of services revenues
    2,560       2,942       382       14.9  
                                 
Cost of maintenance and services revenues
  $ 3,410     $ 5,027     $ 1,617       47.4 %
                                 
 
Maintenance gross margin decreased to 81.8% in fiscal 2006 from 85.7% in fiscal 2005 as a result of the hiring of additional maintenance personnel to support our growing customer base. Services gross margin decreased slightly to 42.3% in fiscal 2006 from 43.3% in fiscal 2005.
 
Operating Expenses
 
Research and Development Expenses.  The increase in research and development expenses in fiscal 2006 compared to fiscal 2005 was primarily attributable to an increase of $4.0 million in compensation and related expenses associated with an increase in research and development personnel from 45 to 71 at the respective period ends. Research and development expense as a percentage of revenues was 30.8% in fiscal 2006, compared to 23.1% in fiscal 2005. The timing of revenue recognition for sales transactions that included an undelivered product element for which we did not have VSOE contributed to 3.9% of the 7.7% increase in research and development expenses as a percentage of revenues.
 
Sales and Marketing Expenses.  The increase in sales and marketing expenses in fiscal 2006 compared to fiscal 2005 was primarily attributable to an increase of $6.2 million in compensation and related expenses associated with an increase in sales and marketing personnel from 50 to 74 at the respective period ends. In addition, marketing expenses related to trade shows, public relations and advertising increased by $1.0 million and travel expenses increased $1.6 million compared to fiscal 2005. Sales and marketing expense as a percentage of revenues was 61.7% in fiscal 2006, compared to 44.6% in fiscal 2005. The timing of revenue recognition for sales transactions that included an undelivered product element for which we did not have VSOE contributed to 8.0% of the 17.1% increase in sales and marketing expenses as a percentage of revenues.
 
General and Administrative Expenses.  The increase in general and administrative expenses in fiscal 2006 compared to fiscal 2005 was primarily a result of an increase of $2.3 million in compensation and related expenses, in connection with the increase in personnel from 14 to 22 at the respective period ends. The $2.3 million includes an increase in stock-based compensation expense of $1.1 million as a result of variable accounting treatment for options exercised with an employee loan and the increase in the value of our common stock in fiscal 2006. In addition, professional service provider fees increased $1.8 million in fiscal 2006. General and administrative expense as a percentage of revenues was 32.9% in fiscal 2006, compared to 26.6% in fiscal 2005. The timing of revenue recognition for sales transactions that included an undelivered product element for which we did not have VSOE contributed to 4.1% of the 6.3% increase in general and administrative expenses as a percentage of revenues.
 
Other Income (Expense), Net.  The increase in other income (expense), net in fiscal 2006 is primarily a result of higher invested cash balances generated from operations, as our foreign currency related gains and losses remained relatively flat year over year.
 
Provision for Income Taxes.  The provision for income taxes for fiscal 2006 was primarily related to foreign income taxes. The provision for income taxes for fiscal 2005 was a combination of U.S. federal, state and foreign income taxes.


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Liquidity and Capital Resources
 
At April 30, 2007, we had cash and cash equivalents totaling $16.9 million and accounts receivable of $15.6 million. From our inception in May 2000 through October 2002, we funded our operations primarily through equity financings of convertible preferred stock that raised a total of $26.8 million.
 
Historically our principal uses of cash have consisted of payroll and other operating expenses and purchases of property and equipment to support our growth. In fiscal 2007, we used $7.2 million in cash to purchase the assets of Enira Technologies, LLC, including acquisition costs.
 
The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
    (in thousands)  
 
Net cash provided by operating activities
  $ 5,922     $ 3,848     $ 10,161  
Net cash used in investing activities
    (1,238 )     (1,431 )     (10,274 )
Net cash provided by financing activities
    832       538       571  
 
Operating Activities
 
We derive cash flows from operations primarily from cash collected from the sale of our products and related maintenance and services. Our cash flows from operating activities are also significantly influenced by our use of cash to support the growth of our business in areas such as sales and marketing, research and development and corporate administration. Net cash provided by operating activities was $5.9 million, $3.8 million and $10.2 million in fiscal 2005, 2006 and 2007, respectively. Net cash provided by operating activities in fiscal 2007 primarily consisted of cash contributed by net changes in deferred revenues, accounts receivable, accrued liabilities and other operating assets and liabilities of $6.9 million, depreciation and amortization expense of $1.9 million and stock-based compensation of $1.5 million, offset by a net loss of $0.3 million. The increase in cash generated from operations from fiscal 2006 to fiscal 2007 principally reflects an increase in cash collected from customers due to the increased product and related services sales between the periods, offset by the increase in payroll and other operating costs. Net cash provided by operating activities in fiscal 2005 and 2006 primarily consisted of cash contributed by net changes in deferred revenues, accounts receivable, accrued liabilities and other operating assets and liabilities of $0.9 million and $11.5 million, stock-based compensation of $7.2 million and $8.1 million, offset by net losses of $2.8 million and $16.7 million, respectively.
 
Investing Activities
 
Net cash used in investing activities was $1.2 million, $1.4 million and $10.3 million in fiscal 2005, 2006 and 2007, respectively. Investing activities in fiscal 2007 consisted of $7.2 million cash consideration, including acquisition costs, for the purchase of the assets of Enira Technologies, LLC, $2.2 million in purchases of property and equipment and $0.8 million in a restricted cash account used to secure a standby letter of credit. Investing activities for 2005 and 2006 consisted of purchases of property and equipment to support our growth.
 
Financing Activities
 
Net cash provided by financing activities was $0.8 million, $0.5 million and $0.6 million in fiscal 2005, 2006 and 2007, respectively. In fiscal 2007, the net cash provided by financing activities consisted of proceeds from the exercise of stock options. In fiscal 2006, the net cash provided by financing activities consisted of proceeds from the repayment of certain stockholder notes and proceeds from the exercise of stock options. In fiscal 2005, the net cash provided by financing activities consisted of proceeds from the exercise of Series C preferred stock warrants, the repayment of stockholder notes and the exercise of stock options.


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Other Factors Affecting Liquidity and Capital Resources
 
We believe that our cash and cash equivalents and any cash flow from operations will be sufficient to meet our anticipated cash needs, including for working capital purposes, capital expenditures and various contractual obligations, for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional equity securities or to obtain a credit facility. The sale of convertible debt securities or additional equity securities could result in additional dilution to our stockholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financial covenants that would restrict our operations. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. We anticipate that, from time to time, we may evaluate acquisitions of complementary businesses, technologies or assets. However, there are no current understandings, commitments or agreements with respect to any acquisitions.
 
Off-Balance Sheet Arrangements
 
As of April 30, 2007, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.
 
Contractual Obligations and Commitments
 
We lease facilities for our corporate headquarters, subsidiaries and regional sales offices. We lease our principal facility in Cupertino, California under a non-cancellable operating lease agreement that expires in October 2013. We also have leases for our regional sales offices that are for 13 months or less.
 
The following table is a summary of our contractual obligations as of April 30, 2007:
 
                                         
    Payments Due by Period  
          Less than 1
                More than
 
Contractual Obligations
  Total     Year     1-3 Years     3-5 Years     5 Years  
    (in thousands)  
 
Operating lease obligations
  $ 12,896     $ 1,797     $ 3,773     $ 4,057     $ 3,269  
Contractual commitments
    557       202       355              
Total
  $ 13,453     $ 1,999     $ 4,128     $ 4,057     $ 3,269  
 
Following the end of fiscal 2007, in May 2007, we entered into a royalty commitment agreement under which we will make payments totaling $3.9 million through April 2009.
 
Recent Accounting Pronouncements
 
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, or SFAS 155, which amends the guidance in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair-value basis. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We do not expect the adoption of SFAS 155 to have a material impact on our consolidated results of operations, financial position or cash flows.
 
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, or FIN 48, which specifies how tax benefits for uncertain tax positions are to be recognized, measured and derecognized in financial statements. FIN 48 also requires certain disclosures of uncertain tax positions and specifies how reserves should be classified on the balance sheet. FIN 48 is effective for us in the first quarter of fiscal 2008. We will adopt FIN 48 in the first quarter of fiscal 2008, and are currently evaluating the effect, if any, the adoption of FIN 48 will have on our results of operations, financial position and cash flows.
 
In September 2006, the Securities and Exchange Commission issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, or SAB 108.


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SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. The adoption of SAB 108 during the fiscal year ended April 30, 2007 did not have a material impact on our consolidated results of operations, financial position or cash flows.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement, or SFAS 157, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement does not require any new fair value measurements. SFAS 157 is effective for all financial statements issued for fiscal years beginning after November 15, 2007. We are currently assessing the impact, if any, the adoption of SFAS 157 will have on our consolidated results of operations, financial position and cash flows.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159, including an amendment of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which allows an entity to choose to measure certain financial instruments and liabilities at fair value. Subsequent measurements for the financial instruments and liabilities an entity elects to measure at fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adopts SFAS 157. We are currently evaluating the effect, if any, the adoption of SFAS 159 will have on our consolidated results of operations, financial position and cash flows.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.
 
Foreign Currency Exchange Risk.  To date, substantially all of our international sales have been denominated in U.S. dollars. We utilize foreign currency forward and option contracts to manage our currency exposures as part of our ongoing business operations. We do not currently expect to enter into foreign currency exchange contracts for trading or speculative purposes.
 
Interest Rate Risk.  We had cash and cash equivalents totaling $16.9 million at April 30, 2007. These amounts were primarily invested in money market funds and held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we do not believe that we have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income.


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BUSINESS
 
Overview
 
We are a leading provider of security and compliance management solutions that intelligently mitigate business risk for enterprises and government agencies. Much like a “mission control center,” our ESM platform delivers a centralized, real-time view of disparate digital alarms, alerts and status messages, which we refer to as events, across geographically dispersed and heterogeneous business and technology infrastructures. Our software correlates massive numbers of events from thousands of security point solutions, network and computing devices and applications, enabling intelligent identification, prioritization and response to external threats, insider threats and compliance and corporate policy violations. We also provide complementary software that delivers pre-packaged analytics and reports tailored to specific security and compliance initiatives, as well as appliances that streamline threat response, event log archiving and network configuration.
 
We have designed our platform to support the increasingly complex business and technology infrastructure of our customers. Our platform ships with over 240 pre-built software connectors for products from approximately 100 vendors. It also integrates easily with products for which we do not provide pre-built connectors and with proprietary enterprise applications to ensure that event logs from these products are seamlessly integrated into our platform for intelligent correlation and analysis. As of April 30, 2007, we have sold our products to more than 350 customers across multiple industries and government agencies in the United States and internationally, including companies in the Fortune Top 5 of the aerospace and defense, energy and utilities, financial services, food production and services, healthcare, high technology, insurance, media and entertainment, retail and telecommunications industries, and more than 20 major U.S. government agencies.
 
Our Industry
 
Heightened Risks of a Real-Time Business Architecture
 
Enterprises and government agencies increasingly utilize interconnected IT infrastructure to enhance efficiency and achieve business advantage. As more devices, applications and business processes are integrated into these networks, the power, utility and extensibility of the network grows. Organizations have used these improvements to transform their IT infrastructures into platforms to conduct transactions with customers, suppliers, employees and other partners in real-time. While the adoption of and reliance on this new interconnected IT infrastructure has significantly enhanced productivity and lowered the cost of doing business, it also has exposed organizations to heightened risk. These risks include:
 
  •  External Threats.  Historically, threats from external sources have originated from “hobbyist” hackers who introduce malicious code into the IT infrastructure or deface or disable a corporation’s Web presence. More recently, hackers have increasingly participated in highly sophisticated, well organized and financially motivated crime rings, launching attacks aimed at identity theft, credit card fraud, extortion and industrial espionage. In addition, terrorists and some nation-states engage in espionage or cyberwarfare by targeting key elements of a nation’s infrastructures, such as financial exchanges, power grids and pipeline and transportation networks. In recent years, the sophistication and speed of these attacks have increased. Today, attacks can propagate worldwide in minutes, severely impacting service levels for critical infrastructure applications and business processes, such as voice and electronic communications, enterprise resource planning and financial transactions, and can disrupt entire corporate and civil infrastructures.
 
  •  Insider Threats.  In recent years, the open and distributed nature of corporate and government networks, as well as the rising level of IT sophistication of the average user, have increased the risk of malfeasance or negligence on the part of trusted individuals “within” the network, such as employees, partners or contractors. Malicious insider threats include, for example, misuse by an IT professional of administrative access to attack the corporate network and unauthorized copying proprietary information by an employee to an external memory device for use by a third party. Organizations also are threatened by employee negligence, such as unauthorized employee download of potentially vulnerable or harmful applications. Insider threats account for an increasingly large portion of security attacks, especially in large enterprises. In 2007, a study by the TheInfoPro, an industry publication, revealed that 59% of organizations have


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  experienced security losses attributed to insiders, with nearly one in five attributing more than 75% of their security incidents to insiders.
 
  •  Regulatory Non-Compliance and Corporate Policy Violations.   Several new laws and regulatory initiatives mandate that enterprises design, implement, document and demonstrate controls and processes to maintain the integrity and confidentiality of information transmitted and stored on their IT systems. Many of these compliance mandates require enterprises to archive and retrieve data from the significant volume of event logs being generated by IT devices, in some cases for as long as seven years. Examples of these mandates include the Sarbanes-Oxley Act, the Health Insurance Portability and Accountability Act (HIPAA), the Basel II framework for the banking industry, the Payment Card Industry (PCI) Data Security Standard, the Federal Information Security Management Act (FISMA) and the new Federal Rules of Civil Procedure. According to a January 2007 study of Fortune 1000 companies by TheInfoPro, compliance was listed as the top IT security-related “pain point.” In addition to compliance with regulations, enterprises and government agencies require their employees to comply with numerous organizational policies, such as confidentiality guidelines, acceptable use policies and intellectual property protection.
 
The repercussions for enterprises and government agencies from external threats, insider threats and compliance violations continue to increase in severity, causing such adverse effects as prolonged network outages, adverse publicity and damage to organizational reputation and brand, loss of confidential information such as credit card and social security numbers and various legal ramifications. Given the potential severity of such repercussions, these issues increasingly have become an area of focus among the senior-most decision makers, auditors, regulators and even at the board of directors level, and are no longer confined to network administrators and IT security professionals.
 
Challenges Facing Organizations to Effectively Mitigate These Risks
 
A large organization typically employs thousands of devices and applications in its business and technology infrastructure, including:
 
  •  security appliances, such as firewalls, virtual private networks, or VPNs, and intrusion detection and prevention systems, or IDPs;
 
  •  end-user devices, such as personal computers, or PCs, mobile phones and personal digital assistants, or PDAs;
 
  •  network equipment, such as routers, switches and media gateways;
 
  •  storage systems, such as storage area networks, or SANs, and network attached storage, or NAS;
 
  •  computing infrastructure, such as servers and mainframes;
 
  •  other IP-enabled devices that are increasingly supplanting the functionality of traditional offline corporate functions, such as IP-video cameras, badge readers, and phone systems;
 
  •  applications and their associated databases, including enterprise resource planning, or ERP, and customer relationship management, or CRM, systems and custom applications; and
 
  •  other systems related to business processes that are performed in real-time by customers, employees and partners such as point-of-sale and inventory control systems, trading exchange platforms, supply-chain management, electronic banking, human resource management and customer record-keeping platforms.
 


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(FLOW CHART)
 
The heterogeneous applications and devices in the business and technology infrastructure generate massive amounts of disaggregated event data, challenging organizations to collect this information, identify threats among the “white noise” of normal activity and respond efficiently and effectively to identified threats.
 
Traditional Management Solutions Are Either Limited in Scope or Not Equipped to Handle Event Data in Volume
 
Each of the devices and applications in an organization’s architecture, which we refer to as event sources, generates a log, which is a digital record of all events associated with that device or application. For example, an event is recorded when an email server sends or receives a single email, a database server provides a customer record or an employee swipes his identification badge when entering the corporate headquarters. A single device or application can generate thousands of events in a single day and, in aggregate, the thousands of event sources attached to a global, distributed enterprise can generate millions of events daily.
 
Organizations typically use separate vendor-specific management consoles to collect, monitor and manage the information and events being generated by devices and applications from that vendor. This approach creates multiple, separate and narrow views of the event activity occurring across their business and technology infrastructures. Organizations also attempt to gain a broader, more integrated view of IT activity by using systems management framework tools. However, these tools provide only a basic understanding of the operating parameters of the devices, such as current CPU capacity or available throughput. In addition, these systems management tools are not designed to collect and analyze large volumes of streaming event data.
 
Organizations Are Unable to Distinguish Threats from “White Noise” and Prioritize Them in Real-Time
 
Most of the thousands of streaming events that occur every second in any organization, are normal and non-threatening activity. However, there are pieces of valuable information within the event stream related to unusual activity or patterns of behavior that may identify an impending security, compliance or business threat. As a result of

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the large volume and siloed view of events, organizations generally have difficulty identifying events that are threatening in nature because they are unable to:
 
  •  distinguish threats from the “white noise” of normal events in the event stream;
 
  •  understand the context in which the events arise, including relationships between events; and
 
  •  appropriately prioritize responses in real-time.
 
Some basic examples of this challenge include:
 
  •  An employee is logged onto the corporate network remotely through a VPN connection, while a physical badge reader simultaneously detects that the employee has entered corporate headquarters. Individually, both of these activities appear normal in nature as they are occurring, although when seen in context identify a potential threat.
 
  •  A threat has targeted two servers, both of which are physically identical and running the same operating system, although one server is a print server and the other is running a critical transaction processing application for customers. Given the similar characteristics, a security analyst, without additional information, must arbitrarily choose to start remediation of the threat on one of the servers. Choosing to begin with the lower priority server could result in significant damage to the enterprise by allowing the critical server to be compromised.
 
  •  An IDP identifies a known threat and generates an alarm that requires investigation by a security analyst. Upon investigation, the analyst learns that the threat was targeting a system that was not vulnerable to that particular threat and therefore wasted effort on a false alarm.
 
The inability of an organization to understand the link between related events and the context in which they arise, including the business value, compliance status and vulnerability status of the targeted assets, makes it very difficult to identify and prioritize those events that represent a security, compliance or business risk.
 
Response Processes Are Slow and Labor-Intensive
 
Effectively responding to identified threats and non-compliance with regulations and organizational policy is challenging because response usually requires coordination among IT security teams, network operations teams, application engineering teams and others. This coordination often triggers a labor intensive workflow, including submitting requests into the trouble ticketing system, identifying all necessary individuals, orchestration of meetings to facilitate discussion of a remediation strategy and documenting the changes that are made. Furthermore, given the increasing complexity of the IT environment, organizations are often slow to shut down or modify the configuration of any device or application, for fear that the remedial action may trigger further vulnerabilities or cause other parts of the IT infrastructure to fail.
 
Organizations Require a Highly Scalable and Intelligent Technology Platform with Real-Time Event Correlation to Effectively Mitigate Business Risk
 
To address these challenges, enterprises and government agencies require a technology platform that can collect, correlate, respond to and archive all of the events across an organization’s business and technology infrastructure in order to provide real-time management of the organization’s vulnerability to external threats, insider threats and compliance and corporate policy violations. This technology platform must:
 
  •  collect event data from devices and applications manufactured by many different vendors as well as proprietary solutions;
 
  •  process and archive streaming data from a globally dispersed network of thousands of event sources as soon as they are captured, or in “real-time”;
 
  •  correlate this event data in order to identify and prioritize threats across the organization;
 
  •  provide a centralized easy to understand view of these threats;


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  •  enable an automated response workflow that conforms to an organization’s policies;
 
  •  store event data for compliance purposes and forensic analysis; and
 
  •  facilitate network configuration changes to isolate threats and prevent recurrence.
 
The market for security and compliance management solutions today includes security information and event management, forensics and incident investigation, policy and compliance management and network change and configuration management. According to a report by International Data Corporation, or IDC, the security information and event management, forensics and incident investigation, and policy and compliance management markets are projected to grow, in aggregate, from $993.6 million in 2007 to $2.2 billion in 2011, representing a compound annual growth rate of 22.1%. In separate reports, IDC projects that the network change and configuration management market will grow from $157.1 million in 2007 to $372.6 million in 2011, representing a compound annual growth rate of 24.1%, and the compliance infrastructure software market, in which we also compete, will grow from $6.2 billion in 2007 to $10.6 billion in 2010, representing a compound annual growth rate of 19.5%.
 
Our Solutions
 
We are a leading provider of security and compliance management software solutions that intelligently mitigate business risk for enterprises and government agencies. Much like a “mission control center,” our solution delivers a centralized, real-time view of events across geographically dispersed and heterogeneous business and technology infrastructures. Our ESM platform collects streaming data from event sources, translates the streaming data into a common format, and then processes the data with our correlation engine in which complex algorithms determine if events taking place conform to normal patterns of behavior, established security policies and compliance regulations. Our platform identifies and prioritizes high-risk activity and presents a consolidated view of threats to the business and technology infrastructure in rich, graphical displays. Once threats are identified, our recently introduced TRM and NCM appliance products help our customers easily re-configure network devices to remediate threats and prevent recurrence. In addition, through our new Logger appliance we enable efficient and scalable storage, preservation and management of terabytes of enterprise log data for compliance requirements or forensic analysis. Our customers enhance the value of other security products in their business and technology infrastructure by integrating them with our platform.
 
Key benefits of our solutions include:
 
Enterprise-Class Technology and Architecture.  We design our solutions to serve the needs of even the largest organizations, which typically have highly complex, geographically dispersed and heterogeneous business and technology infrastructures. We deliver enterprise-class solutions by providing:
 
  •  Interoperability.  We provide off-the-shelf software connectors for over 240 products, including security devices, end-user devices, networking equipment, computing infrastructure, other IP-enabled devices, and enterprise applications and databases, from approximately 100 vendors, allowing our customers to rapidly deploy our platform in their existing business and technology infrastructures.
 
  •  Flexibility.  In addition to providing off-the-shelf connectors, our ESM platform is designed to enable customers to rapidly build interfaces to new products, proprietary applications and legacy systems.
 
  •  Scalability.  Our ESM platform enables customers to collect and correlate millions of events per day from a large number of heterogeneous devices and applications in real-time. Once customers have installed our ESM platform, our product architecture enables customers to incorporate additional departments, branch offices or geographies, as well as additional categories of devices and applications, while maintaining the overall performance of the platform.
 
  •  Archiving.  Our solution provides organizations with cost-effective long-term storage of and an ability to search across event log data by centralizing event log archiving onto a dedicated hardware appliance. This also helps customers store event data to satisfy regulatory recordkeeping requirements.


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Intelligent Correlation.  Our correlation engine intelligently distills millions of events occurring daily into information that allows customers to identify, prioritize and respond to specific threats or compliance violations. Our correlation engine accomplishes this by:
 
  •  analyzing common data elements, such as time of occurrence, type of behavior, source, destination and geographic location, contained within multiple events to establish relationships or identify events that, alone or in combination, signify a threat across the infrastructure independent of the device type or device vendor that generated the event;
 
  •  differentiating event sources by their relative level of importance to business or compliance function, enabling the correlation engine to prioritize event sources such as Web or transaction processing applications over print servers, for example;
 
  •  factoring in known security vulnerabilities of targeted assets, such as systems that have not been patched for the relevant threat;
 
  •  establishing a record of user roles and identity, enabling our engine to differentiate for example between an intended user, such as a human resources professional, who is accessing a sensitive employee database and a user whose access is more questionable, such as a consultant; and
 
  •  storing and comparing event data over time to capture not only rapidly executing threats but also low-profile, slowly emerging attacks that may unfold over days, weeks or even months.
 
Our correlation engine includes over 100 standard rules that address common security and compliance issues and business risks and enables customers to write customized rules that apply their specific security and compliance policies. Our complementary pattern discovery technology allows users to automatically generate new rules to address patterns of activity specific to their technology infrastructure.
 
Streamlined Response and Seamless Workflow.  Our products simplify the management of the broad range of notifications and actions that must take place to remediate a threat and prevent recurrence across the technology infrastructure, thus narrowing the period of vulnerability. Once our correlation engine has prioritized a security, compliance or business risk and pinpointed the business assets that are exposed, our response technology recommends a precise set of remediation steps, based on the customer’s specific topology and consistent with the customer’s policy directives, designed to minimize the impact on related devices or applications. Based on this knowledge, our products can either automatically implement the recommended network configuration changes or follow pre-determined workflow by generating an incident response ticket that enables our customers to manage the remediation process.
 
Reporting and Visualization.  We present threat information through a rich and intuitive graphical user interface. Our user interface enables customers to perform a variety of tasks to gain insight into threats across their infrastructure, such as monitoring and analyzing overall threats in real-time, drilling down to investigate a single incident, responding to incidents or creating a new policy setting. Our ESM platform contains approximately 350 standard report templates that address common security, compliance and business risk reporting requirements. Our software also allows customers to design their own reports. With our user interface, customers can view risk across their organization in a variety of ways, address internal and external compliance requirements and communicate the value and effectiveness of the organization’s security operations.
 
Our Strategy
 
Our objective is to be the leading provider of security and compliance management software solutions that intelligently mitigate business risk for enterprises and government agencies. The key elements of our strategy to achieve this objective include:
 
Grow Our Customer Base.  We have provided our products to over 350 customers and plan to increase our customer base in the future by:
 
  •  Expanding Our Geographic Coverage.  While we generate most of our revenues from customers based in the United States, and we continue to experience significant domestic growth, a growing portion of our


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  revenues are from customers based in Europe, the Middle East, the Asia-Pacific region and elsewhere. We intend to increase our presence globally by expanding our direct sales force and building additional relationships with local and regional value added resellers and distribution partners in these markets.
 
  •  Further Penetrating the Mid-Market.  While our sales to date have primarily been to Global 2000 companies and government agencies, we are increasingly experiencing demand from mid-market customers, predominantly driven by their regulatory compliance needs. We are investing in research and development, sales, marketing, training and other resources to develop products and extend our network of channel partners to market our solutions, particularly our appliance-based products, to this target market.
 
Deepen Our Penetration of Existing Customers.  We intend to further penetrate our customer base by encouraging and facilitating expanded deployments of our products and introducing new solutions. The more broadly enterprises deploy our platform to manage their security, compliance and business risk, the more our platform becomes an integral component of their infrastructure. We expect our TRM, Logger and NCM appliances to generate opportunities for additional sales to our installed base as customers build on their existing implementation. We are investing in in-house sales professionals and strategic account managers to focus on selling more products into our existing installed base. We are also growing our dedicated Customer Success team to help customers realize more value from and potentially expand their implementations of our products.
 
Extend Our Partner Network.  We work with a wide range of technology partners, including CA, Cisco Systems, IBM, Juniper Networks, McAfee, Oracle, SAP and Symantec, and other vendors, such as Check Point Software Technologies, Trend Micro and Websense. We plan to continue to work with these and other technology vendors to provide for compatibility between our platform and their latest products. To facilitate the independent development of connectors by our partners and customers, we publish an open event format standard called Common Event Format, or CEF. As the adoption of CEF increases, the value of this standard increases and drives additional sales opportunities by expanding our event feeds and the range of risks that our platform can address.
 
Extend Our Expertise in Security Best Practices.  We maintain significant in-house expertise in security best practices and intend to leverage and expand our expertise into other areas of risk. We plan to continue to help our customers realize faster time to risk reduction by providing additional pre-packaged software solutions that are tailored to address specific security and regulatory concerns, as with our existing IT governance, Sarbanes-Oxley and Payment Card Industry (PCI) compliance, and Insider Threat packages. For example, we plan to develop packages that address the Basel II Framework and the Gramm-Leach-Bliley Act.
 
Extend Our Value Proposition to More Event Sources and Business Use Cases Beyond Traditional IT Security. We intend to create new sales opportunities by developing solutions that address high-value additional use cases for our platform. In addition to using our software to mitigate risk from external or insider threats and to satisfy compliance requirements, we believe that enterprises are increasingly finding value in leveraging our highly scalable, real-time event correlation platform for applications beyond security to mitigate additional risks associated with their specific business practices. Two examples of potential uses of our ESM platform beyond traditional IT security include:
 
  •  a financial services company using our products to monitor online stock transactions to detect likely cases of fraud and abuse; and
 
  •  an energy company using our products to monitor and prevent attacks on their pipeline control systems by correlating information from conventional network threat detection systems and process control logs, such as event data from supervisory control and data acquisition (SCADA) systems.
 
We believe that other organizations face similar business risks that threaten the efficiency or effectiveness of their business or the integrity of the product or service that they provide to their customers. As more enterprises use our platform to mitigate these risks, we will become an even more strategic part of our customers’ technology infrastructure.


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Products
 
(FLOW CHART)
 
ArcSight ESM.  ArcSight ESM, our flagship product, is designed specifically to address the security, compliance and business risk concerns of large, geographically-distributed organizations with complex, heterogeneous IT environments. ArcSight ESM serves as the “mission control center” for managing risks across an organization’s entire business and technology infrastructure. The key elements within ArcSight ESM include:
 
  •  ArcSight Connectors.  Connectors are software that collect event data streams from sources across an organization’s business and technology infrastructure. These connectors then implement extensive normalization capabilities to restructure event data into a common taxonomy so events from hundreds of different sources can be compared meaningfully and queried systematically irrespective of which device is reporting the information. The normalized event data stream is then intelligently aggregated and compressed to eliminate irrelevant and duplicate messages and reduce bandwidth and storage consumption. Our SmartConnectors receive and translate event data streams from over 240 different devices and applications from approximately 100 vendors and in more than 30 different solution categories. Further, using our FlexConnector toolkit, our customers can create custom connectors tailored to their environment, such as for new products, proprietary applications and mainframe and other legacy systems. Our connectors can be deployed on intermediate collection points, such as third-party management consoles, where available, avoiding the requirement to provision our connectors directly onto end devices.
 
  •  ArcSight Manager.  ArcSight Manager is server-based software that manages event aggregation and storage, controls the various elements of our platform and provides the engine for high-speed real-time correlation and incident response workflow. ArcSight Manager comes with over 100 standard rules that address common security and compliance issues and business risks. It also provides an intuitive system that enables customers to write customized rules that apply an organization’s security and compliance policies into the real-time analytics of the correlation engine as well as seamless integration with rules generated by our Pattern Discovery product. ArcSight Manager enables real-time collaboration and case management among security analysts, to track risk-prioritized response and remediation. In addition, it provides case resolution metrics to demonstrate security and compliance process and control effectiveness. Our case management system also can integrate with third party trouble ticketing systems, such as BMC Software. Our architecture was designed to allow customers to scale from a single centralized deployment to a distributed, global deployment by deploying additional Managers that work in concert.


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  •  ArcSight Console and ArcSight Web.  ArcSight Console is the primary user interface to interact with and control the ArcSight ESM platform. Through its intuitive interface, the Console provides administrators, analysts and operators with graphical data summaries and an intuitive interface to perform tasks ranging from real-time monitoring and analysis to incident investigation and response to system administration and authoring of new content. The Console is highly configurable to reflect individual customer environments and can display threat and risk information in a wide variety of formats including geographically, by division or line of business, by type of threat, and by compliance or policy initiative. With ArcSight Console, customers can run a wide variety of reports to answer internal and external compliance audits and communicate the value and effectiveness of the organization’s security operations. We also provide an authoring system which customers can use to create new reports to meet their specific business needs. Our ESM platform contains approximately 350 standard report templates that immediately address common security, compliance and business risk reporting requirements. To facilitate remote access for IT administrators as well as provide a portal for line-of-business viewing of status summaries and scheduled reports, our ArcSight Web product provides browser-based access to all Console functions and content, except administration and authoring.
 
ArcSight Compliance Insight and Insider Threat Packages.  We offer pre-packaged software solutions that enable our ESM platform to provide technical- and business-level checks on corporate compliance with regulatory and policy requirements for perimeter security, protection of key business processes, threat management and incident response. These packages, which are tailored to address specific regulatory or policy concerns, comprise relevant rules and reports to accelerate implementation by our customers and can be customized or extended by the customer:
 
     
Package
 
Application
 
ArcSight Compliance Insight Package for IT Governance   Monitoring, assessing and reporting of compliance with the updated ISO-17799:2005 and the NIST 800-53 standards.
     
ArcSight Compliance Insight Package for Sarbanes-Oxley   Monitoring, assessing and reporting applicable to IT-related internal controls for financial reporting.
     
ArcSight Compliance Insight Package for PCI   Monitoring, assessing and reporting IT-related risks in accordance with the twelve requirements of the PCI standard.
     
ArcSight Insider Threat Package   Monitoring, assessing and reporting suspicious activities common to insider threats, such as inappropriate access or transmission of sensitive data, or the internal use or presence of hacking tools.
 
ArcSight Discovery Modules.  Our ArcSight Discovery modules, which provide additional advanced analytics and visualization on our ESM platform, include:
 
  •  Our ArcSight Pattern Discovery software is a powerful complement to our correlation engine. It is an advanced pattern identification engine that retrospectively examines large amounts of security events previously collected and processed by ArcSight ESM to discover patterns of activity that may be characteristic of threats, such as emerging worms, new worm variants, self-concealing malware, and low profile, slowly developing attacks. Pattern Discovery proactively alerts the security operations analyst about existing or emerging patterns that are not comprehended by any rules in our correlation engine, and provides the customer the option to classify the patterns and also to optionally or automatically generate new rules for our ESM platform that will detect and respond to similar threatening patterns in the future.
 
  •  Our ArcSight Interactive Discovery visualization software helps IT security professionals pan, zoom and switch perspectives across complex technical data to perform in-depth analysis of security data as well as


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  featuring visuals and drill-down capabilities that enable non-technical employees to see relevant threat information in a non-technical format.
 
In addition to our software products, we have a suite of appliances that enable automated network response, event log archiving, and configuration capabilities.
 
ArcSight TRM (Threat Response Manager).  ArcSight TRM enables customers to quickly and precisely reconfigure network control devices to remediate security, compliance and business risks, consistent with an organization’s policy directives. TRM profiles a network’s topology through communication with devices without the need to install a software agent on the device. Through advanced algorithms, it can identify the exact location of any node (wireless, wired or VPN) on the network, analyze, recommend and, at the customer’s option, execute specific, policy-based actions in response to a threat, attack or other out-of-policy situation. TRM can block, quarantine or filter undesirable users and systems at the individual port level. The user account control feature in ArcSight TRM defines task groups, allowing control and restricted access rights in accordance to individual job tasks and descriptions. ArcSight TRM integrates seamlessly with ArcSight ESM to accelerate incident response by facilitating the coordination between the security and networking groups, thus improving the effectiveness of the response and acute remediation function.
 
ArcSight Logger.  ArcSight Logger enables organizations to collect and store event data in support of security and compliance requirements. Logger provides customers with an easily searchable log data repository that can be leveraged across networking, security and IT operations teams. Access controls and intelligent search technology enable customers to interact with historical raw event data for insight into specific events. ArcSight Logger provides approximately 10:1 compression capability of event data. Multiple ArcSight Loggers can be deployed to linearly scale both storage and performance. Logger can flexibly and selectively forward security events to ESM for real-time, cross-device correlation, visualization and threat detection. In turn, ESM can send correlated alerts back to Logger for archival and subsequent retrieval. As with our ESM platform, Logger is also the basis for its own add-on Compliance Insight Packages, such as our Logger Compliance Insight Package for Sarbanes-Oxley.
 
ArcSight NCM (Network Configuration Manager).  ArcSight NCM automates the definition, implementation and audit of network topology. NCM provides a wizard-based interface to define the desired configuration, reconfigure out-of-policy devices, and maintain protected records of all prior configurations for purposes of rollback, audit and compliance reporting. NCM presents network topology in a visual format, allowing organizations to identify mis-configurations, redundant links and multiple wide area network (WAN) access routes. NCM dynamically compares existing device configuration and highlights discrepancies from desired configuration policies that generally map to regulatory requirements, operational guidelines and business rules.
 
Maintenance and Professional Services
 
We offer a range of services after a sale occurs, principally in installation and implementation, project planning, advice on business use cases and training services that complement our product offerings. Initial implementation of our ESM platform typically is accomplished within two to four weeks. On an ongoing basis, we offer consulting services and training related to application of our ESM platform and associated complementary products to address additional or customer-specific security and compliance issues and business risks. Following deployment, our technical support organization provides ongoing maintenance for our products. We provide standard and, for customers that require 24-hour coverage seven days a week, premium tiers of maintenance and support which cover telephone- and web-based technical support and updates to our software during the period of coverage. Our three major support centers are located in Hong Kong, London and Cupertino, California. In addition, we sell an enhanced maintenance service that provides regular security content updates for our software. These content updates reflect emerging threats and risks in the form of signature categorization, vulnerability mapping and knowledge base articles on an ongoing basis.


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Case Studies
 
Examples of deployments of our flagship ESM platform include:
 
  •  Traditional External Threat.  A Fortune 100 financial services firm noticed that its efforts to remedy worm infestations were taking weeks and consuming excessive time and resources. As worms evolved faster than defense mechanisms like anti-virus solutions, firewalls and intrusion detection systems, their ability to penetrate the company’s infrastructure and propagate rapidly was increasing. The customer turned to our ESM platform to utilize the event data coming from a diverse set of existing security devices to provide an early warning system that identified the location and propagation mechanism of worm-like behavior. The customer now employs ArcSight ESM to coordinate and enhance its virus detection solutions and over time has reduced the time between worm detection and eradication from days to hours while reducing the number of affected systems by a similar margin.
 
  •  Emerging External Threat.  A major international telecommunications operator was concerned that mobile malware was propagating rapidly through its wireless networks, potentially impacting quality of service by reducing bandwidth and disrupting handset operation. The customer utilized our ESM platform to collect and monitor event data on its 3G systems to identify malware behavior profiles and gain a clear understanding of the impact of malware on its network. By implementing our software, the company was able to assess the risk from mobile malware and its potential impact on service level agreement non-compliance and protect against damage to its networks.
 
  •  Insider Threat.  A large aerospace company operates under a number of government regulations concerning use of its network, actions of partners and protection of sensitive information. The organization turned to us to significantly enhance monitoring of user privilege access control and data flow. The customer used our ESM platform to implement custom rules to identify intellectual property leak risks such as alerting the customer whenever a sensitive file that was accessed and then subsequently sent to an external location. Our solution allowed the customer to assign priority levels to various files across its infrastructure, in order to facilitate a response and remediation workflow that matches the urgency of the threat. After implementing our software, the customer was able to increase its ability to monitor intellectual property leakage incidents and non-U.S. access to their network.
 
  •  Compliance.  To comply with Section 404 of the Sarbanes-Oxley compliance framework, enterprises must monitor access and configuration changes to critical financial reporting and accounting systems, including ERP systems, databases and the associated operating systems. A customer did not have centralized log review to support these tasks, and lacked necessary detective controls. The customer deployed our ESM platform and the ArcSight Compliance Insight Package for Sarbanes-Oxley to help manage their compliance efforts by collecting event data from these systems and correlating them in real-time against predefined corporate policies. Our software provided the customer with an efficient platform for Sarbanes-Oxley compliance while improving efficiency and satisfying both internal and external auditors with a demonstrable, repeatable process.
 
  •  Application Beyond Traditional Security.  A leading online broker was experiencing significant increases in fraud and account misuse resulting in customer dissatisfaction and intensified regulatory scrutiny. New forms of identity theft continued to outpace the customer’s ability to catch fraud at the point of user authentication which meant that it needed a mechanism to detect fraudulent behavior after user sign-on. The customer now uses our ESM platform to monitor and analyze transactions as they occur as part of its overall fraud management system. As a result, the company’s fraud oversight group is now seeing a real-time view of abnormal activity before it has a chance to cause material financial loss, reducing both the firm’s and its customer’s exposure.
 
Product Development and Technology
 
We have developed and continue to enhance technologies that underlie three core features incorporated into one or more of our products.


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Multi-Vector Correlation
 
The strengths of our correlation engine are its contextual analysis, mathematical correlation, identity correlation and timestamp and time window analysis techniques.
 
  •  Contextual Analysis.  A core strength of our correlation engine is its ability to separate “white noise” from actionable events. Our correlation engine evaluates, among other considerations, whether the targeted device or application actually exists in the infrastructure, known vulnerabilities of the targeted device or application, the business value of the targeted device or application, whether the potential attack is from a known malicious device and prior history of the source or target.
 
  •  Mathematical Correlation.  Our platform implements classical mathematical correlation models in the context of security events. This allows arbitrary security attributes to be tracked to determine whether they are positively or negatively covariant or independent and allows moving average analyses to be used to flag behavior that has anomalous deviations from a cyclical norm. Moving average analysis compares events to a baseline that automatically adjusts for normal deviations in patterns of activity, eliminating the problem of comparing data for anomalies against an incorrect or fixed baseline.
 
  •  Identity Correlation.  Our correlation engine, using our session list management capabilities, automates identity-related investigations that would normally require exhaustive manual labor to perform. Logged events generally report only low level identifying information, such as a source IP address and a target IP address. In a typical network environment, addresses are constantly reassigned as sessions are initiated and terminated, which makes it difficult, if not impossible, to know which user was using a specific IP address over time. Our correlation engine solves this problem by collecting records from the systems that are performing the dynamic assignments of these addresses, such as dynamic host configuration protocol (DHCP) server logs or VPN logs, and then using that information to analyze the logs from other reporting systems, such as firewalls. This allows our correlation engine to attribute actions originating from a specific device to its owner. For example, our session list manager can track which users accessed a given network node at a given time or over time by tracing events that originated from each relevant device to the user who was logged in at that time, and can list all users logged onto a particular system or accessing a particular asset at the time of an attack.
 
  •  Timestamp and Time Window Analysis.  Event sources typically have wide variations in clock settings, and distributed and complex networking environments can introduce lags in the transmission of event data prior to its receipt by our correlation engine. In order to overcome the varying amounts of delay or latency in the release or receipt of data from event sources, and the clock drift or inaccuracy in the timestamps reported, our software captures multiple timestamps for every received event and normalizes them to a standard time zone, while also retaining the original timestamp. It then applies proprietary time discrepancy detection techniques, and performs both manual and automatic clock drift corrections, as necessary, to align the events for more accurate correlation. Our correlation engine is designed to accurately match time-bounded sequences of events that occur across sliding time windows, such as a specified number of failed logins within a specified period.
 
Scalable Architecture
 
We designed the architecture of our ESM platform so that it can scale and adjust to the ongoing needs of an organization.
 
  •  Cross-Platform.  Our products operate on multiple platforms, including multiple versions of the Linux, UNIX, Windows, Solaris and AIX operating systems.
 
  •  Modular Connector Design.  We have used a modular framework in the design of our connectors, separating the information that describes the unique features of each data source from the components that provide functionality that can be shared across multiple connectors, such as encryption or compression capabilities. This allows for efficient development of new connectors or modification of existing connectors, as any new functionality added to new or existing connectors can be concurrently propagated to all connectors.


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  •  Multi-Manager Scaling.  We designed our ESM architecture to allow multiple instances of ArcSight Manager to be deployed on servers centrally located or distributed across an enterprise where the geographic distribution of infrastructure assets or the number of event sources and resulting volume of event data warrants in order to achieve the desired level of performance. These can then communicate with each other in either a peer-to-peer or hierarchical configuration to perform correlation, for instance allowing geographically dispersed ArcSight Managers to act as concentrators and forward information to one or more central ArcSight Managers. Consistent with this architectural approach, our connectors can communicate with multiple ArcSight Managers simultaneously, locally cache events if an ArcSight Manager is not available, and switch primary ArcSight Managers in the event of a failure. Further, decentralizing the work of translation, categorization and normalization to our connectors allows our architecture to be more scalable, since ArcSight Manager is shielded from the incremental data preparation work as the number of event sources increases.
 
  •  In-Memory Correlation and Flexible Storage.  We built an architecture that takes incoming event data as it arrives and performs real-time correlation directly in system memory, while simultaneously sending both the original event stream and the correlated output to persistent storage for archiving purposes. This allows us to correlate, display and store thousands of incoming events per second, while also retaining huge volumes of event data, and allowing quick availability to support forensic investigation. Our ESM platform also has been designed to allow a user to input a start time and end time to select events from an archive, such as ArcSight Logger, and then re-stream the selected events back through our correlation engine, applying any subsequently introduced correlation rules, and display the resulting analysis as if the events were occurring in real-time. Our Logger product employs a storage management system designed to improve disk utilization for long term storage and the speed of data retrieval for pattern analysis or investigative purposes by eliminating the disk fragmentation that typically accompanies the storage and archiving of large volumes of data on standard disk drives. Through the use of proprietary technology, disk space that is made available by data that has been deleted or archived is automatically reused without the need to execute disk “cleanup” or other administrative tools.
 
Vendor Agnostic
 
We have developed proprietary technologies that are designed to enable deployment of our products in business and technology infrastructures with a wide range of event sources.
 
  •  Translation, Categorization and Normalization.  Our connectors, which are used by both our ESM and Logger products, analyze dozens of fields or attributes in the event data and translate this data into a common taxonomy. In addition, we use this data to create six additional fields with our categorized threat taxonomy information, including the type of object being acted upon, the type of behavior being performed, what is known about the outcome of the reported event, the priority level of the event, the type of event source reporting the activity and the significance of the activity. Additionally, different vendors often will use different scales or vocabulary to describe values for the same type of data. As a result, once data has been categorized, where relevant, our connectors convert the data into a common scale, for example, harmonizing the severity level from a device that rates from 1 to 10 with 1 as most severe with a device that rates from 1 to 7 with 7 as most severe to a device that uses words to describe severity, while also preserving the original score or value. This allows customers to switch, for example, from one brand of IDP to another or add new IDPs from other vendors (whether by procurement, merger or otherwise) without having to rewrite the standard ESM or customer-authored correlation rules. In addition to facilitating correlation, our translation, categorization and normalization capabilities allow ArcSight Manager to align data from many heterogeneous event sources so that they can be meaningfully compared and queried systematically without having to design the queries to address the specifics of how the event sources are reporting information. We use a similar abstraction approach with TRM and NCM to program responses and reconfiguration rules once, and have them transparently operate in any equipment environment, sorting out the relevant details and sending the right commands to the appropriate event sources.
 
  •  Common Event Format (CEF).  We created and are promoting the adoption of a common format for event sources to output their log data. Any event source that outputs data in this format can be integrated with our


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platform without modification through our pre-packaged CEF-compatible connector. As a result, adoption of our CEF enables third-party vendors to more readily sell their devices and applications into our customer base. It also provides internal developers at our customers a simpler pathway for providing event data from their custom applications to our ESM software.
 
Customers
 
As of April 30, 2007, we have sold our products to more than 350 customers in a broad range of industries. Our customers include companies in the Fortune Top 5 of the aerospace and defense, energy and utilities, financial services, food production and services, healthcare, high technology, insurance, media and entertainment, retail and telecommunications industries, and more than 20 major U.S. government agencies. No customer accounted for more than 10% of our revenues during fiscal 2006 and 2007. Our top ten customers accounted for 32% and 31% of our product revenues during fiscal 2006 and 2007, respectively.
 
Research and Development
 
Building on our history of innovation, we believe that continued and timely development of new products and enhancements to our existing products are necessary to maintain our competitive position. Accordingly, we have invested, and intend to continue to invest, significant time and resources in our research and development activities to extend our technology leadership. At present, our research and development efforts are focused on improving and broadening the capability of each of our major product lines and developing additional products. We work closely with our customers as well as technology partners to understand their emerging requirements and use cases for our products. As of April 30, 2007, our research and development team had 89 employees. Our research and development expenses were $7.6 million, $12.2 million and $14.5 million during the fiscal years ended April 30, 2005, 2006 and 2007, respectively.
 
Sales and Marketing
 
We market and sell our software through our direct sales organization and indirectly through value added resellers and systems integrators. Historically, the majority of our sales are made through our direct sales organization. We structure our sales organization by function, including direct and channel sales, strategic accounts, technical pre-sales, customer and sales operations, and by region, including Americas, U.S. Federal, EMEA and APAC. As of April 30, 2007, we had 104 employees in our sales and marketing organizations.
 
The selling process for ArcSight ESM follows a typical enterprise software sales cycle that involves one or more of our direct sales representatives, even when a channel partner is involved. The sales cycle for an initial sale normally takes from three to six months, but can extend up to over a year for certain sales, from the time of initial prospect qualification to consummation and typically includes product demonstrations and proof of concepts. We deploy a combination of field account management supported by technical pre-sales specialists to manage the activities from qualification through close. After initial deployment, our sales personnel focus on ongoing account management and follow-on sales. To assist our customers with reaching their business and technical goals for their implementations of our products, our Customer Success Ownership, or CSO, organization meets with customers to determine their success criteria and to help formulate both short and long term plans for their deployments of our products. We also have assigned specific sales personnel to our larger, more diverse and often global customers in order to understand their individual needs and increase customer satisfaction. Historically, we used our channel partners to support direct sales of our ESM platform products. In part to address the mid-market, we are currently investing resources to develop channel partners that will operate more independently. To this end, we recently created a dedicated channel team in each of our geographic regions responsible for recruiting, managing and supporting our channel partners.
 
We focus our marketing efforts on building brand awareness and on customer lead generation, including advertising, cooperative marketing, public relations activities, web-based seminars and targeted direct mail and e-mail campaigns. We also are building our brand through articles contributed in various trade magazines, public speaking opportunities and international, national and regional trade show participation. We reinforce our brand and loyalty among our customer base with our annual users conference.


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Competition
 
Our primary product is our ArcSight ESM software platform, the key elements of which are the ESM Manager, the connectors and related toolkit for the creation of custom connectors and our Consoles that serve as the platform interface. In addition, we offer complementary software for our ESM platform that delivers pre-packaged analytics and reports tailored to specific security and compliance initiatives, and have recently introduced our complementary TRM, Logger and NCM appliances that assist our customers in threat response, log archiving and network configuration.
 
We believe that the market for a security and compliance management software platform that collects and correlates event data from across a heterogeneous IT infrastructure, which we are addressing with ArcSight ESM, is a developing market. Existing competitors for a platform-wide solution such as this product primarily are specialized, privately held companies, such as Intellitactics and NetForensics, as well as larger companies such as CA and Symantec, and EMC, IBM and Novell, through their acquisitions of Network Intelligence, Micromuse and Consul, and e-Security, respectively. A greater source of competition is represented by the custom efforts undertaken by potential customers to analyze and manage the information produced from their existing devices and applications to identify and remediate threats. In addition, some organizations have outsourced these functions to managed security services providers.
 
In addition to our existing competitors for our ESM platform, we believe that we face potential competition from a wide variety of sources that could become effective competitors. Many large, integrated software companies offer suites of products that include software applications for security and compliance and enterprise management. In addition, hardware vendors, including diversified, global concerns, offer products that address other security and compliance needs of the enterprises and government agencies that comprise our target market. If and to the extent that the market for our software platform continues to grow, we expect that large software and hardware vendors may seek to enter this market, either by way of the organic development of a competing product line or through the acquisition of a competitor.
 
For our ESM platform, we believe that we compete principally on the basis of functionality, analytical capability, scalability, interoperability with other components of the network and business infrastructure, and customers’ ability to successfully and rapidly deploy the product. We believe that we compete favorably with our existing competitors with respect to these factors.
 
The market for our TRM, Logger and NCM products is also competitive. We have limited experience with the sales of these products, and we expect that to be successful in addressing these markets we will need to work effectively with channel partners. We are unable to predict the extent to which we will be successful selling these products independently of sales of our ESM platform. Further, we may be at a disadvantage in dealing with our channel partners who also may have relationships with large competitors who offer a wide variety of products through the channel.
 
Competitors for sales of our TRM and NCM products include privately-held companies, such as Alterpoint and Voyence; larger providers of IT automation software products, such as Opsware, which Hewlett-Packard has agreed to acquire; and diversified IT security vendors. Current competitors for sales of our Logger product include specialized, privately-held companies, such as LogLogic and Sensage. In addition to these current competitors, we expect to face competition for our appliance products from both existing large, diversified software and hardware companies, from specialized, smaller companies and from new companies that may seek to enter this market. The primary competitive factors for our appliance products are functionality, price, scalability, interoperability with other components of the network and customers’ ability to successfully and rapidly deploy the product. We believe that we currently compete favorably with respect to these factors.
 
Mergers, acquisitions or consolidations by and among actual and potential competitors present heightened competitive challenges to our business. We believe that this trend toward consolidation in our industry will continue and may increase the competitive pressures we face on all our products. Further, continued industry consolidation may impact customers’ perceptions of the viability of smaller or even medium-sized software firms and consequently customers’ willingness to purchase from such firms.


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Increased competition could result in fewer customer orders, price reductions, reduced gross margins and loss of market share. Many of our existing and potential competitors enjoy substantial competitive advantages, such as wider geographic presence, access to larger customer bases and the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products, and substantially greater financial, technical and other resources. As a result, they may be able to adapt more quickly and effectively to new or emerging technologies and changing opportunities, standards or customer requirements. In addition, large competitors, such as integrated software companies and diversified, global hardware vendors, may regularly sell enterprise-wide and other large software applications, or large amounts of infrastructure hardware, to, and may have more extensive relationships within, large enterprises and government agencies worldwide, which may provide them with an important advantage in competing for business with those potential customers. These companies may also offer a large array of security or software products or may be able to offer products or functionality similar to ours at a more attractive price than we can by integrating or bundling them with their other product offerings. In addition, if our target market continues to grow small, highly specialized competitors may continue to emerge.
 
Intellectual Property
 
Our intellectual property is an essential element of our business. We use a combination of copyright, patent, trademark, trade secret and other intellectual property laws, confidentiality agreements and license agreements to protect our intellectual property. It is our policy that our employees and independent contractors involved in development are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership that they may claim in those works. Despite our precautions, it may be possible for third parties to obtain and use without consent intellectual property that we own or license. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
 
We have two issued patents and 30 patent applications in the United States, including three provisional applications. We also have 11 patent applications in foreign countries, based on two of the patent applications in the United States. We do not know whether any of our remaining patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims, except that some of our patent applications have received office actions and in some cases we have modified the claims. Any patents that may be issued to us may be contested, circumvented, found unenforceable or invalidated, and we may not be able to prevent third parties from infringing them. Therefore, the exact effect of having a patent cannot be predicted with certainty.
 
From time to time, we may encounter disputes over rights and obligations concerning intellectual property. Although we believe that our product offerings do not infringe the intellectual property rights of any third party, we cannot be certain that we will prevail in any intellectual property dispute. If we do not prevail in these disputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of our products that are determined to infringe the rights of others, and/or be forced to pay substantial royalties to a third party, any of which would adversely affect our business, financial condition and results of operations.
 
Employees
 
As of April 30, 2007, we had a total of 287 employees, consisting of 104 employees in sales and marketing, 89 employees in research and development, 36 employees in professional services, 26 in support and 32 in general and administrative functions. A total of 38 employees are located outside the United States. None of our employees is represented by a union or covered by a collective bargaining agreement. We consider our employee relations to be good and have never experienced a work stoppage.
 
Legal Proceedings
 
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a party to any material legal proceedings.


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Facilities
 
Our corporate headquarters and research and development facilities occupy approximately 80,000 square feet in Cupertino, California under a lease that expires in October 2013. In addition to our principal office space in Cupertino, we lease facilities for use as sales and local support offices in various cities in the United States and internationally. We believe our facilities are adequate for our needs for at least the next 12 months. We also anticipate that suitable additional or alternative space will be available to accommodate foreseeable expansion of our operations.


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MANAGEMENT
 
Executive Officers and Directors
 
The following table provides information regarding our executive officers and directors as of September 1, 2007:
 
             
Name
 
Age
  Position(s)
 
Executive Officers:
       
Robert W. Shaw
  60   Chief Executive Officer and Chairman of the Board of Directors
Hugh S. Njemanze
  50   Founder, Chief Technology Officer and Executive Vice President of Research and Development
Thomas Reilly
  45   President and Chief Operating Officer
Stewart Grierson
  41   Chief Financial Officer
Kevin P. Mosher
  50   Senior Vice President of Worldwide Field Operations
Reed T. Henry
  44   Senior Vice President of Marketing and Business Development
Lawrence F. Lunetta
  55   Vice President of Strategy
Trâm T. Phi
  36   Vice President, General Counsel and Secretary
Other Directors:
       
Sandra Bergeron
  49   Director
William P. Crowell(2)(3)
  66   Director
E. Stanton McKee, Jr.(1)(3)
  63   Director
Craig Ramsey(2)
  61   Director
Scott A. Ryles(1)(3)
  48   Director
Ted Schlein(2)
  43   Director
Ernest von Simson(1)(3)
  69   Director
 
(1) Member of the Audit Committee.
 
(2) Member of the Compensation Committee.
 
(3) Member of the Nominating and Corporate Governance Committee.
 
Robert W. Shaw has served as our Chairman and Chief Executive Officer since August 2001, and also served as our President until August 2007. From 1998 until its acquisition in 2001 by Whitman-Hart, Inc., Mr. Shaw served as Chief Executive Officer of USWeb Corporation, a provider of Internet professional services. From 1992 to 1998, Mr. Shaw served as Executive Vice President of worldwide consulting services and vertical markets for Oracle Corporation, a provider of enterprise software. Mr. Shaw holds a B.B.A. in finance from the University of Texas, Austin.
 
Hugh S. Njemanze co-founded ArcSight in May 2000 and has served as our Executive Vice President of Research Development and Chief Technology Officer since March 2002. From 1993 to 2000, Mr. Njemanze served in various positions at Verity, Inc., a provider of knowledge retrieval software products, most recently as its Chief Technology Officer. He holds a B.S. in computer science from Purdue University.
 
Thomas Reilly has served as our Chief Operating Officer since November 2006 and as our President since August 2007. From April 2004 to November 2006, Mr. Reilly served as Vice President of Business Information Services of IBM. From November 2000 until its acquisition in April 2004 by IBM, Mr. Reilly served as Chief


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Executive Officer of Trigo Technologies, Inc., a product information management software company. He holds a B.S. in mechanical engineering from the University of California, Berkeley.
 
Stewart Grierson has served as our Chief Financial Officer since October 2004 and also served as our Vice President of Finance from March 2003 to April 2007. In addition, from January 2003 to January 2006, he served as our Secretary. From 1999 to July 2002, Mr. Grierson served in several positions for ONI Systems Corp., a provider of optical communications equipment, including most recently as Vice President and Corporate Controller. From 1992 to 1999, he served in various roles in the audit practice at KPMG LLP. He holds a B.A. in economics from McGill University and is a chartered accountant.
 
Kevin P. Mosher has served as our Senior Vice President of Worldwide Field Operations since March 2004. From May 2002 to March 2003, Mr. Mosher served as the President and Chief Operating Officer of Rapt Inc., a provider of pricing and profitability management solutions. From 1997 to 2001, Mr. Mosher served as Senior Vice President of Sales at Portal Software, Inc., a provider of billing and customer management solutions. He also serves as a director of a private company. Mr. Mosher holds a B.A. in economics from the University of Connecticut.
 
Reed T. Henry has served as our Senior Vice President of Marketing and Business Development since May 2007. From 2001 to August 2005, Mr. Henry served in several positions for SeeBeyond Technology Corporation, a provider of enterprise integration software, including most recently as Senior Vice President, Marketing, Alliances and Business Development and previously as Senior Vice President, Professional Services, Customer Support and Alliances. Following the acquisition of SeeBeyond by Sun Microsystems, Inc. in August 2005, Mr. Henry served in the same role for Sun Microsystems until October 2005. Prior to SeeBeyond, Mr. Henry served as Vice President of Strategy and New Business at eBay, Inc., an internet auction company, and as Vice President of Marketing and Product Management for Vertical Networks, Inc., a provider of integrated voice/data communications platforms and associated computer telephony applications, which he co-founded in 1996. Mr. Henry holds a B.S. in electrical engineering from the University of Washington, an M.S. in electrical engineering from the California Institute of Technology and an M.B.A. from Stanford University Graduate School of Business.
 
Lawrence F. Lunetta has served as our Vice President of Strategy since February 2006. From September 2004 to February 2006, Mr. Lunetta served as our Chief Customer Officer. From September 2001 to September 2004, he served as our Vice President of Marketing. From April 2001 to September 2001, Mr. Lunetta served as Chief Operating Officer of EPAC Technologies, Inc., a software company. He holds a B.S. in electrical engineering from Rutgers University and an M.S. in engineering and an M.B.A. from Arizona State University.
 
Trâm T. Phi has served as our Vice President, General Counsel and Secretary since January 2006. From September 2002 to May 2005, Ms. Phi served in various positions at InVision Technologies, Inc., a manufacturer of explosives detection systems, most recently as Senior Vice President and General Counsel, including following the acquisition of InVision by General Electric Company in December 2004. From 1995 to September 2002, she was an associate at Fenwick & West LLP, a high technology law firm. Ms. Phi holds a B.A. in political science from San Jose State University and a J.D. from the University of California, Berkeley, School of Law (Boalt Hall).
 
Sandra Bergeron has served as a director since May 2006. Since June 2005, Ms. Bergeron has served as a Venture Advisor to Trident Capital, a venture capital firm. From 2001 to December 2004, Ms. Bergeron served in various positions at McAfee, Inc., a software security company, most recently as Executive Vice President of Mergers/Acquisitions and Corporate Strategy. Ms. Bergeron currently serves as a director of several private companies. She holds a B.B.A. in information systems from Georgia State University and an M.B.A. from Xavier University, Cincinnati.
 
William P. Crowell has served as a director since March 2003. Since February 2003, Mr. Crowell has worked as an independent consultant in the areas of information technology, security and intelligence systems and serves as Chairman of the Senior Advisory Group to the Director of National Intelligence. He served as President and Chief Executive Officer of Cylink Corporation, a provider of network security solutions, from 1998 until its acquisition by SafeNet, Inc. in February 2003. Prior to Cylink, Mr. Crowell worked at the National Security Agency, where he held a series of senior executive positions, including Deputy Director of Operations and Deputy Director of the NSA. He also serves as a director of several private companies. Mr. Crowell holds a B.A. in political science from Louisiana State University.


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E. Stanton McKee, Jr. has served as a director since February 2005. From 1989 until his retirement in November 2002, Mr. McKee served in various positions at Electronic Arts Inc., a developer and publisher of interactive entertainment, most recently as Executive Vice President and Chief Financial and Administrative Officer. He also serves as a director of LeapFrog Enterprises, Inc., a provider of technology-based educational products, and of a private company. Mr. McKee holds a B.A. in political science from Stanford University and an M.B.A. from Stanford University Graduate School of Business.
 
Craig Ramsey has served as a director since October 2002. From July 2003 to September 2004, Mr. Ramsey served as Chief Executive Officer of Solidus Networks Inc. (doing business as Pay By Touch), a provider of authentication and payment processing services. From 1996 to 2000, Mr. Ramsey served as Senior Vice President, Worldwide Sales, of Siebel Systems, Inc., a provider of eBusiness applications. From 1994 to 1996, Mr. Ramsey served as Senior Vice President, Worldwide Sales, Marketing and Support for nCube Corporation, a maker of massively parallel computers. From 1968 to 1994, Mr. Ramsey held various positions with Oracle Corporation, Amdahl Corporation and IBM. He also serves as a director of salesforce.com, inc., a provider of customer relationship management services, and of several private companies. Mr. Ramsey holds a B.A. in economics from Denison University.
 
Scott A. Ryles has served as a director since November 2003. Mr. Ryles has served as Vice Chairman of Cowen and Company, LLC, an investment banking firm, since February 2007. From December 2004 to September 2006, he served as Chief Executive Officer of Procinea Management LLC, a private equity firm. From 1999 to 2001, Mr. Ryles served as Chief Executive Officer of Epoch Partners, Inc., an investment bank, until its acquisition by The Goldman Sachs Group, Inc. Prior to then, Mr. Ryles served as a Managing Director of Merrill Lynch & Co., Inc. Mr. Ryles holds a B.A. in economics from Northwestern University.
 
Ted Schlein has served as a director since March 2002. Mr. Schlein has served as a partner at Kleiner Perkins Caufield & Byers, a venture capital firm, since 1996. From 1986 to 1996, Mr. Schlein served in various executive positions at Symantec Corporation, a provider of Internet security technology and business management technology solutions, most recently as Vice President of Enterprise Products. He currently serves as a director of several private companies. Mr. Schlein holds a B.A. in economics from the University of Pennsylvania.
 
Ernest von Simson has served as a director since October 2002. Mr. von Simson has served as the President of Ostriker von Simson, Inc., an information technology consulting firm, since 1999. He also served as a senior partner of Cassius Advisors, an emerging technology consulting firm, from 1999 to January 2006. Prior to then, Mr. von Simson served as a Senior Partner at The Research Board, a company that assists large companies with their information technology strategies. He currently serves as a director of two private companies. Mr. von Simson holds a B.A. in international relations from Brown University and an M.B.A. from New York University.
 
Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no family relationships among any of our directors or executive officers.
 
Board of Directors
 
Under our restated bylaws that will become effective immediately following the completion of this offering, our board of directors may set the authorized number of directors. Each director currently serves until our next annual meeting or until his or her successor is duly elected and qualified. Upon the completion of this offering, our common stock will be listed on The NASDAQ Global Market. The rules of The NASDAQ Stock Market require that a majority of the members of our board of directors be independent within specified periods following the completion of this offering. We believe that seven of our directors are independent as determined under the rules of The NASDAQ Stock Market: Ms. Bergeron and Messrs. Crowell, McKee, Ramsey, Ryles, Schlein and von Simson.
 
Pursuant to a voting agreement entered into on October 24, 2002, Messrs. Schlein and Shaw were appointed to our board of directors by certain of our investors. As of the date of this prospectus, Messrs. Schlein and Shaw continue to serve on our board of directors and will continue to serve as directors until their resignation or until their successors are duly elected by the holders of our common stock, despite the fact that the voting agreement will terminate upon the completion of this offering.


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Immediately following the completion of this offering, we will file our restated certificate of incorporation. We anticipate that the restated certificate of incorporation will divide our board of directors into three classes, with staggered three-year terms:
 
  •  Class I directors, whose initial term will expire at the annual meeting of stockholders to be held in 2008;
 
  •  Class II directors, whose initial term will expire at the annual meeting of stockholders to be held in 2009; and
 
  •  Class III directors, whose initial term will expire at the annual meeting of stockholders to be held in 2010.
 
At each annual meeting of stockholders after the initial classification, the successors to directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following election. Upon the completion of this offering, the Class I directors will consist of          ,          and          ; the Class II directors will consist of          ,          , and          ; and the Class III directors will consist of           and          . 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 three-year terms.
 
In addition, we intend to restate our bylaws upon the completion of this offering to provide that only our board of directors may fill vacancies on our board of directors until the next annual meeting of stockholders. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.
 
This classification of our board of directors and the provisions described above may have the effect of delaying or preventing changes in our control or management. See “Description of Capital Stock—Anti-Takeover Provisions—Restated Certificate of Incorporation and Restated Bylaw Provisions.”
 
Board Committees
 
Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee, each of which has the composition and responsibilities described below as of the completion of this offering. Members serve on these committees until their resignations or until otherwise determined by our board of directors.
 
Audit Committee
 
Our audit committee is comprised of Mr. McKee, who is the chair of the audit committee, and Messrs. Ryles and von Simson. The composition of our audit committee meets the requirements for independence under the current NASDAQ Stock Market and SEC rules and regulations. Each member of our audit committee is financially literate. In addition, our audit committee includes a financial expert within the meaning of Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act of 1933, or the Securities Act. All audit services to be provided to us and all permissible non-audit services to be provided to us by our independent registered public accounting firm will be approved in advance by our audit committee. We anticipate that our audit committee will recommend, and our board of directors will adopt, an amended and restated charter for our audit committee, which will be posted on our website. We anticipate that our audit committee, among other things, will:
 
  •  select a firm to serve as the independent registered public accounting firm to audit our financial statements;
 
  •  help to ensure the independence of the independent registered public accounting firm;
 
  •  discuss the scope and results of the audit with the independent registered public accounting firm, and review, with management and that firm, our interim and year-end operating results;
 
  •  develop procedures for employees to submit anonymously concerns about questionable accounting or audit matters;
 
  •  consider the adequacy of our internal accounting controls and audit procedures; and
 
  •  approve or, as permitted, pre-approve all audit and non-audit services to be performed by the independent registered public accounting firm.


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Compensation Committee
 
Our compensation committee is comprised of Mr. Ramsey, who is the chair of the compensation committee, and Messrs. Crowell and Schlein. The composition of our compensation committee meets the requirements for independence under the current NASDAQ Stock Market and SEC rules and regulations. The purpose of our compensation committee is to discharge the responsibilities of our board of directors relating to compensation of our executive officers. We anticipate that our compensation committee will recommend, and our board of directors will adopt, an amended and restated charter for our compensation committee. We anticipate that our compensation committee, among other things, will:
 
  •  review and determine the compensation of our executive officers and directors;
 
  •  administer our stock and equity incentive plans;
 
  •  review and make recommendations to our board of directors with respect to incentive compensation and equity plans; and
 
  •  establish and review general policies relating to compensation and benefits of our employees.
 
Nominating and Corporate Governance Committee
 
Our nominating and corporate governance committee is comprised of Mr. von Simson, who is the chair of the nominating and corporate governance committee, and Messrs. Crowell, McKee and Ryles. The composition of our nominating and corporate governance committee will meet the requirements for independence under the current NASDAQ Stock Market and SEC rules and regulations. Our nominating and corporate governance committee has recommended, and we anticipate that our board of directors will adopt, an amended and restated charter for our nominating and corporate governance committee. We anticipate that our nominating and corporate governance committee, among other things, will:
 
  •  identify, evaluate and recommend nominees to our board of directors and committees of our board of directors;
 
  •  conduct searches for appropriate directors;
 
  •  evaluate the performance of our board of directors;
 
  •  consider and make recommendations to our board of directors regarding the composition of our board of directors and its committees;
 
  •  review related party transactions and proposed waivers of the code of conduct;
 
  •  review developments in corporate governance practices; and
 
  •  evaluate the adequacy of our corporate governance practices and reporting.
 
Compensation Committee Interlocks and Insider Participation
 
During fiscal 2007, our compensation committee consisted of Messrs. Ramsey, Schlein and Crowell. None of them has at any time in the last fiscal year been one of our officers or employees, and none has had any relationships with our company of the type that is required to be disclosed under Item 404 of Regulation S-K. None of our executive officers has served as a member of the board of directors, or as a member of the compensation or similar committee, of any entity that has one or more executive officers who served on our board of directors or compensation committee during fiscal 2007.
 
Director Compensation
 
The following table provides information for our fiscal year ended April 30, 2007 regarding all plan and non-plan compensation awarded to, earned by or paid to each person who served as a non-employee director for some portion or all of fiscal 2007. Other than as set forth in the table and the narrative that follows it, to date we have not paid any fees to or reimbursed any expenses of our directors, made any equity or non-equity awards to directors, or


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paid any other compensation to directors. All compensation that we paid to Mr. Shaw, our only employee director, is set forth in the tables summarizing executive officer compensation below. No compensation was paid to Mr. Shaw in his capacity as a director.
 
         
    Option
 
Name
  Awards(1)  
 
Sandra Bergeron(2)
  $ 78,669  
E. Stanton McKee, Jr.(3)
    22,600  
Scott A. Ryles(4)
    746  
 
(1) In accordance with SEC rules, the amounts in this column represent the amounts that we would have recognized as compensation expense for financial statement reporting purposes for any part of fiscal 2007 in accordance with SFAS 123R in connection with all of the options previously issued to the named director had we applied the modified prospective transition method without reflecting the estimate for forfeitures related to service-based vesting used for financial statement reporting purposes, rather than the prospective transition method actually utilized by us for financial statement reporting purposes. The aggregate grant date fair values, computed in accordance with SFAS 123R, of the option granted to Ms. Bergeron in fiscal 2007 was $363,717. No stock options were granted to the other non-employee directors in fiscal 2007. See note 9 of the notes to our consolidated financial statements for a discussion of all assumptions made in determining the grant date fair values. As of April 30, 2007, each non-employee director holds outstanding options to purchase the following aggregate number of shares: Ms. Bergeron: 391,094; Mr. Crowell: 391,094; Mr. McKee: 391,094; Mr. Ramsey: 391,094; Mr. Ryles: 391,094; and Mr. von Simson: 391,094. Each of these options: (i) is immediately exercisable; (ii) vests as to 1/48th of the shares of common stock underlying it monthly beginning one month after the vesting start date, except that Ms. Bergeron’s option vests as to 1/4th of the shares one year after the vesting start date and as to an additional 1/48th of the shares each month thereafter; and (iii) contains change of control provisions such that all unvested shares vest immediately upon the closing of a change of control transaction.
 
(2) In June 2006, we granted Ms. Bergeron an option to purchase 391,094 shares of our common stock at an exercise price of $1.52 per share.
 
(3) In February 2005, we granted Mr. McKee an option to purchase 391,094 shares of our common stock at an exercise price of $0.20 per share.
 
(4) In January 2004, we granted Mr. Ryles an option to purchase 391,094 shares of our common stock at an exercise price of $0.06 per share.
 
Following the completion of this offering, we intend to compensate our non-employee directors with a combination of cash and equity as described below.
 
Cash Compensation
 
The chairs of the audit committee, the compensation committee and the nominating and corporate governance committee will receive additional annual retainers of $15,000, $10,000 and $5,000, respectively. Each member of the audit committee, the compensation committee and the nominating and corporate governance committee will receive annual retainers of $8,000, $5,000 and $2,500, respectively. We do not pay fees to directors for attendance at meetings of our board of directors and its committees.
 
Equity Compensation
 
Each non-employee director who becomes a member of our board of directors after this offering will be granted an initial option to purchase 45,000 shares of our common stock upon election to our board of directors. On the date of each annual stockholder meeting subsequent to this offering, each non-employee director who continues to serve on our board of directors immediately following such meeting will automatically be granted an option to purchase 41,500 shares of our common stock (subject to pro-ration on a monthly basis in the event the non-employee director has not served an entire year on the board of directors since the last stock option grant to such non-employee director). Each option will have an exercise price equal to the fair market value of our common stock


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on the date of grant, will have a 10-year term and will terminate 90 days following the date the director ceases to serve on the board of directors for any reason other than death or disability, and 12 months following that date if the termination is due to death or disability. Each initial grant vests and becomes exercisable as to 1/36th of the shares each month after the grant date over three years. Each annual grant vests and becomes exercisable as to 1/12th of the shares each month after the grant date over one year.
 
Executive Compensation
 
Compensation Discussion and Analysis
 
The following discussion and analysis of compensation arrangements of our executive officers should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. The actual amount and form of compensation and the compensation programs that we adopt may differ materially from currently planned programs as summarized in this discussion.
 
This section discusses the principles underlying our executive compensation policies and decisions and the most important factors relevant to an analysis of these policies and decisions. It provides qualitative information regarding the manner and context in which compensation is awarded to and earned by our executive officers and places in perspective the data presented in the tables and narrative that follow.
 
Compensation Philosophy and Objectives
 
Our compensation program for executive officers is designed to attract, as needed, individuals with the skills necessary for us to achieve our business plan, to motivate those individuals, to reward those individuals fairly over time, and to retain those individuals who continue to perform at or above the levels that we expect. It is also designed to link rewards to measurable corporate and individual performance. We believe that the most effective executive compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals, and which aligns executives’ interests with those of the stockholders by rewarding performance of established goals, with the ultimate objective of improving stockholder value. We evaluate compensation to ensure that we maintain our ability to attract and retain talented employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies. To that end, we believe executive compensation packages provided by us to our executive officers should include both cash and stock-based compensation that reward performance as measured against established goals.
 
We work within the framework of our pay-for-performance philosophy to determine each component of an executive’s compensation package based on numerous factors, including:
 
  •  the individual’s particular background and circumstances, including training and prior relevant work experience;
 
  •  the individual’s role with us and the compensation paid to similar persons in the companies represented in the compensation data that we review;
 
  •  the demand for individuals with the individual’s specific expertise and experience at the time of hire;
 
  •  performance goals and other expectations for the position; and
 
  •  comparison to other executives within our company having similar levels of expertise and experience.
 
Role of Executive Officers in Compensation Decisions
 
Mr. Shaw’s compensation is determined by our board of directors after input from and consultation with our compensation committee, which reviews Mr. Shaw’s performance. The compensation for all other executive officers is determined by our compensation committee after input from and consultation with Mr. Shaw. Mr. Shaw typically provides annual recommendations to the compensation committee and discusses with the compensation committee the compensation and performance of all executive officers, excluding himself, during the first fiscal


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quarter. Consistent with our compensation philosophy, each employee’s evaluation begins with a written self-assessment, which is submitted to the employee’s supervisor. The supervisor then prepares a written evaluation based on the employee’s self-assessment, the supervisor’s own evaluation of the employee’s performance and input from others within the company. Mr. Shaw bases his recommendations in part upon annual performance reviews of our executive officers, including a review of self-evaluations prepared by such executive officers and supervisor reviews when the executive officers report to someone other than Mr. Shaw. Our compensation committee may exercise its discretion in modifying any recommended compensation adjustments or awards to executives. In addition, compensation committee meetings typically have included, for all or a portion of each meeting, not only the committee members but also Mr. Grierson, Ms. Phi and Gail Boddy, the head of our human resources department.
 
Components of Executive Compensation
 
Our executive officers’ compensation currently has three primary components – base compensation or salary, initial stock option awards granted pursuant to our 2002 Stock Plan, which is described below under “—Employee Benefit Plans,” and cash bonuses and stock option awards under a performance-based bonus plan. We fix executive officer base compensation at a level we believe enables us to hire and retain individuals in a competitive environment and to reward satisfactory individual performance and a satisfactory level of contribution to our overall business goals. We also take into account the base compensation that is payable by companies that we believe to be our competitors and by other private and public companies with which we believe we generally compete for executives. To this end, we review a number of executive compensation surveys of high technology companies located in the San Francisco Bay Area annually when we review executive compensation. We utilize salary as the base amount necessary to match our competitors for executive talent. We designed our executive bonus plan to focus our management on achieving key corporate financial objectives, to motivate desired individual behaviors and to reward substantial achievement of these company financial objectives and individual goals. We utilize cash bonuses under our bonus plan to reward performance achievements with a time horizon of one year or less, and similarly, we utilize equity grants under our bonus plan to provide additional long-term rewards for short term performance achievements to encourage similar performance over a longer term. We utilize initial and refresh stock options to reward long-term performance, with strong corporate performance and extended officer tenure producing potentially significant value for the officer.
 
We view these components of compensation as related but distinct. Although our compensation committee does review total compensation, we do not believe that significant compensation derived from one component of compensation should negate or reduce compensation from other components. We determine the appropriate level for each compensation component based in part, but not exclusively, on competitive benchmarking consistent with our recruiting and retention goals, our view of internal equity and consistency and other considerations we deem relevant, such as rewarding extraordinary performance. We believe that, as is common in the technology sector, stock option awards are the primary compensation-related motivator in attracting and retaining employees and that salary and bonus levels are secondary considerations to most employees, including our executive officers.
 
Our compensation committee’s current intent is to perform at least annually a strategic review of our executive officers’ compensation levels to determine whether they provide adequate incentives and motivation to our executive officers and whether they adequately compensate our executive officers relative to comparable officers in other companies with which we compete for executives. These companies may or may not be public companies or even in all cases technology companies.
 
In March 2007, our compensation committee retained Compensia, a compensation consulting company, to help evaluate our compensation philosophy and provide guidance in administering our compensation program in the future. Following the completion of our initial public offering, our compensation committee anticipates adopting more formal and structured compensation policies and programs. On an annual basis, our compensation committee plans to have our compensation consultant provide market data on a peer group of companies in the technology sector and we intend to benchmark this information and other information obtained by the members of our compensation committee against the compensation we offer to ensure that our compensation program is competitive. Our compensation committee plans to have our compensation consultant provide market data for consideration in establishing annual salary increases and additional stock grants.


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We account for equity compensation paid to our employees under the rules of SFAS 123R, which requires us to estimate and record an expense over the service period of the award. Accounting rules also require us to record cash compensation as an expense at the time the obligation is accrued. Unless and until we achieve sustained profitability, the availability to us of a tax deduction for compensation expense will not be material to our financial position. We structure cash bonus compensation so that it is taxable to our executives at the time it is paid to them. We currently intend that all cash compensation paid will be tax deductible for us. However, with respect to equity compensation awards, while any gain recognized by employees from nonqualified options should be deductible, to the extent that an option constitutes an incentive stock option, gain recognized by the optionee will not be deductible if there is no disqualifying disposition by the optionee. In addition, if we grant restricted stock or restricted stock unit awards that are not subject to performance vesting, they may not be fully deductible by us at the time the award is otherwise taxable to the employee.
 
Base Compensation
 
Our compensation committee generally consults executive compensation surveys that provide industry data to better inform its determination of the key elements of our compensation program in order to develop a compensation program that it believes will enable us to effectively compete for new employees and retain existing employees. In fiscal 2007, our compensation committee utilized data from a Radford Benchmark Survey obtained by our human resources department in order to determine competitive salary levels. This industry data consists of salaries and other compensation paid by companies in our peer group to executives in positions comparable to those held by our executive officers. This peer group consists of software companies nationally with revenues of up to $200 million. A random sample of the companies represented in the calendar year 2007 Radford Benchmark Survey of software companies with revenues up to $200 million includes Agile Software, Dicarta, E2Open, Entrust, Matrix One, Micromuse, Mitchell International, Navimedix, Open TV, PDF Solutions, Peregrine Systems and Zantaz. We believe that this peer group is representative of companies in our size range and industry that are a fair representation of the employment market in which we compete. While we compete for executive talent to some degree with companies that have revenues significantly in excess of $200 million, we believe that the companies represented in the survey similarly compete with such larger companies and hence are an appropriate comparison for our employment market. Our compensation committee realizes that using a benchmark may not always be appropriate, but believes that it is the best alternative at this point in the life cycle of our company. In addition to benchmarking studies, our compensation committee has historically taken into account input from other sources, including input from the members of the compensation committee (as well as any input that may be offered by other independent members of the board of directors) and publicly available data relating to the compensation practices and policies of other companies within and outside of our industry.
 
Our compensation committee typically sets executive officers’ salaries at a level that was at or near the median of salaries of executives with similar roles at comparable pre-public and small public companies. Our compensation committee believes that the median for base salaries is the minimum cash compensation level that would allow us to attract and retain talented officers. In instances where an executive officer is uniquely key to our success, such as Messrs. Shaw and Njemanze, our compensation committee may provide compensation in excess of the median. Our compensation committee’s choice of the foregoing salary target to apply to the data in the compensation surveys reflected consideration of our stockholders’ interests in paying what was necessary, but not significantly more than necessary, to achieve our corporate goals, while conserving cash as much as practicable. We believe that, given the industry in which we operate and the corporate culture that we have created, base compensation at this level is generally sufficient to retain our existing executive officers and to hire new executive officers when and as required.
 
We annually review our base salaries, and may adjust them from time to time based on market trends, along with the applicable executive officer’s responsibilities, performance and experience. We do not provide formulaic base salary increases to our executive officers. If necessary, we also realign base salaries with market levels for the same positions in companies of similar size to us represented in the compensation data we review, if we identify significant market changes in our data analysis. Additionally, we adjust base salaries as warranted throughout the year for promotions or other changes in the scope or breadth of an executive’s role or responsibilities.


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Equity Compensation
 
In February 2006, in response to Section 409A of the Internal Revenue Code of 1986, as amended, and the proposed regulations issued by the U.S. Internal Revenue Services thereunder, our board of directors hired an independent valuation firm to determine the fair market value of our common stock as of February 1, 2006, and it has sought periodic valuation updates as of November 1, 2006, March 15, 2007 and June 1, 2007. All equity awards to our employees, including executive officers, and to our directors have been granted and reflected in our consolidated financial statements, based upon the applicable accounting guidance, at fair market value on the grant date in accordance with the valuation determined by our independent, outside valuation firm. We do not have any program, plan or obligation that requires us to grant equity compensation on specified dates and, because we have not been a public company, we have not made equity grants in connection with the release or withholding of material non-public information. It is possible that we will establish programs or policies of this sort in the future, but we do not expect to do so prior to this offering. Authority to make equity grants to executive officers rests with our compensation committee, although, as noted above, our compensation committee does consider the recommendations of Mr. Shaw in connection with grants to other executive officers. Prior to the original engagement of an independent valuation firm, our board of directors determined the value of our common stock based on consideration of a number of relevant factors including the status of our business in light of market conditions, our earnings history and forecasted earnings, the absence of a market for sales of our capital stock and the absence of a significant number of reasonably comparable publicly-traded corporations in the same industry as us, the preferences of our preferred stock, the risks inherent in the development and expansion of our product and services offerings, and other risks normally associated with operating a similarly situated business.
 
Due to the early stage of our business, we believe that equity awards will incentivize our executive officers to achieve long-term performance because they provide greater opportunities for our executive officers to benefit from any future successes in our business. Consistent with this view, our compensation committee chose to make equity grants based on input from members of the compensation committee (as well as any input that may be offered by other independent members of the board of directors) drawing on their experience as directors and executives at other companies within and outside of our industry, as well as recommendations from Mr. Shaw. Each executive officer is initially provided with an option grant when they join our company based upon their position with us and their relevant prior experience. These initial grants generally vest over four years and no shares vest before the one year anniversary of the option grant. We spread the vesting of our options over four years to compensate executives for their contribution over a period of time. In addition, one of the initial stock option grants made to Mr. Reilly in connection with his hiring vests as to approximately one quarter of the shares upon the achievement of specified milestones relating to business planning and operations, sales, services and support execution, and company positioning, market and product strategy, during his first year of employment at the company, and if such milestones are achieved the remaining shares vest monthly over the subsequent three years. In the absence of milestone achievement, such stock option will terminate. Authority to make equity-based awards to executive officers rests with our compensation committee, which considers the recommendations of Mr. Shaw.
 
The value of the shares subject to the fiscal 2007 option grants to named executive officers are reflected in the “Fiscal 2007 Summary Compensation Table” table below and further information about these grants is reflected in the “Fiscal 2007 Grants of Plan-Based Awards” table below.
 
In           2007, our board of directors adopted a new equity plan, which is described under “—Employee Benefit Plans” below. The 2007 Equity Incentive Plan will replace our existing 2002 Stock Plan immediately following this offering and, as described below, will afford our compensation committee much greater flexibility in making a wide variety of equity awards. Participation in the 2007 Employee Stock Purchase Plan that our board of directors adopted in           2007 will also be available to all executive officers following this offering on the same basis as our other employees. However, any executive officers who are 5% stockholders, or would become 5% stockholders as a result of their participation in our 2007 Employee Stock Purchase Plan, will be ineligible to participate in our 2007 Employee Stock Purchase Plan.
 
Other than the equity plans described in this section, we do not have any equity security ownership guidelines or requirements for our executive officers and we do not have any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash


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compensation or among different forms of non-cash compensation. Other than Messrs. Shaw and Njemanze, our equity compensation plans have provided the principal method for our executive officers to acquire equity or equity-linked interests in our company.
 
Cash Bonuses Under Our Bonus and Profit Sharing Plans
 
We pay bonuses annually generally during the first quarter of our fiscal year. We determined not to pay bonuses quarterly or semi-annually because our compensation committee believed an annual orientation was appropriate given the fluctuations in our operating results from quarter to quarter. We base bonuses for executive officers other than Mr. Shaw on two components – revenues and individual contributions as determined by the executive officer’s supervisor. We will pay no bonus unless the revenue component is achieved, regardless of an individual executive officer’s contributions. If the revenue component is achieved, executive officers are eligible to receive bonuses at the target level. However the actual portion of the eligible bonus that is ultimately awarded is determined by our chief executive officer, following evaluation of the executive officer’s contributions by the executive officer’s supervisor where such supervisor is not the chief executive officer. The compensation committee chose revenues because it believed that, as a “growth company,” we should reward revenue growth. While in prior years the compensation committee also included operating margin as a component of the performance targets, the compensation committee determined that it was appropriate to focus on revenues given the additional levels of investment in our sales and marketing and research and development efforts. Thus, the compensation committee considered the chosen metrics to be the best indicators of financial success and stockholder value creation. The individual performance objectives are determined by the executive officer to whom the potential bonus recipient reports. We base bonuses for Mr. Shaw on revenues. Payments of cash bonuses are contingent upon continued employment through the actual date of payment.
 
Our bonus and profit sharing plan for fiscal 2007 was adopted by our compensation committee in March 2007 to reward all employees of the company, including executive officers. The plan was designed to focus on revenue growth and had a targeted revenues goal of approximately $60.5 million, excluding revenues related to transactions consummated in prior fiscal years, for which revenue recognition was delayed as a result of undelivered elements for which we did not have VSOE. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Sources of Revenues, Cost of Revenues and Operating Expenses.” Under this plan, executive officers other than Mr. Mosher received:
 
  •  no payment unless we achieved 90% of the targeted minimum revenues goal;
 
  •  a payment of 26.25% of base salary if we achieved at least 90% but less than 100% of the targeted revenues goal;
 
  •  a payment of 35% of base salary if we achieved 100% but less than 101% of the targeted revenues goal;
 
  •  a payment of 36.75% of base salary if we achieved at least 101% but less than 105% of the targeted revenues goal;
 
  •  a payment of 38.75% of base salary if we achieved at least 105% but less than 110% of the targeted revenues goal;
 
  •  a payment of 42% of base salary if we achieved at least 110% but less than 120% of the targeted revenues goal; and
 
  •  a payment of 43.75% of base salary if we achieved 120% or more of the targeted revenues goal.
 
In addition, the bonus and profit sharing plan for fiscal 2007 provided that if we achieved at least 100% of the targeted revenues goal, our executive officers other than Mr. Mosher were eligible for an additional cash bonus pool equal to 17% of our operating margin for fiscal 2007 to be paid on a pro rata basis based on their portion of total bonuses paid to officers, with a cap at 100% of base salary for all payments under both the payments described above and payments under the additional cash bonus pool. As a result of revenue performance in fiscal 2007, our executive officers other than Mr. Mosher were eligible for bonuses under the bonus and profit sharing plan for fiscal 2007 based on achievement up to the level of at least 105% but less than 110%, and no additional amounts were paid


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under the additional cash bonus pool, as the bonus and profit sharing bonuses represented the maximum amount payable.
 
We feel it is more appropriate to tie the additional cash incentives for Mr. Mosher to his revenue-generating efforts and management of the operating expenses and contribution margin for our sales department, rather than tying his additional cash incentives solely to the company-level financial objectives. For this reason, we pay him a quarterly sales commission pursuant to his Sales Commission Plan – FY 2007, rather than the bonus discussed above for other executive officers. Under the plan, Mr. Mosher was entitled to quarterly commission payments based on achievement of quarterly revenues targets, with the potential commission rates structured to incentivize achievement and overachievement of the targets. The quarterly commission rates payable to Mr. Mosher for each portion of achievement or overachievement of his fiscal 2007 quarterly revenues targets in each fiscal quarter were:
 
                                 
Revenues Target Achievement Level
  First Quarter     Second Quarter     Third Quarter     Fourth Quarter  
 
Portion of revenues that is up to 100%
    0.21%       0.20%       0.17%       0.16%  
Portion of revenues that is more than 100% and up to 105%
    2.06%       2.00%       1.72%       1.56%  
Portion of revenues that is more than 105% and up to 110%
    3.12%       3.00%       2.59%       2.34%  
Portion of revenues that is more than 110%
    4.00%       4.00%       4.00%       4.00%  
 
In addition, under the plan, Mr. Mosher receives an additional commission in the event that he achieves or exceeds his revenues target and either (i) actual operating expenses for the sales department are less than or equal to the sales operating expense target, or (ii) actual contribution margins for the sales department are equal to or greater than the sales contribution margin target. Actual sales contribution margins are determined by subtracting actual sales operating expenses from actual revenues for the quarter. The quarterly commission amounts payable to Mr. Mosher upon achievement of his fiscal 2007 quarterly operating expense or contribution margin targets vary by level of achievement relative to his quarterly revenues target. The potential amounts payable to Mr. Mosher in any fiscal quarter at each revenues target achievement level were:
 
         
Revenues Target Achievement Level
  Quarterly Amount  
 
Up to 100%
  $ 7,500  
More than 100% and up to 105%
  $ 11,250  
More than 105% and up to 110%
  $ 16,875  
More than 110%
  $ 22,500  
 
As a result of revenue performance in fiscal 2007, Mr. Mosher was eligible for commissions under his plan based on achievement up to the level of 100% of revenues target for each quarter of fiscal 2007 and for the second, third and fourth quarter for revenues in excess of 100% of target up to 105% of revenues target, and no additional amounts were paid for performance related to the sales operating expenses target and the sales contribution margins target. The sales commission “bonus” for Mr. Mosher is included in the “Fiscal 2007 Summary Compensation Table” under the “Salary” column, rather than in the “Fiscal 2007 Grants of Plan-Based Awards” table under the “Non-Equity Incentive Plan Compensation” column, where we disclose cash bonuses for our other named executive officers.
 
The “threshold,” “target” and “maximum” bonus amounts that could be earned by each named executive officer in fiscal 2007 are reflected in the “Fiscal 2007 Grants of Plan-Based Awards” table below.
 
Our annual cash bonuses, as opposed to our equity grants, are designed to more immediately reward our executive officers for their performance during the most recent fiscal year. We believe that the immediacy of these cash bonuses, in contrast to our equity grants which vest over a period of time, provides a significant incentive to our executives towards achieving their respective individual objectives, and thus our company-level objectives. Thus, we believe our cash bonuses are an important motivating factor for our executive officers, in addition to being a significant factor in attracting and retaining our executive officers.


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We do not have a formal policy regarding adjustment or recovery of awards or payments if the relevant performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of the award or payment.
 
Equity Bonuses Under Our Bonus and Profit Sharing Plans
 
Our compensation committee believes that granting additional stock options on an annual basis to existing executive officers provides an important incentive to retain executives and rewards them for short-term company performance while also creating long-term incentives to sustain that performance. Under our bonus and profit sharing plan for fiscal 2007, the compensation committee approved a pool of 1,205,620 shares of common stock to be granted during the first quarter of fiscal 2008 to executive officers on the achievement of the targeted revenues goal, and, for the officers other than Mr. Shaw, individual performance objectives, for the reasons described above for cash bonuses. The annual grant to Mr. Shaw is determined by our compensation committee after input from and consultation with the other members of the board of directors. The annual grants to all other executive officers are determined by our compensation committee after input from and consultation with Mr. Shaw. Our compensation committee may exercise its discretion in modifying any recommended adjustments or awards to executives. Equity grants made pursuant to the bonus plan vest over four fiscal years and no shares vest before the first day of the succeeding fiscal year (the fiscal year following the fiscal year in which the options were actually granted). In addition to the annual awards pursuant to our bonus and profit sharing plan, grants of stock options may be made to executive officers following a significant change in job responsibility or in recognition of a significant achievement. The “shares underlying,” “exercise price” and “grant date fair value” of option awards made to each named executive officer in fiscal 2007 are reflected in the “Fiscal 2007 Grants of Plan-Based Awards” table below.
 
The compensation committee has the discretion to award cash bonuses or equity-based grants outside of our bonus and profit sharing plan. However, the compensation committee did not exercise its discretion in this regard in fiscal 2007.
 
Severance and Change of Control Payments
 
When we retained Mr. Shaw in August 2001, we entered into an employment agreement, which was amended initially in August 2004 as the initial term expired and then amended again effective in August 2007 as the term expired for the amended employment agreement. Under our employment agreement and option grant agreements with Mr. Shaw and under the offer letters and option grant agreements with some of our executive officers, we are required to make specified severance payments and accelerate the vesting of equity awards in the event of a termination in connection with a change in control. For quantification of and additional information regarding these severance and change of control arrangements, please see the discussion under “—Employment, Severance and Change of Control Arrangements” below. Our employment agreement and option grant agreements with Mr. Shaw also provide severance and acceleration of vesting if we terminate his employment without cause or if he terminates his employment for good reason. Our board of directors determined to provide these severance and change of control arrangements in order to mitigate some of the risk that exists for executives working in a small, dynamic startup company, an environment where there is a meaningful likelihood that we may be acquired. These arrangements are intended to attract and retain qualified executives that have alternatives that may appear to them to be less risky absent these arrangements, and to mitigate a potential disincentive to consideration and execution of such an acquisition, particularly where the services of these executive officers may not be required by the acquirer.
 
Perquisites and Other Personal Benefits
 
Under the terms of our then current employment agreement with Mr. Shaw, we were obligated to pay or reimburse him for the following perquisites and other personal benefits:
 
  •  an apartment near our corporate headquarters, together with related utilities;
 
  •  commercial airfare for travel between Mr. Shaw’s residences outside of the San Francisco Bay Area and our corporate headquarters, and an automobile for use when he is in the San Francisco Bay Area, together with related expenses;


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  •  life insurance premiums for an insurance policy in the amount of $2.0 million payable to the beneficiary designated by Mr. Shaw;
 
  •  membership dues for a country club and a yacht club; and
 
  •  cash in an amount equal to the federal and state income and payroll taxes on the foregoing items.
 
When we initially retained Mr. Shaw as our chairman, president and chief executive officer in August 2001, we agreed to provide the life insurance and club membership dues described above and to reimburse him for the federal and state income and payroll taxes for such benefits, believing that his retention was critical to our future success and that, as with the level of his base salary, those perquisites were necessary to retain him and provide adequate incentive for his efforts. We also agreed to provide him with four weeks of annual vacation. In 2004, Mr. Shaw relocated his primary residences from the San Francisco Bay Area to Montana and Cabo San Lucas, Mexico for personal reasons as the end of the term of our employment agreement with him approached. Following Mr. Shaw’s relocation, we believed that it was still in our best interests to retain his services and agreed to amend his employment agreement to extend its term, provide the apartment and transportation necessary to enable him to serve with us while having his primary residences outside of the San Francisco Bay Area and to cover the federal and state income and payroll taxes for such additional benefits.
 
In September 2007, we entered into our current employment agreement with Mr. Shaw, under which he will receive a minimum salary of $414,500, and we are obligated to pay or reimburse him for the following perquisites and other personal benefits:
 
  •  an apartment near our corporate headquarters, together with related utilities;
 
  •  commercial airfare for travel between Mr. Shaw’s residences outside of the San Francisco Bay Area and our corporate headquarters, and an automobile for use when he is in the San Francisco Bay Area, provided that the aggregate reimbursement for these items and the apartment and utilities discussed above will not exceed $125,000 in the aggregate in any fiscal year;
 
  •  life insurance premiums for an insurance policy in the amount of $2.0 million payable to the beneficiary designated by Mr. Shaw; and
 
  •  cash in an amount equal to the federal and state income and payroll taxes on the foregoing items.
 
In addition, our employment agreement with Mr. Shaw provides for the severance and change of control benefits described under “—Employment, Severance and Change of Control Arrangements” below. Our prior employment agreement with Mr. Shaw expired in August 2007. Our compensation committee and our board approved the new employment agreement with Mr. Shaw, which expires in August 2009, because they believed that it was in our best interests to retain his services, and agreed to amend his employment agreement to extend its term, subject to amending our compensation arrangement with him to provide the salary, perquisites and benefits described above.
 
     Other Benefits
 
Executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life, disability, and accidental death and dismemberment insurance and our 401(k) plan, in each case on the same basis as other employees. We do not match employee contributions under our 401(k) plan. We also provide vacation and other paid holidays to all employees, including our executive officers, which are comparable to those provided at peer companies. There were no special benefits or perquisites provided to any executive officer in fiscal 2007 other than Mr. Shaw as described above.
 
    Executive Compensation Tables
 
The following table presents compensation information for our fiscal year ended April 30, 2007 paid to or accrued for our Chief Executive Officer, Chief Financial Officer and each of our three other most highly


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compensated executive officers whose total compensation was more than $100,000. We refer to these executive officers as our “named executive officers” elsewhere in this prospectus.
 
Fiscal 2007 Summary Compensation Table
 
                                         
                Non-Equity
             
          Option
    Incentive Plan
    All Other
       
Name and Principal Position
  Salary(1)     Awards(2)     Compensation(3)     Compensation     Total  
 
Robert W. Shaw
                                       
Chief Executive Officer
  $ 400,000     $ 197,987     $ 154,000     $ 220,743 (4)   $ 972,730  
Thomas Reilly(5)
                                       
President and Chief Operating Officer
    129,615       512,812       48,125             690,552  
Hugh S. Njemanze
                                       
Chief Technology Officer and Executive Vice President of Research and Development
    270,833 (6)     50,966       105,875             427,674  
Kevin P. Mosher
                                       
Senior Vice President of Worldwide Field Operations
    398,946 (7)     28,815                   427,761  
Stewart Grierson
                                       
Chief Financial Officer
    230,000       25,646       75,268             330,914  
 
 
(1) The amounts in this column include payments by us in respect of accrued vacation, holidays and sick days, as well as any salary contributed by the named executive officer to our 401(k) plan.
 
(2) In accordance with SEC rules, the amounts in this column represent the amounts that we would have recognized as compensation expense for financial statement reporting purposes for any part of fiscal 2007 in accordance with SFAS 123R in connection with all of the options previously issued to the named executive officer had we applied the modified prospective transition method without reflecting the estimate for forfeitures related to service-based vesting used for financial statement reporting purposes, rather than the prospective transition method actually utilized by us for financial statement reporting purposes.
 
(3) The amounts in this column reflect amounts paid pursuant to our Fiscal Year 2007 Management and Employee Bonus Plan. For a description of this plan, see “—Executive Compensation—Compensation Discussion and Analysis.”
 
(4) Includes $101,203 in tax reimbursements (related to the following items), $47,579 in apartment expenses and utilities and $40,450 in commuting airfare and taxis, and also includes life insurance premiums, automobile expenses and yacht and country club memberships.
 
(5) Mr. Reilly began service with us in November 2006. Mr. Reilly’s annual salary is $300,000.
 
(6) In September 2007, Mr. Njemanze’s annual salary was increased to $300,000.
 
(7) Includes $148,946 of sales commission bonus paid pursuant to Mr. Mosher’s Sales Commission Plan – FY 2007. Excludes $28,827 of sales commission bonus paid to Mr. Mosher during fiscal 2007, but earned in fiscal 2006, pursuant to his then applicable commission plan. For a description of this plan, see “—Executive Compensation—Compensation Discussion and Analysis.”
 
For a description of the material terms of offer letters for the named executive officers in the above table, please see “—Executive Compensation—Employment, Severance and Change of Control Arrangements,” below.


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Fiscal 2007 Grants of Plan-Based Awards
 
The table below summarizes grants made to each of our named executive officers for the fiscal year ended April 30, 2007:
 
                                                                 
                            Estimated
                   
                            Possible
                Grant Date
 
                            Payouts
    Number of
    Exercise
    Fair Value of
 
          Estimated Possible Payouts Under
    Under Equity
    Securities
    Price of
    Stock and
 
    Grant
    Non-Equity Incentive Plan Awards(1)     Incentive Plan
    Underlying
    Option
    Option
 
Name
  Date     Threshold     Target     Maximum     Awards(2)     Options(3)     Awards(4)     Awards(5)  
 
Robert W. Shaw
    6/5/2006                               124,589 (6)   $ 1.52     $ 115,868  
      6/5/2006                               62,911 (6)     1.52       58,507  
          $ 105,000     $ 140,000     $ 400,000                          
Thomas Reilly
    1/24/2007                               3,426,992 (7)     1.70       3,564,072  
      1/24/2007                               1,161,938 (7)     1.70       1,208,416  
      1/24/2007                               58,823 (7)     1.70       61,176  
            32,813       43,750       125,000                          
Hugh S. Njemanze
    6/5/2006                               57,005 (6)     1.52       53,015  
      6/5/2006                               37,995 (6)     1.52       35,335  
            71,094       94,792       275,000                          
Kevin P. Mosher
    6/5/2006                               84,046 (6)     1.52       78,163  
      6/5/2006                               10,954 (6)     1.52       10,187  
                  150,000       (8)                        
Stewart Grierson
    6/5/2006                               94,024 (6)     1.52       87,442  
      6/5/2006                               976 (6)     1.52       908  
            60,375       80,500       230,000                          
 
(1) The amounts in this column reflect amounts payable or options grantable pursuant to our Fiscal Year 2007 Management and Employee Bonus Plan, except for amounts payable to Mr. Mosher pursuant to his Sales Commission Plan – FY 2007, which are recorded as “Salary” in the “Fiscal 2007 Summary Compensation Table.” For a description of these plans, see “—Executive Compensation—Compensation Discussion and Analysis.”
 
(2) As described in “—Executive Compensation—Compensation Discussion and Analysis,” all of our executive officers are eligible to receive options to purchase shares of our common stock pursuant to our Fiscal Year 2007 Management and Employee Bonus Plan. These options are allocated out of a pool of 1,205,620 shares of our common stock. There are no threshold, target or maximum amounts for these option grants, as the allocation of shares to the eligible executives is determined by our compensation committee, with input from Mr. Shaw, except that Mr. Shaw has no input into his option grant. In August 2007, we granted the following options to purchase shares of our common stock at an exercise price of $2.50 per share pursuant to the allocation determined by our compensation committee and Mr. Shaw: Mr. Shaw, 180,000 shares; Mr. Njemanze, 125,000 shares; Mr. Mosher, 100,000 shares; and Mr. Grierson, 125,000 shares. For additional information on these grants, see the footnotes to the “Outstanding Option Awards at Fiscal 2007 Year-End” table.
 
(3) Each stock option was granted pursuant to our 2002 Stock Plan.
 
(4) Represents the fair market value of a share of our common stock on the option’s grant date, as determined by our board of directors.
 
(5) The amounts in this column represent the grant date fair value, computed in accordance with SFAS 123R, of each option granted to the named executive officer in fiscal 2007, less in the case of modified or replacement options the fair value of the option modified or replaced. Our compensation cost for these option grants is similarly based on the grant date fair value but is recognized over the period, typically four years, in which the named executive officer must provide services in order to earn the award. Please see note 9 of the notes to our consolidated financial statements for a discussion of all assumptions made in determining the grant date fair values of the options we granted in fiscal 2007.
 
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(6) Option vests as to 1/4th of the shares of common stock underlying it on May 1, 2007 and vests as to 1/48th of the underlying shares monthly thereafter until fully vested on May 1, 2010.
 
(7) Each of the option to purchase 3,426,992 shares and the option to purchase 58,823 shares vests as to 1/4th of the shares of common stock underlying it on November 27, 2007 and vests as to 1/48th of the underlying shares monthly thereafter until fully vested on November 27, 2010. The option to purchase 1,161,938 shares vests as to approximately one quarter of the shares upon the achievement of specified milestones relating to business planning and operations, sales, services and support execution, and company positioning, market and product strategy, during his first year of employment, and if such milestones are achieved the option vests as to 1/48th of the underlying shares monthly over the subsequent three years. In the absence of milestone achievement, such stock option will terminate.
 
(8) Mr. Mosher is eligible to receive a commission rate of 4.00% of quarterly revenues, as well as $22,500 in each quarter that we achieve 110% or more of our revenues target for that quarter and achieve sales contribution or sales operating expenses targets, pursuant to his Sales Commission Plan – FY 2007. There is not a maximum amount that Mr. Mosher may receive under this plan. For a description of this plan, see “—Executive Compensation—Compensation Discussion and Analysis.”
 
Each of the grants made on June 5, 2006 is exerciseable as it vests. Each of the grants made to Mr. Reilly is immediately exercisable in full; however, unvested shares issued upon exercise are subject to a right of repurchase by us upon termination of employment, which right lapses in accordance with the vesting schedule described above. Each of these stock options expires 10 years from the date of grant. These stock options are also subject to accelerated vesting upon involuntary termination or constructive termination following a change of control of us, as discussed below in “—Executive Compensation —Employment, Severance and Change of Control Arrangements.”
 
Outstanding Option Awards at Fiscal 2007 Year-End
 
The following table summarizes outstanding equity awards held by each of our named executive officers at April 30, 2007:
 
                                 
    Number of Securities
             
    Underlying Unexercised
    Option
    Options
 
    Options(1)     Exercise
    Expiration
 
Name
  Exercisable     Unexercisable     Price(2)     Date  
 
Robert W. Shaw(3)
    800,000 (4)         $ 0.06       1/22/2014  
      2,000,000 (5)           0.20       2/3/2015  
      200,000 (6)           1.00       5/26/2015  
      (7)     187,500 (7)     1.52       6/5/2016  
Thomas Reilly
    4,647,753 (8)           1.70       1/24/2017  
Hugh S. Njemanze(9)
    500,000 (10)           0.20       2/3/2015  
      100,000 (6)           1.00       5/26/2015  
      (7)     95,000 (7)     1.52       6/5/2016  
Kevin P. Mosher(11)
    350,000 (7)           1.00       5/26/2015  
      (7)     95,000 (7)     1.52       6/5/2016  
Stewart Grierson(9)
    100,000 (4)           0.04       1/28/2013  
      100,000 (12)           0.04       7/16/2013  
      75,000 (4)           0.06       1/22/2014  
      525,000 (13)           0.12       10/6/2014  
      350,000 (6)           1.00       5/26/2015  
      (7)     95,000 (7)     1.52       6/5/2016  
 
(1) Each stock option was granted pursuant to our 2002 Stock Plan. The vesting and exercisability of each stock option is described in the footnotes below for each option. Each of these stock options expires 10 years from the date of grant. These stock options are also subject to accelerated vesting upon involuntary termination or
 
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constructive termination following a change of control, as discussed below in “—Executive Compensation—Employment, Severance and Change of Control Arrangements.”
 
(2) Represents the fair market value of a share of our common stock on the option’s grant date, as determined by our board of directors.
 
(3) In August 2007, we granted Mr. Shaw an option to purchase 180,000 shares of our common stock at an exercise price of $2.50 per share pursuant to our Fiscal Year 2007 Management and Employee Bonus Plan. This option vests as to 1/4th of the shares of common stock underlying it on May 1, 2008 and as to 1/48th of the underlying shares monthly thereafter until fully vested on May 1, 2011. For a description of this plan, see “Executive Compensation—Compensation Discussion and Analysis.”
 
(4) This stock option is fully vested.
 
(5) Includes two options, each to purchase 1,000,000 shares, granted to Mr. Shaw concurrently, one of which vested as to 1/4th of the shares of common stock underlying it on February 3, 2006 and vests as to 1/48th of the underlying shares monthly thereafter until fully vested on February 3, 2009, and the other of which vested as to 1/2 of the shares of common stock underlying it on February 3, 2007 and vests as to 1/48th of the underlying shares monthly thereafter until fully vested on February 3, 2009.
 
(6) Option vested as to 1/4th of the shares of common stock underlying it on May 1, 2006 and vests as to 1/48th of the underlying shares monthly thereafter until fully vested on May 1, 2009.
 
(7) Option vested as to 1/4th of the shares of common stock underlying it on May 1, 2007 and vests as to 1/48th of the underlying shares monthly thereafter until fully vested on May 1, 2010.
 
(8) Includes options to purchase 3,426,992 shares, 58,823 shares and 1,161,938 shares granted to Mr. Reilly concurrently in connection with his hiring. Each of the option to purchase 3,426,992 shares and the option to purchase 58,823 shares vests as to 1/4th of the shares of common stock underlying it on November 27, 2007 and as to 1/48th of the underlying shares monthly thereafter until fully vested on November 27, 2010. The option to purchase 1,161,938 shares vests as to approximately one quarter of the shares upon the achievement of specified milestones relating to business planning and operations, sales, services and support execution, and company positioning, market and product strategy, during his first year of employment, and if such milestones are achieved the option vests 1/48th of the underlying shares monthly over the subsequent three years. In the absence of milestone achievement, such stock option will terminate.
 
(9) In August 2007, we granted Messrs. Njemanze and Grierson each an option to purchase 125,000 shares of our common stock at an exercise price of $2.50 per share pursuant to our Fiscal Year 2007 Management and Employee Bonus Plan. Each option vests as to 1/4th of the shares of common stock underlying it on May 1, 2008 and as to 1/48th of the underlying shares monthly thereafter until fully vested on May 1, 2011. For a description of this plan, see “—Executive Compensation—Compensation Discussion and Analysis.”
 
(10) Option vested as to 1/4th of the shares of common stock underlying it on February 3, 2006 and vests as to 1/48th of the underlying shares monthly thereafter until fully vested on February 3, 2009.
 
(11) In August 2007, we granted Mr. Mosher an option to purchase 100,000 shares of our common stock at an exercise price of $2.50 per share pursuant to our Fiscal Year 2007 Management and Employee Bonus Plan. This option vests as to 1/4th of the shares of common stock underlying it on May 1, 2008 and as to 1/48th of the underlying shares monthly thereafter until fully vested on May 1, 2011. For a description of this plan, see “—Executive Compensation—Compensation Discussion and Analysis.”
 
(12) Option vested as to 1/4th of the shares of common stock underlying it on July 16, 2004 and vests as to 1/48th of the underlying shares monthly thereafer until fully vested on July 16, 2007.
 
(13) Option vested as to 1/4th of the shares of common stock underlying it on October 1, 2005 and vests as to 1/48th of the underlying shares monthly thereafter until fully vested on October 1, 2008.


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Employment, Severance and Change of Control Arrangements
 
Under our employment agreement and option grant agreements with Mr. Shaw, if we terminate his employment for any reason other than cause, death or disability or if he terminates his employment for good reason, he is entitled to a lump-sum severance payment equal to his then-current annual base salary and accelerated vesting of 33% of his remaining unvested stock options. If we terminate his employment without cause or if he terminates his employment for good reason within 12 months of a change in control, he is entitled to a lump-sum severance payment equal to his then-current annual base salary and accelerated vesting of all remaining unvested stock options. For a description of the base salary and perquisites and other personal benefits provided for under our employment agreement Mr. Shaw, please see the discussion under “—Executive Compensation—Compensation Discussion and Analysis” and the “Fiscal 2007 Summary Compensation Table” above.
 
Under our offer letter with Mr. Reilly, if he is subject to an involuntary termination within 12 months of a change in control and such change in control occurs within the first year of his employment with the company, then for 12 months following such termination he is entitled to continued payment of his then-current base salary and accelerated vesting of 50% of his remaining unvested stock options. If he is subject to an involuntary termination within 12 months of a change in control and such change in control occurs after the first year of his employment with us, then for 12 months following such termination he is entitled to continued payment of his then-current annual base salary and accelerated vesting of all remaining unvested stock options.
 
Under our offer letter with Mr. Mosher, if he is subject to an involuntary termination within 12 months of a change in control, then for 12 months following such termination he is entitled to continued payment of his then-current base salary and COBRA health insurance premiums, and 24 months of additional vesting of his stock options.
 
Under our offer letter with Mr. Njemanze, if we terminate his employment for any reason, then for six months following such termination he is entitled to continued payment of his then-current base salary.
 
Under our offer letter with Mr. Grierson, if he is subject to an involuntary termination within six months of a change in control, then for three months following such termination he is entitled to continued payment of his then-current base salary and COBRA health insurance premiums, and will also receive accelerated vesting of 50% of his remaining unvested stock options as of his termination date.
 
Absent a change of control event, no executive officer other than Mr. Shaw or Mr. Njemanze is entitled upon termination to either equity vesting acceleration or cash severance payments.
 
For Messrs. Shaw and Reilly, cause is defined as the occurrence of any of the following:
 
  •  willful failure by the executive officer to substantially perform his duties under his employment agreement, after receipt of a written warning from our board of directors;
 
  •  a willful act by the executive officer which is injurious to us;
 
  •  a willful breach by the executive officer of a material provision of his employment agreement or offer letter; or
 
  •  a material violation by the executive officer of a federal or state law or regulation applicable to our business.
 
For Mr. Shaw, good reason is defined as the occurrence of any of the following (unless the event described in the third, fourth and fifth bullet points occurs prior to a change in control and also generally applies to all other members of our senior management):
 
  •  the assignment to Mr. Shaw of any duties or the reduction of his duties, either of which results in a significant diminution in his position or responsibilities with us in effect immediately prior to such assignment, or the removal of Mr. Shaw from such position and responsibilities;
 
  •  the assignment to Mr. Shaw of (i) any position other than as our chief executive officer or (ii) any position that does not report directly to our board of directors;


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  •  a material reduction, without good business reasons, of the facilities and perquisites available to Mr. Shaw immediately prior to such reduction;
 
  •  a material reduction in Mr. Shaw’s base salary; or
 
  •  a material reduction by us in the kind or level of employee benefits to which Mr. Shaw is entitled immediately prior to such reduction with the result that Mr. Shaw’s overall benefits package is significantly reduced.
 
For Messrs. Reilly, Grierson and Mosher, involuntary termination is defined as the occurrence of any of the following:
 
  •  we terminate the executive officer without cause; or
 
  •  the executive officer resigns within 30 days after the scope of his or her job responsibilities or authority was materially reduced without his or her written consent.
 
In addition, the resignation by Messrs. Reilly or Grierson within 30 days after receipt of notice that his principal workplace will be relocated 100 miles or more from its location at the time of notice shall constitute involuntary termination.
 
For Messrs. Grierson and Mosher, cause is defined as the occurrence of any of the following:
 
  •  the commission of an act of embezzlement, fraud, dishonesty or breach of fiduciary duty to us;
 
  •  deliberate and repeated violation of our rules or the valid instructions of our board of directors or an authorized officer;
 
  •  any unauthorized disclosure by the executive officer of any of our secrets or confidential information;
 
  •  the inducement of any of our clients or customers to break any contract with us; or
 
  •  the engagement in any conduct that could reasonably be expected to result in loss, damage or injury to us.
 
A change of control will occur, generally, in the event of a merger, sale of our assets or a stock acquisition in which the stockholders of our company will hold less than 50% of the stock of the acquiring company following the transaction.
 
The following table summarizes the benefits payable to each named executive officer pursuant to the arrangements described above:
 
                                 
    Termination     Involuntary Termination Within One Year of a Change of Control  
          Acceleration of
          Acceleration of
 
          Equity
          Equity
 
Name
  Salary     Vesting(1)     Salary     Vesting(1)  
 
Robert W. Shaw
  $ 400,000 (2)   $ (3)   $ 400,000 (2)   $ (4)
Thomas Reilly
              $ 300,000 (5)     (6)
Hugh S. Njemanze
  $ 135,417 (7)         $ 135,417 (7)      
Kevin P. Mosher
              $ 253,629 (8)     (9)
Stewart Grierson(10)
              $ 61,129 (11)     (12)
 
(1) Calculated based on the termination or change of control taking place as of April 30, 2007, the last day of our most recent fiscal year, and based on assumed initial public offering price of $      per share, based on the midpoint of the range set forth on the cover page of this prospectus.
 
(2) Reflects a lump-sum payment equal to his then-current annual base salary. Mr. Shaw’s termination must be by us without cause or by Mr. Shaw for good reason in order for him to receive the continued base salary disclosed in the table. See the narrative description of the terms of Mr. Shaw’s employment arrangements, above, for more information.


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(3) Reflects accelerated vesting of 33% of Mr. Shaw’s remaining unvested stock options. Mr. Shaw’s termination must be by us without cause or by Mr. Shaw for good reason in order for him to receive the accelerated vesting disclosed in the table. See the narrative description of the terms of Mr. Shaw’s employment arrangements, above, for more information.
 
(4) Reflects accelerated vesting of 100% of Mr. Shaw’s remaining unvested stock options.
 
(5) Reflects continued base salary for 12 months following termination.
 
(6) Mr. Reilly is entitled to accelerated vesting of 50% of his remaining unvested stock options upon an involuntary termination of Mr. Reilly within his first year of employment with us. Mr. Reilly is entitled to accelerated vesting of 100% of his remaining unvested stock options upon an involuntary termination of Mr. Reilly after his first year of employment with us; the value of such acceleration of equity vesting would be $          , based on the assumptions discussed in footnote (1) above but assuming that the involuntary termination took place after his first year of employment with us.
 
(7) Reflects continued base salary for six months following termination. Mr. Njemanze is entitled to such continued base salary regardless of the circumstances of his termination.
 
(8) Reflects continued base salary and COBRA health insurance premiums for 12 months following termination.
 
(9) Reflects 24 months of additional vesting of Mr. Mosher’s remaining unvested stock options.
 
(10) Mr. Grierson’s termination must take place within six months of a change of control in order for him to receive the continued base salary, COBRA health insurance premiums and accelerated vesting disclosed in the table.
 
(11) Reflects continued base salary and COBRA health insurance premiums for three months following termination.
 
(12) Reflects accelerated vesting of 50% of Mr. Grierson’s remaining unvested stock options.
 
Employee Benefit Plans
 
2000 Stock Incentive Plan
 
Our board of directors adopted our 2000 Stock Incentive Plan in May 2000 and our stockholders approved it on May 25, 2000. Our 2000 Stock Incentive Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or the Code, to our employees and any parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options to our employees, directors and consultants and any parent and subsidiary corporations’ employees and consultants. The 2000 Stock Incentive Plan also allows for awards of restricted stock. We ceased issuing awards under the 2000 Stock Incentive Plan upon the implementation of the 2002 Stock Plan, which is described below. Likewise, we will not grant any additional awards under our 2000 Stock Incentive Plan following this offering. Instead we will grant options under our 2007 Equity Incentive Plan.
 
Share Reserve.  Awards are no longer granted under the 2000 Stock Incentive Plan. As of April 30, 2007, options to purchase 190,500 shares of common stock were outstanding under options granted pursuant to this plan. Shares of common stock reserved for issuance pursuant to this plan have been rolled into our 2002 Stock Plan.
 
Administration.  Our compensation committee currently administers our 2000 Stock Incentive Plan. Under our 2000 Stock Incentive Plan, our compensation committee has the power to determine the terms of the awards, including who will receive awards, the exercise price, the number of shares subject to each award, the vesting schedule and exercisability of awards and the form of consideration payable upon exercise.
 
Stock Options.  The exercise price of incentive stock options and nonstatutory stock options must be at least equal to the fair market value of our common stock on the date of grant, and their terms may not exceed ten years. With respect to incentive stock options granted to any participant who owns 10% or more of the voting power of all classes of our outstanding stock as of the grant date, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. With respect to nonstatutory stock options granted to any participant who owns 10% or more of the voting power of all classes of our outstanding stock as of the grant


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date, the exercise price of nonstatutory stock options must also be equal to at least 110% of the fair market value on the grant date.
 
Upon termination of a participant’s service with us, he or she may exercise his or her option for the period of time stated in the option agreement, to the extent his or her option is vested on the date of termination. If termination is due to death or disability, the option will remain exercisable for twelve months. If termination is for cause, the option will immediately terminate in its entirety. In all other cases and if not otherwise stated in the award agreement, the option will remain exercisable for 30 days. An option may never be exercised later than the expiration of its term.
 
Restricted Stock.  The right to purchase restricted stock may be granted alone, in addition to or in tandem with other awards granted under our 2000 Stock Incentive Plan. The grant of restricted stock is the right to purchase shares of our common stock that vest in accordance with terms and conditions established by the compensation committee. The compensation committee will determine the number of restricted shares that may be granted. The compensation committee may impose whatever conditions to vesting it determines to be appropriate. Upon termination of the purchaser’s service with us for reasons other than death or disability, the restricted shares are forfeited. Upon the death of a purchaser or upon purchaser’s termination of service as a result of disability, all restricted shares shall be forfeited, unless the compensation committee in its sole discretion shall determine otherwise.
 
Effect of a Change in Control.  Our 2000 Stock Incentive Plan provides that in the event of certain change in control transactions, including our merger with or into another corporation or the sale of substantially all of our assets, the stock option agreement may provide that the options or restricted shares shall become fully or partially vested and exercisable, for the assumption of options or for the substitution of new options and restricted shares by the successor entity.
 
Transferability.  The 2000 Stock Incentive Plan does not allow for the sale or transfer of incentive stock option awards and they may be exercised only during the lifetime of the participant and only by such participant. However, a nonstatutory stock option award may be transferred upon the approval of the compensation committee by will or the laws of descent and distribution or by gift to a member of a participant’s immediate family.
 
Additional Provisions.  Our compensation committee has the authority to amend or terminate the 2000 Stock Incentive Plan subject to the approval of our stockholders; provided that, such action shall not affect any award previously granted under the 2000 Stock Incentive Plan.
 
2002 Stock Plan
 
Our board of directors adopted our 2002 Stock Plan in March 2002 and our stockholders approved it on March 29, 2002, and it was amended and restated on January 24, 2007. Our 2002 Stock Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Code to our employees and any parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options to our employees, directors and consultants and any parent and subsidiary corporations’ employees and consultants. The 2002 Stock Plan also allows for awards of stock purchase rights. We will not grant any additional awards under our 2002 Stock Plan following this offering. Instead we will grant options under our 2007 Equity Incentive Plan.
 
Share Reserve.  We have reserved a total of 40,390,937 shares of our common stock for issuance pursuant to the 2002 Stock Plan, however, in the event that shares previously issued are reacquired such shares will be added to the number of shares available for issuance. As of April 30, 2007, options to purchase 22,900,796 shares of common stock were outstanding and 6,703,243 shares were available for future grant under this plan.
 
Administration.  Our compensation committee currently administers our 2002 Stock Plan. Under our 2002 Stock Plan, the plan administrator has the power to determine the terms of the awards, including the employees and consultants who will receive awards, the exercise price, the number of shares subject to each award, the vesting schedule and exercisability of awards and the form of consideration payable upon exercise.
 
Stock Options.  The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant, and their terms may not exceed ten years. The exercise price of nonstatutory


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stock options may be determined by the plan administrator provided the per share price shall be no less than 85% on the date of grant. With respect to incentive stock options granted to any participant who owns 10% or more of the voting power of all classes of our outstanding stock as of the grant date, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. With respect to participants who own 10% or more of the voting power of all classes of our outstanding stock as of the grant date, the exercise price of nonstatutory stock options must also be equal to at least 110% of the fair market value on the grant date. The plan administrator determines the term of all other options.
 
Upon termination of a participant’s service with us or with a subsidiary of ours, he or she may exercise his or her option for the period of time stated in the option agreement, to the extent his or her option is vested on the date of termination. In the absence of a stated period in the award agreement, if termination is due to death or disability, the option will remain exercisable for twelve months (but not less than six months). If termination is for retirement at or after age 65, the option will remain exercisable for twelve months. If termination is for cause, the option will immediately terminate in its entirety. In all other cases and if not otherwise stated in the award agreement, the option will remain exercisable for 30 days. An option may never be exercised later than the expiration of its term.
 
Stock Purchase Rights.  Stock purchase rights may be granted alone, in addition to or in tandem with other awards granted under our 2002 Stock Plan. Stock purchase rights are rights to purchase shares of our common stock that vest in accordance with terms and conditions established by the compensation committee. The compensation committee will determine the number of shares subject to a stock purchase right granted to any employee. The compensation committee may impose whatever conditions to vesting it determines to be appropriate. Unless the compensation committee determines otherwise, we have a repurchase option exercisable upon termination of the purchaser’s service with us. Shares subject to stock purchase rights that do not vest are subject to our right of repurchase or forfeiture.
 
Effect of a Change in Control.  Our 2002 Stock Plan provides that in the event of certain change in control transactions, including our merger with or into another corporation or the sale of substantially all of our assets, all outstanding awards under the plan shall be subject to the agreement governing such change in control.
 
Transferability.  Unless otherwise determined by the plan administrator, the 2002 Stock Plan generally does not allow for the sale or transfer of awards under the 2002 Stock Plan other than by will or the laws of descent and distribution, and may be exercised only during the lifetime of the participant and only by such participant. However, a nonstatutory stock option may be transferred by gift to a member of the optionee’s immediate family or a gift to a trust in which members of the optionee’s immediate family have a beneficial interest of more than 50%.
 
Additional Provisions.  Our compensation committee has the authority to amend, suspend or terminate the 2002 Stock Plan provided such action is approved by the our stockholders if it increases the number of shares available for issuance under the plan or materially changes the class of persons who are eligible for the grant of incentive stock options.
 
2007 Equity Incentive Plan
 
We anticipate that we will adopt a 2007 Equity Incentive Plan that will become effective on the date of this prospectus and will serve as the successor to our 2000 Stock Incentive Plan and our 2002 Stock Plan. We anticipate that we will reserve           shares of our common stock to be issued under our 2007 Equity Incentive Plan. In addition, we anticipate that shares not issued, or subject to outstanding grants, under our 2000 Stock Incentive Plan and our 2002 Stock Plan on the date of this prospectus, and any shares issued under the 2000 Stock Incentive Plan and the 2002 Stock Plan that are forfeited or repurchased by us or that are issuable upon exercise of options that expire or become unexercisable for any reason without having been exercised in full, will be available for grant and issuance under our 2007 Equity Incentive Plan. We anticipate that the number of shares available for grant and issuance under the 2007 Equity Incentive Plan will be increased automatically on January 1 of each of 2008 through 2011 by an amount equal to     % of our shares outstanding on the immediately preceding December 31, unless


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our board of directors, in its discretion, determines to make a smaller increase. In addition, the following shares will again be available for grant and issuance under our 2007 Equity Incentive Plan:
 
  •  shares subject to an option or stock appreciation right granted under our 2007 Equity Incentive Plan that cease to be subject to the option or stock appreciation right for any reason other than exercise of the option or stock appreciation right;
 
  •  shares subject to an award granted under our 2007 Equity Incentive Plan that are forfeited or repurchased by us at the original issue price;
 
  •  shares surrendered pursuant to an exchange program; or
 
  •  shares subject to an award granted under our 2007 Equity Incentive Plan that otherwise terminates without shares being issued.
 
We anticipate that our 2007 Equity Incentive Plan will terminate ten years from the date our board of directors approves the plan, unless it is terminated earlier by our board of directors. Our 2007 Equity Incentive Plan authorizes the award of stock options, restricted stock awards, stock appreciation rights, restricted stock units, stock bonus awards and performance shares. No person will be eligible to receive more than           shares in any calendar year under our 2007 Equity Incentive Plan other than a new employee of ours or a new employee of any parent or subsidiary of ours, who will be eligible to receive no more than           shares under the plan in the calendar year in which the employee commences employment.
 
Our 2007 Equity Incentive Plan will be administered by our compensation committee, all of the members of which are non-employee directors under applicable federal securities laws and outside directors as defined under applicable federal tax laws, or by our board of directors acting in place of the compensation committee. Our compensation committee will have the authority to construe and interpret our 2007 Equity Incentive Plan, grant and determine the terms of each award, including the exercise price, the number of shares subject to the award, the exercisability of the award and the form of consideration payable upon exercise of the award, and make all other determinations necessary or advisable for the administration of the plan. The compensation committee will also have the authority to institute an exchange program whereby outstanding awards may be surrendered, cancelled or exchanged.
 
Options.  We anticipate that our 2007 Equity Incentive Plan will provide for the grant of incentive stock options that qualify under Section 422 of the Code only to our employees and those of any parent or subsidiary of ours. All awards other than incentive stock options may be granted to our employees, directors, consultants, independent contractors and advisors. The exercise price of incentive stock options must be at least equal to 100% of the fair market value of our common stock on the date of grant, and the exercise price of incentive stock options granted to 10% or greater stockholders must be at least equal to 110% of the fair market value of our common stock on that date. The exercise price of nonqualified stock options may be less than 100% of the fair market value of our common stock on the date of grant in the compensation committee’s discretion.
 
Our compensation committee may provide for options to be exercised only as they vest or to be immediately exercisable with any shares issued on exercise being subject to our right of repurchase that lapses as the shares vest. Options may vest based on time or achievement of performance conditions. In general, options will vest over a four-year period. After termination of services, an option may be exercised for the period of time stated in the option agreement. Generally, if termination is due to death or disability, the option will remain exercisable for 12 months. In all other cases, the option will generally remain exercisable for three months. Options will generally terminate immediately upon termination of employment for cause. The maximum term of options granted under our 2007 Equity Incentive Plan is ten years, with a maximum term of five years for incentive stock options granted to 10% or greater stockholders.
 
Restricted Stock Awards.  A restricted stock award is an offer by us to sell shares of our common stock subject to restrictions. The price, if any, of a restricted stock award will be determined by our compensation committee. Unless otherwise determined by our compensation committee at the time of award, vesting will cease on the date the participant no longer provides services to us and unvested shares will be forfeited to us. Restricted stock awards may vest based on time or achievement of performance conditions.


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Stock Appreciation Rights.  Stock appreciation rights provide for a payment, or payments, in cash or shares of our common stock, to the holder based upon the increase in the fair market value of our common stock on the date of exercise from the stated exercise price (subject to any maximum number of shares as may be specified in the applicable award agreement). Stock appreciation rights may vest based on time or achievement of performance conditions. Stock appreciation rights expire under the same rules that apply to stock options.
 
Restricted Stock Units.  Restricted stock units represent the right to receive shares of our common stock at a specified date in the future, subject to forfeiture of that right because of termination of the holder’s services to us or the holder’s failure to achieve certain performance conditions. If a restricted stock unit has not been forfeited, then on the date specified in the restricted stock unit agreement, we will deliver to the holder of the restricted stock unit whole shares of our common stock, which may be subject to additional restrictions, cash or a combination of our common stock and cash.
 
Performance Shares.  Performance shares are awards denominated in shares of our common stock that may be settled in cash or by issuance of those shares only if performance goals established by our compensation committee have been achieved or the awards otherwise vest.
 
Stock Bonuses.  Stock bonuses are awards of shares of our common stock, which may be restricted stock or restricted stock units, that are granted as additional compensation for service and/or performance. Payment from the holder is not required for stock bonuses, and stock bonuses are generally not subject to vesting.
 
Grants to Outside Directors.  Non-employee members of our board of directors are eligible to receive any type of award offered under the 2007 Equity Incentive Plan except incentive stock options, which can only be granted to employees. Awards to our non-employee directors may be made automatically pursuant to a policy adopted by our board of directors, or made time to time as determined in the discretion of our board of directors. If stock options or stock appreciation rights are granted to our non-employee directors, their exercise price may not be less than the fair market value of our common stock when the option or stock appreciation right is granted. In the event of a change in control transaction, all awards held by our non-employee directors will accelerate fully and become vested and exercisable or settled, as the case may be.
 
Awards granted under our 2007 Equity Incentive Plan generally may not be transferred in any manner other than by will or by the laws of descent and distribution or as determined by our compensation committee. Awards may be exercised during the lifetime of the award holder only by the award holder or the award holder’s guardian or legal representative.
 
If we are dissolved or liquidated or have a change in control transaction, outstanding awards, including any vesting provisions, may be assumed or substituted by the successor company. Outstanding awards that are not assumed or substituted will expire upon the dissolution, liquidation or closing of a change in control transaction. In the discretion of our board of directors or our compensation committee, if so designated by our board of directors, the vesting of these awards may be accelerated in connection with these types of transactions
 
2007 Employee Stock Purchase Plan
 
We anticipate that we will adopt a 2007 Employee Stock Purchase Plan, which is designed to enable eligible employees to purchase shares of our common stock periodically at a discount. Purchases will be accomplished through participation in discrete offering periods. Our 2007 Employee Stock Purchase Plan is intended to qualify as an employee stock purchase plan under Section 423 of the Code. We anticipate that we will seek approval of our 2007 Employee Stock Purchase Plan from our board of directors and our stockholders to be effective upon completion of this offering.
 
We anticipate that we will initially reserve           shares of our common stock for issuance under our 2007 Employee Stock Purchase Plan. We anticipate that the number of shares reserved for issuance under our 2007 Employee Stock Purchase Plan will increase automatically on January 1 of each of the first eight years commencing after the completion of this offering by the number of shares equal to     % of our total outstanding shares as of the immediately preceding December 31 (rounded to the nearest whole share). Our board of directors or compensation committee may reduce the amount of the increase in any particular year. No more than           shares of our


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common stock may be issued under our 2007 Employee Stock Purchase Plan, and no other shares may be added to this plan without the approval of our stockholders.
 
Our compensation committee will administer our 2007 Employee Stock Purchase Plan. Our employees generally will be eligible to participate in our 2007 Employee Stock Purchase Plan if they are employed by us, or a subsidiary or parent of ours that we designate, and are regularly scheduled to work more than 20 hours per week and more than five months in a calendar year. Employees who are 5% stockholders, or would become 5% stockholders as a result of their participation in our 2007 Employee Stock Purchase Plan, will be ineligible to participate in our 2007 Employee Stock Purchase Plan. We may impose additional restrictions on eligibility as well. Under our 2007 Employee Stock Purchase Plan, eligible employees may acquire shares of our common stock by accumulating funds through payroll deductions. Our eligible employees may select a rate of payroll deduction between 1% and     % of their cash compensation. We also have the right to amend or terminate our 2007 Employee Stock Purchase Plan, except that, subject to certain exceptions, no such action may adversely affect any outstanding rights to purchase stock under the plan. Our 2007 Employee Stock Purchase Plan will terminate on the tenth anniversary of the first purchase date (as set forth in the plan), unless it is terminated earlier by our board of directors.
 
When an initial offering period commences, our employees who meet the eligibility requirements for participation in that offering period will automatically be granted a non-transferable option to purchase shares in that offering period. For other offering periods, new participants will have to enroll in a timely manner. Once an employee is enrolled, his or her participation will be automatic in subsequent offering periods. Each offering period may run for no more than 24 months and consist of no more than 5 purchase periods. An employee’s participation will automatically end upon termination of employment for any reason.
 
No participant will have the right to purchase our shares at a rate which, when aggregated with purchase rights under all our employee stock purchase plans that are also outstanding in the same calendar year(s), have a fair market value of more than $25,000, determined in accordance with Section 423 of the Code, for each calendar year in which that right is outstanding. The purchase price for shares of our common stock purchased under our 2007 Employee Stock Purchase Plan will be 85% of the lesser of the fair market value of our common stock on the first day of the offering period or the last trading day of the applicable purchase period within that offering period. For the initial offering period, the fair market value on the first trading day will be the price at which our shares are initially offered.
 
In the event of a change in control transaction, each outstanding right to purchase shares under our 2007 Employee Stock Purchase Plan may be assumed or substituted by our successor. In the event that the successor refuses to assume or substitute the outstanding purchase rights, any offering periods that commenced prior to the closing of the proposed change in control transaction will be shortened and terminated on a new purchase date. The new purchase date will occur prior to the closing of the proposed change in control and our 2007 Employee Stock Purchase Plan will then terminate on the closing of the proposed change in control.
 
401(k) Plan
 
We maintain a tax-qualified retirement plan that provides eligible employees with an opportunity to save for retirement on a tax-advantaged basis. Eligible employees are able to participate in the 401(k) plan as of the first day of the month on or following the date they begin employment and participants are able to defer up to 25% of their eligible compensation subject to applicable annual Code limits. The 401(k) plan permits us to make profit sharing contributions to eligible participants, although such contributions are not required and are not currently contemplated. Pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. All accounts are 100% vested at all times. The 401(k) plan is intended to qualify under Sections 401(a) and 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan and all contributions are deductible by us when made.
 
Other
 
We currently have employees in Canada, Germany, Hong Kong, India, Japan, Netherlands, Singapore, South Korea and the United Kingdom. In addition to providing statutorily mandated benefit programs in each country, we


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contribute to private plans for health, pension and insurance benefits in the countries where those contributions are customarily provided to employees.
 
Limitations on Liability and Indemnification Matters
 
Our restated certificate of incorporation contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Delaware law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:
 
  •  any breach of the director’s duty of loyalty to us or our stockholders,
 
  •  any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law,
 
  •  unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law, or
 
  •  any transaction from which the director derived an improper personal benefit.
 
Our restated certificate of incorporation provides that we are required to indemnify our directors and our restated bylaws provide that we are required to indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law. Any repeal of or modification to our restated certificate of incorporation or restated bylaws may not adversely affect any right or protection of a director or officer for or with respect to any acts or omissions of such director or officer occurring prior to such amendment or repeal. Our restated bylaws also provide that we shall advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of Delaware law. We have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by the board of directors. With certain exceptions, these agreements provide for indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors’ and officers’ liability insurance.
 
The limitation of liability and indemnification provisions in our restated certificate of incorporation and restated bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.


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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
The following are transactions or agreements in effect with each holder of more than 5% of our capital stock, our directors, executive officers or any member of, or person sharing the household with, any of the foregoing:
 
Investors’ Rights Agreement
 
We have entered into an amended and restated investors’ rights agreement with the purchasers of our outstanding Series A preferred stock, Series B preferred stock and Series C preferred stock, including entities with which certain of our directors are affiliated, the holders of our outstanding Series B preferred stock warrants and certain of the purchasers of our outstanding common stock. As of April 30, 2007, the holders of an aggregate of 49,138,177 shares of our common stock, including shares of our common stock issuable upon conversion of our preferred stock, and the holders of warrants to purchase an aggregate of 35,962 shares of our common stock, including shares of our common stock issuable upon the exercise of warrants to purchase shares of our preferred stock that will convert into warrants to purchase common stock upon completion of this offering, or their permitted transferees, are entitled to rights with respect to the registration of these shares under the Securities Act. For a more detailed description of these registration rights, see “Description of Capital Stock—Registration Rights.”
 
Stock Option Grants
 
We have granted certain of our executive officers and directors equity based awards, and in September 2007, our board of directors has approved compensation to be paid to our directors following the completion of this offering. See the related descriptions in this prospectus under the captions “Management—Director Compensation” and “Management—Executive Compensation.”
 
Employment Arrangements and Indemnification Agreements
 
We have entered into employment arrangements with certain of our executive officers. See “Management—Executive Compensation—Employment, Severance and Change in Control Arrangements.”
 
We entered or will enter into indemnification agreements with each of our directors and executive officers. The indemnification agreements and our restated certificate of incorporation and restated bylaws require us to indemnify our directors and executive officers to the fullest extent permitted by Delaware law. See “Management—Limitations on Liability and Indemnification Matters.”
 
Review, Approval or Ratification of Transactions with Related Parties
 
We anticipate that our policy and the charters of our nominating and corporate governance committee and our audit committee to be adopted by our board of directors will require that any transaction with a related party that must be reported under applicable rules of the SEC, other than compensation related matters, must be reviewed and approved or ratified by our nominating and corporate governance committee, unless the related party is, or is associated with, a member of that committee, in which event the transaction must be reviewed and approved by our audit committee. These committees have not adopted policies or procedures for review of, or standards for approval of, these transactions.


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PRINCIPAL AND SELLING STOCKHOLDERS
 
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of August 31, 2007 and as adjusted to reflect the sale of common stock offered by us and the selling stockholders in this offering, for:
 
  •  each person who we know beneficially owns more than 5% of our common stock;
 
  •  each of our directors;
 
  •  each of our named executive officers;
 
  •  all of our directors and executive officers as a group; and
 
  •  each selling stockholder.
 
We have determined beneficial ownership in accordance with the rules of the SEC. 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 98,892,066 shares of common stock outstanding at August 31, 2007, assuming conversion of all outstanding shares of preferred stock into 55,950,192 shares of common stock. For purposes of the table below, we have assumed that           shares of common stock will be sold in 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 to be outstanding all shares of common stock subject to options, warrants or other convertible securities held by that person or entity that are currently exercisable or exercisable within 60 days of August 31, 2007. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o ArcSight, Inc., 5 Results Way, Cupertino, California 95014.
 
                                         
    Shares Beneficially
    Number of
    Shares Beneficially
 
    Owned
    Shares
    Owned
 
    Prior to This Offering     Being
    After This Offering  
Name of Beneficial Owner
  Number     Percentage     Offered     Number     Percentage  
 
Directors and Executive Officers:
                                       
Robert W. Shaw(1)
    10,266,406       10.1 %                           %
Sandra Bergeron(2)
    391,094       *                       *  
William P. Crowell(3)
    391,094       *                       *  
E. Stanton McKee, Jr.(4)
    391,094       *                       *  
Craig Ramsey(5)
    5,962,132       6.0                          
Scott A. Ryles(6)
    391,094       *                       *  
Ted Schlein(7)
    17,931,707       18.1                          
Ernest von Simson(3)
    391,094       *                       *  
Thomas Reilly(8)
    4,647,753       4.5                          
Hugh S. Njemanze(9)
    4,533,645       4.6                          
Kevin P. Mosher(10)
    1,883,645       1.9                          
Stewart Grierson(11)
    1,383,645       1.4                          
All executive officers and directors
as a group (15 persons)(12)
    49,569,418       44.4                          
 
(table continues on following page)


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    Shares Beneficially
    Number of
    Shares Beneficially
 
    Owned
    Shares
    Owned
 
    Prior to This Offering     Being
    After This Offering  
Name of Beneficial Owner
  Number     Percentage     Offered     Number     Percentage  
 
5% Stockholders:
                                       
Entities affiliated with Kleiner Perkins Caufield & Byers(7)
    23,521,123       23.8                          
Entities affiliated with Institutional Venture Partners(13)
    11,787,821       11.9                          
Daly Alpha Limited Partnership(14)
    10,292,454       10.4                          
Entities affiliated with Integral Capital Partners(15)
    6,256,022       6.3                          
Entities affiliated with New Enterprise Associates(16)
    5,347,523       5.4                          
Other Selling Stockholders:
                                       
                                         
                                         
                                         
                                         
                                         
 
* Less than 1%.
 
(1) Represents 7,200,000 shares held by Mr. Shaw and includes options exercisable for 3,066,406 shares of common stock within 60 days of August 31, 2007, of which 745,835 shares would be subject to a right of repurchase in our favor upon exercise and Mr. Shaw’s cessation of service prior to vesting.
 
(2) Includes an option exercisable for 391,094 shares of common stock within 60 days of August 31, 2007, of which 260,729 shares would be subject to a right of repurchase in our favor upon exercise and Ms. Bergeron’s cessation of service prior to vesting.
 
(3) Includes an option exercisable for 391,094 shares of common stock within 60 days of August 31, 2007.
 
(4) Includes an option exercisable for 391,094 shares of common stock within 60 days of August 31, 2007, of which 130,365 shares would be subject to a right of repurchase in our favor upon exercise and Mr. McKee’s cessation of service prior to vesting.
 
(5) Includes 2,898,551 shares held by Mr. Ramsey, 2,004,365 shares held by Mr. Ramsey and Maja Ramsey, his wife, together, and 668,122 shares held by Ms. Ramsey, as well as an option exercisable for 391,094 shares of common stock within 60 days of August 31, 2007 that is held by Mr. Ramsey.
 
(6) Includes an option exercisable for 391,094 shares of common stock within 60 days of August 31, 2007. Excludes 23,521,123 shares held by entities affiliated with Kleiner Perkins Caufield & Byers. Mr. Ryles is a limited partner in KPCB Holdings, Inc., as nominee, however, Mr. Ryles does not have voting or dispositive power with respect to these shares and disclaims beneficial ownership except to the extent of his pecuniary interest in these shares.
 
(7) Includes 9,129,345 shares beneficially owned and 13,316 shares issuable upon exercise of a warrant held by Kleiner Perkins Caufield & Byers IX-A, L.P.; 281,843 shares beneficially owned and 411 shares issuable upon exercise of a warrant held by Kleiner Perkins Caufield & Byers IX-B, L.P.; 8,036,030 shares beneficially owned and 11,722 shares issuable upon exercise of a warrant held by Kleiner Perkins Caufield & Byers X-A, L.P.; 226,649 shares beneficially owned and 331 shares issuable upon exercise of a warrant held by Kleiner Perkins Caufield & Byers X-B, L.P.; and 231,722 shares beneficially owned and 338 shares issuable upon exercise of a warrant held by Ted Schlein, Trustee, Schlein Family Trust Dtd 4/20/99. Excludes, in the case of Mr. Schlein, 5,581,275 shares held by and 8,141 shares issuable upon exercise of a warrant held by other entities affiliated with Kleiner Perkins Caufield & Byers as to which Mr. Schlein does not have voting or dispositive power. Shares are held for convenience in the name of “KPCB Holdings, Inc. as nominee” for the account of entities affiliated with Kleiner Perkins Caufield & Byers and others. KPCB Holdings, Inc. has no voting, dispositive or pecuniary interest in any such shares. Mr. Schlein disclaims beneficial ownership of any of the shares held by the aforementioned entities, except to the extent of his pecuniary interest therein. The address of entities affiliated with Kleiner Perkins Caufield & Byers is 2750 Sand Hill Road, Menlo Park, California 94025.
 
(8) Includes options exercisable for 4,647,753 shares of common stock within 60 days of August 31, 2007, which would be subject to a right of repurchase in our favor upon exercise and Mr. Reilly’s cessation of service prior to vesting.
 
(9) Includes 1,650,000 shares held by Mr. Njemanze and 2,250,000 shares held by Mr. Njemanze and Cherl M. Njemanze, his wife, together, as well as options exercisable for 633,645 shares of common stock within 60 days of August 31, 2007 that is held by Mr. Njemanze, of which 206,251 shares would be subject to a right of repurchase in our favor upon exercise and Mr. Njemanze’s cessation of service prior to vesting.
 
(10) Represents 1,500,000 shares held by Mr. Mosher, of which 156,250 shares are subject to our right of repurchase in our favor upon Mr. Mosher’s cessation of service prior to vesting, and includes options exercisable for 383,645 shares of common stock within 60 days of August 31, 2007, of which 138,543 shares would be subject to a right of repurchase in our favor upon exercise and Mr. Mosher’s cessation of service prior to vesting.
 
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(11) Represents 200,000 shares held by Mr. Grierson and Jennifer Murray, his wife, together, as well as options exercisable for 1,183,645 shares of common stock within 60 days of August 31, 2007 that is held by Mr. Grierson, of which 269,793 shares would be subject to a right of repurchase in our favor upon exercise and Mr. Grierson’s cessation of service prior to vesting.
 
(12) Includes 156,250 shares subject to a right of repurchase in our favor upon an executive officer’s cessation of service prior to vesting and options exercisable for 12,817,791 shares of common stock within 60 days of August 31, 2007, of which 6,671,631 shares would be subject to vesting and a right of repurchase in our favor upon exercise and the executive officers’ or directors’ cessation of service prior to vesting.
 
(13) Includes 9,655,794 shares held by Institutional Venture Partners X, L.P. (“IVP X”) and 2,132,027 shares held by Institutional Venture Partners X GmbH & Co. Beteiligungs KG (“IVP X-KG”). Institutional Venture Management X, LLC (“IVM X”) is the general partner of IVP X and managing limited partner of IVP X-KG. Todd Chaffee, Reid Dennis, Mary Jane Elmore, Norm Fogelsong, Steve Harrick and Dennis Phelps are managing directors of IVM X and share voting and dispositive power over these shares. Such individuals disclaim beneficial ownership of these shares except to the extent of his/her actual respective pecuniary interest therein. The address of Institutional Venture Partners is 3000 Sand Hill Road, Building 2, Suite 250, Menlo Park, California 94025.
 
(14) KPCB Holdings, Inc. has voting power over the shares held by Daly Alpha Limited Partnership pursuant to a voting agreement, dated as of October 3, 2002, between KPCB Holdings, Inc. and Daly Alpha Limited Partnership. Alex Daly has dispositive power over these shares. The address of Daly Alpha Limited Partnership is 1643 Brickell Avenue, Suite #3502, Miami, Florida 33129.
 
(15) Represents 17,739 shares held by and 39 shares issuable upon exercise of a warrant held by Integral Capital Partners V Side Fund SLP, LLC (“ICP Side Fund SLP”), 81,388 shares held by 178 shares issuable upon exercise of a warrant held by Integral Capital Partners V Side Fund, L.P. (“ICP Side Fund”) and 6,143,266 shares held by and 13,412 shares issuable upon exercise of a warrant held by Integral Capital Partners V, L.P. (“ICM”) Integral Capital Management V, LLC is the general partner of ICP Side Fund SLP, ICP Side Fund and ICM. John Powell, Roger McNamee, Pamela Hagenah, Glen Kacher, Charles Morris and Brian Stansky are managers of Integral Capital Management V, LLC and share voting and dispositive power over these shares. Such individuals disclaim beneficial ownership of these shares except to the extent of his/her actual respective pecuniary interest therein. The address of Integral Capital Partners is 3000 Sand Hill Road, Building 3, Suite 240, Menlo Park, California 94025.
 
(16) Represents 5,327,517 shares held by New Enterprise Associates 11, Limited Partnership and 20,006 shares held by NEA Ventures 2005, Limited Partnership. NEA Partners 11, Limited Partnership is the sole general partner of New Enterprise Associates 11, Limited Partnership, and NEA 11 GP, LLC, which has eleven individual managers, is the sole general partner of NEA Partners 11, Limited Partnership. The individual managers of NEA 11 GP, LLC are M. James Barrett, Peter J. Barris, Forest Baskett, Ryan D. Drant, Krishna “Kittu” Kolluri, C. Richard Kramlich, Charles M. Linehan, Charles W. Newhall III, Mark W. Perry, Scott D. Sandell and Eugene A. Trainor III, and may be deemed to share voting and dispositive power over these shares and disclaim beneficial ownership of these shares except to the extent of their actual respective pecuniary interest therein. These individual managers do not have voting and dispositive power over the shares held by NEA Ventures 2005, Limited Partnership and disclaim beneficial ownership of these shares, except to the extent of their actual respective pecuniary interest therein. The address of entities affiliated with New Enterprise Associates is 2490 Sand Hill Road, Menlo Park, California 94025.


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DESCRIPTION OF CAPITAL STOCK
 
Upon the completion of this offering, our authorized capital stock will consist of           shares of common stock, $0.00001 par value per share, and           shares of preferred stock, $0.00001 par value per share. A description of the material terms and provisions of our restated certificate of incorporation and restated bylaws affecting the rights of holders of our capital stock is set forth below. The description is intended as a summary, and is qualified in its entirety by reference to the form of our restated certificate of incorporation and the form of our restated bylaws to be adopted prior to the completion of this offering that will be filed with the registration statement relating to this prospectus.
 
As of April 30, 2007, and after giving effect to the automatic conversion of all of our outstanding preferred stock into common stock upon completion of this offering, there were outstanding:
 
  •  98,430,496 shares of our common stock held by approximately 164 stockholders;
 
  •  23,091,296 shares issuable upon exercise of outstanding stock options; and
 
  •  76,820 shares issuable upon exercise of outstanding warrants.
 
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 funds legally available if our board of directors, in its discretion, determines to issue dividends and only then at the times and in the amounts that our board of directors may determine.
 
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. Our restated certificate of incorporation eliminates the right of stockholders to cumulate votes for the election of directors. Our restated certificate of incorporation establishes a classified board of directors, to be divided into three classes with staggered three-year terms. 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 three-year terms.
 
No Preemptive or Similar Rights
 
Our common stock is not entitled to preemptive rights and is not subject to conversion, redemption or sinking fund provisions.
 
Right to Receive Liquidation Distributions
 
Upon our dissolution, liquidation or winding-up, the assets legally available for distribution to our stockholders are distributable ratably among the holders of our common stock, subject to prior satisfaction of all outstanding debt and liabilities and the preferential rights and payment of liquidation preferences, if any, on any outstanding shares of preferred stock.
 
Preferred Stock
 
Upon the closing of this offering, each outstanding share of preferred stock will be converted into common stock.
 
Following this offering, we will be authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions. Our board of directors also can 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


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by our stockholders. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect 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 our company and may adversely affect the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plan to issue any shares of preferred stock.
 
Options
 
As of April 30, 2007, we had options to purchase 23,091,296 shares of our common stock outstanding pursuant to our 2000 Stock Incentive Plan and 2002 Stock Plan.
 
Warrants
 
As of April 30, 2007, we had one warrant to purchase 25,185 shares of our common stock with an exercise price of $0.001 per share and seven warrants to purchase an aggregate of 51,635 shares of our Series B Preferred Stock with an exercise price of $0.00001 per share. The exercise price of each warrant may be paid either in cash or by surrendering the right to receive shares of common stock having a value equal to the exercise price.
 
Registration Rights
 
Pursuant to the terms of our amended and restated investors’ rights agreement, following this offering, the holders of 33,681,685 shares of our common stock issued upon conversion of our preferred stock and warrants and the holders of 15,492,454 shares of our common stock will be entitled to rights with respect to the registration of these shares under the Securities Act, as described below.
 
Demand Registration Rights
 
At any time beginning six months after the completion of this offering, upon the written request of holders of at least 30% of the shares having registration rights that we file a registration statement under the Securities Act with an anticipated aggregate price to the public of at least $5,000,000, we will be obligated to use our best efforts to register such shares. We are required to effect no more than two registration statements upon exercise of these demand registration rights. We may postpone the filing of a registration statement for up to 180 days once in a 12-month period if we determine that the filing would be seriously detrimental to us and our stockholders, and are not required to effect the filing of a registration statement during the period beginning 90 days prior to our good faith estimate of the date of the filing of, and ending on a date 90 days following the effective date of, a registration initiated by us.
 
Piggyback Registration Rights
 
If we register any of our securities for public sale, the stockholders with registration rights will have the right to include their shares in the registration statement. However, this right does not apply to a registration relating to any of our employee benefit plans or a corporate reorganization. The managing underwriter of any underwritten offering will have the right to limit, due to marketing reasons, the number of shares registered by these holders to 30% of the total shares covered by the registration statement.
 
Form S-3 Registration Rights
 
The holders of at least 20% of the shares having registration rights can request that we register all or a portion of their shares on Form S-3 if we are eligible to file a registration statement on Form S-3 and the aggregate price to the public of the shares offered is at least $5,000,000. We are required to file no more than one registration statement on Form S-3 upon exercise of these rights per 12-month period. We may postpone the filing of a registration statement on Form S-3 for up to 180 days once in a 12-month period if we determine that the filing would be seriously detrimental to us and our stockholders.


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Registration Expenses
 
We will pay all expenses incurred in connection with each of the registrations described above, except for underwriters’ and brokers’ discounts and commissions. However, we will not pay for any expenses of any demand or Form S-3 registration if the request is subsequently withdrawn by a majority of the holders requesting that we file such a registration statement, subject to limited exceptions.
 
Expiration of Registration Rights
 
The registration rights described above will expire five years after this offering is completed. The registration rights will terminate earlier with respect to a particular stockholder to the extent the shares held by and issuable to such holder may be sold under Rule 144 of the Securities Act in any 90 day period.
 
Holders of substantially all of our shares with these registration rights have signed agreements with the underwriters prohibiting the exercise of their registration rights for 180 days, subject to a possible extension of up to 34 additional days beyond the end of such 180-day period, following the date of this prospectus. These agreements are described below under “Underwriting.”
 
Anti-Takeover Provisions
 
The provisions of Delaware law, our restated certificate of incorporation and our restated bylaws may have the effect of delaying, deferring or discouraging another person from acquiring control of our company.
 
Delaware Law
 
We are governed by the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes mergers, asset sales or other transactions resulting in a financial benefit to the stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation’s outstanding voting stock. These provisions may have the effect of delaying, deferring or preventing a change in our control.
 
Restated Certificate of Incorporation and Restated Bylaw Provisions
 
Our restated certificate of incorporation and our restated bylaws will include a number of provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes in control of our management team, including the following:
 
  •  Board of Directors Vacancies.  Our restated certificate of incorporation and restated bylaws will authorize only our board of directors to fill vacant directorships. In addition, the number of directors constituting our board of directors will be set only by resolution adopted by a majority vote of our entire board of directors. These provisions prevent a stockholder from increasing the size of our board of directors and gaining control of our board of directors by filling the resulting vacancies with its own nominees.
 
  •  Classified Board.  Our restated certificate of incorporation and restated bylaws will provide that our board of directors is classified into three classes of directors. The existence of a classified board could delay a successful tender offeror from obtaining majority control of our board of directors, and the prospect of that delay might deter a potential offeror.
 
  •  Stockholder Action; Special Meeting of Stockholders.  Our restated certificate of incorporation will provide that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders. Stockholders will not be permitted to cumulate their votes for the election of directors. Our restated bylaws will further provide that special meetings of our stockholders may be called only by a majority of our board of directors, the chairman of our board of directors, our chief executive officer or our president.


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  •  Advance Notice Requirements for Stockholder Proposals and Director Nominations.  Our restated bylaws will provide advance notice procedures for stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders. Our restated bylaws also will specify certain requirements regarding the form and content of a stockholder’s notice. These provisions may preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders.
 
  •  Issuance of Undesignated Preferred Stock.  After the filing of our restated certificate of incorporation, our board of directors will have the authority, without further action by the stockholders, to issue up to           shares of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by the board of directors. The existence of authorized but unissued shares of preferred stock enables our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.
 
NASDAQ Global Market Listing
 
We will apply to list our common stock on The NASDAQ Global Market under the symbol “ARST.”
 
Transfer Agent and Registrar
 
The transfer agent and registrar for our common stock is          .


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SHARES ELIGIBLE FOR FUTURE SALE
 
Before this offering, there has not been a public market for shares of our common stock. Future sales of substantial amounts of shares of our common stock, including shares issued upon the exercise of outstanding options, in the public market after this offering, or the possibility of these sales occurring, could cause the prevailing market price for our common stock to fall or impair our ability to raise equity capital in the future.
 
Upon the closing of this offering, a total of           shares of common stock will be outstanding, assuming 98,430,496 shares outstanding as of April 30, 2007 and that there are no exercises of options or warrants after April 30, 2007. Of these shares, all           shares of common stock sold in this offering by us and the selling stockholders will be freely tradable in the public market without restriction or further registration under the Securities Act, unless these shares are held by “affiliates,” as that term is defined in Rule 144 under the Securities Act.
 
The remaining           shares of common stock will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below.
 
As a result of the lock-up agreements described below and subject to the provisions of Rules 144 and 701 under the Securities Act, these restricted securities will be available for sale in the public market as follows:
 
  •  on the date of this prospectus, none of the shares will be available for sale in the public market without restriction; and
 
  •  beginning 181 days after the date of this prospectus,           shares will become eligible for sale in the public market, of which           shares will be freely tradeable under Rule 144(k), of which           shares will be unvested and subject to our right of repurchase, and           shares will be freely tradeable, subject to the limitations under Rules 144 and 701.
 
In addition, of the 23,168,116 shares of our common stock that were subject to stock options and warrants outstanding as of April 30, 2007, options and warrants to purchase 6,369,591 shares of common stock were vested as of April 30, 2007 and will be eligible for sale 180 days following the effective date of this prospectus, subject to extension as described in “Underwriters.”
 
Rule 144
 
In general, under Rule 144 as currently in effect, a person who owns shares that were acquired from us or an affiliate of ours at least one year prior to the proposed sale is entitled to sell upon the expiration of the lock-up agreements described below, within any three-month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:
 
  •  1% of the number of shares of common stock then outstanding, which will equal approximately           shares immediately after the offering, or
 
  •  the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.
 
Rule 144(k)
 
Under Rule 144(k), a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than our affiliates, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.
 
Rule 701
 
In general, under Rule 701 as currently in effect, any of our employees, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement in a transaction


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before the effective date of this offering that was completed in reliance on Rule 701 and complied with the requirements of Rule 701 will, subject to the lock-up restrictions described below, be eligible to resell such shares 90 days after the date of this prospectus in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144.
 
Lock-Up Agreements
 
We and each of our directors, officers and a substantial majority of our other stockholders, including the selling stockholders, have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus: (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of directly or indirectly, any shares of common stock or any securities convertible into, or exercisable or exchangeable for, common stock; (ii) file any registration statement with the SEC relating to the offering of any shares of common stock or any securities convertible into, or exercisable or exchangeable for, common stock; or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; subject to specified exceptions.
 
The 180-day restricted period described in the preceding paragraph will be extended if:
 
  •  during the last 17 days of the 180-day restricted period we issue a release regarding earnings or regarding material news or a material event relating to us occurs; or
 
  •  prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period,
 
in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the release or the occurrence of the material news or material event, except in no event shall the restrictions extend past 214 days after the date of this prospectus.
 
See “Underwriters” for a more complete description of the lock-up agreements.
 
Registration Rights
 
Upon closing of this offering, the holders of an aggregate of 49,138,177 shares of our common stock and the holders of warrants to purchase an aggregate of 35,962 shares of our common stock, or their permitted transferees, will be entitled to rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchased by affiliates. See “Description of Capital Stock—Registration Rights” for additional information.
 
Registration Statements
 
We intend to file registration statements on Form S-8 under the Securities Act covering all of the shares of common stock subject to options outstanding and reserved for issuance under our stock plans, and shares issued or subject to options under our stock plans without reliance on Rule 701. We expect to file these registration statements as soon as practicable after this offering. However, none of the shares registered on Form S-8 will be eligible for resale until the expiration of the lock-up agreements to which they are subject.


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UNDERWRITERS
 
Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated is acting as representative, have severally agreed to purchase, and we and the selling stockholders have agreed to sell to them, severally, the number of shares indicated below:
 
         
    Number of
 
Underwriter
  Shares  
 
Morgan Stanley & Co. Incorporated
                
Lehman Brothers Inc. 
       
Wachovia Capital Markets, LLC
       
RBC Capital Markets Corporation
       
         
Total
       
         
 
The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and the selling stockholders and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.
 
The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $      a share under the public offering price. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives.
 
We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of           additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares of common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriters’ option is exercised in full, the total price to the public would be $     , the total underwriters’ discounts and commissions would be $      and the total proceeds to us and the selling stockholders would be $      and $     , respectively.
 
The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock offered by them.
 
We will apply to list our common stock on The NASDAQ Global Market under the symbol “ARST.”
 
We and each of our directors, officers and a substantial majority of our other stockholders, including the selling stockholders, have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus:
 
  •  offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock;
 
  •  file any registration statement with the SEC relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or
 
  •  enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock;


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whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise.
 
The restrictions described in the preceding paragraph do not apply to:
 
  •  in the case of us:
 
  (a)  the sale of shares to the underwriters;
 
  (b)  the issuance of shares of common stock upon the exercise of an option, warrant or other right to acquire shares of common stock or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing;
 
  (c)  the issuance by us of shares, options or other rights to purchase shares of common stock to employees, officers, directors, advisors or consultants pursuant to any stock option or similar equity incentive or compensation plan disclosed in this prospectus;
 
  (d)  the issuance by us of shares of our common stock, or securities convertible into, or exercisable or exchangeable for, our common stock, in connection with mergers or acquisitions (irrespective of whether in the form of an acquisition of securities, businesses, properties or assets), or joint ventures, commercial relationships or strategic transactions (including but not limited to marketing or distribution arrangements, collaboration agreements or intellectual property license agreements) with, another company or the securityholders of another company in an aggregate amount not to exceed 10% of the number of shares of stock issued and outstanding immediately following completion of this offering, provided that the recipient thereof executes a lock-up agreement substantially in the form of those executed by our stockholders; and
 
  (e)  the filing with the SEC of any registration statement (1) on Form S-8 in respect of any shares issued under or the grant of any award pursuant to any employee benefit plan described in this prospectus, or (2) in connection with mergers or acquisitions (irrespective of whether in the form of an acquisition of securities, businesses, properties or assets), or joint ventures, commercial relationships or strategic transactions (including but not limited to marketing or distribution arrangements, collaboration agreements or intellectual property license agreements) with, another company or the securityholders of another company in an aggregate amount not to exceed 10% of the number of shares of stock issued and outstanding immediately following completion of this offering; and
 
  •  in the case of our directors, officers and other stockholders:
 
  (1)  transactions relating to shares of common stock or other securities acquired in open market transactions after the completion of this offering, provided that no filing under Section 16(a) of the Exchange Act, as amended, shall be required or shall be voluntarily made in connection with subsequent sales of common stock or other securities acquired in such open market transactions;
 
  (2)  transfers of shares of common stock or any security convertible into, or exercisable or exchangeable for, common stock as a bona fide gift;
 
  (3)  in the case of a non-natural person, distributions of shares of common stock or any security convertible into, or exercisable or exchangeable for, common stock to limited partners, members or stockholders of the stockholder;
 
  (4)  in the case of a natural person, transfers of shares of common stock or any security convertible into, or exercisable or exchangeable for, common stock by will or intestate succession or to any trust or partnership for the direct or indirect benefit of such person or any member of the immediate family of the stockholder;
 
  (5)  the entry by the stockholder into a trading plan established in accordance with Rule 10b5-1 under the Exchange Act, provided that sales under any such plan may not occur during the restricted period;
 
  (6)  the “net” or “cashless” exercise of options, warrants or rights to acquire shares of common stock or any security convertible into common stock in accordance with their terms, provided that no filing under Section 16(a) of the Exchange Act, reporting a disposition of shares of common stock, shall be required or shall be voluntarily made in connection with the exercise;


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  (7)  transfers of shares of common stock or any securities convertible into or exercisable or exchangeable for common stock to us, pursuant to agreements under which we have the option to repurchase such shares or a right of first refusal with respect to transfers of such shares, provided that such transfers after the date of this prospectus shall be for less than market value of the common stock at the time of transfer;
 
  (8)  the sale of shares of common stock to the underwriters; and
 
  (9)  in the case of a non-natural person, transfers of shares of common stock to any wholly-owned subsidiary of the stockholder (including any corporation, partnership, limited liability company or other entity that is directly or indirectly owned by the stockholder) or to the parent corporation of the stockholder or any wholly-owned subsidiary of such parent corporation;
 
provided that in the case of any transfer or distribution pursuant to clauses (2), (3), (4) and (9), each donee, distributee or transferee shall sign and deliver a lock-up letter substantially in the form of lock-up letter signed by our stockholders and no filing under Section 16(a) of the Exchange Act reporting a reduction in beneficial ownership of shares of common stock shall be required or shall be voluntarily made during the 180-day restricted period referred to in the preceding paragraph. The 180-day restricted period described above will be extended if:
 
  •  during the last 17 days of the 180-day restricted period we issue a release regarding earnings or regarding material news or a material event relating to us occurs; or
 
  •  prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period,
 
in which case the restrictions described above will continue to apply until the expiration of the 18-day period beginning on the issuance of the release or the occurrence of the material news or material event, except that in no event shall the restrictions extend past 214 days after the date of this prospectus.
 
In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over- allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over allotment option. The underwriters may also sell shares in excess of the over allotment option, creating a naked short position. 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 common stock in the open market after pricing that could adversely affect investors who purchase in the offering. As an additional means of facilitating the offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. The underwriting syndicate may also reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the syndicate repurchases previously distributed common stock to cover syndicate short positions or to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities, and may end any of these activities at any time.
 
The underwriters may in the future provide investment banking services to us for which they would receive customary compensation.
 
We, the selling stockholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
 
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Member State it has not made and will not make an offer of shares of


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common stock to the public in that Member State, except that it may, with effect from and including such date, make an offer of shares of common stock to the public in that Member State:
 
  (a)  at any time to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
 
  (b)  at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or
 
  (c)  at any time in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.
 
For the purposes of the above, the expression an “offer of shares of common stock to the public” in relation to any shares of common stock in any Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares of common stock to be offered so as to enable an investor to decide to purchase or subscribe the shares of common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in that Member State.
 
Each underwriter has represented and agreed that it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of the common stock in circumstances in which Section 21(1) of such Act does not apply to us and it has complied and will comply with all applicable provisions of such Act with respect to anything done by it in relation to any shares of common stock in, from or otherwise involving the United Kingdom.
 
Pricing of the Offering
 
Prior to this offering, there has been no public market for the shares of common stock. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. Among the factors to be considered in determining the initial public offering price will be our future prospects and our industry in general, our sales, earnings and certain other financial operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors.


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LEGAL MATTERS
 
The validity of the shares of common stock offered hereby will be passed upon for us by Fenwick & West LLP, Mountain View, California. Davis Polk & Wardwell, Menlo Park, California, will act as counsel to the underwriters.
 
EXPERTS
 
Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements at April 30, 2007 and 2006, and for each of the three fiscal years in the period ended April 30, 2007, as set forth in their report. We have included our consolidated financial statements in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.
 
WHERE YOU CAN FIND ADDITIONAL INFORMATION
 
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits filed therewith. For further information about us and the common stock offered hereby, reference is made to the registration statement and the exhibits filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. We currently do not file periodic reports with the SEC. Upon completion of this offering, we will be required to file periodic reports, proxy statements and other information with the SEC pursuant to the Exchange Act. A copy of the registration statement and the exhibits filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from that office. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.


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Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
ArcSight, Inc.
 
We have audited the accompanying consolidated balance sheets of ArcSight, Inc. as of April 30, 2006 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended April 30, 2007. 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 the 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ArcSight, Inc. at April 30, 2006 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2007, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 2 to the consolidated financial statements, under the heading “Stock-Based Compensation Expense,” effective May 1, 2006, ArcSight, Inc. adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” using the prospective transition method.
 
/s/  Ernst & Young LLP
 
San Jose, California
September 10, 2007


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ARCSIGHT, INC.
 
Consolidated Balance Sheets
 
(In thousands, except share amounts and par value)
 
                         
                Pro Forma
 
                as of
 
    As of April 30,     April 30,
 
    2006     2007     2007  
                (unaudited)  
 
Assets
                       
Current assets:
                       
Cash and cash equivalents
  $ 16,443     $ 16,917          
Accounts receivable, net of allowance for doubtful accounts of $54 and $123 at April 30, 2006 and 2007, respectively
    12,247       15,554          
Prepaid expenses and other current assets
    1,277       3,075          
                         
Total current assets
    29,967       35,546          
Restricted cash
          842          
Income taxes receivable
    1,020       761          
Property and equipment, net
    1,925       2,753          
Goodwill
          5,746          
Acquired intangible assets, net
          2,734          
Other long-term assets
    14       608          
                         
Total assets
  $ 32,926     $ 48,990          
                         
Liabilities and stockholders’ equity
                       
Current liabilities:
                       
Accounts payable
  $ 647     $ 2,846          
Accrued compensation and benefits
    3,384       6,678          
Other accrued liabilities
    2,845       4,420          
Deferred revenues, current
    17,714       24,794          
                         
Total current liabilities
    24,590       38,738          
Deferred revenues, non-current
    6,903       4,794          
Other long-term liabilities
          328          
                         
Total liabilities
    31,493       43,860          
Commitments and contingencies (Note 6)
                       
Stockholders’ equity:
                       
Convertible preferred stock, $0.00001 par value, issuable in series; 86,407,009 shares authorized at April 30, 2006 and 2007
                       
Series A, 14,727,649 shares designated; 14,727,649 shares issued and outstanding at April 30, 2006 and 2007; aggregate liquidation preference of $14,439 at April 30, 2007; no shares outstanding pro forma (unaudited)
    14,439       14,439     $  
Series B, 33,679,360 shares designated; 29,651,362 and 29,664,461 shares issued and outstanding at April 30, 2006 and 2007, respectively; aggregate liquidation preference of $9,504 at April 30, 2007; no shares outstanding pro forma (unaudited)
    9,185       9,185        
Series C, 8,000,000 shares designated; 7,737,914 shares issued and outstanding at April 30, 2006 and 2007; aggregate liquidation preference of $2,975 at April 30, 2007; no shares outstanding pro forma (unaudited)
    3,134       3,134        
Common stock, $0.00001 par value; 130,000,000 shares authorized at April 30, 2006 and 2007; 39,870,352 and 42,480,304 shares issued and outstanding at April 30, 2006 and 2007, respectively;           shares issued and outstanding pro forma (unaudited)
                1  
Additional paid-in capital
    19,383       23,479       50,236  
Deferred stock-based compensation
    (396 )     (554 )     (554 )
Accumulated other comprehensive (loss) income
    (3 )     13       13  
Accumulated deficit
    (44,309 )     (44,566 )     (44,566 )
                         
Total stockholders’ equity
    1,433       5,130     $ 5,130  
                         
Total liabilities and stockholders’ equity
  $ 32,926     $ 48,990          
                         
 
See accompanying notes.


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ARCSIGHT, INC.
 
Consolidated Statements of Operations
 
(In thousands, except per share amounts)
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
 
Revenues:
                       
Products
  $ 22,357     $ 22,859     $ 43,989  
Maintenance and services
    10,465       16,576       25,844  
                         
Total revenues
    32,822       39,435       69,833  
                         
Cost of revenues:
                       
Products
    1,084       1,769       2,569  
Maintenance and services(1)
    3,410       5,027       7,019  
                         
Total cost of revenues
    4,494       6,796       9,588  
                         
Gross profit
    28,328       32,639       60,245  
Operating expenses(1):
                       
Research and development
    7,583       12,154       14,535  
Sales and marketing
    14,647       24,309       36,587  
General and administrative
    8,725       12,978       9,453  
                         
Total operating expenses
    30,955       49,441       60,575  
                         
Loss from operations
    (2,627 )     (16,802 )     (330 )
Interest income
    132       435       637  
Other income and expense, net
    (181 )     (216 )     (175 )
                         
Income (loss) before provision for income taxes
    (2,676 )     (16,583 )     132  
Provision for income taxes
    137       163       389  
                         
Net loss
  $ (2,813 )   $ (16,746 )   $ (257 )
                         
Net loss per common share, basic and diluted
  $ (0.11 )   $ (0.56 )   $ (0.01 )
                         
Shares used in computing basic and diluted net loss per common share
    24,647       29,874       40,169  
                         
Pro forma net loss per common share, basic and diluted (unaudited)
                  $ (0.00 )
                         
Shares used in computing pro forma basic and diluted net loss per common share (unaudited)
                    96,106  
                         
 
(1) Stock-based compensation expense as included in above (see Note 9):
                         
Cost of maintenance and services revenues
  $ 7     $ 10     $ 17  
Research and development
    1,642       1,950       501  
Sales and marketing
    746       210       661  
General and administrative
    4,838       5,948       350  
 
See accompanying notes.


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ARCSIGHT, INC.
 
Consolidated Statements of Stockholders’ Equity
 
(In thousands, except share amounts)
 
                                                                         
                                  Deferred
    Accumulated
             
    Convertible
                Additional
    Stock-
    Other
          Total
 
    Preferred Stock     Common Stock     Paid-In
    Based
    Comprehensive
    Accumulated
    Stockholders’
 
    Shares     Amount     Shares     Amount     Capital     Compensation     (Loss) Income     Deficit     Equity  
 
Balance at April 30, 2004
    47,175,084     $ 26,362       35,314,050     $     $ 2,950     $ (103 )   $ 1     $ (24,750 )   $ 4,460  
Vesting of Series C preferred stock warrants
          566                                           566  
Issuance of Series C preferred stock in connection with exercise of warrants
    4,941,841                                                  
Issuance of common stock upon exercise of stock options
                4,230,210             311                         311  
Repurchase of common stock subject to vesting
                (574,656 )           (63 )                       (63 )
Compensation expense related to stock options accounted for under variable accounting
                              6,983                         6,983  
Reclassification of options exercised but not vested, net
                            (134 )                       (134 )
Repayment of non-recourse notes by employees
                            152                         152  
Deferred stock-based compensation
                            1,102       (1,102 )                  
Amortization of deferred stock-based compensation
                                  250                   250  
Comprehensive income:
                                                                       
Foreign currency translation adjustment
                                        1             1  
Net loss
                                              (2,813 )     (2,813 )
                                                                         
Comprehensive loss
                                                                    (2,812 )
                                                                         
Balance at April 30, 2005
    52,116,925       26,928       38,969,604             11,301       (955 )     2       (27,563 )     9,713  
Cost of dispute settlement regarding Series B preferred stock issuance
          (170 )                                         (170 )
Issuance of common stock upon exercise of stock options
                1,118,386             189                         189  
Repurchase of common stock subject to vesting
                (217,638 )           (18 )                       (18 )
Compensation expense related to stock options accounted for under variable accounting
                            7,549                         7,549  
Repayment of non-recourse notes by employees
                            367                           367  
Reclassification of options exercised but not vested, net
                            (5 )     (10 )                 (15 )
Amortization of deferred stock-based compensation
                                  569                   569  
Comprehensive loss:
                                                                       
Foreign currency translation adjustment
                                        (5 )           (5 )
Net loss
                                              (16,746 )     (16,746 )
                                                                         
Comprehensive loss
                                                                    (16,751 )
                                                                         
Balance at April 30, 2006
    52,116,925       26,758       39,870,352             19,383       (396 )     (3 )     (44,309 )     1,433  
(table continues on following page)


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ARCSIGHT, INC.


Consolidated Statements of Stockholders’ Equity (continued)


(In thousands, except share amounts)
 
                                                                         
                                  Deferred
    Accumulated
             
    Convertible
                Additional
    Stock-
    Other
          Total
 
    Preferred Stock     Common Stock     Paid-In
    Based
    Comprehensive
    Accumulated
    Stockholders’
 
    Shares     Amount     Shares     Amount     Capital     Compensation     (Loss) Income     Deficit     Equity  
 
Issuance of common stock in connection with legal settlement
                250,000             178                         178  
Exercise of Series B preferred stock warrants
    13,099                                                  
Issuance of common stock in connection with acquisition of Enira Technologies, LLC
                1,012,156             1,538                         1,538  
Reclassification of options exercised but not vested, net
                            122                         122  
Issuance of common stock upon exercise of stock options
                901,332             582                         582  
Repurchase of common stock subject to vesting
                (85,064 )           (11 )                       (11 )
Amortization of deferred stock-based compensation, net of terminations
                            (13 )     280                   267  
Stock-based compensation under SFAS 123R—options
                            892                         892  
Issuance of restricted stock in connection with acquisition of Enira Technologies, LLC
                531,528             808       (808 )                  
Amortization of restricted stock-based compensation
                                  370                   370  
Comprehensive income:
                                                                       
Foreign currency translation adjustment
                                        16             16  
Net loss
                                              (257 )     (257 )
                                                                         
Comprehensive loss
                                                                    (241 )
                                                                         
Balance at April 30, 2007
    52,130,024     $ 26,758       42,480,304     $     $ 23,479     $ (554 )   $ 13     $ (44,566 )   $ 5,130  
                                                                         
 
See accompanying notes.


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Table of Contents

ARCSIGHT, INC.
 
Consolidated Statements of Cash Flows
 
(In thousands)
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
 
Cash flows from operating activities:
                       
Net loss
  $ (2,813 )   $ (16,746 )   $ (257 )
Adjustments to reconcile net loss to net cash provided by operating activities:
                       
Depreciation and amortization
    555       941       1,414  
Amortization of acquired intangibles
                476  
Loss on disposal of property and equipment
    2       1       3  
Stock-based compensation
    7,233       8,118       1,529  
Provision for allowance for doubtful accounts
    76       60       112  
Changes in operating assets and liabilities, net of the effects of the acquisition of Enira Technologies, LLC:
                       
Accounts receivable
    (7,325 )     (1,612 )     (3,352 )
Prepaid expenses and other current assets
    219       (523 )     (1,873 )
Income taxes receivable
    (150 )     (870 )     259  
Accounts payable
    958       (498 )     2,199  
Accrued compensation and benefits
    2,051       719       3,294  
Other accrued liabilities
    602       1,067       1,386  
Deferred revenues
    4,514       13,191       4,971  
                         
Net cash provided by operating activities
    5,922       3,848       10,161  
Cash flows from investing activities:
                       
Restricted cash
                (842 )
Acquisition of Enira Technologies, LLC
                (7,209 )
Purchase of property and equipment
    (1,238 )     (1,431 )     (2,223 )
                         
Net cash used in investing activities
    (1,238 )     (1,431 )     (10,274 )
Cash flows from financing activities:
                       
Proceeds from exercise of stock options, net of repurchases
    114       171       571  
Net proceeds from exercise of warrants
    566              
Net proceeds from repayment of stockholder notes
    152       367        
                         
Net cash provided by financing activities
    832       538       571  
Effect of exchange rate changes on cash
    1       (5 )     16  
                         
Net increase in cash and cash equivalents
    5,517       2,950       474  
Cash and cash equivalents at beginning of period
    7,976       13,493       16,443  
                         
Cash and cash equivalents at end of period
  $ 13,493     $ 16,443     $ 16,917  
                         
Supplemental Information:
                       
Income taxes paid
  $ 289     $ 1,470     $ 583  
Accrual of cost of dispute settlement regarding Series B preferred stock issuance
  $     $ 170     $  
Common stock issued to non-employee for settlement of Series B financing costs and for consulting services
  $     $     $ 178  
Issuance of Series C preferred stock in connection with exercise of warrant
  $ 2,124     $     $  
Issuance of restricted stock in connection with acquisition of Enira Technologies, LLC
  $     $     $ 808  
Common stock issued for acquisition
  $     $     $ 1,538  
 
See accompanying notes.


F-7


Table of Contents

ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements
 
1.   Description of Business
 
ArcSight, Inc. (“ArcSight” or the “Company”) is a leading provider of security and compliance management software solutions that intelligently mitigate business risk for enterprises and government agencies. Much like a “mission control center,” the Company’s ESM platform delivers a centralized, real-time view of disparate digital alarms, alerts and status messages, which the Company refers to as events, across geographically dispersed and heterogeneous business and technology infrastructures. The Company’s software correlates massive numbers of events from thousands of security point solutions, network and computing devices and applications, enabling intelligent identification, prioritization and response to external threats, insider threats and compliance and corporate policy violations. ArcSight also provides complementary software that delivers pre-packaged analytics and reports tailored to specific security and compliance initiatives, as well as appliances that streamline threat response, event log archiving and network configuration. The Company is headquartered in Cupertino, California, and was incorporated on May 3, 2000 under the laws of the state of Delaware.
 
2.   Significant Accounting Policies
 
Basis of Presentation and Consolidation
 
The accompanying audited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions have been eliminated on consolidation.
 
On June 2, 2006, the Company completed the acquisition of substantially all of the assets of Enira Technologies, LLC (“Enira”), a privately-held provider of solutions for responding to network security compromises. The accompanying consolidated financial statements include the combined activity since the date of the acquisition.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions, and its beliefs on what could occur in the future, given available information. Estimates are used for, but are not limited to, revenue recognition, determination of fair value of stock awards, valuation of goodwill and intangible assets acquired in business combinations, impairment of goodwill and other intangible assets, amortization of intangible assets, contingencies and litigation, allowances for doubtful accounts, and accrued liabilities. Actual results may differ from those estimates, and such differences may be material to the financial statements.
 
Unaudited Pro Forma Stockholders’ Equity
 
All of the convertible preferred stock outstanding will automatically convert into 55,950,192 shares of common stock, based on the shares of convertible preferred stock outstanding as of April 30, 2007, upon completion of this offering. Unaudited pro forma stockholders’ equity as adjusted for the assumed conversion of the convertible preferred stock is set forth in the accompanying Consolidated Balance Sheets.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. The Company’s cash equivalents consist of money market accounts on deposit with a bank and are stated at cost, which approximates fair value.


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
2.   Significant Accounting Policies (Continued)
 
Fair Value of Financial Instruments
 
The carrying amounts of cash equivalents, restricted cash, trade accounts receivable, accounts payable, other accrued liabilities and derivative financial instruments approximate their fair value due to the relative short-term maturities.
 
Foreign Currency Translation/Transactions
 
The functional currency of the Company’s foreign subsidiaries is the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component of accumulated other comprehensive income (loss). Income and expense accounts are translated into U.S. dollars at average rates of exchange prevailing during the periods presented. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rates in effect on the balance sheet dates.
 
Net foreign currency transaction losses of approximately $28,000, $222,000 and $172,000 for the fiscal years ended April 30, 2005, 2006 and 2007, respectively, were primarily the result of the settlement of inter-company transactions and are included in other expense.
 
Derivative Financial Instruments
 
The majority of the Company’s sales are denominated in United States dollars; however, there are some sales transactions denominated in foreign currencies. In addition, the Company’s foreign subsidiaries pay their expenses in local currency. Therefore, movements in exchange rates could cause net sales and expenses to fluctuate, affecting the Company’s profitability and cash flows. The Company’s general practice is to use foreign currency forward contracts to reduce its exposure to foreign currency exchange rate fluctuations. Unrealized gains and losses associated with these foreign currency contracts are reflected in the Company’s balance sheet and recorded in prepaid expenses and other current asset or accrued expenses and other current liabilities. Changes in fair value and premiums paid for foreign currency contracts are recorded directly in other expense in the consolidated statement of operations. The objective of these contracts is to reduce the impact of foreign currency exchange rate movements on the Company’s operating results. All of the Company’s foreign currency forward contracts mature within twelve months from the balance sheet date. The Company does not use derivatives for speculative or trading purposes, nor does the Company designate its derivative instruments as hedging instruments, as defined by the Financial Accounting Standard Board (“FASB”) under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”).
 
Concentration of Credit Risk and Business Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivable. The Company is exposed to credit risk in the event of default by the financial institution holding its cash and cash equivalents to the extent recorded on its balance sheet. Risks associated with cash equivalents are mitigated by banking with high-credit quality institutions. To date, the Company has not experienced any significant losses on its cash and cash equivalents. The Company performs periodic evaluations of the relative credit standing of the financial institutions.
 
The Company sells its products and maintenance and services to customers and resellers in the Americas, Europe and Asia, with the majority of its sales in United States. The Company monitors its exposure within accounts receivable and records an allowance against uncollectible accounts receivable as necessary. The Company performs ongoing credit evaluations of its customers and extends credit in the normal course of business and generally does not require collateral. Historically, the Company has not experienced significant credit losses on its accounts


F-9


Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
2.   Significant Accounting Policies (Continued)
 
receivable. Management believes that any risk of loss for trade receivables is mitigated by the Company’s ongoing credit evaluations of its customers.
 
One reseller accounted for 12% of total revenues for the fiscal year ended April 30, 2005. There was no customer or reseller that accounted for more than 10% of total revenues for the fiscal years ended April 30, 2006 and 2007. At April 30, 2006, the Company had no customer with an accounts receivable balance greater than 10% of the Company’s net accounts receivable. The Company had one customer that accounted for 12% of the Company’s net accounts receivable at April 30, 2007.
 
The majority of ArcSight’s revenues are derived from sales of the ESM product and related products and services, and the Company expects this to continue for the foreseeable future. As a result, although the Company has introduced complementary appliance products in fiscal 2007 for which the Company uses a single source for manufacture and fulfillment of the appliance product, the Company’s revenues and operating results will continue to depend substantially on the demand for the ArcSight ESM product. Demand for ArcSight ESM is affected by a number of factors beyond the Company’s control, including, the timing of development and release of new products by the Company and its competitors, technological change, and lower-than-expected growth or a contraction in the worldwide market for enterprise security and compliance management solutions or other risks. If the Company is unable to continue to meet customer demands or achieve more widespread market acceptance of ArcSight ESM, its business, operating results, financial condition and growth prospects will be adversely affected.
 
Revenue Recognition
 
The Company derives its revenues from two sources: (1) the sales of software licenses and related appliances (“products”); and (2) fees for maintenance and services, which includes services performed in connection with time-and-materials based consulting agreements (“maintenance and services”).
 
For all sales, revenues are subject to the guidance and requirements of AICPA Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by SOP No. 98-9, “Software Revenue Recognition with Respect to Certain Arrangements” (“SOP 98-9”).
 
The Company enters into software license agreements through direct sales to customers and through resellers. The license agreements include post-contract customer support and may include professional services deliverables. Post-contract customer support includes rights to receive unspecified software product updates and upgrades, maintenance releases and patches released during the term of the support period, and Internet and telephone access to technical support personnel and content. Professional services include installation and implementation of the Company’s software and customer training. Professional services are not essential to the functionality of the associated licensed software.
 
For all sales, revenues attributable to an element in a customer arrangement are recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable and collectibility is reasonably assured.
 
The Company uses a binding purchase order or a signed contract depending on the nature of the transaction, as evidence of an arrangement. Sales through its significant resellers are evidenced by a master agreement governing the relationship.
 
Resellers and systems integrators purchase products for specific end users and do not hold inventory. Resellers and systems integrators perform functions that include delivery to the end customer, installation or integration and post-sales service and support. The agreements with these resellers and systems integrators have terms which are generally consistent with the standard terms and conditions for the sale of the Company’s products and services to end users and do not provide for product rotation or pricing allowances. Revenues on sales to resellers and systems


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
2.   Significant Accounting Policies (Continued)
 
integrators are recognized after delivery to the end user on a sell-through basis, provided all other criteria for revenue recognition have been met.
 
At the time of each transaction, the Company assesses whether the fees associated with the transaction are fixed or determinable. If a significant portion of a fee is due after the Company’s normal payment terms, currently up to three months (payment terms beyond three months are considered to be extended terms), or if the price is subject to refund or forfeiture, concession or other adjustment, then the Company considers the fee to not be fixed or determinable. In these cases, revenues are deferred and recognized when payments become due and payable, or the right to refund or forfeiture, concession or adjustment, if any, lapses.
 
The Company assesses whether collection is reasonably assured based on a number of factors including the creditworthiness of the customer as determined by credit checks and analysis, past transaction history, geographic location and financial viability. The Company generally does not require collateral from customers. If the determination is made at the time of the transaction that collection of the fee is not reasonably assured, then all of the related revenues are deferred until the time that collection becomes reasonably assured, which in some cases requires the collection of cash prior to recognition of the related revenues.
 
The Company uses shipping documents, contractual terms and conditions and customer acceptance, when applicable, to verify delivery to the customer. For perpetual software license fees in arrangements that do not include customization, or services that are not considered essential to the functionality of the licenses, delivery is deemed to occur when the product is delivered to the customer. Services and consulting arrangements that are not essential to the functionality of the licensed product are recognized as revenues as these services are provided. Delivery of maintenance agreements is considered to occur on a straight-line basis over the life of the contract, typically twelve months.
 
Vendor-specific objective evidence of fair value, or VSOE, is established for maintenance and support services based on renewals to other customers or upon renewal rates quoted in contracts when the quoted renewal rates are deemed substantive. VSOE for professional services is established based on prices charged to customers when such services are sold separately. For deliverables and multiple element arrangements subject to SOP 97-2, as amended by SOP 98-9, when VSOE exists for all of the undelivered elements of the arrangement, but does not exist for the delivered elements in the arrangement, the Company recognizes revenues under the residual method. Under the residual method, at the outset of the arrangement with a customer, revenues are deferred for the fair value of the undelivered elements and revenues are recognized for the remainder of the arrangement fee attributed to the delivered elements (typically software licenses) under the residual method when all of the applicable criteria in SOP 97-2 have been met. In the event that VSOE for maintenance services does not exist, and this represents the only undelivered element, revenues for the entire arrangement are recognized ratably over the performance period. Revenues from maintenance and support agreements are recognized on a straight-line basis over the life of the contract.
 
Many of the Company’s product contracts include implementation and training services. When licenses are sold together with such consulting services, license fees are recognized upon delivery, provided that (i) the criteria of software revenue recognition have been met, (ii) payment of the license fees is not dependent upon the performance of the services, and (iii) the services do not provide significant customization of the products and are not essential to the functionality of the software that was delivered. The Company does not provide significant customization of its software products. These services are recognized on a time-and-materials basis.
 
The cost of providing the Company’s products and maintenance and services consists primarily of direct material costs for products and the fully burdened cost of the Company’s service organization for maintenance and services. Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of revenues in the accompanying Consolidated Statements of Operations. If it becomes probable that the amount


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
2.   Significant Accounting Policies (Continued)
 
allocated to an undelivered element will result in a loss on that element of the arrangement, the loss is recognized pursuant to SFAS No. 5, “Accounting for Contingencies.”
 
Deferred revenues consist primarily of deferred product revenues, deferred maintenance fees and deferred services fees. Deferred revenues are recorded net of pre-billed services, post-contract customer support billings for which the term has not commenced and invoices for cash basis customers. Deferred product revenues generally relate to product sales being recognized ratably over the term of the licensing arrangement, and, to a lesser extent, partial shipments when the Company does not have VSOE for the undelivered elements and products that have been delivered but await customer acceptance. Deferred maintenance fees and consulting services generally relate to advanced payments for maintenance and consulting services in advance of the time of revenue recognition. These deferred amounts are expected to be recognized as revenues based on the policy outlined above.
 
Allowance for Doubtful Accounts
 
The Company maintains an allowance for doubtful accounts for potential future estimated losses resulting from the inability or unwillingness of certain customers to make all of their required payments. The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. This assessment requires significant judgment. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, records a charge in the period such determination is made. If the financial condition of its customers or any of the other factors the Company uses to analyze creditworthiness were to worsen, additional allowances may be required, resulting in future operating losses that are not included in the allowance for doubtful accounts at April 30, 2007.
 
The following describes activity in the allowance for doubtful accounts for the fiscal years ended April 30, 2005, 2006 and 2007 (in thousands):
 
                                 
          Addition
             
    Balance at
    Charged to
          Balance at
 
    Beginning
    Costs and
          End
 
Fiscal Year
  of Fiscal Year     Expenses     Deductions(1)     of Fiscal Year  
 
2005
  $     $ 76     $ (65 )   $ 11  
2006
  $ 11     $ 60     $ (17 )   $ 54  
2007
  $ 54     $ 112     $ (43 )   $ 123  
 
(1) Uncollectible amounts written off, net of recoveries.
 
Restricted Cash
 
Restricted cash consists of a deposit in a money market account amounting to $842,000 at April 30, 2007, that is held to secure a standby letter of credit required in connection with the operating lease for the Company’s headquarters in Cupertino, California.
 
Impairment of Long-Lived Assets
 
Long-lived assets, such as property, plant and equipment and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Among the factors and circumstances considered by management in determining assessments of recoverability are: (i) a significant decrease in the market price of a


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
2.   Significant Accounting Policies (Continued)
 
long-lived asset; (ii) a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition; (iii) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator; (iv) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; (v) current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; and (vi) a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Under SFAS 144, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the asset. There have been no indicators of impairment and no impairment losses have been recorded by the Company in any period presented.
 
Property and Equipment, Net
 
Property and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the property and equipment of one to three years. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the assets.
 
Business Combinations
 
The Company accounts for business combinations in accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”), which requires the purchase method of accounting for business combinations. In accordance with SFAS 141, the Company determines the recognition of intangible assets based on the following criteria: (i) the intangible asset arises from contractual or other rights; or (ii) the intangible is separable or divisible from the acquired entity and capable of being sold, transferred, licensed, returned or exchanged. In accordance with SFAS 141, the Company allocates the purchase price of its business combinations to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill.
 
The Company must make valuation assumptions that require significant estimates, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include, but are not limited to future expected cash flows from customer contracts, customer lists, distribution agreements and discount rates. The Company estimates fair value based upon assumptions the Company believes to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
 
Goodwill and Intangible Assets
 
Goodwill is not amortized, but rather it is periodically assessed for impairment. The allocation of the acquisition cost to intangible assets and goodwill therefore could have a significant impact on the Company’s future operating results. The allocation process requires the extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets. Further, when impairment indicators are identified with respect to previously recorded intangible assets, the values of the assets are determined using discounted future cash flow techniques. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of the projected discounted cash flows and should different conditions prevail, material write-downs of net intangible assets could occur. The Company reviews periodically the estimated remaining useful lives of its acquired intangible assets. A reduction in its estimate of remaining useful lives, if any, could result in increased amortization expense in future periods.


F-13


Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
2.   Significant Accounting Policies (Continued)
 
The Company tests goodwill for impairment annually and more frequently if events merit. The Company performs this fair-value based test in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Future goodwill impairment tests could result in a charge to earnings.
 
Software Development Costs
 
In accordance with SFAS No. 86, “Accounting for the Costs of Computer software to Be Sold, Leased, or Otherwise Marketed,” costs incurred for the development of new software products are expensed as incurred until technological feasibility is established. Development costs are capitalized beginning when a product’s technological feasibility has been established and ending when the product is available for general release to customers. Technological feasibility is reached when the product reaches the beta stage using the working model approach. To date, the period of time between the establishment of a technologically feasible working model and the subsequent general release of the product have been of a relatively short duration of time and have resulted in insignificant amounts of costs qualifying for capitalization for all years presented. As such, all software development costs have been expensed as incurred in research and development expense.
 
Research and Development Expenses
 
The Company expenses research and development expenses in the period in which such costs are incurred.
 
Advertising Expense
 
Advertising costs are expensed as incurred. The Company incurred $56,000, $138,000 and $371,000 in advertising expenses for the fiscal years ended April 30, 2005, 2006 and 2007, respectively.
 
Income Taxes
 
The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109 “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carry-forwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
 
Stock-Based Compensation Expense
 
Prior to May 1, 2006, the Company accounted for its stock-based awards to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations as permitted by SFAS No. 123, “Accounting For Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, compensation expense is measured on the date of the grant as the difference between the deemed fair value of the Company’s common stock and the exercise or purchase price multiplied by the number of stock options or restricted stock awards granted. The Company amortizes deferred stock-based compensation using the multiple option method as prescribed by FASB Interpretation No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option Award Plans” (“FIN 28”) over the option vesting period using an accelerated amortization schedule which results in amortization to expense over the grant’s vesting period, which is generally four years.
 
Effective May 1, 2006, the Company adopted the provisions of SFAS No. 123(R) (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the prospective transition method. In accordance with SFAS 123R, measurement


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
2.   Significant Accounting Policies (Continued)
 
and recognition of compensation expense for all share-based payment awards made to employees and directors beginning on May 1, 2006 is recognized based on estimated fair values. SFAS 123R requires nonpublic companies that used the minimum value method under SFAS 123 for either recognition or pro forma disclosures to apply SFAS 123R using the prospective-transition method. As such, the Company continues to apply APB 25 in future periods to unvested equity awards outstanding at the date of adoption of SFAS 123R that were measured using the intrinsic value method. In addition, the Company continues to amortize those awards granted prior to May 1, 2006 using the multiple option method as prescribed by FIN 28, as described above. In accordance with SFAS 123R, the Company uses the Black-Scholes pricing model to determine the fair value of the stock options on the grant dates for stock awards made on or after May 1, 2006, and the Company amortizes the fair value of share-based payments on a straight-line basis.
 
Comprehensive (Loss) Income
 
The Company reports comprehensive (loss) income in accordance with SFAS No. 130, “Reporting Comprehensive Income.” Comprehensive (loss) income includes certain unrealized gains and losses that are recorded as a component of stockholders’ equity and excluded from the determination of net income. The Company’s accumulated other comprehensive income or losses consisted solely of cumulative currency translation adjustments resulting from the translation of the financial statements of the foreign subsidiaries. The tax effects on the foreign currency translation adjustments have not been significant.
 
Recent Accounting Pronouncements
 
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), which amends the guidance in SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair-value basis. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS 155 to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
 
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109” (“FIN 48”), which specifies how tax benefits for uncertain tax positions are to be recognized, measured and derecognized in financial statements. FIN 48 also requires certain disclosures of uncertain tax positions and specifies how reserves should be classified on the balance sheet. FIN 48 is effective the first fiscal year that begins after December 15, 2006 and is effective for the Company in the first quarter of fiscal 2008. The Company will adopt FIN 48 in the first quarter of fiscal 2008 and is currently evaluating the effect, if any, the adoption of FIN 48 will have on its consolidated financial position, results of operations and cash flows.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement does not require any new fair value measurements. SFAS 157 is effective for all financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact, if any, the adoption of SFAS 157 will have on the consolidated results of operations, financial position and cash flows.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), including an amendment of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which allows an entity to choose to measure certain financial instruments and liabilities at fair value. Subsequent measurements for the financial instruments and liabilities an entity elects to measure at fair


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ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
2.   Significant Accounting Policies (Continued)
 
value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adopts SFAS 157. The Company is currently evaluating the effect, if any, the adoption of SFAS 159 will have on its consolidated results of operations, financial position and cash flows.
 
3.   Net Loss Per Common Share
 
Basic and diluted net loss per common share is computed using the weighted average number of shares of common stock outstanding during the period. Potentially dilutive securities consisting of convertible preferred stock, stock options, common stock subject to repurchase and warrants were not included in the diluted loss per common share for all periods presented because the inclusion of such shares would have had an anti-dilutive effect.
 
Pro forma basic and diluted net loss per common share have been computed to give effect to the conversion of the Company’s convertible preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the original dates of issuance.
 
The following table sets forth the computation of loss per share (in thousands, except per share amounts):
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
 
Numerator:
                       
Net loss
  $ (2,813 )   $ (16,746 )   $ (257 )
                         
Denominator:
                       
Shares, net of weighted-average shares subject to repurchase, used in computing net loss per common share — basic and diluted
    24,647       29,874       40,169  
                         
Net loss per common share, basic and diluted
  $ (0.11 )   $ (0.56 )   $ (0.01 )
                         
Basic and diluted weighted-average shares used above
                    40,169  
Pro forma adjustment to reflect assumed conversion of convertible preferred stock (unaudited)
                    55,937  
                         
Shares used in computing pro forma net loss per common share (unaudited)
                    96,106  
                         
Pro forma net loss per common share, basic and diluted (unaudited)
                  $ (0.00 )
                         
 
As the Company had a net loss for each of the periods presented, basic and diluted net loss per share are the same. The weighted averages shares used in the computation of basic and diluted net loss per share for the periods are presented net of shares subject to repurchase.
 
The following table sets forth the weighted-average potentially dilutive outstanding securities (i.e., convertible preferred stock, common stock options, common stock subject to repurchase and warrants) that were excluded from


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ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
3.   Net Loss Per Common Share (Continued)
 
the computation of diluted net loss per share for the periods presented because including them would have an anti-dilutive effect (in thousands):
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
 
Convertible preferred stock (as converted)
    53,442       55,880       55,937  
Options to purchase common stock
    4,757       7,742       8,973  
Common stock subject to repurchase
    2,284       2,474       1,748  
Warrants to purchase common stock and convertible preferred stock (as converted)
    4,271       25       90  
                         
Total
    64,754       66,121       66,748  
                         
 
4.   Acquisition of Enira Technologies, LLC
 
On June 2, 2006, the Company completed the acquisition of substantially all of the assets of Enira Technologies, LLC (“Enira”), a privately-held provider of solutions for responding to network security compromises. Enira’s core product, Network Response, was an appliance-based solution that speeds the time to threat remediation by automating the error-prone and time consuming network discovery and network change/configuration tasks without altering an organization’s existing infrastructure. Through this acquisition, the Company acquired the predecessor products to its TRM and NCM appliance products.
 
The acquisition was accounted for under the purchase method of accounting in accordance with SFAS 141. Assets acquired and liabilities assumed were recorded at their fair values as of June 2, 2006.
 
The total purchase price of $8.7 million was comprised of (in thousands):
 
         
Cash consideration for members of Enira
  $ 7,000  
Fair value of common stock issued(1)
    1,538  
Estimated acquisition-related costs(2)
    209  
         
Total consideration
  $ 8,747  
         
(1) The members of Enira received $7.0 million in aggregate cash consideration and 1,012,156 shares of the Company’s common stock. The fair value of ArcSight’s shares issued was based on a per share value of $1.52, which was equal to its then deemed fair value.
 
(2) The acquisition-related costs consist primarily of legal and accounting fees and other directly related costs.
 
The total purchase consideration has been allocated to the assets and liabilities acquired, including identifiable intangible assets and assumed contractual obligations and related contingent liabilities, based on their respective fair values at the acquisition date and resulting in excess purchase consideration over the net tangible liabilities and identifiable intangible assets acquired of $5.7 million.
 
In connection with the Enira acquisition, 531,528 additional shares of restricted common stock were issued to Enira employees who accepted employment with the Company. These shares are subject to a two-year vesting requirement based on continued employment by these former Enira employees. The fair value of these restricted shares amounted to $808,000 and was based on a per share value of $1.52. In accordance with EITF 95-8, “Accounting for Contingent Consideration Paid to Shareholders of an Acquired Enterprise in a Purchase Business Combination,” the total fair value of these shares is being accounted for as deferred compensation expense and is


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ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
4.   Acquisition of Enira Technologies, LLC (Continued)
 
being amortized on a straight-line basis over the term of the required post-combination services. For the fiscal year ended April 30, 2007, the related compensation expense amounted to approximately $370,000.
 
The following condensed balance sheet data presents the respective fair value of the assets and liabilities acquired (in thousands):
 
         
Accounts receivable
  $ 67  
Inventory
    32  
Other assets
    15  
Goodwill
    5,746  
Intangible assets
    3,210  
Liabilities
    (323 )
         
Total
  $ 8,747  
         
 
The estimated fair value of intangible assets identified and the useful lives assigned at the time of acquisition are as follows (dollars in thousands):
 
                 
          Estimated Weighted
 
          Average
 
          Useful Lives
 
    Purchase Price     in Years  
 
Core and developed technologies
  $ 1,970       5.00  
Customer installed-base relationships
    80       6.00  
Employee non-compete agreements
    1,160       5.00  
                 
Total
  $ 3,210       5.02  
                 
 
The excess of the purchase price over the fair value of the net tangible and identifiable intangible assets was recorded as goodwill, none of which will be deductible for federal tax purposes. The Company has excluded from the purchase price allocation 657,894 shares to be issued upon achievement of specified milestones by April 30, 2007 as the issuance of such shares was considered to be remote at the time of the acquisition. No additional shares will be issued as the specified milestones were not achieved as of April 30, 2007.
 
Pro forma financial information presenting the results of continuing operations of the Company and Enira for the fiscal years ended April 30, 2006 and 2007 including this acquisition have not been presented as the historical operations of Enira were not material to the Company’s consolidated financial statements. The total amortization expense related to intangible assets was $476,000 for the fiscal year ended April 30, 2007.
 
Purchased intangible assets other than goodwill are amortized over the estimated useful lives to match the amortization to the benefits received.


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ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
4.   Acquisition of Enira Technologies, LLC (Continued)
 
The gross carrying amount and net book value of goodwill and intangible assets is as follows (in thousands):
 
                         
    As of April 30, 2007  
    Gross Carrying
    Accumulated
    Net Carrying
 
    Amount     Amortization     Amount  
 
Intangible assets:
                       
Core and developed technologies
  $ 1,970     $ (139 )   $ 1,831  
Customer installed-base relationships
    80       (19 )     61  
Employee non-compete agreements
    1,160       (318 )     842  
                         
Total
  $ 3,210     $ (476 )   $ 2,734  
                         
Goodwill
                  $ 5,746  
                         
 
There was no impairment of goodwill or intangible assets in fiscal year ended April 30, 2007.
 
Future estimated amortization costs per year for the Company’s existing intangible assets other than goodwill are estimated as follows (in thousands):
 
         
    Estimated
 
    Amortization
 
Fiscal Year Ended April 30,
  Expense  
 
2008
  $ 573  
2009
    842  
2010
    889  
2011
    425  
2012
    5  
         
Total
  $ 2,734  
         
 
5.   Balance Sheet Details
 
Property and Equipment, Net
 
Property and equipment consisted of the following (in thousands):
 
                 
    As of April 30,  
    2006     2007  
 
Computers and equipment
  $ 2,933     $ 4,898  
Furniture and fixtures
    451       451  
Software
    477       576  
Leasehold improvements
    465       640  
                 
      4,326       6,565  
Less: Accumulated depreciation and amortization
    (2,401 )     (3,812 )
                 
Property and equipment, net
  $ 1,925     $ 2,753  
                 
 
Depreciation expense was $482,000, $713,000 and $930,000 for the fiscal years ended April 30, 2005, 2006 and 2007, respectively. Amortization expense was $73,000, $228,000 and $484,000 for the fiscal years ended April 30, 2005, 2006 and 2007, respectively.


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ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
5.   Balance Sheet Details (Continued)
 
Accrued Compensation and Benefits
 
Accrued compensation and benefits consist of the following (in thousands):
 
                 
    As of April 30,  
    2006     2007  
 
Accrued commissions
  $ 789     $ 2,016  
Accrued bonus
    1,398       2,572  
Accrued payroll taxes
    167       591  
Accrued vacation
    833       1,296  
Other compensation and benefits
    197       203  
                 
Total accrued compensation and benefits
  $ 3,384     $ 6,678  
                 
 
Deferred Revenues
 
Deferred revenues consist of the following (in thousands):
 
                 
    As of April 30,  
    2006     2007  
 
Deferred product revenues
  $ 10,639     $ 10,316  
Deferred maintenance and services revenues
    13,978       19,272  
                 
Total deferred revenues
    24,617       29,588  
Less deferred revenues, current portion
    (17,714 )     (24,794 )
                 
Deferred revenues, non-current
  $ 6,903     $ 4,794  
                 
 
6.   Commitments and Contingencies
 
The Company and its subsidiaries operate from leased premises in the United States, Asia and Europe with lease periods expiring through 2013. In April 2007, the Company entered into a lease extension and added additional office space to the lease for the corporate headquarters which extended the lease through October 2013.
 
Future minimum lease payments under the Company’s noncancelable operating leases as of April 30, 2007 are as follows (in thousands):
 
         
Fiscal Year Ended April 30:
  Lease Payments  
 
2008
  $ 1,797  
2009
    1,861  
2010
    1,912  
2011
    1,989  
2012
    2,068  
Thereafter
    3,269  
         
Total future minimum lease payments
  $ 12,896  
         
 
Rent expense under all operating leases was approximately $570,000, $738,000 and $901,000, for the fiscal years ended April 30, 2005, 2006 and 2007, respectively.


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ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
6.   Commitments and Contingencies (Continued)
 
The Company leases office facilities under various operating leases. One of these lease agreements includes a rent escalation clause and includes a renewal period at the Company’s option. The Company recognizes expense for scheduled rent increases on a straight-line basis over the lease term beginning with the date the Company takes possession of the leased space.
 
The Company has also entered into various contractual commitments with payments totaling $557,000 over the next three fiscal years of which $202,000 are due within the next 12 months.
 
7.   Indemnification and Warranties
 
The Company from time to time enters into certain types of contracts that contingently require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) certain real estate leases under which the Company may be required to indemnify property owners for environmental and other liabilities and other claims arising from the Company’s use of the applicable premises, (ii) under its bylaws, the Company must indemnify directors, and may indemnify officers and employees for liabilities arising out of their relationship, (iii) contracts under which the Company may be required to indemnify customers or resellers against third-party claims, including claims that a Company product infringes a patent, copyright, or other intellectual property right, and (iv) procurement or license agreements under which the Company may be required to indemnify licensors or vendors for certain claims, including claims that may be brought against them arising from the Company’s acts or omissions with respect to the supplied products or technology.
 
The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors. To date, the Company has not been required to make any payment resulting from infringement claims asserted against its customers and has not recorded any related accruals.
 
The Company generally provides a warranty for its products and services to its customers and accounts for its warranties under the FASB’s Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS 5”) date, the Company’s product warranty expense has not been significant. Accordingly, the Company did not provide for a warranty accrual as of April 30, 2006 or 2007.
 
In the event that one or more of these matters were to result in a claim against the Company, an adverse outcome, including a judgment or settlement, may cause a material adverse effect on the Company’s future business, operating results, or financial condition.
 
8.   Stockholders’ Equity
 
The Company is authorized to issue two classes of stock totaling 216,407,009 shares of which 86,407,009 are designated as preferred stock and 130,000,000 are common stock, each with a par value of $0.00001.


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
8.   Stockholders’ Equity (Continued)
 
Convertible Preferred Stock
 
The following is a summary of the authorized, issued and outstanding convertible preferred stock:
 
                                 
    Shares Authorized     Shares Issued and Outstanding  
    April 30,     April 30,  
    2006     2007     2006     2007  
 
Series A
    14,727,649       14,727,649       14,727,649       14,727,649  
Series B
    33,679,360       33,679,360       29,651,362       29,664,461  
Series C
    8,000,000       8,000,000       7,737,914       7,737,914  
Undesignated
    30,000,000       30,000,000              
                                 
      86,407,009       86,407,009       52,116,925       52,130,024  
                                 
 
The Company’s Board of Directors maintains unilateral authority to issue at their discretion 30,000,000 shares of undesignated preferred stock, subject to certain limitations.
 
The significant terms of the designated preferred stock are as follows:
 
  •  Holders of Series A, B and C preferred stock have the right, at their option at any time, to convert any such shares into common stock. The conversion ratios of the Series A, B and C preferred stock are subject to adjustment from time to time in the event of certain dilutive issuances and events.
 
  •  At April 30, 2007 the conversion ratios for the convertible preferred stock were as follows:
 
  •  Each share of Series A preferred stock will convert into 1.2582 shares of common stock (the “Series A Conversion Ratio”);
 
  •  Each share of Series B preferred stock will convert into 1.0000 shares of common stock (the “Series B Conversion Ratio”); and
 
  •  Each share of Series C preferred stock will convert into 1.0022 shares of common stock (the “Series C Conversion Ratio”).
 
  •  Each share of Series A, B and C preferred stock shall automatically be converted upon the earlier of (i) a public offering of common stock, pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, yielding gross proceeds of at least $20,000,000 and a per share price of $0.96117 or (ii) by agreement of the holders of a majority of the then-outstanding shares of preferred stock.
 
  •  Each share of Series A, B and C preferred stock will have one vote for each share of common stock into which such preferred stock could be converted as of the record date of such vote.
 
  •  The Series B preferred stockholders have the right to nominate two directors to the Board of Directors, the common stockholders have the right to nominate one director and the remaining directors are nominated jointly by the preferred stockholders’ representatives and the common stockholders’ representative.
 
  •  If and when declared by the Board of Directors, and in preference to dividends on the common stock, the holders of Series A, B and C preferred stock are entitled to receive noncumulative dividends of $0.0588, $0.019 and $0.023 per share per annum, respectively. To date, no dividends have been declared.
 
  •  In the event of liquidation (including a merger or acquisition of the Company or the sale of all or substantially all of the Company’s assets), holders of Series A, B and C preferred stock are entitled to receive pari passu, prior and in preference to holders of common stock an amount per share equal to such share’s original issue price plus accrued but unpaid dividends on such shares. In the case of Series A preferred stock,


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
8.   Stockholders’ Equity (Continued)
 
the original issue price is equal to $0.9803537; in the case of Series B preferred stock, the original issue price is equal to $0.32039; and in the case of Series C, the original issue price is equal to $0.384468. Any excess funds will be distributed among the holders of Series A, B and C preferred stock and common stock pro rata based on the number of shares of common stock held by each (determined on an as-converted-to-common-stock basis), until the holders of Series A preferred stock have received distributions up to an aggregate of $1.96 per share, the holders of Series B preferred stock have received distributions up to an aggregate of $0.64 per share and the holders of Series C preferred stock have received distributions up to an aggregate of $0.77 per share. Any remaining assets will be distributed to the holders of common stock on a pro rata basis.
 
Series B Financing Costs Settlement
 
In September 2005, the Company received a claim from a former consultant asserting monies due to the consultant related to the alleged past services rendered by the consultant in connection with the Company’s Series B preferred stock financing in March 2002. The Company recorded a liability in fiscal year ended April 30, 2006 for the fair value of common stock to be issued to the consultant amounting to $170,000 in accordance with the terms of the legal settlement that was executed in May 2006. The fair value of the equity consideration issued in the settlement was determined based on the guidance outlined in EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” This liability was settled in May 2006 by the issuance of 170,000 shares of common stock. At the same time, the Company issued an additional 80,000 shares of common stock to the same former consultant as payment for past consulting services rendered in 2001. The cost for these services was accrued when incurred in May 2001 through August 2001.
 
In connection with the issuance of the 250,000 shares of common stock described above, certain anti-dilution provisions of the Series A, B and C preferred stock were triggered. This resulted in a revision to the conversion ratios of the Series A and Series C stockholders from 1.2555 and 1.0000 to 1.2582 and 1.0022, respectively. The change in the conversion ratios will result in the issuance of 40,369 and 16,891 additional shares of common stock upon the conversion of the Series A and Series C preferred stock, respectively. There was no change to the Series B conversion ratio. Instead, as required by the preferred stock purchase agreement, the Series B stockholders were issued warrants to purchase an additional 64,734 Series B preferred stock at an exercise price of $0.00001 per share. The Series B warrants are exercisable until May 4, 2011. The warrants may be exercised using the net exercise method. The number of shares issuable upon exercise of these warrants and the exercise price per share are adjustable in the event of stock splits, dividends and similar fundamental changes. In April 2007, warrants to acquire 13,099 shares were exercised; and warrants to acquire 51,635 shares remained outstanding as of April 30, 2007.
 
Warrants
 
In connection with a revenue arrangement with a customer in October 2002, the Company issued a warrant for 4,941,894 shares of Series C preferred stock with an exercise price of $0.00001 per share. The warrant was exercisable by the customer as the Company received payments for certain milestones achieved under the terms of the license agreement and all of the 4,941,894 shares of Series C preferred stock could be earned if the total payments equaled $2.5 million. Upon receipt of milestone payments in fiscal years 2004 and 2005, the Company recorded deferred revenues equal to the amount of cash received, $1.0 million and $450,000, respectively. These revenue amounts were recorded net of the fair value of the warrant earned by the holder $760,000 and $566,000, respectively, which was recorded as warrants outstanding in equity. During the fiscal year ended April 30, 2005, the Company recorded revenues of $376,000 and issued 4,941,841 shares of its Series C preferred stock due to the fact that the total payments received exceeded the $2.5 million milestone. Upon receipt of the customer’s final payment


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
8.   Stockholders’ Equity (Continued)
 
during fiscal 2005, the total deferred revenues balance was recognized as revenues and the warrant was fully exercised.
 
The Company issued a warrant to purchase 25,185 shares of common stock at a price per share of $0.001 to an investor in October 2002. The warrant is exercisable for a period of ten years.
 
Common Stock Reserved for Issuance
 
Common stock reserved for future issuance is as follows:
 
         
    As of April 30, 2007  
 
Options available for future grant under the 2002 Stock Plan
    6,703,243  
Options outstanding under the stock option plans
    23,091,296  
Conversion of convertible preferred stock
    55,950,192  
Warrants to purchase convertible preferred stock and common stock
    76,820  
         
Total shares reserved
    85,821,551  
         
 
Stock Plans
 
2000 Stock Incentive Plan
 
The 2000 Stock Incentive Plan provides for both the award of restricted stock and the grant of options, which includes both incentive and nonstatutory stock options. The Company ceased issuing awards under the 2000 Stock Incentive Plan upon the implementation of the 2002 Stock Plan, which is described below. Likewise, the Company will not grant any additional awards under its 2000 Stock Incentive Plan following this offering. These options generally expire ten years from the date of grant and are exercisable at any time after the date of grant. Options granted generally vest over four years. Shares issued upon exercise prior to vesting are subject to a right of repurchase, which lapses according to the vesting schedule of the original option. The repurchase right terminates upon the first sale of common stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended. As of April 30, 2007, 3,468,314 options, net of repurchase, were exercised. The cash received from these exercises is initially recorded as a liability and is subsequently reclassified to common stock as the shares vest. As of April 30, 2006 and 2007, a total of 1,805,173 and 1,316,164 shares of common stock, respectively, were subject to repurchase by the Company at the original exercise price of the common stock. The corresponding exercise value of $206,000 and $84,000 as of April 30, 2006 and 2007, respectively, was recorded in accrued liabilities.
 
2002 Stock Plan
 
In March 2002, the Board of Directors adopted the 2002 Stock Plan, as amended, and the Company’s stockholders approved the 2002 Stock Plan. 16,080,299 shares were originally authorized for issuance under this plan. In addition, 375,763 shares were rolled over from the 2000 Stock Incentive Plan, 75,646 shares were cancelled or repurchased under the 2000 Stock Incentive Plan and the Board of Directors has authorized a net increase of an additional 23,859,229 shares for issuance. The 2002 Stock Plan provides for either the award of stock purchase rights or for the grant of options, which includes both incentive and nonstatutory stock options. A total of 42,960,379 shares have been issued under the 2002 Stock Plan to employees, directors and service providers at an exercise price not less than 85% of the fair market value of such shares as determined by the Company’s Board of Directors as of the grant date (and not less than 110% of such fair market value for grants to any person who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company as of the grant date).


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
8.   Stockholders’ Equity (Continued)
 
Options granted under the 2002 Stock Plan generally expire ten years from the date of grant and are exercisable either (i) at any time after the date of grant or (ii) as such stock options vest. Options granted generally vest over four years. Shares issued upon exercise prior to vesting are subject to a right of repurchase, which lapses according to the vesting schedule of the original option. All shares issued upon exercise are subject to a right of first refusal, which terminates when the common stock of the Company is readily tradable on an established securities market.
 
     Stock Plan Activity
 
A summary of the option activity under the 2000 Stock Incentive Plan and the 2002 Stock Plan during the fiscal years ended April 30, 2005, 2006 and 2007, is as follows:
 
                                         
          Outstanding Options              
                Weighted-
    Weighted-
       
                Average
    Average
       
    Shares
          Exercise
    Remaining
    Aggregate
 
    Available
    Number of
    Price
    Contractual
    Intrinsic
 
    for Grant     Shares     Per Share     Term     Value  
                      (years)     (in thousands)  
 
Options outstanding as of April 30, 2004
    5,863,931       8,303,374     $ 0.05                  
Options authorized
    1,300,000                                
Options granted
    (8,920,344 )     8,920,344     $ 0.15                  
Options exercised
          (4,230,210 )   $ 0.07                  
Options canceled
    2,072,255       (2,072,255 )   $ 0.08                  
Shares repurchased
    574,656                                
                                         
Options outstanding as of April 30, 2005
    890,498       10,921,253     $ 0.12                  
Options authorized
    9,332,363                                
Options granted
    (8,457,750 )     8,457,750     $ 1.11                  
Options exercised
          (1,118,386 )   $ 0.17                  
Options canceled
    1,140,661       (1,140,661 )   $ 0.45                  
Shares repurchased
    217,638                                
                                         
Options outstanding as of April 30, 2006
    3,123,410       17,119,956     $ 0.58                  
Options authorized
    10,367,441                                
Options granted
    (8,833,397 )     8,833,397     $ 1.72                  
Options exercised
          (901,332 )   $ 0.65                  
Options canceled
    1,960,725       (1,960,725 )   $ 0.92                  
Shares repurchased
    85,064                                
                                         
Options outstanding as of April 30, 2007
    6,703,243       23,091,296     $ 0.99       8.31     $ 31,005  
                                         
Vested at April 30, 2007, net of anticipated forfeitures
            20,712,893     $ 0.99       8.31     $ 27,811  
                                         
Vested and exercisable at April 30, 2007
            8,927,913     $ 0.40       7.18     $ 17,256  
                                         
 
The aggregate intrinsic value shown in the table above is equal to the difference between the exercise price of the underlying stock options and $2.33, the fair value of the Company’s common stock as of April 30, 2007.


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
8.   Stockholders’ Equity (Continued)
 
The following table summarizes additional information regarding outstanding options at April 30, 2007:
 
                                 
    Options Outstanding              
          Weighted-
    Options Vested and Exercisable  
          Average
          Weighted-
 
          Remaining
          Average
 
    Number
    Contractual
    Number of
    Exercise
 
Exercise Price
  Outstanding     Life(Years)     Shares     Price  
 
$0.03
    95,539       4.98       95,539     $ 0.03  
0.04
    1,787,907       5.68       1,786,562       0.04  
0.06
    1,530,344       6.70       1,426,141       0.06  
0.09
    457,500       7.07       335,884       0.09  
0.10
    190,500       4.16       190,500       0.10  
0.12
    1,097,562       7.44       719,023       0.12  
0.20
    3,275,594       7.76       1,783,963       0.20  
1.00
    4,316,125       8.19       2,006,546       1.00  
1.52
    3,448,672       8.98       583,755       1.52  
1.70
    6,080,553       9.71             1.70  
2.33
    811,000       9.97             2.33  
                                 
      23,091,296       8.31       8,927,913     $ 0.40  
                                 
 
Total intrinsic value of options exercised for fiscal 2005, 2006 and 2007 was $0.2 million, $0.6 million and $1.0 million, respectively, determined at the date of option exercise.
 
9.   Stock-Based Compensation
 
During fiscal 2005, 2006 and 2007, the Company recorded stock-based compensation as described below (in thousands):
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
 
Stock-based compensation under SFAS 123R
  $     $     $ 892  
Stock-based compensation under prospective transition method for option awards granted prior to the adoption of SFAS 123R
    250       569       267  
Amortization of restricted stock awards in connection with the acquisition of Enira Technologies, LLC
                370  
Stock-based compensation under variable accounting
    6,983       7,549        
                         
Total
  $ 7,233     $ 8,118     $ 1,529  
                         
 
Adoption of SFAS 123R
 
On May 1, 2006, the Company adopted SFAS 123R, which establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in stock-based payment transactions. SFAS 123R requires the Company to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
9.   Stock-Based Compensation (Continued)
 
compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. SFAS 123R supersedes the Company’s previous accounting under APB 25 for periods beginning in fiscal 2007.
 
The Company adopted SFAS 123R using the prospective transition method, which requires the application of the accounting standard as of May 1, 2006, the first day of fiscal 2007. The consolidated financial statements as of and for the fiscal year ended April 30, 2007 reflect the impact of SFAS 123R. In accordance with the prospective transition method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.
 
Effective with the adoption of SFAS 123R, the fair value of stock-based awards to employees is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires, among other inputs, an estimate of the fair value of the underlying common stock on the date of grant and assumptions as to volatility of the Company’s stock over the term of the related options, the expected term of the options, the risk-free interest rate and the option forfeiture rate. These assumptions used in the pricing model are determined by the Company at each grant date. As there has been no public market for the Company’s common stock prior to this offering, the Company has determined the volatility for options granted in fiscal 2007 based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using weighted average measures of this peer group of companies of the implied volatility and the historical volatility for a period equal to the expected life of the option. The expected life of options has been determined considering the expected life of options granted by a group of peer companies and the average vesting and contractual term of the Company’s options. The risk-free interest rate is based on a zero coupon United States treasury instrument whose term is consistent with the expected life of the stock options. As the Company has not paid and does not anticipate paying cash dividends on outstanding shares of common stock, the expected dividend yield is assumed to be zero. In addition, SFAS 123R requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas SFAS 123 permitted companies to record forfeitures based on actual forfeitures, which was the Company’s historical policy under SFAS 123. The Company applied an estimated annual forfeiture rate, based on its historical forfeiture experience during the previous six years in determining the expense recorded in its consolidated statement of operations.
 
SFAS 123R requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows. Due to the loss position, there were no such tax benefits during the fiscal year ended April 30, 2007. Prior to the adoption of SFAS 123R those benefits would have been reported as operating cash flows had the Company received any tax benefits related to stock option exercises.
 
Valuation and Expense Information under SFAS 123R
 
The weighted-average fair value calculations for options granted within the period are based on the following weighted average assumptions set forth in the table below and assume no dividends will be paid. Options that were granted in prior periods are based on assumptions prevailing at the date of grant.
 
     
    Fiscal Year Ended April 30, 2007
 
Risk-free interest rate
  5.00%
Expected volatility
  66%
Expected life (years)
  5.25


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
9.   Stock-Based Compensation (Continued)
 
The compensation costs that have been included in our results of operations for these stock-based compensation arrangements during fiscal 2007, as a result of the Company’s adoption of SFAS 123R, were as follows: (in thousands, except per share amount):
 
         
 
Cost of maintenance and services revenues
  $ 10  
         
SFAS 123R expense included in gross profit
    10  
Operating expenses:
       
Research and development
    135  
Sales and marketing
    583  
General and administrative
    164  
         
SFAS 123R expense included in operating expenses
    871  
         
SFAS 123R expense included in net loss
  $ 892  
         
SFAS 123R expense included in basic and diluted net loss per share
  $ 0.02  
         
 
Because the amount of stock-based compensation associated with our cost of production is not significant, we did not capitalize any stock-based compensation cost as part of inventory and fixed assets during fiscal year ended April 30, 2007. No income tax benefit was realized from stock option exercises during the fiscal 2007.
 
As of April 30, 2007, there was $7.4 million of total unrecognized compensation expense under SFAS 123R, net of estimated forfeitures, related to stock options that the Company will amortize over the next four fiscal years.
 
The weighted average fair value of options granted during the fiscal year ended April 30, 2007 was $1.05 per underlying share of common stock.
 
APB 25 Intrinsic Value Charges
 
Given the absence of an active market for the Company’s common stock, the Company’s Board of Directors historically determined the fair value of the Company’s common stock in connection with the Company’s grant of stock options and stock awards. The Company’s Board of Directors made such determinations based on the business, financial and venture capital experience of the individual directors along with input from management. In January 2006, the Company engaged an unrelated third-party valuation firm to advise the Board of Directors in determining the fair value of its common stock.
 
As a result of management’s reassessment of the fair value of the Company’s common stock at the grant dates of options granted to purchase common stock in fiscal 2004 and 2005, deferred stock compensation has been recorded for the excess of the fair value of the common stock underlying the options at the grant date over the exercise price of the options. These amounts are being amortized on an accelerated basis over the vesting period, generally four years, consistent with the method described in FIN 28. Amortization of the deferred compensation was $250,000, $569,000 and $267,000 for the fiscal years ended April 30, 2005, 2006 and 2007, respectively. All options granted in and after fiscal 2006 were issued with exercise prices equal to the fair value.


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
9.   Stock-Based Compensation (Continued)
 
Information regarding the Company’s stock option grants for these years is summarized as follows:
 
                         
    Options
    Exercise Price Per Share
    Reassessed
 
Grant Date
  Granted     and Original Fair Value     Fair Value  
 
May 25, 2004
    1,365,000     $ 0.09     $ 0.12  
August 12, 2004
    588,750       0.12       0.16  
October 6, 2004
    2,677,500       0.12       0.16  
November 11, 2004
    668,000       0.12       0.18  
February 3, 2005
    3,621,094       0.20       0.47  
 
Restricted Stock Awards for Enira Acquisition
 
In connection with the acquisition of Enira Technologies, LLC, 531,528 shares of restricted common stock that were subject to two-year vesting were issued. See Note 4 “Acquisition of Enira Technologies, LLC.”
 
Variable Compensation
 
Between November 2000 and March 2002, the Company issued, upon the exercise of options and the receipt of promissory notes, 3,560,550 shares of common stock at exercise prices ranging from $0.03 per share to $0.10 per share to employees. The promissory notes bore annual interest rates between 4.25% and 8.75%, with principal and interest due upon termination of the notes. The employees executed full-recourse promissory notes for $324,864, as well as stock pledge agreements with the Company. In May 2002, in conjunction with the termination of one employee, the Company forgave a portion of the principal of one of these notes. As a result, all such employee promissory notes were deemed to be non-recourse in nature and therefore subject to the provisions of EITF 95-16, “Accounting for Stock Compensation Arrangements with Employer Loan Features Under APB Opinion No. 25.”
 
Variable accounting for these fully vested options ceased in fiscal 2006 upon repayment of the notes outstanding. For the fiscal years ended April 30, 2005 and 2006, additional stock-based compensation of $7.0 million and $7.5 million, respectively, was recorded.
 
10.   Segment Information
 
The Company operates in one industry segment selling security and compliance management solutions.
 
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis for evaluating financial performance and allocating resources. There are no segment managers who are held accountable for operations below the consolidated financial statement level. Accordingly, the Company has determined that it operates in a single reportable segment.
 
The CEO evaluates performance based primarily on revenues in the geographic locations in which the Company operates. Revenues are attributed by geographic location based on the ship-to location of the Company’s customers. The Company’s assets are primarily located in the United States and not allocated to any specific region. Therefore, geographic information is presented only for total revenues. As of April 30, 2006 and 2007, long-lived assets, which represent property, plant and equipment, goodwill and intangible assets, net of accumulated depreciation and amortization, located outside the Americas were immaterial and less than one percent of the total net assets for each of the fiscal year.


F-29


Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
10.   Segment Information (Continued)
 
Total revenues by geographical region are based on the ship-to location and are as follows (in thousands):
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
 
Total revenues by geography:
                       
United States
  $ 26,789     $ 31,117     $ 53,893  
EMEA
    4,912       4,668       9,408  
Asia Pacific
    1,006       2,024       4,583  
Other Americas
    115       1,626       1,949  
                         
Total revenues
  $ 32,822     $ 39,435     $ 69,833  
                         
 
11.   Income Taxes
 
The Company’s book income (loss) before income taxes is as follows (in thousands):
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
 
Current:
                       
Federal
  $ (2,795 )   $ (16,769 )   $ 102  
Foreign
    119       186       30  
                         
Total
  $ (2,676 )   $ (16,583 )   $ 132  
                         
 
The provision of federal, state, and foreign income tax expense on income from continuing operations consists of the following (in thousands):
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
 
Current:
                       
Federal
  $ 23     $     $ 73  
State
    62       6       91  
Foreign
    52       157       225  
                         
Total provision
  $ 137     $ 163     $ 389  
                         
 
The Company’s effective tax rates vary from the federal statutory rates due to non-deductible items, such as a portion of the Company’s meals and entertainment expenses, state and foreign taxes, and charitable contributions.


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Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
11.   Income Taxes (Continued)
 
A reconciliation of income taxes at the statutory federal income tax rate of 34% to the income tax expense included in the accompanying consolidated statements of operations is as follows (in thousands):
 
                         
    Fiscal Year Ended April 30,  
    2005     2006     2007  
 
U.S. federal taxes (benefit) at statutory rate
  $ (909 )   $ (5,638 )   $ 45  
State tax expense, net
    41       4       60  
Foreign taxes
    52       157       225  
Net operating losses not benefited (benefited)
    211       4,837       (231 )
Alternative minimum tax
    23             73  
Stock option expense
    687       811       214  
Meals and entertainment
                92  
Other
    32       (8 )     (89 )
                         
Total provision
  $ 137     $ 163     $ 389  
                         
 
U.S. income taxes and foreign withholding taxes are not provided on undistributed earnings of foreign subsidiaries that are considered to be indefinitely reinvested in the operations of such subsidiaries. The amount of these earnings was approximately $415,000 at April 30, 2007. The aggregate tax savings based on the exclusion of these earnings from the fiscal 2006 and prior fiscal years’ tax provisions is $30,000.
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets are as follows (in thousands):
 
                 
    As of April 30,  
    2006     2007  
 
Deferred tax assets:
               
Net operating losses
  $ 8,088     $ 6,282  
Research credits
    2,264       3,329  
Non-deductible reserves and accruals
    382       1,194  
Non-deductible stock-based compensation
    4,419       4,768  
Deferred revenues
    2,240       2,765  
Foreign earnings
          175  
Other
    128       437  
                 
Total deferred tax assets
    17,521       18,950  
Valuation allowance
    (17,521 )     (18,814 )
                 
Total deferred tax assets
  $     $ 136  
                 
Deferred tax liabilities:
               
Goodwill
  $     $ (136 )
                 
Total deferred tax liabilities
  $     $ (136 )
                 
Net deferred tax assets
  $     $  
                 


F-31


Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
11.   Income Taxes (Continued)
 
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $748,000, $6,470,000 and $1,293,000 for the fiscal years ended April 30, 2005, 2006 and 2007, respectively.
 
As of April 30, 2007, the Company had net operating loss carry-forwards for federal income tax purposes of approximately $15,879,000, which expire beginning in fiscal 2021 if not utilized. The Company also has California net operating loss carry-forwards of approximately $15,438,000, which expire beginning in fiscal 2013. The Company also has federal and California research and development tax credits of $1,959,000 and $2,076,000, respectively. The federal research credits will begin to expire in fiscal 2019, and the California research credits have no expiration date.
 
Utilization of the Company’s net operating loss may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provision. Such an annual limitation could result in the expiration of the net operating loss before utilization.
 
12.   Related-Party Transactions
 
Certain employees had outstanding promissory notes with the Company relating to stock option exercises, which are disclosed in Note 9. Certain of these transactions have been made between the Company and its executive officers as follows:
 
In March 2002, the Company granted the Chief Technology Officer (“CTO”) an option to purchase 2,250,000 shares of common stock at an exercise price of $0.03 per share under its 2002 Stock Plan. In July 2002, the CTO exercised this option and paid for the $23 aggregate par value of the shares in cash and the remainder of the purchase price of $67,477 in the form of a full-recourse promissory note. The note bore interest at a rate of 8.75% per year, compounded annually. The note was collateralized by the 2,250,000 shares. The note, including the accrued interest, was repaid in January 2006.
 
In March 2002, the Company entered into a restricted stock purchase agreement with the Chief Executive Officer (“CEO”). This agreement provided the CEO with a right to purchase up to 7,200,000 shares of the Company’s common stock at $0.03 per share. In September 2002, the CEO purchased all 7,200,000 shares of common stock. The CEO paid for the $72 aggregate par value of the shares in cash and the remainder of the purchase price of $215,928 in the form of a full-recourse promissory note. The note bore interest at a rate of 3.75% per year, compounded annually, and was payable in arrears on each anniversary date of the note. The note was collateralized by the 7,200,000 shares. The note, including the accrued interest, was repaid in January 2006.
 
In September 2001, the Company granted the then Chief Customer Officer (“CCO”) an option to purchase 300,000 shares of common stock at an exercise price of $0.10 per share under its 2002 Stock Plan. In January 2002, the CCO exercised this option and paid for the $3 aggregate par value of the shares in cash and the remainder of the purchase price of $29,997 in the form of a full-recourse promissory note. The note bore interest at a rate of 4.77% per year, compounded annually. The note was collateralized by the 300,000 shares. The portion of the note that represented 109,790 shares plus the accrued interest was repaid in April 2005. The portion of the note that represented 51,069 shares plus the accrued interest was repaid in July 2005. The remainder of the note, including the accrued interest, was repaid in November 2005.
 
In May 2001, the Company granted the CTO an option to purchase 125,000 shares of common stock at an exercise price of $0.10 per share under its 2002 Stock Plan. In January 2002, the CTO exercised this option and paid for the $1.25 aggregate par value of the shares in cash and the remainder of the purchase price of $12,499 in the form of a full-recourse promissory note. The note bore interest at a rate of 4.77% per year, compounded annually. The note, including the accrued interest, was repaid in January 2006.


F-32


Table of Contents

 
ARCSIGHT, INC.
 
Notes to Consolidated Financial Statements (Continued)
 
12.   Related-Party Transactions (Continued)
 
In November 2000, the Company granted the then Executive Vice President and Chief Operating Officer (“COO”), an option to purchase 1,200,000 shares of common stock at an exercise price of $0.10 per share under its 2000 Stock Incentive Plan. In May 2001, the COO exercised this option and paid for the $12 aggregate par value of the shares in cash and the remainder of the purchase price of $119,988 in the form of a full-recourse promissory note. The note bore interest at a rate of 5.43% per year, compounded annually. The entire principal amount and any outstanding amount of interest on the note were due and payable on April 30, 2006. The COO repaid the note in February 2005.
 
13.   Employee Benefit Plan
 
The Company sponsors a 401(k) savings plan for all employees who meet certain eligibility requirements. Participants may contribute, on a pretax basis, up to 15% of their annual compensation, but not to exceed a maximum contribution pursuant to Section 401(k) of the Internal Revenue Code. The Company is not required to contribute, nor has it contributed, to the plan for any of the periods presented. Administrative expenses relating to the plan are insignificant.


F-33


Table of Contents

(GRAPHIC)
External Attcks
Insider Threat
Protect your Business
The ArcSight platform provides the awareness and controls for real-time security and compliance management
ArcSight

 


Table of Contents

(ARCSIGHT)
 


Table of Contents

PART II
 
INFORMATION NOT REQUIRED IN PROSPECTUS
 
Item 13.   Other Expenses of Issuance and Distribution
 
The following table sets forth all expenses to be paid by the Registrant, other than estimated underwriting discounts and commissions, in connection with this offering. All amounts shown are estimates except for the SEC registration fee, the FINRA filing fee and The NASDAQ Global Market listing fee:
 
         
SEC registration fee
  $ 2,295  
FINRA filing fee
    7,975  
The NASDAQ Global Market listing fee
    *  
Printing and engraving
    *  
Legal fees and expenses
    *  
Accounting fees and expenses
    *  
Blue sky fees and expenses (including legal fees)
    *  
Transfer agent and registrar fees
    *  
Director and officer insurance
    *  
Miscellaneous
    *  
         
Total
  $ *  
         
To be completed by amendment.
 
Item 14.   Indemnification of Directors and Officers
 
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers under certain circumstances and subject to certain limitations. The terms of Section 145 of the Delaware General Corporation Law are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933, as amended (the “Securities Act”).
 
As permitted by the Delaware General Corporation Law, the Registrant’s restated certificate of incorporation contains provisions that eliminate the personal liability of its directors for monetary damages for any breach of fiduciary duties as a director, except liability for the following:
 
  •  any breach of the director’s duty of loyalty to the Registrant or its stockholders;
 
  •  acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
 
  •  under Section 174 of the Delaware General Corporation Law (regarding unlawful dividends and stock purchases); or
 
  •  any transaction from which the director derived an improper personal benefit.
 
As permitted by the Delaware General Corporation Law, the Registrant’s restated bylaws to be effective upon the completion of this offering, provide that:
 
  •  the Registrant is required to indemnify its directors and executive officers to the fullest extent permitted by the Delaware General Corporation Law, subject to very limited exceptions;
 
  •  the Registrant may indemnify its other employees and agents as set forth in the Delaware General Corporation Law;


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  •  the Registrant is required to advance expenses, as incurred, to its directors and executive officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to very limited exceptions; and
 
  •  the rights conferred in the bylaws are not exclusive.
 
Prior to the completion of this offering, the Registrant intends to enter into indemnity agreements with each of its current directors and executive officers to provide these directors and executive officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrant’s restated certificate of incorporation and restated bylaws and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director or executive officer of the Registrant regarding which indemnification is sought. Reference is also made to Section 8 of the Underwriting Agreement, which provides for the indemnification of executive officers, directors and controlling persons of the Registrant against certain liabilities. The indemnification provision in the Registrant’s restated certificate of incorporation, restated bylaws and the indemnification agreements entered into or to be entered into between the Registrant and each of its directors and executive officers may be sufficiently broad to permit indemnification of the Registrant’s directors and executive officers for liabilities arising under the Securities Act.
 
The Registrant currently carries liability insurance for its directors and officers.
 
One of Registrant’s directors (Ted Schlein) is also indemnified by his employer with regard to his service on the Registrant’s board of directors.
 
Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
 
         
    Exhibit
 
Exhibit Title
  Number  
 
Form of Underwriting Agreement
    1.1  
Form of Amended and Restated Certificate of Incorporation of the Registrant, to be in effect upon the completion of this offering
    3.2  
Form of Amended and Restated Bylaws of the Registrant, to be in effect upon the completion of this offering
    3.4  
Amended and Restated Investors’ Rights Agreement, dated as of October 24, 2002, between the Registrant and certain security holders of the Registrant
    4.2  
Form of Indemnity Agreement to be entered into between the Registrant and its directors and executive officers
    10.1  
 
Item 15.   Recent Sales of Unregistered Securities
 
Since May 1, 2004, the Registrant has issued and sold the following securities:
 
1. Since May 1, 2004, the Registrant has granted to its directors, officers, employees and consultants options to purchase shares of common stock under its 2002 Stock Plan with per share exercise prices ranging from $0.09 to $2.50, and has issued 6,721,520 shares of common stock upon exercise of such options. These transactions were exempt from the registration requirements of the Securities Act in reliance upon Rule 701 promulgated under the Securities Act or Section 4(2) of the Securities Act.
 
2. In May 2006, the Registrant issued 250,000 shares of its common stock (valued at approximately $380,000) to Challenger Capital LLC, a sophisticated accredited investor). This transaction was exempt from registration requirements of the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated under the Securities Act.
 
3. In May 2006, the Registrant issued warrants to purchase an aggregate of 64,734 shares of Series B Preferred Stock at an exercise price of $0.00001 per share to nine sophisticated accredited investors who previously purchased the Registrant’s Series B preferred stock in connection with the terms of an agreement with such investors. In April 2007, Institutional Venture Partners X, L.P. and Institutional Venture Partners X, GmbH & Co. Beteilgungs KG


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exercised their warrants at an exercise price of $0.00001 per share, and we issued an aggregate of 13,099 shares of Series B preferred stock. This transaction was exempt from registration requirements of the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated under the Securities Act.
 
4. In June 2006, the Registrant issued an aggregate of 1,543,684 shares of its common stock (valued at approximately $2.3 million) to Enira Technologies, LLC (“Enira”) in connection with the acquisition of the assets of Enira, of which 1,315,789 shares of common stock were held in escrow with the Registrant. In September 2006, pursuant to the dissolution of Enira, 1,543,684 shares of common stock (valued at approximately $2.3 million) were transferred to one advisor to Enira, who was sophisticated and accredited, and eight members of Enira, three of whom were sophisticated and accredited and five of whom appointed a “purchaser representative” and “professional advisor” as used in Rule 501(h) promulgated under the Securities Act. 1,315,789 of such shares of common stock are currently held in escrow by the Registrant. This transaction was exempt from registration requirements of the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated under the Securities Act.
 
None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and the Registrant believes each transaction was exempt from the registration requirements of the Securities Act as stated above. The recipients of the foregoing securities in such transactions represented their intention to acquire the securities for investment only and not with a 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 of the foregoing transactions either received adequate information about the Registrant or had access, through their relationships with the Registrant, to such information.
 
Item 16.   Exhibits and Financial Statement Schedules
 
(a)  Exhibits.  The following exhibits are included herein or incorporated herein by reference:
 
         
Exhibit Number
  Description
 
  1 .1*   Form of Underwriting Agreement.
  3 .1   Restated Certificate of Incorporation, as amended, of the Registrant.
  3 .2*   Form of Amended and Restated Certificate of Incorporation of the Registrant, to be in effect upon the completion of this offering.
  3 .3   Amended and Restated Bylaws of the Registrant.
  3 .4*   Form of Amended and Restated Bylaws of the Registrant, to be in effect upon the completion of this offering.
  4 .1*   Form of Registrant’s common stock certificate.
  4 .2   Amended and Restated Investors’ Rights Agreement, dated as of October 24, 2002, between the Registrant and certain security holders of the Registrant.
  5 .1*   Opinion of Fenwick & West LLP.
  10 .1*   Form of Indemnity Agreement to be entered into between the Registrant and its directors and executive officers.
  10 .2   2000 Stock Incentive Plan.
  10 .3   Forms of Stock Option Agreement and Stock Option Exercise Agreement under the 2000 Stock Incentive Plan.
  10 .4   2002 Stock Plan, as amended.
  10 .5   Forms of Stock Option Agreement and Stock Option Exercise Agreement under the 2002 Stock Plan.
  10 .6*   2007 Equity Incentive Plan, to be in effect upon the completion of this offering.
  10 .7*   Form of Stock Option Agreement and Stock Option Exercise Agreement under the 2007 Equity Incentive Plan.
  10 .8*   2007 Employee Stock Purchase Plan, to be in effect upon the completion of this offering.
  10 .9*   Form of Subscription Agreement under the 2007 Employee Stock Purchase Plan.
  10 .10*   Second Amended and Restated Employment Agreement, effective as of August 13, 2007, between the Registrant and Robert W. Shaw.


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Exhibit Number
  Description
 
  10 .11*   Offer Letter, dated June 1, 2000, between the Registrant and Hugh S. Njemanze.
  10 .12*   Offer Letter, dated January 24, 2003, between the Registrant and Stewart Grierson.
  10 .13*   Offer Letter, dated February 26, 2004, between the Registrant and Kevin P. Mosher.
  10 .14*   Offer Letter, dated October 5, 2006, between the Registrant and Thomas Reilly.
  10 .15*   Fiscal Year 2007 Management and Employee Bonus Plan.
  10 .16*   Sales Commission Plan – FY 2007 (Kevin P. Mosher).
  10 .17   Lease Agreement, dated April 24, 2007, between the Registrant and ECI Two Results LLC.
  10 .18*†   Oracle PartnerNetwork Embedded Software License Distribution Agreement, dated March 31, 2006, as amended, between the Registrant and Oracle USA, Inc.
  21 .1*   Subsidiaries of the Registrant.
  23 .1   Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
  23 .2*   Consent of Fenwick & West LLP (included in Exhibit 5.1).
  24 .1   Power of Attorney (see page II-5 to this Form S-1).
  99 .1   Consent of TheInfoPro, Inc., a market research firm, dated September 7, 2007.
  99 .2   Consent of International Data Corporation, a market research firm, dated September 10, 2007.
To be filed by amendment.
 
†  Registrant has omitted portions of the referenced exhibit and filed such exhibit separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406 promulgated under the Securities Act.
 
(b) Financial Statement Schedules.  All financial statement schedules are omitted because they are not applicable or the information is included in the Registrant’s consolidated financial statements or related notes.
 
Item 17.   Undertakings
 
The undersigned Registrant hereby undertakes to provide to the underwriters at the closing 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.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14 above, 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 Securities 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 Securities Act and will be governed by the final adjudication of such issue.
 
The undersigned Registrant hereby undertakes that:
 
(1) For purposes of determining any liability under the Securities 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 Securities 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 Securities 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.


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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 Cupertino, State of California, on this 11th day of September, 2007.
 
ARCSIGHT, INC.
 
  By: 
/s/  Robert W. Shaw
Robert W. Shaw
Chief Executive Officer and
Chairman of the Board of Directors
 
POWER OF ATTORNEY
 
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Robert W. Shaw and Stewart Grierson, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this registration statement (including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, 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 by the following persons in the capacities and on the dates indicated.
 
             
Signature   Title   Date
 
         
/s/  Robert W. Shaw

Robert W. Shaw
  Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
  September 11, 2007
         
/s/  Stewart Grierson

Stewart Grierson
  Chief Financial Officer
(Principal Accounting
and Financial Officer)
  September 11, 2007
         
/s/  Sandra Bergeron

Sandra Bergeron
  Director   September 11, 2007
         
/s/  William P. Crowell

William P. Crowell
  Director   September 11, 2007
         
/s/  E. Stanton McKee, Jr.

E. Stanton McKee, Jr.
  Director   September 11, 2007
         
/s/  Craig Ramsey

Craig Ramsey
  Director   September 11, 2007


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Signature   Title   Date
 
         
/s/  Scott A. Ryles

Scott A. Ryles
  Director   September 11, 2007
         
/s/  Ted Schlein

Ted Schlein
  Director   September 11, 2007
         
/s/  Ernest von Simson

Ernest von Simson
  Director   September 11, 2007


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EXHIBIT INDEX
 
         
Exhibit Number
  Description
 
  1 .1*   Form of Underwriting Agreement.
  3 .1   Restated Certificate of Incorporation, as amended, of the Registrant.
  3 .2*   Form of Amended and Restated Certificate of Incorporation of the Registrant, to be in effect upon the completion of this offering.
  3 .3   Amended and Restated Bylaws of the Registrant.
  3 .4*   Form of Amended and Restated Bylaws of the Registrant, to be in effect upon the completion of this offering.
  4 .1*   Form of Registrant’s common stock certificate.
  4 .2   Amended and Restated Investors’ Rights Agreement, dated as of October 24, 2002, between the Registrant and certain security holders of the Registrant.
  5 .1*   Opinion of Fenwick & West LLP.
  10 .1*   Form of Indemnity Agreement to be entered into between the Registrant and its directors and executive officers.
  10 .2   2000 Stock Incentive Plan.
  10 .3   Forms of Stock Option Agreement and Stock Option Exercise Agreement under the 2000 Stock Incentive Plan.
  10 .4   2002 Stock Plan, as amended.
  10 .5   Forms of Stock Option Agreement and Stock Option Exercise Agreement under the 2002 Stock Plan.
  10 .6*   2007 Equity Incentive Plan, to be in effect upon the completion of this offering.
  10 .7*   Form of Stock Option Agreement and Stock Option Exercise Agreement under the 2007 Equity Incentive Plan.
  10 .8*   2007 Employee Stock Purchase Plan, to be in effect upon the completion of this offering.
  10 .9*   Form of Subscription Agreement under the 2007 Employee Stock Purchase Plan.
  10 .10*   Second Amended and Restated Employment Agreement, effective as of August 13, 2007, between the Registrant and Robert W. Shaw.
  10 .11*   Offer Letter, dated June 1, 2000, between the Registrant and Hugh S. Njemanze.
  10 .12*   Offer Letter, dated January 24, 2003, between the Registrant and Stewart Grierson.
  10 .13*   Offer Letter, dated February 26, 2004, between the Registrant and Kevin P. Mosher.
  10 .14*   Offer Letter, dated October 5, 2006, between the Registrant and Thomas Reilly.
  10 .15*   Fiscal Year 2007 Management and Employee Bonus Plan.
  10 .16*   Sales Commission Plan – FY 2007 (Kevin P. Mosher).
  10 .17   Lease Agreement, dated April 24, 2007, between the Registrant and ECI Two Results LLC.
  10 .18*†   Oracle PartnerNetwork Embedded Software License Distribution Agreement, dated March 31, 2006, as amended, between the Registrant and Oracle USA, Inc.
  21 .1*   Subsidiaries of the Registrant.
  23 .1   Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
  23 .2*   Consent of Fenwick & West LLP (included in Exhibit 5.1).
  24 .1   Power of Attorney (see page II-5 to this Form S-1).
  99 .1   Consent of TheInfoPro, Inc., a market research firm, dated September 7, 2007.
  99 .2   Consent of International Data Corporation, a market research firm, dated September 10, 2007.
To be filed by amendment.
 
†  Registrant has omitted portions of the referenced exhibit and filed such exhibit separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406 promulgated under the Securities Act.

EX-3.1 2 f28075orexv3w1.htm EXHIBIT 3.1 exv3w1
 

Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
ARCSIGHT, INC.
a Delaware Corporation
     ArcSight, Inc., a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (the “General Corporation Law”),
     DOES HEREBY CERTIFY:
     FIRST: That the name of this corporation is ArcSight, Inc. and that this corporation was originally incorporated pursuant to the General Corporation Law on May 3, 2000 under the name Wahoo Technologies, Inc.
     SECOND: That the Board of Directors duly adopted resolutions proposing to amend the Restated Certificate of Incorporation of this corporation, declaring said amendment to be advisable and in the best interests of this corporation and its stockholders, and authorizing the appropriate officers of this corporation to solicit the consent of the stockholders therefor, which resolutions setting forth the proposed amendment are as follows:
     RESOLVED, that Article IV(B)4(d)(ii)(B) of Restated Certificate of Incorporation of this corporation be amended to delete reference to “one Series A Director and” and to therefore read in its entirety as follows;
     “(B) up to 21,280,299 shares of Common Stock (excluding shares repurchased at cost by this corporation in connection with the termination of service) issuable or issued to employees, consultants, directors or vendors (if in transactions with primarily non-financing purposes) of this corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of this corporation, such number to be subject to increase upon approval by the Board of Directors, including the approval from at least one Series B Director (as defined below);”
     RESOLVED, that Article IV(B)5(b) of Restated Certificate of Incorporation of this corporation be amended to delete the sentence stating “As long as a majority of the shares of Series A Preferred Stock originally issued remain outstanding, the holders of such shares of Series A Preferred Stock shall be entitled to elect two (2) directors of this corporation at each annual election of directors (“Series A Directors”) and to therefore read in its entirety as follows:

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     “(b) Voting for the Election of Directors. As long as a majority of the shares of Series B Preferred Stock originally issued remain outstanding, the holders of such shares of Series B Preferred Stock shall be entitled to elect two (2) directors of this corporation at each annual election of directors (“Series B Directors”). The holders of outstanding Common Stock shall be entitled to elect one (1) director of this corporation at each annual election of directors. The holders of Preferred Stock and Common Stock (voting together as a single class and not as separate series, and on an as-converted basis) shall be entitled to elect any remaining directors of this corporation.
     In the case of any vacancy (other than a vacancy caused by removal) in the office of a director occurring among the directors elected by the holders of a class or series of stock pursuant to this Section 5(b), the remaining directors so elected by that class or series may by affirmative vote of a majority thereof (or the remaining director so elected if there be but one, or if there are no such directors remaining by the affirmative vote of the holders of a majority of the shares of that class or series), elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant. Any director who shall have been elected by the holders of a class or series of stock or by any directors so elected as provided in the immediately preceding sentence hereof may be removed during the aforesaid term of office, either with or without cause, by, and only by, the affirmative vote of the holders of the shares of the class or series of stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders, and any vacancy thereby created may be filled by the holders of that class or series of stock represented at the meeting or pursuant to unanimous written consent.”
     FOURTH: That the foregoing Certificate of Amendment of the Restated Certificate of Incorporation of this corporation has been duly adopted and approved by the stockholders of this corporation in accordance with the applicable provisions of Sections 228 and 242 of the Delaware General Corporation Law.

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     IN WITNESS WHEREOF, said corporation has caused this certificate to be signed this 30th day of September, 2005.
         
 
  /s/ Robert Shaw
 
Robert Shaw,
   
 
  President and Chief Executive Officer    

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RESTATED CERTIFICATE OF INCORPORATION
OF
ARCSIGHT, INC.
(Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware)
     ArcSight, Inc., a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (the “General Corporation Law”).
     DOES HEREBY CERTIFY:
     FIRST: That the name of this corporation is ArcSight, Inc. and that this corporation was originally incorporated pursuant to the General Corporation Law on May 3, 2000, under the name Wahoo Technologies, Inc.
     SECOND: That the Board of Directors duly adopted resolutions proposing to amend and restate the Certificate of Incorporation of this corporation, declaring said amendment and restatement to be advisable and in the best interests of this corporation and its stockholders, and authorizing the appropriate officers of this corporation to solicit the consent of the stockholders therefor, which resolution setting forth the proposed amendment and restatement is as follows:
     RESOLVED, that the Certificate of Incorporation of this corporation be amended and restated in its entirety as follows:
ARTICLE I
     The name of this corporation is ArcSight, Inc.
ARTICLE II
     The address of the registered office of this corporation in the State of Delaware is 9 East Lockerman Street, in the City of Dover, County of Kent. The name of its registered agent at such address is National Registered Agents, Inc.
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 Delaware.
ARTICLE IV
     A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares that this corporation is authorized to issue is 216,407,009 shares. 130,000,000 shares shall be

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Common Stock and 86,407,009 shares shall be Preferred Stock, each with a par value of $.00001 per share.
     B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred Stock authorized by this Restated Certificate of Incorporation may be issued from time to time in one or more series. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Preferred Stock, which series shall consist of 14,727,649 shares (the “Series A Preferred Stock”), the Series B Preferred Stock, which series shall consist of 33,679,360 shares (the “Series B Preferred Stock”) and the Series C Preferred stock, which series shall consist of 8,000,000 shares (the “Series C Preferred Stock”), are as set forth below in this Article IV(B). The Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon additional series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or of any of them. Subject to compliance with applicable protective voting rights that have been or may be granted to the Preferred Stock or series thereof in Certificates of Designation or this corporation’s Certificate of Incorporation (“Protective Provisions”), but notwithstanding any other rights of the Preferred Stock or any series thereof, the rights, privileges, preferences and restrictions of any such additional series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote or written consent), or senior to any of those of any present or future class or series of Preferred or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series, prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any 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.
     1. Dividend_Provisions.
     (a) Subject to the rights of any series of Preferred Stock that may from time to time come into existence, the holders of shares of Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Common Stock of this corporation, at the rate of (i) $0.0588 per share per annum for the Series A Preferred Stock (as adjusted for any stock splits, stock dividends, recapitalizations or the like), (ii) $.019 per share per annum for the Series B Preferred Stock (as adjusted for any stock splits, stock dividends, recapitalizations or the like) and (iii) $.023 per share per annum for the Series C Preferred Stock (as adjusted for any stock splits, stock dividends, recapitalizations or the like), payable when, as, and if declared by the Board of Directors. Such dividends shall not be cumulative.
     2. Liquidation Preference.
     (a) In the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, subject to the rights of any series of Preferred Stock that may from time to time come into existence, the holders of Series A Preferred Stock, Series B

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Preferred Stock and Series C Preferred Stock shall be entitled to receive pari passu, prior and in preference to any distribution of any of the assets of this corporation to the holders of Common Stock by reason of their ownership thereof (i) in the case of Series A Preferred Stock, an amount per share equal to the sum of (A) $0.9803537 for each outstanding share of Series A Preferred Stock (the “Original Series A Issue Price”) and (B) declared but unpaid dividends on such share (subject to adjustment of such fixed dollar amounts for any stock splits, stock dividends, combinations, recapitalizations or the like), (ii) in the case of Series B Preferred Stock, an amount per share equal to the sum of (A) $.32039 for each outstanding share of Series B Preferred Stock (the “Original Series B Issue Price”) and (B) declared but unpaid dividends on such share (subject to adjustment of such fixed dollar amounts for any stock splits, stock dividends, combinations, recapitalizations or the like) and (iii) in the case of Series C Preferred Stock, an amount per share equal to the sum of (A) $0.384468 for each outstanding share of Series C Preferred Stock (the “Original Series C Issue Price”) and (B) declared but unpaid dividends on such share (subject to adjustment of such fixed dollar amounts for any stock splits, stock dividends, combinations, recapitalizations or the like). If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, subject to the rights of any series of Preferred Stock that may from time to time come into existence, the entire assets and funds of this corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock in proportion to the full preferential amount each holder is entitled to receive under this Section 2(a).
     (b) Upon the completion of the distribution required by subsection (a) of this Section 2 and any other distribution that may be required with respect to series of Preferred Stock that may from time to time come into existence, the remaining assets of this corporation available for distribution to stockholders shall be distributed among the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each (assuming full conversion of all such Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock ) until (i) with respect to the holders of Series A Preferred Stock, such holders shall have received an aggregate of $1.96 per share (as adjusted for any stock splits, stock dividends, recapitalizations or the like) (including amounts paid pursuant to subsection (a) of this Section 2), (ii) with respect to the holders of Series B Preferred Stock, such holders shall have received an aggregate of $0.64 per share (as adjusted for any stock splits, stock dividends, recapitalizations or the like) (including amounts paid pursuant to subsection (a) of this Section 2) and (iii) with respect to the holders of Series C Preferred Stock, such holders shall have received an aggregate of $0.77 per share (as adjusted for any stock splits, stock dividends, recapitalizations or the like) (including amounts paid pursuant to subsection (a) of this Section 2); thereafter, subject to the rights of any series of Preferred Stock that may from time to time come into existence, if assets remain in this corporation, the holders of the Common Stock of this corporation shall receive all of the remaining assets of this corporation pro rata based on the number of shares of Common Stock held by each.
     (c) (i) For purposes of this Section 2, a liquidation, dissolution or winding up of this corporation shall be deemed to be occasioned by, or to include (A) the acquisition of this

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corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the transfer of fifty percent (50%) or more of the outstanding voting power of this corporation; or (B) a sale of all or substantially all of the assets of this corporation other than the issuance of Preferred Stock consummated primarily for equity financing purposes. The treatment of any particular transaction or series of related transactions as a liquidation, dissolution or winding up of this corporation may be waived by the vote or written consent of the holders of a majority of the outstanding Preferred Stock (voting together as a single class and not as separate series, and on an as-converted basis).
          (ii) In any of such events, if the consideration received by this corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows:
               (A) Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below:
                    (1) If traded on a securities exchange or through the Nasdaq Stock Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the thirty (30) day period ending three (3) days prior to the closing;
                    (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the closing; and
                    (3) If there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors of this corporation.
               (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder’s status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (A) (1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by this corporation and the holders of a majority of the voting power of all then outstanding shares of such Preferred Stock.
          (iii) In the event the requirements of this subsection 2(c) are not complied with, this corporation shall forthwith either:
               (A) cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with; or
               (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(c)(iv) hereof.

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          (iv) This corporation shall give each holder of record of Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the stockholders’ meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and this corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after this corporation has given the first notice provided for herein or sooner than ten (10) days after this corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent a majority of the voting power of all then outstanding shares of such Preferred Stock.
     3. Redemption. The Preferred Stock is not redeemable.
     4. Conversion. The holders of the Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):
     (a) Right to Convert.
          (i) Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (A) the product of (x) 1.2555 and (y) $.32039 by (B) the Series A Conversion Price in effect at the time of conversion, determined as hereafter provided.
          (ii) Each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series B Issue Price by the Conversion Price then in effect for the Series B Preferred Stock, determined as hereafter provided.
          (iii) Each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series C Issue Price by the Conversion Price then in effect for the Series C Preferred Stock, determined as hereafter provided.
          (iv) The Conversion Price per share for shares of Series A Preferred Stock shall be $.32039; provided, however, that the Conversion Price for the Series A Preferred Stock shall be subject to adjustment as set forth in subsection 4(d). The initial Conversion Price per share for shares of Series B Preferred Stock shall be the Original Series B Issue Price; provided, however, that the Conversion Price for the Series B Preferred Stock shall be subject to

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adjustment as set forth in subsection 4(d). The initial Conversion Price per share for shares of Series C Preferred Stock shall be the Original Series C Issue Price; provided, however, that the Conversion Price for the Series C Preferred Stock shall be subject to adjustment as set forth in subsection 4(d).
     (b) Automatic Conversion. Each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such series immediately upon the earlier of (i) this corporation’s sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 or Form SB-2 under the Securities Act of 1933, as amended, the public offering price of which was not less than $0.96117 per share (as adjusted for any stock splits, stock dividends, recapitalizations or the like) and $20,000,000 in the aggregate or (ii) the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Preferred Stock.
     (c) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he or she shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. 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 Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the persons entitled to receive the Common Stock upon conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities.
     (d) Conversion Price Adjustments of Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion Prices of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be subject to adjustment from time to time as follows:
          (i) (A) If this corporation shall issue, after the date upon which any shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock were first issued (the “Purchase Date” with respect to each such series), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of

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Common Stock outstanding immediately prior to such issuance (including shares of Common Stock deemed to be issued pursuant to subsection 4(d)(i)(E)(1) or (2)) plus the number of shares of Common Stock that the aggregate consideration received by this corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including shares of Common Stock deemed to be issued pursuant to subsection 4(d)(i)(E)(1) or (2)) plus the number of shares of such Additional Stock.
               (B) No adjustment of the Conversion Price for the Preferred Stock shall be made in an amount totaling less than one hundredth of one cent per share, provided that any adjustments that are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment.
               (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof.
               (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment.
               (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 4(d)(i) and subsection 4(d)(ii):
                    (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D)), if any, received by this corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights for the Common Stock covered thereby.
                    (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any

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conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for, any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by this corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by this corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D)).
                    (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof (unless such options or rights or convertible or exchangeable securities were merely deemed to be included in the numerator and denominator for purposes of determining the number of shares of Common Stock outstanding for purposes of subsection 4(d)(i)(A)), the Conversion Price of the Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities.
                    (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities (unless such options or rights were merely deemed to be included in the numerator and denominator for purposes of determining the number of shares of Common Stock outstanding for purposes of subsection 4(d)(i)(A)), shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities that remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities.
                    (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 4(d)(i)(E)(3) or (4).
          (ii) “Additional Stock” shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E)) by this corporation after the Purchase Date other than:

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                    (A) Common Stock issued pursuant to a transaction described in subsection 4(d)(iii) hereof;
                    (B) up to 21,280,299 shares of Common Stock (excluding shares repurchased at cost by this corporation in connection with the termination of service) issuable or issued to employees, consultants, directors or vendors (if in transactions with primarily non-financing purposes) of this corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of this corporation, such number to be subject to increase upon approval by the Board of Directors, including the approval from at least one Series A Director and one Series B Director (as defined below);
                    (C) Shares of capital stock issued pursuant to the conversion or exercise of convertible or exercisable securities;
                    (D) Shares of capital stock, or options or warrants to purchase shares of capital stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, real estate transactions, joint ventures or other partnering arrangements or similar transactions approved by the Board of Directors of this corporation;
                    (E) Shares of capital stock, or options or warrants to purchase shares of capital stock, issued in connection with the Series B Preferred Stock Purchase Agreement to holders of Series B Preferred Stock;
                    (F) Shares of capital stock issued at a per share price equal to or greater than the Original Series C Issue Price after the first date on which any shares of Series C Preferred Stock are issued;
                    (G) Shares of capital stock, or warrants or options to purchase shares of capital stock, issued or issuable in connection with bona fide acquisitions, mergers or similar transactions, the terms of which are approved by the Board of Directors of this corporation;
                    (H) Up to 3,142,454 shares of capital stock issued to Daly Alpha Limited Partnership;
                    (I) a warrant to purchase up to 25,185 shares of capital stock and the shares of capital stock issuable upon exercise of such warrant issued to Alexander Enterprise Holdings Corp;
                    (J) a warrant issued to In-Q-Tel, Inc. to purchase up to 4,941,894 shares of Series C Preferred Stock and the shares of Series C Preferred Stock issuable upon exercise of such warrant; or
                    (K) Shares of capital stock, or warrants or options to purchase shares of capital stock, issued or issuable in connection with that certain Letter Agreement dated May 17, 2001 by and between this corporation and Silicon Valley Internet Capital, LLC, as amended.
          (iii) In the event this corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the

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outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as “Common Stock Equivalents”) without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents.
          (iv) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares.
     (e) Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(d)(iii), then, in each such case for the purpose of this subsection 4(e), the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of this corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of this corporation entitled to receive such distribution.
     (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) provision shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of the Preferred Stock the number of shares of stock or other securities or property of this corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable.
     (g) No Impairment. This corporation will not, by amendment of its Restated Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all

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the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment.
     (h) No Fractional Shares and Certificate as to Adjustments.
          (i) No fractional shares shall be issued upon conversion of the Preferred Stock. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. If the conversion would result in any fractional share, this corporation shall, in lieu of issuing any fractional share, pay the holder an amount in cash equal to the fair market value of such fractional share on the date of conversion, as determined in good faith by the Board of Directors.
          (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Preferred Stock pursuant to this Section 4, this corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property that at the time would be received upon the conversion of a share of Preferred Stock.
     (i) Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each holder of Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right.
     (j) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Restated Certificate of Incorporation.

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     (k) Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation.
     5. Voting Rights.
     (a) General Voting Rights. The holder of each share of Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders’ meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded down to the nearest whole number.
     (b) Voting for the Election of Directors. As long as a majority of the shares of Series A Preferred Stock originally issued remain outstanding, the holders of such shares of Series A Preferred Stock shall be entitled to elect two (2) directors of this corporation at each annual election of directors (“Series A Directors”). As long as a majority of the shares of Series B Preferred Stock originally issued remain outstanding the holders of such shares of Series B Preferred Stock shall be entitled to elect two (2) directors of this corporation at each annual election of directors (“Series B Directors”). The holders of outstanding Common Stock shall be entitled to elect one (1) director of this corporation at each annual election of director. The holders of Preferred Stock and Common Stock (voting together as a single class and not as separate series, and on an as-converted basis) shall be entitled to elect any remaining directors of this corporation.
     In the case of any vacancy (other than a vacancy caused by removal) in the office of a director occurring among the directors elected by the holders of a class or series of stock pursuant to this Section 5(b), the remaining directors so elected by that class or series may by affirmative vote of a majority thereof (or the remaining director so elected if there be but one, or if there are no such directors remaining by the affirmative vote of the holders of a majority of the shares of that class or series), elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant Any director who shall have been elected by the holders of a class or series of stock or by any directors so elected as provided in the immediately preceding sentence hereof may be removed during the aforesaid term of office, either with or without cause, by, and only by, the affirmative vote of the holders of the shares of the class or series of stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders, and any vacancy thereby created may be filled by the holders of that class or series of stock represented at the meeting or pursuant to unanimous written consent.
     6. Protective Provisions. Subject to the rights of any series of Preferred Stock that may from time to time come into existence, so long as any shares of Preferred Stock are

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outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least 75% of the then outstanding shares of Preferred Stock, voting together on an as-converted to Common Stock basis as a class and not as separate series:
     (a) sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of this corporation is disposed of;
     (b) alter or change the rights, preferences or privileges of the shares of Preferred Stock so as to affect adversely the shares;
     (c) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Common Stock or Preferred Stock;
     (d) authorize or issue, or obligate itself to issue, any other equity security (including any other security convertible into or exercisable for any such equity security) or reclassify any outstanding shares into shares having a preference over, or being on a parity with, any then outstanding Preferred Stock;
     (e) redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for this corporation or any subsidiary pursuant to agreements under which this corporation has the option to repurchase such shares at cost or at cost upon the occurrence of certain events, such as the termination of employment;
     (f) approve a liquidation, dissolution or winding up of this corporation;
     (g) declare or pay a dividend on the Common Stock (other than a dividend payable solely in shares of Common Stock);
     (h) amend this corporation’s Restated Certificate of Incorporation or bylaws; or
     (i) change the authorized number of directors of this corporation.
     7. Status of Converted Stock. In the event any shares of Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be cancelled and shall not be issuable by this corporation. The Restated Certificate of Incorporation of this corporation shall be appropriately amended to effect the corresponding reduction in this corporation’s authorized capital stock.
     C. Common Stock. The rights, preferences, privileges and restrictions granted to and imposed on the Common Stock are as set forth below in this Article IV(C).

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     1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of this corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors.
     2. Liquidation Rights. Upon the liquidation, dissolution or winding up of this corporation, the assets of this corporation shall be distributed as provided in Section 2 of Division (B) of Article IV hereof.
     3. Redemption. The Common Stock is not redeemable at the option of the holder.
     4. Voting Rights. The holder of each share of Common Stock shall have the right to one vote for each such share, and shall be entitled to notice of any stockholders’ meeting in accordance with the bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. The number of authorized shares of Common 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 stock of this corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law.
ARTICLE V
     Except as otherwise provided in this Restated Certificate of Incorporation, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of this corporation.
ARTICLE VI
     The number of directors of this corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors or by the stockholders.
ARTICLE VII
     Elections of directors need not be by written ballot unless the Bylaws of this corporation shall so provide.
ARTICLE VIII
     Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of this corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of this corporation.
ARTICLE IX
     A director of this corporation shall, to the fullest extent permitted by the General Corporation Law as it now exists or as it may hereafter be amended, not be personally liable to

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this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to this corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the General Corporation Law is amended, after approval by the stockholders of this Article, to authorize corporation action further eliminating or limiting the personal liability of directors, then the liability of a director of this corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law, as so amended.
     Any amendment, repeal or modification of this Article IX, or the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article IX, by the stockholders of this corporation shall not apply to or adversely affect any right or protection of a director of this corporation existing at the time of such amendment, repeal, modification or adoption.
ARTICLE X
     This corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.
ARTICLE XI
     To the fullest extent permitted by applicable law, this corporation is authorized to provide indemnification of (and advancement of expenses to) agents of this corporation (and any other persons to which General Corporation Law permits this corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law, subject only to limits created by applicable General Corporation Law (statutory or non-statutory), with respect to actions for breach of duty to this corporation, its stockholders, and others.
     Any amendment, repeal or modification of the foregoing provisions of this Article XI shall not adversely affect any right or protection of a director, officer, agent, or other person existing at the time of, or increase the liability of any director of this corporation with respect to any acts or omissions of such director, officer or agent occurring prior to, such amendment, repeal or modification.
* * *
     THIRD: The foregoing amendment and restatement was approved by the holders of the requisite number of shares of said corporation in accordance with Section 228 of the General Corporation Law.
     FOURTH: That said amendment and restatement was duly adopted in accordance with the provisions of Section 242 and 245 of the General Corporation Law.

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     IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been executed by the Chief Executive Officer of this corporation on this 22nd day of October, 2002.
         
     
  /s/ Robert Shaw    
  Robert Shaw, Chief Executive Officer   
     
 

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EX-3.3 3 f28075orexv3w3.htm EXHIBIT 3.3 exv3w3
 

Exhibit 3.3
AMENDED AND RESTATED BYLAWS
OF
ARCSIGHT, INC.
(A DELAWARE CORPORATION)

 


 

TABLE OF CONTENTS
         
    Page(s)
ARTICLE I
OFFICES   1  
ARTICLE II
MEETINGS OF STOCKHOLDERS   1  
ARTICLE III
DIRECTORS   4  
ARTICLE IV
NOTICES   7  
ARTICLE V
OFFICERS   8  
ARTICLE VI
CERTIFICATE OF STOCK   10  
ARTICLE VII
GENERAL PROVISIONS   11  
ARTICLE VIII
AMENDMENTS   13  
 -i- 

 


 

AMENDED AND RESTATED BYLAWS
OF
ARCSIGHT, INC.
ARTICLE I
OFFICES
     1.1 The registered office shall be in the City of Dover, County of Kent, State of Delaware.
     1.2 The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
     2.1 All meetings of the stockholders for the election of directors shall be held in the City of Sunnyvale, State of California, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting; provided, however, that the Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211 of the Delaware General Corporations Law (“DGCL”). Meetings of stockholders for any other purpose may be held at such time and place, if any, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof, or a waiver by electronic transmission by the person entitled to notice.
     2.2 Annual meetings of stockholders, commencing with the year 2003, shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting.
     2.3 Written notice of any stockholder meeting stating the place, if any, date and hour of the meeting, the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, shall be given to each stockholder entitled to vote at such meeting not fewer than ten (10) nor more than sixty (60) days before the date of the meeting.
     2.4 The officer who has charge of the stock ledger of the corporation 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 (but not the electronic address or other electronic contact information) 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 10 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. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. If the meeting is to be held at a place, then the list shall 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 access such list shall be provided with the notice of the meeting.
     2.5 Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president and shall be called by the president or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning at least fifty percent 50% in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting.
     2.6 Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not fewer than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. The means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting shall also be provided in the notice.
     2.7 Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.
     2.8
          (a) The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, 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 that might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) 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.

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          (b) If authorized by the Board of Directors in its sole discretion, and subject to such guidelines and procedures as the Board of Directors may adopt, stockholders and proxyholders not physically present at a meeting of stockholders may, by means of remote communication:
               (1) participate in a meeting of stockholders; and
               (2) be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication, provided that (i) the corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (ii) the corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the corporation.
     2.9 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, a different vote is required, in which case such express provision shall govern and control the decision of such question.
     2.10 Unless otherwise provided in the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote by such stockholder or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period.
     2.11
          (a) Unless otherwise provided by the certificate of incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed in a manner permitted by law by the holders of outstanding stock having not less than the number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Written stockholder consents shall bear the date of signature of each stockholder who signs the consent in the manner permitted by law and shall be delivered to the corporation as provided in subsection (b) below. No written consent shall be effective to take the action set forth therein unless, within sixty (60) days of the earliest dated consent delivered to the corporation in the manner provided above, written consents signed by a sufficient number of stockholders to take the action set forth therein are delivered to the corporation in the manner provided above.

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          (b) A telegram, cablegram or other electronic transmission consenting to an action to be taken and transmitted by a stockholder or proxyholder, or a person or persons authorized to act for a stockholder or proxyholder, shall be deemed to be written, signed and dated for the purposes of this section, provided that any such telegram, cablegram or other electronic transmission sets forth or is delivered with information from which the corporation can determine (i) that the telegram, cablegram or other electronic transmission was transmitted by the stockholder or proxyholder or by a person or persons authorized to act for the stockholder or proxyholder and (ii) the date on which such stockholder or proxyholder or authorized person or persons transmitted such telegram, cablegram or electronic transmission. The date on which such telegram, cablegram or electronic transmission is transmitted shall be deemed to be the date on which such consent was signed. No consent given by telegram, cablegram or other electronic transmission shall be deemed to have been delivered until such consent is reproduced in paper form and until such paper form shall be delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation’s registered office shall be made by hand or by certified or registered mail, return receipt requested. Notwithstanding the foregoing limitations on delivery, consents given by telegram, cablegram or other electronic transmission may be otherwise delivered to the principal place of business of the corporation or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded if, to the extent and in the manner provided by resolution of the Board of Directors of the corporation.
          (c) Prompt notice of any action taken pursuant to this Section 2.11 shall be provided to the stockholders in accordance with Section 228(e) of the Delaware General Corporation Law.
ARTICLE III
DIRECTORS
     3.1 The number of directors that shall constitute the whole Board of Directors shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting of the stockholders, except as provided in Section 3.2 of this Article, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders.
     3.2 Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board of Directors (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office.

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     3.3 The business of the corporation shall be managed by or under the direction of its Board of Directors, 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 or by these bylaws directed or required to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
     3.4 The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware.
     3.5 The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors.
     3.6 Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors.
     3.7 Special meetings of the Board of Directors may be called by the president on two (2) days’ notice to each director by mail or forty-eight (48) hours’ notice to each director either personally or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two (2) directors unless the Board of Directors consists of only one director, in which case special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director.
     3.8 At all meetings of the Board of Directors a majority of the directors 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 of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the Board of Directors, 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.
     3.9 Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing, writings, electronic transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee.
     3.10 Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference

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telephone or other means of communication 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.
COMMITTEES OF DIRECTORS
     3.11 The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board of Directors 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 thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors 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 of Directors, shall have and may exercise all the powers and authority of the Board of Directors 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 the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the General Corporation Law of Delaware to be submitted to stockholders for approval or (ii) adopting, amending or repealing any provision of these bylaws.
     3.12 Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
     3.13 Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors 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 of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors 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.
REMOVAL OF DIRECTORS
     3.14 Unless otherwise provided by the certificate of incorporation or these bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors.

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ARTICLE IV
NOTICES
     4.1 Whenever, under the provisions of the statutes or of the certificate of incorporation or of these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his 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. Notice to directors may also be given by telegram.
     4.2 Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation 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.
     4.3
          (a) Without limiting the manner by which notice otherwise may be given effectively to stockholders and directors, any notice to stockholders and directors given by the corporation under any provision of the DGCL, the certificate of incorporation, or these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder or director to whom the notice is given. Any such consent shall be revocable by the stockholder or director by written notice to the corporation. Any such consent shall be deemed revoked if (1) the corporation is unable to deliver by electronic transmission two consecutive notices given by the corporation in accordance with such consent and (2) such inability becomes known to the secretary or an assistant secretary of the corporation or to the transfer agent, or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.
          (b) Notice given pursuant to subsection (a) of this section shall be deemed given: (1) if by facsimile telecommunication, when directed to a number at which the stockholder or director has consented to receive notice; (2) if by electronic mail, when directed to an electronic mail address at which the stockholder or director has consented to receive notice; (3) if by a posting on an electronic network together with separate notice to the stockholder or director of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (4) if by any other form of electronic transmission, when directed to the stockholder or director. An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.
          (c) For purposes of these bylaws, “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

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ARTICLE V
OFFICERS
     5.1 The officers of the corporation shall be chosen by the Board of Directors and shall be a president, treasurer and a secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice-Chairman of the Board. The Board of Directors may also choose one or more vice-presidents, assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide.
     5.2 The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a president, a treasurer, and a secretary and may choose vice-presidents.
     5.3 The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.
     5.4 The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors.
     5.5 The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
     5.6 The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board of Directors and as may be provided by law.
     5.7 In the absence of the Chairman of the Board, the Vice-Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board of Directors and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
     5.8 The president shall be the chief executive officer of the corporation; and in the absence of the Chairman and Vice-Chairman of the Board he shall preside at all meetings of the stockholders and the Board of Directors; he shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect.
     5.9 He 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

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executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation.
     5.10 In the absence of the president or in the event of his inability or refusal to act, the vice-president, if any (or in the event there be more than one vice-president, the vice-presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election), shall perform 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 perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
     5.11 The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature.
     5.12 The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
     5.13 The treasurer 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 of Directors.
     5.14 He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation.
     5.15 If required by the Board of Directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal

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from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation.
     5.16 The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
     6.1 Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the president or a vice-president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in 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.
          If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, 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.
     6.2 Any of or all 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 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.
LOST CERTIFICATES
     6.3 The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by 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. When authorizing such issue of a new

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certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond 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.
TRANSFER OF STOCK
     6.4 Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation 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.
FIXING RECORD DATE
     6.5 In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholder 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 rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. 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 of Directors may fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
     6.6 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.
ARTICLE VII
GENERAL PROVISIONS

DIVIDENDS
     7.1 Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation.
     7.2 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

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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 purposes 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.
CHECKS
     7.3 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 of Directors may from time to time designate.
FISCAL YEAR
     7.4 The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.
SEAL
     7.5 The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year of its organization and the words “Corporate Seal, Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
     7.6 The corporation shall, to the fullest extent authorized under the laws of the State of Delaware, as those laws may be amended and supplemented from time to time, indemnify any director made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of being a director of the corporation or a predecessor corporation or, at the corporation’s request, a director or officer of another corporation; provided, however, that the corporation shall indemnify any such agent in connection with a proceeding initiated by such agent only if such proceeding was authorized by the Board of Directors of the corporation. The indemnification provided for in this Section 7.6 shall: (i) not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement or vote of stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such office, (ii) continue as to a person who has ceased to be a director, and (iii) inure to the benefit of the heirs, executors and administrators of such a person. The corporation’s obligation to provide indemnification under this Section 7.6 shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the corporation or any other person.
          Expenses incurred by a director of the corporation in defending a civil or criminal action, suit or proceeding by reason of the fact that he is or was a director of the corporation (or was serving at the corporation’s request as a director or officer of another corporation) shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as

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authorized by relevant sections of the General Corporation Law of Delaware. Notwithstanding the foregoing, the corporation shall not be required to advance such expenses to an agent who is a party to an action, suit or proceeding brought by the corporation and approved by a majority of the Board of Directors of the corporation that alleges willful misappropriation of corporate assets by such agent, disclosure of confidential information in violation of such agent’s fiduciary or contractual obligations to the corporation or any other willful and deliberate breach in bad faith of such agent’s duty to the corporation or its stockholders.
     The foregoing provisions of this Section 7.6 shall be deemed to be a contract between the corporation and each director who serves in such capacity at any time while this bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts.
     The Board of Directors in its discretion shall have power on behalf of the corporation to indemnify any person, other than a director, made a party to any action, suit or proceeding by reason of the fact that he, his testator or intestate, is or was an officer or employee of the corporation.
     To assure indemnification under this Section 7.6 of all directors, officers and employees who are determined by the corporation or otherwise to be or to have been “fiduciaries” of any employee benefit plan of the corporation that may exist from time to time, Section 145 of the General Corporation Law of Delaware shall, for the purposes of this Section 7.6, be interpreted as follows: an “other enterprise” shall be deemed to include such an employee benefit plan, including without limitation, any plan of the corporation that is governed by the Act of Congress entitled “Employee Retirement Income Security Act of 1974,” as amended from time to time; the corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to such Act of Congress shall be deemed “fines.”
CERTIFICATE OF INCORPORATION GOVERNS
     7.7 In the event of any conflict between the provisions of the Corporation’s Certificate of Incorporation and Bylaws, the provisions of the Certificate of Incorporation shall govern.
ARTICLE VIII
AMENDMENTS
     8.1 These bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the certificate of incorporation at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained

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in the notice of such special meeting. If the power to adopt, amend or repeal bylaws is conferred upon the Board of Directors by the certificate or incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal bylaws.

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EX-4.2 4 f28075orexv4w2.htm EXHIBIT 4.2 exv4w2
 

Exhibit 4.2
ARCSIGHT, INC.
AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT
October 24, 2002

 


 

AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT
     THIS AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT (the “Agreement”) is made as of the 24th day of October, 2002, by and among ArcSight, Inc., a Delaware corporation (the “Company”), the investors listed on Schedule A hereto (each of which is herein referred to as an “Investor”), Ted Schlein (“Schlein”) and Daly Alpha Limited Partnership (“Daly”).
RECITALS
     WHEREAS, certain of the Investors (the “Existing Investors”) hold shares of the Company’s Preferred Stock and/or shares of Common Stock issued upon conversion thereof (the “Preferred Stock”) and possess registration rights, information rights, rights of first offer and other rights pursuant to an Amended and Restated Investors’ Rights Agreement dated as of October 3, 2002 by and among the Company, Schlein, Daly and such Existing Investors (the “Prior Agreement”);
     WHEREAS, the Company has authorized 8,000,000 shares of Series C Preferred Stock (the “Series C Shares”) and the parties hereto desire that the Common Stock issuable upon conversion of the Series C Shares be included as “Registrable Securities” hereunder and the holders thereof included as “Holders” hereunder;
     WHEREAS, the Prior Agreement may be amended, and any provision therein waived, with the consent of (i) the Company, (ii) the Investors who hold 75% of the Registrable Securities and (iii) the Major Investors who hold 75% of the Registrable Securities then held by Major Investors (as all such terms are defined in the Prior Agreement); and
     WHEREAS, the parties hereto hold sufficient Registrable Securities to amend and restate the Prior Agreement and to accept the rights created pursuant hereto in lieu of the rights granted to them under the Prior Agreement on behalf of all parties thereto;
     NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereto hereby agree that the Prior Agreement shall be superseded and replaced in its entirety by this Agreement, and the parties hereto further agree as follows:
1. Registration Rights. The Company covenants and agrees as follows:
     1.1 Definitions. For purposes of this Section 1:
          (a) The term “Act” means the Securities Act of 1933, as amended.
          (b) The term “Form S-3” means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the SEC that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.
          (c) The term “Holder” means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.11 hereof;

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provided, however, that Daly shall not be deemed a Holder for purposes of Sections 1.12 and 3.7 and shall only be deemed a Holder for purposes of Sections 1.2 and 1.4 if Silicon Valley Internet Capital, LLC (“SVIC”) is an Initiating Holder under such Sections (but shall remain a Holder at all times for all other purposes hereunder).
          (d) The term “Major Investor” shall mean an Investor (or valid assignee of an Investor hereunder) that holds at least 6,000,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations). The term “Major Investor” shall also, for purposes of Sections 2.1, 2.2 and 2.3 only, include IN-Q-TEL, INC., a Delaware corporation (“IQT”), provided that IQT has become a party to this Agreement pursuant to Section 3.8 hereof.
          (e) The term “Initial Offering” means the Company’s first firm commitment underwritten public offering of its Common Stock under the Act.
          (f) The term “1934 Act” means the Securities Exchange Act of 1934, as amended.
          (g) The terms “register,” “registered,” and “registration” refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document.
          (h) The term “Preferred Stock” means the Company’s Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, whether presently outstanding or hereinafter issued;
          (i) The term “Registrable Securities” means (i) the Common Stock issuable or issued upon conversion of the Preferred Stock, (ii) the 5,200,000 shares of Common Stock issued to Schlein pursuant to an option held by him, (iii) the Common Stock held by Daly, (iv) the Common Stock issuable or issued upon conversion of the Preferred Stock issuable or issued upon exercise of the Warrant (assuming for this purpose only as if the Warrant is fully vested) and (iv) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security that is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, the shares referenced in (i), (ii), (iii) and (iv) above, excluding in all cases, however, any Registrable Securities sold by a stockholder in a transaction in which such stockholder’s rights under this Section 1 are not assigned.
          (j) The number of shares of “Registrable Securities” outstanding shall be determined with respect to any provision herein by the number of shares of Common Stock outstanding that are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities that are, Registrable Securities for the purposes of such provision.
          (k) The term “Rule 144” shall mean Rule 144 under the Act.
          (l) The term “Rule 144(k)” shall mean subsection (k) of Rule 144 under the Act.

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          (m) The term “SEC” shall mean the U.S. Securities and Exchange Commission or any successor thereto.
          (n) The term “Warrant” shall mean the Warrant issued by the Company to IQT on November 1, 2002.
     1.2 Request for Registration.
          (a) Subject to the conditions of this Section 1.2, if the Company shall receive at any time after six (6) months after the effective date of the Initial Offering, a written request from the Holders of thirty percent (30%) or more of the Registrable Securities then outstanding (for purposes of this Section 1.2, the “Initiating Holders”) that the Company file a registration statement under the Act covering the registration of Registrable Securities with an anticipated aggregate offering price of at least $5,000,000, then the Company shall, within twenty (20) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 1.2, use its best efforts to effect, as soon as practicable, the registration under the Act of all Registrable Securities that the Holders request to be registered in a written request received by the Company within twenty (20) days of the mailing of the Company’s notice pursuant to this Section 1.2(a).
          (b) 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 a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in Section 1.2(a). In such event the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders (which underwriter or underwriters shall be of nationally recognized standing). Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Company that marketing factors require a limitation of the number of securities underwritten (including Registrable Securities), then the Company shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders). In no event shall any Registrable Securities be excluded from such underwriting unless all other securities are first excluded. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration.
          (c) The Company shall not be required to effect a registration pursuant to this Section 1.2:
               (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, unless

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the Company is already subject to service in such jurisdiction and except as may be required under the Act; or
               (ii) after the Company has effected two (2) registrations pursuant to this Section 1.2, and such registrations have been declared or ordered effective; or
               (iii) during the period starting with the date ninety (90) days prior to the Company’s good faith estimate of the date of the filing of, and ending on a date ninety (90) days following the effective date of, a Company-initiated registration subject to Section 1.3 below, provided that the Company is actively employing in good faith all commercially reasonable efforts to cause such registration statement to become effective; or
               (iv) if the Initiating Holders propose to dispose of Registrable Securities that may be registered on Form S-3 pursuant to Section 1.4 hereof; or
               (v) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the Company’s Chief Executive Officer or Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than one hundred eighty (180) days after receipt of the request of the Initiating Holders, provided that such right shall be exercised by the Company not more than once in any twelve (12)-month period.
     1.3 Company Registration.
          (a) If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities (other than a registration relating solely to the sale of securities of participants in a Company stock plan, a registration relating to a corporate reorganization or transaction under Rule 145 of the Act, or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, subject to the provisions of Section 1.3(c), use all commercially reasonable efforts to cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered.
          (b) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 1.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The expenses of such withdrawn registration shall be borne by the Company in accordance with Section 1.7 hereof.
          (c) Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company’s capital stock, the Company shall not be required under

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this Section 1.3 to include any of the Holders’ securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters) and enter into an underwriting agreement in customary form with such underwriters, and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, that the underwriters determine in their sole discretion will not jeopardize the success of the offering. In no event shall any Registrable Securities be excluded from such offering unless all other stockholders’ securities are first excluded. In the event that the underwriters determine that less than all of the Registrable Securities requested to be registered can be included in such offering, then the Registrable Securities that are included in such offering shall be apportioned pro rata among the selling Holders based on the number of Registrable Securities held by all selling Holders or in such other proportions as shall mutually be agreed to by all such selling Holders. Notwithstanding the foregoing, in no event shall the amount of securities of the selling Holders included in the offering be reduced below thirty percent (30%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company’s securities, in which case the selling Holders may be excluded if the underwriters make the determination described above and no other stockholder’s securities are included. For purposes of the preceding sentence concerning apportionment, for any selling stockholder that is a Holder of Registrable Securities and that is a venture capital fund, partnership, limited liability company (an “LLC”), trust or corporation, the affiliated venture capital funds, partners, retired partners, beneficiaries, members, retired members and stockholders of such Holder, or the estates and family members of any such partners, retired partners, members, retired members, beneficiaries and stockholders and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single “selling Holder,” and any pro rata reduction with respect to such “selling Holder” shall be based upon the aggregate amount of Registrable Securities owned by all such related entities and individuals.
     1.4 Form S-3 Registration. In case the Company shall receive from the Holders of at least twenty percent (20%) of the Registrable Securities (for purposes of this Section 1.4, the “Initiating Holders”) a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company shall:
          (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and
          (b) use all commercially reasonable efforts to effect, as soon as practicable, such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holders’ Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company,

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provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this section 1.4:
               (i) if Form S-3 is not available for such offering by the Holders;
               (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters’ discounts or commissions) of less than $5,000,000;
               (iii) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.4, a certificate signed by the Company’s Chief Executive Officer or Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than one hundred eighty (180) days after receipt of the request of the Initiating Holders, provided that such right shall be exercised by the Company not more than once in any twelve (12)-month period;
               (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected one registration on Form S-3 for the Holders pursuant to this Section 1.4; or
               (v) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance.
          (c) 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 a part of their request made pursuant to this Section 1.4 and the Company shall include such information in the written notice referred to in Section 1.4(a). The provisions of Section 1.2(b) shall be applicable to such request (with the substitution of Section 1.4 for references to Section 1.2).
          (d) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders. Registrations effected pursuant to this Section 1.4 shall not be counted as requests for registration effected pursuant to Section 1.2.
     1.5 Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:
          (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all commercially reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a

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period of up to one hundred twenty (120) days or, if earlier, until the distribution contemplated in the Registration Statement has been completed;
          (b) prepare and file with the SEC 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 Act with respect to the disposition of all securities covered by such registration statement;
          (c) furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them;
          (d) use all commercially reasonable 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;
          (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 of such offering;
          (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 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;
          (g) cause all such Registrable Securities registered pursuant to this Section 1 to be listed on a national exchange or trading system and on each securities exchange and trading system on which similar securities issued by the Company are then listed; and
          (h) provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration.
     Notwithstanding the provisions of this Section 1, the Company shall be entitled to postpone or suspend, for a reasonable period of time, the filing, effectiveness or use of, or trading under, any registration statement if the Company shall determine that any such filing or the sale of any securities pursuant to such registration statement would:
               (i) in the good faith judgment of the Board of Directors of the Company, materially impede, delay or interfere with any material pending or proposed financing, acquisition, corporate reorganization or other similar transaction involving the Company for which the Board of Directors of the Company has authorized negotiations;

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               (ii) in the good faith judgment of the Board of Directors of the Company, materially adversely impair the consummation of any pending or proposed material offering or sale of any class of securities by the Company; or
               (iii) in the good faith judgment of the Board of Directors of the Company, require disclosure of material nonpublic information that, if disclosed at such time, would be materially harmful to the interests of the Company and its stockholders; provided, however, that during any such period all executive officers and directors of the Company are also prohibited from selling securities of the Company (or any security of any of the Company’s subsidiaries or affiliates).
     In the event of the suspension of effectiveness of any registration statement pursuant to this Section 1.5, the applicable time period during which such registration statement is to remain effective shall be extended by that number of days equal to the number of days during which the effectiveness of such registration statement was suspended.
     1.6 Information from Holder. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be reasonably required to effect the registration of such Holder’s Registrable Securities.
     1.7 Expenses of Registration. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Sections 1.2, 1.3 and 1.4, including (without limitation) all registration, filing and qualification fees, printers’ and accounting fees, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the selling Holders shall be borne by the Company. Notwithstanding the foregoing, the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 or Section 1.4 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be included in the withdrawn registration), unless, in the case of a registration requested under Section 1.2, the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.2 and provided, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 1.2 or 1.4.
     1.8 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1.

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     1.9 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 1:
          (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, members, trustees, officers, directors and stockholders of each Holder, legal counsel and accountants for each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act, any state securities laws or any rule or regulation promulgated under the Act, the 1934 Act or any state securities law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a “Violation”): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities laws or any rule or regulation promulgated under the Act, the 1934 Act or any state securities laws, and the Company will reimburse each such Holder, underwriter, controlling person or other aforementioned person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation that occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter, controlling person or other aforementioned person; provided further, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Holder or underwriter or other aforementioned person, or any person controlling such Holder or underwriter, from whom the person asserting any such losses, claims, damages or liabilities purchased shares in the offering, if a copy of the most current prospectus was not sent or given by or on behalf of such Holder or underwriter or other aforementioned person to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the shares to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability.
          (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers, each person, if any, who controls the Company within the meaning of the Act, legal counsel and accountants for the Company, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, the 1934 Act, any state securities laws or any rule or regulation promulgated under the Act, the 1934 Act or any state securities laws, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for

9


 

use in connection with such registration; and each such Holder will reimburse any person intended to be indemnified pursuant to this subsection 1.9(b) for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred.
          (c) Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of liability to the indemnified party under this Section 1.9 to the extent of such prejudice, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.9.
          (d) If the indemnification provided for in this Section 1.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense 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 statements or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined 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 and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission.
          (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.
          (f) The obligations of the Company and Holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise.

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     1.10 Reports Under the 1934 Act. With a view to making available to the Holders the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to:
          (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times after the effective date of the Initial Offering;
          (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and
          (c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration or pursuant to such form.
     1.11 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities that (i) is a subsidiary, parent, partner, limited partner, retired partner, member, retired member, stockholder or affiliate (as such term is defined in Rule 12b-2 of the Securities Act of 1934) of a Holder, (ii) after such assignment or transfer, holds at least 1,560,598 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations) or (iii) in the case of the Registrable Securities held by Schlein, the transferee is Kleiner Perkins Caufield & Byers (“KPCB”) or a permitted transferee of KPCB under this Section 1.11, provided: (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including, without limitation, the provisions of Section 1.13 below; (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act; and (d) such transferee is not a competitor of the Company (such determination to be made, if at all, in good faith by the Board of Directors of the Company).
     1.12 Limitations on Subsequent Registration Rights. Except as provided in Section 3.8 herein pursuant to which purchasers of Series C Shares (or options, warrants or other rights to acquire Series C Shares) may become party to this Agreement, from and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company that would allow such holder or prospective holder (a) to include

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such securities in any registration filed under Section 1.2, Section 1.3 or Section 1.4 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such securities will not reduce the amount of the Registrable Securities of the Holders that are included or (b) to demand registration of their securities. If, after the date hereof, (1) a majority of the Board of Directors approves the grant of registration rights substantially identical to the registration rights contained in this Section 1 to a person (a “Future Party”) in connection with Common Stock (or stock or other securities convertible into or exerciseable for, either directly or indirectly, Common Stock) then held or issuable to such Future Party and (2) the Company receives the written consent of the Holders of a majority of the Registrable Securities related to the grant of registration rights to such Future Party, then such Future Party shall become a party hereto and be included within the definition of “Holder” hereof and the Common Stock issued or issuable, directly or indirectly, to such party shall, to the extent and amounts approved, be included within the definition of “Registrable Securities” upon the execution of a counterpart signature page hereto by such Future Party.
     1.13 “Market Stand-Off” Agreement. The Holders hereby agree that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Company’s Initial Offering and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days) (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are then owned by the Holder or are thereafter acquired), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing provisions of this Section 1.13 shall apply only to the Company’s initial public offering of equity securities and the first public offering of equity securities, if any, made within one year of such initial public offering, shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, to any shares purchased in the public offering and to any shares purchased in the open market following the public offering and shall only be applicable to the Holders if all officers and directors and greater than one percent (1%) stockholders of the Company enter into similar agreements. The underwriters in connection with the Company’s Initial Offering are intended third party beneficiaries of this Section 1.13 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. The Holders each further agree to execute such agreements as may be reasonably requested by the underwriters in the Company’s Initial Offering that are consistent with this Section 1.13 or that are necessary to give further effect thereto.
     In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period.
     1.14 Termination of Registration Rights. No Holder shall be entitled to exercise any right provided for in this Section 1 (i) after five (5) years following the consummation of the

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Initial Offering or (ii) as to any Holder, such earlier time after the Initial Offering at which such Holder (A) can sell all shares held by it in compliance with Rule 144(k) or (B) holds one percent (1%) or less of the Company’s outstanding Common Stock (including Common Stock issuable upon conversion of any convertible security) and all Registrable Securities held by such Holder (together with any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) can be sold in any three (3)-month period without registration in compliance with Rule 144.
2. Covenants of the Company.
     2.1 Delivery of Financial Statements. The Company shall deliver to each Major Investor:
          (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of stockholders’ equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles (“GAAP”), and audited and certified by independent public accountants of nationally recognized standing selected by the Company;
          (b) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited income statement, statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter;
          (c) within thirty (30) days of the end of each month, an unaudited income statement and statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail; and
          (d) as soon as practicable, but in any event at least thirty (30) days prior to the end of each fiscal year, a budget for the next fiscal year, prepared on a monthly basis, including balance sheets, income statements and statements of cash flows for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company.
     2.2 Inspection. The Company shall permit each Major Investor, upon reasonable notice from such Major Investor and at such Major Investor’s expense, to visit and inspect the Company’s properties, to examine its books of account and records and to discuss the Company’s affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Major Investor; provided, however, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information that it reasonably considers to be a trade secret or similar confidential information.
     2.3 Termination of Information and Inspection Covenants. The covenants set forth in Sections 2.1 and 2.2 shall terminate and be of no further force or effect when the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public is consummated or when the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur.

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     2.4 Right of First Offer. Subject to the terms and conditions specified in this Section 2.4, the Company hereby grants to each Investor a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). Each time the Company proposes to offer any shares of, or securities convertible into or exchangeable or exercisable for any shares of, any class of its capital stock (“Shares”), the Company shall first make an offering of such Shares to each Investor in accordance with the following provisions:
          (a) The Company shall deliver a notice in accordance with Section 3.5 (“Notice”) to the Investors stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms upon which it proposes to offer such Shares.
          (b) By written notification received by the Company within twenty (20) calendar days after receipt of the Notice, each Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares that equals the proportion that the number of shares of Registrable Securities issued and held by such Investor bears to the total number of shares of Common Stock of the Company then outstanding (assuming full conversion and exercise of all convertible and exercisable securities then outstanding).
          (c) If all Shares that Investors are entitled to obtain pursuant to subsection 2.4(b) are not elected to be obtained as provided in subsection 2.4(b) hereof, the Company may, during the ninety (90) day period following the expiration of the period provided in subsection 2.4(b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than that, and upon terms no more favorable to the offeree than those, specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within sixty (60) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Investors in accordance herewith.
          (d) The right of first offer in this Section 2.4 shall not be applicable to (i) the issuance or sale of up to 21,280,299 shares of Common Stock (or options therefor) to employees, directors, consultants and other service providers for the primary purpose of soliciting or retaining their services pursuant to plans or agreements approved by the Company’s Board of Directors, such number to be subject to increase upon approval by the Board of Directors, including the approval from at least one Series A Director and at least one Series B Director (as such terms are defined in the Company’s Restated Certificate of Incorporation (the “Restated Certificate”)); (ii) the issuance of securities pursuant to a bona fide, firmly underwritten public offering of shares of Common Stock, registered under the Act, (iii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities, (iv) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, the terms of which are approved by the Board of Directors of the Company, (v) the issuance and sale of Series B Preferred Stock pursuant to the Series B Preferred Stock Purchase Agreement (the “Series B Agreement”), (vi) the issuance of warrants to purchase shares of Series B Preferred Stock issued pursuant to Section 6.8 of the Series B Agreement, (vii) the issuance of stock, warrants or other securities or rights to persons or entities approved by the Company’s Board of

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Directors, including the approval from at least one Series B Director and at least one Series A Director, with which the Company has business relationships, provided such issuances are for other than primarily equity financing purposes, (viii) the issuance of securities pursuant to that certain Letter Agreement dated May 17, 2001 by and between the Company and SVIC, as amended, (ix) the issuance of 3,142,454 shares of capital stock issued to Daly Alpha Limited Partnership, (x) the issuance of a warrant to purchase up to 25,185 shares of capital stock and the shares of capital stock issuable upon exercise of such warrant issued to Alexander Enterprise Holdings Corp, (xi) the sale and issuance of Series C Preferred Stock pursuant to the Series C Preferred Stock Purchase Agreement or (xii) the issuance of a warrant to IQT to purchase up to 4,941,894 shares of Series C Preferred Stock and the shares of Series C Preferred Stock issuable upon exercise of such warrant. In addition to the foregoing, the right of first offer in this Section 2.4 shall not be applicable with respect to any Investor and any subsequent offering of Shares if (i) at the time of such offering, the Investor is not an “accredited investor,” as that term is then defined in Rule 501(a) of the Act and (ii) such offering of Shares is otherwise being offered only to accredited investors.
          (e) The rights provided in this Section 2.4 may not be assigned or transferred by any Investor; provided, however, that an Investor that is a venture capital fund may assign or transfer such rights to an affiliated venture capital fund, an Investor that is a limited liability company may assign or transfer such rights to its members or retired members, Schlein may assign or transfer such rights to KPCB and SVIC may assign or transfer such rights to Alexander Enterprise Holdings Corp. and/or SVIC Investors I, LLC.
          (f) The covenants set forth in this Section 2.4 shall terminate and be of no further force or effect upon the consummation of the sale of securities pursuant to a bona fide, firmly underwritten public offering of shares of common stock registered under the Act.
     2.5 Proprietary Information and Inventions Agreements. The Company shall require all employees and consultants with access to confidential information to execute and deliver a Proprietary Information and Inventions Agreement in substantially the form approved by the Company’s Board of Directors.
     2.6 Employee Agreements. Unless approved by the Board of Directors of the Company, including at least one designee of KPCB for so long as KPCB is entitled to at least one designee on the Company’s Board of Directors, all employees of the Company receiving grants of options or other securities of the Company following the date hereof shall be required to execute stock purchase or option agreements with respect to such options or other securities providing for (i) vesting of shares over a four-year period with the first 25% of such shares vesting following twelve (12) months of continued employment or services, and the remaining shares vesting in equal monthly installments over the following 36 months thereafter (without any provision for the acceleration of such vesting, except for discretionary acceleration provisions provided for in the Company’s option plans) and (ii) a 180-day lockup period in connection with the Company’s initial public offering. The Company shall retain a right of first refusal on transfers until the Company’s initial public offering and the right to repurchase unvested shares at cost.

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     2.7 Termination of Certain Covenants. The covenants set forth in Sections 2.5 and 2.6 shall terminate and be of no further force or effect upon the consummation of the sale of securities pursuant to a bona fide, firmly underwritten public offering of shares of common stock registered under the Act.
3. Miscellaneous.
     3.1 Successors and Assigns. Except as otherwise provided herein, 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 (including transferees of any shares of Registrable Securities). 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.
     3.2 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.
     3.3 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.
     3.4 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.
     3.5 Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the respective parties at the addresses set forth on the signature pages attached hereto (or at such other addresses as shall be specified by notice given in accordance with this Section 3.5).
     3.6 Expenses. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.
     3.7 Entire Agreement: Amendments and Waivers. This Agreement (including the Exhibits hereto, if any) constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof. Any term of this Agreement (other than Section 2.1, Section 2.2 and Section 2.3) 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 75% of the Registrable Securities. The provisions of Section 2.1, Section 2.2 and Section 2.3 may be amended or waived (either generally or in a particular instance and either retroactively or

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prospectively) only with the written consent of the Company and the Holders of 75% of the Registrable Securities that are held by Major Investors. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities, each future holder of all such Registrable Securities and the Company. Notwithstanding anything to the contrary in this Section 3.7, neither this Agreement nor any provision hereof shall be amended or waived to the detriment of Daly vis-à-vis Silicon Valley Internet Capital, LLC (“SVIC”) or an SVIC Affiliate, without the prior written consent of Daly (“SVIC Affiliate” is herein defined as a person or entity controlled by, controlling or under common control with, SVIC or a person or entity controlled by, controlling or under common control with, such person or entity. For the avoidance of all doubt, Robert Shaw is not an SVIC Affiliate). For the avoidance of all doubt, an amendment of this Agreement or any provision hereof that maintains the registration rights as currently provided to SVIC and Daly shall not be considered to be to the detriment of Daly vis-à-vis SVIC.
     3.8 Subsequent Investors. At such time as the Company shall duly and validly issue Series C Shares (or options, warrants or other rights to acquire Series C Shares) to one or more third parties approved by the Board of Directors of the Company (a “Series C Holder”), each such Series C Holder may become a party to this Agreement without the need for any additional consent, approval, signature or other action of any party hereto by executing a counterpart signature page to this Agreement, in the form attached hereto as Exhibit A, indicating such Series C Holder’s agreement to become bound by the provisions hereof and to accept the rights and obligations hereunder (upon the Company’s receipt of such signature page, such person shall be a “Subsequent Investor”). A Subsequent Investor shall be deemed an “Investor” under this Agreement for any and all purposes and shall be added to Schedule A hereto as such.
     3.9 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms.
     3.10 Aggregation of Stock. All shares of Registrable Securities held or acquired by affiliated entities (including, without limitation, affiliated venture capital funds) or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

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     IN WITNESS WHEREOF, the parties have executed this Investors’ Rights Agreement as of the date first above written.

      
         
ARCSIGHT, INC.    
 
       
By:
  /s/ Robert Shaw     
 
       
Name:
  Robert Shaw    
Title:
  President and Chief Executive Officer    
 
       
Address:
  1309 South Mary Avenue    
 
  Sunnyvale, CA 94087    
Phone:
  (408) 328-5500    
Fax:
  (408) 749-8760    


 


 

             
    TED SCHLEIN    
 
           
 
  By:   /s/ Ted Schlein     
 
  Name:  
 
Ted Schlein
   
 
           
 
  Address:   2750 Sand Hill Road    
 
      Menlo Park, CA 94025    
 
  Phone:   (650) 233-2750    
 
  Fax:   (650) 233-0300    

 


 

             
    INVESTOR    
 
           
    KPCB HOLDINGS, INC., as nominee    
 
           
 
  By:   /s/ Ted Schlein     
 
  Title:  
 
its Senior Vice President
   
 
           
 
  Address:   2750 Sand Hill Road    
 
      Menlo Park, CA 94025    
 
  Phone:   (650) 233-2750    
 
  Fax:   (650) 233-0300    

 


 

             
    INVESTOR    
 
           
    INTEGRAL CAPITAL PARTNERS V, L.P.    
 
           
    By Integral Capital Management V, LLC
its General Partner
   
 
           
 
  By:   /s/ Pamela K. Hagenah     
 
  Name:  
 
Pamela K. Hagenah
   
 
  Title:   a Manager    
 
           
    INTEGRAL CAPITAL PARTNERS V SIDE FUND, L.P.    
 
           
    By ICP Management V, LLC its General Partner    
 
           
 
  By:   /s/ Pamela K. Hagenah     
 
           
 
  Name:   Pamela K. Hagenah    
 
  Title:   a Manager    
 
           
    INTEGRAL CAPITAL PARTNERS V SIDE FUND SLP, LLC    
 
           
    By ICP Management V, LLC its Manager    
 
           
 
  By:   /s/ Pamela K. Hagenah     
 
           
 
  Name:   Pamela K. Hagenah    
 
  Title:   a Manager    
 
           
 
  Address:   2750 Sand Hill Road    
 
      Menlo Park, CA 94025    
 
  Phone:   (650) 233-0360    
 
  Fax:   (650) 233-0366    

 


 

             
    INVESTOR    
 
           
    SILICON VALLEY INTERNET CAPITAL, LLC    
 
           
 
  By:   /s/ Alexander F. Hern     
 
  Name:  
 
Alexander F. Hern
   
 
  Title:   Executive Vice President    
 
           
 
  Address:   301 University Avenue    
 
    Palo Alto, CA 94301    
 
  Phone:   (650) 289-5600    
 
  Fax:   (650) 324-1999    

 


 

             
    INVESTOR    
 
           
    INSTITUTIONAL VENTURE PARTNERS X, L.P.    
 
           
 
  By:   /s/ Norman A. Fogelsong     
 
  Name:  
 
Norman A. Fogelsong
   
 
  Title:   Managing Director     
 
           
 
  Address:   c/o Institutional Venture Partners    
 
      3000 Sand Hill Road    
 
      Building Two, Suite 290    
 
      Menlo Park, CA 94027    
 
           
    INVESTOR    
 
           
    INSTITUTIONAL VENTURE PARTNERS X, GmbH & Co. Beteiligungs KG.    
 
           
 
  By:   /s/ Norman A. Fogelsong     
 
  Name:  
 
Norman A. Fogelsong
   
 
  Title:   Managing Director    
 
           
 
  Address:   c/o Institutional Venture Partners    
 
      3000 Sand Hill Road    
 
      Building Two, Suite 290    
 
      Menlo Park, CA 94027    

 


 

             
    INVESTOR    
 
           
    PRESIDIO VENTURE PARTNERS LLC    
 
           
 
  By:   /s/ Kazuyuki Inoue     
 
  Name:  
 
Kazuyuki Inoue
   
 
  Title:   President and Chief Executive Officer    
 
           
 
  Address:   5150 El Camino Real, Suite C31    
 
      Los Altos, CA 94022    
 
  Phone:   (650) 528-5172    
 
  Fax:   (650) 938-5176    

 


 

             
    INVESTOR    
 
           
    SUMITOMO CORPORATION    
 
           
 
  By:   /s/ Yoshio Osawa     
 
  Name:  
 
Yoshio Osawa
   
 
  Title:   General Manager    
 
      Network Systems Department    
 
           
 
  Address:   1-8-11 Harumi    
 
      Chuo-ku, Tokyo 104-8610    
 
  Phone:   81-3-5166-4654    
 
  Fax:   81-3-5166-6427    

 


 

             
    INVESTOR    
 
           
    G&H PARTNERS    
 
           
 
  By:   /s/ Scott F. Armienti    
 
     
 
   
 
           
 
  Address:   155 Constitution Drive    
 
      Menlo Park, CA 94025    
 
  Phone:   (650) 321-2400    
 
  Fax:   (650) 321-2800    

 


 

SCHEDULE A
LIST OF INVESTORS
KPCB Holdings, Inc., as nominee
Integral Capital Partners V, L.P.
Integral Capital Partners V Side Fund, L.P.
Integral Capital Partners V Side Fund SLP, LLC
Silicon Valley Internet Capital, LLC
SVIC Investors I, LLC
Alexander Enterprise Holdings Corp.
Institutional Venture Partners X, L.P.
Institutional Venture Partners X, GmbH & Co. Beteiligungs KG
Presidio Venture Partners LLC
Sumitomo Corporation
G&H Partners

 


 

Exhibit A
Counterpart Signature Page
[See next page.]

 


 

     IN WITNESS WHEREOF, in connection with the undersigned’s purchase of shares of Series C Preferred Stock of the Company (or options, warrants or other rights to acquire the same) the undersigned has executed this counterpart signature page to the Amended and Restated Investors’ Rights Agreement of ArcSight, Inc. dated October 24, 2002 (the “Agreement”) pursuant to Section 3.8 of the Agreement as of the date written below. The undersigned hereby acknowledges and agrees to be bound by the provisions of the Agreement and to accept the rights and obligations thereunder.
             
Dated: November 1, 2002   SUBSEQUENT INVESTOR    
 
           
 
  By:   /s/ Gilman G. Louie    
 
  Name:  
 
Gilman G. Louie for In-Q-Tel, Inc.
   
 
  Title:   Chief Executive Officer    
 
           
 
  Address:   In-Q-Tel, Inc.    
 
      1000 Wilson Boulevard, Suite 2900    
 
      Arlington, VA 22209    

 

EX-10.2 5 f28075orexv10w2.htm EXHIBIT 10.2 exv10w2
 

Exhibit 10.2
ARCSIGHT, INC.
2000 STOCK INCENTIVE PLAN
     The Plan was originally adopted by the Board and approved by the shareholders on May 25, 2000, and is effective as of that date. This document is an amendment and restatement of that earlier plan document and is generally effective with respect to all Options or Restricted Shares granted on or after November 15, 2000. Capitalized terms are defined in Article 14.
     1. ESTABLISHMENT AND PURPOSE.
     The 2000 Stock Incentive Plan is established to attract, retain and reward persons providing services to the Company and any successor corporation, to (a) encourage Participants to focus on critical long-range objectives, (b) encourage the attraction and retention of Company employees, and (c) link Participants directly to shareholder interests through increased stock ownership. The Plan provides for awards of ISOs, NSOs and Restricted Shares to eligible individuals.
     2. ADMINISTRATION.
     The Board shall administer the Plan. The Board shall have all powers and discretion necessary or appropriate to administer the Plan including, but not limited to the power to: (a) select the Participants under the Plan; (b) determine the type, number, vesting requirements and other features and conditions of Awards; (c) interpret the Plan; (d) resolve disputed issues of fact; and (e) make all other decisions relating to the operation of the Plan. The Board may adopt such rules or guidelines, as it deems appropriate to implement the Plan. The Board’s determinations under the Plan shall be final and binding on all persons. No member of the Board shall be liable for any action or decision made in good faith in connection with the exercise of the Board’s duties under the Plan. The Board, in its sole discretion and on such terms and conditions as it may provide, may delegate all or any part of its authority and powers under the Plan to one or more Directors or officers of the Company.
     3. AGREEMENTS.
     All Awards shall be evidenced by an Agreement signed by the Company and the Participant. Each Agreement shall identify the type of Award and if an Award includes Options, shall designate the Options as either ISOs or NSOs. Each Award shall be subject to the terms and conditions of the Plan and to such other terms and conditions as may be established by the Board in the Agreements. Determinations by the Board under the Plan, including, without limitation, determinations of Participants, the form, amount and timing of Awards, the terms and provisions of Awards and the Agreements, need not be uniform and may be made selectively among Participants who receive or are eligible to receive Awards, whether or not such Participants are similarly situated.
     4. SHARES AVAILABLE FOR GRANTS.
          4.1 Basic Limitation. Shares issued pursuant to the Plan shall be authorized but unissued shares or treasury shares. Subject to adjustment pursuant to Section 4.2, the

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aggregate number of Shares that may be issued under Awards shall be 11,200,000 Shares. If an Option expires, is surrendered, or becomes unexercisable without having been exercised in full, or if any unissued Shares are retained by the Company upon exercise of an Option in order to satisfy the exercise price for such Option or any withholding taxes due with respect to such exercise, the unissued or retained Shares shall become available for future grant under the Plan. If Restricted Shares are forfeited, such Shares shall also become available for future grant under the Plan. Prior to the adoption of the Plan, the Company had awarded Restricted Shares to certain individuals. For purposes of calculating the number of Shares that may be issued under the Plan, those Restricted Shares shall reduce the number of Shares that may be issued under the Plan, and any of those Restricted Shares that are forfeited or terminated for any other reason before being exercised shall again become available for awards under the Plan.
          4.2 Adjustments. In the event of a reorganization, recapitalization, stock split, stock dividend, spin-off, combination of Shares, merger, consolidation, rights offering, or any other increase or decrease in the number of Shares effected without the receipt of consideration by the Company, the Board shall make such adjustment, if any, as it may deem appropriate in the number and kind of Shares authorized by the Plan, in the number of Shares covered by Awards and the Exercise Price of Options.
     5. ELIGIBILITY.
     Subject to the terms and provisions of the Plan, Awards may be granted to Employees, Consultants, and Directors at any time as determined by the Board in its sole discretion. For purposes of the foregoing sentence, Employees and Consultants shall include prospective employees or consultants to whom Awards other than ISOs are granted in connection with written offers of employment or engagement of services, respectively, with the Company; provided that no Award granted to a prospective employee or consultant may be exercised prior to the commencement of employment or services with the Company. The Board may grant ISOs, NSOs, Restricted Shares or any combination of them. The Company does not represent or warrant that an option intended to be an ISO qualifies as such. Eligible persons may receive more than one Award.
     6. TERMS OF OPTIONS.
     Options granted under the Plan shall be subject to the following terms and conditions.
          6.1 Exercise Price. The Exercise Price for an Option shall equal or exceed the Fair Market Value on the Grant Date. The Exercise Price of an Option granted to a Ten Percent Owner shall not be less than 110 percent of the Fair Market Value on the Grant Date.
          6.2 Termination. Each Option shall terminate in accordance with this section.
               (a) Expiration. Unless terminated sooner in accordance with the remaining provisions of this section, each Option shall expire either ten (10) years after the Grant Date or after a shorter term as may be fixed by the Board.
               (b) Death or Disability. If a Participant’s Service ends because the Participant dies or becomes disabled while in Service with the Company, the Participant’s estate

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or representative shall have the right for a period of twelve (12) months after the date of death or disability to exercise the Participant’s Options to the extent the Participant was entitled to exercise the Options on that date, provided the date of exercise is in no event after the expiration of the term of the Options. To the extent the Options are not exercised within this period, they will terminate.
               (c) Resignation or Termination For Reasons Other than Cause. If a Participant voluntarily resigns from the Company or is terminated by the Company for reasons other than Cause, unvested Options shall be forfeited on the termination date and the Participant shall have the right for a period of thirty (30) days after the date of resignation or termination to exercise vested Options, provided the date of exercise is in no event after the expiration of the term of the Options. To the extent the Options are not exercised within this period, they will terminate.
               (d) Termination for Cause. If lithe Company terminates a Participant’s Service for Cause, vested and unvested Options, to the extent not previously exercised, shall immediately terminate and no longer be exercisable as of the date of termination.
          6.3 Exercisability. In the Board’s discretion, Options may be exercisable immediately upon grant or the right to exercise Options may accrue in installments based upon the passage of time or the attainment of performance goals, which need not be equal, at a rate which shall be set forth in the Agreement and shall provide for a right to exercise that is at least 20% per year over five years from the Grant Date. In addition, the Board may, at any time, and from time to time, determine that Options shall, notwithstanding any vesting period or deferral of the right to exercise otherwise applicable, be immediately exercisable, effective on and after a date declared by the Board to be an advanced exercise date.
          6.4 Payment. To the extent that Options are exercised, the aggregate Exercise Price shall be paid in full upon exercise. An Agreement may provide for payment in the form of: (i) cash; (ii) check; (iii) delivery of a promissory note with such recourse, interest, security, and redemption provisions as the Board in its discretion determines as appropriate; (iv) surrender of Shares having a Fair Market Value on the date of surrender not less than the aggregate Exercise Price of the Shares being acquired; or (v) any combination of the foregoing methods of payment. Unless otherwise provided by the Board, Options may not be exercised by surrender of Shares unless such Shares either have been owned by the Participant for more than six (6) months or were not acquired, directly or indirectly, from the Company.
          6.5 Exercise Procedure. An Option shall be deemed exercised when the Company receives: (i) a signed written exercise notice (in accordance with the Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 4 of the Plan.

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          6.6 Restrictions on Transfer of Shares and Minimum Vesting. Except as otherwise specified in an Agreement, any Shares issued upon exercise of Options shall be subject to the Company’s right of repurchase and right of first refusal and an agreement may provide that the Company’s right of repurchase and right of first refusal shall lapse upon the occurrence of a Change of Control or an IPO. If Options include a provision whereby the Participant may elect at any time while an Employee, Director or Consultant to exercise the Options prior to their vesting, the Shares acquired with respect to unvested Options shall be subject to a repurchase right in favor of the Company, with the repurchase price per Share to be equal to the original Exercise Price,; provided, however, that (i) the right to repurchase at the original Exercise Price shall lapse at a minimum rate of 20 percent per year over five (5) years from the date the Options were granted, and (ii) such right shall be exercisable only within (A) the ninety (90) day period following the termination of Service, or (B) such longer period as may be agreed to by the Company and the Participant (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code (regarding “qualified small business stock”)), and (iii) such right shall be exercisable only for cash or cancellation of purchase money indebtedness for the Shares. Shares issued upon exercise of Options may be subject to such other special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Board of Directors may determine. Such restrictions shall be set forth in the applicable Agreement and shall apply in addition to any restrictions that may apply to holders of Shares generally.
          6.7 Modification, Extension, and Renewal. The Board shall have the power to modify, extend, or renew outstanding options and authorize the grant of new options in substitution therefor, provided that any such action may not have the effect of altering or impairing any rights or obligations of any option previously granted without the consent of the Participant.
          6.8 Cancellation and Rescission Provision. A Participant shall neither render services for any organization or business that is or becomes competitive with the Company, nor engage directly or indirectly in any organization or business which is or becomes otherwise prejudicial to or in conflict with the interests of the Company, as determined by the Board. If a Participant fails to comply with the previous sentence prior to or during a six-month period after any exercise of an Option, the exercise shall be cancelled and rescinded. The Board shall notify the Participant in writing of any such cancellation and rescission within two years after such exercise. Within ten days after receiving such notice from the Board, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of the cancelled and rescinded exercise of the Option.
          6.9 Transferability. Options granted under the Plan are not transferable and shall be exercisable during a Participant’s lifetime only by the Participant; provided, however, that a NSO may be transferred upon the approval of the Administrator (in its sole discretion) by appropriate instrument to an inter vivos or testamentary trust in which the option is to be passed to the Participant’s beneficiaries upon the Participant’s death or by gift to the Participant’s immediate family (consisting of the Participant’s child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include adoptive relationships). No option or interest therein may be otherwise transferred, assigned, pledged, or hypothecated by a Participant, whether by operation of law or otherwise, or be made subject to execution, attachment, or similar process.

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Any such purported assignment, sale, transfer, delegation, or other disposition shall be null and void.
          7. SPECIAL TERMS OF INCENTIVE STOCK OPTIONS.
          Notwithstanding any other provision of the Plan, the terms and conditions set forth in this Section 7 shall apply to all Options granted under the Plan that are intended to be ISOs. Any Option the terms of which provide that it shall be treated as an NSO shall not be subject to such terms and conditions.
               7.1 Employees. ISOs may only be granted to Employees. If an ISO is exercised more than three (3) months after the date on which the Participant ceases to be an employee (other than by reason of death or a permanent and total disability as defined in Code § 22(e)(3)), the Option will be treated as an NSO, and not an ISO.
               7.2 Exercise Price. The Exercise Price of an ISO granted to a Ten Percent Owner shall not be less than 110 percent of the Fair Market Value on the Grant Date. The Exercise Price of an ISO granted to any other Employee shall not be less than the Fair Market Value on the Grant Date.
               7.3 Expiration for Ten Percent Owners. An ISO granted to a Ten Percent Owner shall expire either five (5) years after the date on which it was granted or after a shorter term as may be fixed by the Board.
               7.4 One Hundred Thousand Dollars ($100,000) Limitation. To the extent that the aggregate Fair Market Value (determined in accordance with this paragraph) of the Shares subject to ISOs (determined without regard to this paragraph) held by a Participant under all plans of the Company or its Affiliates that become exercisable for the first time by a Participant during any calendar year exceeds One Hundred Thousand Dollars ($100,000), the most recently granted Options shall be treated as NSOs to the extent of the excess Shares. For purposes of this paragraph, all Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares subject to such Options shall be determined as of the Grant Date with respect to each Option.
          8. RESTRICTED SHARES.
          The Board may grant Restricted Shares under the Plan, subject to such restrictions, conditions and other terms and for such consideration as the Board may determine in addition to those set forth in this Section.
               8.1 Restrictions. At the time a grant of Restricted Shares is made, the Board shall establish the Restricted Period applicable to such Restricted Shares. Each grant of Restricted Shares may be subject to a different Restricted Period. The Board may, in its sole discretion, at the time a grant is made, prescribe restrictions in addition to or other than the expiration of the Restricted Period, including the satisfaction of corporate or individual performance objectives, which shall be applicable to all or any portion of the Restricted Shares. The Board may also, in its sole discretion, shorten or terminate the Restricted Period or waive any other restrictions applicable to all or a portion of such Restricted Shares. None of the Restricted Shares may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of prior to the date on which such the Restricted Period expires and any other restrictions have lapsed or been satisfied.

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          8.2 Restricted Shares Certificates. As soon as practicable following an Award of Restricted Shares, the Company shall issue, in the name of the Participant, a stock certificate with proper legends representing the total number of Restricted Shares granted to the Participant. The Secretary of the Company shall hold such certificates, properly endorsed for transfer, for the Participant’s benefit until such time as the Restricted Shares are forfeited to the Company or until the Restricted Shares vest. In lieu of the foregoing, Restricted Shares awarded to a Participant may be held under the Participant’s name in a book entry account maintained by or on behalf of the Company.
          8.3 Rights of Holders of Restricted Shares. Except as otherwise determined by the Board either at the time Restricted Shares are awarded or at any time thereafter prior to the lapse of the restrictions, holders of Restricted Shares shall have the right to vote such shares or the right to receive any dividends with respect to such shares. All distributions, if any, received by an employee or consultant with respect to Restricted Shares as a result of any stock split-up, stock distribution, combination of shares, or other similar transaction shall be subject to the restrictions of this Section.
          8.4 Termination of Service. Any Restricted Shares shall be forfeited if the Participant terminates Service for reasons other than death or disability prior to the expiration or termination of the Restricted Period and the satisfaction of any other conditions applicable to such Restricted Shares. Upon such forfeiture, the Secretary of the Company shall either cancel or retain in its treasury the Restricted Shares that are forfeited to the Company. Upon the death of a Participant prior to his termination of Service, or upon a Participant’s termination of Service as a result of disability, all Restricted Shares previously awarded to such Participant which have not previously vested shall be forfeited unless the Board in its sole discretion shall determine otherwise.
          8.5 Lapse of Restrictions. All restrictions imposed on the Restricted Shares shall lapse upon the expiration of the Restriction Period, and satisfaction of other requirements, if any, specified in the Agreement. The grantee shall then be entitled to have the legend removed from the certificates.
          8.6 Delivery of Restricted Shares. Subject to the provisions of this Section, at such time as the Participant shall become vested in his Restricted Shares, the restrictions applicable to the Restricted Shares shall lapse and a stock certificate for the number of Restricted Shares with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions, to the Participant or the Participant’s beneficiary or estate, as the case may be.
     9. CORPORATE TRANSACTION.
     An Agreement may provide that Options or Restricted Shares shall become fully or partially vested and exercisable upon a Change Of Control, IPO or other corporate transaction, or an Agreement may provide for the assumption of Options or substitution of new options by the successor entity and the substitution of new restricted shares following a Change Of Control or corporate transaction.

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     10. TERM OF THE PLAN; AMENDMENT TERMINATION.
          10.1 Term of the Plan. The Plan was effective as of May 25, 2000, the date of its adoption by the Board and approval by the shareholders. The Plan shall remain in effect until May 24, 2010, unless terminated sooner in accordance with Section 10.2.
          10.2 Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. An amendment of the Plan shall be subject to the approval of the Company’s shareholders only to the extent required by applicable laws, regulations or rules. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan.
     11. REGULATORY APPROVAL, REGISTRATION, AND INVESTMENT PURPOSE.
          Shares 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. Unless the Shares shall have been registered under the Securities Act of 1933, Awards under the Plan shall be granted on the condition that the Participant: (1) agree that purchases or grant of Shares thereunder shall be for investment and not with a view to resale or distribution of such Shares; and (ii) give such other written representations as the Board may require. As a condition to the issuance of Restricted Shares or Shares purchased upon the exercise of any Options granted pursuant to the Plan which are not registered under such Act, the Participant, his legal representative, executor, administrator, heir or legatee, as the case may be, receiving such Shares shall deliver to the Company a writing, in form and substance satisfactory to the Company and its counsel, implementing such agreement. The Plan is intended to satisfy all requirements of Rule 701 under the Securities Act of 1933 and California Corporations Code § 25102(o) with respect to offers and sales that would otherwise violate Federal and California securities law (including the requirement that Optionees receive financial statements at least annually), and any such requirement is hereby incorporated into the Plan to effect that intent.
     12. CLAIMS; ARBITRATION.
          12.1 Claims. Any individual who makes a claim for benefits under the Plan shall file the claim in writing with the Board. Written notice of the disposition of the claim shall be delivered to the claimant within 30 days after filing. If the claim is denied, the reasons shall be set forth in a statement delivered to the claimant. Thereafter the claimant may request arbitration in accordance with subsection (b). The filing of a claim in accordance with this section shall be a condition precedent to the prosecution of any dispute.
          12.2 Arbitration. Any dispute between the Company and an individual claiming a benefit under the Plan which is not resolved between the Company and the claimant shall, if either party wishes to further pursue resolution of the dispute, be submitted to arbitration in accordance with the rules of Commercial Arbitration of the American Arbitration Association. Any such arbitration shall take place in San Francisco. The arbitrator shall be a person

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experienced in employment and compensation of corporate business executives who is mutually acceptable to the Company and the claimant. If an arbitrator cannot be agreed upon within 15 days after a dispute is submitted to arbitration, the parties shall each select one representative who is not and has never been associated with the Company and who is not related to the claimant, and these two representatives shall choose a neutral arbitrator with the qualifications described above. If the representatives cannot reach agreement, one arbitrator with the qualifications described above shall be selected by the San Francisco office of the American Arbitration Association. All actions and proceedings under this Section shall be kept confidential and neither party shall divulge any part thereof to third parties without the prior written consent of the other party. Each party to an arbitration under this section shall pay his or her own expenses, including but not limited to, fees of counsel, and each of the parties shall bear one-half of the fees and costs of the arbitrators.
     13. MISCELLANEOUS.
          13.1 Employment Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an Employee, Consultant or Director of the Company or an Affiliate. The Company and its Affiliates reserve the right to terminate the service of any Employee, Consultant or Director at any time, and for any reason, subject to applicable laws, the Company’s bylaws and a written employment agreement (if any).
          13.2 Shareholders’ Rights. Except as otherwise provided in an Agreement, a Participant shall have no dividend rights, voting rights or other rights as a shareholder with respect to any Shares covered by Options prior to the issuance of such Shares.
          13.3 Withholding. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor should make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Shares or make any cash payment under the Plan until such obligations are satisfied. The Board 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. Any payment of taxes by assigning Shares to the Company may be subject to restrictions, including any restrictions required by rules of the Securities and Exchange Commission.
          13.4 Governing Law. The Plan and all Agreements shall be construed in accordance with and governed by the laws of the State of California.
14. DEFINITIONS.
     “Affiliate” means any “parent corporation” or “subsidiary corporation,” as such terms are defined in Code Sections 424(e) and 424(f).
     “Agreement” means the written agreement setting forth the terms and provisions applicable to each Option granted under the Plan.

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     “Award” means, individually or collectively, a grant under this Plan, including any NSOs, ISOs or Restricted Shares.
     “Board” means the Company’s Board of Directors.
     “Cause” means that the Participant is determined by the Board reasonably and in good faith to have: (i) committed an act of embezzlement, fraud, dishonesty, or breach of fiduciary duty to the Company; (ii) deliberately and repeatedly violated the rules of the Company or the valid instructions of the Board or an authorized officer of the Company; (iii) made any unauthorized disclosure of any of the secrets or confidential information of the Company; (iv) induced any client or customer of the Company to break any contract with the Company; or (v) engaged in any conduct that could reasonably be expected to result in loss, damage or injury to the Company.
     “Change of Control” means the occurrence of any of the following events: (i) the acquisition, other than directly from the Company, by any person (deemed to have the same meaning as when used in Section 13 of the Securities Exchange Act of 1934) of more than fifty percent (50%) of the Company’s outstanding shares entitled to vote for Directors; (ii) a merger, consolidation or other combination of the Company with one or more other corporations which results in more than fifty percent (50%) of the voting stock of the merged, consolidated or combined corporation being held by former shareholders of the corporations (other than the Company) which are parties to such merger, consolidation or other combination; (iii) during any period of 24 months, individuals who, at the beginning of such period constitute the Board cease to constitute the majority of the Board (unless the election or nomination of the new members was approved by the majority of the Board of Directors as constituted at the beginning of the 24 month period); or (iv) the liquidation of the Company or a plan or agreement for the sale or other disposition of all or substantially all of the Company’s assets.
     “Code” means the Internal Revenue Code of 1986, as amended.
     “Company” means ArcSight, Inc., a Delaware corporation.
     “Consultant” means an individual performing services for the Company or an Affiliate and who is not an Employee or a Director.
     “Director” means a member of the Board.
     “Employee” means any key employee, including founders, of the Company or an Affiliate.
     “Exercise Price” means the amount for which one Share may be purchased upon exercise of such Option, as specified in the applicable Agreement.
     “Fair Market Value” means the market price of one Share, determined by the Board in good faith on such basis as it deems appropriate, in a manner consistent with California Code of Regulations, Title 10 §260.140.50.
     “Grant Date” means, with respect to an Option, the date on which the Board makes the determination to grant such Option, or such other date as is determined by the Board. Within a

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reasonable time thereafter, the Company will execute and deliver an Agreement to the Participant.
     “IPO” means a financial closing of an underwritten public offering of common or preferred stock of the Company pursuant to an effective registration statement under the Securities Act of 1933, as amended.
     “ISO” means an incentive stock option described in Code Section 422.
     “NSO” means an employee stock option not described in Code Section 422.
     “Option” means an ISO or NSO granted under the Plan.
     “Participant” means an individual or estate that holds an Award. If a NSO is assigned pursuant to Section 6.9, the term “Participant” shall mean the assignee when required by the context.
     “Plan” means this ArcSight, Inc. 2000 Stock Incentive Plan, as it may be amended from time to time.
     “Restricted Shares” means an Award granted to a Participant pursuant to Section 8.
     “Restriction Period” means the period during which the transfer of Restricted Shares is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Board, in its discretion), and the Shares are subject to a substantial risk of forfeiture.
     “Service” means the Participant’s employment or service with the Company or an Affiliate, whether as an Employee, Director or Consultant. The Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee. Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant’s Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director of the Company will not constitute an interruption of Service. The Board or the chief executive officer of the Company, in that party’s sole discretion, may determine whether Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. Subject to the foregoing, the Company, in its sole discretion, shall determine whether a Participant’s Service has terminated and the effective date of such termination.
     “Share” means one share of the common stock of the Company.
     “Ten Percent Owner” means any Employee who is, on the Grant Date of an Option, the owner of Shares (determined with application of ownership attribution rules of Code Section 424(d)) possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any of its Affiliates.

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EX-10.3 6 f28075orexv10w3.htm EXHIBIT 10.3 exv10w3
 

Exhibit 10.3
ARCSIGHT, INC.
STOCK OPTION GRANT AND AGREEMENT
          I. NOTICE OF GRANT
          ArcSight, Inc., a Delaware corporation (the “Company”), hereby grants an Option to purchase Shares to the Participant named below. The terms and conditions of the Option are set forth in this cover sheet and in the attachment (together, the “Agreement”) and in the Plan. To the extent the terms and conditions set forth on this cover sheet or the attachment differ in any way from the terms set forth in the Plan, the terms of the Plan shall govern. Unless otherwise defined in this Agreement, the terms defined in the ArcSight, Inc. 2000 Stock Incentive Plan shall have the same defined meanings in this Agreement.
          Participant:
          Date of Grant:
          Total Number of Shares Granted:
          Exercise Price per Share:
          Exercise Date:                                         Immediately Exercisable
          Vesting Schedule:
          Vesting Commencement Date:
          Type of Option:
          Expiration Date:
          By signing this cover sheet, you agree to all of the terms and conditions described in the attached Agreement and in the Plan, a copy of which is also enclosed.
             
PARTICIPANT
      ARCSIGHT, INC.    
 
           
 
           
Signature
      By    
 
           
 
           
Print Name
      Title    

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          II. AGREEMENT
          1. Grant of Option. The Board hereby grants to Participant an Option to purchase the number of Shares set forth in the Notice of Grant, at the Exercise Price set forth in the Notice of Grant, and subject to the terms and conditions of the Plan, which is incorporated herein by reference.
          2. Exercise Prior To Vesting. You may elect at any time prior to termination of your Option to exercise all or part of your Option; provided, however, that a partial exercise of your Option shall be deemed to cover first Vested Shares and then the earliest vesting installment of Unvested Shares.
          3. Vesting of Shares. Shares acquired pursuant to the exercise of an Option under the Plan shall vest (and thus become “Vested Shares”) in accordance with the Vesting Schedule set forth in the Notice of Grant; provided that Participant’s Service continues.
          4. Exercise of Option.
               (a) The Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the “Exercise Notice”) which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Shares with respect to which the Option is being exercised. The Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price.
               (b) No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise comply with applicable laws. Upon the Company’s determination that an Option has been validly exercised, the Company shall issue or cause to be issued as promptly as practicable certificates in the Participant’s name for such Shares, and delivered to either the Participant, or, if applicable, the Secretary of the Company as escrowholder. However, the Company shall not be liable to the Participant for damages relating to any delays in issuing the certificates or in the certificates themselves. For income tax purposes the Shares shall be considered transferred to the Participant on the date on which the Option is exercised with respect to such Shares.
          5. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Participant, and with the approval of the Board:
               (a) cash or check;
               (b) a promissory note with such recourse, interest, security, and redemption provisions as the Board in its discretion determines as appropriate;
               (c) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or

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               (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Participant for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the exercised Shares.
          6. Section 83(b) Election. If the Participant exercises an Option to purchase Unvested Shares, the Participant understands that he or she should consult with his or her tax advisor regarding the advisability of filing with the Internal Revenue Service an election under Code §83(b), which must be filed no later than thirty (30) days after the date on which the Participant exercises the Option.
          7. Share Repurchase Rights.
               (a) Unvested Shares. Shares that are acquired pursuant to the exercise of an Option under the Plan and that have not vested as described in Section 3 (“Unvested Shares”) may be repurchased by the Company at the lesser of: (1) the original exercise price, or (2) the Shares’ Fair Market Value on the date of repurchase if the Participant’s Service is terminated for any reason or no reason, with or without Cause, or if the Participant or other holder of Shares attempts to sell, exchange, transfer, pledge, or otherwise dispose of the Shares. The Company may assign any Unvested Share repurchase right it may have, whether or not then exercisable, to person(s) as may be selected by the Company. The Company may exercise its Unvested Share repurchase right by written notice to Participant within sixty (60) days after the Participant’s termination date (or exercise of the Option, if later). If the Company fails to give notice within such sixty (60) day period, the repurchase option shall terminate unless the parties have extended the time for its exercise. The repurchase right must be exercised for all Unvested Shares, unless the parties agree otherwise. Cash payment must be made by the Company by the thirtieth (30th) day after the date of the written notice to Participant of the exercise of the repurchase right.
               (b) Vested Shares. Vested Shares may be repurchased by the Company at the Shares’ Fair Market Value if the Participant’s Service is terminated for any reason or no reason, with or without Cause. The Company may exercise its Vested Share repurchase right in the same manner and at the same time as its Unvested Share repurchase right; provided that, this Vested Share repurchase right (i) must be exercised for all Vested Shares, if at all, and (ii) is exercisable without regard to whether the Unvested Share repurchase right is exercised. The Company may assign any Vested Share repurchase right it may have, whether or not then exercisable, to person(s) as may be selected by the Company.
               (c) Termination of Share Repurchase Rights. The Share repurchase rights with respect to Vested Shares shall terminate upon the first sale of common stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended.

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          8. Termination of Service.
               (a) In the event that the Participant’s Service is terminated by the Company for Cause, any unexercised portion of the Option (whether vested or unvested) shall be deemed canceled and forfeited in its entirety on the Participant’s termination date.
               (b) In the event that the Participant’s Service is terminated by the Participant voluntarily or by the Company without Cause, the unexercised portion of the Option, if any, as of the termination date shall remain exercisable for a period of thirty (30) days following the termination date, and shall thereafter be deemed canceled and forfeited.
               (c) In the event that the Participant’s Service is terminated by reason of death, Disability or retirement on or after age 65, unless otherwise provided by the Board at the time of such termination, the unexercised portion of the Option shall remain exercisable for the lesser of a period of one year following the termination date or until the expiration date, and shall thereafter be deemed canceled and forfeited.
          9. Company’s Right of First Refusal. Before any Shares (vested or unvested) held by the Participant may be sold or otherwise transferred (including transfer by gift or operation of law), the Company shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 9.
               (a) Notice of Proposed Transfer. The Participant shall deliver to the Company a written notice stating: (i) the Participant’s bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee (“Proposed Transferee”); (iii) the number of Shares to be transferred to each Proposed Transferee; (iv) the bona fide cash price or other consideration for which the Participant proposes to transfer the Shares, or, in the event of a transfer by gift or operation of law, the Fair Market Value of Shares (the “Offered Price”); and (v) an offer of the Shares at the Offered Price to the Company.
               (b) Exercise of Right of First Refusal. Within thirty (30) days after receipt of the written notice from the Participant, the Company may elect in writing to purchase all (but not less than all) of the Shares proposed to be transferred, at the Offered Price. The Company shall pay the Offered Price in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Participant to the Company or by any combination elected by the Company, within thirty (30) days after receipt of the written notice from the Participant.
               (c) Participant’s Right to Transfer. If the Company does not purchase all of the Shares, then the Participant may sell or otherwise transfer such Shares to the Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the delivery of the written notice of subsection (a) above, that any such sale or other transfer is effected in accordance with any applicable securities laws and that the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares are not transferred to the Proposed Transferee within such period, the Company and/or its assignees shall again be offered the right of first refusal before any Shares held by the Participant may be sold or otherwise transferred.

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               (d) Exception for Certain Family Transfers. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Participant’s lifetime or on his or her death by will or intestacy to the Participant’s immediate family or a trust for the benefit of the Participant’s immediate family shall be exempt from the provisions of this Section. “Immediate Family” as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section.
               (e) Termination of Right of First Refusal. The right of first refusal shall terminate as to any Shares upon the first sale of common stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended.
          10. Participant’s Representations. In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time the Option is exercised, the Participant shall, if required by the Company, concurrently with the exercise of any Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B.
          11. Lock-Up Period. Participant hereby agrees that, if so requested by the Company or any representative of the underwriters (the “Managing Underwriter”) in connection with any registration of the offering of any securities of the Company under the Securities Act, Participant shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the “Market Standoff Period”) following the effective date of a registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period.
          12. Restrictions on Exercise. An Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable law.
          13. Non-Transferability of Option. An Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Participant only by Participant. The terms of the Plan and this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Participant.
          14. Cancellation and Rescission Provision. A Participant shall neither render services for any organization or business that is or becomes competitive with the Company, nor engage directly or indirectly in any organization or business which is or becomes otherwise

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prejudicial to or in conflict with the interests of the Company, as determined by the Board. If a Participant fails to comply with the previous sentence prior to or during a six-month period after any exercise of an Option, the exercise shall be cancelled and rescinded. The Board shall notify the Participant in writing of any such cancellation and rescission within two years after such exercise. Within ten days after receiving such notice from the Board, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of the cancelled and rescinded exercise of the Option.
          15. Term of the Option. An Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the Agreement.
          16. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof, and may not be modified adversely to the Participant’s interest except by means of a writing signed by the Company and Participant. This agreement is governed by the internal substantive laws but not the choice of law rules of California.
          17. No Guarantee of Continued Service. PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING TO PROVIDE SERVICE AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED SERVICE FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH PARTICIPANTS RIGHT OR THE COMPANY’S RIGHT TO TERMINATE PARTICIPANT’S SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE.
     Participant acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Option subject to all of the terms and provisions thereof. Participant has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of the Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Agreement. Participant further agrees to notify the Company upon any change in the residence address.

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EXHIBIT A
ARCSIGHT, INC.
2000 STOCK INCENTIVE PLAN
EXERCISE NOTICE
Attention: ArcSight, Inc.
     1. Exercise. Effective as of today, ___, 2001, I hereby elect to exercise my Option to purchase ___Shares of the common stock of ArcSight, Inc. under and pursuant to the 2000 Stock Incentive Plan and the Agreement dated            , 2001 (the “Agreement”).
     2. Delivery of Payment. I hereby deliver to the Company the full Exercise Price of the Shares, as set forth in the Agreement.
     3. Representations of Participant. I acknowledge that I have received, read and understand the Plan and the Agreement and agree to abide by and be bound by their terms and conditions.
     4. Transfer of Unvested Shares upon Repurchase; Escrow. I hereby appoint the Secretary of the Company as my attorney-in-fact to sell, assign and transfer unto the Company such Unvested Shares, if any, repurchased by the Company pursuant to the repurchase right and shall, upon execution of this Agreement, deliver and deposit with the Secretary of the Company the share certificates representing the Unvested Shares. The Unvested Shares shall be held by the Secretary in escrow until the Company exercises its repurchase right, until all of the Shares acquired upon exercise of the Option are vested, or until such time this Agreement no longer is in effect. Upon vesting of the Unvested Shares pursuant to the vesting schedule set forth in Section 3 of the Option Agreement, the escrow agent shall promptly deliver to me the certificate or certificates representing such Shares in the escrow agent’s possession belonging to me.
     5. Rights as Shareholder. Until the issuance of Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of tile Company), I have no right to vote or receive dividends or any other rights as a shareholder with respect to the Vested Shares, notwithstanding the exercise of the Option. The Vested Shares shall be issued to me as soon as practicable after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance.
     6. Tax Consultation. I understand that I may suffer adverse tax consequences as a result of my purchase or disposition of the Shares. I represent that I have consulted with any tax consultants I deem advisable in connection with the purchase or disposition of the Shares and that I am not relying on the Company for any tax advice.

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     7. Restrictive Legends and Stop-Transfer Orders.
               (a) Legends. I understand and agree that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE OPTION AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
               (b) Stop-Transfer Notices. I agree that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.
               (c) Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Exercise Notice or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.
     8. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Notice shall be binding upon me and my heirs, executors, administrators, successors and assigns.
     9. Interpretation. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by me or by the Company forthwith to the Administrator which shall review

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such dispute at its next regular meeting. The resolution of such a dispute by the Administrator shall be final and binding on all parties.
     10. Governing Law: Severability. This Exercise Notice is governed by the internal substantive laws, but not the choice of law rules, of California.
     11. Entire Agreement. The Plan and Agreement are incorporated herein by reference. This Exercise Notice, the Plan, the Agreement and the Investment Representation Statement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and me with respect to the subject matter hereof, and may not be modified adversely to my interest except by means of a writing signed by the Company and me.
             
Submitted by:
      Accepted by:    
 
           
PARTICIPANT
      ARCSIGHT, INC.    
 
           
 
           
Signature
      By    
 
           
 
           
Print Name
      Title    
 
           
Address:
      Address:    
 
           
 
           
 
           
 
           
 
           
 
           
 
           
 
           
 
      Date Received    

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EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
     
PARTICIPANT:
   
     
COMPANY:
  ARCSIGHT, INC.
     
SECURITY:
  COMMON STOCK
     
AMOUNT:
   
     
DATE:
   
     In connection with the purchase of the above-listed Securities, the undersigned Participant represents to the Company the following:
     (a) Participant is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Participant is acquiring these Securities for investment for Participant’s own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act of 1933, as amended (the “Securities Act”).
     (b) Participant acknowledges and understands that the Securities constitute “restricted securities” under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Participant’s investment intent as expressed herein. In this connection, Participant understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Participant’s representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. Participant further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Participant further acknowledges and understands that the Company is under no obligation to register the Securities. Participant understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, and any other legend required under applicable state securities laws.
     (c) Participant is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of “restricted securities” acquired, directly or indirectly from the issuer thereof, in a non—public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Participant, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may

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require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited “broker’s transaction” or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company; (3) the amount of Securities being sold during any three month period not exceeding the limitations specified in Rule 144(e); and (4) the timely filing of a Form 144, if applicable.
     In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than one year after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than two years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above.
     (d) Participant further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Participant understands that no assurances can be given that any such other registration exemption will be available in such event.
         
 
  Signature of Participant:    
 
       
 
 
 

Date:                                         , 2001
   

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WAHOO TECHNOLOGIES, INC.
STOCK OPTION GRANT AND AGREEMENT
     I. NOTICE OF GRANT
     Wahoo Technologies, Inc., a Delaware corporation (the “Company”), hereby grants an Option to purchase Shares to the Participant named below. The terms and conditions of the Option are set forth in this cover sheet and in the attachment (together, the “Agreement”) and in the Plan. To the extent the terms and conditions set forth on this cover sheet or the attachment differ in any way from the terms set forth in the Plan, the terms of the Plan shall govern. Unless otherwise defined in this Agreement, the terms defined in the Wahoo Technologies, Inc. 2000 Stock Incentive Plan shall have the same defined meanings in this Agreement.
          Participant:
          Date of Grant:
          Total Number of Shares Granted:
          Exercise Price per Share:
          Exercise Date:                                         Immediately Exercisable
          Vesting Schedule:
          Vesting Commencement Date:
          Type of Option:
          Expiration Date:
     By signing this cover sheet, you agree to all of the terms and conditions described in the attached Agreement and in the Plan, a copy of which is also enclosed.
             
PARTICIPANT
      WAHOO TECHNOLOGIES, INC.    
 
           
 
           
Signature
      By    
 
           
 
           
Print Name
      Title    

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     II. AGREEMENT
          1. Grant of Option. The Board hereby grants to Participant an Option to purchase the number of Shares set forth in the Notice of Grant, at the Exercise Price set forth in the Notice of Grant, and subject to the terms and conditions of the Plan, which is incorporated herein by reference.
          2. Exercise Prior To Vesting. You may elect at any time prior to termination of your Option to exercise all or part of your Option; provided, however, that a partial exercise of your Option shall be deemed to cover first Vested Shares and then the earliest vesting installment of Unvested Shares.
          3. Vesting of Shares. Shares acquired pursuant to the exercise of an Option under the Plan shall vest (and thus become “Vested Shares”) in accordance with the Vesting Schedule set forth in the Notice of Grant; provided that Participant’s Service continues. Upon the occurrence of a Change of Control prior to the first anniversary of the Vesting Commencement Date, the Vesting Schedule set forth in the Notice of Grant shall not apply and, instead, Shares acquired pursuant to the exercise of an Option under the Plan shall vest at the rate of 1/48 of the total Shares per month from the Vesting Commencement Date.
          4. Exercise of Option.
               (a) The Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the “Exercise Notice”) which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Shares with respect to which the Option is being exercised. The Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price.
               (b) No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise comply with applicable laws. Upon the Company’s determination that an Option has been validly exercised, the Company shall issue or cause to be issued as promptly as practicable certificates in the Participant’s name for such Shares, and delivered to either the Participant, or, if applicable, the Secretary of the Company as escrowholder. However, the Company shall not be liable to the Participant for damages relating to any delays in issuing the certificates or in the certificates themselves. For income tax purposes the Shares shall be considered transferred to the Participant on the date on which the Option is exercised with respect to such Shares.
          5. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Participant, and with the approval of the Board:
               (a) cash or check;

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               (b) a promissory note with such recourse, interest, security, and redemption provisions as the Board in its discretion determines as appropriate;
               (c) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or
               (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Participant for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the exercised Shares.
          6. Section 83(b) Election. If the Participant exercises an Option to purchase Unvested Shares, the Participant understands that he or she should consult with his or her tax advisor regarding the advisability of filing with the Internal Revenue Service an election under Code §83(b), which must be filed no later than thirty (30) days after the date on which the Participant exercises the Option.
          7. Share Repurchase Rights.
               (a) Unvested Shares. Shares that are acquired pursuant to the exercise of an Option under the Plan and that have not vested as described in Section 3 (“Unvested Shares”) may be repurchased by the Company at the lesser of: (1) the original exercise price, or (2) the Shares’ Fair Market Value on the date of repurchase if the Participant’s Service is terminated for any reason or no reason, with or without Cause, or if the Participant or other holder of Shares attempts to sell, exchange, transfer, pledge, or otherwise dispose of the Shares. The Company may assign any Unvested Share repurchase right it may have, whether or not then exercisable, to person(s) as may be selected by the Company. The Company may exercise its Unvested Share repurchase right by written notice to Participant within sixty (60) days after the Participant’s termination date (or exercise of the Option, if later). If the Company fails to give notice within such sixty (60) day period, the repurchase option shall terminate unless the parties have extended the time for its exercise. The repurchase right must be exercised for all Unvested Shares, unless the parties agree otherwise. Cash payment must be made by the Company by the thirtieth (30th) day after the date of the written notice to Participant of the exercise of the repurchase right.
               (b) Vested Shares. Vested Shares may be repurchased by the Company at the Shares’ Fair Market Value if the Participant’s Service is terminated for any reason or no reason, with or without Cause. The Company may exercise its Vested Share repurchase right in the same manner and at the same time as its Unvested Share repurchase right; provided that, this Vested Share repurchase right (i) must be exercised for all Vested Shares, if at all, and (ii) is exercisable without regard to whether the Unvested Share repurchase right is exercised. The Company may assign any Vested Share repurchase right it may have, whether or not then exercisable, to person(s) as may be selected by the Company.
               (c) Termination of Share Repurchase Rights. The Share repurchase rights with respect to Vested Shares shall terminate upon an IPO.

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          8. Termination of Service.
               (a) In the event that the Participant’s Service is terminated by the Company for Cause, any unexercised portion of the Option (whether vested or unvested) shall be deemed canceled and forfeited in its entirety on the Participant’s termination date.
               (b) In the event that the Participant’s Service is terminated by the Participant voluntarily or by the Company without Cause, the unexercised portion of the Option, if any, as of the termination date shall remain exercisable for a period of thirty (30) days following the termination date, and shall thereafter be deemed canceled and forfeited.
               (c) In the event that the Participant’s Service is terminated by reason of death, Disability or retirement on or after age 65, unless otherwise provided by the Board at the time of such termination, the unexercised portion of the Option shall remain exercisable for the lesser of a period of one year following the termination date or until the expiration date, and shall thereafter be deemed canceled and forfeited.
          9. Company’s Right of First Refusal. Before any Shares (vested or unvested) held by the Participant may be sold or otherwise transferred (including transfer by gift or operation of law), the Company shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 9.
               (a) Notice of Proposed Transfer. The Participant shall deliver to the Company a written notice stating: (i) the Participant’s bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee (“Proposed Transferee”); (iii) the number of Shares to be transferred to each Proposed Transferee; (iv) the bona fide cash price or other consideration for which the Participant proposes to transfer the Shares, or, in the event of a transfer by gift or operation of law, the Fair Market Value of Shares (the “Offered Price”); and (v) an offer of the Shares at the Offered Price to the Company.
               (b) Exercise of Right of First Refusal. Within thirty (30) days after receipt of the written notice from the Participant, the Company may elect in writing to purchase all (but not less than all) of the Shares proposed to be transferred, at the Offered Price. The Company shall pay the Offered Price in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Participant to the Company or by any combination elected by the Company, within thirty (30) days after receipt of the written notice from the Participant.
               (c) Participant’s Right to Transfer. If the Company does not purchase all of the Shares, then the Participant may sell or otherwise transfer such Shares to the Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the delivery of the written notice of subsection (a) above, that any such sale or other transfer is effected in accordance with any applicable securities laws and that the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares are not transferred to the Proposed Transferee within such period, the Company and/or its assignees shall again be offered the right of first refusal before any Shares held by the Participant may be sold or otherwise transferred.

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               (d) Exception for Certain Family Transfers. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Participant’s lifetime or on his or her death by will or intestacy to the Participant’s immediate family or a trust for the benefit of the Participant’s immediate family shall be exempt from the provisions of this Section. “Immediate Family” as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section.
               (e) Termination of Right of First Refusal. The right of first refusal shall terminate as to any Shares upon an IPO.
          10. Participant’s Representations. In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time the Option is exercised, the Participant shall, if required by the Company, concurrently with the exercise of any Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B.
          11. Lock-Up Period. Participant hereby agrees that, if so requested by the Company or any representative of the underwriters (the “Managing Underwriter”) in connection with any registration of the offering of any securities of the Company under the Securities Act, Participant shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the “Market Standoff Period”) following the effective date of a registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period.
          12. Restrictions on Exercise. An Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable law.
          13. Non-Transferability of Option. An Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Participant only by Participant. The terms of the Plan and this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Participant.
          14. Cancellation and Rescission Provision. A Participant shall neither render services for any organization or business that is or becomes competitive with the Company, nor engage directly or indirectly in any organization or business which is or becomes otherwise prejudicial to or in conflict with the interests of the Company, as determined by the Board. If a Participant fails to comply with the previous sentence prior to or during a six-month period after

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any exercise of an Option, the exercise shall be cancelled and rescinded. The Board shall notify the Participant in writing of any such cancellation and rescission within two years after such exercise. Within ten days after receiving such notice from the Board, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of the cancelled and rescinded exercise of the Option.
          15. Term of the Option. An Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the Agreement.
          16. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof, and may not be modified adversely to the Participant’s interest except by means of a writing signed by the Company and Participant. This agreement is governed by the internal substantive laws but not the choice of law rules of California.
          17. No Guarantee of Continued Service. PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING TO PROVIDE SERVICE AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED SERVICE FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH PARTICIPANT’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE PARTICIPANT’S SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE.
               Participant acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Option subject to all of the terms and provisions thereof. Participant has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of the Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Agreement. Participant further agrees too notify the Company upon any change in the residence address.

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EXHIBIT A
WAHOO TECHNOLOGIES, INC.
2000 STOCK INCENTIVE PLAN
EXERCISE NOTICE
Attention: Wahoo Technologies, Inc.
     1. Exercise. Effective as of today,___, 20___, I hereby elect to exercise my Option to purchase ___Shares of the common stock of Wahoo Technologies, Inc. under and pursuant to the 2000 Stock Incentive Plan and the Agreement dated ___(the “Agreement”).
     2. Delivery of Payment. I hereby deliver to the Company the full Exercise Price of the Shares, as set forth in the Agreement.
     3. Representations of Participant. I acknowledge that I have received, read and understand the Plan and the Agreement and agree to abide by and be bound by their terms and conditions.
     4. Transfer of Unvested Shares upon Repurchase; Escrow. I hereby appoint the Secretary of the Company as my attorney-in-fact to sell, assign and transfer unto the Company such Unvested Shares, if any, repurchased by the Company pursuant to the repurchase right and shall, upon execution of this Agreement, deliver and deposit with the Secretary of the Company the share certificates representing the Unvested Shares. The Unvested Shares shall be held by the Secretary in escrow until the Company exercises its repurchase right, until all of the Shares acquired upon exercise of the Option are vested, or until such time this Agreement no longer is in effect. Upon vesting of the Unvested Shares pursuant to the vesting schedule set forth in Section 3 of the Option Agreement, the escrow agent shall promptly deliver to me the certificate or certificates representing such Shares in the escrow agent’s possession belonging to me.
     5. Rights as Shareholder. Until the issuance of Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), I have no right to vote or receive dividends or any other rights as a shareholder with respect to the Vested Shares, notwithstanding the exercise of the Option. The Vested Shares shall be issued to me as soon as practicable after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance.
     6. Tax Consultation. I understand that I may suffer adverse tax consequences as a result of my purchase or disposition of the Shares. I represent that I have consulted with any tax consultants I deem advisable in connection with the purchase or disposition of the Shares and that I am not relying on the Company for any tax advice.

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     7. Restrictive Legends and Stop-Transfer Orders.
               (a) Legends. I understand and agree that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE OPTION AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
               (b) Stop-Transfer Notices. I agree that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.
               (c) Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Exercise Notice or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.
     8. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Notice shall be binding upon me and my heirs, executors, administrators, successors and assigns.
     9. Interpretation. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by me or by the Company forthwith to the Administrator which shall review

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such dispute at its next regular meeting. The resolution of such a dispute by the Administrator shall be final and binding on all parties.
     10. Governing Law; Severability. This Exercise Notice is governed by the internal substantive laws, but not the choice of law rules, of California.
     11. Entire Agreement. The Plan and Agreement are incorporated herein by reference. This Exercise Notice, the Plan, the Agreement and the Investment Representation Statement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and me with respect to the subject matter hereof, and may not be modified adversely to my interest except by means of a writing signed by the Company and me.
             
Submitted by:
      Accepted by:    
 
           
PARTICIPANT
      WAHOO TECHNOLOGIES, INC.    
 
           
 
           
Signature
      By    
 
           
 
           
Print Name
      Title    
 
           
Address:
      Address:    
 
           
 
           
 
           
 
           
 
           
 
           
 
           
 
           
 
           
 
           
 
           
 
           
 
           
 
      Date Received    

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EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
     
PARTICIPANT:
   
 
   
COMPANY:
  WAHOO TECHNOLOGIES, INC.
 
   
SECURITY:
  COMMON STOCK
 
   
AMOUNT:
   
 
   
DATE:
   
     In connection with the purchase of the above-listed Securities, the undersigned Participant represents to the Company the following:
     (a) Participant is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Participant is acquiring these Securities for investment for Participant’s own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act of 1933, as amended (the “Securities Act”).
     (b) Participant acknowledges and understands that the Securities constitute “restricted securities” under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Participant’s investment intent as expressed herein. In this connection, Participant understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Participant’s representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. Participant further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Participant further acknowledges and understands that the Company is under no obligation to register the Securities. Participant understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, and any other legend required under applicable state securities laws.
     (c) Participant is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of “restricted securities” acquired, directly or indirectly from the issuer thereof, in a non public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Participant, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject

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to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited “broker’s transaction” or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company; (3) the amount of Securities being sold during any three month period not exceeding the limitations specified in Rule 144(e); and (4) the timely filing of a Form 144, if applicable.
     In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than one year after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than two years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above.
     (d) Participant further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Participant understands that no assurances can be given that any such other registration exemption will be available in such event.
         
 
  Signature of Participant.    
 
       
 
 
 
   
 
  Date:                                         , 20___    

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ARCSIGHT, INC.
STOCK OPTION GRANT AND AGREEMENT
     I. NOTICE OF GRANT
     ArcSight, Inc., a Delaware corporation (the “Company”), hereby grants an Option to Purchase Shares to the Participant named below. The terms and conditions of the Option are set forth in this cover sheet and in the attachment (together, the “Agreement”) and in the Plan. To the extent the terms and conditions set forth on this cover sheet or the attachment differ in any way from the terms set forth in the Plan, the terms of the Plan shall govern. Unless otherwise defined in this Agreement, the terms defined in the ArcSight, Inc. 2000 Stock Incentive Plan shall have the same defined meanings in this Agreement.
     Participant:
     Date of Grant:
     Total Number of Shares Granted:
     Exercise Price per Share:
     Exercise Date:                                         Immediately Exercisable
     Vesting Schedule:
     Vesting Commencement Date:
     Type of Option:
     Expiration Date:
     By signing this cover sheet, you agree to all of the terms and conditions described in the attached Agreement and in the Plan, a copy of which is also enclosed.
         
PARTICIPANT
  ARCSIGHT, INC.    
 
       
 
       
Signature
  By    
 
       
 
       
Print Name
  Title    

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     II. AGREEMENT
          1. Grant of Option. The Board hereby grants to Participant an Option to purchase the number of Shares set forth in the Notice of Grant, at the Exercise Price set forth in the Notice of Grant, and subject to the terms and conditions of the Plan, which is incorporated herein by reference.
          2. Exercise Prior To Vesting. You may elect at any time prior to termination of your Option to exercise all or part of your Option; provided, however, that a partial exercise of your Option shall be deemed to cover first Vested Shares and then the earliest vesting installment of Unvested Shares.
          3. Vesting of Shares. Shares acquired pursuant to the exercise of an Option under the Plan shall vest (and thus become “Vested Shares”) in accordance with the Vesting Schedule set forth in the Notice of Grant; provided that Participant’s Service continues. Upon the occurrence of a Change of Control, Participant’s Vesting Commencement Date shall be adjusted so that the adjusted Vesting Commencement Date is one year prior to the original Vesting Commencement Date.
          4. Exercise of Option.
               (a) The Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the “Exercise Notice”) which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Shares with respect to which the Option is being exercised. The Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price.
               (b) No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise comply with applicable laws. Upon the Company’s determination that an Option has been validly exercised, the Company shall issue or cause to be issued as promptly as practicable certificates in the Participant’s name for such Shares, and delivered to either the Participant, or, if applicable, the Secretary of the Company as escrowholder. However, the Company shall not be liable to the Participant for damages relating to any delays in issuing the certificates or in the certificates themselves. For income tax purposes the Shares shall be considered transferred to the Participant on the date on which the Option is exercised with respect to such Shares.
          5. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Participant, and with the approval of the Board:
               (a) cash or check;
               (b) a promissory note with such recourse, interest, security, and redemption provisions as the Board in its discretion determines as appropriate;

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               (c) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or
               (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Participant for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the exercised Shares.
          6. Section 83(b) Election. If the Participant exercises an Option to purchase Unvested Shares, the Participant understands that he or she should consult with his or her tax advisor regarding the advisability of filing with the Internal Revenue Service an election under Code §83(b), which must be filed no later than thirty (30) days after the date on which the Participant exercises the Option.
          7. Share Repurchase Rights.
               (a) Unvested Shares. Shares that are acquired pursuant to the exercise of an Option under the Plan and that have not vested as described in Section 3 (“Unvested Shares”) may be repurchased by the Company at the lesser of: (1) the original exercise price, or (2) the Shares’ Fair Market Value on the date of repurchase if the Participant’s Service is terminated for any reason or no reason, with or without Cause, or if the Participant or other holder of Shares attempts to sell, exchange, transfer, pledge, or otherwise dispose of the Shares. The Company may assign any Unvested Share repurchase right it may have, whether or not then exercisable, to person(s) as may be selected by the Company. The Company may exercise its Unvested Share repurchase right by written notice to Participant within sixty (60) days after the Participant’s termination date (or exercise of the Option, if later). If the Company fails to give notice within such sixty (60) day period, the repurchase option shall terminate unless the parties have extended the time for its exercise. The repurchase right must be exercised for all Unvested Shares, unless the parties agree otherwise. Cash payment must be made by the Company by the thirtieth (30th) day after the date of the written notice to Participant of the exercise of the repurchase right.
               (b) Vested Shares. Vested Shares may be repurchased by the Company at the Shares’ Fair Market Value if the Participant’s Service is terminated for any reason or no reason, with or without Cause. The Company may exercise its Vested Share repurchase right in the same manner and at the same time as its Unvested Share repurchase right; provided that, this Vested Share repurchase right (i) must be exercised for all Vested Shares, if at all, and (ii) is exercisable without regard to whether the Unvested Share repurchase right is exercised. The Company may assign any Vested Share repurchase right it may have, whether or not then exercisable, to person(s) as may be selected by the Company.
               (c) Termination of Share Repurchase Rights. The Share repurchase rights with respect to Vested Shares shall terminate upon an IPO.
          8. Termination of Service.

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               (a) In the event that the Participant’s Service is terminated by the Company for Cause, any unexercised portion of the Option (whether vested or unvested) shall be seemed canceled and forfeited in its entirety on the Participant’s termination date.
               (b) In the event that the Participant’s Service is terminated by the Participant voluntarily or by the Company without Cause, the unexercised portion of the Option, if any, as of the termination date shall remain exercisable for a period of thirty (30) days following the termination date, and shall thereafter be deemed canceled and forfeited.
               (c) In the event that the Participant’s Service is terminated by reason of death, Disability or retirement on or after age 65, unless otherwise provided by the Board at the time of such termination, the unexercised portion of the Option shall remain exercisable for the lesser of a period of one year following the termination date or until the expiration date, and shall thereafter be deemed canceled and forfeited.
          9. Company’s Right of First Refusal. Before any Shares (vested or unvested) held by the Participant may be sold or otherwise transferred (including transfer by gift or operation of law), the Company shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 9.
               (a) Notice of Proposed Transfer. The Participant shall deliver to the Company a written notice stating: (i) the Participant’s bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee (“Proposed transferee”); (iii) the number of Shares to be transferred to each Proposed Transferee; (iv) the bona fide cash price or other consideration for which the Participant proposes to transfer the Shares, or, in the event of a transfer by gift or operation of law, the Fair Market Value of Shares (the “Offered Price”); and (v) an offer of the Shares at the Offered Price to the Company.
               (b) Exercise of Right of First Refusal. Within thirty (30) days after receipt of the written notice from the Participant, the Company may elect in writing to purchase all (but not less than all) of the Shares proposed to be transferred, at the Offered Price. The Company shall pay the Offered Price in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Participant to the Company or by any combination elected by the Company, within thirty (30) days after receipt of the written notice from the Participant.
               (c) Participant’s Right to Transfer. If the Company does not purchase all of the Shares, then the Participant may sell or otherwise transfer such Shares to the Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the delivery of the written notice of subsection (a) above, that any such sale or other transfer is effected in accordance with any applicable securities laws and that the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares are not transferred to the Proposed Transferee within such period, the Company and/or its assignees shall again be offered the right of first refusal before any Shares held by the Participant may be sold or otherwise transferred.

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               (d) Exception for Certain Family Transfers. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Participant’s lifetime or on his or her death by will or intestacy to the Participant’s immediate family or a trust for the benefit of the Participant’s immediate family shall be exempt from the provisions of this Section. “Immediate Family” as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section.
               (e) Termination of Right of First Refusal. The right of first refusal shall terminate as to any Shares upon an IPO.
          10. Participant’s Representations. In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time the Option is exercised, the Participant shall, if required by the Company, concurrently with the exercise of any Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B.
          11. Lock-Up Period. Participant hereby agrees that, if so requested by the Company or any representative of the underwriters (the “Managing Underwriter”) in connection with any registration of the offering of any securities of the Company under the Securities Act, Participant shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the “Market Standoff Period”) following the effective date of a registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period.
          12. Restrictions on Exercise. An Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable law.
          13. Non-Transferability of Option. An Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Participant only by Participant. The terms of the Plan and this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Participant.
          14. Cancellation and Rescission Provision. A Participant shall neither render services for any organization or business that is or becomes competitive with the Company, nor engage directly or indirectly in any organization or business which is or becomes otherwise prejudicial to or in conflict with the interests of the Company, as determined by the Board. If a Participant fails to comply with the previous sentence prior to or during a six-month period after

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any exercise of an Option, the exercise shall be cancelled and rescinded. The Board shall notify the Participant in writing of any such cancellation and rescission within two years after such exercise. Within ten days after receiving such notice from the Board, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of the cancelled and rescinded exercise of the Option.
          15. Term of the Option. An Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the Agreement.
          16. Entire Agreement: Governing Law. The Plan is incorporated herein by reference. The Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof, and may not be modified adversely to the Participant’s interest except by means of a writing signed by the Company and Participant. This agreement is governed by the internal substantive laws but not the choice of law rules of California.
          17. No Guarantee of Continued Service. PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING TO PROVIDE SERVICE AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED SERVICE FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH PARTICIPANTS RIGHT OR THE COMPANY’S RIGHT TO TERMINATE PARTICIPANTS SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE.
               Participant acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Option subject to all of the terms and provisions thereof. Participant has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of the Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Agreement. Participant further agrees to notify the Company upon any change in the residence address.

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EXHIBIT A
ARCSIGHT, INC.
2000 STOCK INCENTIVE PLAN
EXERCISE NOTICE
     Attention: ArcSight, Inc.
          1. Exercise. Effective as of today,                     , 2001, I hereby elect to exercise my Option to purchase                     Shares of the common stock of ArcSight, Inc. under and pursuant to the 2000 Stock Incentive Plan and the Agreement dated                      (the “Agreement”).
          2. Delivery of Payment. I hereby deliver to the Company the full Exercise Price of the Shares, as set forth in the Agreement.
          3. Representations of Participant. I acknowledge that I have received, read and understand the Plan and the Agreement and agree to abide by and be bound by their terms and conditions.
          4. Transfer of Unvested Shares upon Repurchase: Escrow. I hereby appoint the Secretary of the Company as my attorney-in-fact to sell, assign and transfer unto the Company such Unvested Shares, if any, repurchased by the Company pursuant to the repurchase right and shall, upon execution of this Agreement, deliver and deposit with the Secretary of the Company the share certificates representing the Unvested Shares. The Unvested Shares shall be held by the Secretary in escrow until the Company exercises its repurchase right, until all of the Shares acquired upon exercise of the Option are vested, or until such time this Agreement no longer is in effect. Upon vesting of the Unvested Shares pursuant to the vesting schedule set forth in Section 3 of the Option Agreement, the escrow agent shall promptly deliver to me the certificate or certificates representing such Shares in the escrow agent’s possession belonging to me.
          5. Rights as Shareholder. Until the issuance of Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), I have no right to vote or receive dividends or any other rights as a shareholder with respect to the Vested Shares, notwithstanding the exercise of the Option. The Vested Shares shall be issued to me as soon as practicable after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance.
          6. Tax Consultation. I understand that I may suffer adverse tax consequences as a result of my purchase or disposition of the Shares. I represent that I have consulted with any

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tax consultants I deem advisable in connection with the purchase or disposition of the Shares and that I am not relying on the Company for any tax advice.
          7. Restrictive Legends and Stop-Transfer Orders.
               (a) Legends. I understand and agree that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE OPTION AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
               (b) Stop-Transfer Notices. I agree that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.
               (c) Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Exercise Notice or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.
          8. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Notice shall be binding upon me and my heirs, executors, administrators, successors and assigns.

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          9. Interpretation. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by me or by the Company forthwith to the Administrator which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Administrator shall be final and binding on all parties.
          10. Governing Law; Severability. This Exercise Notice is governed by the internal substantive laws, but not the choice of law rules, of California.
          11. Entire Agreement. The Plan and Agreement are incorporated herein by reference. This Exercise Notice, the Plan, the Agreement and the Investment Representation Statement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and me with respect to the subject matter hereof, and may not be modified adversely to my interest except by means of a writing signed by the Company and me.
             
Submitted by:
      Accepted by:    
 
           
PARTICIPANT
      ARCSIGHT, INC.    
 
           
 
           
Signature
      By    
 
           
 
           
Print Name
      Title    
 
           
Address:
      Address:    
 
           
 
           
 
           
 
           
 
           
 
           
 
           
 
           
 
      Date Received    

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EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
     PARTICIPANT:
     COMPANY:                                ARCSIGHT, INC.
     SECURITY:                                COMMON STOCK
     AMOUNT:
     DATE:
     In connection with the purchase of the above-listed Securities, the undersigned Participant represents to the Company the following:
               (a) Participant is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Participant is acquiring these Securities for investment for Participant’s own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act of 1933, as amended (the “Securities Act”).
               (b) Participant acknowledges and understands that the Securities constitute “restricted securities” under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Participant’s investment intent as expressed herein. In this connection, Participant understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Participant’s representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. Participant further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Participant further acknowledges and understands that the Company is under no obligation to register the Securities. Participant understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, and any other legend required under applicable state securities laws.
               (c) Participant is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale

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of “restricted securities” acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Participant, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited “broker’s transaction” or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company; (3) the amount of Securities being sold during any three month period not exceeding the limitations specified in Rule 144(e); and (4) the timely filing of a Form 144, if applicable.
     In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than one year after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than two years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above.
               (d) Participant further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Participant understands that no assurances can be given that any such other registration exemption will be available in such event.
         
 
  Signature of Participant:    
 
       
 
 
 
   
 
  Date:                                         , 20___    

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EX-10.4 7 f28075orexv10w4.htm EXHIBIT 10.4 exv10w4
 

Exhibit 10.4
ArcSight, Inc.
2002 Stock Plan
(Adopted on March 29, 2002)
(as Amended and Restated through January 24, 2007)

 


 

TABLE OF CONTENTS
         
    Page No.
SECTION 1. ESTABLISHMENT AND PURPOSE
    1  
 
       
SECTION 2. ADMINISTRATION
    1  
 
       
(a) Committees of the Board of Directors
    1  
(b) Authority of the Board of Directors
    1  
 
       
SECTION 3. ELIGIBILITY
    1  
 
       
(a) General Rule
    1  
(b) Ten-Percent Stockholders
    1  
 
       
SECTION 4. STOCK SUBJECT TO PLAN
    2  
 
       
(a) Basic Limitation
    2  
(b) Additional Shares
    2  
 
       
SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES
    2  
 
       
(a) Stock Purchase Agreement
    2  
(b) Duration of Offers and Nontransferability of Rights
    2  
(c) Purchase Price
    3  
(d) Withholding Taxes
    3  
(e) Restrictions on Transfer of Shares and Minimum Vesting
    3  
 
       
SECTION 6. TERMS AND CONDITIONS OF OPTIONS
    3  
 
       
(a) Stock Option Agreement
    3  
(b) Number of Shares
    3  
(c) Exercise Price
    4  
(d) Exercisability
    4  
(e) Basic Term
    4  
(f) Termination of Service (Except by Death)
    4  
(g) Leaves of Absence
    5  
(h) Death of Optionee
    5  
(i) Restrictions on Transfer of Shares and Minimum Vesting
    5  
(j) Transferability of Options
    6  
(k) Withholding Taxes
    6  
(l) No Rights as a Stockholder
    6  
(m) Modification, Extension and Assumption of Options
    6  
 
       
SECTION 7. PAYMENT FOR SHARES
    6  
 
       
(a) General Rule
    6  

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    Page No.
(b) Surrender of Stock
    6  
(c) Services Rendered
    7  
(d) Promissory Note
    7  
(e) Exercise/Sale
    7  
(f) Exercise/Pledge
    7  
 
       
SECTION 8. ADJUSTMENT OF SHARES
    7  
 
       
(a) General
    7  
(b) Change in Control
    7  
(c) Reservation of Rights
    8  
 
       
SECTION 9. SECURITIES LAW REQUIREMENTS
    8  
 
       
(a) General
    8  
(b) Financial Reports
    8  
 
       
SECTION 10. NO RETENTION RIGHTS
    9  
 
       
SECTION 11. DURATION AND AMENDMENTS
    9  
 
       
(a) Term of the Plan
    9  
(b) Right to Amend or Terminate the Plan
    9  
(c) Effect of Amendment or Termination
    9  
 
       
SECTION 12. DEFINITIONS
    9  

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ArcSight, Inc. 2002 Stock Plan
(Adopted on March 29, 2002)
(as Amended and Restated through January 24, 2007)
SECTION 1. ESTABLISHMENT AND PURPOSE.
          The purpose of the Plan is to offer selected persons an opportunity to acquire a proprietary interest in the success of the Company, or to increase such interest, by purchasing Shares of the Company’s Stock. The Plan provides both for the direct award or sale of Shares and for the grant of Options to purchase Shares. Options granted under the Plan may include Nonstatutory Options as well as ISOs intended to qualify under Section 422 of the Code.
          Capitalized terms are defined in Section 12.
SECTION 2. ADMINISTRATION.
          (a) Committees of the Board of Directors. The Plan may be administered by one or more Committees. Each Committee shall consist of one or more members of the Board of Directors who have been appointed by the Board of Directors. Each Committee shall have such authority and be responsible for such functions as the Board of Directors has assigned to it. If no Committee has been appointed, the entire Board of Directors shall administer the Plan. Any reference to the Board of Directors in the Plan shall be construed as a reference to the Committee (if any) to whom the Board of Directors has assigned a particular function.
          (b) Authority of the Board of Directors. Subject to the provisions of the Plan, the Board of Directors shall have full authority and discretion to take any actions it deems necessary or advisable for the administration of the Plan. All decisions, interpretations and other actions of the Board of Directors shall be final and binding on all Purchasers, all Optionees and all persons deriving their rights from a Purchaser or Optionee.
SECTION 3. ELIGIBILITY.
          (a) General Rule. Only Employees, Outside Directors and Consultants shall be eligible for the grant of Nonstatutory Options or the direct award or sale of Shares. Only Employees shall be eligible for the grant of ISOs.
          (b) Ten-Percent Stockholders. A person who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, its Parent or any of its Subsidiaries shall not be eligible for designation as an Optionee or Purchaser unless (i) the Exercise Price is at least 110% of the Fair Market Value of a Share on the date of grant, (ii) the Purchase Price (if any) is at least 100% of the Fair Market Value of a Share and (iii) in the case of an ISO, such ISO by its terms is not exercisable after the expiration of five years from the date of grant. For purposes of this Subsection (b), in determining stock ownership, the attribution rules of Section 424(d) of the Code shall be applied.

 


 

SECTION 4. STOCK SUBJECT TO PLAN.
          (a) Basic Limitation. No additional grants shall be made under the Predecessor Plan on or after January 1, 2002. Not more than 40,390,9371 Shares may be issued under this Plan (subject to Subsection (b) below and Section 8). The number of Shares that are subject to Options or other rights outstanding at any time under the Plan shall not exceed the number of Shares that then remain available for issuance under the Plan. 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. Shares offered under the Plan may be authorized but unissued Shares or treasury Shares.
          (b) Additional Shares. In the event that Shares previously issued under this Plan (after January 1, 2002) or the Predecessor Plan are reacquired by the Company pursuant to a forfeiture provision, right of repurchase or right of first refusal, such Shares shall be added to the number of Shares then available for issuance under this Plan. However, the aggregate number of Shares issued upon the exercise of ISOs (including Shares reacquired by the Company) shall in no event exceed 300% of the number specified in Subsection (a) above. In the event that an outstanding Option or other right under this Plan for any reason expires or is canceled, the Shares allocable to the unexercised portion of such Option or other right shall not reduce the number of Shares available for issuance under the Plan. In the event that any outstanding option granted under the Predecessor Plan for any reason expires or is canceled (after January 1, 2002), the Shares allocable to the unexercised portion of such option shall become available for all purposes under this Plan.
SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES.
     (a) Stock Purchase Agreement. Each award or sale of Shares under the Plan (other than upon exercise of an Option) shall be evidenced by a Stock Purchase Agreement between the Purchaser and the Company. Such award or sale 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 Board of Directors deems appropriate for inclusion in a Stock Purchase Agreement. The provisions of the various Stock Purchase Agreements entered into under the Plan need not be identical.
     (b) Duration of Offers and Nontransferability of Rights. Any right to acquire Shares under the Plan (other than an Option) shall automatically expire if not exercised by the Purchaser within 30 days after the grant of such right was communicated to the Purchaser by
 
1   Reflects a decrease of 2,640,575-shares approved by the Board of Directors on September 26, 2002, an increase of 375,763-shares rolled over from the Predecessor Plan, an increase of 5,500,000-shares approved by the Board of Directors on March 25, 2004, an increase of 1,300,000-shares approved by the Board of Directors on February 3, 2005, an increase of 5,300,000-shares approved by the Board of Directors on May 26, 2005, an increase of 4,032,363-shares approved by the Board of Directors on September 15, 2005 and an increase of 10,367,441-shares approved by the Board of Directors on January 24, 2007. Such number excludes the additional Shares that have and will become available for grant under this Plan upon forfeiture, repurchase, expiration, cancellation or other reacquisition of Shares, or Shares subject to options or other rights, issued under the Predecessor Plan as set forth in Section 4(b).

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the Company. Such right shall not be transferable and shall be exercisable only by the Purchaser to whom such right was granted.
          (c) Purchase Price. The Purchase Price of Shares to be offered under the Plan shall not be less than 85% of the Fair Market Value of such Shares, and a higher percentage may be required by Section 3(b). Subject to the preceding sentence, the Board of Directors shall determine the Purchase Price at its sole discretion. The Purchase Price shall be payable in a form described in Section 7.
          (d) Withholding Taxes. As a condition to the purchase of Shares, the Purchaser shall make such arrangements as the Board of Directors may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such purchase.
          (e) Restrictions on Transfer of Shares and Minimum Vesting. Any Shares awarded or sold under the Plan shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Board of Directors may determine. Such restrictions shall be set forth in the applicable Stock Purchase Agreement and shall apply in addition to any restrictions that may apply to holders of Shares generally. In the case of a Purchaser who is not an officer of the Company, an Outside Director or a Consultant:
          (i) Any right to repurchase the Purchaser’s Shares at the original Purchase Price (if any) upon termination of the Purchaser’s Service shall lapse at least as rapidly as 20% per year over the five-year period commencing on the date of the award or sale of the Shares;
          (ii) Any such right may be exercised only for cash or for cancellation of indebtedness incurred in purchasing the Shares; and
          (iii) Any such right may be exercised only within 90 days after the termination of the Purchaser’s Service.
SECTION 6. 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. The 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 Board of Directors deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical.
          (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 8. The Stock Option Agreement shall also specify whether the Option is an ISO or a Nonstatutory Option.

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          (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, and a higher percentage may be required by Section 3(b). The Exercise Price of a Nonstatutory Option shall not be less than 85% of the Fair Market Value of a Share on the date of grant, and a higher percentage may be required by Section 3(b). Subject to the preceding two sentences, the Exercise Price under any Option shall be determined by the Board of Directors at its sole discretion. The Exercise Price shall be payable in a form described in Section 7.
          (d) Exercisability. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. No Option shall be exercisable unless the Optionee has delivered an executed copy of the Stock Option Agreement to the Company. In the case of an Optionee who is not an officer of the Company, an Outside Director or a Consultant, an Option shall become exercisable at least as rapidly as 20% per year over the five-year period commencing on the date of grant. Subject to the preceding sentence, the Board of Directors shall determine the exercisability provisions of the Stock Option Agreement at its sole discretion.
          (e) Basic Term. The Stock Option Agreement shall specify the term of the Option. The term shall not exceed 10 years from the date of grant, and a shorter term may be required by Section 3(b). Subject to the preceding sentence, the Board of Directors at its sole discretion shall determine when an Option is to expire.
          (f) Termination of Service (Except by Death). If an Optionee’s Service terminates for any reason other than the Optionee’s death, then the Optionee’s Options shall expire on the earliest of the following occasions:
          (i) The expiration date determined pursuant to Subsection (f) above;
          (ii) The date 30 days after the termination of the Optionee’s Service for any reason other than Cause, retirement at or after age 65, or Disability, or such later date as the Board of Directors may determine;
          (iii) The date of the termination of the Optionee’s Service for Cause, or such later date as the Board of Directors may determine;
          (iv) The date 12 months after the Optionee’s retirement at or after age 65, or such other date as the Board of Directors may determine; or
          (v) The date 12 months after the termination of the Optionee’s Service by reason of Disability, or such other date as the Board of Directors may determine (but not less than six months after the termination of the Optionee’s Service by reason of Disability).
The Optionee may exercise all or part of the Optionee’s Options at any time before the expiration of such Options under the preceding sentence, but only to the extent that such Options had become exercisable before the Optionee’s Service terminated (or became exercisable as a result

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of the termination) and the underlying Shares had vested before the Optionee’s Service terminated (or vested as a result of the termination). The balance of such Options shall lapse when the Optionee’s Service terminates. In the event that the Optionee dies after the termination of the Optionee’s Service but before the expiration of the Optionee’s Options, all or part of such Options may be exercised (prior to expiration) by the executors or administrators of the Optionee’s estate or by any person who has acquired such Options directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that such Options had become exercisable before the Optionee’s Service terminated (or became exercisable as a result of the termination) and the underlying Shares had vested before the Optionee’s Service terminated (or vested as a result of the termination).
          (g) Leaves of Absence. For purposes of Subsection (g) above, Service shall be deemed to continue while the Optionee is on a bona fide leave of absence, if such leave was approved by the Company in writing and if continued crediting of Service for this purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company).
          (h) Death of Optionee. If an Optionee dies while the Optionee is in Service, then the Optionee’s Options shall expire on the earlier of the following dates:
          (i) The expiration date determined pursuant to Subsection (f) above; or
          (ii) The date 12 months after the Optionee’s death, or such later date as the Board of Directors may determine.
All or part of the Optionee’s Options may be exercised at any time before the expiration of such Options under the preceding sentence by the executors or administrators of the Optionee’s estate or by any person who has acquired such Options directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that such Options had become exercisable before the Optionee’s death (or became exercisable as a result of the death) and the underlying Shares had vested before the Optionee’s death (or vested as a result of the Optionee’s death). The balance of such Options shall lapse when the Optionee dies.
          (i) Restrictions on Transfer of Shares and Minimum Vesting. 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 Board of Directors may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any restrictions that may apply to holders of Shares generally. In the case of an Optionee who is not an officer of the Company, an Outside Director or a Consultant:
          (i) Any right to repurchase the Optionee’s Shares at the original Exercise Price upon termination of the Optionee’s Service shall lapse at least as rapidly as 20% per year over the five-year period commencing on the date of the option grant;
          (ii) Any such right may be exercised only for cash or for cancellation of indebtedness incurred in purchasing the Shares; and

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          (iii) Any such right may be exercised only within 90 days after the later of (A) the termination of the Optionee’s Service or (B) the date of the option exercise.
          (j) Transferability of Options. An Option shall be transferable by the Optionee only by (i) a beneficiary designation, (ii) a will or (iii) the laws of descent and distribution, except as provided in the next sentence. If the applicable Stock Option Agreement so provides, an NSO shall also be transferable by the Optionee by (i) a gift to a member of the Optionee’s Immediate Family or (ii) a gift to an inter vivos or testamentary trust in which members of the Optionee’s Immediate Family have a beneficial interest of more than 50% and which provides that such NSO is to be transferred to the beneficiaries upon the Optionee’s death. An ISO may be exercised during the lifetime of the Optionee only by the Optionee or by the Optionee’s guardian or legal representative.
          (k) Withholding Taxes. As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Board of Directors 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 Board of Directors may require for the 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.
          (l) 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 the Optionee’s Option until such person becomes entitled to receive such Shares by filing a notice of exercise and paying the Exercise Price pursuant to the terms of such Option.
          (m) Modification, Extension and Assumption of Options. Within the limitations of the Plan, the Board of Directors may modify, extend or assume outstanding Options or may accept the cancellation of outstanding Options (whether granted by the Company or another issuer) 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. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, impair the Optionee’s rights or increase the Optionee’s obligations under such Option.
SECTION 7. PAYMENT FOR SHARES.
          (a) General Rule. The entire Purchase Price or Exercise Price of Shares issued under the Plan shall be payable in cash or cash equivalents at the time when such Shares are purchased, except as otherwise provided in this Section 7.
          (b) Surrender of Stock. To the extent that a Stock Option Agreement so provides, all or any part of the Exercise Price may be paid by surrendering, or attesting to the ownership of, Shares that are already owned by the Optionee. Such Shares shall be surrendered to the Company in good form for transfer and shall be valued at their Fair Market Value on the date when the Option is exercised. 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

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compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes.
          (c) Services Rendered. At the discretion of the Board of Directors, Shares may be awarded under the Plan in consideration of services rendered to the Company, a Parent or a Subsidiary prior to the award.
          (d) Promissory Note. To the extent that a Stock Option Agreement or Stock Purchase Agreement so provides, all or a portion of the Exercise Price or Purchase Price (as the case may be) of Shares issued under the Plan may be paid with a full-recourse promissory note. However, the par value of the Shares, if newly issued, shall be paid in cash or cash equivalents. The Shares shall be pledged as security for payment of the principal amount of the promissory note and interest thereon. The interest rate payable under the terms of the promissory note shall not be less than the minimum rate (if any) required to avoid the imputation of additional interest under the Code. Subject to the foregoing, the Board of Directors (at its sole discretion) shall specify the term, interest rate, amortization requirements (if any) and other provisions of such note.
          (e) Exercise/Sale. To the extent that a Stock Option Agreement so provides, and if Stock is publicly traded, payment may be made all or in part by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes.
          (f) Exercise/Pledge. To the extent that a Stock Option Agreement so provides, and if Stock is publicly traded, payment may be made all or in part by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes.
SECTION 8. ADJUSTMENT OF SHARES.
          (a) General. In the event of a subdivision of the outstanding Stock, a declaration of a dividend payable in Shares, a declaration of an extraordinary dividend payable in a form other than Shares in an amount that has a material effect on the Fair Market Value of the Stock, a combination or consolidation of the outstanding Stock into a lesser number of Shares, a recapitalization, a spin-off, a reclassification or a similar occurrence, the Board of Directors shall make appropriate adjustments in one or more of (i) the number of Shares available for future grants under Section 4, (ii) the number of Shares covered by each outstanding Option or (iii) the Exercise Price under each outstanding Option.
          (b) Change in Control. In the event that the Company is subject to a Change in Control specified in Section 12, outstanding Options shall be subject to the agreement governing such Change in Control. Such agreement may provide for:

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          (i) The continuation of such outstanding Options by the Company (if the Company is the surviving corporation);
          (ii) The assumption of the Plan and such outstanding Options by the surviving corporation or its parent;
          (iii) The substitution by the surviving corporation or its parent of options with substantially the same terms for such outstanding Options;
          (iv) The full exercisability of such outstanding Options and full vesting of the Shares subject to such Options, followed by the cancellation of such Options;
          (v) The settlement of the full value of such outstanding Options (whether or not then exercisable) in cash or cash equivalents, followed by the cancellation of such Options; or
          (vi) Any other action permitted by applicable law.
          (c) Reservation of Rights. Except as provided in this Section 8, an Optionee or Purchaser shall have no rights by reason of (i) any subdivision or consolidation of shares of stock of any class, (ii) the payment of any dividend or (iii) any other increase or decrease in the number of shares of stock of any class. Any issuance 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 9. SECURITIES LAW REQUIREMENTS.
          (a) General. Shares 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.
          (b) Financial Reports. The Company each year shall furnish to Optionees, Purchasers and stockholders who have received Stock under the Plan its balance sheet and income statement during the period such Optionee, Purchaser or stockholder has awards or Options outstanding, unless such Optionees, Purchasers or stockholders are key Employees whose duties with the Company assure them access to equivalent information. Such balance sheet and income statement need not be audited.

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SECTION 10. NO RETENTION RIGHTS.
          Nothing in the Plan or in any right or Option granted under the Plan shall confer upon the Purchaser or Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining the Purchaser or Optionee) or of the Purchaser or Optionee, which rights are hereby expressly reserved by each, to terminate his or her Service at any time and for any reason, with or without cause.
SECTION 11. DURATION AND AMENDMENTS.
          (a) Term of the Plan. The Plan, as set forth herein, shall become effective on the date of its adoption by the Board of Directors, subject to the approval of the Company’s stockholders. If the stockholders fail to approve the Plan within 12 months after its adoption by the Board of Directors, then any grants, exercises or sales that have already occurred under the Plan shall be rescinded and no additional grants, exercises or sales shall thereafter be made under the Plan. The Plan shall terminate automatically 10 years after the later of (i) its adoption by the Board of Directors or (ii) the most recent increase in the number of Shares reserved under Section 4 that was approved by the Company’s stockholders. The Plan 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, suspend or terminate the Plan at any time and for any reason; provided, however, that any amendment of the Plan shall be subject to the approval of the Company’s stockholders if it (i) increases the number of Shares available for issuance under the Plan (except as provided in Section 8) or (ii) materially changes the class of persons who are eligible for the grant of ISOs. Stockholder approval shall not be required for any other amendment of the Plan. If the stockholders fail to approve an increase in the number of Shares reserved under Section 4 within 12 months after its adoption by the Board of Directors, then any grants, exercises or sales that have already occurred in reliance on such increase shall be rescinded and no additional grants, exercises or sales shall thereafter be made in reliance on such increase.
          (c) Effect of Amendment or Termination. No Shares shall be issued or sold under the Plan after the termination thereof, except upon exercise of an Option granted prior to such termination. The termination of the Plan, or any amendment thereof, shall not affect any Share previously issued or any Option previously granted under the Plan.
SECTION 12. DEFINITIONS.
          (a) “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time.
          (b) “Cause” shall mean (except as may otherwise be defined in an Optionee’s employment agreement or Option agreement) that the Board of Directors determines reasonably and in good faith that the Optionee (i) committed an act of embezzlement, fraud, dishonesty or breach of fiduciary duty to the Company, (ii) deliberately and repeatedly violated the rules of the Company or the valid instructions of the Board of Directors or an authorized officer of the

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Company, (iii) made any unauthorized disclosure of any of the secrets or confidential information of the Company, (iv) induced any client or customer of the Company to break any contract with the Company or (v) engaged in any conduct that could reasonably be expected to result in loss, damage or injury to the Company.
          (c) “Change in Control” shall mean (except as may otherwise be defined in an Optionee’s employment agreement or Option agreement) the occurrence of any of the following events:
          (i) any reorganization, consolidation, merger or similar transaction or series of related transactions (each, a combination transaction) in which the Company is a constituent corporation or is a party if, as a result of such combination transaction, the voting securities of the Company that are outstanding immediately prior to the consummation of such combination transaction (other than any such securities that are held by an “Acquiring Stockholder,” as defined below) do not represent, or are not converted into, securities of the surviving corporation of such combination transaction (or such surviving corporation’s parent corporation if the surviving corporation is owned by the parent corporation) that, immediately after the consummation of such combination transaction, together possess at least a majority of the total voting power of all securities of such surviving corporation (or its parent corporation, if applicable) that are outstanding immediately after the consummation of such combination transaction, including securities of such surviving corporation (or its parent corporation, if applicable) that are held by the Acquiring Stockholder; where an “Acquiring Stockholder” means a stockholder or stockholders of the Company that (a) merges or combines with the Company in such combination transaction or (b) owns or controls a majority of another corporation that merges or combines with the Company in such combination transaction;
          (ii) any acquisition by any Person (including any “person” within the meaning of Section 13(d) of the Exchange Act) as a result of which, such Person (or any Group of which such Person is a member) becomes a Beneficial Owner of 50% or more of the issued and outstanding shares of voting stock of the Company in any single transaction or a series of related transactions; where “Person” means any natural person, corporation, limited liability company, general partnership, limited partnership, trust, proprietorship, joint venture, business organization or government, political subdivision, agency or instrumentality, and “Group” means two or more Persons acting as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding, or disposing of the applicable securities referred to herein; or
          (iii) any sale, transfer or other disposition of all or substantially all of the Company’s assets.
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

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the same proportions by the persons who held the Company’s securities immediately before such transaction.
          (d) “Code” shall mean the Internal Revenue Code of 1986, as amended.
          (e) “Committee” shall mean a committee of the Board of Directors, as described in Section 2(a).
          (f) “Company” shall mean ArcSight, Inc., a Delaware corporation.
          (g) “Consultant” shall mean a person who performs bona fide services for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding Employees and Outside Directors.
          (h) “Disability” shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment.
          (i) “Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.
          (j) “Exercise Price” shall mean the amount for which one Share may be purchased upon exercise of an Option, as specified by the Board of Directors in the applicable Stock Option Agreement.
          (k) “Fair Market Value” shall mean the fair market value of a Share, as determined by the Board of Directors in good faith. Such determination shall be conclusive and binding on all persons.
          (l) “Immediate Family” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include adoptive relationships.
          (m) “ISO” shall mean an employee incentive stock option described in Section 422(b) of the Code.
          (n) “Nonstatutory Option” or “NSO” shall mean a stock option not described in Sections 422(b) or 423(b) of the Code.
          (o) “Option” shall mean an ISO or Nonstatutory Option granted under the Plan and entitling the holder to purchase Shares.
          (p) “Optionee” shall mean a person who holds an Option.
          (q) “Outside Director” shall mean a member of the Board of Directors who is not an Employee.

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          (r) “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 considered a Parent commencing as of such date.
          (s) “Plan” shall mean this ArcSight, Inc. 2002 Stock Plan.
          (t) “Predecessor Plan” shall mean the ArcSight, Inc. 2000 Stock Incentive Plan.
          (u) “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 Board of Directors.
          (v) “Purchaser” shall mean a person to whom the Board of Directors has offered the right to acquire Shares under the Plan (other than upon exercise of an Option).
          (w) “Service” shall mean service as an Employee, Outside Director or Consultant.
          (x) “Share” shall mean one share of Stock, as adjusted in accordance with Section 8 (if applicable).
          (y) “Stock” shall mean the Common Stock of the Company, with a par value of $0.00001 per Share.
          (z) “Stock Option Agreement” shall mean the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to the Optionee’s Option.
          (aa) “Stock Purchase Agreement” shall mean the agreement between the Company and a Purchaser who acquires Shares under the Plan that contains the terms, conditions and restrictions pertaining to the acquisition of such Shares.
          (bb) “Subsidiary” shall mean 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. 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.

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EX-10.5 8 f28075orexv10w5.htm EXHIBIT 10.5 exv10w5
 

Exhibit 10.5
ArcSight, Inc. 2002 Stock Plan
Notice of Stock Option Grant
          You have been granted the following option to purchase shares of the Common Stock of ArcSight, Inc. (the “Company”):
         
 
  Name of Optionee:    
 
       
 
  Total Number of Shares:    
 
       
 
  Type of Option:    
 
       
 
  Exercise Price Per Share:   $
 
       
 
  Date of Grant:    
 
       
 
  Date Exercisable:   This option may not be exercised with respect to any portion until such shares have vested in accordance with the Vesting Schedule.
 
       
 
  Vesting Commencement Date:    
 
       
 
  Vesting Schedule:    
 
       
 
  Expiration Date:                       . This option expires earlier if the Optionee’s Service terminates earlier, as provided in Section 6 of the Stock Option Agreement.
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 terms and conditions of the 2002 Stock Plan and the Stock Option Agreement, both of which are attached to and made a part of this document.
             
Optionee:       ArcSight, Inc.
 
           
 
      By:    
 
           
 
           
 
      Title:    
 
           

 


 

THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
ArcSight, Inc. 2002 Stock Plan:
Stock Option Agreement
SECTION 1. GRANT OF OPTION.
     (a) Option. On the terms and conditions set forth in the Notice of Stock Option Grant and this Agreement, the Company grants to the Optionee on the Date of Grant the option to purchase at the Exercise Price the number of Shares set forth in the Notice of Stock Option Grant. The Exercise Price is agreed to be at least 100% of the Fair Market Value per Share on the Date of Grant (110% of Fair Market Value if Section 3(b) of the Plan applies). This option is intended to be an ISO or an NSO, as provided in the Notice of Stock Option Grant.
     (b) $100,000 Limitation. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it shall be deemed to be an NSO to the extent (and only to the extent) required by the $100,000 annual limitation under Section 422(d) of the Code.
     (c) Stock Plan and Defined Terms. This option is granted pursuant to the Plan, a copy of which the Optionee acknowledges having received. The provisions of the Plan are incorporated into this Agreement by this reference. Capitalized terms are defined in Section 13 of this Agreement.
SECTION 2. RIGHT TO EXERCISE.
     (a) Exercisability. Subject to Subsection (b) below and the other conditions set forth in this Agreement, this option may be exercised prior to its expiration in accordance with the Vesting Schedule set forth in the Notice of Stock Option Grant.
     (b) Stockholder Approval. Any other provision of this Agreement notwithstanding, no portion of this option shall be exercisable at any time prior to the approval of the Plan by the Company’s stockholders.
SECTION 3. NO TRANSFER OR ASSIGNMENT OF OPTION.
          Except as otherwise provided in this Agreement, this option and the rights and privileges conferred hereby shall not be sold, pledged or otherwise transferred (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment, levy or similar process.

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SECTION 4. EXERCISE PROCEDURES.
     (a) Notice of Exercise. The Optionee or the Optionee’s representative may exercise this option by giving written notice to the Company pursuant to Section 12(c). The notice shall specify the election to exercise this option, the number of Shares for which it is being exercised and the form of payment. The person exercising this option shall sign the notice. In the event that this option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof (satisfactory to the Company) of the representative’s right to exercise this option. The Optionee or the Optionee’s representative shall deliver to the Company, at the time of giving the notice, payment in a form permissible under Section 5 for the full amount of the Purchase Price. In the event of a partial exercise of this option, Shares shall be deemed to have been purchased in the order in which they vest in accordance with the Notice of Stock Option Grant.
     (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued one or more certificates evidencing the Shares for which this option has been exercised. Such Shares shall be registered (i) in the name of the person exercising this option, (ii) in the names of such person and his or her spouse as community property or as joint tenants with the right of survivorship or (iii) with the Company’s consent, in the name of a revocable trust. The Company shall cause such certificates to be delivered to or upon the order of the person exercising this option.
     (c) Withholding Taxes. In the event that the Company determines that it is required to withhold any tax as a result of the exercise of this option, the Optionee, as a condition to the exercise of this option, shall make arrangements satisfactory to the Company to enable it to satisfy all withholding requirements. The Optionee shall also make arrangements satisfactory to the Company to enable it to satisfy any withholding requirements that may arise in connection with the vesting or disposition of Shares purchased by exercising this option.
SECTION 5. PAYMENT FOR STOCK.
     (a) Cash. All or part of the Purchase Price may be paid in cash or cash equivalents.
     (b) Surrender of Stock. All or any part of the Purchase Price may be paid by surrendering Shares that are already owned by the Optionee for at least six (6) months. Such Shares shall be surrendered to the Company in good form for transfer and shall be valued at their Fair Market Value on the date when this option is exercised. The Optionee shall not surrender Shares in payment of the Purchase Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes.
     (c) Exercise/Sale. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company.
     (d) Exercise/Pledge. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an

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irrevocable direction to pledge Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company.
SECTION 6. TERM AND EXPIRATION.
     (a) Basic Term. This option shall in any event expire on the expiration date set forth in the Notice of Stock Option Grant, which date is 10 years after the Date of Grant (five years after the Date of Grant if this option is designated as an ISO in the Notice of Stock Option Grant and Section 3(b) of the Plan applies).
     (b) Termination of Service (Except by Death). If the Optionee’s Service terminates for any reason other than death, then this option shall expire on the earliest of the following occasions:
     (i) The expiration date determined pursuant to Subsection (a) above;
     (ii) The date 30 days after the termination of the Optionee’s Service for any reason other than Cause, retirement at or after age 65, or Disability;
     (iii) The date of the termination of the Optionee’s Service for Cause;
     (iv) The date 12 months after the Optionee’s retirement at or after age 65; or
     (v) The date 12 months after the termination of the Optionee’s Service by reason of Disability.
The Optionee may exercise all or part of this option at any time before its expiration under the preceding sentence, but only to the extent that this option is exercisable for vested Shares on or before the date when the Optionee’s Service terminates. When the Optionee’s Service terminates, this option shall expire immediately with respect to the number of Shares for which this option is not yet vested and exercisable. In the event that the Optionee dies after termination of Service but before the expiration of this option, all or part of this option may be exercised (prior to expiration) by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option was exercisable for vested Shares on or before the date when the Optionee’s Service terminated.
     (c) Death of the Optionee. If the Optionee dies while in Service, then this option shall expire on the earlier of the following dates:
     (i) The expiration date determined pursuant to Subsection (a) above; or
     (ii) The date 12 months after the Optionee’s death.
All or part of this option may be exercised at any time before its expiration under the preceding sentence by the executors or administrators of the Optionee’s estate or by any person who has

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acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option is exercisable for vested Shares on or before the Optionee’s death. When the Optionee dies, this option shall expire immediately with respect to the number of Shares for which this option is not yet vested and exercisable.
     (d) Leaves of Absence. For any purpose under this Agreement, Service shall be deemed to continue while the Optionee is on a bona fide leave of absence, if such leave was approved by the Company in writing and if continued crediting of Service for such purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company).
     (e) Notice Concerning ISO Treatment. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it ceases to qualify for favorable tax treatment as an ISO to the extent that it is exercised:
     (i) More than three months after the date when the Optionee ceases to be an Employee for any reason other than death or permanent and total disability (as defined in Section 22(e)(3) of the Code);
     (ii) More than 12 months after the date when the Optionee ceases to be an Employee by reason of permanent and total disability (as defined in Section 22(e)(3) of the Code); or
     (iii) More than three months after the date when the Optionee has been on a leave of absence for 90 days, unless the Optionee’s reemployment rights following such leave were guaranteed by statute or by contract.
SECTION 7. RIGHT OF FIRST REFUSAL.
     (a) Right of First Refusal. In the event that the Optionee proposes to sell, pledge or otherwise transfer to a third party any Shares acquired under this Agreement, or any interest in such Shares, the Company shall have the Right of First Refusal with respect to all (and not less than all) of such Shares. If the Optionee desires to transfer Shares acquired under this Agreement, the Optionee shall give a written Transfer Notice to the Company describing fully the proposed transfer, including the number of Shares proposed to be transferred, the proposed transfer price, the name and address of the proposed Transferee and proof satisfactory to the Company that the proposed sale or transfer will not violate any applicable federal or state securities laws. The Transfer Notice shall be signed both by the Optionee and by the proposed Transferee and must constitute a binding commitment of both parties to the transfer of the Shares. The Company shall have the right to purchase all, and not less than all, of the Shares on the terms of the proposal described in the Transfer Notice (subject, however, to any change in such terms permitted under Subsection (b) below) by delivery of a notice of exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Company.
     (b) Transfer of Shares. If the Company fails to exercise its Right of First Refusal within 30 days after the date when it received the Transfer Notice, the Optionee may, not later than 90 days following receipt of the Transfer Notice by the Company, conclude a transfer of the

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Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice, provided that any such sale is made in compliance with applicable federal and state securities laws and not in violation of any other contractual restrictions to which the Optionee is bound. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance with the procedure described in Subsection (a) above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Shares on the terms set forth in the Transfer Notice within 60 days after the date when the Company received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Shares was to be made in a form other than cash or cash equivalents paid at the time of transfer, the Company shall have the option of paying for the Shares with cash or cash equivalents equal to the present value of the consideration described in the Transfer Notice.
     (c) Additional or Exchanged Securities and Property. In the event of a merger or consolidation of the Company with or into another entity, any other corporate reorganization, a stock split, the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities, any securities or other property (including cash or cash equivalents) that are by reason of such transaction exchanged for, or distributed with respect to, any Shares subject to this Section 7 shall immediately be subject to the Right of First Refusal. Appropriate adjustments to reflect the exchange or distribution of such securities or property shall be made to the number and/or class of the Shares subject to this Section 7.
     (d) Termination of Right of First Refusal. Any other provision of this Section 7 notwithstanding, in the event that the Stock is readily tradable on an established securities market when the Optionee desires to transfer Shares, the Company shall have no Right of First Refusal, and the Optionee shall have no obligation to comply with the procedures prescribed by Subsections (a) and (b) above.
     (e) Permitted Transfers. This Section 7 shall not apply to (i) a transfer by beneficiary designation, will or intestate succession or (ii) a transfer to one or more members of the Optionee’s Immediate Family or to a trust established by the Optionee for the benefit of the Optionee and/or one or more members of the Optionee’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Shares acquired under this Agreement, either under this Subsection (e) or after the Company has failed to exercise the Right of First Refusal, then this Agreement shall apply to the Transferee to the same extent as to the Optionee.
     (f) Termination of Rights as Stockholder. If the Company makes available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Shares to be purchased in accordance with this Section 7, then after such time the person from whom such Shares are to be purchased shall no longer have any rights as a holder of such Shares (other than the right to receive payment of such consideration in accordance with this

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Agreement). Such Shares shall be deemed to have been purchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement.
     (g) Assignment of Right of First Refusal. The Board of Directors may freely assign the Company’s Right of First Refusal, in whole or in part. Any person who accepts an assignment of the Right of First Refusal from the Company shall assume all of the Company’s rights and obligations under this Section 7.
SECTION 8. LEGALITY OF INITIAL ISSUANCE.
     No Shares shall be issued upon the exercise of this option unless and until the Company has determined that:
     (a) It and the Optionee have taken any actions required to register the Shares under the Securities Act or to perfect an exemption from the registration requirements thereof;
     (b) Any applicable listing requirement of any stock exchange or other securities market on which Stock is listed has been satisfied; and
     (c) Any other applicable provision of federal, state or foreign law has been satisfied.
SECTION 9. NO REGISTRATION RIGHTS.
     The Company may, but shall not be obligated to, register or qualify the sale of Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the sale of Shares under this Agreement to comply with any law.
SECTION 10. RESTRICTIONS ON TRANSFER.
     (a) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
     (b) Market Stand-Off. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company’s initial public offering, the Optionee or a Transferee shall not directly or indirectly sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer, or agree to engage in any of the foregoing transactions with respect to, any Shares acquired under this Agreement without the prior written

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consent of the Company or its underwriters. Such restriction (the “Market Stand-Off”) shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In no event, however, shall such period exceed 180 days. The Market Stand-Off shall in any event terminate two years after the date of the Company’s initial public offering. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Shares acquired under this Agreement until the end of the applicable stand-off period. The Company’s underwriters shall be beneficiaries of the agreement set forth in this Subsection (b). This Subsection (b) shall not apply to Shares registered in the public offering under the Securities Act, and the Optionee or a Transferee shall be subject to this Subsection (b) only if the directors and officers of the Company are subject to similar arrangements.
     (c) Investment Intent at Grant. The Optionee represents and agrees that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof.
     (d) Investment Intent at Exercise. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel.
     (e) Legends. All certificates evidencing Shares purchased under this Agreement shall bear the following legend:
“THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.”
All certificates evidencing Shares purchased under this Agreement in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law):

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“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.”
     (f) Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Agreement is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend.
     (g) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 10 shall be conclusive and binding on the Optionee and all other persons.
SECTION 11. ADJUSTMENT OF SHARES.
          In the event of any transaction described in Section 8(a) of the Plan, the terms of this option (including, without limitation, the number and kind of Shares subject to this option and the Exercise Price) shall be adjusted as set forth in Section 8(a) of the Plan. In the event that the Company is a party to a merger or consolidation, this option shall be subject to the agreement of merger or consolidation, as provided in Section 8(b) of the Plan.
SECTION 12. MISCELLANEOUS PROVISIONS.
     (a) Rights as a Stockholder. Neither the Optionee nor the Optionee’s representative shall have any rights as a stockholder with respect to any Shares subject to this option until the Optionee or the Optionee’s representative becomes entitled to receive such Shares by filing a notice of exercise and paying the Purchase Price pursuant to Sections 4 and 5.
     (b) No Retention Rights. Nothing in this option or in the Plan shall confer upon the Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining the Optionee) or of the Optionee, which rights are hereby expressly reserved by each, to terminate his or her Service at any time and for any reason, with or without cause.
     (c) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Optionee at the address that he or she most recently provided to the Company in accordance with this Subsection (c).
     (d) Entire Agreement. The Notice of Stock Option Grant, this Agreement and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof.

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     (e) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
SECTION 13. DEFINITIONS.
     (a) “Agreement” shall mean this Stock Option Agreement.
     (b) “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time or, if a Committee has been appointed, such Committee.
     (c) “Cause” shall mean that the Board of Directors determines reasonably and in good faith that the Optionee (i) committed an act of embezzlement, fraud, dishonesty or breach of fiduciary duty to the Company, (ii) deliberately and repeatedly violated the rules of the Company or the valid instructions of the Board of Directors or an authorized officer of the Company, (iii) made any unauthorized disclosure of any of the secrets or confidential information of the Company, (iv) induced any client or customer of the Company to break any contract with the Company or (v) engaged in any conduct that could reasonably be expected to result in loss, damage or injury to the Company.
     (d) “Code” shall mean the Internal Revenue Code of 1986, as amended.
     (e) “Committee” shall mean a committee of the Board of Directors, as described in Section 2 of the Plan.
     (f) “Company” shall mean ArcSight, Inc., a Delaware corporation.
     (g) “Consultant” shall mean a person who performs bona fide services for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding Employees and Outside Directors.
     (h) “Date of Grant” shall mean the date specified in the Notice of Stock Option Grant, which date shall be the later of (i) the date on which the Board of Directors resolved to grant this option or (ii) the first day of the Optionee’s Service.
     (i) “Disability” shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment.
     (j) “Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.
     (k) “Exercise Price” shall mean the amount for which one Share may be purchased upon exercise of this option, as specified in the Notice of Stock Option Grant.
     (l) “Fair Market Value” shall mean the fair market value of a Share, as determined by the Board of Directors in good faith. Such determination shall be conclusive and binding on all persons.

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     (m) “Immediate Family” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include adoptive relationships.
     (n) “Involuntary Termination” means that (a) the Optionee’s Service is terminated by the Company without Cause, (b) the Optionee resigns within 30 days after the scope of his or her job responsibilities or authority was materially reduced without his or her written consent or (c) the Optionee resigns within 30 days after receipt of notice that his or her principal workplace will be relocated 100 miles or more from its location at the time of notice.
     (o) “ISO” shall mean an employee incentive stock option described in Section 422(b) of the Code.
     (p) “Notice of Stock Option Grant” shall mean the document so entitled to which this Agreement is attached.
     (q) “NSO” shall mean a stock option not described in Sections 422(b) or 423(b) of the Code.
     (r) “Optionee” shall mean the person named in the Notice of Stock Option Grant.
     (s) “Outside Director” shall mean a member of the Board of Directors who is not an Employee.
     (t) “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.
     (u) “Plan” shall mean the ArcSight, Inc. 2002 Stock Plan, as in effect on the Date of Grant.
     (v) “Purchase Price” shall mean the Exercise Price multiplied by the number of Shares with respect to which this option is being exercised.
     (w) “Right of First Refusal” shall mean the Company’s right of first refusal described in Section 7.
     (x) “Securities Act” shall mean the Securities Act of 1933, as amended.
     (y) “Service” shall mean service as an Employee, Outside Director or Consultant.
     (z) “Share” shall mean one share of Stock, as adjusted in accordance with Section 8 of the Plan (if applicable).
     (aa) “Stock” shall mean the Common Stock of the Company, with a par value of $0.00001 per Share.

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     (bb) “Subsidiary” shall mean 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.
     (cc) “Transferee” shall mean any person to whom the Optionee has directly or indirectly transferred any Share acquired under this Agreement.
     (dd) “Transfer Notice” shall mean the notice of a proposed transfer of Shares described in Section 7.

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ArcSight, Inc. 2002 Stock Plan
Notice of Stock Option Grant
          You have been granted the following option to purchase shares of the Common Stock of ArcSight, Inc. (the “Company”):
         
 
  Name of Optionee:    
 
       
 
  Total Number of Shares:    
 
       
 
  Type of Option:    
 
       
 
  Exercise Price Per Share:   $
 
       
 
  Date of Grant:    
 
       
 
  Date Exercisable:   This option may be exercised at any time after the Date of Grant for all or any part of the Shares subject to this option.
 
       
 
  Vesting Commencement Date:    
 
       
 
  Vesting Schedule:    
 
       
 
  Expiration Date:                       . This option expires earlier if the Optionee’s Service terminates earlier, as provided in Section 6 of the Stock Option Agreement.
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 terms and conditions of the 2002 Stock Plan and the Stock Option Agreement, both of which are attached to and made a part of this document.
             
Optionee:       ArcSight, Inc.
 
           
 
      By:    
 
           
 
           
 
      Title:    
 
           

 


 

THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
ArcSight, Inc. 2002 Stock Plan:
Stock Option Agreement
SECTION 1. GRANT OF OPTION.
     (a) Option. On the terms and conditions set forth in the Notice of Stock Option Grant and this Agreement, the Company grants to the Optionee on the Date of Grant the option to purchase at the Exercise Price the number of Shares set forth in the Notice of Stock Option Grant. The Exercise Price is agreed to be at least 100% of the Fair Market Value per Share on the Date of Grant (110% of Fair Market Value if Section 3(b) of the Plan applies). This option is intended to be an ISO or an NSO, as provided in the Notice of Stock Option Grant.
     (b) $100,000 Limitation. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it shall be deemed to be an NSO to the extent (and only to the extent) required by the $100,000 annual limitation under Section 422(d) of the Code.
     (c) Stock Plan and Defined Terms. This option is granted pursuant to the Plan, a copy of which the Optionee acknowledges having received. The provisions of the Plan are incorporated into this Agreement by this reference. Capitalized terms are defined in Section 14 of this Agreement.
SECTION 2. RIGHT TO EXERCISE.
     (a) Exercisability. Subject to Subsection (b) below and the other conditions set forth in this Agreement, all or part of this option may be exercised prior to its expiration at the time or times set forth in the Notice of Stock Option Grant. Shares purchased by exercising this option may be subject to the Right of Repurchase under Section 7.
     (b) Stockholder Approval. Any other provision of this Agreement notwithstanding, no portion of this option shall be exercisable at any time prior to the approval of the Plan by the Company’s stockholders.
SECTION 3. NO TRANSFER OR ASSIGNMENT OF OPTION.
     Except as otherwise provided in this Agreement, this option and the rights and privileges conferred hereby shall not be sold, pledged or otherwise transferred (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment, levy or similar process.

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SECTION 4. EXERCISE PROCEDURES.
     (a) Notice of Exercise. The Optionee or the Optionee’s representative may exercise this option by giving written notice to the Company pursuant to Section 13(c). The notice shall specify the election to exercise this option, the number of Shares for which it is being exercised and the form of payment. The person exercising this option shall sign the notice. In the event that this option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof (satisfactory to the Company) of the representative’s right to exercise this option. The Optionee or the Optionee’s representative shall deliver to the Company, at the time of giving the notice, payment in a form permissible under Section 5 for the full amount of the Purchase Price. In the event of a partial exercise of this option, Shares shall be deemed to have been purchased in the order in which they vest in accordance with the Notice of Stock Option Grant.
     (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued one or more certificates evidencing the Shares for which this option has been exercised. Such Shares shall be registered (i) in the name of the person exercising this option, (ii) in the names of such person and his or her spouse as community property or as joint tenants with the right of survivorship or (iii) with the Company’s consent, in the name of a revocable trust. In the case of Restricted Shares, the Company shall cause such certificates to be deposited in escrow under Section 7(c). In the case of other Shares, the Company shall cause such certificates to be delivered to or upon the order of the person exercising this option.
     (c) Withholding Taxes. In the event that the Company determines that it is required to withhold any tax as a result of the exercise of this option, the Optionee, as a condition to the exercise of this option, shall make arrangements satisfactory to the Company to enable it to satisfy all withholding requirements. The Optionee shall also make arrangements satisfactory to the Company to enable it to satisfy any withholding requirements that may arise in connection with the vesting or disposition of Shares purchased by exercising this option.
SECTION 5. PAYMENT FOR STOCK.
     (a) Cash. All or part of the Purchase Price may be paid in cash or cash equivalents.
     (b) Surrender of Stock. All or any part of the Purchase Price may be paid by surrendering Shares that are already owned by the Optionee for at least six (6) months. Such Shares shall be surrendered to the Company in good form for transfer and shall be valued at their Fair Market Value on the date when this option is exercised. The Optionee shall not surrender Shares in payment of the Purchase Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes.
     (c) Exercise/Sale. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company.

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     (d) Exercise/Pledge. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company.
SECTION 6. TERM AND EXPIRATION.
     (a) Basic Term. This option shall in any event expire on the expiration date set forth in the Notice of Stock Option Grant, which date is 10 years after the Date of Grant (five years after the Date of Grant if this option is designated as an ISO in the Notice of Stock Option Grant and Section 3(b) of the Plan applies).
     (b) Termination of Service (Except by Death). If the Optionee’s Service terminates for any reason other than death, then this option shall expire on the earliest of the following occasions:
     (i) The expiration date determined pursuant to Subsection (a) above;
     (ii) The date 30 days after the termination of the Optionee’s Service for any reason other than Cause, retirement at or after age 65, or Disability;
     (iii) The date of the termination of the Optionee’s Service for Cause;
     (iv) The date 12 months after the Optionee’s retirement at or after age 65; or
     (v) The date 12 months after the termination of the Optionee’s Service by reason of Disability.
The Optionee may exercise all or part of this option at any time before its expiration under the preceding sentence, but only to the extent that this option is exercisable for vested Shares on or before the date when the Optionee’s Service terminates. When the Optionee’s Service terminates, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares. In the event that the Optionee dies after termination of Service but before the expiration of this option, all or part of this option may be exercised (prior to expiration) by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option was exercisable for vested Shares on or before the date when the Optionee’s Service terminated.
     (c) Death of the Optionee. If the Optionee dies while in Service, then this option shall expire on the earlier of the following dates:
     (i) The expiration date determined pursuant to Subsection (a) above; or
     (ii) The date 12 months after the Optionee’s death.

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All or part of this option may be exercised at any time before its expiration under the preceding sentence by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option is exercisable for vested Shares on or before the Optionee’s death. When the Optionee dies, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares.
     (d) Leaves of Absence. For any purpose under this Agreement, Service shall be deemed to continue while the Optionee is on a bona fide leave of absence, if such leave was approved by the Company in writing and if continued crediting of Service for such purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company).
     (e) Notice Concerning ISO Treatment. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it ceases to qualify for favorable tax treatment as an ISO to the extent that it is exercised:
     (i) More than three months after the date when the Optionee ceases to be an Employee for any reason other than death or permanent and total disability (as defined in Section 22(e)(3) of the Code);
     (ii) More than 12 months after the date when the Optionee ceases to be an Employee by reason of permanent and total disability (as defined in Section 22(e)(3) of the Code); or
     (iii) More than three months after the date when the Optionee has been on a leave of absence for 90 days, unless the Optionee’s reemployment rights following such leave were guaranteed by statute or by contract.
SECTION 7. RIGHT OF REPURCHASE.
          (a) Scope of Repurchase Right. Until they vest in accordance with the Notice of Stock Option Grant and Subsection (b) below, the Shares acquired under this Agreement shall be Restricted Shares and shall be subject to the Company’s Right of Repurchase. The Company, however, may decline to exercise its Right of Repurchase or may exercise its Right of Repurchase only with respect to a portion of the Restricted Shares. The Company may exercise its Right of Repurchase only during the Repurchase Period following the termination of the Optionee’s Service. The Right of Repurchase may be exercised automatically under Subsection (d) below. If the Right of Repurchase is exercised, the Company shall pay the Optionee an amount equal to the Exercise Price for each of the Restricted Shares being repurchased.
          (b) Lapse of Repurchase Right. The Right of Repurchase shall lapse with respect to the Restricted Shares in accordance with the vesting schedule set forth in the Notice of Stock Option Grant.

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          (c) Escrow. Upon issuance, the certificate(s) for Restricted Shares shall be deposited in escrow with the Company to be held in accordance with the provisions of this Agreement. Any additional or exchanged securities or other property described in Subsection (f) below shall immediately be delivered to the Company to be held in escrow. All ordinary cash dividends on Restricted Shares (or on other securities held in escrow) shall be paid directly to the Optionee and shall not be held in escrow. Restricted Shares, together with any other assets held in escrow under this Agreement, shall be (i) surrendered to the Company for repurchase upon exercise of the Right of Repurchase or the Right of First Refusal or (ii) released to the Optionee upon his or her request to the extent that the Shares have ceased to be Restricted Shares (but not more frequently than once every six months). In any event, all Shares that have ceased to be Restricted Shares, together with any other vested assets held in escrow under this Agreement, shall be released within 90 days after the earlier of (i) the termination of the Optionee’s Service or (ii) the lapse of the Right of First Refusal.
          (d) Exercise of Repurchase Right. The Company shall be deemed to have exercised its Right of Repurchase automatically for all Restricted Shares as of the commencement of the Repurchase Period, unless the Company during the Repurchase Period notifies the holder of the Restricted Shares pursuant to Section 13(c) that it will not exercise its Right of Repurchase for some or all of the Restricted Shares. During the Repurchase Period, the Company shall pay to the holder of the Restricted Shares the purchase price determined under Subsection (a) above for the Restricted Shares being repurchased. Payment shall be made in cash or cash equivalents and/or by canceling indebtedness to the Company incurred by the Optionee in the purchase of the Restricted Shares. The certificate(s) representing the Restricted Shares being repurchased shall be delivered to the Company properly endorsed for transfer.
          (e) Termination of Rights as Stockholder. If the Right of Repurchase is exercised in accordance with this Section 7 and the Company makes available the consideration for the Restricted Shares being repurchased, then the person from whom the Restricted Shares are repurchased shall no longer have any rights as a holder of the Restricted Shares (other than the right to receive payment of such consideration). Such Restricted Shares shall be deemed to have been repurchased pursuant to this Section 7, whether or not the certificate(s) for such Restricted Shares have been delivered to the Company or the consideration for such Restricted Shares has been accepted.
          (f) Additional or Exchanged Securities and Property. In the event of a merger or consolidation of the Company with or into another entity, any other corporate reorganization, a stock split, the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities, any securities or other property (including cash or cash equivalents) that are by reason of such transaction exchanged for, or distributed with respect to, any Restricted Shares shall immediately be subject to the Right of Repurchase. Appropriate adjustments to reflect the exchange or distribution of such securities or property shall be made to the number and/or class of the Restricted Shares. Appropriate adjustments shall also be made to the price per share to be paid upon the exercise of the Right of Repurchase, provided that the aggregate purchase price payable for the Restricted Shares shall remain the same. In the event of a merger or

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consolidation of the Company with or into another entity or any other corporate reorganization, the Right of Repurchase may be exercised by the Company’s successor.
          (g) Transfer of Restricted Shares. The Optionee shall not transfer, assign, encumber or otherwise dispose of any Restricted Shares without the Company’s written consent, except as provided in the following sentence. The Optionee may transfer Restricted Shares to one or more members of the Optionee’s Immediate Family or to a trust established by the Optionee for the benefit of the Optionee and/or one or more members of the Optionee’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Restricted Shares, then this Agreement shall apply to the Transferee to the same extent as to the Optionee.
          (h) Assignment of Repurchase Right. The Board of Directors may freely assign the Company’s Right of Repurchase, in whole or in part. Any person who accepts an assignment of the Right of Repurchase from the Company shall assume all of the Company’s rights and obligations under this Section 7.
SECTION 8. RIGHT OF FIRST REFUSAL.
     (a) Right of First Refusal. In the event that the Optionee proposes to sell, pledge or otherwise transfer to a third party any Shares acquired under this Agreement, or any interest in such Shares, the Company shall have the Right of First Refusal with respect to all (and not less than all) of such Shares. If the Optionee desires to transfer Shares acquired under this Agreement, the Optionee shall give a written Transfer Notice to the Company describing fully the proposed transfer, including the number of Shares proposed to be transferred, the proposed transfer price, the name and address of the proposed Transferee and proof satisfactory to the Company that the proposed sale or transfer will not violate any applicable federal or state securities laws. The Transfer Notice shall be signed both by the Optionee and by the proposed Transferee and must constitute a binding commitment of both parties to the transfer of the Shares. The Company shall have the right to purchase all, and not less than all, of the Shares on the terms of the proposal described in the Transfer Notice (subject, however, to any change in such terms permitted under Subsection (b) below) by delivery of a notice of exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Company.
     (b) Transfer of Shares. If the Company fails to exercise its Right of First Refusal within 30 days after the date when it received the Transfer Notice, the Optionee may, not later than 90 days following receipt of the Transfer Notice by the Company, conclude a transfer of the Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice, provided that any such sale is made in compliance with applicable federal and state securities laws and not in violation of any other contractual restrictions to which the Optionee is bound. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance with the procedure described in Subsection (a) above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Shares on the terms set forth in the Transfer Notice within 60 days

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after the date when the Company received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Shares was to be made in a form other than cash or cash equivalents paid at the time of transfer, the Company shall have the option of paying for the Shares with cash or cash equivalents equal to the present value of the consideration described in the Transfer Notice.
     (c) Additional or Exchanged Securities and Property. In the event of a merger or consolidation of the Company with or into another entity, any other corporate reorganization, a stock split, the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities, any securities or other property (including cash or cash equivalents) that are by reason of such transaction exchanged for, or distributed with respect to, any Shares subject to this Section 8 shall immediately be subject to the Right of First Refusal. Appropriate adjustments to reflect the exchange or distribution of such securities or property shall be made to the number and/or class of the Shares subject to this Section 8.
     (d) Termination of Right of First Refusal. Any other provision of this Section 8 notwithstanding, in the event that the Stock is readily tradable on an established securities market when the Optionee desires to transfer Shares, the Company shall have no Right of First Refusal, and the Optionee shall have no obligation to comply with the procedures prescribed by Subsections (a) and (b) above.
     (e) Permitted Transfers. This Section 8 shall not apply to (i) a transfer by beneficiary designation, will or intestate succession or (ii) a transfer to one or more members of the Optionee’s Immediate Family or to a trust established by the Optionee for the benefit of the Optionee and/or one or more members of the Optionee’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Shares acquired under this Agreement, either under this Subsection (e) or after the Company has failed to exercise the Right of First Refusal, then this Agreement shall apply to the Transferee to the same extent as to the Optionee.
     (f) Termination of Rights as Stockholder. If the Company makes available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Shares to be purchased in accordance with this Section 8, then after such time the person from whom such Shares are to be purchased shall no longer have any rights as a holder of such Shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such Shares shall be deemed to have been purchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement.
     (g) Assignment of Right of First Refusal. The Board of Directors may freely assign the Company’s Right of First Refusal, in whole or in part. Any person who accepts an assignment of the Right of First Refusal from the Company shall assume all of the Company’s rights and obligations under this Section 8.

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SECTION 9. LEGALITY OF INITIAL ISSUANCE.
          No Shares shall be issued upon the exercise of this option unless and until the Company has determined that:
          (a) It and the Optionee have taken any actions required to register the Shares under the Securities Act or to perfect an exemption from the registration requirements thereof;
          (b) Any applicable listing requirement of any stock exchange or other securities market on which Stock is listed has been satisfied; and
          (c) Any other applicable provision of federal, state or foreign law has been satisfied.
SECTION 10. NO REGISTRATION RIGHTS.
     The Company may, but shall not be obligated to, register or qualify the sale of Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the sale of Shares under this Agreement to comply with any law.
SECTION 11. RESTRICTIONS ON TRANSFER.
     (a) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
     (b) Market Stand-Off. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company’s initial public offering, the Optionee or a Transferee shall not directly or indirectly sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer, or agree to engage in any of the foregoing transactions with respect to, any Shares acquired under this Agreement without the prior written consent of the Company or its underwriters. Such restriction (the “Market Stand-Off”) shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In no event, however, shall such period exceed 180 days. The Market Stand-Off shall in any event terminate two years after the date of the Company’s initial public offering. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become

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convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Shares acquired under this Agreement until the end of the applicable stand-off period. The Company’s underwriters shall be beneficiaries of the agreement set forth in this Subsection (b). This Subsection (b) shall not apply to Shares registered in the public offering under the Securities Act, and the Optionee or a Transferee shall be subject to this Subsection (b) only if the directors and officers of the Company are subject to similar arrangements.
     (c) Investment Intent at Grant. The Optionee represents and agrees that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof.
     (d) Investment Intent at Exercise. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel.
     (e) Legends. All certificates evidencing Shares purchased under this Agreement shall bear the following legend:
“THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES AND CERTAIN REPURCHASE RIGHTS UPON TERMINATION OF SERVICE WITH THE COMPANY. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.”
All certificates evidencing Shares purchased under this Agreement in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law):
“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.”

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     (f) Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Agreement is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend.
     (g) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 11 shall be conclusive and binding on the Optionee and all other persons.
SECTION 12. ADJUSTMENT OF SHARES.
     In the event of any transaction described in Section 8(a) of the Plan, the terms of this option (including, without limitation, the number and kind of Shares subject to this option and the Exercise Price) shall be adjusted as set forth in Section 8(a) of the Plan. In the event that the Company is a party to a merger or consolidation, this option shall be subject to the agreement of merger or consolidation, as provided in Section 8(b) of the Plan.
SECTION 13. MISCELLANEOUS PROVISIONS.
     (a) Rights as a Stockholder. Neither the Optionee nor the Optionee’s representative shall have any rights as a stockholder with respect to any Shares subject to this option until the Optionee or the Optionee’s representative becomes entitled to receive such Shares by filing a notice of exercise and paying the Purchase Price pursuant to Sections 4 and 5.
     (b) No Retention Rights. Nothing in this option or in the Plan shall confer upon the Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining the Optionee) or of the Optionee, which rights are hereby expressly reserved by each, to terminate his or her Service at any time and for any reason, with or without cause.
     (c) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Optionee at the address that he or she most recently provided to the Company in accordance with this Subsection (c).
     (d) Entire Agreement. The Notice of Stock Option Grant, this Agreement and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof.
     (e) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.

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SECTION 14. DEFINITIONS.
     (a) “Agreement” shall mean this Stock Option Agreement.
     (b) “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time or, if a Committee has been appointed, such Committee.
     (c) “Cause” shall mean that the Board of Directors determines reasonably and in good faith that the Optionee (i) committed an act of embezzlement, fraud, dishonesty or breach of fiduciary duty to the Company, (ii) deliberately and repeatedly violated the rules of the Company or the valid instructions of the Board of Directors or an authorized officer of the Company, (iii) made any unauthorized disclosure of any of the secrets or confidential information of the Company, (iv) induced any client or customer of the Company to break any contract with the Company or (v) engaged in any conduct that could reasonably be expected to result in loss, damage or injury to the Company.
     (d) “Code” shall mean the Internal Revenue Code of 1986, as amended.
     (e) “Committee” shall mean a committee of the Board of Directors, as described in Section 2 of the Plan.
     (f) “Company” shall mean ArcSight, Inc., a Delaware corporation.
     (g) “Consultant” shall mean a person who performs bona fide services for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding Employees and Outside Directors.
     (h) “Date of Grant” shall mean the date specified in the Notice of Stock Option Grant, which date shall be the later of (i) the date on which the Board of Directors resolved to grant this option or (ii) the first day of the Optionee’s Service.
     (i) “Disability” shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment.
     (j) “Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.
     (k) “Exercise Price” shall mean the amount for which one Share may be purchased upon exercise of this option, as specified in the Notice of Stock Option Grant.
     (l) “Fair Market Value” shall mean the fair market value of a Share, as determined by the Board of Directors in good faith. Such determination shall be conclusive and binding on all persons.
     (m) “Immediate Family” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include adoptive relationships.

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     (n) “Involuntary Termination” means that (a) the Optionee’s Service is terminated by the Company without Cause, (b) the Optionee resigns within 30 days after the scope of his or her job responsibilities or authority was materially reduced without his or her written consent or (c) the Optionee resigns within 30 days after receipt of notice that his or her principal workplace will be relocated 100 miles or more from its location at the time of notice.
     (o) “ISO” shall mean an employee incentive stock option described in Section 422(b) of the Code.
     (p) “Notice of Stock Option Grant” shall mean the document so entitled to which this Agreement is attached.
     (q) “NSO” shall mean a stock option not described in Sections 422(b) or 423(b) of the Code.
     (r) “Optionee” shall mean the person named in the Notice of Stock Option Grant.
     (s) “Outside Director” shall mean a member of the Board of Directors who is not an Employee.
     (t) “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.
     (u) “Plan” shall mean the ArcSight, Inc. 2002 Stock Plan, as in effect on the Date of Grant.
     (v) “Purchase Price” shall mean the Exercise Price multiplied by the number of Shares with respect to which this option is being exercised.
     (w) “Repurchase Period” shall mean a period of 90 consecutive days commencing on the date when the Optionee’s Service terminates for any reason, including (without limitation) death or disability.
     (x) “Restricted Share” shall mean a Share that is subject to the Right of Repurchase.
     (y) “Right of First Refusal” shall mean the Company’s right of first refusal described in Section 8.
     (z) “Right of Repurchase” shall mean the Company’s right of repurchase described in Section 7.
     (aa) “Securities Act” shall mean the Securities Act of 1933, as amended.
     (bb) “Service” shall mean service as an Employee, Outside Director or Consultant.

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     (cc) “Share” shall mean one share of Stock, as adjusted in accordance with Section 8 of the Plan (if applicable).
     (dd) “Stock” shall mean the Common Stock of the Company, with a par value of $0.00001 per Share.
     (ee) “Subsidiary” shall mean 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.
     (ff) “Transferee” shall mean any person to whom the Optionee has directly or indirectly transferred any Share acquired under this Agreement.
     (gg) “Transfer Notice” shall mean the notice of a proposed transfer of Shares described in Section 8.

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ArcSight, Inc. 2002 Stock Plan
Notice of Stock Option Grant
          You have been granted the following option to purchase shares of the Common Stock of ArcSight, Inc. (the “Company”):
         
 
  Name of Optionee:    
 
       
 
  Total Number of Shares:    
 
       
 
  Type of Option:    
 
       
 
  Exercise Price Per Share:   $
 
       
 
  Date of Grant:    
 
       
 
  Date Exercisable:   This option may be exercised at any time after the Date of Grant for all or any part of the Shares subject to this option.
 
       
 
  Vesting Commencement Date:    
 
       
 
  Vesting Schedule:    
 
       
 
  Expiration Date:                       . This option expires earlier if the Optionee’s Service terminates earlier, as provided in Section 6 of the Stock Option Agreement.
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 terms and conditions of the 2002 Stock Plan and the Stock Option Agreement, both of which are attached to and made a part of this document.
             
Optionee:       ArcSight, Inc.
 
           
 
      By:    
 
           
 
           
 
      Title:    
 
           

 


 

THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
ArcSight, Inc. 2002 Stock Plan:
Stock Option Agreement
SECTION 1. GRANT OF OPTION.
     (a) Option. On the terms and conditions set forth in the Notice of Stock Option Grant and this Agreement, the Company grants to the Optionee on the Date of Grant the option to purchase at the Exercise Price the number of Shares set forth in the Notice of Stock Option Grant. The Exercise Price is agreed to be at least 100% of the Fair Market Value per Share on the Date of Grant (110% of Fair Market Value if Section 3(b) of the Plan applies). This option is intended to be an ISO or an NSO, as provided in the Notice of Stock Option Grant.
     (b) $100,000 Limitation. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it shall be deemed to be an NSO to the extent (and only to the extent) required by the $100,000 annual limitation under Section 422(d) of the Code.
     (c) Stock Plan and Defined Terms. This option is granted pursuant to the Plan, a copy of which the Optionee acknowledges having received. The provisions of the Plan are incorporated into this Agreement by this reference. Capitalized terms are defined in Section 14 of this Agreement.
SECTION 2. RIGHT TO EXERCISE.
     (a) Exercisability. Subject to Subsection (b) below and the other conditions set forth in this Agreement, all or part of this option may be exercised prior to its expiration at the time or times set forth in the Notice of Stock Option Grant. Shares purchased by exercising this option may be subject to the Right of Repurchase under Section 7.
     (b) Stockholder Approval. Any other provision of this Agreement notwithstanding, no portion of this option shall be exercisable at any time prior to the approval of the Plan by the Company’s stockholders.
SECTION 3. NO TRANSFER OR ASSIGNMENT OF OPTION.
          Except as otherwise provided in this Agreement, this option and the rights and privileges conferred hereby shall not be sold, pledged or otherwise transferred (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment, levy or similar process.

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SECTION 4. EXERCISE PROCEDURES.
     (a) Notice of Exercise. The Optionee or the Optionee’s representative may exercise this option by giving written notice to the Company pursuant to Section 13(c). The notice shall specify the election to exercise this option, the number of Shares for which it is being exercised and the form of payment. The person exercising this option shall sign the notice. In the event that this option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof (satisfactory to the Company) of the representative’s right to exercise this option. The Optionee or the Optionee’s representative shall deliver to the Company, at the time of giving the notice, payment in a form permissible under Section 5 for the full amount of the Purchase Price. In the event of a partial exercise of this option, Shares shall be deemed to have been purchased in the order in which they vest in accordance with the Notice of Stock Option Grant.
     (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued one or more certificates evidencing the Shares for which this option has been exercised. Such Shares shall be registered (i) in the name of the person exercising this option, (ii) in the names of such person and his or her spouse as community property or as joint tenants with the right of survivorship or (iii) with the Company’s consent, in the name of a revocable trust. In the case of Restricted Shares, the Company shall cause such certificates to be deposited in escrow under Section 7(c). In the case of other Shares, the Company shall cause such certificates to be delivered to or upon the order of the person exercising this option.
     (c) Withholding Taxes. In the event that the Company determines that it is required to withhold any tax as a result of the exercise of this option, the Optionee, as a condition to the exercise of this option, shall make arrangements satisfactory to the Company to enable it to satisfy all withholding requirements. The Optionee shall also make arrangements satisfactory to the Company to enable it to satisfy any withholding requirements that may arise in connection with the vesting or disposition of Shares purchased by exercising this option.
SECTION 5. PAYMENT FOR STOCK.
     (a) Cash. All or part of the Purchase Price may be paid in cash or cash equivalents.
     (b) Surrender of Stock. All or any part of the Purchase Price may be paid by surrendering Shares that are already owned by the Optionee for at least six (6) months. Such Shares shall be surrendered to the Company in good form for transfer and shall be valued at their Fair Market Value on the date when this option is exercised. The Optionee shall not surrender Shares in payment of the Purchase Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes.
     (c) Exercise/Sale. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company.

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     (d) Exercise/Pledge. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company.
SECTION 6. TERM AND EXPIRATION.
     (a) Basic Term. This option shall in any event expire on the expiration date set forth in the Notice of Stock Option Grant, which date is 10 years after the Date of Grant (five years after the Date of Grant if this option is designated as an ISO in the Notice of Stock Option Grant and Section 3(b) of the Plan applies).
     (b) Termination of Service (Except by Death). If the Optionee’s Service terminates for any reason other than death, then this option shall expire on the earliest of the following occasions:
     (i) The expiration date determined pursuant to Subsection (a) above;
     (ii) The date 30 days after the termination of the Optionee’s Service for any reason other than Cause, retirement at or after age 65, or Disability;
     (iii) The date of the termination of the Optionee’s Service for Cause;
     (iv) The date 12 months after the Optionee’s retirement at or after age 65; or
     (v) The date 12 months after the termination of the Optionee’s Service by reason of Disability.
The Optionee may exercise all or part of this option at any time before its expiration under the preceding sentence, but only to the extent that this option is exercisable for vested Shares on or before the date when the Optionee’s Service terminates. When the Optionee’s Service terminates, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares. In the event that the Optionee dies after termination of Service but before the expiration of this option, all or part of this option may be exercised (prior to expiration) by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option was exercisable for vested Shares on or before the date when the Optionee’s Service terminated.
     (c) Death of the Optionee. If the Optionee dies while in Service, then this option shall expire on the earlier of the following dates:
     (i) The expiration date determined pursuant to Subsection (a) above; or
     (ii) The date 12 months after the Optionee’s death.

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All or part of this option may be exercised at any time before its expiration under the preceding sentence by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option is exercisable for vested Shares on or before the Optionee’s death. When the Optionee dies, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares.
     (d) Leaves of Absence. For any purpose under this Agreement, Service shall be deemed to continue while the Optionee is on a bona fide leave of absence, if such leave was approved by the Company in writing and if continued crediting of Service for such purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company).
     (e) Notice Concerning ISO Treatment. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it ceases to qualify for favorable tax treatment as an ISO to the extent that it is exercised:
     (i) More than three months after the date when the Optionee ceases to be an Employee for any reason other than death or permanent and total disability (as defined in Section 22(e)(3) of the Code);
     (ii) More than 12 months after the date when the Optionee ceases to be an Employee by reason of permanent and total disability (as defined in Section 22(e)(3) of the Code); or
     (iii) More than three months after the date when the Optionee has been on a leave of absence for 90 days, unless the Optionee’s reemployment rights following such leave were guaranteed by statute or by contract.
SECTION 7. RIGHT OF REPURCHASE.
          (a) Scope of Repurchase Right. Until they vest in accordance with the Notice of Stock Option Grant and Subsection (b) below, the Shares acquired under this Agreement shall be Restricted Shares and shall be subject to the Company’s Right of Repurchase. The Company, however, may decline to exercise its Right of Repurchase or may exercise its Right of Repurchase only with respect to a portion of the Restricted Shares. The Company may exercise its Right of Repurchase only during the Repurchase Period following the termination of the Optionee’s Service. The Right of Repurchase may be exercised automatically under Subsection (d) below. If the Right of Repurchase is exercised, the Company shall pay the Optionee an amount equal to the Exercise Price for each of the Restricted Shares being repurchased.
          (b) Lapse of Repurchase Right. The Right of Repurchase shall lapse with respect to the Restricted Shares in accordance with the vesting schedule set forth in the Notice of Stock Option Grant. In addition, the Right of Repurchase shall lapse with respect to 100% of the remaining Restricted Shares if the Company is subject to a Change in Control before the Optionee’s Service terminates.

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          (c) Escrow. Upon issuance, the certificate(s) for Restricted Shares shall be deposited in escrow with the Company to be held in accordance with the provisions of this Agreement. Any additional or exchanged securities or other property described in Subsection (f) below shall immediately be delivered to the Company to be held in escrow. All ordinary cash dividends on Restricted Shares (or on other securities held in escrow) shall be paid directly to the Optionee and shall not be held in escrow. Restricted Shares, together with any other assets held in escrow under this Agreement, shall be (i) surrendered to the Company for repurchase upon exercise of the Right of Repurchase or the Right of First Refusal or (ii) released to the Optionee upon his or her request to the extent that the Shares have ceased to be Restricted Shares (but not more frequently than once every six months). In any event, all Shares that have ceased to be Restricted Shares, together with any other vested assets held in escrow under this Agreement, shall be released within 90 days after the earlier of (i) the termination of the Optionee’s Service or (ii) the lapse of the Right of First Refusal.
          (d) Exercise of Repurchase Right. The Company shall be deemed to have exercised its Right of Repurchase automatically for all Restricted Shares as of the commencement of the Repurchase Period, unless the Company during the Repurchase Period notifies the holder of the Restricted Shares pursuant to Section 13(c) that it will not exercise its Right of Repurchase for some or all of the Restricted Shares. During the Repurchase Period, the Company shall pay to the holder of the Restricted Shares the purchase price determined under Subsection (a) above for the Restricted Shares being repurchased. Payment shall be made in cash or cash equivalents and/or by canceling indebtedness to the Company incurred by the Optionee in the purchase of the Restricted Shares. The certificate(s) representing the Restricted Shares being repurchased shall be delivered to the Company properly endorsed for transfer.
          (e) Termination of Rights as Stockholder. If the Right of Repurchase is exercised in accordance with this Section 7 and the Company makes available the consideration for the Restricted Shares being repurchased, then the person from whom the Restricted Shares are repurchased shall no longer have any rights as a holder of the Restricted Shares (other than the right to receive payment of such consideration). Such Restricted Shares shall be deemed to have been repurchased pursuant to this Section 7, whether or not the certificate(s) for such Restricted Shares have been delivered to the Company or the consideration for such Restricted Shares has been accepted.
          (f) Additional or Exchanged Securities and Property. In the event of a merger or consolidation of the Company with or into another entity, any other corporate reorganization, a stock split, the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities, any securities or other property (including cash or cash equivalents) that are by reason of such transaction exchanged for, or distributed with respect to, any Restricted Shares shall immediately be subject to the Right of Repurchase. Appropriate adjustments to reflect the exchange or distribution of such securities or property shall be made to the number and/or class of the Restricted Shares. Appropriate adjustments shall also be made to the price per share to be paid upon the exercise of the Right of Repurchase, provided that the aggregate purchase price payable for the Restricted Shares shall remain the same. In the event of a merger or

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consolidation of the Company with or into another entity or any other corporate reorganization, the Right of Repurchase may be exercised by the Company’s successor.
          (g) Transfer of Restricted Shares. The Optionee shall not transfer, assign, encumber or otherwise dispose of any Restricted Shares without the Company’s written consent, except as provided in the following sentence. The Optionee may transfer Restricted Shares to one or more members of the Optionee’s Immediate Family or to a trust established by the Optionee for the benefit of the Optionee and/or one or more members of the Optionee’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Restricted Shares, then this Agreement shall apply to the Transferee to the same extent as to the Optionee.
          (h) Assignment of Repurchase Right. The Board of Directors may freely assign the Company’s Right of Repurchase, in whole or in part. Any person who accepts an assignment of the Right of Repurchase from the Company shall assume all of the Company’s rights and obligations under this Section 7.
SECTION 8. RIGHT OF FIRST REFUSAL.
     (a) Right of First Refusal. In the event that the Optionee proposes to sell, pledge or otherwise transfer to a third party any Shares acquired under this Agreement, or any interest in such Shares, the Company shall have the Right of First Refusal with respect to all (and not less than all) of such Shares. If the Optionee desires to transfer Shares acquired under this Agreement, the Optionee shall give a written Transfer Notice to the Company describing fully the proposed transfer, including the number of Shares proposed to be transferred, the proposed transfer price, the name and address of the proposed Transferee and proof satisfactory to the Company that the proposed sale or transfer will not violate any applicable federal or state securities laws. The Transfer Notice shall be signed both by the Optionee and by the proposed Transferee and must constitute a binding commitment of both parties to the transfer of the Shares. The Company shall have the right to purchase all, and not less than all, of the Shares on the terms of the proposal described in the Transfer Notice (subject, however, to any change in such terms permitted under Subsection (b) below) by delivery of a notice of exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Company.
     (b) Transfer of Shares. If the Company fails to exercise its Right of First Refusal within 30 days after the date when it received the Transfer Notice, the Optionee may, not later than 90 days following receipt of the Transfer Notice by the Company, conclude a transfer of the Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice, provided that any such sale is made in compliance with applicable federal and state securities laws and not in violation of any other contractual restrictions to which the Optionee is bound. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance with the procedure described in Subsection (a) above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Shares on the terms set forth in the Transfer Notice within 60 days

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after the date when the Company received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Shares was to be made in a form other than cash or cash equivalents paid at the time of transfer, the Company shall have the option of paying for the Shares with cash or cash equivalents equal to the present value of the consideration described in the Transfer Notice.
     (c) Additional or Exchanged Securities and Property. In the event of a merger or consolidation of the Company with or into another entity, any other corporate reorganization, a stock split, the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities, any securities or other property (including cash or cash equivalents) that are by reason of such transaction exchanged for, or distributed with respect to, any Shares subject to this Section 8 shall immediately be subject to the Right of First Refusal. Appropriate adjustments to reflect the exchange or distribution of such securities or property shall be made to the number and/or class of the Shares subject to this Section 8.
     (d) Termination of Right of First Refusal. Any other provision of this Section 8 notwithstanding, in the event that the Stock is readily tradable on an established securities market when the Optionee desires to transfer Shares, the Company shall have no Right of First Refusal, and the Optionee shall have no obligation to comply with the procedures prescribed by Subsections (a) and (b) above.
     (e) Permitted Transfers. This Section 8 shall not apply to (i) a transfer by beneficiary designation, will or intestate succession or (ii) a transfer to one or more members of the Optionee’s Immediate Family or to a trust established by the Optionee for the benefit of the Optionee and/or one or more members of the Optionee’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Shares acquired under this Agreement, either under this Subsection (e) or after the Company has failed to exercise the Right of First Refusal, then this Agreement shall apply to the Transferee to the same extent as to the Optionee.
     (f) Termination of Rights as Stockholder. If the Company makes available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Shares to be purchased in accordance with this Section 8, then after such time the person from whom such Shares are to be purchased shall no longer have any rights as a holder of such Shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such Shares shall be deemed to have been purchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement.
     (g) Assignment of Right of First Refusal. The Board of Directors may freely assign the Company’s Right of First Refusal, in whole or in part. Any person who accepts an assignment of the Right of First Refusal from the Company shall assume all of the Company’s rights and obligations under this Section 8.

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SECTION 9. LEGALITY OF INITIAL ISSUANCE.
          No Shares shall be issued upon the exercise of this option unless and until the Company has determined that:
     (a) It and the Optionee have taken any actions required to register the Shares under the Securities Act or to perfect an exemption from the registration requirements thereof;
     (b) Any applicable listing requirement of any stock exchange or other securities market on which Stock is listed has been satisfied; and
     (c) Any other applicable provision of federal, state or foreign law has been satisfied.
SECTION 10. NO REGISTRATION RIGHTS.
     The Company may, but shall not be obligated to, register or qualify the sale of Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the sale of Shares under this Agreement to comply with any law.
SECTION 11. RESTRICTIONS ON TRANSFER.
     (a) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
     (b) Market Stand-Off. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company’s initial public offering, the Optionee or a Transferee shall not directly or indirectly sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer, or agree to engage in any of the foregoing transactions with respect to, any Shares acquired under this Agreement without the prior written consent of the Company or its underwriters. Such restriction (the “Market Stand-Off”) shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In no event, however, shall such period exceed 180 days. The Market Stand-Off shall in any event terminate two years after the date of the Company’s initial public offering. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become

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convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Shares acquired under this Agreement until the end of the applicable stand-off period. The Company’s underwriters shall be beneficiaries of the agreement set forth in this Subsection (b). This Subsection (b) shall not apply to Shares registered in the public offering under the Securities Act, and the Optionee or a Transferee shall be subject to this Subsection (b) only if the directors and officers of the Company are subject to similar arrangements.
     (c) Investment Intent at Grant. The Optionee represents and agrees that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof.
     (d) Investment Intent at Exercise. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel.
     (e) Legends. All certificates evidencing Shares purchased under this Agreement shall bear the following legend:
“THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES AND CERTAIN REPURCHASE RIGHTS UPON TERMINATION OF SERVICE WITH THE COMPANY. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.”
All certificates evidencing Shares purchased under this Agreement in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law):
“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.”

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     (f) Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Agreement is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend.
     (g) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 11 shall be conclusive and binding on the Optionee and all other persons.
SECTION 12. ADJUSTMENT OF SHARES.
          In the event of any transaction described in Section 8(a) of the Plan, the terms of this option (including, without limitation, the number and kind of Shares subject to this option and the Exercise Price) shall be adjusted as set forth in Section 8(a) of the Plan. In the event that the Company is a party to a merger or consolidation, this option shall be subject to the agreement of merger or consolidation, as provided in Section 8(b) of the Plan.
SECTION 13. MISCELLANEOUS PROVISIONS.
     (a) Rights as a Stockholder. Neither the Optionee nor the Optionee’s representative shall have any rights as a stockholder with respect to any Shares subject to this option until the Optionee or the Optionee’s representative becomes entitled to receive such Shares by filing a notice of exercise and paying the Purchase Price pursuant to Sections 4 and 5.
     (b) No Retention Rights. Nothing in this option or in the Plan shall confer upon the Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining the Optionee) or of the Optionee, which rights are hereby expressly reserved by each, to terminate his or her Service at any time and for any reason, with or without cause.
     (c) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Optionee at the address that he or she most recently provided to the Company in accordance with this Subsection (c).
     (d) Entire Agreement. The Notice of Stock Option Grant, this Agreement and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof.
     (e) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.

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SECTION 14. DEFINITIONS.
     (a) “Agreement” shall mean this Stock Option Agreement.
     (b) “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time or, if a Committee has been appointed, such Committee.
     (c) “Cause” shall mean that the Board of Directors determines reasonably and in good faith that the Optionee (i) committed an act of embezzlement, fraud, dishonesty or breach of fiduciary duty to the Company, (ii) deliberately and repeatedly violated the rules of the Company or the valid instructions of the Board of Directors or an authorized officer of the Company, (iii) made any unauthorized disclosure of any of the secrets or confidential information of the Company, (iv) induced any client or customer of the Company to break any contract with the Company or (v) engaged in any conduct that could reasonably be expected to result in loss, damage or injury to the Company.
     (d) “Code” shall mean the Internal Revenue Code of 1986, as amended.
     (e) “Committee” shall mean a committee of the Board of Directors, as described in Section 2 of the Plan.
     (f) “Company” shall mean ArcSight, Inc., a Delaware corporation.
     (g) “Consultant” shall mean a person who performs bona fide services for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding Employees and Outside Directors.
     (h) “Date of Grant” shall mean the date specified in the Notice of Stock Option Grant, which date shall be the later of (i) the date on which the Board of Directors resolved to grant this option or (ii) the first day of the Optionee’s Service.
     (i) “Disability” shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment.
     (j) “Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.
     (k) “Exercise Price” shall mean the amount for which one Share may be purchased upon exercise of this option, as specified in the Notice of Stock Option Grant.
     (l) “Fair Market Value” shall mean the fair market value of a Share, as determined by the Board of Directors in good faith. Such determination shall be conclusive and binding on all persons.
     (m) “Immediate Family” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include adoptive relationships.

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     (n) “Involuntary Termination” means that (a) the Optionee’s Service is terminated by the Company without Cause, (b) the Optionee resigns within 30 days after the scope of his or her job responsibilities or authority was materially reduced without his or her written consent or (c) the Optionee resigns within 30 days after receipt of notice that his or her principal workplace will be relocated 100 miles or more from its location at the time of notice.
     (o) “ISO” shall mean an employee incentive stock option described in Section 422(b) of the Code.
     (p) “Notice of Stock Option Grant” shall mean the document so entitled to which this Agreement is attached.
     (q) “NSO” shall mean a stock option not described in Sections 422(b) or 423(b) of the Code.
     (r) “Optionee” shall mean the person named in the Notice of Stock Option Grant.
     (s) “Outside Director” shall mean a member of the Board of Directors who is not an Employee.
     (t) “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.
     (u) “Plan” shall mean the ArcSight, Inc. 2002 Stock Plan, as in effect on the Date of Grant.
     (v) “Purchase Price” shall mean the Exercise Price multiplied by the number of Shares with respect to which this option is being exercised.
     (w) “Repurchase Period” shall mean a period of 90 consecutive days commencing on the date when the Optionee’s Service terminates for any reason, including (without limitation) death or disability.
     (x) “Restricted Share” shall mean a Share that is subject to the Right of Repurchase.
     (y) “Right of First Refusal” shall mean the Company’s right of first refusal described in Section 8.
     (z) “Right of Repurchase” shall mean the Company’s right of repurchase described in Section 7.
     (aa) “Securities Act” shall mean the Securities Act of 1933, as amended.
     (bb) “Service” shall mean service as an Employee, Outside Director or Consultant.

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     (cc) “Share” shall mean one share of Stock, as adjusted in accordance with Section 8 of the Plan (if applicable).
     (dd) “Stock” shall mean the Common Stock of the Company, with a par value of $0.00001 per Share.
     (ee) “Subsidiary” shall mean 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.
     (ff) “Transferee” shall mean any person to whom the Optionee has directly or indirectly transferred any Share acquired under this Agreement.
     (gg) “Transfer Notice” shall mean the notice of a proposed transfer of Shares described in Section 8.

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Arcsight, Inc. 2002 Stock Plan
Notice of Stock Option Grant
     You have been granted the following option to purchase shares of the Common Stock of ArcSight, Inc. (the “Company”):
     
Name of Optionee:
   
 
   
Total Number of Shares:
   
 
   
Type of Option:
   
 
   
Exercise Price Per Share:
   
 
   
Date of Grant:
   
 
   
Date Exercisable:
  This option may be exercised at any time after the Date of Grant for all or any part of the Shares subject to this option.
 
   
Vesting Commencement Date:
   
 
   
Vesting Schedule:
   
 
   
Expiration Date:
                  . This option expires earlier if the Optionee’s Service terminates earlier, as provided in Section 6 of the Stock Option Agreement.
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 terms and conditions of the 2002 Stock Plan and the Stock Option Agreement, both of which are attached to and made a part of this document.
             
OPTIONEE:       ARCSIGHT, INC.
 
           
 
      By:    
 
           
 
           
 
      Title:    
 
           

 


 

THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
Arcsight, Inc. 2002 Stock Plan:
Stock Option Agreement
SECTION 1. GRANT OF OPTION.
     (a) Option. On the terms and conditions set forth in the Notice of Stock Option Grant and this Agreement, the Company grants to the Optionee on the Date of Grant the option to purchase at the Exercise Price the number of Shares set forth in the Notice of Stock Option Grant. The Exercise Price is agreed to be at least 100% of the Fair Market Value per Share on the Date of Grant (110% of Fair Market Value if Section 3(b) of the Plan applies). This option is intended to be an ISO or an NSO, as provided in the Notice of Stock Option Grant.
     (b) $100,000 Limitation. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it shall be deemed to be an NSO to the extent (and only to the extent) required by the $100,000 annual limitation under Section 422(d) of the Code.
     (c) Stock Plan and Defined Terms. This option is granted pursuant to the Plan, a copy of which the Optionee acknowledges having received. The provisions of the Plan are incorporated into this Agreement by this reference. Capitalized terms are defined in Section 14 of this Agreement.
SECTION 2. RIGHT TO EXERCISE.
     (a) Exercisability. Subject to Subsection (b) below and the other conditions set forth in this Agreement, all or part of this option may be exercised prior to its expiration at the time or times set forth in the Notice of Stock Option Grant. Shares purchased by exercising this option may be subject to the Right of Repurchase under Section 7.
     (b) Stockholder Approval. Any other provision of this Agreement notwithstanding, no portion of this option shall be exercisable at any time prior to the approval of the Plan by the Company’s stockholders.
SECTION 3. NO TRANSFER OR ASSIGNMENT OF OPTION.
     Except as otherwise provided in this Agreement, this option and the rights and privileges conferred hereby shall not be sold, pledged or otherwise transferred (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment, levy or similar process.

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SECTION 4. EXERCISE PROCEDURES.
     (a) Notice of Exercise. The Optionee or the Optionee’s representative may exercise this option by giving written notice to the Company pursuant to Section 13(c). The notice shall specify the election to exercise this option, the number of Shares for which it is being exercised and the form of payment. The person exercising this option shall sign the notice. In the event that this option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof (satisfactory to the Company) of the representative’s right to exercise this option. The Optionee or the Optionee’s representative shall deliver to the Company, at the time of giving the notice, payment in a form permissible under Section 5 for the full amount of the Purchase Price. In the event of a partial exercise of this option, Shares shall be deemed to have been purchased in the order in which they vest in accordance with the Notice of Stock Option Grant.
     (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued one or more certificates evidencing the Shares for which this option has been exercised. Such Shares shall be registered (i) in the name of the person exercising this option, (ii) in the names of such person and his or her spouse as community property or as joint tenants with the right of survivorship or (iii) with the Company’s consent, in the name of a revocable trust. In the case of Restricted Shares, the Company shall cause such certificates to be deposited in escrow under Section 7(c). In the case of other Shares, the Company shall cause such certificates to be delivered to or upon the order of the person exercising this option.
     (c) Withholding Taxes. In the event that the Company determines that it is required to withhold any tax as a result of the exercise of this option, the Optionee, as a condition to the exercise of this option, shall make arrangements satisfactory to the Company to enable it to satisfy all withholding requirements. The Optionee shall also make arrangements satisfactory to the Company to enable it to satisfy any withholding requirements that may arise in connection with the vesting or disposition of Shares purchased by exercising this option.
SECTION 5. PAYMENT FOR STOCK.
     (a) Cash. All or part of the Purchase Price may be paid in cash or cash equivalents.
     (b) Surrender of Stock. All or any part of the Purchase Price may be paid by surrendering, or attesting to the ownership of, Shares that are already owned by the Optionee. Such Shares shall be surrendered to the Company in good form for transfer and shall be valued at their Fair Market Value on the date when this option is exercised. The Optionee shall not surrender, or attest to the ownership of, Shares in payment of the Purchase Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes.
     (c) Promissory Note. All or part of the Purchase Price may be paid with a full-recourse promissory note. However, the par value of the Shares, if newly issued, shall be paid in cash or cash equivalents. The Shares shall be pledged as security for payment of the principal amount of the promissory note and interest thereon. The interest rate payable under the terms of the promissory note shall not be less than the minimum rate, if any, required to avoid (i) the

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imputation of additional interest under the Code and (ii) variable accounting under the applicable guidelines issued by the Financial Accounting Standards Board. Subject to the foregoing, the Board of Directors (at its sole discretion) shall specify the term, interest rate, amortization requirements, if any, and other provisions of such note.
     (d) Exercise/Sale. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company.
     (e) Exercise/Pledge. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company.
SECTION 6. TERM AND EXPIRATION.
     (a) Basic Term. This option shall in any event expire on the expiration date set forth in the Notice of Stock Option Grant, which date is 10 years after the Date of Grant (five years after the Date of Grant if this option is designated as an ISO in the Notice of Stock Option Grant and Section 3(b) of the Plan applies).
     (b) Termination of Service (Except by Death). If the Optionee’s Service terminates for any reason other than death, then this option shall expire on the earliest of the following occasions:
     (i) The expiration date determined pursuant to Subsection (a) above;
     (ii) The date 30 days after the termination of the Optionee’s Service for any reason other than Cause, retirement at or after age 65, or Disability;
     (iii) The date of the termination of the Optionee’s Service for Cause;
     (iv) The date 12 months after the Optionee’s retirement at or after age 65; or
     (v) The date 12 months after the termination of the Optionee’s Service by reason of Disability.
The Optionee may exercise all or part of this option at any time before its expiration under the preceding sentence, but only to the extent that this option is exercisable for vested Shares on or before the date when the Optionee’s Service terminates. When the Optionee’s Service terminates, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares. In the event that the Optionee dies after termination of Service but before the expiration of this option, all or part of this option may be exercised (prior to expiration) by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option was exercisable for vested Shares on or before the date when the Optionee’s Service terminated.

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     (c) Death of the Optionee. If the Optionee dies while in Service, then this option shall expire on the earlier of the following dates:
     (i) The expiration date determined pursuant to Subsection (a) above; or
     (ii) The date 12 months after the Optionee’s death.
All or part of this option may be exercised at any time before its expiration under the preceding sentence by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option is exercisable for vested Shares on or before the Optionee’s death. When the Optionee dies, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares.
     (d) Leaves of Absence. For any purpose under this Agreement, Service shall be deemed to continue while the Optionee is on a bona fide leave of absence, if such leave was approved by the Company in writing and if continued crediting of Service for such purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company).
     (e) Notice Concerning ISO Treatment. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it ceases to qualify for favorable tax treatment as an ISO to the extent that it is exercised:
     (i) More than three months after the date when the Optionee ceases to be an Employee for any reason other than death or permanent and total disability (as defined in Section 22(e)(3) of the Code);
     (ii) More than 12 months after the date when the Optionee ceases to be an Employee by reason of permanent and total disability (as defined in Section 22(e)(3) of the Code); or
     (iii) More than three months after the date when the Optionee has been on a leave of absence for 90 days, unless the Optionee’s reemployment rights following such leave were guaranteed by statute or by contract.
SECTION 7. RIGHT OF REPURCHASE.
     (a) Scope of Repurchase Right. Until they vest in accordance with the Notice of Stock Option Grant and Subsection (b) below, the Shares acquired under this Agreement shall be Restricted Shares and shall be subject to the Company’s Right of Repurchase. The Company, however, may decline to exercise its Right of Repurchase or may exercise its Right of Repurchase only with respect to a portion of the Restricted Shares. The Company may exercise its Right of Repurchase only during the Repurchase Period following the termination of the Optionee’s Service. The Right of Repurchase may be exercised automatically under Subsection (d) below. If the Right of Repurchase is exercised, the Company shall pay the Optionee an amount equal to the Exercise Price for each of the Restricted Shares being repurchased.

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     (b) Lapse of Repurchase Right. The Right of Repurchase shall lapse with respect to the Restricted Shares in accordance with the vesting schedule set forth in the Notice of Stock Option Grant.
     (c) Escrow. Upon issuance, the certificate(s) for Restricted Shares shall be deposited in escrow with the Company to be held in accordance with the provisions of this Agreement. Any additional or exchanged securities or other property described in Subsection (f) below shall immediately be delivered to the Company to be held in escrow. All ordinary cash dividends on Restricted Shares (or on other securities held in escrow) shall be paid directly to the Optionee and shall not be held in escrow. Restricted Shares, together with any other assets held in escrow under this Agreement, shall be (i) surrendered to the Company for repurchase upon exercise of the Right of Repurchase or the Right of First Refusal or (ii) released to the Optionee upon his or her request to the extent that the Shares have ceased to be Restricted Shares (but not more frequently than once every six months). In any event, all Shares that have ceased to be Restricted Shares, together with any other vested assets held in escrow under this Agreement, shall be released within 90 days after the earlier of (i) the termination of the Optionee’s Service or (ii) the lapse of the Right of First Refusal.
     (d) Exercise of Repurchase Right. The Company shall be deemed to have exercised its Right of Repurchase automatically for all Restricted Shares as of the commencement of the Repurchase Period, unless the Company during the Repurchase Period notifies the holder of the Restricted Shares pursuant to Section 13(c) that it will not exercise its Right of Repurchase for some or all of the Restricted Shares. During the Repurchase Period, the Company shall pay to the holder of the Restricted Shares the purchase price determined under Subsection (a) above for the Restricted Shares being repurchased. Payment shall be made in cash or cash equivalents and/or by canceling indebtedness to the Company incurred by the Optionee in the purchase of the Restricted Shares. The certificate(s) representing the Restricted Shares being repurchased shall be delivered to the Company properly endorsed for transfer.
     (e) Termination of Rights as Stockholder. If the Right of Repurchase is exercised in accordance with this Section 7 and the Company makes available the consideration for the Restricted Shares being repurchased, then the person from whom the Restricted Shares are repurchased shall no longer have any rights as a holder of the Restricted Shares (other than the right to receive payment of such consideration). Such Restricted Shares shall be deemed to have been repurchased pursuant to this Section 7, whether or not the certificate(s) for such Restricted Shares have been delivered to the Company or the consideration for such Restricted Shares has been accepted.
     (f) Additional or Exchanged Securities and Property. In the event of a merger or consolidation of the Company with or into another entity, any other corporate reorganization, a stock split, the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities, any securities or other property (including cash or cash equivalents) that are by reason of such transaction exchanged for, or distributed with respect to, any Restricted Shares shall immediately be subject to the Right of Repurchase. Appropriate adjustments to reflect the exchange or distribution of such securities or property shall be made to the number and/or class of the

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Restricted Shares. Appropriate adjustments shall also be made to the price per share to be paid upon the exercise of the Right of Repurchase, provided that the aggregate purchase price payable for the Restricted Shares shall remain the same. In the event of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, the Right of Repurchase may be exercised by the Company’s successor.
     (g) Transfer of Restricted Shares. The Optionee shall not transfer, assign, encumber or otherwise dispose of any Restricted Shares without the Company’s written consent, except as provided in the following sentence. The Optionee may transfer Restricted Shares to one or more members of the Optionee’s Immediate Family or to a trust established by the Optionee for the benefit of the Optionee and/or one or more members of the Optionee’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Restricted Shares, then this Agreement shall apply to the Transferee to the same extent as to the Optionee.
     (h) Assignment of Repurchase Right. The Board of Directors may freely assign the Company’s Right of Repurchase, in whole or in part. Any person who accepts an assignment of the Right of Repurchase from the Company shall assume all of the Company’s rights and obligations under this Section 7.
SECTION 8. RIGHT OF FIRST REFUSAL.
     (a) Right of First Refusal. In the event that the Optionee proposes to sell, pledge or otherwise transfer to a third party any Shares acquired under this Agreement, or any interest in such Shares, the Company shall have the Right of First Refusal with respect to all (and not less than all) of such Shares. If the Optionee desires to transfer Shares acquired under this Agreement, the Optionee shall give a written Transfer Notice to the Company describing fully the proposed transfer, including the number of Shares proposed to be transferred, the proposed transfer price, the name and address of the proposed Transferee and proof satisfactory to the Company that the proposed sale or transfer will not violate any applicable federal or state securities laws. The Transfer Notice shall be signed both by the Optionee and by the proposed Transferee and must constitute a binding commitment of both parties to the transfer of the Shares. The Company shall have the right to purchase all, and not less than all, of the Shares on the terms of the proposal described in the Transfer Notice (subject, however, to any change in such terms permitted under Subsection (b) below) by delivery of a notice of exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Company.
     (b) Transfer of Shares. If the Company fails to exercise its Right of First Refusal within 30 days after the date when it received the Transfer Notice, the Optionee may, not later than 90 days following receipt of the Transfer Notice by the Company, conclude a transfer of the Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice, provided that any such sale is made in compliance with applicable federal and state securities laws and not in violation of any other contractual restrictions to which the Optionee is bound. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be

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subject to the Right of First Refusal and shall require compliance with the procedure described in Subsection (a) above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Shares on the terms set forth in the Transfer Notice within 60 days after the date when the Company received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Shares was to be made in a form other than cash or cash equivalents paid at the time of transfer, the Company shall have the option of paying for the Shares with cash or cash equivalents equal to the present value of the consideration described in the Transfer Notice.
     (c) Additional or Exchanged Securities and Property. In the event of a merger or consolidation of the Company with or into another entity, any other corporate reorganization, a stock split, the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities, any securities or other property (including cash or cash equivalents) that are by reason of such transaction exchanged for, or distributed with respect to, any Shares subject to this Section 8 shall immediately be subject to the Right of First Refusal. Appropriate adjustments to reflect the exchange or distribution of such securities or property shall be made to the number and/or class of the Shares subject to this Section 8.
     (d) Termination of Right of First Refusal. Any other provision of this Section 8 notwithstanding, in the event that the Stock is readily tradable on an established securities market when the Optionee desires to transfer Shares, the Company shall have no Right of First Refusal, and the Optionee shall have no obligation to comply with the procedures prescribed by Subsections (a) and (b) above.
     (e) Permitted Transfers. This Section 8 shall not apply to (i) a transfer by beneficiary designation, will or intestate succession or (ii) a transfer to one or more members of the Optionee’s Immediate Family or to a trust established by the Optionee for the benefit of the Optionee and/or one or more members of the Optionee’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Shares acquired under this Agreement, either under this Subsection (e) or after the Company has failed to exercise the Right of First Refusal, then this Agreement shall apply to the Transferee to the same extent as to the Optionee.
     (f) Termination of Rights as Stockholder. If the Company makes available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Shares to be purchased in accordance with this Section 8, then after such time the person from whom such Shares are to be purchased shall no longer have any rights as a holder of such Shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such Shares shall be deemed to have been purchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement.

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     (g) Assignment of Right of First Refusal. The Board of Directors may freely assign the Company’s Right of First Refusal, in whole or in part. Any person who accepts an assignment of the Right of First Refusal from the Company shall assume all of the Company’s rights and obligations under this Section 8.
SECTION 9. LEGALITY OF INITIAL ISSUANCE.
     No Shares shall be issued upon the exercise of this option unless and until the Company has determined that:
     (a) It and the Optionee have taken any actions required to register the Shares under the Securities Act or to perfect an exemption from the registration requirements thereof;
     (b) Any applicable listing requirement of any stock exchange or other securities market on which Stock is listed has been satisfied; and
     (c) Any other applicable provision of federal, state or foreign law has been satisfied.
SECTION 10. NO REGISTRATION RIGHTS.
     The Company may, but shall not be obligated to, register or qualify the sale of Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the sale of Shares under this Agreement to comply with any law.
SECTION 11. RESTRICTIONS ON TRANSFER.
     (a) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
     (b) Market Stand-Off. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company’s initial public offering, the Optionee or a Transferee shall not directly or indirectly sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer, or agree to engage in any of the foregoing transactions with respect to, any Shares acquired under this Agreement without the prior written consent of the Company or its underwriters. Such restriction (the “Market Stand-Off”) shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In no event, however, shall such period exceed 180 days. The Market Stand-Off shall in any event terminate two years after the date of the Company’s initial public offering. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction

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affecting the Company’s outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Shares acquired under this Agreement until the end of the applicable stand-off period. The Company’s underwriters shall be beneficiaries of the agreement set forth in this Subsection (b). This Subsection (b) shall not apply to Shares registered in the public offering under the Securities Act, and the Optionee or a Transferee shall be subject to this Subsection (b) only if the directors and officers of the Company are subject to similar arrangements.
     (c) Investment Intent at Grant. The Optionee represents and agrees that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof.
     (d) Investment Intent at Exercise. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel.
     (e) Legends. All certificates evidencing Shares purchased under this Agreement shall bear the following legend:
      “THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES AND CERTAIN REPURCHASE RIGHTS UPON TERMINATION OF SERVICE WITH THE COMPANY. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.”
     All certificates evidencing Shares purchased under this Agreement in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law):
      “THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR

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      OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.”
     (f) Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Agreement is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend.
     (g) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 11 shall be conclusive and binding on the Optionee and all other persons.
SECTION 12. ADJUSTMENT OF SHARES.
     In the event of any transaction described in Section 8(a) of the Plan, the terms of this option (including, without limitation, the number and kind of Shares subject to this option and the Exercise Price) shall be adjusted as set forth in Section 8(a) of the Plan. In the event that the Company is a party to a merger or consolidation, this option shall be subject to the agreement of merger or consolidation, as provided in Section 8(b) of the Plan.
SECTION 13. MISCELLANEOUS PROVISIONS.
     (a) Rights as a Stockholder. Neither the Optionee nor the Optionee’s representative shall have any rights as a stockholder with respect to any Shares subject to this option until the Optionee or the Optionee’s representative becomes entitled to receive such Shares by filing a notice of exercise and paying the Purchase Price pursuant to Sections 4 and 5.
     (b) No Retention Rights. Nothing in this option or in the Plan shall confer upon the Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining the Optionee) or of the Optionee, which rights are hereby expressly reserved by each, to terminate his or her Service at any time and for any reason, with or without cause.
     (c) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Optionee at the address that he or she most recently provided to the Company in accordance with this Subsection (c).
     (d) Entire Agreement. The Notice of Stock Option Grant, this Agreement and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof.

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     (e) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
SECTION 14. DEFINITIONS.
     (a) “Agreement” shall mean this Stock Option Agreement.
     (b) “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time or, if a Committee has been appointed, such Committee.
     (c) “Cause” shall mean that the Board of Directors determines reasonably and in good faith that the Optionee (i) committed an act of embezzlement, fraud, dishonesty or breach of fiduciary duty to the Company, (ii) deliberately and repeatedly violated the rules of the Company or the valid instructions of the Board of Directors or an authorized officer of the Company, (iii) made any unauthorized disclosure of any of the secrets or confidential information of the Company, (iv) induced any client or customer of the Company to break any contract with the Company or (v) engaged in any conduct that could reasonably be expected to result in loss, damage or injury to the Company.
     (d) “Code” shall mean the Internal Revenue Code of 1986, as amended.
     (e) “Committee” shall mean a committee of the Board of Directors, as described in Section 2 of the Plan.
     (f) “Company” shall mean ArcSight, Inc., a Delaware corporation.
     (g) “Consultant” shall mean a person who performs bona fide services for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding Employees and Outside Directors.
     (h) “Date of Grant” shall mean the date specified in the Notice of Stock Option Grant, which date shall be the later of (i) the date on which the Board of Directors resolved to grant this option or (ii) the first day of the Optionee’s Service.
     (i) “Disability” shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment.
     (j) “Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.
     (k) “Exercise Price” shall mean the amount for which one Share may be purchased upon exercise of this option, as specified in the Notice of Stock Option Grant.
     (l) “Fair Market Value” shall mean the fair market value of a Share, as determined by the Board of Directors in good faith. Such determination shall be conclusive and binding on all persons.

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     (m) “Immediate Family” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include adoptive relationships.
     (n) “ISO” shall mean an employee incentive stock option described in Section 422(b) of the Code.
     (o) “Notice of Stock Option Grant” shall mean the document so entitled to which this Agreement is attached.
     (p) “NSO” shall mean a stock option not described in Sections 422(b) or 423(b) of the Code.
     (q) “Optionee” shall mean the person named in the Notice of Stock Option Grant.
     (r) “Outside Director” shall mean a member of the Board of Directors who is not an Employee.
     (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.
     (t) “Plan” shall mean the ArcSight, Inc. 2002 Stock Plan, as in effect on the Date of Grant.
     (u) “Purchase Price” shall mean the Exercise Price multiplied by the number of Shares with respect to which this option is being exercised.
     (v) “Repurchase Period” shall mean a period of 90 consecutive days commencing on the date when the Optionee’s Service terminates for any reason, including (without limitation) death or disability.
     (w) “Restricted Share” shall mean a Share that is subject to the Right of Repurchase.
     (x) “Right of First Refusal” shall mean the Company’s right of first refusal described in Section 8.
     (y) “Right of Repurchase” shall mean the Company’s right of repurchase described in Section 7.
     (z) “Securities Act” shall mean the Securities Act of 1933, as amended.
     (aa) “Service” shall mean service as an Employee, Outside Director or Consultant.
     (bb) “Share” shall mean one share of Stock, as adjusted in accordance with Section 8 of the Plan (if applicable).

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     (cc) “Stock” shall mean the Common Stock of the Company, with a par value of $0.00001 per Share.
     (dd) “Subsidiary” shall mean 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.
     (ee) “Transferee” shall mean any person to whom the Optionee has directly or indirectly transferred any Share acquired under this Agreement.
     (ff) “Transfer Notice” shall mean the notice of a proposed transfer of Shares described in Section 8.

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Arcsight, Inc. 2002 Stock Plan
Notice Of Stock Option Grant
     You have been granted the following option to purchase shares of the Common Stock of ArcSight, Inc. (the “Company”):
     
Name of Optionee:
   
 
Total Number of Shares:
   
 
Type of Option:
   
 
Exercise Price Per Share:
   
 
Date of Grant:
   
 
Date Exercisable:
  This option may be exercised at any time after the Date of Grant for all or any part of the Shares subject to this option.
 
Vesting Commencement Date:
   
 
Vesting Schedule:
   
 
Expiration Date:
               . This option expires earlier if the Optionee’s Service terminates earlier, as provided in Section 6 of the Stock Option Agreement.
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 terms and conditions of the 2002 Stock Plan and the Stock Option Agreement, both of which are attached to and made a part of this document.
                 
OPTIONEE:       ARCSIGHT, INC.
 
               
 
      By:        
                 
 
               
 
      Title:        
 
               

 


 

THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
Arcsight, Inc. 2002 Stock Plan:
Stock Option Agreement
SECTION 1. GRANT OF OPTION.
     (a) Option. On the terms and conditions set forth in the Notice of Stock Option Grant and this Agreement, the Company grants to the Optionee on the Date of Grant the option to purchase at the Exercise Price the number of Shares set forth in the Notice of Stock Option Grant. The Exercise Price is agreed to be at least 100% of the Fair Market Value per Share on the Date of Grant (110% of Fair Market Value if Section 3(b) of the Plan applies). This option is intended to be an ISO or an NSO, as provided in the Notice of Stock Option Grant.
     (b) $100,000 Limitation. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it shall be deemed to be an NSO to the extent (and only to the extent) required by the $100,000 annual limitation under Section 422(d) of the Code.
     (c) Stock Plan and Defined Terms. This option is granted pursuant to the Plan, a copy of which the Optionee acknowledges having received. The provisions of the Plan are incorporated into this Agreement by this reference. Capitalized terms are defined in Section 14 of this Agreement.
SECTION 2. RIGHT TO EXERCISE.
     (a) Exercisability. Subject to Subsection (b) below and the other conditions set forth in this Agreement, all or part of this option may be exercised prior to its expiration at the time or times set forth in the Notice of Stock Option Grant. Shares purchased by exercising this option may be subject to the Right of Repurchase under Section 7.
     (b) Stockholder Approval. Any other provision of this Agreement notwithstanding, no portion of this option shall be exercisable at any time prior to the approval of the Plan by the Company’s stockholders.
SECTION 3. NO TRANSFER OR ASSIGNMENT OF OPTION.
     Except as otherwise provided in this Agreement, this option and the rights and privileges conferred hereby shall not be sold, pledged or otherwise transferred (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment, levy or similar process.

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SECTION 4. EXERCISE PROCEDURES.
     (a) Notice of Exercise. The Optionee or the Optionee’s representative may exercise this option by giving written notice to the Company pursuant to Section 13(c). The notice shall specify the election to exercise this option, the number of Shares for which it is being exercised and the form of payment. The person exercising this option shall sign the notice. In the event that this option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof (satisfactory to the Company) of the representative’s right to exercise this option. The Optionee or the Optionee’s representative shall deliver to the Company, at the time of giving the notice, payment in a form permissible under Section 5 for the full amount of the Purchase Price. In the event of a partial exercise of this option, Shares shall be deemed to have been purchased in the order in which they vest in accordance with the Notice of Stock Option Grant.
     (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued one or more certificates evidencing the Shares for which this option has been exercised. Such Shares shall be registered (i) in the name of the person exercising this option, (ii) in the names of such person and his or her spouse as community property or as joint tenants with the right of survivorship or (iii) with the Company’s consent, in the name of a revocable trust. In the case of Restricted Shares, the Company shall cause such certificates to be deposited in escrow under Section 7(c). In the case of other Shares, the Company shall cause such certificates to be delivered to or upon the order of the person exercising this option.
     (c) Withholding Taxes. In the event that the Company determines that it is required to withhold any tax as a result of the exercise of this option, the Optionee, as a condition to the exercise of this option, shall make arrangements satisfactory to the Company to enable it to satisfy all withholding requirements. The Optionee shall also make arrangements satisfactory to the Company to enable it to satisfy any withholding requirements that may arise in connection with the vesting or disposition of Shares purchased by exercising this option.
SECTION 5. PAYMENT FOR STOCK.
     (a) Cash. All or part of the Purchase Price may be paid in cash or cash equivalents.
     (b) Surrender of Stock. All or any part of the Purchase Price may be paid by surrendering, or attesting to the ownership of, Shares that are already owned by the Optionee. Such Shares shall be surrendered to the Company in good form for transfer and shall be valued at their Fair Market Value on the date when this option is exercised. The Optionee shall not surrender, or attest to the ownership of, Shares in payment of the Purchase Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes.
     (c) Promissory Note. All or part of the Purchase Price may be paid with a full-recourse promissory note. However, the par value of the Shares, if newly issued, shall be paid in cash or cash equivalents. The Shares shall be pledged as security for payment of the principal amount of the promissory note and interest thereon. The interest rate payable under the terms of the promissory note shall not be less than the minimum rate, if any, required to avoid (i) the

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imputation of additional interest under the Code and (ii) variable accounting under the applicable guidelines issued by the Financial Accounting Standards Board. Subject to the foregoing, the Board of Directors (at its sole discretion) shall specify the term, interest rate, amortization requirements, if any, and other provisions of such note.
     (d) Exercise/Sale. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company.
     (e) Exercise/Pledge. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company.
SECTION 6. TERM AND EXPIRATION.
     (a) Basic Term. This option shall in any event expire on the expiration date set forth in the Notice of Stock Option Grant, which date is 10 years after the Date of Grant (five years after the Date of Grant if this option is designated as an ISO in the Notice of Stock Option Grant and Section 3(b) of the Plan applies).
     (b) Termination of Service (Except by Death). If the Optionee’s Service terminates for any reason other than death, then this option shall expire on the earliest of the following occasions:
     (i) The expiration date determined pursuant to Subsection (a) above;
     (ii) The date 30 days after the termination of the Optionee’s Service for any reason other than Cause, retirement at or after age 65, or Disability;
     (iii) The date of the termination of the Optionee’s Service for Cause;
     (iv) The date 12 months after the Optionee’s retirement at or after age 65; or
     (v) The date 12 months after the termination of the Optionee’s Service by reason of Disability.
     The Optionee may exercise all or part of this option at any time before its expiration under the preceding sentence, but only to the extent that this option is exercisable for vested Shares on or before the date when the Optionee’s Service terminates. When the Optionee’s Service terminates, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares. In the event that the Optionee dies after termination of Service but before the expiration of this option, all or part of this option may be exercised (prior to expiration) by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option was exercisable for vested Shares on or before the date when the Optionee’s Service terminated.

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     (c) Death of the Optionee. If the Optionee dies while in Service, then this option shall expire on the earlier of the following dates:
     (i) The expiration date determined pursuant to Subsection (a) above; or
     (ii) The date 12 months after the Optionee’s death.
All or part of this option may be exercised at any time before its expiration under the preceding sentence by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option is exercisable for vested Shares on or before the Optionee’s death. When the Optionee dies, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares.
     (d) Leaves of Absence. For any purpose under this Agreement, Service shall be deemed to continue while the Optionee is on a bona fide leave of absence, if such leave was approved by the Company in writing and if continued crediting of Service for such purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company).
     (e) Notice Concerning ISO Treatment. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it ceases to qualify for favorable tax treatment as an ISO to the extent that it is exercised:
     (i) More than three months after the date when the Optionee ceases to be an Employee for any reason other than death or permanent and total disability (as defined in Section 22(e)(3) of the Code);
     (ii) More than 12 months after the date when the Optionee ceases to be an Employee by reason of permanent and total disability (as defined in Section 22(e)(3) of the Code); or
     (iii) More than three months after the date when the Optionee has been on a leave of absence for 90 days, unless the Optionee’s reemployment rights following such leave were guaranteed by statute or by contract.
SECTION 7. RIGHT OF REPURCHASE.
     (a) Scope of Repurchase Right. Until they vest in accordance with the Notice of Stock Option Grant and Subsection (b) below, the Shares acquired under this Agreement shall be Restricted Shares and shall be subject to the Company’s Right of Repurchase. The Company, however, may decline to exercise its Right of Repurchase or may exercise its Right of Repurchase only with respect to a portion of the Restricted Shares. The Company may exercise its Right of Repurchase only during the Repurchase Period following the termination of the Optionee’s Service. The Right of Repurchase may be exercised automatically under Subsection (d) below. If the Right of Repurchase is exercised, the Company shall pay the Optionee an amount equal to the Exercise Price for each of the Restricted Shares being repurchased.

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     (b) Lapse of Repurchase Right. The Right of Repurchase shall lapse with respect to the Restricted Shares in accordance with the vesting schedule set forth in the Notice of Stock Option Grant. In addition, the vested portion of the Shares acquired under this Agreement shall be determined by adding 12 months to the Optionee’s actual Service if the Company is subject to a Change in Control before the Optionee’s Service terminates and the Optionee, within 12 months after the Change in Control, is either:
     (i) Discharged by the Company (or the Parent or Subsidiary employing him or her) for reasons other than Cause; or
     (ii) Required to relocate outside the San Francisco Bay Area (in the case of an Optionee whose principal place of employment is at the Company’s headquarters) or required to relocate more than 60 miles (in the case of an Optionee whose principal place of employment is not at the Company’s headquarters). This Paragraph (ii) shall apply whether or not the Optionee’s Service terminates.
     (c) Escrow. Upon issuance, the certificate(s) for Restricted Shares shall be deposited in escrow with the Company to be held in accordance with the provisions of this Agreement. Any additional or exchanged securities or other property described in Subsection (f) below shall immediately be delivered to the Company to be held in escrow. All ordinary cash dividends on Restricted Shares (or on other securities held in escrow) shall be paid directly to the Optionee and shall not be held in escrow. Restricted Shares, together with any other assets held in escrow under this Agreement, shall be (i) surrendered to the Company for repurchase upon exercise of the Right of Repurchase or the Right of First Refusal or (ii) released to the Optionee upon his or her request to the extent that the Shares have ceased to be Restricted Shares (but not more frequently than once every six months). In any event, all Shares that have ceased to be Restricted Shares, together with any other vested assets held in escrow under this Agreement, shall be released within 90 days after the earlier of (i) the termination of the Optionee’s Service or (ii) the lapse of the Right of First Refusal.
     (d) Exercise of Repurchase Right. The Company shall be deemed to have exercised its Right of Repurchase automatically for all Restricted Shares as of the commencement of the Repurchase Period, unless the Company during the Repurchase Period notifies the holder of the Restricted Shares pursuant to Section 13(c) that it will not exercise its Right of Repurchase for some or all of the Restricted Shares. During the Repurchase Period, the Company shall pay to the holder of the Restricted Shares the purchase price determined under Subsection (a) above for the Restricted Shares being repurchased. Payment shall be made in cash or cash equivalents and/or by canceling indebtedness to the Company incurred by the Optionee in the purchase of the Restricted Shares. The certificate(s) representing the Restricted Shares being repurchased shall be delivered to the Company properly endorsed for transfer.
     (e) Termination of Rights as Stockholder. If the Right of Repurchase is exercised in accordance with this Section 7 and the Company makes available the consideration for the Restricted Shares being repurchased, then the person from whom the Restricted Shares are repurchased shall no longer have any rights as a holder of the Restricted Shares (other than the right to receive payment of such consideration). Such Restricted Shares shall be deemed to have been repurchased pursuant to this Section 7, whether or not the certificate(s) for such Restricted

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Shares have been delivered to the Company or the consideration for such Restricted Shares has been accepted.
     (f) Additional or Exchanged Securities and Property. In the event of a merger or consolidation of the Company with or into another entity, any other corporate reorganization, a stock split, the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities, any securities or other property (including cash or cash equivalents) that are by reason of such transaction exchanged for, or distributed with respect to, any Restricted Shares shall immediately be subject to the Right of Repurchase. Appropriate adjustments to reflect the exchange or distribution of such securities or property shall be made to the number and/or class of the Restricted Shares. Appropriate adjustments shall also be made to the price per share to be paid upon the exercise of the Right of Repurchase, provided that the aggregate purchase price payable for the Restricted Shares shall remain the same. In the event of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, the Right of Repurchase may be exercised by the Company’s successor.
     (g) Transfer of Restricted Shares. The Optionee shall not transfer, assign, encumber or otherwise dispose of any Restricted Shares without the Company’s written consent, except as provided in the following sentence. The Optionee may transfer Restricted Shares to one or more members of the Optionee’s Immediate Family or to a trust established by the Optionee for the benefit of the Optionee and/or one or more members of the Optionee’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Restricted Shares, then this Agreement shall apply to the Transferee to the same extent as to the Optionee.
     (h) Assignment of Repurchase Right. The Board of Directors may freely assign the Company’s Right of Repurchase, in whole or in part. Any person who accepts an assignment of the Right of Repurchase from the Company shall assume all of the Company’s rights and obligations under this Section 7.
SECTION 8. RIGHT OF FIRST REFUSAL.
     (a) Right of First Refusal. In the event that the Optionee proposes to sell, pledge or otherwise transfer to a third party any Shares acquired under this Agreement, or any interest in such Shares, the Company shall have the Right of First Refusal with respect to all (and not less than all) of such Shares. If the Optionee desires to transfer Shares acquired under this Agreement, the Optionee shall give a written Transfer Notice to the Company describing fully the proposed transfer, including the number of Shares proposed to be transferred, the proposed transfer price, the name and address of the proposed Transferee and proof satisfactory to the Company that the proposed sale or transfer will not violate any applicable federal or state securities laws. The Transfer Notice shall be signed both by the Optionee and by the proposed Transferee and must constitute a binding commitment of both parties to the transfer of the Shares. The Company shall have the right to purchase all, and not less than all, of the Shares on the terms of the proposal described in the Transfer Notice (subject, however, to any change in

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such terms permitted under Subsection (b) below) by delivery of a notice of exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Company.
     (b) Transfer of Shares. If the Company fails to exercise its Right of First Refusal within 30 days after the date when it received the Transfer Notice, the Optionee may, not later than 90 days following receipt of the Transfer Notice by the Company, conclude a transfer of the Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice, provided that any such sale is made in compliance with applicable federal and state securities laws and not in violation of any other contractual restrictions to which the Optionee is bound. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance with the procedure described in Subsection (a) above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Shares on the terms set forth in the Transfer Notice within 60 days after the date when the Company received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Shares was to be made in a form other than cash or cash equivalents paid at the time of transfer, the Company shall have the option of paying for the Shares with cash or cash equivalents equal to the present value of the consideration described in the Transfer Notice.
     (c) Additional or Exchanged Securities and Property. In the event of a merger or consolidation of the Company with or into another entity, any other corporate reorganization, a stock split, the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities, any securities or other property (including cash or cash equivalents) that are by reason of such transaction exchanged for, or distributed with respect to, any Shares subject to this Section 8 shall immediately be subject to the Right of First Refusal. Appropriate adjustments to reflect the exchange or distribution of such securities or property shall be made to the number and/or class of the Shares subject to this Section 8.
     (d) Termination of Right of First Refusal. Any other provision of this Section 8 notwithstanding, in the event that the Stock is readily tradable on an established securities market when the Optionee desires to transfer Shares, the Company shall have no Right of First Refusal, and the Optionee shall have no obligation to comply with the procedures prescribed by Subsections (a) and (b) above.
     (e) Permitted Transfers. This Section 8 shall not apply to (i) a transfer by beneficiary designation, will or intestate succession or (ii) a transfer to one or more members of the Optionee’s Immediate Family or to a trust established by the Optionee for the benefit of the Optionee and/or one or more members of the Optionee’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Shares acquired under this Agreement, either under this Subsection (e) or after the Company has failed to exercise the Right

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of First Refusal, then this Agreement shall apply to the Transferee to the same extent as to the Optionee.
     (f) Termination of Rights as Stockholder. If the Company makes available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Shares to be purchased in accordance with this Section 8, then after such time the person from whom such Shares are to be purchased shall no longer have any rights as a holder of such Shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such Shares shall be deemed to have been purchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement.
     (g) Assignment of Right of First Refusal. The Board of Directors may freely assign the Company’s Right of First Refusal, in whole or in part. Any person who accepts an assignment of the Right of First Refusal from the Company shall assume all of the Company’s rights and obligations under this Section 8.
SECTION 9. LEGALITY OF INITIAL ISSUANCE.
     No Shares shall be issued upon the exercise of this option unless and until the Company has determined that:
     (a) It and the Optionee have taken any actions required to register the Shares under the Securities Act or to perfect an exemption from the registration requirements thereof;
     (b) Any applicable listing requirement of any stock exchange or other securities market on which Stock is listed has been satisfied; and
     (c) Any other applicable provision of federal, state or foreign law has been satisfied.
SECTION 10. NO REGISTRATION RIGHTS.
     The Company may, but shall not be obligated to, register or qualify the sale of Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the sale of Shares under this Agreement to comply with any law.
SECTION 11. RESTRICTIONS ON TRANSFER.
     (a) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.

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     (b) Market Stand-Off. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company’s initial public offering, the Optionee or a Transferee shall not directly or indirectly sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer, or agree to engage in any of the foregoing transactions with respect to, any Shares acquired under this Agreement without the prior written consent of the Company or its underwriters. Such restriction (the “Market Stand-Off”) shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In no event, however, shall such period exceed 180 days. The Market Stand-Off shall in any event terminate two years after the date of the Company’s initial public offering. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Shares acquired under this Agreement until the end of the applicable stand-off period. The Company’s underwriters shall be beneficiaries of the agreement set forth in this Subsection (b). This Subsection (b) shall not apply to Shares registered in the public offering under the Securities Act, and the Optionee or a Transferee shall be subject to this Subsection (b) only if the directors and officers of the Company are subject to similar arrangements.
     (c) Investment Intent at Grant. The Optionee represents and agrees that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof.
     (d) Investment Intent at Exercise. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel.
     (e) Legends. All certificates evidencing Shares purchased under this Agreement shall bear the following legend:
“THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES AND

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CERTAIN REPURCHASE RIGHTS UPON TERMINATION OF SERVICE WITH THE COMPANY. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.”
All certificates evidencing Shares purchased under this Agreement in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law):
“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.”
     (f) Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Agreement is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend.
     (g) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 11 shall be conclusive and binding on the Optionee and all other persons.
SECTION 12. ADJUSTMENT OF SHARES.
     In the event of any transaction described in Section 8(a) of the Plan, the terms of this option (including, without limitation, the number and kind of Shares subject to this option and the Exercise Price) shall be adjusted as set forth in Section 8(a) of the Plan. In the event that the Company is a party to a merger or consolidation, this option shall be subject to the agreement of merger or consolidation, as provided in Section 8(b) of the Plan.
SECTION 13. MISCELLANEOUS PROVISIONS.
     (a) Rights as a Stockholder. Neither the Optionee nor the Optionee’s representative shall have any rights as a stockholder with respect to any Shares subject to this option until the Optionee or the Optionee’s representative becomes entitled to receive such Shares by filing a notice of exercise and paying the Purchase Price pursuant to Sections 4 and 5.
     (b) No Retention Rights. Nothing in this option or in the Plan shall confer upon the Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining the Optionee) or of the Optionee, which rights are hereby expressly reserved by each, to terminate his or her Service at any time and for any reason, with or without cause.
     (c) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United

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States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Optionee at the address that he or she most recently provided to the Company in accordance with this Subsection (c).
     (d) Entire Agreement. The Notice of Stock Option Grant, this Agreement and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof.
     (e) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
SECTION 14. DEFINITIONS.
     (a) “Agreement” shall mean this Stock Option Agreement.
     (b) “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time or, if a Committee has been appointed, such Committee.
     (c) “Cause” shall mean that the Board of Directors determines reasonably and in good faith that the Optionee (i) committed an act of embezzlement, fraud, dishonesty or breach of fiduciary duty to the Company, (ii) deliberately and repeatedly violated the rules of the Company or the valid instructions of the Board of Directors or an authorized officer of the Company, (iii) made any unauthorized disclosure of any of the secrets or confidential information of the Company, (iv) induced any client or customer of the Company to break any contract with the Company or (v) engaged in any conduct that could reasonably be expected to result in loss, damage or injury to the Company.
     (d) “Change in Control” shall mean:
     (i) 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
     (ii) The sale, transfer or other disposition of all or substantially all of the Company’s assets.
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.

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     (e) “Code” shall mean the Internal Revenue Code of 1986, as amended.
     (f) “Committee” shall mean a committee of the Board of Directors, as described in Section 2 of the Plan.
     (g) “Company” shall mean ArcSight, Inc., a Delaware corporation.
     (h) “Consultant” shall mean a person who performs bona fide services for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding Employees and Outside Directors.
     (i) “Date of Grant” shall mean the date specified in the Notice of Stock Option Grant, which date shall be the later of (i) the date on which the Board of Directors resolved to grant this option or (ii) the first day of the Optionee’s Service.
     (j) “Disability” shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment.
     (k) “Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.
     (l) “Exercise Price” shall mean the amount for which one Share may be purchased upon exercise of this option, as specified in the Notice of Stock Option Grant.
     (m) “Fair Market Value” shall mean the fair market value of a Share, as determined by the Board of Directors in good faith. Such determination shall be conclusive and binding on all persons.
     (n) “Immediate Family” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include adoptive relationships.
     (o) “ISO” shall mean an employee incentive stock option described in Section 422(b) of the Code.
     (p) “Notice of Stock Option Grant” shall mean the document so entitled to which this Agreement is attached.
     (q) “NSO” shall mean a stock option not described in Sections 422(b) or 423(b) of the Code.
     (r) “Optionee” shall mean the person named in the Notice of Stock Option Grant.
     (s) “Outside Director” shall mean a member of the Board of Directors who is not an Employee.
     (t) “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

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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.
     (u) “Plan” shall mean the ArcSight, Inc. 2002 Stock Plan, as in effect on the Date of Grant.
     (v) “Purchase Price” shall mean the Exercise Price multiplied by the number of Shares with respect to which this option is being exercised.
     (w) “Repurchase Period” shall mean a period of 90 consecutive days commencing on the date when the Optionee’s Service terminates for any reason, including (without limitation) death or disability.
     (x) “Restricted Share” shall mean a Share that is subject to the Right of Repurchase.
     (y) “Right of First Refusal” shall mean the Company’s right of first refusal described in Section 8.
     (z) “Right of Repurchase” shall mean the Company’s right of repurchase described in Section 7.
     (aa) “Securities Act” shall mean the Securities Act of 1933, as amended.
     (bb) “Service” shall mean service as an Employee, Outside Director or Consultant.
     (cc) “Share” shall mean one share of Stock, as adjusted in accordance with Section 8 of the Plan (if applicable).
     (dd) “Stock” shall mean the Common Stock of the Company, with a par value of $0.00001 per Share.
     (ee) “Subsidiary” shall mean 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.
     (ff) “Transferee” shall mean any person to whom the Optionee has directly or indirectly transferred any Share acquired under this Agreement.
     (gg) “Transfer Notice” shall mean the notice of a proposed transfer of Shares described in Section 8.

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ArcSight, Inc. 2002 Stock Plan
Notice of Stock Option Grant
     You have been granted the following option to purchase shares of the Common Stock of ArcSight, Inc. (the “Company”):
     
Name of Optionee:
   
 
   
Total Number of Shares:
   
 
   
Type of Option:
   
 
   
Exercise Price Per Share:
   
 
   
Date of Grant:
   
 
   
Date Exercisable:
  This option may be exercised at any time after the Date of Grant for all or any part of the Shares subject to this option.
 
   
Vesting Commencement Date:
   
 
   
Vesting Schedule:
  Provided that the Optionee shall have achieved the performance objectives that are set forth in Attachment A attached hereto (the “Performance Objectives”) by November 30, 2007 when the Optionee completes twelve months of continuous Service after the Vesting Commencement Date, the Right of Repurchase shall lapse with respect to the first 25% of the Shares subject to this option, and thereafter, the Right of Repurchase shall lapse with respect to an additional 1/48th (2.0833%) of the Shares subject to this option when the Optionee completes each month of continuous Service. For avoidance of doubt, the Right of Repurchase shall not lapse with respect to any of the Shares subject to this option if the Performance Objectives and twelve months of continuous Service after the Vesting Commencement Date are not fulfilled by the Optionee, other than as provided in Section 7(b) of the Stock Option Agreement.
 
   
Expiration Date:
                                . This option expires earlier if the Optionee’s Service terminates earlier, as provided in Section 6 of the Stock Option Agreement.
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 terms and conditions of the 2002 Stock Plan and the Stock Option Agreement, both of which are attached to and made a part of this document.
                 
Optionee:       ArcSight, Inc.
 
               
 
      By:        
                 
 
      Title:        
 
               

 


 

THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
ArcSight, Inc. 2002 Stock Plan:
Stock Option Agreement
SECTION 1. GRANT OF OPTION.
     (a) Option. On the terms and conditions set forth in the Notice of Stock Option Grant and this Agreement, the Company grants to the Optionee on the Date of Grant the option to purchase at the Exercise Price the number of Shares set forth in the Notice of Stock Option Grant. The Exercise Price is agreed to be at least 100% of the Fair Market Value per Share on the Date of Grant (110% of Fair Market Value if Section 3(b) of the Plan applies). This option is intended to be an ISO or an NSO, as provided in the Notice of Stock Option Grant.
     (b) $100,000 Limitation. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it shall be deemed to be an NSO to the extent (and only to the extent) required by the $100,000 annual limitation under Section 422(d) of the Code.
     (c) Stock Plan and Defined Terms. This option is granted pursuant to the Plan, a copy of which the Optionee acknowledges having received. The provisions of the Plan are incorporated into this Agreement by this reference. Capitalized terms are defined in Section 14 of this Agreement.
SECTION 2. RIGHT TO EXERCISE.
     (a) Exercisability. Subject to Subsection (b) below and the other conditions set forth in this Agreement, all or part of this option may be exercised prior to its expiration at the time or times set forth in the Notice of Stock Option Grant. Shares purchased by exercising this option may be subject to the Right of Repurchase under Section 7.
     (b) Stockholder Approval. Any other provision of this Agreement notwithstanding, no portion of this option shall be exercisable at any time prior to the approval of the Plan by the Company’s stockholders.

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SECTION 3. NO TRANSFER OR ASSIGNMENT OF OPTION.
          Except as otherwise provided in this Agreement, this option and the rights and privileges conferred hereby shall not be sold, pledged or otherwise transferred (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment, levy or similar process.
SECTION 4. EXERCISE PROCEDURES.
     (a) Notice of Exercise. The Optionee or the Optionee’s representative may exercise this option by giving written notice to the Company pursuant to Section 13(c). The notice shall specify the election to exercise this option, the number of Shares for which it is being exercised and the form of payment. The person exercising this option shall sign the notice. In the event that this option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof (satisfactory to the Company) of the representative’s right to exercise this option. The Optionee or the Optionee’s representative shall deliver to the Company, at the time of giving the notice, payment in a form permissible under Section 5 for the full amount of the Purchase Price. In the event of a partial exercise of this option, Shares shall be deemed to have been purchased in the order in which they vest in accordance with the Notice of Stock Option Grant.
     (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued one or more certificates evidencing the Shares for which this option has been exercised. Such Shares shall be registered (i) in the name of the person exercising this option, (ii) in the names of such person and his or her spouse as community property or as joint tenants with the right of survivorship or (iii) with the Company’s consent, in the name of a revocable trust. In the case of Restricted Shares, the Company shall cause such certificates to be deposited in escrow under Section 7(c). In the case of other Shares, the Company shall cause such certificates to be delivered to or upon the order of the person exercising this option.
     (c) Withholding Taxes. In the event that the Company determines that it is required to withhold any tax as a result of the exercise of this option, the Optionee, as a condition to the exercise of this option, shall make arrangements satisfactory to the Company to enable it to satisfy all withholding requirements. The Optionee shall also make arrangements satisfactory to the Company to enable it to satisfy any withholding requirements that may arise in connection with the vesting or disposition of Shares purchased by exercising this option.
SECTION 5. PAYMENT FOR STOCK.
     (a) Cash. All or part of the Purchase Price may be paid in cash or cash equivalents.
     (b) Surrender of Stock. All or any part of the Purchase Price may be paid by surrendering Shares that are already owned by the Optionee for at least six (6) months. Such Shares shall be surrendered to the Company in good form for transfer and shall be valued at their Fair Market Value on the date when this option is exercised. The Optionee shall not surrender Shares in payment of the Purchase Price if such action would cause the Company to recognize

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compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes.
     (c) Exercise/Sale. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company.
     (d) Exercise/Pledge. If Stock is publicly traded, all or part of the Purchase Price and any withholding taxes may be paid by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company.
SECTION 6. TERM AND EXPIRATION.
     (a) Basic Term. This option shall in any event expire on the expiration date set forth in the Notice of Stock Option Grant, which date is 10 years after the Date of Grant (five years after the Date of Grant if this option is designated as an ISO in the Notice of Stock Option Grant and Section 3(b) of the Plan applies).
     (b) Termination of Service (Except by Death). If the Optionee’s Service terminates for any reason other than death, then this option shall expire on the earliest of the following occasions:
     (i) The expiration date determined pursuant to Subsection (a) above;
     (ii) The date 30 days after the termination of the Optionee’s Service for any reason other than Cause, retirement at or after age 65, or Disability;
     (iii) The date of the termination of the Optionee’s Service for Cause;
     (iv) The date 12 months after the Optionee’s retirement at or after age 65; or
     (v) The date 12 months after the termination of the Optionee’s Service by reason of Disability.
The Optionee may exercise all or part of this option at any time before its expiration under the preceding sentence, but only to the extent that this option is exercisable for vested Shares on or before the date when the Optionee’s Service terminates. When the Optionee’s Service terminates, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares. In the event that the Optionee dies after termination of Service but before the expiration of this option, all or part of this option may be exercised (prior to expiration) by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option was exercisable for vested Shares on or before the date when the Optionee’s Service terminated.

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     (c) Death of the Optionee. If the Optionee dies while in Service, then this option shall expire on the earlier of the following dates:
     (i) The expiration date determined pursuant to Subsection (a) above; or
     (ii) The date 12 months after the Optionee’s death.
All or part of this option may be exercised at any time before its expiration under the preceding sentence by the executors or administrators of the Optionee’s estate or by any person who has acquired this option directly from the Optionee by beneficiary designation, bequest or inheritance, but only to the extent that this option is exercisable for vested Shares on or before the Optionee’s death. When the Optionee dies, this option shall expire immediately with respect to the number of Shares for which this option is not yet exercisable and with respect to any Restricted Shares.
     (d) Leaves of Absence. For any purpose under this Agreement, Service shall be deemed to continue while the Optionee is on a bona fide leave of absence, if such leave was approved by the Company in writing and if continued crediting of Service for such purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company).
     (e) Notice Concerning ISO Treatment. Even if this option is designated as an ISO in the Notice of Stock Option Grant, it ceases to qualify for favorable tax treatment as an ISO to the extent that it is exercised:
     (i) More than three months after the date when the Optionee ceases to be an Employee for any reason other than death or permanent and total disability (as defined in Section 22(e)(3) of the Code);
     (ii) More than 12 months after the date when the Optionee ceases to be an Employee by reason of permanent and total disability (as defined in Section 22(e)(3) of the Code); or
     (iii) More than three months after the date when the Optionee has been on a leave of absence for 90 days, unless the Optionee’s reemployment rights following such leave were guaranteed by statute or by contract.
SECTION 7. RIGHT OF REPURCHASE.
          (a) Scope of Repurchase Right. Until they vest in accordance with the Notice of Stock Option Grant and Subsection (b) below, the Shares acquired under this Agreement shall be Restricted Shares and shall be subject to the Company’s Right of Repurchase. The Company, however, may decline to exercise its Right of Repurchase or may exercise its Right of Repurchase only with respect to a portion of the Restricted Shares. The Company may exercise its Right of Repurchase only during the Repurchase Period following the termination of the Optionee’s Service. The Right of Repurchase may be exercised automatically

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under Subsection (d) below. If the Right of Repurchase is exercised, the Company shall pay the Optionee an amount equal to the Exercise Price for each of the Restricted Shares being repurchased.
          (b) Lapse of Repurchase Right. The Right of Repurchase shall lapse with respect to the Restricted Shares in accordance with the vesting schedule set forth in the Notice of Stock Option Grant. In addition, the Right of Repurchase shall lapse with respect to an additional 50% of the remaining Restricted Shares if the Company is subject to a Change in Control (as defined in the Plan) before the first anniversary of the Vesting Commencement Date and the Optionee is subject to an Involuntary Termination within twelve months after such Change in Control irrespective of whether the Performance Objectives have been or are achieved. Subject to achievement of the Performance Objectives by the date set forth in Attachment A attached hereto, in the event that the Company is subject to a Change in Control (as defined in the Plan) on or after the first anniversary of the Vesting Commencement Date and the Optionee is subject to an Involuntary Termination within twelve months after such Change in Control, then the Right of Repurchase shall lapse with respect to 100% of the Restricted Shares.
          (c) Escrow. Upon issuance, the certificate(s) for Restricted Shares shall be deposited in escrow with the Company to be held in accordance with the provisions of this Agreement. Any additional or exchanged securities or other property described in Subsection (f) below shall immediately be delivered to the Company to be held in escrow. All ordinary cash dividends on Restricted Shares (or on other securities held in escrow) shall be paid directly to the Optionee and shall not be held in escrow. Restricted Shares, together with any other assets held in escrow under this Agreement, shall be (i) surrendered to the Company for repurchase upon exercise of the Right of Repurchase or the Right of First Refusal or (ii) released to the Optionee upon his or her request to the extent that the Shares have ceased to be Restricted Shares (but not more frequently than once every six months). In any event, all Shares that have ceased to be Restricted Shares, together with any other vested assets held in escrow under this Agreement, shall be released within 90 days after the earlier of (i) the termination of the Optionee’s Service or (ii) the lapse of the Right of First Refusal.
          (d) Exercise of Repurchase Right. The Company shall be deemed to have exercised its Right of Repurchase automatically for all Restricted Shares as of the commencement of the Repurchase Period, unless the Company during the Repurchase Period notifies the holder of the Restricted Shares pursuant to Section 13(c) that it will not exercise its Right of Repurchase for some or all of the Restricted Shares. During the Repurchase Period, the Company shall pay to the holder of the Restricted Shares the purchase price determined under Subsection (a) above for the Restricted Shares being repurchased. Payment shall be made in cash or cash equivalents and/or by canceling indebtedness to the Company incurred by the Optionee in the purchase of the Restricted Shares. The certificate(s) representing the Restricted Shares being repurchased shall be delivered to the Company properly endorsed for transfer.
          (e) Termination of Rights as Stockholder. If the Right of Repurchase is exercised in accordance with this Section 7 and the Company makes available the consideration for the Restricted Shares being repurchased, then the person from whom the Restricted Shares are repurchased shall no longer have any rights as a holder of the Restricted Shares (other than the right to receive payment of such consideration). Such Restricted Shares shall be deemed to

6


 

have been repurchased pursuant to this Section 7, whether or not the certificate(s) for such Restricted Shares have been delivered to the Company or the consideration for such Restricted Shares has been accepted.
     (f) Additional or Exchanged Securities and Property. In the event of a merger or consolidation of the Company with or into another entity, any other corporate reorganization, a stock split, the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities, any securities or other property (including cash or cash equivalents) that are by reason of such transaction exchanged for, or distributed with respect to, any Restricted Shares shall immediately be subject to the Right of Repurchase. Appropriate adjustments to reflect the exchange or distribution of such securities or property shall be made to the number and/or class of the Restricted Shares. Appropriate adjustments shall also be made to the price per share to be paid upon the exercise of the Right of Repurchase, provided that the aggregate purchase price payable for the Restricted Shares shall remain the same. In the event of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, the Right of Repurchase may be exercised by the Company’s successor.
     (g) Transfer of Restricted Shares. The Optionee shall not transfer, assign, encumber or otherwise dispose of any Restricted Shares without the Company’s written consent, except as provided in the following sentence. The Optionee may transfer Restricted Shares to one or more members of the Optionee’s Immediate Family or to a trust established by the Optionee for the benefit of the Optionee and/or one or more members of the Optionee’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Restricted Shares, then this Agreement shall apply to the Transferee to the same extent as to the Optionee.
     (h) Assignment of Repurchase Right. The Board of Directors may freely assign the Company’s Right of Repurchase, in whole or in part. Any person who accepts an assignment of the Right of Repurchase from the Company shall assume all of the Company’s rights and obligations under this Section 7.
SECTION 8. RIGHT OF FIRST REFUSAL.
     (a) Right of First Refusal. In the event that the Optionee proposes to sell, pledge or otherwise transfer to a third party any Shares acquired under this Agreement, or any interest in such Shares, the Company shall have the Right of First Refusal with respect to all (and not less than all) of such Shares. If the Optionee desires to transfer Shares acquired under this Agreement, the Optionee shall give a written Transfer Notice to the Company describing fully the proposed transfer, including the number of Shares proposed to be transferred, the proposed transfer price, the name and address of the proposed Transferee and proof satisfactory to the Company that the proposed sale or transfer will not violate any applicable federal or state securities laws. The Transfer Notice shall be signed both by the Optionee and by the proposed Transferee and must constitute a binding commitment of both parties to the transfer of the Shares. The Company shall have the right to purchase all, and not less than all, of the Shares on

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the terms of the proposal described in the Transfer Notice (subject, however, to any change in such terms permitted under Subsection (b) below) by delivery of a notice of exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Company.
     (b) Transfer of Shares. If the Company fails to exercise its Right of First Refusal within 30 days after the date when it received the Transfer Notice, the Optionee may, not later than 90 days following receipt of the Transfer Notice by the Company, conclude a transfer of the Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice, provided that any such sale is made in compliance with applicable federal and state securities laws and not in violation of any other contractual restrictions to which the Optionee is bound. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance with the procedure described in Subsection (a) above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Shares on the terms set forth in the Transfer Notice within 60 days after the date when the Company received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Shares was to be made in a form other than cash or cash equivalents paid at the time of transfer, the Company shall have the option of paying for the Shares with cash or cash equivalents equal to the present value of the consideration described in the Transfer Notice.
     (c) Additional or Exchanged Securities and Property. In the event of a merger or consolidation of the Company with or into another entity, any other corporate reorganization, a stock split, the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities, any securities or other property (including cash or cash equivalents) that are by reason of such transaction exchanged for, or distributed with respect to, any Shares subject to this Section 8 shall immediately be subject to the Right of First Refusal. Appropriate adjustments to reflect the exchange or distribution of such securities or property shall be made to the number and/or class of the Shares subject to this Section 8.
     (d) Termination of Right of First Refusal. Any other provision of this Section 8 notwithstanding, in the event that the Stock is readily tradable on an established securities market when the Optionee desires to transfer Shares, the Company shall have no Right of First Refusal, and the Optionee shall have no obligation to comply with the procedures prescribed by Subsections (a) and (b) above.
     (e) Permitted Transfers. This Section 8 shall not apply to (i) a transfer by beneficiary designation, will or intestate succession or (ii) a transfer to one or more members of the Optionee’s Immediate Family or to a trust established by the Optionee for the benefit of the Optionee and/or one or more members of the Optionee’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If the Optionee transfers any Shares acquired under this Agreement, either under this Subsection (e) or after the Company has failed to exercise the Right

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of First Refusal, then this Agreement shall apply to the Transferee to the same extent as to the Optionee.
     (f) Termination of Rights as Stockholder. If the Company makes available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Shares to be purchased in accordance with this Section 8, then after such time the person from whom such Shares are to be purchased shall no longer have any rights as a holder of such Shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such Shares shall be deemed to have been purchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement.
     (g) Assignment of Right of First Refusal. The Board of Directors may freely assign the Company’s Right of First Refusal, in whole or in part. Any person who accepts an assignment of the Right of First Refusal from the Company shall assume all of the Company’s rights and obligations under this Section 8.
SECTION 9. LEGALITY OF INITIAL ISSUANCE.
          No Shares shall be issued upon the exercise of this option unless and until the Company has determined that:
          (a) It and the Optionee have taken any actions required to register the Shares under the Securities Act or to perfect an exemption from the registration requirements thereof;
          (b) Any applicable listing requirement of any stock exchange or other securities market on which Stock is listed has been satisfied; and
          (c) Any other applicable provision of federal, state or foreign law has been satisfied.
SECTION 10. NO REGISTRATION RIGHTS.
          The Company may, but shall not be obligated to, register or qualify the sale of Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the sale of Shares under this Agreement to comply with any law.
SECTION 11. RESTRICTIONS ON TRANSFER.
     (a) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.

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     (b) Market Stand-Off. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company’s initial public offering, the Optionee or a Transferee shall not directly or indirectly sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer, or agree to engage in any of the foregoing transactions with respect to, any Shares acquired under this Agreement without the prior written consent of the Company or its underwriters. Such restriction (the “Market Stand-Off”) shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In no event, however, shall such period exceed 180 days. The Market Stand-Off shall in any event terminate two years after the date of the Company’s initial public offering. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Shares acquired under this Agreement until the end of the applicable stand-off period. The Company’s underwriters shall be beneficiaries of the agreement set forth in this Subsection (b). This Subsection (b) shall not apply to Shares registered in the public offering under the Securities Act, and the Optionee or a Transferee shall be subject to this Subsection (b) only if the directors and officers of the Company are subject to similar arrangements.
     (c) Investment Intent at Grant. The Optionee represents and agrees that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof.
     (d) Investment Intent at Exercise. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel.
     (e) Legends. All certificates evidencing Shares purchased under this Agreement shall bear the following legend:
“THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES AND CERTAIN REPURCHASE RIGHTS UPON TERMINATION OF SERVICE WITH THE COMPANY. THE

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SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.”
All certificates evidencing Shares purchased under this Agreement in an unregistered transaction shall bear the following legend (and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law):
“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.”
     (f) Removal of Legends. If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Shares sold under this Agreement is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend.
     (g) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 11 shall be conclusive and binding on the Optionee and all other persons.
SECTION 12. ADJUSTMENT OF SHARES.
          In the event of any transaction described in Section 8(a) of the Plan, the terms of this option (including, without limitation, the number and kind of Shares subject to this option and the Exercise Price) shall be adjusted as set forth in Section 8(a) of the Plan. In the event that the Company is a party to a merger or consolidation, this option shall be subject to the agreement of merger or consolidation, as provided in Section 8(b) of the Plan.
SECTION 13. MISCELLANEOUS PROVISIONS.
     (a) Rights as a Stockholder. Neither the Optionee nor the Optionee’s representative shall have any rights as a stockholder with respect to any Shares subject to this option until the Optionee or the Optionee’s representative becomes entitled to receive such Shares by filing a notice of exercise and paying the Purchase Price pursuant to Sections 4 and 5.
     (b) No Retention Rights. Nothing in this option or in the Plan shall confer upon the Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining the Optionee) or of the Optionee, which rights are hereby expressly reserved by each, to terminate his or her Service at any time and for any reason, with or without Cause.
     (c) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United

11


 

States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Optionee at the address that he or she most recently provided to the Company in accordance with this Subsection (c).
     (d) Entire Agreement. The Notice of Stock Option Grant, this Agreement and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof.
     (e) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
SECTION 14. DEFINITIONS.
     (a) “Agreement” shall mean this Stock Option Agreement.
     (b) “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time or, if a Committee has been appointed, such Committee.
     (c) “Cause” shall mean (i) willful failure by the Optionee to substantially perform his duties under the revised Offer Letter between Optionee and the Company, dated as of October 5, 2006, as amended from time to time (“Optionees Offer Letter”), after receipt of a written warning from the Board of Directors, (ii) a willful act by the Optionee which is injurious to the Company, (iii) a willful breach by the Optionee of a material provision of Optionee’s Offer Letter, or (iv) a material violation of a federal or state law or regulation applicable to the business of the Company.
     (d) “Code” shall mean the Internal Revenue Code of 1986, as amended.
     (e) “Committee” shall mean a committee of the Board of Directors, as described in Section 2 of the Plan.
     (f) “Company” shall mean ArcSight, Inc., a Delaware corporation.
     (g) “Consultant” shall mean a person who performs bona fide services for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding Employees and Outside Directors.
     (h) “Date of Grant” shall mean the date specified in the Notice of Stock Option Grant, which date shall be the later of (i) the date on which the Board of Directors resolved to grant this option or (ii) the first day of the Optionee’s Service.
     (i) “Disability” shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment.

12


 

     (j) “Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.
     (k) “Exercise Price” shall mean the amount for which one Share may be purchased upon exercise of this option, as specified in the Notice of Stock Option Grant.
     (l) “Fair Market Value” shall mean the fair market value of a Share, as determined by the Board of Directors in good faith. Such determination shall be conclusive and binding on all persons.
     (m) “Immediate Family” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include adoptive relationships.
     (n) “Involuntary Termination” means that (a) the Optionee’s Service is terminated by the Company without Cause, (b) the Optionee resigns within 30 days after the scope of his or her job responsibilities or authority was materially reduced without his or her written consent or (c) the Optionee resigns within 30 days after receipt of notice that his or her principal workplace will be relocated 100 miles or more from its location at the time of notice.
     (o) “ISO” shall mean an employee incentive stock option described in Section 422(b) of the Code.
     (p) “Notice of Stock Option Grant” shall mean the document so entitled to which this Agreement is attached.
     (q) “NSO” shall mean a stock option not described in Sections 422(b) or 423(b) of the Code.
     (r) “Optionee” shall mean the person named in the Notice of Stock Option Grant.
     (s) “Outside Director” shall mean a member of the Board of Directors who is not an Employee.
     (t) “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.
     (u) “Plan” shall mean the ArcSight, Inc. 2002 Stock Plan, as in effect on the Date of Grant.
     (v) “Purchase Price” shall mean the Exercise Price multiplied by the number of Shares with respect to which this option is being exercised.
     (w) “Repurchase Period” shall mean a period of 90 consecutive days commencing on the date when the Optionee’s Service terminates for any reason, including (without limitation) death or disability.

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     (x) “Restricted Share” shall mean a Share that is subject to the Right of Repurchase.
     (y) “Right of First Refusal” shall mean the Company’s right of first refusal described in Section 8.
     (z) “Right of Repurchase” shall mean the Company’s right of repurchase described in Section 7.
     (aa) “Securities Act” shall mean the Securities Act of 1933, as amended.
     (bb) “Service” shall mean service as an Employee, Outside Director or Consultant.
     (cc) “Share” shall mean one share of Stock, as adjusted in accordance with Section 8 of the Plan (if applicable).
     (dd) “Stock” shall mean the Common Stock of the Company, with a par value of $0.00001 per Share.
     (ee) “Subsidiary” shall mean 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.
     (ff) “Transferee” shall mean any person to whom the Optionee has directly or indirectly transferred any Share acquired under this Agreement.
     (gg) “Transfer Notice” shall mean the notice of a proposed transfer of Shares described in Section 8.

14


 

Arcsight, Inc. 2002 Stock Plan
Notice of Stock Option Grant for Hong Kong Based
Employees
          You have been granted the following option to purchase shares of the Common Stock of ArcSight, Inc. (the “Company”). For the purposes of this Agreement “Company” includes ArcSight, Inc., a Hong Kong business or group company of ArcSight, Inc. operating in Hong Kong:
     
Name of Optionee:
   
 
   
Total Number of Shares:
   
 
   
Exercise Price Per Share:
   
 
   
Date of Grant:
   
 
   
Date Exercisable:
   
 
   
Vesting Commencement Date:
   
 
   
Vesting Schedule:
   
 
   
Expiration Date:
                      . This option expires earlier if the Optionee’s Service terminates earlier, as provided in Section 6 of the Stock Option Agreement.
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 terms and conditions of the ArcSight, Inc. 2002 Stock Plan, as amended from time to time, and the Stock Option Agreement, both of which are attached to and made a part of this document.
                 
Optionee:       ArcSight, Inc.    
 
               
 
      By:        
 
         
 
   
 
      Title:        
 
         
 
   

 


 

Arcsight, Inc. 2002 Stock Plan
Notice of Stock Option Grant for UK Based
Employees
          You have been granted the following option to purchase shares of the Common Stock of ArcSight, Inc. (the “Company”). For the purposes of this Agreement “Company” includes ArcSight, Inc., a UK business or group company of ArcSight, Inc. operating in the UK:
     
Name of Optionee:
   
 
   
Total Number of Shares:
   
 
   
Exercise Price Per Share:
   
 
   
Date of Grant:
   
 
   
Date Exercisable:
   
 
   
Conditions of Grant:
  Within thirty (30) days of the date of receipt of the Grant Notice of Board approval of the grant, which ever is later, the Optionee must sign and return the joint Election transferring the Employers Secondary National Insurance to the Employee (attached hereto as Appendix I), and an executed joint Restricted Stock Purchase Election (attached hereto as Appendix II). Failure to sign and return the Elections will result in the grant being invalid.
 
   
Vesting Commencement Date:
   
 
   
Vesting Schedule:
   
 
   
Expiration Date:
                                          . This option expires earlier if the Optionee’s Service terminates earlier, as provided in Section 6 of the Stock Option Agreement.

 


 

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 terms and conditions of the ArcSight, Inc. 2002 Stock Plan, as amended from time to time, and the Stock Option Agreement, both of which are attached to and made a part of this document.
                 
Optionee:       ArcSight, Inc.    
 
               
 
      By:        
 
         
 
   
 
      Title:        
 
         
 
   

2


 

APPENDIX I
Joint Election Transferring the Liability for Secondary National Insurance
Contributions on Share Option Gains from ArcSight (UK) Limited to the
Employee (“the Election”)
Parties to the Election:
(1)   «OptioneeName» (“the Employee”)
 
(2)   ArcSight (UK) Limited (“the Employer”)
 
1.   Introduction
  1.   This Election refers to all Options Granted under any Option Number to the above Employee on or after 12 October 2004 in the ArcSight, Inc 2002 Stock Plan, as amended (“the Options”).
 
  2.   The grant of the Options was made by virtue of the employment of the Employee in ArcSight (UK) Limited, a company registered in the UK.
 
  3.   ArcSight (UK) Limited is a wholly owned subsidiary of ArcSight, Inc.
2.   The Election
  1.   The parties to the Election certify that on the exercise, assignment, release or upon the employee being offered cash by the Employer to cancel all or part of the Options any gain arising (individually or collectively termed “the Gain”) shall be treated as remuneration under section 4 (4) (a) of the Social Security Contributions and Benefits Act 1992.
 
      The effect of this section is to treat as earnings any amount of any gain on which the employee is chargeable already to Income Tax under S479 of ITEPA 2003 in respect of which an amount counts as employment income under S476 of that act, reduced by any amounts deducted under section 480 (1-6) of that act in arriving at the amount counting as employment income.
 
  2.   Accordingly, a charge to secondary Class I National Insurance Contributions (NIC) may arise from the Gain which is payable by the Employer.
 
  3.   The purpose of this Election is to transfer the liability for the secondary NIC arising in paragraph 2(2) above from the Employer to become that of the Employee.
 
  4.   The Election relates to the transfer of the whole of the charge to secondary NIC payable (i.e. 100%) on the Gain.
 
  5.   The Employee undertakes to notify the Employer through the delivery of a

3


 

      properly executed notice either to the Employer, to ArcSight, Inc, or to the Scheme Administrator in accordance with the ArcSight, Inc 2002 Stock Plan, as amended, Rules that a liability to secondary NIC is to arise. No shares or proceeds shall be released by the Scheme Administrator until such time that such notice is confirmed received by the Employer.
 
  6.   The Employee by signing this Election recognises that the Gain in respect of all or part of the Options may result in a charge for secondary NIC which is payable by the Employee irrespective of whether the Employee remains a resident and employee in the UK or relocates outside the UK to reside and work.
 
  7.   The Employer (or the parent company of the Employer) agrees to notify the Employee of such liability due on the Gain from the Options granted under this Election within five (5) UK working days from the date of the Gain arising.
  a.   Where the cash proceeds, or the share issue arising, from the Gain is due from the Employer to the Employee then the Employee in signing this joint Election authorises the Employer (or the parent company of the Employer) and the Administrator of the ArcSight, Inc 2002 Stock Plan, as amended, to effect a withholding of such part of the cash proceeds from the Gain, or for the Administrator to act as the agent of the Employee and sell sufficient shares required, and deliver to the Employer such proceeds to settle the liability for secondary NIC;
      and/or
  b.   Where the cash proceeds from the Gain is payable by a third party to the Employee then the Employee authorises the third party to effect a withholding of such part of the proceeds on the Gain and deliver to the Employer such proceeds required to settle the liability for secondary NIC within five (5) US working days of the Gain arising.
  8.   The Employer certifies he will ensure that the secondary NIC collected in accordance with paragraph 2(7) above will be paid to the Collector of Taxes within 14 days of the end of the income tax month in which the gain is made, and that such payments will be recorded on the monthly payslip of the Employee.
 
  9.   This Election shall cease to be effective at the earlier of -
  -   the date of signing by both parties subject to another or subsequent Election revoking the contents and statements of this Election;
 
  -   the Employer choosing to terminate the Election;
 
  -   at such a date as determined under the termination clause of the ArcSight, Inc 2002 Stock Plan, as amended;
 
  -   the Inland Revenue withdrawal of approval of the Election;
 
  -   ten years after the termination of the ArcSight, Inc 2002 Stock Plan, as amended, under which the Options were granted.

4


 

The Employee hereby certifies that he agrees to be bound by the terms of this Election:
                 
«OptioneeName»
          Dated    
 
               
In the presence of:
         
Witness:
       
Address:
 
 
   
The Employer hereby certifies that he agrees to be bound by the terms of this Election:
                 
ArcSight, Inc.
          Dated    
 
               
Director — ArcSight (UK) Limited            
In the presence of:
Witness:
Address:
     
«OptioneeName»
  ArcSight (UK) Limited
 
  c/o Nair & Co
 
  Whitefriars
 
  Lewins Mead
 
  Bristol BSI 2NT

5


 

APPENDIX II
Joint Election under s431 ITEPA 2003 for full or partial disapplication of
Chapter 2 Income Tax (Earnings and Pensions) Act 2003
One Part Election
1. Between
             
the Employee
  «OptioneeName»        
 
           
whose National Insurance Number is
           
 
         
 
           
and
           
 
           
the Company (who is the Employee’s employer)
  ArcSight (UK) Limited        
 
           
of Company Registration Number
  05054440        
2. Purpose of Election
This joint election is made pursuant to section 431(1) or 431(2) Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and applies where employment-related securities, which are restricted securities by reason of section 423 ITEPA, are acquired.
The effect of an election under section 431(1) is that, for the relevant Income Tax and NIC purposes, the employment-related securities and their market value will be treated as if they were not restricted securities and that sections 425 to 430 ITEPA do not apply. An election under section 431(2) will ignore one or more of the restrictions in computing the charge on acquisition. Additional Income Tax will be payable (with PAYE and NIC where the securities are Readily Convertible Assets).

Should the value of the securities fall following the acquisition, it is possible that Income Tax/NIC that would have arisen because of any future chargeable event (in the absence of an election) would have been less than the Income Tax/NIC due by reason of this election. Should this be the case, there is no Income Tax/NIC relief available under Part 7 of ITEPA 2003; nor is it available if the securities acquired are subsequently transferred, forfeited or revert to the original owner.
3. Application
This joint election is made not later than 14 days after the date of acquisition of the securities by the employee and applies to:
             
Number of securities
  «Shares»        
 
           
Description of securities
  Stock options        

 


 

             
Name of issuer of securities
  ArcSight, Inc.        
To be acquired by the Employee after 12 October 2004 under the terms of the ArcSight, Inc. 2002 Stock Plan, as amended.
4. Extent of Application
This election disapplies S.431(1) ITEPA: All restrictions attaching to the securities.
5. Declaration
This election will become irrevocable upon the later of its signing or the acquisition (and each subsequent acquisition) of employment-related securities to which this election applies.
In signing this joint election, we agree to be bound by its terms as stated above.
             
 
 
           
Signature (Employee)
      Date    
 
           
 
           
ArcSight, Inc.
      Date    
Director — ArcSight (UK) Limited
           
Note: Where the election is in respect of multiple acquisitions, prior to the date of any subsequent acquisition of a security it may be revoked by agreement between the employee and employer in respect of that and any later acquisition.

 


 

ArcSight, Inc. 2002 Stock Plan
Notice of Stock Option Exercise
You must sign this Notice on Page 3 before submitting it to the Company.
                 
Optionee Information:            
 
               
Name:
          Social Security Number:    
 
               
Address:
               
 
               
 
               
             
 
               
             
 
               
Option Information:            
 
Date of Grant:                           , 200                   Type of Stock Option:
 
               
Exercise Price Per Share: $                                                          o      Nonstatutory (NSO)
 
               
Total number of shares of Common Stock of ArcSight,
Inc. (the “Company”) covered by option:                                                        
                o      Incentive (ISO)
 
               
Exercise Information:            
Number of shares of Common Stock of the Company for which option is being exercised now:                     . (These shares are referred to below as the “Purchased Shares.”)
Form of payment enclosed [check all that apply]:
o   Check for $                    , payable to “ArcSight, Inc.”
 
o   Certificate(s) for                      shares of Common Stock of the Company that I have owned for at least six months. (These shares will be valued as of the date this notice is received by the Company.)
Name(s) in which the Purchased Shares should be registered [check one box]:
o   In my name only
 
o   In the names of my spouse and myself as                                                                     My spouse’s name (if applicable):
community property                                                                                                                                                                    

 


 

         
o
  In the names of my spouse and myself as community property with the right of survivorship    
 
       
o
  In the names of my spouse and myself as joint tenants with the right of survivorship    
 
       
o
  In the name of an eligible revocable trust [requires Stock Transfer Agreement]   Full legal name of revocable trust:
 
       
 
       
 
       
 
       
 
       
 
       
     
The certificate for the Purchased Shares should be sent to the following address:
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Representations and Acknowledgments of the Optionee:
1.   I represent and warrant to the Company that I am acquiring and will hold the Purchased Shares for investment for my account only, and not with a view to, or for resale in connection with, any “distribution” of the Purchased Shares within the meaning of the Securities Act of 1933, as amended (the “Securities Act”). I have no present intention of selling or otherwise disposing of all or any portion of the Purchased Shares.
2.   I understand that the Purchased Shares have not been registered under the Securities Act by reason of a specific exemption therefrom and that the Purchased Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or I obtain an opinion of counsel (in form and substance satisfactory to the Company and its counsel) that registration is not required.
3.   I acknowledge that the Company is under no obligation to register the Purchased Shares.
4.   I am aware of the adoption of Rule 144 by the Securities and Exchange Commission under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions. These conditions include (without limitation) that certain current public information about the issuer is available, that the resale occurs only after the holding period required by Rule 144 has been satisfied, that the sale occurs through an unsolicited “broker’s transaction” and that the amount of securities being sold during any three-month period does not exceed specified limitations. I understand that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company has no plans to satisfy these conditions in the foreseeable future.

 


 

5.   I will not sell, transfer or otherwise dispose of the Purchased Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act.
 
6.   I acknowledge that I have received and had access to such information as I consider necessary or appropriate for deciding whether to invest in the Purchased Shares and that I had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Purchased Shares. At no time was I presented with or solicited by any publicly issued or circulated newspaper, mail, radio, television or other form of general advertising or solicitation in connection with the offer, sale and purchase of the Purchased Shares.
 
7.   I am aware that my investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. I am able, without impairing my financial condition, to hold the Purchased Shares for an indefinite period and to suffer a complete loss of my investment in the Purchased Shares.
 
8.   I acknowledge that the Purchased Shares remain subject to the Company’s right of first refusal and the market stand-off (sometimes referred to as the “lock-up”), all in accordance with the applicable Notice of Stock Option Grant and Stock Option Agreement.
 
9.   I acknowledge that I am acquiring the Purchased Shares subject to all other terms of the ArcSight, Inc. 2002 Stock Plan, the Notice of Stock Option Grant and Stock Option Agreement, and this Notice of Stock Option Exercise. I acknowledge that there may be adverse tax consequences upon exercise of the option or disposition of the Purchased Shares, and that I should consult a tax adviser prior to such exercise or disposition.
 
10.   I acknowledge that the Company has encouraged me to consult my own adviser to determine the form of ownership that is appropriate for me. In the event that I choose to transfer my Purchased Shares to a trust, I agree to sign a Stock Transfer Agreement. In the event that I choose to transfer my Purchased Shares to a trust that is not an eligible revocable trust, I also acknowledge that the transfer may be treated as a “disposition” for tax purposes. As a result, the favorable ISO tax treatment will be unavailable and other unfavorable tax consequences may occur.
 
11.   THE ARCSIGHT, INC. 2002 STOCK PLAN, THE NOTICE OF STOCK OPTION GRANT AND STOCK OPTION AGREEMENT, AND THIS NOTICE OF STOCK OPTION EXERCISE ARE INTENDED TO COMPLY WITH SECTION 25102(o) OF THE CALIFORNIA CORPORATIONS CODE AND ANY RULES (INCLUDING COMMISSIONER RULES, IF APPLICABLE) OR REGULATIONS PROMULGATED THEREUNDER BY THE CALIFORNIA DEPARTMENT OF CORPORATIONS (THE “REGULATIONS”). ANY PROVISION OF THIS NOTICE OF STOCK OPTION EXERCISE THAT IS INCONSISTENT WITH SECTION 25102(o) SHALL, WITHOUT FURTHER ACT OR AMENDMENT BY THE COMPANY OR THE BOARD, BE REFORMED TO COMPLY WITH THE REQUIREMENTS OF SECTION 25102(o). THE SALE OF THE SECURITIES THAT

 


 

    ARE THE SUBJECT OF THIS NOTICE OF STOCK OPTION EXERCISE, IF NOT YET QUALIFIED WITH THE CALIFORNIA COMMISSIONER OF CORPORATIONS AND NOT EXEMPT FROM SUCH QUALIFICATION, IS SUBJECT TO SUCH QUALIFICATION, AND THE ISSUANCE OF SUCH SECURITIES, AND THE RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE IS EXEMPT. THE RIGHTS OF THE PARTIES TO THIS NOTICE OF STOCK OPTION EXERCISE ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION BEING AVAILABLE.
 
12.   I agree to seek the consent of my spouse to the extent required by the Company to enforce the foregoing.
         
Signature:
  Date:    
 
       
 
       
The company will not check to determine whether the form of ownership that you elect in your Notice of Stock Option Exercise is appropriate. You should consult your own advisers on this subject. If an inappropriate election is made, the form of ownership may not withstand legal scrutiny or may have adverse tax consequences.

 


 

ArcSight, Inc. 2002 Stock Plan
Notice of Stock Option Exercise (Note Available)
You must sign this Notice on Page 3 before submitting it to the Company.
Optionee Information:
                 
Name:
          Social Security Number:    
 
               
Address:
          Employee Number:    
 
               
 
               
             
Option Information:
     
Date of Grant:                                         , 200___
  Type of Stock Option:
 
   
Exercise Price per Share: $                                         
  o      Nonstatutory (NSO)
 
   
Total number of shares of Common Stock of ArcSight, Inc. (the “Company”) covered by option:                                        
  o      Incentive (ISO)
Exercise Information:
Number of shares of Common Stock of the Company for which option is being exercised now: .                                         . (These shares are referred to below as the “Purchased Shares.”)
Total Exercise Price for the Purchased Shares: $                                        
Form of payment enclosed [check all that apply]:
o Check for $                                         , payable to “ArcSight, Inc.”
o Full-recourse promissory note for $                                         , payable to “ArcSight, Inc.,” plus check for the par value of the Purchased Shares.
o Certificate(s) for                                         shares of Common Stock of the Company that I have owned for at least six months. (These shares will be valued as of the date this notice is received by the Company.)
o Attestation Form covering                                         shares of Common Stock of the Company. (These shares will be valued as of the date this notice is received by the Company.)
Name(s) in which the Purchased Shares should be registered [please review the attached explanation of the available forms of ownership, and then check one box]:
 1 

 


 

         
o
  In my name only    
 
       
o
  In the names of my spouse and myself as community property   My spouse’s name (if applicable):
 
       
o
  In the names of my spouse and myself as joint tenants with the right of survivorship    
 
       
o
  In the name of an eligible revocable trust [requires Stock Transfer Agreement]   Full legal name of revocable trust:
 
 
       
 
       
 
       
 
       
 
       
 
       
The certificate for the Purchased Shares should be sent to the following address:    
 
       
 
       
 
       
 
       
 
       
 
       
 
       
Representations and Acknowledgments of the Optionee:
1.   I represent and warrant to the Company that I am acquiring and will hold the Purchased Shares for investment for my account only, and not with a view to, or for resale in connection with, any “distribution” of the Purchased Shares within the meaning of the Securities Act of 1933, as amended (the “Securities Act”).
 
2.   I understand that the Purchased Shares have not been registered under the Securities Act by reason of a specific exemption therefrom and that the Purchased Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or I obtain an opinion of counsel (in form and substance satisfactory to the Company and its counsel) that registration is not required.
 
3.   I acknowledge that the Company is under no obligation to register the Purchased Shares.
 
4.   I am aware of the adoption of Rule 144 by the Securities and Exchange Commission under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions. These conditions include (without limitation) that certain current public information about the issuer is available, that the resale occurs only after the holding period required by Rule 144 has been satisfied, that the sale occurs through an unsolicited “broker’s transaction” and that the amount of securities being sold during any three-month period does not exceed specified limitations. I understand that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company has no plans to satisfy these conditions in the foreseeable future. I recognize that the holding period required by Rule 144 generally will not start until I have paid for the Purchased Shares (including full payment of any promissory note that I signed at the time of exercise).
 2 

 


 

5.   I will not sell, transfer or otherwise dispose of the Purchased Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act.
 
6.   I acknowledge that I have received and had access to such information as I consider necessary or appropriate for deciding whether to invest in the Purchased Shares and that I had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Purchased Shares.
 
7.   I am aware that my investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. I am able, without impairing my financial condition, to hold the Purchased Shares for an indefinite period and to suffer a complete loss of my investment in the Purchased Shares.
 
8.   I acknowledge that the Purchased Shares remain subject to the Company’s right of first refusal and the market stand-off (sometimes referred to as the “lock-up”) and may remain subject to the Company’s right of repurchase at the exercise price, all in accordance with the applicable Notice of Stock Option Grant and Stock Option Agreement.
 
9.   I acknowledge that I am acquiring the Purchased Shares subject to all other terms of the Notice of Stock Option Grant and Stock Option Agreement.
 
10.   I acknowledge that I have received a copy of the Company’s explanation of the forms of ownership available for my Purchased Shares. I acknowledge that the Company has encouraged me to consult my own adviser to determine the form of ownership that is appropriate for me. In the event that I choose to transfer my Purchased Shares to a trust, I agree to sign a Stock Transfer Agreement. In the event that I choose to transfer my Purchased Shares to a trust that does not satisfy the requirements described in the attached explanation (i.e. a trust that is not an eligible revocable trust), I also acknowledge that the transfer will be treated as a “disposition” for tax purposes. As a result, the favorable ISO tax treatment will be unavailable and other unfavorable tax consequences may occur.
 
11.   I acknowledge that I have received a copy of the Company’s explanation of the federal income tax consequences of an option exercise and the tax election under section 83(b) of the Internal Revenue Code. In the event that I choose to make a section 83(b) election, I acknowledge that it is my responsibility—and not the Company’s responsibility—to file the election in a timely manner, even if I ask the Company or its agents to make the filing on my behalf. I acknowledge that the Company has encouraged me to consult my own adviser to determine the tax consequences of acquiring the Purchased Shares at this time.
 
12.   I agree to seek the consent of my spouse to the extent required by the Company to enforce the foregoing.
         
SIGNATURE:
  DATE:    
 
       
 
       
 3 

 


 

Explanation of Forms of Stock Ownership
Purpose of This Explanation
The purpose of this explanation is to provide you with a brief summary of the forms of legal ownership available for the shares that you are purchasing (the “Purchased Shares”). For a number of reasons, this explanation is no substitute for personal legal advice:
  To make the explanation short and readable, only the highlights are covered. Some legal rules are not addressed, even though they may be important in particular cases.
  While the summary attempts to deal with the most common situations, your own situation may well be different from the norm.
  The law may change, and the Company is not responsible for updating this summary.
For these reasons, the Company strongly encourages you to consult your own adviser before exercising your option and before making a decision about the form of ownership for your shares.
Overview
The Notice of Stock Option Exercise offers four forms of taking title to the Purchased Shares:
  In your name only,
  In your name and the name of your spouse as community property,
  In your name and the name of your spouse as joint tenants with the right of survivorship, or
  In the name of an eligible revocable trust.
Title in the Purchased Shares depends upon (a) your marital status, (b) the marital property laws of your state of residence and (c) any agreement with your spouse altering the existing marital property laws of your state of residence. If you are not married, you generally will take title in your name alone. If you are married, title depends upon the marital property laws of your state of residence. In general, states are classified either as “community property” states or as “common-law property” states. (But individual state law may vary within these classifications.)
Community Property and Joint Tenancy
Community property states include California, Texas, Washington, Arizona, Nevada, New Mexico, Idaho, Louisiana and Wisconsin. In a community property state, property acquired during marriage by either spouse is deemed to be one-half owned by each spouse. All other property is classified as the separate property of the spouse who acquires the property. While either spouse has equal management and control over the community property and may sell, spend or encumber all community property, neither spouse may gift community property or
 4 

 


 

partition his/her one-half interest without the consent of the other spouse. Upon divorce, all community property is divided equally among the spouses and each spouse is entitled to retain all of his/her separate property. Upon the death of a spouse, one-half of the community property (and all of the decedent spouse’s separate property) will pass to the decedent spouse’s heirs. The other one-half of the community property remains the property of the surviving spouse.
Other states are common-law property states. In a common-law property state, each spouse is generally deemed to own whatever he/she earns or acquires.
A married couple may elect to alter the marital property rules by mutually agreeing to take title to property in other forms. For example, a couple residing in a community property state may enter into an agreement and transform what otherwise would be community property into the separate property of the spouse who earns or acquires the property.
In addition, many community property and common-law property states allow married couples to take joint title in property acquired during marriage. For example, California allows a married couple to take title in a joint tenancy with the right of survivorship. In a joint tenancy, each spouse owns a one-half interest in the property as separate property. This means that each spouse may transfer or sell his/her one-half interest in the property. However, unlike traditional separate property, a spouse cannot transfer his/her one-half interest to heirs at death. Instead, the surviving spouse automatically receives the decedent spouse’s one-half interest and becomes the full owner of the property. (This is called the “right of survivorship.”) Both spouses must consent to taking property in a joint tenancy in lieu of having the community property laws apply.
If you have the Purchased Shares issued in a form other than those described above, then the transfer will be treated as a “disposition” for tax purposes. This means that the effect, for tax purposes, will be the same as selling the Purchased Shares. Please refer to the attached tax summary for additional information.
Trusts
A transfer to a trust generally should not be treated as a “disposition” of the Purchased Shares for tax purposes if the trust satisfies each of the following conditions:
  You are the sole grantor of the trust,
 
  You are the sole trustee, or you and your spouse are the sole co-trustees,
 
  The trustee or trustees are not required to distribute the income of the trust to any person other than you and/or your spouse while you are alive, and
 
  The trust permits you to revoke all or part of the trust and to have the trust’s assets returned to you, without the consent of any other person (including your spouse).
If you have the Purchased Shares issued to a trust that does not meet these requirements, then the transfer will be treated as a “disposition” for tax purposes. This means that the effect, for tax purposes, will be the same as selling the Purchased Shares. Please refer to the attached tax
 5 

 


 

summary for additional information.
If you have the Purchased Shares issued to any trust, you will be required to sign a Stock Transfer Agreement in your capacity as trustee. Under the Stock Transfer Agreement, the Purchased Shares remain subject to the Company’s right of first refusal and may remain subject to the Company’s right of repurchase at the exercise price, all in accordance with the applicable Notice of Stock Option Grant and Stock Option Agreement.
The Company will not check to determine whether the form of ownership that you elect in your Notice of Stock Option Exercise is appropriate. You should consult your own advisers on this subject. If an inappropriate election is made, the form of ownership may not withstand legal scrutiny or may have adverse tax consequences.
 6 

 


 

Explanation of Federal Income Tax Consequences and
Section 83(b) Election
(Current as of February 2002)
Purpose of this Explanation
The purpose of this explanation is to provide you with a brief summary of the tax consequences of exercising your option. For a number of reasons, this explanation is no substitute for personal tax advice:
  To make the explanation short and readable, only the highlights are covered. Some tax rules are not addressed, even though they may be important in particular cases.
 
  While the summary attempts to deal with the most common situations, your own tax situation may well be different from the norm.
 
  State and foreign income taxes are not addressed at all, even though they could have a significant impact on your tax planning. Likewise, federal gift and estate taxes and state inheritance taxes are not discussed.
 
  Tax planning involving incentive stock options is exceedingly complex, in part because of the possible application of the alternative minimum tax.
 
  The explanation assumes that you are paying the exercise price of your option in cash (or in the form of a full-recourse promissory note with an interest rate that meets IRS requirements). If you are paying the exercise price in the form of stock, you become subject to special rules that are not addressed here.
 
  The tax rules change often, and the Company is not responsible for updating this summary.
For these reasons, the Company strongly encourages you to consult your own tax adviser before exercising your option and before making a decision about filing or not filing a section 83(b) election.
Limit on ISO Treatment
The Notice of Stock Option Grant indicates whether your option is a nonstatutory stock option (NSO) or an incentive stock option (ISO). The favorable tax treatment for ISOs is limited, regardless of what the Notice of Stock Option Grant indicates. Of the options that become exercisable in any calendar year, only options covering the first $100,000 of stock are eligible for ISO treatment. The excess over $100,000 automatically receives NSO treatment. For this purpose, stock is valued at the time of grant. This means that the value is generally equal to the exercise price.
 7 

 


 

For example, assume that you hold an option to buy 50,000 shares for $4 per share. Assume further that the entire option is exercisable immediately after the date of grant. (It is irrelevant when the underlying stock vests.) Only the first 25,000 shares qualify for ISO treatment. (25,000 times $4 equals $100,000.) The remaining 25,000 shares will be treated as if they had been acquired by exercising an NSO. This is true regardless of when the option is actually exercised; what matters is when it first could have been exercised.
Exercise of Nonstatutory Stock Option to Purchase Vested Shares
The Notice of Stock Option Grant indicates whether your Purchased Shares are already vested. Vested shares are no longer subject to the Company’s right to repurchase them at the exercise price, although they are still subject to the Company’s right of first refusal. If you know that your Purchased Shares are already vested, there is no need to file a section 83(b) election.
If you are exercising an NSO to purchase vested shares, you will be taxed now. You will recognize ordinary income in an amount equal to the difference between (a) the fair market value of the Purchased Shares on the date of exercise and (b) the exercise price you are paying. If you are an employee or former employee of the Company, this amount is subject to withholding for income and payroll taxes. Your tax basis in the Purchased Shares (to calculate capital gain when you sell the shares) is equal to their fair market value on the date of exercise.
Exercise of NSO to Purchase Non-Vested Shares
If you are exercising an NSO to purchase non-vested shares, and if you do not file a timely election under section 83(b) of the Internal Revenue Code, then you will not be taxed now. Instead, you will be taxed whenever an increment of Purchased Shares vests — in other words, when the Company no longer has the right to repurchase those shares at the exercise price. The Notice of Stock Option Grant indicates when this occurs, generally over a period of several years. Whenever an increment of Purchased Shares vests, you will recognize ordinary income in an amount equal to the difference between (a) the fair market value of those Purchased Shares on the date of vesting and (b) the exercise price you are paying for those Purchased Shares. If you are an employee or former employee of the Company, this amount will be subject to withholding for income and payroll taxes. Your tax basis in the Purchased Shares (to calculate capital gain when you sell the shares) will be equal to their fair market value on the date of vesting.
If you are exercising an NSO to purchase non-vested shares, and if you file a timely election under section 83(b) of the Internal Revenue Code, then you will be taxed now. You will recognize ordinary income in an amount equal to the difference between (a) the fair market value of the Purchased Shares on the date of exercise and (b) the exercise price you are paying. If you are an employee or former employee of the Company, this amount is subject to withholding for income and payroll taxes. Your tax basis in the Purchased Shares (to calculate capital gain when you sell the shares) is equal to their fair market value on the date of exercise. Even if the fair market value of the Purchased Shares on the date of exercise equals the exercise price (and thus no tax is payable), the section 83(b) election must be made in order to avoid having any subsequent appreciation taxed as ordinary income at the time of vesting.
 8 

 


 

You must file a section 83(b) election with the Internal Revenue Service within 30 days after the Notice of Stock Option Exercise is signed. The 30-day filing period cannot be extended. If you miss the deadline, you will be taxed as the Purchased Shares vest, based on the value of the shares at that time. (See above.) The form for making the 83(b) election is attached. Additional copies of the form must be filed with the Company and with your tax return for the year in which you make the election.
Exercise of ISO and ISO Holding Periods
If you are exercising an ISO, you will not be taxed under the regular tax rules until you dispose of the Purchased Shares.1 (The alternative minimum tax rules are described below.) The tax treatment at the time of disposition depends on how long you hold the shares. You will satisfy the ISO holding periods if you hold the Purchased Shares until the later of the following dates:
  The date two years after the ISO was granted, and
 
  The date one year after the ISO is exercised.
Disposition of ISO Shares
If you dispose of the Purchased Shares after satisfying both of the ISO holding periods, then you will recognize only a long-term capital gain at the time of disposition. The amount of the capital gain is equal to the difference between (a) the sales proceeds and (b) the exercise price. In general, the maximum marginal federal income tax rate on long-term capital gains is 20%.
If you dispose of the Purchased Shares before either or both of the ISO holding periods are met, then you will recognize ordinary income at the time of disposition. The calculation of the ordinary income amount depends on whether the shares are vested at the time of exercise.
  Shares Vested. If the shares are vested at the time of exercise, the amount of ordinary income will be equal to the difference between (a) the fair market value of the Purchased Shares on the date of exercise and (b) the exercise price. But if the disposition is an arm’s length sale to an unrelated party, the amount of ordinary income will not exceed the total gain from the sale. Under current IRS rules, the ordinary income amount will not be subject to withholding for income or payroll taxes. Your tax basis in the Purchased Shares will be equal to their fair market value on the date of exercise. Any gain in excess of your basis will be taxed as a capital gain — either long-term or short-term, depending on how long you hold the Purchased Shares after the date of exercise.
 
  Shares Not Vested—No 83(b) Election Filed. If the Purchased Shares are not vested at the time of exercise, and if you do not file a timely election under section 83(b) of the Internal Revenue Code, then the amount of ordinary income will be equal to the difference between
 
1   Generally, a “disposition” of shares purchased under an ISO encompasses any transfer of legal title, such as a transfer by sale, exchange or gift. It generally does not include a transfer to your spouse, a transfer into joint ownership with right of survivorship (if you remain one of the joint owners), a pledge, a transfer by bequest or inheritance, or certain tax-free exchanges permitted under the Internal Revenue Code. A transfer to a trust is a “disposition” unless the trust is an eligible revocable trust, as described in the attached explanation.
 9 

 


 

(a) the fair market value of the Purchased Shares on the date of vesting and (b) the exercise price. But if the disposition is an arm’s length sale to an unrelated party, the amount of ordinary income will not exceed the total gain from the sale. Under current IRS rules, the ordinary income amount will not be subject to withholding for income or payroll taxes. Your tax basis in the Purchased Shares will be equal to their fair market value on the date of vesting. Any gain in excess of your basis will be taxed as a capital gain — either long-term or short-term, depending on how long you hold the Purchased Shares after the date of vesting.
  Shares Not Vested—Timely 83(b) Election Filed. If the shares are not vested at the time of exercise, and if you file a timely election under section 83(b) of the Internal Revenue Code, then the amount of ordinary income should be equal to the difference between (a) the fair market value of the Purchased Shares on the date of exercise and (b) the exercise price. In other words, the 83(b) election should cause the ordinary income to be calculated as if the shares were vested at the time of exercise. All other rules described above for the purchase of vested shares by exercising an ISO apply here as well. You must file an 83(b) election with the Internal Revenue Service within 30 days after the Notice of Stock Option Exercise is signed. The 30-day filing period cannot be extended. Note that, in the case of an ISO, the 83(b) election does not trigger an immediate tax; it merely affects how the ordinary income should be calculated when you dispose of the Purchased Shares. If you miss the filing deadline, the amount of your ordinary income will be based on the value of the Purchased Shares at the time they vest. (See above.) The form for making the 83(b) election is attached. Additional copies of the form must be filed with the Company and with your tax return for the year in which you make the election.
You may not know at this time whether you will dispose of your Purchased Shares before meeting the two holding periods. You should nevertheless consider filing an 83(b) election. If you meet the holding periods, the election will be moot for purposes of the regular tax system, since you will have no ordinary income. (The effect of the election under the alternative minimum tax system is discussed below.) If you do not satisfy the holding periods, then the election should take effect and should limit your ordinary income to the gain that existed at the time of exercise.
It is not certain that an 83(b) election is effective in conjunction with an ISO. The Internal Revenue Service may take the position that the 83(b) election — even if filed on time — must be disregarded for purposes of the regular tax system. The Company strongly encourages you to consult your own tax adviser before exercising an ISO and before making a decision about filing or not filing a section 83(b) election in conjunction with an ISO.
Summary of Alternative Minimum Tax
The alternative minimum tax (AMT) must be paid if it exceeds your regular income tax. The AMT is equal to 26% of your alternative minimum tax base up to $175,000 and 28% of the excess over $175,000. (In the case of married individuals filing separately, the breakpoint is $87,500 rather than $175,000.) Your alternative minimum tax base is equal to your alternative
 10 

 


 

minimum taxable income (AMTI) minus your exemption amount.
  Alternative Minimum Taxable Income. Your AMTI is equal to your regular taxable income, subject to certain adjustments and increased by items of tax preference. Among the many adjustments made in computing AMTI are the following:
    State and local income and property taxes are not allowed as a deduction.
 
    Miscellaneous itemized deductions are not allowed.
 
    Medical expenses are not allowed as a deduction until they exceed 10% of adjusted gross income (as opposed to the 7.5% floor that applies to regular income taxes).
 
    Certain interest deductions are not allowed.
 
    The standard deduction and personal exemptions are not allowed.
 
    When an ISO is exercised, the spread is treated as if the option were an NSO. (See discussion below.)
  Exemption Amount. Before AMT is calculated, AMTI is reduced by the exemption amount. The exemption amount is as follows:
                         
       
    Joint Returns:   Single Returns:   Separate Returns:
Through 2004
  $ 49,000     $ 36,750     $ 24,500  
       
After 2004
  $ 45,000     $ 33,750     $ 22,500  
       
The exemption amount is phased out by 25 cents for each $1 by which AMTI exceeds the following levels:
         
Joint Returns: $150,000
  Single Returns: $112,500 Separate Returns: $75,000
This means, for example, that the entire $45,000 exemption amount disappears for married individuals filing joint returns when AMTI reaches $330,000.
Application of AMT when ISO is Exercised
As noted above, when an ISO is exercised, the spread is treated for AMT purposes as if the option were an NSO. In other words, the spread is included in AMTI at the time of exercise, unless the Purchased Shares are not yet vested at the time of exercise. If the Purchased Shares are not yet vested, the value of the shares minus the exercise price is included in AMTI when the shares vest. If you make an election under section 83(b) within 30 days after exercise, then the spread is included in AMTI at the time of exercise. You must file an 83(b) election with the Internal Revenue Service within 30 days after the Notice of Stock Option Exercise is signed. The 30-day filing period cannot be extended.
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A special rule applies if you dispose of the Purchased Shares in the same year in which you exercised the ISO. If the amount you realize on the sale is less than the value of the stock at the time of exercise, then the amount includible in AMTI on account of the ISO exercise is limited to the gain realized on the sale.2
To the extent that your AMT is attributable to the spread on exercising an ISO (and certain other items), the AMT paid may be applied as a credit against your regular income tax liability in future years. But this tax credit cannot reduce your regular income tax liability in any future tax year below your AMT for that year. The AMT credit may be carried forward indefinitely, but it may not be carried back. (In practice, many optionees who paid AMT upon exercising an ISO find that they cannot fully use this tax credit for many years, if at all.)
When Purchased Shares are sold, your basis for purposes of computing the capital gain or loss under the AMT system is increased by the option spread that exists at the time of exercise. Again, an ISO is treated under the AMT system much like an NSO is treated under the regular tax system. But your basis in the ISO shares for purposes of computing gain or loss under the regular tax system is equal to the exercise price; it does not reflect any AMT that you pay on the spread at exercise. Therefore, if you pay AMT in the year of the ISO exercise and regular income tax in the year of selling the Purchased Shares, you could pay tax twice on the same gain (except to the extent that you can use the AMT credit described above).
 
2   This is similar to the rule that applies under the regular tax system in the event of a disqualifying disposition of ISO stock. The amount of ordinary income that must be recognized in that case generally does not exceed the amount of the gain realized in the disposition.
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Section 83(b) Election
This statement is made under Sections 55 and 83(b) of the Internal Revenue Code of 1986, as amended, pursuant to Treasury Regulations Section 1.83-2.
  A.   The taxpayer who performed the services is:
 
      Name:                                                                 
 
      Address:                                                             
 
                                                                                  
 
      Social Security No.:                                            
 
  B.   The property with respect to which the election is made is                     shares of the common stock of ArcSight, Inc.
 
  C.   The property was transferred on                                                                  ,                      .
 
  D.   The taxable year for which the election is made is the calendar year                     .
 
  E.   The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason taxpayer’s service with the issuer terminates. The issuer’s repurchase right lapses in a series of installments over a                       -year period ending on                                         ,                      .
 
  F.   The fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $                     per share.
 
  G.   The amount paid for such property is $                     per share.
 
  H.   A copy of this statement was furnished to ArcSight, Inc., for whom taxpayer rendered the services underlying the transfer of such property.
 
  I.   This statement is executed on                                                               ,                       .
     
 
   
Signature of Spouse (if any)
  Signature of Taxpayer
Within 30 days after the date of exercise, this election must be filed with the Internal Revenue Service Center where the Optionee files his or her federal income tax returns. The filing should be made by registered or certified mail, return receipt requested. The Optionee must (a) file a copy of the completed form with his or her federal tax return for the current tax year and (b) deliver an additional copy to the Company.
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EX-10.17 9 f28075orexv10w17.htm EXHIBIT 10.17 exv10w17
 

Exhibit 10.17
LEASE AGREEMENT
between
ECI TWO RESULTS LLC,
as “Landlord
and
ARCSIGHT, INC.
as “Tenant

 


 

TABLE OF CONTENTS

i


 

TABLE OF CONTENTS
             
SECTION       PAGE  
1.  
PREMISES, PROJECT, CAMPUS AND COMMON AREAS
    5  
2.  
TERM
    5  
3.  
RENT
    6  
4.  
SECURITY DEPOSIT
    11  
5.  
USE AND COMPLIANCE WITH LAWS
    11  
6.  
TENANT IMPROVEMENTS & ALTERATIONS
    14  
7.  
MAINTENANCE AND REPAIRS
    16  
8.  
TENANT’S TAXES
    18  
9.  
UTILITIES AND SERVICES
    18  
10.  
EXCULPATION AND INDEMNIFICATION
    20  
11.  
INSURANCE
    21  
12.  
DAMAGE OR DESTRUCTION
    23  
13.  
CONDEMNATION
    25  
14.  
ASSIGNMENT AND SUBLETTING
    26  
15.  
DEFAULT AND REMEDIES
    29  
16.  
LATE CHARGE AND INTEREST
    31  
17.  
WAIVER
    32  
18.  
ENTRY, INSPECTION AND CLOSURE
    32  
19.  
SURRENDER AND HOLDING OVER
    33  
20.  
ENCUMBRANCES
    34  
21.  
ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS
    35  
22.  
NOTICES
    35  
23.  
ATTORNEYS’ FEES
    35  
24.  
QUIET POSSESSION
    36  
25.  
SECURITY MEASURES
    36  
26.  
FORCE MAJEURE
    36  
27.  
RULES AND REGULATIONS
    37  
28.  
LANDLORD’S LIABILITY
    37  
29.  
CONSENTS AND APPROVALS
    37  
30.  
WAIVER OF RIGHT TO JURY TRIAL
    37  
31.  
BROKERS
    38  
32.  
RELOCATION OF PREMISES
    38  
33.  
MISCELLANEOUS
    38  
34.  
AUTHORITY
    38  
35.  
HAZARDOUS SUBSTANCE DISCLOSURE
    39  
36.  
ENTIRE AGREEMENT
    39  

-i-


 

INDEX OF DEFINED TERMS
         
 
       
Additional Rent
    9  
Affiliate
    30  
Alterations
    15  
Annual Expenses
    10  
Award
    25  
Broker
    39  
Building
    5  
Building Rules
    38  
Building Systems
    12  
Campus
    5  
Claims
    21  
Common Areas
    5  
Condemnation
    25  
Condemnor
    25  
Construction Rider
    15  
Control
    30  
Controls
    18  
Date of Condemnation
    26  
Encumbrance
    35  
Environmental Losses
    13  
Environmental Requirements
    13  
Event of Default
    30  
Existing Premises
    5  
Existing Premises Commencement Date
    6  
Expansion Premises
    5  
Expansion Premises Commencement Date
    6  
Expiration Date
    6  
Fees
    36  
Handled by Tenant
    13  
Handling by Tenant
    13  
Hazardous Materials
    12  
HVAC
    12  
Interest Rate
    33  
Land
    5  
Landlord
    5  
Landlord Parties
    14  
Late Charge
    32  
Laws
    7  
Main Utility Lines
    5  
Minor Changes
    15  
Mortgagee
    35  
Newly Enacted Laws
    7  
Operating Costs
    6  
Parking Facility
    5  
Past Due Notice
    32  
Permitted Hazardous Materials
    13  
Permitted Transfer
    30  
Permitted Transferee
    30  
Premises
    5  
Premises Utilities
    19  
Project
    5  
Property Manager
    22  
Proposed Transferee
    27  
Rent
    11  
Rental Tax
    18  
Representatives
    13  
Security Deposit
    11  
Service Failure
    19  
Structural Elements
    17  
Taxes
    8  
Telecommunication Provider
    21  
Tenant
    5  
Tenant Improvements
    15  
Tenant’s Inspection
    10  
Tenant’s Inspection Notice
    10  
Tenant’s Share of the Building
    8  
Tenant’s Taxes
    18  
Term
    6  
Trade Fixtures
    16  
Transfer
    27  
Transfer Consideration
    28  
Transferee
    27  
Visitors
    13  

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BASIC LEASE INFORMATION
     
Lease Date:
  For identification purposes only, the date of this Lease is April 24, 2007
 
   
Landlord:
  ECI TWO RESULTS LLC, a California limited liability company
 
   
Tenant:
  ARCSIGHT, INC., a Delaware corporation
 
   
Project:
  Site One at Results Way Corporate Park, consisting of four (4) buildings containing a total of approximately 146,237 rentable square feet, located at Two, Three, Four and Five Results Way, Cupertino, CA 95014, and the land parcel(s) of approximately 8 acres on which such buildings and their associated parking areas are situated, including “Common Areas” serving the Project, which Common Areas consist of: driveways, sidewalks, landscaping, parking and other common exterior areas available for use by occupants.
 
   
Campus:
  The Results Way Corporate Park, including the Project, and approximately 12 acres adjacent to the Project, as more particularly defined in Article 1 of the Lease
 
   
Premises:
  The Premises consists of two (2) spaces, (a) one of which is the Existing Premises, and (b) the other of which is the Expansion Premises, both as defined below.
 
   
 
  The Premises contains a total of approximately 79,629 rentable square feet
     
Building Address of
Existing Premises:
  Five Results Way
 
   
Existing Premises:
  The entire Building located at Five Results Way, and containing approximately 44,320 rentable square feet
 
   
Building Address of
Expansion Premises:
  Four Results Way
 
   
Expansion Premises:
  The entire Building located at Four Results Way and containing approximately 35,309 rentable square feet
 
   
Existing Premises
Commencement Date:
  May 1, 2007

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Expansion Premises
Commencement Date:
  October 1, 2007
 
   
Term:
  Seventy-eight (78) full calendar months following the Existing Premises Commencement Date
 
   
Expiration Date:
  October 31, 2013
 
   
Base Rent:
   
         
 
  05/01/07 — day
immediately before the
Expansion Premises
Commencement Date:
  $81,992.00 per month
 
       
 
  Expansion Premises
Commencement
Date — 04/30/08:
  $147,313.65 per month
 
       
 
  05/01/08 — 04/30/09:   $153,206.20 per month
 
  05/01/09 — 04/30/10:   $159,334.44 per month
 
  05/01/10 — 04/30/11:   $165,707.82 per month
 
  05/01/11— 04/30/12:   $172,336.13 per month
 
  05/01/12 — 04/30/13:   $179,229.58 per month
 
  05/01/13 — 10/31/13:   $186,398.76 per month
     
Maintenance, Operating
Costs and Taxes:
  This is a “triple net lease” where Tenant is responsible for maintenance of specific portions of the Premises, and reimbursing Landlord for operating costs and taxes, all as more specifically contained in the applicable provisions of the Lease.
 
   
Tenant’s Share of
each of the Buildings:
  100%
 
   
Security Deposit:
  $200,000.00 cash, subject to reduction in steps to $100,000.00 in accordance with the provisions contained in Article 40 of Exhibit D attached hereto, plus:
 
   
 
  As additional security for Tenant’s obligations under this Lease, on execution of this Lease Tenant shall deliver to Landlord a $800,000 letter of credit in accordance with the provisions of Article 4 of this Lease, as more particularly described in Section 40 of Exhibit D attached hereto.

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Landlord’s Address
for Payment of Rent:
  ECI TWO RESULTS LLC
One Results Way
P.O. Box 301104
Los Angeles, CA 90030-1104
 
   
Landlord’s Address
for Notices:
  ECI TWO RESULTS LLC
c/o Embarcadero Capital Partners, LLC
1301 Shoreway Road, Suite 250
Belmont, CA 94002
Attn: John Hamilton
 
   
 
  with a copy to:
 
   
 
  Ed Cherry, Esq.
Cox Castle & Nicholson LLP
555 Montgomery Street, Suite 1500
San Francisco, CA 94111
 
   
Tenant’s Address
for Notices:
  ArcSight, Inc.
Five Results Way
Cupertino, CA 95014
Attn: Stewart Grierson, Chief Financial Officer
 
   
Broker(s):
  Colliers International Services Group
 
   
Property Manager:
  CB Richard Ellis
 
   
             
Additional Provisions:
    37.     Parking
 
    38.     Right of First Offer
 
    39.     Extension Option
 
    40.     Letter of Credit and Security Deposit
 
    41.     Satellite Dish or Dishes
 
    42.     Signs

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Exhibits:
   
Exhibit A-1:
  The Existing Premises
Exhibit A-2:
  The Expansion Premises
Exhibit A-3:
  The Campus
Exhibit B:
  Construction Rider
Exhibit B-2:
  Preliminary Space Plan
Exhibit C:
  Building Rules
Exhibit D:
  Additional Provisions
Exhibit E:
  Form of Letter of Credit
     The Basic Lease Information set forth above is part of the Lease. In the event of any conflict between any provision in the Basic Lease Information and the Lease, the Lease shall control.

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     THIS LEASE is made as of the Lease Date set forth in the Basic Lease Information, by and between the Landlord identified in the Basic Lease Information (“Landlord”), and the Tenant identified in the Basic Lease Information (“Tenant”). Landlord and Tenant hereby agree as follows:
     1. PREMISES, PROJECT, CAMPUS AND COMMON AREAS.
          1.1 Leasing of the Premises. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, upon the terms and subject to the conditions of this Lease, the space identified in the Basic Lease Information as the Existing Premises (the “Existing Premises”), and the Expansion Premises (the “Expansion Premises”) in the buildings located at the addresses specified in the Basic Lease Information (individually and together, the “Building”). The Existing Premises and the Expansion Premises together constitute the Premises (the “Premises”). The approximate configuration and location of the Existing Premises is shown on Exhibit A-1. The approximate configuration and location of the Expansion Premises is shown on Exhibit A-2. Landlord and Tenant agree that the rentable area of the Existing Premises, the Expansion Premises and each Building for all purposes under this Lease shall be the Rentable Areas specified in the Basic Lease Information.
          1.2 The Project, Campus and Common Areas. Each Building is part of the Project identified in the Basic Lease Information (the “Project”), which includes the parcel(s) of land on which the Project is situated (the “Land”). Tenant shall have the non-exclusive right to use in common with other tenants in the Project, subject to the rules and regulations contained in Exhibit C, those portions of the Project, including the parking facilities serving the Project (the “Parking Facility”), which are provided, from time-to-time, for use in common by Landlord, Tenant and any other tenants in the Project (such areas are referred to herein as the “Common Areas”). The Project is part of the Results Way Corporate Park (the “Campus”), which also includes several buildings on approximately 12 acres of land adjacent to the Project. Certain of the Common Areas serve the Campus as a whole in addition to the Project or the Building. The Common Areas include the “Main Utility Lines”, consisting of the pipes, conduits, lines, trails and/or systems for electricity, telephone, water, storm drain, gas and sewer services serving all or a part of the Campus and located under or on portions of the Campus. A site plan showing the approximate configuration of the Project and Campus is contained on Exhibit A-3.
          1.3 Use of Common Areas. The manner in which the Common Areas are maintained and operated shall be at the sole discretion of Landlord and the use thereof shall be subject to any easements, to any covenants, conditions and restrictions of record, and to such rules, regulations and restrictions as Landlord may make from time to time. Landlord reserves the right to close temporarily, make alterations or additions to, or change the location of elements of the Project and the Common Areas provided that Tenant’s use of and access to the Premises and the Parking Facility are not materially diminished, except for any temporary closing of the Common Areas or Parking Facilities which materially limit Tenant’s access to the Premises for not more than three (3) consecutive Business Days.
     2. TERM. Tenant has been occupying the Existing Premises pursuant to a sublease which expires on April 30, 2007. The term of this Lease (the “Term”) shall commence on May 1, 2007 (the “Existing Premises Commencement Date” and, unless sooner terminated,

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shall expire on the Expiration Date set forth in the Basic Lease Information (the “Expiration Date”).
     The “Expansion Premises Commencement Date” shall be October 1, 2007. Notwithstanding the foregoing, if Tenant occupies the Expansion Premises prior to October 1, 2007, Tenant shall not be obligated to pay Base Rent for the Expansion Premises until October 1, 2007. Landlord shall not be liable for any claims, damages or liabilities if the Expansion Premises are not ready for occupancy by the Expansion Premises Commencement Date.
     3. RENT.
          3.1 Base Rent. Tenant agrees to pay to Landlord the Base Rent set forth in the Basic Lease Information, without prior notice or demand, on the first day of each and every calendar month during the Term, except that Base Rent for the first full calendar month in which Base Rent is payable shall be paid upon Tenant’s execution of this Lease and Base Rent for any partial month at the beginning of the Term shall be paid on the Commencement Date. Base Rent for any partial month at the beginning or end of the Term shall be prorated based on the actual number of days in the month.
     Tenant’s obligations to pay Base Rent and Additional Rent (as defined below) for the Existing Premises shall commence on the Existing Premises Commencement Date. Tenant’s obligations to pay Base Rent and Additional Rent for the Expansion Premises shall commence on the Expansion Premises Commencement Date.
     If the Basic Lease Information provides for any change in Base Rent by reference to years or months (without specifying particular dates), the change will take effect on the applicable annual or monthly anniversary of the Commencement Date (which might not be the first day of a calendar month).
     This Lease is intended to be a “net” lease, and the Base Rent shall be paid to Landlord absolutely net of all costs and expenses, except to the extent expressly provided to the contrary in this Lease. The provisions for payment of Operating Costs and Taxes are intended to pass on to Tenant and to reimburse Landlord for all costs and expenses incurred in connection with the ownership and operation of the Project and the Common Areas, except to the extent expressly provided to the contrary in this Lease.
          3.2 Additional Rent: Operating Costs and Taxes.
               (a) Definitions.
                    (1) “Operating Costs” means all costs, expenditures, fees and charges of managing, operating, maintaining and repairing the Building, including, for: (A) operation, maintenance and repairs (including maintenance, repair and replacement of glass, the roof covering or membrane, and landscaping); (B) utilities and services (including telecommunications facilities and equipment, recycling programs and trash removal), and associated supplies and materials; (C) compensation (including employment taxes and fringe benefits for persons at or below the level of property manager or building engineer who perform duties in connection with such operation, management, maintenance and repair, such

6


 

compensation to be appropriately allocated for persons who also perform unrelated duties; (D) property (including coverage for earthquake and flood if carried by Landlord), liability, rental income and other insurance relating to the Building, and expenditures for commercially reasonable deductible amounts under such insurance; (E) licenses, permits and inspections; (F) complying with the requirements of any law, statute, ordinance or governmental rule or regulation or any orders pursuant thereto (collectively “Laws”) either (i) not in effect as of the Commencement Date or (ii) as any Laws in effect as of the Commencement Date may be amended, changed, added to, interpreted or re-interpreted by applicable governmental authority or court decision, or administrative ruling subsequent to the Commencement Date (such [i] and [ii] being herein called “Newly Enacted Laws” ”; (G) amortization, over such useful life as Landlord reasonably determines, with interest on the unamortized balance at ten percent (10%) per annum, of the cost of capital improvements made or required to comply with Laws, or to reduce Operating Costs or improve the utility, efficiency or capacity of any Building System, or otherwise for the safety, comfort and convenience of tenants, or which are required to comply with conservation programs, except as provided in Section 7.2 of this Lease; (H) property management fees equal to three percent (3%) of gross revenue receivable by Landlord (and not payable by tenants to third parties); (I) accounting, legal, engineering and other professional services; (J) a reasonable allowance for depreciation on machinery and equipment used for operation and maintenance, and other personal property owned by Landlord in the Building (including window coverings and carpeting in common areas); (K) any cost incurred at the Project or Campus level that is exclusively for the benefit of the Building or any other building; and (L) any other cost, expenditure, fee or charge, whether or not hereinbefore described, which in accordance with generally accepted property management practices would be considered an expense of managing, operating, maintaining and repairing the Building. Operating Costs shall also include (but without duplication) those costs, expenditures, fees and charges of the same type and nature as items (A) through (L) in the foregoing sentence that are incurred at the Project level or Campus level to the extent the same are equitably allocated to the Building, including by way of example, (M) the cost to maintain an office for the management of the Project or Campus, including expenses of furnishing and equipping such office and the rental value of any space occupied for such purposes; (N) accounting, legal and other professional fees incurred in connection with the operation of the Project or Campus; (O) a reasonable allowance for depreciation of machinery and equipment used to maintain the Project or Campus; (P) any shared Project or Campus costs or Common Area maintenance costs and expenses (including costs and expenses of operating, managing, owning and maintaining the Main Utility Lines, the Common Areas, and non-building specific costs, and the Parking Facility of the Project and Campus); and (Q) the cost of maintaining and operating any associations created under any covenants, conditions and restrictions governing the Building, Project or Campus.
     Operating Costs for the Building for any calendar year during which average occupancy of the Building is less than one hundred percent (100%) shall be calculated based upon the Operating Costs that would have been incurred if the Building had an average occupancy of one hundred percent (100%) during the entire calendar year.
     Operating Costs for the Project or Campus for any calendar year during which average occupancy of the Project or Campus is less than one hundred percent (100%) shall be calculated based upon the Operating Costs that would have been incurred if the Project had an average occupancy of one hundred percent (100%) during the entire calendar year.

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     Operating Costs shall not include (i) capital improvements (except as specifically enumerated above); (ii) costs of special services rendered to individual tenants (including Tenant) for which separate, direct reimbursement is made; (iii) costs of electricity and other services sold or provided to individual tenants (including Tenant) and for which Landlord is reimbursed by such tenants as a separate additional charge or rental over and above the basic rent or escalation payment payable under the Lease with such tenant; (iv) ground rent, and interest and principal payments on loans or indebtedness secured by any part of the Campus; (v) costs of tenant improvements for Tenant or other tenants of the Campus; (vi) costs of services or other benefits of a type which are not available to Tenant but which are available to other tenants or occupants without special, separate charge; (vii) leasing commissions, attorneys’ fees and other expenses incurred in connection with leasing space in the Campus or enforcing such leases; (viii) depreciation or amortization, other than as specifically enumerated above; and (ix) fines or penalties incurred due to Landlord’s violation of any Law.
                    (2) “Taxes” means that portion of the following taxes on the Project which are allocable to the Building in Landlord’s reasonable judgment: all real property taxes and general, special or district assessments or other governmental impositions, of whatever kind, nature or origin, imposed on or by reason of the ownership or use of the Project; governmental charges, fees or assessments for transit or traffic mitigation (including area-wide traffic improvement assessments and transportation system management fees), housing, police, fire or other governmental service or purported benefits to the Project; personal property taxes assessed on the personal property of Landlord used in the operation of the Project; service payments in lieu of taxes and taxes and assessments of every kind and nature whatsoever levied or assessed in addition to, in lieu of or in substitution for existing or additional real or personal property taxes on the Project or the personal property described above; any increases in the foregoing caused by changes in assessed valuation, tax rate or other factors or circumstances (in which case Taxes will be as finally determined after any appeals); and the reasonable cost of contesting by appropriate proceedings the amount or validity of any taxes, assessments or charges described above. To the extent paid by Tenant or other tenants as “Tenant’s Taxes” (as defined in Section 8 — Tenant’s Taxes), “Tenant’s Taxes” shall be excluded from Taxes.
                    (3) “Tenant’s Share of the Building” means the Rentable Area of the Premises divided by the total Rentable Area of the Building, as set forth in the Basic Lease Information. If the Rentable Area of the Premises is changed by Tenant’s leasing of additional space hereunder or for any other reason, Tenant’s Share shall be adjusted accordingly.
               (b) Additional Rent.
                    (1) Tenant shall pay Landlord as “Additional Rent” for each calendar year or portion thereof during the Term Tenant’s Share of the sum of (x) the amount of Operating Costs, and (y) the amount of Taxes.
                    (2) Prior to the Existing Premises Commencement Date and each calendar year thereafter, Landlord shall notify Tenant of Landlord’s estimate of Operating Costs, Taxes and Tenant’s Additional Rent for the following calendar year (or first partial year following the Commencement Date). If Landlord later estimates that Operating Costs or Taxes for such year will vary from Landlord’s prior estimate, Landlord may, by notice to Tenant, revise

8


 

the estimate for such year (and Additional Rent shall thereafter be payable based on the revised estimate).
                    Commencing on (a) the Existing Premises Commencement Date with respect to the Existing Premises, and (b) the Expansion Premises Commencement Date with respect to the Expansion Premises, and continuing on the first day of every month thereafter in such year, Tenant shall pay to Landlord one-twelfth (1/12th) of the Additional Rent, as reasonably estimated by Landlord for such full calendar year.
                    In calendar years following the initial partial year, commencing on the first day of January of each calendar year and continuing on the first day of every month thereafter in such year, Tenant shall pay to Landlord one-twelfth (1/12th) of the Additional Rent, as reasonably estimated by Landlord for such full calendar year.
                    (3) As soon as reasonably practicable after the end of each calendar year, Landlord shall furnish Tenant a statement with respect to such year, showing Operating Costs, Taxes and Additional Rent for the year, and the total payments made by Tenant with respect thereto. Unless Tenant raises any objections to Landlord’s statement within ninety (90) days after receipt of the same, such statement shall conclusively be deemed correct and Tenant shall have no right thereafter to dispute such statement or any item therein or the computation of Additional Rent based thereon. If Tenant does object to such statement, then Landlord shall provide Tenant with reasonable verification of the figures shown on the statement and the parties shall negotiate in good faith to resolve any disputes. Any objection of Tenant to Landlord’s statement and resolution of any dispute shall not postpone the time for payment of any amounts due Tenant or Landlord based on Landlord’s statement, nor shall any failure of Landlord to deliver Landlord’s statement in a timely manner relieve Tenant of Tenant’s obligation to pay any amounts due Landlord based on Landlord’s statement.
                    (4) If Tenant’s Additional Rent as finally determined for any calendar year exceeds the total payments made by Tenant on account thereof, Tenant shall pay Landlord the deficiency within ten (10) days of Tenant’s receipt of Landlord’s statement. If the total payments made by Tenant on account thereof exceed Tenant’s Additional Rent as finally determined for such year, Tenant’s excess payment shall be credited toward the rent next due from Tenant under this Lease. For any partial calendar year at the beginning or end of the Term, Additional Rent shall be prorated on the basis of a 360-day year by computing Tenant’s Share of Operating Costs and Taxes for the entire year and then prorating such amount for the number of days during such year included in the Term. The obligations of Landlord to refund any overpayment of Additional Rent and of Tenant to pay any Additional Rent not previously paid shall survive the expiration or termination of this Lease. Landlord shall pay to Tenant or Tenant shall pay to Landlord, as the case may be, within ten (10) days after Tenant’s receipt of Landlord’s final statement for the calendar year in which this Lease terminates, the difference between Tenant’s Additional Rent for that year, as finally determined by Landlord, and the total amount previously paid by Tenant on account thereof.
               If for any reason Taxes for any year during the Term are reduced, refunded or otherwise changed, Tenant’s Additional Rent shall be adjusted accordingly. If Taxes are temporarily reduced as a result of space in the Project being leased to a tenant that is entitled

9


 

to an exemption from property taxes or other taxes, then for purposes of determining Additional Rent for each year in which Taxes are reduced by any such exemption, Taxes for such year shall be calculated on the basis of the amount the Taxes for the year would have been in the absence of the exemption. The obligations of Landlord to refund any overpayment of Additional Rent and of Tenant to pay any Additional Rent not previously paid shall survive the expiration of the Term.
               (c) For a period of sixty (60) days after receipt of a statement of Operating Costs, Taxes and Additional Rent (“Annual Expenses”), Tenant shall be entitled, upon not less than ten (10) days’ prior written notice to Landlord (“Tenant’s Inspection Notice”) to inspect and examine Landlord’s books and records relating to the determination of Annual Expenses for the immediately preceding year (“Tenant’s Inspection”), subject to the following terms and conditions: (a) Tenant shall not conduct Tenant’s Inspection at any time that Tenant is in default of any of the terms of this Lease; (b) Tenant’s Inspection shall be done during normal business hours, at the office of the property manager for the Building, (c) Tenant shall not conduct Tenant’s Inspection more than one (1) time for any calendar year, and (d) Tenant’s Inspection Notice shall specify in detail which items of expense Tenant, in good faith, believes have been misstated. Tenant acknowledges that Tenant’s right to conduct Tenant’s Inspection for the preceding calendar year is for the exclusive purpose of determining whether Landlord has complied with the terms of the Lease with respect to Annual Expenses. Within fifteen (15) business days after receipt of Tenant’s Inspection Notice, Landlord will provide copies of or give Tenant reasonable access to those documents and date as Landlord reasonably believes relate to the expense items specified in Tenant’s Inspection Notice. If Landlord affords access to such documents and data, Tenant shall not remove such materials from the location where the same have been made available, but Tenant shall have the right to make copies of the same at Tenant’s expense. Tenant shall have thirty (30) days after Landlord shall have provided copies of or access to the relevant documents and data as aforesaid to complete Tenant’s Inspection. Tenant shall deliver to Landlord a copy of the results of Tenant’s Inspection within thirty (30) days conducting Tenant’s Inspection. Failure of Tenant to request an inspection within the above sixty (60)-day period shall render the statement of Annual Expenses conclusive and binding on Tenant for all purposes. If, after conducting Tenant’s Inspection, Tenant disputes the amount of Annual Expenses charged by Landlord, Tenant may, by written notice to Landlord, request an independent audit of such books and records. The independent audit of the books and records shall be conducted by a certified public accountant (“CPA”) reasonably acceptable to both Landlord and Tenant. If, within thirty (30) days after Landlord’s receipt of Tenant’s notice requesting an audit, Landlord and Tenant are unable to agree on the CPA to conduct such audit, then Landlord may designate a “Big Five” accounting firm not then employed by Landlord or Tenant to conduct the audit. The audit shall be limited to the determination of the amount of Annual Expenses for the subject year. If the audit discloses that the amount of Annual Expenses billed to Tenant was incorrect, the appropriate party shall pay to the other party the deficiency or overpayment, as applicable. All costs and expenses of the audit shall be paid by Tenant unless the audit shows that Landlord overstated Annual Expenses for the subject year by more than five percent (5%), in which case Landlord shall pay all costs and expenses of the audit. Tenant and the CPA shall keep the information gained from any audit confidential and shall not disclose it to any other party. Tenant’s Inspection and any exercise by Tenant of the audit rights hereunder shall not relieve Tenant of its obligation to

10


 

timely pay all sums due under this Lease, including, without limitation, the disputed Excess Expenses.
          3.3 Payment of Rent. All amounts payable or reimbursable by Tenant under this Lease, including late charges and interest (collectively, “Rent”), shall constitute rent and shall be payable and recoverable as rent in the manner provided in this Lease. All sums payable to Landlord on demand under the terms of this Lease shall be payable within ten (10) days after Landlord invoices Tenant therefor or otherwise makes demand of the amounts due. All rent shall be paid without offset or deduction in lawful money of the United States of America to Landlord at Landlord’s Address for Payment of Rent as set forth in the Basic Lease Information, or to such other person or at such other place as Landlord may from time to time designate.
     4. SECURITY DEPOSIT. On execution of this Lease, Tenant shall deposit with Landlord the amount specified in the Basic Lease Information and the letter of credit identified in Section 40 below as the Security Deposit (collectively, the “Security Deposit”), as security for the performance of Tenant’s obligations under this Lease. Landlord may (but shall have no obligation to) use the Security Deposit or any portion thereof to cure any breach or default by Tenant under this Lease, to fulfill any of Tenant’s obligations under the Lease, or to compensate Landlord for any damage it incurs as a result of Tenant’s failure to perform any of Tenant’s obligations hereunder. In such event, Tenant shall pay to Landlord on demand an amount sufficient to replenish the Security Deposit to the full amount of the cash specified in the Basic Lease Information and the applicable Face Amount (defined in Section 40 below) of the letter of credit. If at the expiration or termination of this Lease, Tenant is not in default, has otherwise fully performed all of Tenant’s obligations under this Lease, and there are no outstanding Claims (defined in Section 10.1 below, and including all existing and potential Claims) for which Tenant is responsible, Landlord shall return to Tenant the Security Deposit or the balance thereof then held by Landlord and not applied as provided above. Landlord may commingle the Security Deposit with Landlord’s general and other funds. Landlord shall not be required to pay interest on the Security Deposit to Tenant. Tenant acknowledges that Landlord has agreed to accept a letter of credit in lieu of an additional cash deposit as an accommodation to Tenant. Tenant waives the provisions of Section 1950.7 of the California Civil Code, and all other provisions of Law now in force or that become in force after the date of this Lease, which provide that Landlord may claim from a security deposit only those sums reasonably necessary to remedy defaults in the payment of Rent, to repair damage caused by Tenant, or to clean the Premises. Landlord and Tenant agree that Landlord may, in addition, claim and use those sums necessary to compensate Landlord for any foreseeable or unforeseeable loss or damage caused by the act or omission by Tenant, including, without limitation, any post default damages and such remedies to which Landlord is entitled under the provisions of Section 15.2 of this Lease.
     5. USE AND COMPLIANCE WITH LAWS.
          5.1 Use. The Premises shall be used and occupied for the purposes of (a) general business office, (b) computer programming and related development, (c) customer training and support, and (d) sales and marketing, and for no other use or purpose. Tenant shall comply with all present and future Laws relating to Tenant’s use or occupancy of the Premises and make any repairs, alterations or improvements as required to comply with all such Laws to the extent that such Laws relate to or are triggered by (a) Tenant’s particular use of the Premises

11


 

(as opposed to general office use), or (b) any Alterations. Tenant shall observe the “Building Rules” (as defined in Section 27 — Rules and Regulations). Tenant shall not do, bring, keep or sell anything in or about the Premises that is prohibited by, or that will cause a cancellation of or an increase in the existing premium for, any insurance policy covering the Building or any part thereof. Tenant shall not permit the Premises to be occupied or used in any manner that will constitute waste or a nuisance, or disturb the quiet enjoyment of or otherwise annoy other tenants in the Building. Without limiting the foregoing, the Premises shall not be used for educational activities, practice of medicine or any of the healing arts, providing social services, for any governmental use (including embassy or consulate use), or for personnel agency, customer service office, studios for radio, television or other media, travel agency or reservation center operations or uses. Tenant shall not, without the prior consent of Landlord, (i) bring into the Building or the Premises anything that may cause substantial noise, odor or vibration, overload the floors in the Premises or the Building or any of the heating, ventilating and air-conditioning (“HVAC”), mechanical, elevator, plumbing, electrical, fire protection, life safety, security or other systems in the Building (“Building Systems”), or jeopardize the structural integrity of the Building or any part thereof; (ii) connect to the utility systems of the Building any apparatus, machinery or other equipment other than typical low power task lighting or office equipment; or (iii) connect to any electrical circuit in the Premises any equipment or other load with aggregate electrical power requirements in excess of 80% of the rated connected load capacity of the circuit. Tenant’s use of electricity shall never exceed the safe capacity of the feeders to the Building or the risers or wiring installation of the Building.
          5.2 Hazardous Materials.
               (a) Definitions.
                    (1) “Hazardous Materials” shall mean any substance: (A) that now or in the future is regulated or governed by, requires investigation or remediation under, or is defined as a hazardous waste, hazardous substance, pollutant or contaminant under any governmental statute, code, ordinance, regulation, rule or order, and any amendment thereto, including the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. §9601 et seq., and the Resource Conservation and Recovery Act, 42 U.S.C. §6901 et seq., or (B) that is toxic, explosive, corrosive, flammable, radioactive, carcinogenic, dangerous or otherwise hazardous, including gasoline, diesel fuel, petroleum hydrocarbons, polychlorinated biphenyls (PCBs), asbestos, radon and urea formaldehyde foam insulation.
                    (2) “Environmental Requirements” shall mean all present and future Laws, orders, permits, licenses, approvals, authorizations and other requirements of any kind applicable to Hazardous Materials.
                    (3) “Handled by Tenant” and “Handling by Tenant” shall mean and refer to any installation, handling, generation, storage, use, disposal, discharge, release, abatement, removal, transportation, or any other activity of any type by Tenant or its agents, employees, contractors, licensees, assignees, sublessees, transferees or representatives (collectively, “Representatives”) or its guests, customers, invitees, or visitors (collectively, “Visitors”), at or about the Premises in connection with or involving Hazardous Materials.

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                    (4) “Environmental Losses” shall mean all costs and expenses of any kind, damages, including foreseeable and unforeseeable consequential damages, fines and penalties incurred in connection with any violation of and compliance with Environmental Requirements and all losses of any kind attributable to the diminution of value, loss of use or adverse effects on marketability or use of any portion of the Premises or Project.
               (b) Tenant’s Covenants. No Hazardous Materials shall be Handled by Tenant at or about the Premises or Project without Landlord’s prior written consent, which consent may be granted, denied, or conditioned upon compliance with Landlord’s requirements, all in Landlord’s absolute discretion. Notwithstanding the foregoing, normal quantities and use of those Hazardous Materials customarily used in the conduct of general office activities, such as copier fluids and cleaning supplies (“Permitted Hazardous Materials”), may be used and stored at the Premises without Landlord’s prior written consent, provided that Tenant’s activities at or about the Premises and Project and the Handling by Tenant of all Hazardous Materials shall comply at all times with all Environmental Requirements. At the expiration or termination of the Lease, Tenant shall promptly remove from the Premises and Project all Hazardous Materials Handled by Tenant at the Premises or the Project. Tenant shall keep Landlord fully and promptly informed of all Handling by Tenant of Hazardous Materials other than Permitted Hazardous Materials. Tenant shall be responsible and liable for the compliance with all of the provisions of this Section by all of Tenant’s Representatives and Visitors, and all of Tenant’s obligations under this Section (including its indemnification obligations under paragraph (e) below) shall survive the expiration or termination of this Lease.
               (c) Compliance. Tenant shall at Tenant’s expense promptly take all actions required by any governmental agency or entity in connection with or as a result of the Handling by Tenant of Hazardous Materials at or about the Premises or Project, including inspection and testing, performing all cleanup, removal and remediation work required with respect to those Hazardous Materials, complying with all closure requirements and post-closure monitoring, and filing all required reports or plans. All of the foregoing work and all Handling by Tenant of all Hazardous Materials shall be performed in a good, safe and workmanlike manner by consultants qualified and licensed to undertake such work and in a manner that will not interfere with any other tenant’s quiet enjoyment of the Project or Landlord’s use, operation, leasing and sale of the Project. Tenant shall deliver to Landlord prior to delivery to any governmental agency, or promptly after receipt from any such agency, copies of all permits, manifests, closure or remedial action plans, notices, and all other documents relating to the Handling by Tenant of Hazardous Materials at or about the Premises or Project. If any lien attaches to the Premises or the Project in connection with or as a result of the Handling by Tenant of Hazardous Materials, and Tenant does not cause the same to be released, by payment, bonding or otherwise, within ten (10) days after the attachment thereof, Landlord shall have the right but not the obligation to cause the same to be released and any sums expended by Landlord (plus Landlord’s administrative costs) in connection therewith shall be payable by Tenant on demand.
               (d) Landlord’s Rights. Landlord shall have the right, but not the obligation, to enter the Premises at any reasonable time (i) to confirm Tenant’s compliance with the provisions of this Section 5.2, and (ii) to perform Tenant’s obligations under this Section if Tenant has failed to do so after reasonable notice to Tenant. Landlord shall also have the right to

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engage qualified Hazardous Materials consultants to inspect the Premises and review the Handling by Tenant of Hazardous Materials, including review of all permits, reports, plans, and other documents regarding same. If the reports of such consultants show that Tenant was in violation of Tenant’s obligations under this Section 5.2 at the time of the consultants’ inspection, then Tenant shall pay to Landlord on demand the costs of Landlord’s consultants’ fees and all reasonable actual, out-of-pocket costs incurred by Landlord in performing Tenant’s obligations under this Section. Landlord shall use reasonable efforts to minimize any interference with Tenant’s business caused by Landlord’s entry into the Premises, but Landlord shall not be responsible for any interference caused thereby.
               (e) Tenant’s Indemnification. The term Landlord Parties (“Landlord Parties”) refers singularly and collectively to Landlord and the shareholders, partners, venturers, and members of Landlord, and the respective officers, directors, employees, managers, owners and any affiliates or agents of such entities and persons. Tenant agrees to indemnify, defend, protect and hold harmless the Landlord Parties from all Environmental Losses and all other claims, actions, losses, damages, liabilities, costs and expenses of every kind, including reasonable attorneys’, experts’ and consultants’ fees and costs, incurred at any time and arising from or in connection with the Handling by Tenant of Hazardous Materials at or about the Project or Tenant’s failure to comply in full with all Environmental Requirements with respect to the Premises.
               (f) Landlord’s Responsibility. If the presence of Hazardous Materials on the Project in violation of Environmental Requirements is caused by Landlord or Landlord’s Representatives and results in contamination of the Project such that Tenant’s ability to use and occupy the Premises as provided in Section 5.1 is materially impaired, then Landlord shall promptly take those legally required actions to investigate, remediate or contain such contamination to the extent necessary to restore Tenant’s ability to use and occupy the Premises without material impairment. In such event Tenant shall be entitled to an equitable abatement of rent to the extent and for so long as Tenant’s use and occupancy of the Premises has been so materially impaired.
     6. TENANT IMPROVEMENTS & ALTERATIONS.
          6.1 Landlord and Tenant shall perform their respective obligations with respect to design and construction of any improvements to be constructed and installed in the Premises (the “Tenant Improvements”), as provided in the Construction Rider attached as Exhibit B (the “Construction Rider”). Except for any Tenant Improvements to be constructed by Tenant as provided in the Construction Rider, Tenant shall not make any alterations, improvements or changes to the Premises, including installation of any security system or telephone or data communication wiring, (“Alterations”), without Landlord’s prior written consent. Notwithstanding any other provision contained herein, Tenant shall not be required to obtain Landlord’s prior consent for minor, non-structural Alterations that (a) do not affect any of the Building Systems, (b) are not visible from the exterior of the Premises, (c) do not affect the water tight character of the Building or its roof, (d) do not require a building permit, (e) do not move any interior walls or otherwise change the layout of the Premises, and (f) cost less than Twenty-Five Thousand Dollars ($25,000), (collectively, “Minor Changes”) so long as Tenant gives Landlord notice of the proposed Minor Change at least ten (10) days prior to commencing

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the Minor Change and complies with all of the following provisions (except that Tenant shall not be required to obtain Landlord’s approval of any plans or specifications therefor). All Alterations shall be completed by Tenant at Tenant’s sole cost and expense: (i) with due diligence, in a good and workmanlike manner, using new materials; (ii) in compliance with plans and specifications approved by Landlord; (iii) in compliance with the construction rules and regulations promulgated by Landlord from time to time; (iv) in accordance with all applicable Laws (including all work, whether structural or non-structural, inside or outside the Premises, required to comply fully with all applicable Laws and necessitated by Tenant’s work); and (v) subject to all conditions which Landlord may in Landlord’s discretion impose. Such conditions may include requirements for Tenant to: (i) provide payment or performance bonds or additional insurance (from Tenant or Tenant’s contractors, subcontractors or design professionals); (ii) use contractors or subcontractors approved by Landlord, which approval shall not be unreasonably withheld, except that Landlord shall have the right to designate contractors and subcontractors for Alterations affecting either the structure of the Building, or the Building Systems; and (iii) remove all or part of the Alterations prior to or upon expiration or termination of the Term, as designated by Landlord. At the time Landlord consents to any Alterations, Landlord shall indicate which of Tenant’s Alterations Tenant must remove at Tenant’s sole cost and expense at the end of the Term. If any work outside the Premises, or any work on or adjustment to any of the Building Systems, is required in connection with or as a result of Tenant’s work, such work shall be performed at Tenant’s expense by contractors designated by Landlord. Landlord’s right to review and approve (or withhold approval of) Tenant’s plans, drawings, specifications, contractor(s) and other aspects of construction work proposed by Tenant is intended solely to protect Landlord, the Building and Landlord’s interests. No approval or consent by Landlord shall be deemed or construed to be a representation or warranty by Landlord as to the adequacy, sufficiency, fitness or suitability thereof or compliance thereof with applicable Laws or other requirements. Except as otherwise provided in Landlord’s consent, all Alterations shall upon installation become part of the realty and be the property of Landlord.
          6.2 Before making any Alterations which require Landlord’s consent, Tenant shall submit to Landlord for Landlord’s prior approval reasonably detailed final plans and specifications prepared by a licensed architect or engineer, a copy of the construction contract, including the name of the contractor and all subcontractors proposed by Tenant to make the Alterations and a copy of the contractor’s license. Tenant shall reimburse Landlord upon demand for any out-of-pocket expenses incurred by Landlord in connection with any Alterations made by Tenant, including reasonable fees charged by Landlord’s contractors or consultants to review plans and specifications prepared by Tenant and to update the existing as-built plans and specifications of the Building to reflect the Alterations. Before commencement of any Alterations Tenant shall (i) obtain all applicable permits, authorizations and governmental approvals and deliver copies of the same to Landlord, and (ii) give Landlord at least ten (10) days prior written notice and shall cooperate with Landlord in posting and maintaining notices of non-responsibility in connection with the Alterations. Within thirty (30) days following the completion of any Alterations Tenant shall deliver to Landlord “as built” plans showing the completed Alterations. The “as built” plans shall be “hard copy” on paper and in digital form (if done on CAD), and show the Alterations in reasonable detail, including (a) the location of walls, partitions and doors, including fire exits and ADA paths of travel, (b) electrical, plumbing and

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life safety fixtures, and (c) a reflected ceiling plan showing the location of heating, ventilating and air conditioning registers, lighting and life safety systems.
          6.3 In connection with all Alterations requiring Landlord’s approval, or cost more than Twenty-Five Thousand Dollars ($25,000), Landlord shall be entitled to a construction coordination fee equal to four percent (4%) of the first one hundred thousand dollars ($100,000) of construction costs, three percent (3%) of the next four hundred thousand dollars ($400,000) of construction costs, and two percent (2%) of any additional construction costs. The construction coordination fee shall be limited to one thousand dollars ($1,000.00) per week, commencing when Tenant first contacts Landlord concerning any specific Alterations, and continuing until the specific Alterations are completed.
          6.4 Tenant shall keep the Premises and the Project free and clear of all liens arising out of any work performed, materials furnished or obligations incurred by Tenant. If any such lien attaches to the Premises or the Project, and Tenant does not cause the same to be released by payment, bonding or otherwise within ten (10) days after the attachment thereof, Landlord shall have the right but not the obligation to cause the same to be released, and any sums expended by Landlord (plus Landlord’s administrative costs) in connection therewith shall be payable by Tenant on demand with interest thereon from the date of expenditure by Landlord at the Interest Rate (as defined in Section 16.2 — Interest).
          6.5 Subject to the provisions of Section 5 — Use and Compliance with Laws and the other provisions of this Section 6, Tenant may install and maintain furnishings, equipment, movable partitions, business equipment and other trade fixtures (“Trade Fixtures”) in the Premises, provided that the Trade Fixtures do not become an integral part of the Premises or the Building. Tenant shall promptly repair any damage to the Premises or the Building caused by any installation or removal of such Trade Fixtures.
     7. MAINTENANCE AND REPAIRS.
          7.1 By taking possession of the Existing Premises on the Existing Premises Commencement Date, Tenant agrees that the Existing Premises are then in a good and tenantable condition. By taking possession of the Expansion Premises Tenant agrees that the Expansion Premises are then in a good and tenantable condition except for any latent defects. Except for maintenance and repairs undertaken by Landlord as provided in Section 7.2 below, Tenant, at Tenant’s sole cost and expense, shall maintain and repair the Premises (including the interior walls, floor coverings, ceiling (ceiling tiles and grid), Tenant Improvements and Alterations, corridors, restrooms and fire extinguishers), that portion of the Building Systems exclusively serving the Premises, and the interior public and common areas of the Building, keeping the same in good and serviceable condition and in compliance with all Laws and Environmental Regulations; provided, however, Tenant’s maintenance and repair obligations shall not include work in the nature of capital repairs, capital replacements or capital improvements under generally accepted accounting principles as reasonably determined by Landlord. Landlord shall undertake the capital repairs, replacements and improvements when necessary as determined in Landlord’s good faith discretion, subject to reimbursement in Operating Costs in accordance with Section 3.2 of this Lease, or otherwise as provided in this Lease. Upon request by Landlord, Tenant agrees to provide to Landlord (a) reasonable access to the Premises for

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inspections, and (b) appropriate evidence that Tenant is fulfilling its maintenance and repair obligations in this Section 7.1 and any other applicable provisions of the Lease. The evidence that Tenant is fulfilling its maintenance and repair obligations includes maintenance contracts, logs, inspection and test reports, and similar documentation. If Tenant fails to perform Tenant’s maintenance and repair obligations, then Landlord shall have the right to perform Tenant’s maintenance and repairs commencing thirty (30) days after Landlord has given Tenant written notice thereof (or after a shorter notice period as is reasonable under the circumstances if Tenant’s failure constitutes a violation of any Laws or Environmental Requirements, jeopardize the structural or watertight integrity of the Building, or otherwise might materially adversely affect the Building, Building Systems or Project). Tenant shall pay the cost of repairs for any damage occasioned by Tenant’s use of the Premises or the Project or any act or omission of Tenant or Tenant’s Representatives or Visitors, to the extent not covered by the proceeds of Landlord’s property insurance, except for normal wear and tear caused by ordinary use of the Premises.
          7.2 Landlord shall maintain or cause to be maintained in a condition and repair comparable to similar quality buildings in the Cupertino market, the structural portions of the roof, foundations, floors and exterior walls of the Buildings (collectively, the “Structural Elements”) and Common Areas; provided, however, that Tenant shall pay the cost of repairs for any damage occasioned by Tenant’s use of the Premises or the Buildings or any act or omission of Tenant or Tenant’s Representatives or Visitors, to the extent not covered by the proceeds of Landlord’s property insurance. Landlord shall be under no obligation to inspect the Premises. The cost to maintain and repair Structural Elements shall not be included in Operating Costs. Tenant shall promptly report in writing to Landlord any defective condition known to Tenant which Landlord is required to repair. As a material part of the consideration for this Lease, Tenant hereby waives any benefits of any applicable existing or future Law, including the provisions of California Civil Code Sections 1932(1), 1941 and 1942, that allows a tenant to make repairs at its landlord’s expense.
          7.3 Landlord hereby reserves the right, at any time and from time to time, without liability to Tenant, and without constituting an eviction, constructive or otherwise, or entitling Tenant to any abatement of rent or to terminate this Lease or otherwise releasing Tenant from any of Tenant’s obligations under this Lease:
               (a) To make alterations, additions, repairs, improvements to or in or to decrease the size of area of, all or any part of the Building, the fixtures and equipment therein, and the Building Systems ; provided, however, Landlord shall not have any right under this provision to materially reduce the size of a Building, or to permanently, materially and adversely affect Tenant’s access to and use of the Premises, except only as may be required to comply with Laws or as a result of any fire or other casualty or Condemnation;
               (b) To change the name or street address of the Building, the Project or the Campus;
               (c) To install and maintain any and all signs on the exterior and interior of the Building, Project or Campus;

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               (d) To reduce, increase, enclose or otherwise change at any time and from time to time the size, number, location, lay-out and nature of the Common Areas (including the Parking Facility) and other tenancies and premises in the Project and the Campus, and to create additional rentable areas through use or enclosure of common areas; and
               (e) If any governmental authority promulgates or revises any Law or imposes mandatory or voluntary controls or guidelines on Landlord or the Project relating to the use or conservation of energy or utilities or the reduction of automobile or other emissions or reduction or management of traffic or parking on the Project (collectively “Controls”), to comply with such Controls, whether mandatory or voluntary, or make any alterations to the Project related thereto.
     8. TENANT’S TAXES. “Tenant’s Taxes” shall mean (a) all taxes, assessments, license fees and other governmental charges or impositions levied or assessed against or with respect to Tenant’s personal property or Trade Fixtures in the Premises, whether any such imposition is levied directly against Tenant or levied against Landlord or the Project, (b) all rental, excise, sales or transaction privilege taxes arising out of this Lease (excluding, however, state and federal personal or corporate income taxes measured by the income of Landlord from all sources) imposed by any taxing authority upon Landlord or upon Landlord’s receipt of any rent payable by Tenant pursuant to the terms of this Lease (“Rental Tax”), and (c) any increase in Taxes attributable to inclusion of a value placed on Tenant’s personal property, Trade Fixtures or Alterations. Tenant shall pay any Rental Tax to Landlord in addition to and at the same time as Base Rent is payable under this Lease, and shall pay all other Tenant’s Taxes before delinquency (and, at Landlord’s request, shall furnish Landlord satisfactory evidence thereof). If Landlord pays Tenant’s Taxes or any portion thereof, Tenant shall reimburse Landlord upon demand for the amount of such payment, together with interest at the Interest Rate from the date of Landlord’s payment to the date of Tenant’s reimbursement.
     9. UTILITIES AND SERVICES.
          9.1 Description of Services. During the Term Landlord shall furnish to the Premises for ordinary office use and occupancy reasonable amounts of electricity for building standard lighting and use of office equipment.
          9.2 Payment for Utilities and Services.
               (a) Tenant shall be responsible to pay for the costs of all utilities for the Premises (the “Premises Utilities”), including the costs of (i) gas for the Premises, (ii) electricity, (iii) water and sewer, and (iv) telephone and data systems. Tenant shall provide janitorial services and waste removal for the Premises. The cost of Premises Utilities paid by Tenant for the Premises shall not be included in Operating Costs. Electricity and gas for the Premises shall be either separately metered, or submetered; provided, however, if electricity or gas for the Premises is not metered or submetered, then Landlord shall equitably estimate the cost of electricity and gas for the Premises. If either the electricity or gas is separately metered, Tenant shall pay the costs of such utility for the Premises directly to the public utility company. If the electricity or gas is submetered, Tenant shall pay the costs of the applicable utility to the Landlord within ten (10) days after Landlord invoices Tenant therefor, based upon the metered

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readings. If electricity or gas for the Premises is not metered or submetered, then Tenant shall pay Landlord the cost of electricity and gas estimated by Landlord for the Premises, within ten (10) days after Landlord invoices Tenant therefor.
               (b) If the temperature otherwise maintained in any portion of the Premises by the HVAC systems of the Building is affected as a result of (i) any lights, machines or equipment used by Tenant in the Premises, or (ii) the occupancy of the Premises by more than one person per 200 square feet of rentable area, then Landlord shall have the right to install any machinery or equipment reasonably necessary to restore the temperature, including modifications to the standard air-conditioning equipment. The cost of any such equipment and modifications, including the cost of installation and any additional cost of operation and maintenance of the same, shall be paid by Tenant to Landlord upon demand.
               (c) Tenant will be responsible for any additional costs at the Project or Campus level attributable to Tenant’s activities, such as unusually long hours of operation, the carelessness of Tenant, or unusual Alterations, and Landlord may impose a reasonable charge for the costs of such activities.
          9.3 Interruption of Services. In the event of an interruption in, or failure or inability to provide any of the services or utilities described in Section 9.1 — “Description of Services” (a “Service Failure”), such Service Failure shall not, regardless of its duration, constitute an eviction of Tenant, constructive or otherwise, or impose upon Landlord any liability whatsoever, including, but not limited to, liability for consequential damages or loss of business by Tenant or, except as provided below in this Section 9.3, entitle Tenant to an abatement of rent or to terminate this Lease.
               (a) If any Service Failure not caused by Tenant or its Representatives prevents Tenant from reasonably using a material portion of the Premises and Tenant in fact ceases to use such portion of the Premises, Tenant shall be entitled to an abatement of Base Rent and Additional Rent with respect to the portion of the Premises that Tenant is prevented from using by reason of such Service Failure in the following circumstances: (i) if Landlord fails to commence reasonable efforts to remedy the Service Failure within five (5) Business Days following the occurrence of the Service Failure, and such failure has persisted and continuously prevented Tenant from using a material portion of the Premises during that period, the abatement of rent shall commence on the sixth (6th) Business Day following the Service Failure and continue until Tenant is no longer so prevented from using such portion of the Premises; and (ii) if the Service Failure in all events is not remedied within thirty (30) days following the occurrence of the Service Failure and Tenant in fact does not use such portion of the Premises for an uninterrupted period of thirty (30) days or more by reason of such Service Failure, the abatement of rent shall commence no later than the thirty-first (31st) day following the occurrence of the Service Failure and continue until Tenant is no longer so prevented from using such portion of the Premises.
               (b) If a Service Failure is caused by Tenant or its Representatives, Landlord shall nonetheless remedy the Service Failure, at the expense of Tenant, pursuant to Landlord’s maintenance and repair obligations under Section 7 — “Maintenance and Repair” or

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Section 12.1 — “Landlord’s Duty to Repair,” as the case may be, but Tenant shall not be entitled to an abatement of rent or to terminate this Lease as a result of any such Service Failure.
               (c) Notwithstanding Tenant’s entitlement to rent abatement under the preceding provisions, Tenant shall continue to pay Tenant’s then current rent until such time as Landlord and Tenant agree on the amount of the rent abatement. If Landlord and Tenant are unable to agree on the amount of such abatement within ten (10) Business Days of the date they commence negotiations regarding the abatement, then either party may submit the matter to binding arbitration pursuant to Sections 1280 et seq. of the California Code of Civil Procedure.
               (d) If any Service Failure is caused by fire or other casualty then the provisions of Section 12 — “Damage or Destruction” shall control.
               (e) Where the cause of a Service Failure is within the control of a public utility or other public or quasi-public entity outside Landlord’s control, notification to such utility or entity of the Service Failure and request to remedy the failure shall constitute “reasonable efforts” by Landlord to remedy the Service Failure.
               (f) Tenant hereby waives the provisions of California Civil Code Section 1932(1) or any other applicable existing or future law, ordinance or governmental regulation permitting the termination of this Lease due to such interruption, failure or inability.
          9.4 Sole Electrical Representative. Landlord shall maintain exclusive control over and be the sole representative with respect to reception, utilization and distribution of electric power, regardless of point or means of origin, use or generation. Tenant shall not have the right to contract directly with any provider of electrical power or services.
          9.5 Telecommunications. Tenant shall have the right to contract directly with telecommunications and media service providers (each a “Telecommunications Provider”) of Tenant’s choice, subject to the provisions of this Section 9.5 and other provisions of this Lease. Upon request from Tenant Landlord agrees to deliver to Tenant a list of Telecommunication Providers then serving the Project. If Tenant desires to (a) obtain service from or enter into a contract with any Telecommunication Provider which at the time of Tenant’s request does not serve the Project, or (b) obtain services which will require installation of new equipment by a Telecommunication Provider then serving the Project, then prior to providing service, any such Telecommunication Provider must enter into a written agreement with Landlord, acceptable to Landlord in Landlord’s sole discretion, setting forth the terms and conditions of the access to be granted to any such Telecommunication Provider. Landlord shall not be obligated to incur any expense, liability or costs in connection with any Telecommunication Provider proposed by Tenant. All installations made by Telecommunication Providers shall be subject to Landlord’s prior written approval and shall be made in accordance with the provisions of Section 6 of this Lease.
     10. EXCULPATION AND INDEMNIFICATION.
          10.1 Landlord’s Indemnification of Tenant. Landlord shall indemnify, protect, defend and hold Tenant harmless from and against any claims, actions, liabilities, damages, costs or expenses, including reasonable consultants’, expert witnesses’ and attorneys’ fees and costs

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incurred in defending against the same (“Claims”) asserted by any third party against Tenant for loss, injury or damage, to the extent such loss, injury or damage is caused by the willful misconduct or negligent acts or omissions of Landlord or its authorized representatives in connection with the ownership, operation or management of the Building, Project or Campus.
          10.2 Tenant’s Indemnification of Landlord. Tenant shall indemnify, protect, defend and hold the Landlord Parties harmless from and against Claims arising from (a) the acts or omissions of Tenant or Tenant’s Representatives or Visitors in or about the Project or Campus, or (b) any construction or other work or maintenance undertaken by Tenant on the Premises or elsewhere in the Project or Campus (including any design defects), or (c) any breach or default under this Lease by Tenant, or (d) any loss, injury or damage, howsoever and by whomsoever caused, to any person or property, arising out of or relating to Tenant’s occupancy or operation and occurring in or about the Premises or elsewhere in the Project or Campus, excepting only Claims described in this clause (d) to the extent they are caused by the willful misconduct or negligent acts or omissions of Landlord or its authorized representatives.
          10.3 Damage to Tenant and Tenant’s Property. The Landlord Parties shall not be liable to Tenant for any loss, injury or other damage to Tenant or to Tenant’s property in or about the Premises or the Campus from any cause (including defects in the Property or in any equipment in the Property; fire, explosion or other casualty; bursting, rupture, leakage or overflow of any plumbing or other pipes or lines, sprinklers, tanks, drains, drinking fountains or washstands in, above, or about the Premises or the Property; or acts of other tenants in the Property), unless caused by the intentional act or willful misconduct of Landlord or its authorized representative or agents. Tenant hereby waives all claims against Landlord Parties for any such loss, injury or damage and the cost and expense of defending against claims relating thereto, including any loss, injury or damage caused by Landlord’s negligence (active or passive), unless caused by the intentional act or willful misconduct of Landlord or its authorized representative or agents. Notwithstanding any other provision of this Lease to the contrary, in no event shall Landlord be liable to Tenant for any punitive or consequential damages or damages for loss of business by Tenant.
          10.4 Survival. The obligations of the parties under this Section 10 shall survive the expiration or termination of this Lease.
     11. INSURANCE.
          11.1 Tenant’s Insurance.
               (a) Liability Insurance. Tenant shall at all times following complete execution of this Lease maintain in full force, commercial general liability insurance providing coverage on an occurrence form basis with limits of not less than Ten Million Dollars ($10,000,000.00) each occurrence for bodily injury and property damage combined, Ten Million Dollars ($10,000,000.00) annual general aggregate. Tenant shall also at all times following complete execution of this Lease maintain in full force and effect, products and completed operations insurance providing coverage on a claims made basis with limits of not less than Three Million Dollars ($3,000,000.00) annual aggregate. Tenant’s liability insurance policy or policies shall: (i) include premises and operations liability coverage, products and completed

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operations liability coverage, broad form property damage coverage including completed operations, blanket contractual liability coverage including, to the maximum extent possible, coverage for the indemnification obligations of Tenant under this Lease, and personal and advertising injury coverage; (ii) provide that the insurance company has the duty to defend all named and additional insureds under the policy; (iii) [intentionally deleted]; (iv) cover liabilities arising out of or incurred in connection with Tenant’s use or occupancy of the Premises or the Project; (v) extend coverage to cover liability for the actions of Tenant’s Representatives and Visitors; and (vi) provide a per location aggregate of not less than Ten Million Dollars ($10,000,000.00) if such policy or policies are written on a “blanket” basis covering more than one location. Each policy of liability insurance required by this Section shall: (i) contain a separation of insureds clause or otherwise provide cross-liability coverage; (ii) provide that any waiver of subrogation rights or release prior to a loss does not void coverage; (iii) provide that it is primary insurance; (iv) name as additional insureds the Landlord Parties, the Property Manager identified in the Basic Lease Information (the “Property Manager”), all Mortgagees (as defined in Section 20.2 of this Lease) and such other parties in interest as Landlord may reasonably designate to Tenant in writing; and (v) provide that any failure to comply with the reporting provisions under the policies shall not affect coverage provided such additional insureds. Such additional insureds shall be provided at least the same extent of coverage as is provided to Tenant under such policies. All endorsements effecting such additional insured status shall be at least as broad as additional insured endorsement form number CG 20 11 01 96 promulgated by the Insurance Services Office.
               (b) Property Insurance. Tenant shall at all times (including any construction or installation periods, whether or not included in the Term) maintain in effect with respect to any Alterations and Tenant’s Trade Fixtures and personal property, commercial property insurance providing coverage, on an “all risk” or “special form” basis, in an amount equal to at least 90% of the full replacement cost of the covered property. Tenant may carry such insurance under a blanket policy, provided that such policy provides coverage equivalent to a separate policy. During the Term, the proceeds from any such policies of insurance shall be used for the repair or replacement of the Alterations, Trade Fixtures and personal property so insured. The Landlord Parties shall be provided coverage under such insurance to the extent of their insurable interest and, if requested by Landlord, both Landlord and Tenant shall sign all documents reasonably necessary or proper in connection with the settlement of any claim or loss under such insurance. Landlord will have no obligation to carry insurance on any Alterations or on Tenant’s Trade Fixtures or personal property.
               (c) Requirements For All Policies. Each policy of insurance required under this Section 11.1 shall: (i) be in a form, and written by an insurer, reasonably acceptable to Landlord, (ii) be maintained at Tenant’s sole cost and expense, and (iii) require at least thirty (30) days’ written notice to Landlord prior to any cancellation, nonrenewal or modification of insurance coverage. Insurance companies issuing such policies shall have rating classifications of “A” or better and financial size category ratings of “VIII” or better according to the latest edition of the A.M. Best Key Rating Guide. All insurance companies issuing such policies shall be admitted carriers licensed to do business in the state where the Project is located. Any deductible amount under such insurance shall not exceed $5,000. Tenant shall provide to Landlord, upon request, evidence that the insurance required to be carried by Tenant pursuant to

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this Section, including any endorsement effecting the additional insured status, is in full force and effect and that premiums therefor have been paid.
               (d) Updating Coverage. Tenant shall increase the amounts of insurance as required by any Mortgagee, and, not more frequently than once every three (3) years, as recommended by Landlord’s insurance broker, if, in the opinion of either of them, the amount of insurance then required under this Lease is not adequate. Any limits set forth in this Lease on the amount or type of coverage required by Tenant’s insurance shall not limit the liability of Tenant under this Lease.
               (e) Certificates of Insurance. Prior to any entry into or occupancy of the Premises by Tenant, and not less than ten (10) days prior to expiration of any policy thereafter, Tenant shall furnish to Landlord a certificate of insurance reflecting that the insurance required by this Section is in force, accompanied by an endorsement showing the required additional insureds satisfactory to Landlord in substance and form. Notwithstanding the requirements of this paragraph, Tenant shall at Landlord’s request provide to Landlord a certified copy of each insurance policy required to be in force at any time pursuant to the requirements of this Lease or its Exhibits.
          11.2 Landlord’s Insurance. During the Term, to the extent such coverages are available at a commercially reasonable cost, Landlord shall maintain in effect insurance on the Building with responsible insurers, on an “all risk” or “special form” basis, insuring the Building and Tenant Improvements in an amount equal to at least 90% of the replacement cost thereof, excluding land, foundations, footings and underground installations. Landlord may, but shall not be obligated to, carry insurance against additional perils and/or in greater amounts.
          11.3 Mutual Waiver of Right of Recovery & Waiver of Subrogation. Landlord and Tenant each hereby waive any right of recovery against each other and their respective partners, managers, members, shareholders, officers, directors and authorized representatives for any loss or damage that is covered by any policy of property insurance maintained by either party (or required by this Lease to be maintained) with respect to the Premises or the Building or any operation therein, regardless of cause, including negligence (active or passive) of the party benefiting from the waiver. If any such policy of insurance relating to this Lease or to the Premises or the Building does not permit the foregoing waiver or if the coverage under any such policy would be invalidated as a result of such waiver, the party maintaining such policy shall obtain from the insurer under such policy a waiver of all right of recovery by way of subrogation against either party in connection with any claim, loss or damage covered by such policy.
     12. DAMAGE OR DESTRUCTION.
          12.1 Landlord’s Duty to Repair.
               (a) If all or a substantial part of the Premises are rendered untenantable or inaccessible by damage to all or any part of the Building from fire or other casualty during the Term, then, unless either party is entitled to and elects to terminate this Lease pursuant to Sections 12.2 - Landlord’s Right to Terminate and 12.3 — Tenant’s Right to Terminate, Landlord shall, at its expense, use reasonable efforts to repair and restore the

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Premises and/or the Building, as the case may be, to substantially their former condition to the extent permitted by then applicable Laws; provided, however, that in no event shall Landlord have any obligation for repair or restoration beyond the extent of insurance proceeds received by Landlord for such repair or restoration, or for any of Tenant’s personal property, Trade Fixtures or Alterations.
               (b) If Landlord is required or elects to repair damage to the Premises and/or the Building, this Lease shall continue in effect, but Tenant’s Base Rent and Additional Rent shall be abated with regard to any portion of the Premises that Tenant is prevented from using by reason of such damage or its repair from the date of the casualty until substantial completion of Landlord’s repair of the affected portion of the Premises as required under this Lease. In no event shall Landlord be liable to Tenant by reason of any injury to or interference with Tenant’s business or property arising from fire or other casualty or by reason of any repairs to any part of the Building necessitated by such casualty.
          12.2 Landlord’s Right to Terminate. Landlord may elect to terminate this Lease following damage by fire or other casualty under the following circumstances:
               (a) If, in the reasonable judgment of Landlord, the Premises and the Building cannot be substantially repaired and restored under applicable Laws within nine (9) months from the date of the casualty;
               (b) If, in the reasonable judgment of Landlord, adequate proceeds are not, for any reason, made available to Landlord from Landlord’s insurance policies (and/or from Landlord’s funds made available for such purpose, at Landlord’s sole option) to make the required repairs;
               (c) If the Building is damaged or destroyed to the extent that, in the reasonable judgment of Landlord, the cost to repair and restore the Building would exceed twenty percent (20%) of the full replacement cost of the Building, whether or not the Premises are at all damaged or destroyed; or
               (d) If the fire or other casualty occurs during the last year of the Term or if upon completion of repair and restoration there would be less than one (1) year remaining in the Term.
If any of the circumstances described in subparagraphs (a), (b), (c) or (d) of this Section 12.2 occur or arise, Landlord shall give Tenant notice within one hundred and twenty (120) days after the date of the casualty, specifying whether Landlord elects to terminate this Lease as provided above and, if not, Landlord’s estimate of the time required to complete Landlord’s repair obligations under this Lease.
          12.3 Tenant’s Right to Terminate. If all or a substantial part of the Premises are rendered untenantable or inaccessible by damage to all or any part of the Building from fire or other casualty, and Landlord does not elect to terminate as provided above, then Tenant may elect to terminate this Lease if Landlord’s estimate of the time required to complete Landlord’s repair obligations under this Lease is greater than nine (9) months, in which event Tenant may elect to terminate this Lease by giving Landlord notice of such election to terminate within thirty

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(30) days after Landlord’s notice to Tenant pursuant to Section 12.2 — Landlord’s Right to Terminate.
          12.4 Waiver. Landlord and Tenant each hereby waive the provisions of California Civil Code Sections 1932(2), 1933(4) and any other applicable existing or future Law permitting the termination of a lease agreement in the event of damage or destruction under any circumstances other than as provided in Sections 12.2 — Landlord’s Right to Terminate and 12.3 — Tenant’s Right to Terminate.
     13. CONDEMNATION.
          13.1 Definitions.
               (a) “Award” shall mean all compensation, sums, or anything of value awarded, paid or received on a total or partial Condemnation.
               (b) “Condemnation” shall mean (i) a permanent taking (or a temporary taking for a period extending beyond the end of the Term) pursuant to the exercise of the power of condemnation or eminent domain by any public or quasi-public authority, private corporation or individual having such power (“Condemnor”), whether by legal proceedings or otherwise, or (ii) a voluntary sale or transfer by Landlord to any such authority, either under threat of condemnation or while legal proceedings for condemnation are pending.
               (c) “Date of Condemnation” shall mean the earlier of the date that title to the property taken is vested in the Condemnor or the date the Condemnor has the right to possession of the property being condemned.
          13.2 Effect on Lease.
               (a) If the Premises are totally taken by Condemnation, this Lease shall terminate as of the Date of Condemnation. If a portion but not all of the Premises is taken by Condemnation, this Lease shall remain in effect; provided, however, that if the portion of the Premises remaining after the Condemnation will be unsuitable for Tenant’s continued use, then upon notice to Landlord within thirty (30) days after Landlord notifies Tenant of the Condemnation, Tenant may terminate this Lease effective as of the Date of Condemnation.
               (b) If fifteen percent (15%) or more of the Project or of the parcel(s) of land on which the Building is situated or of the Parking Facility or of the floor area in the Building is taken by Condemnation, or if as a result of any Condemnation the Building is no longer reasonably suitable for use as an office building, whether or not any portion of the Premises is taken, Landlord may elect to terminate this Lease, effective as of the Date of Condemnation, by notice to Tenant within thirty (30) days after the Date of Condemnation.
               (c) If all or a portion of the Premises is temporarily taken by a Condemnor for a period greater than six (6) consecutive months, then Tenant shall have the right to terminate this Lease by written notice to Landlord within twenty (20) days following the expiration of such six (6) consecutive month period; and for any other temporary taking, not extending beyond the end of the Term, this Lease shall remain in full force and effect.

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          13.3 Restoration. If this Lease is not terminated as provided in Section 13.2 - Effect on Lease, Landlord, at its expense, shall diligently proceed to repair and restore the Premises to substantially its former condition (to the extent permitted by then applicable Laws) and/or repair and restore the Building to an architecturally complete office building; provided, however, that Landlord’s obligations to so repair and restore shall be limited to the amount of any Award received by Landlord and not required to be paid to any Mortgagee (as defined in Section 20.2 below). In no event shall Landlord have any obligation to repair or replace any improvements in the Premises beyond the amount of any Award received by Landlord for such repair or to repair or replace any of Tenant’s personal property, Trade Fixtures, or Alterations.
          13.4 Abatement and Reduction of Rent. If any portion of the Premises is taken in a Condemnation or is rendered permanently untenantable by repairs necessitated by the Condemnation, and this Lease is not terminated, the Base Rent and Additional Rent payable under this Lease shall be proportionally reduced as of the Date of Condemnation based upon the percentage of rentable square feet in the Premises so taken or rendered permanently untenantable. In addition, if this Lease remains in effect following a Condemnation and Landlord proceeds to repair and restore the Premises, the Base Rent and Additional Rent payable under this Lease shall be abated during the period of such repair or restoration to the extent such repairs prevent Tenant’s use of the Premises.
          13.5 Awards. Any Award made shall be paid to Landlord, and Tenant hereby assigns to Landlord, and waives all interest in or claim to, any such Award, including any claim for the value of the unexpired Term; provided, however, that Tenant shall be entitled to receive, or to prosecute a separate claim for, an Award for a temporary taking of the Premises or a portion thereof by a Condemnor where this Lease is not terminated (to the extent such Award relates to the unexpired Term), or an Award or portion thereof separately designated for relocation expenses or the interruption of or damage to Tenant’s business or as compensation for Tenant’s personal property, Trade Fixtures or Alterations, provided that in no event will any Award to Tenant reduce any Award to which Landlord would otherwise be entitled.
          13.6 Waiver. Landlord and Tenant each hereby waive the provisions of California Code of Civil Procedure Section 1265.130 and any other applicable existing or future Law allowing either party to petition for a termination of this Lease upon a partial taking of the Premises and/or the Building or the Project.
     14. ASSIGNMENT AND SUBLETTING.
          14.1 Landlord’s Consent Required. Tenant shall not assign this Lease or any interest therein, or sublet or license or permit the use or occupancy of the Premises or any part thereof by or for the benefit of anyone other than Tenant, or in any other manner transfer all or any part of Tenant’s interest under this Lease (each and all a “Transfer”), without the prior written consent of Landlord, which consent (subject to the other provisions of this Section 14) shall not be unreasonably withheld. If Tenant is a business entity, any direct or indirect transfer of fifty percent (50%) or more of the ownership interest of the entity (whether in a single transaction or in the aggregate through more than one transaction, except for ordinary trading, of publicly tradable equity interests on a public securities exchange), including a merger or consolidation, shall be deemed a Transfer. Notwithstanding any provision in this Lease to the

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contrary, Tenant shall not mortgage, pledge, hypothecate or otherwise encumber this Lease or all or any part of Tenant’s interest under this Lease. Any assignee, subtenant, user or other transferee under any proposed Transfer is herein called a “Proposed Transferee”. Any assignee, subtenant, user or other transferee is herein called a “Transferee”.
          14.2 Reasonable Consent.
               (a) At least twenty (20) days prior to any proposed Transfer, Tenant shall submit in writing to Landlord (i) the name and legal composition of the Proposed Transferee, (ii) the nature of the business proposed to be carried on in the Premises; (iii) a current balance sheet, and income and cash flow statements for the last two years and such other reasonable financial and other information concerning the Proposed Transferee as Landlord may request; and (iv) a copy of the proposed assignment, sublease or other agreement governing the proposed Transfer. Within ten (10) Business Days after Landlord receives all such information it shall notify Tenant whether it approves or disapproves such Transfer or if it elects to proceed under Section 14.7 — Landlord’s Right to Space.
               (b) Tenant acknowledges and agrees that, among other circumstances for which Landlord could reasonably withhold consent to a proposed Transfer, it shall be reasonable for Landlord to withhold consent where (i) the Proposed Transferee does not intend itself to occupy the entire portion of the Premises assigned or sublet, (ii) Landlord reasonably disapproves of the Proposed Transferee’s business operating ability or history, reputation or creditworthiness or the character of the business to be conducted by the Proposed Transferee at the Premises, (iii) the Proposed Transferee is a governmental agency or unit, (iv) the proposed Transfer would violate any “exclusive” rights of any tenants in the Project, (v) Landlord or Landlord’s agent has shown space in the Project to the Proposed Transferee or responded to any inquiries from the Proposed Transferee or the Proposed Transferee’s agent concerning availability of space in the Project, at any time within the preceding three (3)+ months, (vi) a proposed Transfer would violate any Encumbrance, (vii) any Mortgagee objects to the proposed Transfer, or (viii) Landlord otherwise determines that the proposed Transfer would have the effect of decreasing the value of the Project or increasing the expenses associated with operating, maintaining and repairing the Project. In no event may Tenant publicly offer or advertise all or any portion of the Premises for assignment or sublease at a rental less than eighty percent (80%) of that then sought by Landlord for a direct lease (non-sublease) of comparable space in the Project.
          14.3 Excess Consideration. If Landlord consents to a Transfer, Tenant shall pay to Landlord, as Additional Rent, within ten (10) days after receipt by Tenant, fifty percent (50%) of all “Transfer Consideration”, which shall mean any consideration paid or payable by the Transferee for the Transfer. In the case of a sublease, Transfer Consideration includes any “key money” or other non-rent consideration payable in connection with the sublease, plus the excess of the rent payable by the subtenant over the amount of Base Rent and Additional Rent payable hereunder applicable to the subleased space, less the direct, out-of-pocket expenses and costs for necessary Alterations, legal fees and brokerage commission costs paid by Tenant to procure the subtenant. Any such costs for Alterations and brokerage commissions shall be amortized on a straight basis over the term of the sublease. In the case of an assignment (including any Transfer resulting from a change in ownership, merger or consolidation), Transfer

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Consideration includes the value of the Lease (whether or not expressly allocated or otherwise provided for in such transaction) and any other consideration paid or payable by the Transferee for the assignment of the Lease.
          14.4 No Release Of Tenant. No consent by Landlord to any Transfer shall relieve Tenant of any obligation to be performed by Tenant under this Lease, whether occurring before or after such consent, assignment, subletting or other Transfer. Each Transferee shall be jointly and severally liable with Tenant (and Tenant shall be jointly and severally liable with each Transferee) for the payment of rent (or, in the case of a sublease, rent in the amount set forth in the sublease) and for the performance of all other terms and provisions of this Lease. The consent by Landlord to any Transfer shall not relieve Tenant or any such Transferee from the obligation to obtain Landlord’s express prior written consent to any subsequent Transfer by Tenant or any Transferee. The acceptance of rent by Landlord from any other person (whether or not such person is an occupant of the Premises) shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any Transfer.
          14.5 Expenses and Attorneys’ Fees. Tenant shall pay to Landlord on demand all costs and expenses (including reasonable attorneys’ fees) incurred by Landlord in connection with reviewing or consenting to any proposed Transfer (including any request for consent to, or any waiver of Landlord’s rights in connection with, any security interest in any of Tenant’s property at the Premises), not to exceed Two Thousand Five Hundred Dollars ($2,500.00) per request for Landlord’s consent to a proposed Transfer.
          14.6 Effectiveness of Transfer. Prior to the date on which any Transfer (whether or not requiring Landlord’s consent) becomes effective, Tenant shall deliver to Landlord a counterpart of the fully executed Transfer document and Landlord’s standard form of Consent to Assignment or Consent to Sublease executed by Tenant and the Transferee in which each of Tenant and the Transferee confirms its obligations pursuant to this Lease. Failure or refusal of a Transferee to execute any such instrument shall not release or discharge the Transferee from liability as provided herein. The voluntary, involuntary or other surrender of this Lease by Tenant, or a mutual cancellation by Landlord and Tenant, shall not work a merger, and any such surrender or cancellation shall, at the option of Landlord, either terminate all or any existing subleases or operate as an assignment to Landlord of any or all of such subleases.
          14.7 Landlord’s Right to Space. Notwithstanding any of the above provisions of this Section to the contrary, if Tenant notifies Landlord that it desires to enter into a Transfer other than a Permitted Transfer, Landlord, in lieu of consenting to such Transfer, may elect (a) in the case of an assignment or a sublease of the entire Premises, to terminate this Lease, or (b) or in the case of a sublease of more than fifty percent (50%) of the entire Premises for a period ending within six (6) months prior to the Expiration Date, to terminate this Lease as it relates to the space proposed to be subleased by Tenant. In such event, this Lease will terminate (or the space proposed to be subleased will be removed from the Premises subject to this Lease and the Base Rent and Tenant’s Share under this Lease shall be proportionately reduced) on the earlier of (x) sixty (60) days after the date of Landlord’s notice to Tenant making the election set forth in this Section 14.7, or (y) the date the Transfer was proposed to be effective, if such date is specified in Tenant’s notice to Landlord regarding the proposed Transfer, and Landlord may lease such space to any party, including the prospective Transferee identified by Tenant.

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          14.8 Assignment of Sublease Rents. Tenant hereby absolutely and irrevocably assigns to Landlord any and all rights to receive rent and other consideration from any sublease and agrees that Landlord, as assignee or as attorney-in-fact for Tenant for purposes hereof, or a receiver for Tenant appointed on Landlord’s application may (but shall not be obligated to) collect such rents and other consideration and apply the same toward Tenant’s obligations to Landlord under this Lease; provided, however, that Landlord grants to Tenant at all times prior to occurrence of any breach or default by Tenant a revocable license to collect such rents (which license shall automatically and without notice be and be deemed to have been revoked and terminated immediately upon any Event of Default).
          14.9 Permitted Transfers. Notwithstanding any provision contained in the Section 14 to the contrary, Tenant shall have the right, without the consent of Landlord, upon ten (10) days prior written notice to Landlord, to engage in any of the following transactions (each a “Permitted Transfer”) and to Transfer the Lease to any of the following entities (each, a “Permitted Transferee”), so long as the Permitted Transferee has a tangible net worth sufficient to fulfill the obligations of the original Tenant under this Lease being assumed by the Permitted Transferee and no less than the tangible net worth of Tenant immediately prior to such Transfer: (i) a successor corporation related to Tenant by merger, consolidation, or non-bankruptcy reorganization, (ii) a purchaser of at least ninety percent (90%) of Tenant’s assets as an ongoing concern, or (iii) an “Affiliate” of Tenant. The provisions of Sections 14.2, 14.3 and 14.7 shall not apply with respect to a Permitted Transfer, but any transfer pursuant to the provisions of this Section 14.9 shall be subject to all other terms and conditions of this Lease, including the provisions of this Section 14.9. Tenant shall remain liable under this Lease after any such transfer. For the purposes of this Article 14, the term “Affiliate” of Tenant shall mean and refer to any entity controlling, controlled by or under common control with Tenant or Tenant’s parent or subsidiary, as the case may be. “Control” ” as used herein shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such controlled entity; and the ownership, or possession of the right to vote, in the ordinary direction of its affairs, of at least fifty percent (50%) of the voting interest in any entity. Notwithstanding Tenant’s right to make a Permitted Transfer pursuant to the provisions of this Section 14.9, Tenant may not, through use of its rights under this Article 14 in two or more transactions (whether separate transactions or steps or phases of a single transaction), at one time or over time, whether by first assigning this Lease to a subsidiary and then merging the subsidiary into another entity or selling the stock of the subsidiary or by other means, assign or sublease the Premises, or transfer control of Tenant, to any person or entity which is not a subsidiary, affiliate or controlling corporation of the original Tenant, as then constituted, existing prior to the commencement of such transactions, without first obtaining Landlord’s prior written consent and complying with all other applicable provisions of this Article 14.
     15. DEFAULT AND REMEDIES.
          15.1 Events of Default. The occurrence of any of the following shall constitute an “Event of Default” by Tenant:
               (a) Tenant fails to make any payment of Rent when due, or any amount required to replenish the Security Deposit as provided in Section 4 above, if payment in full is not received by Landlord within three (3) days after written notice that it is due. If

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Landlord accepts any past due Rent, such acceptance shall not be a waiver of any other prior breach by Tenant under this Lease, other than the failure of Tenant to pay the particular past due Rent which Landlord has accepted.
               (b) Tenant abandons the Premises, as defined in California Civil Code § 1951.3.
               (c) Tenant fails timely to deliver any subordination document, estoppel certificate or financial statement requested by Landlord within the applicable time period specified in Sections 20 — Encumbrances — and 21 — Estoppel Certificates and Financial Statements - below.
               (d) Tenant violates the restrictions on Transfer set forth in Section 14 — Assignment and Subletting.
               (e) Tenant ceases doing business as a going concern; makes an assignment for the benefit of creditors; is adjudicated an insolvent, files a petition (or files an answer admitting the material allegations of a petition) seeking relief under any state or federal bankruptcy or other statute, law or regulation affecting creditors’ rights; all or substantially all of Tenant’s assets are subject to judicial seizure or attachment and are not released within 30 days, or Tenant consents to or acquiesces in the appointment of a trustee, receiver or liquidator for Tenant or for all or any substantial part of Tenant’s assets.
               (f) Tenant fails, within ninety (90) days after the commencement of any proceedings against Tenant seeking relief under any state or federal bankruptcy or other statute, law or regulation affecting creditors’ rights, to have such proceedings dismissed, or Tenant fails, within ninety (90) days after an appointment, without Tenant’s consent or acquiescence, of any trustee, receiver or liquidator for Tenant or for all or any substantial part of Tenant’s assets, to have such appointment vacated.
               (g) Tenant fails to perform or comply with any provision of this Lease other than those described in (a) through (f) above, and does not fully cure such failure within fifteen (15) days after notice to Tenant or, if such failure cannot be cured within such fifteen (15)-day period, Tenant fails within such fifteen (15)-day period to commence, and thereafter diligently proceed with, all actions necessary to cure such failure as soon as reasonably possible but in all events within ninety (90) days of such notice; provided, however, that if Landlord in Landlord’s reasonable judgment determines that such failure cannot or will not be cured by Tenant within such ninety (90) days, then such failure shall constitute an Event of Default immediately upon such notice to Tenant.
          15.2 Remedies. Upon the occurrence of an Event of Default, Landlord shall have the following remedies, which shall not be exclusive but shall be cumulative and shall be in addition to any other remedies now or hereafter allowed by law:
               (a) Landlord may terminate Tenant’s right to possession of the Premises at any time by written notice to Tenant. Tenant expressly acknowledges that in the absence of such written notice from Landlord, no other act of Landlord, including re-entry into the Premises, efforts to relet the Premises, reletting of the Premises for Tenant’s account, storage

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of Tenant’s personal property and Trade Fixtures, acceptance of keys to the Premises from Tenant or exercise of any other rights and remedies under this Section, shall constitute an acceptance of Tenant’s surrender of the Premises or constitute a termination of this Lease or of Tenant’s right to possession of the Premises. Upon such termination in writing of Tenant’s right to possession of the Premises, as herein provided, this Lease shall terminate and Landlord shall be entitled to recover damages from Tenant as provided in California Civil Code Section 1951.2 and any other applicable existing or future Law providing for recovery of damages for such breach, including the worth at the time of award of the amount by which the rent which would be payable by Tenant hereunder for the remainder of the Term after the date of the award of damages, including Additional Rent as reasonably estimated by Landlord, exceeds the amount of such rental loss as Tenant proves could have been reasonably avoided, discounted at the discount rate published by the Federal Reserve Bank of San Francisco for member banks at the time of the award plus one percent (1%).
               (b) Landlord shall have the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant’s breach and abandonment and recover rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations).
               (c) Landlord may cure the Event of Default at Tenant’s expense. If Landlord pays any sum or incurs any expense in curing the Event of Default, Tenant shall reimburse Landlord upon demand for the amount of such payment or expense with interest at the Interest Rate from the date the sum is paid or the expense is incurred until Landlord is reimbursed by Tenant.
               (d) Landlord may remove all Tenant’s property from the Premises, and such property may be stored by Landlord in a public warehouse or elsewhere at the sole cost and for the account of Tenant. If Landlord does not elect to store any or all of Tenant’s property left in the Premises, Landlord may consider such property to be abandoned by Tenant, and Landlord may thereupon dispose of such property in any manner deemed appropriate by Landlord. Any proceeds realized by Landlord on the disposal of any such property shall be applied first to offset all expenses of storage and sale, then credited against Tenant’s outstanding obligations to Landlord under this Lease, and any balance remaining after satisfaction of all obligations of Tenant under this Lease shall be delivered to Tenant.
     16. LATE CHARGE AND INTEREST.
          16.1 Late Charge. If any payment of rent is not received by Landlord when due, Tenant shall pay to Landlord on demand as a late charge (“Late Charge”) an additional amount equal to four percent (4%) of the overdue payment. Notwithstanding the foregoing, Tenant shall not be obligated to pay a Late Charge on the first payment of rent not received by Landlord when due unless Tenant does not pay such rent within five (5) days after written notice from Landlord (the “Past Due Notice”) that such payment of rent is past due. Commencing with the second (2nd) past due payment of rent in any twelve (12) month period, and continuing with each past due payment thereafter in such twelve (12) month period, Tenant shall pay the Late Charge to Landlord on demand. Each late payment of rent shall begin a new twelve (12) month period during which Tenant shall not be entitled to notice for any subsequent payment of past

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due rent. A Late Charge shall not be imposed more than once on any particular installment not paid when due, but imposition of a Late Charge on any payment not made when due does not eliminate or supersede late charges imposed on other (prior) payments not made when due or preclude imposition of a late charge on other installments or payments not made when due.
          16.2 Interest. In addition to the late charges referred to above, which are intended to defray Landlord’s costs resulting from late payments, any payment from Tenant to Landlord not paid when due shall at Landlord’s option bear interest from the date due until paid to Landlord by Tenant at the rate of fifteen percent (15%) per annum or the maximum lawful rate that Landlord may charge to Tenant under applicable laws, whichever is less (the “Interest Rate”). Acceptance of any late charge and/or interest shall not constitute a waiver of Tenant’s default with respect to the overdue sum or prevent Landlord from exercising any of its other rights and remedies under this Lease.
     17. WAIVER. No provisions of this Lease shall be deemed waived by Landlord unless such waiver is in a writing signed by Landlord. The waiver by Landlord of any breach of any provision of this Lease shall not be deemed a waiver of such provision or of any subsequent breach of the same or any other provision of this Lease. No delay or omission in the exercise of any right or remedy of Landlord upon any default by Tenant shall impair such right or remedy or be construed as a waiver. Landlord’s acceptance of any payments of rent due under this Lease shall not be deemed a waiver of any default by Tenant under this Lease (including Tenant’s recurrent failure to timely pay rent) other than Tenant’s nonpayment of the accepted sums, and no endorsement or statement on any check or payment or in any letter or document accompanying any check or payment shall be deemed an accord and satisfaction. Landlord’s consent to or approval of any act by Tenant requiring Landlord’s consent or approval shall not be deemed to waive or render unnecessary Landlord’s consent to or approval of any subsequent act by Tenant.
     18. ENTRY, INSPECTION AND CLOSURE. Upon reasonable oral or written notice to Tenant (and without notice in emergencies), Landlord and its authorized representatives may enter the Premises at all reasonable times to: (a) determine whether the Premises are in good condition, (b) determine whether Tenant is complying with its obligations under this Lease, (c) perform any maintenance or repair of the Premises or the Building that Landlord has the right or obligation to perform, (d) install or repair improvements for other tenants where access to the Premises is required for such installation or repair, (e) serve, post or keep posted any notices required or allowed under the provisions of this Lease, (f) show the Premises to prospective brokers, agents, buyers, transferees or Mortgagees, or (g) do any other act or thing necessary for the safety or preservation of the Premises or the Building; provided, however, Landlord shall show the Premises to prospective tenants only upon prior notice to Tenant during the last nine (9) months of the Term. When reasonably necessary Landlord may temporarily close entrances, doors, corridors, elevators or other facilities in the Building without liability to Tenant by reason of such closure. Landlord shall use commercially reasonable efforts to conduct its activities under this Section in a manner that will minimize inconvenience to Tenant without incurring additional expense to Landlord. In no event shall Tenant be entitled to an abatement of rent on account of any entry by Landlord, and Landlord shall not be liable in any manner for any inconvenience, loss of business or other damage to Tenant or other persons arising out of Landlord’s entry on the Premises in accordance with this Section. No action by Landlord

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pursuant to this paragraph shall constitute an eviction of Tenant, constructive or otherwise, entitle Tenant to an abatement of rent or to terminate this Lease or otherwise release Tenant from any of Tenant’s obligations under this Lease.
     19. SURRENDER AND HOLDING OVER.
          19.1 Surrender. Upon the expiration or termination of this Lease, Tenant shall surrender the Premises and all Tenant Improvements and Alterations to Landlord broom-clean and in their original condition, except for reasonable wear and tear, damage from casualty or condemnation and any changes resulting from approved Alterations; provided, however, that prior to the expiration or termination of this Lease Tenant shall, at Landlord’s request, remove all telephone and other cabling installed in the Building by Tenant and remove from the Premises all Tenant’s personal property and any Trade Fixtures and all Alterations that Landlord has elected to require Tenant to remove as provided in Section 6.1 — Tenant Improvements & Alterations, and repair any damage caused by such removal. If such removal is not completed before the expiration or termination of the Term, Landlord shall have the right (but no obligation) to remove the same, and Tenant shall pay Landlord on demand for all costs of removal and storage thereof and for the rental value of the Premises for the period from the end of the Term through the end of the time reasonably required for such removal. Landlord shall also have the right to retain or dispose of all or any portion of such property if Tenant does not pay all such costs and retrieve the property within ten (10) days after notice from Landlord (in which event title to all such property described in Landlord’s notice shall be transferred to and vest in Landlord). Tenant waives all Claims against Landlord for any damage or loss to Tenant resulting from Landlord’s removal, storage, retention, or disposition of any such property. Upon expiration or termination of this Lease or of Tenant’s possession, whichever is earliest, Tenant shall surrender all keys to the Premises or any other part of the Building and shall deliver to Landlord all keys for or make known to Landlord the combination of locks on all safes, cabinets and vaults that may be located in the Premises. Tenant’s obligations under this Section shall survive the expiration or termination of this Lease.
          19.2 Holding Over. If Tenant (directly or through any Transferee or other successor-in-interest of Tenant) remains in possession of the Premises after the expiration or termination of this Lease, Tenant’s continued possession shall be on the basis of a tenancy at the sufferance of Landlord. No act or omission by Landlord, other than its specific written consent, shall constitute permission for Tenant to continue in possession of the Premises, and if such consent is given or declared to have been given by a court judgment, Landlord may terminate Tenant’s holdover tenancy at any time upon seven (7) days written notice. In such event, Tenant shall continue to comply with or perform all the terms and obligations of Tenant under this Lease, except that the monthly Base Rent (a) during the first two (2) months of Tenant’s holding over shall be one hundred fifty percent (150%) of the Base Rent payable in the last full month prior to the expiration or termination hereof, (b) following the first two (2) months after the expiration or termination of this Lease shall be two hundred percent (200%) of the Base Rent payable in the last full month prior to the expiration or termination hereof. Acceptance by Landlord of rent after such termination shall not constitute a renewal or extension of this Lease; and nothing contained in this provision shall be deemed to waive Landlord’s right of re-entry or any other right hereunder or at law. Tenant shall indemnify, defend and hold Landlord harmless from and against all Claims arising or resulting directly or indirectly from Tenant’s failure to

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timely surrender the Premises, including (i) any rent payable by or any loss, cost, or damages claimed by any prospective tenant of the Premises, and (ii) Landlord’s damages as a result of such prospective tenant rescinding or refusing to enter into the prospective lease of the Premises by reason of such failure to timely surrender the Premises.
     20. ENCUMBRANCES.
          20.1 Subordination. This Lease is expressly made subject and subordinate to any mortgage, deed of trust, ground lease, underlying lease or like encumbrance affecting any part of the Project or any interest of Landlord therein which is now existing or hereafter executed or recorded (“Encumbrance”); provided, however, that such subordination shall only be effective, as to future Encumbrances, if the holder of the Encumbrance agrees in writing that this Lease shall survive the termination of the Encumbrance by lapse of time, foreclosure or otherwise so long as Tenant is not in default under this Lease. Provided the conditions of the preceding sentence are satisfied, Tenant shall execute and deliver to Landlord, within ten (10) days after written request therefor by Landlord and in a form reasonably requested by Landlord, and the holder of any Encumbrance, any additional documents evidencing the subordination of this Lease with respect to any such Encumbrance and the nondisturbance agreement of the holder of any such Encumbrance, which documents may include customary commercially reasonable terms, such as the agreement of Tenant to provide such holder notice and opportunity to cure any Landlord default under the Lease (including the opportunity to take possession of the Project as provided in the Encumbrance). If the interest of Landlord in the Project is transferred pursuant to or in lieu of proceedings for enforcement of any Encumbrance (including, without limitation, any judicial foreclosure or foreclosure by a power of sale in a deed of trust), Tenant shall, at the request of the new owner, immediately attorn to, and become the tenant of, the new owner, and this Lease shall continue in full force and effect as a direct lease between the transferee and Tenant on the terms and conditions set forth in this Lease and, at such new owner’s request, shall execute a new lease confirming the lease terms of this Lease. In furtherance of the foregoing, any such successor to the Landlord shall not be liable for any offsets, defenses, claims, counterclaims, liabilities or obligations of the “landlord” under the Lease accruing prior to the date that such new owner exercises its rights pursuant to the preceding sentence.
          20.2 Mortgagee Protection. Tenant agrees to give any holder of any Encumbrance covering any part of the Project (“Mortgagee”), by registered mail, a copy of any notice of default served upon Landlord, provided that prior to such notice Tenant has been notified in writing (by way of notice of assignment of rents and leases, or otherwise) of the address of such Mortgagee. If Landlord shall have failed to cure such default within thirty (30) days from the effective date of such notice of default, then the Mortgagee shall have an additional thirty (30) days within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary to cure such default (including the time necessary to foreclose or otherwise terminate its Encumbrance, if necessary to effect such cure), and this Lease shall not be terminated so long as such remedies are being diligently pursued.

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     21. ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS.
          21.1 Estoppel Certificates. Within ten (10) Business Days after written request therefor, Tenant shall execute and deliver to Landlord, in a form provided by or satisfactory to Landlord, a certificate stating that this Lease is in full force and effect, describing this Lease and any amendments or modifications hereto, acknowledging that this Lease is subordinate or prior, as the case may be, to any Encumbrance and stating any other information Landlord may reasonably request, including the commencement and expiration dates of the Term, the monthly Base Rent, the date to which Rent has been paid, the amount of any security deposit or prepaid rent, whether either party hereto is in default under the terms of the Lease, whether Landlord has completed its construction obligations hereunder (if any), and whether Tenant has accepted the Premises. Tenant irrevocably constitutes, appoints and authorizes Landlord as Tenant’s special attorney-in-fact for such purpose to complete, execute and deliver such certificate if Tenant fails timely to execute and deliver such certificate as provided above. Any person or entity purchasing, acquiring an interest in or extending financing with respect to the Project shall be entitled to rely upon any such certificate. If Tenant fails to deliver such certificate within ten (10) days after Landlord’s second written request therefor, Tenant shall be liable to Landlord for any damages incurred by Landlord as a result, directly or indirectly, of Tenant’s failure or refusal to timely execute or deliver such estoppel certificate.
          21.2 Financial Statements. Within ten (10) Business Days after written request therefor, but not more than once a year, Tenant shall deliver to Landlord a copy of the financial statements (including at least a year end balance sheet, a statement of profit and loss, and a statement of cash flows) of Tenant (and of each guarantor of Tenant’s obligations under this Lease) for each of the three most recently completed years, prepared in accordance with generally accepted accounting principles (and, if such is Tenant’s normal practice, audited by an independent certified public accountant), all then available subsequent interim statements, and such other financial information as may reasonably be requested by Landlord or required by any Mortgagee.
     22. NOTICES. Any notice, demand, request, consent or approval that either party desires or is required to give to the other party under this Lease shall be in writing and shall be served personally, delivered by messenger or courier service, or sent by U.S. certified mail, return receipt requested, postage prepaid, addressed to the other party at the party’s address for notices set forth in the Basic Lease Information. Any notice required pursuant to any Laws may be incorporated into, given concurrently with or given separately from any notice required under this Lease. Notices shall be deemed to have been given and be effective on the earlier of (a) receipt (or refusal of delivery or receipt); or (b) one (1) day after acceptance by the independent service for delivery, if sent by independent messenger or courier service, or three (3) days after mailing if sent by mail in accordance with this Section. Either party may change its address for notices hereunder, effective fifteen (15) days after notice to the other party complying with this Section. If Tenant sublets the Premises, notices from Landlord shall be effective on the subtenant when given to Tenant pursuant to this Section.
     23. ATTORNEYS’ FEES. In the event of any dispute between Landlord and Tenant in any way related to this Lease, and whether involving contract and/or tort claims, the non-prevailing party shall pay to the prevailing party all reasonable attorneys’ fees and costs and

35


 

expenses of any type, without restriction by statute, court rule or otherwise, incurred by the prevailing party in connection with any action or proceeding (including any appeal and the enforcement of any judgment or award), whether or not the dispute is litigated or prosecuted to final judgment (collectively, “Fees”). The “prevailing party” shall be determined based upon an assessment of which party’s major arguments or positions taken in the action or proceeding could fairly be said to have prevailed (whether by compromise, settlement, abandonment by the other party of its claim or defense, final decision, after any appeals, or otherwise) over the other party’s major arguments or positions on major disputed issues. Any Fees incurred in enforcing a judgment shall be recoverable separately from any other amount included in the judgment and shall survive and not be merged in the judgment. The Fees shall be deemed an “actual pecuniary loss” within the meaning of Bankruptcy Code Section 365(b)(1)(B), and notwithstanding the foregoing, all Fees incurred by either party in any bankruptcy case filed by or against the other party, from and after the order for relief until this Lease is rejected or assumed in such bankruptcy case, will be “obligations of the debtor” as that phrase is used in Bankruptcy Code Section 365(d)(3).
     24. QUIET POSSESSION. Subject to Tenant’s full and timely performance of all of Tenant’s obligations under this Lease and subject to the terms of this Lease, including Section 20 - Encumbrances, Tenant shall have the quiet possession of the Premises throughout the Term as against any persons or entities lawfully claiming by, through or under Landlord.
     25. SECURITY MEASURES. Landlord may, but shall be under no obligation to, implement security measures for the Project, such as the registration or search of all persons entering or leaving the Building, requiring identification for access to the Building, evacuation of the Building for cause, suspected cause, or for drill purposes, the issuance of magnetic pass cards or keys for Building or elevator access and other actions that Landlord deems necessary or appropriate to prevent any threat of property loss or damage, bodily injury or business interruption; provided, however, that such measures shall be implemented in a way as not to materially inconvenience tenants of the Building unreasonably. If Landlord uses an access card system, Landlord may require Tenant to pay Landlord a deposit for each after-hours Building access card issued to Tenant. Tenant shall be responsible for any loss, theft or breakage of any such cards, which must be returned by Tenant to Landlord upon expiration or earlier termination of the Lease. Landlord may retain the deposit for any card not so returned. Landlord shall at all times have the right to change, alter or reduce any such security services or measures. Tenant shall cooperate and comply with, and cause Tenant’s Representatives and Visitors to cooperate and comply with, such security measures. Landlord, its agents and employees shall have no liability to Tenant or its Representatives or Visitors for the implementation or exercise of, or the failure to implement or exercise, any such security measures or for any resulting disturbance of Tenant’s use or enjoyment of the Premises.
     26. FORCE MAJEURE. If Landlord is delayed, interrupted or prevented from performing any of its obligations under this Lease, including its obligations under the Construction Rider (if any), and such delay, interruption or prevention is due to fire, act of God, governmental act or failure to act, terrorist act, labor dispute, unavailability of labor or materials or any other cause outside the reasonable control of Landlord, then the time for performance of the affected obligations of Landlord shall be extended for a period equivalent to the period of such delay, interruption or prevention.

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     27. RULES AND REGULATIONS. Tenant shall be bound by and shall comply with the rules and regulations attached to and made a part of this Lease as Exhibit C to the extent those rules and regulations are not in conflict with the terms of this Lease, as well as any reasonable rules and regulations hereafter adopted by Landlord for all tenants of the Building, upon notice to Tenant thereof (collectively, the “Building Rules”). Landlord shall not be responsible to Tenant or to any other person for any violation of, or failure to observe, the Building Rules by any other tenant or other person.
     28. LANDLORD’S LIABILITY. The term “Landlord,” as used in this Lease, shall mean only the owner or owners of the Building at the time in question. In the event of any conveyance of title to the Building, then from and after the date of such conveyance, the transferor Landlord shall be relieved of all liability with respect to Landlord’s obligations to be performed under this Lease after the date of such conveyance. Notwithstanding any other term or provision of this Lease, the liability of Landlord for its obligations under this Lease is limited solely to the equity interest Landlord would have in the Building if the Building were encumbered only by third party debt in an amount equal to seventy-five percent (75%) of the value of the Building; and except as provided to the contrary in the preceding no personal liability shall at any time be asserted or enforceable against any other assets of Landlord or against Landlord’s partners or members or its or their respective partners, shareholders, members, directors, officers or managers on account of any of Landlord’s obligations or actions under this Lease.
     29. CONSENTS AND APPROVALS.
          29.1 Determination in Good Faith. Wherever the consent, approval, judgment or determination of Landlord is required or permitted under this Lease, Landlord may exercise its good faith business judgment in granting or withholding such consent or approval or in making such judgment or determination without reference to any extrinsic standard of reasonableness, unless the specific provision contained in this Lease providing for such consent, approval, judgment or determination specifies that Landlord’s consent or approval is not to be unreasonably withheld, or that such judgment or determination is to be reasonable, or otherwise specifies the standards under which Landlord may withhold its consent. If it is determined that Landlord failed to give its consent where it was required to do so under this Lease, Tenant shall be entitled to injunctive relief but shall not to be entitled to monetary damages or to terminate this Lease for such failure.
          29.2 No Liability Imposed on Landlord. The review and/or approval by Landlord of any item or matter to be reviewed or approved by Landlord under the terms of this Lease or any Exhibits or Addenda hereto shall not impose upon Landlord any liability for the accuracy or sufficiency of any such item or matter or the quality or suitability of such item for its intended use. Any such review or approval is for the sole purpose of protecting Landlord’s interest in the Building, and no third parties, including Tenant or the Representatives and Visitors of Tenant or any person or entity claiming by, through or under Tenant, shall have any rights as a consequence thereof.
     30. WAIVER OF RIGHT TO JURY TRIAL. To the extent permitted by Law, Landlord and Tenant waive their respective rights to trial by jury of any contract or tort claim,

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counterclaim, cross-complaint, or cause of action in any action, proceeding, or hearing brought by either party against the other on any matter arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, or Tenant’s use or occupancy of the Premises, including any claim of injury or damage or the enforcement of any remedy under any current or future law, statute, regulation, code, or ordinance.
     31. BROKERS. Landlord shall pay the fee or commission of the broker or brokers identified in the Basic Lease Information (the “Broker”) in accordance with Landlord’s separate written agreement with the Broker, if any. Tenant warrants and represents to Landlord that in the negotiating or making of this Lease neither Tenant nor anyone acting on Tenant’s behalf has dealt with any broker or finder who might be entitled to a fee or commission for this Lease other than the Broker. Tenant shall indemnify and hold Landlord harmless from any claim or claims, including costs, expenses and attorney’s fees incurred by Landlord asserted by any other broker or finder for a fee or commission based upon any dealings with or statements made by Tenant or Tenant’s Representatives.
     32. RELOCATION OF PREMISES. [Intentionally deleted].
     33. MISCELLANEOUS. This Lease may not be amended or modified except by a writing signed by Landlord and Tenant. Subject to Section 14 — Assignment and Subletting and Section 28 — Landlord’s Liability, this Lease shall be binding on and shall inure to the benefit of the parties and their respective successors, assigns and legal representatives. The determination that any provisions hereof may be void, invalid, illegal or unenforceable shall not impair any other provisions hereof and all such other provisions of this Lease shall remain in full force and effect. The unenforceability, invalidity or illegality of any provision of this Lease under particular circumstances shall not render unenforceable, invalid or illegal other provisions of this Lease, or the same provisions under other circumstances. This Lease shall be construed and interpreted in accordance with the laws (excluding conflict of laws principles) of the State in which the Building is located. The provisions of this Lease shall be construed in accordance with the fair meaning of the language used and shall not be strictly construed against either party, even if such party drafted the provision in question. When required by the context of this Lease, the singular includes the plural. Wherever the term “including” is used in this Lease, it shall be interpreted as meaning “including, but not limited to” the matter or matters thereafter enumerated. The captions contained in this Lease are for purposes of convenience only and are not to be used to interpret or construe this Lease. If more than one person or entity is identified as Tenant hereunder, the obligations of each and all of them under this Lease shall be joint and several. Time is of the essence with respect to this Lease, except as to the conditions relating to the delivery of possession of the Premises to Tenant. Neither Landlord nor Tenant shall record this Lease.
     34. AUTHORITY. If Tenant is a corporation, partnership, limited liability company or other form of business entity, each of the persons executing this Lease on behalf of Tenant warrants and represents that Tenant is a duly organized and validly existing entity, that Tenant has full right and authority to enter into this Lease and that the persons signing on behalf of Tenant are authorized to do so and have the power to bind Tenant to this Lease. Tenant shall provide Landlord upon request with evidence reasonably satisfactory to Landlord confirming the foregoing representations.

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     35. HAZARDOUS SUBSTANCE DISCLOSURE. California law requires landlords to disclose to tenants the existence of certain hazardous substances. Accordingly, the existence of gasoline and other automotive fluids, maintenance fluids, copying fluids and other office supplies and equipment, certain construction and finish materials, tobacco smoke, cosmetics and other personal items, and asbestos-containing materials (“ACM”) must be disclosed. Landlord has made no special investigation of the Premises with respect to any hazardous substances.
     However, gasoline and other automotive fluids are found in the garage and outdoor parking areas of the Building. Cleaning, lubricating and hydraulic fluids used in the operation and maintenance of the Building are found in the utility areas of the Building not generally accessible to Building occupants or the public. Many Building occupants use copy machines and printers with associated fluids and toners, and pens, markers, inks, and computers and other office equipment that may contain hazardous substances. Certain adhesives, paints, carpeting and other construction materials and finishes used in portions of the Building may contain hazardous substances. Building occupants and other persons entering the Building from time-to-time may use or carry prescription and non-prescription drugs, perfumes, cosmetics and other toiletries, and foods and beverages, some of which may contain hazardous substances.
     Although smoking is prohibited inside the Building, indoor areas may, from time to time, be exposed to tobacco smoke. Smoking is generally permitted outside the Building, and so tobacco smoke may be present from time-to-time in the outdoor portion of the Building site.
     36. ENTIRE AGREEMENT. This Lease, including the Exhibits and any Addenda attached hereto, and the documents referred to herein, if any, constitute the entire agreement between Landlord and Tenant with respect to the leasing of space by Tenant in the Building, and supersede all prior or contemporaneous agreements, understandings, proposals and other representations by or between Landlord and Tenant, whether written or oral, all of which are merged herein. Neither Landlord nor Landlord’s agents have made any representations or warranties with respect to the Premises, the Building, the Project or this Lease except as expressly set forth herein, and no rights, easements or licenses shall be acquired by Tenant by implication or otherwise unless expressly set forth herein. The submission of this Lease for examination does not constitute an option for the Premises and this Lease shall become effective as a binding agreement only upon execution and delivery thereof by Landlord to Tenant.

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     IN WITNESS WHEREOF, Landlord and Tenant have entered into this Lease as of the date first above written.
                     
TENANT:       LANDLORD:
 
                   
ARCHSIGHT, INC.,       ECI TWO RESULTS LLC,
a Delaware corporation       a California limited liability company
 
                   
            by:   Embarcadero Capital Investors Two, L.P,
a Delaware limited partnership,
sole member
By:
  /s/ Robert W. Shaw                 
 
                   
Name:
  Robert W. Shaw        by:   Embarcadero Capital Partners LLC,
 
                   
Title:
  Chairman & CEO            a Delaware limited liability company,
 
                   
                sole general partner
By:
  /s/ Stewart Grierson                 
 
                   
Name:
  Stewart Grierson            by:   Hamilton Partners, LP
 
                   
Title:
  CFO                Manager 
 
                   
 
                   
 
              by:   Hamilton Ventures, Inc.,
general partners
 
                   
 
              by:   /s/ John Hamilton 
 
                   
 
                  John Hamilton, President
(For corporate entities, signature by TWO corporate officers is required: one by (x) the chairman of the board, the president, or any vice president; and the other by (y) the secretary, any assistant secretary, the chief financial officer, or any assistant treasurer.)

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EXHIBIT A-1
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF APRIL 24, 2007
BETWEEN
ECI TWO RESULTS LLC, AS LANDLORD,
AND
ARCSIGHT, INC., AS TENANT (“LEASE”)
THE EXISTING PREMISES

Exhibit A-1, Page 1

[Plans Omitted]
       
 
INITIALS:  
 
Landlord  
JH
 
Tenant
SG


 

EXHIBIT A-2
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF APRIL 24, 2007
BETWEEN
ECI TWO RESULTS LLC, AS LANDLORD,
AND
ARCSIGHT, INC., AS TENANT (“LEASE”)
THE EXPANSION PREMISES

Exhibit A-2, Page 1

[Plans Omitted]
       
 
INITIALS:  
 
Landlord  
JH
 
Tenant
SG


 

EXHIBIT A-3
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF APRIL 24, 2007
BETWEEN
ECI TWO RESULTS LLC, AS LANDLORD,
AND
ARCSIGHT, INC., AS TENANT (“LEASE”)
THE CAMPUS

Exhibit A-3, Page 1

[Plans Omitted]
       
 
INITIALS:  
 
Landlord  
JH
 
Tenant
SG


 

EXHIBIT B
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF APRIL 24, 2007
BETWEEN
ECI TWO RESULTS LLC, AS LANDLORD,
AND
ARCSIGHT, INC., AS TENANT (“LEASE”)
CONSTRUCTION RIDER
     1. (a) Existing Premises. Tenant has been occupying the Existing Premises pursuant to a sublease. Tenant shall take the Existing Premises in their existing “AS IS” condition.
         (b) Tenant Improvements in the Expansion Premises. Tenant shall through a Contractor (as defined below) construct and install in the Expansion Premises the improvements and fixtures provided for in this Construction Rider (“Tenant Improvements”). Tenant shall take the Expansion Premises in their existing “AS IS” condition, subject to the Contractor constructing the Tenant Improvements.
     Upon request by Landlord, Tenant shall designate in writing an individual authorized to act as Tenant’s Representative with respect to all approvals, directions and authorizations pursuant to this Construction Rider.
     Tenant shall submit the Construction Documents (as defined below) to (a) OPI Commercial Builders, and (b) Venture Builders (together, the “Bidding Contractors”) for bids to construct the Tenant Improvements. Tenant shall request the Bidding Contractors to competitively bid all subcontracts for major components of the Tenant Improvements. Landlord shall have the right to approve (x) all major subcontractors whose work costs more than $25,000.00, and (y) all subcontractors who will perform work on the structure or the Building Systems. Tenant shall deliver copies of all of the bids to Landlord. Landlord and Tenant shall then mutually and jointly review the bids in order to determine which of the two Bidding Contractors is best able to complete the work in accordance with the schedule and within a budget approved by Landlord and Tenant. Tenant acknowledges that the lowest bid may not necessarily be the contractor to be selected. However, it is the intention of the parties to select the lowest cost contractor from between the Bidding Contractors who is approved by both Landlord and Tenant, absent circumstances that are reasonably acceptable to Tenant. The contractor selected by Landlord and Tenant from the Bidding Contractors is called the “Contractor.”

Exhibit B, Page 1


 

          1.1. Plans for the Expansion Premises. Korth Sunseri Hagey Architects (the “Space Planner”) shall prepare conceptual space plans (“Space Plans”) and Construction Documents (as defined below) for the Expansion Premises. The Tenant Improvements in the Expansion Premises shall be constructed substantially as shown on the Preliminary Space Planconsisting of two (2) sheets, and identified as “Tenant Requested Plan Revisions Building 3” dated April 20, 2007”, attached hereto as Exhibit B-2 (“Preliminary Space Plan”), which has been prepared by the Space Planner. Landlord and Tenant shall review additional Space Plans which may be prepared after the Preliminary Space Plan, and which shall be consistent with the Preliminary Space Plan. Landlord and Tenant shall promptly approve a final Space Plan (the “Approved Space Plan”). The Approved Space Plan shall be consistent with the Preliminary Space Plan.
     Tenant shall retain the Space Planner for preparation of additional Space Plans and Construction Documents for the Expansion Premises. Tenant shall pay those fees and costs of the Space Planner incurred from and after the date of this Lease. Landlord shall be responsible for those fees and costs of the Space Planner incurred prior to the date of this Lease.
     As soon as is reasonably practicable after Landlord and Tenant approve the Approved Space Plan, the Space Planner will prepare and deliver to Landlord and Tenant detailed plans and specifications consistent with the Approved Space Plan, and sufficient to permit the construction of the Tenant Improvements by the Contractor (“Construction Documents”). The Construction Documents shall be subject to approval by Landlord and Tenant. Tenant will request the Bidding Contractors to provide Landlord and Tenant with a cost estimate for the work shown in the Construction Documents. Tenant shall respond to the Construction Documents and cost estimates within three (3) Business Days after receipt thereof, specifying any changes or modifications Tenant desires in the Construction Documents required because the Construction Documents are inconsistent with the Approved Space Plan or because Tenant finds the cost estimates exceed Tenant’s expectations. Any disapproval by Tenant shall also specify in detail the reasons for Tenant’s disapproval, together with a detailed listing of those changes or modifications to the Construction Documents which would cause Tenant to approve the Construction Documents (“Tenant’s Plans Changes”). Tenant’s Plans Changes shall be subject to Landlord’s approval, which approval shall not be unreasonably withheld. Within five (5) Business Days after receipt of Tenant’s Plan Changes the Space Planner shall revise the Construction Documents to include Tenant’s Plans Changes, as such may be reasonably approved by Landlord. The revised Construction Documents and cost estimate, as approved by Tenant and Landlord, are hereinafter referred to as the “Final Construction Documents” and “Final Cost Estimate,” respectively.
          1.2. Construction. Following approval of the Final Cost Estimate and selection of the Contractor, Tenant shall enter into a contract with the Contractor to construct the Tenant Improvements in accordance with the Final Construction Documents, the Final Cost Estimate (subject to increases or decreases based upon “Changes”), and any building permit, and to use commercially reasonable efforts to Substantially Complete such construction in accordance with a construction schedule proposed by the Contractor, and agreed upon by Landlord and Tenant.
     The Tenant Improvements shall be deemed to be “Substantially Complete” when they have been completed in accordance with the Final Construction Documents except for finishing

Exhibit B, Page 2


 

details, minor omissions, decorations and mechanical adjustments of the type normally found on an architectural “punch list”. (The definition of Substantially Complete shall also define the terms “Substantial Completion” and “Substantially Completed.”)
     Within thirty (30) days following the completion of any punch list items (after Substantial Completion of the Tenant Improvements), Tenant shall, at Tenant’s cost and expense, deliver to Landlord “as built” plans showing the completed Tenant Improvements. The “as built” plans shall be “hard copy” on paper and in digital form (on CAD), and show the Tenant Improvements in reasonable detail, including (a) the location of walls, partitions and doors, including fire exits and ADA paths of travel, (b) electrical, plumbing and life safety fixtures, and (c) a reflected ceiling plan showing the location of heating, ventilating and air conditioning registers, lighting and life safety systems (collectively, the “Completion Drawings”).
          1.3. Cost of Tenant Improvements.
          1.3.1. Improvement Allowance. Landlord shall contribute up to Seven Hundred Seven Thousand Five Hundred Eighty-Eight and 00/100 Dollars ($707,588.00) (the “Improvement Allowance”) towards the costs of (a) design (including preparation of space plans and Construction Documents), construction and installation of the Tenant Improvements in the Expansion Premises, and (b) of any improvements desired by Tenant to the Existing Premises. Tenant is responsible for all costs of the Tenant Improvements in excess of the Improvement Allowance.
          1.3.2. Disbursement of Improvement Allowance. Landlord shall disburse the Improvement Allowance to Tenant as the construction of the Tenant Improvements progresses as follows: On or before the tenth (10th) day of each month, Tenant shall deliver to Landlord an application for reimbursement, accompanied by documentary evidence as reasonably required by Landlord (including, at a minimum, copies of the paid invoices and unconditional mechanics’ lien waivers reasonably required by Landlord and signed by the applicable party) of the costs incurred by Tenant for the design and construction of the Tenant Improvements since the last application for reimbursement. Within thirty (30) days after Landlord’s receipt of such an application for reimbursement, Landlord shall pay to Tenant a pro rata share of such application determined by multiplying the amount of such application by a fraction, the numerator of which is the Improvement Allowance and the denominator of which is the total costs of the Tenant Improvements, including Changes, the amount of the all professional fees and services, and all licensing and permit fees; provided, however that after making the foregoing calculation Landlord shall retain an amount equal to ten percent (10%) of Landlord’s pro rata share of each application (the “Landlord Retention”), which Landlord Retention shall be released pursuant to the provisions of Section 1.3.3 below.
          1.3.3. Evidence of Completion. Within thirty (30) days following Substantial Completion of the Tenant Improvements (which shall mean completion of the Tenant Improvements and receipt of permit sign-offs sufficient to permit legal occupancy of the Premises, subject only to correction of punch-list items that do not affect safe occupancy of the Premises), Tenant shall submit to Landlord:

Exhibit B, Page 3


 

               (a) A statement of Tenant’s final construction costs, together with receipted evidence showing payment thereof, reasonably satisfactory to Landlord, and, to the extent not previously delivered, fully executed and notarized unconditional lien releases in the form prescribed by law from Tenant’s contractors, copies of all detailed, final invoices from Tenant’s contractors related to the Tenant Improvements.
               (b) All Permits and other documents issued by any governmental authority in connection with the approval and completion of the Tenant Improvements, and all evidence reasonably available showing compliance with all applicable Laws of any and all governmental authorities having jurisdiction over the Premises, including, without limitation, a certificate of occupancy or its equivalent such as duly signed-off job cards, building permit sign-offs, and/or other appropriate authorization for physical occupancy of the Premises.
               (c) A valid certificate of substantial completion executed by the Space Planner confirming that the Tenant Improvements have been substantially completed in accordance with the Final Construction Documents, subject to punch-list items to be completed by the Contractor after commencement of the Lease.
               (d) A written certificate, subscribed and sworn before a Notary Public, from the Contractor as follows: “There are no known mechanics’ or materialmen’s liens outstanding, all due and payable bills with respect to the Tenant Improvements have been paid, and there is no known basis for the filing of any mechanics’ or materialmen’s liens against the Premises, the Building or the Property, and, to the best of our knowledge, waivers from all subcontractors and materialmen are valid and constitute an effective waiver of lien under applicable law.”
               (e) Copies of all of Tenant’s contractors’ warranties.
               (f) The Completion Drawings.
               (g) A Notice of Completion recorded in the office of the Recorder of the County of Santa Clara in accordance with Section 3093 of the Civil Code of the State of California or any successor statute.
               (h) Any other items reasonably requested by Landlord.
Within thirty (30) days after receipt of all of the above, Landlord shall make its disbursement of the final ten percent (10%) of the Improvement Allowance (or so much of the Improvement Allowance that has not yet been paid by Landlord, but in no event to exceed, in the aggregate, the actual cost of the design and construction of the Tenant Improvements) to Tenant or Tenant’s contractors, as applicable, as required above.
Any portion of the Improvement Allowance not used in the design, construction and installation of the Tenant Improvements shall be retained by Landlord, and Tenant shall have no right to receive or apply toward Tenant’s rental obligations any portion of the Improvement Allowance not actually used.

Exhibit B, Page 4


 

          1.4. Changes. If Tenant desires any change, addition or alteration in or to any Final Construction Documents (whether one or more, hereinafter called “Changes”), Tenant shall request the Space Planner to prepare additional proposed Construction Documents containing such Changes. Tenant shall be responsible for the costs and fees charged by the Space Planner for the Space Planner making any proposed Changes to the Final Construction Documents (even if such Changes are not used in the construction of Tenant Improvements). As soon as practicable after the completion of such additional proposed Construction Documents showing the Changes requested by Tenant, Landlord shall request the Contractor to notify Tenant of the estimated cost of the Changes. Within three (3) working days after receipt of such cost estimate, Tenant shall notify Landlord in writing whether Tenant approves the Changes. If Tenant approves the Changes, such approved changes shall be incorporated into the Final Construction Documents, the Contractor shall proceed with the Changes. If Tenant fails to approve the Changes within such three (3) day period, construction of the Tenant Improvements shall proceed as provided in accordance with the Final Construction Documents (as such Final Construction Documents may have been previously amended through Changes approved pursuant to the procedures contained in this Paragraph) prior to the applicable requested Changes.
     2. Delivery of Expansion Premises. The Expansion Premises are leased to, and occupied by, a tenant (the “Existing Tenant”) under a lease which expires June 30, 2007. Landlord shall deliver possession of the Expansion Premises to Tenant promptly after the Existing Tenant has vacated the Expansion Premises. If Landlord does not deliver the Expansion Premises to Tenant on or before July 10, 2007, then the Commencement Date shall be extended day-for-day for each day after July 10, 2007 until Landlord delivers possession of the Expansion Premises to Tenant.
     3. Access to Expansion Premises. Landlord shall allow Tenant and Tenant’s Representatives to enter the Expansion Premises prior to the Expansion Premises Commencement Date to permit Tenant to make the Expansion Premises ready for its use and occupancy; provided, however, that prior to such entry of the Expansion Premises, Tenant shall provide evidence reasonably satisfactory to Landlord that Tenant’s insurance, as described in Section 11.1 — Tenant’s Insurance of the Lease, shall be in effect as of the time of such entry. Such permission may be revoked at any time upon twenty-four (24) hours’ notice, and Tenant and its Representatives shall not interfere with Landlord or the Contractor in completing the Tenant Improvements.
     Tenant agrees that Landlord shall not be liable in any way for any injury, loss or damage which may occur to any of Tenant’s property placed upon or installed in the Expansion Premises prior to the Expansion Premises Commencement Date, the same being at Tenant’s sole risk, and Tenant shall be liable for all injury, loss or damage to persons or property arising as a result of such entry into the Expansion Premises by Tenant or its Representatives.
     4. Ownership of Tenant Improvements. All Tenant Improvements, whether installed by Landlord or Tenant, shall become a part of the Premises, shall be the property of Landlord and, subject to the provisions of the Lease, shall be surrendered by Tenant with the Premises, without any compensation to Tenant, at the expiration or termination of the Lease in accordance with the provisions of the Lease.

Exhibit B, Page 5

       
 
INITIALS:  
 
Landlord  
JH
 
Tenant
SG


 

EXHIBIT B-2
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF APRIL 24, 2007
BETWEEN
ECI TWO RESULTS LLC, AS LANDLORD,
AND
ARCSIGHT, INC., AS TENANT (“LEASE”)
THE PRELIMINARY SPACE PLAN

Exhibit B-2, Page 1

[Plans Omitted]
       
 
INITIALS:  
 
Landlord  
JH
 
Tenant
SG


 

EXHIBIT C
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF APRIL 24, 2007
BETWEEN
ECI TWO RESULTS LLC, AS LANDLORD,
AND
ARCSIGHT, INC., AS TENANT (“LEASE”)
BUILDING RULES
The following Building Rules are additional provisions of the foregoing Lease to which they are attached. The capitalized terms used herein have the same meanings as these terms are given in the Lease.
     1. Use of Common Areas. Tenant will not obstruct the Common Areas, and Tenant will not use the Common Areas for any purpose other than ingress and egress to and from the Premises. The Common Areas are not open to the general public and Landlord reserves the right to control and prevent access to the Common Areas of any person whose presence, in Landlord’s opinion, would be prejudicial to the safety, reputation and interests of the Campus and its tenants.
     2. No Access to Roof. Except to the extent provided in Article 41 of Exhibit D, Tenant has no right of access to the roof of the Building and will not install, repair or replace any antenna, aerial, aerial wires, fan, air-conditioner or other device on the roof of the Building, without the prior written consent of Landlord. Any such device installed without such written consent is subject to removal at Tenant’s expense without notice at any time. In any event Tenant will be liable for any damages or repairs incurred or required as a result of its installation, use, repair, maintenance or removal of such devices on the roof and agrees to indemnify and hold harmless Landlord from any liability, loss, damage, cost or expense, including reasonable attorneys’ fees, arising from any activities of Tenant or of Tenant’s Representatives on the roof of the Building.
     3. Signage. No sign, placard, picture, name, advertisement or notice visible from the exterior of the Building will be inscribed, painted, affixed or otherwise displayed by Tenant on or in any part of the Building without the prior written consent of Landlord, or the City of Cupertino, California. Landlord reserves the right to adopt and furnish Tenant with general guidelines relating to signs in or on the Building. All approved signage will be inscribed, painted or affixed at Tenant’s expense by a person approved by Landlord, which approval will not be unreasonably withheld. At the expiration or termination of this Lease Tenant shall remove all signs, repair and damage resulting from the installation or removal, and restore the area where the signs were removed to a condition consistent with the area surrounding the removed signs.
     4. Prohibited Uses. The Premises will not be used for manufacturing, for the storage of merchandise held for sale to the general public, for lodging or for the sale of goods to the general public. Tenant will not permit any food preparation on the Premises except that Tenant

Exhibit C, Page 1


 

may use Underwriters’ Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages so long as such use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations and provided that such activity does not generate odors outside of the Premises.
     5. Clean. Tenant shall be responsible for keeping the Premises clean and in good order. Tenant shall not cause any unnecessary labor by reason of Tenant’s carelessness or indifference in the preservation of good order and cleanliness.
     6. Keys and Locks. Upon request, each tenant shall provide keys, key cards and access codes to Landlord so that Landlord can have access to such tenant’s premises in the event of any emergency. Each tenant, upon the termination of its tenancy, shall deliver to Landlord all keys, key cards and/or access codes to doors in its premises. As to secure areas, in an emergency, Landlord may use any means to enter and Tenant shall indemnify Landlord against all Claims arising out of such entry.
     7. Heavy Objects. Prior to installing heavy objects, furniture or equipment in the Premises, Tenant shall confirm the capacity of the Premises to bear such loads and Tenant shall not exceed such capacity at any time. Installation of such heavy objects shall be subject to Landlord’s prior written approval. Upon expiration or termination of this Lease Tenant shall repair any damage to the Premises caused by any such heavy objects.
     8. Nuisances and Dangerous Substances. Tenant will not conduct itself or permit Tenant’s Representatives or Visitors to conduct themselves, in the Premises or anywhere on or in the Campus in a manner which is offensive or unduly annoying to any other tenant in the Campus or Landlord’s property managers. Tenant will not install or operate any phonograph, radio receiver, musical instrument, or television or other similar device in any part of the Common Areas and shall not operate any such device installed in the Premises in such manner as to disturb or annoy other tenants of the Campus. Tenant will not use or keep in the Premises, Project or Campus any kerosene, gasoline or other combustible fluid or material other than limited quantities thereof reasonably necessary for the maintenance of office equipment, or, without Landlord’s prior written approval, use any method of heating or air conditioning other than that supplied by Landlord. Tenant will not use or keep any foul or noxious gas or substance in the Premises. Tenant will not bring or keep any animals in or about the Premises or the Campus.
     9. Building Name and Address. Without Landlord’s prior written consent, Tenant will not use the name of the Building in connection with or in promoting or advertising Tenant’s business except as Tenant’s address.
     10. Building Directory. [Intentionally Deleted].
     11. Window Coverings. No curtains, draperies, blinds, shutters, shades, awnings, screens or other coverings, window ventilators, hangings, decorations or similar equipment shall be attached to, hung or placed in, or used in or with any window of the Building without the prior written consent of Landlord.

Exhibit C, Page 2


 

     12. Floor Coverings. Tenant will not lay or otherwise affix linoleum, tile, carpet or any other floor covering to the floor of the Premises in any manner except as approved in writing by Landlord. Tenant will be liable for the cost of repair of any damage resulting from the violation of this rule or the removal of any floor covering by Tenant or its contractors, employees or invitees.
     13. Wiring and Cabling Installations. No boring or cutting for wires or cables will be allowed without the prior written consent of Landlord. The location of burglar alarms, smoke detectors, telephones, call boxes and other office equipment affixed to the Premises shall be subject to the written approval of Landlord.
     14. Plumbing Facilities. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be disposed of therein. Tenant will be liable for any breakage, stoppage or damage resulting from the violation of this rule by Tenant, its employees or invitees.
     15. Doors. Tenant shall ensure that the doors of the Premises are closed and locked, and that all water faucets, water apparatus and utilities are shut off before Tenant or Tenant’s employees leave the Premises.
     16. Refuse. Tenant shall store all of Tenant’s trash and garbage within the Premises or in other facilities designated by Landlord for such purpose. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the city in which the Building is located without being in violation of any law or ordinance governing such disposal. Tenant shall comply with the requirements of any recycling program adopted by Landlord for the Building.
     17. Activities. Canvassing, peddling, soliciting and distribution of handbills or other written materials in the Common Areas are prohibited.
     18. Bicycles. Tenant’s employees may bring bicycles into Tenant’s own Premises; however, bicycles shall be ridden only on roads and bike paths and not on sidewalks or other portions of the Common Areas. The use of skateboards, skates, rollerblades and scooters is prohibited at all times in the Common Areas.
     19. Events. Tenant shall not use the Common Areas for events, activities or parties (for example, employee parties) without Landlord’s prior written consent. Tenant shall submit a written request for Landlord’s consent to use the Common Areas for such events, activities or parties at least ten (10) days prior thereto. Such use of the Common Areas by Tenant shall be subject to such conditions and restrictions as Landlord may specify, in Landlord’s sole and absolute discretion. Alcohol beverages shall not be served or consumed in the Common Areas at any time.
     20. Parking. Tenant will use, and cause Tenant’s Representatives and Visitors to use, any parking spaces to which Tenant is entitled under the Lease in a manner consistent with Landlord’s directional signs and markings in the Parking Facility. Specifically, but without limitation, Tenant will not park, or permit Tenant’s Representatives or Visitors to park, in a

Exhibit C, Page 3


 

manner that impedes access to and from the Building or the Parking Facility or that violates space reservations for handicapped drivers registered as such with the California Department of Motor Vehicles. Landlord may use such reasonable means as may be necessary to enforce the directional signs and markings in the Parking Facility, including but not limited to towing services, and Landlord will not be liable for any damage to vehicles towed as a result of non-compliance with such parking regulations.
     21. Fire, Security and Safety Regulations. Tenant will comply with all safety, security, fire protection and evacuation measures and procedures established by Landlord or any governmental agency.
     22. Responsibility for Theft. Tenant assumes any and all responsibility for protecting the Premises from theft, robbery and pilferage, which includes keeping doors locked, and windows and other means of entry to the Premises closed. Roof access hatches must remain shut and locked at all times.
     23. Sales and Auctions. Tenant will not conduct or permit to be conducted any sale by auction in, upon or from the Premises or elsewhere on the Campus, whether said auction be voluntary, involuntary, pursuant to any assignment for the payment of creditors or pursuant to any bankruptcy or other insolvency proceeding.
     24. Waiver of Rules. Landlord may waive any one or more of these Building Rules for the benefit of any particular tenant or tenants, but no such waiver by Landlord will be construed as a waiver of such Building Rules in favor of any other tenant or tenants nor prevent Landlord from thereafter enforcing these Building Rules against any or all of the tenants of the Campus.
     25. Effect on Lease. These Building Rules are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of the Lease. Violation of these Building Rules constitutes a failure to fully perform the provisions of the Lease, as referred to in Section 15.1 — “Events of Default”.
     26. Non-Discriminatory Enforcement. Subject to the provisions of the Lease (and the provisions of other leases with respect to other tenants), Landlord shall use reasonable efforts to enforce these Building Rules in a non-discriminatory manner, but in no event shall Landlord have any liability for any failure or refusal to do so (and Tenant’s sole and exclusive remedy for any such failure or refusal shall be injunctive relief preventing Landlord from enforcing any of the Building Rules against Tenant in a manner that discriminates against Tenant).
     27. Additional and Amended Rules. Landlord reserves the right to rescind or amend these Building Rules and/or adopt any other and reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Campus and for the preservation of good order therein.

Exhibit C, Page 4

       
 
INITIALS:  
 
Landlord  
JH
 
Tenant
SG


 

EXHIBIT D
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF APRIL 24, 2007
BETWEEN
ECI TWO RESULTS LLC, AS LANDLORD,
AND
ARCSIGHT, INC., AS TENANT (“LEASE”)
ADDITIONAL PROVISIONS RIDER
37. PARKING.
     (a) Tenant’s Parking Rights. On the Existing Premises Commencement Date Landlord shall provide Tenant, one hundred fifty (150) parking spaces, and on the Expansion Premises Commencement Date Landlord shall provide Tenant, an additional one hundred sixteen (116) parking spaces in the Parking Facility. All such parking spaces shall be on an unreserved, unassigned and non-exclusive basis, for use by Tenant and Tenant’s Representatives and Visitors, at the users’ sole risk, in the Parking Facility. The parking spaces to be made available to Tenant hereunder may contain a reasonable mix of spaces for compact cars and up to ten percent (10%) of the unassigned spaces may also be designated by Landlord as Building visitors’ parking.
     (b) Availability of Parking Spaces. Landlord shall take reasonable actions to ensure the availability of the parking spaces leased by Tenant, but Landlord does not guarantee the availability of those spaces at all times against the actions of other tenants of the Building and users of the Parking Facility. Access to the Parking Facility may, at Landlord’s option, be regulated by card, pass, bumper sticker, decal or other appropriate identification issued by Landlord. Landlord retains the right to revoke the parking privileges of any user of the Parking Facility who violates the rules and regulations governing use of the Parking Facility (and Tenant shall be responsible for causing any employee of Tenant or other person using parking spaces allocated to Tenant to comply with all parking rules and regulations).
     (c) Assignment and Subletting. Notwithstanding any other provision of the Lease to the contrary, Tenant shall not assign its rights to the parking spaces or any interest therein, or sublease or otherwise allow the use of all or any part of the parking spaces to or by any other person, except (i) with Landlord’s prior written consent, which may be granted or withheld by Landlord in its sole discretion, (ii) in connection with an assignment of this Lease, or (iii) in the event of any sublease, Tenant may assign the number of parking spaces determined by multiplying the total number of parking spaces contained in Section 38 (a) above times a fraction, the numerator of which shall be the rentable area of the subleased space, and the denominator of which shall be the rentable area in the Premises. In the event of any separate assignment or sublease of parking space rights that is approved by Landlord, Landlord shall be entitled to receive, as additional Rent hereunder, one hundred percent (100%) of any profit received by Tenant in connection with such assignment or sublease.

Exhibit D, Page 1


 

     (d) Condemnation, Damage or Destruction. In the event the Parking Facility is the subject of a Condemnation, or is damaged or destroyed, and this Lease is not terminated, and if in such event the available number of parking spaces in the Parking Facility is permanently reduced, then Tenant’s rights to use parking spaces hereunder may, at the election of Landlord, thereafter be reduced in proportion to the reduction of the total number of parking spaces in the Parking Facility. In such event, Landlord reserves the right to reduce the number of parking spaces to which Tenant is entitled or to relocate some or all of the parking spaces to which Tenant is entitled to other areas in the Parking Facility.
38. RIGHT OF FIRST OFFER.
     (a) Provided that ArcSight, Inc. has not assigned this Lease or sublet any or all of the Premises other than to a Permitted Transferee (it being intended that all rights pursuant to this provision are and shall be personal to the original Tenant under this Lease and shall not be transferable or exercisable for the benefit of any Transferee other than a Permitted Transferee), “ and provided Tenant is not in default under this Lease at the time of the exercise of any such right or at any time thereafter until delivery of possession of the space to Tenant, subject to any and all rights granted by Landlord with respect to such space existing as of the date of this Lease (including renewal and extension rights and rights of first offer, first negotiation, first refusal or other expansion rights), and subject to Landlord’s right to extend or renew any then existing lease of the space or otherwise to lease the space to any tenant, subtenant or other occupant of the space, Tenant shall have a one-time right of first offer to lease the following spaces in the Campus (each, as offered, a “ROFO Space”): Up to 100,000 rentable square feet in the Campus, other than in Buildings 1 and 2 shown on the Site Plan.
     (b) Such right of first offer (i) may only be exercised with respect to a particular ROFO Space which has been previously leased and becomes available during the Term upon expiration or other termination of the previous lease, and (ii) may only be exercised with respect to all of the ROFO Space being offered by Landlord. If ROFO Space qualifying for such right of first offer becomes available, Landlord shall offer to lease such ROFO Space to Tenant at the same rent and on the same terms that Landlord intends to offer to other prospective tenants, with a security deposit based upon the amount of security deposit Landlord would obtain from at a prospective tenant having credit comparable to Tenant’s credit. Tenant shall have ten (10) Business Days following receipt of Landlord’s offer with respect to any ROFO Space within which to notify Landlord in writing of its intention to lease such ROFO Space, and such notice, if given by Tenant, shall constitute an acceptance of Landlord’s terms for the lease of such ROFO Space. If Tenant exercises such right of first offer, Tenant shall lease the ROFO Space on the same terms and conditions as are contained in this Lease except for the economic and other terms specifically set forth in Landlord’s notice, and the parties shall execute an amendment to this Lease to include such ROFO Space in the Premises and otherwise to provide for the leasing of such ROFO Space on such terms. If Tenant fails so to exercise Tenant’s right of first offer within such ten (10) Business Day period, Landlord may thereafter lease such ROFO Space to other prospective tenants.
     (c) If Tenant does not lease a particular ROFO Space from Landlord when it is first offered to Tenant by Landlord then this right of first offer shall terminate with respect to such

Exhibit D, Page 2


 

particular ROFO Space, and Tenant shall have no further rights to lease any of the particular ROFO Space which Landlord has offered.
39. EXTENSION OPTION.
     Provided that ArcSight, Inc. has not assigned this Lease or sublet any or all of the Premises other than to a Permitted Transferee (it being intended that all rights pursuant to this provision are and shall be personal to the original Tenant under this Lease and shall not be transferable or exercisable for the benefit of any Transferee other than a Permitted Transferee), and provided Tenant is not in default under this Lease at the time of exercise or at any time thereafter until the beginning of such extension of the Term, Tenant shall have the option (the “Extension Option”) to extend the Term for one (1) additional consecutive period of five (5) years (the “Extension Period”), by giving written notice to Landlord of the exercise of such Extension Option at least twelve (12) months, but not more than fifteen (15) months, prior to the expiration of the initial Term. The exercise of the Extension Option by Tenant shall be irrevocable and shall cover the entire Premises leased by Tenant pursuant to this Lease. Upon such exercise, the term of the Lease shall automatically be extended for the Extension Period without the execution of any further instrument by the parties; provided that Landlord and Tenant shall, if requested by either party, execute and acknowledge an instrument confirming the exercise of the Extension Option. The Extension Option shall terminate if not exercised precisely in the manner provided herein. Any extension of the Term shall be upon all the terms and conditions set forth in this Lease and all Exhibits thereto, except that: (i) Tenant shall have no further option to extend the Term of the Lease; (ii) Landlord shall not be obligated to contribute funds toward the cost of any remodeling, renovation, alteration or improvement work in the Premises; and (iii) Base Rent for the Extension Period shall be the then Fair Market Base Rental (as defined below) for the Premises for the space and term involved, which shall be determined as set forth below.
     (a) “Fair Market Base Rental” shall mean the “fair market” Base Rent at the time or times in question for the Building, based on the prevailing rentals then being charged to tenants in other buildings in Cupertino of comparable location and quality as the Building, for leases with terms approximately equal to the term for which Fair Market Base Rental is being determined, taking into account: the desirability, location in the building, size and quality of the space, including interior finishes and other tenant improvements; included services and related operating expenses and tax and expense stops or other escalation clauses; and any other special rights of Tenant under this Lease in comparison to typical market leases (e.g. for parking, signage, and extension or expansion options). Fair Market Base Rental shall also reflect the then prevailing rental structure for comparable office buildings in Cupertino, so that if, for example, at the time Fair Market Base Rental is being determined the prevailing rental structure includes periodic rental adjustments or escalations, Fair Market Base Rental shall reflect such rental structure.
     (b) Landlord and Tenant shall endeavor to agree upon the Fair Market Base Rental. If they are unable to so agree within thirty (30) days after receipt by Landlord of Tenant’s notice of exercise of the Extension Option, Landlord and Tenant shall mutually select a licensed real estate broker who is active in the leasing of office space in the Cupertino. Landlord shall submit Landlord’s determination of Fair Market Base Rental and Tenant shall submit Tenant’s

Exhibit D, Page 3


 

determination of Fair Market Base Rental to such broker, at such time or times and in such manner as Landlord and Tenant shall agree (or as directed by the broker if Landlord and Tenant do not promptly agree). The broker shall select either Landlord’s or Tenant’s determination as the Fair Market Base Rental, and such determination shall be binding on Landlord and Tenant. If Tenant’s determination is selected as the Fair Market Base Rental, then Landlord shall bear all of the broker’s cost and fees. If Landlord’s determination is selected as the Fair Market Base Rental, then Tenant shall bear all of the broker’s cost and fees.
     (c) In the event the Fair Market Base Rental for the Extension Period has not been determined at such time as Tenant is obligated to pay Base Rent for the Extension Period, Tenant shall pay as Base Rent pending such determination, the Base Rent in effect for such space immediately prior to the Extension Period; provided, that upon the determination of the applicable Fair Market Base Rental, any shortage of Base Rent paid, together with interest at the rate specified in the Lease, shall be paid to Landlord by Tenant.
     (d) In no event shall the Base Rent during the Extension Period be less than the Base Rent in effect immediately prior to such Extension Period.
     (e) The term of this Lease, whether consisting of the Initial Term alone or the Initial Term as extended by the Extension Period (if the Extension Option is exercised), is referred to in this Lease as the “Term.”
40. LETTER OF CREDIT AND SECURITY DEPOSIT.
     A. Letter of Credit:
     (a) Upon execution of this Lease, Tenant shall deliver to Landlord an unconditional, irrevocable, transferable and negotiable standby letter of credit (the “L/C”) in an amount equal to $800,000.00 (“Face Amount”), issued by a bank or trust company (“Issuer”) and in form and content acceptable to Landlord, in its sole and absolute discretion, as additional security for the performance of Tenant’s obligations under this Lease. An L/C in the form attached hereto as Exhibit E is hereby approved by Landlord. The L/C shall name Landlord as beneficiary thereunder and provide that draws, including partial draws, at Landlord’s election, will be honored upon the delivery to the Issuer of a certificate signed by Landlord, or its authorized agent, that Tenant has failed to perform its obligations under the Lease. The L/C shall also provide that it will be automatically extended upon each renewal date unless the Issuer thereof delivers to Landlord, no later than forty-five (45) days prior to the stated expiration date of the L/C, written notice of Issuer’s intent not to extend or renew the L/C. During any period that Tenant is required to maintain the L/C, Tenant shall, at least thirty (30) days prior to any expiration or termination of the L/C, provide Landlord either with written confirmation that the existing L/C will be automatically extended and renewed or with a new L/C that satisfies all of the requirements for the L/C in this Section 40. In addition, upon a proposed sale or other transfer of any interest in the Building, the Project, this Lease or Landlord (including consolidations, mergers, or other entity changes), Tenant, at its sole cost and expense and upon ten (10) Business Days’ notice, shall, concurrent with Landlord’s delivery to Tenant of the then outstanding L/C, deliver to any such transferees, successors, or assigns a replacement L/C on identical terms (except for the stated beneficiary) from the same Issuer or another bank or trust

Exhibit D, Page 4


 

company acceptable to Landlord, in Landlord’s sole discretion, naming the new landlord as the beneficiary thereof. Tenant’s failure to perform or observe any of the covenants set forth in this Section 40 for any reason shall entitle Landlord to draw on the full amount of the L/C and shall constitute an Event of Default under this Lease without the requirement of any notice from Landlord. Any amount(s) drawn under the L/C shall be held or used by Landlord in accordance with the terms of Section 4 of the Lease.
     (b) On the first (1st), second (2nd), third (3rd) and fourth (4th) anniversary of the Expansion Premises Commencement Date, if: (i) within the prior twelve (12) month period no prior or current Event of Default has occurred, and no event or condition exists or has occurred which with the passage of time or delivery of notice by Landlord, or both, would constitute an Event of Default, and (ii) Tenant has delivered to Landlord, on or before such anniversary date, financial statements prepared in accordance with generally accepted accounting principles consistently applied, and certified by Tenant’s president, chief financial officer or controller as being complete and accurate, which confirm that for at least three (3) out of the previous four (4) consecutive calendar quarters immediately preceding the applicable anniversary date, (A) Tenant has a tangible net worth of no less than $5,000,000 at the end of three (3) out of four (4) such calendar quarters, (B) Tenant has positive pre-tax earnings of no less than $900,000 aggregate during the four quarters immediately preceding the applicable anniversary date, and (C) Tenant has cash and marketable securities of no less than $1,000,000 at the end of three (3) out of such four (4) immediately preceding previous calendar quarters, then the Face Amount of the L/C may be immediately reduced by One Hundred Fifty Thousand Dollars ($150,000.00) (the “L/C Burnoff”). In no event shall the Face Amount of the L/C be less than Two Hundred Thousand Dollars ($200,000.00).
     (c) Notwithstanding any other provisions of this Article 40 to the contrary, if Tenant has a market capitalization of $750 million or more after (i) any public offering and Tenant is traded on a public exchange, or (ii) any purchase by another entity meeting the standards in (b) (ii) above and which assumes and becomes liable under the Lease, then immediately the Face Amount of the L/C shall be reduced to zero, and Landlord shall retain the Security Deposit as security for Tenant’s obligations under this Lease.
     B. Security Deposit:
     On the first (1st), second (2nd), third (3rd) and fourth (4th) anniversary of the Expansion Premises Commencement Date, if: (i) within the prior twelve (12) month period no prior or current Event of Default has occurred, and no event or condition exists or has occurred which with the passage of time or delivery of notice by Landlord, or both, would constitute an Event of Default, and (ii) Tenant has delivered to Landlord, on or before such anniversary date, financial statements prepared in accordance with generally accepted accounting principles consistently applied, and certified by Tenant’s president, chief financial officer or controller as being complete and accurate, which confirm that for at least three (3) out of the previous four (4) consecutive calendar quarters immediately preceding the applicable anniversary date, (A) Tenant has a tangible net worth of no less than $5,000,000 at the end of three (3) out of four (4) such calendar quarters, (B) Tenant has positive pre-tax earnings of no less than $900,000 aggregate during the four quarters immediately preceding the applicable anniversary date, and (C) Tenant has cash and marketable securities of no less than $1,000,000 at the end of three

Exhibit D, Page 5


 

(3) out of such four (4) immediately preceding previous calendar quarters, then the amount of the Security Deposit shall be immediately reduced by Twenty-Five Thousand Dollars ($25,000.00) (the “Security Deposit Burnoff”). In no event, as a result of any Security Deposit Burnoff shall the cash amount of the Security Deposit be less than One Hundred Thousand Dollars ($100,000.00).
41. SATELLITE DISH OR DISHES.
     (a) Grant of License for Satellite Dish or Dishes. Provided that ArcSight, Inc. has not assigned this Lease or sublet any or all of the Premises other than to a Permitted Transferee (it being intended that all rights pursuant to this provision are and shall be personal to the original Tenant under this Lease and shall not be transferable or exercisable for the benefit of any Transferee other than a Permitted Transferee), Tenant shall have the non-exclusive license, in accordance with the terms and conditions of this Section 41, and subject to the provisions of this Lease, to install on the roof of each Building and use during the Term use in conjunction with the conduct of Tenant’s usual business in the Premises, up to one (1) antenna, or three (3) satellite dishes (in each instance a “Satellite Dish” and together, “Satellite Dishes”). The size of any Satellite Dish shall not exceed thirty (30) inches in diameter. The Satellite Dish or Dishes shall be designed, made, operated, maintained, repaired, replaced as necessary, and removed by Tenant at Tenant’s sole cost and expense and at no cost or expense to Landlord. The license granted herein shall be for no additional rent or other charge (other than reimbursement of any out-of-pocket expenditures incurred in good faith by Landlord in connection therewith and payment of other costs as provided below).
     (b) Location of Satellite Dishes. All Satellite Dishes shall be located on the main roof of each Building (and not the elevator penthouse or any parapet) in a location designated by Landlord (the “Licensed Area”). Each Satellite Dish shall not be higher than any parapet wall and shall not be visible from street level. Tenant shall not install any equipment on the roof of the Building other than the Satellite Dishes and related wiring and supports. If Tenant desires to locate any Satellite Dish outside the Licensed Area, then Landlord may designate the location or locations of such the Equipment in its sole discretion, and the designated location for such Satellite Dish shall be included in the definition of Licensed Area. The Licensed Area shall be included within the term Premises for all purposes under the Lease.
     (c) Request by Tenant, Approval by Landlord and Permits. At least thirty (30) days prior to starting to install any Satellite Dish, Tenant shall submit detailed plans and specifications, describing all aspects of Tenant’s proposed installation, including detailed specifications and plans concerning the Satellite Dish(es), all associated equipment, the means of placing the Satellite Dish(es) on the roof of the Building, the connections between the Satellite Dish(es) and the equipment in the Premises, power requirements, cable specifications, equipment and equipment cabinet dimensions and weights, and such other particulars and details as Landlord may request in order to have sufficient information to understand the installation proposed by Tenant (collectively, the “Plans”), for review and approval by Landlord and Landlord’s consultants, including Landlord’s structural engineer. All aspects of the Plans (including the location of any Satellite Dish and any associated equipment) shall be subject to Landlord’s prior written approval, and any approval from all applicable governmental agencies, including ordinances, regulations and any approval from the City of Cupertino, California.

Exhibit D, Page 6


 

Tenant shall be responsible, at Tenant’s sole cost and expense, to obtain from the City of Cupertino, California all building permits and all permits from any applicable governmental agency necessary to install and operate all Satellite Dishes. Landlord shall have the right to require reasonable modifications and impose reasonable conditions on Tenant’s Plans. To the extent any installation or construction shown on the Plans affects the structural integrity of the Building Landlord shall have the absolute right, in its sole discretion, to require any changes or impose any conditions on the Plans (including without limitation the right to designate contractors). Tenant shall pay all of Landlord’s actual costs incurred in the review and supervision of Tenant’s efforts, including any fees charged by Landlord’s structural engineer in connection with such engineer’s review and recommendations with respect to the installation of the Equipment.
     (d) Installation and Maintenance of Equipment. The Licensed Area will be delivered to Tenant in its AS IS and WHERE IS condition and Landlord shall have no obligation to modify or install any improvements in the Licensed Area. There shall be no roof penetration in connection with the Satellite Dishes, except for cabling connecting the Satellite Dish or Dishes to the Premises. If the installation of any Satellite Dish adversely affects the structural integrity of the roof, causes any leaks or voids any roof warranty, Tenant shall be responsible for the costs of repairing the roof. Tenant shall coordinate the installation of the Equipment with Landlord’s roofing contractor, at Tenant’s sole cost and expense. All equipment installed in connection with any Satellite Dish shall be located within the Premises. The Satellite Dishes shall be properly counterweighted. The installation and use of the Satellite Dishes and Equipment shall not affect any of the Building Systems. Prior to installing any Satellite Dish in the Licensed Area or any Equipment, Tenant shall establish to Landlord’s satisfaction that the requirements of Article 11 (Insurance) of the Lease have been satisfied. Tenant shall be required, at its own cost, to construct or install any improvements to the Building or the Property required by applicable Laws as a result of Tenant’s installation of any Satellite Dish or improvements or the use or operation thereof. The installation of all Satellite Dishes and construction of all related or required improvements shall be at Tenant’s sole cost, in full compliance with the Plans approved by Landlord and the requirements of Article 6 (Alterations) of the Lease. Tenant shall (i) label each cable placed in or on the Building, as well as the Satellite Dishes, with information as to where the cables originate and where the cables terminate, (ii) prominently label any related equipment with appropriate safety warnings when human exposure to radio frequency radiation may exceed the safety standards of any applicable governmental authority, and (iii) at Tenant’s sole cost, maintain the Satellite Dishes, all cabling and the Licensed Area in a good, orderly, sanitary and safe condition and repair. Tenant shall have access to the Licensed Area and other portions of the Property at all reasonable times and as necessary for Tenant’s installation, operation, use, maintenance, repair, replacement and removal of the Equipment and other improvements installed by Tenant.
     (e) Use; Compliance with Laws. The Licensed Area may be used by Tenant only for the installation, operation, use, maintenance, repair, replacement and removal of the Satellite Dish(es), all at Tenant’s sole risk and expense and in full compliance with all applicable Laws. Tenant’s right to use the Licensed Area is personal to Tenant and may not be separately assigned or sublet other than to a Permitted Transferee.

Exhibit D, Page 7


 

     (f) Interference. The Satellite Dish or Dishes and Tenant’s use of the Licensed Area and related equipment shall not interfere in any manner with Landlord’s activities in the applicable Building and shall not damage or interfere with any facilities or equipment of any type installed by Landlord or any other person or entity, including without limitation, the Building Systems and any satellite dishes, antenna, computer or other devices or systems installed at the Project at any time. Tenant agrees, warrants and represents that should any such interference occur, it shall take whatever steps are required to correct such interference within two (2) Business Days after receiving written notice thereof from Landlord, and that should there occur any interference with the ability of Landlord or any tenants, occupants or licensees of the Project to communicate in any manner (whether by radio, television, electrical, telephone, computer, microwave or otherwise) that Tenant shall take whatever steps are required to stop such interference within seventy-two (72) hours after receiving written notice thereof from Landlord. If despite Tenant’s steps to stop such interference, the interference continues, then Tenant shall discontinue using the Satellite Dish(es) and related equipment. Tenant’s failure to promptly correct any such interference, as set forth herein, shall constitute an Event of Default and shall entitle Landlord to correct the cause of the interference, and to charge Tenant with all costs so incurred. Tenant agrees that Landlord shall not be responsible for preventing or correcting any interference that may be caused to Tenant’s Satellite Dish(es) and related equipment or its use and that Tenant shall be fully responsible for coordinating and cooperating with other tenants, occupants or licensees who have communications devices at the Project in order to minimize or prevent any interference by or with Tenant’s Equipment and its use (except as Landlord may otherwise expressly agree to the contrary at the time Landlord approves Tenant’s Plans; for example, based on a particular proposed location for Tenant’s Satellite Dishes, Landlord may agree not to locate anything that would interfere with Tenant’s Satellite Dish between Tenant’s Satellite Dish and the edge of the roof).
     (g) Title to Equipment and Removal. Tenant shall at all times remain the owner of the Satellite Dishes the related equipment, which shall not be deemed fixtures, notwithstanding their method of installation or attachment to the Building, and shall pay all Tenant’s Taxes with respect to the Satellite Dish(es) and related equipment constructed or installed by Tenant. On or before the Expiration Date or earlier termination date of the Lease, Tenant shall (i) remove all Satellite Dishes and related equipment installed or constructed by Tenant, (ii) restore the Licensed Area and Building to the condition they were in upon installation of any Satellite Dish and related equipment, reasonable wear and tear excepted, and (iii) return the Licensed Area in broom-clean condition. Notwithstanding the foregoing Landlord shall have the right to approve Tenant’s contractor and all of Tenant’s plans for the removal of the Satellite Dish(es) and related equipment and the restoration of the Building. If any of the improvements installed or constructed by Tenant at the Building penetrated the roof membrane or otherwise in any way affect the watertight integrity of the Building’s roof, then upon removal of such improvements, Tenant shall provide Landlord with a written warranty, in a form and from a contractor reasonably acceptable to Landlord, warranting the watertight integrity of the roof for a period of ten (10) years after removal of such improvements. If Tenant does not remove the Satellite Dish(es) and all of the related equipment, as required hereunder, Landlord may, at its sole option, either retain such items as its own, without any further actions, notice or compensation to Tenant, or remove and dispose of such items in any manner it chooses, restore the Property as required hereunder and charge Tenant for all costs incurred in that effort.

Exhibit D, Page 8


 

     (h) Utilities. Tenant shall pay for all costs of electrical service provided to the Satellite Dishes, related equipment, and the Licensed Area. If Tenant’s usage of electricity exceeds what Landlord determines to be excessive, Landlord may determine the amount of such excess use by any reasonable means (including the installation at Landlord’s request but at Tenant’s expense of a separate meter or other measuring device) and charge Tenant for the cost of such excess usage.
     (i) Relocation. Upon sixty (60) days prior written notice from Landlord Tenant shall relocate the Satellite Dish or Satellite Dishes to a different location on the roof of the Building at Landlord’s cost, which area shall become the new Licensed Area.
     (j) Indemnification and Waiver. In addition to the indemnification of Landlord set forth in the Lease, Tenant shall indemnify, protect, defend and hold harmless Landlord from any Claims arising out of or resulting from, in whole or in part, any loss, injury or damage occurring or caused to any person or property during the Term (i) in or about the Licensed Area, or the roof of the Building, arising from the acts or omissions of Tenant, its agents, employees, contractors, or others acting under its control or at its discretion, or by the existence of Tenant’s cabling and any other improvements on the roof of the Building, or (ii) within the vicinity of the Building caused by the Satellite Dish(es) becoming detached from the roof; provided, however, that the foregoing indemnification by Tenant shall not apply to the extent any such Claims are caused by acts or omissions of Landlord that constitute gross negligence or willful misconduct. This indemnification shall apply and be enforced to the fullest extent permitted by Law and shall survive termination or expiration of the Term. Landlord shall not be liable to Tenant, and Tenant hereby waives all claims it may have against Landlord, for any loss, injury or damage to any person or property in or about the Licensed Area or the roof of the Building, or resulting from the Satellite Dish(es) becoming detached from the roof, any interruption of services and loss of use of the Satellite Dish(es), from any cause, without limitation as to type or description and specifically including acts or omissions constituting the active or sole negligence of Landlord, but excluding from all of the foregoing the acts or omissions of Landlord that constitute gross negligence or willful misconduct. Notwithstanding any other provision of the Lease, in no event shall Landlord be liable to Tenant for any punitive or consequential damages or damages for loss of business by Tenant. It is the intent of the foregoing provisions that Tenant shall look to its own insurance for payment or reimbursement for any such loss, damage, injury or liability.
42. SIGNS.
     Tenant shall be permitted to use the existing sign (“Existing Sign”) which is located at the Existing Premises. Tenant shall also have the right to use the existing sign which is located at the Expansion Premises (the “Expansion Premises Sign”). During the Term Tenant shall maintain and repair the Existing Sign and Expansion Premises Sign in a condition comparable to similar signs at similar properties in the vicinity of the Project. Any changes to the Existing Sign or the Expansion Premises Sign shall be subject to Landlord’s prior written approval, and any approval required by the City of Cupertino, or any other applicable government agency.

Exhibit D, Page 9

       
 
INITIALS:  
 
Landlord  
JH
 
Tenant
SG


 

EXHIBIT E
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF APRIL 24, 2007
BETWEEN
ECI TWO RESULTS LLC, AS LANDLORD,
AND
ARCSIGHT, INC., AS TENANT (“LEASE”)
APPROVED LETTER OF CREDIT FORM
[Letterhead of Issuing Bank]
[must be a Bank whose location, credit and practices Landlord has approved]
RE:   IRREVOCABLE COMMERCIAL STANDBY LETTER OF CREDIT NO.                    
TO: [Name of project owner] (“Landlord”),                                                              [Landlord’s address]
Gentlemen:
We hereby issue our Irrevocable Commercial Letter of Credit in your favor, for the account of                                                              [name of tenant and type of entity (e.g. “ABC Corporation, a California corporation”)] (“Tenant”), in the amount of                                          Dollars ($                    ). This amount is available to you on presentation of your sight draft drawn upon us referring to the above letter of credit number, date and amount being drawn hereunder, accompanied by the signed statement of you or your authorized agent, either Embarcadero Capital Partners LLC, or Hamilton Partners, LP, that the amount drawn hereunder is being drawn pursuant to the terms of the                                          [title of lease document (e.g. Office Lease, Lease Agreement, etc.)] dated as of                     , between Tenant, as tenant, and Landlord, as landlord, for certain premises located at                                                              (the “Lease”).
Any draft presented for payment must be presented on or before                                          [term should be at least one year], the date this Letter of Credit expires. Partial drawings are permitted.
If you sell or otherwise transfer any interest in the “Building” (as defined in the Lease) [be sure to use the defined terms used in the Lease (e.g. if the building is called the “Property” in the Lease, then use that term here)], in the land upon which the same is located, in the Lease, or in Landlord (including consolidations, mergers or other entity changes), you shall have the right to transfer this Letter of Credit to your transferee(s), successors or assigns.
We hereby certify that this is an unconditional and irrevocable Letter of Credit and agree that a draft drawn under and in compliance with the terms hereof will be honored upon presentation at

Exhibit E, Page 1


 

our office at                                                              [it must be a location easily accessible to us (e ..g. no country banks located in some tiny town in the Southeastern corner of Texas].
This Letter of Credit shall automatically be extended and renewed for successive one year periods at the end of the stated expiration date and each anniversary thereof unless we notify you in writing, no later than forty-five (45) days prior to the then applicable expiration date, that we will not extend and renew the Letter of Credit for another one year term.
Except to the extent inconsistent with the express provisions hereof, this Letter of Credit is subject to and governed by Uniform Customs and Practice for Documentary Credits (1993 Revision) International Chamber of Commerce publication number 500.
         
 
  [Name of Bank]    
 
       
 
 
 
Authorized Signature
   

Exhibit E, Page 2

       
 
INITIALS:  
 
Landlord  
JH
 
Tenant
SG
EX-23.1 10 f28075orexv23w1.htm EXHIBIT 23.1 exv23w1
 

Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm under the caption “Experts” and to the use of our report dated September 10, 2007, in the Registration Statement (Form S-1) and related Prospectus of ArcSight, Inc. for the registration of shares of its common stock.
/s/ Ernst & Young LLP
San Jose, California
September 10, 2007

 

EX-99.1 11 f28075orexv99w1.htm EXHIBIT 99.1 exv99w1
 

Exhibit 99.1
(THEINFOPRO LOGO)
 
The Info Project, Inc.
108 West 39th Street, 16th Floor
New York, NY 10018
Telephone (212) 672-0010
Fax (212) 688-6598
September 7, 2007
ArcSight, Inc.
5 Results Way
Cupertino, CA 95014
Attn: Trâm Phi
Ladies and Gentlemen:
          ArcSight, Inc. (the “Company”) has requested that TheInfoPro, Inc. (“TheInfoPro”) execute this letter in connection with a proposed initial public offering by the Company (the “IPO”). In connection with the IPO, the Company will be filing a registration statement on Form S-1 (the “Registration Statement”) with the Securities and Exchange Commission. In response to such request, please be advised as follows:
          1.     TheInfoPro consents to the use by the Company of TheInfoPro’s name in portions of the prospectus and the Registration Statement.
          2.     TheInfoPro consents to the use by the Company of the research data substantially in the form furnished hereto as Exhibit A, which will be included as part of the Registration Statement. In granting such consent, TheInfoPro represents that, to its knowledge, the statements made in such survey are accurate and fairly present the matters referred to therein.
          TheInfoPro agrees that the existence and terms of the IPO constitute confidential information and agrees not to disclose such confidential information to any person or entity or use such confidential information for any purpose other than set forth herein.
         
 
  Very truly yours,
 
       
 
  TheInfoPro, Inc.
 
       
 
  By:   /s/ Deborah Cavaliere
 
       
 
  Name:   Deborah Cavaliere
 
       
 
  Title:   VP, Operations
 
       

 


 

Exhibit A
A study by the TheInfoPro, Inc. (TIP), published in TheInfoPro Information Security Study, Wave 8, Winter 2007, revealed that 59% of organizations have experienced security losses attributed to insiders, with nearly one in five attributing more than 75% of their security incidents to insiders.
According to a study of Fortune 1000 companies by TheInfoPro, Inc., published in TheInfoPro Information Security Study, Wave 8, Winter 2007, compliance was listed as the top IT security-related “pain point.”

 

EX-99.2 12 f28075orexv99w2.htm EXHIBIT 99.2 exv99w2
 

Exhibit 99.2

(INTERNATIONAL DATA CORP LOGO)
September 10, 2007

ArcSight, Inc.
5 Results Way
Cupertino, CA 95014
Attn: Trâm Phi

Ladies and Gentlemen:

          ArcSight, Inc. (the “Company”) has requested that International Data Corporation. (“IDC”) execute this letter in connection with a proposed initial public offering by the Company (the “IPO”). In connection with the IPO, the Company will be filing a registration statement on Form S-1 (the “Registration Statement”) with the Securities and Exchange Commission. In response to such request, please be advised as follows:

          1. IDC consents to the use by the Company of IDC’s name in portions of the prospectus and the Registration Statement.

          2. IDC consents to the use by the Company of the research data substantially in the form furnished hereto as Exhibit A, which will be included as part of the Registration Statement. In granting such consent, IDC represents that, to its knowledge, the statements made in such survey are accurate and fairly present the matters referred to therein.

          IDC agrees that the existence and terms of the IPO constitute confidential information and agrees not to disclose such confidential information to any persons or entity or use such confidential information for any purpose other than set forth herein.

 
             
    Very truly yours,    
 
           
    International Data Corporation    
 
           
 
  By:   /s/ Michael R. Shirer    
 
  Name:  
 
Michael R. Shirer
   
 
  Title:  
 
Corporate Communications Director
   
 
     
 
   


 

Exhibit A

     According to a report by International Data Corporation, or IDC, the security information and event management, forensics and incident investigation, policy and compliance management markets are projected to grow, in aggregate, from $993.6 million in 2007 to $2.2 billion in 2011, representing a compounded annual growth rate of 22.1%. In separate reports, IDC projects that the network change and configuration management market will grow from $157.1 million in 2007 to $372.6 million in 2011, representing a compounded annual growth rate of 24.1%, and the related compliance infrastructure software market, in which we also compete, will grow from $6.2 billion in 2007 to $10.6 billion in 2010, representing a compounded annual growth rate of 19.5%. 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[Fenwick & West LLP logo]
September 11, 2007
VIA EDGAR
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
         
 
  Re:   ArcSight, Inc.
 
      Registration Statement on Form S-1
Ladies and Gentlemen:
     On behalf of ArcSight, Inc. (the “Company”), we are transmitting, via EDGAR, for filing pursuant to the Securities Act of 1933, as amended, a registration statement on Form S-1 relating to the proposed initial public offering of up to $74,750,000 of the Company’s shares of common stock. The Company has transmitted the required filing fee via wire transfer to the Securities and Exchange Commission’s account.
     Should you have any questions regarding the above-mentioned filing, please do not hesitate to contact me at (650) 335-7130 or, in my absence, Daniel J. Winnike at (650) 335-7657.
         
  Very truly yours,


Fenwick & West LLP
 
 
  /s/ David A. Bell    
  David A. Bell   
     
 
     
cc:
  Trâm T. Phi, Vice President and General Counsel, ArcSight, Inc.
 
  Daniel J. Winnike, Fenwick & West LLP

-----END PRIVACY-ENHANCED MESSAGE-----

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