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FINANCIAL RESULTS FOR FISCAL YEAR 2007 vPLOOLRQLQWRWDOUHYHQXHDQLQFUHDVHRIRYHUoVFDO ANNUAL REPORT vPLOOLRQLQVXEVFULSWLRQUHYHQXHXSIURPoVFDO • $59.9 million in net income, or $0.29 per diluted share. 2007 vPLOOLRQLQGHIHUUHGUHYHQXHEDODQFHDWoVFDO\HDUHQGDQ 07 LQFUHDVHRI\HDURYHU\HDU Dear Red Hat Shareholder: Fiscal year 2007, the year ending February 28, 2007, was a year of solid execution, rapid growth and global H[SDQVLRQ:HFRQWLQXHWRGHPRQVWUDWHFRQVLVWHQWoQDQFLDOSHUIRUPDQFH On December 12, 2006 we joined the New York Stock Exchange, the home of the world’s most established companies. We are well positioned to expand our leadership role and take advantage of the growing market opportunity ahead. Our commitment to delivering low-cost, high-value technology and services has been proven among the world’s most technically demanding customers. For the third-consecutive year, Red Hat was ranked the #1 enterprise software vendor in delivering value to customers in the independent :@F@ej`^_k9HQGRU9DOXHVXUYH\,QoVFDO year 2007, 98 out of our top 100 customers renewed their Red Hat Enterprise Linux subscriptions, and we added more than 42,000 net new customers. We continue to expand the breadth of our product and service offerings, deepening our relationships with enterprise customers. On March 14, 2007, we announced the latest version of Red Hat Enterprise Linux 5 and $GYDQFHG3ODWIRUP:HEHOLHYHLWPDUNVWKHPRVWVLJQLoFDQWUHOHDVHLQRXUFRPSDQ\ VKLVWRU\ We’ve further expanded the Open Source Architecture, which combines Enterprise Linux with our Service-Oriented Architecture platform from JBoss. The acquisition of JBoss, completed in June of 2006, continues to deliver value for enterprise customers as they migrate more of their infrastructure to open source. To accelerate the global availability of open source technology and services, we introduced Red Hat Exchange. Our goal is to create a contemporary value-added model of software distribution to provide solutions to new and emerging markets. :HDUHDOVRLQYHVWLQJLQRXUSHRSOHWRPHHWJOREDOGHPDQG,QWKHSDVWoVFDO\HDUZHDGGHGDVVRFLDWHVDQG RIoFHVJURZLQJWRQHDUO\DVVRFLDWHVLQPRUHWKDQRIoFHVZRUOGZLGH $QGoQDOO\ZH UHFRQWLQXLQJRXUHIIRUWVOHDGLQJWKHVRIWZDUHLQWHJUDWLRQRQWKH2QH/DSWRS3HU&KLOGSURMHFW,W is a core part of our mission to promote the free exchange of knowledge and technology. Through this important project, children around the world will be able to learn, create, and share on an unprecedented scale. We believe when access to knowledge is open, there is no limit to what we can do. Whether developing technology or solving the problems of the world. Thank you for your continued support of Red Hat. Matthew Szulik &KDLUPDQ&KLHI([HFXWLYH2IoFHUDQG3UHVLGHQW 5HG+DW,QF UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934 (Mark One) È Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended February 28, 2007 OR ‘ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . Commission File Number: 0-26281 RED HAT, INC. (Exact name of registrant as specified in its charter) Delaware (State of Incorporation) 06-1364380 (I.R.S. Employer Identification No.) 1801 Varsity Drive, Raleigh, North Carolina 27606 (Address of principal executive offices, including zip code) (919) 754-3700 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $0.0001 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer È Accelerated filer ‘ Non-accelerated filer ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È The aggregate market value of the common equity held by non-affiliates of the registrant as of August 31, 2006 was approximately $3.4 billion based on the closing price of $23.20 of our common stock as reported by the NASDAQ Global Market on August 31, 2006. There were 193,180,053 shares of common stock outstanding as of April 27, 2007. DOCUMENTS INCORPORATED BY REFERENCE Portions of Red Hat, Inc.’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with its annual meeting of stockholders to be held on August 16, 2007 are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS Page No. PART I Item 1. Business ................................................................ 3 Item 1A. Risk Factors ............................................................. 17 Item 1B. Unresolved Staff Comments ................................................ 29 Item 2. Properties ............................................................... 29 Item 3. Legal Proceedings ........................................................ 29 Item 4. Submission of Matters to a Vote of Security Holders ............................. 31 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ............................................. 32 Item 6. Selected Financial Data .................................................... 35 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................................................. 36 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....................... 51 Item 8. Financial Statements and Supplementary Data .................................. 53 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............................................................ 90 Item 9A. Controls and Procedures ................................................... 90 Item 9B. Other Information ........................................................ 90 PART III Item 10. Directors, Executive Officers and Corporate Governance ......................... 91 Item 11. Executive Compensation ................................................... 91 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ..................................................... 91 Item 13. Certain Relationships and Related Transactions, and Director Independence .......... 91 Item 14. Principal Accountant Fees and Services ....................................... 91 PART IV Item 15. Exhibits and Financial Statement Schedules .................................... 91 2 PART I ITEM 1. BUSINESS OVERVIEW We are a global leader in providing open source software solutions to the enterprise, including our core enterprise operating system platform, Red Hat Enterprise Linux, our enterprise middleware platform, JBoss Enterprise Middleware Suite (“JBoss Enterprise Middleware”), and other Red Hat enterprise technologies. We employ an open source software development and licensing model that uses the collaborative input of an international community of contributors to develop and enhance software. We actively participate in this community-oriented development process, often in a leadership role, and leverage it to create our Red Hat-branded enterprise technologies. We believe the open source development and licensing models offer significant advantages over the proprietary software development and licensing models both for Red Hat and our customers. Specifically, through the open source development model, we leverage this community of developers and users, whose collective resources and knowledge supplement the developers we employ. As a result, we believe we are able to offer functionality enhancements and upgrades more quickly and with less development cost than is typical of proprietary software vendors. In turn, our customers are able to take advantage of the quality and value of open source software, which we help develop, aggregate, integrate, test, certify, deliver, maintain and support for their enterprise use. In addition, under the open source licensing model, the collectively developed software is distributed under licenses, such as the GNU General Public License and GNU Lesser General Public