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Directorship Agreement - Rackable Systems Inc. and Hagi Schwartz

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[Rackable Letterhead]

August 18, 2004

Mr. Hagi Schwartz

754 Moreno Avenue

Palo Alto, CA 94303

Re:

Position on the Board of Directors of Rackable Systems, Inc. (“Rackable”)

Dear Hagi:

I am very happy to report that, as we have discussed, you were appointed to the Board of Directors of Rackable (the “Board”) at a meeting held on August 18, 2004. Furthermore, the Board reached consensus that, once Rackable has established an Audit Committee, the Board expects that you will be appointed to serve as Chairman of the Audit Committee.

At the recent board meeting, the Board granted to you a non-statutory stock option to purchase 17,000 shares of Rackable’s common stock, at an exercise price of $4.00 per share. Your option will vest over a four year period commencing on the date of your appointment, with 1/48th vesting per month of service, for so long as you continue to serve as a director, until the entire amount of the grant is vested.

In addition, for your services as Chairman of the Audit Committee, the Board granted to you a non-statutory stock option to purchase 15,000 shares of Rackable’s common stock, at an exercise price of $4.00 per share. This option will also vest over a four year period commencing on the closing date of Rackable’s initial public offering, with 1/48^th vesting per month of service, for so long as you continue to serve as the Chairman of the Audit Committee, until the entire amount of the grant is vested.

All vesting of shares covered by the options will cease upon termination of your service with Rackable. You may exercise your options until the date 90 days after your termination of service with Rackable. The option grants will permit you to exercise your options immediately after they are granted, even as to unvested shares, provided that the unvested shares shall be subject to repurchase by Rackable upon termination of service. All other terms of the option will be in accordance with the terms and conditions of the stock option agreement, grant notice and exercise notice attached hereto.

As a non-employee director of Rackable, you will receive an annual retainer of $20,000 for your services, and an additional annual retainer of $10,000 for your services as Chairman of the Audit Committee, to be paid on a quarterly basis. Rackable will also reimburse you for your travel expenses in attending board and committee meetings.

If the terms of this letter are acceptable to you, and to confirm your willingness to serve on Rackable’s Board of Directors, please sign and date this letter below. We look forward to your favorable reply and to a productive and enjoyable future relationship.


Very truly yours,

RACKABLE SYSTEMS, INC.

By:		/s/ Thomas K. Barton
		Thomas K. Barton
		President and Chief Executive Officer


Accepted:

/s/ Hagi Schwartz				8/18/04
Hagi Schwartz				Date

Attachments:

Stock Option Agreement

Grant Notice

Exercise Notice

RACKABLE SYSTEMS, INC.

STOCK OPTION GRANT NOTICE

2002 STOCK OPTION PLAN

Rackable Systems, Inc. (the “Company”), pursuant to its 2002 Stock Option Plan, hereby grants to Optionholder an option to purchase the number of shares of the Company’s Common Stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in the Stock Option Agreement and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety.


Optionholder:		Hagi Schwartz
Date of Grant:		August 18, 2004
Vesting Commencement Date:		August 18, 2004
Number of Shares Subject to Option:		17,000
Exercise Price (Per Share):		$4.00
Total Exercise Price:		$68,000
Expiration Date:		August 17, 2014


Type of Grant:	¨ Incentive Stock Option¹	x Nonstatutory Stock Option

Exercise Schedule:	¨ Same as Vesting Schedule	x Early Exercise Permitted

Vesting Schedule:	1/48^th of the shares vest for each month of service as a director following the Vesting Commencement Date.

Payment:	By one or a combination of the following items (described in the Stock Option Agreement):

	x By cash or check
	x Pursuant to a Regulation T Program if the Shares are publicly traded
	x By delivery of already-owned shares if the Shares are publicly traded

Additional Terms/Acknowledgements: The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Stock Option Grant Notice and the Stock Option Agreement. Optionholder further acknowledges that as of the Date of Grant, this Stock Option Grant Notice and the Stock Option Agreement set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject.


RACKABLE SYSTEMS, INC.		OPTIONHOLDER:

By:
	Signature		Signature
Title:		Date:

Date:

ATTACHMENTS: Stock Option Agreement and Notice of Exercise

¹	If this is an Incentive Stock Option, it (plus other outstanding Incentive Stock Options) cannot be first exercisable for more than $100,000 in value (measured by exercise price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock Option.

ATTACHMENT I

STOCK OPTION AGREEMENT

ATTACHMENT II

NOTICE OF EXERCISE

RACKABLE SYSTEMS, INC.

STOCK OPTION GRANT NOTICE

2002 STOCK OPTION PLAN


Optionholder:		Hagi Schwartz
Date of Grant:		August 18, 2004
Vesting Commencement Date:		The closing date of the Company’s initial public offering
Number of Shares Subject to Option:		15,000
Exercise Price (Per Share):		$4.00
Total Exercise Price:		$60,000
Expiration Date:		August 17, 2004


Type of Grant:	¨ Incentive Stock Option¹	x Nonstatutory Stock Option

Exercise Schedule:	¨ Same as Vesting Schedule	x Early Exercise Permitted

Vesting Schedule:	1/48^th of the shares vest for each month of service as Chairman of the Audit Committee following the Vesting Commencement Date. All of the shares shall vest on the fifth anniversary of the Date of Grant.

Payment:	By one or a combination of the following items (described in the Stock Option Agreement):

	x By cash or check
	x Pursuant to a Regulation T Program if the Shares are publicly traded
	x By delivery of already-owned shares if the Shares are publicly traded


RACKABLE SYSTEMS, INC.		OPTIONHOLDER:

By:
	Signature		Signature
Title:		Date:

Date:

ATTACHMENTS: Stock Option Agreement and Notice of Exercise

¹	If this is an Incentive Stock Option, it (plus other outstanding Incentive Stock Options) cannot be first exercisable for more than $100,000 in value (measured by exercise price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock Option.

ATTACHMENT I

STOCK OPTION AGREEMENT

ATTACHMENT II

NOTICE OF EXERCISE

RACKABLE SYSTEMS, INC.

2002 STOCK OPTION PLAN

STOCK OPTION AGREEMENT

(NONSTATUTORY STOCK OPTION)

Pursuant to your Stock Option Grant Notice (“Grant Notice”) and this Stock Option Agreement, Rackable Systems, Inc. (the “Company”) has granted you a nonstatutory stock option under its 2002 Stock Option Plan (the “Plan”) to purchase the number of shares of the Company’s Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice.

The details of the Option are as follows:

1. VESTING. Subject to the limitations contained herein, the Option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service.

2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to the Option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments.

3. EXERCISE PRIOR TO VESTING (“EARLY EXERCISE”). If permitted in your Grant Notice (i.e., the “Exercise Schedule” indicates that “Early Exercise” of the Option is permitted) and subject to the provisions of the Option, you may elect at any time that is both (i) during the period of your Continuous Service and (ii) during the term of the Option, to exercise all or part of the Option, including the nonvested portion of the Option; provided, however, that:

(a) a partial exercise of the Option shall be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock;

(b) any shares of Common Stock so purchased from installments that have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Company’s form of Early Exercise Stock Purchase Agreement; and

(c) you shall enter into the Company’s form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred.

4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of the Option. You may elect to make payment of the exercise price in cash or by check or in any other manner permitted by your Grant Notice, which may include one or more of the following.

(a) In the Company’s sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds.

(b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Company’s reported earnings (generally six (6) months) or that you did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. “Delivery” for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock.

5. WHOLE SHARES. You may exercise the Option only for whole shares of Common Stock.

6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise the Option unless the shares of Common Stock issuable upon such exercise (the “Purchased Shares”) are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of the Option must also comply with other applicable laws and regulations governing the Option, and you may not exercise the Option if the Company determines that such exercise would not be in material compliance with such laws and regulations.

7. TERM. You may not exercise the Option before the commencement of its term or after its term expires. The term of the Option commences on the Date of Grant and expires upon the earliest of the following:

(a) three (3) months after the termination of your Continuous Service for any reason other than your Disability or death, provided that if during any part of such three (3)-month period the Option is not exercisable solely because of the condition set forth in the preceding paragraph relating to “Securities Law Compliance,” the Option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service;

(b) twelve (12) months after the termination of your Continuous Service due to your Disability;

(c) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates;

(d) the Expiration Date indicated in your Grant Notice; or

(e) the day before the tenth (10th) anniversary of the Date of Grant.

8. EXERCISE.

(a) You may exercise the vested portion of the Option (and the unvested portion of the Option if your Grant Notice so permits) during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require.

(b) By exercising the Option you agree that, as a condition to any exercise of the Option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of the Option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise.

(c) By exercising the Option you agree that the Company (or a representative of the underwriter(s)) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, require that you not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by you, for a period of time specified by the underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing 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 your shares of Common Stock until the end of such period. The underwriters of the Company’s stock are intended third party beneficiaries of this Section 8(c) and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto.

9. TRANSFERABILITY. The Option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise the Option.

10. CHANGE IN CONTROL. If a Change in Control occurs and your Continuous Service with the Company has not terminated as of, or immediately prior to, the effective time of the Change

in Control, then, as of the effective time of such Change in Control, the vesting and exercisability of your option shall be accelerated in full.

11. RIGHT OF FIRST REFUSAL. Shares of Common Stock that you acquire upon exercise of the Option are subject to any right of first refusal that may be described in the Company’s bylaws in effect at such time the Company elects to exercise its right. The Company’s right of first refusal shall expire on the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on a national securities exchange or on the Nasdaq National Market of the Nasdaq Stock Market (or any successor thereto).

12. RIGHT OF REPURCHASE. To the extent, if any, provided in the Company’s bylaws as amended from time to time, the Company shall have the right to repurchase all or any part of the shares of Common Stock you acquire pursuant to the exercise of the Option.

13. OPTION NOT A SERVICE CONTRACT. The Option is not an employment or service contract, and nothing in the Option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in the Option shall obligate the Company or an Affiliate, their respective shareholders, Board members, officers or employees to continue any relationship that you might have as a director or consultant for the Company or an Affiliate.

14. WITHHOLDING OBLIGATIONS.

(a) At the time you exercise the Option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a “cashless exercise” pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with the Option.

(b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable conditions or restrictions of law, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of the Option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law. If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of the Option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of the Option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of the Option that are otherwise issuable to you upon

such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility.

(c) You may not exercise the Option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise the Option when desired even though it is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein.

15. NOTICES. Any notices provided for in the Option shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.

DEFINITIONS.

(a) “Affiliate” means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code.

(b) “Board” means the Board of Directors of the Company.

(c) “Capitalization Adjustments” means a change made in the Common Stock subject to the Option without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating distribution, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company).

(d) “Change in Control” means the merger, consolidation, sale of all or substantially all of the Company’s assets or similar transaction involving (directly or indirectly) the Company if, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not own, directly or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction. A Change in Control shall not include the public offering of the Company’s securities pursuant to the Securities Act or any similar law then in force.

(e) “Code” means the Internal Revenue Code of 1986, as amended.

(f) “Common Stock” means the common stock of the Company.

(g) “Continuous Service” means that the Participant’s service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. 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 with the Company or an Affiliate, shall not terminate a Participant’s Continuous Service. For example, a change in status from an employee of the Company to a consultant to an Affiliate or to a Director shall not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party’s sole discretion, may determine whether Continuous 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. Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in the Option only to such extent as may be provided in the Company’s leave of absence policy or in the written terms of the Participant’s leave of absence.

(h) “Disability” means the inability of a person, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of that person’s position with the Company or an Affiliate because of the sickness or injury of the person.

(i) “Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable.

(ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board.

(j) “Securities Act” means the Securities Act of 1933, as amended.

* * * *

NOTICE OF EXERCISE

RACKABLE SYSTEMS, INC.

1933 Milmont Drive

Milpitas, CA 95035

Date of Exercise:

Ladies and Gentlemen:

This constitutes notice under my stock option that I elect to purchase the number of shares for the price set forth below.


Type of option (check one):	Incentive ¨	Nonstatutory x

Stock option dated:	August 18, 2004

Number of shares as to which option is exercised:	_________

Certificates to be issued in name of:	_________

Total exercise price:	$

Cash payment delivered herewith:	$

By this exercise, I agree (i) to provide such additional documents as you may require and (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this option.

I hereby make the following certifications and representations with respect to the number of shares of Common Stock of the Company listed above (the “Shares”), which are being acquired by me for my own account upon exercise of the Option as set forth above:

I acknowledge that the Shares have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and are deemed to constitute “restricted securities” under Rule 701 and “control securities” under Rule 144 promulgated under the Securities Act. I warrant and represent to the Company that I have no present intention of distributing or selling said Shares, except as permitted under the Securities Act and any applicable state securities laws.

I further acknowledge that I will not be able to resell the Shares for at least ninety days (90) after the stock of the Company becomes publicly traded (i.e., subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934) under Rule 701 and that more restrictive conditions apply to affiliates of the Company under Rule 144.

I further acknowledge that all certificates representing any of the Shares subject to the provisions of the Option shall have endorsed thereon appropriate legends reflecting the foregoing limitations, as well as any legends reflecting restrictions pursuant to the Company’s Certificate of Incorporation, Bylaws and/or applicable securities laws.

I further agree that, if required by the Company (or a representative of the underwriters) in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, I will not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act as may be requested by the Company or the representative of the underwriters. I further agree that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period.

Very truly yours,

Hagi Schwartz