Lindows, Inc.

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

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

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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, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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

This is our initial offering of our shares to the public, and no public market currently exists for our shares. We expect that the public offering price will be between $9.00 and $11.00 per share.

We have granted the underwriters the right to purchase up to 660,000 additional shares from us within 30 days after the date of this prospectus to cover any over-allotments. The underwriters expect to deliver shares of common stock to purchasers on , 2004.

This offering involves a high degree of risk. You should purchase shares only if you can afford a complete loss of your investment. See “Risk Factors” beginning on page 7.

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

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations, and prospects may have changed since that date.

PROSPECTUS SUMMARY

You should read this entire prospectus carefully, especially “Risk Factors” and our financial statements and the related notes, before deciding to invest in our common stock. References in this prospectus to our restated certificate of incorporation and restated bylaws refer to the restated certificate of incorporation and restated bylaws that will be in effect upon the completion of this offering.

Lindows, Inc.

Overview

We are a developer and vendor of Linux-based operating systems, application software and services designed specifically for desktop and laptop computers in homes, schools and businesses. We use technology and software developed by the collaboration of independent Linux developers, referred to as the open source community, with our own technology and software to offer affordable, easy-to-use software products and services, many of which are similar in feel and functionality to our higher-priced competitors. The cornerstone of our product line is our Linspire operating system. We also offer Linux application software and services developed by us and others. We sell and distribute our products and services both by pre-installing them on third-party computer hardware and through the Internet using our proprietary technology. This technology, which we refer to as our “CNR technology,” allows users to license, install, manage, and configure programs available from our software Warehouse on the Linspire.com website.

Industry Background

According to International Data Corporation, or IDC, worldwide client operating system revenues were approximately $10.4 billion in 2002. IDC data shows that Microsoft captured 96.1% of this revenue through its Microsoft Windows products during the same period.

The application software market is larger and more fragmented than the desktop operating system market, with many competitors selling consumer, education and business oriented application software for various platforms.

International and emerging markets are increasingly important to the personal computer operating system industry. According to IDC, the value of personal computers sold into the U.S. has declined as a percentage of the worldwide personal computer market from 38.9% in 2000 to 32.0% in 2003.

The Linux Desktop Opportunity

As the prices for personal computers, or PCs, have continued to decline, the relative cost of the Microsoft Windows operating system has increased. In value-priced PCs and laptops, which we consider to be those with a manufacturer’s suggested retail price, or MSRP, of less than $600, the Microsoft Windows operating system and bundled software can be the most expensive component. As computer manufacturers continue to compete on price, and value conscious consumers look to save money, we believe that operating systems based on Linux technology will increasingly be offered on value-priced computers.

Risks Affecting Us

We are subject to a number of risks, which you should be aware of before you decide to buy our common stock. These risks are discussed in “Risk Factors.” From inception through March 31, 2004 (unaudited), we had an accumulated deficit of $13,480,909, as restated (see Note 2 to our financial statements). The report of our independent registered public accounting firm on our 2003 financial statements states that our historical losses and negative cash flows raise substantial doubt about our ability to continue as a going concern. While we expect that either the proceeds from our recent settlement with Microsoft or the completion of this offering will enable us to continue as a

going concern, we also expect to continue to incur significant losses over the next several years, and we may never become profitable. If we are unable to expand our distribution channels and convince desktop and laptop users that our Linux-based products and services are affordable and effective alternatives to Microsoft’s products and services, we will fail to achieve our business objectives. For more information regarding our recent settlement with Microsoft, see “Business — Legal Proceedings.”

Our Solution

We have developed a simple and comprehensive solution allowing homes, schools and businesses to use a Linux-based operating system and to install and maintain application software on PCs. Our Linux-based desktop solution, the Linspire operating system, is:

• Easy to use — The Linspire operating system presents the user with an intuitive and comfortable graphical user interface.

• A full-featured platform — The Linspire operating system is configured to perform many common tasks such as email and Internet browsing.

• CNR equipped — Our proprietary CNR technology allows users to license, install, manage, update, and configure programs available from our software Warehouse on the Linspire.com website.

• Hardware compatible — We believe the Linspire operating system is able to work with many of the most popular PCs and peripheral devices on the market today, including laser and inkjet printers, displays, digital cameras, network cards, and storage devices.

• File compatible — Users can work with many common file types used by Microsoft’s office suite.

• Stable and secure — We believe the Linspire operating system is currently less prone to virus attacks than other desktop operating systems not based on Linux.

As a result of these features, more than 550 hardware manufacturers, systems builders and software and hardware resellers have participated in our channel distribution programs by licensing the right to distribute the Linspire operating system or sell hardware pre-installed with the Linspire operating system. We refer to participants in our channel distribution programs as our channel partners.

Strategy

We generate revenue from the sale of affordable desktop operating systems, application software and services for desktop and laptop computers. We seek to build a large installed base of computers running our Linspire operating system, to which we will offer value-added applications and services. The key elements of our strategy are:

• broaden distribution of the Linspire operating system by making it available on a large scale, quickly and at a low cost;

• use CNR technology to drive revenues from our value-added software and services;

• focus on products and services primarily for desktop and laptop users;

• support and leverage the open source community;

• increase our penetration into international and emerging markets; and

• increase awareness of Linspire and our other brands.

Corporate Information

We were incorporated in Delaware on July 24, 2001 under the name “Lindoz, Inc.” We changed our name to “Lindows.com, Inc.” in September 2001 and to “Lindows, Inc.” in March 2004. We also conduct business under the trademark “Linspire.” Pursuant to our recent settlement agreement with Microsoft, we intend to change our name to Linspire, Inc. by September 14, 2004.

Our principal executive offices are located at 9333 Genesee Ave., 3rd Floor, San Diego, California 92121, and our telephone number is (858) 587-6700. Our corporate website address is www.lindowsinc.com. Our branded commerce website is www.linspire.com. The information contained in, or that can be accessed through, our websites should not be considered a part of, nor is such information incorporated into, this prospectus.

Linspire, CNR and our logos are our trademarks. We have applied to register Linspire and CNR with the U.S. Patent and Trademark Office. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners.

The Offering


Common stock offered		4,400,000 shares

Common stock to be outstanding after this offering		20,655,506 shares

Use of proceeds		We expect to use the net proceeds of this offering to expand our sales and marketing activities, including developing further the distribution channels for our Linux-based operating system, application software and services, to continue to develop existing and new products, technologies and services, and for other working capital and general corporate purposes, including potential acquisitions of products, technologies or companies.

Proposed Nasdaq National Market symbol		LINE

The number of shares of common stock to be outstanding after this offering is based on the shares outstanding as of March 31, 2004. This number excludes as of March 31, 2004:

• 1,053,391 shares of our common stock subject to outstanding options under our 2001 stock incentive plan, having a weighted average exercise price of $0.04 per share; and

• 510,452 shares of our common stock reserved for future issuance under our 2001 stock incentive plan.

In addition, except where we state otherwise, the information we present in this prospectus reflects:

• a 1-for-3.65 reverse stock split effected in July 2004;

• the conversion of all our outstanding preferred stock into 14,452,054 shares of common stock, which shall occur automatically upon the closing of this offering pursuant to the terms of our currently effective amended and restated certificate of incorporation;

• the adoption of our restated certificate of incorporation and restated bylaws to be effective upon the closing of this offering; and

• no exercise of the underwriters’ over-allotment option.

Summary Financial Data

The following tables summarize the financial data for our business. For a more detailed explanation of our financial condition and operating results, you should read “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. The summary financial data at March 31, 2004 and for the three months ended March 31, 2003 and 2004 are derived from our unaudited financial statements which are included elsewhere in this prospectus. The pro forma information included in the statement of operations and balance sheet data has been computed as described in Note 1 to the financial statements. The pro forma as adjusted balance sheet data reflects the unaudited balance sheet data at March 31, 2004 adjusted for the conversion of all outstanding shares of preferred stock into 14,452,054 shares of common stock and the receipt of the estimated net proceeds from the sale of the shares of common stock in this offering, at an assumed initial public offering price per share of $10.00, after deducting estimated underwriting discounts and commissions and offering expenses.


	Period from
	July 24, 2001			Years ended						Three months ended
	(inception) to			December 31,						March 31,
	December 31,
	2001			2002			2003			2003			2004(1)

													(unaudited)
										(unaudited)			(restated)
Net revenues	$	—		$	63,131		$	2,074,002		$	311,673		$	1,030,061
Cost of sales		—			415,077			605,567			158,198			211,438

Gross profit (loss)		—			(351,946	)		1,468,435			153,475			818,623
Operating loss		(1,146,138	)		(6,651,667	)		(3,793,187	)		(1,307,945	)		(1,499,157	)

Net loss	$	(1,127,391	)	$	(6,656,212	)	$	(4,075,202	)	$	(1,355,731	)	$	(1,622,104	)

Weighted average shares — basic and diluted		324,890			769,346			1,435,387			1,213,898			1,727,917
Net loss per common share — basic and diluted	$	(3.47	)	$	(8.65	)	$	(2.84	)	$	(1.12	)	$	(0.94	)

Pro forma weighted average shares used in computing pro forma net loss per share as adjusted for conversion of preferred stock(2)								15,887,441			15,665,952			16,179,971

Pro forma net loss per share, adjusted for conversion of preferred stock(2)							$	(0.26	)	$	(0.09	)	$	(0.10	)

Pro forma net loss, adjusted for effect of executive officer employment agreements(3)		—			—		$	(4,823,908	)	$	(1,511,290	)	$	(1,815,344	)

Pro forma net loss per share, adjusted for effect of executive officer employment agreements(3)		—			—		$	(3.36	)	$	(1.24	)	$	(1.05	)

Pro forma net loss per share as adjusted for effect of executive officer employment agreements, on a fully-diluted basis giving effect to conversion of preferred stock(3)							$	(0.30	)	$	(0.10	)	$	(0.11	)

Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about the risks described below, together with the other information contained in this prospectus, before you decide whether to buy our common stock. If any of the following risks actually occur, our business, financial condition, results of operations, and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

We may lack the financial, operational and sales and marketing resources to compete effectively with Microsoft and other operating system and application software providers, which may limit our commercial opportunity.

Our primary competitor, Microsoft Corporation, has significantly more financial, operational and sales and marketing resources than we do. In addition, the desktop computer market is dominated by Microsoft’s Windows operating system. Accordingly, it will be difficult for us to compete effectively against Microsoft and other companies whose products are compatible with the Microsoft Windows operating system. We also will likely face intense competition from other established operating system developers, including Red Hat, Novell, Sun Microsystems, and Apple, among others. These competitors may be able to leverage their existing service organizations and provide better levels of support on a more cost-effective basis than we can, and their greater resources, installed base, brand recognition, and more established distribution and other collaborative relationships may make it difficult for us to effectively access and exploit existing and future distribution channels to attract and retain an adequate customer base. We also face competition from many smaller Linux-based operating system providers. If we are unable to compete effectively against existing and future competitors, our business will not succeed.

If we fail to continue to establish and maintain distribution and other collaborative relationships, we may not be able to attract and retain a sufficient customer base.

Our success depends in part on our ability to continue to establish and maintain distribution and other collaborative relationships with hardware manufacturers, systems builders and software and hardware resellers, which we refer to as channel partners. These relationships allow us to offer our products and services to a much larger customer base than we would otherwise be able to access through our direct sales and marketing efforts. If our channel partners fail to realize adequate financial benefits from these relationships, we may not be able to maintain existing channel partnering relationships or establish new relationships on attractive terms. In addition, most of our existing channel partnering relationships do not, and any future channel partnering relationships may not, afford us any exclusive marketing or distribution rights. As a result, many of the companies with which we have channel partnering relationships may pursue alternative technologies and develop alternative products and services in addition to or in lieu of our products and services, either on their own or in collaboration with others, including our competitors. Our channel partner agreements typically have not included minimum purchase or license obligations.

Our business may not succeed because our open source software business model is unproven.

We have not demonstrated the success of our open source software business model, which gives our customers the right to freely copy and distribute some of the software in our operating system and in the applications we develop and distribute. There is uncertainty in connection with open source business models, particularly as to whether or not businesses based on open source

software can operate profitably. In addition, because our business model also contemplates developing and distributing products based on and including technology that is not open source, those within the Linux and open source communities who oppose the development and distribution of technology that is not open source may refuse to purchase our products, refuse to collaborate with us or offer products through our software Warehouse, encourage others not to purchase our products and attempt to harm our reputation both within and outside of the Linux and open source communities. We also face risks that independent developers may develop competing open source solutions or choose to take proprietary products in which we have invested significant time and resources and make similar products available on an open source basis, making our proprietary solutions less attractive and decreasing our revenue. If our business model should fail to gain both widespread commercial and open source community acceptance, we will not be able to sustain our revenue and our business could fail.

The market for Linux solutions may not grow as we anticipate, which would limit our commercial opportunity.

Our strategy for marketing our Linux solutions depends in part upon our belief that homes, schools and businesses will increasingly adopt Linux solutions. If homes, schools and businesses, which at present favor Microsoft, UNIX and other non-Linux operating systems, do not increasingly adopt Linux operating systems and related solutions, a market for our products will not develop. Factors that may keep homes, schools and businesses from adopting Linux solutions include:


	•	technical difficulty in installing and configuring many of the currently available Linux-based operating systems and software applications;

	•	lack of well-financed companies pursuing the adoption of Linux in the desktop computer market, coupled with the lack of computers pre-installed with a Linux operating system;

	•	few high quality applications developed for Linux-based desktop operating systems as compared with their Microsoft Windows-based counterparts;

	•	lack of compatibility with the majority of applications created for personal computers; and

	•	greater familiarity with and previous significant investments by consumers in Microsoft Windows and other competing systems.

Our fee-based contract model may encounter customer resistance, which could cause us to lose revenues.

Many of our Linux-based products and services require customers to pay a service or license fee. Customers and potential customers who believe we should distribute our services and products without cost may resist this distribution model. To the extent we are unsuccessful in promoting or defending this distribution model, our revenues and reputation in the open source community could be harmed.

Our marketing and distribution strategy may adversely impact revenues from licensing our operating system.

Our marketing and distribution strategy relies in part on making our Linspire operating system available to consumers at a low cost by working with our channel partners to pre-install PCs and hard drives with the Linspire operating system and by free promotional distributions of the Linspire operating system. This strategy is designed to grow our Linspire operating system installed base so that we can increase revenues through the sale of application software and services. The availability of the Linspire operating system at no charge, or at a low price, may adversely affect the price at which we can license our Linspire operating system directly to consumers from our website, which could reduce our revenues.

We rely in part on an indirect sales channel for distribution of our products, and disruption of any part of this channel could adversely affect the sales of our products and services.

We sell our products and services through an indirect sales channel in which our channel partners sell our products and services to their customers, either on a stand-alone basis or incorporated in products that they manufacture. We have no written agreement or other relationship with many of the retailers and resellers of our products and services, and therefore cannot control the relationships through which our products and services are ultimately sold to homes, schools and businesses. As a result, our distribution channel could be affected by disruptions in the relationships between our distributors and their customers. We also cannot guarantee that our distributors will market our products effectively or continue to devote the resources necessary to provide us or our customers with effective sales, marketing and technical support. Disruptions in our distribution channel or poor marketing and support by third parties could lead to decreased sales or slower than expected growth.

We rely on one distributor for the exclusive distribution of our products and services in Japan, and this distributor has acquired a competing product.

In the twelve months ended December 31, 2003 and the three months ended March 31, 2004, our distribution arrangement with Livedoor Co., Ltd., a Japanese information technology company, accounted for approximately 11% and 38% of our net revenue, respectively. We entered into a follow-on distribution agreement with Livedoor in April 2004 which extends Livedoor’s exclusive right to market, sell and support the Japanese versions of our products and services in Japan. In exchange for the additional year as exclusive distributor in Japan, Livedoor will pay us additional nonrefundable exclusive licensing fees of $1,069,000 payable in four quarterly installments ending on February 17, 2005. The new agreement remains in effect through August 29, 2005. Our future sales to Livedoor will be affected by the success of our products and services in the Japanese market. We expect that Livedoor will continue to represent a significant portion of our revenues in 2004. However, Livedoor does not have a commitment to purchase a specific amount of our products in future periods, and there can be no assurance that they will continue as our Japanese distributor. Livedoor also recently acquired Turbolinux, and may intend to market Turbolinux’s competing operating system product in Japan during the period of our agreement. Consequently, our business and results of operations could be adversely affected by the loss of the Livedoor relationship or the reduction, delay or cancellation of Livedoor orders.

Because we recently adopted an alternative name strategy for our commerce website and our products and services, and will be changing our corporate name, our existing and potential customers, channel partners, industry vendors, and investors may not recognize our new brand and name, which may cause our revenues to decline.

In response to our prior litigation with Microsoft Corporation, we recently adopted an alternative name strategy for our commerce website and our products and services. We also have changed the location of our commerce website from www.lindows.com to www.linspire.com. Because we have previously marketed our products and services under the Lindows name, some of our existing and potential customers, channel partners, industry vendors, and investors may not recognize our new brand. To increase awareness of our new brand, we may need to spend significant amounts on marketing activities. These expenditures may not increase our brand recognition or result in increased revenues sufficient to cover such marketing expenses. In addition, even if brand recognition increases, the number of new customers or the number of transactions on our commerce website may not increase. Furthermore, pursuant to our recent settlement agreement with Microsoft, we have agreed to change our corporate name and abandon the Lindows trademark. These additional changes will cause us to incur additional expenses and may result in a decline in our revenues. Please see “Business — Legal Proceedings” for more description of our settlement with Microsoft.

Our reliance on independent third parties to develop software included in our products and services could result in delays or unreliable products and services and damage to our reputation.

Our operating systems and application software consist of many different software code components, including the heart of Linux technologies, the Linux kernel. Most of this software is developed by independent third parties over whom we have no control. We cannot guarantee that we have selected or will select in the future the most reliable software code components available in the market or that we will successfully integrate the many components of our products. In addition, if any of this third-party software is not reliable or available, we may have to develop it ourselves, which would significantly increase our development expenses and delay our time to market. Our customers could be dissatisfied if any of these products fails to work as designed or if adequate product support is not provided, which could damage our reputation and lead to litigation.

If third-party application software providers do not continue to make their new applications compatible with our Linux-based operating systems, our software will not be competitive.

Our products will not be competitive unless new software applications developed by third parties continue to be compatible with our Linux-based operating system. We believe the availability of compatible third-party application software products depends in part on third-party developers’ perception and analysis of the relative benefits of developing, maintaining and upgrading software for Linux-based operating systems versus software for the larger Microsoft Windows market. This analysis is based on factors such as the perceived strength of our business and products, the anticipated potential revenue that may be generated, acceptance by customers of our operating system, and the costs of developing compatible software products. Our limited operating history, financial losses in prior years and minority market share in the operating system market may cause software developers to question our prospects for success, in which case developers could be less inclined to develop new application software or upgrade existing software for our Linux-based operating systems. We intend to encourage the development of additional applications that operate on Linux-based operating systems by attracting third-party developers to the Linux platform and maintaining our existing developer relationships through marketing and technical support for third-party developers. If we are not successful in achieving these goals, however, our products will not be competitive and our sales will be adversely affected.

Security and privacy breaches may expose us to liability and cause us to lose customers.

Our security measures may not prevent security breaches that could harm our business. Currently, a significant number of our users provide us with credit card and other financial information and authorize us to bill their credit card accounts directly for our products and services. We rely on open source encryption technology, as well as authentication certification services purchased from a third party, to effect secure transmission of this confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. Any compromise of our security could harm our reputation and, therefore, our business. In addition, a party who is able to circumvent our security measures could misappropriate proprietary information, cause interruptions in our operations or expose customers to computer viruses.

Our servers are also vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We have experienced attacks on our system that resulted in the compromise of unsecured data, but which have had no material impact on us. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. These issues are likely to become more difficult as we expand the number of places where we operate. Security breaches could damage our reputation and expose us to liability or losses. Our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.

In addition, our users may be targeted by parties using fraudulent emails to misappropriate passwords, credit card numbers or other personal information. In addition to harming our users, fraudulent emails could damage our reputation, reduce our ability to attract new users to our websites and diminish the value of our brand names.

We are vulnerable to system failures, which could adversely affect the sales of our products and services and harm our business.

We rely on our commerce website to sell our application software and services, and to a lesser extent, our operating systems. Any interruption in the availability of our commerce website will likely reduce our revenues, and our future revenues could be harmed if our users believe that our system is unreliable. Our systems are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks, and similar events. The majority of our systems are not redundant, and our disaster recovery planning is not sufficient for all eventualities. Our systems are also subject to break-ins, sabotage and intentional acts of vandalism. Despite any precautions we may take, the occurrence of a natural disaster, a decision by our third-party hosting provider to close a facility we use without adequate notice for financial or other reasons, or other unanticipated problems at our hosting facility could result in lengthy interruptions in our services. In addition, the failure by our hosting facility to provide our required data communications capacity could result in interruptions in our service. We do not carry business interruption insurance sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.

Any interruption in the availability of our websites would place increased burdens on our engineering staff and create a large volume of user questions and complaints that would need to be addressed by our customer support personnel. Additionally, any unscheduled interruption in our services would likely result in a loss of revenues and could cause some users to switch to our competitors.

Our infrastructure could prove unable to handle a larger volume of customer transactions. Any failure to accommodate transaction growth could impair customer satisfaction, lead to a loss of customers, impair our ability to add customers, or increase our costs, all of which would harm our business.

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

Different groups of open source software programmers typically compete with one another to develop new technology. Typically, the technology developed by one group will become more widely used than that developed by others. If we adopt new technology and incorporate it into our products and competing technology becomes more widely used or accepted, the market appeal of our products may be reduced, which could result in harm to our reputation, decreased revenue or increased expense to alter our technology.

There are few technology barriers to entry in the open source market, which may increase the competitive threats we face and limit the demand for our products and services.

One of the characteristics of open source software is that anyone can modify the existing software or develop new software that competes with existing open source software. Such competition can develop without the degree of overhead and lead time required in the case of traditional proprietary software companies. It is also possible for a competitor with greater resources than ours to develop its own open source operating system solution, potentially reducing the demand for our solutions.

We may encounter difficulties managing our growth, which could adversely affect our results of operations.

We will need to expand and effectively manage our organization and operations in order to successfully extend our product and service offerings and geographic reach. We increased the number of our full-time employees from two as of August 31, 2001 to 62 as of March 31, 2004. We expect to continue to grow as needed to meet our strategic objectives. If we continue to grow, it is possible that our management, employees, systems, and facilities currently in place may not be adequate. Our need to effectively manage our operations, growth and various projects requires that we continue to improve our operational, financial and management controls, reporting systems and procedures. If we are unable to successfully implement these tasks on a larger scale, our operations and financial results could be adversely affected.

We expect to increase our sales and marketing expenditures to broaden our market penetration, but these efforts may be unsuccessful and our business may not succeed.

In order for us to successfully market our products on a wide scale, we must achieve sufficient market penetration and broad recognition as a leading provider of Linux-based software solutions for the desktop computer. We may lack the economic and managerial resources necessary to promote this growth. We expect to increase our sales and marketing expenses in future periods as we attempt to build our installed base, and there can be no assurance that these efforts will be successful.

If we do not successfully integrate the operations of any future acquisitions, we may incur unexpected costs and experience disruptions to our business.

As part of our business strategy, we may enter into business combinations and acquisitions in the future. Our management team has limited experience making acquisitions, and we have made no acquisitions to date. Future acquisitions may entail numerous operational and financial risks, including:


	•	exposure to unknown liabilities;

	•	disruption of our business and diversion of our management’s time and attention to developing acquired technologies;

	•	increased amortization expenses;

	•	higher than expected acquisition and integration costs;

	•	impairment of relationships with key suppliers, distributors or customers of acquired businesses due to changes in management and ownership;

	•	inability to retain key employees of acquired businesses; and

	•	incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions.

Although we periodically engage in preliminary discussions with respect to acquisitions of companies, we are not currently a party to any such agreements or commitments.

If we are unable to attract and retain key management and staff, we may be unable to successfully extend our product and service offerings.

We are a small company, with approximately 75 employees, and our success depends on our continued ability to attract, retain and motivate highly qualified management and personnel. In the software industry, there is substantial and continuous competition for highly skilled business, product development, technical, and other personnel. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will impede our ability to extend our product and service offering and cause our stock price to decline. In addition,

We may not be able to meet the operational and financial challenges that we will encounter as our international operations continue to expand. We have derived a material percentage of our revenues from Japan and Europe, and expect our business in Latin America to increase.

In 2002 and 2003, approximately 21% and 35%, respectively, of our revenues were from customers outside of the U.S., principally in Japan and Europe. As we expand our international operations, we expect our business in Latin America to increase. We will face a number of challenges associated with the conduct of business overseas. For example:


	•	we may have difficulty managing and administering a globally-dispersed business;

	•	fluctuations in exchange rates and currency devaluations may negatively affect our operating results;

	•	we may have to comply with a wide variety of foreign laws;

	•	we may not be able to adequately protect our intellectual property rights overseas due to the uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property rights;

	•	export controls and times of crisis could prevent us from shipping our products into and out of certain markets;

	•	changes in import/export duties and quotas could affect the competitive pricing of our products and services and reduce our market share in some countries;

	•	economic or political instability in some international markets could result in the forfeiture of some foreign assets and the loss of sums spent developing and marketing those assets; and

	•	an increase in the perceived risks associated with investing in emerging economies such as those in Latin America could limit foreign investment and adversely affect those economies, which could adversely impact our revenues.

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

Customer complaints or negative publicity about our customer service could affect use of our products and services adversely and, as a result, our business could suffer.

Customer complaints or negative publicity about our customer service could diminish consumer confidence in and use of our products and services. We have limited customer service personnel and rely heavily on self-service, web-based support. Our web-based support system is not equipped to handle all customer service issues and complaints effectively. If we do not handle customer service and complaints effectively, our reputation may suffer and we may lose our customers’ confidence. Additionally, expanding our customer service capabilities would require significant personnel expense, which could impact our results of operations.

We have incurred significant operating losses since our inception. We expect to incur significant additional operating losses in the future and may not achieve profitability.

We have generated operating losses each year since our inception in July 2001. As of March 31, 2004, we had an accumulated deficit, as restated, of $13,480,909. For the quarter ended March 31, 2004, our cash used in operations was $459,198. Our future product development and sales and marketing activities will require significant expenditures. We expect to continue to incur additional operating losses and capital expenditures over the next several years and anticipate that our expenses will increase substantially in the foreseeable future as we continue to develop the distribution channels for our products and services and expand our product development and sales and marketing activities. Currently, we estimate that we will need to use a minimum of $15,000,000 from the proceeds of this offering, our recent settlement with Microsoft or from other sources to fund operating losses, expected capital expenditures and other working capital requirements for the 24 months from the date of this prospectus. However, the extent of our future operating losses, capital expenditures and other working capital requirements and the timing of our reaching profitability are highly uncertain, and we may never achieve profitability. If we do not achieve profitability on the timeline we anticipate, or at all, our ability to achieve our development and expansion goals would be adversely affected. For more information regarding our recent settlement with Microsoft, see “Business — Legal Proceedings.”

Our quarterly revenues and financial results are likely to fluctuate significantly and may not meet our expectations or those of third parties, which could cause our stock price to fall rapidly.

Our quarterly revenues and financial results have fluctuated and may continue to fluctuate from quarter to quarter. For example, our unaudited revenues and operating profit (loss) were approximately $312,000 and $(1,308,000) in the first quarter of 2003, $419,000 and $83,000 in the second quarter of 2003, $607,000 and $(841,000) in the third quarter of 2003, $736,000 and $(1,727,000) in the fourth quarter of 2003 and, as restated, $1,030,000 and $(1,499,000) in the first quarter of 2004. In addition, as a result of the $237,000 in additional revenue recorded in the first quarter of 2004 related to the Livedoor agreement signed in March 2003, as well as the fact that we did not begin recognizing revenues under the Livedoor agreement signed in April 2004 until the first payment of $184,000 was received in the third quarter of 2004, we expect that second quarter 2004 revenues will be approximately 30% lower than those in the first quarter. Factors that are likely to cause our quarterly revenues and financial results to fluctuate include those disclosed in these risk factors and the following:


	•	our ability to attract and retain new customers and maintain customer satisfaction;

	•	the level of adoption of Linux in homes, schools and businesses generally;

	•	the timing of product releases and upgrades of our Linux-based operating system and software applications, and other new or enhanced products and services introduced by us or by our competitors; and

	•	the costs and results of litigation that involves us.

Additionally, our quarterly financial results may vary because we base our current and projected future expense levels in part on our estimates of future revenues. Our expenses are, to a large extent, fixed in the short term. We may not be able to adjust our spending quickly enough to achieve our projected financial results for a quarter if our revenues in that quarter fall short of our expectations. If our quarterly revenues or financial results are below the expectations of securities analysts or investors, the price of our common stock could fall rapidly.

The report of our independent registered public accounting firm expresses substantial doubt about our ability to continue as a going concern.

We have received an audit report from our independent registered public accounting firm containing an explanatory paragraph stating that our historical losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. We believe that either the proceeds from our recent settlement with Microsoft or the successful completion of this offering will provide us with the necessary working capital to continue as a going concern.

Our short operating history makes it difficult to evaluate our business and prospects.

We were originally incorporated in July 2001 and began selling products in January 2002. As a result, we have limited historical financial data upon which to base planned operating expenses or forecast accurately our future operating results. Further, our limited operating history will make it difficult for investors and securities analysts to evaluate our business and prospects. You must consider our business and prospects in light of the risks and difficulties we may face as an early stage company with limited operating history. These risks and difficulties include challenges in accurate financial planning as a result of limited historical data and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to older companies with longer operating histories. Our failure to address these risks and difficulties successfully would harm our business.

We likely will need to raise additional funds to pursue our growth strategy or continue our operations and we may be unable to raise capital when needed.

We believe that either the proceeds from our recent settlement with Microsoft or the net proceeds from this offering will be sufficient to fund our operations for at least the next 24 months. However, we anticipate that we may need to raise additional capital in the future to facilitate long-term expansion, to respond to competitive pressures or to respond to unanticipated financial requirements. We cannot be certain that we will be able to obtain additional financing on commercially reasonable terms or at all. If we raise additional funds through the issuance of equity, equity-related or debt securities, such securities may have rights, preferences or privileges senior to those of our common stock, and our stockholders will experience dilution of their ownership interests. A failure to obtain additional financing or an inability to obtain financing on acceptable terms could require us to incur indebtedness that has high rates of interest or substantial restrictive covenants, issue equity securities that will substantially dilute the ownership interests of existing stockholders, or scale back, or fail to address opportunities for expansion or enhancement of, our operations. Since our inception, we have experienced negative cash flow from operations and expect to experience negative cash flow from operations for the foreseeable future.

We are recording non-cash stock-based compensation, which may result in an increase of our net losses.

Stock-based compensation represents an expense arising from the difference between the deemed fair value of common stock for financial reporting purposes at the time of an option grant or stock issuance and the option exercise price or price paid for the stock. Stock-based compensation is amortized on an accelerated basis over the vesting period of the option or issuance. From inception through March 31, 2004, deferred stock-based compensation related to option grants and stock issuances to our employees totaled approximately $1,077,000, which is being amortized on an accelerated basis as the options or stock are earned, generally over a period of four or five years. We have also modified the terms of one of our option grants to accelerate the vesting of the option. This modification may increase our future net losses if the optionee’s employment terminates before the end of the original option vesting period. Also, we have granted options to consultants which, for expense recognition purposes, are remeasured at each reporting date during the vesting period.

We could be forced to reimburse our insurance carrier for some or all legal fees and costs it has paid relating to our prior litigation with Microsoft.

We are in litigation with our insurance carrier relating to our prior litigation with Microsoft. With respect to the Microsoft lawsuit in the U.S., we obtained a decision from the court that our carrier is obligated to bear the cost of our legal defense and that it breached its contract with us by refusing to defend. That decision may be appealed to an appellate court, but, based on that decision and our settlement with Microsoft, the only remaining issues to be decided by the court currently hearing the case are issues related to damages we are seeking against the carrier for its breach of contract, and our bad faith claim against the carrier for its failure to defend. With respect to the foreign litigation brought by Microsoft, we recently brought suit against the same insurance carrier to enforce its obligations to us regarding the foreign litigation. Our carrier has agreed only to pay partial defense costs for the foreign litigation, subject to its reservation of rights to deny coverage and seek reimbursement.

If our carrier successfully appeals the decision relating to its obligation to bear the cost of our legal defense with respect to Microsoft’s U.S. litigation, we may be forced to reimburse our carrier for some or all of the legal fees and costs it has paid to us or our legal counsel in the Microsoft U.S. litigation. If we are unsuccessful in our lawsuit relating to the foreign litigation, we also may be forced to reimburse our carrier for some or all legal fees and costs it has paid to us or our legal counsel, and continues to pay to us or our legal counsel, relating to the foreign litigation. Furthermore, even if our carrier is required to bear the cost of our legal defense in the foreign litigation, it may only be required to cover a portion of the fees charged by the attorneys defending the case, in which case we would be required to bear the portion of the legal fees in excess of the amounts covered by our carrier. Because of the uncertainties as to whether our carrier will be required to cover the legal defense costs in the foreign litigation, we have accrued $250,000 in estimated legal fees as of March 31, 2004 relating to the foreign litigation.

As of March 31, 2004, our carrier has paid approximately $3,280,000 of our legal fees and costs relating to our U.S. and foreign litigation with Microsoft. If we are forced to reimburse our carrier for these legal fees and costs, our financial position and ability to fund our operations could be materially harmed.

We may not prevail in our lawsuits with our insurance carrier. Each of these lawsuits has resulted in significant expenses and has been, and is expected to continue to be, a diversion of management’s time and other resources well into the future. Please see “Business — Legal Proceedings” for more description of our litigation with our insurance carrier.

We could be prevented from selling or developing most of our software if the GNU General Public License and similar licenses under which most of our products are developed and licensed are not enforceable.

The Linux kernel and our operating system and application software have been developed and licensed under the GNU General Public License and similar open source licenses. These licenses state that any program licensed under them may be liberally copied, modified and distributed. The GNU General Public License is a subject of litigation in the case of The SCO Group, Inc. v. International Business Machines Corp., pending in the United States District Court for the District of Utah. It is possible that a court would hold these licenses to be unenforceable in that litigation or that someone could assert a claim for proprietary rights in a program developed and distributed under them. Any ruling by a court that these licenses are not enforceable, or that Linux-based

Claims that we have infringed the intellectual property rights of others could divert management attention, be costly to defend and prevent us from using or selling the challenged technology.

The software industry is characterized by frequent litigation regarding intellectual property infringement. We are particularly vulnerable to infringement claims because our products are comprised of distinct software components, many of which are developed by numerous independent parties. As the number of products in the desktop operating systems market increases, we believe that infringement claims are likely to become more common.

Infringement claims could require us to seek to obtain licenses from third parties in order to continue offering our products, reengineer our products or discontinue the sale of our products in the event reengineering could not be accomplished on a timely basis. Defending infringement claims, even claims without significant merit, can be expensive and divert management’s attention. An adverse legal decision affecting our intellectual property could materially harm our business.

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

Despite testing by ourselves and our customers, defects have been and may continue to be found in our products after commencement of commercial shipments. The risk of product defects is exacerbated by the fact that much of the code in our products is developed by independent parties over whom we exercise no supervision or control. To date, the errors we have discovered have not been material, but future errors could be material. If errors are discovered, we may have to make significant expenditures of capital to eliminate them and may not be able to successfully correct them in a timely manner or at all. Errors and failures in our products could result in a loss of, or delay in, market acceptance of our products and could damage our reputation and our ability to convince commercial users of the benefits of Linux-based operating systems and other open source software products.

In addition, failures in our products could cause system failures for our customers who may assert warranty and other claims for substantial damages against us. Although our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims, it is possible that these provisions may not be effective or enforceable under the laws of some jurisdictions. In addition, our insurance policies may not adequately limit our exposure to this type of claim. These claims, even if unsuccessful, could be costly and time consuming to defend.

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

Our collection of trademarks is valuable intellectual property. The protective steps we have taken in the past have been, and may in the future continue to be, inadequate to deter infringement of our trademark rights. Although we do not believe that we have suffered any material harm from infringement to date, we may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our trademark rights in a timely manner. We have trademark applications pending in the U.S. Effective trademark protection may not be available in every country in which we offer or intend to offer our products and services. Failure to adequately protect our trademark rights could damage or even destroy our brand and impair our ability to compete effectively. Furthermore, defending or enforcing our trademark rights could result in the expenditure of significant financial and managerial resources.

Given that we are a technology company with a limited operating history and an unproven business model in a rapidly changing industry, the market price of our common stock is likely to be particularly volatile, and, as a result, you may not be able to sell your shares at or above the offering price.

Technology companies have historically experienced high levels of stock price volatility. Given that we are a technology company with a limited operating history and an unproven business model in a rapidly changing industry, the market price for our common stock is likely to be particularly volatile. The price of the common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. The fluctuations could cause you to lose part or all of your investment. Factors that are likely to cause fluctuations in the trading price of our common stock include those disclosed in these risk factors and the following:


	•	potential adverse developments in litigation concerning open source software generally and Linux in particular;

	•	conditions or trends in the Linux, software or high-technology industries; and

	•	discussion of our business, products, financial performance, prospects, or our stock price by the financial and software and high-technology press and online investor communities such as chat rooms.

Sales by our current stockholders of a substantial number of shares after this offering, or sales by our executive management team of any shares after this offering, may cause our stock price to decline.

Our current stockholders hold a substantial number of shares of our common stock that they will be able to sell in the public market in the near future. Significant portions of these shares are held by a small number of stockholders. Sales by our current stockholders of a substantial number of shares after this offering, or the expectation that such sale may occur, could significantly reduce the market price of our common stock. Additionally, sales by our executive management team of any shares of common stock after this offering could reduce the market price of our common stock. Although the holders of approximately 95% of our capital stock outstanding as of June 30, 2004 have agreed with the underwriters of this offering to be bound by a 180-day lock-up agreement that prohibits these holders from selling or transferring their stock other than in specific circumstances, the restrictions set forth in one of the lock-up agreements permits a non-management stockholder to make sales resulting in gross proceeds to the holder of not more than $500,000 in the aggregate. Additionally, Roth Capital Partners, at its discretion, can waive the restrictions of the lock-up agreements at an earlier time without prior notice or announcement and allow all of our stockholders to sell their shares of our common stock in the public market subject only to applicable securities rules and regulations. We also intend to register all common stock that we have issued or reserved for issuance under our 2001 stock incentive plan and 2004 stock incentive plan, as well as 844,329 shares of common stock held by our President, approximately 30 days after the closing of this offering. Once we register these shares, they can be freely sold in the public market, subject to any restrictions under the securities laws and, in some cases, the lock-up agreements described in “Plan of Distribution.” If any of these stockholders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. Please see “Shares Eligible for Future Sale” for a description of sales that may occur in the future.

Our executive officers and directors and their affiliates will exercise control over stockholder voting matters in a manner that may not be in the best interests of all of our stockholders.

Immediately after this offering, our executive officers and directors and their affiliates will together control approximately 68.9% of our outstanding common stock. As a result, these stockholders will collectively be able to control all matters requiring approval of a majority of our stockholders, including the election of directors and approval of significant corporate transactions. The concentration of ownership may delay, prevent or deter a change in control of our company even when such a change may be in the best interests of all stockholders, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or our assets and might affect the prevailing market price of our common stock.

As a new investor, you will incur substantial dilution as a result of this offering and future equity issuances, and therefore you may receive significantly less than the purchase price you paid in this offering if we are acquired or liquidated.

The initial public offering price will be substantially higher than the pro forma, net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $8.47 per share. This dilution is due in large part to earlier investors in our company having paid substantially less than the initial public offering price when they purchased their shares. Investors who purchase shares of common stock in this offering will contribute approximately 90% of the total amount we have raised to fund our operations but will own only approximately 21% of our common stock. The exercise of outstanding options and future equity issuances, including future public offerings or future private placements of equity securities and any additional shares issued in connection with acquisitions, will result in further dilution to investors. Furthermore, following the offering, our board of directors will have the authority, without further action by the stockholders and subject to the limits imposed by the Delaware General Corporation Law, to issue up to 10,000,000 shares of preferred stock in one or more series. The issuance of preferred stock could have the effect of, among other things, restricting dividends on the common stock and diluting the voting power for the common stock. As a result of dilution, investors purchasing stock in this offering may receive significantly less than the purchase price paid in this offering if we are acquired or liquidated. Please see “Dilution” for more information regarding the dilution you will incur upon purchasing our common stock in this offering.

We may become involved in securities class action litigation that could divert management’s attention and harm our business.

The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of software and high-technology companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. If we are found liable, then we could be required to pay substantial monetary damages. Further, even if we successfully defend ourselves, we could be forced to spend a substantial amount of money in litigation expenses, our management could be required to spend valuable time in the defense against these claims and our reputation could suffer, any of which could harm our business.

Being a public company will increase our administrative costs, financial reporting and internal control responsibilities and associated risks, and may make it more difficult for us to attract and retain key personnel.

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

corporate governance practices of public companies. Similarly, the Nasdaq Stock Market has revised its requirements for companies that are Nasdaq-listed. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time consuming and costly. For example, partially in connection with becoming a public company, we have engaged auditors to perform our first independent audit, added independent directors, created several board committees, retained a transfer agent, a bank note company, and a financial printer, adopted an insider trading policy and will have all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws. Furthermore, we must make improvements to our internal controls and procedures to be compliant with the requirements of the Sarbanes-Oxley Act of 2002 and with an accepted internal control framework. Our financial statements for the three months ended March 31, 2004 have been restated to reflect an additional $237,000 in revenue arising from a correction in our revenue recognition methodology for an agreement with our Japanese distributor. This restatement resulted solely from a significant deficiency in our internal controls relating to the application of accounting principles for long-term distribution agreements (also see Note 2 to our financial statements). As we are at an early stage of development, we have limited accounting personnel and other resources with which to address these internal controls and procedures requirements. Furthermore, there can be no assurance that we will successfully implement the necessary policies, systems and procedures in a timely manner or that once implemented, our new internal control procedures will operate as intended. In addition, the new rules could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.

Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in control, even if an acquisition or management change would be beneficial to our stockholders.

Our restated certificate of incorporation and restated bylaws contain provisions that may delay or prevent a change in control, discourage bids at a premium over the market price of our common stock and adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:


	•	dividing our board of directors into three classes serving staggered three-year terms;

	•	prohibiting our stockholders from calling a special meeting of stockholders;

	•	permitting the issuance of additional shares of our common stock or preferred stock without stockholder approval;

	•	prohibiting our stockholders from making certain changes to our restated certificate of incorporation or restated bylaws except with 66 2/3% stockholder approval; and

	•	requiring advance notice for raising matters of business or making nominations at stockholders’ meetings.

We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by

We will have broad discretion in how we use the proceeds of this offering, and we may not use these proceeds effectively, which could hinder our results of operations and cause our stock price to decline.

We will have considerable discretion in the application of the net proceeds of this offering. We expect to use the net proceeds of this offering to further develop the distribution channels for our Linux-based operating system, application software and services, to expand our sales and marketing activities, to continue to develop existing and new products, technologies and services and to increase personnel. In addition, we may use a portion of the net proceeds from this offering to acquire products, technologies or businesses that are complementary to our current or future business and product lines. We cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. The amount and timing of our expenditures will depend on several factors, including the status of our product development efforts, sales and marketing activities, technological advances, competition, and amount of cash generated or used by our operations. Accordingly, our management will have broad discretion in the application of the net proceeds and investors will be relying on the judgment of our management regarding the application of the proceeds of this offering. We reserve the right to change the use of these proceeds as a result of certain contingencies such as the results of our distribution efforts, competitive developments, opportunities to acquire products, technologies or businesses, and other factors. We may use the net proceeds for corporate purposes that do not yield a significant return or any return at all for our stockholders, which may cause our stock price to decline.

We have never paid cash dividends on our capital stock, and we do not anticipate paying dividends in the foreseeable future.

We have paid no cash dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of potential gain for the foreseeable future.

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.” In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

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

We estimate that the net proceeds from this offering will be approximately $39,170,000, based upon an assumed initial public offering price of $10.00 per share and after deducting estimated underwriting discounts and commissions and offering expenses. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be approximately $45,308,000.


	•	expand our sales and marketing activities, including developing further the distribution channels for our Linux-based operating system, application software and services (approximately $4 million to $11 million);

	•	continue to develop existing and new products, technologies and services (approximately $4 million to $8 million); and

	•	for other working capital and general corporate purposes, including potential acquisitions of products, technologies or companies (approximately $10 million to $20 million).

We currently have no commitments or agreements relating to any of these types of acquisitions. We intend to repay all amounts outstanding under our revolving line of credit with our Chief Executive Officer with a portion of the first installment of the aggregate $20 million that Microsoft has agreed to pay us pursuant to the settlement agreement described below under “Business — Legal Proceedings.”

We believe that the net proceeds from this offering will be sufficient to meet our projected operating requirements for at least the next 24 months. We expect to satisfy our future cash needs through cash flows from operations, the sale of equity securities and debt financings and a portion of the proceeds from our recent settlement with Microsoft.

As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. The amount and timing of our expenditures will depend on several factors, including the status of our product development efforts, sales and marketing activities, technological advances, competition, and the amount of cash generated or used by our operations. Accordingly, our management will have broad discretion in the application of the net proceeds and investors will be relying on the judgment of our management regarding the application of the proceeds of this offering. We reserve the right to change the use of these proceeds based on these and other factors.

Pending the uses described above, we plan to invest the net proceeds of this offering in short- and medium-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business, and do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors.


	•	on an actual basis;

	•	on a pro forma basis after giving effect to the conversion of all outstanding shares of preferred stock into 14,452,054 shares of common stock; and

	•	on a pro forma as adjusted basis to reflect the conversion of all outstanding shares of preferred stock into 14,452,054 shares of common stock, the receipt of the estimated net proceeds from this offering, calculated as described under “Use of Proceeds,” and the filing of a restated certificate of incorporation to provide for authorized capital stock of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock.

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



	•	1,053,391 shares of our common stock subject to outstanding options under our 2001 stock incentive plan, having a weighted average exercise price of $0.04 per share; and


	•	510,452 shares of common stock reserved for issuance under our 2001 stock incentive plan.

All share amounts have been retroactively adjusted to give effect to the one-for 3.65 reverse stock split of our common stock effected in July 2004.

If you invest in our common stock, your interest will be diluted to the extent of the difference between the 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 after this offering. As of March 31, 2004, we had a net tangible book value of $(7,474,287), or $(4.14) per share of common stock, not taking into account the conversion of our outstanding preferred stock. Net tangible book value per share is equal to our total tangible assets (total assets less intangible assets) less total liabilities, divided by the number of shares of our outstanding common stock. Our pro forma net tangible book value as of March 31, 2004 was $(7,474,287), or $(0.46) per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the pro forma number of shares of common stock outstanding as of March 31, 2004. Our pro forma net tangible book value and pro forma net tangible book value per share amounts give effect to the assumed automatic conversion of all outstanding shares of our convertible preferred stock into shares of common stock upon the closing of the offering.

Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to our sale of 4,400,000 shares of common stock in this offering at an assumed initial public offering price of $10.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our adjusted pro forma net tangible book value as of March 31, 2004 would have been $31,695,713, or $1.53 per share. This amount represents an immediate increase in pro forma net tangible book value of $1.99 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $8.47 per share to new investors. The following table illustrates this per share dilution:

If the underwriters exercise their option to purchase additional shares in this offering, our adjusted pro forma net tangible book value at March 31, 2004 would have been $37,833,713, or $1.77 per share, representing an immediate increase in pro forma net tangible book value of $2.23 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $8.23 per share to new investors purchasing shares in this offering.

The following table summarizes, on a pro forma basis as of March 31, 2004, after giving effect to the assumed automatic conversion of all outstanding shares of our convertible preferred stock into common stock upon the closing of the offering, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors, based on an assumed initial public offering price of $10.00 per share before deducting estimated underwriting discounts and commissions and offering expenses payable by us:

If the underwriters exercise their over-allotment option in full, our existing stockholders would own 76% and our new investors would own 24% of the total number of shares of our common stock outstanding after this offering.

The above discussion and tables assume no exercise of any stock options outstanding as of March 31, 2004. As of March 31, 2004, we had options outstanding to purchase a total of 1,053,391 shares of common stock with a weighted average exercise price of $0.04 per share. We have also adopted a new 2004 stock incentive plan that will become effective upon the completion of this offering. To the extent that any of these options are exercised, there will be further dilution to new investors. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

The following selected financial data reflect our historical results of operations and balance sheet data. Our statement of operations data set forth below for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003 and the selected balance sheet data as of December 31, 2002 and 2003, are derived from our audited financial statements included in this prospectus. The balance sheet data set forth below as of December 31, 2001 are derived from our audited financial statements that are not included in this prospectus. The selected statements of operations data for the three months ended March 31, 2003 and 2004 and the selected balance sheet data as of March 31, 2004 are derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include, in the opinion of management, all adjustments, consisting only of normal, recurring adjustments, that management considers necessary for a fair statement of the results of those periods. Historical results are not necessarily indicative of future results. The financial information presented below may not be indicative of our future performance. You should read these selected financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.


(1)	See note 2 to the financial statements.

(2)	The pro forma net loss per share assumes conversion of all shares of our outstanding preferred stock into shares of common stock. The pro forma shares used in calculating the pro forma net loss per share assume the conversion of the following preferred shares outstanding:


(3)	The pro forma net loss reflects the effect of the current executive officer employment agreements entered into in April 2004 as if such agreements had been entered into on January 1, 2003:

The following discussion should be read in conjunction with our “Selected Financial Data” and our financial statements and the related notes contained elsewhere in this prospectus. In addition to historical information, the following discussion and analysis contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled “Risk Factors” and elsewhere in this prospectus. Except as may be required by applicable law, we undertake no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

We are a developer and vendor of Linux-based operating systems, application software and subscription services designed specifically for desktop and laptop computers in homes, schools and businesses. We sell and distribute our products and subscription services both by pre-installing them on third-party computer hardware and through the Internet using our proprietary technology. This technology, which we refer to as our “CNR technology,” allows users to license, install, manage, and configure programs available from our software Warehouse on the Linspire.com website.

We were incorporated in the State of Delaware in July 2001 and launched our product offerings in January 2002 through our commerce website. Since inception through March 31, 2004, we had an accumulated deficit of $13,480,909. We are in the early stages of implementing our business plan and have not generated significant revenues and expect to incur operating losses over the next several years.

In evaluating our financial condition and operating results, our management team focuses on a variety of information and performance metrics, including the following:


	•	the growth of our end-user customer base, including the number of computers running our operating system;

	•	sales generated from new and existing channel partners and end users;

	•	sales mix generated from our different product offerings;

	•	the geographic mix of our customer base; and

	•	the ability to control our cost structure.

We face numerous operational and financial challenges, including competing with Microsoft, a company that has significantly more financial, operational and sales and marketing resources than we do. To compete effectively, we need to expand our customer base by, among other things, establishing and maintaining channel partner relationships. We also must continue to overcome historical challenges to Linux adoption, including complexity, lack of distribution, limited software applications, and lack of compatibility. Furthermore, our brief operating history and unpredictable quarterly revenues and results of operations provide limited financial data useful in evaluating our business and prospects. Similarly, the rapidly evolving nature of Linux desktop computing makes it likely that we will implement one or more changes to our business model, which could affect our financial results.

To address these challenges, we have and will continue to invest resources to further develop the U.S. and international distribution channels for our operating system. We intend to increase our focus on global markets, through the entry into underdeveloped foreign markets, such as Mexico and other Latin American countries. We believe there exists a demand in emerging markets for value-priced desktop operating systems and that our current price advantage over Microsoft Windows and other competitors should help us to increase our penetration into emerging markets. We intend to

While we believe that we have technology and a business model to address the challenges to acceptance of Linux on the desktop, we intend to continue to invest resources to enhance our current product offerings and develop new products. Additionally, we intend to hire additional personnel in finance and administration to address the increased control and oversight requirements of being a publicly-traded company.

We have derived the substantial majority of our historical revenues from sales of our Linspire operating system, application software and services from our commerce website. Our service offerings are software products which are sold with a subscription for a fixed period of time within which the customer receives either (i) periodic updates to the software when they become available (as is the case with our VirusSafe and SurfSafe products) or (ii) access to a range of software products on a free or discounted basis (as is the case with our LinspirePlus product). The majority of these historical transactions were from early adopters who have purchased in relatively small quantities. We have also generated revenues from licensing our products to various channel partners throughout the U.S. and worldwide.

We anticipate that a significant component of our historical revenue mix, sales of Insider memberships (which gave Insider members access to pre-release (beta) products as well as access to our software Warehouse through our LinspirePlus product), will not be material to our financial results in the future. In 2002, we sold $1,200,000 in Insider memberships, for which revenues were deferred and recognized ratably in 2003 and 2004 over the term of the related LinspirePlus subscription which ends in November 2004. Revenues recognized from Insider memberships sold in 2002 totaled approximately $620,000 in 2003 and are expected to total approximately $580,000 in 2004 (of which approximately $160,000 was recognized as revenue in the three months ended March 31, 2004). With the release of our first operating system in late 2002 and the elimination of access to our software Warehouse with the purchase of an Insider membership, we have seen a decrease in sales of Insider memberships. Fees received from Insider membership sales totaled approximately $37,000 and $1,000 in the year ended December 31, 2003 and in the three months ended March 31, 2004, respectively. The decrease of Insider membership sales is not expected to have a significant impact on our operating results, as the decrease in such sales has largely been offset by operating system and other product sales.

We plan to continue to encourage widespread adoption of our Linspire operating system both domestically and internationally, principally by working with our channel partners to pre-install our operating system and software products on desktops, laptops and other computer hardware. We believe that in this highly competitive market space, value-priced operating systems and application software will become increasingly attractive to consumers, particularly in underdeveloped international markets. Our strategy of investment in the widespread distribution of our operating system at a low cost is intended to significantly increase revenues from back-end sales of add-on software and services to end users. This distribution strategy has not significantly affected our historical or current pricing model for licensing our operating system directly to consumers from our commerce website because website customers typically already have PCs. As such, we do not believe the availability of the operating system pre-installed on a new PC through our channel partners would deter a potential website customer from purchasing the operating system from our commerce website.

We offer a number of incentives to our channel partners, including discounted pricing and an opportunity for large volume channel partners to participate in revenue sharing programs. Under our revenue share programs, large volume channel partners may receive a percentage of the revenue generated by later sales by us of add-on software and services to customers of those channel partners. Through March 31, 2004, our revenue share payments have not been material.

We also believe that, over time, increased consumer awareness of Linux as a high-quality, low-cost desktop computing alternative will boost the demand for our Linspire operating system, leading to increasing revenues.

Since the first general release of our Linspire operating system in 2002, the prices we charge end users for unbundled sales of our products have remained constant. We offer bundled packages of our products under which a customer receives a discount when purchasing several products together versus purchasing the products separately. We evaluate our pricing strategy on an ongoing basis. While historically prices to end users have remained constant, prices may change in the future which could have a significant impact on our revenues and results of operations. Beginning in 2003, we began to enter into individually negotiated agreements with certain channel partners. The prices at which these channel partners license our products vary and have had, and may have in the future, a significant impact on our revenues and results of operations. For example, during 2003, Livedoor, our Japanese channel partner, accounted for approximately 11% of total revenues. This customer accounted for approximately 38% of our revenues for the three months ended March 31, 2004. We expect this customer to continue to account for a significant percentage of our total revenues in 2004. No customer accounted for more than 10% of our total revenues in 2002. Approximately 35% of our revenues in 2003 were from customers outside of the U.S. We expect foreign revenues to increase as a percentage of total revenues, as we continue to target international and emerging markets.

Our revenues are generated from two main customer categories, channel partner revenues and end-user revenues, as discussed below:

Channel partner revenues are derived from the licensing of our products and services to our channel partners who then resell or distribute those products and services to end users. To date, more than 550 channel partners have participated in our channel distribution programs by licensing the right to distribute the Linspire operating system or sell hardware pre-installed with the Linspire operating system.


	•	flat-fee licensing fees from our channel partners to pre-install our base Linspire operating system on an unlimited number of computer systems;

	•	per-unit licensing fees from our channel partners to pre-install our Linspire operating system, bundled application software and services on computer systems;

	•	revenues from our channel partners who resell the retail box version of our Linspire operating system, application software and services; and

	•	licensing fees from our channel partners who license or sell our Linspire operating system, application software or services for a particular language or to a particular geographic market.

Channel partner revenues were $34,719 and $470,854, as restated, for the three months ended March 31, 2003 and 2004 and $21,947 and $410,774 for the years ended December 31, 2002 and 2003, respectively.

End-user revenues are derived from sales of software products and services directly to home, school and business end users. End users who run the Linspire operating system can purchase software products and services over the Internet directly from their Linspire desktop using our CNR technology.

Each time a computer running the Linspire operating system is connected to the Internet for the first time, our CNR technology automatically records this connection on our servers. We refer to this connection as a light up. We use light ups to monitor the growth of our installed base, the effectiveness of our marketing and distribution efforts and the quality and breadth of our products and services.

The table below shows our estimated accumulated light ups from September 2002 through March 2004.

* From September 2002 through May 2003, our tracking system did not distinguish between a light up from an initial connection to our servers and a light up from a reinstallation. In June 2003, we began separately tracking light ups from initial installations and light ups from possible reinstallations (which we define as any installation from a computer we can identify as associated with a prior recorded light up, as well as any installation from a computer we cannot specifically identify when it connects to our servers). Accordingly, the table above includes our estimate of the number of accumulated initial installation light ups from September 2002 through May 2003. We arrived at this estimate by reducing the monthly number of accumulated light ups registered by our tracking system from September 2002 through May 2003 by 11.5%, which is the percentage of total accumulated light ups from June 2003 through March 2004 that was attributable to possible reinstallations. We cannot assure you that our estimate of accumulated light ups from September 2002 through May 2003 is accurate, although we are not aware of any reason why the percentage of total light ups attributable to possible reinstallations during such period would materially differ from more recent periods, and we believe that our estimates and underlying assumptions are reasonable. Light ups are affected by a number of factors including promotional activities, new software releases

End-user revenues come from those customers who acquired the Linspire operating system or other products directly from us. Although we classify revenue derived from sales of our products by our channel partners directly to end users as channel partner revenues, end-user revenues may also come from customers of our channel partners for any additional products purchased by them directly from us through our commerce website. Our CNR technology provides us with the opportunity of generating optional add-on sales to these Linspire users.


	•	LinspirePlus — Purchase of this product allows users for a specified time, usually one year in duration, to easily install over 1,800 open-source software products at no additional charge and to purchase commercial Click-N-Buy products at a discount to list price.

	•	Click-N-Buy software products — Software products such as games, word processors, spreadsheets, and other commercial software programs sold individually.

	•	VirusSafe — Anti-virus software with virus updates available over a specified period of time, usually one year in duration.

	•	SurfSafe — Web filtering software with updates available over a specified period of time, usually one year in duration.

	•	Support services — Fees paid for online or telephonic technical support.

In the future, we plan to add additional products and services to our Warehouse for license or sale directly to end users using CNR technology.

End-user revenues were $276,954 and $559,207 in the three months ended March 31, 2003 and 2004 and $41,184 and $1,663,228 in the years ended December 31, 2002 and 2003, respectively.

Cost of revenues are expensed as incurred and consist primarily of royalties, product costs, fees paid for third-party credit verification services, credit card fees, depreciation, and bandwidth charges associated with the delivery of our software to our end users. Our operating expenses are classified into five categories: sales and marketing, research and development, general and administrative, legal expenses (net of recoveries) and stock-based compensation. Stock-based compensation charges have been allocated to income statement expense categories based on the assigned department of the employee to whom the charge relates. We allocate the costs of overhead, such as rent, communication charges, depreciation for office furniture, and equipment and employee benefit costs to each functional area that uses overhead and facilities services based on its employee headcount.

Sales and marketing activities consist of efforts to increase the awareness of Linux and more specifically, the Linspire product offerings in an attempt to increase sales of such products. Our efforts include the development of relationships with our channel partners worldwide, which include builders of computer hardware and resellers; maintaining the content of our commerce website, which is currently the primary customer interface for many of our product offerings; developing marketing promotions designed to increase the awareness of our products; and addressing the needs and inquiries of potential end-user customers. Sales and marketing expenses consist primarily of salaries and benefits, stock-based compensation charges, and related expenses, including travel expenses, as well as public relations, advertising, promotional costs, and allocated overhead costs.

Research and development expenses consist primarily of salaries and benefits, stock-based compensation charges, consultant and contractor costs, expenses for engineers, developers and

General and administrative expenses consist primarily of salaries and benefits, stock-based compensation charges, benefits and related expenses for our executive, finance and administrative personnel, third party professional service fees, business insurance, other corporate expenses, and allocated overhead.

Legal expenses (net of recoveries) include legal expenses for general corporate and compliance matters and legal costs associated with litigation matters, principally the Microsoft, St. Paul and Xandros actions further discussed in “Legal Proceedings.” In addition, such expenses include the reimbursement of legal fees paid by us from our insurance carrier, St. Paul, in May 2003.

Stock-based compensation expenses relate to the fair value of options issued to non-employees, as well as option grants to employees in situations where the deemed fair value of our common stock for financial reporting purposes is higher than the option exercise price at the date of grant.

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we have and will evaluate these estimates, including those related to our allowance for doubtful accounts, income taxes, impairment analyses, commitments, contingencies, and accrued liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates under different assumptions or conditions.

We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:


	•	revenue recognition;

	•	accounting for litigation contingencies;

	•	accounting for stock-based compensation; and

	•	accounting for income taxes.

Our revenues are derived from the sales of our operating system and application software products to end-users and our channel partners. We recognize revenue in accordance with Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by SOP 98-4 and SOP 98-9. Revenues are recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is deemed fixed and determinable; and (4) collection is probable. Billings made or payments received in advance of the delivery of product or the provision of services are deferred until the period of performance or delivery, as applicable. As of March 31, 2004, we had deferred revenue amounts of $1,830,444, as restated, of which we estimate that $1,567,911 will be recognized as revenue through March 2005.

The terms and conditions of our sales arrangements vary depending on numerous factors, including the nature of the product offering and the customer channel. Judgment is required by the Company in applying the provisions of SOP 97-2 to each of these sales arrangements, including in such areas as (i) the identification of different elements offered as part of a sales arrangement, and (ii) where applicable, the determination of whether vendor-specific objective evidence, or VSOE, of fair value exists for those elements. Our customers receive certain of our products over a period of time. These elements include technical support, rights to additional software products included in our software Warehouse in the future and rights to receive unspecified upgrades/enhancements on a when-and-if-available basis. One of our membership programs provides lifetime rights to access our software Warehouse, the fair value of which is recognized over the estimated economic life of the underlying products. Our revenue and deferred revenue balances could be materially impacted by different judgments with respect to the elements included in a sales arrangement, the determination of VSOE of fair value for those elements, and changes to a product’s estimated economic life.

Our revenue recognition policies with respect to our various product offerings are as follows:

Our primary products, the Linspire operating system and application software, are sold directly to end users through our commerce website using our CNR technology. Customers can download our products directly from the website or can request shipment of software products on compact disc. The majority of our sales occur through our web site, where customers pay for their purchases using a credit card. We offer a 15-day return policy, and as a result, revenues are not recorded until such return privileges expire. Purchasers of the Linspire operating system and other desktop products are not entitled to upgrade rights under the terms of our software license agreement; however, when the release of a new version of a software product is imminent (within 90 days) and we expect that the new version will be provided to a customer due to the customer’s recent purchase of the current version of the product, revenue is deferred until the new version has been delivered to the customer. Post-contract customer support is provided online through databases of frequently asked questions which may be accessed on our commerce website. We also provide post-contract support via email. The cost of providing this post-contract customer support historically has been insignificant.

Several of our software products, including our LinspirePlus product, virus protection and Internet security, include a subscription service element, as the customer purchases access to additional products and/or product updates for a certain period which is included in the price. Our LinspirePlus program (which excludes the Linspire operating system as this must be separately purchased), upon installation of the software, provides the customer access to software programs included in our software Warehouse for a specified period of time. Upon installation, our virus protection and Internet security software product will provide periodic updates when they become available in order to provide the necessary protections over the period for which the product was purchased. Revenues associated with such products are deferred and recognized on a straight-line

Builders of computer systems and manufacturers of computer hardware, such as disc drives and motherboards, can become channel partners by paying monthly or annual program fees or by paying per-unit licensing fees for each unit of our product installed. These channel partners are entitled to technical support relating to each channel partner’s specific hardware. High volume channel partners may participate in revenue sharing programs from which they will receive a percentage share of net revenue for products and services that their customers buy.

Revenues associated with monthly and annual builder and manufacturer programs are deferred and recognized on a straight-line basis over the term of the contract, which ranges from one month to one year. Per unit license fees are recognized as revenue upon notification from the builder or manufacturer of such product sales. Revenue share payments, which through March 31, 2004 have not been material, are recorded as a reduction of revenue in the period in which they are earned.

Revenues from resellers and distributors are recognized when products have been delivered, when return obligations have expired and service obligations, if any, have been fulfilled. Our agreements with resellers include a 15-day right of return and may provide for technical support as well as upgrades on a when-and-if available basis. We recognize license revenue from resellers and distributors ratably over the period (which ranges from 1-24 months) in which technical support and when-and-if available upgrades are provided to the customer.

In March 2003, we entered into an agreement with a Japanese distributor for the exclusive distribution of our products in Japan beginning in May 2003 and continuing through May 2004 in exchange for minimum payments of $1,575,000 to be received on an installment basis over the 1-year term of the agreement. The agreement also requires us to provide when-and-if available upgrades during the 1-year term of the agreement as well as certain technical support through May 2005. Payments received under this agreement are recognized as revenue ratably over the support period. Also see Note 2 of our financial statements. Revenues under this agreement totaled approximately $227,000 in 2003 and approximately $393,000 in the three months ended March 31, 2004. Deferred revenues related to this agreement totaled approximately $797,000 as of March 31, 2004 which will be recognized as revenue ratably through May 2005.

We offer bundled packages of our operating system and application software to our customers. For such arrangements with multiple elements, we allocate revenue to each element of the transaction based upon the VSOE, of each element. The VSOE of the elements has been established as the sales price of the product when sold by us on a stand-alone basis to other customers. Prior to the first general release of our operating system in the fourth quarter of 2002, we developed an Insider membership program whereby members were provided various elements including pre-release (beta) software when it became available, our operating system when it was released, and access to our software Warehouse through November 2004. Upon expiration of the Insider membership in November 2004, Insiders wishing to maintain their access to our software Warehouse must renew their subscription to our software Warehouse by purchasing our LinspirePlus product. The various elements provided to Insider members have not been sold separately by us; accordingly, we did not allocate the Insider fees among the various elements. Rather, Insider membership fees were deferred until the only remaining element to be delivered to the Insider

Under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, we are required to record an estimated loss from a loss contingency if we consider it probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a material loss has been incurred. In making determinations as to the accrual and disclosure of loss contingencies, we assess various factors, including the degree of probability of an unfavorable outcome, the ability to reasonably estimate the amount of loss (or a range of loss), and the probability that the loss and defense costs are covered, either entirely or partially, by insurance. Changes in these factors or different judgments as to the application of these factors could materially impact our financial position or our results of operations.

We record deferred stock-based compensation charges in the amount by which the deemed fair value of our common stock for financial reporting purposes is greater than the exercise price of an option at the date of grant. Because there has been no public market for our stock, our board of directors has determined an estimate of the fair value of our common stock for financial reporting purposes based upon several factors, including, but not limited to, our operating and financial performance and valuations performed in connection with proposed financing transactions. We amortize the deferred compensation charges on an accelerated basis over the vesting period of the underlying option awards, which is generally four years. In connection with the grant of stock options during the three months ended March 31, 2003 and 2004, we recorded $18,773 and $68,606 in deferred stock-based compensation within stockholders’ equity, respectively. In connection with the grant of stock options during the years ended December 31, 2002 and 2003, we recorded $194,944 and $490,835 in deferred stock-based compensation within stockholders’ equity, respectively. These options resulted in the recording of compensation charges because the deemed fair value of the underlying common stock for financial reporting purposes was greater than the option exercise prices determined by the board of directors on the date of grant. The determination of the fair value of the underlying shares of common stock involves subjective judgment and the consideration of a variety of factors, and as a result the amount of the compensatory charge is not based on an objective measure such as the trading price of the common stock since there was no public market for our common stock prior to this offering. As of March 31, 2004, we had an aggregate of $453,173 of deferred stock-based compensation remaining to be amortized to expense. We estimate that this deferred compensation balance will be amortized to expense as follows: $231,334 for the remaining nine months of 2004; $152,294 in 2005; $52,994 in 2006; $16,013 in 2007; and $538 in 2008. We anticipate that we will record additional stock-based compensation expense related to options granted subsequent to March 31, 2004. The amount of stock-based compensation expense recognized in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited. We have elected not to record the fair value of employee stock-based awards. The impact of recording employee stock-based awards at fair value, using the Black-Scholes option-pricing model, is further described in the notes to our financial statements.

In the past, we have awarded a limited number of stock options to non-employee consultants. For these options, we recognize the stock-based expense over the vesting periods of the underlying awards, based on an estimate of the fair value of the awards at each financial reporting date using the Black-Scholes option-pricing model.

Since inception, we have incurred losses for both book and tax purposes; accordingly, we have not recorded any tax expense for the period from July 24, 2001 (inception) to December 31, 2001 or for the years ended December 31, 2002 and 2003. Significant management judgment is required in determining our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. This process involves the assessment of our net operating loss carry forwards and credits, as well as assessing temporary differences resulting from differing treatment of items, such as bad debt reserves and stock option compensation, for tax and accounting purposes. To the extent we experience a cumulative change in ownership of more than 50% within a three-year period, our ability to utilize our net operating loss carryforwards may be limited. While we do not believe that we have experienced a change in ownership as defined under Sections 382 and 383 of the Internal Revenue Code, determining whether such a change has occurred is complex and requires significant judgment. We must assess the likelihood that deferred tax assets will be recovered, and to the extent we believe that recovery is not likely, we establish a valuation allowance. Based on our historical results and due to uncertainties related to our future ability to recover our deferred tax assets, primarily consisting of certain net operating loss carry forwards and tax credits, we do not believe that it is more likely than not that we will realize the value of our deferred taxes. Therefore, we have recorded a full valuation allowance on our net deferred tax assets as of December 31, 2003. As a result, we carry no deferred tax assets on our balance sheet as of December 31, 2003.

In light of our limited operating history, we believe that period-to-period comparisons of revenue and operating results are not necessarily meaningful and should not be relied upon as indications of future performance. Our operating performance must be considered in light of the risks, expenses and difficulties encountered by companies in new and rapidly evolving markets. Despite our revenue growth during prior periods, we do not believe that historical growth rates are necessarily indicative of future growth rates.


(1)	See Note 2 to the financial statements.

(2)	Net of recoveries of $1,441,179 in the year ended December 31, 2003 and $0 in other periods.

Our results of operations and financial position as of and for the three months ended March 31, 2004 have been restated solely to reflect a correction in our revenue recognition methodology with respect to a distribution agreement with our Japanese distributor. The terms of this distribution agreement are discussed under “Reseller Agreements” in Note 1 to our financial statements. As a result of our assessment at the time the agreement was executed that future installment payments under the agreement were not fixed or determinable, our prior revenue recognition methodology was to record payments as revenue ratably over only the remaining service period, commencing from receipt of the payment. Based upon further analysis, we corrected our methodology to recognize revenue for a pro-rata portion of each payment received based on the portion of the service period which had elapsed at the time the payment was received, with the remaining amount of the payment recorded as revenue ratably over the remaining service period (the retrospective method). As a result of this correction, our revenues for the three months ended March 31, 2004 have been increased by $237,433 and our operating and net loss for the three months ended March 31, 2004 and our deferred revenue, total liabilities, accumulated deficit and total stockholders’ deficit as at March 31, 2004 have been reduced by the same amount.

Revenue. Revenue increased from $311,673 for the three months ended March 31, 2003 to $1,030,061 for the three months ended March 31, 2004.

Revenues from operating system sales in the three months ended March 31, 2003 were approximately $279,000 compared to approximately $790,000 in the three months ended March 31, 2004. Revenues from other product sales were approximately $33,000 in the three months ended March 31, 2003 compared to approximately $240,000 in the three months ended March 31, 2004. The increase in revenue was due to an increase in our customer base and release of new product offerings since the prior year quarter. We launched our commerce website and began selling our products in January 2002. Most of our customer sales in 2002 consisted of Insider memberships, which gave our Insider members access to various items including pre-release beta software when available, the Linspire operating system and access to our software Warehouse for periods ranging from one to two years. Although we sold approximately $1,200,000 of such Insider memberships through 2002, most of the revenues from the sales of such memberships were deferred and are being amortized over the two-year period over which access to our software Warehouse is provided. Revenues from sales of Insider memberships are included in operating system sales. Since the release of the retail versions of our operating system in late 2002, our sales of Insider memberships have declined, though we continue to recognize deferred revenue from prior sales of such memberships. The decline in such sales has largely been offset by sales of our other product offerings.

Recognition of Insider membership program revenues totaled approximately $150,000 and approximately $160,000 in the three months ended March 31, 2003 and 2004, respectively. In the fourth quarter of 2002, we began to sell our Linspire operating system products and further increased our product offerings in the third quarter of 2003. The additional product offerings and the 2003 launch of versions 4.0 and 4.5 of our Linspire operating system further contributed to the increase in revenues. In March 2003, we entered into a licensing arrangement with a Japanese company to become the exclusive distributor of our products in Japan for the term of the license in exchange for a non-refundable license fee of $1,575,000. Revenues from these license fees are included in operating system revenues. These license fees, net of withholding taxes of $157,500, are being recognized as revenue ratably as payments are received commencing with the delivery of the product in the second quarter of 2003 through May 2005, which represents the period over which we are providing technical support under the agreement. No revenues were recognized in the three months ended March 31, 2003 while revenues of approximately $393,000 were recognized in the first quarter of 2004. In March 2004, we received the final installment of $585,020 out of a total of $1,575,000 under the Livedoor agreement signed in March 2003. As a result, we recognized approximately $237,000 of additional revenues in the three months ended March 31, 2004, representing a correction of ratable revenue recognition through March 2004 as compared to total cash received to date under the contract. The $237,000 of additional revenue is included in the $393,000 of revenues recognized in the first quarter of 2004 noted above. As a result of the $237,000 in additional revenue recorded in the first quarter ended March 2004, as well as the fact that we did not begin recognizing revenues under the Livedoor agreement signed in April 2004 until the first payment of $184,000 was received in the third quarter of 2004, we expect that second quarter 2004 revenues will be approximately 30% lower than those in the first quarter. Deferred revenue at March 31, 2004 relating to this licensing arrangement was approximately $797,000, which we expect to recognize ratably through May 2005.

In late 2003 and into 2004, we entered into several agreements with larger channel partners that manufacture computer components, whereby the channel partner will pay us a per-unit license fee to include our Linspire operating system products on its hardware. While revenues to date from such channel partner agreements have not been significant, we expect revenues from these channel partners to increase in the future. We expect that increasing channel partner sales will lead to

As of March 31, 2004, we had deferred revenue of $1,830,444, which represented sales for which we had received payment but for which revenues have been deferred. This deferred revenue is being recognized as revenue over periods ranging from one month to up to five years. We expect that deferred revenue as of March 31, 2004, will be recognized as revenue in subsequent years as follows: $588,596 in the quarter ended June 30, 2004; $427,337 in the quarter ended September 30, 2004; $345,885 in the quarter ended December 31, 2004; $333,121 in 2005; $45,563 in 2006; $45,320 in 2007; $43,122 in 2008 and $1,500 in 2009.

Cost of Revenues. Cost of revenues increased from $158,198 for the three months ended March 31, 2003 to $211,438 for the three months ended March 31, 2004. This $53,240 increase was due primarily to an increase in expenses associated with our commerce website and customer sales growth. Quarterly bandwidth charges for web hosting increased by approximately $47,000, fees paid for third-party credit verification services and credit card fees increased by approximately $20,000, and freight costs increased by approximately $19,000, all of which are expensed as incurred and resulted from the increased sales activity through our commerce website. These increases were offset, in part, by a $38,000 decrease in third party software license costs expensed in the prior year associated with a now expired license agreement. Gross profit as a percentage of revenues improved in the three months ended March 31, 2004 principally because our revenues increased relative to fixed costs of sales. As our revenues increase, and our product and/or customer mix changes, our cost of revenues may change significantly and gross margin may not remain at its current level.

Sales and Marketing. Sales and marketing expenses were $274,378 in the three months ended March 31, 2003 as compared to $463,045 in the three months ended March 31, 2004. The increase in sales and marketing expenses were primarily due to an increase in payroll related expenses of $174,000 (including $71,000 of deferred compensation amortization) associated with an increase in headcount over the prior year first quarter. In the first quarter of 2003, we invested approximately $31,000 to sponsor key Linux events such as the Desktop Linux Summit. In 2004, the Desktop Linux Summit was held in the second quarter, therefore no similar costs were incurred in the first quarter of 2004. Also, in the three months ended March 31, 2004, we invested approximately $17,000 in advertising expense whereas no such costs were incurred in the first quarter of 2003. Such increases were offset, in part, by decreases in other various sales and marketing expenses aggregating approximately $60,000. We expect our sales and marketing expenses to increase in the near term as we expand our selling and marketing efforts into international markets and increase our administrative infrastructure to attract and support increased sales. Sales efforts incurred in prior years to increase international awareness have led to an increase in international revenues. This increase in international revenues includes the agreement reached in 2003 with our Japanese channel partner, from which first quarter revenues increased approximately $155,000.

Research and Development. Research and development expenses were $764,876 in the three months ended March 31, 2003 as compared to $967,868 in the three months ended March 31, 2004. These increases were primarily due to an increase of approximately $144,000 for labor related costs (including $64,000 of deferred compensation amortization) and increased other costs, including development consultant costs, totaling $59,000. During the three months ended March 31, 2004, our development efforts concentrated on updating our current software products. In addition, we were nearing completion on the development of two new products, Lsongs, a digital musical player, and Lphoto, photo management software. These new products were launched in the second quarter of 2004. We expect that our research and development expenses will increase in the future as we develop new products and continue to maintain and support our current products. However, we expect these expenses will likely decrease as a percentage of total operating expenditures over time.

General and Administrative. General and administrative expenses increased from $71,409 in the three months ended March 31, 2003 to $562,721 in the three months ended March 31, 2004. Our audit related expenditures increased by approximately $200,000, in connection with the audit of our financial statements. During the three months ended March 31, 2004, we also experienced increases in depreciation of $26,000, rent expense of $45,000, and other sundry expenses, such as travel and supplies, which increased by an aggregate of approximately $112,000 from the prior year first quarter. In addition, payroll related costs increased by $70,000 from 2003 to 2004 (including $30,000 of deferred compensation amortization) as a result of the increase in our financial administrative staff. We added our Chief Financial Officer in April 2003 and our Controller in February 2004. We expect our quarterly general and administrative expenses to increase substantially (approximately $500,000 to $750,000 per quarter) in the future as a result of headcount growth for the required administrative infrastructure to support our growth objective and to meet the additional regulatory demands placed on public companies. In particular, increases are expected in directors’ and officers’ insurance costs and professional fees. In April 2004, we entered into employment agreements with our four key executives, whereby each executive was given an increase in annual salary, additional stock options and an opportunity to receive an annual bonus of up to 25% of their annual salary. These salary and bonus increases are contingent upon the closing of this offering, with the salary increases to accrue during the period from the date we entered into the employment agreements until the closing of this offering and to be paid upon the closing of this offering. We expect the quarterly effect of the new executive employment agreements on general and administrative expenses to be an increase of approximately $200,000 to $250,000 per quarter.

Legal expenses. Our legal expenditures in the three months ended March 31, 2003 and 2004 were $350,757 and $324,146, respectively. Legal expenses in the three months ended March 31, 2004 related to costs associated with general, corporate and compliance matters and additional legal costs associated with the Microsoft foreign trademark litigation. Costs associated with Microsoft litigation totaled approximately $300,000 and $250,000 in the three months ended March 31, 2003 and 2004, respectively. In May 2003, our insurance carrier reimbursed us approximately $1,441,000 in connection with previously incurred legal costs related to Microsoft litigation in the United States. The 2004 amounts relate to legal fees in connection with foreign trademark actions for which coverage responsibility by our insurance carrier has not yet been determined. We believe that ultimately our insurance carrier will be required to cover these costs; however, as of March 31, 2004, the uncertainties surrounding coverage responsibility are such that we have been unable to determine that it is probable that such recoveries will be made. If our carrier is not required to bear the costs of the legal defense associated with the foreign litigation brought by Microsoft against us, we may have to repay these reimbursed costs to our carrier, which could have a material effect on operating results and our liquidity.

Revenue. Revenue increased from $63,131 in 2002 to $2,074,002 in 2003. The increase in revenue from 2002 to 2003 was primarily due to the deferral of revenue recognition of the Insider memberships until the fourth quarter of 2002. Approximately $600,000 of 2003 revenues were associated with the recognition of Insider membership program revenues compared to approximately $40,000 in 2002. We expect the balance of these Insider membership revenues will be recognized in 2004. Revenues associated with the Japanese licensing arrangement totaled approximately $227,500 in 2003. Revenues from operating system sales (including the Japanese licensing fees and sales of Insider memberships) totaled approximately $1,619,000 in 2003, compared to approximately $60,000 in 2002. Revenues from other product sales were approximately $455,000 in 2003, compared to approximately $3,000 in 2002.

Cost of Revenues. Cost of revenues increased from $415,077 in 2002 to $605,567 in 2003. This increase was due primarily to expenses associated with our commerce website, customer sales growth and increased sales transactions such as bandwidth charges for web hosting of $53,000, and

Sales and Marketing. Sales and marketing expenses were $843,772 in 2002 and $1,044,040 in 2003. The increase in sales and marketing expenses was primarily due to $155,000 of labor related expenses resulting from the increase in headcount. In addition, during 2003 we invested approximately $34,000 in the sponsorship of key Linux events such as the Desktop Linux Summit.

Research and Development. Research and development expenses increased from $2,453,126 in 2002 to $3,272,109 in 2003. This increase was primarily due to increased consultant costs of approximately $28,000 as well as increased labor related costs of $655,000 resulting from additional employees. The increases were necessary to support the development of our operating system, other products and our commerce infrastructure. In 2003, we released versions 4.0 and 4.5 of Linspire, the Spanish version of Linspire 4.0, and our virus protection and Internet security software. In 2002, we released the 3.0 version of Linspire, as well LinspirePlus, which enables access to our software Warehouse. We expect that our research and development expenses will increase in the future as we develop new products and continue to maintain and support our current products. We believe continued investments in our current products, as well as in the development of new products, are necessary to remain competitive in the market. Reductions in our development efforts or maintenance of current programs could have significant negative effects on our revenues and operating results. However, we expect these expenses will likely decrease as a percentage of total operating expenditures over time.

General and Administrative. General and administrative expenses decreased from $1,636,876 in 2002 to $1,478,180 in 2003. The decrease in 2003 general and administrative expenses from 2002 resulted from an expense of $661,000 recorded in 2002 related to a note receivable for which we have fully reserved. Please see “Business — Legal Proceedings” for a description of related legal proceedings. Partially offsetting the decrease was an increase in payroll related expenditures of approximately $458,000 associated with an increase in headcount (including $176,000 of deferred compensation amortization), and an increase in our business insurance costs of $26,000. Other sundry expenses including supplies and travel increased an aggregate of $45,000 compared to 2002. We expect our general and administrative expenses to increase by approximately $2,000,000 to $3,000,000 per year in the future as a result of the increased costs of being a public company. In particular, increases are expected in directors’ and officers’ insurance costs and professional fees. In addition, we expect the effect of the new executive compensation agreements on general and administrative expenses will be an increase of approximately $800,000 to $1,000,000 per year for the term of the agreements.

Legal expenses. Our legal expenditures in 2002 and 2003 were $1,365,947 and $(532,707), respectively. The decrease resulted from reimbursements of approximately $1,441,000 received in 2003 from our insurance carrier for legal fees incurred in 2002 and 2003 related to the Microsoft litigation in the United States. In 2002, we incurred approximately $1,366,000 in legal fees, primarily related to the Microsoft litigation. Our insurance carrier has paid for most of such legal costs directly. With respect to our foreign litigation with Microsoft, our insurance carrier has paid only partial defense costs, subject to its reservation of rights to deny coverage and seek reimbursement. However, through December 31, 2003, no significant costs related to the foreign litigation had been incurred. Please see “Business — Legal Proceedings” for a description of these legal proceedings.

Comparison of the period from July 24, 2001 (inception) to December 31, 2001 to Year Ended December 31, 2002

Revenues. We had no revenues in the period from July 24, 2001 (inception) to December 31, 2001 and compared to $63,131 in 2002. We launched our website in January 2002 and had approximately $1,465,000 of customer sales in 2002. The majority of customer sales, including

Operating expenses. Operating expenses, sales and marketing, research and development and general and administration all increased from the prior period resulting from the increase in employee headcount and operating results for an entire year as compared to a partial period. During 2001, we abandoned development efforts on WINE, an open source project which was designed to enable Linspire to run a limited number of Microsoft Windows-compatible programs.

We have funded our operations principally through the initial $5,000,000 equity investment by our founders and through borrowings under the $10,000,000 revolving line of credit with our Chairman and Chief Executive Officer, founder and majority stockholder. At March 31, 2004, we had cash totaling $5,150,495 as compared to $250,720 at December 31, 2003.

The most significant factors affecting our cash flows from operations are the relative timing of our receipt of cash from our product sales and the payments of our operating liabilities. We receive payment for most of our sales via credit card for which settlements are generally received on a daily basis. During the quarter ended March 31, 2004, we received approximately $540,000 in credit card settlements and approximately $610,000 of other customer cash receipts, including $585,000 from our Japanese channel partner. In the quarter ended March 31, 2003, we received approximately $335,000 in credit card settlements and $615,000 in other customer cash receipts, $608,000 of which related to our Japanese channel partner. Although trade accounts receivable have not been historically significant, we believe as we expand our relationships with larger channel partners, the levels of trade accounts receivable will increase. As of March 31, 2004, accounts payable and accrued expenses totaled approximately $987,000, of which approximately $732,000 related to legal fees primarily associated with foreign litigation and costs of this offering. As of December 31, 2003, accounts payable and accrued expenses totaled approximately $405,000, of which approximately $225,000 related to legal fees associated with litigation and general corporate matters.

Effective April 2004, we entered into employment agreements with our four key executives, whereby each executive was given an increase in annual salary, additional stock options and the opportunity to receive an annual bonus of up to 25% of their annual salary. These salary and bonus increases are contingent upon the closing of this offering, with the salary increases to accrue during the period from the date we entered into the employment agreements until the closing of this offering and to be paid upon the closing of this offering. We expect the effect of the new employee agreements on liquidity and the results of operations to be an increase of approximately $800,000 to $1,000,000 per year for the term of the agreements.

Net cash used in operating activities was $459,198 for the three months ended March 31, 2004 as compared to $506,008 for the three months ended March 31, 2003. Net cash used in operating activities was primarily used to fund operating losses in each period. This increase in net cash used was partially offset by increases in accounts payable, accrued expenses, and deferred revenues, and further offset by non-cash items such as depreciation and amortization of stock-based compensation. Cash used in operating activities for the three months ended March 31, 2003 resulted primarily from operating losses and decreases in accounts payable, offset in part by increases in deferred revenue and depreciation and stock-based compensation.

Net cash used in operating activities was $830,028 for the period from July 24, 2001 (inception) through December 31, 2001, $3,860,960 in 2002 and $2,462,576 in 2003. Net cash used in operating activities was used primarily to fund operating losses in each period, offset in part by depreciation and amortization of stock-based compensation and an increase in current liabilities. The decrease in net cash used in 2003 as compared to 2002 was primarily due to the reimbursement in 2003 of approximately $1,441,000 for legal fees incurred in 2002 related to the Microsoft litigation. The increase in net cash used in operating activities in 2002 was further offset by

Net cash used in investing activities was $27,936 and $49,624 for the three months ended March 31, 2004 and 2003, respectively. Investing activities consisted of capital expenditures relating to the purchase of computers, software, and office furniture and equipment. Net cash used in investing activities was $1,263,779 in the period from July 24, 2001 (inception) through December 31, 2001, $414,784 in 2002 and $325,424 in 2003. Net cash used in investing activities in 2003 and 2002 was for capital expenditures relating to the purchase of computers, software, and office furniture and equipment. We also loaned $750,000 to another company in the form of a convertible promissory note during the period from July 24, 2001 (inception) through December 31, 2001. We fully reserved this note receivable during 2002. We expect cash used in investing activities in 2004 to remain at levels similar to those in the past two years, and to be used primarily to purchase additional computer hardware in response to increasing employee headcount and commerce infrastructure expansion.

Net cash provided by financing activities was $5,386,909 and $1,118,975 for the three months ended March 31, 2004 and 2003, respectively and resulted primarily from proceeds from borrowings under our revolving line of credit, offset in part by $227,813 of deferred offering costs incurred during the quarter ended March 2004.

Net cash provided by financing activities was $5,000,000 for the period from July 24, 2001 (inception) through December 31, 2001, $1,482,869 in 2002 and $2,925,402 in 2003, primarily from borrowings under our revolving line of credit, the exercise of stock options and the issuance of Series A Convertible Preferred stock.

In February 2004, we amended our revolving line of credit with our Chief Executive Officer to increase the total amount available under the line to $10,000,000 and extend the maturity date of principal and interest payments to June 30, 2005. As of March 31, 2004, we had $10,000,000 outstanding under the loan agreement, as well as accrued interest of approximately $416,000. We intend to repay all amounts outstanding under the loan agreement with a portion of the first installment of the aggregate $20 million that Microsoft has agreed to pay us pursuant to the settlement agreement described below under “Business — Legal Proceedings.”

As of March 31, 2004, we had working capital of approximately $2,404,000 as compared to a working capital deficit of $1,777,000 as of December 31, 2003. As of March 31, 2004 we had a long-term debt balance of approximately $10,416,000, and an accumulated deficit of approximately $13,481,000. As a result, the report of our independent registered public accounting firm on our 2003 financial statements contains an explanatory paragraph stating that our historical losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern.

Our ability to fund our future operations is dependent upon obtaining additional debt or equity financing adequate to fulfill our development and marketing activities, and achieving a level of revenues adequate to support our cost structure. We believe that the net proceeds from this offering will be sufficient to meet our working capital requirements and contractual commitments for at least the next 24 months. We expect to satisfy our future cash needs through cash flows from operations, the sale of equity securities and debt financings and a portion of the proceeds from our recent settlement with Microsoft.

Our anticipated capital requirements may change, and we may need additional financing earlier than we anticipate depending upon numerous factors, including the following:


	•	the development of the Linux desktop market;

	•	the cost of developing improved functionality of our products and services;

	•	the cost of expanding our sales and distribution capabilities;

	•	our ability to establish and maintain channel partnerships;

	•	the extent to which we acquire or invest in other products, technologies and businesses; and

	•	the cost of responding to competitive pressures.

If we raise additional funds through the sale of equity or convertible debt securities, these transactions may dilute the value of our outstanding common stock. We may also decide to issue securities, including debt securities, which have rights, preferences and privileges senior to our common stock. We cannot assure you that we will be able to raise additional funds on terms favorable to us or at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs. This may prevent us from increasing our market share, capitalizing on new business opportunities or remaining competitive in our industry.

As of March 31, 2004, we did not have any relationships with unconsolidated entities or financial partnerships, often referred to as special purpose entities, established for the purposes of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we do not believe we are materially exposed to any financing, liquidity, market, or credit risks that could arise if we had engaged in these relationships.


*	The full balance of this note payable is anticipated to be paid from a portion of the first installment of the Microsoft settlement.

We are in litigation with our insurance carrier relating to our prior litigation with Microsoft. With respect to the Microsoft lawsuit in the U.S., we obtained a decision from the court that our carrier is obligated to bear the cost of our legal defense and that it breached its contract with us by refusing to defend. That decision may be appealed to an appellate court, but, based on that decision and our recent settlement with Microsoft, the only remaining issues to be decided by the court currently hearing the case are issues related to damages we are seeking against the carrier for its breach of contract, and our bad faith claim against the carrier for its failure to defend. With respect to the foreign litigation brought by Microsoft, we recently brought suit against the same insurance carrier to enforce its obligations to us regarding the foreign litigation. Our carrier has agreed only to pay partial defense costs for the foreign litigation, subject to its reservation of rights to deny coverage and seek reimbursement.

If our carrier successfully appeals the decision relating to its obligation to bear the cost of our legal defense with respect to Microsoft’s U.S. litigation, we may be forced to reimburse our carrier for some or all of the legal fees and costs it has paid to us or our legal counsel, in the Microsoft U.S. litigation. If we are unsuccessful in our lawsuit relating to the foreign litigation, we also may be forced to reimburse our carrier for some or all legal fees and costs it has paid to us or our legal counsel, and continues to pay to us or our legal counsel, relating to the foreign litigation. Furthermore, even if our carrier is required to bear the cost of our legal defense in the foreign litigation, it may only be required to cover a portion of the fees charged by the attorneys defending the case, in which case we would be required to bear the portion of the legal fees in excess of the amounts covered by our carrier. Because of the uncertainties as to whether our carrier will be required to cover the legal defense costs in the foreign litigation, we have accrued $250,000 in estimated legal fees as of March 31, 2004 relating to the foreign litigation.

As of March 31, 2004, our carrier has paid approximately $3,280,000 of our legal fees and costs relating to our litigation with Microsoft. If we are forced to reimburse our carrier for these legal fees and costs, our financial position and ability to fund our operations could be materially harmed.

Additionally, we have initiated a lawsuit against Xandros, Inc., Linux Global Partners, Inc., Michael Bego, and William Jay Roseman alleging these parties fraudulently induced us to loan Xandros, Inc. $750,000 in exchange for convertible promissory notes, and that Xandros, Inc. then failed to repay the promissory notes when they became due. We are seeking $750,000, plus interest, attorneys’ fees and punitive damages. This lawsuit is in the discovery phase, and may proceed for an extended period of time. We intend to pursue the lawsuit vigorously, but cannot assure you that it will be resolved in our favor. Additionally, even if the court rules in our favor, we cannot assure you that we will be able to collect the amounts owed. We fully reserved this note payable in 2003.

Although we believe in the merits of our claims and defenses in each of these lawsuits, we may not prevail. Each of these lawsuits has resulted in significant expenses and has been, and is expected to continue to be, a diversion of management’s time and other resources well into the future. Please see “Business — Legal Proceedings” for more description of our litigation.

In December 2003, the Securities and Exchange Commission released Staff Accounting Bulletin No. 104, “Revenue Recognition,” (“SAB 104”). SAB 104 revises or rescinds portions of the interpretative guidance related to revenue recognition included in Topic 13 of the codification of the staff accounting bulletins. We have assessed the impact of SAB 104 and concluded that the adoption of SAB 104 did not have a material impact on our financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Our adoption of SFAS 150 has had no effect on our financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities,” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FASB

In December 2003, the FASB issued additional guidance clarifying the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” or (“FIN 46-R”). FIN 46-R provides a deferral of FIN 46 for certain entities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. We believe that the adoption of this standard will not have a material impact on our financial statements.

FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), was issued in November 2002. FIN 45 requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement requirement of FIN 45 is effective for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002, and are applicable to certain guarantees issued by us before December 31, 2002. We adopted FIN 45 disclosure requirements as of December 31, 2002. The adoption of the provisions for recognition and initial measurement did not have a material impact on our financial position, results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 is an amendment to SFAS No. 123 providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also provides additional disclosures about the method of accounting for stock-based employee compensation. Amendments are effective for financial statements for fiscal years ending after December 15, 2002. We have currently chosen not to adopt the voluntary change to the fair value based method of accounting for stock based employee compensation, pursuant to SFAS No. 148, which, if adopted, could have a material effect on its financial position or results of operations.

In March 2004, the Emerging Issues Task Force (“EITF”) reached a final consensus regarding Issue 03-6, “Participating Securities and the Two-Class Method under FAS 128.” The issue addresses a number of questions regarding the computation of earnings per share (“EPS”) by companies that have issued securities other than common stock that participate in dividends and earnings of the issuing entity. Such securities are contractually entitled to receive dividends when and if the entity declares dividends on common stock. The issue also provides further guidance in applying the two-class method of calculating EPS once it is determined that a security is participating. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. This consensus is effective for periods beginning after March 31, 2004, and should be applied by restating prior period earnings per share. We are still evaluating the impact of this consensus, but we believe it will not have a material impact on our results of operations or financial position.

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly

At March 31, 2004, we had a $10,000,000 principal balance (plus accrued but unpaid interest of $416,792) outstanding under our revolving credit line with our Chief Executive Officer. The amounts outstanding under this credit line bear interest at a fixed interest rate of 10% per annum. Accordingly, our interest expense relating to this credit line is not subject to changes in prevailing interest rates.

We derive a majority of our revenues from sales within the U.S. We do, however, have business relationships with foreign customers which constitute approximately 35% of our combined 2002 and 2003 revenues. Substantially all of the payments by these foreign customers for the three months ended March 31, 2004 were made in U.S. dollars, although there can be no assurance that future sales to foreign customers will continue to be denominated in U.S. dollars. Given that our transactions in foreign currencies are negligible, we have not historically hedged against foreign currency risks. This could change in the future if we enter into transactions whereby the sales price is denominated in foreign currency or where we face other foreign currency risks where we determine it is appropriate to enter into hedging transactions.

According to International Data Corporation, or IDC, worldwide client operating system revenues were approximately $10.4 billion in 2002. IDC data shows Microsoft captured 96.1% of this revenue through its Microsoft Windows products during the same period.

Operating systems are complex to design and typically take several years to develop. Until the advent of the Linux operating system, almost all operating systems were developed as proprietary products licensed to an end user for a fee. The base engine for the Linux operating system, known as the kernel, is open source code, which is available for no charge, as are other Linux-based building blocks such as the graphical user interface.

In 1991, Linus Torvalds developed an operating system now known as Linux. Developers worldwide collaborate on improving and updating Linux-based operating systems. We believe users of Linux-based operating systems enjoy benefits not provided to users of other operating systems for the desktop including:


	•	reduced licensing costs;

	•	ability to modify the source code; and

	•	reputation for stability and security.

While Linux-based operating systems have achieved significant market share in the server market, they have not yet penetrated the desktop computing market to a material extent.

Despite the market acceptance of Linux in the server market, there have existed a number of factors limiting the adoption of Linux on the desktop, including:



	•	Complexity — Technical difficulty in installing and configuring Linux-based operating systems and software applications has made it unattractive for businesses and individuals to migrate from other operating systems.


	•	Distribution — Lack of well-financed companies pursuing the adoption of Linux in the desktop computer market, coupled with the lack of computers pre-installed with a Linux-based operating system, have made it difficult for Linux to capture market share.

	•	Limited software applications — There are relatively few high quality software applications developed for Linux-based desktop operating systems as compared with their Microsoft Windows-based counterparts.

	•	Compatibility — The majority of the applications created for PCs are currently only compatible with Microsoft Windows. Proprietary file formats make it difficult for Microsoft Windows users to share data and work product with non-Microsoft Windows users.

Our technology and business model are designed to overcome these hurdles and increase acceptance of our Linux-based operating system.


	•	Easy to use — The Linspire operating system presents the user with an intuitive and comfortable graphical user interface, in which programs and files are represented by icons and information from multiple programs or files can be displayed in overlapping windows.

	•	A full-featured platform — The Linspire operating system is configured to perform many common tasks, including email, Internet web browsing, instant messaging, multimedia and audio playback, networking, and printing.

	•	CNR equipped — Our proprietary CNR technology allows users to license, install, manage, and configure programs available from our Warehouse on the Linspire.com website, usually with just one mouse click. CNR technology also allows users to keep both their operating system and application software updated at all times.

	•	Hardware compatible — We believe the Linspire operating system is able to work with many of the most popular PCs and peripheral devices on the market today, including laser and inkjet printers, displays, digital cameras, network cards, and storage devices.

	•	File compatible — Users can view and edit most Microsoft Word, Microsoft Excel and Microsoft PowerPoint files and view other popular graphic file types, such as Adobe Acrobat files. Consumers also can view and play popular media files types, such as Flash, QuickTime and Real Audio.

	•	Stable and secure — Based on the Linux kernel, the Linspire operating system provides a stable and secure computing environment. We believe the Linspire operating system is less prone to viruses than other desktop operating systems.

Due to the collaborative model of open source software development, we believe we have a substantial cost advantage over providers of proprietary code operating systems in providing software to our customers. We believe that these competitors have significantly higher expenses for research and development. We plan to encourage the adoption of our Linspire operating system by maintaining a significant price advantage over Microsoft Windows and other proprietary code operating systems. In addition, we believe our value-price products and services will be attractive to consumers in international and emerging markets.

We seek to make the Linspire operating system widely available, quickly and at a low price. Our goal is to make the Linspire operating system readily available by working with our channel partners to pre-install PCs and hard drives with the Linspire operating system. We anticipate this distribution strategy can significantly grow our installed base by making the Linspire operating system available to consumers with no installation process, saving time and money. By accelerating widespread adoption of the Linspire operating system, we intend to increase revenues through the sale of value-added application software and services.

One of the ways in which we intend to implement our distribution strategy is through smaller computer manufacturers. Approximately half of all desktop computers today are sold by smaller manufacturers, which we define as those having less than 3% market share. We offer a low cost licensing program, which we believe is particularly appealing to smaller manufacturers. These smaller manufacturers seek to be price-competitive with larger companies such as Dell that, because of their size, may have inherent advantages when negotiating volume discounts with proprietary code operating system suppliers. By using the Linspire operating system, smaller manufacturers can better compete with larger builders in the value-priced computer segment. For example, there are Linspire operating system computers being sold today for under $200, and it may be difficult for even a larger builder to match this price after obtaining a Microsoft Windows license. We believe this pricing pressure eventually will encourage a broader range of computer manufacturers to offer computers using value-priced operating systems, such as the Linspire operating system.

We are also implementing our distribution strategy with established vendors in the computer industry, as exemplified by our relationship with Seagate Technology, a leading manufacturer of computer hard drives. Pursuant to our agreement with Seagate entered into in September 2003, Seagate pre-installs the Linspire operating system on certain Seagate hard drives and sells those pre-installed hard drives in the U.S. and Canada. In April 2004, this agreement was amended to include Mexico and other Spanish-speaking countries. Seagate has agreed to pay a per unit license fee for each Spanish-language version of Linspire it orders, subject to a guaranteed minimum order. In addition to providing us with revenue, Seagate will help us to expand our installed base in the U.S., Canada and emerging markets.

Similarly, Elektra, a retail store chain with over 800 stores throughout Mexico, sells a low-cost computer with Linspire pre-installed. According to Elektra, since December 2003 and as of April 2004, Elektra’s best selling computer was the Linspire system, outselling all other desktop computers it offers running other operating systems.

To facilitate our distribution strategy, we have created affordable, easy-to-implement license programs. For example, we have a web-based builder program, which allows manufacturers, builders and resellers of all sizes to become channel partners by pre-installing the Linspire operating system on either a flat rate or per unit basis, without onerous licensing agreements. At a channel partner’s request, we will test and certify that its hardware configurations are compatible with our Linspire operating system. We believe proprietary code operating systems are generally more expensive and usually require licensees to enter into complex agreements and submit to audits.

We have implemented revenue share programs with our higher volume channel partners in order to create additional incentives for the license and distribution of the Linspire operating system and application software. Each channel partner that distributes the Linspire operating system with its products is assigned a builder number. These builder numbers are encoded into each copy of the Linspire operating system that the channel partner pre-installs or distributes. This system allows us to track incremental revenue generated by participating channel partners and share a percentage of the revenue from add-on products and services based upon sales volume and other factors. We believe this revenue sharing program gives us a competitive advantage in attracting channel partners.

We seek to sell value-added application software and services to Linspire operating system users. Our CNR technology built into the Linspire operating system allows users to easily install, manage and update software from our Warehouse, generally with one click of a mouse. Our Warehouse carries over 1,800 software programs comprised of applications that are included with an annual service fee as well as commercial applications for which we receive a portion of the sales price. We also have developed or licensed several software products which we sell under the Linspire brand name to our customers, including LinspireOffice and Linspire DVD. Furthermore, we sell services such as VirusSafe virus protection, SurfSafe web filtering and extended customer support services.

Digital delivery is a driver of the scalability of our business model and is the backbone of our proprietary CNR technology. CNR provides easy access to an extensive software library, which includes tools such as productivity software, office suites, virus protection, web filtering, games, and utilities. Unlike some competing operating systems, our technology was conceived and developed in the Internet era and has been optimized to take advantage of Internet connectivity.

Our objective is to enhance our position as a leading developer and vendor of Linux-based desktop operating systems, application software and services designed specifically for desktop and laptop computers in homes, schools and businesses. The key elements of our strategy are:

We believe most home, school and business users do not install operating systems, but rather use the operating system that comes pre-installed on their PC. By providing the Linspire operating system to a wide range of value-priced computer hardware manufacturers, systems builders and resellers, we believe the Linspire operating system can gain traction throughout many desktop and laptop market segments, fostering acceptance of our products and services.

Use CNR Technology to Drive Revenues from our Value-added Software and Services

CNR’s digital delivery technology complements our distribution strategy by enabling the sale of value-added application software and services to Linspire operating system users. Our proprietary CNR technology allows purchasers of our LinspirePlus service to download over 1,800 software titles from our Warehouse, generally with one click of a mouse.

We assist software developers in creating and publishing Linux-compatible software that can be used with our products and services. Developers may choose to share their products for free or sell them at an agreed upon price. There are selected commercial software programs, known as “Click-N-Buy” programs, which are offered at discounted prices to purchasers of our LinspirePlus service.

Our strategy is to focus on desktop and laptop solutions rather than to try to compete in the server and other software markets. We believe this focused strategy gives our products and services a competitive edge. Our desktop business model is scalable and web-based, which distinguishes us from some other Linux companies which rely on consulting revenue.

Computers pre-installed with the Linspire operating system are available in over 20 countries. We intend to continue to expand our sales and marketing efforts internationally. We believe that there exists a demand in emerging markets for value-priced desktop operating systems such as the Linspire operating system. We have developed a version of the Linspire operating system program for the Spanish-speaking market and have developed language packs for the translation of key parts of the Linspire operating system user-interface into over four dozen non-English languages. We have also developed an international template that allows us to either establish partnerships or set up local offices to take advantage of international opportunities. Financial information regarding our international revenues is included in Note 1 to our financial statements.

We intend to continue to promote acceptance of Linux software on the desktop through a variety of means, including strengthening and establishing strategic alliances and sharing our development efforts with third-party developers. The strength and synergy of these relationships is crucial to the expansion of the Linux community, the technical advancement and widespread distribution of Linux and the continued development of third-party applications suitable for Linux-based operating systems.

Our Linspire Insiders are members of the open source community who believe in our vision and provide us with critical input in the form of early testing of new Linspire operating system versions

We provide financial support and marketing services to open source projects that develop ease-of-use features, which we believe will broaden the user base of the Linspire operating system, as well as open source projects such as building file systems and graphical user interfaces. Representative open source projects that we have financially supported include:

For the past two years we have sponsored the Desktop Linux Summit, which is a conference for industry leaders that sell, market or promote desktop Linux-based products, services, applications, and technologies.

We recently adopted “Linspire” as an alternative name for our commerce website and our products and services. We believe that building greater awareness of our brands within and beyond our existing customers is important for our continued growth. We intend to promote our brands aggressively through a variety of online and offline marketing and promotional techniques.


	•	Linspire 4.5 — Linspire 4.5 is our full-featured operating system, which combines the stability and cost-savings of Linux with the ease of a comfortable graphical user interface using windows and icons. In addition, Linspire 4.5 features our proprietary CNR technology that enables easy installation of software and services on Linspire 4.5.

	•	Linspire 4.5 Developers Edition — Our developers edition includes over 100 developer tools and utilities and is designed for professional programmers designing and writing software to run on Linux-based computers.

	•	LinspireLive — LinspireLive is a bootable CD-ROM that allows consumers with Microsoft Windows installed on their computer to experience the power and ease of use of the Linspire operating system without reconfiguring their hard disk or operating system.

	•	Linspire Laptop Edition — Linspire Laptop Edition is a version of the Linspire operating system that is designed specifically for laptop computers, including improved power management, compatibility with wireless technology and the ability to take advantage of keyboard shortcuts to browsers and email programs.

	•	Linspire International Editions — We provide language packs for over 50 languages for our Linspire operating system users. In addition, we have more completely translated and localized versions of the Linspire operating system for the Spanish and Japanese languages.

We expect to introduce in the third quarter of 2004 the next version of our Linspire operating system, which will incorporate additional functionality.

The Linspire operating system has the following key advantages over other operating systems for the desktop:

The Linspire operating system includes several features to make it easy for mainstream computer buyers to install and use, including:


	•	Comfortable Look — The Linspire operating system uses a graphical user interface of icons, windows, menus, and tool bars that will feel natural, intuitive and comfortable to most users. The interface is designed to be graphically appealing and easy to use.

	•	Easy Installation — The Linspire operating system features a simple, step-by-step installation, easy enough for anyone from the most seasoned computer expert to a complete novice. Depending on the speed of the user’s computer, total installation time is usually around 10 minutes. Many users skip this step, since the Linspire operating system comes pre-installed, tested and certified on a number of affordable PCs.

	•	CNR Technology — CNR allows users to license, install, manage, and update hundreds of programs available on the Linspire.com website automatically, usually with just one mouse click. CNR allows users to keep their operating system and application software updated. CNR Aisles (a collection of software products from our Warehouse grouped together) make it easy to set up multiple computers with predetermined software sets.

	•	Plug & Play Functionality — The Linspire operating system automatically detects and configures many peripherals, such as USB devices and wireless cards.

	•	Audio Assist Tutorials — Several tutorials, each using video animation and audio narration, walk the user through step-by-step instructions for performing many basic computing tasks with the Linspire operating system.

	•	Internet Connectivity — The Linspire operating system automatically detects and configures the Internet connection for most systems, and provides dialers and step-by-step instructions to connect to many of the more popular dial-up Internet service providers, such as Earthlink, NetZero and Juno.

The Linspire operating system comes with a substantial library of built-in programs which enable users to perform many common tasks without having to install additional software, including:


	•	Web Browsing — The Linspire Internet Suite features tabbed browsing to keep windows organized, group bookmarking to save several pages under one bookmark and pop-up blocking to stop advertisements from appearing on the desktop.

	•	Email — The Linspire Internet Suite includes an email program that can handle multiple accounts, address books, spell checking, font formatting, embedded graphics, and spam mail filtering.

	•	Instant Messaging and Chat — The instant messenger included with the Linspire operating system can sign on to multiple accounts at one time and is compatible with the ICQ, MSN, Yahoo!, and AOL IM networks.

	•	Networking — The Linspire operating system allows a user to connect to Microsoft Windows networks and share files and printers between the Linspire operating system and Microsoft Windows machines.

	•	Integrated Access to Search and eCommerce Engines — Integration with popular websites such as Google, Yahoo!, Amazon, and eBay brings the rich resources of the Internet to the Linspire operating system desktop.


	•	SIP Dialer — SIP, or Session Initiating Protocol, allows the Linspire operating system computer to make Voice Over Internet Protocol, or VoIP, telephone calls without the need for additional software. Calls made through a SIP-enabled personal computer (or a SIPphone) to another SIP device are free of traditional long-distance phone charges.

	•	Desktop Sharing — The Linspire operating system allows a user to access the desktop of his or her computer from other computers via the Internet.

Linux has a reputation for its stability and security. We believe the Linspire operating system is currently less prone to virus attacks than other desktop operating systems not based on Linux. In addition to the option of password protection at both the administrator and user levels, the Linspire operating system comes pre-configured with a firewall to help protect users from unauthorized access.

We believe that our Linspire operating system can be run on many of the most popular hardware configurations for desktop and laptop computers. We work with computer and component manufacturers to ensure hardware compatibility with the Linspire operating system. Our engineers test hardware configurations for compatibility and recommend modifications if a device is found to be incompatible. We maintain a database of hundreds of hardware products on our website to help consumers achieve this compatibility.

We sell and distribute a variety of Linspire operating system compatible software programs designed to work with files created by programs such as Microsoft Word, Microsoft Excel and Microsoft PowerPoint. We believe that file compatibility is an important driver of adoption by individuals and organizations currently using Microsoft software.

The table below summarizes some commonly used file types and the compatible programs available to Linspire operating system users:

CNR technology allows Linspire operating system users to install new software and updates from our Warehouse located on the Linspire.com website. Installation times vary depending upon the size of the software application and the speed of the user’s Internet connection. Users can browse through hundreds of software titles. For each title, a user can typically find screenshots, descriptions, specifications, and comparisons. Once a paying customer finds a desired software application, he or she can click the CNR button, and the software is automatically downloaded and installed. Additionally, a record of the selected software title will be saved in the user’s My.Linspire.com account, so that the user can run it at no extra charge on his or her other computers.

There are over 1,800 software programs made available through our Warehouse. Examples of software categories available at our Warehouse include:

Our services consist of software applications sold with a subscription for a fixed period of time. These services include our LinspirePlus, VirusSafe and SurfSafe services.

By purchasing our LinspirePlus service for $49.95 per year or $4.95 per month, a user can install a large number of software titles from our Warehouse at no additional charge. There are also some commercial software programs, known as “Click-N-Buy” programs, which are offered at discounted prices to purchasers of the LinspirePlus service. The LinspirePlus service includes the following benefits:


	•	easily searchable online library of over 1,800 business, home, education, and entertainment software titles;

	•	free automatic updates and upgrades for most software;

	•	discounts on all commercial software;

	•	easy installation;

	•	a lifetime license to use any software installed from the Warehouse on multiple computers; and

	•	web-based support for our Warehouse products.

LinspirePlus customers also have access to CNR Express, which enables them to install some of the larger programs from our Warehouse in a few minutes or less, even over a modem connection. CNR Express pre-installs certain large files on the computer’s hard drive, thus eliminating the need to download these files via the Internet.

We offer our VirusSafe service on an annual basis for $29.95 per year for LinspirePlus customers, and $39.95 per year for other users. VirusSafe is designed to protect a Linspire operating system computer from unwanted and hazardous viruses, and features automated virus definition updating and the ability to prevent transfer of Microsoft Windows-based viruses to other non-Linux computers. VirusSafe gives users the option to repair, rename or delete infected files.

SurfSafe is a comparable annual service also priced at $29.95 per year for LinspirePlus customers and $39.95 per year for other users. SurfSafe’s web filtering is designed to protect the Linspire operating system user and his or her family from Internet pornography or other objectionable material, and updates are made to our database of objectionable websites daily. SurfSafe may be left permanently on or activated by an adult using a password. SurfSafe requires no additional configuration or software and works with any Internet connection.

In an effort to increase market acceptance of our Linspire operating system, we have established distribution relationships with the following companies, each of which was among our top 15 hardware manufacturer channel partners or top 15 reseller channel partners in terms of volume of Linspire operating system copies distributed or purchased in 2003:


	•	Avatar — Avatar is the result of an alliance between Prophecy Technology, LLC, a memory and computer components distributor, and PC Chips, a motherboard manufacturer. Pursuant to our standard Builder Agreement, Avatar pre-installs computers with the Spanish-language version of the Linspire operating system and supplies the computers to Elektra, a retail chain with over 800 stores throughout Mexico. Our standard Builder Agreement provides for a nonexclusive, non-transferable and non-assignable license to install one copy of the Linspire operating system onto each unit in exchange for an annual fee. Our standard Builder Agreement also provides for an initial one year term which automatically renews annually.

	•	Elitegroup Computer System (ECS) — ECS is a manufacturer and distributor of mainboards and barebones systems and desktop and laptop complete systems. Pursuant to our standard Builder Agreement, ECS is shipping desktop computer systems pre-installed with Linspire 4.5 into the Fry’s Electronics chain of over 30 stores in the U.S., and is shipping laptop computer systems pre-installed with Linspire 4.5 Laptop Edition into their worldwide channels.

	•	Livedoor Co., Ltd. — Livedoor is a Japanese information technology company that has the exclusive right to market, sell and support the Japanese versions of the Linspire operating system, LinspireLive, Linspire Laptop Edition, LinspireOffice, and VirusSafe to consumers, resellers, distributors, and manufacturers in Japan. Livedoor accounted for approximately 11% of our net revenue in 2003 and 20% of our net revenue for the three months ended March 31, 2004. We have entered into a written agreement with Livedoor, which provides Livedoor with the exclusive right to market, sell and support the Japanese versions of the Linspire operating system in Japan in exchange for nonrefundable exclusive licensing fees of $1,069,000 payable in four installments ending on February 17, 2005. Livedoor also pays us a per unit license fee for each copy of the Linspire operating system that it orders. The agreement remains in effect through August 29, 2005.

	•	MicrotelPC — MicrotelPC is a system builder that, pursuant to our standard Builder Agreement, assembles and manufactures complete desktop and laptop computer systems


		pre-installed with the Linspire operating system and Linspire Laptop Edition and offers the products to consumers and businesses through strategic accounts with Walmart.com and Amazon.com. In addition, as a member of our standard reseller network, MicrotelPC also offers our complete software retail package product line in exchange for per unit payments to us. Members of our standard reseller network are typically not required to enter into separate resale agreements with us and have become resellers by paying a per unit fee to us through our website application process.


	•	PC Club — PC Club is a retailer offering consumers and businesses computer components, barebones systems, software products, training, services, and complete desktop and laptop computer systems. Pursuant to our standard Builder Agreement, PC Club offers the Linspire operating system pre-installed on desktop computer systems and Linspire Laptop Edition pre-installed on laptops. In addition, PC Club is a member of our standard reseller network and offers our software retail package product line in exchange for per unit payments to us.



	•	Procure 1 — Procure 1 is a distributor of name brand computer hardware and software products to resellers. Procure 1 is a member of our standard reseller network and currently distributes our software retail package product line for a per unit fee to Fry’s Electronics, Micro Center, PC Club, and PC Mall.


	•	Questar — Questar is focused on the localization, republishing, channel development, sales and support activities of innovative software products for the Italian market. Questar has an exclusive territory distribution agreement with us to distribute Linspire in Italy. We have entered a written agreement with Questar which provides that Questar has the exclusive right and license within the country of Italy to both translate the Linspire operating system into Italian and to distribute the Linspire operating system in exchange for an initial nonrefundable license fee and a per unit license fee for each copy of Linspire that it orders.

	•	Seagate Technology — Seagate designs, manufactures and markets hard disc drives for enterprise, PC, notebook and consumer electronics applications. We have an agreement with Seagate under which Seagate pre-installs the Linspire operating system on certain Seagate hard drives and sells those pre-installed hard drives in the U.S. and Canada, as well as Mexico and other Spanish-speaking markets. Seagate has agreed to pay a per unit license fee for each Spanish-language version of Linspire it orders, subject to a guaranteed minimum order.


	•	Wintergreen Systems — Wintergreen is a system builder. Pursuant to our standard Builder Agreement, Wintergreen assembles and manufactures complete desktop, laptop and web station computer systems pre-installed with the Linspire operating system and sells these products to consumers and businesses through strategic accounts with Tigerdirect.com, PCWarehouse.com, Ubid.com, and Smartbargains.com. In addition, Wintergreen is a member of our standard reseller network and offers our software retail package product line.

We sell our products worldwide directly through our Linspire.com website and indirectly through our channel partners. We permit channel partners to distribute the Linspire operating system with their own hardware in exchange for royalty payments to us. We currently have channel partner agreements in place with over 450 hardware manufacturers. These agreements are typically non-exclusive and most have no stated minimum purchase or license obligations. We also sell our Linspire operating system and application software directly to academic institutions, for which special terms are available.

Our website, Linspire.com, serves as the primary delivery mechanism and customer interface for many of our offerings. Linspire.com offers extensive resources for Linspire operating system customers, including systems and software updates and downloads through our Warehouse. Linspire.com is also a commerce site for our licenses and support offerings. We use open source encryption technology, as well as an authentication certification service purchased from a third party, to effect secure transmission of credit card and other confidential information. Additionally, Linspire.com offers users access to news, documentation, educational materials and case studies. Our website serves the interests and needs of a wide spectrum of Linux computer users and professionals, from mainstream computer users to professional resellers and systems integrators.

Our marketing efforts use a broadcast model focused on building end-user awareness and demand for our products and seek to educate potential end users of the Linspire operating system of its advantages over competing operating systems. Our outbound marketing programs include weekly press releases, as well as regular communications from our Chairman and Chief Executive Officer, Michael Robertson, in the form of “Michael’s Minute” and email newsletters. We have also built several websites to market Linspire to specialized market segments, including tryoutlinux.com, desktoplinuxsummit.com and koobox.com.

We regularly run special promotions to encourage the adoption and use of the Linspire operating system. We place ads on the Internet, which may include digital coupons for discounts on our products. We distribute our Linspire operating system through CDs packaged with various publications focused on computer users.

We also market add-on products and services to our current user base through our Warehouse. We continue to increase the number of products available from the Warehouse through regular investigation of available open source software and through our software publishing partnership programs. We also notify our existing customers of new programs of interest through messaging systems built into our Linspire operating system.

Registered users of Linspire can seek help through online technical support, which has a 24-hour response time. We have invested in a scalable e-support infrastructure, which we believe allows us to effectively serve a greater number of customers with less headcount than our competitors as our installed base grows. Our support organization is designed to provide the majority of our customers with self-service, web-based support.

We also offer Premium Phone Support and Always On-Call Support, which provide extended support hours for our customers.


	•	Installation and Configuration — Provides users with assistance on Linspire operating system product and service acquisition, downloads, installation, configuration, usage, and setup.

	•	Linspire Operating System Questions — Linspire.com will answer questions regarding Linspire operating system capabilities, features, settings, usage, and tips.

	•	CNR — Linspire.com will assist with questions or issues regarding its CNR technology, including CNR Express, CNR features, login and logout, usage, and settings.

	•	Warehouse Programs — Linspire representatives will answer installation, start up and basic usage questions with respect to third-party programs included in our Warehouse or distributed with the Linspire operating system.

Our Linspire Insiders support other Linspire operating system users through postings on message boards and forums. Many Linspire Insiders move on to participate in our Linspire Consultants Program and offer assistance to homes, schools and businesses, informing them how to set up, use and maintain their Linspire products and services.

We have invested, and intend to continue to invest, significant resources in product and technology development. Our engineering team is organized into four components: an operating system team, a services team, a web team, and an applications team. Our operating system team focuses on developing and upgrading the Linspire operating system and also works directly with third parties to certify their hardware with the Linspire operating system upon request. The products certified include motherboards, laptops, printers and other devices. Our services team maintains and improves our proprietary CNR technology, our Warehouse and our services such as VirusSafe and SurfSafe. The services team not only monitors all open source and commercial applications within the Warehouse, but builds and updates our proprietary server technology that allows CNR to function. Our web team focuses on all aspects of our commerce engine, including forms, e-support, mailing tools, administrative and reporting tools, and auxiliary or related websites. Our applications team develops proprietary application software and related back-end services, such as LPhoto and LSongs.

We are currently focusing our development efforts on improving or adding functionality to the Linspire operating system and our CNR technology. Our software engineers collaborate with open source software development teams working via the Internet. This collaboration enables us to use the latest technical advances, coordinate plans for development of new features and timing of releases on the Linux desktop and leverage the development of the Linux kernel and other open source projects.

Our software development engineers perform extensive testing of the Linspire operating system and our CNR technology to ensure that they are properly assembled and work coherently from the user’s perspective. We use industry standard methods of quality assurance testing to ensure that our technologies are solidly engineered and ready for use by our customers when shipped.

Our success and ability to compete depend in part on our ability to protect the proprietary components of the Linspire operating system and CNR technology. We rely on trademark, copyright and trade secret laws and restrictions in the United States and other jurisdictions, together with contractual restrictions, to protect our proprietary rights. We typically enter into confidentiality and invention agreements with our employees and contractors, and nondisclosure agreements with our channel partners to limit access to and distribution and disclosure of our proprietary information.

Our Linux-based operating systems, application software and services rely on a combination of open source and proprietary software programs. The open source programs have been developed and made available for licensing under the GNU General Public License and similar open source licenses. These licenses generally permit anyone to copy, modify and re-distribute the open source software, provided that any re-distribution includes access to the source code of the modified software, and includes the right to further copy, modify and re-distribute the source and object code. The proprietary technologies include software programs that we have developed ourselves and software programs developed by third parties. These proprietary programs cannot be modified, copied or distributed without our consent.

We have pursued registration of some of our trademarks in the United States with the U.S. Patent and Trademark Office. We have federal registrations pending for our trademarks “CNR” and “Linspire.” Over time, we intend to introduce new trademarks, service marks and brand names and maintain registrations on trademarks that remain valuable to our business.

Despite our efforts to protect our trademark rights, unauthorized third parties have in the past attempted and in the future may attempt to infringe our trademark rights. We cannot be certain that we will succeed in preventing the continued infringement of our tradename and trademarks in these circumstances or that we will be able to prevent this type of unauthorized use in the future. The laws of some foreign countries do not protect our trademark rights to the same extent as do the laws of the United States. In addition, policing unauthorized use of our trademark rights is difficult, expensive and time consuming. The loss of any material trademark or trade name could have a material adverse effect on our business, operating results and financial condition.

Although we do not believe that our products infringe the rights of third parties, third parties may assert infringement claims against us which may result in costly litigation or require us to obtain a license to third-party intellectual property rights. There can be no assurance that such licenses will be available on reasonable terms or at all, which could have a material adverse effect on our business, operating results and financial condition.

In the general market for desktop operating systems, we compete with both Linux-based and non-Linux-based operating systems. Our non-Linux-based competitors include a number of large and well-established companies that have significantly greater financial resources, larger development staffs and more extensive marketing and distribution capabilities. These competitors include Microsoft, Apple, Novell, IBM, Sun Microsystems, and SCO. In the newer and rapidly evolving Linux-based desktop operating system market, we compete with a number of well-respected vendors and development projects including Red Hat’s Fedora, Mandrake, Xandros, Turbolinux (which was recently acquired by Livedoor) and SuSE, which was recently acquired by Novell. Some of these competitors have established and stable customer bases and continue to attract new customers, with Red Hat being one of the most dominant players in the market. In addition, we face potential competition from several companies with larger customer bases and greater financial resources and name recognition than we have, such as Sun Microsystems, Corel Corp. and Cygnus Solutions, each of which has indicated a growing interest in the Linux-based operating system market. The desktop application software market is more fragmented than the desktop operating system market, with many competitors selling consumer, education and business-oriented application software for various platforms.

We compete primarily on the basis of product cost, performance, reliability, and functionality; name and reputation of the vendor; distribution strength and number of channel partners; service and support; and strength of relationships in the open source community. We believe that we compare favorably to many of our current competitors with respect to some or all of these factors.

As of March 31, 2004, we had a total of 62 employees. Of the total employees, 38 were in software engineering, 11 in sales and marketing, 6 in customer service and technical support, and 7 in finance and administration. Our future success will depend in part on our ability to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. Our employees are not represented by any labor union and are not organized under a collective bargaining agreement, and we have never experienced a work stoppage. We believe our relations with our employees are good.

Our headquarters are currently located in a leased facility in San Diego, California, consisting of approximately 26,280 square feet under a three-year lease that will expire on September 30, 2006. We believe that additional space will be required as our business expands and will be available on acceptable terms.

On December 20, 2001, Microsoft initiated an action against us in U.S. District Court for the Western District of Washington, asserting that our use of the Lindows mark violated U.S. trademark law and U.S. and Washington state unfair competition laws. On November 28, 2003, Microsoft initiated an action against us in the Helsinki District Court of Finland, asserting that our use of the Lindows name violated Finland’s trademark law. Microsoft initiated similar actions against us in the Stockholm City Court in Sweden on December 8, 2003, the District Court in Amsterdam on December 11, 2003, the Tribunal de Grande Instance de Paris, or Paris Civil Court, on December 4, 2003, the Federal Court in Canada on February 11, 2004, and the Madrid First Instance Court in Spain on February 3, 2004. On May 12, 2004, Microsoft sent us a letter alleging that we were distributing copyrighted Microsoft Windows Media technology with our operating system without a license.

On July 16, 2004, we entered into a settlement agreement with Microsoft pursuant to which all of the foregoing matters were resolved. The settlement agreement provides that, among other things:


	•	Microsoft will pay us $15 million no later than August 15, 2004;

	•	Microsoft will pay us an additional $5 million by February 1, 2005 in exchange for us assigning to Microsoft the lindows.org, lindowsinc.net, lindowsinc.org, lindowsos.com, lindos.com, lindoors.com, lindowsemail.com, lindowsfan.com, lin - - - - s.com, lin - - - s.com, lin - - s.com, lin-s.com, and lindash.com domain names;

	•	no later than September 14, 2004, we will change our corporate name and will permanently cease all use of the “Lindows Marks,” which is defined to include “Lindow” or “Lindows” or “Lindoz” or “lindows.com” or “lindowsinc.com” or “lin - - - s.com” or any other term including “ - indows” or “indoz.” However, until July 15, 2008, we may use www.lindows.com and www.lindowsinc.com solely for the purpose of redirecting traffic to other websites. After July 15, 2008, we will assign the www.lindowsinc.com and www.lindows.com domain names to Microsoft;

	•	no later than September 14, 2004, we will offer to our distributors a modified version of our Linspire operating system that does not include any of the Lindows Marks. The settlement agreement defines the term “distributors” to include any third party to which we have granted distribution rights for our products, including but not limited to distributors, resellers and builders;

	•	to the extent that we have contractual authority to do so under our agreements with distributors, no later than September 14, 2004, we will inform our distributors that they are to discontinue all further use of the Lindows Marks, and that any authorization or license from us to use the Lindows Marks is withdrawn and replaced with our authorization to use the Linspire mark. To the extent that we do not have the contractual authority referenced above, no later than October 14, 2004 we will inform our distributors that we have entered into the settlement agreement, that we have acknowledged the validity of the Windows marks and that we will not provide distributors with indemnity against claims brought by Microsoft arising out of future use of the Lindows Marks;

	•	no later than October 14, 2004, we will cease any further use or distribution of the Windows Media Files. The settlement agreement defines the term “Windows Media Files” to mean five copyrighted files owned by Microsoft, which are included in Linspire 4.5 and a prior version of our operating system; however, in connection with the settlement agreement, Microsoft has agreed to grant us limited four-year, royalty-free licenses to certain Windows Media software components, which we plan to include and distribute with our Linspire operating system;


	•	no later than October 14, 2004, we will offer to our distributors a modified version of our Linspire operating system that does not include the Windows Media Files, but which may include the Windows Media software components;

	•	no later than October 14, 2004, we will inform our distributors to discontinue all further use of any versions of our products that contain the Windows Media Files and that any authorization or license from us to distribute versions of our products that contain the Windows Media Files is withdrawn and replaced with our authorization or license to use the modified version that does not contain the Windows Media Files, but which may include the Windows Media software components;

	•	to the extent that we do not have the contractual authority to require our distributors to discontinue the use of versions of our products that contain the Windows Media Files, we will no later than October 14, 2004 inform our distributors that we have entered into a settlement agreement with Microsoft providing that we will cease distribution of the Windows Media Files, that Microsoft alleges that unauthorized distribution of the Windows Media Files infringes its copyrights, and that we will not provide distributors with indemnity against claims brought by Microsoft arising out of unauthorized use of the Windows Media Files;

	•	no later than October 14, 2004, we will review several additional products to assure that Windows Media Files are not included in them. We agree not to post on our website any links or directions to other locations from which users may download unauthorized copies of the Windows Media Files from other sources;

	•	no later than August 15, 2004, we agree to expressly abandon with prejudice any pending applications for registrations for trademarks or trade names containing the Lindows Marks in the United States or any foreign jurisdiction. We further agree to immediately dismiss with prejudice all claims, counterclaims or other legal proceedings in whatever form or forum that we have brought for cancellation of any U.S. or foreign trademark registration issued to Microsoft containing the term Windows;

	•	we and Microsoft will immediately direct our respective counsel to dismiss with prejudice all pending litigation between us. Microsoft further agrees to refrain from filing any new cases outside the U.S. against us concerning the Lindows Marks, unless Microsoft has given us 30 days written notice of the use of the Lindows Marks to which Microsoft objects. If we provide Microsoft written confirmation of our intent to cure within the 30 day notice period, we will have an additional 30 days to cure our use of the Lindows Marks;

	•	we agree to acknowledge Microsoft’s ownership of, and the validity of, the Windows trademark; and

	•	Microsoft agrees not to sue us for past damages for any patent infringement that may have occurred prior to the date of the settlement agreement, and the parties mutually release each other from any claims relating to the litigation being settled or our prior distribution of the Windows Media Files.

On February 3, 2002, our commercial general liability insurer, St. Paul Fire and Marine Insurance Company, or St. Paul, initiated a civil action against us in the U.S. District Court for the Central District of California. In this lawsuit, St. Paul sought declaratory relief that it had no duty to defend or indemnify us in connection with our litigation with Microsoft currently pending in the U.S. District Court for the Western District of Washington. Please see “Business — Legal Proceedings — Microsoft Litigation and Settlement” for a description of our prior litigation with Microsoft. In support of this claim, St. Paul asserted that our insurance policy excludes litigation relating to the Lindows name because we used the Lindows name before the policy went into effect.

We asserted several defenses and a counterclaim in this lawsuit. We asserted that St. Paul has breached its contract with us and has acted in bad faith. We asked the court to give us monetary damages, including punitive damages, as well as a declaratory order by the court that St. Paul must defend and indemnify us in connection with the U.S. Microsoft litigation.

Both parties filed motions for partial summary judgment. The court granted our motion and denied St. Paul’s motion. The court ruled that St. Paul had an obligation to defend us and had breached its contract by denying coverage. Based on this decision, and our recent settlement with Microsoft, the only remaining issues to be decided by the court are issues related to damages for St. Paul’s breach of contract, and our bad faith claim against St. Paul for its failure to defend. After the court granted our motion for partial summary judgment, St. Paul agreed to defend us in the U.S. Microsoft litigation, but reserved its right to appeal the court’s order after a final adjudication of the remaining issues in the lawsuit. The court then stayed the proceedings pending a final outcome in the U.S. Microsoft litigation. Now that we have settled with Microsoft, the stay can be lifted.

On January 6, 2004, we initiated a separate civil action against St. Paul in the U.S. District Court for the Central District of California. In this lawsuit, we assert that St. Paul has wrongfully denied us coverage in connection with the lawsuits Microsoft brought against us in Finland, Sweden, the Netherlands, and France. Our complaint seeks monetary damages, including punitive damages, as well as a declaratory order by the court that St. Paul must fully defend and indemnify us in connection with the Microsoft litigation pending in Finland, Sweden, the Netherlands, and France.

In response to our lawsuit, St. Paul sent us letters agreeing to pay partial defense costs for the lawsuits in Finland, Sweden, the Netherlands and France, subject to St. Paul’s reservation of its rights to deny coverage. In response to these letters we amended our complaint to address St. Paul’s refusal to pay complete defense costs and its reservation of rights. In addition, St. Paul recently advised us that it will agree to pay defense costs for lawsuits filed against us by Microsoft in Canada and Spain on the same terms as set forth above with respect to the lawsuits in Finland, Sweden, the Netherlands and France. We have amended our complaint to add the Canada and Spain lawsuits.

St. Paul has filed an answer to our second amended complaint and a counterclaim. St. Paul seeks a declaratory order that it has no duty to defend or indemnify us in connection with the lawsuits in Finland, Sweden, the Netherlands, France, Canada and Spain. It also seeks a declaratory order that any attorneys’ fees it is obligated to pay be at a reduced hourly rate. We filed a motion for preliminary injunction in which we asked the court to immediately enforce St. Paul’s obligation to pay attorneys’ fees at the full hourly rate. The court denied our motion and ordered us to arbitrate the hourly rate issue. Now that we have settled with Microsoft, the claims relating to St. Paul’s obligation to indemnify us for any amounts that we might have to pay Microsoft have become moot.

Both of our lawsuits with St. Paul may proceed for an extended period of time. We intend to pursue our rights in the lawsuits vigorously, but cannot assure you that they will be resolved in our favor. If St. Paul successfully appeals the decision relating to its obligation to bear the cost of our legal defense with respect to Microsoft’s U.S. litigation, we may be forced to reimburse St. Paul for some or all of the legal fees and costs it has paid to us or our legal counsel in the Microsoft U.S. litigation. If we are unsuccessful in our lawsuit relating to the foreign litigation, we also may be forced to reimburse St. Paul for some or all legal fees and costs it has paid to us or our legal counsel relating to the foreign litigation. Furthermore, even if St. Paul is required to bear the cost of our legal defense in the foreign litigation, it may only be required to cover a portion of the fees charged by the attorneys defending the case, in which case we would be required to bear the portion of the legal fees in excess of the amounts covered by St. Paul. Because of the uncertainties as to whether St. Paul will be required to cover the legal defense costs in the foreign litigation, we have accrued $250,000 in estimated legal fees as of March 31, 2004 relating to the foreign litigation.

On December 13, 2002, we initiated a civil action against Xandros, Inc., Linux Global Partners, Inc., Michael Bego, and William Jay Roseman in U.S. District Court for the Southern District of California. Our action asserts that Xandros, Inc., Linux Global Partners, Inc., Michael Bego, and William Jay Roseman fraudulently induced us to loan Xandros, Inc. $750,000 in exchange for convertible promissory notes. Xandros, Inc. then failed to repay the promissory notes when they became due. We are seeking $750,000, plus interest, attorneys’ fees and punitive damages. This lawsuit is in the discovery phase, and may proceed for an extended period of time. We intend to pursue the lawsuit vigorously, but cannot assure you that it will be resolved in our favor. Additionally, even if the court rules in our favor, we cannot assure you that we will be able to collect the amounts owed.

Other than the immediately preceding discussion, we are not currently a party to any material legal proceedings.

The following table sets forth certain information concerning our directors, executive officers and key employees:


(1)	Member of the nominating and corporate governance committee

(2)	Member of the compensation committee

(3)	Member of the audit committee

Michael L. Robertson is our founder and has served as our Chairman and Chief Executive Officer since September 2001. Prior to founding us, Mr. Robertson founded MP3.com, a publicly-traded company which focused on storage, management, promotion, and delivery of digital music. Mr. Robertson served as MP3.com’s Chief Executive Officer and Chairman of the Board from March 1998 to August 2001, when it was acquired by Vivendi Universal. From September 1995 to March 1998, Mr. Robertson operated several websites that focused on merging search technologies with commerce. From September 1995 to September 1996, Mr. Robertson was President and Chief Executive Officer of Media Minds, Inc., a developer of digital picture software. From January 1994 to August 1995, Mr. Robertson was President and Chief Executive Officer of MR Mac Software, a developer of networking and security tools. From July 2003 to the present, Mr. Robertson has served as the founder and Chief Executive Officer of SIPphone, Inc., a company that uses the Internet to allow customers to make free long distance phone calls. From January 2002 to July 2003, Mr. Robertson served as Chairman of Gamespy, now IGN/ Gamespy, an Internet gaming and entertainment company. Mr. Robertson holds a B.A. in cognitive science from the University of California, San Diego.

Kevin B. Carmony has served as our President and Chief Operating Officer since September 2001 and has served as a member of our board of directors since April 2004. Prior to joining us in July 2001, Mr. Carmony served as a Project Director for MP3.com from April 2001 to July 2001. From March 2000 to March 2001, Mr. Carmony served as President of NewVox Records, a record company for independent musicians. From August 1998 to March 2000, Mr. Carmony served as founder and Chief Executive Officer of TrueVerse Management, a music management firm for recording artists.

From August 1995 to August 1998, Mr. Carmony was a co-founder and Vice President of Franchise Sales for I.N.V.U. Portraits, a chain of children’s vintage photography franchises. From January 1994 to August 1995, Mr. Carmony was President of I.N.V.U., Inc., an apparel manufacturing company. Mr. Carmony served as Vice President of Technology of Franklin Covey Co., an international learning and performance solutions company, from March 1992 to January 1994. From July 1989 to March 1992, Mr. Carmony served as founder and Chief Executive Officer of NewQuest Technologies, Inc., developer of the personal information management software Ascend, which was acquired by Franklin Covey in March 1992. From January 1983 to July 1989, Mr. Carmony served as founder and Chief Executive Officer of Streamlined Information Systems, Inc., a company that specialized in point-of-sale automation systems for retail operations. Mr. Carmony is also a co-founder and current director of Sadie’s, LLC, a national chain of mall-based children’s digital photography stores, as well as a board member of Awake Community, a not-for-profit organization. Mr. Carmony holds a B.A. in business administration from Weber State University.

Chad H. Olson has served as our Chief Financial Officer since April 2003. From August 2000 to April 2003, Mr. Olson was the co-founder, Chief Executive Officer and a director of Sadie’s, LLC, a national chain of mall-based children’s digital photography stores. Mr. Olson continues to serve as a director of Sadie’s. From August 1995 to July 2000, Mr. Olson was a co-founder, Chief Executive Officer and President of I.N.V.U. Portraits, a chain of children’s vintage photography franchises. In October 1993, Mr. Olson founded I.N.V.U., Inc., an apparel manufacturing company, for which Mr. Olson served as Chief Executive Officer until August 1995. Mr. Olson was also the co-founder, Chairman and Chief Executive Officer of The Pro Image, Inc. from its inception in September 1985 until October 1993 when the company was sold. The Pro Image was a franchise chain of over 202 sports fan gift and apparel stores located in regional shopping malls in 46 states, Canada, Germany, Puerto Rico and Japan. Mr. Olson holds a B.S. in accounting from Weber State University. Mr. Olson is the brother-in-law of Thomas C. Welch, our Chief Technology Officer.

Thomas C. Welch has served as our Chief Technology Officer since January 2002. From August 2001 to December 2001, Mr. Welch was a partner with QRQ Technologies, a professional services firm specializing in consultation and development of customized applications for various clients. From December 1999 until August 2001, Mr. Welch served as President of KnowledgeTrack Professional Services. From January 1994 to December 1999, Mr. Welch served as the founder, President and Chief Executive Officer of Axiom Technologies Ltd., which specialized in commercial quality software development and professional services for clients such as Franklin Covey Co., Rexall Corporation and Shaklee Corporation. Axiom Technologies was purchased by KnowledgeTrack Corporation in December 1999. From March 1992 to December 1993, Mr. Welch served as Director of Software Development at Franklin Covey Co., an international learning and performance solutions company. From July 1989 to March 1992 Mr. Welch served as Director of Software Development for NewQuest Technologies, Inc., where he developed the personal information management software, Ascend. Mr. Welch attended Brigham Young University and Weber State University. Mr. Welch is the brother-in-law of Chad H. Olson, our Chief Financial Officer.

Rex E. Bosen has served as a member of our board of directors since April 2004. Since September 2002, Mr. Bosen has been Vice President, Finance and Accounting of Provide Commerce, Inc., a publicly-traded company that operates an e-commerce marketplace of websites for perishable goods. Prior to joining Provide Commerce, Mr. Bosen was a self-employed tax accountant from January 2001 through September 2002. From September 1999 through January 2001, Mr. Bosen co-founded and served as Chief Financial Officer at PhatPipe, Inc., a start-up company involved with the provision of high speed Internet access and e-commerce. From September 1992 through October 1999, Mr. Bosen served as the Controller at E/ G Electro-graph, Inc., a manufacturing company. From August 1984 to September 1992, Mr. Bosen was an accountant with Price Waterhouse. Mr. Bosen holds an MACC and B.S. in accounting from Brigham Young University.

David S. Buzby has served as a member of our board of directors since April 2004. Since January 1992, Mr. Buzby has been a private equity investor investing in and managing early stage technology and environmental companies. From June 1999 to September 2000, Mr. Buzby was the Chief Operating Officer and a founding investor of Internet Barter, Inc., an international business-to-business e-commerce barter exchange. From August 1994 to January 1999, Mr. Buzby worked with Best Internet, a web hosting company. Mr. Buzby held various positions at Best Internet, including Chief Financial Officer and Vice Chairman of the board and was a founding investor. Since May 1999, Mr. Buzby has been a director of ValueClick, Inc., a publicly-traded company that provides a range of products and services relating to online marketing. Mr. Buzby also serves on the boards of several private companies. Mr. Buzby holds a B.A. in political science from Middlebury College and an M.B.A. from Harvard Business School.

Robin D. Richards has served as a member of our board of directors since April 2004. Mr. Richards is currently the Chairman and Chief Executive Officer of Notification Technologies, Inc., which does business under the name Partnership for Academic and Community Excellence, or PACE. PACE provides Internet-to-phone-based communication among schools, parents, students, and faculty. From December 2002 to June 2003, Mr. Richards was the President and Chief Operating Officer of the Prostate Cancer Foundation, for which he continues to serve as a director. From January 1999 to August 2001, Mr. Richards served as the President and a director of MP3.com, a publicly-traded company which focused on storage, management, promotion, and delivery of digital music. He also served as the Chief Operating Officer of MP3.com from January 1999 to January 2001. After Vivendi Universal acquired MP3.com in August 2001, Mr. Richards served as the Chief Executive Officer of Vivendi Universal Net USA, a company created to oversee the U.S. Internet-related companies owned by Vivendi Universal. From October 1998 to January 1999 Mr. Richards served as Managing Director of Tickets.com, Inc., an Internet ticketing company. Prior to Tickets.com, Mr. Richards served as the founder, President and Chief Executive Officer of Lexi International, a teleservices and database management company. Mr. Richards also currently serves as the President of the Chase Foundation, an organization that provides funds to terminally ill children who have been hospitalized in the Los Angeles area. Mr. Richards holds a B.S. in political science from Michigan State University and attended Whittier College School of Law.

Larry M. Kettler has been our Vice President of Worldwide Sales since October 2002. From December 2001 to October 2002, he was our Director of Sales. From March 2000 to December 2001, Mr. Kettler was Vice President of Channel Sales and Vice President of Business Development for Raindance Communications, Inc., a publicly-traded company that provides services that integrate traditional telephony technology with real-time interactive web tools. From February 1998 to March 2000, Mr. Kettler was Director of Business Development for Contigo Software, Inc., which offered web collaboration tools to enable real-time web conferences. Raindance acquired Contigo in June 2000. Mr. Kettler holds a B.S. in business marketing from San Diego State University.

C. Kevin La Rue has been our Vice President of Marketing since September 2003. From December 2002 to September 2003, he was our Director of Services. From December 2001 to December 2002, Mr. La Rue was Director of Business Development for 3 Tier Systems, where he developed e-commerce websites with search engine marketing programs. From January 2001 to December 2001, Mr. La Rue was Product Planner for Sony Corporation, where he planned Sony’s next generation Internet appliances. From February 2000 to December 2000, Mr. La Rue was the Director of Product Marketing for exobox, Inc., an embedded software systems firm. From January 1998 to January 2000, Mr. La Rue was Director of Marketing Communications for Science Applications International Corporation, an employee-owned research and engineering firm. Mr. La Rue holds a B.S.B.A. in marketing from the University of Arizona.

Randy D. Linnell has been our Vice President of Customer Satisfaction since October 2003. From January 2002 to October 2003, Mr. Linnell was our Director of Quality Support. From October 1990 to

William A. Long has been our Corporate Controller since February 2004. From September 2001 to December 2003, Mr. Long was Corporate Controller and Assistant Treasurer for Equidyne Corporation, a publicly-traded medical device manufacturing company. From February 1994 to September 2001, Mr. Long served in a variety of financial management positions with Maxwell Technologies, Inc., a publicly-traded developer and manufacturer of cost-effective energy storage and power delivery solutions, including Division Controller, Corporate Manager of Financial Reporting and Corporate Controller. From September 1986 to February 1994, Mr. Long was an accountant with Ernst & Young LLP. Mr. Long holds a B.B.A. in accounting from the University of San Diego.

Michael S. Umansky has been our General Counsel since July 2004. Mr. Umansky was associated with the law firm of Morrison & Foerster LLP from February 2003 to July 2004 and with the law firm of Brobeck, Phleger & Harrison LLP from October 1996 to February 2003, where he represented a variety of clients in general corporate and securities law matters. Mr. Umansky is a member of the State Bar of California and holds a B.A. in psychology from the University of California, Los Angeles and a J.D. from the University of California, Berkeley.

Our board of directors currently has five members. Our restated certificate of incorporation and restated bylaws provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, stockholders will elect a portion of our board of directors each year. Class I directors’ terms will expire at the first annual meeting of stockholders following the completion of this offering, Class II directors’ terms will expire at the second annual meeting of stockholders following the completion of this offering, and Class III directors’ terms will expire at the third annual meeting of stockholders following the completion of this offering. The Class I directors are Messrs. Bosen and Richards, the Class II directors are Messrs. Buzby and Carmony and the Class III director is Mr. Robertson. At each annual meeting of stockholders held after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election until the third annual meeting following election. The division of our board of directors into three classes with staggered terms may delay or prevent a change of our management or a change in control.

In addition, our restated bylaws provide that the authorized number of directors which shall constitute the whole board of directors may be changed by a resolution duly adopted by the board of directors or by the holders of at least 66 2/3% of our outstanding voting stock. 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.

Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee.

Audit Committee. Our audit committee currently consists of Messrs. Bosen, Buzby and Richards, each of whom is a non-management member of our board of directors. The functions of this committee include:


	•	meeting with our management periodically to consider the adequacy of our internal controls and the objectivity of our financial reporting;


	•	meeting with our independent registered public accounting firm and with internal financial personnel regarding these matters;

	•	recommending to our board of directors the engagement of our independent registered public accounting firm;

	•	reviewing our audited financial statements and reports and discussing the statements and reports with our management and our independent registered public accounting firm, including any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management; and

	•	reviewing our financial plans and reporting recommendations to our full board for approval and to authorize action.

Both our independent registered public accounting firm and internal financial personnel regularly meet privately with our audit committee and have unrestricted access to this committee. We believe that the composition of our audit committee meets the criteria for independence under, and the functioning of our audit committee complies with the applicable requirements of, the Sarbanes-Oxley Act of 2002, the current rules of the Nasdaq Stock Market and Securities and Exchange Commission rules and regulations. We intend to comply with future audit committee requirements as they become applicable to us.

Compensation Committee. Our compensation committee currently consists of Messrs. Bosen, Buzby and Richards, each of whom is a non-management member of our board of directors. The functions of this committee include:


	•	reviewing and, as it deems appropriate, recommending to our board of directors, policies, practices and procedures relating to the compensation of our directors, officers and other managerial employees and the establishment and administration of our employee benefit plans;

	•	exercising authority under our employee benefit plans; and

	•	advising and consulting with our officers regarding managerial personnel and development.

Nominating and Corporate Governance Committee. Our nominating and corporate governance committee currently consists of Messrs. Bosen, Buzby and Richards, each of whom is a non-management member of our board of directors. The functions of this committee include:


	•	reviewing and recommending nominees for election as directors;

	•	assessing the performance of the board of directors;

	•	developing guidelines for board composition; and

	•	reviewing and administering our corporate governance guidelines and considering other issues relating to corporate governance.

In April 2004, we established a non-employee director compensation program. We currently do not pay any cash compensation to our directors for their service as directors. Directors are reimbursed for reasonable out-of-pocket expenses in connection with attending meetings of our board of directors and committees of the board of directors. In connection with each non-employee director’s election to our board of directors, we grant to the director an option to purchase 27,397 shares of common stock at an exercise price per share equal to the fair market value of our common stock at the date of grant. These options vest and become exercisable on a monthly basis over four years, and they become fully vested and exercisable if we experience a change of control. In addition, each non-employee director who is re-elected to the board of directors at an annual meeting of our stockholders will be granted a fully-vested option to purchase 5,479 shares of

Pursuant to our non-employee director compensation program, in April 2004 our initial non-employee directors, Messrs. Bosen, Buzby and Richards, each received their initial option to purchase 27,397 shares of common stock and we also granted to Messrs. Bosen, Buzby and Richard their annual option grants under the program. These annual grants included options to purchase 13,699 shares of common stock in the case of Mr. Bosen and options to purchase 10,959 shares of common stock in the case of Messrs. Buzby and Richards.

None of our executive officers serves as a member of the board of directors or compensation committee of any other company that has one or more executive officers serving as a member of our board of directors or compensation committee. Our full board of directors made all compensation decisions prior to the creation of our compensation committee.

The following table summarizes information concerning the compensation awarded to, earned by or paid for services rendered to us in all capacities during the fiscal year ended December 31, 2003 by our Chief Executive Officer and our three other most highly compensated executive officers whose salary and bonus for fiscal 2003 exceeded $100,000. We refer to these executives as our named executive officers elsewhere in this prospectus. No other individuals served as our executive officers during 2003.

The following table summarizes the stock options granted to each named executive officer during the fiscal year ended December 31, 2003. No stock appreciation rights were granted during the year. All options were granted under the 2001 stock incentive plan.

(1)

Potential realizable value is based upon the assumed initial public offering price of our common stock of $10.00, which is the midpoint of the range listed on the cover of this prospectus. Potential realizable values are net of exercise price, but before taxes associated with exercise. Amounts per share representing hypothetical gains are those that could be achieved if options are exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with the rules of the Securities and Exchange Commission based on the assumed initial public offering price of $10.00 per share and do not represent our estimate or projection of the future common stock price.

The following table sets forth certain information regarding exercised stock options during the fiscal year ended December 31, 2003 and unexercised options held as of December 31, 2003, by each of the named executive officers. There was no public trading market for our common stock as of December 31, 2003. Accordingly, these values have been calculated on the basis of the assumed initial public offering price of $10.00, less the applicable exercise price per share, multiplied by the number of shares issued or issuable, as the case may be, on the exercise of the option. All options were granted under our 2001 stock incentive plan.

Employment Agreement with Michael L. Robertson. In April 2004, we entered into an employment agreement with Michael L. Robertson, our Chairman and Chief Executive Officer. The agreement provides for a base salary of $410,000 per year, to be reviewed and adjusted from time to time in accordance with our procedures for adjusting salaries for senior executives. The agreement also provides that Mr. Robertson is eligible to receive an annual bonus of up to 25% of his annual base salary, subject to his attainment of reasonable corporate goals and objectives to be established annually by our board of directors (or compensation committee) with the assistance and

The agreement provides that Mr. Robertson is an at will employee, which means he or we can terminate his employment at any time, with or without cause. If we terminate Mr. Robertson’s employment without cause (as defined in the agreement), Mr. Robertson terminates his employment for good reason (as defined in the agreement) or if Mr. Robertson dies or becomes disabled as a direct result of business-related activities within nine months of the date of the agreement, then:


	•	Mr. Robertson is entitled to receive severance equal to the amount of the annual base salary and bonus that he would have earned during the severance period if he had remained employed with us;

	•	we will continue to make available to Mr. Robertson the benefits made generally available to our employees, to the extent permitted under applicable law and the terms of the benefit plans; and

	•	all non-vested options to purchase shares of our common stock granted to Mr. Robertson will immediately become vested.

The agreement provides that, if Mr. Robertson’s employment is terminated on or before the first anniversary of the date of the agreement, then the severance period will be the period beginning on the date of his termination and ending on the third anniversary of the date of the agreement. Otherwise, the severance period will be the 24-month period immediately following the date of his termination.

The salary, bonus and severance provisions of the agreement do not become effective until the completion of this offering, at which time any unpaid salary accrued under the agreement will be paid to Mr. Robertson, if he is still employed by us at that time.

Employment Agreement with Kevin B. Carmony. In April 2004, we entered into an employment agreement with Kevin B. Carmony, our President and Chief Operating Officer. The agreement provides for a base salary of $275,000 per year, to be reviewed and adjusted from time to time in accordance with our procedures for adjusting salaries for senior executives. The agreement also provides that Mr. Carmony is eligible to receive an annual bonus of up to 25% of his annual base salary, subject to his attainment of reasonable corporate goals and objectives to be established annually by our Chief Executive Officer (or compensation committee) with the assistance and agreement of Mr. Carmony. In addition, pursuant to the agreement, we granted to Mr. Carmony options to purchase 273,973 shares of our common stock, at an exercise price of $9.13 per share, which our board of directors determined to be the fair market value per share of our common stock at the date of grant. These options vest on a monthly basis over four years. The agreement also provides that, if we experience a change in control, then all non-vested options to purchase shares of our common stock granted to Mr. Carmony may immediately become vested, in the discretion of the administrator of the plans under which the options are granted.

The agreement provides that Mr. Carmony is an at will employee, which means he or we can terminate his employment at any time, with or without cause. If we terminate Mr. Carmony’s employment without cause (as defined in the agreement), Mr. Carmony terminates his employment


	•	Mr. Carmony is entitled to receive severance equal to the amount of the annual base salary and bonus that he would have earned during the severance period if he had remained employed with us;

	•	we will continue to make available to Mr. Carmony the benefits made generally available to our employees, to the extent permitted under applicable law and the terms of the benefit plans; and

	•	all non-vested options to purchase shares of our common stock granted to Mr. Carmony will immediately become vested.

The agreement provides that, if Mr. Carmony’s employment is terminated on or before the first anniversary of the date of the agreement, then the severance period will be the period beginning on the date of his termination and ending on the third anniversary of the date of the agreement. Otherwise, the severance period will be the 24-month period immediately following the date of his termination.

The salary, bonus and severance provisions of the agreement do not become effective until the completion of this offering, at which time any unpaid salary accrued under the agreement will be paid to Mr. Carmony, if he is still employed by us at that time.

Employment Agreement with Chad H. Olson. In April 2004, we entered into an employment agreement with Chad H. Olson, our Chief Financial Officer. The agreement provides for a base salary of $240,000 per year, to be reviewed and adjusted from time to time in accordance with our procedures for adjusting salaries for senior executives. The agreement also provides that Mr. Olson is eligible to receive an annual bonus of up to 25% of his annual base salary, subject to his attainment of reasonable corporate goals and objectives to be established annually by our Chief Operating Officer and President (or compensation committee) with the assistance and agreement of Mr. Olson. In addition, pursuant to the agreement, we granted to Mr. Olson options to purchase 205,479 shares of our common stock, at an exercise price of $9.13 per share, which our board of directors determined to be the fair market value per share of our common stock at the date of grant. These options vest on a monthly basis over four years. The agreement also provides that, if we experience a change in control, then all non-vested options to purchase shares of our common stock granted to Mr. Olson may immediately become vested, in the discretion of the administrator of the plans under which the options are granted.

The agreement provides that Mr. Olson is an at will employee, which means he or we can terminate his employment at any time, with or without cause. If we terminate Mr. Olson’s employment without cause (as defined in the agreement), Mr. Olson terminates his employment for good reason (as defined in the agreement) or if Mr. Olson dies or becomes disabled as a direct result of business-related activities within nine months of the date of the agreement, then:


	•	Mr. Olson is entitled to receive severance equal to the amount of the annual base salary and bonus that he would have earned during the severance period if he had remained employed with us;

	•	we will continue to make available to Mr. Olson the benefits made generally available to our employees, to the extent permitted under applicable law and the terms of the benefit plans; and

	•	all non-vested options to purchase shares of our common stock granted to Mr. Olson will immediately become vested.

The agreement provides that, if Mr. Olson’s employment is terminated on or before the first anniversary of the date of the agreement, then the severance period will be the period beginning on

Employment Agreement with Thomas C. Welch. In April 2004, we entered into an employment agreement with Thomas C. Welch, our Chief Technology Officer. The agreement provides for a base salary of $200,000 per year, to be reviewed and adjusted from time to time in accordance with our procedures for adjusting salaries for senior executives. The agreement also provides that Mr. Welch is eligible to receive an annual bonus of up to 25% of his annual base salary, subject to his attainment of reasonable corporate goals and objectives to be established annually by our Chief Operating Officer and President (or compensation committee) with the assistance and agreement of Mr. Welch. In addition, pursuant to the agreement, we granted to Mr. Welch options to purchase 205,479 shares of our common stock, at an exercise price of $9.13 per share, which our board of directors determined to be the fair market value per share of our common stock at the date of grant. These options vest on a monthly basis over four years. The agreement also provides that, if we experience a change in control, then all non-vested options to purchase shares of our common stock granted to Mr. Welch may immediately become vested, in the discretion of the administrator of the plans under which the options are granted.

The agreement provides that Mr. Welch is an at will employee, which means he or we can terminate his employment at any time, with or without cause. If we terminate Mr. Welch’s employment without cause (as defined in the agreement), Mr. Welch terminates his employment for good reason (as defined in the agreement) or if Mr. Welch dies or becomes disabled as a direct result of business-related activities within nine months of the date of the agreement, then:


	•	Mr. Welch is entitled to receive severance equal to the amount of the annual base salary and bonus that he would have earned during the severance period if he had remained employed with us;

	•	we will continue to make available to Mr. Welch the benefits made generally available to our employees, to the extent permitted under applicable law and the terms of the benefit plans; and

	•	all non-vested options to purchase shares of our common stock granted to Mr. Welch will immediately become vested.

The agreement provides that, if Mr. Welch’s employment is terminated on or before the first anniversary of the date of the agreement, then the severance period will be the period beginning on the date of his termination and ending on the third anniversary of the date of the agreement. Otherwise, the severance period will be the 24-month period immediately following the date of his termination.

2004 Stock Incentive Plan. Our board of directors and our stockholders approved our 2004 stock incentive plan in May 2004. We have reserved 3,506,849 shares of our common stock for issuance under our 2004 stock incentive plan, subject to adjustment for a stock split, or any future stock dividend or other similar change in our common stock or our capital structure. The number of shares initially reserved under the 2004 stock incentive plan will be increased by any shares (up to a

Our 2004 stock incentive plan provides for the grant of stock options, restricted stock, restricted stock units, stock appreciation rights and dividend equivalent rights, collectively referred to as “awards.” Stock options granted under the 2004 stock incentive plan may be either incentive stock options under the provisions of Section 422 of the Internal Revenue Code, or non-qualified stock options. Incentive stock options may be granted only to employees. Awards other than incentive stock options may be granted to employees, directors and consultants.

The board of directors or a committee designated by the board, referred to as the “plan administrator”, will administer our 2004 stock incentive plan, including selecting the optionees, determining the number of shares to be subject to each award, determining the exercise or purchase price of each award and determining the vesting and exercise periods of each award.

The exercise price of all incentive stock options granted under our 2004 stock incentive plan must be at least equal to 100% of the fair market value of the common stock on the date of grant. If, however, incentive stock options are granted to an employee who owns stock possessing more than 10% of the voting power of all classes of our stock or the stock of any parent or subsidiary of us, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value of the common stock at the date of grant and the maximum term of these incentive stock options must not exceed five years. The maximum term of an incentive stock option granted to any other participant must not exceed ten years. The plan administrator will determine the term and exercise or purchase price of all other awards granted under our 2004 stock incentive plan.

Under the 2004 stock incentive plan, incentive stock options may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised during the lifetime of the participant only by the participant. Other awards are transferable by will or by the laws of descent or distribution and to the extent provided in the award agreement. The 2004 stock incentive plan permits the designation of beneficiaries by holders of awards, including incentive stock options.

In the event a participant in our 2004 stock incentive plan terminates service or is terminated by us without cause, any options which have become exercisable prior to the time of termination will remain exercisable for three months from the date of termination (unless a shorter or longer period of time is determined by the plan administrator). In the event a participant in our 2004 stock incentive plan is terminated by us for cause, any options which have become exercisable prior to the time of termination will immediately terminate. If termination was caused by death or disability, any options which have become exercisable prior to the time of termination, will remain exercisable for twelve months from the date of termination (unless a shorter or longer period of time is determined by the plan administrator). In no event may a participant exercise the option after the expiration date of the option.

The administrator has discretion to provide for acceleration of vesting in connection with a corporate transaction. Under our 2004 stock incentive plan, a corporate transaction is generally defined as:


	•	acquisition of 40% or more of our stock by any individual or entity including by tender offer or a reverse merger;


	•	a sale, transfer or other disposition of all or substantially all of the assets of our company;

	•	a merger or consolidation in which our company is not the surviving entity; or

	•	a complete liquidation or dissolution.

Unless terminated sooner, our 2004 stock incentive plan will automatically terminate in 2014. Our board of directors will have the authority to amend or terminate our 2004 stock incentive plan. No amendment or termination of the 2004 stock incentive plan may adversely affect any rights under awards already granted to a participant unless agreed to by the affected participant. To the extent necessary to comply with applicable provisions of federal securities laws, state corporate and securities laws, the Internal Revenue Code, the rules of any applicable stock exchange or national market system, and the rules of any non-U.S. jurisdiction applicable to awards granted to residents therein, we must obtain stockholder approval of any such amendment to the 2004 stock incentive plan in such a manner and to such a degree as required.

2004 Non-Employee Director Stock Option Program. Our 2004 non-employee director stock option program will be adopted as part of the 2004 stock incentive plan and will be subject to the terms and conditions of the 2004 stock incentive plan. Our 2004 non-employee director stock option program was approved by our board of directors in May 2004. The 2004 non-employee director stock option program will become effective as of the effective date of this prospectus, and no awards will be made under this program until that time.

The purpose of the 2004 non-employee director stock option program is to enhance our ability to attract and retain the best available non-employee directors, to provide them additional incentives and, therefore, to promote the success of our business.

The 2004 non-employee director stock option program will establish an automatic option grant program for the grant of awards to non-employee directors, which will be consistent with the terms and conditions of the non-employee director compensation program that we established in April 2004, as described above under “Management — Director Compensation.” Under the 2004 non-employee director stock option program, in connection with each non-employee director’s election to our board of directors, we grant to the director an option to purchase 27,397 shares of common stock at an exercise price per share equal to the fair market value of our common stock at the date of grant. These options vest and become exercisable on a monthly basis over four years, and they become fully vested and exercisable if we experience a change of control. In addition, each non-employee director who is re-elected to the board of directors at an annual meeting of our stockholders will be granted a fully-vested option to purchase 5,479 shares of common stock at an exercise price per share equal to the fair market value of our common stock at the date of grant. Each year the chairman of our audit committee will receive an additional fully-vested option to purchase 8,219 shares of common stock and the chairman of each of our compensation committee and our nominating and corporate governance committee will receive an additional fully-vested option to purchase 5,479 shares of common stock. The term of each automatic option grant and the extent to which it will be transferable will be provided in the agreement evidencing the option.

The 2004 non-employee director stock option program will be administered by the board or a committee designated by the board made up of two or more non-employee directors so that such awards would be exempt from Section 16(b) of the Exchange Act, referred to as the “program administrator.” The program administrator determines the terms and conditions of awards, and construe and interpret the terms of the program and awards granted under the program. Non-employee directors may also be granted additional awards under the 2004 stock incentive plan, subject to the discretion of the board or the committee.

Unless terminated sooner, the 2004 non-employee director stock option program will terminate automatically in 2014 when the 2004 stock incentive plan terminates. Our board of directors will have the authority to amend, suspend or terminate the 2004 non-employee director stock option program. No amendment or termination of the 2004 non-employee director stock option program may adversely affect

2001 Stock Incentive Plan. The 2001 stock incentive plan was approved by our board of directors and our stockholders in December 2001. As of the date of this prospectus, we have a total of 2,910,959 shares of common stock reserved for issuance under the 2001 stock incentive plan, subject to adjustment for a stock split, or any future stock dividend or other similar change in our common stock or our capital structure. As of March 31, 2004, options to purchase 399,342 shares of common stock had been exercised (of which 251,226 options were granted under the 2001 stock incentive plan), options to purchase 1,053,391 shares of common stock were outstanding and 510,452 shares of common stock remained available for grant. As of March 31, 2004, the outstanding options were exercisable at a weighted average exercise price of approximately $0.04 per share. In April 2004, we amended and restated the 2001 stock incentive plan to increase the number of shares of common stock reserved for issuance under the 2001 stock incentive plan from 1,815,068 shares to 2,910,959 shares.

After the completion of this offering, no additional options will be granted under the 2001 stock incentive plan and all options granted under the 2001 stock incentive plan that expire without having been exercised or are cancelled will become available for grant under the 2004 stock incentive plan.

Awards under the 2001 stock incentive plan may consist of incentive stock options (which are stock options that qualify under Section 422 of the Internal Revenue Code), non-qualified stock options and direct issuances of common stock.

Under the 2001 stock incentive plan, the board may grant incentive stock options to employees, including officers and employee directors. Non-qualified stock options and stock issuances may be granted to employees, directors and consultants. The board of directors or a committee designated by the board (referred to as the “administrator”) administers our 2001 stock incentive plan, including selecting the award recipients, determining the number of shares to be subject to each award, determining the exercise or purchase price of each award and determining the vesting and exercise periods of each award.

The exercise price of all incentive stock options granted under our 2001 stock incentive plan must be at least equal to 100% of the fair market value of the common stock on the date of grant. The exercise price of all non-qualified stock options granted under our 2001 stock incentive plan are determined by the administrator, but in no event may be less than 85% of the fair market value of the common stock on the date of grant. With respect to any optionee who owns stock possessing more than 10% of the voting power of all our classes of stock or the stock of any parent or subsidiary of ours, the exercise price of any option must equal at least 110% of the fair market value of the common stock at the date of grant. The maximum term of an incentive stock option or non-qualified stock option must not exceed ten years. With respect to any optionee who owns stock possessing more than 10% of the voting power of all our classes of stock or the stock of any parent or subsidiary of us, the maximum term of an incentive stock option must not exceed five years. The purchase price per share for direct stock issuances cannot be less than 85% of the fair market value of the common stock on the date of issuance. With respect to any participant who owns stock possessing more than 10% of the voting power of all our classes of stock or the stock of any parent or subsidiary of us, the purchase price per share for direct stock issuances cannot be less than 100% of the fair market value of the common stock on the date of issuance.

Under the 2001 stock incentive plan, incentive stock options may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised during the lifetime of the optionee only by the

If an optionee’s continuous service terminates without cause for any reason other than death or disability, the optionee may exercise his or her vested options within the period specified in the applicable option agreement, which period will not be less than the 60-day period following the termination date. If we terminate an optionee’s continuous service for cause, any options which have become exercisable prior to the time of termination will immediately terminate, except as otherwise determined by the administrator. If an optionee’s continuous service terminates as a result of death, the options vested as of the date of death may be exercised prior to the earlier of their expiration date or 12 months from the date of the optionee’s death. If an optionee’s continuous service terminates as a result of disability, the options vested as of the date of disability may be exercised prior to the earlier of their expiration date or 6 months from the date of the optionee’s disability.

The administrator has discretion to provide for acceleration of vesting in connection with a corporate transaction. Under our 2001 stock incentive plan, a corporate transaction is generally defined as:


	•	the acquisition of more than 50% of our stock by any individual or entity including by a reverse merger;

	•	a sale, transfer or other disposition of all or substantially all of the assets of our company;

	•	a merger or consolidation in which our company is not the surviving entity; or

	•	a complete liquidation or dissolution.

The 2001 stock incentive plan will terminate automatically in 2011 unless terminated earlier by our board of directors. The board of directors has the authority to amend or terminate the 2001 stock incentive plan. No amendment or termination of the 2001 stock incentive plan may adversely affect any rights under awards already granted to a participant unless agreed to by the affected participant. To the extent necessary to comply with applicable provisions of federal securities laws, state corporate and securities laws, the Internal Revenue Code, the rules of any applicable stock exchange or national market system, and the rules of any non-U.S. jurisdiction applicable to awards granted to residents therein, we must obtain stockholder approval of any such amendment to the 2001 stock incentive plan in such a manner and to such a degree as required.

As permitted by Section 102 of the Delaware General Corporation Law, we have adopted provisions in our restated certificate of incorporation and restated bylaws that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for 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;

	•	any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or

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

These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our restated certificate of incorporation also authorizes us to indemnify our officers, directors and other agents to the fullest extent permitted under Delaware law.

As permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws provide that:


	•	we may indemnify our directors, officers and employees to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions;

	•	we may advance expenses to our directors, officers and employees in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and

	•	the rights provided in our bylaws are not exclusive.

We have entered, and intend to continue to enter, into separate indemnification agreements with each of our directors, officers and key employees which may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements may require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as directors, officers and key employees other than liabilities arising from willful misconduct. These indemnification agreements also may require us to advance any expenses incurred by the directors, officers or key employees as a result of any proceeding against them as to which they could be indemnified.

At present, we are not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.

We have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances.

In September 2001, we issued an aggregate of 273,973 shares of our common stock to Michael L. Robertson, our Chairman, Chief Executive Officer and majority stockholder, for an aggregate purchase price of $9,500, and in October 2001, we issued an aggregate of 47,474,626 shares of our Series A preferred stock to Mr. Robertson, for an aggregate purchase price of $4,499,645.

In September 2001, we issued to Kevin B. Carmony, our President and Chief Operating Officer, 1,130,137 shares of our common stock valued at $39,187, in lieu of a like amount of compensation otherwise due to him for services rendered.

In October 2001, we issued an aggregate of 5,275,374 shares of Series A preferred stock to the Burcham Community Property Trust dated May 23, 1990, for an aggregate purchase price of $500,000. The trustees of the Burcham Community Property Trust are the parents of Mr. Robertson’s wife.

In July 2002, we entered into a revolving line-of-credit agreement with Mr. Robertson. Pursuant to this agreement, Mr. Robertson provided to us a line of credit of up to a total of $5,000,000, bearing simple interest at a rate of 10% per year, with interest payments due monthly and all outstanding principal amounts due on December 31, 2003. In February 2004, the credit agreement was amended to increase the maximum amount available under the line of credit to $10,000,000 and to extend the maturity date for both principal and accrued interest to June 30, 2005. The credit agreement was further amended to remove the requirement to make monthly interest payments. As of March 31, 2004, we owed Mr. Robertson approximately $10,400,000 in principal and accrued interest under the credit agreement. As discussed above under “Use of Proceeds,” we intend to use a portion of the first installment of the proceeds from our recent settlement with Microsoft to pay to Mr. Robertson all amounts that we owe to him under the credit agreement.

In 2003 through March 2004, we had an arrangement with SIPphone, Inc., a company of which Mr. Robertson is the founder and Chief Executive Officer, under which we provided office space and administrative support to SIPphone, including the handling of payments from third parties for its products, for which we are reimbursed at cost. In 2003, the aggregate amounts paid to us by SIPphone under this arrangement were $91,916 and the aggregate amounts paid by us to SIPphone were $100,141. In April 2004, we entered into a written sublease with SIPphone memorializing the terms of our agreement to provide office space to SIPphone through 2006. SIPphone’s sublease payments are calculated based on the percentage of our total square footage subleased to SIPphone and a corresponding percentage of any overage from operating expenses. Given that SIPphone subleases 6% of our total square footage, these sublease payments have equaled 6% of our monthly lease obligation plus a percentage of any overage from operating expenses.

We have entered into indemnification agreements with each of our executive officers and directors. The indemnification agreements require us to indemnify these individuals to the fullest extent permitted by Delaware law and may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. In addition, we have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances.

The following table sets forth information regarding the beneficial ownership of our common stock as of June 30, 2004 for:


	•	each executive officer named in the Summary Compensation Table;

	•	each of our directors;

	•	each person known by us to beneficially own more than 5% of our common stock; and

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

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to the securities. Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares of common stock used to calculate the percentage ownership of each listed person includes the shares of common stock underlying options or warrants held by such persons that are exercisable within 60 days of June 30, 2004.

Percentage of beneficial ownership before the offering is based on 16,347,586 shares, consisting of 1,895,532 shares of common stock outstanding as of June 30, 2004, and 14,452,054 shares issuable upon the conversion of the preferred stock. Percentage of beneficial ownership after the offering is based on 20,747,586 shares, including 4,400,000 shares sold in this offering.

Unless otherwise indicated, the address for the following stockholders is c/o Lindows, Inc., 9333 Genesee Ave., 3rd Floor, San Diego, California 92121.


(1)	Includes (a) 10,814,966 shares owned by The SKL Trust dated May 19, 2000, of which Mr. Robertson is a trustee, (b) 2,383,561 shares owned by The Robertson Descendants Irrevocable Trust dated July 15, 1999, of which Mr. Robertson is a trustee and (c) 34,247 shares subject to options exercisable within 60 days of June 30, 2004.

(2)	Includes 22,831 shares subject to options exercisable within 60 days of June 30, 2004.

(3)	Includes 250,000 shares subject to options exercisable within 60 days of June 30, 2004.


(4)	Includes 263,699 shares subject to options exercisable within 60 days of June 30, 2004.

(5)	Includes 15,982 shares subject to options exercisable within 60 days of June 30, 2004.

(6)	Includes 13,242 shares subject to options exercisable within 60 days of June 30, 2004.

(7)	Includes 13,242 shares subject to options exercisable within 60 days of June 30, 2004.

(8)	Keith Burcham and Audra Lee Burcham are co-trustees of Burcham Community Property Trust dated May 23, 1990. The Burcham Community Property Trust’s address is P.O. Box 3445, Rancho Santa Fe, California 92067.

(9)	Includes options to purchase up to 613,242 shares of our common stock.

Upon completion of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, $0.0001 par value per share, and 10,000,000 shares of preferred stock, $0.0001 par value per share.

The following summary of the rights of our common stock and preferred stock is not complete and is qualified in its entirety by reference to our amended and restated certificate of incorporation and amended and restated bylaws to be in effect upon completion of this offering, copies of which are filed as exhibits to the registration statement of which this prospectus is a part.

Based on 1,895,532 shares of common stock outstanding as of June 30, 2004, the issuance of 4,400,000 shares of common stock in this offering, the issuance of 14,452,054 shares of common stock upon conversion of all outstanding shares of our preferred stock, and no exercise of outstanding options or warrants, there will be 20,747,586 shares of common stock outstanding upon completion of this offering. As of the same date, there were options outstanding to purchase 2,506,738 shares of common stock and no warrants outstanding. As of June 30, 2004, we had approximately 53 record holders of our common stock.

Holders of our common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. The holders of common stock are not entitled to cumulate voting rights with respect to the election of directors, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election.

Subject to limitations under Delaware law and preferences that may apply to any outstanding shares of preferred stock, holders of our common stock are entitled to receive ratably such dividends or other distribution, if any, as may be declared by our board of directors out of funds legally available therefor.

In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the liquidation preference of any outstanding preferred stock.

The common stock has no preemptive, conversion or other rights to subscribe for additional securities. There are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.

All outstanding shares of our common stock are, and all shares of common stock to be outstanding upon completion of the offering will be, validly issued, fully paid and nonassessable.

As of June 30, 2004, there were 52,750,000 shares of preferred stock outstanding. Upon the closing of this offering, all outstanding shares of preferred stock will automatically convert into 14,452,054 shares of common stock.

Following the offering, our board of directors will have the authority, without further action by the stockholders and subject to the limits imposed by the Delaware General Corporation Law, to issue up to 10,000,000 shares of preferred stock in one or more series and to designate the rights, preferences, privileges and restrictions of each such series. The issuance of preferred stock could have the effect of restricting dividends on the common stock, diluting the voting power for the common stock, impairing the liquidation rights of the common stock or delaying or preventing a change in control without further action by the stockholders. At present, we have no plans to issue any shares of preferred stock after completion of this offering.

Anti-takeover Effects of Delaware Law and Provisions of Our Certificate of Incorporation and Bylaws

We are subject to Section 203 of the Delaware General Corporation Law. This statute regulating corporate takeovers prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for three years following the date that the stockholder became an interested stockholder, unless:


	•	prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

	•	the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

	•	on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.


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

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

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

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

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

Provisions of our restated certificate of incorporation and restated bylaws, which will become effective upon the closing of this offering, may have the effect of making it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of our company by means of a tender offer, a proxy contest or otherwise. These provisions may also make the removal of incumbent officers and directors more difficult. These provisions are intended to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions may make it more difficult for stockholders to take specific corporate actions and could have the effect of delaying or preventing a change in our control. The amendment of any of these anti-takeover provisions would require approval by holders of at least 66 2/3% of our outstanding common stock entitled to vote.

In particular, our certificate of incorporation and bylaws provide for the following:

Our board of directors is divided into three classes of the same or nearly the same number of directors, each serving staggered three-year terms, which means that only one class of directors may be elected at each annual meeting or special meeting in lieu of such annual meeting. These provisions may make the removal of incumbent directors difficult and may discourage third parties from attempting to circumvent the anti-takeover effects of our certificate of incorporation and bylaws by removing our incumbent directors.

Any action to be taken by our stockholders must be effected at a duly called annual or special meeting and may not be effected by written consent.

Special meetings of our stockholders may be called only by the president, chief executive officer, chairman of the board of directors or a majority of the members of the board of directors.

Stockholder proposals to be brought before an annual meeting of our stockholders must comply with advance notice procedures. These advance notice procedures require timely notice and apply in several situations, including stockholder proposals relating to the nominations of persons for election to the board of directors. Generally, to be timely, notice must be received at our principal executive offices no later than the due date for stockholder proposals that is specified in our proxy statement released to stockholders in connection with the previous year’s annual meeting of stockholders, which date shall not be less than 120 days in advance of the date of that proxy statement.

The approval of not less that 66 2/3% of the outstanding shares of our capital stock entitled to vote is required to amend the provisions of our amended and restated bylaws by stockholder action, or to amend the provisions of our amended and restated certificate of incorporation that are described in this section or that are described under “Management — Limitation of Liability and Indemnification of Officers and Directors” above. These provisions will make it more difficult to circumvent the anti-takeover provisions of our certificate of incorporation and our bylaws.

Our board of directors is authorized to issue, without further action by the stockholders, up to 10,000,000 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.

The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.

We have applied for approval for trading and quotation of our common stock on the Nasdaq National Market under the symbol “LINE.”

The following is a summary of certain U.S. federal income and estate tax consequences of the acquisition, ownership and disposition of our common stock purchased pursuant to this offering by a holder that, for U.S. federal income tax purposes, is not a “U.S. person,” as we define that term below. A beneficial owner of our common stock who is not a U.S. person is referred to below as a “non-U.S. holder.” This summary is based upon current provisions of the U.S. Internal Revenue Code, U.S. Treasury regulations promulgated thereunder, judicial opinions, administrative pronouncements and published rulings of the U.S. Internal Revenue Service all as in effect as of the date hereof. These authorities may be changed, possibly retroactively, resulting in U.S. federal tax consequences different from those set forth below. We have not sought, and will not seek, any ruling from the U.S. Internal Revenue Service or opinion of counsel with respect to the statements made in the following summary, and there can be no assurance that the U.S. Internal Revenue Service will not take a position contrary to such statements or that any such contrary position taken by the U.S. Internal Revenue Service would not be sustained.

This summary is limited to non-U.S. holders who purchase our common stock issued pursuant to this offering and who hold our common stock as a capital asset, which generally is property held for investment. This summary also does not address the tax considerations arising under the laws of any foreign, state or local jurisdiction, or under U.S. federal estate or gift tax laws, except as specifically described below. In addition, this summary does not address tax considerations that may be applicable to an investor’s particular circumstances or to investors that may be subject to special tax rules, including, without limitation:


	•	banks, insurance companies or other financial institutions;

	•	partnerships;

	•	entities that are “controlled foreign corporations,” “passive foreign investment companies” or “foreign personal holding companies” for U.S. federal income tax purposes;

	•	U.S. expatriates;

	•	tax-exempt organizations;

	•	tax-qualified retirement plans;

	•	dealers in securities or currencies;

	•	traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; or

	•	persons that will hold common stock as a position in a hedging transaction, “straddle” or “conversion transaction” for tax purposes.

If a partnership, including any entity treated as a partnership for U.S. federal income tax purposes, is a holder, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A holder that is a partnership, and partners in such partnership, should consult their own tax advisors regarding the tax consequences of the purchase, ownership and disposition of our common stock.


	•	a citizen or resident of the United States;

	•	a corporation, including any entity treated as a corporation for U.S. federal income tax purposes, or partnership, including any entity treated as a partnership for U.S. federal income tax purposes, created or organized under the laws of the United States or of any political subdivision of the United States;


	•	an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

	•	a trust, the administration of which is subject to the primary supervision of a U.S. court and one or more U.S. persons have the authority to control all substantial decisions of the trust, or other trusts considered U.S. persons for U.S. federal income tax purposes.

Generally, an individual may be treated as a resident of the United States in any calendar year for U.S. federal income tax purposes, instead of a nonresident, by, among other ways, being present in the United States for at least 31 days in that calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. For purposes of this calculation, you would count all of the days present in the current year, one-third of the days present in the immediately preceding year and one-sixth of the days present in the second preceding year. Residents are taxed for U.S. federal income tax purposes as if they were U.S. citizens.

YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

If distributions are made with respect to shares of our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, it will constitute a return of capital that is applied against and reduces, but not below zero, your adjusted tax basis in our common stock. Any remainder will be treated as gain on the disposition of the common stock, as discussed below. Dividends paid to a non-U.S. holder generally will be subject to withholding of U.S. federal income tax at the rate of 30% or such lower rate as may be specified by an applicable income tax treaty.

If the dividend is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States or, if an income tax treaty applies, attributable to a U.S. permanent establishment maintained by such non-U.S. holder, the dividend will not be subject to any U.S. federal income tax withholding, provided certain certification requirements are met, as described below, but will be subject to U.S. federal income tax imposed on net income on the same basis that applies to U.S. persons generally. A corporate holder under certain circumstances also may be subject to a U.S. federal “branch profits tax” equal to 30%, or such lower rate as may be specified by an applicable income tax treaty, of a portion of its effectively connected earnings and profits for the taxable year.

In order to claim the benefit of a tax treaty or to claim exemption from withholding because the income is effectively connected with the conduct of a trade or business in the United States, a non-U.S. holder must provide a properly executed U.S. Internal Revenue Service Form W-8BEN for treaty benefits or W-8ECI for effectively connected income, or such successor forms as the U.S. Internal Revenue Service designates, prior to the payment of dividends. These forms must be periodically updated. Non-U.S. holders may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund.

A non-U.S. holder generally will not be subject to U.S. federal income tax on gain recognized on a disposition of our common stock unless:


	•	the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States or, alternatively, if an income tax treaty applies, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; in these cases, the gain will be taxed on a net income basis at the regular graduated rates and generally in the manner applicable to U.S. persons and, if the non-U.S. holder is a foreign corporation, the “branch profits tax” described above may also apply;

	•	the non-U.S. holder is an individual who holds our common stock as a capital asset, is present in the United States for 183 days or more in the taxable year of the disposition and meets other requirements; or

	•	we are or have been a “U.S. real property holding corporation” for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that the non-U.S. holder held our common stock.

Generally, a corporation is a “U.S. real property holding corporation” if the fair market value of its “U.S. real property interests” equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. The tax relating to stock in a “U.S. real property holding corporation” generally will not apply to a non-U.S. holder whose holdings, direct and indirect, at all times during the applicable period, constituted 5% or less of our common stock, provided that our common stock was regularly traded on an established securities market. We believe that we have not been and are not currently, and we do not anticipate becoming in the future, a “U.S. real property holding corporation” for U.S. federal income tax purposes.

Our common stock owned or treated as owned by an individual who at the time of death is a non-U.S. holder will be included in his or her estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Under U.S. Treasury regulations, we must report annually to the U.S. Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to such non-U.S. holder and the tax withheld with respect to those dividends. These information reporting requirements apply even if withholding was not required because the dividends were effectively connected dividends or withholding was reduced or eliminated by an applicable income tax treaty. Pursuant to an applicable income tax treaty, that information may also be made available to the tax authorities in the country in which the non-U.S. holder resides.

U.S. federal backup withholding, currently at a 28% rate of tax, generally will not apply to payments of dividends made by us or our paying agents, in their capacities as such, to a non-U.S. holder of our common stock if either the holder has properly certified that it is not a U.S. person on U.S. Internal Revenue Services Form W-8BEN (or other appropriate form) or certain other requirements are met. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a U.S. person.

Payments of the proceeds from a disposition or a redemption effected outside the United States by a non-U.S. holder of our common stock made by or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, information reporting, but not backup withholding, generally will apply to such a payment if the broker has certain

Payment of the proceeds from a disposition by a non-U.S. holder of common stock made by or through the U.S. office of a broker generally is subject to information reporting and backup withholding unless the non-U.S. holder certifies that it is not a U.S. person under penalties of perjury (and we and our paying agent do not have actual knowledge, or reason to know, that the holder is a U.S. person) or otherwise establishes an exemption from information reporting and backup withholding.

Backup withholding is not an additional tax. Any amounts that are withheld under the backup withholding rules will be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability if certain required information is furnished to the U.S. Internal Revenue Service. Non-U.S. holders should consult their own tax advisors regarding application of backup withholding in their particular circumstance and the availability of, and procedure for, obtaining an exemption from backup withholding under current U.S. Treasury regulations.

Immediately prior to this offering, there has been no public market for our common stock. Possible or actual sales by our stockholders of substantial amounts of our common stock in the public market following this offering could cause the prevailing market price of our common stock to decline and could make it difficult or impossible for us to sell equity or equity-related securities in the future at a time and price we deem appropriate.

Upon completion of this offering, we will have 20,747,586 shares of common stock outstanding, based on shares outstanding as of June 30, 2004 and assuming no exercise of currently outstanding options or warrants. Of these shares, the 4,400,000 shares sold in this offering, plus any additional shares sold upon exercise of the underwriters’ over-allotment option, will be freely transferable without restriction under the Securities Act, unless they are held by our “affiliates” as that term is used under the Securities Act and the rules and regulations promulgated thereunder. The remaining 16,347,586 shares of common stock held by existing stockholders are restricted shares. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration such as the exemptions under Rules 144 or 701 promulgated under the Securities Act, which rules are summarized below.

As a result of lock-up agreements, the provisions of Rules 144 and 701 and a registration statement on Form S-8 that we expect to file after the effective date of this offering, based on shares outstanding as of June 30, 2004, additional shares will be available for sale in the public market, subject to certain volume and other restrictions, as follows:


	•	143,342 restricted shares will be eligible for immediate sale on the effective date of this offering;

	•	340,566 restricted shares will be eligible for sale approximately 30 days after the date of this prospectus, pursuant to a registration statement on Form S-8 that we expect to file, as described below;

	•	148,116 restricted shares will be eligible for sale 90 days after the date of this prospectus;

	•	15,433,369 restricted shares will be eligible for sale upon expiration of the lock-up agreements, which will occur 180 days after the date of this prospectus; and

	•	the remaining 282,191 restricted shares will be eligible for sale from time to time thereafter upon expiration of their respective one-year holding periods.

The holders of approximately 95% of our capital stock outstanding as of June 30, 2004 have entered into lock-up agreements pursuant to which they have agreed, subject to specified exceptions, that, without prior written consent of Roth Capital Partners, they will not offer, sell, contract to sell, pledge, grant any option to sell, or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exercisable for shares of our common stock, or warrants or other rights to purchase our common stock during the 180-day period following the effective date of the registration statement. However, notwithstanding the foregoing restrictions, one of the lock-up agreements permits a non-management stockholder to make sales resulting in gross proceeds to the holder of not more than $500,000 in the aggregate. Additionally, Roth Capital Partners, at its discretion, can waive the restrictions of the lock-up agreements at an earlier time without prior notice or announcement and allow all of our stockholders to sell their shares of our common stock in the public market subject only to applicable securities rules and regulations. In considering any request to release shares subject to a lock-up agreement Roth Capital Partners will consider the possible impact of the release of the shares on the trading price of the stock sold in the offering. Roth Capital Partners does not have any present intention or any understandings, implicit or

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year, including the holding period of certain prior owners other than affiliates, is entitled to sell within any three-month period a number of shares that does not exceed the greater of (a) 1% of the number of shares of our common stock then outstanding, which will equal approximately 207,476 shares immediately after the offering, or (b) the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions, notice requirements and the availability of current public information about us.

Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale and who has beneficially owned shares for at least two years, including the holding period of certain prior owners other than affiliates, is entitled to sell those shares without complying with the volume limitations, manner-of-sale provisions, notice requirements and public information provisions of Rule 144. Therefore, unless restricted under the 180-day lock-up arrangement or otherwise, Rule 144(k) shares may be sold immediately upon the closing of this offering.

In general, under Rule 701 of the Securities Act as currently in effect, each of our directors, officers, employees, consultants or advisors who purchased shares from us before the date of this prospectus in connection with a compensatory stock plan or other written compensatory agreement is eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144.

We intend to file with the Securities and Exchange Commission a registration statement on Form S-8 under the Securities Act covering the shares of common stock issued or reserved for issuance under our 2001 stock incentive plan and 2004 stock incentive plan, as well as 844,329 shares of common stock held by our President. The registration statement is expected to be filed and become effective approximately 30 days after the date of this prospectus. Accordingly, shares registered under the registration statement will be available for sale in the open market, subject to Rule 144 volume limitations applicable to affiliates and to shares that we issued prior to the filing of the registration statement, and subject to any vesting restrictions and lock-up agreements applicable to these shares.

We and the underwriters named below intend to enter into an underwriting agreement with respect to the shares of common stock being offered. Subject to the terms and conditions of the underwriting agreement, the underwriters named below will severally agree to purchase from us the number of shares of our common stock set forth opposite their names on the table below at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this prospectus as follows:

The underwriting agreement will provide that the obligations of the underwriters are subject to conditions, including:


	•	the absence of any material misstatements or omissions in this prospectus or the registration statement;

	•	the absence of any material adverse change in our business;

	•	the continuing accuracy of representations and warranties made to the underwriters by us; and

	•	the receipt of certificates, opinions and letters from us, counsel and our independent accountants.

Subject to those conditions, the underwriters will be committed to purchase all of the shares of our common stock offered by this prospectus if any of the shares are purchased. This commitment does not include the shares subject to the over-allotment option described below unless and until the underwriters exercise this option.

The underwriters propose to offer the common stock to the public at the public offering price set forth on the cover of this prospectus. The underwriters may offer the common stock to securities dealers at the price to the public less a concession not in excess of $ per share. Securities dealers may reallow a concession not in excess of $ per share to other dealers. After the common stock is released for sale to the public, the underwriters may vary the offering price and other selling terms from time to time.

We have granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to an aggregate of 660,000 additional shares of common stock at the public offering price set forth on the cover page of this prospectus less the underwriting discounts and commissions. The underwriters may exercise this option only to cover over-allotments, if any, made in connection with the sale of our common stock offered hereby.

The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming no exercise and full exercise of the underwriters’ option to purchase additional common shares.

We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $1,750,000.

The terms of the underwriting agreement will provide that we will indemnify the underwriters against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, and to contribute to payments the underwriters may be required to make in respect of any such liabilities.

We have agreed not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of common stock, or any options or warrants to purchase common stock other than the shares of common stock or options to acquire common stock issued under our stock plans, for a period of 180 days after the date of this prospectus, except with the prior written consent of Roth Capital Partners. In addition, the holders of approximately 95% of our capital stock outstanding as of June 30, 2004 have entered into lock-up agreements pursuant to which they have agreed, subject to specified exceptions, that, without prior written consent of Roth Capital Partners, they will not offer, sell, contract to sell, pledge, grant any option to sell, or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exercisable for shares of our common stock, or warrants or other rights to purchase our common stock during the 180-day period following the effective date of the registration statement. However, notwithstanding the foregoing restrictions, one of the lock-up agreements permits a non-management stockholder to make sales resulting in gross proceeds to the holder of not more than $500,000 in the aggregate. Roth Capital Partners, at its discretion, can waive the restrictions of the lock-up agreements at an earlier time without prior notice or announcement and allow all of our stockholders to sell their shares of our common stock in the public market subject only to applicable securities rules and regulations. In considering any request to release shares subject to a lock-up agreement Roth Capital Partners will consider the possible impact of the release of the shares on the trading price of the stock sold in the offering. Roth Capital Partners does not have any present intention or any understandings, implicit or explicit, to release any of the shares subject to the lock-up agreements prior to the expiration of these lock-up periods.

At our request, the underwriters have reserved up to five percent of the shares offered by this prospectus for sale at the initial public offering price to individuals associated with us. The number of shares of our common stock available for sale to the general public will be reduced to the extent these individuals purchase or confirm for purchase, orally or in writing, such reserved shares. Any reserved shares not purchased or confirmed for purchase will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.

This prospectus forms part of a registration statement on Form S-1 filed with the Securities and Exchange Commission, to register the shares under the Securities Act.

The underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Securities Exchange Act of 1934. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Covered short sales are sales made in an amount not greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters may close out a covered short sale by exercising their over-allotment option or purchasing shares in the open market. Naked short sales are sales made in an amount in excess of the number of shares available under the over-allotment option. The underwriters must close out any naked short sale by purchasing shares in the open market.

Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the shares of common shares in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the shares of common shares originally sold by such syndicate member are purchased in a syndicate covering transaction to cover syndicate short

The validity of the shares of common stock offered by this prospectus will be passed upon for us by Morrison & Foerster LLP, San Diego, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.

The financial statements as of December 31, 2002 and 2003 and for each of the two years in the period ended December 31, 2003 and for the period from July 24, 2001 (inception) to December 31, 2001 included in this prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to our ability to continue as a going concern as described in Note 1 to the financial statements) of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock being offered by this prospectus. This prospectus does not contain all of the information in the registration statement and its exhibits. For further information about us and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance where such contract or other document is filed as an exhibit to the registration statement, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by the filed exhibit.

You can read our Securities and Exchange Commission filings, including the registration statement of which this prospectus is a part, over the Internet at the Securities and Exchange Commission’s website at www.sec.gov. You may also read and copy any document we file with the Securities and Exchange Commission at its public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also obtain copies of the document at prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

Upon completion of this offering, we will be subject to the information reporting requirements of the Exchange Act and we will file reports, proxy statements and other information with the Securities and Exchange Commission. We also intend to furnish our stockholders with annual reports containing our financial statements audited by an independent public accounting firm and quarterly reports containing our unaudited financial information. We maintain a website at www.linspire.com. Upon completion of this offering, you may access our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the Securities and Exchange Commission free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The reference to our web address does not constitute an incorporation by reference of the information contained at this site into the registration statement or this prospectus.

In our opinion, the accompanying balance sheets and the related statements of operations, stockholders’ equity (deficit) and cash flows present fairly, in all material respects, the financial position of Lindows, Inc. at December 31, 2002 and 2003, and the results of its operations and its cash flows for the years then ended and for the period from July 24, 2001 (inception) to December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 16(b)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has negative working capital and an accumulated deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Lindows, Inc. (the “Company”) was incorporated in the state of Delaware on July 24, 2001. The Company is a developer and vendor of Linux-based operating systems, application software and services designed specifically for desktop and laptop computers in homes, schools and businesses. The cornerstone of the Company’s product line is the Linspire operating system. The Company also offers Linux application software and subscription services developed by the Company and others. The Company sells and distributes its products and subscription services both through hardware manufacturers, systems builders, and software and hardware resellers and through the Internet using its “CNR technology,” which allows users to license, install, manage, and configure programs available from the Company’s software Warehouse on the Linspire.com website.

The accompanying financial statements have been prepared assuming the Company will recover its assets and satisfy its liabilities in the normal course of business. As of March 31, 2004, the Company had working capital of $2.4 million, long-term debt of $10.4 million and an accumulated deficit, as restated, of $13.5 million. As of December 31, 2003, the Company had a working capital deficit of $1.8 million, long-term debt of $4.7 million and an accumulated deficit of $11.9 million. The Company’s ability to fund its operations during 2004 is dependent upon obtaining additional debt or equity financing adequate to fulfill its development and marketing activities, and achieving a level of revenues adequate to support the Company’s cost structure. The Company intends to raise the proceeds necessary to fund its operations during 2004 through a combination of financings, including an offering of equity securities. Should the Company be unsuccessful in obtaining from third parties the funds necessary to fund its operations, one of the Company’s principal stockholders has committed to continue to provide an available line of credit up to $10.0 million through June 30, 2005 (See Note 5). While management believes that its existing working capital, its plans to raise proceeds through equity or debt financings and the line of credit from one of its principal stockholders are sufficient to fund its operations for at least the next twelve months, there can be no assurance that the Company will be able to obtain additional financing on commercially reasonable terms or at all.

The Company’s Board of Directors has authorized the filing of a registration statement with the Securities and Exchange Commission to register shares of its common stock in an initial public offering (IPO). If the IPO is consummated as presently anticipated, all of the outstanding shares of Series A Convertible Preferred stock will convert into 14,452,054 shares of common stock. Unaudited pro forma stockholders’ equity at March 31, 2004 reflects the assumed automatic conversion of all outstanding shares of Series A Convertible Preferred Stock into shares of common stock as if such conversion had occurred at March 31, 2004.

The financial statements as of and for the three months ended March 31, 2003 and 2004 are unaudited. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial information therein. The

results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results that may be reported for the year ended December 31, 2004.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

The Company considers all highly liquid investments with an original or remaining maturity of three months or less when purchased to be cash equivalents.

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts and notes receivable. The Company limits its exposure to credit loss by placing its cash and cash equivalents and short-term investments with high credit quality financial institutions. The Company does not require collateral on its arrangements with customers. In general, the Company requires most of its customers to pay by credit card at the time of purchase. As is necessary, the Company provides reserves against accounts receivable for estimated losses that may result from customers’ inability to pay. The amount of the reserve is determined by analyzing known uncollectible accounts, aged receivables, economic conditions in the customers’ industry, historical losses and changes in customer creditworthiness. Write-offs of trade receivables to date have not been material. Also see reserve for note receivable discussed in Note 9.

The Company had one customer, based in Japan, that comprised approximately 11% of revenues for the year ended December 31, 2003 and approximately 38% for the three months ended March 31, 2004. No single customer comprised more than 10% of revenues for the year ended December 31, 2002.

The carrying amounts shown for the Company’s cash and cash equivalents, notes receivable and accounts and notes payable approximate their fair value due to the short-term maturities of these instruments.

Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets: computer hardware and software — 3 years; office furniture and equipment — 5 years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the terms of the related leases.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment of or Disposal of Long-Lived Assets,” the Company records impairment losses on

long-lived assets used in operations when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. To date, the Company has not experienced any impairment losses on its long-lived assets used in operations.

The Company generates its revenue from the sale of desktop operating systems and application software for desktop and laptop computers. The Company licenses and distributes Linux software applications, developed by the Company and others, through the Internet using the Company’s CNR technology and through hardware manufacturers, system builders and software and hardware resellers. The Company recognizes revenue in accordance with Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by SOP 98-4 and SOP 98-9. The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists (upon receipt of an authorized purchase order from the customer); (2) delivery has occurred (upon delivery of the software product or performance of services in accordance with contract specifications); (3) the sales price is deemed fixed and determinable (free of contingencies or significant uncertainties such as refund/adjustment provisions or extended payment terms); and (4) collection is probable (there are no indicators of non-payment based upon history with the customer and/or upon completion of applicable credit review procedures). Billings made or payments received in advance of delivery are deferred until the period these services are provided. As of December 31, 2003 and March 31, 2004, the Company had deferred revenue amounts of $1,706,839 and $1,830,444 (restated), respectively, of which approximately $1,567,911 (restated) is classified as current.

The Company’s revenue recognition policies with respect to various product offerings are as follows:

The Company’s primary products, the Linspire operating system software and other application software (spreadsheet, presentation, word processing, games, etc.) are sold on a perpetual basis directly to end users through the Company’s internet website. Customers can download the purchased software directly from the website or request shipment of the software product on CD. Most of the Company’s customers pay for their purchases using a credit card. The Company offers a 15-day right of return; as a result, revenues are not recorded until after such return privileges expire. Purchasers of Linspire and other desktop products are not entitled to upgrade rights under the terms of the software license agreement; however, when the release of a new version of a software product is imminent (within 90 days) and the Company expects that the new version will be provided to a customer due to the customer’s purchase of the current version of the product, revenue is deferred until the new version has been made available to the customer. Post-contract customer support (PCS) is provided online primarily through databases of frequently asked questions (FAQs) which may be accessed on the Company’s website and secondarily through responses to email queries. The cost of providing such PCS is insignificant. The Company periodically offers discounts and coupons as promotions for potential customers. Such discounts and coupons are recorded as reductions of revenue upon use of the discount or coupon.

Revenues from resellers and distributors are recognized when products have been delivered, when return obligations have expired and service obligations, if any, have been fulfilled. The Company’s agreements with resellers include a 15-day right of return and may provide for technical support as well as upgrades on a when-and-if available basis. License revenue from resellers and distributors is recognized ratably over the period in which technical support and when-and-if available upgrades are provided to the customer.

In March 2003, the Company entered into an agreement with a Japanese distributor for the exclusive distribution of the Company’s products in Japan beginning in May 2003 and continuing through May 2004 in exchange for minimum payments of $1,575,000 to be received on an installment basis over the 1-year term of the agreement. The agreement also requires the Company to provide when-and-if available upgrades during the 1-year term of the agreement as well as certain technical support during the period through May 2005 (the “Support Period”). Payments received under this agreement are recognized as revenues commencing in the period they are received, with a pro-rata portion of the payment recognized as revenue based on the portion of the Support Period which had elapsed at the date the payment was received, with the remaining amount of the payment recorded as revenue ratably over the remaining Support Period. Revenues under this agreement totaled $227,500 in 2003 and $392,656 (restated — see Note 2) in the three months ended March 31, 2004. Deferred revenues related to this agreement totaled approximately $797,000 (restated — see Note 2) as of March 31, 2004.

Several of the Company’s software products, including the LinspirePlus program (a software service which allows users to install available software titles from the Company’s Warehouse at no additional charge or at a discounted price), the Company’s virus protection software and Internet security software, are sold as annual subscription services, with access to these services over a certain period included in the software price. Revenues associated with such software services are deferred and recognized on a straight-line basis over the entire term of the service period, which ranges from one month to two years in duration. For subscription services sold on a lifetime basis, revenues are recognized ratably over the estimated five-year life of the underlying products.

Pursuant to the terms of the Company’s standard Builder Agreement, Builders of computer systems and manufacturers of computer hardware pay monthly or annual program fees in exchange for a non-exclusive license to install one copy of the basic Linspire operating system onto each unit they manufacture. In addition, Builders pay per-unit licensing fees for each unit of the Company’s other products which they install. Builders and manufacturers are entitled to technical support relating to the builder’s specific hardware as well as when-and-if available upgrades during the term of the Builder Agreement. High-volume builders may participate in revenue sharing programs for products and services that their customers buy from the Company’s Warehouse. Revenue sharing payments are accounted for as reductions in revenue in the period they are earned.

Revenue associated with monthly and annual builder and manufacturer programs are deferred and recognized on a straight-line basis over the term of the Builder Agreement, which ranges from one month to one year. Per unit license fees are recognized as revenue in the period the builder or manufacturer notifies the Company of products sold.

The Company offers bundled packages of the Company’s operating system and other application software to customers. For such arrangements with multiple elements, revenue is allocated to each element of the transaction based upon the sales price of the element when sold on a stand-alone basis to other customers. Prior to the first general release of the Company’s operating system in the fourth quarter of 2002, the Company developed an Insider membership program whereby members were provided various elements including pre-release (beta) software when it became available, the Company’s operating system when it was released, and access to the Company’s software Warehouse through November 2004. Upon expiration of the Insider membership in November 2004, in order to maintain access to the Company’s software Warehouse, Insiders must renew their subscriptions by purchasing the Company’s LinspirePlus product. The various elements provided to Insider members have not been sold separately; accordingly, the Insider fees have not been allocated among the various elements. Rather, Insider membership fees were deferred until the only remaining element to be delivered to the Insider members was access to the Company’s software Warehouse, at which time the Insider fees were recognized on a straight-line basis over the remaining period of Warehouse access, which ranged from 12-24 months.

The fees for shipping and handling paid by the customer are recognized as revenues. The costs associated with shipping and handling the Company’s products are expensed as cost of revenues.

Cost of revenues are expensed as incurred and consist primarily of royalties, product costs, third party credit verification services, merchant transaction charges and bandwidth charges associated with the delivery of the Company’s software products to the consumer.

Research and development expenses, including payroll, employee benefits, allocated overhead, and other headcount-related costs associated with product development are charged to expense as incurred.

In accordance with Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”), the Company capitalized $280,450 in costs related to the development of internal use software for its website and e-commerce systems during the period from July 24, 2001 (inception) to December 31, 2001. Such costs represent software purchased from external third parties for use in the Company’s internal operations. No costs were capitalized during the years ended December 31, 2002 and 2003 and the three months ended March 31, 2004. The Company amortizes the costs of computer software developed for internal use on a straight-line basis over its estimated useful life of 3 years. The carrying value of internal use software is included in property and equipment at December 31, 2002 and 2003 and at March 31, 2004.

Capitalization of software development costs for products to be sold to third parties begins upon the establishment of technological feasibility and ceases when the product is available for general release. Technological feasibility is established upon the development of a working model of the software program. On a regular basis, the Company releases the source code underlying its software products as well as the beta versions of its software. As the time period between establishment of technological feasibility and when the software is available for general release is short and the related development costs are not material, the Company has not capitalized any software development costs since its inception.

On April 20, 2004, the Company filed a Registration Statement on Form S-1 in connection with a proposed initial public offering of its common stock. As of March 31, 2004, the Company has incurred $227,813 of costs associated with the offering. The Company has classified these deferred offering costs as a long-term asset on its balance sheet as of March 31, 2004. The Company anticipates offsetting these costs against proceeds received from the offering. If the offering is not completed, these costs will be expensed.

Sales and marketing expenses consist primarily of salaries, benefits and related expenses, including travel of personnel engaged in selling, marketing and customer support functions as well as public relations, promotional costs (including packaging and shipping costs related to free products distributed in promotions) and allocated overhead costs and advertising. The Company expenses all advertising costs when incurred. For the year ended December 31, 2003 and for the three months ended March 31, 2004, such costs were $7,549 and $17,018, respectively. There were no advertising costs incurred during the period from July 24, 2001 (inception) through December 31, 2001, for the year ended December 31, 2002 and the three months ended March 31, 2003.

As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company has elected to apply Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of the Company’s employee stock options is equal to or greater than the estimated fair value of the underlying stock on the date of grant, no compensation expense is recognized. With respect to stock options granted with exercise prices below the fair value of the Company’s common stock as estimated by the Company’s management for financial reporting purposes, the Company has recorded deferred stock-based compensation for the difference between the exercise prices of these stock options and the related estimated fair values. This deferred compensation is being amortized to expense on an accelerated basis over the stock option’s vesting period in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 28 (“FIN 28”), “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, an Interpretation of APB Opinion Nos. 15 and 25.”

Compensation for equity instruments issued to non-employees has been determined in accordance with SFAS No. 123, FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation,” and the EITF consensus on Issue 96-18, “Accounting for Equity

Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services,” as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured.

Pro forma information regarding net loss is required by SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the grant date using the Black-Scholes method for option pricing with the following assumptions:

Future pro forma results of operations under SFAS No. 123 may be materially different from actual amounts reported. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense on an accelerated basis in accordance with FIN 28 over the vesting period. The Company has used the Black-Scholes method to determine the fair value of options granted prior to its initial filing in a registration statement under the Securities Act of 1933 relating to an initial public offering of the Company’s common stock. While, as a non-public company, there has not been an observable market for the Company’s common stock, the Company has used an estimated volatility factor for grants issued since inception based upon stock price volatility factors of comparable public companies.

The following table illustrates the pro forma effect on net losses if the Company had applied the fair value recognition provisions of SFAS No. 123 to record stock-based compensation:

Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement basis and the tax basis of assets and liabilities using enacted tax rates. Valuation allowances are established to reduce deferred tax assets to the amount that is expected to more likely than not be realized in the future.

Comprehensive loss is the total of net loss and all other non-owner changes in stockholders’ equity. Such amounts are excluded from net loss and are reported in accumulated other comprehensive loss in the accompanying financial statements. For the period from July 24, 2001 (inception) through March 31, 2004, the Company had no items of other comprehensive loss.

In accordance with SFAS No. 128, “Earnings Per Share,” basic net loss per common share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Potentially dilutive securities are not considered in the calculation of net loss per common share as their inclusion would be anti-dilutive.

In accordance with SAB No. 98, common shares issued for nominal consideration, if any, would be included in the per share calculations as if they were outstanding for all periods presented. No common shares have been issued for nominal consideration.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share is as follows:

The following table summarizes securities as of December 31, 2001, 2002, 2003 and March 31, 2004 that could potentially dilute basic EPS in the future that are not included in the denominator used in the diluted net loss per share calculation because to do so would be antidilutive:

Unaudited pro forma basic and diluted net loss per share for the year ended December 31, 2003 and the three months ended March 31, 2003 and 2004 is computed using the weighted average number of common shares outstanding, including the pro forma effect, on an as-if converted basis, of the conversion of 14,452,054 shares of Series A Convertible Preferred stock into an equal number of shares of common stock, as if such conversion had occurred on January 1, 2003. Pro forma diluted net loss per share is computed using the pro forma weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalent shares, composed of shares of common stock issuable upon the exercise of stock options, are not included in pro forma diluted net loss per share because to do so would be antidilutive.

In April 2004 the Company entered into employment agreements with four of the Company’s executives, whereby each executive was given an increase in annual salary, payment of which is contingent upon the closing of the Company’s initial public offering. The pro forma net loss below reflects the effect of these employment agreements as if they had been in place effective from January 1, 2003 (or from the commencement of employment by the related executive, if later):

The provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies its operating segments based on how management internally evaluates separate financial information, business activities and management responsibility. On that basis, the Company believes it operates in a single business segment.

International sales totaled $13,146 and $727,161 in the years ended December 31, 2002 and 2003, respectively, and were received principally from customers in Europe and Japan. The Company attributes revenues from external customers based on the country in which the Company’s direct customer is located.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 has had no effect on the Company’s financial position or results of operations.

Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”) and amends certain other existing pronouncements. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. All provisions of SFAS 149, except those related to forward purchases or sales of “when-issued” securities, should be applied prospectively. The adoption of SFAS 149 has had no effect on the Company’s financial position or results of operations.

In December 2003, the FASB issued additional guidance clarifying the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” or (“FIN 46-R”). FIN 46-R provides a deferral of FIN 46 for certain entities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

FASB Interpretation No. 45 was issued in November 2002. FIN 45 requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement requirement of FIN 45 is effective for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002, and are applicable to certain guarantees issued by the Company before December 31, 2002. The Company adopted FIN 45 disclosure requirements as of December 31, 2002. The adoption of the provisions for recognition and initial measurement did not have a material impact on the Company’s financial position, results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 is an amendment to SFAS No. 123 providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also provides additional disclosures about the method of accounting for stock-based employee compensation. Amendments are effective for financial statements for fiscal years ending after December 15, 2002. The Company has currently chosen to not adopt the voluntary change to the fair value based method of accounting for stock based employee compensation, pursuant to SFAS No. 148, which, if adopted, could have a material impact on its financial position or results of operations.

In March 2004, the Emerging Issues Task Force (“EITF”) reached a final consensus regarding Issue 03-6, “Participating Securities and the Two-Class Method under FAS 128.” The issue addresses a number of questions regarding the computation of earnings per share (“EPS”) by companies that have issued securities other than common stock that participate in dividends and earnings of the issuing entity. Such securities are contractually entitled to receive dividends when and if the entity declares dividends on common stock. The issue also provides further guidance in applying the two-class method of calculating EPS once it is determined that a security is participating. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. This consensus is effective for the period beginning after March 31, 2004, and should be applied by restating prior earnings per share.

The Company is still evaluating the impact of this consensus, but believes it will not have a material impact on the results of operations or financial position of the Company.

The Company’s results of operations and financial position as of and for the three months ended March 31, 2004 have been restated solely to reflect a correction in its revenue recognition methodology with respect to a distribution agreement with the Company’s Japanese distributor. The terms of this distribution agreement are discussed under “Reseller Agreements” in Note 1. As a result of the Company’s assessment at the time the agreement was executed that future installment payments under the agreement were not fixed or determinable, the Company’s prior revenue recognition methodology was to record payments as revenue ratably over only the remaining Support Period, commencing from receipt of the payment. Based upon further analysis, the Company has corrected its methodology to recognize revenue for a pro-rata portion of each payment received based on the portion of the Support Period which had elapsed at the time the payment was received, with the remaining amount of the payment recorded as revenue ratably over the remaining Support Period (the retrospective method). As a result of this correction, the Company’s revenues for the three months ended March 31, 2004 have been increased by $237,433 and the Company’s operating and net loss for the three months ended March 31, 2004 and its deferred revenue, total liabilities, accumulated deficit and total stockholders’ deficit as at March 31, 2004 have been reduced by the same amount.

Depreciation and amortization expense was $13,212, $256,710, $337,462, $75,760 and $101,616, for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003 and for the three months ended March 31, 2003 and 2004, respectively.

As of March 31, 2004, accrued legal expense includes $250,000 in connection with the defense of certain trademark infringement lawsuits filed by Microsoft in foreign jurisdictions. While the Company believes that its insurance carrier has an obligation to bear the Company’s trademark defense costs, there is uncertainty as to whether the insurance carrier will ultimately cover the legal costs of all related foreign lawsuits. In addition, to the extent that the Company’s insurance carrier is required to pay such defense costs, it may only be required to pay such legal fees at rates substantially lower than those actually charged by the attorneys assigned to defend the claims. As a result, the Company may be required to bear certain legal fees in excess of those borne by the Company’s insurance carrier (See Note 9).

The Company leases space on a month-to-month basis to and performs certain administrative, support and operational services for an entity, which is controlled by the Company’s CEO and majority stockholder, for which the Company is reimbursed based upon the actual cost of the space and services provided. During the year ended December 31, 2003, the Company received approximately $66,000 for reimbursement of such general and administrative costs.

In July 2002, the Company entered into a Revolving Line of Credit Agreement (“the Loan Agreement”) with the Company’s Chief Executive Officer and majority stockholder. The Loan Agreement, as amended, provided the Company a $5 million line of credit through December 31, 2003, bearing an interest rate of 10% per year, with interest payments due monthly. As of December 31, 2003 and March 31, 2004, borrowings under the line of credit totaled $4,400,000 and $10,000,000, respectively, and accrued but unpaid interest totaled $303,181 and $416,792, respectively.

In February 2004, the Loan Agreement was amended to increase the amount available under the line of credit to $10 million and to extend the maturity date for both principal and accrued interest to June 30, 2005. The amendment also removed the requirement to make monthly interest payments and waived all prior events of default under the Loan Agreement. To date, no interest payments have been made. As a result of the change in credit terms, the entire loan balance of $10,000,000 plus accrued interest of $416,792 is due on June 30, 2005; accordingly, these amounts have been classified as a non-current liability at December 31, 2003 and March 31, 2004.

Interest expense, substantially all of which was related to the note payable, was $0, $19,563, $283,785, $47,833 and $125,179 for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003 and for the three months ended March 31, 2003 and 2004, respectively.

In August 2001, the Company issued 273,973 shares of common stock to one of its founders at $0.0347 per share for proceeds of $9,500. In October 2001, the Company issued 1,130,137 shares of restricted common stock valued at $39,187 ($0.0347 per share) to the Company’s President. The estimated fair value of the common stock of $39,187 was recorded as deferred compensation upon issuance and was amortized to compensation expense over the 2-year vesting period of the restricted stock award. As of December 31, 2003 and March 31, 2004, such common stock was fully vested and the restrictions had lapsed.

The Company has authorized the issuance of 80,000,000 shares of preferred stock, of which 52,750,000 were issued during 2001 in the form of Series A Convertible Preferred stock with a liquidation value of $5,000,000. All shares of Series A Convertible Preferred stock remained issued and outstanding as of December 31, 2002 and 2003 and March 31, 2004. The preferred stock is convertible on a 3.65 to 1 basis, subject to anti-dilution adjustments, into shares of common stock at the option of the stockholder. The preferred stock will automatically convert upon the occurrence of certain events including the closing of an initial public offering of at least $10,000,000, or by the written consent of a majority of the preferred stockholders of the consenting series.

The outstanding shares of Series A Convertible Preferred stock are held by two stockholders, with approximately 90% of the Series A Convertible Preferred stock held by a single stockholder who controls the majority of the Company’s voting rights. The Series A Convertible Preferred stock has a non-cumulative cash dividend per share in an amount to be determined by the Board of Directors when and if declared. Each Series A Convertible Preferred stockholder has the right to

vote as if their shares of preferred stock had been converted to common stock at the then-current conversion rate. The terms of the Series A Convertible Preferred stock provide for preferences upon liquidation and other rights. In general, the Series A Convertible Preferred stockholders have a preference at liquidation equal to the issuance price, plus any declared and unpaid dividends. The remaining assets, if any, would be distributed ratably to the common stockholders. No dividends were declared through March 31, 2004. The Series A Convertible Preferred stock is not subject to redemption.

In December 2001, the Company adopted the Lindows.com, Inc. 2001 Stock Incentive Plan (the “Plan”). As amended, under the Plan the Company may grant options for up to 1,815,068 shares of the Company’s common stock. The Plan is administered by the Board of Directors or by a committee designated by the Board. The Board may fix the terms and vesting of all options; however, in no event will the contractual term exceed 10 years. Generally, options vest 25% one year from the grant date and 1/16th (6.25%) per quarter thereafter until the options are fully vested.

The Company recorded deferred stock compensation totaling $63,025, $194,944, $490,835 and $328,565 for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003 and for the three months ended March 31, 2004, respectively, in connection with the grant of various stock options and restricted stock to employees. The deferred stock compensation represents the difference between the exercise or grant price and the estimated fair value of the Company’s common stock for financial reporting purposes as determined by the Company’s board of directors. Deferred compensation is included as a reduction of stockholders’ equity and is being amortized to expense over the vesting period of the options on an accelerated basis in accordance with FIN 28. Amortization of deferred compensation expense was $9,796, $174,307, $341,940, $18,773 and $68,606 for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003 and for the three months ended March 31, 2003 and 2004, respectively. Deferred compensation was reduced by $0, $2,170, $11,535, $1,165 and $55,029 for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003 and for the three months ended March 31, 2003 and 2004 to reflect the cancellation of certain unvested stock options upon the respective individual’s termination. As of March 31, 2004, the total charges to be recognized in future periods from amortization of deferred stock compensation are anticipated to be approximately $299,939, $152,294, $52,994, $16,012 and $538 for the years ended December 31, 2004, 2005, 2006, 2007 and 2008, respectively.

The above tables include certain options granted to consultants with terms similar to options issued to employees, including options granted in 2002 outside the Plan to purchase 280,822 shares of common stock (none of which were outstanding at March 31, 2004), options granted under the Plan in 2003 to purchase 4,110 shares of common stock (of which 1,027 were outstanding at March 31, 2004), and options granted under the Plan in 2004 to purchase 16,027 shares of common stock (of which 11,233 were outstanding at March 31, 2004).

Expense recorded related to awards granted to consultants was $0, $138,553, $92,086, $42,937 and $158,341 for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003, and for the three months ended March 31, 2003 and 2004, respectively. The fair value for these options was estimated at the grant date using the Black-Scholes method for option pricing with the following assumptions:

The fair value of stock options granted to consultants is periodically remeasured until the options are exercised or the service period is completed at which time a final remeasurement of the value of the options is determined.

Since inception, the Company has incurred losses for both book and tax purposes; accordingly, the Company has not recorded any tax expense for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003. Significant components of the Company’s deferred tax assets as of December 31, 2002 and 2003 are shown below. A valuation allowance has been recognized to offset the deferred tax assets as realization of such assets is not considered to be more likely than not.

At December 31, 2003, the Company had federal and California tax net operating loss carryforwards of approximately $8,076,000 and $7,050,473, respectively. The federal and California tax loss carryforwards will begin to expire in 2021 and 2013, respectively, unless previously utilized. The Company also has federal and California research and development tax credits of approximately $173,000 and $192,000, respectively, and California manufacturers’ investment credit carryforwards of approximately $37,000. The federal research and development tax credit carryforwards will expire beginning in 2020, unless previously utilized. The California credits begin to expire in 2011.

Pursuant to Code Sections 382 and 383, use of the Company’s net operating loss carryforwards may be limited in the event of a cumulative change in ownership of more than 50% within a three-year period.

The Company leases its corporate office space under a non-cancelable operating lease agreement. The lease contains escalation clauses and requires the Company to pay a share of any increases in operating expenses.

Future minimum lease payments under non-cancelable operating lease arrangements as of December 31, 2003 are as follows:

Rent expense was $60,796, $371,672, and $368,557 for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003, respectively.

On December 20, 2001, Microsoft initiated an action against the Company asserting that the Company’s use of the Lindows mark violates U.S. trademark law and U.S. and Washington state unfair competition laws. Microsoft seeks injunctive relief preventing the Company from using the name Lindows in connection with the Company’s software or other computer products or services. Microsoft also seeks monetary damages, including treble damages, attorney’s fees and costs.

The Company has asserted several defenses and a counterclaim in this lawsuit. The Company asserts that Microsoft’s WINDOWS trademarks are unenforceable and invalid because the Company believes the term “windows” is generic, and a generic term can never be subject to trademark protection. The Company also asserts that Microsoft committed fraud on the U.S. Patent and Trademark Office and is pursuing this action for anti-competitive purposes. Finally, the Company asserts that the use of the Lindows name does not result in confusion with Microsoft’s WINDOWS trademark.

In its ruling on February 10, 2004, the court determined that it would instruct the jury to consider whether “windows” was a generic term before Microsoft introduced software with that name in November 1985. Microsoft had argued that the jury should consider whether “windows” is now a generic term. Microsoft appealed this ruling and the Company contested Microsoft’s appeal. On May 19, 2004, the United States Court of Appeals for the Ninth Circuit denied Microsoft’s appeal, leaving the February 10, 2004 ruling intact. The Company expects the trial date to be set shortly.

During the period from November 28, 2003 through February 11, 2004, Microsoft initiated various separate trademark violation claims against the Company in certain foreign jurisdictions including Finland, Sweden, the Netherlands, France, Spain and Canada. These claims seek injunctive relief to prevent the Company from using the Lindows name in connection with the

Company’s software or other computer products or services distributed in the respective countries. Each of the foreign Microsoft lawsuits seeks monetary damages, including attorneys’ fees and other damages allegedly sustained by Microsoft. In addition to these actions, Microsoft has threatened to bring similar trademark infringement actions in other countries.

Microsoft did not provide the Company with notice of the Finland and Sweden lawsuits until after the courts in those countries ruled in favor of Microsoft on its motions for injunctive relief. Accordingly, the Company had no opportunity to present a defense and is now appealing these rulings. While the appeals are pending, the Company is prohibited from selling products with the Lindows name in Finland and Sweden. The Netherlands court has also ruled in favor of Microsoft. The court’s ruling prohibits the Company from selling products with the Lindows name in the Netherlands, Belgium and Luxembourg. In order to comply with the ruling pending the appeal, the Company has adopted “Linspire” as an alternative name for its commerce website and its products and services.

The litigation with Microsoft may continue well into the future. If the litigation is resolved in favor of Microsoft, Microsoft may be entitled to receive significant monetary damages from the Company, and the Company could be required to permanently drop the use of the Lindows name. Furthermore, the Company may have to indemnify channel partners for losses they may suffer as a result of the Microsoft litigation. Although there can be no assurance that an unfavorable outcome of the dispute would not have a material adverse effect on the Company’s operating results, liquidity and/or financial position, the Company believes the Microsoft claims are without merit and intends to vigorously defend the action.

On February 3, 2002, the Company’s commercial general liability insurer initiated a civil action against the Company whereby the insurance carrier sought declaratory relief that it had no duty to defend or indemnify the Company in connection with the Company’s U.S. litigation with Microsoft. As part of the Company’s defense and counterclaim in this lawsuit, the Company sought a declaratory order by the court that the insurance carrier must defend and indemnify the Company in connection with the U.S. Microsoft litigation. In March 2003, the court ruled that the insurance carrier had an obligation to defend the Company and had breached its contract by denying coverage. Thereafter, the insurance carrier agreed to defend the Company in the U.S. Microsoft litigation, but reserved its right to appeal the court’s order.

During 2002, the Company incurred legal expenses related to the Microsoft litigation of $1,080,513 which were charged to general and administrative expenses without regard to the potential for recovery of these expenses from the Company’s insurance carrier due to the litigation in process at the time whereby the insurance carrier had denied coverage. Following the March 2003 court ruling whereby the court ruled that the insurance carrier had a duty to defend the Company in the U.S. Microsoft litigation, the insurance carrier reimbursed the Company for 2002 legal expenses associated with the U.S. Microsoft litigation as well as 2003 legal expenses in the amount of $360,666. This reimbursement is included as a reduction in legal expenses, net in 2003. Subsequent to the March 2003 court ruling, the insurance carrier has assumed direct responsibility for legal fees associated with the defense of the U.S. Microsoft litigation and legal expenses incurred associated with this litigation are currently being paid directly by the insurance carrier. Including the $1,441,179 reimbursement received by the Company in 2003, the insurance carrier has paid approximately

$3,280,000 of the Company’s U.S. Microsoft legal defense costs through December 31, 2003. Although there can be no assurance that the insurance carrier will not appeal the March 2003 court ruling or that they will not be successful in such an appeal or that this would not have a material adverse effect on the Company’s operating results, liquidity and/or financial position, the Company believes that such an appeal would be without merit and intends to vigorously defend any such action.

During 2004 the Company initiated a separate civil action against the same insurance carrier asserting that the insurance carrier has wrongfully denied coverage in connection with the lawsuits Microsoft had brought against the Company in Finland, Sweden, the Netherlands and France. The Company’s complaint seeks monetary damages, including punitive damages, as well as a declaratory order by the court that the insurance carrier must fully defend and indemnify the Company in connection with the Microsoft litigation pending in Finland, Sweden, the Netherlands, and France. In response to this lawsuit, the insurance carrier agreed to pay partial defense costs for these lawsuits, subject to the reservation of its rights to deny coverage. The carrier has also agreed to pay the defense costs for the lawsuits filed against the Company by Microsoft in Canada and Spain on the same terms. In response, the Company amended the complaint to add the Canada and Spain lawsuits and to address the insurance carrier’s refusal to pay complete defense costs and its reservation of rights. The insurance carrier has filed an answer to the amended complaint and a counterclaim whereby it seeks a declaratory order that it has no duty to defend or indemnify the Company in connection with the lawsuits in Finland, Sweden, the Netherlands, France, Canada, and Spain. It also seeks a declaratory order that any attorneys’ fees it is obligated to pay be at a reduced hourly rate. While the Company believes that its insurance carrier has an obligation to bear the Company’s defense costs in the foreign Microsoft litigation, there is uncertainty as to whether the insurance carrier will ultimately be required to provide coverage for defense costs in each foreign location where Microsoft has brought suit against the Company. In addition, even if the Company’s insurance carrier is required to provide coverage, the insurance carrier may only be required to cover a portion of the Company’s defense costs, rather than the full amount of the fees charged by the attorneys defending the cases, in which case the Company may be required to bear the portion of the legal fees in excess of amounts covered by the insurance carrier. As a result of the above uncertainties as to whether the Company’s insurance carrier will be required to provide coverage of the Company’s legal defense costs in certain foreign jurisdictions, the Company has accrued $250,000 in estimated legal fees as of March 31, 2004.

Although there can be no assurance that an unfavorable outcome of the dispute with the Company’s insurance carrier regarding coverage of the Microsoft lawsuits would not have a material adverse effect on the Company’s operating results, liquidity and/or financial position, the Company believes the insurance carrier’s claims are without merit and intends to vigorously defend the action.

During 2002, the Company initiated a civil action against a Debtor Company and certain of its investors and executives with respect to the Company’s $750,000 loan to this Debtor Company in the form of convertible promissory notes which were expected to be converted into preferred stock of the Debtor Company. The Debtor Company has failed to repay the promissory notes when they became due and the Company is seeking $750,000, plus interest, attorneys’ fees and punitive damages. This lawsuit is in the discovery phase, and may proceed for an extended period of time. The Company intends to pursue the lawsuit vigorously, but there cannot be any assurance that it will be resolved in the Company’s favor. Additionally, even if the court rules in the Company’s favor,

there can be no assurance that the Company will be able to collect the amounts owed. As a result, in 2002 the Company provided a bad debt reserve of $661,366 against the note receivable included in general and administrative expenses. During 2002, the Company also recorded $88,634 of royalties payable to the Debtor Company. In accordance with the terms of the royalty agreement, the Company has offset the amount of royalties payable ($88,634 at December 31, 2002 and 2003) against the notes receivable balance of $750,000, resulting in a net balance due from the Debtor Company of $661,366, which is fully reserved at December 31, 2002 and 2003.

Apart from the $250,000 in legal fees the Company has accrued in connection with the foreign Microsoft litigation, the Company has not accrued any contingent liability associated with the legal proceedings described above based on the Company’s belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time.

From time to time, the Company enters into contracts with customers in which the Company provides certain indemnification to the customer in the event of claims of intellectual property infringement resulting from the customer’s use of the Company’s products. The Company has not recorded a liability for potential obligations under these indemnification provisions based on the Company’s belief that a liability, while possible, is not probable.

In 2002, the Company established a defined contribution 401(k) plan for employees. Under the terms of the plan, employees may make voluntary contributions to the plan. The Company’s contributions to the plan are discretionary. The Company has made no discretionary contributions to the plan since its inception.

In April 2004 the Company reserved an additional 1,095,890 shares for issuance under the 2001 Stock Incentive Plan. Subsequent to March 31, 2004, the Company has granted options to purchase 1,541,507 shares of common stock with exercise prices of $9.13 per share.

Subsequent to March 31, 2004, the Company modified the terms of an employee option award for the purchase of 273,973 shares of common stock to include a provision for accelerated vesting in the event of a change in control of the Company, as defined. Subsequent to the modification, the change in control event occurred. The difference between the intrinsic value at the original grant date and the modification date was approximately $1,500,000. To the extent the employee terminates prior to the date at which the related options would have vested based on the original terms, allowing the employee to exercise (or vest in) option awards that otherwise would have expired unexercisable/unvested, a portion of this amount may be recognized as compensation expense in the period of termination.

In April 2004, the Company entered into an agreement with its Japanese distributor for the continued exclusive distribution of the Company’s products in Japan beginning in April 2004 and continuing through August 2005 in exchange for minimum payments totaling $1,069,000 to be received on an installment basis over the first 10 months of the agreement. The agreement also

provides for the Company to provide when-and-if available upgrades and certain technical support during the period through August 2005. Payments received under this agreement will be recognized as revenues commencing in the period they are received, with a pro-rata portion of the payment recognized as revenue based on the portion of the contract term which had elapsed at the date the payment was received, with the remaining amount of the payment recorded as revenue ratably over the remaining contract term. This agreement replaces and supersedes the previous agreement entered into with this same distributor in March 2003; accordingly, deferred revenue of $797,344 as of March 31, 2004 related to the March 2003 agreement will be recorded as revenue ratably through August 2005.

In July 2004, the Company effected a 1-for-3.65 reverse stock split of the Company’s outstanding common stock. The accompanying financial statements give retroactive effect to the 1-for-3.65 reverse stock split for all periods presented.

On July 16, 2004, the Company entered into a settlement agreement with Microsoft pursuant to which the Microsoft litigation described in Note 9 was resolved. The settlement agreement provides, among other things, the following:


	•	Microsoft will pay the Company $15 million no later than August 15, 2004;

	•	Microsoft will pay the Company an additional $5 million by February 1, 2005 in exchange for the Company assigning to Microsoft certain domain names;

	•	Microsoft has agreed to grant the Company limited four-year, royalty-free licenses to certain Windows Media software components, which the Company plans to include and distribute with its Linspire operating system;

	•	The Company agreed to immediately dismiss with prejudice all claims, counterclaims or other legal proceedings in whatever form or forum that the Company has brought for cancellation of any U.S. or foreign trademark registration issued to Microsoft containing the term Windows;


	•	the Company and Microsoft will immediately direct their respective counsel to dismiss with prejudice all pending litigation between them. Microsoft further agrees to refrain from filing any new cases outside the U.S. against the Company concerning the Lindows Marks, unless Microsoft has given the Company 30 days written notice of the use of the Lindows Marks to which Microsoft objects. If the Company provides Microsoft written confirmation of the Company’s intent to cure within the 30 day notice period, the Company will have an additional 30 days to cure its use of the Lindows Marks; and


	•	Microsoft agrees not to sue the Company for past damages for any patent infringement that may have occurred prior to the date of the settlement agreement, and the parties mutually release each other from any claims relating to the litigation being settled or the Company’s prior distribution of Microsoft’s Windows Media Files.

The Company intends to record settlement proceeds as a gain (included in other income) in the period the payment is received from Microsoft. Payments received from Microsoft related to the transfer of domain names will be recorded as a gain (included in other income) in the period the payment is received and the Company transfers the required internet domain names to Microsoft.

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

The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee.


	•	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;

	•	any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or

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

As permitted by Section 145 of the Delaware General Corporation Law, our bylaws provide that:


	•	we may indemnify our directors, officers, and employees to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions;


	•	we may advance expenses to our directors, officers and employees in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and

	•	the rights provided in our bylaws are not exclusive.

Our restated certificate of incorporation, attached as Exhibit 3.1 hereto, and our restated bylaws, attached as Exhibit 3.2 hereto, provide for the indemnification provisions described above and elsewhere herein. In addition, we have entered into separate indemnification agreements, a form of which is attached as Exhibit 10.1 hereto, with our directors and officers which may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements may require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct. These indemnification agreements also may require us to advance any expenses incurred by the directors or officers as a result of any proceeding against them as to which they could be indemnified. In addition, we have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification of our officers and directors for liabilities, including reimbursement of expenses incurred, arising under the Securities Act.

The form of Underwriting Agreement, attached as Exhibit 1.1 hereto, provides for indemnification by the underwriters of us and our officers and directors for specified liabilities, including matters arising under the Securities Act.

During the last three years, we have issued unregistered securities to a limited number of persons, as described below.


	(a) On September 25, 2001, we issued 273,973 shares of our common stock at a price of $0.0347 per share to an accredited investor for an aggregate price of $9,500, and we issued 1,130,137 shares of our common stock to another accredited investor, in lieu of $39,187.50 of compensation otherwise due to him for services rendered.

	(b) On October 16, 2001, we issued 52,750,000 shares of our Series A preferred stock at a price of $.0948 per share to two accredited investors for an aggregate price of $4,999,645. Upon completion of this offering, these shares of Series A preferred stock will convert into 14,452,054 shares of our common stock.

	(c) On February 27, 2002, we granted options to purchase an aggregate of 205,479 shares of our common stock at an exercise price of $0.365 per share, to a consultant. On July 15, 2002, we granted options to purchase an aggregate of 75,342 shares of our common stock at an exercise price of $0.365 per share, to the same consultant. On December 12, 2002, we reduced the exercise price of these options to $0.0347 per share.

	(d) From December 30, 2001 through March 31, 2004, we granted options to purchase 1,358,903 shares of common stock to employees, directors and consultants under our 2001 stock incentive plan at exercise prices ranging from $0.0347 to $6.21 per share. As of March 31, 2004, of the 1,358,903 options granted, 1,053,391 remain outstanding, 251,226 shares of common stock have been purchased pursuant to the exercise of stock options for aggregate consideration of $8,711 and 54,287 shares have been cancelled and returned to the 2001 stock incentive plan option pool.

	(e) On May 31, 2004, we issued 2,739 shares of our common stock to an accredited investor in exchange for the transfer to us of rights to certain domain names.

The offers, sales and issuances of the securities described in paragraphs (a), (b), (c) and (e) were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act in that the issuance of securities to the recipients did not involve a public offering. The recipients of securities in each such transaction represented to us 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 warrants issued in such transactions. Each of the recipients of securities in the transactions described in paragraphs (a), (b), (c) and (e) were accredited (with the exception of the consultant referred to in paragraph (c), which was a marketing company that qualified as a sophisticated person) and had adequate access, through employment, business or other relationships, to information about us.

The offers, sales and issuances of the options and common stock described in paragraph (d) were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under such rule. The recipients of such options and common stock were our employees, directors or bona fide consultants and received the securities under our 2001 stock incentive plan. Appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions had adequate access, through employment, business or other relationships, to information about us.


*	To be included by amendment.

**	Previously filed.

***	Incorporated by reference to Exhibit 4.1 to the Form 8-A (File No. 000-50877) that we filed on July 29, 2004.

#	Indicates management contract or compensatory plan.

†	Application has been made to the Securities and Exchange Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.

All other schedules of which provision is made in the applicable regulation of the Securities and Exchange Commission have been omitted because the information is disclosed in the Consolidated Financial Statements or because such schedules are not required or are not applicable.

The undersigned 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 our directors, officers and controlling persons pursuant to the Delaware General Corporation Law, our Certificate of Incorporation or our Bylaws, the underwriting agreement or otherwise, we have 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 us of expenses incurred or paid by one of our directors, officers, or controlling persons 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 hereunder, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of 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.


	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 us 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 this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, we have duly caused this amendment no. 4 to registration statement (no. 333-114614) to be signed on our behalf by the undersigned, thereunto duly authorized, in San Diego, California, on August 5, 2004.

Pursuant to the requirements of the Securities Act of 1933, as amended, this amendment no. 4 to registration statement (no. 333-114614) has been signed by the following persons in the capacities and on the dates indicated:


*	To be included by amendment.

**	Previously filed.

***	Incorporated by reference to Exhibit 4.1 to the Form 8-A (File No. 000-50877) that we filed on July 29, 2004.

#	Indicates management contract or compensatory plan.

†	Application has been made to the Securities and Exchange Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.

EX-10.5 2 a97792a4exv10w5.txt EXHIBIT 10.5 EXHIBIT 10.5 *** CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT (INDICATED BY ASTERISKS) HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER 17 C.F.R. SECTIONS 200.80(B)(4), 200.803 AND 230.406 JN MICROSYSTEMS, INC. PROPRIETARY AND CONFIDENTIAL Agreement Number 115804 STAROFFICE SOFTWARE OEM LICENSE AND DISTRIBUTION AGREEMENT This StarOffice Software OEM License and Distribution Agreement ("Agreement") is made and entered into by and between Sun Microsystems, Inc., a Delaware corporation, located at 901 San Antonio Road, Palo Alto, California 94303 ("Sun)" and Customer set forth below ("Customer"): Customer: Lindows.com Address: 9333 Genesee Avenue, 3rd Floor San Diego, California 92121 U.S.A. Tel: 858-587-6700 Fax: 858-587-6700 E-mail: Kevin@lindows.com WHEREAS, Sun designs, develops and markets office productivity software and documentation. WHEREAS, Customer desires to license from Sun the Software (as defined below) and distribute the same on the terms and conditions herein. IN CONSIDERATION of the mutual promises and covenants contained in this Agreement and the Attachments attached hereto and incorporated herein, and for other good and valuable consideration, receipt of which is hereby acknowledged, the parties agree as follows: This Agreement includes the terms and conditions set forth herein and the following attachments (collectively, "Attachments"): ATTACHMENT 1 AGREEMENT DETAILS ATTACHMENT 2 END USER BINARY CODE LICENSE AGREEMENT ATTACHMENT 3 TRADEMARK LICENSE AGREEMENT Notices as described in Section 12.8 ("Notices") shall be delivered to Customer at the above address and to Sun at the above address, Mailstop: SCA12-101, Attention: StarOffice Software OEM Sales Department, with a copy to Sun Legal Dept., Attn. Vice President Software Legal at the above address, Mailstop: SCA14-210. Royalty reports and payments should be sent to Sun Microsystems, Inc., Software Royalty Accounting Group, PO Box 10903, Palo Alto, CA 94303. EXHIBIT 10.5 IN WITNESS WHEREOF the parties have caused this Agreement to be executed by their duly authorized representatives. SUN: LINDOWS.COM By: /s/ Sheila Kerr By: /s/ Kevin Carmony ----------------------------- -------------------------------- Name: Sheila Kerr Name: Kevin Carmony --------------------------- ------------------------------ (printed or typed) (printed or typed) Title: Manager - STS Sales Ops Title: President -------------------------- ----------------------------- Date: 6/29/02 Date: 6-28-02 --------------------------- ------------------------------ EXHIBIT 10.5 GENERAL TERMS AND CONDITIONS 1.0 DEFINITIONS 1.1 "Binary Code License" or "BCL" means an End User license to use the Software pursuant to the terms set forth in Attachment 2 ("End User Binary Code License Agreement"). The BCL must be provided with each copy of the Software distributed. 1.2 "Confidential Information" means that information which Customer and/or Sun desire to protect against unauthorized disclosure or use and which the disclosing party designates as confidential (i) in writing, if communicated in writing, or (ii) orally, prior to any oral disclosure of the Confidential Information. The terms and conditions of this Agreement shall be considered Confidential Information of Sun. 1.3 "Customer Marketing Collateral" means all materials created by Customer and used in connection with promoting or marketing Customer's Product, including but not limited to, advertising, press releases, brochures, data sheets, web pages, trade show and event materials, and ad pillars, in any medium, including but not limited to print and online media. 1.4 "Customer's Product(s)" means the hardware system(s), software and/or components manufactured by or for Customer which have material value independent from the Software, and incorporate or include the Software as an integral element of Customer's hardware system, software or component, pre-installed from Master Media. 1.5 "Distributor" means an entity that distributes Customer's Products and which is under a contractual obligation to Customer as set forth in this Agreement, for example, a retail distributor. 1.6 "Effective Date" shall have the meaning set forth in Section 3.1 ("Term"). 1.7 "End User" means the person or entity to whom the BCL applies and to whom Customer and/or Distributors furnish the Software for use with and as part of Customer's Products for internal use and not for resale, marketing, or leasing. 1.8 "End User Documentation " means users' manuals, programmers' guides and system guides which Sun may provide for use with the Software, and which are specified in the Attachments hereto and/or the Price List. 1.9 "Error" means any reproducible failure of the Software to perform its intended functions or any material inaccuracies in the End User Documentation. 1.10 "Error Correction " means a modification, addition, procedure or routine intended to correct the practical adverse effect of an Error. 1.11 "Installed Base" means Customer's pre-existing End User customers who are already in possession of and using Customer's Product under a current and valid license. Such installed Customer Products shall be referred to as "Installed Systems." 1.12 "Licensed Trademarks" means the StarSuite Logos, STARSUITE word mark, and the Sun Logo depicted in the Trademark *rise Agreement entered into by Customer and Sun, or such additional or replacement mark(s) as Sun may provide under the Trademark License Agreement, and no other logo, mark or designation. 1.13 "Master Media" means the Software delivered to Customer for the purpose of mass duplication in accordance with Section 2.0 ("Binary License Rights; Terms and Conditions") herein. 1.14 "Price List" means the then-current, geographical, specific release of the Sun Software OEM and Reseller License Fee and Royalty Schedule including any subsequent price changes made by Sun pursuant to Section 4.4 ("Price Changes"). EXHIBIT 10.5 1.15 "Royalty Bearing Event" means the license, grant of right to use, or other authorized transfer of the Software. There will be only one (1) Royalty Bearing Event for each copy of the Software shipped. 1.16 "Single Incident" means an End User question about the Software relating to a specific, discrete issue (for example, installation, launch, configuration, troubleshootnig, usability, etc.) that can be answered by violating its origin to a single cause. 1.17 "Software" means the binary, machine-readable, executable code for the Sun software product and End User Documentation listed in Attachment 1 ("Agreement Details") hereto, and Updates or Error Corrections provided to Customer, if any. 1.18 "Sun Marketing Collateral" means all materials created by or for Sun and used in connection with promoting or marketing Sun's Software, including but not limited to, advertising, press releases, brochures, data sheets, web pages, trade show and event materials, and ad pillars, in any medium, including but not limited to print and online media. 1.19 "Sun Trademarks" means the Licensed Trademarks and all iPlanet-, Java-, Jini-, Solaris-, Sun-, and StarSuite-based names, marks, logos, trade dress and other brand designations used by Sun and its related companies. 1.20 "Tax" means sales, use, rental, receipt, personal property, value-added, consumption, goods and services, or other tax which may be levied or assessed in connection with this Agreement, excluding tax based on Sun's income. 1.21 "Territory" means the jurisdiction(s) where Customer may market, advertise, and distribute Customer's Product containing the Software as set forth in Attachment 1 ("Agreement Details"), and shall include no other countries except Japan, the Peoples Republic of China (excluding Hong Kong), Korea or Taiwan unless otherwise agreed by Sun in writing. 1.22 "Technical Support Entitlement" means that Sun will provide to Customer for inclusion with Customer's Product, a text file (e.g., "Read Me" file), splash screen, dialogue box or other collateral that will entitle the End User to technical assistance with the Software (End User questions about the Software relating to specific, discrete issues such as installation, launch, configuration, usability, etc.) within a specified timeframe. Sun may also provide End User Software training. 1.23 "Update" means a release of the Software, if any, which is designated by Sun in its sole discretion as containing substantially only Error Corrections, or minor new features, functionality and/or performance enhancements. An Update is generally signified by a change of version designation to the right of the decimal point, for example, version 6.0 to version 6.1. 2.0 BINARY LICENSE RIGHTS; TERMS AND CONDITIONS 2.1 Binary License Grant. Subject to and conditioned upon Customer's compliance with the payment obligations, limitations and restrictions set forth in this Agreement, with respect to Software, Sun grants to Customer a personal, non-transferrable, and nonexclusive, royalty-bearing, limited right and license as follows: (a) to make copies of the Software from Master Media, install those copies in Customer's Products as part of the manufacturing process prior to shipment, and distribute such copies as part of Customer's Products in accordance with the terms of this Agreement; (b) to copy Software from Master Media onto separate packaged product storage media such as CD-ROMs ("White-CD") and distribute for use with Customer's Product one White-CD with each Customer's Product incorporating Software installed from Master Media; EXHIBIT 10.5 (c) to the extent Updates are made available, to distribute unbundled Updates to Customer's Installed Base for use only with Installed Systems. Updates will be made available solely at Sun's discretion. Such distributions, if any, must be made pursuant to an agreement with each End User restricting use of the Update to Installed Systems. 2.2 Binary License Terms and Conditions. Each distribution of the Software by Customer or its Distributors to an End-User must be made pursuant to the unmodified terms and conditions of the BCL, including the supplemental terms and conditions relating to the Software. It is expressly acknowledged and agreed that in the United States and in other jurisdictions where an enforceable copyright protection covering the Software exists, such license may be a written agreement on or accompanying the package containing the Software media that is fully visible to the End-User before the package is opened, that the End-User accepts by opening the package and that complies with applicable law relating to agreements of such type. In all other jurisdictions, such license must be a written agreement signed by the End-User. Sun does not undertake to inform Customer of the jurisdictions where such copyright protection exists. In the event the End User, upon reading the BCL, elects to return the product as provided in the product packaging, Customer will accept return of the Software and shall refund the license fee to the End User. 2.3 Distribution Agreements. (a) Prior to Customer furnishing any Software to any of its Distributors, Customer shall obtain a signed agreement from its Distributors substantially similar to the terms and conditions of this Agreement and sufficient to allow protection of the intellectual property rights of Sun and its licensors. (b) Customer shall use commercially reasonable efforts comparable to those it uses for its own products to monitor and enforce any agreements with Distributors and End Users of the Software entered into by Customer or its Distributors, and Customer shall promptly inform and consult with Sun if Customer becomes aware of any substantial non-compliance. If a Distributor or End User fails to fulfill any of its material obligations with respect to the Software under such agreement, Sun may, upon its election and in addition to any other remedies that it may have, notify Customer in writing of such breach and require Customer to terminate all the rights granted in such agreement with respect to the Software by thirty (30) days written notice to such Distributor or End User specifying the breach, unless the breach is remedied within such thirty (30) day period. In the event that Customer fails to satisfy the foregoing obligations with regard to the Software, subject to Section 8.0 ("Limitation of Liability"), Customer shall be responsible for all reasonable costs incurred by Sun, including without limitation, attorneys' fees, in connection with such enforcement actions undertaken by Sun. In those jurisdictions where Sun does not have standing to bring an action in its own name or under the intellectual property laws of such jurisdiction, Customer shall assign those rights to Sun reasonably necessary to allow Sun to bring an action under any legal theory available to Customer. 2.4 End User Documentation Distribution; Modification. (a) End User Documentation Distribution. Electronic documentation is included with Software. Customer may reprint documentation included on Master Media only. (b) Modification of End User Documentation. Customer may not modify the End User Documentation. 2.5 Trademarks, Logos and Product Designs; Proprietary Notices. (a) Customer may refer to Software by the associated Sun Trademarks, provided that such reference is not misleading and complies with the then-current Sun Trademark and Logo Requirements, currently located at http://www.sun.com/policies/trademarks. Customer shall not remove, alter, or add to any Sun Trademarks, nor shall it co-logo Software. Customer is granted no right, title or EXHIBIT 10.5 license to, or interest, any Sun Trademarks or any name, mark, logo, trade dress or brand designation of Sun and its related companies in this Agreement or any Attachment. Customer acknowledges Sun's rights in Sun Trademarks and agrees that any use of Sun Trademarks by Customer shall inure to the sole benefit of Sun. Customer agrees not to (i) challenge Sun's ownership or use of, (i) register, or (iii) infringe any Sun Trademarks, nor shall Customer incorporate any Sun Trademarks into Customer's trademarks, service marks, company names, internet addresses, domain names, or any other similar designations. If Customer acquires any rights in any Sun Trademarks by operation of law or otherwise, it will immediately at no expense to Sun assign such rights to Sun along with any associated goodwill, applications, and/or registrations. (b) As between Sun and Customer, Customer acknowledges and agrees that Sun is the sole owner of the Sun Trademarks and all associated goodwill and intellectual property rights. Customer further agrees that any use of Sun Trademarks by Customer shall inure to the sole benefit of Sun. Customer agrees not to: (i) challenge Sun's ownership, use of or the validity of the On Trademarks; (ii) attempt or register any mark or logo identical or substantially similar to any Sun Trademark; (iii) remove, alter or add to any of Sun Trademark; (iv) incorporate any of Sun Trademarks into Customer's trademarks, product names, service marks, company names, slogans, domain names or any other similar designations for use on or in connection with any computer and/or internet-related hardware, software, technologies or services or any other products or services likely to cause confusion with or dilute the Sun Trademarks; or (v) infringe any Sun Trademark or associated intellectual property rights. If Customer acquires any rights in any Sun Trademarks by operation of law or otherwise, it will immediately at no expense to Sun assign such rights to Sun along with any associated goodwill, applications, and/or registrations. (c) Customer agrees to enter into and comply with a Trademark License Agreement appended as Attachment 3. Customer shall use the STARSUITE word mark, the StarSuite Logos and the Sun Logo in strict compliance with the terms and conditions of the Trademark License Agreement. (d) Customer shall not delete, cover or alter, and shall maintain Sun's trademarks, logos, proprietary rights notices and restrictive rights legends included in and on the End User Documentation and Software. Customer shall reproduce any proprietary rights notices of Sun and/or contributing third parties contained in or on all copies of Software, End User Documentation, packaging and related materials, in whole or in part, developed or made by Customer or its Distributors. Customer shall submit its Customer Products containing Software, End User Documentation or other materials licensed hereunder to Sun for approval pursuant to this Section 2.5 ("Trademarks, Logos and Product Designs; Proprietary Notices") prior to distribution, which approval shall not be unreasonably withheld or delayed. 2.6 Intended Purpose. The intended purpose of the Software is for use on, and as an integral component of, Customer's Products. Customer's Product packaging for the Software shall clearly indicate this intended purpose. Customer shall market and distribute the Software only with Customer's Product and directly or indirectly through Customer's Distributors to End Users only if bundled with Customer's Product. Customer and Distributors shall not distribute the Software on a stand-alone basis. 2.7 Governmental Approvals. Customer shall, at its own expense, obtain and arrange for the maintenance in full force and effect of all governmental approvals, consents, licenses, authorizations, declarations, filings and registrations as may be necessary for the performance of the terms and conditions of the Agreement, including without limitation, fair trade approvals, under all laws, regulations and other legal requirements within the jurisdictions that Customer distributes the Software that apply to this Agreement, including tax and foreign exchange legislation. 2.8 No Other Rights. Except as expressly stated herein and in the Attachment(s) hereto, no other license, right or interest is granted to Customer for any other purpose. EXHIBIT 10.5 3.0 TERM AND TERMINATION 3.1 Term. This Agreement shall commence on: (i) the date of its execution by Sun or (ii) where this Agreement will be void or Sun will be liable for a penalty without an approval, registration, filing as referred to in Section 2.7 ("Governmental Approvals"), or Sun obtaining the necessary US export license, the date of such approval, registration, filing, or US export license, whichever occurs later (the "Effective Date") and shall have an initial term of one (1) year. Thereafter, this Agreement shall be automatically renewed for successive one (1) year terms (with a maximum of two (2) subsequent terms), unless one party notifies the other party in writing at least thirty (30) days before the end of the then-current term stating that it wishes to terminate this Agreement; whereupon, this Agreement shall terminate at the end of the then-current term. 3.2 Termination. If either party fails to comply with any of the material terms and conditions of this Agreement, the other party may terminate this Agreement upon thirty (30) days written notice to the breaching party specifying any such breach, unless the breach specified therein has been remedied within such thirty (30) day period. In the event of Customer's breach, Sun may terminate this Agreement in its entirety or as to any individual Software product. 3.3 Termination for Insolvency. Either party may terminate this Agreement immediately in the event that the other party ceases to conduct its operations in the normal course of business, files for or becomes the subject of a bankruptcy petition, is placed in receivership, or attempts to assign this Agreement to creditors or otherwise without prior written consent of the other party. 3.4 Effect of Termination. (a) For Breach by Customer: Upon expiration or termination of this Agreement for breach by Customer, Customer shall discontinue issuing BCLs for the Software, shall return all Software and Sun Confidential Information and all copies thereof in its possession to Sun or destroy all Software and all copies thereof in Customer's possession and certify in writing by an officer of Customer that such Software and all copies thereof were so destroyed. (b) BCLs for the Software issued prior to the effective date of termination shall continue in accordance with their terms and conditions. Customer's obligation to pay royalties accrued prior to the termination of this Agreement shall not terminate. 3.5 No Liability For Termination. To the full extent allowed by any applicable law except as expressly provided in this Agreement, Customer agrees that it shall have no rights to damages or indemnification of any nature due to any expiration or rightful termination of this Agreement by Sun pursuant to its terms. The foregoing restriction shall include without limitation, commercial severance pay whether by way of loss of future profits, expenditure for promotion of the Software, payment for goodwill generated or other commitments made in connection with the business contemplated by this Agreement or other similar matters. Customer will not be entitled under local law or otherwise to receive any payment from Sun, whether for actual, consequential, indirect, special or incidental damages, costs or expenses, whether foreseeable or unforeseeable, any right to which Customer hereby waives and disclaims. Customer EXPRESSLY WAIVES AND RENOUNCES ANY CLAIM TO COMPENSATION OR INDEMNITIES FOR ANY TERMINATION OF BUSINESS RELATIONSHIP BY A FOREIGN BUSINESS ENTITY, WHICH MAY EXIST UNDER THE LAWS OF ANY APPLICABLE JURISDICTION. 3.6 Survival. Rights and obligations under this Agreement which by their nature should survive, will remain in effect after termination or expiration hereof. 4.0 PAYMENTS; TAXES; ACTIVITY LEVEL 4.1 Payment Terms. Except as otherwise specified in the Attachments hereto, and in consideration of the rights granted to Customer hereunder, Customer shall pay to Sun the royalties for EXHIBIT 10.5 each Royalty Bearing Event for the applicable Software licensed or distributed by Customer on a quarterly basis within thirty (30) days following the end of the preceding calendar quarter, accompanied by a report pursuant to Section 5.1 ("Record Keeping") below. Software license and royalty fees are set forth on the Sun Price List. To the extent that Customer orders any Software or other products from Sun or Sun invoices Customer for any royalties due, Customer shall pay any amounts due to Sun within thirty (30) days from Sun's invoice date except for royalties, which shall always be due within thirty (30) following the end of the preceding calendar quarter. Sun's acceptance of this Agreement and any associated order(s) does not imply Sun's approval of an open line of credit. Credit terms are established by Sun based in part upon Customer's financial and payment records. Sun reserves the right to place Customer on credit hold in the event Customer's financial condition ceases to warrant the credit terms specified above. 4.2 Taxes. (a) Subject to Section 4.2(b), all amounts payable by Customer under this Agreement are exclusive of any Tax, levy or similar governmental charge that may be assessed by any jurisdiction, whether based on gross revenue, the delivery, possession or use of the Software, the execution or performance of this Agreement or otherwise, except for net income, net worth or franchise taxes assessed on Sun. If, under the local law, Customer is required to withhold any Tax on such payments, then the amount of the payment actually remitted to Sun will be net of all Taxes. Customer will promptly furnish Sun with the official receipt of payment of these Taxes to the appropriate taxing authority. Customer will pay all other Taxes, levies or similar governmental charges or provide Sun with a certificate of exemption acceptable to the taxing authority. (b) Notwithstanding Section 4.2(a), Customer may deduct from payments any income tax or tax of a similar nature imposed by any non-United States government ("government income tax") on the income of Sun from such payment and actually paid by Customer for the account of Sun. In the event that Customer deducts any such income tax from any such payment, Customer shall furnish Sun with evidence acceptable to Sun and to the United States Government to sufficiently establish that such government income tax has been paid for the account of Sun. 4.3 Updates. The fees specified in this Agreement are for the then-current release of the Software and any Updates. It is within Sun's sole discretion to release and/or distribute Updates to Customer. Sun shall have the right, at its sole discretion and without incurring any liability to Customer, to modify the Software or discontinue its development, manufacture, sale or support and will provide Customer with sixty (60) days prior notice. Such change shall not require Customer's approval. 4.4 Price Changes. Sun reserves the right to change the Price List, discount schedule and/or royalties for any Software at any time. In the event of a price increase, Sun shall provide Customer with thirty (30) days prior notice. Such change shall not require Customer's approval. If, during the term of this Agreement, Sun decreases the royalty rate for any Software(s), all orders for such Software(s) scheduled for shipment or in transit to Customer at the time of such notice shall be adjusted to the decreased royalty rate. 4.5 Customer's Products. Customer shall list in its revenue reports to Sun pursuant to Section 5.0 ("Records; Audit Requirement; Forecast") of the Agreement, Customer's Products shipped in conjunction or associated with the Software hereunder. 5.0 RECORDS; AUDIT REQUIREMENTS; FORECAST 5.1 Record Keeping. Customer shall maintain for a three (3) year period revenue records sufficient to determine that Customer is in compliance with the terms and conditions of this Agreement. Customer shall provide to Sun along with any payments specified hereunder, quarterly revenue reports, in the English language which shall include, at a minimum, the following information: (i) the Names of EXHIBIT 10.5 Software products; (ii) Customer's Product names; (iii) the number of units of each type of Customer's Product shipped with the Software; (iv) the number of Customer's Product units forecasted to be shipped for the next six (6) months; (v) the number of units of Customers Product that were returned to Customer for the reporting period for which Customer is entitled to a credit; and (vi) the royalty amounts due Sun. For any quarter in which no royalties are paid, Licensee will submit a report so indicating, along with any of the applicable above information. Royalty reports and payments should be sent to the address set forth above unless otherwise indicated by Sun in writing. 5.2 Audit Requirements. The following audit provision shall continue throughout the term of this Agreement and shall survive the termination of this Agreement insofar as applicable to obligations accrued prior to such termination. (a) Right to Audit. Sun shall have the right to audit the records and accounts of Customer required to be kept in accordance with this Agreement. The auditor shall be adequately bound to keep confidential all Confidential Information of Customer learned during the course of or pursuant to the audit. Any such audit shall be performed only during Customer's normal business hours, no more frequently than once per calendar year (but more frequently and at Sun's discretion if irregularities are found), and shall be performed in such a manner as to avoid unreasonable interference with Customer's business operations; and the auditor shall be limited to reporting the adequacy of Customer's records and accounts, including, but not limited to, whether Customer is in compliance with the terns of this Agreement and the amount, if any, of underpayment or overpayment of the amounts due Sun pursuant to this Agreement. Except as expressly provided in Section 5.2(b) ("Errors In Payment"), Sun shall bear all costs and expenses associated with the exercise of its right to audit. (b) Errors in Payment. In the event that any errors in payment shall be determined, such errors shall be corrected by appropriate adjustment in payment (plus interest at one and one-half percent (1-1/2%) per month or the highest rate permitted by law) for the quarterly period during which the error is discovered. In the event of underpayment of more than five percent (5%) of the amount due for that period (i) Customer shall reimburse Sun for the reasonable charges of the audit that identified the underpayments, and (ii) Sun shall have the right to conduct additional audits, at its sole discretion; in ninety (90) day intervals until Customer becomes fully compliant with the terms and conditions of this Agreement. 6.0 CONFIDENTIAL INFORMATION Customer may not disclose Sun's Confidential Information and may use it only for purposes specifically contemplated in this Agreement. Sun will treat Customers Confidential Information with the same degree of care as it does its own similar information. The foregoing obligations do not apply to information which: (i) is rightfully obtained by recipient without an obligation to maintain its confidentiality; (ii) is or becomes generally known to the public through no act or omission of recipient, or (iii) is independently developed by recipient without use of the other party's Confidential Information. This Section 6.0 ("Confidential Information") will not affect any other confidential disclosure agreement between the parties. 7.0 WARRANTIES 7.1 Customer's Limited Warranty: Sun warrants that for a period of ninety (90) days from the date of delivery to Customer that the media on which the Software is furnished will be free of defects in materials and workmanship under normal use. Except for the foregoing, to the full extent allowed by applicable law, the Software is provided "AS IS" and without warranty of any kind. Customer's exclusive remedy and Sun's entire liability under this limited warranty will be at Sun's option to repair or replace the defective media. EXHIBIT 10.5 7.2 Nuclear Applications. Software is not designed or intended for use in the design, construction, operation or maintenance of any nuclear facility. SUN DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY OF FITNESS FOR SUCH USES. 7.3 No Other Warranties. UNLESS SPECIFIED IN THIS AGREEMENT, ALL EXPRESS OR IMPLIED CONDITIONS, REPRESENTATIONS AND WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT, ARE DISCLAIMED, EXCEPT TO THE EXTENT THAT SUCH DISCLAIMERS ARE HELD TO BE LEGALLY INVALID. 8.0 LIMITATION OF LIABILITY TO THE FULL EXTENT ALLOWED BY ANY APPLICABLE LAW, AND EXCEPT FOR OBLIGATIONS TO DEFEND UNDER SECTION 9.0 ("INTELLECTUAL PROPERTY CLAIMS") OF THIS AGREEMENT, EACH PARTY'S LIABILITY TO THE OTHER FOR CLAIMS RELATING TO THIS AGREEMENT, WHETHER FOR BREACH OR IN TORT, SHALL BE LIMITED TO THE AMOUNT OF ACCRUED ROYALTIES PAYABLE TO SUN FOR ALL COPIES LICENSED HEREUNDER FOR THE PARTICULAR SOFTWARE GIVING RISE TO SUCH CLAIM, IF ANY. THE FOREGOING LIMITATION DOES ~T REDUCE CUSTOMER'S OBLIGATION TO PAY SUN THE LICENSE FEES DUE AND OWING FOR THE SOFTWARE. NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INDIRECT, PUNITIVE, SPECIAL, INCIDENTAL OR NSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT (INCLUDING WITHOUT LIMITATION, LOSS OF PROFITS, USE, DATA, OR OTHER ECONOMIC ADVANTAGE), HOWEVER IT ARISES, WHETHER FOR BREACH OF THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, BREACH OF WARRANTY, OR IN TORT, EVEN IF THAT PARTY HAS BEEN PREVIOUSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGE, AND WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE. THE FOREGOING LIMITATION OF LIABILITY OF CUSTOMER TO SUN SHALL NOT APPLY IF CUSTOMER'S ACTIONS OR INACTION RESULT IN THE UNAUTHORIZED DISCLOSURE, DISTRIBUTION OR USE OF THE SOFTWARE OR SUN'S CONFIDENTIAL INFORMATION. 9.0 INTELLECTUAL PROPERTY CLAIMS 9.1 Sun shall defend at its own expense and, in addition, shall indemnify Customer from damages, liabilities, costs and expenses actually awarded against Customer up to the amount stated in Section 8.0 ("Limitation of Liability"), as a result of any final judgment against Customer in which it is determined that the marketing or use of any Sun written code within the Software infringe Berne Convention copyrights of third parties in any country where Sun has a subsidiary. In the event Sun elects to avoid litigation relating to the foregoing and settle any such claims, Sun will pay the settlement amount and obtain a release as to all such claims against Customer. 9.2 Customer shall defend at its expense without limitation and, in addition, shall indemnify Sun from damages, liabilities, costs and expenses actually awarded against Sun up to the amount stated in Section 8.0 ("Limitation of Liability"), as a result of actions or omissions set forth in Section 9.5 (i) through (iv). In the event Customer elects to avoid litigation relating to the foregoing and settle any such claims, Customer will pay the settlement amount and obtain a release as to all such claims against Sun. 9.3 The indemnification obligations set forth in Sections 9.1 and 9.2 above shall be conditioned upon the indemnified party (i) notifying the indemnifying party within thirty (30) days of notice of a claim of infringement; (ii) providing full cooperation and assistance to the indemnifying party at the indemnifying party's expense; and (iii) providing the indemnifying party full authority to manage the defense or settlement of the claim. 9.4 Should Software become or, in Sun's opinion, be likely to become the subject of a claim of infringement for which indemnification obligations would apply according to Section 9.1 above, Sun, EXHIBIT 10.5 at its option may (i) at no additional cost to Customer, procure for Customer the right to continue to use the Software, (ii) at no additional cost to Customer, replace or modify the Software to make such Software non-infringing, provided that substantially similar functionality and performance is obtained with the replacement or modified Software, or (iii) if the right to continue to use cannot be procured under commercially reasonable terms, or such Software cannot be replaced or modified within a commercially reasonable time and at a commercially reasonable expense, terminate the license to use such Software and refund to Customer over five (5) years in equal monthly payments the amounts that Customer refunds to its customers for such Software due to the claim of infringement, up to the total amounts actually paid by Customer to Sun under this Agreement for such Software. Sun's performance of (i), (ii) or (iii) above shall be Customer's sole and exclusive remedies. 9.5 Notwithstanding the foregoing, Sun shall have no obligation to indemnify and defend Customer or to pay costs, damages or attorneys' fees for any claim based upon (i) the combination, operation, or use by Customer of Software with other equipment, code, programs or data not supplied by Sun if such infringement would have been avoided but for the combination, operation or use of the Software with other equipment, code, programs or data; or (ii) use by Customer of other than the then-latest version of the Software, if such infringement could have been avoided by the use of the latest version of the Software and such latest version had been made available to Customer; or (iii) modifications by Customer of the Software in the event such infringement is caused by such modifications; or (iv) use by Customer outside the scope of the granted license(s). 10.0 MAINTENANCE AND SUPPORT Sun shall provide technical assistance (as provided in Section 1.21) to End Users. Customer shall distribute the Technical Support Entitlement with Customer's Product to End Users. 11.0 GOVERNMENT CONTRACTS 11.1 U.S. Governments (a) If Software is being acquired by or on behalf of the U.S. Government or by a U.S. Government prime contractor or subcontractor (at any tier), then the Government's rights in Software and accompanying documentation will be only as set forth in this Agreement; this is in accordance with 48 CFR 227.7201 through 227.7202-4 (for Department of Defense (DOD) acquisitions) and with 48 CFR 2.101 and 12.212 (for non-DOD acquisitions). Customer is responsible for ensuring that proper notice is given to all such third parties and that the Software and technical data are properly marked. Customer shall indemnify Sun for any claims or damages arising from any claim by the U.S. Government to more than Restricted Rights in and to the Software product(s) resulting from Customer's failure to provide a Restricted Rights legend as required herein. Any failure by Sun to affix a Restricted Rights legend on the Software product(s) shall not be deemed to constitute a waiver of any limitation on Customer's rights imposed by this Agreement. (b) Under no circumstances shall Sun be obligated to comply with any requirements imposed by the U.S. Government regarding submission of or the request for exemption from submission of cost or pricing data or cost accounting requirements for any distribution or license of Software that would require compliance by Sun with U.S. Governmental requirements relating to cost or pricing data or cost accounting requirements. 11.2 Other Sovereign Governments At its own cost and expense, Customer and its Distributors will take all necessary steps in making proposals and agreements with sovereign governments other than the U.S. Government which involve Software and End User Documentation to ensure that Sun's proprietary rights in Software and End User Documentation receive the reasonably necessary protection available from such foreign governments for commercial computer software and related documentation developed at private expense. EXHIBIT 10.5 12.0 MISCELLANEOUS 12.1 Force Majeure. A party is not liable under this Agreement for non-performance caused by events or conditions beyond that party's control if the party makes reasonable efforts to perform. This provision does not relieve Customer of its obligation to make payments then owing. 12.2 Severability. In the event that any part of this Agreement is held to be unenforceable, in whole or in part, such holding will not affect the validity of the other parts of this Agreement, unless Sun deems the unenforceable part to be essential to this Agreement, in which case Sun may terminate this Agreement, effective immediately upon notice to Customer. 12.3 Relationship of the Parties. This Agreement is not intended to create a relationship such as a partnership, franchise, joint venture, agency, or employment relationship. Neither party may act in a manner which expresses or implies a relationship other than that of independent contractor, nor bind the other party. 12.4 Governing Law. Any action related to this Agreement will be governed by California law and controlling U.S. federal law. No choice of law rules of any jurisdiction will apply. 12.5 Import and Export Laws. All Software and technical data delivered under this Agreement are subject to U.S. export control laws and may be subject to export or import regulations in other countries. Customer agrees to comply strictly with all such laws and regulations and acknowledges that it has the responsibility to obtain such licenses to export, re-export or import as may be required after delivery to Customer. 12.6 Assignment. Neither party may assign or otherwise transfer any of its rights or obligations under this Agreement, without the prior written consent of the other party, except that Sun may assign its right to payment and may assign this Agreement to an affiliated company. 12.7 Change of Control. In the event of the direct or indirect taking over or assumption of control of Customer or of substantially all of its assets by any government, governmental agency or other third party, Sun may terminate this Agreement upon written notice to Customer. 12.8 Notices. All written notices required by this Agreement must be delivered in person or by means evidenced by a delivery receipt and will be effective upon receipt. 12.9 Waiver or Delay. Any express waiver or failure to exercise promptly any right under this Agreement will not create a continuing waiver or any expectation of non-enforcement. To be enforceable, a waiver must be in writing and signed by the waiving party. 12.10 No Rights in Third Parties. This Agreement is made for the benefit of the parties hereto, and not for the benefit of any third parties unless otherwise stated herein or agreed to by the parties. 12.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which will constitute but one and the same instrument. 12.12 Headings. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 12.13 Construction. This Agreement has been negotiated by the parties hereto and by their respective counsel. This Agreement will be fairly interpreted in accordance with its terms and without any strict construction in favor of or against either party. The original of this Agreement has been written in English, and such version shall be the governing version of the Agreement. To the extent allowed under applicable law, Customer waives any right it may have, if any, under any law or regulation to have this Agreement written in a language other than English. 12.14 Orders. This Agreement does not constitute an order for Software, but rather a commitment to order Software as set forth in the Attachments hereto. Purchase orders for Software shall EXHIBIT 10.5 be submitted to Sun by Customer pursuant to the terms of this Agreement. Any terms or conditions set forth on any purchase order, check, or other document of Customer shall have no force or effect whatsoever. Customer further acknowledges that it does not take title to the Software, with the exception of the media, but rather licenses the Software pursuant to the terms and conditions of this Agreement. 12.15 Deliveries. Software and Documentation shall be delivered F.O.B. Sun's designated shipping facility unless otherwise agreed to by the parties in writing. Title to the Software media, but not to the Software and its associated intellectual property rights, shall pass to Customer at that time. Sun may make partial deliveries and such deliveries will not relieve Customer of its obligation to accept the remainder of that order in whole or in part. Sun may allocate Software to fairly accommodate orders received by Sun from all customers at any time demand exceeds the available supply. 12.16 Equitable Relief. Because the licenses granted under this Agreement are personal and unique, and because Customer will have access to and become acquainted with confidential and proprietary information of Sun, the unauthorized use or disclosure of which would cause irreparable harm and significant injury which would be difficult to ascertain and which would not be compensable by damages alone, both parties agree that, in addition to any and all legal remedies available to Sun for Customer's breach of this Agreement, Sun shall be entitled to avail itself of actions against Customer and/or third parties for seizure and injunctive relief. If an unauthorized use or disclosure occurs, Customer will promptly notify Sun and take, at Customer's expense, all steps which are necessary to recover the Software and to prevent its subsequent unauthorized use or dissemination. 12.17 Entire Agreement. This Agreement is the parties' entire agreement relating to its subject matter. It supersedes all prior and contemporaneous oral or written communications, proposals, conditions, representations and warranties and prevails over any conflicting or additional terms of any quote, order, acknowledgment, or other communication between the parties relating to its subject matter during the term of this Agreement. No modification to this Agreement will be binding, unless in writing and signed by an authorized representative of each party. EXHIBIT 10.5 ATTACHMENT 1 AGREEMENT DETAILS 1. SOFTWARE PRODUCT VERSION & LANGUAGES: StarSuite software version 6.0* in English, German, French, Italian, Swedish, Spanish. *If and when Sun makes a Portuguese edition of version 6.0 of the Software generally commercially available, Customer may distribute such edition pursuant to the terms of this Agreement. Customer understands and agrees that Sun is under no obligation to make such a Portuguese edition available, and that Sun may never make such and edition generally commercially available. 2. CUSTOMER'S PRODUCT(S) THAT WILL INCLUDE STARSUITE 6.0: _____________________ Lindows.com [***]_______________________ 3. DISTRIBUTION TERRITORY(S): Customer may distribute Customer's Product(s) in any territory except for the territories stated below in Section 4 to Attachment 1, or any other territory otherwise prohibited under this Agreement. 4. DISTRIBUTION TERRITORY LIMITATIONS: THE STARSUITE SOFTWARE AND CUSTOMER MARKETING COLLATERAL CONTAINING THE LICENSED TRADEMARKS MUST NOT BE DISTRIBUTED OR MARKETED SOLELY IN JAPAN, PRC (EXCLUDING HONG KONG), TAIWAN OR KOREA. A SEPARATE AND SPECIFIC PRODUCT ("STAROFFICE") IS AVAILABLE FOR DISTRIBUTION IN TERRITORIES OUTSIDE OF THESE AREAS UNDER A SEPARATE AGREEMENT THROUGH THE STAROFFICE BUSINESS GROUP. 5. SINGLE USER LICENSE AND END USER SUPPORT: Each StarSuite Software unit is a single user license (please refer to the End User Binary Code License for more detail). Each single user license includes a single Support Incident which entitles the End User licensee to receive technical assistance. Sun will provide technical support program details. 6. DISTRIBUTION OPTIONS: Customer is authorized to distribute Software via one or more of the following models only A. SOFTWARE OEMS: Customer must market and distribute the Software, in binary form, by bundling it with Customer's Product and reproducing the Software on CDs that shall be distributed with Customer's Product. Customer (at its own expense) must produce and distribute the CDs containing the StarSuite Software as a value-add component of Customer's Product only, and shall not distribute the StarSuite Software as a stand-alone product. Customer is prohibited from distributing StarSuite Software as part of any publication of any kind (books, magazines, etc.) without prior written permission from Sun. References to Sun-approved CD producers are available upon request. Customer agrees to distribute one (1) Technical Support Entitlement with each Software unit distributed. B. HARDWARE OEM PRE-INSTALLS: Software shall be pre-installed on Customer's Product, and a shortcut visible to End User will be placed on the desktop upon initial activation and remain visible unless uninstalled by End User. Customer may elect to include a CD containing the Software in binary form for the sole purpose of providing a back-up CD to End User. Under this scenario, separate instances of the Software (pre-install and on back-up CD) count as a single unit for royalty calculation purposes. Customer will distribute one (1) Technical Support Entitlement with each Software unit distributed. EXHIBIT 10.5 C. SUB-LICENSING TO HARDWARE MANUFACTURERS: Customer may resell Software only to third party computer hardware manufacturers, and only if the Software is bundled with Customer's Product. Customer must maintain accurate records of all Software units distributed to third parties, and Customer will pay royalties for such units based on Customer's current royalty rate as set forth in the Price List. Customer is responsible for ensuring that computer hardware manufacturers who obtain Software from Customer for further distribution, fully comply with the trademark usage standards set forth in Section 5 of the Trademark License Agreement, AND pre-install Software as specified above in Section 6.B ("Hardware OEM Pre-Installs"). Customer shall ensure that one (1) Technical Support Entitlement is included with each Software unit distributed to sublicensees. D. [***] 7. CUSTOMER TECHNICAL CONTACTS: [***] 8. CUSTOMER MARKETING CONTACT: [***] 9. ADDITIONAL CUSTOMER COMMITMENTS: i. TRADEMARKS: Customer agrees to use the Sun Trademarks as specified in the Trademark License Agreement (Attachment 3). ii. REFERENCES AND PRESS QUOTE SUPPORT: Customer agrees to support a reasonable amount of Sun's press release and customer reference activities by providing quotes and acting as a customer reference (when requested and where appropriate). Customer retains final approval of quotes and reference use. 10. CUSTOMER DELIVERABLES: A. QUARTERLY REPORTS: Within thirty (30) days following each quarter end, Customer shall report to Sun the number of copies of Software (by platform) distributed by Customer in each country in the distribution Territory. B. CUSTOMER MARKETING COLLATERAL & PACKAGING SAMPLES: Customer shall deliver to Sun all Customer Marketing Collateral samples and Customer Product packaging mock-ups, and allow one week for Sun's approval of the trademark and logo usage before production. C. FINAL PRODUCT SAMPLES: If Customer's Product is packaged as a retail box, Customer shall deliver to Sun two (2) complete samples of each boxed Customer Product that includes the Software. Customer will deliver new boxed samples as new versions of Customer's Products are released. In the event that Customer's Product is not packaged as a retail box, then Customer must provide a screenshot of Customer's Product clearly showing the pre-installed Software icon on the desktop. 11. SUN DELIVERABLES. A. MASTER MEDIA: Sun shall deliver Master Media to Customer following the Effective Date of this Agreement. Customer is authorized to distribute Software binaries duplicated from Master Media only. EXHIBIT 10.5 B. ARTWORK/FORMAT: Sun shall make available to Customer the Licensed Trademarks (in .eps format) relating to the StarSuite Software following the Effective Date of this Agreement. C. TECHNICAL SUPPORT ENTITLEMENT: Sun shall provide Technical Support Entitlement (at no cost) to Customer which must be distributed with Customer's Product to End Users via printed collateral, text file (e.g., "Read Me" file), splash screen, dialogue box, or other means pre-approved in writing by Sun. 12. PREPAYMENT. A. Customer agrees to make a non-refundable, non-transferable prepayment in the amount of [***] ("Prepayment") for the right to distribute up to [***] copies of the Linux version of Software version 6.0 within the territories specified in Section 4 of this Attachment 1. Any portion of the Prepayment not used on or before the termination or expiration of the agreement shall be deemed forfeited. Only upon timely payment of the Prepayment, may Customer distribute Software pursuant to Option D of Section 6 of this Attachment. EXHIBIT 10.5 ATTACHMENT 2 END USER BINARY CODE LICENSE AGREEMENT READ THE TERMS OF THIS AGREEMENT AND ANY PROVIDED SUPPLEMENTAL LICENSE TERMS (COLLECTIVELY "AGREEMENT") CAREFULLY BEFORE OPENING THE SOFTWARE MEDIA PACKAGE. BY OPENING THE SOFTWARE MEDIA PACKAGE, YOU AGREE TO THE TERMS OF THIS AGREEMENT. IF YOU ARE ACCESSING THE SOFTWARE ELECTRONICALLY, INDICATE YOUR ACCEPTANCE OF THESE TERMS BY SELECTING THE "ACCEPT" BUTTON AT THE END OF THIS AGREEMENT. IF YOU DO NOT AGREE TO ALL THESE TERMS, PROMPTLY RETURN THE UNUSED SOFTWARE TO YOUR PLACE OF PURCHASE FOR A REFUND OR, IF THE SOFTWARE IS ACCESSED ELECTRONICALLY, SELECT THE "DECLINE" BUTTON AT THE END OF THIS AGREEMENT. 1. LICENSE TO USE. Sun grants you a non-exclusive and non-transferable license for the internal use only of the accompanying software and documentation and any error corrections provided by Sun (collectively "Software"), by the number of users and the class of computer hardware for which the corresponding fee has been paid. 2. RESTRICTIONS. Software is confidential and copyrighted. Title to Software and all associated intellectual property rights is retained by Sun and/or its licensors. Except as specifically authorized in any Supplemental License Terms, you may not make copies of Software, other than a single copy of Software for archival purposes. Unless enforcement is prohibited by applicable law, you may not modify, decompile, or reverse engineer Software. You acknowledge that Software is not designed, licensed or intended for use in the design, construction, operation or maintenance of any nuclear facility. Sun disclaims any express or implied warranty of fitness for such uses. No right, title or interest in or to any trademark, service mark, logo or trade name of Sun or its licensors is granted under this Agreement. 3. LIMITED WARRANTY. Sun warrants to you that for a period of ninety (90) days from the date of purchase, as evidenced by a copy of the receipt, the media on which Software is furnished (if any) will be free of defects in materials and workmanship under normal use. Except for the foregoing, Software is provided "AS IS". Your exclusive remedy and Sun's entire liability under this limited warranty will be at Sun's option to replace Software media or refund the fee paid for Software. 4. DISCLAIMER OF WARRANTY. UNLESS SPECIFIED IN THIS AGREEMENT, ALL EXPRESS OR IMPLIED CONDITIONS, REPRESENTATIONS AND WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT ARE DISCLAIMED, EXCEPT TO THE EXTENT THAT THESE DISCLAIMERS ARE HELD TO BE LEGALLY INVALID. 5. LIMITATION OF LIABILITY. TO THE EXTENT NOT PROHIBITED BY LAW, IN NO EVENT WILL SUN OR ITS LICENSORS BE LIABLE FOR ANY LOST REVENUE, PROFIT OR DATA, OR FOR SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES, HOWEVER CAUSED REGARDLESS OF THE THEORY OF LIABILITY, ARISING OUT OF OR RELATED TO THE USE OF OR INABILITY TO USE SOFTWARE, EVEN IF SUN HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. In no event will Sun's liability to you, whether in contract, tort (including negligence), or otherwise, exceed the amount paid by you for Software under this Agreement. The foregoing limitations will apply even if the above stated warranty fails of its essential purpose. EXHIBIT 10.5 6. Termination. This Agreement is effective until terminated. You may terminate this Agreement at any time by destroying all copies of Software. This Agreement will terminate immediately without notice from Sun if you fail to comply with any provision of this Agreement. Upon Termination, you must destroy all copies of Software. 7. Export Regulations. All Software and technical data delivered under this Agreement are subject to US export control laws and may be subject to export or import regulations in other countries. You agree to comply strictly with all such laws and regulations and acknowledge that you have the responsibility to obtain such licenses to export, re-export, or import as may be required after delivery to you. 8. U.S. Government Restricted Rights. If Software is being acquired by or on behalf of the U.S. Government or by a U.S. Government prime contractor or subcontractor (at any tier), then the Government's rights in Software and accompanying documentation will be only as set forth in this Agreement; this is in accordance with 48 CFR 227.7201 through 227.7202-4 (for Department of Defense (DOD) acquisitions) and with 48 CFR 2.101 and 12.212 (for non-DOD acquisitions). 9 Governing Law. Any action related to this Agreement will be governed by California law and controlling U.S. federal law. No choice of law rules of any jurisdiction will apply. 10. Severability. If any provision of this Agreement is held to be unenforceable, this Agreement will remain in effect with the provision omitted, unless omission would frustrate the intent of the parties, in which case this Agreement will immediately terminate. 11. Integration. This Agreement is the entire agreement between you and Sun relating to its subject matter. It supersedes all prior or contemporaneous oral or written communications, proposals, representations and warranties and prevails over any conflicting or additional terms of any quote, order, acknowledgment, or other communication between the parties relating to its subject matter during the term of this Agreement. No modification of this Agreement will be binding, unless in writing and signed by an authorized representative of each party. STARSUITE, VERSION 6.0 SUPPLEMENTAL LICENSE TERMS These supplemental license terms ("Supplemental Terms") add to or modify the terms of the Binary Code License Agreement (collectively, the "Agreement"). Capitalized terms not defined in these Supplemental Terms shall have the same meanings ascribed to them in the Agreement. These Supplemental Terms shall supersede any inconsistent or conflicting terms in the Agreement, or in any license contained within the Software. 1. SOFTWARE LICENSE TO USE. Subject to the terms and conditions of this Agreement, Sun grants you a non-exclusive, nontransferable, limited license to use up to five (5) complete and unmodified copies of the binary form of the Software installed only on computers that you operate. 2. LINUX END USER LICENSE TO USE. Subject to the terms and conditions of this Agreement, if you are a Linux operating system end user and you received the Software as part of a Linux operating system bundle, Sun grants you a non-exclusive and non-transferable license for the internal use only of the accompanying unmodified binary form of the Software. 3. EDUCATIONAL INSTITUTION LICENSE TO USE. Subject to the terms and conditions of this Agreement, if you are an educational institution, Sun grants you a non-exclusive and non-transferable license for the EXHIBIT 10.5 internal use only of the accompanying unmodified binary form of the Software. In this situation "internal use" means that your enrolled students, faculty and staff may use the Software. 4. FONT SOFTWARE. The Software contains font software which generates typeface designs ("Font Software"). You may not separate the Font Software from the Software. You may not alter Font Software for the purpose of adding any functionality which such Font Software did not have when delivered to you as part of the Software. You may not embed Font Software into a document which is distributed as a commercial product in exchange for a fee or other consideration (For example, End-Users shall not embed Font Software into an electronic book that is offered to the public for a fee). 5. TRADEMARKS AND LOGOS. You acknowledge and agree as between you and Sun that Sun owns the SUN, STARSUITE, SOLARIS, JAVA, JINI, FORTE, iPLANET trademarks and all SUN, SOLARIS, JAVA, JINI, FORTE, and iPLANET-related trademarks, service marks, logos and other brand designations ("Sun Marks"), and you agree to comply with the Sun Trademark and Logo Usage Requirements currently located at http://www.sun.com/policies/trademarks. Any use you make of the Sun Marks inures to Sun's benefit. 6. SOURCE CODE. Software may contain source code that is provided solely for reference purposes pursuant to the terms of this Agreement. Source code may not be redistributed unless expressly provided for in this Agreement. 7. TERMINATION FOR INFRINGEMENT. Either party may terminate this Agreement immediately should any Software become, or in either party's opinion be likely to become, the subject of a claim of infringement of any intellectual property right. 8. LIMITED WARRANTY. Any implied warranties on the Software are limited to 90 days. Some states do not allow limitations on duration of an implied warranty, so the above may not apply to you. This limited warranty gives you specific legal rights. You may have others, which vary from state to state. 9. LIMITATION OF LIABILITY. Some states do not allow the exclusion of incidental or consequential damages, so some of the terms of Section 5, Limitation of Liability, above may not be applicable to you. 10. JAVA TECHNOLOGY RESTRICTIONS. You may not modify the Java Platform Interface ("JPI", identified as classes contained within the "java" package or any subpackages of the "java" package), by creating additional classes within the JPI or otherwise causing the addition to or modification of the classes in the JPI. In the event that you create an additional class and associated API(s) which (i) extends the functionality of the Java platform, and (ii) is exposed to third party software developers for the purpose of developing additional software which invokes such additional API, you must promptly publish broadly an accurate specification for such API for free use by all developers. You may not create, or authorize your licensees to create, additional classes, interfaces, or subpackages that are in any way identified as "java", ` javax", "sun" or similar convention as specified by Sun in any naming convention designation. Refer to the appropriate version of the Java Runtime Environment binary code license (currently located at http://www.java.sun.com/jdk/index.htm]) for the availability of runtime code which may be distributed with Java applets and applications. For inquiries please contact: Sun Microsystems, Inc., 901 San Antonio Road, Palo Alto, California 94303 (LF1 #111636) EXHIBIT 10.5 JN MICROSYSTEMS, INC. PROPRIETARY AND CONFIDENTIAL Agreement Number 115804 ATTACHMENT 3 TRADEMARK LICENSE AGREEMENT This Trademark License Agreement ("Trademark Agreement") is entered into as of the Effective Date between Sun Microsystems, Inc. and its affiliates, with offices at 901 San Antonio Road, Palo Alto, California 94303 ("Sun)" and Customer set forth below ("Customer"): CUSTOMER MUST COMPLETE THE INFORMATION BELOW, REVIEW AND SIGN THE TRADEMARK AGREEMENT, AND RETURN IT TO SUN AT: SUN MICROSYSTEMS, INC., STAROFFICE SOFTWARE OEM SALES DEPARTMENT, 901 SAN ANTONIO ROAD, MAILSTOP: USCA12-101, PALO ALTO, CALIFORNIA 94303. Customer: Lindows.com Contact: _____________________________ Address: 9333 Genesee Avenue, 3rd Floor San Diego, California 92121 U.S.A. Tel: 858-587-6700 Fax: 858-587-6700 E-mail: __________________________ Sun and Customer entered into a StarOffice Software OEM License and Distribution Agreement ("StarOffice OEM License Agreement") allowing Customer to bundle Sun's StarOffice' application Software with Customer's Product. This Trademark Agreement sets forth the terms and conditions for Customer's licensing and use of the StarOffice Logo, StarOffice word mark, and ___ Logo in connection with Customers distribution and marketing of Customers Products that contain the Software. The terms and conditions of this Trademark Agreement shall supersede any inconsistent or conflicting terms and conditions in the StarOffice OEM License Agreement, including Attachments. This Trademark Agreement includes by reference Attachment 3-A, entitled Licensed Trademarks, as an integral part hereto. In consideration of the mutual promises and covenants set forth in this Trademark Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged, the parties agree to the terms and conditions herein. IN WITNESS WHEREOF, the parties hereby execute this Trademark Agreement through the authorized representatives whose names appear below.. SUN: LINDOWS.COM By: /s/ Sheila Kerr By: /s/ Kevin Carmony ------------------------------- ---------------------------------- Name: Sheila Kerr Name: Kevin Carmony ----------------------------- -------------------------------- (printed or typed) (printed or typed) Title: Manager - STS Sales Ops Title: President ---------------------------- ------------------------------- Date: 6/29/02 Date: 6-28-02 ----------------------------- -------------------------------- EXHIBIT 10.5 1.0 DEFINITIONS 1.1 All capitalized terms shall have the same meaning set forth in the StarOffice OEM License Agreement. 2. LICENSE AND PERMISSION GRANTS 2.1 License Grant to Customer. Subject to and conditioned upon compliance with all of the terms in this Trademark Agreement, including without limitation Sections 3, 4 and 5, and with the terms in the StarOffice OEM License Agreement, Sun grants to Customer, for the term set forth in Section 8 and within the Territory, a limited, non-exclusive, non-transferable, personal, royalty-free license to use, and Customer agrees to use, certain of the Licensed Trademarks in the manner specified in Section 5 of this Trademark Agreement in connection with the distribution, sale and marketing of all Customer's Product(s) that incorporate the Software. Customer is granted no other right, title, license to or interest in the Licensed Trademarks, or any of the Sun Trademarks, for any purpose, and specifically is granted no right to sublicense the Licensed Trademarks. This grant does not extend to Customer's subsidiaries, affiliates, suppliers, distributors, dealers, agents, customers, or other third-party entities. Customer's use of the Licensed Trademarks inures solely to Sun's benefit. 2.2 Territory. Customer may use the Licensed Trademarks in the Territory. Sun may eliminate, any jurisdiction from the Territory if it determines that use of one or more of the Licensed Trademarks in such jurisdiction may subject Sun or a third party to legal liability, or may jeopardize Sun's rights in such jurisdiction. In such event, within sixty (60) calendar days of receipt of notice from Sun, or such earlier date as may be required by court or judicial order, Customer shall cease all use of the Licensed Trademark(s) in such jurisdiction. Customer is granted no right to use the Licensed Trademarks outside the Territory, and shall not distribute Customer's Product, packaging or Customer Marketing Collateral containing the Licensed Trademarks outside the Territory. 2.3 No Limitation On Sun's Use. Nothing in this Trademark Agreement shall: (a) prohibit Sun from offering to customers, directly or indirectly, products, services and/or other items that are the same or similar to those of Customer; or (b) limit or restrict, in any way or manner, any right of Sun to register, defend, protect, maintain, encumber, transfer, license, access, reference, use, exploit, enforce or practice any of the Sun Trademarks in any way, anywhere in the world, for any purpose. 2.4 Permission Grant to Sun. Customer grants to Sun permission to use, display, publish, copy and otherwise distribute, in any medium, Customer's name and company logo solely to identify Customer: (a) on the StarOffice program website within http://www.sun.com and (b) in listings of StarOffice Customers. With Customer's prior approval, Sun may use Customer's name, logo and other relevant information in Sun Marketing Collateral. Sun shall own all right, title and interest in and to all of Sun Marketing Collateral, in any medium, associated with the program, except for Customer's preexisting rights contained in any such materials. 3.0 PROTECTION OF THE TRADEMARKS 3.1 Sun's Ownership And Rights. As between Sun and Customer, Customer agrees that Sun is the sole owner of the Sun Trademarks and all associated goodwill. Customer shall not: (a) challenge Sun's ownership or use, or the validity, of the Sun Trademarks; (b) attempt to adopt or register any mark or logo identical or substantially similar to any Sun Trademarks, including without limitation any translation or transliteration thereof, or any other variants similar to Sun Trademarks in appearance, pronunciation or meaning; (c) remove, alter, or add to any of the Sun Trademarks; or (d) incorporate any of the Sun EXHIBIT 10.5 Trademarks into Customer's trademarks, product names, service marks, company names, slogans, domain names, or any other similar designations. Sun, in its sole discretion, may change the Licensed Trademarks at any time, but shall give Customer reasonable advance notice of such change. 3.2 Assignment Of Rights. If Customer acquires any rights in any of the Licensed Trademarks by operation of law or otherwise, Customer shall, at no expense to Sun, immediately assign such rights to Sun, along with all associated goodwill. If such assignment cannot be completed for any reason, Customer hereby irrevocably grants to Sun, and Sun accepts, an exclusive, worldwide, perpetual, royalty-free, transferable and sublicensable right to use the Licensed Trademarks and shall, at Sun's sole discretion, cancel, withdraw or delete any applications or registrations of the Licensed Trademarks acquired by Customer. 3.3 Further Assurances. Customer agrees to cooperate with Sun and take all reasonable actions required to assist Sun to secure, protect and maintain ownership rights in the Licensed Trademarks worldwide, including but not limited to giving prompt notice to Sun of any known or potential infringement of the Licensed Trademarks of which Customer becomes aware, and cooperating with Sun in the preparation, execution and/or recordation of any documents necessary to register or otherwise protect the Licensed Trademarks, and maintaining or terminating, as applicable, such documents or recordation. Sun shall reimburse Customer for the reasonable costs associated with providing such assistance, except to the extent that any such costs result from Customer's breach of this Trademark Agreement. 3.4 Enforcing Trademark Rights. Sun may commence, prosecute or defend any action or claim concerning the Licensed Trademarks. Sun shall have the right to control any such action, and Customer shall fully cooperate with Sun in any such action, including the satisfaction of procedural requirements necessary to bring such action in a particular jurisdiction. Sun shall reimburse Customer for the reasonable costs associated with providing such assistance to Sun, except to the extent that any such costs result from Customer's breach of this Trademark Agreement. Customer shall not commence any action regarding the Licensed Trademarks or any of the Sun Trademarks without Sun's prior written consent, which Sun may withhold. 4.0 QUALITY STANDARDS 4.1 Customer's Product with which the Licensed Trademarks are associated shall be of a high quality that is at least equal to Customer's overall reputation for high quality products and that meets or exceeds industry standards. 4.2 Customer shall comply with all applicable laws, rules and regulations of the jurisdictions in which it uses the Licensed Trademarks, and Customer shall not violate or infringe any rights of any third party in connection with its distribution of Customer's Product. 4.3 Sun shall have the right, and Customer agrees to allow Sun, to inspect Customer's Products with which the Licensed Trademarks are associated. Prior to first shipment of Customer's Product, Customer shall provide to Sun, at no charge to Sun, samples of Customer's Product, packaging and Customer Marketing Collateral to ensure correct usage of the Licensed Trademarks, and, in its sole discretion shall determine if Customer's use is in compliance with this Trademark Agreement, and Sun shall advise Customer, in writing, whether compliance is met. Customer agrees not to ship Customer's Product or distribute Customer Marketing Collateral without Sun's prior written approval of compliance. EXHIBIT 10.5 4.4 Customer shall give prompt notice to Sun of any material complaint or other indication by any customer or other third party that Customer's Product, packaging or Customer Marketing Collateral may not conform to the quality standards set forth in this Trademark Agreement. 5.0 TRADEMARK USAGE STANDARDS 5.1 Usage. Customer must use the Licensed Trademarks in the manner specified in this Trademark Agreement and in accordance with the Sun Trademark and Logo Usage Requirements set forth at http://www.sun.com/policies/trademarks, which Sun may modify from time to time in its sole discretion and which are incorporated here by reference. 5.2 Trademark and Logo Use & Placement. (a) The Sun Logo and StarOffice Logo must appear on the outside packaging of all Customer's Products that incorporate the StarOffice Software. (b) The Sun Logo and StarOffice Logo must appear on CDs and/or DVDs distributed by Customer that incorporate the StarOffice Software. (c) The Sun Logo and StarOffice Logo must appear on Customer Marketing Collateral. (d) If Customer has an Internet presence, there must be a StarOffice Software description on Customer's website that states: StarOffice(TM)software is a complete office productivity suite that is changing the rules about software because it's multiplatform, based on open standards, and compatible with Microsoft Office files. Since the StarOffice(TM)suite is fully integrated, you can do what you want, when you want, without changing applications. Look up a fact on the Internet while writing a report. Send an e-mail while creating a presentation. The software is even smart enough to make sure you have the tools you need at all times, no matter which application you're using. And it's easy to share documents with people using Microsoft Office as well as other popular applications. Sun's StarOffice(TM)productivity suite is the right choice for those who want, well .... a choice! (e) The StarOffice Logo and Sun Logo must be placed on Customer's web pages promoting Customer's Product (including but not limited to web pages from which Customer's Product is available for download), and such pages must have a link to http://www.sun,com/staroffice. Customer must inform Sun where the Sun URL and the Licensed Trademarks are placed on Customer's website. (f) Prohibited. The Sun Logo cannot be used as a stand-alone logo and must be used in conjunction with the StarOffice Logo. (g) Other uses of Sun Trademarks: Customer may not use any Sun Trademarks, including the Licensed Trademarks, in or on product, packaging, marketing collateral, or web pages other than in connection with Customer's Product that incorporates the Software. All use of Sun Trademarks by Customer shall be in accordance with this Trademark Agreement. 5.3 Artwork. Customer shall use the Sun Logo and the StarOffice Logo only in the exact form received from Sun or Sun's designee. The reproduction of the Licensed Trademarks in Attachment 3-A is for reference only. EXHIBIT 10.5 5.4 Symbols. Whenever Customer uses the Licensed Trademarks, Customer shall attribute such mark or marks by using the (R) or (TM) symbols, whichever is appropriate as set forth in the artwork and/or graphics provided by Sun or Sun's designee to Customer. The appropriate symbol shall accompany the Licensed Trademark in all prominent uses of the mark, including use on Customer's Product, packaging, and Customer's web pages promoting Customer's Product, and the first use in body copy or text of Customer Marketing Collateral. 5.5 Legend. Customer shall legibly display the following trademark legend in an appropriate location on Customer's Product and packaging, on Customer's web pages promoting Customer's Product, and on Customer Marketing Collateral: "StarOffice, the StarOffice Logo and the Sun Logo are trademarks or registered trademarks of Sun Microsystems, Inc. in the United States and other countries, and are used under license." 5.6 Avoiding Confusion as to Source. Customer agrees to use the Licensed Trademarks in a manner that will not create any confusion regarding source of the Customer's Product. To mitigate any likelihood of confusion: (a) Customer must ensure that the Licensed Trademarks are used only to refer to the fact that Sun's StarOffice Software is incorporated into or bundled with Customer's Product; (b) the Licensed Trademarks must not appear larger or more prominent than Customer's company name, marks or designations used for Customer's Product; (c) Customer must not alter the artwork or graphics depicting the Licensed Trademarks provided by Sun or its designee to Customer; (d) the Licensed Trademarks must not be combined with any other graphic or textual elements and must not be used as a design element of any other logo or trademark. 6.0 WARRANTIES; LIMITATION OF LIABILITY 6.1 SUN MAKES NO WARRANTIES OF ANY KIND WITH RESPECT TO THE LICENSED TRADEMARKS, INCLUDING THE VALIDITY OF SUN'S RIGHTS IN THE LICENSED TRADEMARKS IN ANY COUNTRY, AND DISCLAIMS ANY AND ALL WARRANTIES AND CONDITIONS THAT MIGHT OTHERWISE BE IMPLIED BY APPLICABLE LAW INCLUDING WARRANTIES AGAINST INFRINGEMENT OF THIRD PARTY TRADEMARKS AND/OR SIMILAR RIGHTS. 6.2 IN NO EVENT SHALL SUN BE LIABLE FOR ANY DAMAGES, WHETHER DIRECT, INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE (INCLUDING, WITHOUT LIMITATION LOSS OF PROFITS, REVENUE, BUSINESS, DATA OR OTHER ECONOMIC ADVANTAGE), REGARDLESS OF THE THEORY OF LIABILITY, ARISING FROM OR RELATING TO CUSTOMER'S USE OF THE LICENSED TRADEMARKS, OR TERMINATION OF THIS TRADEMARK AGREEMENT, EVEN IF CUSTOMER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. LIABILITY FOR SUCH DAMAGES IS EXCLUDED EVEN IF THE EXCLUSIVE REMEDIES PROVIDED FOR IN THIS TRADEMARK AGREEMENT FAIL OF THEIR ESSENTIAL PURPOSE. EXHIBIT 10.5 7.0 ASSIGNMENT Sun may assign this Trademark Agreement or any of its rights or obligations hereunder in any manner in its sole discretion. Customer may not assign or otherwise transfer this Trademark Agreement or any of its rights or obligations hereunder without Sun's written consent, which Sun may withhold in its sole discretion. This Trademark Agreement shall be binding upon and inure to the benefit of the permitted successors and assigns of the parties hereto. 8.0 TERM AND TERMINATION 8.1 This Trademark Agreement shall commence on the date upon which Sun signs below and shall continue for a period of one (1) year. This Trademark Agreement shall be renewed automatically for successive one (1) year terms (with a maximum of two (2) subsequent terms). 8.2 Sun shall have the right, at its sole discretion and without incurring any liability to Customer, to modify or terminate this Trademark Agreement with a written notice to Customer. 8.3 Upon termination or expiration of this Agreement, Licensee shall discontinue all use of the Licensed Trademarks as promptly as possible, and the license and rights granted hereunder shall terminate completely, Nothing in this Section 8.3 shall limit Sun's rights to pursue other legal remedies, including immediate court or judicial relief. 9.0 SURVIVAL The rights and obligations under this Trademark Agreement which by their nature should survive, including, but not limited to, Sections ___, 6, 8.3, 9 and 10 shall remain in effect after termination or expiration of this Trademark Agreement. 10.0 GENERAL PROVISIONS 10.1 In the event there is any inconsistency between this Trademark Agreement and any of the other Attachments in the StarOffice OEM License Agreement, this Trademark Agreement controls. 10.2 This Trademark Agreement is not intended to and shall not create a relationship between the parties, such as a partnership, franchise, joint venture, agency or employment relationship of any kind. 10.3 All notices required by this Trademark Agreement must be in writing and delivered in person or by means evidenced by a delivery receipt, will be effective upon receipt, and shall be delivered to Sun and Customer at the addresses first set forth in this Trademark Agreement. 10.4 Any express waiver or failure to exercise promptly any right under this Trademark Agreement will not create a continuing waiver or any expectation of non-enforcement. To be enforceable, a waiver must be in writing and signed by the waiving party. 10.5 If any provision of this Trademark Agreement is held invalid by any competent authority, such invalidity will not affect the enforceability of other provisions, and in such event, the parties agree that such provision will be replaced with a new provision that accomplishes the original business purpose. 10.6 This Trademark Agreement is made under and shall be governed by and construed under the laws of the State of California, and controlling U.S. federal law, and the choice of law rules of any jurisdiction shall not apply. The parties agree that any action arising out of this Trademark Agreement shall be brought in the U.S. District Court for the Northern District of California or the California Superior Court, County of Santa Clara, as applicable, and the parties hereby submit exclusively to the personal jurisdiction and venue of such Courts. 10.7 Licensee acknowledges that a material breach of the obligations in Sections 2, 3, 4, 5, 7, and 8.3, and Section 10.10 of this Agreement would cause irreparable harm to Sun for which damages would not be an adequate remedy. Therefore, in addition to its rights and remedies otherwise available at law, including, without limitation, the recovery of damages for breach of this Agreement, Sun shall be entitled to immediate equitable relief, specifically including, but not limited to, both interim and permanent restraining orders and injunctions, and to such other and further equitable relief as the court may deem proper under the circumstances. 10.8 If any legal action or other proceedings are brought for the enforcement of this Trademark Agreement, the successful or prevailing party shall be entitled to recover reasonable attorney's fees and other costs incurred in an action or proceeding in addition to any other relief to which that party may be entitled. 10.9 The English language version of this Trademark Agreement governs the understanding of the parties. In the event of a conflict between the English language version and a translated version of this Trademark Agreement, the English language version controls. All translations of this Trademark Agreement into other languages are for convenience only. 10.10 Neither party may assign this Agreement or any of its rights or obligations hereunder without the other party's prior written consent, such consent not to be unreasonably withheld. This Agreement shall be binding upon and inure to the benefit of the permitted successors and assigns of the parties hereto. 10.11 If one party desires that information provided to the other under this Agreement be held in confidence, the disclosing party will designate the information in writing as confidential or proprietary. Intangible information shall be identified as confidential or proprietary at the time of disclosure, and within thirty (30) calendar days of the disclosure shall be reduced to writing and transmitted to the receiving party pursuant to the notice provisions of Section 10.3. The receiving party may not disclose the other party's confidential or proprietary information, other than to a subsidiary, agent, or contractor of the receiving party who has _____ to be bound by the terms of the duty of confidentiality contained in this Section 10.11, and may use such information only in election with Customer's participation in the Program, including without limitation any associated audits. The receiving party will _______ confidential and proprietary information of the disclosing party that has been previously identified as confidential or proprietary with at least the same degree of care as it does its own such information, but no less than a reasonable degree of care. The foregoing obligations do not apply to information which: (a) was in the possession of, or was known by, the receiving party prior to its receipt from the disclosing party; (b) is obtained by the receiving party from a third party without an obligation to keep such information confidential; (c) is or becomes generally known to the public without violation of this Agreement; (d) is independently developed by the receiving party without use of the confidential information of the other party; or (e) is disclosed in response to a valid court or governmental order or regulatory directive, if the receiving party has given the other party prior notice to afford the other party the opportunity to object. This section will not affect any other confidential disclosure agreement between the parties. 10.12 Each party acknowledges that it understands the terms of this Trademark Agreement and has had the opportunity to consult with independent counsel of its own choice throughout all negotiations that preceded, and occurred in connection with, the execution of this Trademark Agreement. EXHIBIT 10.5 10.13 No Modifications. Customer represents and warrants that it has not in any way unilaterally modified the terms of this Agreement as provided by Sun, and is signing the most recent version of this Trademark Agreement provided by Sun. 10.14 This Trademark Agreement is the parties' entire agreement relating to its subject matter. It supersedes all prior and contemporaneous oral or written communications, proposals, conditions, representations, and warranties, and prevails over any conflicting or additional terms of any quote, order, acknowledgment, or other communication between the parties relating to its subject matter during the term of this Trademark Agreement. No modification to this Trademark Agreement will be binding, unless in writing and signed by an authorized representative of each party. EXHIBIT 10.5 JN MICROSYSTEMS, INC. PROPRIETARY AND CONFIDENTIAL Agreement Number 115804 ATTACHMENT 3-A LICENSED TRADEMARKS STAROFFICE WORD MARK: StarOffice(TM) STAROFFICE LOGO(S): STAROFFICE(TM) STAROFFICE(TM) sun.com/staroffice SUN LOGO: SUN MICROSYSTEMS If you have questions or would like further information regarding Sun and/or StarOffice trademarks or the Sun/ Trademark and Logo Usage Requirements, please contact: SMI Marketing & Trademarks Department Sun Microsystems, Inc. 901 San Antonio Road, MS-PALO 1-521 Palo Alto, CA 94303 Fax: (650) 336-6623 General Hotline: (650) 336-0146 Group E-mail: trademarks!a4un.com Do not send your signed Trademark Agreement to this address or use this address to provide notice under this agreement. EX-10.6 3 a97792a4exv10w6.txt EXHIBIT 10.6 EXHIBIT 10.6 AMENDED AND RESTATED REVOLVING LINE OF CREDIT AGREEMENT This Revolving Line of Credit Agreement (the "AGREEMENT") is made and entered into in this 29th day of July, 2002, by and between MICHAEL ROBERTSON ("LENDER"), and Lindows.com, Inc., a Delaware corporation ("BORROWER"). On August 5, 2004, the parties hereto amended and restated the Agreement solely to modify Lender's address set forth in Section 8 and the Promissory Note attached hereto. In consideration of the mutual covenants and agreements contained herein, the parties agree as follows: 1. LINE OF CREDIT. Lender hereby establishes for a period extending to December 31, 2003 (the "MATURITY DATE") a revolving line of credit (the "CREDIT LINE") for Borrower in the principal amount of Five Hundred Thousand Dollars ($500,000.00) (the "CREDIT LIMIT"). In connection herewith, Borrower shall execute and deliver to Lender a Promissory Note in the amount of the Credit Limit and in form and content satisfactory to Lender. All sums advanced on the Credit Line or pursuant to the terms of this Agreement (each an "ADVANCE") shall become part of the principal of said Promissory Note. 2. ADVANCES. Any request for an Advance may be made from time to time and in such amounts as Borrower may choose; provided, however, any requested Advance will not, when added to the outstanding principal balance of all previous Advances, exceed the Credit Limit. Requests for Advances may be made orally or in writing by such officer of Borrower authorized by it to request such Advances. Until such time as Lender may be notified otherwise, Borrower hereby authorizes its president or any vice president to request Advances. Lender may deposit or credit the amount of any requested Advance to Borrower's checking account with Lender. Lender may refuse to make any requested Advance if an event of default has occurred and is continuing hereunder either at the time the request is given or the date the Advance is to be made, or if an event has occurred or condition exists which, with the giving of notice or passing of time or both, would constitute an event of default hereunder as of such dates. The funds from the Advances will be used by the Borrower for operating expenses in connection with the operations of the Borrower. 3. INTEREST. All sums advanced pursuant to this Agreement shall bear interest from the date each Advance is made until paid in full at the rate of ten percent (10%) per annum, simple interest (the "EFFECTIVE RATE"). 4. REPAYMENT. Borrower shall pay accrued interest on the outstanding principal balance on a monthly basis commencing on September 15, 2002, and continuing on the fifteenth day of each month thereafter. The entire unpaid principal balance, together with any accrued interest and other unpaid charges or fees hereunder, shall be due and payable on the Maturity Date. All payments shall be made to Lender at such place as Lender may, from time to time, designate. All payments received hereunder shall be applied, first, to any costs or expenses incurred by Lender in collecting such payment or to any other unpaid charges or expenses due hereunder; second, to accrued interest; and third, to principal. Borrower may prepay principal at any time without penalty. 5. REPRESENTATIONS AND WARRANTIES. In order to induce Lender to enter into this Agreement and to make the advances provided for herein, Borrower represents and warrants to Lender as follows: 1 EXHIBIT 10.6 a. Borrower is a duly organized, validly existing, and in good standing under the laws of the State of Utah with the power to own its assets and to transact business in California, and in such other states where its business is conducted. b. Borrower has the authority and power to execute and deliver any document required hereunder and to perform any condition or obligation imposed under the terms of such documents. c. The execution, delivery and performance of this Agreement and each document incident hereto will not violate any provision of any applicable law, regulation, order, judgment, decree, article of incorporation, by-law, indenture, contract, agreement, or other undertaking to which Borrower is a party, or which purports to be binding on Borrower or its assets and will not result in the creation or imposition of a lien on any of its assets. d. There is no action, suit, investigation, or proceeding pending or, to the knowledge of Borrower, threatened, against or affecting Borrower or any of its assets which, if adversely determined, would have a material adverse affect on the financial condition of Borrower or the operation of its business. 6. EVENTS OF DEFAULT. An event of default will occur if any of the following events occurs: a. Failure to pay any principal or interest hereunder within ten (10) days after the same becomes due. b. Any representation or warranty made by Borrower in this Agreement or in connection with any borrowing or request for an Advance hereunder, or in any certificate, financial statement, or other statement furnished by Borrower to Lender is untrue in any material respect at the time when made. c. Default by Borrower in the observance or performance of any other covenant or agreement contained in this Agreement, other than a default constituting a separate and distinct event of default under this Paragraph 6. d. Filing by Borrower of a voluntary petition in bankruptcy seeking reorganization, arrangement or readjustment of debts, or any other relief under the Bankruptcy Code as amended or under any other insolvency act or law, state or federal, now or hereafter existing. e. Filing of an involuntary petition against Borrower in bankruptcy seeking reorganization, arrangement or readjustment of debts, or any other relief under the Bankruptcy Code as amended, or under any other insolvency act or law, state or federal, now or hereafter existing, and the continuance thereof for sixty (60) days undismissed, unbonded, or undischarged. 7. REMEDIES. Upon the occurrence of an event of default as defined above, Lender may declare the entire unpaid principal balance, together with accrued interest thereon, to be immediately due and payable without presentment, demand, protest, or other notice of any kind. Lender may suspend or terminate any obligation it may have hereunder to make additional Advances. To the extent permitted by law, Borrower waives any rights to presentment, demand, protest, or notice of any kind in connection with this Agreement. No failure or delay on the part of Lender in exercising any right, power, or privilege hereunder will preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided herein are cumulative and not exclusive of any other rights 2 EXHIBIT 10.6 or remedies provided at law or in equity. Borrower agrees to pay all costs of collection incurred by reason of the default, including court costs and reasonable attorney's fees. 8. NOTICE. Any written notice will be deemed effective on the date such notice is placed, first class, postage prepaid, in the United States mail, addressed to the party to which notice is being given as follows: Lender: Michael Robertson c/o Lindows.com, Inc. 9333 Genesee Ave. 3rd Floor San Diego, CA 92121 Borrower: Lindows.com, Inc. Attn.: Kevin Carmony 9333 Genesee Ave. 3rd Floor San Diego, CA 92121 9. GENERAL PROVISIONS. All representations and warranties made in this Agreement and the Promissory Note and in any certificate delivered pursuant thereto shall survive the execution and delivery of this Agreement and the making of any loans hereunder. This Agreement will be binding upon and inure to the benefit of Borrower and Lender, their respective successors and assigns, except that Borrower may not assign or transfer its rights or delegate its duties hereunder without the prior written consent of Lender. This Agreement, the Promissory Note, and all documents and instruments associated herewith will be governed by and construed and interpreted in accordance with the laws of the State of California. Time is of the essence hereof. This Agreement will be deemed to express, embody, and supersede any previous understanding, agreements, or commitments, whether written or oral, between the parties with respect to the general subject matter hereof. This Agreement may not be amended or modified except in writing signed by the parties. EXECUTED on the day and year first written above. Borrower: Lindows.com, Inc. By: /s/ Kevin Carmony --------------------------- Title: Pres/COO ------------------- Lender: /s/ Michael Robertson ------------------------------ Michael Robertson 3 EXHIBIT 10.6 1 Promissory Note $500,000.00 San Diego, CA July 29, 2002 This Promissory Note (the "NOTE") is made and executed as of the date referred to above, by and between Lindows.com, Inc., a Delaware corporation (the "BORROWER"), and Michael Robertson ("LENDER"). By this Note, the Borrower promises and agrees to pay to the order of Lender, at 9333 Genesee Ave. 3Ta Floor, San Diego, CA 92121, or at such other place as Lender may designate in writing, the principal sum of Five Hundred Thousand and 00/100 Dollars ($500,000.00), or the aggregate unpaid principal amount of all advances made by Lender to Borrower pursuant to the terms of a Revolving Line of Credit Agreement (the "LOAN AGREEMENT") of even date herewith, whichever is less, together with interest thereon from the date each advance is made until paid in full, both before and after judgment, at the rate of 10 percent (10%) per annum, simple interest. Borrower shall pay accrued interest on the outstanding principal balance under the Note on a monthly basis commencing on September 15, 2002, and continuing on the fifteenth day of each month thereafter until paid in full. The entire unpaid principal balance, together with any accrued interest and other unpaid charges or fees hereunder, shall be due and payable on December 31, 2003 (the "MATURITY DATE"). Prepayment in whole or part may occur at any time hereunder without penalty; provided that the Lender shall be provided with not less than ten (10) days notice of the Borrower's intent to pre-pay; and provided further that any such partial prepayment shall not operate to postpone or suspend the obligation to make, and shall not have the effect of altering the time for payment of the remaining balance of the Note as provided for above, unless and until the entire obligation is paid in full. All payments received hereunder shall be applied, first, to any costs or expenses incurred by Lender in collecting such payment or to any other unpaid charges or expenses due hereunder; second, to accrued interest; and third, to principal. An event of default will occur if any of the following events occurs: (a) failure to pay any principal or interest hereunder within ten (10) days after the same becomes due; (b) if any representation or warranty made by Borrower in the Loan Agreement or in connection with any borrowing or request for an advance thereunder, or in any certificate, financial statement, or other statement furnished by Borrower to Lender is untrue in any material respect at the time when made; (c) default by Borrower in the observance or performance of any other covenant or agreement contained in the Loan Agreement, other than a default constituting a separate and distinct event of default under Paragraph 7 of the Loan Agreement; (d) filing by Borrower of a voluntary petition in bankruptcy seeking reorganization, arrangement or readjustment of debts, or any other relief under the Bankruptcy Code as amended or under any other insolvency act or law, state or federal, now or hereafter existing; or (e) filing of an involuntary petition against Borrower in bankruptcy seeking reorganization, arrangement or readjustment of debts, or any other relief under the Bankruptcy Code as amended, or under any other insolvency act or law, state or federal, now or hereafter existing, and the continuance thereof for sixty (60) days undismissed, unbonded, or undischarged. Any notice or demand to be given to the parties hereunder shall be deemed to have been given to and received by them and shall be effective when personally delivered or when deposited in the U.S. mail, certified or registered mail, return receipt requested, postage prepaid, and addressed to the party at his or its last known address, or at such other address as the one of the parties may hereafter designate in writing to the other party. 4 EXHIBIT 10.6 The Borrower hereof waives presentment for payment, protest, demand, notice of protest, notice of dishonor, and notice of nonpayment, and expressly agrees that this Note, or any payment hereunder, may be extended from time to time by the Lender without in any way affecting its liability hereunder. In the event any payment under this Note is not made at the time and in the manner required, the Borrower agrees to pay any and all costs and expenses which may be incurred by the Lender hereof in connection with the enforcement of any of its rights under this Note or under any such other instrument, including court costs and reasonable attorneys' fees. This Note shall be governed by and construed and enforced in accordance with the laws of California. The Borrower: Lindows.com, Inc., a Delaware corporation By: /s/ Kevin Carmony ------------------------------ Title: Pres/COO ------------------------------ Lender: /s/ Michael Robertson --------------------------------- Michael Robertson 5 EXHIBIT 10.6 Addendum to the Revolving Line of Credit Agreement $500,000.00 San Diego, CA September 11, 2002 This Addendum to the Revolving Line of Credit Agreement by and between Lindows.com, Inc., a Delaware Corporation (the "BORROWER") and Michael Robertson ("LENDER") is made and executed as of the date referred to above. An additional principal sum of Five Hundred Thousand and 00/100 Dollars ($500,000.00) has been added to the Revolving Line of Credit Agreement (the "LOAN AGREEMENT") bringing the Loan Agreement to a total sum of One Million and 00/100 Dollars ($1,000,000.00). This Addendum shall be governed by and construed and enforced in accordance with the laws of California. The Borrower: Lindows.com, Inc., a Delaware corporation By: /s/ Kevin Carmony --------------------------- President Lender: /s/ Michael Robertson ------------------------------ Michael Robertson 6 EXHIBIT 10.6 Addendum to the Revolving Line of Credit Agreement $1,000,000.00 San Diego, CA December 6, 2002 This Addendum to the Revolving Line of Credit Agreement by and between Lindows.com, Inc., a Delaware Corporation (the "BORROWER") and Michael Robertson ("LENDER") is made and executed as of the date referred to above. An additional principal sum of One Million and 00/100 Dollars ($1,000,000.00) has been added to the Revolving Line of Credit Agreement (the "LOAN AGREEMENT") bringing the Loan Agreement to a total sum of Two Million and 00/100 Dollars ($2,000,000.00). This Addendum shall be governed by and construed and enforced in accordance with the laws of California. The Borrower: Lindows.com, Inc., a Delaware corporation By: /s/ Kevin Carmony --------------------------- President Lender: /s/ Michael Robertson ------------------------------ Michael Robertson 7 EXHIBIT 10.6 Addendum to the Revolving Line of Credit Agreement $1,000,000.00 San Diego, CA February 7, 2003 This Addendum to the Revolving Line of Credit Agreement by and between Lindows.com, Inc., a Delaware Corporation (the "BORROWER") and Michael Robertson ("LENDER") is made and executed as of the date referred to above. An additional principal sum of One Million and 00/100 Dollars ($1,000,000.00) has been added to the Revolving Line of Credit Agreement (the "LOAN AGREEMENT") bringing the Loan Agreement to a total sum of Three Million and 00/100 Dollars ($3,000,000.00). This Addendum shall be governed by and construed and enforced in accordance with the laws of California. The Borrower: Lindows.com, Inc., a Delaware corporation By: /s/ Kevin Carmony --------------------------- President Lender: /s/ Michael Robertson ------------------------------ Michael Robertson 8 EXHIBIT 10.6 Addendum to the Revolving Line of Credit Agreement $500,000.00 San Diego, CA September 17, 2003 This Addendum to the Revolving Line of Credit Agreement by and between Lindows.com, Inc., a Delaware Corporation (the "BORROWER") and Michael Robertson ("LENDER") is made and executed as of the date referred to above. An additional principal sum of Five Hundred Thousand and 00/100 Dollars ($500,000.00) has been added to the Revolving Line of Credit Agreement (the "LOAN AGREEMENT") bringing the Loan Agreement to a total sum of Three Million, Five Hundred Thousand and 00/100 Dollars ($3,500,000.00). This Addendum shall be governed by and construed and enforced in accordance with the laws of California. The Borrower: Lindows.com, Inc., a Delaware corporation By: /s/ Kevin Carmony --------------------------- President Lender: /s/ Michael Robertson ------------------------------ Michael Robertson 9 EXHIBIT 10.6 Addendum to the Revolving Line of Credit Agreement $100,000.00 San Diego, CA November 11, 2003 This Addendum to the Revolving Line of Credit Agreement by and between Lindows.com, Inc., a Delaware Corporation (the "BORROWER") and Michael Robertson ("LENDER") is made and executed as of the date referred to above. An additional principal sum of One Hundred Thousand and 00/100 Dollars ($100,000.00) has been added to the Revolving Line of Credit Agreement (the "LOAN AGREEMENT") bringing the Loan Agreement to a total sum of Three Million, Six Hundred Thousand and 00/100 Dollars ($3,600,000.00). This Addendum shall be governed by and construed and enforced in accordance with the laws of California. The Borrower: Lindows.com, Inc., a Delaware corporation By: /s/ Kevin Carmony ------------------------------ President Lender: /s/ Michael Robertson ------------------------------ Michael Robertson 10 EXHIBIT 10.6 Addendum to the Revolving Line of Credit Agreement $500,000.00 San Diego, CA November 14, 2003 This Addendum to the Revolving Line of Credit Agreement by and between Lindows.com, Inc., a Delaware Corporation (the "BORROWER") and Michael Robertson ("LENDER") is made and executed as of the date referred to above. An additional principal sum of Five Hundred Thousand and 00/100 Dollars ($500,000.00) has been added to the Revolving Line of Credit Agreement (the "LOAN AGREEMENT") bringing the Loan Agreement to a total sum of Four Million, One Hundred Thousand and 00/100 Dollars ($4,100,000.00). This Addendum shall be governed by and construed and enforced in accordance with the laws of California. The Borrower: Lindows.com, Inc., a Delaware corporation By: /s/ Kevin Carmony --------------------------- President Lender: /s/ Michael Robertson ------------------------------ Michael Robertson 11 EXHIBIT 10.6 Addendum to the Revolving Line of Credit Agreement $900,000.00 San Diego, CA December 23, 2003 This Addendum to the Revolving Line of Credit Agreement by and between Lindows.com, Inc., a Delaware Corporation (the "BORROWER") and Michael Robertson ("LENDER") is made and executed as of the date referred to above. An additional principal sum of Nine Hundred Thousand and 00/100 Dollars ($900,000.00) has been added to the Revolving Line of Credit Agreement (the "LOAN AGREEMENT") bringing the Loan Agreement to a total sum of Five Million and 00/100 Dollars ($5,000,000.00). This Addendum shall be governed by and construed and enforced in accordance with the laws of California. The Borrower: Lindows.com, Inc., a Delaware corporation By: /s/ Kevin Carmony --------------------------- President Lender: /s/ Michael Robertson ------------------------------ Michael Robertson 12 EXHIBIT 10.6 Addendum to the Revolving Line of Credit Agreement $5,000,000.00 San Diego, CA February 12, 2004 This Addendum to the Revolving Line of Credit Agreement by and between Lindows.com, Inc., a Delaware Corporation (the "BORROWER") and Michael Robertson ("LENDER") is made and executed as of the date referred to above. An additional principal sum of Five Million and 00/100 Dollars ($5,000,000.00) has been added to the Revolving Line of Credit Agreement (the "LOAN AGREEMENT") bringing the Loan Agreement to a total sum of Ten Million and 00/100 Dollars ($10,000,000.00). This Addendum shall be governed by and construed and enforced in accordance with the laws of California. The Borrower: Lindows.com, Inc., a Delaware corporation By: /s/ Kevin Carmony ------------------------------ President Lender: /s/ Michael Robertson ------------------------------ Michael Robertson 13 Amendment to the Revolving Line of Credit Agreement and Promissory Note San Diego, CA February 12, 2004 This Amendment to the Revolving Line of Credit Agreement and Promissory Note by and between Lindows.com, Inc., a Delaware Corporation (the "BORROWER"), and Michael Robertson ("LENDER") is made and executed as of the date referred to above. An additional principal sum of Five Million and 00/100 Dollars ($5,000,000.00) has been added to the Revolving Line of Credit Agreement dated July 29, 2002 (the "LOAN AGREEMENT") and Promissory Note dated July 29, 2002 (the "NOTE") bringing the total principal amount available under the Loan Agreement and Note to a total sum of Ten Million and 00/100 Dollars ($10,000,000.00). Borrowings currently outstanding under the Loan Agreement are Five Million and 00/100 Dollars ($5,000,000). The Credit Limit as set forth in the Loan Agreement is hereby increased to the principal amount of Ten Million and 00/100 Dollars ($10,000,000.00). The Maturity Date as set forth in the Loan Agreement and Note is hereby extended to June 30, 2005. The first sentence of Section 4 of the Loan Agreement and the first sentence of the second paragraph of the Note are hereby deleted such that no interest shall be due and payable prior to the Maturity Date. Lender hereby waives any and all defaults that may have occurred under the Loan Agreement and/or Note prior to the date of this Amendment. Except as provided above in this Amendment and in all prior addendums, all terms, covenants and conditions in the Loan Agreement and Note shall remain in full force and effect and shall not be affected by this Amendment. This Amendment shall be governed by and construed and enforced in accordance with the laws of California. The Borrower: Lindows.com, Inc., a Delaware Corporation By /s/ Kevin Carmomy --------------------------------------- President Lender: /s/ Michael Robertson ----------------------------------------- Michael Robertson EX-10.7 4 a97792a4exv10w7.txt EXHIBIT 10.7 EXHIBIT 10.7 SOFTWARE DISTRIBUTION AGREEMENT This Software Distribution Agreement ("Agreement"), effective as of the 17th day of March, 2003 (the "Effective Date"), is entered into by and between Lindows, Inc., a Delaware corporation ("Supplier"), and Livin' On The Edge, Co., Ltd., a Japanese corporation ("Distributor"). RECITALS A. Distributor is in the business of licensing and distributing software products in Japan, and desires to distribute Supplier's Product (as defined below) in Japan. B. Supplier is in the business of developing and licensing software products and services, and desires to authorize Distributor to distribute the Product (as defined below) in Japan. The parties agree as follows: 1. DEFINITIONS (a) "Customer" shall mean an end-user who purchases the Product within the Territory. (b) "Documentation" shall mean the end-user manuals relating to the Software and services and related materials provided by Supplier to Distributor hereunder. (c) "Product" Product shall mean the Software, services, and Documentation listed on Exhibit "A" attached hereto, including any modifications, improvements, alterations, translations, localizations, innovations, or changes of any kind performed on the Software or Documentation by Distributor or agents, sub-licensees, contractors, or employees of Distributor. (d) "Release Date" shall mean the earlier of (1) the actual date on which Distributor first releases the Localized Product for sale, or (2) 60 days after the Effective Date. (e) "Software" shall mean the computer program(s) listed in Exhibit A in machine executable object code format. (f) "Territory" shall mean the Nation of Japan. (g) "Updates" shall mean versions of the Software, including version patches, subsequently released to the public for the purpose of correcting errors and fixing software bugs that Supplier generally makes available to its customers free of charge. "Updates" does not include subsequent versions of the Software that contain new features or functionality, or which are considered a new software product. 2. APPOINTMENT Supplier hereby appoints Distributor, and Distributor hereby accepts the appointment, as Supplier's sole and exclusive distributor (subject to loss of exclusivity discussed in Section 6) to distribute the Product to Customers in the Territory. The period of this grant shall begin on the Release Date and shall continue for 365 calendar days or until the termination of this Agreement. This grant shall include the following permitted uses: Page 1 EXHIBIT 10.7 (a) Copying the Software from the Golden Master into copies of CD Rom disks and repackaging such Software for distribution for retail sale within the Territory. (b) Distribution of the Product through retail locations within the Territory or via electronic transfer through servers controlled and maintained by Supplier, through an Internet domain address jointly chosen by Distributor and Supplier. (c) Translating and localizing the English version of the Product into appropriate Japanese language. Supplier reserves the sole and exclusive right to terminate this Agreement in the event that the Product, as translated and localized by the Distributor, does not satisfy Supplier's reasonable requirements. Provided, however, that Supplier shall provide reasonable notice to Distributor with regard to this subsection and Distributor shall have ten (10) days to respond to such notice. Distributor shall have forty-five (45) days after responding to the notice to satisfy such requirement(s). (d) Authorizing dealers to distribute the Product on behalf of Distributor, provided said dealers distribute the Product consistent with the limitations, terms, and conditions contained herein. (e) Sublicensing the Product to Customers pursuant to an end user license agreement (the "End User Agreement") with terms consistent with the terms set forth in Exhibit "B" attached hereto. (f) Using the Product for the purpose of providing customer support services, demonstrations and marketing purposes. 3. OBLIGATIONS OF DISTRIBUTOR (a) Diligence. Distributor shall use commercially reasonable efforts to promote the marketing and distribution of the Product to realize the maximum sales potential for the Product in the Territory. Except as expressly set forth herein, Distributor shall be solely responsible for all costs and expenses related to the advertising, marketing, promotion, and distribution of the Product and for performing its obligations hereunder. (b) Repackaging. Any retail repackaging of the Product must be approved by Supplier before the distribution of the Product in the Territory, provided, however, that such approval shall not be unreasonably withheld. (c) Translation; Localization. Distributor shall translate or localize the Product into the Japanese language, provided, however, that Supplier retains all ownership rights in and to such translated/localized versions of the Product (the "Localized Product"), subject to the termination provisions set forth in Section 2(c), above. Distributor shall provide a copy of any and all publicly released versions of the Product containing such translations/localizations within five (5) days of the Release Date. (d) Product Support. (i) Distributor shall provide reasonable technical support to Customers, including without limitation (x) maintaining trained and competent technical and engineering support personnel for the Product who are sufficiently knowledgeable with respect to the Product to answer Customer questions regarding the use and operation of Product, (y) responding promptly to requests for technical support from Customers, and (z) providing technical support services to address and resolve Customers' support requests with respect to the Product. Page 2 EXHIBIT 10.7 (ii) Distributor shall ensure that all Customer questions regarding the use or operation of Product are initially addressed to and answered by Distributor. Unless otherwise agreed in writing by Supplier, Distributor shall not represent to any third party that Supplier is available to answer questions from any Customer directly. (e) End User License. Prior to providing any Customer with any Software, Distributor shall ensure that each Customer has read and agreed to the terms and conditions of the End User Agreement contained in each Software unit . Distributor shall not conduct, support, or permit, and shall not authorize any third party to conduct, support, or permit, the copying, modification, alteration, reverse engineering, disassembly or decompiling of the Product. 4. OBLIGATIONS OF SUPPLIER (a) Product Support and Training. Supplier shall provide Distributor with engineering and technical support for the Product, including providing corrections or workarounds to correct defects, bugs, or errors in the Product. In the event a critical defect is discovered, Supplier agrees to use best efforts to correct the defect and provide such correction within fifteen (15) calendar days after notice thereof. A critical defect is generally defined as one which causes the Product not to function for which there is no known workaround. Supplier shall maintain a telephone number and technicians to receive calls from Distributor's technical staff for so long as Supplier has technicians responding to product support calls, currently 8 a.m. to 6 p.m. Pacific Standard Time (USA). Supplier shall also provide Distributor with a pager number pursuant to which Supplier's technician shall respond within four (4) hours to any page received from Distributor, twenty-four (24) hours a day seven (7) days a week concerning problems and questions. Supplier shall respond to email questions regarding product support and training sent by Distributor within twenty-four (24) hours. Supplier shall also provide training with respect to the use, reproduction, installation and distribution of the Software as contemplated under the Agreement. (b) E-commerce transaction services and infrastructure. Supplier shall provide Distributor with such e-commerce transaction services and infrastructure necessary for the sale of the Product through any Internet web site through which the parties agree to distribute the Product. (c) Marketing Support. Supplier shall provide Distributor with reasonable marketing support, including providing reasonable quantities of Supplier's advertising and promotional materials, pricing information and technical data related to the Product. Supplier may also from time to time provide, at Supplier's sole discretion, monetary support for certain marketing and promotional activities involving the Product, such as exhibitions, conventions, trade shows and advertisements. (d) Japanese Language Click-N-Run Warehouse Aisle. Within thirty (30) days of the Effective Date of this Agreement, Supplier shall establish and maintain an aisle within the Click-N-Run Warehouse containing references to software applications which may be of interest to Japanese-speaking end-users. Supplier exercises its sole and absolute discretion as to which software application titles to place within the Japanese language aisle. (e) Software and Click-N-Run Memberships. Within fifteen (15) days of the Effective Date of this Agreement, Supplier shall provide the following to Distributor: (x) a golden master for the LindowsOS ;(y) a golden master for the Click-N-Run Express; (z) the Click-N-Run Membership identification numbers for the Click-N-Run Warehouse in the amount consistent with the number of memberships ordered by Distributor as described in Section 6(a). In the event that Distributor purchases additional memberships, or makes additional payment pursuant to Section 6(a) below, Supplier shall provide the membership identification numbers within ten (10) days of receipt of Distributor's payment for such memberships. Page 3 EXHIBIT 10.7 (f) Software Updates. Supplier shall make available to Distributor for distribution any Updates to the Software within ten (10) days after release to the public. Supplier shall deliver a golden master for each Update to Distributor. (g) Post-termination Obligations. After the termination of this Agreement, Supplier shall continue to provide Distributor with engineering and technical support pursuant to Section 4(a) at no cost for one (1) year, and at an hourly rate of $150 per hour thereafter. After the termination of this Agreement, Supplier shall continue to provide warranty coverage to Customers of the Product up to the expiration of the Customers' warranty period. Supplier shall further continue to provide Click-N-Warehouse membership privileges for Customers up to the expiration of such membership privileges. 5. PRICE/PRICE CHANGE (a) Price. Distributor shall pay Supplier $50.00 ("Wholesale Price") for each Product sold, less any discounts for volume purchases as described hereinbelow. Distributor shall be entitled to a credit against future payments to Supplier for any amounts previously paid to Supplier for Product that is returned by Customers. Distributor shall maintain records of any and all Customer returns, including the name, address, telephone number, and e-mail address of the Customer returning the Product, the date of the return and reason for the return. Distributor shall maintain such records for a period of one (1) year after termination of this agreement and shall permit inspection and copying of such records by Supplier upon ten (10) days notice by Supplier. (b) Price Discounts. Provided Distributor makes timely payment for minimum purchases described hereinbelow, Distributor shall be entitled to a US $5.00 per unit discount of the Wholesale Price for all purchases ("Discount Price"). (c) Click-N-Run Memberships. For each Click-N-Run stand-alone membership or membership renewal sold by Distributor through the e-commerce infrastructure provided for in Section 4(b), Supplier shall pay Distributor, in regular monthly intervals, the difference between full purchase price paid (less any processing or transaction fees charged by third party ecommerce processors) and $45.00. All Click-N-Run membership renewals or stand-alone memberships sold pursuant to this Agreement shall be included in the Minimum Product Purchase amounts set forth in Section 6(a). (d) Price Decreases. The parties may negotiate in good faith a discount to the Price in order to allow Distributor to be competitive in obtaining certain distribution accounts, such as accounts with OEMs. (e) Taxes. Prices do not include any Japanese taxes, including franchise, sales and use taxes, if any. Distributor shall be solely responsible for payment of any and all such taxes or obligations, including any fines, penalties, or interest relating thereto. 6. MINIMUM PURCHASE REQUIREMENT AND EXCLUSIVITY (a) In order to maintain Distributor's rights to exclusive distribution of the Product as described hereinabove, and in order to obtain the Discount Price for the Product, Distributor must make purchases of the minimum amounts of the Product from Supplier as provided in the table below:

Page 4 EXHIBIT 10.7 (b) In the event that Distributor has satisfied the minimum purchase requirements described above, Supplier shall grant Distributor a U.S. $5.00 discount from the price set forth in Section 5(a) for any additional purchases of the units. (c) In the event that Supplier fails to make payments to as described in the table provided in Section 6(a), Distributor shall no longer be entitled to the exclusive rights granted in Section 2, including subsections (a)-(f), above, but shall be entitled to the non-exclusive right to distribute the Product as described in Section 2, including subsections (a)-(f), above. 7. PAYMENT TERMS (a) Payment Terms. All payments shall be in U.S. Dollars via certified check or electronic wire transfer and shall be submitted together with an accounting statement indicating all sales of the Product for such period. Provided, however, that all payments made by Supplier to Distributor pursuant to sales processed by Supplier under Section 7(b) shall be made in Japanese yen. (b) Payments for Sales Processed by Supplier. For all retail sales occurring through the e-commerce infrastructure provided by Supplier and discussed in Section 4(b), Customers shall make payments directly to Supplier or Supplier's agent designated to process such ecommerce transactions. Supplier shall provide Distributor an accounting of and reimbursement for all such sales as follows: (i) Retail Sales of Minimum Product Purchases: For each retail sale of Product purchased pursuant to any Minimum Product Purchase (as defined in Column A(1), and (2), in Section 6(a), above) for which Distributor has made timely payment pursuant to Section 6(a), above, Supplier shall pay Distributor, in regular monthly intervals, the full purchase price paid by such Customers, less any processing or transaction fees charged by third party ecommerce processors. (ii) Retail Sales in Excess of the Minimum Product Purchases: For each retail sale of Product to Customers which is a retail sale of Product purchased in excess of any Minimum Product Purchase (as defined in Column A(1) and (2) in Section 6(a), above), Supplier shall pay Distributor, in regular monthly intervals, the difference, if any, between the full purchase price paid by such Customers (less any processing or transaction fees charged by third party e-commerce processors) and the Discount Price. (iii) Retail Sales for Non-Minimum Product Purchases: If the Distributor does not timely purchase the Minimum Product Purchase Amounts set forth in Columns A(1) and (2) of Section 6(a), Supplier shall pay Distributor, in regular monthly intervals, the difference, if any, between the full purchase price paid by Customers (less any processing or transaction fees charged by third party e-commerce processors) and the Wholesale Price. (c) Payments for Sales Processed by Distributor. For all sales of the Product to Customers, retail outlets, OEMs, or otherwise, which occur outside of the e-commerce infrastructure provided for in Section 4(b), above, payments shall be made to Distributor. For all such sales which, in combination with all other sales by Distributor, are in excess of the Minimum Product Purchase (as defined in Columns A(1) and (2) in Section 6(a), above) and for which Distributor has made timely payment pursuant to Section 6(a), above, Distributor shall pay Supplier, in regular monthly intervals, the Discount Price for each unit sold. If the Distributor does not timely purchase the Minimum Product Purchase Amounts set forth in Columns A(1) and (2) of Section 6(a), Distributor shall pay Supplier, in regular monthly intervals, the Wholesale Price for each unit sold. Distributor shall provide Supplier an accounting of all such sales at regular monthly intervals. Page 5 (d) Notices. Distributor shall maintain an accounting and all records of sales of the Product and shall notify Supplier in writing when it has sold through the Minimum Product Purchase amounts set forth in Section 6(a), above (e) OEM Distribution. The parties are currently negotiating an agreement pursuant to which Supplier shall grant Distributor the right to distribute the Product to OEMs. In the event that the Parties execute such an agreement for OEM distribution, all units sold pursuant to such agreement shall be included in the minimum product purchase amounts set forth in Section 6(a). (f) Books and Records; Audit. Both parties shall maintain complete books, records and accounts relevant to computation and accounting for amounts payable under this Agreement. Each party agrees to allow an independent certified public accountant the right to audit and examine such books, records and accounts during normal business hours no more than once per year upon ten (10) days notice at such examining party's expense, to verify the accuracy of the reports and payments made under this Section 7. 8. LIMITED WARRANTY (a) Limited Warranty. Subject to the provisions of this Section 8 below, Supplier warrants that for a period of sixty (60) days ("Warranty Period") the Software will conform to the specifications set forth in the Documentation, manuals and any relevant data sheet or promotional literature provided by Supplier. In the event that the Software fails to conform to such specifications during the Warranty Period, Supplier shall use best efforts to repair and correct such errors so that the Software conforms to such specifications. (b) Disclaimer of Warranties. EXCEPT AS EXPRESSLY PROVIDED IN SECTION 8(a) ABOVE, SUPPLIER MAKES NO WARRANTIES OR CONDITIONS, EXPRESS, STATUTORY, IMPLIED, OR OTHERWISE, AND SUPPLIER SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES AND CONDITIONS OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING THE FOREGOING, SUPPLIER DOES NOT EXCLUDE LIABILITY TO THE EXTENT THAT SUCH LIABILITY MAY NOT BE EXCLUDED OR LIMITED BY LAW. (c) Distributor Limitations. Except to the extent required by applicable law, Distributor shall not grant to its Customers a warranty of greater scope or protection than the warranty (including the limited remedy, exclusions, and limitation of liability) set forth in this Section 8 and Section 13 below. (d) Customer Claims. Distributor shall ensure that all Customer claims for warranty, repair, or replacement are addressed to Distributor and not to Supplier. 9. TERM AND TERMINATION (a) Term. This Agreement shall commence upon the Effective Date and continue in full force and effect for a fixed term of twelve (12) months after the Release Date, unless earlier terminated in accordance with the provisions of this Agreement and shall be automatically renewed for an additional one (1) year period unless either party provides written notice of its intention to terminate this Agreement ninety (90) days prior to the expiration of this Agreement. During the second year (renewal period) of this Agreement, Distributor shall be entitled to nonexclusive distribution of the Product, and shall be entitled to exclusive distribution rights as set forth herein only upon purchase of additional Minimum Product Purchase amounts substantially identical to the amounts, pricing, and payment timing set forth in Section 6(a). If a party is in material breach of this Agreement and has failed to cure such material breach Page 6 EXHIBIT 10.7 within thirty (30) days after receiving written notice from the other party of such material breach, the party not in breach may terminate this Agreement. Distributor may also terminate this Agreement in accordance with Section 11(c). Without limiting the foregoing, either party may terminate this Agreement effective upon written notice to the other party stating such party's intention to terminate, in the event the other party: (i) ceases to function as a going concern or to conduct operations in the normal course of business; (ii) has a petition filed by or against it under any bankruptcy or insolvency law which petition has not been dismissed or set aside within sixty (60) days of its filing; or (iii) fails to perform any of its obligations under this Agreement so as to be in default hereunder and fails to cure such default within thirty (30) days after written notice of such default. (b) Customer Support. Distributor may continue to use the Product after termination of this Agreement to provide customer support services set forth in Section 3(d). (c) No Liability for Termination. Except as expressly required by law, in the event of termination of this Agreement by either party in accordance with any of the provisions of this Agreement, neither party shall be liable to the other, because of such termination, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases or commitments in connection with the business or goodwill of Supplier or Distributor. Termination shall not, however, relieve either party of obligations incurred prior to the termination. (d) Survival. Distributor may sell Product existing in its inventory as of the effective date of termination of this Agreement for a period of ninety (90) days after the effective date of such termination ("Wind-Down Period"). During the Wind-Down Period, the provisions of Sections 7 and 10 shall survive. In addition to the provisions set forth in this Section 9(d), the following provisions shall survive expiration or any termination of this Agreement: Sections 4(g), 8, 9(b)-(e), 10, 11, 13, 15 and the last sentence in Section 12(b). (e) Return of Materials. All Product, trademarks, marks, trade names, patents, copyrights, designs, drawings, formulas or other data, photographs, samples, literature, and sales and promotional aids of every kind shall remain the property of Supplier. Within thirty (30) days after the effective date of termination of this Agreement, Distributor shall at Supplier's option destroy all tangible items bearing, containing, or contained in, any of the foregoing, in its possession or control and provide written certification of such destruction, or prepare such tangible items for shipment to Supplier or Supplier's designee, as Supplier may direct, at Supplier's expense. Distributor shall not make or retain any copies of any Confidential Information (as defined in Section 10, below) which may have been entrusted to it. 10. CONFIDENTIALITY AND PROPRIETARY RIGHTS (a) Confidential Information. The term "Confidential Information" means any information disclosed by one party to the other pursuant to this Agreement that is in written, graphic, machine readable or other tangible form and is marked "Confidential", "Proprietary" or in some other manner to indicate its confidential nature. Confidential Information may also include oral information disclosed by one party to the other pursuant to this Agreement, provided that such information is designated as confidential at the time of disclosure and is reduced to writing by the disclosing party within a Page 7 EXHIBIT 10.7 reasonable time (not to exceed 30 days) after its oral disclosure, and such writing is marked in a manner to indicate its confidential nature and delivered to the receiving party. (b) Confidentiality. Each party shall treat as confidential all Confidential Information of the other party, shall not use such Confidential Information except to exercise its rights and perform its obligations under this Agreement herein, and shall not disclose such Confidential Information to any third party. Without limiting the foregoing, each of the parties shall use at least the same degree of care it uses to prevent the disclosure of its own confidential information of like importance, to prevent the disclosure of Confidential Information of the other party. Each party shall promptly notify the other party of any actual or suspected misuse or unauthorized disclosure of the other party's Confidential Information. (c) Exceptions. Confidential Information excludes information that: (i) was in the public domain at the time it was disclosed or has become in the public domain through no fault of the receiving party; (ii) was known to the receiving party, without restriction, at the time of disclosure, as demonstrated by files in existence at the time of disclosure; (iii) is disclosed with the prior written approval of the disclosing party; (iv) was independently developed by the receiving party without any use of the Confidential Information; (v) becomes known to the receiving party, without restriction, from a source other than the disclosing party, without breach of this Agreement, by the receiving party; or (vi) is disclosed generally to third parties by the disclosing party without restrictions similar to those contained in this Agreement. The receiving party may disclose the other party's Confidential Information to the extent such disclosure is required by order or requirement of a court, administrative agency, or other governmental body, but only if the receiving party provides prompt notice thereof to the disclosing party to enable the disclosing party to seek a protective order or otherwise prevent or restrict such disclosure. (d) Proprietary Rights. Distributor agrees that Supplier retains all of its right, title and interest in and to all patent rights, trademarks, trade names, inventions, copyrights, know-how and trade secrets relating to the Product, including modifications, translations, and/or localizations of the Product performed by Distributor, or the product lines that include the Product, and the design, manufacture, operation or service of the Product. To the extent that the Product contains or incorporates intellectual property of parties other than Supplier, Distributor agrees to respect such third party rights and abide by any terms and conditions contingent upon grant and use of such rights, and that such third parties retain any such rights, if applicable. The use by Distributor of any of these property rights is authorized only for the purposes herein set forth and upon termination of this Agreement for any reason such authorization will cease, subject to Section 9(d). Distributor shall not (and shall require that its Customers do not) remove, alter, cover or obfuscate any copyright notices or other proprietary rights notices placed or embedded by Supplier on or in any Product. 11. PATENT/COPYRIGHT/TRADEMARK WARRANTY AND INDEMNIFICATION (a) Indemnity. Supplier represents and warrants that the Product or any part thereof, and any of its patents, copyrights, trademarks, trade secrets or other proprietary rights related thereto, do not violate or infringe any patent, copyright, trademark, trade secret or other proprietary right of any third party. Supplier shall defend and hold Distributor harmless against any loss, liability or expense (including reasonable attorney's fees) paid to third parties arising from any action, proceeding or claim brought or threatened against Distributor alleging that the Product infringes any third party's patent, copyright, trademark (provided Distributor adheres to the Branding Guidelines provided by Supplier), trade secret or other intellectual property right (an "Action"). Supplier will have sole control of any such Action or settlement negotiations, and Supplier agrees to pay, subject to the limitations hereinafter set forth, any final judgment entered against Distributor on such issue in any such Action defended by Supplier. Distributor shall notify Supplier promptly in writing of such Action, give Supplier authority to proceed as contemplated herein, and give Supplier proper and full information and assistance to settle Page 8 EXHIBIT 10.7 and/or defend any such Action. If it is adjudicatively determined, or if Supplier believes, that the Product, or any part thereof, infringe any patent, copyright or trademark (provided Distributor adheres to the Branding Guidelines provided by Supplier), or if the sale or use of the Product, or any part thereof, is, as a result, enjoined, then Supplier may, at its election, option, and expense: (i) procure for Distributor the right under such patent, copyright or trademark to sell or use, as appropriate, the Product or such part thereof; (ii) modify the Product or part thereof; or (iii) cease distribution of the Product, or part thereof, and refund any payments (including any minimum product purchases under Section 6) paid by Distributor for such Product. (b) Modifications to Branding Guidelines. Supplier reserves the right to modify the Branding guidelines from time to time, and shall give Distributor notice of any such modifications. Within thirty (30) days of receipt of notice of any modifications to the Branding guidelines, Distributor shall act to assure that all Product, Product marketing materials or other promotional matter complies with the Branding Guidelines. If at any time Distributor fails to follow the Branding Guidelines, Lindows.com shall be relieved of any obligation set forth in Section 10 relating to or resulting from such failure. (c) LINDOWS Trademarks. Notwithstanding the terms in Section 11(a), in the event that any trademark or service mark containing the terms "Lindows" or "LindowsOS" are held by a court to infringe upon the trademark or service mark of a third party, the use of such trademarks or service marks are enjoined by a court, or Supplier changes such trademarks or service marks in connection with a third party infringement action, claim or dispute, Distributor shall have the option to immediately terminate this Agreement and Supplier shall (i) indemnify Distributor for all liability and costs in connection with such infringement (including damages and reasonable attorneys fees) and (ii) shall also remunerate Distributor for the difference between the amount of any advance payments paid to Supplier under Section 6 and the amount of payments received from Customers for Product purchased from Supplier by Distributor pursuant to such advance payments. 12. USE OF TRADEMARKS/TRADE NAMES (a) Trademarks. During the term of this Agreement, Distributor shall have the right to indicate to the public that it is an authorized distributor of Supplier's Product and to advertise such Product under the trademarks, marks, and trade names of Supplier and in the promotion and distribution of the Product; provided, however, that upon thirty (30) days prior written notice to Distributor, Supplier may substitute alternative marks for any or all of such Supplier's trademarks used by Distributor. All representations of Supplier's trademarks that Distributor intends to use shall first be submitted to Supplier for approval (which shall not be unreasonably withheld) of design, color and other details or shall be exact copies of those used by Supplier. In addition, Distributor shall fully comply with all reasonable guidelines, if any, communicated by Supplier concerning the use of Supplier's trademarks. (b) Use. Distributor shall not alter or remove any of Supplier's trademarks affixed to the Product by Supplier. Except as set forth in this Section 12, nothing contained in this Agreement shall grant or shall be deemed to grant to Distributor any right, title or interest in or to Supplier's trademarks. All uses of Supplier's trademarks will inure solely to Supplier and Distributor shall obtain no rights with respect to any of Supplier's trademarks, other than the right to distribute Product as set forth herein, and Distributor irrevocably assigns to Supplier all such right, title and interest, if any, in any of Supplier's trademarks. At no time during or after the term of this Agreement shall Distributor challenge or assist others to challenge Supplier's trademarks (except to the extent expressly prohibited by applicable law) or the registration thereof or attempt to register any trademarks, marks or trade names confusingly similar to those of Supplier. Upon termination of this Agreement, Distributor shall immediately cease to use all Supplier's trademarks (other than for any remaining inventory to be sold during the "Wind Down Period"). Page 9 EXHIBIT 10.7 13. LIMITATION OF LIABILITY IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR LOST PROFITS, COST OF PROCUREMENT OF SUBSTITUTE GOODS, OR ANY OTHER SPECIAL, RELIANCE, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND UNDER ANY THEORY OF LIABILITY WHETHER BASED IN CONTRACT, TORT (INCLUDING NEGLIGENCE), OR OTHERWISE. THE FOREGOING LIMITATIONS SHALL APPLY REGARDLESS OF WHETHER SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY STATED HEREIN. NEITHER PARTY'S LIABILITY ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL EXCEED THE AGGREGATE AMOUNTS PAID BY DISTRIBUTOR TO SUPPLIER HEREUNDER. NOTWITHSTANDING THE FOREGOING, THIS SECTION 13 SHALL NOT BE APPLICABLE WITH REGARD TO ANY BREACH OR LIABILITY UNDER SECTIONS 10 AND 11. 14. COMPLIANCE WITH LAWS (a) Export Control. Distributor understands and acknowledges that Supplier is subject to regulation by agencies of the United States Government, including, but not limited to, the U.S. Department of Commerce, which prohibit export or diversion of certain Product and technology to certain countries. Any and all obligations of Supplier to provide the Product, as well as any other technical information or assistance shall be subject in all respects to such United States laws and regulations as shall from time to time govern the license and delivery of technology and Product abroad by persons subject to the jurisdiction of the United States, including the Export Administration Act of 1979, as amended, any successor legislation, and the Export Administration Regulations issued by the Department of Commerce, Bureau of Export Administration. Distributor agrees to cooperate with Supplier including without limitation, providing required documentation, in order to obtain export licenses or exemptions therefrom. Distributor warrants that it will comply with the Export Administration Regulations and other United States laws and regulations governing exports in effect from time to time. Distributor further agrees not to resell Product to any organization, public or private, which engages in the research or production of military devices, armaments, or any instruments of warfare, including biological, chemical and nuclear warfare. (b) Governmental Approvals. Distributor represents and warrants that it has obtained all required approvals of the government within the Territory in connection with this Agreement and that the provisions of this Agreement and the rights and obligations of the parties hereunder, are enforceable under the laws within the Territory. Supplier represents and warrants that it has obtained all required approvals of the United States government in connection with this Agreement and that the provisions of this Agreement and the rights and obligations of the parties hereunder, are enforceable under the laws of the United States of America. 15. MISCELLANEOUS PROVISIONS (a) Independent Contractors. The relationship of Supplier and Distributor established by this Agreement is that of independent contractors, and neither party is an employee, agent, partner or joint venturer of the other. (b) Assignment. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that neither party shall assign any of its rights, obligations, or privileges (by operation of law or otherwise) hereunder without the prior written consent of the other party. Page 10 EXHIBIT 10.7 (c) Indemnity. Except for warranty claims for which Supplier is liable under Section 8 and infringement claims covered by Section 11, Distributor agrees to indemnify and hold Supplier harmless against any cost, loss, liability or expense (including attorneys' fees) arising out of third party claims against Supplier relating to Distributor's use and distribution of the Product. (d) No Implied Waivers. The failure of either party at any time to require performance by the other of any provision hereof shall not affect the right of such party to require performance at any time thereafter, nor shall the waiver of either party of a breach of any provision hereof be taken or held to be a waiver of a provision itself. (e) Severability. If any provision of this Agreement is held to be invalid by a court of competent jurisdiction, then the remaining provisions will nevertheless remain in full force and effect. The parties agree to renegotiate in good faith those provisions so held to be invalid to be valid, enforceable provisions which provisions shall reflect as closely as possible the original intent of the parties, and further agree to be bound by the mutually agreed substitute provision. (f) Force Majeure. Except for payment of monies, neither party shall be liable for failure to fulfill its obligations under this Agreement or for delays in delivery due to causes beyond its reasonable control, including, but not limited to, acts of God, acts of terror, man-made or natural disasters, earthquakes, fire, riots, flood, material shortages, strikes, delays in transportation or inability to obtain labor or materials through its regular sources. The time for performance of any such obligation shall be extended for the time period lost by reason of the delay. (g) Conflicting Terms. The parties agree that the terms and conditions of this Agreement shall prevail, notwithstanding contrary or additional terms, in any purchase order, sales acknowledgment, confirmation or any other document issued by either party effecting the purchase and/or sale of Product. (h) Headings. Headings of Sections herein are inserted for convenience of reference only and shall not affect the construction or interpretation of this Agreement. (i) Notice. Any notice required or permitted to be given under this Agreement shall be delivered (i) by hand, (ii) by registered or certified mail, postage prepaid, return receipt requested, to the address of the other party first set forth above, or to such other address as a party may designate by written notice in accordance with this Section 15(i), (iii) by overnight courier, (iv) by email to an officer of such party or (v) by fax with confirming letter mailed under the conditions described in (ii) above. Notice so given shall be deemed effective when received, or if not received by reason of fault of addressee, when delivered. (j) Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements relating thereto, written or oral, between the parties. Amendments to this Agreement must be in writing, signed by the duly authorized officers of the parties. This Agreement may be executed in counterparts and delivered by facsimile, all of which shall together be effective as a single original. (k) Governing Law. This Agreement shall be governed by and construed under the laws of the State of California, United States of America, without regard to conflict of laws principles or the U.N. Convention on Contracts for the International Sale of Goods. The parties consent to the jurisdiction of the United States District Court for the Southern District of California for purposes of any disputes arising out the their relationship. Page 11 EXHIBIT 10.7 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement effective as of the Effective Date. SUPPLIER: DISTRIBUTOR: LINDOWS.COM, INC. LIVIN' ON THE EDGE, CO., LTD. By: /s/ Kevin Carmony By: /s/ Takafumi Horie ------------------------------- --------------------------------- Name: Kevin Carmony Name: Takafumi Horie ----------------------------- Title: President and COO Title: President and CEO ---------------------------- Page 12 EXHIBIT 10.7 EXHIBIT A SOFTWARE LindowsOS Version 3.0 Membership Edition (both English and Japanese versions) (Object Code) and any new versions including versions that contain new features or functionality. Click-N-Run Installation with pre-determined software applications (Object Code) MEMBERSHIP SERVICES One year free membership to "Click-N-Run" Warehouse, a service provided by Lindows.com enabling users of LindowsOS to access and install software applications provided by parties other than Provider, valued at $99.00 (United States Dollars). Membership to "Click-N-Run" Warehouse does not include the cost, if any, of the software which may be charged for the software provided by such third parties. DOCUMENTATION Page B-1 EX-10.8 5 a97792a4exv10w8.txt EXHIBIT 10.8 EXHIBIT 10.8 *** CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT (INDICATED BY ASTERISKS) HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER 17 C.F.R. SECTIONS 200.80(B)(4), 200.803 AND 230.406 STARSUITE SOFTWARE OEM LICENSE AND DISTRIBUTION AGREEMENT This StarSuite Software OEM License and Distribution Agreement ("Agreement") is made and entered into by and between Sun Microsystems, Inc., a Delaware corporation, located at 4150 Network Circle, Santa Clara, California 95054 ("Sun") and Customer set forth below ("Customer"): Customer: Lindows.com Address: 9333 Genesee Avenue, 3rd Floor San Diego, California 92121 U.S.A. Tel: 858-587-6700 Fax: 858-587-6700 E-mail: __________________________ WHEREAS, Sun designs, develops and markets office productivity software and documentation. WHEREAS, Customer desires to license from Sun the Software (as defined below) and distribute the same on the terms and conditions herein. IN CONSIDERATION of the mutual promises and covenants contained in this Agreement and the Attachments attached hereto and incorporated herein, and for other good and valuable consideration, receipt of which is hereby acknowledged, the parties agree as follows: This Agreement includes the terms and conditions set forth herein and the following attachments (collectively, "Attachments"): ATTACHMENT 1 AGREEMENT DETAILS ATTACHMENT 2 END USER BINARY CODE LICENSE AGREEMENT Notices as described in Section 12.8 ("Notices") shall be delivered to Customer at the above address and to Sun at 4120 Network Circle, Bldg. 12, M/S: SCA12-112, Santa Clara, CA 95054, Attention: Vice President, Software Sales, with a copy to Sun Legal Dept. at 4140 Network Circle, Bldg. 14, M/S: SCA14-210 OEM & Technologies Legal Dept., Santa Clara, CA 95054. Royalty reports and payments should be sent to the following address unless otherwise specified by Sun in writing: Sun Microsystems, Inc., Software Royalty Accounting Group - --StarSuite, P.O. Box 10903, Palo Alto, CA 94303. IN WITNESS WHEREOF the parties have caused this Agreement to be executed by their duly authorized representatives. SUN MICROSYSTEMS, INC. CUSTOMER: LINDOWS.COM By: /s/ Vineet Gupta By: /s/ Kevin Carmony --------------------------------- --------------------------------- Page 1 of 17 EXHIBIT 10.8 Name: Vineet Gupta Name: Kevin Carmony ------------------------------- ------------------------------- (printed or typed) (printed or typed) Title: Worldwide Director Title: President ------------------------------ ------------------------------ Date: 6-17-03 Date: 5-28-03 ------------------------------- ------------------------------- Page 2 of 17 EXHIBIT 10.8 GENERAL TERMS AND CONDITIONS 1.0 DEFINITIONS 1.1 "Binary Code License" or "BCL" means an End User license to use the Software pursuant to the terms set forth in Attachment 2 ("End User Binary Code License Agreement"). The BCL must be provided with each copy of the Software distributed. 1.2 "Confidential Information" means that information which Customer and/or Sun desire to protect against unauthorized disclosure or use and which the disclosing party designates as confidential (i) in writing, if communicated in writing, or (ii) orally, prior to any oral disclosure of the Confidential Information. The terms and conditions of this Agreement shall be considered Confidential Information of Sun. 1.3 "Customer Marketing Collateral" means all materials created by Customer and used in connection with promoting or marketing Customer's Product, including but not limited to, advertising, press releases, brochures, data sheets, web pages, trade show and event materials, and ad pillars, in any medium, including but not limited to print and online media. 1.4 "Customer's Product(s)" means the hardware system(s), software and/or components manufactured by or for Customer which have material value independent from the Software, and incorporate or include the Software as an integral element of Customer's hardware system, software or component, pre-installed from Master Media. 1.5 "Distributor" means an entity that distributes Customer's Products and which is under a contractual obligation to Customer as set forth in this Agreement, for example, a retail distributor. 1.6 "Effective Date" shall have the meaning set forth in Section 3.1 ("Term"). 1.7 "End User" means the person or entity to whom the BCL applies and to whom Customer and/or Distributors furnish the Software for use with and as part of Customer's Products for internal use and not for resale, marketing, or leasing. 1.8 "End User Documentation " means users' manuals, programmers' guides and system guides which Sun may provide for use with the Software, and which are specified in the Attachments hereto and/or the Price List. 1.9 "Error" means any reproducible failure of the Software to perform its intended functions or any material inaccuracies in the End User Documentation. 1.10 "Error Correction " means a modification, addition, procedure or routine intended to correct the practical adverse effect of an Error. 1.11 "Installed Base" means Customer's pre-existing End User customers who are already in possession of and using Customer's Product under a current and valid license. Such installed Customer Products shall be referred to as "Installed Systems." 1.12 "Licensed Trademarks" means the StarSuite Logos, STARSUITE word mark, and the Sun Logo depicted in the Trademark *rise Agreement entered into by Customer and Sun, or such additional or replacement mark(s) as Sun may provide under the Trademark License Agreement, and no other logo, mark or designation. 1.13 "Master Media" means the Software delivered to Customer for the purpose of mass duplication in accordance with Section 2.0 ("Binary License Rights; Terms and Conditions") herein. 1.14 "Price List" means the then-current, geographical, specific release of the Sun Software OEM and Reseller License Fee and Royalty Schedule including any subsequent price changes made by Sun pursuant to Section 4.4 ("Price Changes"). 1.15 "Royalty Bearing Event" means the license, grant of right to use, or other authorized transfer of the Software. There will be only one (1) Royalty Bearing Event for each copy of the Software shipped. Page 3 of 17 EXHIBIT 10.8 1.16 "Software" means the binary, machine-readable, executable code for the Sun software product and End User Documentation listed in Attachment 1 ("Agreement Details") hereto, and Updates or Error Corrections provided to Customer, if any. 1.17 "Sun Marketing Collateral" means all materials created by or for Sun and used in connection with promoting or marketing Sun's Software, including but not limited to, advertising, press releases, brochures, data sheets, web pages, trade show and event materials, and ad pillars, in any medium, including but not limited to print and online media. 1.18 "Sun Trademarks" means the Licensed Trademarks and all iPlanet-, Java-, Jini-, Solaris-, Sun-, and StarSuite-based names, marks, logos, trade dress and other brand designations used by Sun and its related companies. 1.19 "Tax" means sales, use, rental, receipt, personal property, value-added, consumption, goods and services, or other tax which may be levied or assessed in connection with this Agreement, excluding tax based on Sun's income. 1.20 "Territory" means the jurisdiction(s) where Customer may market, advertise, and distribute Customer's Product containing the Software as set forth in Attachment 1 ("Agreement Details"), and shall include no other countries except Japan, the Peoples Republic of China (excluding Hong Kong), Korea or Taiwan unless otherwise agreed by Sun in writing. 1.21 "Technical Support Entitlement" means that Sun will provide to Customer for inclusion with Customer's Product, a text file (e.g., "Read Me" file), splash screen, dialogue box or other collateral that will entitle the End User to technical assistance with the Software (End User questions about the Software relating to specific, discrete issues such as installation, launch, configuration, usability, etc.) within a specified timeframe. Sun may also provide End User Software training. 1.22 "Update" means a release of the Software, if any, which is designated by Sun in its sole discretion as containing substantially only Error Corrections, or minor new features, functionality and/or performance enhancements. An Update is generally signified by a change of version designation to the right of the decimal point, for example, version 6.0 to version 6.1. 2.0 BINARY LICENSE RIGHTS; TERMS AND CONDITIONS 2.1 Binary License Grant. Subject to and conditioned upon Customer's compliance with the payment obligations, limitations and restrictions set forth in this Agreement, with respect to Software, Sun grants to Customer a personal, non-transferrable, and nonexclusive, royalty-bearing, limited right and license as follows: (a) to make copies of the Software from Master Media, install those copies in Customer's Products as part of the manufacturing process prior to shipment, and distribute such copies as part of Customer's Products in accordance with the terms of this Agreement; (b) to copy Software from Master Media onto separate packaged product storage media such as CD-ROMs ("White-CD") and distribute for use with Customer's Product one White-CD with each Customer's Product incorporating Software installed from Master Media; (c) to the extent Updates are made available, to distribute unbundled Updates to Customer's Installed Base for use only with Installed Systems. Updates will be made available solely at Sun's discretion. Such distributions, if any, must be made pursuant to an agreement with each End User restricting use of the Update to Installed Systems. 2.2 Binary License Terms and Conditions. Each distribution of the Software by Customer or its Distributors to an End-User must be made pursuant to the unmodified terms and conditions of the BCL, including the supplemental terms and conditions relating to the Software. It is expressly acknowledged and agreed that in the United States and in other jurisdictions where an enforceable copyright protection covering the Software exists, such license may be a written agreement on or accompanying the package containing the Software media that is fully visible to the End-User before the package is opened, that the End-User accepts by Page 4 of 17 EXHIBIT 10.8 opening the package and that complies with applicable law relating to agreements of such type. In all other jurisdictions, such license must be a written agreement signed by the End-User. Sun does not undertake to inform Customer of the jurisdictions where such copyright protection exists. In the event the End User, upon reading the BCL, elects to return the product as provided in the product packaging, Customer will accept return of the Software and shall refund the license fee to the End User. 2.3 Distribution Agreements. (a) Prior to Customer furnishing any Software to any of its Distributors, Customer shall obtain a signed agreement from its Distributors substantially similar to the terms and conditions of this Agreement and sufficient to allow protection of the intellectual property rights of Sun and its licensors. (b) Customer shall use commercially reasonable efforts comparable to those it uses for its own products to monitor and enforce any agreements with Distributors and End Users of the Software entered into by Customer or its Distributors, and Customer shall promptly inform and consult with Sun if Customer becomes aware of any substantial non-compliance. If a Distributor or End User fails to fulfill any of its material obligations with respect to the Software under such agreement, Sun may, upon its election and in addition to any other remedies that it may have, notify Customer in writing of such breach and require Customer to terminate all the rights granted in such agreement with respect to the Software by thirty (30) days written notice to such Distributor or End User specifying the breach, unless the breach is remedied within such thirty (30) day period. In the event that Customer fails to satisfy the foregoing obligations with regard to the Software, subject to Section 8.0 ("Limitation of Liability"), Customer shall be responsible for all reasonable costs incurred by Sun, including without limitation, attorneys' fees, in connection with such enforcement actions undertaken by Sun. In those jurisdictions where Sun does not have standing to bring an action in its own name or under the intellectual property laws of such jurisdiction, Customer shall assign those rights to Sun reasonably necessary to allow Sun to bring an action under any legal theory available to Customer. 2.4 End User Documentation Distribution; Modification. (a) End User Documentation Distribution. Electronic documentation is included with Software. Customer may reprint documentation included on Master Media only. (b) Modification of End User Documentation. Customer may not modify the End User Documentation. 2.5 Trademarks, Logos and Product Designs; Proprietary Notices. (a) Customer may refer to Software by the associated Sun Trademarks (but shall not use Suns stylization or logos except as otherwise provided in the Trademark License Agreement that will be executed in conjunction with this Agreement, provided that such reference is not misleading and complies with the Sun Trademark and Logo Requirements, currently located at http://www.sun.com/policies/trademarks. Customer shall not remove, alter, or add to any Sun Trademarks, nor shall it co-logo Software. (b) As between Sun and Customer, Customer acknowledges and agrees that Sun is the sole owner of the Sun Trademarks and all associated goodwill and intellectual property rights. Customer further agrees that any use of Sun Trademarks by Customer shall inure to the sole benefit of Sun. Customer agrees not to: (i) challenge Sun's ownership, use of or the validity of the On Trademarks; (ii) attempt or register any mark or logo identical or substantially similar to any Sun Trademark; (iii) remove, alter or add to any of Sun Trademark; (iv) incorporate any of Sun Trademarks into Customer's trademarks, product names, service marks, company names, slogans, domain names or any other similar designations for use on or in connection with any computer and/or internet-related hardware, software, technologies or services or any other products or services likely to cause confusion with or dilute the Sun Trademarks; or (v) infringe any Sun Trademark or associated intellectual property rights. If Customer acquires any rights in any Sun Trademarks by operation of law or otherwise, it will immediately at no expense to Sun assign such rights to Sun along with any associated goodwill, applications, and/or registrations. (c) Customer is granted no right, title or license to, or interest in, any Sun Trademarks or any name, mark, logo, trade dress or brand designation of Sun and its related companies in this Agreement or Page 5 of 17 EXHIBIT 10.8 any Attachment to this Agreement. Customer agrees to enter into and comply with a Trademark License Agreement that it will sign with Sun. The Trademark License Agreement shall be considered a separate agreement and not part of the terms of this Agreement. Customer shall use the STARSUITE word mark, the StarSuite Logos and the Sun Logo in strict compliance with the terms and conditions of the Trademark License Agreement. (d) Customer shall not delete, cover or alter, and shall maintain Sun's trademarks, logos, proprietary rights notices and restrictive rights legends included in and on the End User Documentation and Software. Customer shall reproduce any proprietary rights notices of Sun and/or contributing third parties contained in or on all copies of Software, End User Documentation, packaging and related materials, in whole or in part, developed or made by Customer or its Distributors. Customer shall submit its Customer Products containing Software, End User Documentation or other materials licensed hereunder to Sun for approval pursuant to this Section 2.5 ("Trademarks, Logos and Product Designs; Proprietary Notices") prior to distribution, which approval shall not be unreasonably withheld or delayed. 2.6 Intended Purpose. The intended purpose of the Software is for use on, and as an integral component of, Customer's Products. Customer's Product packaging for the Software shall clearly indicate this intended purpose. Customer shall market and distribute the Software only with Customer's Product and directly or indirectly through Customer's Distributors to End Users only if bundled with Customer's Product. Customer and Distributors shall not distribute the Software on a stand-alone basis. 2.7 Governmental Approvals. Customer shall, at its own expense, obtain and arrange for the maintenance in full force and effect of all governmental approvals, consents, licenses, authorizations, declarations, filings and registrations as may be necessary for the performance of the terms and conditions of the Agreement, including without limitation, fair trade approvals, under all laws, regulations and other legal requirements within the jurisdictions that Customer distributes the Software that apply to this Agreement, including tax and foreign exchange legislation. 2.8 No Other Rights. Except as expressly stated herein and in the Attachment(s) hereto, no other license, right or interest is granted to Customer for any other purpose. 3.0 TERM AND TERMINATION 3.1 Term. This Agreement shall commence on: (i) the date of its execution by Sun or (ii) where this Agreement will be void or Sun will be liable for a penalty without an approval, registration, filing as referred to in Section 2.7 ("Governmental Approvals"), or Sun obtaining the necessary US export license, the date of such approval, registration, filing, or US export license, whichever occurs later (the "Effective Date") and shall have an initial term of one (1) year. Thereafter, this Agreement shall be automatically renewed for successive one (1) year terms (with a maximum of two (2) subsequent terms), unless one party notifies the other party in writing at least thirty (30) days before the end of the then-current term stating that it wishes to terminate this Agreement; whereupon, this Agreement shall terminate at the end of the then-current term. 3.2 Termination. If either party fails to comply with any of the material terms and conditions of this Agreement, the other party may terminate this Agreement upon thirty (30) days written notice to the breaching party specifying any such breach, unless the breach specified therein has been remedied within such thirty (30) day period. In the event of Customer's breach, Sun may terminate this Agreement in its entirety or as to any individual Software product. 3.3 Termination for Insolvency. Either party may terminate this Agreement immediately in the event that the other party ceases to conduct its operations in the normal course of business, files for or becomes the subject of a bankruptcy petition, is placed in receivership, or attempts to assign this Agreement to creditors or otherwise without prior written consent of the other party. 3.4 Effect of Termination. (a) For Breach by Customer: Upon expiration or termination of this Agreement for breach by Customer, Customer shall discontinue issuing BCLs for the Software, shall return all Software and Sun Confidential Information and all copies thereof in its possession to Sun or destroy all Software and all Page 6 of 17 EXHIBIT 10.8 copies thereof in Customer's possession and certify in writing by an officer of Customer that such Software and all copies thereof were so destroyed. (b) BCLs for the Software issued prior to the effective date of termination shall continue in accordance with their terms and conditions. Customer's obligation to pay royalties accrued prior to the termination of this Agreement shall not terminate. 3.5 No Liability For Termination. To the full extent allowed by any applicable law except as expressly provided in this Agreement, Customer agrees that it shall have no rights to damages or indemnification of any nature due to any expiration or rightful termination of this Agreement by Sun pursuant to its terms. The foregoing restriction shall include without limitation, commercial severance pay whether by way of loss of future profits, expenditure for promotion of the Software, payment for goodwill generated or other commitments made in connection with the business contemplated by this Agreement or other similar matters. Customer will not be entitled under local law or otherwise to receive any payment from Sun, whether for actual, consequential, indirect, special or incidental damages, costs or expenses, whether foreseeable or unforeseeable, any right to which Customer hereby waives and disclaims. Customer EXPRESSLY WAIVES AND RENOUNCES ANY CLAIM TO COMPENSATION OR INDEMNITIES FOR ANY TERMINATION OF BUSINESS RELATIONSHIP BY A FOREIGN BUSINESS ENTITY, WHICH MAY EXIST UNDER THE LAWS OF ANY APPLICABLE JURISDICTION. 3.6 Survival. Rights and obligations under this Agreement which by their nature should survive, will remain in effect after termination or expiration hereof. 4.0 PAYMENTS; TAXES; ACTIVITY LEVEL 4.1 Payment Terms. Except as otherwise specified in the Attachments hereto, and in consideration of the rights granted to Customer hereunder, Customer shall pay to Sun the royalties for each Royalty Bearing Event for the applicable Software licensed or distributed by Customer on a quarterly basis within thirty (30) days following the end of the preceding calendar quarter, accompanied by a report pursuant to Section 5.1 ("Record Keeping") below. Software license and royalty fees are set forth on the Sun Price List. To the extent that Customer orders any Software or other products from Sun or Sun invoices Customer for any royalties due, Customer shall pay any amounts due to Sun within thirty (30) days from Sun's invoice date except for royalties, which shall always be due within thirty (30) following the end of the preceding calendar quarter. Sun's acceptance of this Agreement and any associated order(s) does not imply Sun's approval of an open line of credit. Credit terms are established by Sun based in part upon Customer's financial and payment records. Sun reserves the right to place Customer on credit hold in the event Customer's financial condition ceases to warrant the credit terms specified above. 4.2 Taxes. (a) Subject to Section 4.2(b), all amounts payable by Customer under this Agreement are exclusive of any Tax, levy or similar governmental charge that may be assessed by any jurisdiction, whether based on gross revenue, the delivery, possession or use of the Software, the execution or performance of this Agreement or otherwise, except for net income, net worth or franchise taxes assessed on Sun. If, under the local law, Customer is required to withhold any Tax on such payments, then the amount of the payment actually remitted to Sun will be net of all Taxes. Customer will promptly furnish Sun with the official receipt of payment of these Taxes to the appropriate taxing authority. Customer will pay all other Taxes, levies or similar governmental charges or provide Sun with a certificate of exemption acceptable to the taxing authority. (b) Notwithstanding Section 4.2(a), Customer may deduct from payments any income tax or tax of a similar nature imposed by any non-United States government ("government income tax") on the income of Sun from such payment and actually paid by Customer for the account of Sun. In the event that Customer deducts any such income tax from any such payment, Customer shall furnish Sun with evidence acceptable to Sun and to the United States Government to sufficiently establish that such government income tax has been paid for the account of Sun. Page 7 of 17 EXHIBIT 10.8 4.3 Updates. The fees specified in this Agreement are for the then-current release of the Software and any Updates. It is within Sun's sole discretion to release and/or distribute Updates to Customer. Sun shall have the right, at its sole discretion and without incurring any liability to Customer, to modify the Software or discontinue its development, manufacture, sale or support and will provide Customer with sixty (60) days prior notice. Such change shall not require Customer's approval. 4.4 Price Changes. Sun reserves the right to change the Price List, discount schedule and/or royalties for any Software at any time. In the event of a price increase, Sun shall provide Customer with thirty (30) days prior notice. Such change shall not require Customer's approval. If, during the term of this Agreement, Sun decreases the royalty rate for any Software(s), all orders for such Software(s) scheduled for shipment or in transit to Customer at the time of such notice shall be adjusted to the decreased royalty rate. 4.5 Customer's Products. Customer shall list in its revenue reports to Sun pursuant to Section 5.0 ("Records; Audit Requirement; Forecast") of the Agreement, Customer's Products shipped in conjunction or associated with the Software hereunder. 5.0 RECORDS; AUDIT REQUIREMENTS; FORECAST 5.1 Record Keeping. Customer shall maintain for a three (3) year period revenue records sufficient to determine that Customer is in compliance with the terms and conditions of this Agreement. Customer shall provide to Sun along with any payments specified hereunder, quarterly revenue reports, in the English language which shall include, at a minimum, the following information: (i) the Names of Software products; (ii) Customer's Product names; (iii) the number of units of each type of Customer's Product shipped with the Software; (iv) the number of Customer's Product units forecasted to be shipped for the next six (6) months; (v) the number of units of Customers Product that were returned to Customer for the reporting period for which Customer is entitled to a credit; and (vi) the royalty amounts due Sun. For any quarter in which no royalties are paid, Licensee will submit a report so indicating, along with any of the applicable above information. Royalty reports and payments should be sent to the address set forth above unless otherwise indicated by Sun in writing. 5.2 Audit Requirements. The following audit provision shall continue throughout the term of this Agreement and shall survive the termination of this Agreement insofar as applicable to obligations accrued prior to such termination. (a) Right to Audit. Sun shall have the right to audit the records and accounts of Customer required to be kept in accordance with this Agreement. The auditor shall be adequately bound to keep confidential all Confidential Information of Customer learned during the course of or pursuant to the audit. Any such audit shall be performed only during Customer's normal business hours, no more frequently than once per calendar year (but more frequently and at Sun's discretion if irregularities are found), and shall be performed in such a manner as to avoid unreasonable interference with Customer's business operations; and the auditor shall be limited to reporting the adequacy of Customer's records and accounts, including, but not limited to, whether Customer is in compliance with the terns of this Agreement and the amount, if any, of underpayment or overpayment of the amounts due Sun pursuant to this Agreement. Except as expressly provided in Section 5.2(b) ("Errors In Payment"), Sun shall bear all costs and expenses associated with the exercise of its right to audit. (b) Errors in Payment. In the event that any errors in payment shall be determined, such errors shall be corrected by appropriate adjustment in payment (plus interest at one and one-half percent (1-1/2%) per month or the highest rate permitted by law) for the quarterly period during which the error is discovered. In the event of underpayment of more than five percent (5%) of the amount due for that period (i) Customer shall reimburse Sun for the reasonable charges of the audit that identified the underpayments, and (ii) Sun shall have the right to conduct additional audits, at its sole discretion; in ninety (90) day intervals until Customer becomes fully compliant with the terms and conditions of this Agreement. Page 8 of 17 EXHIBIT 10.8 6.0 CONFIDENTIAL INFORMATION Customer may not disclose Sun's Confidential Information and may use it only for purposes specifically contemplated in this Agreement. Sun will treat Customers Confidential Information with the same degree of care as it does its own similar information. The foregoing obligations do not apply to information which: (i) is rightfully obtained by recipient without an obligation to maintain its confidentiality; (ii) is or becomes generally known to the public through no act or omission of recipient, or (iii) is independently developed by recipient without use of the other party's Confidential Information. This Section 6.0 ("Confidential Information") will not affect any other confidential disclosure agreement between the parties. 7.0 WARRANTIES 7.1 Customer's Limited Warranty: Sun warrants that for a period of ninety (90) days from the date of delivery to Customer that the media on which the Software is furnished will be free of defects in materials and workmanship under normal use. Except for the foregoing, to the full extent allowed by applicable law, the Software is provided "AS IS" and without warranty of any kind. Customer's exclusive remedy and Sun's entire liability under this limited warranty will be at Sun's option to repair or replace the defective media. 7.2 Nuclear Applications. Software is not designed or intended for use in the design, construction, operation or maintenance of any nuclear facility. SUN DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY OF FITNESS FOR SUCH USES. 7.3 No Other Warranties. UNLESS SPECIFIED IN THIS AGREEMENT, ALL EXPRESS OR IMPLIED CONDITIONS, REPRESENTATIONS AND WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT, ARE DISCLAIMED, EXCEPT TO THE EXTENT THAT SUCH DISCLAIMERS ARE HELD TO BE LEGALLY INVALID. 8.0 LIMITATION OF LIABILITY TO THE FULL EXTENT ALLOWED BY ANY APPLICABLE LAW, AND EXCEPT FOR OBLIGATIONS TO DEFEND UNDER SECTION 9.0 ("INTELLECTUAL PROPERTY CLAIMS") OF THIS AGREEMENT, EACH PARTY'S LIABILITY TO THE OTHER FOR CLAIMS RELATING TO THIS AGREEMENT, WHETHER FOR BREACH OR IN TORT, SHALL BE LIMITED TO THE AMOUNT OF ACCRUED ROYALTIES PAYABLE TO SUN FOR ALL COPIES LICENSED HEREUNDER FOR THE PARTICULAR SOFTWARE GIVING RISE TO SUCH CLAIM, IF ANY. THE FOREGOING LIMITATION DOES ~T REDUCE CUSTOMER'S OBLIGATION TO PAY SUN THE LICENSE FEES DUE AND OWING FOR THE SOFTWARE. NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INDIRECT, PUNITIVE, SPECIAL, INCIDENTAL OR NSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT (INCLUDING WITHOUT LIMITATION, LOSS OF PROFITS, USE, DATA, OR OTHER ECONOMIC ADVANTAGE), HOWEVER IT ARISES, WHETHER FOR BREACH OF THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, BREACH OF WARRANTY, OR IN TORT, EVEN IF THAT PARTY HAS BEEN PREVIOUSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGE, AND WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE. THE FOREGOING LIMITATION OF LIABILITY OF CUSTOMER TO SUN SHALL NOT APPLY IF CUSTOMER'S ACTIONS OR INACTION RESULT IN THE UNAUTHORIZED DISCLOSURE, DISTRIBUTION OR USE OF THE SOFTWARE OR SUN'S CONFIDENTIAL INFORMATION. 9.0 INTELLECTUAL PROPERTY CLAIMS 9.1 Sun shall defend at its own expense and, in addition, shall indemnify Customer from damages, liabilities, costs and expenses actually awarded against Customer up to the amount stated in Section 8.0 ("Limitation of Liability"), as a result of any final judgment against Customer in which it is determined that the marketing or use of any Sun written code within the Software infringe Berne Convention copyrights of third parties in any country where Sun has a subsidiary. In the event Sun elects to avoid litigation relating to Page 9 of 17 EXHIBIT 10.8 the foregoing and settle any such claims, Sun will pay the settlement amount and obtain a release as to all such claims against Customer. 9.2 Customer shall defend at its expense without limitation and, in addition, shall indemnify Sun from damages, liabilities, costs and expenses actually awarded against Sun up to the amount stated in Section 8.0 ("Limitation of Liability"), as a result of actions or omissions set forth in Section 9.5 (i) through (iv). In the event Customer elects to avoid litigation relating to the foregoing and settle any such claims, Customer will pay the settlement amount and obtain a release as to all such claims against Sun. 9.3 The indemnification obligations set forth in Sections 9.1 and 9.2 above shall be conditioned upon the indemnified party (i) notifying the indemnifying party within thirty (30) days of notice of a claim of infringement; (ii) providing full cooperation and assistance to the indemnifying party at the indemnifying party's expense; and (iii) providing the indemnifying party full authority to manage the defense or settlement of the claim. 9.4 Should Software become or, in Sun's opinion, be likely to become the subject of a claim of infringement for which indemnification obligations would apply according to Section 9.1 above, Sun, at its option may (i) at no additional cost to Customer, procure for Customer the right to continue to use the Software, (ii) at no additional cost to Customer, replace or modify the Software to make such Software non-infringing, provided that substantially similar functionality and performance is obtained with the replacement or modified Software, or (iii) if the right to continue to use cannot be procured under commercially reasonable terms, or such Software cannot be replaced or modified within a commercially reasonable time and at a commercially reasonable expense, terminate the license to use such Software and refund to Customer over five (5) years in equal monthly payments the amounts that Customer refunds to its customers for such Software due to the claim of infringement, up to the total amounts actually paid by Customer to Sun under this Agreement for such Software. Sun's performance of (i), (ii) or (iii) above shall be Customer's sole and exclusive remedies. 9.5 Notwithstanding the foregoing, Sun shall have no obligation to indemnify and defend Customer or to pay costs, damages or attorneys' fees for any claim based upon (i) the combination, operation, or use by Customer of Software with other equipment, code, programs or data not supplied by Sun if such infringement would have been avoided but for the combination, operation or use of the Software with other equipment, code, programs or data; or (ii) use by Customer of other than the then-latest version of the Software, if such infringement could have been avoided by the use of the latest version of the Software and such latest version had been made available to Customer; or (iii) modifications by Customer of the Software in the event such infringement is caused by such modifications; or (iv) use by Customer outside the scope of the granted license(s). 10.0 MAINTENANCE AND SUPPORT Sun shall provide technical assistance (as provided in Section 1.21) to End Users. Customer shall distribute the Technical Support Entitlement with Customer's Product to End Users. 11.0 GOVERNMENT CONTRACTS 11.1 U.S. Governments (a) If Software is being acquired by or on behalf of the U.S. Government or by a U.S. Government prime contractor or subcontractor (at any tier), then the Government's rights in Software and accompanying documentation will be only as set forth in this Agreement; this is in accordance with 48 CFR 227.7201 through 227.7202-4 (for Department of Defense (DOD) acquisitions) and with 48 CFR 2.101 and 12.212 (for non-DOD acquisitions). Customer is responsible for ensuring that proper notice is given to all such third parties and that the Software and technical data are properly marked. Customer shall indemnify Sun for any claims or damages arising from any claim by the U.S. Government to more than Restricted Rights in and to the Software product(s) resulting from Customer's failure to provide a Restricted Rights legend as required herein. Any failure by Sun to affix a Restricted Rights legend on the Software product(s) shall not be deemed to constitute a waiver of any limitation on Customer's rights imposed by this Agreement. Page 10 of 17 EXHIBIT 10.8 (b) Under no circumstances shall Sun be obligated to comply with any requirements imposed by the U.S. Government regarding submission of or the request for exemption from submission of cost or pricing data or cost accounting requirements for any distribution or license of Software that would require compliance by Sun with U.S. Governmental requirements relating to cost or pricing data or cost accounting requirements. 11.2 Other Sovereign Governments At its own cost and expense, Customer and its Distributors will take all necessary steps in making proposals and agreements with sovereign governments other than the U.S. Government which involve Software and End User Documentation to ensure that Sun's proprietary rights in Software and End User Documentation receive the reasonably necessary protection available from such foreign governments for commercial computer software and related documentation developed at private expense. 12.0 MISCELLANEOUS 12.1 Force Majeure. A party is not liable under this Agreement for non-performance caused by events or conditions beyond that party's control if the party makes reasonable efforts to perform. This provision does not relieve Customer of its obligation to make payments then owing. 12.2 Severability. In the event that any part of this Agreement is held to be unenforceable, in whole or in part, such holding will not affect the validity of the other parts of this Agreement, unless Sun deems the unenforceable part to be essential to this Agreement, in which case Sun may terminate this Agreement, effective immediately upon notice to Customer. 12.3 Relationship of the Parties. This Agreement is not intended to create a relationship such as a partnership, franchise, joint venture, agency, or employment relationship. Neither party may act in a manner which expresses or implies a relationship other than that of independent contractor, nor bind the other party. 12.4 Governing Law. Any action related to this Agreement will be governed by California law and controlling U.S. federal law. No choice of law rules of any jurisdiction will apply. 12.5 Import and Export Laws. All Software and technical data delivered under this Agreement are subject to U.S. export control laws and may be subject to export or import regulations in other countries. Customer agrees to comply strictly with all such laws and regulations and acknowledges that it has the responsibility to obtain such licenses to export, re-export or import as may be required after delivery to Customer. 12.6 Assignment. Neither party may assign or otherwise transfer any of its rights or obligations under this Agreement, without the prior written consent of the other party, except that Sun may assign its right to payment and may assign this Agreement to an affiliated company. 12.7 Change of Control. In the event of the direct or indirect taking over or assumption of control of Customer or of substantially all of its assets by any government, governmental agency or other third party, Sun may terminate this Agreement upon written notice to Customer. 12.8 Notices. All written notices required by this Agreement must be delivered in person or by means evidenced by a delivery receipt and will be effective upon receipt. 12.9 Waiver or Delay. Any express waiver or failure to exercise promptly any right under this Agreement will not create a continuing waiver or any expectation of non-enforcement. To be enforceable, a waiver must be in writing and signed by the waiving party. 12.10 No Rights in Third Parties. This Agreement is made for the benefit of the parties hereto, and not for the benefit of any third parties unless otherwise stated herein or agreed to by the parties. 12.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which will constitute but one and the same instrument. Page 11 of 17 EXHIBIT 10.8 12.12 Headings. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 12.13 Construction. This Agreement has been negotiated by the parties hereto and by their respective counsel. This Agreement will be fairly interpreted in accordance with its terms and without any strict construction in favor of or against either party. The original of this Agreement has been written in English, and such version shall be the governing version of the Agreement. To the extent allowed under applicable law, Customer waives any right it may have, if any, under any law or regulation to have this Agreement written in a language other than English. 12.14 Orders. This Agreement does not constitute an order for Software, but rather a commitment to order Software as set forth in the Attachments hereto. Purchase orders for Software shall be submitted to Sun by Customer pursuant to the terms of this Agreement. Any terms or conditions set forth on any purchase order, check, or other document of Customer shall have no force or effect whatsoever. Customer further acknowledges that it does not take title to the Software, with the exception of the media, but rather licenses the Software pursuant to the terms and conditions of this Agreement. 12.15 Deliveries. Software and Documentation shall be delivered F.O.B. Sun's designated shipping facility unless otherwise agreed to by the parties in writing. Title to the Software media, but not to the Software and its associated intellectual property rights, shall pass to Customer at that time. Sun may make partial deliveries and such deliveries will not relieve Customer of its obligation to accept the remainder of that order in whole or in part. Sun may allocate Software to fairly accommodate orders received by Sun from all customers at any time demand exceeds the available supply. 12.16 Equitable Relief. Because the licenses granted under this Agreement are personal and unique, and because Customer will have access to and become acquainted with confidential and proprietary information of Sun, the unauthorized use or disclosure of which would cause irreparable harm and significant injury which would be difficult to ascertain and which would not be compensable by damages alone, both parties agree that, in addition to any and all legal remedies available to Sun for Customer's breach of this Agreement, Sun shall be entitled to avail itself of actions against Customer and/or third parties for seizure and injunctive relief. If an unauthorized use or disclosure occurs, Customer will promptly notify Sun and take, at Customer's expense, all steps which are necessary to recover the Software and to prevent its subsequent unauthorized use or dissemination. 12.17 Entire Agreement. This Agreement is the parties' entire agreement relating to its subject matter. It supersedes all prior and contemporaneous oral or written communications, proposals, conditions, representations and warranties and prevails over any conflicting or additional terms of any quote, order, acknowledgment, or other communication between the parties relating to its subject matter during the term of this Agreement. No modification to this Agreement will be binding, unless in writing and signed by an authorized representative of each party. Page 12 of 17 EXHIBIT 10.8 ATTACHMENT 1 AGREEMENT DETAILS 1. SOFTWARE PRODUCT VERSION & LANGUAGES: StarSuite software version 6.0 * in English, German, French, Italian, Swedish, Spanish. *If and when Sun Makes a Portuguese edition of version 6.0 of the Software generally commercially available, Customer may distribute such edition pursuant to the terms of this Agreement. Customer understands and agrees that Sun is under no obligation to make such a Portuguese edition available, and that Sun may never make such and edition generally commercially available. 2. CUSTOMER'S PRODUCT(S) THAT WILL INCLUDE STARSUITE 6.0: Lindows OS [***], Customer's Linux operating system. 3. DISTRIBUTION TERRITORY(S): THE STARSUITE SOFTWARE AND CUSTOMER MARKETING COLLATERAL CONTAINING THE LICENSED TRADEMARKS MUST BE DISTRIBUTED OR MARKETED SOLELY IN JAPAN, PRC (EXCLUDING HONG KONG), TAIWAN OR KOREA. 4. DISTRIBUTION TERRITORY LIMITATIONS: THE STARSUITE SOFTWARE AND CUSTOMER MARKETING COLLATERAL CONTAINING THE LICENSED TRADEMARKS MUST BE DISTRIBUTED OR MARKETED SOLELY IN JAPAN, PRC (EXCLUDING HONG KONG), TAIWAN OR KOREA. A SEPARATE AND SPECIFIC PRODUCT ("STAROFFICE") IS AVAILABLE FOR DISTRIBUTION IN TERRITORIES OUTSIDE OF THESE AREAS UNDER A SEPARATE AGREEMENT THROUGH THE STAROFFICE BUSINESS GROUP. 5. SINGLE USER LICENSE AND END USER SUPPORT: Each StarSuite Software unit is a single user license (please refer to the End User Binary Code License for more detail). Each single user license includes a Technical Support Entitlement which entitles the End User licensee to receive technical assistance as provided in Section 1.21. Sun will provide technical assistance program details. 6. DISTRIBUTION OPTIONS: Customer is authorized to distribute Software via one or more of the following models only A. SOFTWARE OEMS: Customer must market and distribute the Software, in binary form, by bundling it with Customer's Product and reproducing the Software on CDs that shall be distributed with Customer's Product. Customer (at its own expense) must produce and distribute the CDs containing the StarSuite Software as a value-add component of Customer's Product only, and shall not distribute the StarSuite Software as a stand-alone product. Customer is prohibited from distributing StarSuite Software as part of any publication of any kind (books, magazines, etc.) without prior written permission from Sun. References to Sun-approved CD producers are available upon request. Customer agrees to distribute one (1) Technical Support Entitlement with each Software unit distributed. B. HARDWARE OEM PRE-INSTALLS: Software shall be pre-installed on Customer's Product, and a shortcut visible to End User will be placed on the desktop upon initial activation and remain visible unless uninstalled by End User. Customer may elect to include a CD containing the Software in binary form for the sole purpose of providing a back-up CD to End User. Under this scenario, separate instances of the Software (pre-install and on back-up CD) count as a single unit for royalty calculation purposes. Customer will distribute one (1) Technical Support Entitlement with each Software unit distributed. C. SUB-LICENSING TO HARDWARE MANUFACTURERS: Customer may resell Software only to third party computer hardware manufacturers, and only if the Software is bundled with Customer's Product. Customer must maintain accurate records of all Software units distributed to third parties, and Customer will pay royalties for such units based on Customer's current royalty rate as set forth in the Price List. Customer is Page 13 of 17 EXHIBIT 10.8 responsible for ensuring that computer hardware manufacturers who obtain Software from Customer for further distribution, fully comply with the trademark usage standards set forth in Section 5 of the Trademark License Agreement, AND pre-install Software as specified above in Section 6.B ("Hardware OEM Pre-Installs"). Customer shall ensure that one (1) Technical Support Entitlement is included with each Software unit distributed to sublicensees. D. [***] 7. CUSTOMER TECHNICAL CONTACTS: [***] 8. CUSTOMER MARKETING CONTACT: [***] 9. ADDITIONAL CUSTOMER COMMITMENTS: i. TRADEMARKS: Customer agrees to use the Sun Trademarks as specified in the Trademark License Agreement. ii. REFERENCES AND PRESS QUOTE SUPPORT: Customer agrees to support and participate in a reasonable amount of Sun's press and marketing activities relating to this Agreement including, but not limited to, press releases, customer references, customer success stories, and customer quotes. Customer retains final approval of press releases, customer reference or success stories, and/or customer quotes. Notwithstanding the foregoing, Sun at its discretion may discuss this and other StarSuite OEM agreements with press and industry analysts. 10. CUSTOMER DELIVERABLES: A. QUARTERLY REPORTS: Within thirty (30) days following each quarter end, Customer shall report to Sun the number of copies of Software (by platform) distributed by Customer in each country in the distribution Territory. B. CUSTOMER MARKETING COLLATERAL & PACKAGING SAMPLES: Customer shall provide to Sun all Customer Marketing Collateral samples and Customer Product packaging mock-ups for approval by Sun pursuant to the terms and conditions in the Trademark License Agreement to be signed by the parties in conjunction with this Agreement. C. FINAL PRODUCT SAMPLES: If Customer's Product is packaged as a retail box, Customer shall deliver to Sun two (2) complete samples of each boxed Customer Product that includes the Software. Customer will deliver new boxed samples as new versions of Customer's Products are released. In the event that Customer's Product is not packaged as a retail box, then Customer must provide a screenshot of Customer's Product clearly showing the pre-installed Software icon on the desktop. 11. SUN DELIVERABLES. A. MASTER MEDIA: Sun shall deliver Master Media to Customer following the Effective Date of this Agreement. Customer is authorized to distribute Software binaries duplicated from Master Media only. B. ARTWORK/FORMAT: Sun shall make available to Customer the Licensed Trademarks (in .eps format) relating to the StarSuite Software following the Effective Date of this Agreement and the execution by both parties of the Trademark License Agreement to be signed by the parties in conjunction with this Agreement. Page 14 of 17 EXHIBIT 10.8 C. TECHNICAL SUPPORT ENTITLEMENT: Sun shall provide Technical Support Entitlement (at no cost) to Customer which must be distributed with Customer's Product to End Users via printed collateral, text file (e.g., "Read Me" file), splash screen, dialogue box, or other means pre-approved in writing by Sun. Page 15 of 17 EXHIBIT 10.8 ATTACHMENT 2 END USER BINARY CODE LICENSE AGREEMENT READ THE TERMS OF THIS AGREEMENT AND ANY PROVIDED SUPPLEMENTAL LICENSE TERMS (COLLECTIVELY "AGREEMENT") CAREFULLY BEFORE OPENING THE SOFTWARE MEDIA PACKAGE. BY OPENING THE SOFTWARE MEDIA PACKAGE, YOU AGREE TO THE TERMS OF THIS AGREEMENT. IF YOU ARE ACCESSING THE SOFTWARE ELECTRONICALLY, INDICATE YOUR ACCEPTANCE OF THESE TERMS BY SELECTING THE "ACCEPT" BUTTON AT THE END OF THIS AGREEMENT. IF YOU DO NOT AGREE TO ALL THESE TERMS, PROMPTLY RETURN THE UNUSED SOFTWARE TO YOUR PLACE OF PURCHASE FOR A REFUND OR, IF THE SOFTWARE IS ACCESSED ELECTRONICALLY, SELECT THE "DECLINE" BUTTON AT THE END OF THIS AGREEMENT. 1. LICENSE TO USE. Sun grants you a non-exclusive and non-transferable license for the internal use only of the accompanying software and documentation and any error corrections provided by Sun (collectively "Software"), by the number of users and the class of computer hardware for which the corresponding fee has been paid. 2. RESTRICTIONS. Software is confidential and copyrighted. Title to Software and all associated intellectual property rights is retained by Sun and/or its licensors. Except as specifically authorized in any Supplemental License Terms, you may not make copies of Software, other than a single copy of Software for archival purposes. Unless enforcement is prohibited by applicable law, you may not modify, decompile, or reverse engineer Software. You acknowledge that Software is not designed, licensed or intended for use in the design, construction, operation or maintenance of any nuclear facility. Sun disclaims any express or implied warranty of fitness for such uses. No right, title or interest in or to any trademark, service mark, logo or trade name of Sun or its licensors is granted under this Agreement. 3. LIMITED WARRANTY. Sun warrants to you that for a period of ninety (90) days from the date of purchase, as evidenced by a copy of the receipt, the media on which Software is furnished (if any) will be free of defects in materials and workmanship under normal use. Except for the foregoing, Software is provided "AS IS". Your exclusive remedy and Sun's entire liability under this limited warranty will be at Sun's option to replace Software media or refund the fee paid for Software. 4. DISCLAIMER OF WARRANTY. UNLESS SPECIFIED IN THIS AGREEMENT, ALL EXPRESS OR IMPLIED CONDITIONS, REPRESENTATIONS AND WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT ARE DISCLAIMED, EXCEPT TO THE EXTENT THAT THESE DISCLAIMERS ARE HELD TO BE LEGALLY INVALID. 5. LIMITATION OF LIABILITY. TO THE EXTENT NOT PROHIBITED BY LAW, IN NO EVENT WILL SUN OR ITS LICENSORS BE LIABLE FOR ANY LOST REVENUE, PROFIT OR DATA, OR FOR SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES, HOWEVER CAUSED REGARDLESS OF THE THEORY OF LIABILITY, ARISING OUT OF OR RELATED TO THE USE OF OR INABILITY TO USE SOFTWARE, EVEN IF SUN HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. In no event will Sun's liability to you, whether in contract, tort (including negligence), or otherwise, exceed the amount paid by you for Software under this Agreement. The foregoing limitations will apply even if the above stated warranty fails of its essential purpose. 6. Termination. This Agreement is effective until terminated. You may terminate this Agreement at any time by destroying all copies of Software. This Agreement will terminate immediately without notice Page 16 of 17 EXHIBIT 10.8 from Sun if you fail to comply with any provision of this Agreement. Upon Termination, you must destroy all copies of Software. 7. Export Regulations. All Software and technical data delivered under this Agreement are subject to US export control laws and may be subject to export or import regulations in other countries. You agree to comply strictly with all such laws and regulations and acknowledge that you have the responsibility to obtain such licenses to export, re-export, or import as may be required after delivery to you. 8. U.S. Government Restricted Rights. If Software is being acquired by or on behalf of the U.S. Government or by a U.S. Government prime contractor or subcontractor (at any tier), then the Government's rights in Software and accompanying documentation will be only as set forth in this Agreement; this is in accordance with 48 CFR 227.7201 through 227.7202-4 (for Department of Defense (DOD) acquisitions) and with 48 CFR 2.101 and 12.212 (for non-DOD acquisitions). 9 Governing Law. Any action related to this Agreement will be governed by California law and controlling U.S. federal law. No choice of law rules of any jurisdiction will apply. 10. Severability. If any provision of this Agreement is held to be unenforceable, this Agreement will remain in effect with the provision omitted, unless omission would frustrate the intent of the parties, in which case this Agreement will immediately terminate. 11. Integration. This Agreement is the entire agreement between you and Sun relating to its subject matter. It supersedes all prior or contemporaneous oral or written communications, proposals, representations and warranties and prevails over any conflicting or additional terms of any quote, order, acknowledgment, or other communication between the parties relating to its subject matter during the term of this Agreement. No modification of this Agreement will be binding, unless in writing and signed by an authorized representative of each party. STARSUITE, VERSION 6.0 SUPPLEMENTAL LICENSE TERMS These supplemental license terms ("Supplemental Terms") add to or modify the terms of the Binary Code License Agreement (collectively, the "Agreement"). Capitalized terms not defined in these Supplemental Terms shall have the same meanings ascribed to them in the Agreement. These Supplemental Terms shall supersede any inconsistent or conflicting terms in the Agreement, or in any license contained within the Software. 1. SOFTWARE LICENSE TO USE. Subject to the terms and conditions of this Agreement, Sun grants you a non-exclusive, nontransferable, limited license to use up to five (5) complete and unmodified copies of the binary form of the Software installed only on computers that you operate. 2. LINUX END USER LICENSE TO USE. Subject to the terms and conditions of this Agreement, if you are a Linux operating system end user and you received the Software as part of a Linux operating system bundle, Sun grants you a non-exclusive and non-transferable license for the internal use only of the accompanying unmodified binary form of the Software. 3. EDUCATIONAL INSTITUTION LICENSE TO USE. Subject to the terms and conditions of this Agreement, if you are an educational institution, Sun grants you a non-exclusive and non-transferable license for the internal use only of the accompanying unmodified binary form of the Software. In this situation "internal use" means that your enrolled students, faculty and staff may use the Software. 4. FONT SOFTWARE. The Software contains font software which generates typeface designs ("Font Software"). You may not separate the Font Software from the Software. You may not alter Font Software for the purpose of adding any functionality which such Font Software did not have when delivered to you as Page 17 of 17 EXHIBIT 10.8 part of the Software. You may not embed Font Software into a document which is distributed as a commercial product in exchange for a fee or other consideration (For example, End-Users shall not embed Font Software into an electronic book that is offered to the public for a fee). 5. TRADEMARKS AND LOGOS. You acknowledge and agree as between you and Sun that Sun owns the SUN-based, STARSUITEbased, SOLARIS-based, JAVA-based, JINI-based, FORTE-based, iPLANET-based brand designations (including without limitation names, marks, logos and trade dress) ("Sun Marks"), and you agree to comply with the Sun Trademark and Logo Usage Requirements currently located at http://www.sun.com/policies/trademarks. Any use you make of the Sun Marks inures to Sun's benefit. These Supplemental License Terms do not grant the right to use any Sun logos or trade dress, and the Sun Trademark and Logo Usage Requirements do not permit any use of any Sun logos or trade dress without written permission or license from Sun. 6. SOURCE CODE. Software may contain source code that is provided solely for reference purposes pursuant to the terms of this Agreement. Source code may not be redistributed unless expressly provided for in this Agreement. 7. TERMINATION FOR INFRINGEMENT. Either party may terminate this Agreement immediately should any Software become, or in either party's opinion be likely to become, the subject of a claim of infringement of any intellectual property right. 8. LIMITED WARRANTY. Any implied warranties on the Software are limited to 90 days. Some states do not allow limitations on duration of an implied warranty, so the above may not apply to you. This limited warranty gives you specific legal rights. You may have others, which vary from state to state. 9. LIMITATION OF LIABILITY. Some states do not allow the exclusion of incidental or consequential damages, so some of the terms of Section 5, Limitation of Liability, above may not be applicable to you. 10. JAVA TECHNOLOGY RESTRICTIONS. You may not modify the Java Platform Interface ("JPI", identified as classes contained within the "Java" package or any subpackages of the "Java" package), by creating additional classes within the JPI or otherwise causing the addition to or modification of the classes in the JPI. In the event that you create an additional class and associated API(s) which (i) extends the functionality of the Java platform, and (ii) is exposed to third party software developers for the purpose of developing additional software which invokes such additional API, you must promptly publish broadly an accurate specification for such API for free use by all developers. You may not create, or authorize your licensees to create, additional classes, interfaces, or subpackages are in any way identified as "Java", "javax", "sun" or similar convention as specified by Sun in any naming convention designation. Refer to the appropriate version of the Java Runtime Environment binary code license (currently located at http://www.java.sun.com/jdk/index.htm]) for the availability of runtime code which may be distributed with Java applets and applications. For inquiries please contact: Sun Microsystems, Inc., 4150 Network Circle, California 95054 Page 18 of 17 EX-10.9 6 a97792a4exv10w9.txt EXHIBIT 10.9 EXHIBIT 10.9 *** CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT (INDICATED BY ASTERISKS) HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER 17 C.F.R. SECTIONS 200.80(B)(4), 200.803 AND 230.406 LINDOWSOS(TM) PARTNERSHIP LICENSE AGREEMENT LindowsOS(TM) and Lindows.com(TM) are not endorsed by nor affiliated with Microsoft Corporation(R) in any way. THIS AGREEMENT ("Agreement") is entered into by and between Lindows.com, Inc. ("Lindows.com"), a Delaware corporation with its principal office located at 9333 Genesee Drive, San Diego, CA 92121, Telephone: 858-587-6700, Facsimile: 858-587-8095, email: licenses@lindows.com, and Seagate Technology LLC, with an office located at 920 Disc Drive, CA 95066 ("Licensee"). WHEREAS, Lindows.com has the right to license LindowsOS(TM) specified below as Lindows.com Software Product; and WHEREAS, Lindows.com desires to license to Licensee and Licensee desires to receive a license to the Lindows.com Software Product for Licensee to install the Lindows.com Software Product on certain Licensee Products, as defined below, for purposes of making Composite Products, as defined below, and for Licensee to distribute such Composite Products, subject to the terms and conditions hereof; NOW, THEREFORE, in consideration of the foregoing, and in reliance on the mutual agreements contained herein, the parties agree as follows: 1. DEFINITIONS: All definitions below or elsewhere in this Agreement shall apply both to the singular and plural forms, as the context may require. 1.1 "Composite Product" means Licensee Products upon which Licensee has installed the Lindows.com Software Product as provided herein. 1.2 "Computer" means a new or refurbished by or for a System Builder personal desktop computer, laptop computer, notebook computer, or server computer. 1.3 "End-User" means an individual or organization that acquires a Composite Product either alone or installed in a Computer for personal and/or internal business use and not for reselling or distribution. 1.4 "GPL" means the GNU General Public License a current version of which is attached as Exhibit B. 1.5 "Hard Disk Drive" means a computer hardware product (a) designed to perform the operations of recording, detecting and erasing representations of any form of information, intelligence or data; (b) which includes the following elements: (i) a single enclosure containing during such operations (w) at least one rigid rotating magnetic disk, (x) at least one motor-driven spindle for engaging and rotating the magnetic disk, (y) at least one magnetic head assembly and (z) at least one actuator assembly for positioning an magnetic head across a disk, and (ii) electronic components used in operating the aforementioned elements; and (c) all the elements of which, when assembled, form an integrated unit. 1.6 "Licensed Territory" means the United States and Canada and such other territories as are mutually agreed upon by the parties. 1.7 "Licensee Branding Features" means Licensee's proprietary trade names, trade dress, service marks, trademarks, logos, and indicia of origin and other distinctive branding features. 1.8 "Licensee Product(s)" means any new or refurbished computer Hard Disk Drive designed, manufactured or refurbished, and distributed by or for Licensee. 1.9 "Light Up" means the first electronic transmission and first reporting only to Lindows.com's server of the specific registration code assigned by Lindows.com to Licensee upon (a) an End-User acquiring a Computer with a Composite Product installed on it, (b) the Computer being turned on and booting up, (c) the Lindows.com Software Product launching for the first time on such Computer, and (d) an End-User manifesting assent to the LindowsOS(TM) License Agreement. 1.10 "Lindows.com Branding Features" means Lindows.com's proprietary trade names, trade dress, service marks, trademarks, logos, and indicia of origin and other distinctive branding features specified or referenced in Exhibit E. 1.11 "Lindows.com Software Product" means certain computer programs including the LindowOS and related documentation and interface specifications developed, owned, licensed, otherwise controlled, and/or distributed by Lindows.com, as more specifically set forth at the website http://www.lindows.com/lindows_products.php or any successor website thereto, and any Updates to the foregoing computer programs and related documentation and interface specifications. 1.12 "Lindows.com Software Product Deliverables" means a master disk image of the Lindows.com Software Product as made available for delivery to Licensee via electronic download at the Builder website http://builder.lindows.com or any successor website thereto or on CD-ROM or other media. 1.13 "Proprietary Rights" means any and all rights, whether registered or unregistered, in, and with respect to, patents, copyrights, confidential information, know-how, trade secrets, moral rights, contract or licensing rights, confidential and proprietary information protected 2 under contract or otherwise under law, trademarks, trade names, trade dress, logos, service marks, rights in and to animated characters and domain names, and all other intellectual or industrial property throughout the world. 1.14 "Registration Data" means the data records submitted by an End-User of Composite Product(s) and received by Licensee as part of the registration process, including but not limited to the first name, last name, and email address of an End-User. 1.15 "Reseller" means a person or entity that distributes Composite Products directly or through other Resellers to End-Users, Composite Products directly or through other Resellers to System Builders, or Composite Products integrated into Computers directly or through other Resellers to End Users. 1.16 "Software Programs" means individual software components, each individual software component and all accompanying documentation, enhancements, upgrades and extensions thereto that were created either by Lindows.com or various individuals and entities. 1.17 "System Builder" means a third party that manufactures itself or has manufactured for its benefit and account Computers. 1.18 "Update" means a new version, new release, upgrade, update, bug fix, patch, work around, or other enhancement, modification, or revision of the Lindows.com Software Product that is designated as such by Lindows.com and made available by Lindows.com at the Lindows.com Builder website http://builder.lindows.com or any successor website thereto. 2. LINDOWS.COM SOFTWARE PRODUCT LICENSE AND RESTRICTIONS: 2.1 LICENSE GRANT: 2.1.1 GRANT: Subject to the restrictions in Section 2.2 and the other terms and conditions in this Agreement and only for the term of this Agreement, Lindows.com hereby grants to Licensee a nontransferable, nonsublicensable except as expressly set forth herein, limited right and license only in the Licensed Territory solely to: (a) Use the Lindows.com Software Product Deliverables to install one (1) copy of the Lindows.com Software Product in executable form only on each unit of the Licensee Products to create Composite Products; (b) to distribute such copy of the Lindows.com Software Product only in executable form and only as installed on and an integrated part of Composite Products directly or through a Reseller to End-Users for each End-User to install a Composite Product as part of that End-User's Computer and access and use such copy of the Lindows.com Software Product installed on such Composite Product via the Composite Product and that End-User's Computer; (c) to distribute such copy of the Lindows.com Software Product only in executable form and only as installed on and an integrated part of Composite Products directly or through a Reseller to System Builders for each System Builder to install such Composite Products in its Computers and distribute such copy of the Lindows.com Software Product only as 3 installed on and an integrated part of such Composite Product installed in such Computer directly or through a Reseller to an End-User for an End-User to access and use such copy of the Lindows.com Software Product via the Composite Product and such Computer; (d) to use the Lindows.com Software Product Deliverables and the Lindows.com Software Product to provide reasonable technical support for Composite Products to Resellers, System Builders and End Users and, to the extent necessary to provide such technical support to End-Users only, to distribute a single copy of the Lindows.com Software Product on a CD-ROM to an End-User for such End-User to re-install the Lindows.com Software Product on such End-User's Composite Product. 2.1.2 EXCLUSIVITY: All licenses granted herein are non-exclusive and Lindows.com may grant licenses to third parties who may compete with Licensee, in connection with the distribution (or other uses licensed herein) of the Lindows.com Software Product Deliverables and Lindows.com Software Product except that, for a period of six (6) months from the effective date of this Agreement, Licensee shall be the exclusive Hard Disk Drive manufacture licensed to pre-install the Lindows.com Software Product on its Hard Disk Drive products for Computers prior to such Hard Disk Drive products being installed in a Computer. 2.1.3 HAVE MADE RIGHTS: The foregoing license shall include the reasonable right for Licensee only to have its rights exercised by a third party for the benefit and account of Licensee only provided that such third party enters into a written agreement consistent with this Agreement, including but not limited to having restrictions at least as restrictive as those in Section 2.2 and confidentiality provisions at least as restrictive as those in Section 13, and Licensee hereby agrees and shall be liable for any breach of this Agreement by, or other unauthorized or wrongful act of, such third party. This Section 2.1.3 shall not apply to a third party who has entered into a sublicense agreement substantially in the form attached hereto as Exhibit A hereto for any activities of such third party covered under such sublicense agreement. 2.2 RESTRICTIONS: 2.2.1 THIRD PARTY SOFTWARE AND LICENSES: (a) GPL AND OTHER OPEN SOURCE LICENSES: Certain Software Programs, or portions thereof, included in the Lindows.com Software Product Deliverables and/or Lindows.com Software Product are distributed under the GPL, and other similar open source license agreements, which contain terms that expand (or restrict) Licensee's and/or third parties' rights to use certain portions of the Lindows.com Software Product Deliverables and Lindows.com Software Product. The GPL and other similar open source license agreements permit Licensee and/or third parties to copy, modify and redistribute certain portions of the Lindows.com Software Product Deliverables and/or Lindows.com Software Product and have access to certain of the source code. The GPL and other similar open source license agreements, on-line documentation, source code, and other information about all such software programs as of the effective date of this Agreement are available at the website www.lindows.com/licensing (http://www.lindows.com/licensing) and current versions of which are attached as Exhibit B hereto. To the extent the GPL and/or other similar open source license agreements require that Lindows.com provide rights to use, copy or modify a Software Program 4 that are broader than the rights granted elsewhere in this agreement, then the rights and restrictions in the GPL and/or other similar open source license agreement shall take precedence over the rights and restrictions set forth in this Agreement. Nothing in this Section 2.2.1(a) shall permit Licensee or any third party to use the Lindows.com Branding Features in connection with exercising the rights granted under the GPL or other similar open source license agreements. (b) THIRD PARTY AGREEMENTS: Certain Software Programs included in the Lindows.com Software Product Deliverables and/or Lindows.com Software Product are distributed under the terms of agreements with third parties ("Third Party Agreements") which may expand or limit rights to use such Software Programs as set forth herein. Such Third Party Agreements and the on-line documentation that accompanies such Software Programs, if any, as of the effective date of this Agreement are available at the website www.lindows.com/licensing (http://www.lindows.com/1icensing) and current versions of which are attached as Exhibit B hereto. To the extent any Third Party Agreements require that Lindows provide rights to use, copy or modify a Software Program that are broader or stricter than the rights granted herein, then such rights and restrictions in such Third Party Agreements shall take precedence over the rights and restrictions granted in this Agreement solely for such Software Programs. Nothing in this Section 2.2.1(b) shall permit License or any third party to use the Lindows.com Branding Features in connection with exercising the rights granted under Third Party Agreements. 2.2.2 LINDOWS.COM SOFTWARE PRODUCT DELIVERABLES AND LINDOWS.COM SOFTWARE PRODUCTS LICENSED AND NOT SOLD: This license does not allow or authorize Licensee or any Reseller, System Builder, End-User, or any other third party to, and neither Licensee nor any Reseller, System Builder, End-User, or other third party shall, sell, resell, distribute, make available, or otherwise dispose of the Lindows.com Software Product Deliverables or Lindows.com Software Products except for distribution of the Lindows.com Software Products via license or sublicense as installed on and an integrated part of a Composite Product either alone or where such Composite Product is installed in a Computer, all of the foregoing only as expressly provided in this Section 2. For clarification, any references to "sale(s)," "resale(s)," "selling" or "reselling" of the Composite Product(s) or the Lindows.com Software Product in this Agreement, refer only to the sale of the Licensee Product(s). The Lindows.com Software Product Deliverables and Lindows.com Software Product may only be licensed or sublicensed under this Agreement and only as expressly provided in Section 2. In no instance shall the Lindows.com Software Product Deliverables, Lindows.com Software Product, or any portion or element of any of the foregoing be sold under this Agreement. 2.2.3 NO CHARGE FOR LINDOWS.COM SOFTWARE PRODUCTS: Licensee shall not, and shall require in any agreement it enters into with Resellers, System Builders, contractors, and any other third party that such Resellers, System Builders, contractors, and other third parties shall not, charge Resellers, System Builders, End-Users, or any other third party directly or indirectly for the Lindows.com Software Product Deliverables and Lindows.com Software Product. 2.2.4 COMPATIBILITY OF LINDOWS.COM SOFTWARE PRODUCT: Licensee shall test and take other commercially reasonable measures to ensure compatibility of the Lindows.com Software Product with Licensee Products and that the Composite Products 5 function correctly. Licensee shall, and shall require in any agreement it enters into with Resellers, System Builders, contractors, and any other third party that such System Builders shall, test and take other commercially reasonable measures to ensure compatibility of the Lindows.com Software Product with Computers and that Computers containing Composite Products function correctly. 2.2.5 GENERAL RESTRICTIONS: Licensee shall not, and shall require in any agreement it enters into with Resellers, System Builders, contractors, and any other third party that Resellers, System Builders, contractors, and any other third party shall not: (i) Copy any Lindows.com Software Product Deliverables or Lindows.com Software Product or any portion or element of either of the foregoing except as and to the extent expressly authorized herein; (ii) translate, adapt, enhance, or otherwise modify the Lindows.com Software Product Deliverables or Lindows.com Software Product or any portion or element of either except as and only to the extent expressly authorized herein and except as and to the extent reverse engineering is expressly permitted by applicable local law; (iii) decompile, disassemble, or reverse engineer, or extract ideas, algorithms, procedures, workflows or hierarchies, from the Lindows.com Software Product Deliverables or Lindows.com Software Product or any portion or element of either, or otherwise use the Lindows.com Software Product Deliverables or Lindows.com Software Product or any portion or element of either for the purpose of creating another product or service except as and to the extent reverse engineering is expressly permitted by applicable local law; or (iv) use the Lindows.com Software Product Deliverables or Lindows.com Software Product or any portion or element of either to provide any facility management, service bureau, or similar services to third parties. Licensee shall not make, and in any agreement it enters into with Resellers, System Builders, contractors, and any other third party shall prohibit Resellers, System Builders, contractors, and any other third parties from making, (a) any representation or warranty on behalf of Lindows.com; (b) any representation concerning the quality, performance or other characteristics of the Lindows.com Software Product Deliverables or Lindows.com Software Product or any portion or element of either; or (c) any commitment to modify any of the Lindows.com Software Product Deliverables or Lindows.com Software Product. 2.2.6 BUILDER AND END-USER LICENSE & REQUIREMENTS: (a) BUILDER AGREEMENT FOR RESELLERS AND BUILDERS AND LINDOWSOS(TM) LICENSE AGREEMENT FOR END-USERS: Licensee shall include the LindowsOS Builder License Agreement ("Builder Agreement") in substantially its current form or such other form as mutually agreed upon by the parties (a current version of which is located at http://www.lindows.com/builder and attached as part of Exhibit C hereto) and the LindowsOS License Agreement ("Lindows.com EULA") (a current of which is located at http://www.lindows.com/eula and attached as part of Exhibit C hereto) in any distribution of a Lindows.com Software Product or a Composite Product, whether such Composite Product is distributed alone or installed in and as part of a Computer. In addition, Licensee shall: (a) place and affix in a conspicuous place on (i) bulk packaging and (ii) individual unit packaging for Composite Products and/or the Composite Product itself a notice that any use, distribution or other disposition of the Lindows.com Software Product and a Composite Product other than by an End User is subject to the Builder Agreement and that any use, distribution or other disposition of the Lindows.com Software Product and a Composite Product by an End User is subject to the Lindows.com EULA or such other notice as is mutually agreed upon by the 6 parties; (b) include in sufficient quantities and in bulk and/or individual unit packaging for Composite Products such that each Reseller and System Builder receives at least one copy per shipment the Builder Agreement as a "shrink-wrapped" or "click-wrapped" license agreement that requires a Reseller and System Builder to view in full and indicate assent either by opening the physical product package or by clicking on a designated button, respectively; and (c) include the Lindows.com EULA as a "shrink-wrapped" or "click-wrapped" license agreement that requires the End User to view in full and indicate assent either by opening the physical product package or by clicking on a designated button, respectively. (b) NO WARRANTIES TO END-USERS FOR LINDOWS.COM SOFTWARE PRODUCT: In connection with End-Users, Licensee shall not, and shall require in any agreement it enters into with Resellers, System Builders, contractors, and any other third party that Resellers, System Builders, contractors, and any other third party shall not, make any representation or warranty binding or purporting to bind Lindows.com in connection with the performance, condition, title, non-infringement, merchantability, fitness for a particular purpose, system integration, or data accuracy of the Lindows.com Software Product Deliverables, Lindows.com Software Product, and/or Composite Product(s), and Licensee shall, and shall require in any agreement it enters into with Resellers, System Builders, contractors, and any other third party that Resellers, System Builders, contractors, and any other third party shall, disclaim all warranties implied by law to the maximum extent permitted by applicable law. If Licensee grants an express warranty in connection with End-Users regarding the performance and/or condition of the Composite Product(s), such express warranty shall expressly exclude the Lindows.com Software Product installed on such Composite Product which shall not be covered under such warranty. 2.2.7 EXPORT COMPLIANCE AND REGULATORY APPROVALS: The Lindows.com Software Product Deliverables and Lindows.com Software Products, including associated technical data, are subject to United States export control laws, and may be subject to export or import regulation restrictions in other countries. Notwithstanding anything else in this Agreement, Licensee shall, and shall require in any agreement it enters into with Resellers, System Builders, contractors, and any other third party that Resellers, System Builders, contractors, and any other third party shall, comply strictly with all such regulations and obtain all required licenses and/or other clearances to export, re-export, or import, as applicable, the Lindows.com Software Product Deliverables, Lindows.com Software Products, and any associated technical data to either of the foregoing, including but not limited to where the Lindows.com Software Products are installed on Composite Product(s) and/or Computers. Licensee shall, at its own expense, obtain and arrange for the maintenance in full force and effect of all governmental approvals, consents, licenses, authorizations, declarations, filings and registrations as may be necessary for the performance of the terms and conditions of this Agreement, including without limitation, fair trade approvals. 2.2.8 BRANDING REQUIREMENTS, BRANDING LICENSE: Licensee shall incorporate Lindows.com Branding Features and designated Lindows.com copyright notice without modification into the Composite Product(s). Licensee is not authorized to incorporate Licensee Branding Features into the Lindows.com Software Product, but Licensee may incorporate Licensee Branding Features in its reasonable discretion into Licensee web pages that feature Composite Product(s). All distribution rights and licenses granted herein for Composite 7 Product(s) are subject to the forgoing branding requirements. Subject to the terms and conditions hereof, and only for term hereof, Lindows.com hereby grants to Licensee the limited nontransferable right and license to publicly display pursuant to Lindows.com's Trademark Guidelines set forth in Exhibit E attached hereto Lindows.com Branding Features on Composite Product(s) and for purposes of promoting and marketing Composite Product(s). Licensee shall not remove or destroy any Lindows Branding Features, proprietary markings, confidential legends placed upon or contained within the Lindows.com Software Product Deliverables or Lindows.com Software Products or any related materials. 2.3 RESERVATION OF RIGHTS: All rights to the Lindows.com Software Product and Lindows.com Branding Features not expressly granted to Licensee in Sections 2.1 and 2.2.8 are expressly reserved by Lindows.com. 3. SUPPORT OBLIGATIONS: Lindows.com shall perform the following obligations [***]: 3.1 GENERAL SUPPORT OPTIONS: Subject to the terms and conditions governing such support web site, Lindows.com will provide support to End-Users through the website Support.Lindows.com (http://support.lindows.com) or any successor website thereto. Such support shall consist exclusively of 24/7 access to frequently asked questions ("FAQs"), a searchable knowledge base, forums, and the opportunity to provide feedback. [***] 3.2 LICENSEE SUPPORT OPTIONS: Subject to the terms and conditions governing such support web site, Licensee may use the website Support.Lindows.com or any successor website thereto, or e-mail Lindows.com at builderhelp@lindows.com, where their e-mail will be reviewed and responded to by Lindows.com customer support personnel. [***] 3.3 SYSTEM BUILDER SUPPORT OPTIONS: Subject to the terms and conditions governing such support web site, System Builders may use the website Support.Lindows.com or any successor website thereto, [***]. 3.4 [***] 3.5 [***]. 4. PAYMENT AND DELIVERY: 4.1 LINDOWS FEES: 4.1.1 MONTHLY LICENSING FEE: Licensee shall pay to Lindows.com a fee of [***] during the term of this Agreement. Such fee shall be [***]. 4.1.2 PAYMENT METHODS AND TERMS: Payments are [***]. A late fee of [***], shall be assessed against overdue amounts more than [***] past due. 4.1.3 RIGHT TO CHANGE TERMS: Lindows.com reserves the right to change these terms at any time at its sole discretion and upon notice to Licensee. If 8 Lindows.com changes the terms, the Licensee may, in its sole discretion, continue under their existing terms through the balance of their agreement, or change to the new terms immediately. 4.1.4 MOST FAVORED CUSTOMER. Lindows.com represents that the terms provided by Lindows.com under this Agreement are in the aggregate at least equivalent to the terms being provided by it to any present hard disk manufacturer customer of Lindows.com involving substantially similar volumes of products, generating substantially similar revenue, and having a substantially similar term. If during the term of this Agreement Lindows.com enters into an agreement with any hard disk manufacturer customer providing that customer with more favorable terms in the aggregate than those presently offered to Licensee, then: (a) Lindows.com will, within thirty (30) calendar days after the effective date of the offering, notify Licensee of the offering; and (b), at the option of Licensee, this Agreement will be deemed to be automatically amended, effective retroactively to the effective date of the more favorable offering, and Lindows.com will provide substantially similar terms to Licensee. 4.1.5 DELIVERY: Lindows.com will deliver the Lindows.com Software Product Deliverables (including delivering all related documentation and manuals) to Licensee on or before the effective date of this Agreement. Lindows.com will electronically deliver to Licensee each Update that becomes available as soon as it is released. 4.2 [***]: 4.2.1 [***]: 4.2.2 [***] 4.3 TAXES: Licensee acknowledges and agrees that Lindows.com does not take any responsibility to calculate, report, or remit sales or use taxes which may be assessed, due or owing to the taxing authorities of any jurisdiction for transactions that arise in connection with this Agreement. Licensee shall pay all taxes, duties and levies directly imposed by all foreign, federal, state, local or other taxing authorities (including, without limitation, export, sales, use, excise, and value-added taxes) based on the transactions or payments under this Agreement, other than taxes imposed or based on Lindows.com's net income. 5. LICENSEE'S RESALE POLICIES: Licensee is free to determine its own pricing for Composite Product(s). Licensee is free to determine its own resale policies for Composite Product(s) so long as such resale policies do not violate this Agreement or applicable laws, rules and regulations. 6. REGISTRATION DATA: Each of the parties represents and warrants that it shall not violate any rights of any person or entity, including, without limitation, rights of publicity, privacy or personality, through such party's collection or use of Registration Data or other personal or private data. 7. LINDOWS.COM REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION 7.1 LIMITED PERFORMANCE WARRANTY: Beginning upon delivery by Lindows.com of the Lindows.com Software Product Deliverables and continuing for a period of 9 [***], Lindows.com warrants to Licensee that such Lindows.com Software Product Deliverables will conform to, and operate materially in accordance with, the documentation located at www.lindows.com/40, a current version of which is attached hereto as Exhibit D. Lindows.com will use commercially reasonable efforts to correct non-conformities of the Lindows.com Software Product Deliverables or replace non-conforming Lindow.com Software Product Deliverables within a commercially reasonable time, not to exceed [***], after being notified in writing of the non-conformity by Licensee. THIS WARRANTY DOES NOT APPLY TO LINDOWS.COM SOFTWARE PRODUCT MODIFIED BY LICENSEE, UNLESS SUCH MODIFICATION WAS AUTHORIZED BY LINDOWS.COM, OR THAT HAVE BEEN INCORPORATED, INTEGRATED OR MERGED WITH OTHER CODE BY OR FOR LICENSEE. NOTWITHSTANDING ANYTHING ELSE HEREIN, LICENSEE'S SOLE AND EXCLUSIVE REMEDY AND LINDOWS.COM'S SOLE AND EXCLUSIVE LIABILITY FOR BREACH OF THIS WARRANTY SHALL BE THE REPAIR OR REPLACEMENT OF THE DEFECTIVE OR NON-CONFORMING LINDOWS.COM SOFTWARE PRODUCT DELIVERABLES. 7.2 LINDOWS.COM INDEMNIFICATION. Lindows.com shall defend at its sole cost any claim or proceeding brought by a third party against Licensee, its officers, directors, agents, and employees ("Licensee Indemnified Parties"), shall have the right at its option and sole cost to settle such claim or action, and shall pay any final award of damages issued against the Licensee Indemnified Parties by a court of competent jurisdiction, to the extent such claim or proceeding is based on a claim that the Licensee Indemnified Parties' authorized use sublicense or distribution of the Lindows.com Software Product directly infringes or misappropriates a third party Proprietary Right (a "Licensee Claim"), provided that: (a) upon becoming aware of such Licensee Claim, the Licensee Indemnified Parties promptly notify Lindows.com in writing of the Licensee Claim; (b) Lindows.com shall have exclusive control of the defense and/or settlement of any action to which the Licensee Claim relates; and (c) the License Indemnified Parties cooperate with Lindows.com in every reasonable way to facilitate such defense or settlement. Lindows.com shall not settle any claim without the Licensee Indemnified Parties' prior written consent (which shall not be unreasonable withheld, conditioned or delayed). Notwithstanding any of the foregoing, the Licensee Indemnified Parties shall have the right, in their absolute discretion and at their sole cost, to employ attorneys of their own choice and to institute or defend any such Licensee Claim. Lindows.com's obligations under this Section 7.2 shall not apply to the extent any Licensee Claim arises from (1) any modifications made by the Licensee Indemnified Parties or any third party to the Lindows.com Software Product as and in the form delivered by Lindows.com to Licensee under this Agreement, (2) the Licensee Indemnified Parties' or a third party's failure to use the Lindows.com Software Product in accordance with the provisions of this Agreement, and/or (3) the combination or use of the Lindows.com Software Product, or any portion thereof with software, hardware or materials not provided by Lindows.com. Lindows.com shall have no liability for any use of the Lindows.com Software Product other than as expressly set forth in this Agreement and the foregoing states Lindows.com's sole indemnification obligations and entire liability to Licensee with respect thereto. 7.3 THREATENED INFRINGEMENT. If the Lindows.com Software Product becomes subject to a Licensee Claim relating to Proprietary Rights or in the event that Lindows.com wishes to minimize its potential liability hereunder, then Lindows.com may, at 10 Lindows.com's option and at no expense to Licensee, (i) obtain for Licensee the right to continue to exercise the license granted; (ii) substitute functionally equivalent non-infringing Lindows.com Software Product; or (iii) modify the Lindows.com Software Product to make it non-infringing but remaining functionally equivalent. 8. WARRANTY DISCLAIMER: EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, TO THE MAXIMUM EXTENT ALLOWED BY LAW, LINDOWS.COM ON BEHALF OF ITSELF AND ITS LICENSORS HEREBY DISCLAIMS ALL OTHER WARRANTIES, BOTH EXPRESS AND IMPLIED. LINDOWS DISCLAIMS, ON BEHALF OF ITSELF AND ITS LICENSORS, IMPLIED WARRANTIES OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, SYSTEM INTEGRATION, AND DATA ACCURACY. LICENSEE ACKNOWLEDGES THAT IT HAS NOT RELIED ON ANY REPRESENTATION THAT IS NOT EXPRESSLY SET OUT HEREIN. 9. LICENSEE INDEMNIFICATION: Licensee shall defend at its sole cost any claim or proceeding brought by a third party against Lindows.com, its officers, directors, agents and employees ("Lindows.com Indemnified Parties"), shall have the right at its option and sole cost to settle such claim or action, and shall pay any final award of damages issued against the Lindows.com Indemnified Parties by a court of competent jurisdiction, to the extent that such claim or proceeding arises out of the Composite Product (except to the extent that Lindows.com is required to indemnify the Licensee Indemnified Parties pursuant to Section 7.2 above) (each, a "Lindows.com Claim"), provided that: (a) upon becoming aware of such Lindows.com Claim, the Lindows.com Indemnified Parties promptly notify Licensee in writing of the Lindows.com Claim; (b) Licensee shall have exclusive control of the settlement or defense of any action to which the Lindows.com Claim relates; and (c) the Lindows.com Indemnified Parties cooperates with Licensee in every reasonable way to facilitate such defense or settlement. Licensee shall not settle any claim without the Lindows.com Indemnified Parties' prior written consent (which shall not be unreasonable withheld, conditioned or delayed). Notwithstanding any of the foregoing, the Lindows.com Indemnified Parties shall have the right, in their absolute discretion and at their sole cost, to employ attorneys of their own choice and to institute or defend any such Lindows.com Claim. 10. DISCLAIMER OF DAMAGES: EXCEPT FOR THE INDEMNIFICATION OBLIGATIONS EXPRESSLY SET FORTH IN SECTIONS 7.2 AND 9 OF THIS AGREEMENT AND BREACH OF THE CONFIDENTIALITY PROVISIONS IN SECTION 13, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY OTHER PERSON, WHETHER IN CONTRACT OR IN TORT (INCLUDING NEGLIGENCE), OR ANY OTHER LEGAL THEORY (INCLUDING STRICT LIABILITY), FOR ANY INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE, STATUTORY OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER, INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF GOOD WILL, LOSS OF DATA, LOSS OF PERFORMANCE, LOST REVENUE, LOST PROSPECTIVE ECONOMIC ADVANTAGE OR LOST PROFIT ARISING FROM ANY PERFORMANCE OR FAILURE TO PERFORM UNDER THIS AGREEMENT, IRRESPECTIVE OF WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE OR SUCH PARTY WAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR THE INDEMNIFICATION OBLIGATIONS EXPRESSLY SET 11 FORTH IN SECTIONS 7.2 AND 9 OF THIS AGREEMENT, BREACH OF SECTION 2.1, 2.2.5, 2.2.6 OR 2.2.8 BY LICENSEE AND BREACH OF THE CONFIDENTIALITY PROVISIONS IN SECTION 13, EITHER PARTY'S MAXIMUM AGGREGATE LIABILITY OF ANY KIND ARISING OUT OF THIS AGREEMENT SHALL BE LIMITED TO THE GREATER OF (A) ONE HUNDRED THOUSAND DOLLARS ($100,000) OR (B) THE TOTAL AMOUNT OF LICENSING FEES ACTUALLY PAID BY LICENSEE TO LINDOWS.COM HEREUNDER. 11. OWNERSHIP OF LINDOWS.COM SOFTWARE PRODUCT: Subject to the license granted in Section 2.1, all right, title and interest in and to the Lindows.com Software Product Deliverables and the Lindows.com Software Products and all Proprietary Rights in and to the Lindows.com Software Product Deliverables and the Lindows.com Software Products shall remain in and be the sole and exclusive property of Lindows.com and/or its licensors. 12. OWNERSHIP OF LINDOWS.COM BRANDING FEATURES: Subject to the license granted in Section 2.2.8, all right, title and interest in and to the Lindows.com Branding Features and all Proprietary Rights in and to the Lindows.com Branding Features shall remain in and be the sole and exclusive property of Lindows.com. Subject to the license granted in Section 2.2.8, Licensee hereby acknowledges and agrees that Licensee has no rights, title or interest in or to the Lindows.com Branding Features, and all benefits from the use of the Lindows.com Branding Features shall automatically vest in Lindows.com. Licensee shall not (i) apply for registration of the Lindows.com Branding Features (or any marks or features confusingly similar thereto) anywhere in the world, (ii) alter, modify or change the Lindows.com Branding Features in any manner, (iii) use any of the Lindows.com Branding Features, except as expressly authorized herein or by prior written approval of the owner thereof, or (iv) take any action inconsistent with Lindows.com's ownership of the Lindows.com Branding Features. 13. CONFIDENTIALITY: 13.1 CONFIDENTIAL INFORMATION: Each party acknowledges that, in the course of exercising its rights or performing its obligations under this Agreement, it may obtain confidential information relating to the other party, its licensors or licensees, contractors, agents, customers and/or end users ("Confidential Information"). Such Confidential Information shall include, without limitation: (i) The source code of the Lindows.com Software Product Deliverables and Lindows.com Software Products (including any and all Updates), the terms of this Agreement, and as it relates to the Lindows.com Software Product Deliverables and Lindows.com Software Products, trade secrets, know-how, inventions (whether or not patentable), techniques, processes, programs, ideas, algorithms, formulas, schematics, testing procedures, software design and architecture, computer code, internal documentation, design and functional specifications, product requirements, problem reports and performance information, software documents and other technical, business, product, marketing and financial information, plans and data; (ii) any information designated by either party as confidential in writing or, if disclosed orally, reduced to writing and designated as confidential within thirty (30) days; and (iii) any nonpublic information regarding Licensee, any sub-licensees, Licensee's products or the Composite Products, including but not limited to, technical data, product design and development, sales information, quantity and kind of products/Composite Products sold, prices and methods of pricing, marketing techniques and plans, product returns, unannounced products, 12 product and process information and any other information which if disclosed might be competitively detrimental to Licensee.. Neither party may use the Confidential Information of the other except for the purposes of this Agreement and shall protect such Confidential Information from disclosure to others, using the same degree of care used to protect its own proprietary information of like importance, but in no event less than a reasonable degree of care. The parties may disclose Confidential Information received hereunder only as reasonably required to perform its obligations or exercise its rights under this Agreement and only to third parties, its employees, and its agents who have a need to know for such purposes and who are bound by signed, written agreements to protect the received Confidential Information from unauthorized use and disclosure at least as protective as this Section 13. 13.2 LIMITATIONS: The restrictions of this Agreement on use and disclosure of Confidential Information shall not apply to information that: (i) was in the possession or control of the receiving party at the time of its disclosure by the disclosing party; (ii) is or becomes publicly known through no wrongful act; (iii) is received from a third party free to disclose it without any confidentiality obligation; or (iv) is independently developed without access to Confidential Information. 13.3 DISCLOSURE REQUIRED BY LAW: In the event a party is required by law, regulation or court order to disclose Confidential Information, it will promptly notify the other party in writing prior to making any such disclosure in order to facilitate the other party's ability to seek a protective order or other appropriate remedy from the appropriate body. Each Party further agrees that if it is not successful in precluding the requesting legal body from requiring the disclosure of the Confidential Information, it will furnish only that portion of the Confidential Information which is legally required and will exercise all reasonable efforts to obtain reliable assurances that confidential treatment will be accorded the Confidential Information. Any Confidential Information released under this Section 13 shall remain Confidential Information or all other purposes. 13.4 INJUNCTIVE RELIEF: The parties hereby agree that any breach of any provision of this Agreement regarding confidentiality or protection of Proprietary Rights would constitute irreparable harm, and that the aggrieved party shall be entitled to specific performance and/or injunctive relief in addition to other remedies at law or in equity. This Section 13.4 shall not be construed to preclude either party from seeking equitable relief under any other Section of this Agreement. 14. TERM AND TERMINATION: 14.1 TERM OF AGREEMENT: The term of this Agreement shall commence as of the effective date hereof and shall continue for twelve (12) months, unless terminated earlier by either of the parties as described below. 14.2 TERMINATION FOR CAUSE: Either party may terminate this Agreement and all rights granted under this Agreement upon written notice to the other party if (a) the other party breaches any material term or condition of this Agreement and fails to correct such breach within thirty (30) days following written notice specifying such breach, or (b) the other party applies for or consents to the appointment of a receiver, trustee or liquidator for substantially all 13 of its assets, or such a receiver, trustee or liquidator is appointed for the other party; or the other party has filed against it an involuntary petition for bankruptcy that has not been dismissed within sixty (60) days thereof, or the other party files a voluntary petition for bankruptcy or a petition or answer seeking reorganization, becomes or is insolvent or bankrupt, admits in writing its inability to pay its debts as they mature, or makes an assignment for the benefit of creditors. 14.3 TERMINATION FOR CONVENIENCE. Either party may terminate this Agreement for any reason by providing 30 days written notice to the other party. 14.4 EFFECT OF EXPIRATION OF TERMINATION: Upon the expiration or termination hereof, Licensee shall cease distributing Composite Products; provided that, except where Lindows.com terminated this Agreement pursuant to Section 14.2, Licensee shall have the right to [***] 15. CHOICE OF LAW; JURISDICTION AND VENUE; ARBITRATION: This Agreement shall be construed under the laws of the State of California, without regard to its conflicts of law rules and without regard to the United Nations Convention on the International Sale of Goods. The parties hereby submit to the exclusive jurisdiction of, and waive any venue objections against, the United States District Court for the Southern District of California and the Courts of the State of California, San Diego County, in any litigation arising out of the Agreement. Except for actions to seek equitable relief and to enforce an arbitrator's decision hereunder, all disputes, controversies, or claims arising out of or relating to this Agreement or a breach thereof shall be submitted to and finally resolved by arbitration in San Diego County under the rules of the American Arbitration Association ("AAA") then in effect. There shall be one arbitrator, and such arbitrator shall be chosen by mutual agreement of the parties in accordance with AAA rules. The findings of the arbitrator shall be final and binding on the parties, and may be entered in any court of competent jurisdiction for enforcement. 16. NOTICES: Any notice or communication required or permitted to be given hereunder may be delivered by hand, deposited with an overnight courier, sent by email or facsimile (provided delivery is confirmed), or U.S. Mail (registered or certified only), return receipt requested, in each case to the address set forth on the initial page hereof or at such other addresses as shall be designated in writing by either party to the other in accordance with this Section 16. Such notice will be deemed to be given when received. 17. ASSIGNMENT: Neither Party may assign, whether by operation of law or otherwise, this Agreement or any right or interest under this Agreement, nor delegate any work or obligation to be performed under this Agreement, without the other party's written consent; provided, however, that either party may assign this Agreement to any of its affiliates controlling, controlled by, or under common control with such party or pursuant to a transfer of all or substantially all of such party's business and assets, whether by merger, sale of assets, sale of stock, or otherwise. Any attempted assignment or delegation in contravention of this Section 17 shall be void and ineffective. 18. CONTUNUING OBLIGATIONS: The following obligations shall survive the expiration or termination hereof: (i) Any and all warranty disclaimers, limitations of liability and indemnities granted by either party herein, (ii) any covenant granted herein for the purpose of 14 determining ownership of, or protecting, the Proprietary Rights, including without limitation, the confidential information of either party, or any remedy for breach thereof, (iii) the payment of taxes, duties, or any money to Lindows.com hereunder and (iv) Sections 1, 2.2, 4.2, 4.3, 7, 8, 9, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 24, and 25. 19. INDEPENDENT CONTRACTORS: The relationship of the parties is that of independent contractor, and nothing herein shall be construed to create a partnership, joint venture, franchise, employment, or agency relationship between the parties. Neither party has any authority to enter into agreements of any kind on behalf of the other party and has no power or authority to bind or obligate the other party in any manner to any third party. 20. FORCE MAJEURE: Neither Lindows.com nor Licensee shall be liable for damages for any delay or failure of delivery, except for any monthly licensing fees due, arising out of causes beyond their reasonable control and without their fault or negligence, including, but not limited to, Acts of God, acts of civil or military authority, fires, riots, acts of terrorism, wars, embargoes, or communications failures. Notwithstanding anything to the contrary contained herein, if either party is unable to perform hereunder for a period of thirty (30) consecutive days, then the other party may terminate this Agreement immediately without liability by ten (10) days written notice to the other. 21. TRADEMARKS: "Lindows.comTM" and "LindowsOS(TM)" are registered trademarks of Lindows.com, Inc., All Rights Reserved. "Linux" is a registered trademark of Linus Torvalds. All other trademarks are the property of their respective owners. 22. PUBLICITY: Neither party is permitted to use the name of the other party in publicity releases, advertising, or any similar activity without the prior written consent of the other party. 23. INSURANCE: 23.1 MINIMUM INSURANCE REQUIREMENTS: Lindows.com will maintain at its expense the following minimum insurance coverage: (a) commercial general liability insurance (including but not limited to products/completed operations and contractual liability) with limits of at least [***] combined single limit for each occurrence; (b) excess liability insurance in the umbrella form with a combined single limit of at least [***]. 23.2 PROOF OF INSURANCE: Lindows.com will give Licensee certificates of insurance upon the execution of this Agreement. Each insurance policy must state that it cannot be canceled without at least ten (10) days prior written notice to Licensee. Lindows.com's insurance must be primary and non-contributory from Licensee or Licensee's insurance program. 24. MISCELLANEOUS: This Agreement constitutes the entire understanding of the parties with respect to the subject matter of this Agreement and merges all prior communications, understandings, and agreements. This Agreement may be modified only by a written agreement signed by the parties. The failure of either party to enforce at any time any of the provisions 15 hereof shall not be a waiver of such provision, or any other provision, or of the right of such party thereafter to enforce any provision hereof. In any action to enforce this Agreement, the prevailing party shall be entitled to reasonable costs and attorneys' fees. If any provision specified in this Agreement shall be invalid under any applicable law, the invalid provision, or portion thereof, shall be struck and the remainder, if any, shall be deemed enforceable to the extent permitted under applicable law, and the remaining provisions of this Agreement shall be given effect in accordance with their terms. IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives. SEAGATE TECHNOLOGY LLC LINDOWS.COM, INC. Signature: /s/ William L. Hudson Signature: /s/ Kevin Carmony ----------------------- ---------------------------- Name: William L. Hudson Name: Kevin Carmony Title: Executive VP, General Counsel Title: President / COO 16 EXHIBIT 10.9 Exhibit A LindowsOS(TM) Sublicense Agreement LINDOWSOS(TM) SUBLICENSE AGREEMENT This LindowsOS(TM) Sublicense Agreement (the "Agreement") is entered into as of __________, _____ (the "Effective Date"), by and between Seagate Technology LLC, a Delaware Limited Liability Company with its principal office located at 920 Disc Drive, CA 95066 ("Sublicensor"), and ________________________, a _____________ corporation, with its principal office located at _________________________ ("Sublicensee"). WHEREAS, Sublicensor has the limited right to sublicense LindowsOS(TM) pursuant to a license agreement (the "Lindows.com Partnership License Agreement") with Lindows.com, Inc. ("Lindows.com"); and WHEREAS, Sublicensor desires to sublicense to Sublicensee and Sublicensee desires to receive a sublicense to distribute in object code as an integrated part of a Composite Product (as defined in Section 1 below) the Lindows.com Software Product (as defined in Section 1 below) pursuant to the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the foregoing, and in reliance on the mutual agreements contained herein, the parties hereby agree as follows: 1. DEFINITIONS. All definitions herein or elsewhere in this Agreement shall apply both to the singular and plural forms, as the context may require. 1.1 "Composite Product" means Sublicensor Products on which the Lindows.com Product Software has been installed as provided herein. 1.2 "Computer" means a new, or refurbished by or for a System Builder, personal desktop computer, laptop computer, notebook computer, or server computer. 1.3 "End-User" means an individual or organization that acquires a Composite Product either alone or installed in a Computer for personal and/or internal business use and not for reselling or distribution. 1.4 "Hard Disk Drive" means a computer hardware product (a) designed to perform the operations of recording, detecting and erasing representations of any form of information, intelligence or data; (b) which includes the following elements: (i) a single enclosure containing during such operations (w) at least one rigid rotating magnetic disk, (x) at least one motor-driven spindle for engaging and rotating the magnetic disk, (y) at least one magnetic head assembly and (z) at least one actuator assembly for positioning an magnetic head across a disk, and (ii) electronic components used in operating the aforementioned elements; and (c) all the elements of which, when assembled, form an integrated unit. 1.5 "Sublicensor Product(s)" means any new or refurbished computer Hard Disk Drive designed, manufactured or refurbished, and distributed by or for Sublicensor. 1.6 "Lindows.com Branding Features" means Lindows.com's proprietary trade names, trade dress, service marks, trademarks, logos, and indicia of origin and other distinctive branding features specified in Exhibit A hereto. 1.7 "Lindows.com Software Product" means certain computer programs including the LindowsOS(TM) and related documentation and interface specifications developed, owned, licensed, otherwise controlled, and/or distributed by Lindows.com, as more specifically set forth at the website http://www.lindows.com/lindows_products.php or any successor website thereto, and any 1 Updates to the foregoing computer programs and related documentation and interface specifications. 1.8 "Lindows.com Software Product Master Disk" means a master disk image of the Lindows.com Software Product as made available to Sublicensee by electronic download at http://builder.lindows.com or any successor website thereto or on CD-ROM or other media. 1.9 "Proprietary Rights" means any and all rights, whether registered or unregistered, in, and with respect to, patents, copyrights, confidential information, know-how, trade secrets, moral rights, contract or licensing rights, confidential and proprietary information protected under contract or otherwise under law, trademarks, trade names, trade dress, logos, service marks, rights in and to animated characters and domain names, and all other intellectual or industrial property throughout the world. 1.10 "Reseller" means a person or entity that distributes Composite Products directly or through other Resellers to End-Users, Composite Products directly or through other Resellers to System Builders, or Composite Products integrated into Computers directly or through other Resellers to End-Users. 1.11 "System Builder" means a third party that manufactures itself or has manufactured for its benefit and account Computers. 1.12 "Update" means a new version, new release, upgrade, update, bug fix, patch, work around, or other enhancement, modification, or revision of the Lindows.com Software Product that is designated as such by Lindows.com, made available by Lindows.com at the Lindows.com Builder website http://builder.lindows.com or any successor website thereto, and provided by Sublicensor to Sublicensee pursuant to this Agreement. 2. INSTALLATION OF LINDOWS.COM SOFTWARE PRODUCT. Subject to Sections 3.2, 4.5, 4.6, 5 and 6 and the other terms and conditions of this Agreement and only to the extent and as expressly and specifically authorized and requested in writing in advance on a case-by-case basis by Sublicensor, Sublicensee (and no other third party on any basis) is hereby authorized in the United States and Canada on a non-exclusive, non-sublicensable, non-transferable and limited basis to and shall use the Lindows.com Software Product Master Disk provided by Sublicensor to install the Lindows.com Software Product on Sublicensor Products only to create Composite Products. Sublicensee is not authorized to use the Lindow.com Software Product Master Disk and the Lindows.com Software Product except as expressly set forth in the foregoing sentence. Sublicensee shall test and take other commercially reasonable measures to ensure compatibility of the Lindows.com Software Products with Sublicensor Products and that Composite Products function correctly. 3. Express Sublicense. 3.1 GRANT. Subject to the restrictions set forth in Section 3.2 below and the other terms and conditions of this Agreement, Sublicensor hereby grants to Sublicensee a non-exclusive, nontransferable, nonsublicensable (except as expressly provided herein), limited right and sublicense only in the United States and Canada solely (a) to distribute the Lindows.com Software Product only in executable form and only as installed on and as an integrated part of a Composite Product to Resellers and System Builders with a Reseller and Builder Agreement (as defined in Section 4.3 below) and End-Users with a Lindows.com EULA (as defined in Section 4.3 below) and (b) to publicly display Lindows.com Branding Features pursuant to Lindows.com's Trademark Guidelines attached hereto as Exhibit A solely on Composite Product(s) and to promote and market Composite Product(s) ((a) through (b), individually and collectively, the "Sublicense"). The foregoing license does not include the right for Sublicensee to have its rights exercised by a third party for its benefit and account or on any other basis. 2 3.2 RESTRICTIONS. Subject to Section 4.6 below, Sublicensee will not: (a) copy, reproduce, distribute or otherwise make available the Lindows.com Software Product Master Disk or any Lindows.com Software Product or any portion or element thereof except as and to the extent expressly authorized herein and by Sublicensor; (b) translate, adapt, enhance, create derivative works of or otherwise modify the Lindows.com Software Product Master Disk or any Lindows.com Software Product, except as expressly set forth in Section 3.1 above, (c) decompile, disassemble or reverse engineer (except as and to the extent permitted by applicable local law), or extract ideas, algorithms, procedures, workflows or hierarchies from, the Lindows.com Software Product Master Disk or any Lindows.com Software Product or any portion or element thereof, (d) use the Lindows.com Software Product Master Disk or the Lindows.com Software Products or any portion or element thereof to provide facility management, service bureau or similar services to third parties; or (e) reproduce or use in any manner (except solely as and to the extent expressly authorized under Sections 2 and 3.1(b) above), or remove, destroy, obscure or alter any Lindows.com Branding Features or any related materials placed on or contained within the Lindows.com Software Product Master Disk, any Lindows.com Software Product, or any Composite Product. 4. Sublicensee Duties. 4.1 COMPATIBILITY TESTING. Sublicensee shall require in any agreement it enters into with Resellers, System Builders, contractors or any other third party that such Resellers, System Builders, contractors and any other third party test and take other commercially reasonable measures to ensure the compatibility of the Lindows.com Software Product with Computers and that Computers containing the Composite Products function correctly (as applicable). 4.2 NO CHARGE FOR LINDOWS.COM SOFTWARE PRODUCTS. Sublicensee shall not charge any Reseller, System Builder, End User or other party directly or indirectly for the Lindows.com Software Product. 4.3 BUILDER LICENSE AGREEMENT AND END USER LICENSE AGREEMENT. Sublicensee shall include the LindowsOS Builder License Agreement ("Builder Agreement") currently located at http://www.lindows.com/____ and the LindowsOS License Agreement ("Lindows.com EULA") currently located at http://www.lindows.com/eula in any distribution of a Lindows.com Software Product or a Composite Product, whether such Composite Product is distributed alone or installed in and as part of a Computer. In addition, Sublicensee shall: (a) place and affix in a conspicuous place on bulk and individual unit packaging for Composite Products a notice that any use, distribution or other disposition of the Lindows.com Software Product and a Composite Product other than by an End User is subject to the Builder Agreement and that any use, distribution or other disposition of the Lindows.com Software Product and a Composite Product by an End User is subject to the Lindows.com EULA; (b) include in all bulk and individual unit packaging for Composite Products the Builder Agreement as a "shrink-wrapped" or "click-wrapped" license agreement that requires a Reseller and System Builder to view in full and indicate assent either by opening the physical product package or by clicking on a designated button, respectively; and (c) include the Lindows.com EULA as a "shrink-wrapped" or "click-wrapped" license agreement that requires the End User to view in full and indicate assent either by opening the physical product package or by clicking on a designated button, respectively. 4.4 NO WARRANTIES. Sublicensee shall not make any representation or warranty binding on or purporting to bind Lindows.com or Sublicensor, including but not limited to in connection with the performance, condition, title, non-infringement, merchantability, fitness for a particular purpose, system integration or data accuracy of a Lindows.com Software Product Master Disk, Lindows.com Software Product and/or Composite Products, and 3 Sublicensee shall disclaim all warranties implied by law and other warranties to the maximum extent permitted by applicable law. 4.5 EXPORT COMPLIANCE. Sublicensee shall comply strictly with all United States import and export regulations (and any similar regulations in foreign countries) and shall obtain all required licenses, approvals and/or other clearances to export, re-export or import, as applicable, the Lindows.com Software Product Master Disk, Lindows.com Software Product, and any associated technical data, including, but not limited to where a Lindows.com Software Product is installed on a Sublicensor Product or on Computers via a Composite Product. 4.6 OPEN SOURCE AND THIRD PARTY LICENSES. Certain Software Programs, or portions thereof, included in the Lindows.com Software Product are distributed under the GNU General Public License ("GPL"), other similar open source license agreements and other third party agreements which contain terms that expand (or restrict) Sublicensee's and/or third parties' rights to certain portions of the Lindows.com Software Product. The GPL and other similar open source license agreements permit Licensee and/or third parties to copy, modify, redistribute and have access to the source code of certain portions of the Lindows.com Software Product. The GPL, other similar open source license agreements, other third party agreements, on-line documentation, source code, and other information about all such software programs are available at the website www.lindows.com/licensing (http://www.lindows.com/licensing). To the extent the GPL, other similar open source license agreements or other third party agreements require Lindows.com to provide rights to the applicable portions of the Lindows.com Software Product that are broader than the rights granted elsewhere in this agreement, then the GPL and/or other similar open source license agreements shall take precedence over the rights and restrictions set forth in this Agreement. Nothing in this Section 4.6 shall permit Licensee or any third party to use the Lindows.com Branding Features in connection with exercising the rights granted under the GPL, other similar open source license agreements or other third party agreements. 5. SUBLICENSEE ACKNOWLEDGEMENT. Although the Lindows.com Software Product and the Sublicensor Products are copyrighted, Sublicensee acknowledges and agrees that the Lindows.com Software Product, the Lindows.com Software Product Master Disk, the Composite Products and the Sublicensor Products, in each case, embody valuable trade secrets proprietary to Lindows.com or Sublicensor, as applicable. Except for the rights and licenses expressly granted to Sublicensee in this Agreement, and subject to Section 4.6, Sublicensee acknowledges and agrees that Sublicensor reserves and retains all right, title and interest (including, without limitation, all Proprietary Rights) in the Sublicensor Products and Sublicensor's Confidential Information and that Lindows.com reserves and retains all right, title and interest (including, without limitation, all Proprietary Rights) in and to the Lindows.com Software Product Master Disk, the Lindows.com Software Product, the Lindows.com Branding Features and the Lindows.com Confidential Information. Subject to the license granted in Section 3.1(b), Sublicensee hereby acknowledges and agrees that Sublicensee has no right, title or interest in or to the Lindows.com Branding Features, and all benefits from the use of the Lindows.com Branding Features shall automatically vest in Lindows.com. Sublicensee shall not (i) apply for registration of the Lindows.com Branding Features (or any marks or features confusingly similar thereto) anywhere in the world, (ii) alter, modify or change the Lindows.com Branding Features in any manner, (iii) use any of the Lindows.com Branding Features, except as expressly authorized herein or by prior written approval of the Lindows.com, or (iv) take any action inconsistent with Lindows.com's ownership of the Lindows.com Branding Features. Nothing contained in this Agreement will be construed as conferring upon Sublicensee or any third party (by implication, operation of law, estoppel or otherwise) any 4 license or right not expressly granted by Sublicensor in this Agreement. 6. Confidentiality. 6.1 CONFIDENTIAL INFORMATION. Each party acknowledges that, in the course of exercising its rights or performing its obligations under this Agreement, it may obtain confidential information relating to the other party, its licensors or licensees, contractors, agents, customers and/or end users ("Confidential Information"). Such Confidential Information shall include, without limitation: (a) The source code of the Lindows.com Software Product Master Disk and the Lindows.com Software Product, the terms of this Agreement, and as it relates to the Lindows.com Software Product Deliverables and Lindows.com Software Product, Proprietary Rights, techniques, processes, programs, ideas, algorithms, formulas, schematics, testing procedures, software design and architecture, computer code, internal documentation, design and functional specifications, product requirements, problem reports and performance information, software documents and other technical, business, product, marketing and financial information, plans and data; (b) any information designated by either party as confidential in writing or, if disclosed orally, reduced to writing and designated as confidential within thirty (30) days; and (c) any nonpublic information regarding Lindows.com, Sublicensor, any sublicensees, Sublicensor Products and Composite Products, including but not limited to, technical data, product design and development, sales information, quantity and kind of Sublicensor Products and/or Composite Products sold, prices and methods of pricing, marketing techniques and plans, product returns, unannounced products, product and process information and any other information which if disclosed might be competitively detrimental to Lindows.com and/or Sublicensor. Neither party may use the Confidential Information of the other except for the purposes of this Agreement and shall protect such Confidential Information from disclosure to others, using the same degree of care used to protect its own proprietary information of like importance, but in no event less than a reasonable degree of care. The parties may disclose Confidential Information received hereunder only as reasonably required to perform its obligations or exercise its rights under this Agreement and only to third parties, its employees, and its agents who have a need to know for such purposes and who are bound by signed, written agreements to protect the received Confidential Information from unauthorized use and disclosure at least as protective as this Section 6. 6.2 LIMITATIONS. The restrictions of this Agreement on use and disclosure of Confidential Information shall not apply to information that: (a) was in the possession or control of the receiving party at the time of its disclosure by the disclosing party; (b) is or becomes publicly known through no wrongful act; (c) is received from a third party free to disclose it without any confidentiality obligation; or (d) is independently developed without access to Confidential Information. 6.3 DISCLOSURES REQUIRED BY LAW. In the event a party is required by law, regulation or court order to disclose Confidential Information, it will promptly notify the other party in writing prior to making any such disclosure in order to facilitate the other party's ability to seek a protective order or other appropriate remedy from the appropriate body. Each party further agrees that if it is not successful in precluding the requesting legal body from requiring the disclosure of the Confidential Information, it will furnish only that portion of the Confidential Information which is legally required and will exercise all reasonable efforts to obtain reliable assurances that confidential treatment will be accorded the Confidential Information. Any Confidential Information released under this Section 6 shall remain Confidential Information or all other purposes. 6.4 REMEDIES. The parties hereby agree that any breach of any provision of this Agreement regarding confidentiality or protection of Proprietary Rights would constitute irreparable harm, and that the aggrieved party shall be entitled to specific performance and/or 5 injunctive relief in addition to other remedies at law or in equity. This Section 6.4 shall not be construed to preclude either party from seeking equitable relief under any other Section of this Agreement. 7. Term and Termination. 7.1 TERM. Unless earlier terminated in accordance with Section 7.2 below, this Agreement shall commence as of the Effective Date and shall continue in effect until (a) termination of this Agreement by either party upon thirty (30) days written notice or (b) the termination of the Lindows.com Partnership License Agreement in accordance with its terms, whichever is earlier. 7.2 TERMINATION. Either party may terminate this Agreement immediately if the other party defaults in the performance of any material provision of this Agreement and fails to cure such default within fifteen (15) days of receiving written notice of such default from the non-defaulting party. Upon the expiration or earlier termination of this Agreement, all rights and licenses granted to Sublicensee hereunder, any Sublicense Agreements or any sublicenses granted at any tier below Sublicensee will terminate. The rights and obligations of the parties under Sections 1, 3.2, 4.2, 4.3, 4.4, 4.5, 5, 6, 7, 8, 9 and 10 will survive any expiration or termination of this Agreement. Any termination of this Agreement by either party shall not limit any right or remedies available at law or equity to the terminating party nor impair any rights nor discharge any obligations which have accrued to the terminating party as of the effective date of such termination. Except where otherwise specified, the rights and remedies granted to a party under this Agreement are cumulative and in addition to, and not in lieu of, any other rights or remedies which the party may possess at law or in equity. 8. THIRD PARTY BENEFICIARY. Each of Sublicensor and Sublicensee acknowledge and agree that Lindows.com is an intended third party beneficiary of Sublicensee's obligations under this Agreement, and that Lindows.com will have the right, to the same extent as Sublicensor, to take legal action against any breach by Sublicensee of such obligations and to otherwise enforce such obligations. 9. Disclaimer; Limitation of Liability. 9.1 NO WARRANTY. SUBLICENSOR MAKES NO WARRANTY TO SUBLICENSEE OF ANY KIND WITH REGARD THE LINDOWS.COM SOFTWARE PRODUCTS, THE LINDOWS.COM SOFTWARE PRODUCT MASTER DISK, THE SUBLICENSOR PRODUCTS, THE COMPOSITE PRODUCTS, OR ANY CONFIDENTIAL INFORMATION. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, SUBLICENSOR, FOR ITSELF AND ON BEHALF OF LINDOWS.COM, EXPRESSLY DISCLAIMS ANY WARRANTIES, EXPRESS, STATUTORY OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF PERFORMANCE, CONDITION, TITTLE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS, MERCHANTABILITY, SYSTEM INTEGRATION, DATA ACCURACY AND FITNESS FOR A PARTICULAR PURPOSE, WHETHER ARISING OUT OF LAW, CUSTOM, CONDUCT, OR OTHERWISE. 9.2 LIMITATION OF LIABILITY. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL SUBLICENSOR, LINDOWS.COM, AND SUBLICENSOR'S OTHER LICENSORS AND SUPPLIERS HAVE ANY OBLIGATION OR LIABILITY (WHETHER IN TORT, CONTRACT, WARRANTY, STRICT LIABILITY OR UNDER ANY OTHER LEGAL THEORY) TO SUBLICENSEE, OR TO ANY OTHER ENTITY OR PERSON, FOR ANY INDIRECT, INCIDENTAL, SPECIAL, STATUTORY, PUNITIVE OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOSS OF GOODWILL, LOSS OF PERFORMANCE, LOST PROSPECTIVE ECONOMIC ADVANTAGE, LOST REVENUE OR PROFITS, OR LOSS OF 6 DATA), IRRESPECTIVE OF WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. SUBLICENSOR'S MAXIMUM AGGREGATE LIABIILTY OF ANY KIND ARISING OUT OF THIS AGREEMENT SHALL BE LIMITED TO FIFTY DOLLARS (US$50); PROVIDED, HOWEVER, THAT, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL (A) SUBLICENSEE OR ANY OTHER ENTITY OR PERSON HAVE ANY CLAIMS OR CAUSES OF ACTION OF ANY KIND AGAINST LINDOWS.COM OR ANY OTHER OF SUBLICENSOR'S LICENSORS OR SUPPLIERS IN CONNECTION WITH THIS AGREEMENT, AND (B) LINDOWS.COM OR ANY OTHER OF SUBLICENSOR'S LICENSORS AND SUPPLIERS HAVE ANY LIABILITY (WHETHER EXPRESS, IMPLIED, STATUTORY, OR OTHER) WHATSOEVER TO SUBLICENSEE OR ANY OTHER ENTITY OR PERSON IN CONNECTION WITH THIS AGREEMENT. 10. GENERAL PROVISIONS. This Agreement represents the entire agreement between Sublicensor and Sublicensee and supersedes all prior agreements and understandings, whether written or oral, with respect to all matters covered in this Agreement. This Agreement will not be altered, modified, or amended in any respect except by a writing signed by each party. This Agreement is to be construed in accordance with and governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Any dispute regarding this Agreement shall be subject to the exclusive jurisdiction of the courts for the State of California in and for Santa Clara County, California, U.S.A. (or, if there is federal jurisdiction, the United States District Court for the Northern District of California, San Jose Branch), and the parties agree to submit to the personal and exclusive jurisdiction and venue of these courts. Nothing in this Agreement is intended or will be construed to give any person (other than Sublicensor, Sublicensee and Lindows.com) any legal or equitable right, remedy or claim under this Agreement or any provision hereof. Sublicensee may not assign this Agreement or any of its rights or obligations hereunder, whether voluntarily, by operation of law or otherwise. Failure by either party to enforce at any time or for any period of time the provisions of this Agreement will not be construed as a waiver of such provisions, and will in no way affect such party's right to later enforce such provisions. If any part of this Agreement is determined by any court of competent jurisdiction to be unenforceable for any reason, such unenforceability will not affect the balance of this Agreement, and the unenforceable provision will be changed and interpreted so as to best accomplish the objectives of such provision within the limits of applicable law. This Agreement may be executed, by manual or facsimile signature, in multiple counterparts, which taken together shall constitute one Agreement and each of which shall be considered an original for all purposes. 7 IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives. SEAGATE TECHNOLOGY LLC [SUBLICENSEE] Signature: Signature: --------------------- ---------------------------- Name: Name: -------------------------- ---------------------------------- Title: Title: ------------------------- -------------------------------- 8 EXHIBIT A LINDOWS.COM BRANDING FEATURES; TRADEMARK GUIDELINES BRANDING FEATURES [WE MAY REFERENCE A WEB SITE FOR THESE.] TRADEMARK NOTICES The Branding Features are trademarks and service marks of Lindows.com. The Branding Features shall be accompanied by the superscript "TM" or "(R)" symbol, as specified by Lindows.com, which must appear to the immediate right of the Branding Features. The footnote "LindowsOS is the trademark of Lindows.com, Inc." or "Lindows.com is the trademark of Lindows.com, Inc.", as applicable, shall accompany each use of the Branding Features (or, if a Branding Feature is used multiple times in a document, screen or packaging, such notice shall accompany the first prominent use in such document, screen or packaging). USING THE BRANDING FEATURES Sublicensee may only use the Branding Features as an indication that the Lindows.com Software Product is being offered to end users via distribution pursuant to the Agreement. Sublicensee may not use the Branding Features in such a way as to suggest that the Branding Features may also apply to any hardware or software other than the Lindows.com Software Product. When referring to Lindows.com, Inc., Sublicensee shall use the name "Lindows.com". When referring to the Lindows.com Software Product, Sublicensee shall use the trademark "LindowsOS". SIZING AND PLACEMENT REQUIREMENTS The digitized, machine-readable file for the artwork of the Branding Features appears above in this Exhibit A. Sublicensee shall not alter this file or the Branding Features in any way, including, without limitation, changing the color of any of the logos or artwork, separating any words in the Branding Features from the remainder of the Branding Features or replacing words with any other words. Sublicensee shall not combine the Branding Features with any other feature, including, without limitation, other marks, words, graphics, photos, slogans, numbers, design features or symbols. The Branding Features shall not be larger or more prominent than the trademark, logo or any Sublicensee trade name that appears on the same packaging, documentation, advertising or other materials. The Branding Features shall not be smaller or less prominent than any name, trademark or logo of any third party that appears on the same packaging, documentation, advertising or other materials. 9 Exhibit B GPL GNU General Public License - GNU Project - Free Software Foundation (FSF) Page 1 of 7 GNU GENERAL PUBLIC LICENSE [GNU LOGO] [Czech | English | Japanese ] - - What to do if you see a possible GPL violation - - Translations of the GPL - - GPL Frequently Asked Questions - - The GNU General Public License (GPL) in plain text format - - The GNU General Public License (GPL) in Texinfo format - - The GNU General Public License (GPL) in LaTeX format - - The GNU General Public License (GPL) as an appendix in DocBook format TABLE OF CONTENTS - - GNU GENERAL PUBLIC LICENSE - Preamble - TERMS AND CONDITIONS FOR COPYING, DISTRIBUTION AND MODIFICATION - How to Apply These Terms to Your New Programs GNU GENERAL PUBLIC LICENSE Version 2, June 1991 Copyright (C) 1989, 1991 Free Software Foundation, Inc. 59 Temple Place - Suite 330, Boston, MA 02111-1307, USA Everyone is permitted to copy and distribute verbatim copies of this license document, but changing it is not allowed. PREAMBLE The licenses for most software are designed to take away your freedom to share and change it. By contrast, the GNU General Public License is intended to guarantee your freedom to share and change free software--to make sure the software is free for all its users. This General Public License applies to most of the Free Software Foundation's software and to any other program whose authors commit to using it. (Some other Free Software Foundation software is covered by the GNU Library General Public License instead.) You can apply it to your programs, too. GNU General Public License - GNU Project - Free Software Foundation (FSF) Page 2 of 7 When we speak of free software, we are referring to freedom, not price. Our General Public Licenses are designed to make sure that you have the freedom to distribute copies of free software (and charge for this service if you wish), that you receive source code or can get it if you want it, that you can change the software or use pieces of it in new free programs; and that you know you can do these things. To protect your rights, we need to make restrictions that forbid anyone to deny you these rights or to ask you to surrender the rights. These restrictions translate to certain responsibilities for you if you distribute copies of the software, or if you modify it. For example, if you distribute copies of such a program, whether gratis or for a fee, you must give the recipients all the rights that you have. You must make sure that they, too, receive or can get the source code. And you must show them these terms so they know their rights. We protect your rights with two steps: (1) copyright the software, and (2) offer you this license which gives you legal permission to copy, distribute and/or modify the software. Also, for each author's protection and ours, we want to make certain that everyone understands that there is no warranty for this free software. If the software is modified by someone else and passed on, we want its recipients to know that what they have is not the original, so that any problems introduced by others will not reflect on the original authors' reputations. Finally, any free program is threatened constantly by software patents. We wish to avoid the danger that redistributors of a free program will individually obtain patent licenses, in effect making the program proprietary. To prevent this, we have made it clear that any patent must be licensed for everyone's free use or not licensed at all. The precise terms and conditions for copying, distribution and modification follow. TERMS AND CONDITIONS FOR COPYING, DISTRIBUTION AND MODIFICATION 0. This License applies to any program or other work which contains a notice placed by the copyright holder saying it may be distributed under the terms of this General Public License. The "Program", below, refers to any such program or work, and a "work based on the Program" means either the Program or any derivative work under copyright law: that is to say, a work containing the Program or a portion of it, either verbatim or with modifications and/or translated into another language. (Hereinafter, translation is included without limitation in the term "modification".) Each licensee is addressed as "you". Activities other than copying, distribution and modification are not covered by this License; they are outside its scope. The act of running the Program is not restricted, and the output from the Program is covered only if its contents constitute a work based on the Program (independent of having been made by running the Program). Whether that is true depends on what the Program does. 1. You may copy and distribute verbatim copies of the Program's source code as you receive it, in any medium, provided that you conspicuously and appropriately publish on each copy an appropriate copyright notice and disclaimer of warranty; keep intact all the notices that refer to this License and to the absence of any warranty; and give any other recipients of the Program a copy of this License along with the Program. You may charge a fee for the physical act of transferring a copy, and you may at your option offer warranty protection in exchange for a fee. 2. You may modify your copy or copies of the Program or any portion of it, thus forming a work based on the Program, and copy and distribute such modifications or work under the terms of Section 1 above, provided that you also meet all of these conditions: http://www.fsf.org/licenses/gpl.html 9/19/2003 GNU General Public License - GNU Project - Free Software Foundation (FSF) Page 3 of 7 A) You must cause the modified files to carry prominent notices stating that you changed the files and the date of any change. B) You must cause any work that you distribute or publish, that in whole or in part contains or is derived from the Program or any part thereof, to be licensed as a whole at no charge to all third parties under the terms of this License. C) If the modified program normally reads commands interactively when run, you must cause it, when started running for such interactive use in the most ordinary way, to print or display an announcement including an appropriate copyright notice and a notice that there is no warranty (or else, saying that you provide a warranty) and that users may redistribute the program under these conditions, and telling the user how to view a copy of this License. (Exception: if the Program itself is interactive but does not normally print such an announcement, your work based on the Program is not required to print an announcement.) These requirements apply to the modified work as a whole. If identifiable sections of that work are not derived from the Program, and can be reasonably considered independent and separate works in themselves, then this License, and its terms, do not apply to those sections when you distribute them as separate works. But when you distribute the same sections as part of a whole which is a work based on the Program, the distribution of the whole must be on the terms of this License, whose permissions for other licensees extend to the entire whole, and thus to each and every part regardless of who wrote it. Thus, it is not the intent of this section to claim rights or contest your rights to work written entirely by you; rather, the intent is to exercise the right to control the distribution of derivative or collective works based on the Program. In addition, mere aggregation of another work not based on the Program with the Program (or with a work based on the Program) on a volume of a storage or distribution medium does not bring the other work under the scope of this License. 3. You may copy and distribute the Program (or a work based on it, under Section 2) in object code or executable form under the terms of Sections 1 and 2 above provided that you also do one of the following: A) Accompany it with the complete corresponding machine-readable source code, which must be distributed under the terms of Sections 1 and 2 above on a medium customarily used for software interchange; or, B) Accompany it with a written offer, valid for at least three years, to give any third party, for a charge no more than your cost of physically performing source distribution, a complete machinereadable copy of the corresponding source code, to be distributed under the terms of Sections 1 and 2 above on a medium customarily used for software interchange; or, C) Accompany it with the information you received as to the offer to distribute corresponding source code. (This alternative is allowed only for noncommercial distribution and only if you received the program in object code or executable form with such an offer, in accord with Subsection b above.) The source code for a work means the preferred form of the work for making modifications to it. For an executable work, complete source code means all the source code for all modules it contains, plus any associated interface definition files, plus the scripts used to control compilation and installation of the executable. However, as a special exception, the source code distributed need not include anything that is normally distributed (in either source or binary form) with the major components (compiler, kernel, and so on) of the operating system on which the executable runs, unless that component itself accompanies the executable. http://www.fsf.org/licenses/gpl.html 9/19/2003 GNU General Public License - GNU Project - Free Software Foundation (FSF) Page 4 of 7 If distribution of executable or object code is made by offering access to copy from a designated place, then offering equivalent access to copy the source code from the same place counts as distribution of the source code, even though third parties are not compelled to copy the source along with the object code. 4. You may not copy, modify, sublicense, or distribute the Program except as expressly provided under this License. Any attempt otherwise to copy, modify, sublicense or distribute the Program is void, and will automatically terminate your rights under this License. However, parties who have received copies, or rights, from you under this License will not have their licenses terminated so long as such parties remain in full compliance. 5. You are not required to accept this License, since you have not signed it. However, nothing else grants you permission to modify or distribute the Program or its derivative works. These actions are prohibited by law if you do not accept this License. Therefore, by modifying or distributing the Program (or any work based on the Program), you indicate your acceptance of this License to do so, and all its terms and conditions for copying, distributing or modifying the Program or works based on it. 6. Each time you redistribute the Program (or any work based on the Program), the recipient automatically receives a license from the original licensor to copy, distribute or modify the Program subject to these terms and conditions. You may not impose any further restrictions on the recipients' exercise of the rights granted herein. You are not responsible for enforcing compliance by third parties to this License. 7. If, as a consequence of a court judgment or allegation of patent infringement or for any other reason (not limited to patent issues), conditions are imposed on you (whether by court order, agreement or otherwise) that contradict the conditions of this License, they do not excuse you from the conditions of this License. If you cannot distribute so as to satisfy simultaneously your obligations under this License and any other pertinent obligations, then as a consequence you may not distribute the Program at all. For example, if a patent license would not permit royalty-free redistribution of the Program by all those who receive copies directly or indirectly through you, then the only way you could satisfy both it and this License would be to refrain entirely from distribution of the Program. If any portion of this section is held invalid or unenforceable under any particular circumstance, the balance of the Section is intended to apply and the Section as a whole is intended to apply in other circumstances. It is not the purpose of this section to induce you to infringe any patents or other property right claims or to contest validity of any such claims; this Section has the sole purpose of protecting the integrity of the free software distribution system, which is implemented by public license practices. Many people have made generous contributions to the wide range of software distributed through that system in reliance on consistent application of that system; it is up to the author/donor to decide if he or she is willing to distribute software through any other system and a licensee cannot impose that choice. This section is intended to make thoroughly clear what is believed to be a consequence of the rest of this License. 8. If the distribution and/or use of the Program is restricted in certain countries either by patents or by copyrighted interfaces, the original copyright holder who places the Program under this License may add an explicit geographical distribution limitation excluding those countries, so that distribution is permitted only in or among countries not thus excluded. In such case, this License incorporates the limitation as if written in the body of this License. 9. The Free Software Foundation may publish revised and/or new versions of the General Public License from time to time. Such new versions will be similar in spirit to the present version, but may differ in detail to address new problems or concerns. http://www.fsf.org/licenses/gpl.html 9/19/2003 GNU General Public License - GNU Project - Free Software Foundation (FSF) Page 5 of 7 Each version is given a distinguishing version number. If the Program specifies a version number of this License which applies to it and "any later version", you have the option of following the terms and conditions either of that version or of any later version published by the Free Software Foundation. If the Program does not specify a version number of this License, you may choose any version ever published by the Free Software Foundation. 10. If you wish to incorporate parts of the Program into other free programs whose distribution conditions are different, write to the author to ask for permission. For software which is copyrighted by the Free Software Foundation, write to the Free Software Foundation; we sometimes make exceptions for this. Our decision will be guided by the two goals of preserving the free status of all derivatives of our free software and of promoting the sharing and reuse of software generally. NO WARRANTY 11. BECAUSE THE PROGRAM IS LICENSED FREE OF CHARGE, THERE IS NO WARRANTY FOR THE PROGRAM, TO THE EXTENT PERMITTED BY APPLICABLE LAW. EXCEPT WHEN OTHERWISE STATED IN WRITING THE COPYRIGHT HOLDERS AND/OR OTHER PARTIES PROVIDE THE PROGRAM "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE PROGRAM IS WITH YOU. SHOULD THE PROGRAM PROVE DEFECTIVE, YOU ASSUME THE COST OF ALL NECESSARY SERVICING, REPAIR OR CORRECTION. 12. IN NO EVENT UNLESS REQUIRED BY APPLICABLE LAW OR AGREED TO IN WRITING WILL ANY COPYRIGHT HOLDER, OR ANY OTHER PARTY WHO MAY MODIFY AND/OR REDISTRIBUTE THE PROGRAM AS PERMITTED ABOVE, BE LIABLE TO YOU FOR DAMAGES, INCLUDING ANY GENERAL, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OR INABILITY TO USE THE PROGRAM (INCLUDING BUT NOT LIMITED TO LOSS OF DATA OR DATA BEING RENDERED INACCURATE OR LOSSES SUSTAINED BY YOU OR THIRD PARTIES OR A FAILURE OF THE PROGRAM TO OPERATE WITH ANY OTHER PROGRAMS), EVEN IF SUCH HOLDER OR OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. http://www.fsf.org/licenses/gpl.html 9/19/2003 GNU General Public License - GNU Project - Free Software Foundation (FSF) Page 6 of 7 END OF TERMS AND CONDITIONS HOW TO APPLY THESE TERMS TO YOUR NEW PROGRAMS If you develop a new program, and you want it to be of the greatest possible use to the public, the best way to achieve this is to make it free software which everyone can redistribute and change under these terms. To do so, attach the following notices to the program. It is safest to attach them to the start of each source file to most effectively convey the exclusion of warranty; and each file should have at least the "copyright" line and a pointer to where the full notice is found. one line to give the program's name and an idea of what it does. Copyright (C) yyyy name of author This program is free software; you can redistribute it and/or modify it under the terms of the GNU General Public License as published by the Free Software Foundation; either version 2 of the License, or (at your option) any later version. This program is distributed in the hope that it will be useful, but WITHOUT ANY WARRANTY; without even the implied warranty of MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE. See the GNU General Public License for more details. You should have received a copy of the GNU General Public License along with this program; if not, write to the Free Software Foundation, Inc., 59 Temple Place - Suite 330, Boston, MA 02111-1307, USA. Also add information on how to contact you by electronic and paper mail. If the program is interactive, make it output a short notice like this when it starts in an interactive mode: Gnomovision version 69, Copyright (C) year name of author Gnomovision comes with ABSOLUTELY NO WARRANTY; for details type `show w'. This is free software, and you are welcome to redistribute it under certain conditions; type `show c' for details. The hypothetical commands `show c' should show the appropriate parts of the General Public License. Of course, the commands you use may be called something other than `show w' and `show c'; they could even be mouse-clicks or menu items--whatever suits your program. You should also get your employer (if you work as a programmer) or your school, if any, to sign a "copyright disclaimer" for the program, if necessary. Here is a sample; alter the names: http://www.fsf.org/licenses/gpl.html 9/19/2003 GNU General Public License - GNU Project - Free Software Foundation (FSF) Page 7 of 7 Yoyodyne, Inc., hereby disclaims all copyright interest in the program `Gnomovision' (which makes passes at compilers) written by James Hacker. signature of Ty Coon, 1 April 1989 Ty Coon, President of Vice This General Public License does not permit incorporating your program into proprietary programs. If your program is a subroutine library, you may consider it more useful to permit linking proprietary applications with the library. If this is what you want to do, use the GNU Library General Public License instead of this License. Return to GNU's home page. FSF & GNU inquiries & questions to gnu@gnu.org. Other ways to contact the FSF. Comments on these web pages to webmasters@www.gnu.org, send other questions to gnu@gnu.org. Copyright notice above. Free Software Foundation, Inc., 59 Temple Place - Suite 330, Boston, MA 02111, USA Updated: Last modified: Mon May 26 14:51:41 EDT 2003 http://www.fsf.org/licenses/gpl.html 9/19/2003 Exhibit C Builder Agreement and Lindows EULA 22 LINDOWSOS(TM) BUILDER LICENSE AGREEMENT This LindowsOS(TM) Builder License Agreement ("Agreement") is between you (both the individual installing the Lindows.com Software Product and, if applicable, the legal entity on behalf of which such individual is acting) ("Builder") and Lindows.com, Inc. ("Lindows.com"), a Delaware corporation with its principal office located at 9333 Genesee Drive, San Diego, CA 92121, Facsimile: 858-587-8095, email: licenses@lindows.com. LindowsOS(TM) and Lindows.com(TM) are not endorsed by nor affiliated with Microsoft Corporation(R) in any way. IT IS IMPORTANT THAT YOU READ CAREFULLY AND UNDERSTAND THE TERMS AND CONDITIONS OF THIS AGREEMENT. BY CLICKING THE "I AGREE" BUTTON BELOW, YOU AGREE TO BE BOUND BY ALL THE TERMS AND CONDITIONS OF THIS AGREEMENT. IF YOU DO NOT AGREE WITH ALL THE TERMS AND CONDITIONS OF THIS AGREEMENT OR IF YOU DO NOT AGREE TO BE BOUND BY ALL THE TERMS AND CONDITIONS OF THIS AGREEMENT, PLEASE CLICK THE "I DO NOT AGREE" BUTTON, AND YOU WILL NOT HAVE THE RIGHT OR AUTHORIZATION TO USE OR ACCESS THE LINDOWS.COM SOFTWARE PRODUCT. 1. DEFINITIONS: All definitions below or elsewhere in this Agreement shall apply both to the singular and plural forms, as the context may require. 1.1 "Builder Branding Features" means Builder's proprietary trade names, trade dress, service marks, trademarks, logos, and indicia of origin and other distinctive branding features. 1.2 "Builder Products" means any new or refurbished complete computer system, including without limitation personal desktop computers, laptop computers, or notebook computers designed, manufactured or refurbished, and distributed by or for Builder, each of which contains a motherboard, CPU, hard drive, case and video card. Builder Products are specified on the builder resource area applicable to Builder on Lindows.com's website at www.lindows.com or any successor website thereto. 1.3 "Composite Products" means the Builder Products on which Builder has installed the Lindows.com Software Product as provided in this Agreement. 1.4 "Deliverables" means a master disk image of the Lindows.com Software Product as made available for delivery to Builder via electronic download at the Builder Resource Center web site http://my.lindows.com or any successor website thereto or on CD-ROM or other media. 1.5 "End-User" means an individual or entity that acquires Composite Products for personal and/or internal business use and not for resale or distribution. 1.6 "GPL" means the GNU General Public License available at the website http://www.gnu.org/licenses/gpl.html or any successor website thereto. 1.7 "Licensed Territory" means worldwide, except to the extent limited by U.S. export laws and the applicable import and export laws of foreign jurisdictions, as described in Section. 1.8 "Lindows.com Branding Features" means Lindows.com's proprietary trade names, trade dress, service marks, trademarks, logos, and indicia of origin and other distinctive branding features. 1.9 "Lindows.com Software Product" means certain computer programs and related documentation and interface specifications developed, owned, licensed, otherwise controlled, and/or distributed by Lindows.com, as more specifically set forth at the website http://www.lindows.com/lindowsos or any successor website thereto, and any Updates to the foregoing computer programs and related documentation and interface specifications. 1.10 "Proprietary Rights" means any and all rights, whether registered or unregistered, in, and with respect to, patents, copyrights, confidential information, know-how, trade secrets, moral rights, contract or licensing rights, confidential and proprietary information protected under contract or otherwise under law, trademarks, trade names, trade dress, logos, service marks, rights in and to animated characters and domain names, and all other intellectual or industrial property throughout the world. 1.11 "Reseller" means a person or entity expressly authorized by Builder to distribute Composite Products to its own Resellers through multiple tiers and/or directly to EndUsers. 1.12 "Software Programs" means individual software components of the Lindows.com Software Product and all accompanying documentation, enhancements, upgrades and extensions thereto that were created either by Lindows.com or various individuals and entities. 1.13 "Update" means a new version, new release, upgrade, update, bug fix, patch, work around, or other enhancement, modification, or revision of the Lindows.com Software Product that is designated as such by Lindows.com and made available by Lindows.com at the Lindows.com Builder Resource Center or any successor website thereto. 2. LINDOWS.COM SOFTWARE PRODUCT LICENSE AND RESTRICTIONS: 2.1 LICENSE GRANT: Subject to the restrictions in Section 2.4 RESTRICTIONS: and the other terms and conditions in this Agreement, Lindows.com hereby grants to Builder a nonexclusive, nontransferable, non-assignable, nonsublicensable (except as expressly set forth in Section 2.3 LIMITED RIGHT TO SUBLICENSE:) limited right and license, only in the Licensed Territory, solely to: (a) internally install, use, reproduce, display, and perform the Deliverables solely as necessary to internally install one (1) copy of the Lindows.com Software Product, only in executable form, on each unit of the Builder Product; and (b) distribute to End-Users one (1) copy of the Lindows.com Software Product, only in executable form, and only as an installed, unmodified and integrated part of each unit of the Composite Products. 2.2 EMPLOYEES AND CONTRACTORS: The license granted in Section Subject to the restrictions in Section 2.4 RESTRICTIONS: and the other terms and conditions in this Agreement, Lindows.com hereby grants to Builder a nonexclusive, nontransferable, non-assignable, nonsublicensable (except as expressly set forth in Section 2.3 LIMITED RIGHT TO SUBLICENSE:) limited right and license, only in the Licensed Territory, solely to: hereof to Builder may be exercised by, and Builder may disclose the Confidential Information of Lindows.com to and allow use of the Confidential Information of Lindows.com by, only employees or contractors (exercising such rights solely on behalf of and for the sole benefit of Builder) of Builder who are bound by written agreements consistent with this Agreement, including without limitation with restrictions at least as restrictive as those contained in Section 2.4 RESTRICTIONS:, restrictions on the use and disclosure of Confidential Information that are at least as strict as those provided in Section 12. CONFIDENTIALITY:, and with prohibitions against any attempts to reverse engineer, decompile, disassemble, extract any element of and/or otherwise discover any element of the Deliverables, Lindows.com Software Product, other Confidential Information of Lindows.com, or any element of any of the foregoing. In respect of any agreement into which Builder enters with a third party concerning the Lindows.com Software Product, Builder shall incorporate the provisions set forth below in Section. 2.3 LIMITED RIGHT TO SUBLICENSE: 2.3.1 GRANT: Subject to the scope of the license in Subject to the restrictions in Section 2.4 RESTRICTIONS: and the other terms and conditions in this Agreement, Lindows.com hereby grants to Builder a nonexclusive, nontransferable, non-assignable, nonsublicensable (except as expressly set forth in Section 2.3 LIMITED RIGHT TO SUBLICENSE:) limited right and license, only in the Licensed Territory, solely to:, the restrictions in Section 2.4 RESTRICTIONS: and the other terms and conditions of this Agreement, Builder may distribute, by sublicense, the Lindows.com Software Products to End-Users only as expressly provided in Section via Builder's authorized Resellers and their authorized Resellers through multiple tiers. 2.3.2 EXPRESS CONDITIONS TO RIGHT TO SUBLICENSE: (a) SUBLICENSE AGREEMENTS: Each sublicense granted under this Section 2.3 LIMITED RIGHT TO SUBLICENSE:, whether granted directly by Builder to its authorized Resellers or granted by such Resellers to their respective authorized Resellers through multiple tiers shall be subject to the written consent of Lindows.com and be pursuant to a written sublicense agreement (the "Sublicense Agreement") executed by both the sublicensor party (i.e., Builder and its authorized Resellers through multiple tiers) and the sublicensee party (Builder's authorized Resellers through multiple tiers). Such Sublicense Agreement shall: (i) be consistent with this Agreement including but not limited to granting rights no greater in scope than the sublicense rights provided expressly herein, providing for restrictions no less restrictive than those provided for in Section 2.4 RESTRICTIONS: or otherwise in this Agreement, and providing confidentiality restrictions no less restrictive than those provided for in Section 12. CONFIDENTIALITY: or otherwise in this Agreement; (ii) contain an acknowledgment that, although copyrighted, the Lindows.com Software Product and the Composite Products embody valuable trade secrets proprietary to Builder, its authorized Resellers through multiple tiers and/or their respective suppliers; (iii) contain an express disclaimer, on behalf of Builder, its authorized Resellers through multiple tiers and all of their respective suppliers and licensors, disclaiming any and all liability for incidental, indirect, special, statutory, punitive and consequential damages (including, but not limited to damages for loss of good will, loss of data, loss of performance, lost revenue, lost prospective economic advantage or lost revenue or profit) to the maximum extent permitted by applicable law, irrespective of whether or not such damages are foreseeable or whether Builder or its authorized Resellers through multiple tiers were advised of the possibility of such damages; (iv) automatically terminate upon the expiration or any termination of this Agreement, unless otherwise consented to in advance in writing by Lindows.com; (v) require that each Reseller be liable and responsible, jointly and severally, directly to Lindows.com for any breach of the Sublicense Agreement by its authorized Resellers through multiple tiers; and (vi) provide that Lindows.com shall be an intended third party beneficiary and shall have the right to enforce any and all obligations of such Resellers and their authorized Resellers through multiple tiers under such agreements. Builder understands and agrees that it will be liable and responsible, jointly and severally, directly to Lindows.com for any breach of the Sublicense Agreement by any of its authorized Resellers and their authorized through multiple tiers. 2.3.3 LIMITATION OF WARRANTIES: In connection with any sublicense, (a) Builder shall not, and shall require and ensure that its Resellers through multiple tiers, contractors, and any other third party shall not, make any representation or warranty, express or implied, binding or purporting to bind Lindows.com in connection the Deliverables, Lindows.com Software Product, and/or Composite Products, including but not limited to representations or warranties relating to the performance, condition, title, non-infringement, merchantability, fitness for a particular purpose, system integration, or data accuracy of any of the foregoing; and (b) Builder shall, and shall require and ensure that its Resellers through multiple tiers, contractors, and any other third party shall, in connection the Deliverables, Lindows.com Software Product, and/or Composite Products disclaim all warranties implied by law to the maximum extent permitted by applicable law. If Builder or any Reseller grants an express warranty regarding the performance and/or condition of the Composite Product, such express warranty shall expressly exclude the Lindows.com Software Product installed on such Composite Product, which shall not be covered under such warranty. 2.4 RESTRICTIONS: 2.4.1 GENERAL RESTRICTIONS: Subject to Section, Builder shall not, shall not permit any third party to, and shall require and ensure that Resellers through multiple tiers, and/or their respective contractors shall not: (a) use the Deliverables, Lindows.com Software Product, other Confidential Information of Lindows.com, or any element of the foregoing except as expressly permitted herein; (b) reverse engineer, decompile, disassemble, or extract any element of, or otherwise attempt to discover, extract, and/or exploit the source code, algorithms, or any other elements of, the Deliverables, Lindows.com Software Product or other Confidential Information of Lindows.com; (c) use the Deliverables, Lindows.com Software Product, other Confidential Information of Lindows.com, or any element of the foregoing for the purpose of creating another product or service; (d) modify, translate, adapt, enhance, create derivative works based on, transfer, assign, pledge, lease, rent, share, or use in connection with any facility management, service bureau or other similar service, the Deliverables, Lindows.com Software Product, other Confidential Information of Lindows.com, or any element of the foregoing; (e) reproduce, sublicense, sell, resell, distribute, publicly display or publicly perform the Deliverables, Lindows.com Software Product, other Confidential Information of Lindows.com, or any element of the foregoing, except as and to the extent expressly provided herein; or (f) integrate, incorporate or port into products the Deliverables, Lindows.com Software Product, other Confidential Information of Lindows.com, or any element of the foregoing, except for the Lindows.com Software Product in executable form only into the Builder Products as expressly provided in this Agreement. Builder shall not make, and shall prohibit Resellers through multiple tiers, contractors, and any other third parties from making: (i) any representation or warranty on behalf of Lindows.com; (ii) any representation concerning the quality, performance or other characteristics of the Deliverables, Lindows.com Software Product, the Confidential Information of Lindows.com, or any element of the foregoing; or (iii) any commitment to modify any of the Deliverables or Lindows.com Software Product. 2.4.2 THIRD PARTY SOFTWARE AND LICENSES: (a) GPL AND OTHER OPEN SOURCE LICENSES: Certain Software Programs, or portions thereof, included in the Deliverables and/or Lindows.com Software Product are subject to the terms and conditions of the GPL and other applicable open source license agreements ("Open Source Programs"). The GPL and other applicable open source license agreements may contain terms that expand or limit Builder's and/or third parties' rights to use the Open Source Programs contained in the Deliverables and Lindows.com Software Product as set forth herein. Under the applicable terms of the GPL and other applicable open source license agreements, Builder and/or third parties may have the right to copy, modify and distribute certain portions of the Deliverables and/or Lindows.com Software Product and have access to certain of the source code of the foregoing, subject to certain terms and conditions. The GPL and other applicable open source license agreements, on-line documentation, and other information about all such Open Source Programs as of the Effective Date are available at the website http://www.lindows.com/licensing or any successor website thereto. Builder acknowledges and agrees that it has read, understood, and agrees to the terms and conditions, including without limitation the GPL, applicable to each such Open Source Program. Notwithstanding anything in this Agreement, to the extent the terms and conditions of the GPL and/or other applicable open source license agreements are inconsistent with or contradictory to the terms and conditions of this Agreement (including terms and conditions which provide rights to use, copy, modify and/or obtain the source code of such Open Source Programs, and disclaimers of warranties and limitation on the type and amount of damages), then the terms and conditions of the GPL and/or other applicable open source license agreements shall prevail and control, insofar as they apply to any Open Source Program included within the Deliverables and/or Lindows.com Software Product. Nothing in this section shall permit Builder or any third party to use the Lindows.com Branding Features in connection with exercising the rights granted under the GPL or other applicable open source license agreements. (b) THIRD PARTY AGREEMENTS: Certain Software Programs included in the Deliverables and/or Lindows.com Software Product are subject to the terms and conditions of agreements with third parties ("Third Party Agreements") which may expand or limit rights to use such Software Programs as set forth herein. Such Third Party Agreements and the on-line documentation that accompanies such Software Programs, if any, as of the Effective Date, are available at the website http://www.lindows.com/licensing or any successor website thereto. Builder acknowledges and agrees that it has read, understood, and agrees to the terms and conditions of each such Third Party Agreement. Notwithstanding anything in this Agreement, to the extent the terms and conditions of such Third Party Agreements are inconsistent with or contradictory to the terms and conditions of this Agreement (including terms and conditions which provide rights to use, copy, modify and/or obtain the source code of the applicable Software Programs, and disclaimers of warranties and limitation on the type and amount of damages), then the terms and conditions of such Third Party Agreements shall prevail and control, insofar as they apply to any such Software Programs. For avoidance of doubt, nothing in this Section (b) THIRD PARTY AGREEMENTS: Certain Software Programs included in the Deliverables and/or Lindows.com Software Product are subject to the terms and conditions of agreements with third parties ("Third Party Agreements") which may expand or limit rights to use such Software Programs as set forth herein. Such Third Party Agreements and the online documentation that accompanies such Software Programs, if any, as of the Effective Date, are available at the website http://www.lindows.com/licensing or any successor website thereto. Builder acknowledges and agrees that it has read, understood, and agrees to the terms and conditions of each such Third Party Agreement. Notwithstanding anything in this Agreement, to the extent the terms and conditions of such Third Party Agreements are inconsistent with or contradictory to the terms and conditions of this Agreement (including terms and conditions which provide rights to use, copy, modify and/or obtain the source code of the applicable Software Programs, and disclaimers of warranties and limitation on the type and amount of damages), then the terms and conditions of such Third Party Agreements shall prevail and control, insofar as they apply to any such Software Programs. For avoidance of doubt, nothing in this section shall permit Builder or any third party to use the Lindows.com Branding Features in connection with exercising the rights granted under Third Party Agreements. shall permit Builder or any third party to use the Lindows.com Branding Features in connection with exercising the rights granted under Third Party Agreements. (c) DISCLAIMER: Builder acknowledges that Lindows.com does not give any warranties (and expressly disclaims any and all warranties), express or implied, grant any license or right or give a covenant not to sue, or grant any other rights, including Proprietary Rights with respect to any Open Source Programs or any other third party Software Programs included within the Deliverables and/or the Lindows.com Software Product. Notwithstanding anything to the contrary in this Agreement, this Agreement does not and shall not be interpreted or construed to include any representation or warranty that the Open Source Programs or any other such third party Software Programs, or the use thereof, whether alone or in combination with other hardware, software, apparatuses, or methods, is or will be free from infringement of any Proprietary Rights or other rights of third parties. Lindows.com disclaims any and all liability arising from the use of such for claims of infringement of third party Intellectual Property Rights or other rights arising out of or relating to such Open Source Programs or any other such third party Software Programs. Builder assumes all risk and liability arising from the use, copying and distribution of such Open Source Programs and other third party Software Programs. 2.4.3 DELIVERABLES AND LINDOWS.COM SOFTWARE PRODUCTS NOT "SOLD": This Agreement does not allow or authorize Builder or any Reseller, End0-User, or any other third party to, and neither Builder nor any Reseller, End-User, or other third party shall, sell, resell, distribute, make available, or otherwise dispose of the Deliverables or Lindows.com Software Products except for distribution of the Lindows.com Software Products via license or sublicense only as an installed, unmodified and integrated part of the Composite Products and only as expressly provided in this section. For clarification, any references to "sale(s)," "resale(s)," "selling" or "reselling" of the Composite Products in this Agreement refer only to the sale and transfer of title of the hardware components of the Composite Products. The Deliverables and Lindows.com Software Product may only be licensed or sublicensed under this Agreement and only as expressly provided in Section . In no instance shall the Deliverables, Lindows.com Software Product, or any portion or element of any of the foregoing be sold or title thereof be transferred under this Agreement. 2.4.4 NO CHARGE FOR LINDOWS.COM SOFTWARE PRODUCTS: Builder shall not, and shall require and ensure that Resellers, their Resellers through multiple tiers and/or contractors shall not, charge any Resellers, End-Users, or any other third party, directly or indirectly, for the Lindows.com Software Product. 2.4.5 COMPATIBILITY OF LINDOWS.COM SOFTWARE PRODUCT: Builder shall test and take other commercially reasonable measures to ensure (a) the compatibility of the Lindows.com Software Product with Builder Products, and (b) that the Composite Products function correctly. 2.4.6 END-USER LICENSE & REQUIREMENTS: (a) LINDOWSOS(TM) LICENSE AGREEMENT FOR END-USERS: As express conditions to the license granted to License in Section 2.1, Builder shall (i) include, and shall require all Resellers through multiple tiers to include, the LindowsOS(TM) License Agreement currently located at the website http://www.lindows.com/eula in any distribution of Lindows.com Software Product or Composite Products, and (ii) require, and shall require all Resellers through multiple tiers to require that each End-User manifest its asset to the LindowsOS(TM) License Agreement in a legally enforceable manner prior to being given access to or making any use of the Lindows.com Software Product. At a minimum, Builder shall include, and shall require all Resellers through multiple tiers to include, the LindowsOS(TM) License Agreement as a "shrink-wrap" or "click-wrap" license agreement that clearly notifies the End-User that the use of the Lindows.com Software Product is subject to the LindowsOS(TM) License Agreement, requires the End-User to indicate assent either by opening the physical product package or by clicking on a designated button, and requires the End-User to view or scroll down through the LindowsOS(TM) License Agreement before opening the product package or clicking on the designated button. (b) NO WARRANTIES TO END-USERS FOR LINDOWS.COM SOFTWARE PRODUCT: In connection with End-Users, (i) Builder shall not, and shall require and ensure that Resellers through multiple tiers, contractors, and any other third party shall not, make any representation or warranty, express or implied, binding or purporting to bind Lindows.com in connection the Deliverables, Lindows.com Software Product, and/or Composite Products, including but not limited to representations or warranties relating to the performance, condition, title, non-infringement, merchantability, fitness for a particular purpose, system integration, or data accuracy of any of the foregoing, and (ii) Builder shall, and shall require and ensure that Resellers through multiple tiers, contractors, and any other third party shall, disclaim all warranties implied by law to the maximum extent permitted by applicable law. If Builder or any Reseller grants an express warranty in regarding the performance and/or condition of the Composite Products, such express warranty shall expressly exclude the Lindows.com Software Product installed on such Composite Product, which shall not be covered under such warranty. 2.4.7 EXPORT COMPLIANCE AND REGULATORY APPROVALS: The Deliverables and Lindows.com Software Products, including associated technical data, are subject to United States export control laws, and may be subject to export or import regulation restrictions in other countries. Notwithstanding anything else in this Agreement, Builder shall, and shall require and ensure that Resellers through multiple tiers, contractors, and any other third party shall, strictly comply with all such regulations and obtain all required licenses and/or other clearances to export, re-export, or import, as applicable, the Deliverables, Lindows.com Software Products, and any associated technical data to either of the foregoing, including but not limited to where the Lindows.com Software Products are installed on Composite Products. Builder shall, at its own expense, obtain and arrange for the maintenance in full force and effect of all governmental approvals, consents, licenses, authorizations, declarations, filings and registrations as may be necessary or advisable for the performance of the terms and conditions of this Agreement, including without limitation, fair trade approvals. 3. BRANDING REQUIREMENTS, BRANDING LICENSE: As express conditions to the license granted in Section 2.1, Builder shall (a) reproduce all copyright notices and other proprietary rights notices and the Lindows.com Branding Features without modification into the Composite Products, and (b) not remove, obscure, alter or destroy any Lindows Branding Features, copyright notices and other proprietary rights notices, confidential legends placed upon or contained within the Deliverables or Lindows.com Software Products or any related materials. Builder is not authorized to incorporate the Builder Branding Features into the Lindows.com Software Product, but Builder may incorporate Builder Branding Features in its reasonable discretion into the other elements of the Composite Products and into Builder's marketing materials for the Composite Products. Subject to the terms and conditions hereof and any branding guidelines that Lindows.com may provide to Builder from time to time, Lindows.com hereby grants to Builder a nonexclusive, nontransferable, non-assignable, nonsublicensable, royalty-free limited right and license, only in the Licensed Territory, to use and display the Lindows.com Branding Features on Composite Products for purposes of promoting and marketing Composite Products. Builder hereby acknowledges and agrees that Builder has no rights, title or interest in or to the Lindows.com Branding Features, and all benefits from the use of the Lindows.com Branding Features shall automatically vest in and inure to the benefit of Lindows.com. Builder shall not (i) apply for registration of the Lindows.com Branding Features (or any marks or features confusingly similar thereto) anywhere in the world, (ii) alter, modify or change the Lindows.com Branding Features in any manner, (iii) use any of the Lindows.com Branding Features, except as expressly authorized herein or by prior written approval of the owner thereof, or (iv) take any action inconsistent with Lindows.com's ownership of the Lindows.com Branding Features. 4. SUPPORT OBLIGATIONS: 4.1 GENERAL SUPPORT OPTIONS: Subject to the terms and conditions governing such support web site, Lindows.com will provide electronic support to End-Users at the website http://www.support.lindows.com or any successor website thereto, and such support shall consist exclusively of frequently asked questions ("FAQs"), a searchable knowledge base, forums, the opportunity to provide feedback, and emailing and receiving email responses to questions. 4.2 BUILDER SUPPORT OPTIONS: Subject to the terms and conditions governing such support web site, Builder may use the website Support.Lindows.com or any successor website thereto, or e-mail Lindows.com at builderhelp@lindows.com, where Builder's e-mail will be reviewed and responded to by Lindows.com customer support personnel. 4.3 PREMIUM SUPPORT OPTIONS: Lindows.com may, at its sole discretion and upon terms and conditions determined in its sole discretion, offer "Premium Support" options that provide additional support contact methods and mediums, extended support hours, escalated support, or other support-related options. 5. REPORTS AND PAYMENT: 5.1 REPORTS: While this Agreement is in effect, within thirty (30) days after the end of each calendar quarter, Builder will deliver to Lindows.com a written report setting forth (a) the number of units of Composite Products shipped, sold, transferred, disposed of or otherwise distributed by or for Builder (including through its Resellers through multiple tiers), or put to productive internal use by Builder, during such quarter; (b) the number of units of Composite Products shipped, sold, transferred, disposed of or otherwise distributed by or for each of Builder's authorized Resellers; (c) information requested by Lindows.com about End-Users (which may include without limitation name, address, and email address) who have purchased Composite Products during such quarter; and (d) information requested by Lindows.com about contractors described in Section 2.2 EMPLOYEES AND CONTRACTORS: The license granted in Section Subject to the restrictions in Section 2.4 RESTRICTIONS: and the other terms and conditions in this Agreement, Lindows.com hereby grants to Builder a nonexclusive, nontransferable, nonassignable, nonsublicensable (except as expressly set forth in Section 2.3 LIMITED RIGHT TO SUBLICENSE:) limited right and license, only in the Licensed Territory, solely to: hereof to Builder may be exercised by, and Builder may disclose the Confidential Information of Lindows.com to and allow use of the Confidential Information of Lindows.com by, only employees or contractors (exercising such rights solely on behalf of and for the sole benefit of Builder) of Builder who are bound by written agreements consistent with this Agreement, including without limitation with restrictions at least as restrictive as those contained in Section 2.4 RESTRICTIONS: , restrictions on the use and disclosure of Confidential Information that are at least as strict as those provided in Section 12. CONFIDENTIALITY:, and with prohibitions against any attempts to reverse engineer, decompile, disassemble, extract any element of and/or otherwise discover any element of the Deliverables, Lindows.com Software Product, other Confidential Information of Lindows.com, or any element of any of the foregoing. In respect of any agreement into which Builder enters with a third party concerning the Lindows.com Software Product, Builder shall incorporate the provisions set forth below in Section. who exercise any rights on behalf of Builder. 5.2 LINDOWS FEES: 5.2.1 ANNUAL FEE FOR BRONZE PROGRAM: Builder shall pay to Lindows.com a non-refundable annual fee of one hundred dollars ($100) for each one (1) year period (or fraction thereof) during the term of this Agreement. Such fee will be due and payable prior to Builder's use and access of the Lindows.com Software Product each year thereafter. 5.2.2 MONTHLY FEE FOR SILVER PROGRAM: Builder shall pay to Lindows.com a non-refundable monthly fee of five hundred dollars (US$500) for each month (or fraction thereof) during the term of this Agreement. Such fee shall be due and payable in advance of the first day of each calendar month. 5.3 PAYMENT METHODS AND TERMS: All payments made by Builder under this Agreement must be made by credit card only. If any amount payable under this Agreement is not paid by the applicable initial due date, then, in addition to any other remedies Lindows.com may have, Builder shall pay interest on such amount at a monthly rate of one percent (1%) (or, if less, the maximum rate permitted by applicable law) compounded on a daily basis beginning on the initial due date of such payment and continuing through the date on which Lindows.com actually receives full payment of such amount. 5.4 RIGHT TO CHANGE TERMS: Lindows.com, in its sole discretion, has the right to change the monthly license fee and/or the annual membership fee, effective thirty (30) days after receipt of written notice thereof by Builder. Upon any such change, Builder may, in its sole discretion, elect to terminate this Agreement by providing at least ten (10) days prior written notice to Lindows.com. Builder's failure to so terminate this Agreement shall constitute and be deemed Builder's acceptance of such changes. 5.5 TAXES: Builder acknowledges and agrees that Lindows.com does not take any responsibility to calculate, report, or remit sales or use taxes which may be assessed, due or owing to the taxing authorities of any jurisdiction for transactions that arise in connection with this Agreement, including Builder's use and distribution of the Lindows.com Software Product. Builder shall pay, and shall indemnify and hold Lindows.com harmless from and against, all taxes, duties and levies directly imposed by all foreign, federal, state, local or other taxing authorities (including, without limitation, export, sales, use, excise, and value-added taxes) based on the transactions or payments under this Agreement, other than taxes imposed or based on Lindows.com's net income. 5.6 RIGHT TO INSPECT BOOKS AND RECORDS: For three (3) years after the end of each Builder fiscal year during the term of this Agreement, Builder will maintain at its principal offices true and accurate books and records as sufficient to confirm Builder's compliance with this Agreement. Builder shall, during usual business hours, permit Lindows.com or its agents, at Lindows.com's expense and upon ten (10) days prior written notice, to inspect and make copies of such books and records for the purpose of verifying Builder's compliance with this Agreement. If such inspection reveals a material breach of this Agreement by Builder, then Builder will pay for the cost of such inspection in addition to any other remedies available to Lindows.com for such breach. 6. BUILDER'S RESALE POLICIES: Builder is free to determine is own pricing for Composite Products. Builder is free to determine its own resale policies for Composite Products so long as such resale policies do not violate the terms or conditions of this Agreement, any Third Party Agreements, the GPL or any other applicable open source license agreement, or applicable laws, rules and regulations. 7. LIMITED PERFORMANCE WARRANTY: For a period of thirty (30) days after the delivery of the Deliverables to Builder, Lindows.com warrants to Builder that the Lindows.com Software Product shall conform to, and operate substantially in accordance with, the specifications contained in the documentation provided by Lindows.com. Lindows.com's sole and exclusive obligation and liability and Builder's sole and exclusive remedy for a breach of the foregoing warranty is for Lindows.com to use commercially reasonable efforts to correct any errors in the Lindows.com Software Product, within a commercially reasonable time after being notified in writing of the error by Builder. THE FOREGOING WARRANTY DOES NOT APPLY TO THE DELIVERABLES OR LINDOWS.COM SOFTWARE PRODUCT THAT HAVE BEEN INCORPORATED, INTEGRATED OR MERGED WITH OTHER PRODUCTS OR CODE BY BUILDER, OR WHICH HAVE BEEN MODIFIED IN ANY WAY. 8. WARRANTY DISCLAIMER: EXCEPT FOR THE EXPRESS WARRANTIES GIVEN BY LINDOWS.COM HEREIN, THE DELIVERABLES, THE LINDOWS.COM SOFTWARE PRODUCT, THE CONFIDENTIAL INFORMATION OF LINDOWS.COM, AND THE LINDOWS.COM BRANDING FEATURES ARE PROVIDED TO BUILDER "AS-IS" WITHOUT ANY WARRANTY, EXPRESS, IMPLIED OR STATUTORY, OR ANY WARRANTIES ARISING OUT OF A COURSE OF PERFORMANCE, DEALING OR TRADE USAGE, AND THEIR EQUIVALENTS UNDER THE LAWS OF ANY JURISDICTION. EXCEPT FOR THE EXPRESS WARRANTIES GIVEN BY LINDOWS.COM HEREIN, TO THE MAXIMUM EXTENT ALLOWED BY LAW, LINDOWS.COM ON BEHALF OF ITSELF AND ITS LICENSORS HEREBY DISCLAIMS ALL WARRANTIES, BOTH EXPRESS AND IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF TITLE, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, SYSTEM INTEGRATION, AND DATA ACCURACY. ADDITIONALLY, OTHER THAN ANY EXPRESS WARRANTIES CONTAINED IN THIS AGREEMENT, LINDOWS.COM GIVES OR MAKES NO WARRANTIES AS TO ANY OTHER MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, SUPPORT SERVICES, THE OPERABILITY OF THE LINDOWS.COM SOFTWARE PRODUCT, THAT THE LINDOWS.COM SOFTWARE PRODUCT WILL BE UNINTERRUPTED, ERROR-FREE, ACCURATE OR OTHERWISE FUNCTION PROPERLY OR THAT THE MEDIA ON WHICH THE DELIVERABLES ARE PROVIDED ARE IS FREE OF VIRUSES OR OTHER HARMFUL COMPONENTS. BUILDER ACKNOWLEDGES THAT IT HAS NOT RELIED ON ANY REPRESENTATION THAT IS NOT EXPRESSLY SET OUT IN THIS AGREEMENT AND THAT NO ORAL OR WRITTEN ADVICE OR INFORMATION PROVIDED BY NOMADIX SHALL CREATE ANY WARRANTY. 9. BUILDER REPRESENTATIONS, INDEMNIFICATION: 9.1 REPRESENTATIONS: Builder represents and warrants to Lindows.com that: (a) any and all sublicenses granted by Builder in connection with the Composite Products shall be in compliance with the sublicense terms set forth in Section 2.3 LIMITED RIGHT TO SUBLICENSE: and otherwise in compliance with this Agreement; (b) that the Builder Products, Composite Products, and any actions taken by Builder, its employees, contractors and Resellers, shall not directly or indirectly infringe or misappropriate any third party Proprietary Rights or other rights; and (c) that installing the Lindows.com Software Product onto and integrating the Lindows.com Software Product with the Builder Product to create a Composite Product, does not and shall not directly or indirectly infringe or misappropriate any third party Proprietary Rights or other rights. 9.2 INDEMNIFICATION: Builder shall defend, indemnify and hold Lindows.com, its licensors, affiliates, successors, assigns, officers, directors, and employees ("Indemnified Parties") harmless from and against any and all claims, costs, damages, losses, liabilities, actions, recoveries, judgments and expenses (including reasonable attorneys' fees and expenses regardless of whether litigation was commenced) arising from or relating to (i) a breach of this Agreement by Builder, or (ii) a claim of bodily injury, death or damage to property arising from or relating to the Composite Product. 9.3 PROCEDURE: Lindows.com shall notify Builder promptly of any claim or liability for which indemnification is sought ("Claim"), provided, however, that the failure to give such notice shall not relieve Builder of its obligations hereunder except to the extent that Builder was actually and materially prejudiced by such failure. Lindows.com may, at its option and expense, participate and appear on an equal footing with Builder in the defense of any Claim that is conducted by Builder as set forth herein. Builder may not settle any Claim without the prior written approval of Lindows.com, which approval shall not be unreasonably withheld except that Lindows.com may withhold consent in its sole and absolute discretion to any settlement that involves any admission of or consent to liability of any kind or otherwise binds Lindows.com in any way. Notwithstanding any of the foregoing, Lindows.com shall have the right, in its sole and absolute discretion and at Developer's cost and expense, to employ attorneys of Lindows.com's own choice and to institute or assume the defense of any claim for which Lindows.com may seek indemnification from Builder hereunder. 10. DISCLAIMER OF DAMAGES: EXCEPT FOR INDEMNIFICATION OBLIGATIONS EXPRESSLY SET FORTH IN THIS AGREEMENT AND BREACH OF THE CONFIDENTIALITY PROVISIONS IN SECTION 12. CONFIDENTIALITY:, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY OTHER PERSON, WHETHER IN CONTRACT OR IN TORT (INCLUDING NEGLIGENCE), OR ANY OTHER LEGAL THEORY (INCLUDING STRICT LIABILITY), FOR ANY INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE, STATUTORY OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER, INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF GOOD WILL, LOSS OF DATA, LOSS OF PERFORMANCE, LOST REVENUE, LOST PROSPECTIVE ECONOMIC ADVANTAGE OR LOST PROFIT ARISING FROM ANY PERFORMANCE OR FAILURE TO PERFORM UNDER THIS AGREEMENT, IRRESPECTIVE OF WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE OR SUCH PARTY WAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT WILL LINDOWS.COM'S MAXIMUM AGGREGATE LIABILITY OF ANY KIND ARISING OUT OF THIS AGREEMENT EXCEED THE TOTAL FEES ACTUALLY PAID BY BUILDER TO LINDOWS.COM HEREUNDER. 11. OWNERSHIP: 11.1 BY LINDOWS.COM: As between Lindows.com and Builder, all right, title and interest (including without limitation all Proprietary Rights) in and to the Deliverables and the Lindows.com Software Products (other than any Open Source Programs or any other third party Software Programs included therein), the Confidential Information of Lindows.com, the Lindows.com Branding Features, and any element of the foregoing shall remain in and be the sole and exclusive property of Lindows.com and/or its licensors. All rights and licenses not expressly granted to Builder in this Agreement are expressly reserved by Lindows.com. 11.2 BY BUILDER: As between Lindows.com and Builder, all right, title and interest (including without limitation all Proprietary Rights) in and to the Builder Products, the Builder Branding Features, and any element of the foregoing shall remain in and be the sole and exclusive property of Builder and/or its Licensors. 12. CONFIDENTIALITY: 12.1 CONFIDENTIAL INFORMATION: Builder acknowledges that, in the course of using the Deliverables and Lindows.com Software Products as provided under this Agreement and exercising its rights under this Agreement, it may obtain confidential information relating to the Deliverables and Lindows.com Software Products and/or to Lindows.com and/or to its licensors, suppliers, contractors, agents, customers and/or end users ("Confidential Information"). Such Confidential Information shall, as between Builder and Lindows.com, belong solely to Lindows.com and shall include, without limitation: (a) the source code of the Deliverables and Lindows.com Software Products (including any and all Updates), the existence of and terms of this Agreement, trade secrets, know-how, inventions (whether or not patentable), techniques, processes, programs, ideas, algorithms, formulas, schematics, testing procedures, software design and architecture, computer code, internal documentation, design and functional specifications, product requirements, problem reports and performance information, software documents and other technical, business, product, marketing and financial information, plans and data; (b) any information designated by Lindows.com as confidential in writing or, if disclosed orally or in other intangible form, disclosed under circumstances indicating its confidential nature; and (c) any information disclosed to Builder by Lindows.com that is reasonably deemed to be of a confidential nature because of its nature whether or not it is identified as such in writing or by stamp. 12.2 OBLIGATIONS: Builder will maintain the Confidential Information of Lindows.com in strict confidence and will not use such Confidential Information or disclose such Confidential Information to any third party, except that (a) Builder may use the Confidential Information of Lindows.com only to the extent necessary to exercise its rights and fulfill its obligations under this Agreement, and (b) Builder may disclose such Confidential Information only to employees or contractors (exercising the rights granted pursuant to Section 2.1 solely on behalf of and for the sole benefit of Builder) of Builder who are bound by written agreements consistent with this Agreement, including without limitation with restrictions on the use and disclosure of Confidential Information that are at least as strict as those provided in this Section 12. CONFIDENTIALITY:, and with prohibitions against any attempts to reverse engineer, decompile, disassemble, extract any element of and/or otherwise discover any element of the Confidential Information of Lindows.com. Builder will protect the confidentiality and avoid the unauthorized use, disclosure, publication, and dissemination of such Confidential Information with the same degree of care that Builder uses to protect its own confidential and proprietary information of similar nature and like importance, and in no event with less than reasonable care. Builder will notify Lindows.com of any actual or suspected unauthorized use or disclosure of such Confidential Information or infringement of any of Confidential Information of which Builder has knowledge. Builder will cooperate with Lindows.com in the investigation and prosecution of such unauthorized use, disclosure or infringement. 12.3 LIMITATIONS: The restrictions of this Agreement on use and disclosure of the Confidential Information of Lindows.com shall not apply to information that Builder can contemporaneously document: (a) was in the possession or control of Builder at the time of its disclosure by Lindows.com to Builder hereunder; (b) is or becomes publicly available through lawful means and by no breach of this Agreement or any third party's confidentiality obligation; (c) is disclosed to Builder without confidential or proprietary restriction by a third party who rightfully possesses such information and did not learn of it, directly or indirectly, from Lindows.com; or (d) is independently developed by Builder without use of, reference or access to such Confidential Information and without violation of any confidentiality restriction. 12.4 DISCLOSURE REQUIRED BY LAW: In the event Builder is compelled by law or a court order to disclose the Confidential Information of Lindows.com, Builder shall promptly notify Lindows.com (in any event prior to any such compelled disclosure) and shall cooperate with Lindows.com in protecting against any such disclosure and/or obtaining a protective order narrowing the scope of such disclosure. Builder further agrees that if Lindows.com and/or Builder is not successful in precluding the requesting legal body from requiring the disclosure of the Confidential Information, Builder will furnish only that portion of the Confidential Information which is legally required and will exercise all reasonable efforts to obtain reliable assurances that confidential treatment will be accorded the Confidential Information. Any Confidential Information released under this Section 12. CONFIDENTIALITY: shall remain Confidential Information for all other purposes. 12.5 INJUNCTIVE RELIEF: The parties hereby agree that any breach of any provision of this Agreement regarding confidentiality or protection of Proprietary Rights would constitute irreparable harm and damage for which there can be no adequate remedy at law. Therefore, upon any such breach or threatened breach by Builder, Lindows.com will be entitled to seek and obtain an immediate injunction, restraining order and/or other appropriate equitable relief, without the requirement of posting a bond or proving actual damages, in addition to whatever remedies it may have under applicable law. 13. TERM AND TERMINATION: 13.1 TERM OF AGREEMENT: The term of this Agreement shall commence on the date that Builder agrees to this Agreement and shall continue for an initial term of one (1) unless earlier terminated pursuant to this Section . The term shall automatically renew for successive one (1) year renewal terms unless either party notifies the other in writing of its intention not to renew the term at least thirty (30) days prior to the expiration of the then-current term or renewal term. 13.2 TERMINATION: Either party shall have the right to terminate this Agreement immediately by written notice, in the event: (a) that the other party breaches a material representation, warranty or obligation under this Agreement and, to the extent such breach is curable, fails to cure such breach within thirty (30) days (or seven (7) days for payment breaches) following the date the breaching party receives written notice from the non-breaching party describing in reasonable detail the nature of such breach; (b) the other party breaches this Agreement and such breach is not capable of cure; (c) of the other party's filing of a petition, action or other proceeding seeking relief or protection under state or federal bankruptcy laws, whether voluntary or involuntary; (iv) of an assignment of the other party's assets made for the benefit of creditors; (d) of the appointment of a trustee or receiver to take charge of the other party's business for any reason; or (e) of the other party's becoming insolvent, or being unable to pay its debts as due, or ceasing to conduct business in the normal course. 13.3 EFFECT OF EXPIRATION OR TERMINATION: Upon the expiration or termination of this Agreement, (a) all rights and licenses granted by Lindows.com to Builder will terminate, (b) Builder shall cease to use or exploit in any manner the Deliverables, Lindows.com Software Product, Confidential Information, the Lindows.com Branding Features, or any element of the foregoing and shall destroy all materials, documents and files containing any of the foregoing, (c) Builder will promptly return to Lindows.com all Confidential Information of Lindows.com and all copies thereof, and (d) Sections l, 2.3.3, 2.4, 5, 8, 9, 10, 11, 12, 13.3, 14, 15, 16, 17, 18, 19, 22 and 23 shall survive. Notwithstanding the foregoing, the expiration or termination of this Agreement will not relieve the parties of any liability or obligation that accrued prior to such expiration or termination.. 14. GOVERNING LAW; DISPUTE RESOLUTIONS: This Agreement shall be construed under the laws of the State of California, without regard to its conflicts of law rules and without regard to the United Nations Convention on the International Sale of Goods. If a dispute arises in relation to this Agreement, the parties shall submit the dispute to binding arbitration. Each party shall give fifteen (15) days written notice to the other party prior to initiating any arbitration proceedings. Any arbitration hereunder shall be conducted under the American Arbitration Association rules then in effect and applying California law. Each such arbitration shall be conducted by a panel of three arbitrators appointed in accordance with such rules. Any such arbitration shall be held in the County of San Diego, California. The arbitrators shall determine all issues regarding such dispute, including without limitation, procedure, discovery, arbitrability and waiver. The parties shall instruct the arbitrators to render their decision no later than ninety (90) days after submission of the dispute, which decision shall be in writing and shall specify the factual and legal bases for the award. The arbitration of such issues, including the determination of any amount of damages suffered by any party hereto, shall be final and binding upon all parties. The arbitrators shall have the authority to grant specific performance, and judgment on the arbitration award may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, the arbitrator or arbitrators shall not be authorized to award punitive damages with respect to any such claim or controversy, nor shall any party seek punitive damages relating to any matter under, arising out of or relating to this Agreement under any circumstances. Except as otherwise set forth in this Agreement, the cost of any arbitration hereunder and all fees involved including reasonable attorneys' fees incurred by the party determined by the arbitrators to be the prevailing party, shall be paid by the party determined by the arbitrators not to be the prevailing party, or otherwise allocated in an equitable manner as determined by the arbitrators. 15. NOTICES: Any notice or communication required or permitted to be given hereunder may be delivered by personal delivery, deposited with an overnight courier, sent by email or facsimile (provided delivery is confirmed), or registered or certified U.S. mail, return receipt requested, in each case to the address set forth on the initial page hereof or at such other addresses as shall be designated in writing by either party to the other in accordance with this Section 15. Notices will be deemed effective on the date of personal delivery, one (1) business day after dispatch if delivered by overnight courier, one (1) business day after transmission by email or facsimile, and three (3) business days after posting by registered or certified U.S. mail. 16. ASSIGNMENT: Builder shall not assign, whether by operation of law or otherwise, this Agreement or any right or interest under this Agreement, nor delegate any work or obligation to be performed under this Agreement, without Lindows.com's prior written consent, which may be given in its sole discretion, and any attempt to assign, delegate or otherwise transfer any of Builder's rights or obligations hereunder without such consent shall be void and ineffective. Subject to the preceding sentence, this Agreement shall bind each party and its permitted successors and assigns. Lindows.com may assign this Agreement without the consent of Builder by providing prior written notice thereof to Builder. 17. INDEPENDENT CONTRACTORS: The relationship of the parties is that of independent contractor, and nothing herein shall be construed to create a partnership, joint venture, franchise, employment, or agency relationship between the parties. Builder shall have no authority to enter into agreements of any kind on behalf of Lindows.com and shall not have the power or authority to bind or obligate Lindows.com in any manner to any third party. 18. FORCE MAJEURE: Neither Lindows.com nor Builder shall be liable for damages for any delay or failure of delivery (except for the payment of money), arising out of causes beyond their reasonable control and without their fault or negligence, including, but not limited to, acts of nature, acts of a military authority, fires, riots, acts of terrorism, wars, embargoes, or communications failures. Notwithstanding anything to the contrary contained herein, if either party is unable to perform hereunder for a period of sixty (60) consecutive days, then the other party may terminate this Agreement immediately without liability by ten (10) days written notice to the other. 19. TRADEMARKS: "Lindows.COM(TM)" and "LindowsOS(TM)" are registered trademarks of Lindows.com, Inc., All Rights Reserved. "Linux" is a registered trademark of Linus Torvalds. All other trademarks are the property of their respective owners. 20. GENERAL OBLIGATION TO MARKET, PROMOTE, AND DISTRIBUTE: Builder shall make commercially reasonable efforts to market, promote, and distribute the Composite Products. 21. PUBLICITY: Lindows.com shall be permitted to use the name of Builder in publicity releases, advertising, or similar activity without the prior written consent of Builder. 22. REGISTRATION DATA: Builder represents and warrants that it shall not violate any rights of any person or entity, including, without limitation, rights of publicity, privacy or personality, through Builder's collection or use of Registration Data or other personal or private data. "Registration Data" means the data and information submitted by End-Users of Composite Products and received by Builder, including but not limited to the first name, last name, and email address of each such End-Users. 23. MISCELLANEOUS: The parties hereto are independent contractors. Nothing contained herein or done in pursuance of this Agreement shall constitute either party the agent of the other party for any purpose or in any sense whatsoever, or constitute the parties as partners or joint venturers. This Agreement constitutes the entire understanding of the parties with respect to the subject matter of this Agreement and merges all prior communications, understandings, and agreements. This Agreement may be modified only by a written agreement signed by both parties. The failure of either party to enforce at any time any of the provisions hereof shall not be a waiver of such provision, or any other provision, or of the right of such party thereafter to enforce any provision hereof. If any provision specified in this Agreement shall be invalid under any applicable law, the invalid provision, or portion thereof, shall be struck and the remainder, if any, shall be deemed enforceable to the extent permitted under applicable law, and the remaining provisions of this Agreement shall be given effect in accordance with their terms. The captions or headings of the Sections of this Agreement are for reference only and are not to be construed in any way as part of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall constitute an original, but all of which together shall constitute one instrument. ********************************** Lindows.com - Products Page 1 of 5 Search: Warehouse LINDOWSOS LICENSE AGREEMENT LindowsOS(TM) and Lindows.Com(TM) are not endorsed or affiliated with Microsoft Corporation in any way. IMPORTANT: THIS IS A LEGAL AGREEMENT BETWEEN LINDOWS.COM, INC. ("LINDOWS") AND EITHER (1) A FAMILY END-USER ("FAMILY") -- AN INDIVIDUAL END-USER AGREEING TO A FAMILY EDITION LICENSEE FOR PERSONAL USE AND USE BY MEMBERS OF SUCH INDIVIDUAL'S HOUSEHOLD OR (2) A BUSINESS END-USER ("BUSINESS") AGREEING TO A BUSINESS EDITION LICENSE FOR AN AGREED UPON NUMBER OF SEATS OR NUMBER OF SIMULTANEOUS USERS, BUT NOT BOTH. THE FAMILY OR THE BUSINESS ("YOU" OR "YOUR"), AS APPROPRIATE, AGREES TO CAREFULLY READ THIS LICENSE AGREEMENT (THIS "AGREEMENT") BEFORE INSTALLING OR USING THE LINDOWSOS SOFTWARE PRODUCT (INCLUDING ALL ACCOMPANYING DOCUMENTATION, ENHANCEMENTS, UPGRADES AND EXTENSIONS THERETO "LINDOWSOS"). INSTALLING OR OTHERWISE USING THIS PRODUCT INDICATES YOUR ACKNOWLEDGMENT THAT YOU HAVE READ THIS AGREEMENT AND AGREE TO BE BOUND BY AND COMPLY WITH ITS TERMS. IF YOU DO NOT AGREE TO THIS AGREEMENT, PROMPTLY RETURN LINDOWSOS (WITHOUT INSTALLING IT) TO PLACE OF PURCHASE AND ANY MONEY YOU HAVE PAID FOR LINDOWSOS WILL BE RETURNED. SELECTING THE "I ACCEPT THIS AGREEMENT" OPTION FURTHER CONFIRMS YOUR ACCEPTANCE OF ALL TERMS CONTAINED IN THIS AGREEMENT. 1. LICENSE. 1.1 License. a. Family License: If You are a Family or Individual, You agree to the following terms of this Section i.1.a: LindowsOS is a modular operating system made up of individual software components (each individual software component and all accompanying documentation, enhancements, upgrades and extensions thereto are referred to herein as "Software Program(s)") that were created either by Lindows or various individuals and entities ("Third Parties"). http://www.lindows.com/lindows_products_OSEULA.php 9/4/2003 Lindows.com - Products Page 2 of 5 Subject to the terms and conditions of this Agreement, Lindows grants You a non-exclusive license to use the object code form of LindowsOS for Your personal use in accordance with the accompanying documentation. You may download and use LindowsOS on multiple computers owned, leased or rented by You; provided, however, You and members of Your Household (a "Household" consists of those individuals that currently reside with You) are the only individuals with the right to use Your licensed copy(ies) of LindowsOS. For example, if You have a desktop computer at home and a laptop computer which You travel with, You may download a copy of LindowsOS on both machines for the personal use of members of Your Household and You. You agree that You are responsible for the members of Your Household's compliance with the terms of this Agreement as though they were You and had agreed to all terms and conditions herein. Except as otherwise expressly set forth herein, You may not (and shall not allow any member of Your Household or any other Third Party to) (i) remove any product identification or other notices; (ii) copy LindowsOS (other than for back-up purposes, for Your personal use on Your multiple machines as set forth in this Section 1.1.a, or for archival purposes); (iii) provide, lease, lend, use for timesharing or service bureau purposes or otherwise use or allow others to use LindowsOS to or for the benefit of Third Parties, or (iv) modify LindowsOS or incorporate LindowsOS into or with other software, except as may be provided for in this agreement. b. Business License: If You are a Business, You agree to the following terms of this Section 1.1.b: LindowsOS is a modular operating system made up of individual software components (each individual software component and all accompanying documentation, enhancements, upgrades and extensions thereto are referred to herein as "Software Program(s)") that were created either by Lindows or various individuals and entities ("Third Parties"). Subject to the terms and conditions of this Agreement, Lindows grants You a non-exclusive license for Your authorized users to use the object code form of LindowsOS for Your internal business purposes on Business owned, rented or leased computers in accordance with the accompanying documentation for: (1) solely up to the number of Simultaneous Users purchased by You as set forth at www.lindows.com/businesslicense, regardless of the number of Business owned, rented or leased computers that You download LindowsOS on or (2) solely up to the number of Seats purchased by You as set forth at www.lindows.com/businesslicense, "Simultaneous Users" refers to authorized users that may use LindowsOS at the same time. A "Seat" is a single computer processing unit or "CPU" (including computers with redundant processing systems), whether LindowsOS is installed directly on that CPU or is served from a centralized server. Except as otherwise expressly set forth herein, You and Your authorized users may not (and shall not allow any Third Party or any of Your authorized users to) (i) remove any product identification or other notices; (ii) copy LindowsOS (other than for back-up purposes, for use on multiple Seats as set forth in this Section 1.1.b, or for archival purposes); (iii) provide, lease, lend, use for timesharing or service bureau purposes or otherwise use or allow others to use LindowsOS to or for the benefit of Third Parties, or (iv) modify LindowsOS or incorporate LindowsOS into or with other software, except as may be provided for in this agreement. You shall keep a current record of the location of each copy of LindowsOS You make. 1.2 Third Party Agreements. Many of the Software Programs included in LindowsOS are distributed under the terms of agreements with Third Parties ("Third Party Agreements") which may expand or limit Your rights to use certain Software Programs as set forth in Section 1.1. Certain Software Programs may be licensed (or sublicensed) to You under the GNU General http://www.lindows.com/lindows_products_OSEULA.php 9/4/2003 Lindows.com - Products Page 3 of 5 Public License and other similar open source license agreements ("OSLAs") which, among other rights, permit You to copy, modify and redistribute certain Software Programs, or portions thereof, and have access to the source code of certain Software Programs, or portions thereof. In addition, certain Software Programs, or portions thereof, may be licensed (or sublicensed) to You under terms stricter than those set forth in Section 1.1. Please review visit www.lindows.com/licensing for the on-line documentation that accompanies certain Software Programs, or portions thereof, for the applicable Third Party Agreements. To the extent any Third Party Agreements require that Lindows provide rights to use, copy or modify a Software Program that are broader than the rights granted in Section 1.1, then such rights shall take precedence over the rights and restrictions granted in this Agreement solely for such Software Programs. 1.3 Violation of Licensing Terms. Any violation by You of the applicable license terms set forth in Section 1.1 or Section 1.2, as appropriate, shall immediately terminate Your license to use LindowsOS. If You do not agree to comply with and be bound by the terms of the applicable license agreement(s), do not install, distribute or otherwise use LindowsOS. 2. PROPRIETARY RIGHTS. All right, title and interest in LindowsOS, including source code, documentation, appearance, structure and organization, are held by Lindows and/or its licensors and are protected by copyright and other laws. You may not copy or otherwise use LindowsOS, in whole or in part, except as expressly permitted in this Agreement. Title to LindowsOS, or to any copy, modification or merged portion of any of the Software Programs, shall at all times remain with Lindows and/or its licensors, subject to the terms of the applicable Third Party Agreement(s) to the Software Programs under consideration. 3. TRADEMARKS "Lindows.com" and "LindowsOS" are registered trademarks of Lindows.com, Inc., All Rights Reserved. "Linux" is a registered trademark of Linus Torvalds. All other trademarks are the property of their respective owners. While certain Third Party Agreements described in Section 1.2 may allow You to copy, modify and distribute certain Software Programs, they do not permit You to distribute the Software Programs utilizing Lindows.com's trademarks. 4. LIMITED WARRANTY. IF LINDOWSOS WAS DISTRIBUTED TO YOU BY LINDOWS OR A LINDOWS AUTHORIZED DISTRIBUTOR ON CD-ROM OR OTHER TANGIBLE STORAGE MEDIA, LINDOWS WARRANTS THAT THE STORAGE MEDIA IN THIS PRODUCT WILL BE FREE FROM DEFECT IN MATERIALS AND WORKMANSHIP UNDER NORMAL USE FOR A PERIOD OF THIRTY (30) DAYS FROM THE DATE THAT YOU ACQUIRE IT. IF SUCH A DEFECT OCCURS, RETURN THE MEDIA TO LINDOWS AT, LINDOWS.COM, INC., 9333 GENESEE AVE., SAN DIEGO, CA 92121, AND LINDOWS WILL REPLACE IT FREE OF CHARGE. THIS REMEDY IS YOUR EXCLUSIVE REMEDY FOR BREACH OF THIS WARRANTY. EXCEPT WHERE SPECIFICALLY STATED OTHERWISE IN THIS AGREEMENT, LINDOWSOS, INCLUDING WITHOUT LIMITATION http://www.lindows.com/lindows_products_OSEULA.php 9/4/2003 Lindows.com - Products Page 4 of 5 EACH SOFTWARE PROGRAM, IS PROVIDED TO YOU ON AN "AS IS" BASIS, WITHOUT ANY OTHER WARRANTIES OR CONDITIONS AND LINDOWS EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THOSE ARISING BY LAW, STATUTE, USAGE OF TRADE, COURSE OF DEALING OR OTHERWISE. ANY WARRANTY OR REMEDY PROVIDED UNDER THIS AGREEMENT EXTENDS ONLY TO THE PARTY WHO PURCHASES A LICENSE TO LINDOWSOS FROM LINDOWS OR A LINDOWS AUTHORIZED DISTRIBUTOR. Some jurisdictions do not allow the exclusion of implied warranties, so the above exclusion may not apply to You. You may have other rights which vary from jurisdiction to jurisdiction. 5. LIMITATION OF LIABILITY. THE ENTIRE RISK AS TO THE RESULTS AND PERFORMANCE OF LINDOWSOS IS ASSUMED BY YOU. NEITHER LINDOWS NOR ITS APPOINTED DEALERS, SUPPLIERS OR LICENSEES SHALL HAVE ANY LIABILITY TO YOU OR ANY OTHER PERSON OR ENTITY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, LOSS OF REVENUE OR PROFIT, LOST OR DAMAGED DATA OR OTHER COMMERCIAL OR ECONOMIC LOSS, EVEN IF LINDOWS OR SUCH DEALER, SUPPLIER OR LICENSEE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, OR THEY ARE FORESEEABLE. OUR MAXIMUM AGGREGATE LIABILITY TO YOU AND THAT OF OUR DEALERS AND SUPPLIERS FOR DIRECT DAMAGES SHALL NOT EXCEED THE AMOUNT PAID BY YOU FOR LINDOWSOS. THE LIMITATIONS IN THIS SECTION SHALL APPLY WHETHER OR NOT THE ALLEGED BREACH OR DEFAULT IS A BREACH OF A FUNDAMENTAL CONDITION OR TERM OR A FUNDAMENTAL BREACH. Some jurisdictions do not allow the limitation or exclusion of liability for incidental or consequential damage, so the above limitation may not apply to You. 6. DISTRIBUTION. If You are permitted to redistribute any Software Programs under an appropriate OSLA, it is Your responsibility to comply with all export laws, rules and regulations in the jurisdictions where the Software Programs are exported from, exported to, or re-exported from time to time 7. TERM. This Agreement is effective until terminated. You may terminate this license at any time by destroying all copies of LindowsOS. The Agreement will terminate automatically if You fail to comply with any term or condition of the Agreement. The provisions of Sections 1.2 (regarding OSLAs that remain in (force) and 2 - 8, shall survive termination. 8. GENERAL. http://www.lindows.com/lindows_products_OSEULA.php 9/4/2003 Lindows.com - Products Page 5 of 5 This Agreement, together with the Third Party Agreements, is the entire agreement regarding Your use of Lindows0S, superseding any other agreement or discussions, oral or written, and may not be changed except by a signed [GRAPHIC agreement. Except as set forth in the appropriate OSLA, You may not assign Your rights or obligations under this Agreement without the prior consent of Lindows. This Agreement shall be governed by and construed in accordance with the laws of the State of California, excluding that body of law applicable to choice of law and excluding the United Nations Convention on Contracts for the International Sale of Goods and any legislation implementing such Convention, if otherwise applicable. The sole jurisdiction and venue for actions related to the subject matter hereof shall be the state and federal courts located in San Diego County. In any action to enforce this Agreement, the prevailing party shall be entitled to costs and attorneys' fees. If any provision of this Agreement is declared by a Court of competent jurisdiction to be invalid, illegal, or unenforceable, such a provision shall be severed from the Agreement and the other provisions shall remain in full force and effect. At no time shall a failure or delay in enforcing any provisions, exercising any option or requiring performance, be construed to be a waiver. Copyright(C)2003 Lindows.com, Inc. All rights reserved. Lindows.com is not endorsed by or affiliated with Microsoft Corporation in any way. Terms and Conditions Privacy Policy http://www.lindows.com/lindows_products_OSEULA.php 9/4/2003 Exhibit D LINDOWS DOCUMENTATION 23 LINDOWSOS QUICKSTART GUIDE TABLE OF CONTENTS 1 1- WHAT CAN I DO? 2-3 2- WHAT SHOULD I DO FIRST? 4-5 3- START LINDOWSOS 6-7 LindowsOS QuickStart Guide 4- MODEM 8-9 4- MODEM 10 5- BROADBAND EXPRESS 11 7- CLICK-N-RUN WAREHOUSE 13-14 7- CLICK-N-RUN (CONT) 15-16 8- SAMPLE DESKTOP 17-18 9- EMAIL 19-20 9- E-MAIL (CONT) 21-22 9- E-MAIL (CONT) 23 10- PRINTER 24-25 10- PRINTER 26-27 10- PRINTER 28 11- FILE MANAGEMENT 29 12- REGISTER 30 13- LEARN MORE 31 14- SUPPORT 32 15- UPGRADE 33 16- KEYBOARD SHORTCUTS 34 COPYRIGHT LINDOWS.COM SUPPORT.LINDOWS.COM EXIT CONGRATULATIONS ON PURCHASING LINDOWSOS We've created this guide so that you can start enjoying Lindows)S as soon as possible. Here you'll find the answers to these basic questions: 1. What can I do with LindowsOS?..............................................2 2. What should I do first?....................................................4 3. How do I start LindowsOS?..................................................6 4. How do I connect to the Internet via modem?................................8 5. How do I connect to the Internet via broadband (cable, DSL, LAN)?.........11 6. How do I install the Click N Run Express CD?..............................12 7. How do I install software from the Click N run Warehouse?.................13 8. What are the icons on the desktop for?....................................17 9. How do I set up my Email?.................................................19 10. How do I connect my local printer?........................................24 11. How do I move files around on my computer?................................29 12. How do I register and activate LindowsOS?.................................30 13. Where can I learn more about LindowsOS....................................31 14. How do I search the online support site?..................................32 15. How do I upgrade my Click-N-Run Membership?...............................33 16. What keyboard shortcuts can I use?........................................34 Thank you for purchasing LINDOWSOS [Step 1 of Lindows QuickStart Guide] [Step 2 of Lindows QuickStart Guide] [Step 3 of Lindows QuickStart Guide] [Step 4 of Lindows QuickStart Guide] [Step 4 continued of Lindows QuickStart Guide] [Step 5 of Lindows QuickStart Guide] [Step 6 of Lindows QuickStart Guide] [Step 7 of Lindows QuickStart Guide] [Step 7 continued of Lindows QuickStart Guide] [Step 8 of Lindows QuickStart Guide] [Step 9 of Lindows QuickStart Guide] [Step 9 continued of Lindows QuickStart Guide] [Step 9 continued of Lindows QuickStart Guide] [Step 10 of Lindows QuickStart Guide] [Step 10 continued of Lindows QuickStart Guide] [Step 10 continued of Lindows QuickStart Guide] [Step 11 of Lindows QuickStart Guide] [Step 12 of Lindows QuickStart Guide] [Step 13 of Lindows QuickStart Guide] [Step 14 of Lindows QuickStart Guide] [Step 15 of Lindows QuickStart Guide] [Step 16 of Lindows QuickStart Guide] [back cover Lindows QuickStart Guide] Exhibit E LINDOWS.COM BRANDING FEATURES; TRADEMARK GUIDELINES BRANDING FEATURES The Branding Features are available at http://www.lindows.com/builder TRADEMARK NOTICES The Branding Features are trademarks and service marks of Lindows.com. The Branding Features shall be accompanied by the superscript "TM" or "(R)" symbol, as specified by Lindows.com, which must appear to the immediate right of the Branding Features. The footnote "LindowsOS is the trademark of Lindows.com, Inc." or "Lindows.com is the trademark of Lindows.com, Inc.", as applicable, shall accompany each use of the Branding Features (or, if a Branding Feature is used multiple times in a document, screen or packaging, such notice shall accompany the first prominent use in such document, screen or packaging). USING THE BRANDING FEATURES Licensee may only use the Branding Features as an indication that the Lindows.com Software Product is being offered to end users via distribution pursuant to the Agreement. Licensee may not use the Branding Features in such a way as to suggest that the Branding Features may also apply to any hardware or software other than the Lindows.com Software Product. When referring to Lindows.com, Inc., Licensee shall use the name "Lindows.com". When referring to the Lindows.com Software Product, Licensee shall use the trademark "LindowsOS". SIZING AND PLACEMENT REQUIREMENTS The digitized, machine-readable file for the artwork of the Branding Features appears above in this Exhibit E. Licensee shall not alter this file or the Branding Features in any way, including, without limitation, changing the color of any of the logos or artwork, separating any words in the Branding Features from the remainder of the Branding Features or replacing words with any other words. Licensee shall not combine the Branding Features with any other feature, including, without limitation, other marks, words, graphics, photos, slogans, numbers, design features or symbols. The Branding Features shall not be larger or more prominent than the trademark, logo or any Licensee trade name that appears on the same packaging, documentation, advertising or other materials. The Branding Features shall not be smaller or less prominent than any name, trademark or logo of any third party that appears on the same packaging, documentation, advertising or other materials. 24 EX-10.10 7 a97792a4exv10w10.txt EXHIBIT 10.10 Exhibit 10.10 *** CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT (INDICATED BY ASTERISKS) HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER 17 C.F.R. SECTIONS 200.80(B)(4), 200.803 AND 230.406 STANDARD OFFICE LEASE BY AND BETWEEN ARDEN REALTY FINANCE V, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY, AS LANDLORD, AND LINDOWS.COM, INC., A DELAWARE CORPORATION DBA DELAWARE LINDOWS.COM, INC., AS TENANT SUITES 250 AND 300 GENESEE EXECUTIVE PLAZA TABLE OF CONTENTS PAGE ---- ARTICLE 1 BASIC LEASE PROVISIONS...................................... 1 ARTICLE 2 TERM/PREMISES............................................... 1 ARTICLE 3 RENTAL...................................................... 2 (a) Basic Rental................................................ 2 (b) Increase in Direct Costs.................................... 2 (c) Definitions................................................. 3 (d) Determination of Payment.................................... 5 ARTICLE 4 INTENTIONALLY OMITTED....................................... 6 ARTICLE 5 HOLDING OVER................................................ 6 ARTICLE 6 OTHER TAXES................................................. 7 ARTICLE 7 USE......................................................... 7 ARTICLE 8 CONDITION OF PREMISES....................................... 8 ARTICLE 9 REPAIRS AND ALTERATIONS..................................... 8 (a) Landlord's Obligation....................................... 8 (b) Tenant's Obligation......................................... 8 (c) Alterations................................................. 9 (d) Insurance: Liens............................................ 9 (e) Costs and Fees; Removal..................................... 9 ARTICLE 10 LIENS....................................................... 10 ARTICLE 11 PROJECT SERVICES............................................ 10 (a) Basic Services.............................................. 10 (b) Excess Usage................................................ 11 (c) Additional Electrical Service............................... 11 (d) HVAC Balance................................................ 11 (e) Telecommunications.......................................... 11 (f) After-hours Use............................................. 11 (g) Reasonable Charges.......................................... 11 (h) Sole Electrical Representative.............................. 12 (i) Abatement Event............................................. 12 (j) Card Key Access............................................. 12 ARTICLE 12 RIGHTS OF LANDLORD.......................................... 12 (a) Right of Entity............................................. 12 (b) Maintenance Work............................................ 13 (c) Rooftop..................................................... 13 ARTICLE 13 INDEMNITY; EXEMPTION OF LANDLORD FROM LIABILITY............. 13 (a) Indemnity................................................... 13 (b) Exemption of Landlord from Liability........................ 14 (c) Security.................................................... 14 ARTICLE 14 INSURANCE................................................... 14 (a) Tenant's Insurance.......................................... 14 (b) Form of Policies............................................ 15 (c) Landlord's Insurance........................................ 15 (d) Waiver of Subrogation....................................... 15 (e) Compliance with Law......................................... 16 ARTICLE 15 ASSIGNMENT AND SUBLETTING................................... 16 -i- TABLE OF CONTENTS (continued) PAGE ---- ARTICLE 16 DAMAGE OR DESTRUCTION....................................... 18 ARTICLE 17 SUBORDINATION............................................... 19 ARTICLE 18 EMINENT DOMAIN.............................................. 20 ARTICLE 19 DEFAULT..................................................... 20 (a) Tenant's Default............................................ 20 (b) Landlord's Default.......................................... 21 ARTICLE 20 REMEDIES.................................................... 21 ARTICLE 21 TRANSFER OF LANDLORD'S INTEREST............................. 22 ARTICLE 22 BROKER...................................................... 23 ARTICLE 23 PARKING..................................................... 23 ARTICLE 24 WAIVER...................................................... 23 ARTICLE 25 ESTOPPEL CERTIFICATE........................................ 24 ARTICLE 26 LIABILITY OF LANDLORD....................................... 24 ARTICLE 27 INABILITY TO PERFORM........................................ 25 ARTICLE 28 HAZARDOUS WASTE............................................. 25 ARTICLE 29 SURRENDER OF PREMISES; REMOVAL OF PROPERTY.................. 26 ARTICLE 30 MISCELLANEOUS............................................... 27 (a) SEVERABILITY; ENTIRE AGREEMENT.............................. 27 (b) Attorneys' Fees Waiver of Jury Trial........................ 28 (c) Time of Essence............................................. 28 (d) Pleadings; Joint and Several................................ 28 (e) Reserved Area............................................... 28 (f) NO OPTION................................................... 28 (g) Use of Project Name; Improvements........................... 28 (h) Rules and Regulations....................................... 28 (i) Quiet Possession............................................ 29 (j) Rent........................................................ 29 (k) Successors and Assigns...................................... 29 (l) Notices..................................................... 29 (m) Intentionally Omitted....................................... 29 (n) Right of Landlord to Perform................................ 29 (o) Access, Changes in Protect Facilities, Name................. 29 (p) Signing Authority........................................... 30 (q) Identification of Tenant.................................... 30 (r) Intentionally Omitted....................................... 31 -ii- INDEX PAGE(S) ------- Abatement Event......................................................... 10 Abatement Notice........................................................ 10 ADA..................................................................... 4 Additional Rent......................................................... 2 Alterations............................................................. 8 Base Year............................................................... 1 Basic Rental............................................................ l Brokers................................................................. l Claims.................................................................. 11 Commencement Date....................................................... l Cosmetic Alterations.................................................... 8 Damage Repair Estimate.................................................. 16 Direct Costs............................................................ 2 Eligibility Period...................................................... 11 Estimate ............................................................... 5 Estimate Statement...................................................... 5 Estimated Excess........................................................ 5 Event of Default........................................................ 18 Excess.................................................................. 5 Expiration Date......................................................... 1 Force Majeure........................................................... 21 Hazardous Material...................................................... 22 Initial Installment of Basic Rental..................................... l Landlord................................................................ l Landlord Parties........................................................ 11 Laws.................................................................... 23 Lease................................................................... 1 Parking Passes.......................................................... 1 Permitted Use........................................................... 1 Premises................................................................ 1 Project................................................................. 1 Real Property........................................................... 2 Security Deposit........................................................ 1 Square Footage.......................................................... 1 Statement............................................................... 5 Tenant.................................................................. 1 Tenant Improvements..................................................... 7 Tenant's Proportionate Share............................................ 1 Tenant's Signage........................................................ 27 Term.................................................................... l Transfer Premium........................................................ 15 Transferee.............................................................. 15 -iii- STANDARD OFFICE LEASE This Standard Office Lease ("LEASE") is made and entered into as of this 30th day of September, 2003, by and between ARDEN REALTY FINANCE V, L.L.C., a Delaware limited liability company ("LANDLORD"), and LINDOWS.COM, INC., a Delaware corporation dba Delaware Lindows.com, Inc. ("TENANT"). Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises described as Suite Nos. 250 and 300, as designated on the plan attached hereto and incorporated herein as Exhibit "A" ("PREMISES"), of the project ("PROJECT") now known as Genesee Executive Plaza whose address is 9333 Genesee Avenue, San Diego, California for the Term and upon the terms and conditions hereinafter set forth, and Landlord and Tenant hereby agree as follows: ARTICLE 1 BASIC LEASE PROVISIONS A. TERM: Three (3) years. COMMENCEMENT DATE: October 1, 2003. EXPIRATION DATE: September 30, 2006. 26,281 rentable square feet (comprised of B. SQUARE FOOTAGE: 1,506 rentable square feet for Suite 250 and 24,775 rentable square feet for Suite 300). C. BASIC RENTAL:

D. BASE YEAR: 2003. E. TENANT'S PROPORTIONATE SHARE: 16.30% F. SECURITY DEPOSIT: Waived. G. PERMITTED USE: General office use. H. BROKERS The Irving Hughes Group, Inc. for Tenant. I. PARKING PASSES: Tenant shall rent eighty-two (82) unreserved parking passes at the rate provided in Article 23 hereof. J. INITIAL INSTALLMENT OF BASIC RENTAL: Not applicable. ARTICLE 2 TERM/PREMISES The Term of this Lease shall commence on the Commencement Date as set forth in Article 1.A of the Basic Lease Provisions and shall end on the Expiration Date set forth in Article 1.A of the Basic Lease Provisions. For purposes of this Lease, the term "LEASE YEAR" shall mean each consecutive twelve (12) month period during the Term, with the first Lease Year commencing on the Commencement Date; however, (a) if the Commencement Date falls on a day other than the first day of a calendar month, the first Lease Year shall end on the last day of the eleventh (11th) month after the Commencement Date and the second (2nd) and each succeeding Lease Year shall commence on the first day of the next calendar month, and (b) the last Lease Year shall end on the Expiration Date. If Landlord is unable to deliver possession of the Premises to Tenant on or before the anticipated Commencement Date, Landlord shall not be subject to any liability for its failure to do so, and such failure shall not affect the validity of this Lease nor the obligations of Tenant hereunder. Landlord and Tenant hereby stipulate that the Premises contains the number of square feet specified in Article I.B of the Basic Lease Provisions, except that the rentable and usable square feet of the Premises and the Project are subject to verification from time to time by Landlord's architect/space planner. In the event that Landlord's architect/space planner determines that the amounts thereof shall be different from those set forth in this Lease, all amounts, percentages and figures appearing or referred to in this Lease based upon such incorrect amount (including, without limitation, the amount of the Basic Rental and Tenant's Proportionate Share) shall be modified in accordance with such determination. If such determination is made, it will be confirmed in writing by Landlord to Tenant. Landlord may deliver to Tenant a Commencement Letter in a form substantially similar to that attached hereto as Exhibit "C", which Tenant shall execute and return to Landlord within five (5) days of receipt thereof. Failure of Tenant to timely execute and deliver the Commencement Letter shall constitute acknowledgment by Tenant that the statements included in such notice are true and correct, without exception. ARTICLE 3 RENTAL (a) Basic Rental. Tenant agrees to pay to Landlord during the Term hereof, at Landlord's office or to such other person or at such other place as directed from time to time by written notice to Tenant from Landlord, the initial monthly and annual sums as set forth in Article 1.C of the Basic Lease Provisions, payable in advance on the first day of each calendar month, without demand, setoff or deduction, except as otherwise expressly provided in this Lease and in the event this Lease commences or the date of expiration of this Lease occurs other than on the first day or last day of a calendar month, the rent for such month shall be prorated. (b) Increase in Direct Costs. The term "BASE YEAR" means the calendar year set forth in Article I.D of the Basic Lease Provisions. If, in any calendar year during the Term of this Lease, the "Direct Costs" (as hereinafter defined) paid or incurred by Landlord shall be higher than the Direct Costs for the Base Year, Tenant shall pay an additional sum for each such subsequent calendar year equal to the product of the amount set forth in Article I.E of the Basic Lease Provisions multiplied by such increased amount of Direct Costs. In the event either the Premises and/or the Project is expanded or reduced, then Tenant's Proportionate Share shall be appropriately adjusted, and as to the calendar year in which such change occurs, Tenant's Proportionate Share for such calendar year shall be determined on the basis of the number of days during that particular calendar year that such Tenant's Proportionate Share was in effect. In the event this Lease shall terminate on any date other than the last day of a calendar year, the additional sum payable hereunder by Tenant during the calendar year in which this Lease terminates shall be prorated on the basis of the relationship which the number of days which have elapsed from the commencement of said calendar year to and including said date on which this Lease terminates bears to three hundred sixty-five (365). Any and all amounts due and payable by Tenant pursuant to this Lease (other than Basic Rental) shall be deemed "ADDITIONAL RENT" and Landlord shall be entitled to exercise the same rights and remedies upon default in these payments as Landlord is entitled to exercise with respect to defaults in monthly Basic Rental payments. -2- (c) Definitions. As used herein the term "DIRECT COSTS" shall mean the sum of the following: (i) "TAX COSTS", which shall mean any and all real estate taxes and other similar charges on real property or improvements, assessments, water and sewer charges, and all other charges assessed, reassessed or levied upon the Project and appurtenances thereto and the parking or other facilities thereof, or the real property thereunder (collectively the "REAL PROPERTY") or attributable thereto or on the rents, issues, profits or income received or derived therefrom which are assessed, reassessed or levied by the United States, the State of California or any local government authority or agency or any political subdivision thereof, and shall include Landlord's reasonable legal fees, costs and disbursements incurred in connection with proceedings for reduction of Tax Costs or any part thereof; provided, however, if at any time after the date of this Lease the methods of taxation now prevailing shall be altered so that in lieu of or as a supplement to or a substitute for the whole or any part of any Tax Costs, there shall be assessed, reassessed or levied (a) a tax, assessment, reassessment, levy, imposition or charge wholly or partially on the rents, or (b) a tax, assessment, reassessment, levy (including but not limited to any municipal, state or federal levy), imposition or charge measured by or based in whole or in part upon the Real Property and imposed upon Landlord, then except to the extent such items are payable by Tenant under Article 6 below, such taxes, assessments, reassessments or levies or the part thereof so measured or based, shall be deemed to be included in the term "Direct Costs." In no event shall Tax Costs included in Direct Costs for any year subsequent to the Base Year be less than the amount of Tax Costs included in Direct Costs for the Base Year. In addition, when calculating Tax Costs for the Base Year, special assessments shall only be deemed included in Tax Costs for the Base Year to the extent that such special assessments are included in Tax Costs for the applicable subsequent calendar year during the Term. Notwithstanding anything to the contrary contained in this Section 3(c)(i), there shall be excluded from Tax Costs (i) all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord's general or net income (as opposed to rents or receipts attributable to operations at the Project), (ii) any items included as Operating Costs, and (iii) any items paid by Tenant under Article 6 of this Lease. (ii) "OPERATING COSTS", which shall mean all costs and expenses incurred by Landlord in connection with the maintenance, operation, replacement, ownership and repair of the Project, the equipment, the intrabuilding cabling and wiring, adjacent walks, malls and landscaped and common areas and the parking structure, areas and facilities of the Project, including, but not limited to, salaries, wages, medical, surgical and general welfare benefits and pension payments, payroll fixes, fringe benefits, employment taxes, workers' compensation, uniforms and dry cleaning thereof for all persons who perform duties connected with the operation, maintenance and repair of the Project, its equipment, the intrabuilding cabling and wiring and the adjacent walks and landscaped areas, including janitorial, gardening, security, parking, operating engineer, elevator, painting, plumbing, electrical, carpentry, heating, ventilation, air conditioning, window washing, hired services, a reasonable allowance for depreciation of the cost of acquiring or the rental expense of personal property used in the maintenance, operation and repair of the Project, accountant's fees incurred in the preparation of rent adjustment statements, legal fees, real estate tax consulting fees, personal property taxes on property used in the maintenance and operation of the Project, fees, costs, expenses or dues payable pursuant to the terms of any covenants, conditions or restrictions or owners' association pertaining to the Project, capital expenditures incurred to effect economies of operation of, or stability of services to, the Project and capital expenditures required by government regulations, laws, or ordinances not in effect as of the Commencement Date; the cost of all charges for electricity, gas, water and other utilities furnished to the Project, including any taxes thereon; the cost of all charges for fire and extended coverage, liability and all other insurance in connection -3- with the Project carried by Landlord; the cost of all building and cleaning supplies and materials; the cost of all charges for cleaning, maintenance and service contracts and other services with independent contractors and administration fees; a property management fee (which fee may be imputed if Landlord has internalized management or otherwise acts as its own property manager) and license, permit and inspection fees relating to the Project. In the event, during any calendar year, the Project is less than ninety-five percent (95%) occupied at all times, Operating Costs shall be adjusted to reflect the Operating Costs of the Project as though ninety-five percent (95%) were occupied at all times, and the increase or decrease in the sums owed hereunder shall be based upon such Operating Costs as so adjusted. In no event shall costs for any item of utilities included in Direct Costs for any year subsequent to the Base Year be less than the amount included in Direct Costs for the Base Year for such utility item. Notwithstanding anything to the contrary set forth in this Article 3. when calculating Operating Costs for the Base Year, Operating Costs shall exclude (a) market-wide labor-rate increases due to extraordinary circumstances including, but not limited to, boycotts and strikes, (b) utility rate increases due to extraordinary circumstances including, but not limited to, conservation surcharges, boycotts, embargoes or other shortages, and (c) amortization of any capital items including, but not limited to, capital improvements, capital repairs and capital replacements (including such amortized costs where the actual improvement, repair or replacement was made in prior years). Notwithstanding anything above to the contrary, Operating Costs shall not include (1) the cost of providing any service directly to and paid directly by any tenant (outside of such tenant's Direct Cost payments) including, without limitation, the cost of electricity, to a tenant's premises; (2) the cost of any items for which Landlord is reimbursed by insurance proceeds, condemnation awards, a tenant of the Project, or otherwise to the extent so reimbursed; (3) any real estate brokerage commissions or other costs incurred in procuring tenants, or any fee in lieu of commission; (4) depreciation, amortization of principal and interest on mortgages or ground lease payments (if any); (5) costs of items considered capital repairs, replacements, improvements and equipment under generally accepted accounting principles consistently applied except as expressly included in Operating Costs pursuant to the definition above; (6) costs incurred by Landlord due to the violation by Landlord or any tenant of the terms and conditions of any lease of space in the Project or any law, code, regulation, ordinance or the like; (7) Landlord's general corporate overhead and general and administrative expenses; (8) any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord (other than in the parking facility for the Project); (9) costs incurred in connection with upgrading the Project to comply with disability, life, seismic, fire and safety codes, ordinances, statutes, or other laws in effect prior to the Commencement Date, including, without limitation, the Americans with Disabilities Act ("ADA"), including penalties or damages incurred due to such non-compliance; (10) bad debt expenses and interest, principal, points and fees on debts (except in connection with the financing of items which may be included in Operating Costs) or amortization on any ground lease, mortgage or mortgages or any other debt instrument encumbering the Project (including the land on which the Project is situated); (11) marketing costs, including leasing commissions, attorneys' fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with present or prospective tenants or other occupants of the Project, including attorneys' fees and other costs and expenditures incurred in connection with disputes with present or prospective tenants or other occupants of the Project; (12) real estate brokers' leasing commissions; (13) costs, including permit, license and inspection costs, incurred with respect to the installation of other tenants' or occupants' improvements made for tenants or other occupants in the Project or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants in the Project; (14) any costs expressly excluded from Operating Costs elsewhere in this Lease; (15) costs of any items (including, but not limited to, costs incurred by Landlord for the repair of damage to the Project) to the extent Landlord receives -4- reimbursement from insurance proceeds or from a third party (except that any deductible amount under any insurance policy shall be included within Operating Costs); (16) rentals and other related expenses for leasing an HVAC system, elevators, or other items (except when needed in connection with normal repairs and maintenance of the Project) which if purchased, rather than rented, would constitute a capital improvement not included in Operating Costs pursuant to this Lease; (17) depreciation, amortization and interest payments, except as specifically included in Operating Costs pursuant to the terms of this Lease and except on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party's services, all as determined in accordance with generally accepted accounting principles, consistently applied, and when depreciation or amortization is permitted or required, the item shall be amortized over its reasonably anticipated useful life; (18) costs incurred by Landlord for alterations (including structural additions), repairs, equipment and tools which are of a capital nature and/or which are considered capital improvements or replacements under generally accepted accounting principles, consistently applied, except as specifically included in Operating Costs pursuant to the terms of this Lease; (19) expenses in connection with services or other benefits which are not offered to Tenant or for which Tenant is charged for directly but which are provided to another tenant or occupant of the Project, without charge; (20) electric power costs or other utility costs for which any tenant directly contracts with the local public service company (but Landlord shall have the right to "gross up" as if such space was vacant); (21) costs incurred in connection with the operation of retail stores selling merchandise and restaurants in the Project to the extent such costs are in excess of the costs Landlord reasonably estimates would have been incurred had such space been used for general office use; (22) costs (including in connection therewith all attorneys' fees and costs of settlement, judgments and/or payments in lieu thereof) arising from claims, disputes or potential disputes in connection with potential or actual claims litigation or arbitrations pertaining to Landlord and/or the Project, other than such claims or disputes respecting any services or equipment used in the operation of the Project by Landlord-, (23) costs associated with the operation of the business of the partnership which constitutes Landlord as the same are distinguished from the costs of operation of the Project; (24) costs incurred in connection with the original construction of the Project; (25) costs of correcting defects in or inadequacy of the initial design or construction of the Project; and (26) costs incurred to (1) comply with laws relating to the removal of any "Hazardous Material," as that term is defined in Article 28 of this Lease, which was in existence on the Project prior to the Commencement Date, and was of such a nature that a federal, state or municipal governmental authority, if it had then had knowledge of the presence of such Hazardous Material, in the state, and under the conditions that it then existed on the Project, would have then required the removal of such Hazardous Material or other remedial or containment action with respect thereto, and (ii) to remove, remedy, contain, or treat any Hazardous Material, which Hazardous Material is brought onto the Project after the date hereof by Landlord or any other tenant of the Project and is of such a nature, at that time, that a federal, state or municipal governmental authority, if it had then had knowledge of the presence of such Hazardous Material, in the state, and under the conditions, that it then exists on the Project, would have then required the removal of such Hazardous Material or other remedial or containment action with respect thereto. (d) Determination of Payment. (i) If for any calendar year ending or commencing within the Term, Tenant's Proportionate Share of Direct Costs for such calendar year exceeds Tenant's Proportionate Share of Direct Costs for the Base Year, then Tenant shall pay to Landlord, in the manner set forth in Sections 3(d)(ii) and (iii), below, and as Additional Rent, an amount equal to the excess (the "EXCESS"). -5- (ii) Landlord shall give Tenant a yearly expense estimate statement (the "ESTIMATE STATEMENT") which shall set forth Landlord's reasonable estimate (the "ESTIMATE") of what the total amount of Direct Costs for the then-current calendar year shall be and the estimated Excess (the `ESTIMATED EXCESS") as calculated by comparing Tenant's Proportionate Share of Direct Costs for such calendar year, which shall be based upon the Estimate, to Tenant's Proportionate Share of Direct Costs for the Base Year. The failure of Landlord to timely furnish the Estimate Statement for any calendar year shall not preclude Landlord from subsequently enforcing its rights to collect any Estimated Excess under this Article 3, once such Estimated Excess has been determined by Landlord. If pursuant to the Estimate Statement an Estimated Excess is calculated for the then-current calendar year, Tenant shall pay, with its next installment of monthly Basic Rental due, a fraction of the Estimated Excess for the then-current calendar year (reduced by any amounts paid pursuant to the last sentence of this Section 3(d)(ii)). Such fraction shall have as its numerator the number of months which have elapsed in such current calendar year to the month of such payment, both months inclusive, and shall have twelve (12) as its denominator. Until a new Estimate Statement is furnished, Tenant shall pay monthly, with the monthly Basic Rental installments, an amount equal to one-twelfth (1/12) of the total Estimated Excess set forth in the previous Estimate Statement delivered by Landlord to Tenant. (iii) In addition, Landlord shall endeavor to give to Tenant as soon as reasonably practicable following the end of each calendar year, a statement (the "STATEMENT") which shall state the Direct Costs incurred or accrued for such preceding calendar year, and which shall indicate the amount, if any, of the Excess. Upon receipt of the Statement for each calendar year during the Term, if amounts paid by Tenant as Estimated Excess are less than the actual Excess as specified on the Statement, Tenant shall pay, with its next installment of monthly Basic Rental due, the full amount of the Excess for such calendar year, less the amounts, if any, paid during such calendar year as Estimated Excess. If, however, the Statement indicates that amounts paid by Tenant as Estimated Excess are greater than the actual Excess as specified on the Statement, such overpayment shall be credited against Tenant's next installments of Estimated Excess. The failure of Landlord to timely furnish the Statement for any calendar year shall not prejudice Landlord from enforcing its rights under this Article 3, once such Statement has been delivered. Even though the Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant's Proportionate Share of the Direct Costs for the calendar year in which this Lease terminates, if an Excess is present, Tenant shall immediately pay to Landlord an amount as calculated pursuant to the provisions of this Article 3(d). The provisions of this Section 3(d)(iii) shall survive the expiration or earlier termination of the Term. (iv) If the Project is a part of a multi-building development those Direct Costs attributable to such development as a whole (and not attributable solely to any individual building therein) shall be allocated by Landlord to the Project and to the other buildings within such development on an equitable basis. ARTICLE 4 INTENTIONALLY OMITTED ARTICLE 5 HOLDING OVER Should Tenant, without Landlord's written consent, hold over after termination of this Lease, Tenant shall become a tenant at sufferance upon each and all of the terms herein provided as may be applicable to such a tenancy and any such holding over shall not constitute an extension of this Lease. During such holding over, Tenant shall pay in advance, monthly, Basic -6- Rental at a rate equal to [***] of the rate in effect for the last month of the Term of this Lease, in addition to, and not in lieu of, all other payments required to be made by Tenant hereunder including but not limited to Tenant's Proportionate Share of any increase in Direct Costs. Nothing contained in this Article 5 shall be construed as consent by Landlord to any holding over of the Premises by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or earlier termination of the Term. If Landlord provides Tenant with at least thirty (30) days prior written notice that Landlord has a signed proposal or lease from a succeeding tenant to lease the Premises, and if Tenant fails to surrender the Premises upon the later of (i) the date of expiration of such thirty (30) day period, or (ii) the date of expiration or termination of this Lease, Tenant agrees to indemnify, defend and hold Landlord harmless from all costs, loss, expense or liability, including without limitation, claims made by any succeeding tenant and real estate brokers claims and attorney's fees and costs. ARTICLE 6 OTHER TAXES Tenant shall pay, prior to delinquency, all taxes assessed against or levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant located in the Premises. In the event any or all of Tenant's trade fixtures, furnishings, equipment and other personal property shall be assessed and taxed with property of Landlord, or if the cost or value of any leasehold improvements in the Premises exceeds the cost or value of a Project-standard buildout as determined by Landlord and, as a result, real property taxes for the Project are increased, Tenant shall pay to Landlord, within ten (10) days after delivery to Tenant by Landlord of a written statement setting forth such amount the amount of such taxes applicable to Tenant's property or above-standard improvements. Tenant shall assume and pay to Landlord at the time Basic Rental next becomes due (or if assessed after the expiration of the Term, then within ten (10) days), any excise, sales, use, rent, occupancy, garage, parking, gross receipts or other taxes (other than net income taxes) which may be imposed on or on account of the letting of the Premises or the payment of Basic Rental or any other sums due or payable hereunder, and which Landlord may be required to pay or collect under any law now in effect or hereafter enacted. Tenant shall pay directly to the party or entity entitled thereto all business license fees, gross receipts taxes and similar taxes and impositions which may from time to time be assessed against or levied upon Tenant, as and when the same become due and before delinquency. Notwithstanding anything to the contrary contained herein, any sums payable by Tenant under this Article 6 shall not be included in the computation of "Tax Costs." ARTICLE 7 USE Tenant shall use and occupy the Premises only for the use set forth in Article 1.G of the Basic Lease Provisions and shall not use or occupy the Premises or permit the same to be used or occupied for any other purpose without the prior written consent of Landlord, which consent may be given or withheld in Landlord's sole and absolute discretion, and Tenant agrees that it will use the Premises in such a manner so as not to interfere with or infringe upon the rights of other tenants or occupants in the Project. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances, governmental regulations or requirements now in force or which may hereafter be in force relating to or affecting (i) the condition, use or occupancy of the Premises or the Project (excluding structural changes to the Project not related to Tenant's particular use of the Premises), and (ii) improvements installed or constructed in the Premises by-or for the benefit of Tenant. Tenant shall not permit more than six (6) people per one thousand -7- (1,000) rentable square feet of the Premises to occupy the Premises at any time. Tenant shall not do or permit to be done anything which would invalidate or increase the cost of any fire and extended coverage insurance policy covering the Project and/or the property located therein and Tenant shall comply with all rules, orders, regulations and requirements of any organization which sets out standards, requirements or recommendations commonly referred to by major fire insurance underwriters, and Tenant shall promptly upon demand reimburse Landlord for any additional premium charges for any such insurance policy assessed or increased by reason of Tenant's failure to comply with the provisions of this Article. Landlord represents that Landlord has taken or shall take the necessary steps to comply with what Landlord reasonably believes are the requirements of the ADA in effect as of the date of this Lease as it pertains to the common areas within the Project. Operating Costs shall not include any cost incurred by Landlord in connection with upgrading the Project to comply with the requirements of the ADA that are in effect as of the date of this Lease, including penalties or damages incurred due to such noncompliance. ARTICLE 8 CONDITION OF PREMISES Tenant hereby agrees that the Premises shall be taken "as is", "with all faults", "without any representations or warranties", and Tenant hereby agrees and warrants that it has investigated and inspected the condition of the Premises and the suitability of same for Tenant's purposes, and Tenant does hereby waive and disclaim any objection to, cause of action based upon, or claim that its obligations hereunder should be reduced or limited because of the condition of the Premises or the Project or the suitability of same for Tenant's purposes. Tenant acknowledges that neither Landlord nor any agent nor any employee of Landlord has made any representations or warranty with respect to the Premises or the Project or with respect to the suitability of either for the conduct of Tenant's business and Tenant expressly warrants and represents that Tenant has relied solely on its own investigation and inspection of the Premises and the Project in its decision to enter into this Lease and let the Premises in the above-described condition. The existing leasehold improvements in the Premises as of the date of this Lease may be collectively referred to herein as the "TENANT IMPROVEMENTS". The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Project were at such time in satisfactory condition. Tenant hereby waives subsection 1 of Section 1932 and Sections 1941 and 1942 of the Civil Code of California or any successor provision of law. ARTICLE 9 REPAIRS AND ALTERATIONS (a) Landlord's Obligation. Landlord shall maintain the structural portions of the Project including the foundation, floor/ceiling slabs, roof, curtain wall, exterior glass, columns, beams, shafts, stairs, stairwells, elevator cabs and common areas, and shall also maintain and repair the basic mechanical, electrical, life safety, plumbing, sprinkler systems and heating, ventilating and air-conditioning systems. (b) Tenant's Obligation. Except as expressly provided as Landlord's obligation in this Article 9, Tenant shall keep the Premises in good condition and repair. All damage or injury to the Premises or the Project resulting from the act or negligence of Tenant, its employees, agents or visitors, guests, invitees or licensees, or by the use of the Premises, shall be promptly repaired by Tenant at its sole cost and expense, to the satisfaction of Landlord; provided, however, that for damage to the Project as a result of casualty or for any repairs that may impact the mechanical, electrical, plumbing, heating, ventilation or air-conditioning systems of the -8- Project, Landlord shall have the right (but not the obligation) to select the contractor and oversee all such repairs. Landlord may make any repairs which are not promptly made by Tenant after Tenant's receipt of written notice and the reasonable opportunity of Tenant to make said repair within five (5) business days from receipt of said written notice, and charge Tenant for the cost thereof, which cost shall be paid by Tenant within five (5) days from invoice from Landlord. Tenant shall be responsible for the design and function of all non-standard improvements of the Premises, whether or not installed by Landlord at Tenant's request. Tenant waives all rights to make repairs at the expense of Landlord, or to deduct the cost thereof from the rent. (c) Alterations. Tenant shall make no alterations, installations, changes or additions in or to the Premises or the Project (collectively, "ALTERATIONS") without Landlord's prior written consent. Any Alterations approved by Landlord must be performed in accordance with the terms hereof, using only contractors or mechanics approved by Landlord in writing and upon the approval by Landlord in writing of fully detailed and dimensioned plans and specifications pertaining to the Alterations in question, to be prepared and submitted by Tenant at its sole cost and expense. Tenant shall at its sole cost and expense obtain all necessary approvals and permits pertaining to any Alterations. Tenant shall cause all Alterations to be performed in a good and workmanlike manner, in conformance with all applicable federal, state, county and municipal laws, rules and regulations, pursuant to a valid building permit, and in conformance with Landlord's construction rules and regulations. If Landlord, in approving any Alterations, specifies a commencement date therefor, Tenant shall not commence any work with respect to such Alterations prior to such date. Notwithstanding anything to the contrary contained herein, Tenant may make strictly cosmetic changes to the finish work in the Premises (the "COSMETIC ALTERATIONS") without Landlord's consent, provided that the aggregate cost of any such alterations does not exceed [***], and further provided that such alterations do not (i) require any structural or other substantial modifications to the Premises, (ii) require any changes to, nor adversely affect, the systems and equipment of the Project, and (iii) affect the exterior appearance of the Project. Tenant shall give Landlord at least fifteen (15) days prior notice of such Cosmetic Alterations, which notice shall be accompanied by reasonably adequate evidence that such changes meet the criteria contained in this Article 9. Tenant hereby agrees to indemnify, defend, and hold Landlord free and harmless from all liens and claims of lien, and all other liability, claims and demands arising out of any work done or material supplied to the Premises by or at the request of Tenant in connection with any Alterations. (d) Insurance: Liens. Prior to the commencement of any Alterations, Tenant shall provide Landlord with evidence that Tenant carries "Builder's All Risk" insurance in an amount approved by Landlord covering the construction of such Alterations, and such other insurance as Landlord may reasonably require, it being understood that all such Alterations shall be insured by Tenant pursuant to Article 14 of this Lease immediately upon completion thereof. In addition, Landlord may, in its discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien free completion of such Alterations and naming Landlord as a co-obligee. (e) Costs and Fees; Removal. If permitted Alterations are made, they shall be made at Tenant's sole cost and expense and shall be and become the property of Landlord, except that Landlord may, by written notice to Tenant given prior to the end of the Term, require Tenant at Tenant's expense to remove all partitions, counters, railings, cabling and other Alterations installed by Tenant, and to repair any damage to the Premises and the Project caused by such removal. Any and all costs attributable to or related to the applicable building codes of the city in which the Project is located (or any other authority having jurisdiction over the Project) arising from Tenant's plans, specifications, improvements, Alterations or otherwise shall be paid by Tenant at its sole cost and expense. With regard to repairs, Alterations or any other work arising from or related to this Article 9, Landlord shall be entitled to receive an -9- administrative/coordination fee (which fee shall vary depending upon whether or not Tenant orders the work directly from Landlord) sufficient to compensate Landlord for all overhead, general conditions, fees and other costs and expenses arising from Landlord's involvement with such work. ARTICLE 10 LIENS Tenant shall keep the Premises and the Project free from any mechanics' liens, vendors liens or any other liens arising out of any work performed, materials furnished or obligations incurred by Tenant, and Tenant agrees to defend, indemnify and hold Landlord harmless from and against any such lien or claim or action thereon, together with costs of suit and reasonable attorneys' fees incurred by Landlord in connection with any such claim or action. Before commencing any work of alteration, addition or improvement to the Premises, Tenant shall give Landlord at least ten (10) business days' written notice of the proposed commencement of such work (to afford Landlord an opportunity to post appropriate notices of non-responsibility). In the event that there shall be recorded against the Premises or the Project or the property of which the Premises is a part any claim or lien arising out of any such work performed, materials furnished or obligations incurred by Tenant and such claim or lien shall not be removed or discharged within ten (10) days of filing, Landlord shall have the right but not the obligation to pay and discharge said lien without regard to whether such lien shall be lawful or correct or to require that Tenant promptly deposit with Landlord in cash, lawful money of the United States, [***] of the amount of such claim, which sum may be retained by Landlord until such claim shall have been removed of record or until judgment shall have been rendered on such claim and such judgment shall have become final, at which time Landlord shall have the right to apply such deposit in discharge of the judgment on said claim and any costs, including attorneys' fees and costs incurred by Landlord, and shall remit the balance thereof to Tenant. ARTICLE 11 PROJECT SERVICES (a) Basic Services. Landlord agrees to furnish to the Premises, at a cost to be included in Operating Costs, from 8:00 a.m. to 6:00 p.m. Mondays through Fridays and 9:00 a.m. to 1:00 p.m. on Saturdays, excepting local and national holidays, air conditioning and heat all in such reasonable quantities as in the judgment of Landlord is reasonably necessary for the comfortable occupancy of the Premises. In addition, Landlord shall provide electric current for normal lighting and normal office machines, elevator service and water on the same floor as the Premises for lavatory and drinking purposes in such reasonable quantities as in the judgment of Landlord is reasonably necessary for general office use and in compliance with applicable codes. Janitorial and maintenance services shall be furnished five (5) days per week, excepting local and national holidays. Tenant shall comply with all rules and regulations which Landlord may establish for the proper functioning and protection of the common area air conditioning, heating, elevator, electrical intrabuilding cabling and wiring and plumbing systems. Except as provided in Section 11(i) below, Landlord shall not be liable for, and there shall be no rent abatement as a result of, any stoppage, reduction or interruption of any such services caused by governmental rules, regulations or ordinances, riot, strike, labor disputes, breakdowns, accidents, necessary repairs or other cause. Except as specifically provided in this Article 11, Tenant agrees to pay for all utilities and other services utilized by Tenant and any additional building services furnished to Tenant which are not uniformly furnished to all tenants of the Project, at the rate generally charged by Landlord to tenants of the Project for such utilities or services. -10- (b) Excess Usage. Tenant will not, without the prior written consent of Landlord, use any apparatus or device in the Premises which will in any way increase the amount of electricity or water usually furnished or supplied for use of the Premises as general office space; nor connect any apparatus, machine or device with water pipes or electric current (except through existing electrical outlets in the Premises), for the purpose of using electric current or water. (c) Additional Electrical Service. If Tenant shall require electric current in excess of that which Landlord is obligated to furnish under Article 11(a) above, Tenant shall first obtain the written consent of Landlord, which Landlord may refuse in its sole and absolute discretion. (d) HVAC Balance. If any lights, machines or equipment (including but not limited to computers and computer systems and appurtenances) are used by Tenant in the Premises which materially affect the temperature otherwise maintained by the air conditioning system, or generate substantially more heat in the Premises than would be generated by the building standard lights and usual office equipment, Landlord shall have the right to install any machinery and equipment which Landlord reasonably deems necessary to restore temperature balance, including but not limited to modifications to the standard air conditioning equipment, and the cost thereof, including the cost of installation and any additional cost of operation and maintenance occasioned thereby, shall be paid by Tenant to Landlord upon demand by Landlord. (e) Telecommunications. Upon request from Tenant from time to time, Landlord will provide Tenant with a listing of telecommunications and media service providers serving the Project, and Tenant shall have the right to contract directly with the providers of its choice. If Tenant wishes to contract with or obtain service from any provider which does not currently serve the Project or wishes to obtain from an existing carrier services which will require the installation of additional equipment, such provider must, prior to providing service, enter into a written agreement with Landlord setting forth the terms and conditions of the access to be granted to such provider. In considering the installation of any new or additional telecommunications cabling or equipment at the Project, Landlord will consider all relevant factors in a reasonable and non-discriminatory manner, including, without limitation, the existing availability of services at the Project, the impact of the proposed installations upon the Project and its operations and the available space and capacity for the proposed installations. Landlord may also consider whether the proposed service may result in interference with or interruption of other services at the Project or the business operations of other tenants or occupants of the Project. In no event shall Landlord be obligated to incur any costs or liabilities in connection with the installation or delivery of telecommunication services or facilities at the Project. All such installations shall be subject to Landlord's prior approval and shall be performed in accordance with the terms of Article 9. If Landlord approves the proposed installations in accordance with the foregoing, Landlord will deliver its standard form agreement upon request and will use commercially reasonable efforts to promptly enter into an agreement on reasonable and non-discriminatory terms with a qualified, licensed and reputable carrier confirming the terms of installation and operation of telecommunications equipment consistent with the foregoing. (f) After-hours Use. If Tenant requires heating, ventilation and/or air conditioning during times other than the times provided in Article 11 (a) above, Tenant shall pay Landlord's standard charge for such after-hours use, which rate is currently [***] (g) Reasonable Charges. Landlord -ray impose a reasonable charge for any utilities or services (other than electric current and heating, ventilation and/or air conditioning which shall be governed by Articles 11(a) and (d) above) utilized by Tenant in excess of the amount or type that Landlord reasonably determines is typical for general office use. -11- (h) Sole Electrical Representative. Tenant agrees that Landlord shall be the sole and exclusive representative with respect to, and shall maintain exclusive control over, the reception, utilization and distribution of electrical 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. (i) Abatement Event. An "ABATEMENT EVENT" shall be defined as an event that prevents Tenant from using the Premises or any portion thereof, as a result of any failure to provide services or access to the Premises, where (i) Tenant does not actually use the Premises or such portion thereof, and (ii) such event is not caused by the negligence or willful misconduct of Tenant, its agents, employees or contractors. Tenant shall give Landlord notice ("Abatement Notice") of any such Abatement Event, and if such Abatement Event continues beyond the "Eligibility Period" (as that term is defined below), then the Basic Rental and Tenant's Proportionate Share of Direct Costs and Tenant's obligation to pay for parking shall be abated entirely or reduced, as the case may be, after expiration of the Eligibility Period for such time that Tenant continues to be so prevented from using, and does not use, the Premises or a portion thereof, in the proportion that the rentable area of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total rentable area of the Premises; provided, however, in the event that Tenant is prevented from using, and does not use, a portion of the Premises for a period of time in excess of the Eligibility Period and the remaining portion of the Premises is not sufficient to allow Tenant to effectively conduct its business therein, and if Tenant does not conduct its business from such remaining portion, then for such time after expiration of the Eligibility Period during which Tenant is so prevented from effectively conducting its business therein, the Basic Rental and Tenant's Proportionate Share of Direct Costs and Tenant's obligation to pay for parking for the entire Premises shall be abated entirely for such time as Tenant continues to be so prevented from using, and does not use, the Premises. If, however, Tenant reoccupies any portion of the Premises during such period, the Basic Rental and Tenant's Proportionate Share of Direct Costs allocable to such reoccupied portion, based on the proportion that the rentable area of such reoccupied portion of the Premises bears to the total rentable area of the Premises, shall be payable by Tenant from the date Tenant reoccupies such portion of the Premises. The term "ELIGIBILITY PERIOD" shall mean a period of five (5) consecutive business days after Landlord's receipt of any Abatement Notice(s). (j) Card Key Access. In the event the Project currently has, or Landlord later elects to install, a card key access system, Tenant agrees to pay $10.00 for the replacement of lost, damaged, or misplaced card keys. ARTICLE 12 RIGHTS OF LANDLORD (a) Right of Entity. Landlord and its agents shall have the right to enter the Premises at all reasonable times for the purpose of cleaning the Premises, examining or inspecting the same, serving or posting and keeping posted thereon notices as provided by law, or which Landlord deems necessary for the protection of Landlord or the Project, showing the same to prospective tenants, lenders or purchasers of the Project, in the case of an emergency, and for making such alterations, repairs, improvements or additions to the Premises or to the Project as Landlord may deem necessary or desirable. If Tenant shall not be personally present to open and permit an entry into the Premises at any time when such an entry by Landlord is necessary or permitted hereunder, Landlord may enter by means of a master key, or may forcibly enter, in the case of an emergency, in each event without liability to Tenant and without affecting this Lease. -12- (b) Maintenance Work. Landlord reserves the right from time to time, but subject to payment by and/or reimbursement from Tenant as otherwise provided herein: (i) to install, use, maintain, repair, replace, relocate and control for service to the Premises and/or other parts of the Project pipes, ducts, conduits, wires, cabling, appurtenant fixtures, equipment spaces and mechanical systems, wherever located in the Premises or the Project, (ii) to alter, close or relocate any facility in the Premises or the common areas or otherwise conduct any of the above activities for the purpose of complying with a general plan for fire/life safety for the Project or otherwise, and (iii) to comply with any federal, state or local law, rule or order. Landlord shall attempt to perform any such work with the least inconvenience to Tenant as is reasonably practicable, but in no event shall Tenant be permitted to withhold or reduce Basic Rental or other charges due hereunder as a result of same, make any claim for constructive eviction or otherwise make any claim against Landlord for interruption or interference with Tenant's business and/or operations. (c) Rooftop. If Tenant desires to use the rooftop of the Project for any purpose, including the installation of communication equipment to be used from the Premises, such rights will be granted in Landlord's sole discretion and Tenant must negotiate the terms of any rooftop access with Landlord or the rooftop management company or lessee holding rights to the rooftop from time to time. Any rooftop access granted to Tenant will be at prevailing rates and will be governed by the terms of a separate written agreement or an amendment to this Lease. ARTICLE 13 INDEMNITY; EXEMPTION OF LANDLORD FROM LIABILITY (a) Indemnity. Tenant shall indemnify, defend and hold Landlord, Arden Realty, Inc., Arden Realty Limited Partnership, their subsidiaries, partners, affiliates and their respective officers, directors, employees and contractors (collectively, "LANDLORD PARTIES") harmless from any and all claims arising from Tenant's use of the Premises or the Projector from the conduct of its business or from any activity, work or thing which may be permitted or suffered by Tenant in or about the Premises or the Project and shall further indemnify, defend and hold Landlord and the Landlord Parties harmless from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under this Lease or arising from any negligence or willful misconduct of Tenant or any of its agents, contractors, employees or invitees, patrons, customers or members in or about the Project and from any and all costs, attorneys' fees and costs, expenses and liabilities incurred in the defense of any claim or any action or proceeding brought thereon, including negotiations in connection therewith. However, notwithstanding the foregoing, Tenant shall not be required to indemnify and/or hold Landlord harmless from any loss, cost, liability, damage or expense, including, but not limited to, penalties, fines, attorneys' fees or costs (collectively, "CLAIMS"), to any person, property or entity to the extent resulting from the negligence or willful misconduct of Landlord or its agents, contractors, or employees (except for damage to the Tenant Improvements and Tenant's personal property, fixtures, furniture and equipment in the Premises in which case Tenant shall be responsible to the extent Tenant is required to obtain the requisite insurance coverage pursuant to this Lease). Landlord hereby indemnifies Tenant and holds Tenant harmless from any Claims to the extent resulting from the negligence or willful misconduct of Landlord or its agents, contractors or employees; provided, however, that because Landlord maintains insurance on the Project and Tenant compensates Landlord for such insurance as part of Tenant's Proportionate Share of Direct Costs and because of the existence of waivers of subrogation set forth in Article 14 of this Lease, Landlord hereby indemnifies and holds Tenant harmless from any Claims to any property outside of the Premises to the extent such Claim is covered by such insurance, even if resulting from the negligent acts, omissions, or willful misconduct of Tenant or those of its agents, contractors, or employees. Similarly, since Tenant must carry insurance pursuant to Article 14 to cover its personal property within the Premises and the Tenant Improvements, -13- Tenant hereby indemnifies and holds Landlord harmless from any Claim to any property within the Premises, to the extent such Claim is covered by such insurance, even if resulting from the negligent acts, omissions or willful misconduct of Landlord or those of its agents, contractors, or employees. Tenant hereby assumes all risk of damage to property or injury to persons in or about the Premises from any cause, and Tenant hereby waives all claims in respect thereof against Landlord and the Landlord Parties, excepting where the damage is caused solely by the gross negligence or willful misconduct of Landlord or of Landlord Parties. (b) Exemption of Landlord from Liability. Landlord and the Landlord Parties shall not be liable for injury to Tenant's business, or loss of income therefrom, however occurring (including, without limitation, from any failure or interruption of services or utilities) or, except in connection with damage or injury resulting from the gross negligence or willful misconduct of Landlord or the Landlord Parties, for damage that may be sustained by the person, goods, wares, merchandise or property of Tenant, its employees, invitees, customers, agents, or contractors, or any other person in, on or about the Premises directly or indirectly caused by or resulting from any cause whatsoever, including, but not limited to, fire, steam, electricity, gas, water, or rain which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, light fixtures, or mechanical or electrical systems or from intrabuilding cabling or wiring, whether such damage or injury results from conditions arising upon the Premises or upon other portions of the Project or four other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Landlord and the Landlord Parties shall not be liable to Tenant for any damages arising from any willful or negligent action or inaction of any other tenant of the Project. (c) Security. Tenant acknowledges that Landlord's election whether or not to provide any type of mechanical surveillance or security personnel whatsoever in the Project is solely within Landlord's discretion. Except in the event Landlord or the Landlord Parties are grossly negligent, Landlord and the Landlord Parties shall not be liable for losses due to theft, vandalism, or like causes. ARTICLE 14 INSURANCE (a) Tenant's Insurance. Tenant, shall at all times during the Term of this Lease, and at its own cost and expense, procure and continue in force the following insurance coverage: (i) Commercial General Liability Insurance, written on an occurrence basis, with a combined single limit for bodily injury and property damages of not less than [***] per occurrence and [***] in the annual aggregate, including products liability coverage if applicable, owners and contractors protective coverage, blanket contractual coverage including both oral and written contracts, and personal injury coverage, covering the insuring provisions of this Lease and the performance of Tenant of the indemnity and exemption of Landlord from liability agreements set forth in Article 13 hereof; (ii) a policy of standard fire, extended coverage and special extended coverage insurance (all risks), including a vandalism and malicious mischief endorsement, sprinkler leakage coverage and earthquake sprinkler leakage where sprinklers are provided in an amount equal to the full replacement value new without deduction for depreciation of all (A) Tenant Improvements, Alterations, fixtures and other improvements in the Premises, including but not limited to all mechanical, plumbing, heating, ventilating, air conditioning, electrical, telecommunication and other equipment, systems and facilities, and (B) trade fixtures, furniture, equipment and other personal property installed by or at the expense of Tenant; (iii) Worker's Compensation coverage as required by law; and (iv) business interruption, loss of income and extra expense insurance covering any failure or interruption of Tenant's business equipment -14- (including, without limitation, telecommunications equipment) and covering all other perils, failures or interruptions sufficient to cover a period of interruption of not less than twelve (12) months. Tenant shall carry and maintain during the entire Term (including any option periods, if applicable), at Tenant's sole cost and expense, increased amounts of the insurance required to be carried by Tenant pursuant to this Article 14 and such other reasonable types of insurance coverage and in such reasonable amounts covering the Premises and Tenant's operations therein, as may be reasonably required by Landlord, so long as such increased amounts and/or other types of insurance coverage are then generally required by comparable landlords of comparable first-class, institutional quality buildings in the vicinity of the Project. (b) Form of Policies. The aforementioned minimum limits of policies and Tenant's procurement and maintenance thereof shall in no event limit the liability of Tenant hereunder. The Commercial General Liability Insurance policy shall name Landlord, the Landlord Parties, Landlord's property manager, Landlord's lender(s) and such other persons or firms as Landlord specifies from time to time, as additional insureds with an appropriate endorsement to the policy(s). All such insurance policies carried by Tenant shall be with companies having a rating of not less than A-VIII in Best's Insurance Guide. Tenant shall furnish to Landlord, from the insurance companies, or cause the insurance companies to furnish, certificates of coverage. No such policy shall be cancelable or subject to reduction of coverage or cancellation except after thirty (30) days prior written notice to Landlord by the insurer. All such policies shall be endorsed to agree that Tenant's policy is primary as to Claims arising within the Premises and that any insurance carried by Landlord is excess and not contributing with any Tenant insurance requirement hereunder. Tenant shall, at least twenty (20) days prior to the expiration of such policies, furnish Landlord with renewals or binders. Tenant agrees that if Tenant does not take out and maintain such insurance or furnish Landlord with renewals or binders in a timely manner, Landlord may (but shall not be required to), upon prior notice to Tenant and the expiration of a five (5) day cure period, procure said insurance on Tenant's behalf and charge Tenant the cost thereof, which amount shall be payable by Tenant upon demand with interest (at the rate set forth in Section 20(e) below) from the date such sums are extended. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by Tenant, provided such blanket policies expressly afford coverage to the Premises and to Tenant as required by this Lease. (c) Landlord's Insurance. Landlord may, as a cost to be included in Operating Costs, procure and maintain at all times during the Term of this Lease, a policy or policies of insurance covering loss or damage to the Project in the amount of the full replacement costs without deduction for depreciation thereof, providing protection against all perils included within the classification of fire and extended coverage, vandalism coverage and malicious mischief, sprinkler leakage, water damage, and special extended coverage on building. Additionally, Landlord may carry: (i) Bodily Injury and Property Damage Liability Insurance and/or Excess Liability Coverage Insurance; and (ii) Earthquake and/or Flood Damage Insurance; and (iii) Rental Income Insurance; and (iv) any other forms of insurance Landlord may deem appropriate or any lender may require. The costs of all insurance carried by Landlord shall be included in Operating Costs. (d) Waiver of Subrogation. Landlord and Tenant each agree to require their respective insurers issuing the insurance described in Sections 14(a)(ii), 14(a)(iv) and the first sentence of Section 14(c), waive any rights of subrogation that such companies may have against the other party. Tenant hereby waives any right that Tenant may have against Landlord and Landlord hereby waives any right that Landlord may have against Tenant as a result of any loss or damage to the extent such loss or damage is insurable under such policies. -15- (e) Compliance with Law. Tenant agrees that it will not, at any time, during the Term of this Lease, carry any stock of goods or do anything in or about the Premises that will in any way tend to increase the insurance rates upon the Project. Tenant agrees to pay Landlord forthwith upon demand the amount of any increase in premiums for insurance that may be carried during the Term of this Lease, on the amount of insurance to be carried by Landlord on the Project resulting from the foregoing, or from Tenant doing any act in or about the Premises that does so increase the insurance rates, whether or not Landlord shall have consented to such act on the part of Tenant. If Tenant installs upon the Premises any electrical equipment which causes an overload of electrical lines of the Premises, Tenant shall at its own cost and expense in accordance with all other Lease provisions(specifically including, but not limited to, the provisions of Article 9, 10 and 11 hereof), make whatever changes are necessary to comply with requirements-of the insurance underwriters and any governmental authority having jurisdiction thereover; but nothing herein contained shall be deemed to constitute Landlord's consent to such overloading. Tenant shall, at its own expense, comply with all insurance requirements applicable to the Premises, including without limitation, the installation of fire extinguishers or an automatic dry chemical extinguishing system. ARTICLE 15 ASSIGNMENT AND SUBLETTING Tenant shall have no power to, either voluntarily, involuntarily, by operation of law or otherwise, sell, assign, transfer or hypothecate this Lease, or sublet the Premises or any part thereof, or permit the Premises or any part thereof to be used or occupied by anyone other than Tenant or Tenant's employees without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant may transfer its interest pursuant to this Lease only upon the following express conditions, which conditions are agreed by Landlord and Tenant to be reasonable: (a) That the proposed "Transferee" (as hereafter defined) shall be subject to the prior written consent of Landlord, which consent will not be unreasonably withheld but, without limiting the generality of the foregoing, it shall be reasonable for Landlord to deny such consent if (i) The use to be made of the Premises by the proposed Transferee is (a) not generally consistent with the character and nature of all other tenancies in the Project, or (b) a use which conflicts with any so-called "exclusive" then in favor of, or for any use which might reasonably be expected to diminish the rent payable pursuant to any percentage rent lease with another tenant of the Project or any other buildings which are in the same complex as the Project, or (c) a use which would be prohibited by any other portion of this Lease (including but not limited to any Rules and Regulations then in effect); (ii) The financial responsibility of the proposed Transferee is not reasonably satisfactory to Landlord; (iii) The proposed Transferee is either a governmental agency or instrumentality thereof; (iv) Either the proposed Transferee or any person or entity which directly or indirectly controls, is controlled by or is under common control with the proposed Transferee (A) occupies space in the Project at the time of the request for consent and Landlord has space in the Project available for lease to such party of comparable size as the proposed space to be assigned or sublet, or (B) is negotiating with Landlord to lease space in the Project; or -16- (v) The rent charged by Tenant to such Transferee during the term of such Transfer, calculated using a present value analysis, is less than the rent being quoted by Landlord at the time of such Transfer for comparable space in the Project for a comparable term, calculated using a present value analysis. (b) Upon Tenant's submission of a request for Landlord's consent to any such Transfer, Tenant shall pay to Landlord Landlord's then standard processing fee and reasonable attorneys' fees and costs incurred in connection with the proposed Transfer, which the parties hereby stipulate to be [***], unless Landlord provides to Tenant evidence that Landlord has incurred greater costs in connection with the proposed Transfer; (c) That the proposed Transferee shall execute an agreement pursuant to which it shall agree to perform faithfully and be bound by all of the terms, covenants, conditions, provisions and agreements of this Lease applicable to that portion of the Premises so transferred; and (d) That an executed duplicate original of said assignment and assumption agreement or other transfer on a form reasonably approved by Landlord, shall be delivered to Landlord within five (5) days after the execution thereof, and that such transfer shall not be binding upon Landlord until the delivery thereof to Landlord and the execution and delivery of Landlord's consent thereto. It shall be a condition to Landlord's consent to any subleasing, assignment or other transfer of part or all of Tenant's interest in the Premises ("TRANSFER") that (i) upon Landlord's consent to any Transfer, Tenant shall pay and continue to pay [***] of any "Transfer Premium" (defined below), received by Tenant from the transferee; (ii) any sublessee of part or all of Tenant's interest in the Premises shall agree that in the event Landlord gives such sublessee notice that Tenant is in default under this Lease, such sublessee shall thereafter make all sublease or other payments directly to Landlord, which will be received by Landlord without any liability whether to honor the sublease or otherwise (except to credit such payments against sums due under this Lease), and any sublessee shall agree to attorn to Landlord or its successors and assigns at their request should this Lease be terminated for any reason, except that in no event shall Landlord or its successors or assigns be obligated to accept such attornment; (iii) any such Transfer and consent shall be effected on forms supplied by Landlord and/or its legal counsel; (iv) Landlord may require that Tenant not then be in default hereunder in any respect; and (v) Tenant or the proposed subtenant or assignee (collectively, "TRANSFEREE") shall agree to pay Landlord, upon demand, as Additional Rent, a sum equal to the additional costs, if any, incurred by Landlord for maintenance and repair as a result of any change in the nature of occupancy caused by such subletting or assignment. "TRANSFER PREMIUM" shall mean all rent, Additional Rent or other consideration payable by a Transferee in connection with a Transfer in excess of the Basic Rental and Direct Costs payable by Tenant under this Lease during the term of the Transfer and if such Transfer is for less than all of the Premises, the Transfer Premium shall be calculated on a rentable square foot basis. In any event, the Transfer Premium shall be calculated after deducting the reasonable expenses incurred by Tenant for (1) any changes, alterations and improvements to the Premises paid for by Tenant in connection with the Transfer, (2) any other out-of-pocket monetary concessions provided by Tenant to the Transferee, and (3) any brokerage commissions paid for by Tenant in connection with the Transfer. "Transfer Premium" shall also include, but not be limited to, key money, bonus money or other cash consideration paid by a Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to the Transferee and any payment in excess of fair market value for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to the Transferee in connection with such Transfer. Any Transfer of this Lease which is not in compliance with the provisions of this Article 15 shall be voidable by written notice from Landlord and shall, at the option of Landlord, terminate this Lease. In no event shall the consent by Landlord to any Transfer be construed as relieving Tenant, or any Transferee from obtaining -17- the express written consent of Landlord to any further Transfer, or as releasing Tenant from any liability or obligation hereunder whether or not then accrued and Tenant shall continue to be fully liable therefor. No collection or acceptance of rent by Landlord from any person other than Tenant shall be deemed a waiver of any provision of this Article 15 or the acceptance of any Transferee hereunder, or a release of Tenant (or of any Transferee of Tenant). Notwithstanding anything to the contrary in this Lease, if Tenant or any proposed Transferee claims that Landlord has unreasonably withheld or delayed its consent under this Article 15 or otherwise has breached or acted unreasonably under this Article 15, their sole remedies shall be a declaratory judgment, an injunction for the relief sought and/or monetary damages, and Tenant hereby waives all other remedies, including, without limitation, any right at law or equity to terminate this Lease. Notwithstanding anything to the contrary contained in this Article 15, Landlord shall have the option, by giving written notice to Tenant within thirty (30) days after Landlord's receipt of a request for consent to a proposed Transfer, to terminate this Lease as to the portion of the Premises that is the subject of the proposed Transfer. If this Lease is so terminated with respect to less than the entire Premises, the Basic Rental and Tenant's Proportionate Share shall be prorated based on the number of rentable square feet retained by Tenant as compared to the total number of rentable square feet previously contained in the Premises, and this Lease as so amended shall continue thereafter in full force and effect, and upon the request of either party, the parties shall execute written confirmation of the same. ARTICLE 16 DAMAGE OR DESTRUCTION Within sixty (60) days after the date Landlord learns of the necessity for repairs as a result of damage, Landlord shall notify Tenant ("DAMAGE REPAIR ESTIMATE") of Landlord's estimated assessment of the period of time in which the repairs will be completed. If the Project is damaged by fire or other insured casualty and the insurance proceeds have been made available therefor by the holder or holders of any mortgages or deeds of trust covering the Premises or the Project, the damage shall be repaired by Landlord to the extent such insurance proceeds are available therefor and provided the Damage Repair Estimate indicates that repairs can be completed within one hundred eighty (180) days after the necessity for repairs as a result of such damage becomes known to Landlord, without the payment of overtime or other premiums, and until such repairs are completed rent shall be abated in proportion to the part of the Premises which is unusable by Tenant in the conduct of its business (but there shall be no abatement of rent by reason of any portion of the Premises being unusable for a period equal to one (1) day or less). However, if the damage is due to the fault or neglect of Tenant, its employees, agents, contractors, guests, invitees and the like, there shall be no abatement of rent, unless and to the extent Landlord receives rental income insurance proceeds. Upon the occurrence of any damage to the Premises, Tenant shall assign to Landlord (or to any party designated by Landlord) all insurance proceeds payable to Tenant under Section 14(a)(ii)(A) above; provided, however, that if the cost of repair of improvements within the Premises by Landlord exceeds the amount of insurance proceeds received by Landlord from Tenant's insurance carrier, as so assigned by Tenant, such excess costs shall be paid by Tenant to Landlord prior to Landlord's repair of such damage. If, however, the Damage Repair Estimate indicates that repairs cannot be completed within one hundred eighty (180) days after the necessity for repairs as a result of such damage becomes known to Landlord without the payment of overtime or other premiums, Landlord may, at its option, either (i) make such repairs in a reasonable time and in such event this Lease shall continue in effect and the rent shall be abated, if at all, in the manner provided in this Article 16, or (ii) elect not to effect such repairs and instead terminate this Lease, by notifying Tenant in writing of such termination within sixty (60) days after Landlord learns of the necessity for repairs as a result of damage, such notice to include a termination date giving Tenant sixty (60) -18- days to vacate the Premises. In addition, Landlord may elect to terminate this Lease if the Project shall be damaged by fire or other casualty or cause, whether or not the Premises are affected, if the damage is not fully covered, except for deductible amounts, by Landlord's insurance policies. However, if Landlord does not elect to terminate this Lease pursuant to Landlord's termination right as provided above, and the Damage Repair Estimate indicates that repairs cannot be completed within one hundred eighty (180) days after being commenced, Tenant may elect, not later than thirty (30) days after Tenant's receipt of the Damage Repair Estimate, to terminate this Lease by written notice to Landlord effective as of the date specified in Tenant's notice. Finally, if the Premises or the Project is damaged to any substantial extent during the last twelve (12) months of the Term, then notwithstanding anything contained in this Article 16 to the contrary, Landlord shall have the option to terminate this Lease by giving written notice to Tenant of the exercise of such option within sixty (60) days after Landlord learns of the necessity for repairs as the result of such damage. In the event that the Premises or the Project is destroyed or damaged to any substantial extent during the last twelve (12) months of the Term and if the Damage Repair Estimate indicates that such damage shall take longer than sixty (60) days to repair and if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's employees, licensees, invitees or agents, then notwithstanding anything in this Article 16 to the contrary, Tenant shall have the option to terminate this Lease by written notice to Landlord of the exercise of such option within sixty (60) days after Tenant learns of the necessity for repairs as the result of such damage. A total destruction of the Project shall automatically terminate this Lease. Except as provided in this Article 16, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business or property arising from such damage or destruction or the making of any repairs, alterations or improvements in or to any portion of the Project or the Premises or in or to fixtures, appurtenances and equipment therein. Tenant understands that Landlord will not carry insurance of any kind on Tenant's furniture, furnishings, trade fixtures or equipment, and that Landlord shall not be obligated to repair any damage thereto or replace the same. Tenant acknowledges that Tenant shall have no right to any proceeds of insurance carried by Landlord relating to property damage. With respect to any damage which Landlord is obligated to repair or elects to repair, Tenant, as a material inducement to Landlord entering into this Lease, irrevocably waives and releases its rights under the provisions of Sections 1932 and 1933 of the California Civil Code. ARTICLE 17 SUBORDINATION This Lease is subject and subordinate to all ground or underlying leases, mortgages and deeds of trust which affect the property or the Project, including all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, if the lessor under any such lease or the holder or holders of any such mortgage or deed of trust shall advise Landlord that they desire or require this Lease to be prior and superior thereto, upon written request of Landlord to Tenant, Tenant agrees to promptly execute, acknowledge and deliver any and all documents or instruments which Landlord or such lessor, holder or holders deem necessary or desirable for purposes thereof. Landlord shall have the right to cause this Lease to be and become and remain subject and subordinate to any and all ground or underlying leases, mortgages or deeds of trust which may hereafter be executed covering the Premises, the Project or the property or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof; provided, however, that a condition precedent to such subordination shall be that Landlord obtains from the lender or other party in question a commercially reasonable non-disturbance agreement in favor of Tenant. Subject to the foregoing, Tenant agrees, within ten (10) business days after Landlord's written request therefor, to execute, acknowledge and deliver -19- upon request any and all documents or instruments requested by Landlord or necessary or proper to assure the subordination of this Lease to any such mortgages, deed of trust, or leasehold estates. Tenant agrees that in the event any proceedings are brought for the foreclosure of any mortgage or deed of trust or any deed in lieu thereof, to attorn to the purchaser or any successors thereto upon any such foreclosure sale or deed in lieu thereof as so requested to do so by such purchaser and to recognize such purchaser as the lessor under this Lease; Tenant shall, within ten (10) days after request execute such further instruments or assurances as such purchaser may reasonably deem necessary to evidence or confirm such attornment. Tenant agrees to provide copies of any notices of Landlord's default under this Lease to any mortgagee or deed of trust beneficiary whose address has been provided to Tenant and Tenant shall provide such mortgagee or deed of trust beneficiary a commercially reasonable time after receipt of such notice within which to cure any such default. Tenant waives the provisions of any current or future statute, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale. ARTICLE 18 EMINENT DOMAIN If the whole of the Premises or the Project or so much thereof as to render the balance unusable by Tenant shall be taken under power of eminent domain, or is sold, transferred or conveyed in lieu thereof, this Lease shall automatically terminate as of the date of such condemnation, or as of the date possession is taken by the condemning authority, at Landlord's option. No award for any partial or entire taking shall be apportioned, and Tenant hereby assigns to Landlord any award which may be made in such taking or condemnation, together with any and all rights of Tenant now or hereafter arising in or to the same or any part thereof; provided, however, that nothing contained herein shall be deemed to give Landlord any interest in or to require Tenant to assign to Landlord any award made to Tenant for the taking of personal property and trade fixtures belonging to Tenant and removable by Tenant at the expiration of the Term hereof as provided hereunder or for the interruption of, or damage to, Tenant's business. In the event of a partial taking described in this Article 18, or a sale, transfer or conveyance in lieu thereof, which does not result in a termination of this Lease, the rent shall be apportioned according to the ratio that the part of the Premises remaining useable by Tenant bears to the total area of the Premises. Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of the California Code of Civil Procedure. ARTICLE 19 DEFAULT (a) Tenant's Default. Each of the following acts or omissions of Tenant or of any guarantor of Tenant's performance hereunder, or occurrences, shall constitute an "EVENT OF DEFAULT": (i) Failure or refusal to pay Basic Rental, Additional Rent or any other amount to be paid by Tenant to Landlord hereunder within five (5) calendar days after notice that the same is due or payable hereunder; said five (5) day period shall be in lieu of, and not in addition to, the notice requirements of Section 1161 of the California Code of Civil Procedure or any similar or successor law; (ii) Except as set forth in items (i) above and (iii) below, failure to perform or observe any other covenant or condition of this Lease to be performed or observed within -20- thirty (30) days following written notice to Tenant of such failure; however, if the nature of such default is such that the same cannot be reasonably cured within a thirty (30) day period, Tenant shall not be deemed to be in default if Tenant diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure said default. Such thirty (30) day notice shall be in lieu of, and not in addition to, any required under Section 1161 of the California Code of Civil Procedure or any similar or successor law; or (iii) Tenant's failure to observe or perform according to the provisions of Articles 7, 17 or 25 within five (5) business days after notice from Landlord. (b) Landlord's Default. Notwithstanding anything to the contrary set forth in this Lease, Landlord shall be in default in the performance of any obligation required to be performed by Landlord pursuant to this Lease if Landlord fails to perform such obligation within thirty (30) days after the receipt of notice from Tenant specifying in detail Landlord's failure to perform; provided, however, if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be in default under this Lease if it shall commence such performance within such thirty (30) day period and thereafter diligently pursue the same to completion. Upon any such default by Landlord under this Lease, Tenant may, except as otherwise specifically provided in this Lease to the contrary, exercise any of its rights provided at law or in equity. ARTICLE 20 REMEDIES (a) Upon the occurrence of an Event of Default under this Lease as provided in Article 19 hereof, Landlord may exercise all of its remedies as may be permitted by law, including but not limited to the remedy provided by Section 1951.4 of the California Civil Code, and including without limitation, terminating this Lease, reentering the Premises and removing all persons and property therefrom, which property may be stored by Landlord at a warehouse or elsewhere at the risk, expense and for the account of Tenant. If Landlord elects to terminate this Lease, Landlord shall be entitled to recover from Tenant the aggregate of all amounts permitted by law, including but not limited to (i) the worth at the time of award of the amount of any unpaid rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary coarse of things would be likely to result therefrom; and (v) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. The tern "rent" as used in this Article 20(a) shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in items (i) and (ii), above, the "worth at the time of award" shall be computed by allowing interest at the rate set forth in item (e), below, but in no case greater than the maximum amount of such interest permitted by law. As used in item (iii), above, the "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (b) Nothing in this Article 20 shall be deemed to affect Landlord's right to indemnification for liability or liabilities arising prior to the termination of this Lease for -21- personal' injuries or property damage under the indemnification clause or clauses contained in this Lease. (c) Notwithstanding anything to the contrary set forth herein, Landlord's re-entry to perform acts of maintenance or preservation of or in connection with efforts to relet the Premises or any portion thereof, or the appointment of a receiver upon Landlord's initiative to protect Landlord's interest under this Lease shall not terminate Tenant's right to possession of the Premises or any portion thereof and, until Landlord does elect to terminate this Lease, this Lease shall continue in full force and effect and Landlord may enforce all of Landlord's rights and remedies hereunder including, without limitation, the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due. (d) All rights, powers and remedies of Landlord hereunder and under any other agreement now or hereafter in force between Landlord and Tenant shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Landlord by law, and the exercise of one or more rights or remedies shall not impair Landlord's right to exercise any other right or remedy. (e) Any amount due from Tenant to Landlord hereunder which is not paid when due shall bear interest at the lower of [***] or the maximum lawful rate of interest from the due date until paid, unless otherwise specifically provided herein, but the payment of such interest shall not excuse or cure any default by Tenant under this Lease. In addition to such interest: (i) if Basic Rental is not paid on or before the fifth (5th) day of the calendar month for which the same is due, a late charge equal to [***] of the amount overdue shall be immediately due and owing and shall accrue for each calendar month or part thereof until such rental, including the late charge, is paid in full, which late charge Tenant hereby agrees is a reasonable estimate of the damages Landlord shall suffer as a result of Tenant's late payment and (ii) an additional charge of [***] shall be assessed for any check given to Landlord by or on behalf of Tenant which is not honored by the drawee thereof, which damages include Landlord's additional administrative and other costs associated with such late payment and unsatisfied checks and the parties agree that it would be impracticable or extremely difficult to fix Landlord's actual damage in such event. Such charges for interest and late payments and unsatisfied checks are separate and cumulative and are in addition to and shall not diminish or represent a substitute for any or all of Landlord's rights or remedies under any other provision of this Lease. ARTICLE 21 TRANSFER OF LANDLORD'S INTEREST In the event of any transfer or termination of Landlord's interest in the Premises or the Project by sale, assignment, transfer, foreclosure, deed-in-lieu of foreclosure or otherwise whether voluntary or involuntary, Landlord shall be automatically relieved of any and all obligations and liabilities on the part of Landlord from and after the date of such transfer or termination. Tenant agrees to attorn to the transferee upon any such transfer and to recognize such transferee as the lessor under this Lease and Tenant shall, within five (5) days after request, execute such further instruments or assurances as such transferee may reasonably deem necessary to evidence or confirm such attornment. -22- ARTICLE 22 BROKER In connection with this Lease, Tenant warrants and represents that it has had dealings only with, term(s) set forth in Article 1.H of the Basic Lease Provisions and that it knows of no other person or entity who is or might be entitled to a commission, finder's fee or other like payment in connection herewith and does hereby indemnify and agree to hold Landlord, its agents, members, partners, representatives, officers, affiliates, shareholders, employees, successors and assigns harmless from and against any and all loss, liability and expenses that Landlord may incur should such warranty and representation prove incorrect, inaccurate or false. ARTICLE 23 PARKING Tenant shall rent from Landlord, commencing on the Commencement Date, the number of unreserved parking passes set forth in Section 1(I) of the Basic Lease Provisions, which parking passes shall pertain to the Project parking facility. Tenant shall pay to Landlord for automobile parking passes [***]. In addition, Tenant shall be responsible for the full amount of any taxes imposed by any governmental authority in connection with the renting of such parking passes by Tenant or the use of the parking facility by Tenant. Tenant's continued right to use the parking passes is conditioned upon Tenant abiding by all rules and regulations which are prescribed from time to time for the orderly operation and use of the parking facility where the parking passes are located, including any sticker or other identification system established by Landlord, Tenant's cooperation in seeing that Tenant's employees and visitors also comply with such rules and regulations, and Tenant not being in default under this Lease. Landlord specifically reserves the right to change the size, configuration, design, layout and all other aspects of the Project parking facility at any time and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of rent under this Lease, from time to time, close-off or restrict access to the Project parking facility for purposes of permitting or facilitating any such construction, alteration or improvements. Landlord may, from time to time, relocate any reserved parking spaces (if any) rented by Tenant to another location in the Project parking facility. Landlord may delegate its responsibilities hereunder to a parking operator or a lessee of the parking facility in which case such parking operator or lessee shall have all the rights of control attributed hereby to the Landlord. The parking passes rented by Tenant pursuant to this Article 23 are provided to Tenant solely for use by Tenant's own personnel and such passes may not be transferred, assigned, subleased or otherwise alienated by Tenant without Landlord's prior approval. Tenant may validate visitor parking by such method or methods as the Landlord may establish, at the validation rate from time to time generally applicable to visitor parking. ARTICLE 24 WAIVER No waiver by Landlord or Tenant of any provision of this Lease shall be deemed to be a waiver of any other provision hereof or of any subsequent breach of the same or any other provision. No provision of this Lease may be waived by Landlord or Tenant, except by an instrument in writing executed by the waiving party. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act of Tenant, whether or not similar to the act so consented to or approved. No act or thing done by Landlord or Landlord's agents during -23- the Term of this Lease shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing and signed by Landlord. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. Any payment by Tenant or receipt by Landlord of an amount less than the total amount then due hereunder shall be deemed to be in partial payment only thereof and not a waiver of the balance due or an accord and satisfaction, notwithstanding any statement or endorsement to the contrary on any check or any other instrument delivered concurrently therewith or in reference thereto. Accordingly, Landlord may accept any such amount and negotiate any such check without prejudice to Landlord's right to recover all balances due and owing and to pursue its other rights against Tenant under this Lease, regardless of whether Landlord makes any notation on such instrument of payment or otherwise notifies Tenant that such acceptance or negotiation is without prejudice to Landlord's rights. ARTICLE 25 ESTOPPEL CERTIFICATE Tenant shall, at any time and from time to time, upon not less than ten (10) days' prior written notice from Landlord, execute, acknowledge and deliver to Landlord a statement in writing certifying the following information, (but not limited to the following information in the event further information is requested by Landlord): (i) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as modified, is in full force and effect); (ii) the dates to which the rental and other charges are paid in advance, if any; and (iii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, and no events or conditions then in existence which, with the passage of time or notice or both, would constitute a default on the part of Landlord hereunder, or specifying such defaults, events or conditions, if any are claimed. It is expressly understood and agreed that any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the Real Property. Tenant's failure to deliver such statement within such time shall constitute an admission by Tenant that all statements contained therein are true and correct. ARTICLE 26 LIABILITY OF LANDLORD Notwithstanding anything in this Lease to the contrary, any remedy of Tenant for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default by Landlord hereunder or any claim, cause of action or obligation, contractual, statutory or otherwise by Tenant against Landlord or the Landlord Parties concerning, arising out of or relating to any matter relating to this Lease and all of the covenants and conditions or any obligations, contractual, statutory, or otherwise set forth herein, shall be limited solely and exclusively to an amount which is equal to the lesser of (i) the interest of Landlord in and to the Project, and (ii) the interest Landlord would have in the Project if the Project were encumbered by third party debt in an amount equal to ninety percent (90%) of the then current value of the Project. No other property or assets of Landlord or any Landlord Party shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, Landlord's obligations to Tenant, whether contractual, statutory or otherwise, the relationship of Landlord and Tenant hereunder, or Tenant's use or occupancy of the Premises. -24- ARTICLE 27 INABILITY TO PERFORM This Lease and the obligations of both parties hereunder shall not be affected or impaired because such party is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of any prevention, delay, stoppage due to strikes, lockouts, acts of God, a- any other cause previously, or at such time, beyond the reasonable control or anticipation of such party (collectively, a "FORCE MAJEURE") and both parties' obligations under this Lease shall be forgiven and suspended by any such Force Majeure; provided, however, that this Article 27 is not intended to, and shall not, extend the time period for the payment of any monetary amounts due (including, without limitation, rent payments from Tenant) from either party to the other under this Lease nor relieve either party from their monetary obligations to the other under this Lease. ARTICLE 28 HAZARDOUS WASTE (a) Tenant shall not cause or permit any Hazardous Material (as defined in Article 28(b) below) to be brought, kept or used in or about the Project by Tenant, its agents, employees, contractors, or invitees. Tenant indemnifies Landlord and the Landlord Parties from and against any breach by Tenant of the obligations stated in the preceding sentence, and agrees to defend and hold Landlord and the Landlord Parties harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities, or losses (including, without limitation, diminution in value of the Project, damages for the loss or restriction or use of rentable or usable space or of any amenity of the Project, damages arising from any adverse impact or marketing of space in the Project, and sums paid in settlement of claims, attorneys' fees and costs, consultant fees, and expert fees) which arise during or after the Term of this Lease as a result of such breach. This indemnification of Landlord and the Landlord Parties by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal, or restoration work required by any federal, state, or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the Project. Without limiting the foregoing, if the presence of any Hazardous Material on the Project caused or permitted by Tenant results in any contamination of the Project, then subject to the provisions of Articles 9, 10 and 11 hereof, Tenant shall promptly take all actions at its sole expense as are necessary to return the Project to the condition existing prior to the introduction of any such Hazardous Material and the contractors to be used by Tenant for such work must be approved by Landlord, which approval shall not be unreasonably withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the Project and so long as such actions do not materially interfere with the use and enjoyment of the Project by the other tenants thereof, provided however, Landlord shall also have the right, by written notice to Tenant, to directly undertake any such mitigation efforts with regard to Hazardous Materials in or about the Project due to Tenant's breach of its obligations pursuant to this Section 28(a), and to charge Tenant, as Additional Rent, for the costs thereof. (b) It shall not be unreasonable for Landlord to withhold its consent to any proposed Transfer if (i) the proposed transferee's anticipated use of the Premises involves the generation, storage, use, treatment, or disposal of Hazardous Material; (ii) the proposed Transferee has been required by any prior landlord, lender, or governmental authority to take remedial action in connection with Hazardous Material contaminating a property if the contamination resulted from such Transferee's actions or use of the property in question; or (iii) the proposed Transferee is -25- subject to an enforcement order issued by any governmental authority in connection with the use, disposal, or storage of a Hazardous Material. (c) As used herein, the term "HAZARDOUS MATERIAL" means any hazardous or toxic substance, material, or waste which is or becomes regulated by any local governmental authority, the State of California or the United States Government. The term "Hazardous Material" includes, without limitation, any material or substance which is (i) defined as "Hazardous Waste," "Extremely Hazardous Waste," or "Restricted Hazardous Waste" under Sections 25115, 25117 or 25122.7, or listed pursuant to Section 25140, of the California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined as a "Hazardous Substance" under Section 25316 of the California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous Substance Account Act), (iii) defined as a "Hazardous Material," "Hazardous Substance," or "Hazardous Waste" under Section 25501 of the California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and Inventory), (iv) defined as a "Hazardous Substance" under Section 25281 of the California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances), (v) petroleum, (vi) asbestos, (vii) listed under Article 9 or defined as Hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 20, (viii) designated as a "Hazardous Substance" pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. Section 1317), (ix) defined as a "Hazardous Waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903), or (x) defined as a "Hazardous Substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601). (d) As used herein, the term "LAWS" means any applicable federal, state or local law, ordinance, or regulation relating to any Hazardous Material affecting the Project, including, without limitation, the laws, ordinances, and regulations referred to in Article 28(c) above. ARTICLE 29 SURRENDER OF PREMISES; REMOVAL OF PROPERTY (a) The voluntary or other surrender of this Lease by Tenant to Landlord, or a mutual termination hereof, shall not work a merger, and shall at the option of Landlord, operate as an assignment to it of any or all subleases or subtenancies affecting the Premises. (b) Upon the expiration of the Term of this Lease, or upon any earlier termination of this Lease, Tenant shall quit and surrender possession of the Premises to Landlord in good order and condition , reasonable wear and tear and repairs which are Landlord's obligation excepted, and shall, without expense to Landlord, remove or cause to be removed from the Premises all debris and rubbish, all furniture, equipment, business and trade fixtures, free-standing cabinet work, moveable partitioning, telephone and data cabling and other articles of personal property owned by Tenant or installed or placed by Tenant at its own expense in the Premises, and all similar articles of any other persons claiming under Tenant (unless Landlord exercises its option to have any subleases or subtenancies assigned to it), and Tenant shall repair all damage to the Premises resulting from the removal of such items from the Premises. (c) Whenever Landlord shall reenter the Premises as provided in Article 12 hereof, or as otherwise provided in this Lease, any property of Tenant not removed by Tenant upon the expiration of the Term of this Lease (or within forty-eight (48) hours after a termination by reason of Tenant's default), as provided in this Lease, shall be considered abandoned and Landlord may remove any or all of such items and dispose of the same in any manner or store the same in a -26- public warehouse or elsewhere for the account and at the expense and risk of Tenant, and if Tenant shall fail to pay the cost of storing any such property after it has been stored for a period of thirty (30) days or more, Landlord may sell any or all of such property at public or private sale, in such manner and at such times and places as Landlord, in its sole discretion, may deem proper, without notice to or demand upon Tenant, for the payment of all or any part of such charges or the removal of any such property, and shall apply the proceeds of such sale as follows: first, to the cost and expense of such sale, including reasonable attorneys' fees for services rendered; second, to the payment of the cost of or charges for storing any such property; third, to the payment of any other sums of money which may then or thereafter be due to Landlord from Tenant under any of the terms hereof, and fourth, the balance, if any, to Tenant. (d) All fixtures, equipment, leasehold improvements, Alterations and/or appurtenances attached to or built into the Premises prior to or during the Term, whether by Landlord or Tenant and whether at the expense of Landlord or Tenant, or of both, shall be and remain part of the Premises and shall not be removed by Tenant at the end of the Term unless otherwise expressly provided for in this Lease or unless such removal is required by Landlord. Such fixtures, equipment, leasehold improvements, Alterations, additions, improvements and/or appurtenances shall include but not be limited to: all floor coverings, drapes, paneling, built-in cabinetry, molding, doors, vaults (including vault doors), plumbing systems, security systems, electrical systems, lighting systems, silencing equipment, communication systems, all fixtures and outlets for the systems mentioned above and for all telephone, radio, telegraph and television purposes, and any special flooring or ceiling installations. ARTICLE 30 MISCELLANEOUS (a) SEVERABILITY; ENTIRE AGREEMENT. ANY PROVISION OF THIS LEASE WHICH SHALL PROVE TO BE INVALID, VOID, OR ILLEGAL SHALL IN NO WAY AFFECT, IMPAIR OR INVALIDATE ANY OTHER PROVISION HEREOF AND SUCH OTHER PROVISIONS SHALL REMAIN IN FULL FORCE AND EFFECT. THIS LEASE AND THE EXHIBITS AND ANY ADDENDUM ATTACHED HERETO CONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH REGARD TO TENANT'S OCCUPANCY OR USE OF ALL OR ANY PORTION OF THE PROJECT, AND NO PRIOR AGREEMENT OR UNDERSTANDING PERTAINING TO ANY SUCH MATTER SHALL BE EFFECTIVE FOR ANY PURPOSE. NO PROVISION OF THIS LEASE MAY BE AMENDED OR SUPPLEMENTED EXCEPT BY AN AGREEMENT IN WRITING SIGNED BY THE PARTIES HERETO OR THEIR SUCCESSOR IN INTEREST. THE PARTIES AGREE THAT ANY DELETION OF LANGUAGE FROM THIS LEASE PRIOR TO ITS MUTUAL "EXECUTION BY LANDLORD AND TENANT SHALL NOT BE CONSTRUED TO HAVE ANY PARTICULAR MEANING OR TO RAISE ANY PRESUMPTION, CANON OF CONSTRUCTION OR IMPLICATION INCLUDING, WITHOUT LIMITATION, ANY IMPLICATION THAT THE PARTIES INTENDED THEREBY TO STATE THE CONVERSE, OBVERSE OR OPPOSITE OF THE DELETED LANGUAGE. (b) Attorneys' Fees Waiver of Jury Trial. (i) In any action to enforce the terms of this Lease, including any suit by Landlord for the recovery of rent or possession of the Premises, the losing party shall pay the successful party a reasonable sum for attorneys' fees and costs in such suit and such attorneys' -27- fees and costs shall be deemed to have accrued prior to the commencement of such action and shall be paid whether or not such action is prosecuted to judgment. (ii) EACH PARTY HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION SEEKING SPECIFIC PERFORMANCE OF ANY PROVISION OF THIS LEASE, FOR DAMAGES FOR ANY BREACH UNDER THIS LEASE, OR OTHERWISE FOR ENFORCEMENT OF ANY RIGHT OR REMEDY HEREUNDER. (c) Time of Essence. Time is of the essence with respect to the performance of every provision of this Lease. (d) Pleadings; Joint and Several. The article headings contained in this Lease are for convenience only and do not in any way limit or amplify any term or provision hereof. The terms "Landlord" and "Tenant" as used herein shall include the plural as well as the singular, the neuter shall include the masculine and feminine genders and the obligations herein imposed upon Tenant shall be joint and several as to each of the persons, firms or corporations of which Tenant may be composed. (e) Reserved Area.. Tenant hereby acknowledges and agrees that the exterior walls of the Premises and the area between the finished ceiling of the Premises and the slab of the floor of the project thereabove have not been demised hereby and the use thereof together with the right to install, maintain, use, repair and replace pipes, ducts, conduits, wiring and cabling leading through, under or above the Premises or throughout the Project in locations which will not materially interfere with Tenant's use of the Premises and serving other parts of the Project are hereby excepted and reserved unto Landlord. (f) NO OPTION. THE SUBMISSION OF THIS LEASE BY LANDLORD, ITS AGENT OR REPRESENTATIVE FOR EXAMINATION OR EXECUTION BY TENANT DOES NOT CONSTITUTE AN OPTION OR OFFER TO LEASE THE PREMISES UPON THE TERMS AND CONDITIONS CONTAINED HEREIN OR A RESERVATION OF THE PREMISES IN FAVOR OF TENANT, IT BEING INTENDED HEREBY THAT THIS LEASE SHALL ONLY BECOME EFFECTIVE UPON THE EXECUTION HEREOF BY LANDLORD AND TENANT AND DELIVERY OF A FULLY EXECUTED LEASE TO TENANT. (g) Use of Project Name; Improvements. Tenant shall not be allowed to use the name, picture or representation of the Project, or words to that effect, in connection with any business carried on in the Premises or otherwise (except as Tenant's address) without the prior written consent of Landlord. In the event that Landlord undertakes any additional improvements on the Real Property including but not limited to new construction or renovation or additions to the existing improvements, Landlord shall not be liable to Tenant for any noise, dust, vibration or interference with access to the Premises or disruption in Tenant's business caused thereby. (h) Rules and Regulations. Tenant shall observe faithfully and comply strictly with the Rules and Regulations attached to this Lease as Exhibit "B" and made a part hereof, and such other Rules and Regulations as Landlord may from time to time reasonably adopt for the safety, care and cleanliness of the Project, the facilities thereof, or the preservation of good order therein. Landlord shall not be liable to Tenant for violation of any such Rules and Regulations, or for the breach of any covenant or condition in any lease by any other tenant in the Project. A waiver by.-Landlord of any Rule or Regulation for any other tenant shall not constitute nor be deemed a waiver of the Rule or Regulation for this Tenant. -28- (i) Quiet Possession. Upon Tenant's paying the Basic Rental, Additional Rent and other sums provided hereunder and observing and performing all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, Tenant shall have quiet possession of the Premises for the entire Term hereof, subject to all of the provisions of this Lease. (j) Rent. All payments required to be made hereunder to Landlord shall be deemed to be rent, whether or not described as such. (k) Successors and Assigns. Subject to the provisions of Article 15 hereof, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. (l) Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal service evidenced by a signed receipt or sent by registered or certified mail, return receipt requested, or via overnight courier, and shall be effective upon proof of delivery, addressed to Tenant at the Premises or to Landlord at the management office for the Project, with a copy to Landlord, c/o Arden Realty, Inc., 11601 Wilshire Boulevard, Fourth Floor, Los Angeles, California 90025, Attn: Legal Department. Either party may by notice to the other specify a different address for notice purposes except that, upon Tenant's taking possession of the Premises, the Premises shall constitute Tenant's address for notice purposes. A copy of all notices to be given to Landlord hereunder shall be concurrently transmitted by Tenant to such party hereafter designated by notice from Landlord to Tenant. Any notices sent by Landlord regarding or relating to eviction procedures, including without limitation three day notices, may be sent by regular mail. (m) Intentionally Omitted. (n) Right of Landlord to Perform. All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant shall fail to pay any sum of money, other than rent, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue beyond any applicable cure period set forth in this Lease, Landlord may, but shall not be obligated to, without waiving or releasing Tenant from any obligations of Tenant, make any such payment or perform any such other act on Tenant's part to be made or performed as is in this Lease provided. All sums so paid by Landlord and all reasonable incidental costs, together with interest thereon at the rate of [***] per annum from the date of such payment by Landlord, shall be payable to Landlord on demand and Tenant covenants to pay any such sums, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the nonpayment thereof by Tenant as in the case of default by Tenant in the payment of the rent. (o) Access, Changes in Protect Facilities, Name. (i) Every part of the Project except the inside surfaces of all walls, windows and doors bounding the Premises (including exterior building walls, the rooftop, core corridor walls and doors and any core corridor entrance), and any space in or adjacent to the Premises or within the Project used for shafts, stacks, pipes, conduits, fan rooms, ducts, electric or other utilities, sinks or other building facilities, and the use thereof, as well as access thereto through the Premises for the purposes of operation, maintenance, decoration and repair, are reserved to Landlord. -29- (ii) Tenant shall permit Landlord to install, use and maintain pipes, ducts and conduits within the walls, columns and ceilings of the Premises and throughout the Project. (iii) Landlord reserves the right, without incurring any liability to Tenant therefor, to make such changes in or to the Project and the fixtures and equipment thereof, as well as in or to the street entrances, halls, passages, elevators, stairways and other improvements thereof, as it may deem necessary or desirable. (iv) Landlord may adopt any name for the Project and Landlord reserves the right, from time to time, to change the name and/or address of the Project. (p) Signing Authority. Concurrently with Tenant's execution of this Lease, Tenant shall provide to Landlord reasonably satisfactory evidence that the individuals executing this Lease on behalf of Tenant are authorized to bind Tenant and to enter into this Lease. (q) Identification of Tenant. (i) If Tenant constitutes more than one person or entity, (A) each of them shall be jointly and severally liable for the keeping, observing and performing of all of the terms, covenants, conditions and provisions of this Lease to be kept, observed and performed by Tenant, (B) the term "Tenant" as used in this Lease shall mean and include each of them jointly and severally, and (C) the act of or notice from, or notice or refund to, or the signature of, any one or more of them, with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, expiration, termination or modification of this Lease, shall be binding upon each and all of the persons or entities executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or so given or received such notice or refund or so signed. (ii) If Tenant is a partnership (or is comprised of two or more persons, individually and as co-partners of a partnership) or if Tenant's interest in this Lease shall be assigned to a partnership (or to two or more persons, individually and as co-partners of a partnership) pursuant to Article 15 hereof (any such partnership and such persons hereinafter referred to in this Article 30(q)(ii) as `Partnership Tenant"), the following provisions of this Lease shall apply to such Partnership Tenant: (A) The liability of each of the parties comprising Partnership Tenant shall be joint and several. (B) Each of the parties comprising Partnership Tenant hereby consents in advance to, and agrees to be bound by, any written instrument which may hereafter be executed, changing, modifying or discharging this Lease, in whole or in part, or surrendering all or any part of the Premises to the Landlord, and by notices, demands, requests or other communication which may hereafter be given, by the individual or individuals authorized to execute this Lease on behalf of Partnership Tenant under Subparagraph (p) above. (C) Any bills, statements, notices, demands, requests or other communications given or rendered to Partnership Tenant or to any of the parties comprising Partnership Tenant shall be deemed given or rendered to Partnership Tenant and to all such parties and shall be binding upon Partnership Tenant and all such parties. (D) If Partnership Tenant admits new partners, all of such new partners shall, by their admission to Partnership Tenant, be deemed to have assumed performance of all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed. -30- Partnership Tenant shall give prompt notice to Landlord of the admission of any such new partners, and, upon demand of Landlord, shall cause each such new partner to execute and deliver to Landlord an agreement in form satisfactory to Landlord, wherein each such new partner shall assume performance of all of the terms, covenants and conditions of this Lease on Partnership Tenant's part to be observed and performed (but neither Landlord's failure to request any such agreement nor the failure of any such new partner to execute or deliver any such agreement to Landlord shall terminate the provisions of clause (D) of this Article 30(q)(ii) or relieve any such new partner of its obligations thereunder). (r) Intentionally Omitted. IN WITNESS WHEREOF, the parties have executed this Lease, consisting of the foregoing provisions and Articles, including all exhibits and other attachments referenced therein, as of the date first above written. "LANDLORD" ARDEN REALTY FINANCE V, L.L.C., a Delaware limited liability company By: /s/ Robert C. Peddicord ---------------------------------------- Its: Robert C. Peddicord ------------------------------------ Senior Vice President Leasing and Operations "TENANT" LINDOWS.COM, INC., a Delaware corporation dba Delaware Lindows.com, Inc. By: /s/ Chad H. Olson ---------------------------------------- Print Name: Chad H. Olson -------------------------------- Title: CFO ------------------------------------- By: /s/ Kevin Carmony ---------------------------------------- Print Name: Kevin Carmony -------------------------------- Title: President ------------------------------------- -31- EXHIBIT "A" PREMISES [Floor Plan] -1- [Suite 300 Floor Plan] -2- EXHIBIT "B" RULES AND REGULATIONS 1. No sign, advertisement or notice shall be displayed, printed or affixed on or to the Premises or to the outside or inside of the Project or so as to be visible from outside the Premises or Project without Landlord's prior written consent. Landlord shall have the right to remove any non-approved sign, advertisement or notice, without notice to and at the expense of Tenant, and Landlord shall not be liable in damages for such removal. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by Landlord or by a person selected by Landlord and in a manner and style acceptable to Landlord. 2. Tenant shall not obtain for use on the Premises ice, waxing, cleaning, interior glass polishing, rubbish removal, towel or other similar services, or accept barbering or bootblackening, or coffee cart services, milk, soft drinks or other like services on the Premises, except from persons authorized by Landlord and at the hours and under regulations fixed by Landlord. No vending machines or machines of any description shall be installed, maintained or operated upon the Premises without Landlord's prior written consent. 3. The sidewalks, halls, passages, exits, entrances, elevators and stairways shall not be obstructed by Tenant or used for any purpose other than for ingress and egress from Tenant's Premises. Under no circumstances is trash to be stored in the corridors. Notice must be given to Landlord for any large deliveries. Furniture, freight and other large or heavy articles, and all other deliveries may be brought into the Project only at times and in the manner designated by Landlord, and always at Tenant's sole responsibility and risk. Landlord may impose reasonable charges for use of freight elevators after or before normal business hours. All damage done to the Project by moving or maintaining such furniture, freight or articles shall be repaired by Landlord at Tenant's expense. Tenant shall not take or permit to be taken in or out of entrances or passenger elevators of the Project, any item normally taken, or which Landlord otherwise reasonably requires to be taken, in or out through service doors or on freight elevators. Tenant shall move all supplies, furniture and equipment as soon as received directly to the Premises, and shall move all waste that is at any time being taken from the Premises directly to the areas designated for disposal. 4. Toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. 5. Tenant shall not overload the floor of the Premises or mark, drive nails, screw or drill into the partitions, ceilings or floor or in any way deface the Premises. Tenant shall not place typed, handwritten or computer generated signs in the corridors or any other common areas. Should there be a need for signage additional to the Project standard tenant placard, a written request shall be made to Landlord to obtain approval prior to any installation. All costs for said signage shall be Tenant's responsibility. 6. In no event shall Tenant place a load upon any floor of the Premises or portion of any such flooring exceeding the floor load per square foot of area for which such floor is designed to carry and which is allowed by law, or any machinery or equipment which shall cause excessive vibration to the Premises or noticeable vibration to any other part of the Project. Prior to bringing any heavy safes, vaults, large computers or similarly heavy equipment into the Project, Tenant shall inform Landlord in writing of the dimensions and weights thereof and shall obtain Landlord's consent thereto. Such consent shall not constitute a representation or warranty -1- by Landlord that the safe, vault or other equipment complies, with regard to distribution of weight and/or vibration, with the provisions of this Rule 6 nor relieve Tenant from responsibility for the consequences of such noncompliance, and any such safe, vault or other equipment which Landlord determines to constitute a danger of damage to the Project or a nuisance to other tenants, either alone or in combination with other heavy and/or vibrating objects and equipment, shall be promptly removed by Tenant, at Tenant's cost, upon Landlord's written notice of such determination and demand for removal thereof. 7. Tenant shall not use or keep in the Premises or Project any kerosene, gasoline or inflammable, explosive or combustible fluid or material, or use any method of heating or air-conditioning other than that supplied by Landlord. 8. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by Landlord. 9. Tenant shall not install or use any blinds, shades, awnings or screens in connection with any window or door of the Premises and shall not use any drape or window covering facing any exterior glass surface other than the standard drapes, blinds or other window covering established by Landlord. 10. Tenant shall cooperate with Landlord in obtaining maximum effectiveness of the cooling system by closing window coverings when the sun's rays fall directly on windows of the Premises. Tenant shall not obstruct, alter, or in any way impair the efficient operation of Landlord's heating, ventilating and air-conditioning system. Tenant shall not tamper with or change the setting of any thermostats or control valves. 11. The Premises shall not be used for manufacturing or for the storage of merchandise except as such storage may be incidental to the permitted use of the Premises. Tenant shall not, without Landlord's prior written consent, occupy or permit any portion of the Premises to be occupied or used for the manufacture or sale of liquor or tobacco in any form, or a barber or manicure shop, or as an employment bureau. The Premises shall not be used for lodging or sleeping or for any improper, objectionable or immoral purpose. No auction shall be conducted on the Premises. 12. Tenant shall not make, or permit to be made, any unseemly or disturbing noises, or disturb or interfere with occupants of Project or neighboring buildings or premises or those having business with it by the use of any musical instrument, radio, phonographs or unusual noise, or in any other way. 13. No bicycles, vehicles or animals of any kind shall be brought into or kept in or about the Premises, and no cooking shall be done or permitted by any tenant in the Premises, except that the preparation of coffee, tea, hot chocolate and similar items for tenants, their employees and visitors shall be permitted. No tenant shall cause or permit any unusual or objectionable odors to be produced in or permeate from or throughout the Premises. The foregoing notwithstanding, Tenant shall have the right to use a microwave and to heat microwavable items typically heated in an office. No hot plates, toasters, toaster ovens or similar open element cooking apparatus shall be permitted in the Premises. 14. The sashes, sash doors, skylights, windows and doors that reflect or admit light and air into the halls, passageways or other public places in the Project shall not be covered or obstructed by any tenant, nor shall any bottles, parcels or other articles be placed on the window sills. -2- 15. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any tenant, nor shall any changes be made in existing locks or the mechanisms thereof unless Landlord is first notified thereof, gives written approval, and is furnished a key therefor. Each tenant must, upon the termination of his tenancy, give to Landlord all keys and key cards of stores, offices, or toilets or toilet rooms, either furnished to, or otherwise procured by, such tenant, and in the event of the loss of any keys so furnished, such tenant shall pay Landlord the cost of replacing the same or of changing the lock or locks opened by such lost key if Landlord shall deem it necessary to make such change. If more than two keys for one lock are desired, Landlord will provide them upon payment therefor by Tenant. Tenant shall not key or re-key any locks. All locks shall be keyed by Landlord's locksmith only. 16. Landlord shall have the right to prohibit any advertising by any tenant which, in Landlord's opinion, tends to impair the reputation of the Project or its desirability as an office building and upon written notice from Landlord any tenant shall refrain from and discontinue such advertising. 17. Landlord reserves the right to control access to the Project by all persons after reasonable hours of generally recognized business days and at all hours on Sundays and legal holidays and may at all times control access to the equipment areas of the Project outside the Premises. Each tenant shall be responsible for all persons for whom it requests after hours access and shall be liable to Landlord for all acts of such persons. Landlord shall have the right from time to time to establish reasonable rules pertaining to freight elevator usage, including the allocation and reservation of such usage for tenants' initial move-in to their premises, and final departure therefrom. Landlord may also establish from time to time reasonable rules and charges for accessing the equipment areas of the Project, including the risers, rooftops and telephone closets. 18. Any person employed by any tenant to do janitorial work shall, while in the Project and outside of the Premises, be subject to and under the control and direction of the Office of the Project or its designated representative such as security personnel (but not as an agent or servant of Landlord, and the Tenant shall be responsible for all acts of such persons). 19. All doors opening on to public corridors shall be kept closed, except when being used for ingress and egress. Tenant shall cooperate and comply with any reasonable safety or security programs, including fire drills and air raid drills, and the appointment of "fire wardens" developed by Landlord for the Project, or required by law. Before leaving the Premises unattended, Tenant shall close and securely lock all doors or other means of entry to the Premises and shut off all lights and water faucets in the Premises. 20. The requirements of tenants will be attended to only upon application to the Office of the Project. 21. Canvassing, soliciting and peddling in the Project are prohibited and each tenant shall cooperate to prevent the same. 22. All office equipment of any electrical or mechanical nature shall be placed by tenants in the Premises in settings approved by Landlord, to absorb or prevent any vibration, noise or annoyance. 23. No air-conditioning unit or other similar apparatus shall be installed or used by any tenant without the prior written consent of Landlord. Tenant shall pay the cost of all electricity used for air-conditioning in the Premises if such electrical consumption exceeds -3- normal office requirements, regardless of whether additional apparatus is installed pursuant to the preceding sentence. 24. There shall not be used in any space, or in the public halls of the Project, either by any tenant or others, any hand trucks except those equipped with rubber tires and side guards. 25. All electrical ceiling fixtures hung in offices or spaces along the perimeter of the Project must be fluorescent and/or of a quality, type, design and bulb color approved by Landlord. Tenant shall not permit the consumption in the Premises of more than 2'h watts per net usable square foot in the Premises in respect of office lighting nor shall Tenant permit the consumption in the Premises of more than 1'/z watts per net usable square foot of space in the Premises in respect of the power outlets therein, at any one time. In the event that such limits are exceeded, Landlord shall have the right to require Tenant to remove lighting fixtures and equipment and/or to charge Tenant for the cost of the additional electricity consumed. 26. Parking. (a) Project parking facility hours shall be 7:00 a.m. to 7:00 p.m., Monday through Friday, and closed on weekends, state and federal holidays excepted, as such hours may be revised from time to time by Landlord. (b) Automobiles must be parked entirely within the stall lines on the floor. (c) All directional signs and arrows must be observed. (d) The speed limit shall be 5 miles per hour. (e) Parking is prohibited in areas not striped for parking. (f) Parking cards or any other device or form of identification supplied by Landlord (or its operator) shall remain the property of Landlord (or its operator). Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable or assignable and any device in the possession of an unauthorized holder will be void. There will be a replacement charge to the Tenant or person designated by Tenant of $10.00 for loss of any parking card. (g) The monthly rate for parking is payable one (1) month in advance and must be paid by the third business day of each month. Failure to do so will automatically cancel parking privileges and a charge at the prevailing daily rate will be due. No deductions or allowances from the monthly rate will be made for days parker does not use the parking facilities. (h) Tenant may validate visitor parking by such method or methods as the Landlord may approve, at the validation rate from time to time generally applicable to visitor parking. (i) Landlord (and its operator) may refuse to permit any person who violates the within rules to park in the Project parking facility, and any violation of the rules shall subject the automobile to removal from the Project parking facility at the parker's expense. In either of said events, Landlord (or its operator) shall refund a prorata portion of the current monthly parking rate and the sticker or any other form of identification supplied by Landlord (or its operator) will be returned to Landlord (or its operator). -4- (j) Project parking facility managers or attendants are not authorized to make or allow any exceptions to these Rules and Regulations. (k) All responsibility for any loss or damage to automobiles or any personal property therein is assumed by the parker. (1) Loss or theft of parking identification devices from automobiles must be reported to the Project parking facility manager immediately, and a lost or stolen report must be filed by the parker at that time. (m) The parking facilities are for the sole purpose of parking one automobile per space. Washing, waxing, cleaning or servicing of any vehicles by the parker or his agents is prohibited. (n) Landlord (and its operator) reserves the right to refuse the issuance of monthly stickers or other parking identification devices to any Tenant and/or its employees who refuse to comply with the above Rules and Regulations and all City, State or Federal ordinances, laws or agreements. (o) Tenant agrees to acquaint all employees with these Rules and Regulations. (p) No vehicle shall be stored in the Project parking facility for a period of more than one (1) week. 27. The Project is a non-smoking Project. Smoking or carrying lighted cigars o: cigarettes in the Premises or the Project, including the elevators in the Project, is prohibited. 28. Tenant shall not, without Landlord's prior written consent (which consent may be granted or withheld in Landlord's absolute discretion), allow any employee or agent to carry any type of gun or other firearm in or about any of the Premises or Project. -5- EXHIBIT "C" NOTICE OF TERM DATES AND TENANT'S PROPORTIONATE SHARE TO:_________________________________ DATE:______________________________ ____________________________________ ____________________________________ RE: Lease dated __________, 20__, between ___________________________________ ______________________ ("Landlord"), and ("Tenant"), concerning Suite _________, located at___________________________________________________. Ladies and Gentlemen: In accordance with the Lease, Landlord wishes to advise and/or confirm the following: 1. That the Premises have been accepted herewith by the Tenant as being substantially complete in accordance with the Lease and that there is no deficiency in construction. 2. That the Tenant has taken possession of the Premises and acknowledges that under the provisions of the Lease the Term of said Lease shall commence as of ______________ for a term of _____________________ ending on ___________________________. 3. That in accordance with the Lease, Basic Rental commenced to accrue on ________________________________. 4. If the Commencement Date of the Lease is other than the first day of the month, the first billing will contain a prorata adjustment. Each billing thereafter shall be for the full amount of the monthly installment as provided for in said Lease. 5. Rent is the and payable in advance on the first day of each and every month during the Term of said Lease. Your rent checks should be made payable to ________________ at ___________________________________________. 6. The exact number of rentable square feet within the Premises is ___________ square feet. 7. Tenant's Proportionate Share, as adjusted based upon the exact number of rentable square feet within the Premises is ______ %. AGREED AND ACCEPTED: TENANT: ____________________________________________ a __________________________________________ By:_________________________________________ Its:__________________________________ -1- EX-10.11 8 a97792a4exv10w11.txt EXHIBIT 10.11 Exhibit 10.11 LINDOWOS(TM) LICENSE AGREEMENT This LindowsOS(TM) License Agreement (the "Agreement") is entered into as of November ___, 2003 (the "Effective Date"), by and between Lindows.com, Inc. ("Lindows.com"), a Delaware corporation with its principal office located at 9333 Genesee Drive, San Diego, CA 92121, Telephone: 858-587-6700, Facsimile: 858-587-8095, email: licenses@lindows.com ("Licensor"), on the one hand, and SYNNEX Corporation, a Delaware corporation, whit its principal office located at 3797 Spinnaker Court, Fremont, California 94538, and SYNNEX Corporation's wholly owned subsidiary SYNNEX Canada Limited, an Ontario corporation, with its principal office located at 200 Ronson Dr., Etobiocoke, IB M9W 5Z9, (collectively SYNNEX Corporation and SYNNEX Canada Limited shall hereinafter be referred to as "Licensee"). WHEREAS, Licensor has entered into a license agreement with Seagate Technology LLC, a Delaware Limited Liability Company with its principal office located at 920 Disc Drive, Scotts Valley, CA 95066, ("Seagate"), (such agreement hereinafter referred to as the "Lindows.com Partnership License Agreement") pursuant to which Seagate has the limited right to pre-install the Lindows.com Software Product (as defined in Section 1 below) on Seagate Products (as defined in Section 1 below) in order to create Composite Products (as defined in Section 1 below) and to distribute in object code as an integrated part of a Composite Product the Lindows.com Software Product; WHEREAS, Seagate at this time desires to have Licensee perform such pre-installation and such distribution; and WHEREAS, Licensor agrees to license to Licensee and Licensee agrees to receive a license to perform such pre-installation and distribution pursuant to the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the foregoing, and in reliance on the mutual agreements contained herein, the parties hereby agree as follows: 1. DEFINITIONS. All definitions herein or elsewhere in this Agreement shall apply both to the singular and plural forms, as the context may require. 1.1 "Composite Product" means Seagate Products on which the Lindows.com Product Software has been installed as provided herein. 1.2 "Computer" means a new, or refurbished by or for a System Builder, personal desktop computer, laptop computer, notebook computer, or server computer. 1.3 "End-User" means an individual or organization that acquires a Composite Product either alone or installed in a Computer for personal and/or internal business use and not for reselling or distribution. 1.4 "Hard Disk Drive" means a computer hardware product (a) designed to perform the operations of recording, detecting and erasing representations of any form of information, intelligence or data; (b) which includes the following elements: (i) a single enclosure containing during such operations (w) at least one rigid rotating magnetic disk, (x) at least one motor-driven spindle for engaging and rotating the magnetic disk, (y) at least one magnetic head assembly and (z) at least one actuator assembly for positioning an magnetic head across a disk, and (ii) electronic components used in operating the aforementioned elements; and (c) all the elements of which, when assembled, form an integrated unit. 1.5 "Seagate Product(s)" means any new or refurbished computer Hard Disk Drive designed, manufactured or refurbished, and distributed by or for Seagate and sold to Licensee by Seagate. 1.6 "Lindows.com Branding Features" means Licensor's proprietary trade names, trade dress, service marks, trademarks, logos, and indicia of origin and other distinctive branding features specified in Exhibit A hereto. 1.7 "Lindows.com Software Product" means certain computer programs including the LindowsOS(TM) and related documentation and interface specifications developed, owned, licensed, otherwise controlled, and/or distributed by Licensor, as more 1 Lindows License final 11-21-03 specifically set forth at the website http://www.lindows.com/lindows_products.php or any successor website thereto, and any Updates to the foregoing computer programs and related documentation and interface specifications. 1.8 "Lindows.com Software Product Master Disk" means a master disk image of the Lindows.com Software Product as made available to Licensee by electronic download at http://builder.lindows.com or any successor website thereto or on CD-ROM or other media. 1.9 "Proprietary Rights" means any and all rights, whether registered or unregistered, in, and with respect to, patents, copyrights, confidential information, know-how, trade secrets, moral rights, contract or licensing rights, confidential and proprietary information protected under contract or otherwise under law, trademarks, trade names, trade dress, logos, service marks, rights in and to animated characters and domain names, and all other intellectual or industrial property throughout the world. 1.10 "Reseller" means a person or entity that distributes Composite Products directly or through other Resellers to End-Users, Composite Products directly or through other Resellers to System Builders, or Composite Products integrated into Computers directly or through other Resellers to End-Users. 1.11 "System Builder" means a third party that manufactures itself or has manufactured for its benefit and account Computers. 1.12 "Update" means a new version, new release, upgrade, update, bug fix, patch, work around, or other enhancement, modification, or revision of the Lindows.com Software Product that is designated as such by Licensor, made available by Licensor at the Lindows.com Builder website http://builder.lindows.com or any successor website thereto, and provided by Licensor to Licensee pursuant to this Agreement. 2. [THIS SECTION 2 INTENTIONALLY LEFT BLANK.] 3. LICENSE. 3.1 GRANT. Subject to the restrictions set forth in Section 3.2. 4.5, 4.6, 5 and 6 below and the other terms and conditions of this Agreement, Licensor hereby grants to Licensee a non-exclusive, nontransferable, nonsublicensable (except as expressly provided herein), limited right and license only in the United States and Canada solely (a) only to the extent and as expressly and specifically authorized and requested by Seagate, use the Lindows.com Software Product Master Disk provided by Licensor solely to install the Lindows.com Software Product on Seagate Products only to create Composite Products, (b) to distribute the Lindows.com Software Product only in executable form and only as installed on and as an integrated part of a Composite Product to Resellers and System Builders and (c) to publicly display Lindows.com Branding Features pursuant to Licensor's Trademark Guidelines attached hereto as Exhibit A solely on Composite Product(s) and to promote and market Composite Product(s) ((a) through (c), individually and collectively, the "License"). The foregoing license does not include the right for Licensee to have its rights exercised by a third party for its benefit and account or on any other basis. 3.2 RESTRICTIONS. Subject to Section 4.6 below, Licensee will not: (a) copy, reproduce, distribute or otherwise make available the Lindows.com Software Product Master Disk or any Lindows.com Software Product or any portion or element thereof except as and to the extent expressly authorized herein and by Licensor; (b) translate, adapt, enhance, create derivative works of or otherwise modify the Lindows.com Software Product Master Disk or any Lindows.com Software Product, except as expressly set forth in Section 3.1 above, (c) decompile, disassemble or reverse engineer (except as and to the extent permitted by applicable local law), or extract ideas, algorithms, procedures, workflows or hierarchies from, the Lindows.com Software Product Master Disk or any Lindows.com Software Product or any portion or element thereof, (d) use the Lindows.com Software Product Master Disk or the Lindows.com Software Products or any portion or element thereof to provide facility management, service bureau or similar services to third parties; or (e) reproduce or use in any manner (except solely as and to the extent expressly authorized under Sections 3.1 (b) above), or remove, destroy, obscure or alter any Lindows.com Branding Features or any related materials placed on or contained within the Lindows.com Software Product Master Disk, any Lindows.com Software Product, or any Composite Product. 4. LICENSEE DUTIES. 4.1 COMPATIBILITY TESTING. Prior to distributing the initial or modified Composite Products, Licensee shall provide Licensor and its licensors and suppliers a reasonable opportunity to test and ensure the compatibility and interoperability of the Lindows.com Software Products with Seagate Products and Composite Products and to ensure that Composite 2 Lindows License final 11-21-03 Products function correctly. The foregoing shall include providing Licensor and its licensors and suppliers in advance a reasonable number of test units. 4.2 NO CHARGE FOR LINDOWS.COM SOFTWARE PRODUCTS. Licensee shall not charge any Reseller, System Builder, End User or other party directly or indirectly for the Lindows.com Software Product. 4.3 BUILDER LICENSE AGREEMENT AND END USER LICENSE AGREEMENT. Licensee shall include the LindowsOS Builder License Agreement ("Builder Agreement") currently located at http://www.lindows.com/builder and the LindowsOS License Agreement ("Lindows.com EULA") currently located at http://www.lindows.com/eula in any distribution of a Lindows.com Software Product or a Composite Product, whether such Composite Product is distributed alone or installed in and as part of a Computer. In addition, Licensee shall place and affix in a conspicuous place on bulk and individual unit packaging for Composite Products a notice that any use, distribution or other disposition of the Lindows.com Software Product and a Composite Product other than by an End User is subject to the Builder Agreement and that any use, distribution or other disposition of the Lindows.com Software Product and a Composite Product by an End User is subject to the Lindows.com EULA. When Licensor includes "click wrap" versions of the Builder Agreement and Lindows.com EULA on the Lindows.com Software Product Master Disk, then Licensor shall provide written notice to Licensee of the same and Licensee shall then be able to satisfy its obligation to include a copy of the Builder Agreement and Lindows.com EULA by not removing or otherwise interfering with the operation of such click wrap versions. 4.4 NO WARRANTIES. Licensee shall not make any representation or warranty binding on or purporting to bind Licensor, including but not limited to in connection with the performance, condition, title, non-infringement, merchantability, fitness for a particular purpose, system integration or data accuracy of a Lindows.com Software Product Master Disk, Lindows.com Software Product and/or Composite Products, and Licensee shall disclaim all warranties implied by law and other warranties to the maximum extent permitted by applicable law. 4.5 EXPORT COMPLIANCE. Licensee shall comply strictly with all United States import and export regulations (and any similar regulations in foreign countries) and shall obtain all required licenses, approvals and/or other clearances to export, re-export or import, as applicable, the Lindows.com Software Product Master Disk, Lindows.com Software Product, and any associated technical data, including, but not limited to where a Lindows.com Software Product is installed on a Licensor Product or on Computers via a Composite Product. 4.6 OPEN SOURCE AND THIRD PARTY LICENSES. Certain Software Programs, or portions thereof, included in the Lindows.com Software Product are distributed under the GNU General Public License ("GPL"), other similar open source license agreements and other third party agreements which contain terms that expand (or restrict) Licensee's and/or third parties' rights to certain portions of the Lindows.com Software Product. The GPL and other similar open source license agreements permit Licensee and/or third parties to copy, modify, redistribute and have access to the source code of certain portions of the Lindows.com Software Product. The GPL, other similar open source license agreements, other third party agreements, on-line documentation, source code, and other information about all such software programs are available at the website www.lindows.com/licensing (http://www.lindows.com/licensing). To the extent the GPL, other similar open source license agreements or other third party agreements require Licensor to provide rights to the applicable portions of the Lindows.com Software Product that are broader than the rights granted elsewhere in this agreement, then the GPL and/or other similar open source license agreements shall take precedence over the rights and restrictions set forth in this Agreement. Nothing in this Section 4.6 shall permit Licensee or any third party to use the Lindows.com Branding Features in connection with exercising the rights granted under the GPL, other similar open source license agreements or other third party agreements. 5. LICENSEE ACKNOWLEDGEMENT. Although the Lindows.com Software Product is copyrighted, Licensee acknowledges and agrees that the Lindows.com Software Product and the Lindows.com Software Product Master Disk embody valuable trade secrets proprietary to Licensor. Except for the rights and licenses expressly granted to Licensee in this Agreement, and subject to Section 4.6, Licensee acknowledges and agrees that Licensor reserves and retains all right, title and interest (including, without limitation, all Proprietary Rights) in and to the Lindows.com Software Product Master Disk, the Lindows.com Software Product, the Lindows.com Branding Features and the Licensor Confidential Information. Subject to the license granted in Section 3.1(b), Licensee hereby acknowledges and agrees that Licensee has no right, title or interest in or to the 3 Lindows License final 11-21-03 Lindows.com Branding Features, and all benefits from the use of the Lindows.com Branding Features shall automatically vest in Licensor. Licensee shall not (i) apply for registration of the Lindows.com Branding Features (or any marks or features confusingly similar thereto) anywhere in the world, (ii) alter, modify or change the Lindows.com Branding Features in any manner, (iii) use any of the Lindows.com Branding Features, except as expressly authorized herein or by prior written approval of the Licensor, or (iv) take any action inconsistent with Licensee's ownership of the Lindows.com Branding Features. Nothing contained in this Agreement will be construed as conferring upon Licensee or any third party (by implication, operation of law, estoppel or otherwise) any license or right not expressly granted by Licensor in this Agreement. 6. CONFIDENTIALITY. 6.1 CONFIDENTIAL INFORMATION. Each party acknowledges that, in the course of exercising its rights or performing its obligations under this Agreement, it may obtain confidential information relating to the other party, its licensors or licensees, contractors, agents, customers and/or end users ("Confidential Information"). Such Confidential Information shall include, without limitation: (a) The source code of the Lindows.com Software Product Master Disk and the Lindows.com Software Product, the terms of this Agreement, and as it relates to the Lindows.com Software Product Deliverables and Lindows.com Software Product, Proprietary Rights, techniques, processes, programs, ideas, algorithms, formulas, schematics, testing procedures, software design and architecture, computer code, internal documentation, design and functional specifications, product requirements, problem reports and performance information, software documents and other technical, business, product, marketing and financial information, plans and data; (b) any information designated by either party as confidential in writing or, if disclosed orally, reduced to writing and designated as confidential within thirty (30) days; and (c) any nonpublic information regarding Licensor, any sublicensees, Seagate Products and Composite Products, including but not limited to, technical data, product design and development, sales information, quantity and kind of Seagate Products and/or Composite Products sold, prices and methods of pricing, marketing techniques and plans, product returns, unannounced products, product and process information and any other information which if disclosed might be competitively detrimental to Licensor and/or Seagate. Neither party may use the Confidential Information of the other except for the purposes of this Agreement and shall protect such Confidential Information from disclosure to others, using the same degree of care used to protect its own proprietary information of like importance, but in no event less than a reasonable degree of care. The parties may disclose Confidential Information received hereunder only as reasonably required to perform its obligations or exercise its rights under this Agreement and only to third parties, its employees, and its agents who have a need to know for such purposes and who are under a duty of confidentiality consistent with this Section 6. 6.2 LIMITATIONS. The restrictions of this Agreement on use and disclosure of Confidential Information shall not apply to information that: (a) was in the possession or control of the receiving party at the time of its disclosure by the disclosing party; (b) is or becomes publicly known through no wrongful act; (c) is received from a third party free to disclose it without any confidentiality obligation; or (d) is independently developed without access to Confidential Information. 6.3 DISCLOSURES REQUIRED BY LAW. In the event a party is required by law, regulation or court order to disclose Confidential Information, it will promptly notify the other party in writing prior to making any such disclosure in order to facilitate the other party's ability to seek a protective order or other appropriate remedy from the appropriate body. Each party further agrees that if it is not successful in precluding the requesting legal body from requiring the disclosure of the Confidential Information, it will furnish only that portion of the Confidential Information which is legally required and will exercise all reasonable efforts to obtain reliable assurances that confidential treatment will be accorded the Confidential Information. Any Confidential Information released under this Section 6 shall remain Confidential Information or all other purposes. 6.4 REMEDIES. The parties hereby agree that any breach of any provision of this Agreement regarding confidentiality or protection of Proprietary Rights would constitute irreparable harm, and that the aggrieved party shall be entitled to specific performance and/or injunctive relief in addition to other remedies at law or in equity. This Section 6.4 shall not be construed to preclude either party from seeking equitable relief under any other section of this Agreement. 7. TERM AND TERMINATION. 7.1 TERM. Unless earlier terminated in accordance with Section 7.2 below, this Agreement shall commence as of the Effective Date and shall 4 Lindows License final 11-21-03 continue in effect until (a) termination of this Agreement by either party upon thirty (30) days written notice or (b) the termination of the Lindows.com Partnership License Agreement in accordance with its terms, whichever is earlier. 7.2 TERMINATION. Either party may terminate this Agreement immediately if the other party defaults in the performance of any material provision of this Agreement and fails to cure such default within fifteen (15) days of receiving written notice of such default from the non-defaulting party. Upon the expiration or earlier termination of this Agreement, all rights and licenses granted to Licensee hereunder, including but not limited to any sublicenses granted at any tier below Licensee, will terminate. Upon the expiration or termination hereof, Licensee shall cease distributing Composite Products; provided that, except where Licensor terminated this Agreement pursuant to default under this Section 7.2, Licensee shall have the right to distribute Composite Products existing as of the date of termination and in its possession or control for a period of one hundred and twenty (120) days after termination. The rights and obligations of the parties under Sections 1, 3.2, 4.2, 4.3, 4.4, 4.5, 6, 7, 9.1, 9.2 and 10 will survive any expiration or termination of this Agreement. Any termination of this Agreement by either party shall not limit any right or remedies available at law or equity to the terminating party nor impair any rights nor discharge any obligations which have accrued to the terminating party as of the effective date of such termination. Except where otherwise specified, the rights and remedies granted to a party under this Agreement are cumulative and in addition to, and not in lieu of, any other rights or remedies which the party may possess at law or in equity. 8. [THIS SECTION 8 INTENTIONALLY LEFT BLANK.] 9. DISCLAIMER; LIMITATION OF LIABILITY; INDEMNIFICATION. 9.1 NO WARRANTY. LICENSOR MAKES NO WARRANTY TO LICENSEE OF ANY KIND WITH REGARD THE LINDOWS.COM SOFTWARE PRODUCTS, THE LINDOWS.COM SOFTWARE PRODUCT MASTER DISK, THE SEAGATE PRODUCTS, THE COMPOSITE PRODUCTS, OR ANY CONFIDENTIAL INFORMATION. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, LICENSOR, FOR ITSELF AND ON BEHALF OF SEAGATE AND LICENSOR'S LICENSORS ANY SUPPLIERS, EXPRESSLY DISCLAIMS ANY WARRANTIES, EXPRESS, STATUTORY OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF PERFORMANCE, CONDITION, TITTLE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS, MERCHANTABILITY, SYSTEM INTEGRATION, DATA ACCURACY AND FITNESS FOR A PARTICULAR PURPOSE, WHETHER ARISING OUT OF LAW, CUSTOM, CONDUCT, OR OTHERWISE. 9.2 LIMITATION OF LIABILITY. EXCEPT FOR A BREACH OF THE LICENSE (INCLUDING BUT NOT LIMITED TO ANY APPLICABLE RESTRICTIONS TO THE SAME) IN SECTION 3 BY LICENSEE, BREACH OF SECTION 6 BY EITHER PARTY, AND THE PARTIES' INDEMNIFICATION OBLIGATIONS IN SECTION 9.3, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL EITHER PARTY AND LICENSOR'S LICENSORS AND SUPPLIERS HAVE ANY OBLIGATION OR LIABILITY (WHETHER IN TORT, CONTRACT, WARRANTY, STRICT LIABILITY OR UNDER ANY OTHER LEGAL THEORY) TO THE OTHER PARTY, OR TO ANY OTHER ENTITY OR PERSON, FOR ANY INDIRECT, INCIDENTAL, SPECIAL, STATUTORY, PUNITIVE OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOSS OF GOODWILL, LOSS OF PERFORMANCE, LOST PROSPECTIVE ECONOMIC ADVANTAGE, LOST REVENUE OR PROFITS, OR LOSS OF DATA), IRRESPECTIVE OF WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR A BREACH OF THE LICENSE (INCLUDING BUT NOT LIMITED TO ANY APPLICABLE RESTRICTIONS TO THE SAME) IN SECTION 3 BY LICENSEE, BREACH OF SECTION 6 BY EITHER PARTY, AND THE PARTIES' INDEMNIFICATION OBLIGATIONS IN SECTION 9.3, EITHER PARTY'S MAXIMUM AGGREGATE LIABILITY OF ANY KIND ARISING OUT OF THIS AGREEMENT SHALL BE LIMITED TO FIFTY DOLLARS (US$50); PROVIDED, HOWEVER, THAT, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL (A) LICENSEE OR ANY OTHER ENTITY OR PERSON HAVE ANY CLAIMS OR CAUSES OF ACTION OF ANY KIND AGAINST SUBLICENSOR'S LICENSORS OR SUPPLIERS IN CONNECTION WITH THIS AGREEMENT, AND (B) SUBLICENSOR'S LICENSORS AND SUPPLIERS HAVE ANY LIABILITY (WHETHER EXPRESS, IMPLIED, STATUTORY, OR OTHER) WHATSOEVER TO LICENSEE OR ANY OTHER 5 Lindows License final 11-21-03 ENTITY OR PERSON IN CONNECTION WITH THIS AGREEMENT. 9.3 INDEMNIFICATION. Licensor shall defend at its sole cost any claim or proceeding brought by a third party against Licensee, its officers, directors, agents, and employees ("Licensee Indemnified Parties"), shall have the right at its option and sole cost to settle such claim or action, and shall pay any final award of damages issued against the Licensee Indemnified Parties by a court of competent jurisdiction to the extent that such claim or proceeding is based on a claim that Licensee's authorized use or distribution of the Lindows.com Software Product infringes or misappropriates a third party Proprietary Right (a "Claim"), provided that: (1) upon becoming aware of such Claim, the Licensee Indemnified Parties promptly notify Licensor in writing of the Claim; (2) Licensor shall have exclusive control of the settlement (except solely to the extent provided below) and/or defense of any action to which the Claim relates; and (3) the Licensee Indemnified Parties cooperate with Licensor in every reasonable way to facilitate such defense or settlement. Licensor shall not settle any claim without the Licensee Indemnified Parties' prior written consent (which shall not be unreasonably withheld, conditioned or delayed). Licensor's obligations under this Section 9.3 shall not apply to the extent any Claim arises from (1) any modifications made by the Licensee Indemnified Parties to the Lindows.com Software Product as and in the form delivered by Licensor to Licensee under this Agreement, (2) the Licensee Indemnified Parties' failure to use the Lindows.com Software Product in accordance with the provisions of this Agreement, or (3) the combination or use by the Licensee Indemnified Parties of the Lindows.com Software Product, or any portion thereof, with software, hardware or materials not provided by Licensor. Licensor shall have no liability for any use of the Lindows.com Software Product other than as expressly set forth in this Agreement and the foregoing states Licensor's sole indemnification obligations and entire liability to the Licensee Indemnified Parties with respect thereto. If the Lindows.com Software Product becomes subject to a Claim or in the event that Licensor wishes to minimize its potential liability hereunder, then Licensor may, at Licensor's option and at no expense to Licensee, (1) obtain for Licensee the right to continue to exercise the license granted; (2) substitute functionally equivalent non-infringing Lindows.com Software Products; or (3) modify the Lindows.com Software Product to make it non-infringing but still functionally equivalent. Licensee shall defend at its sole cost any claim or proceeding brought by a third party against Licensor, its officers, directors, agents and employees ("Licensor Indemnified Parties"), shall have the right at its option and sole cost to settle such claim or action, and shall pay any final award of damages issued against the Licensor Indemnified Parties by a court of competent jurisdiction, to the extent that such claim or proceeding arises out of the Composite Product (except to the extent the claim or proceeding (1) both a) arises out of the Lindows.com Software Product as and in the form delivered and b) does not arise not out of (i) any modifications made by the Licensee Indemnified Parties to the Lindows.com Software Product as and in the form delivered by Licensor to Licensee under this Agreement, (ii) the Licensee Indemnified Parties' failure to use the Lindows.com Software Product in accordance with the provisions of this Agreement, or (iii) the combination or use by the Licensee Indemnified Parties of the Lindows.com Software Product, or any portion thereof, with software, hardware or materials not provided by Licensor, and (2) arises out of a Seagate Product as and in the form delivered by Seagate to Licensee) (each, a "Licensor Claim"), provided that: (1) upon becoming aware of such Licensor Claim, the Licensor Indemnified Parties promptly notify Licensee in writing of the Licensor Claim; (2) Licensee shall have exclusive control of the settlement (except solely to the extent provided below) and/or defense of any action to which the Licensor Claim relates; and (3) the Licensor Indemnified Parties cooperates with Licensee in every reasonable way to facilitate such defense or settlement. Licensee shall not settle any claim without the Licensor Indemnified Parties' prior written consent (which shall not be unreasonable withheld, conditioned or delayed). Notwithstanding any of the foregoing, the Licensor Indemnified Parties shall have the right, in their absolute discretion and at their sole cost, to employ attorneys of their own choice and to institute or defend any such Licensor Claim. 10. GENERAL PROVISIONS. This Agreement represents the entire agreement between Licensor and Licensee and supersedes all prior agreements and understandings, whether written or oral, with respect to all matters covered in this Agreement. This Agreement will not be altered, modified, or amended in any respect except by a writing signed by each party. This Agreement is to be construed in accordance with and governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Except as otherwise set forth in Section 6.4, any dispute regarding this Agreement shall be subject to the exclusive jurisdiction 6 Lindows License final 11-21-03 of the courts for the State of California in and for Santa Clara County, California, U.S.A. (or, if there is federal jurisdiction, the United States District Court for the Northern District of California, San Jose Branch), and the parties agree to submit to the personal and exclusive jurisdiction and venue of these courts. Nothing in this Agreement is intended or will be construed to give any person (other than Licensor and Licensee) any legal or equitable right, remedy or claim under this Agreement or any provision hereof. Neither party may assign this Agreement or any of its rights or obligations hereunder, whether voluntarily, by operation of law or otherwise without the consent of the other party; provided, however, that either party may assign this Agreement pursuant to a transfer of all or substantially all of such party's business and assets, whether by merger, sale of assets, sale of stock, or otherwise. Any attempted assignment or delegation in contravention of this Section 17 shall be void and ineffective. Failure by either party to enforce at any time or for any period of time the provisions of this Agreement will not be construed as a waiver of such provisions, and will in no way affect such party's right to later enforce such provisions. If any part of this Agreement is determined by any court of competent jurisdiction to be unenforceable for any reason, such unenforceability will not affect the balance of this Agreement, and the unenforceable provision will be changed and interpreted so as to best accomplish the objectives of such provision within the limits of applicable law. This Agreement may be executed, by manual or facsimile signature, in multiple counterparts, which taken together shall constitute one Agreement and each of which shall be considered an original for all purposes. IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives. SYNNEX Corporation Lindows.com, Inc. By: /s/ Simon Y. Leung By: /s/ Kevin Carmony -------------------- ------------------------- Name: Simon Y. Leung Name: Kevin Carmony Title: General Counsel & Corporate Secretary Title: Pres/COO Date: 11/24/03 Date: 11/25/03 SYNNEX Canada Limited By: /s/ Simon Y. Leung ------------------ Name: Simon Y. Leung Title: General Counsel & Corporate Secretary Date: 11/24/03 7 Lindows License final 11-21-03 EXHIBIT A LINDOWS.COM BRANDING FEATURES; TRADEMARK GUIDELINES BRANDING FEATURES TRADEMARK NOTICES The Branding Features are trademarks and service marks of Lindows.com. The Branding Features shall be accompanied by the superscript "TM" or "(R)" symbol, as specified by Lindows.com, which must appear to the immediate right of the Branding Features. The footnote "LindowsOS is the trademark of Lindows.com, Inc." or "Lindows.com is the trademark of Lindows.com, Inc.", as applicable, shall accompany each use of the Branding Features (or, if a Branding Feature is used multiple times in a document, screen or packaging, such notice shall accompany the first prominent use in such document, screen or packaging). USING THE BRANDING FEATURES Licensee may only use the Branding Features as an indication that the Lindows.com Software Product is being offered to end users via distribution pursuant to the Agreement. Licensee may not use the Branding Features in such a way as to suggest that the Branding Features may also apply to any hardware or software other than the Lindows.com Software Product. When referring to Lindows.com, Inc., Licensee shall use the name "Lindows.com". When referring to the Lindows.com Software Product, Licensee shall use the trademark "LindowsOS". SIZING AND PLACEMENT REQUIREMENTS The digitized, machine-readable file for the artwork of the Branding Features appears above in this Exhibit A. Licensee shall not alter this file or the Branding Features in any way, including, without limitation, changing the color of any of the logos or artwork, separating any words in the Branding Features from the remainder of the Branding Features or replacing words with any other words. Licensee shall not combine the Branding Features with any other feature, including, without limitation, other marks, words, graphics, photos, slogans, numbers, design features or symbols. The Branding Features shall not be larger or more prominent than the trademark, logo or any Licensee trade name that appears on the same packaging, documentation, advertising or other materials. The Branding Features shall not be smaller or less prominent than any name, trademark or logo of any third party that appears on the same packaging, documentation, advertising or other materials. 8 Lindows License final 11-21-03 EX-10.12 9 a97792a4exv10w12.txt EXHIBIT 10.12 EXHIBIT 10.12 *** CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT (INDICATED BY ASTERISKS) HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER 17 C.F.R. SECTIONS 200.80(B)(4), 200.803 AND 230.406 LINDOWSOS(TM) CD BUNDLING AND DISTRIBUTION AGREEMENT This LindowsOS(TM) CD Bundling and Distribution Agreement (the "Agreement") is entered into as of January, 1st, 2004 (the "Effective Date"), by and between Lindows.com, Inc. ("Lindows.com"), a Delaware corporation with its principal office located at 9333 Genesee Drive, San Diego, CA 92121, Telephone: 858-587-6700, Facsimile: 858-587-8095, email: licenses@lindows.com, and Albatron Technology Co., Ltd., a Taiwan corporation, with its principal office located at 6F, No. 716, Chung Cheng Rd., Chung-Ho City, Taipei Hsien, Taiwan, Telephone: +886-28227-3277 Fax: +886-28227-3266 ("Licensee"). WHEREAS, Lindows.com desires to license to Licensee and Licensee desires to receive a license for Licensee to distribute the Software bundled with certain of Licensee's products subject to the terms and conditions hereof; NOW, THEREFORE, in consideration of the foregoing, and in reliance on the mutual agreements contained herein, the parties hereby agree as follows: 1. DEFINITIONS. All definitions herein or elsewhere in this Agreement shall apply both to the singular and plural forms, as the context may require. 1.1 "Product" means one copy of the Software installed on a CD-ROM disk bundled and packaged together with a single unit of a Licensee Product to create an integrated single product, all as provided herein. 1.2 "Computer" means a new, or refurbished by or for a System Builder, personal desktop computer, laptop computer, notebook computer, or server computer. 1.3 "End-User" means an individual or organization that acquires a Product for personal and/or internal business use and not for reselling or distribution. 1.4 "Licensee Product" means a product manufactured by or for the benefit and account of Licensee and specified on Exhibit B. 1.5 "Lindows.com Branding Features" means Lindows.com's proprietary trade names, trade dress, service marks, trademarks, logos, and indicia of origin and other distinctive branding features specified in Exhibit A hereto. 1.6 "Software" means certain computer programs including the LindowsOS(TM) and related documentation and interface specifications developed, owned, licensed, otherwise controlled, and/or distributed by Lindows.com, as more specifically set forth at the website http://www.lindows.com/40 or any successor website thereto, and any Updates to the foregoing. 1.7 "Master Disk" means a master disk image of the Software as made available to Licensee by electronic download at http://builder.lindows.com or any successor website thereto. 1.8 "Proprietary Rights" means any and all rights, whether registered or unregistered, in, and with respect to, patents, copyrights, confidential information, know-how, trade secrets, moral rights, contract or licensing rights, confidential and proprietary information protected under contract or otherwise under law, trademarks, trade names, trade dress, logos, service marks, rights in and to animated characters and domain names, and all other intellectual or industrial property throughout the world. 1.9 "Reseller" means a person or entity that distributes Products directly or through other Resellers to End-Users, Products directly or through other Resellers to System Builders, or Products integrated into Computers directly or through other Resellers to End-Users. 1.10 "System Builder" means a third party that manufactures itself or has manufactured for its benefit and account Computers. 1.11 "Update" means a new version, new release, upgrade, update, bug fix, patch, work around, or other enhancement, modification, or revision of the Software that is designated as such by Lindows.com, made available by Lindows.com at the Lindows.com Builder website http://builder.lindows.com or any successor website thereto, and provided by Lindows.com to Licensee pursuant to this Agreement. 2. LICENSE. 2.1 GRANT. Subject to the restrictions set forth in Sections 2.2, 3, 4 and 5 below and the other terms and conditions of this Agreement, Lindows.com hereby grants to Licensee a worldwide (except to the extent prohibited or restricted by Section 3.5 below), non-exclusive, nontransferable, nonsublicensable, limited right and license solely (a) to use the Master Disk provided by Lindows.com solely to install a single copy per CD-ROM disk of the Software in object code form only, and pursuant to the specifications and instructions provided from time to time by Lindows.com at http://www.lindows.com/licenses or any successor website thereto, on a CD-ROM disk; (b) to bundle and package together the Software as installed on such CD-ROM disk with Licensee Products to create Products; (c) to distribute the Software as installed on such CD-ROM disk only as an integrated part of a Product to Resellers and System Builders with a Reseller and Builder Agreement (as defined in Section 3.3 below) and End-Users with a Lindows.com EULA (as defined in Section 3.3 below); and (d) to publicly display Lindows.com Branding Features pursuant to Lindows.com's Trademark Guidelines attached hereto as Exhibit A solely on Products and to promote and market Products ((a) through (d), individually and collectively, the "License"). The foregoing License does not include the right for Licensee to have its rights exercised by a third party for its benefit and account or on any other basis. 1 EXHIBIT 10.12 2.2 RESTRICTIONS. Subject to Section 3.6 below, Licensee shall not: (a) copy, reproduce, distribute or otherwise make available the Master Disk or any Software or any portion or element thereof except as and to the extent expressly authorized herein and by Lindows.com; (b) translate, adapt, enhance, create derivative works of or otherwise modify the Master Disk or any Software, except as expressly set forth in Section 2.1 above, (c) decompile, disassemble or reverse engineer (except as and to the extent permitted by applicable local law), or extract ideas, algorithms, procedures, workflows or hierarchies from, the Master Disk, the Software, Lindows.com's Confidential Information, or any portion or element of any of the foregoing, (d) use the Master Disk or the Software or any portion or element thereof to provide facility management, service bureau or similar services to third parties; or (e) reproduce or use in any manner (except solely as and to the extent expressly authorized under Section 2.1(d) above), or remove, destroy, obscure or alter any Lindows.com Branding Features or any related materials placed on or contained within the Master Disk, the Software, Lindows.com's Confidential Information, or any portion or element of any of the foregoing. The foregoing restrictions on reverse engineering shall not apply only to the extent reverse engineering is explicitly permitted by mandatory provisions of applicable national legislation, the provisions of which legislation do not permit the prohibition by contract of such reverse engineering, subject to the following: In countries where mandatory provisions of national legislation permit certain limited reverse engineering for interoperability purposes, if Licensee believes that Licensee requires information related to the interoperability of the Software with other programs, Licensee shall not reverse engineer the Software to obtain such information but instead shall request such information from Lindows.com. Upon receiving such a request from Licensee with respect to such a country, Lindows.com shall reasonably determine whether Licensee requires such information for a legitimate purpose, and, if so, Lindows.com shall either itself implement such interoperability information or provide such information to Licensee within a reasonable time and on reasonable conditions. In the case that Lindows.com informs Licensee that the information will not be provided or implemented, and if Licensee wishes to reverse engineer the Software to ascertain, derive and/or appropriate for any reason or purpose the source code or source listings for the Software as permitted by the mandatory provisions of national legislation, it shall inform Lindows.com in writing at least fifteen (15) days in advance. Any interoperability information supplied under this Section 2.2 or obtained through reverse engineering permitted hereunder shall be treated as Confidential Information under the terms of this Agreement. 3. LICENSEE DUTIES. 3.1 COMPATIBILITY TESTING. Licensee shall, and shall require in any agreement it enters into with Resellers, System Builders, or any other third party that such Resellers, System Builders, and any other third party shall, test and take other commercially reasonable measures to ensure the compatibility of the Software with Products and/or Computers and that Computers containing the Products function correctly (as applicable). 3.2. NO CHARGE FOR SOFTWARE. Licensee shall not charge any Reseller, System Builder, End User or other party directly or indirectly for the Software. 3.3 BUILDER LICENSE AGREEMENT AND END USER LICENSE AGREEMENT. Licensee shall include the LindowsOS Builder License Agreement ("Builder Agreement") currently located at http://www.lindows.com/licenses and the LindowsOS License Agreement ("Lindows.com EULA") currently located at http://www.lindows.com/licenses in any distribution of a Software or a Product, whether such Product is distributed alone or installed in and as part of a Computer. In addition, Licensee shall: (a) place and affix in a conspicuous place on bulk and individual unit packaging for Products a notice that any use, distribution or other disposition of the Software and a Product other than by an End User is subject to the Builder Agreement and that any use, distribution or other disposition of the Software and a Product by an End User is subject to the Lindows.com EULA; (b) include in all bulk and individual unit packaging for Products the Builder Agreement as a "shrink-wrapped" or "click-wrapped" license agreement that requires a Reseller and System Builder to view in full and indicate assent either by opening the physical product package or by clicking on a designated button, respectively; and (c) include the Lindows.com EULA as a "shrink-wrapped" or "click-wrapped" license agreement that requires the End User to view in full and indicate assent either by opening the physical product package or by clicking on a designated button, respectively. 3.4 NO WARRANTIES. Licensee shall not make any representation or warranty binding on or purporting to bind Lindows.com, including but not limited to in connection with the performance, condition, title, non-infringement, merchantability, fitness for a particular purpose, system integration or data accuracy of a Master Disk, Software and/or Products, and Licensee shall disclaim all warranties implied by law and other warranties to the maximum extent permitted by applicable law. 3.5 EXPORT COMPLIANCE. Licensee shall be responsible for complying and shall comply strictly with all United States import and export regulations (and any similar regulations in foreign countries), shall not export, re-export, divert or transfer, directly or indirectly, to any country (or any national or resident of such country) that is embargoed by U.S. Export Administration Regulations, Executive Order (or any similar regulations in foreign countries), and shall obtain all required licenses, approvals and/or other clearances to export, re-export or import, as applicable, the Master Disk, Software, and any associated technical data, including, but not limited to where the Software is bundled with a Product and/or installed into Computers via a Product. 3.6 OPEN SOURCE AND THIRD PARTY LICENSES. Certain Software Programs, or portions thereof, included in the Software are distributed under the GNU General Public License ("GPL"), other similar open source license agreements and other third party agreements which contain terms that expand (or restrict) Licensee's and/or third parties' rights to certain portions of the Software. The GPL and other similar open source license agreements permit Licensee and/or third parties to copy, modify, redistribute and have access to the source code of certain portions of the Software. The GPL, other similar open source license agreements, other third party agreements, on-line documentation, source code, and other information about all such software programs are available at the website http://www.lindows.com/licenses. To the extent the GPL, other similar open source license agreements or other third party agreements require Lindows.com to provide rights to the applicable portions of the Software that are broader than the rights granted elsewhere in this agreement, then the GPL and/or other similar open source license agreements shall take precedence over the rights and restrictions set forth in this Agreement. Nothing in this Section 3.6 shall permit Licensee or any third party to use the Lindows.com Branding Features in connection with exercising the rights granted under the GPL, other similar open source license agreements or other third party agreements. 4. LICENSEE ACKNOWLEDGEMENT. Although the Software and the Lindows.com Products are copyrighted, Licensee acknowledges and agrees that the Software, the Master Disk, the Products and the Lindows.com Products, in each case, embody valuable trade secrets proprietary to Lindows.com, as applicable. Except for the rights and licenses expressly granted to Licensee in this Agreement, and subject to Section 3.6, Licensee acknowledges and agrees that Lindows.com reserves and retains all right, title and interest (including, without limitation, all Proprietary Rights) in and to the Master Disk, the 2 EXHIBIT 10.12 Software, the Lindows.com Branding Features and the Lindows.com Confidential Information. Subject to the license granted in Section 2.1(d), Licensee hereby acknowledges and agrees that Licensee has no right, title or interest in or to the Lindows.com Branding Features, and all benefits from the use of the Lindows.com Branding Features shall automatically vest in Lindows.com. Licensee shall not (i) apply for registration of the Lindows.com Branding Features (or any marks or features confusingly similar thereto) anywhere in the world, (ii) alter, modify or change the Lindows.com Branding Features in any manner, (iii) use any of the Lindows.com Branding Features, except as expressly authorized herein or by prior written approval of the Lindows.com, or (iv) take any action inconsistent with Lindows.com's ownership of the Lindows.com Branding Features. Nothing contained in this Agreement will be construed as conferring upon Licensee or any third party (by implication, operation of law, estoppel or otherwise) any license or right not expressly granted by Lindows.com in this Agreement. 5. CONFIDENTIALITY. 5.1 CONFIDENTIAL INFORMATION. Licensee acknowledges that, in the course of exercising its rights or performing its obligations under this Agreement, it may obtain confidential information relating to Lindows.com, its licensors or licensees, contractors, agents, customers and/or end users ("Confidential Information"). Such Confidential Information shall include, without limitation: (a) the source code of the Master Disk and the Software, the terms of this Agreement, and, as it relates to the Master Disk and the Software, Proprietary Rights, techniques, processes, programs, ideas, algorithms, formulas, schematics, testing procedures, software design and architecture, computer code, internal documentation, design and functional specifications, product requirements, problem reports and performance information, software documents and other technical, business, product, marketing and financial information, plans and data; (b) any information designated by Lindows.com as confidential in writing or, if disclosed orally, reduced to writing and designated as confidential within thirty (30) days; and (c) any nonpublic information regarding Lindows.com, the Master Disk, Software, and other Lindows.com products, including but not limited to, technical data, product design and development, sales information, quantity and kind of products sold, prices and methods of pricing, marketing techniques and plans, product returns, unannounced products, product and process information and any other information which if disclosed might be competitively detrimental to Lindows.com. Licensee shall not use any Confidential Information except for the purposes of this Agreement and shall protect such Confidential Information from disclosure to others, using the same degree of care used to protect its own proprietary information of like importance, but in no event less than a reasonable degree of care. Licensee may disclose Confidential Information received hereunder only as reasonably required to perform its obligations or exercise its rights under this Agreement and only to third parties, its employees, and its agents who have a need to know for such purposes and who are bound by signed, written agreements to protect the received Confidential Information from unauthorized use and disclosure at least as protective as this Section 5. 5.2 LIMITATIONS. The restrictions of this Agreement on use and disclosure of Confidential Information shall not apply to information that: (a) was in the possession or control of Licensee at the time of its disclosure by Lindows.com; (b) is or becomes publicly known by Licensee through no wrongful act; (c) is received by Licensee from a third party free to disclose it without any confidentiality obligation; or (d) is independently developed by Licensee without access to Confidential Information. 5.3 DISCLOSURES REQUIRED BY LAW. In the event Licensee is required by law, regulation or court order to disclose Confidential Information, it will promptly notify Lindows.com in writing prior to making any such disclosure in order to facilitate Lindows.com's ability to seek a protective order or other appropriate remedy from the appropriate body. Licensee further agrees that if it and/or Lindows.com is not successful in precluding the requesting legal body from requiring the disclosure of the Confidential Information, it will furnish only that portion of the Confidential Information which is legally required and will exercise all reasonable efforts to obtain reliable assurances that confidential treatment will be accorded the Confidential Information. Any Confidential Information released under this Section 5 shall remain Confidential Information or all other purposes. 5.4 REMEDIES. The parties hereby agree that any breach of any provision of this Agreement regarding confidentiality or protection of Proprietary Rights would constitute irreparable harm, and that Lindows.com shall be entitled to specific performance and injunctive relief in addition to other remedies at law or in equity. This Section 5.4 shall not be construed to preclude Lindows.com from seeking equitable relief under any other section of this Agreement. 6. TERM AND TERMINATION. 6.1 TERM. Unless earlier terminated in accordance with Section 6.2 below, this Agreement shall commence as of the Effective Date and shall continue in effect until (a) termination of this Agreement by either party upon thirty (30) days written notice or (b) one (1) year, whichever is earlier. 6.2 TERMINATION. Either party may terminate this Agreement immediately if the other party defaults in the performance of any material provision of this Agreement and fails to cure such default within fifteen (15) days of receiving written notice of such default from the non-defaulting party. Upon the expiration or earlier termination of this Agreement, all rights and licenses granted to Licensee hereunder shall terminate. The rights and obligations of the parties under Sections 1, 2.2, 3.2, 3.3, 3.4, 3.5, 4, 5, 6, 7, and 8 will survive any expiration or termination of this Agreement. Any termination of this Agreement by either party shall not limit any right or remedies available at law or equity to the terminating party nor impair any rights nor discharge any obligations which have accrued to the terminating party as of the effective date of such termination. Except where otherwise specified, the rights and remedies granted to a party under this Agreement are cumulative and in addition to, and not in lieu of, any other rights or remedies which the party may possess at law or in equity. 7. DISCLAIMER; LIMITATION OF LIABILITY. 7.1 NO WARRANTY. LINDOWS.COM MAKES NO WARRANTY TO LICENSEE OF ANY KIND WITH REGARD THE SOFTWARE, THE MASTER DISK, THE PRODUCTS, OR ANY CONFIDENTIAL INFORMATION. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, LINDOWS.COM, FOR ITSELF AND ON BEHALF OF ITS LICENSORS AND SUPPLIERS, EXPRESSLY DISCLAIMS ANY WARRANTIES, EXPRESS, STATUTORY OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF PERFORMANCE, CONDITION, TITLE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS, MERCHANTABILITY, SYSTEM INTEGRATION, DATA ACCURACY AND FITNESS FOR A PARTICULAR PURPOSE, WHETHER ARISING OUT OF LAW, CUSTOM, CONDUCT, OR OTHERWISE. 7.2 LIMITATION OF LIABILITY. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL LINDOWS.COM AND ITS LICENSORS AND SUPPLIERS HAVE ANY OBLIGATION OR LIABILITY (WHETHER IN TORT, CONTRACT, WARRANTY, STRICT LIABILITY OR UNDER ANY OTHER LEGAL THEORY) TO LICENSEE, OR TO ANY OTHER ENTITY OR PERSON, FOR ANY INDIRECT, INCIDENTAL, SPECIAL, STATUTORY, PUNITIVE OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED 3 EXHIBIT 10.12 TO, LOSS OF GOODWILL, LOSS OF PERFORMANCE, LOST PROSPECTIVE ECONOMIC ADVANTAGE, LOST REVENUE OR PROFITS, OR LOSS OF DATA), IRRESPECTIVE OF WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. LINDOWS.COM'S MAXIMUM AGGREGATE LIABIILTY OF ANY KIND ARISING OUT OF THIS AGREEMENT SHALL BE LIMITED TO FIFTY DOLLARS (US$50); PROVIDED, HOWEVER, THAT, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL (A) LICENSEE OR ANY OTHER ENTITY OR PERSON HAVE ANY CLAIMS OR CAUSES OF ACTION OF ANY KIND AGAINST LINDOWS.COM'S LICENSORS OR SUPPLIERS IN CONNECTION WITH THIS AGREEMENT, AND (B) ANY OF LINDOWS.COM'S LICENSORS OR SUPPLIERS HAVE ANY LIABILITY (WHETHER EXPRESS, IMPLIED, STATUTORY, OR OTHER) WHATSOEVER TO LICENSEE OR ANY OTHER ENTITY OR PERSON IN CONNECTION WITH THIS AGREEMENT. 8. GENERAL PROVISIONS. This Agreement represents the entire agreement between Lindows.com and Licensee and supersedes all prior agreements and understandings, whether written or oral, with respect to all matters covered in this Agreement. This Agreement will not be altered, modified, or amended in any respect except by a writing signed by each party. This Agreement is to be construed in accordance with and governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Any dispute regarding this Agreement shall be subject to the exclusive jurisdiction of the courts for the State of California in and for San Diego County, California, U.S.A. (or, if there is federal jurisdiction, the United States District Court for the Southern District of California), and the parties agree to submit to the personal and exclusive jurisdiction and venue of these courts. Nothing in this Agreement is intended to or will be construed to give any person (other than Lindows.com and Licensee) any legal or equitable right, remedy or claim under this Agreement or any provision hereof. Licensee may not assign this Agreement or any of its rights or obligations hereunder, whether voluntarily, by operation of law, indirectly, or otherwise. Failure by either party to enforce at any time or for any period of time the provisions of this Agreement will not be construed as a waiver of such provisions, and will in no way affect such party's right to later enforce such provisions. If any part of this Agreement is determined by any court of competent jurisdiction to be unenforceable for any reason, such unenforceability will not affect the balance of this Agreement, and the unenforceable provision will be changed and interpreted so as to best accomplish the objectives of such provision within the limits of applicable law. This Agreement may be executed, by manual or facsimile signature, in multiple counterparts, which taken together shall constitute one Agreement and each of which shall be considered an original for all purposes. IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives. LINDOWS.COM, INC. [LICENSEE] Signature: /s/ Larry Kettler Signature: /s/ Jack Kou ------------------------- -------------------------- Name: Name: Jack Kou ------------------------- -------------------------- Title: Title: President ------------------------- -------------------------- 4 EXHIBIT 10.12 EXHIBIT A LINDOWS.COM BRANDING FEATURES; TRADEMARK GUIDELINES BRANDING FEATURES To be provided on request. TRADEMARK NOTICES The Branding Features are trademarks and service marks of Lindows.com. The Branding Features shall be accompanied by the superscript "TM" or "(R)" symbol, as specified by Lindows.com, which must appear to the immediate right of the Branding Features. The footnote "LindowsOS is the trademark of Lindows.com, Inc." or "Lindows.com is the trademark of Lindows.com, Inc.", as applicable, shall accompany each use of the Branding Features (or, if a Branding Feature is used multiple times in a document, screen or packaging, such notice shall accompany the first prominent use in such document, screen or packaging). USING THE BRANDING FEATURES Licensee may only use the Branding Features as an indication that the Software is being offered to end users via distribution pursuant to the Agreement. Licensee may not use the Branding Features in such a way as to suggest that the Branding Features may also apply to any hardware or software other than the Software. When referring to Lindows.com, Inc., Licensee shall use the name "Lindows.com". When referring to the Software, Licensee shall use the trademark "LindowsOS". SIZING AND PLACEMENT REQUIREMENTS The digitized, machine-readable file for the artwork of the Branding Features shall be delivered as provided above in this Exhibit A. Licensee shall not alter this file or the Branding Features in any way, including, without limitation, changing the color of any of the logos or artwork, separating any words in the Branding Features from the remainder of the Branding Features or replacing words with any other words. Licensee shall not combine the Branding Features with any other feature, including, without limitation, other marks, words, graphics, photos, slogans, numbers, design features or symbols. The Branding Features shall not be larger or more prominent than the trademark, logo or any Licensee trade name that appears on the same packaging, documentation, advertising or other materials. The Branding Features shall not be smaller or less prominent than any name, trademark or logo of any third party that appears on the same packaging, documentation, advertising or other materials. 5 EXHIBIT 10.12 EXHIBIT B LICENSEE PRODUCTS 6 EX-10.13 10 a97792a4exv10w13.txt EXHIBIT 10.13 EXHIBIT 10.13 *** CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT (INDICATED BY ASTERISKS) HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER 17 C.F.R. SECTIONS 200.80(B)(4), 200.803 AND 230.406 TERRITORIAL SOFTWARE DISTRIBUTION AGREEMENT This Territorial Software Distribution Agreement ("Agreement"), effective as of this 12 day of April, 2004 (the "Effective Date"), is entered into by and between Lindows, Inc., a Delaware corporation ("Supplier"), and Questar Srl, an Italian corporation ("Distributor"). RECITALS A. Distributor is in the business of licensing and distributing software products in Italy, and desires to distribute Supplier's Product (as defined below) in Italy. B. Supplier is in the business of developing and licensing software products and services, and desires to authorize Distributor to distribute the Product (as defined below) in Italy. The parties agree as follows: 1. DEFINITIONS: (a) "Branding Guidelines" means Lindows' proprietary trade names, trade dress, service marks, trademarks, logos, and indicia of origin and other distinctive branding features as specified in the Lindows Branding Guidelines attached hereto as Exhibit "C." (b) "Customer" shall mean retail and end user purchasers of the Product within the Territory. (c) "Documentation" shall mean the end-user manuals relating to the Software and services and related materials provided by Supplier to Distributor hereunder. (d) "Gold Master" shall mean a master disk image of the Software as made available for delivery to Licensee via electronic download at the Builder website http://builder.lindows.com or any successor website thereto or on CD-ROM or other media. (e) "OEM Customer" shall mean computer builders, system integrators of computers, and value-added resellers of computers pre-installing LindowsOS on 1 EXHIBIT 10.13 complete computer systems actually within the Territory and who execute a valid Builder Agreement located at [http://www.lindows.com/licenses] with Supplier. (f) "Product" shall mean the Software and Documentation listed on Exhibit "A" attached hereto, including any modifications, improvements, alterations, translations, localization, innovations, or changes of any kind performed on the Software or Documentation by Distributor. (g) "Services" shall mean the services set forth in Exhibit "A" attached hereto. (h) "Software" shall mean the computer program(s) listed in Exhibit "A" in machine executable object code format only. (i) "Territory" shall mean the country of Italy. 2. APPOINTMENT: In consideration of the Exclusive Licensing Fee (as defined in Section 5 below), Supplier hereby appoints Distributor, and Distributor hereby accepts the appointment, as Supplier's sole and exclusive distributor in the Territory for the Licensed Term (as defined in Section 9 below), to distribute Localized Product (as defined in Section 2(d) below) on CD ROM disks and repackaged as set forth in Section 2(a) below directly to Customers in the Territory. Subject to Section 2(j) below, the restrictions set forth in Section (i) below, and the other terms and conditions of this Agreement, Supplier hereby grants to Distributor a non-transferable, personal, non-sublicensable except as expressly set forth in this Section below, without the right to have Distributor's rights exercised on behalf of Distributor by a third party, limited right and license in the Territory during the Licensed Term of this Agreement to: (a) Copy and install the Software portion of the Localized Product (as defined in Section 2(d) below) in object code format only onto copies of CD ROM disks and repackage such CD ROM disks and the Documentation portion of the Localized Product (as defined in Section 2(d) below) and with an end user license agreement (the "End User License Agreement") with terms substantially the same as those set forth in Exhibit "B", both for distribution to Customers for retail sale within the Territory. (b) Distribute the Localized Product to Customers with and pursuant to the End User License Agreement directly through Distributor's retail locations and Distributor's online retail site within the Territory. (c) Set up OEM Customers for the distribution of Software, Documentation, and Localized Product pre-installed on the respective OEM Customer's computer system products. Specifically this appointment shall be non-exclusive, Supplier's OEM customers shall be entitled to sell computer systems with the Software and/or Documentation installed within the Territory, but Supplier will not engage in securing OEM Agreements within the Territory, unless in coordination with, and with compensation to Distributor as provided herein. Distributor shall distribute the Software, Documentation and Localized Product only to OEM Customers who have executed a valid Builder Agreement with Supplier, only for installation in the Territory by such OEM Customer on such OEM Customer's computer systems, only for distribution pre- 2 EXHIBIT 10.13 installed on such OEM Customer's computer systems, and only for distribution to Customers with and pursuant to the End User License Agreement. Such OEM Customers may distribute the Localized Product, only as installed on such OEM Customer's computer systems, outside of the Territory. However, neither Distributor nor OEM Customer shall have any of the exclusive rights granted in this Agreement with regard to the distribution of the Localized Product to end users located outside of the Territory. (d) Translate and localize the English version of the Product into appropriate Italian language using the pre-existing translation applications available to create a localized Product (the "Localized Product"). Supplier reserves the right to terminate this Agreement in its sole and complete discretion in the event that the Localized Product does not operate effectively or provide all defined functions, or is not accurate. Any translation and localization problems or defects which do not entail Software malfunctioning, operating defects, or inaccuracies shall not be deemed as a failure of Supplier's reasonable requirements and shall not justify the termination of this agreement. Distributor shall have forty-five (45) days to cure to Supplier's satisfaction after receiving written notification by registered letter of the Supplier's intention to terminate this agreement which notification shall contain a detailed description of the grounds and requirements which are deemed not to be satisfied. Absent the above-mentioned notice and cure period, any termination shall be void and to no effect. (e) Sublicense to third party distributors in the Territory Distributor's rights under Sections 2(b) and 2(e) only and to third party retailers in the territory Distributor's rights under 2(b) only, both pursuant to an agreement consistent with and substantially the same as this Agreement (except such agreement shall not include the rights set forth in Sections 2(c) and 2(d)). (f) Sublicense the Localized Product to Customers pursuant to the End User License Agreement. (g) Use the Product internally solely for the purpose of providing customer support services, demonstrations and marketing purposes. (h) For clarity, Distributor's rights under Section 2(b) shall include the right for Distributor to distribute downloadable versions of the Localized Product on-line and via the Internet, using both Distributor's facilities and hardware resources for e-commerce, and any services, facilities and hardware resources supplied by third party retailers who are validly sublicensed pursuant to Section 2(e). If deemed necessary by an any of the parties, further terms and conditions or the material sale implementation procedures shall be settled with a further agreement between the same parties, which shall be executed within a reasonable amount of time after request in writing from either party. (i) Subject to Section 2(j) below, Distributor will not, and shall ensure that any OEM Customer, distributor, retailer, Customer, or other third party does not: (a) copy, reproduce, distribute or otherwise make available the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing except as and to the extent expressly authorized herein and by Supplier; (b) translate, adapt, 3 EXHIBIT 10.13 enhance, create derivative works of or otherwise modify the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing, except as expressly set forth in Section 2(d) above, (c) decompile, disassemble or reverse engineer (except as and to the extent permitted by applicable local law), or extract ideas, algorithms, procedures, workflows or hierarchies from, the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing, (d) use the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing to provide facility management, service bureau or similar services to third parties; or (e) reproduce or use in any manner (except solely as and to the extent expressly authorized under Section 2 above), or remove, destroy, obscure or alter any Lindows.com Branding Features or any related materials placed on or contained within the Software, Documentation, or Product or any portion or element of any of the foregoing. Distributor shall not, and shall not allow any other OEM Customer, distributor, or retailer to, make any representation or warranty binding on or purporting to bind Supplier, including but not limited to in connection with the performance, condition, title, non-infringement, merchantability, fitness for a particular purpose, system integration or data accuracy of the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing, and Distributor shall disclaim all warranties implied by law and other warranties to the maximum extent permitted by applicable law. Distributor shall comply strictly with all United States import and export regulations (and any similar regulations in foreign countries) and shall obtain all required licenses, approvals and/or other clearances to export, re-export or import, as applicable, the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing, and any associated technical data, including, but not limited to, where a Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing is installed on computer system. (j) Certain software, or portions thereof, included in the Software are distributed under the GNU General Public License ("GPL"), other similar open source license agreements and other third party agreements which contain terms that expand (or restrict) Distributor's and/or third parties' rights to certain portions of the Software. The GPL and other similar open source license agreements permit Distributor and/or third parties to copy, modify, redistribute and have access to the source code of certain portions of the Software. The GPL, other similar open source license agreements, other third party agreements, on-line documentation, source code, and other information about all such software programs are available at the website www.lindows.com/licensing (http://www.lindows.com/licensing). To the extent the GPL, other similar open source license agreements or other third party agreements require Supplier to provide rights to the applicable portions of the Software that are broader than the rights granted elsewhere in this Agreement, then the GPL and/or other similar open source license agreements shall take precedence over the rights and restrictions set forth in this Agreement. Nothing in this Section 2(j) shall permit Distributor or any third party to use the Lindows.com Branding Features in connection with exercising the rights granted under the GPL, other similar open source license agreements or other third party agreements. 3. OBLIGATIONS OF DISTRIBUTOR: 4 EXHIBIT 10.13 (a) Diligence. Distributor shall use commercially reasonable efforts to promote the marketing and distribution of the Product to realize the maximum sales potential for the Product in the Territory. Except as expressly set forth herein, Distributor shall be solely responsible for all costs and expenses related to the advertising, marketing, promotion, and distribution of the Product and for performing its obligations hereunder. (b) Repackaging. Any retail repackaging of the Product must be approved by Supplier before the distribution of the Product in the Territory, provided, however, that such approval shall not be unreasonably withheld. (c) Translation; Localization. Distributor shall translate or localize the Product into the Italian language as provided in Section 2(d), provided, however, that Supplier retain and shall have all ownership rights in and to the Software, Documentation, Product, and Localized Product. Distributor understands and agrees that Supplier shall have the right, at its sole and absolute discretion, to sell and distribute the Localized Product to end users or OEM customers outside of the Territory. Distributor shall provide a copy of any and all publicly released versions of the Localized Product ten (10) days prior to the release of the Localized Product. Distributor shall use its best efforts to release the first version of the Localized Product within three (3) months of the Effective Date of this Agreement (the "Release Date"). (d) Product Support. (i) Distributor shall provide reasonable technical support to Customers, including without limitation, maintaining trained and competent technical and engineering support personnel for the Localized Product who are sufficiently knowledgeable with respect to the Localized Product to answer Customer questions regarding the use and operation of Product, responding promptly to requests for technical support from Customers, and providing technical support services to address and resolve Customers' support requests with respect to the Localized Product. (ii) Distributor shall ensure that all Customer questions regarding the use or operation of Localized Product are initially addressed to and answered by Distributor. Unless otherwise agreed in writing by Supplier, Distributor shall not represent to any third party that Supplier is available to answer questions from any Customer directly. (f) End User License. Prior to providing any Customer with any Software, Distributor shall ensure that each Customer has read, and agreed to the terms and conditions of, and validly executed the End User License Agreement contained in each software unit. As set forth more fully in Section 2(i), Distributor shall not conduct, support, or permit, and shall not authorize any third party to conduct, support, or permit, the copying, modification, alteration, reverse engineering, disassembly or decompiling of the Product. 4. OBLIGATIONS OF SUPPLIER: (a) Marketing Support. Supplier shall provide Distributor with reasonable marketing support, including providing reasonable quantities of Supplier's advertising 5 EXHIBIT 10.13 and promotional materials, pricing information and technical data related to the Product. Supplier may also from time to time provide, at Supplier's sole discretion, monetary support for certain marketing and promotional activities involving the Product, such as exhibitions, conventions, trade shows, and advertisements. (b) Software and Membership ID's. Within ten (10) days of the Effective Date of this Agreement, Supplier shall provide the following to Distributor: (i) a Gold Master for the LindowsOS (both OEM & Retail versions); (ii) a Gold Master for the Click-N-Run Express; (iii) a Gold Master for the Lindows Laptop Edition; and (iv) the product identification numbers for the Services identified in Exhibit A, in the amount consistent with the number of Services purchased by Distributor pursuant to the terms of Section 6(a) below. 5. EXCLUSIVE LICENSING FEE: In consideration of Supplier's appointment of Distributor as its exclusive distributor in the Territory pursuant to Section 2 above, Distributor shall pay Supplier a fully earned, nonrefundable, exclusive licensing fee of *** (the "Exclusive Licensing Fee"). The Exclusive Licensing Fee shall be paid in two (2) payments according to the following schedule:

All payments by Distributor to Supplier under this Section 5 shall be in U.S. Dollars via certified check or electronic wire transfer. In the event that Distributor fails to make payment of the Exclusive Licensing Fee according to the schedule above, Supplier shall notify Distributor that Distributor is in breach of this Section 5 pursuant to the Notice provision in Section 15(l) below, and Distributor shall have thirty (30) days from the date Distributor receives such notice to cure such breach, and Supplier shall charge Distributor a one percent (1%) late fee for any such amount due to Supplier (the "Late Fee"). In addition to the Late Fee, the past due amount shall accrue interest at eighteen percent (18%) per annum. If, after thirty (30) days from the date Distributor receives notice of such breach, Distributor has not paid Supplier the amounts due, plus the Late Fee, with interest, Supplier shall, at its sole and absolute discretion, elect to terminate this Agreement, upon which the Exclusive Licensing Fee, in its entirety, plus the Late Fee, with interest, shall immediately become due and payable to Supplier, and Distributor shall no longer be entitled to any of the rights granted in Section 2 above. 6. PRICE/PAYMENT: (a) Per Unit License Fee. Pursuant to Section 2(a) above, for each CD-ROM disk copied from the Gold Master, and for each Service purchased from Supplier, Distributor shall pay a per-unit licensing fee to Supplier (the "Per Unit License Fee"). During the Licensed Term (as defined in Section 9 below), Distributor shall pay Supplier the Per Unit License Fee according to the following schedule:

6 EXHIBIT 10.13 LindowsOS (OEM Version) *** LindowsOS (Developer Version) *** LindowsOffice with StarSuite *** LindowsLive (CD) *** Lindows Laptop Edition ***

SERVICE PRICE MINIMUM UNITS PURCHASED ------- ----- ----------------------- LindowsPlus Membership *** *** VirusSafe *** *** SurfSafe *** ***
All payments by Distributor to Supplier under this Section 6(a) shall be made in U.S. Dollars via certified check or electronic wire transfer. Distributor shall provide Supplier, on a monthly basis, sales, shipment, inventory, and other written or electronic reports relating to Distributor's activities under this Agreement during the prior month. All payments made by Distributor to Supplier shall be made within thirty (30) days from the date Distributor ships Product from its manufacturing facility. (b) Expiration of the Licensed Term. Distributor understands and agrees that the Per Unit License Fee set forth in Section 6(a) above shall only be valid during the Licensed Term of this Agreement. Distributor further understands and agrees that all Product, or Localized Product, copied by Distributor pursuant to the terms of this Agreement shall be shipped from Distributor's manufacturing facility by the end of the Licensed Term. Distributor shall have no right to ship from Distributor's manufacturing facility, any Product, or Localized Product, copied pursuant to the terms of this Agreement, after the expiration of the Licensed Term. Any Product, or Localized Product, copied pursuant to the terms of this Agreement, which remains unsold by Distributor upon expiration of the Licensed Term, if any, shall be destroyed by Distributor, at Distributor's expense, and Distributor shall provide Supplier with a record of all destroyed Product or Localized Product. Any Services purchased pursuant to the terms of this Agreement, which remain unsold by Distributor upon expiration of the Licensed Term, if any, shall be sold within ninety (90) days from the end of the Licensed Term. (c) Taxes. The prices set forth in Section 6(a) above do not include any Italian taxes, including franchise, sales and use taxes, if any. Distributor shall be solely responsible for payment of any and all such taxes or obligations, including any fines, penalties, or interest relating thereto. Notwithstanding the foregoing, any sum required under applicable tax laws to be withheld by Distributor for account of Supplier from payments due to Supplier, shall be withheld and shall be promptly paid by Distributor to the appropriate tax authorities. Distributor shall furnish Supplier official tax receipts or other appropriate evidence issued by tax authorities sufficient to enable Supplier to file a claim for credit in respect of any sum so withheld against its home country's income taxes. (d) Product Identification Numbers. For all Services that Distributor purchases during the Licensed Term pursuant to Section 6(a) above, Supplier shall 7 EXHIBIT 10.13 provide Distributor with the product identification numbers for the corresponding Services within ten (10) days of receipt of Distributor's payment for such Services. (e) Books and Records; Audit. Both parties shall maintain complete books, records and accounts relevant to computation and accounting for amounts payable under this Agreement. Each party agrees to allow an independent certified public accountant the right to audit and examine such books, records and accounts during normal business hours no more than once per year upon ten (10) days notice at such examining party's expense, to verify the accuracy of the reports and payments made under this Section 6. In the event any such audit reveals that a party has knowingly breached a material obligation hereunder, then, in addition to such other remedies as such examining party may have, the audited party shall pay or reimburse to the examining party the cost of such audit. 7. REVENUE SHARING: Distributor shall receive quarterly revenue sharing reports from Supplier that will provide in detail the number of "Light Ups" that have occurred during the previous quarter, which shall determine the percentage of "Net Revenue" that is paid to Distributor from sales of software and services purchased by End Users from the Warehouse ("Revenue Sharing"). For purposes of this Agreement, "Light Up" shall mean the unique instance when an End User turns on the computer system, pre-installed with the Localized Product, with a unique "Builder ID Number," for the first time, and is connected to the internet. For purposes of this Agreement, "Net Revenue" shall mean the total revenue generated from sales of software and services purchased by End Users from the Warehouse, less any associated taxes, costs and fees. For purposes of this Agreement, "Builder ID Number" shall mean a unique number, provided to each End User, which identifies to Supplier that such End User obtained the Product from Distributor. For each End User that purchases a computer system, pre-installed with the Localized Product, with a unique Builder ID Number, Distributor shall be entitled to Revenue Sharing from the Light Up date until the end of the Licensed Term, or until the termination of this Agreement, whichever is earlier. The revenue sharing percentages are as follows:
LIGHT UPS % NET REVENUE --------- ------------- *** *** *** *** *** *** *** *** *** ***
Supplier shall make Revenue Sharing payments to Distributor within thirty (30) days from the date Distributor receives the quarterly revenue sharing reports from Supplier. 8. LIMITED WARRANTY: (a) Limited Warranty. Subject to the provisions of this Section 8 below, Supplier warrants that for a period of sixty (60) days from the date Distributor receives any Gold Master ("Warranty Period") the Software will conform to the specifications expressly set forth in the Documentation provided by Supplier. In the event that the 8 EXHIBIT 10.13 Software fails to conform to such specifications during the Warranty Period, Supplier shall use commercially reasonable efforts to repair and correct such errors so that the Software conforms to such specifications. The foregoing sentence shall be Supplier's entire obligation and liability to Distributor and any other party, and Distributor's and any other party's sole and exclusive remedy, under this Agreement and in connection with the Software, Documentation, and Product for any breach of the limited warranty provided in this Section. (b) Disclaimer of Warranties. EXCEPT AS EXPRESSLY PROVIDED IN SECTION 8(a) ABOVE, SUPPLIER MAKES NO WARRANTIES OR CONDITIONS, EXPRESS, STATUTORY, IMPLIED, OR OTHERWISE, AND SUPPLIER SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES AND CONDITIONS OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING THE FOREGOING, SUPPLIER DOES NOT EXCLUDE LIABILITY TO THE EXTENT THAT SUCH LIABILITY MAY NOT BE EXCLUDED OR LIMITED BY LAW. (c) Customer Claims. Distributor shall ensure that all Customer claims for warranty, repair, or replacement are addressed to Distributor and not to Supplier. 9. TERM AND TERMINATION: (a) Licensed Term. This Agreement shall commence upon the Effective Date and continue in full force and effect for a fixed term of eighteen (18) months ("Licensed Term"), unless earlier terminated in accordance with the provisions of this agreement. At the one year anniversary of the signing of this agreement, parties shall meet via teleconference to discuss and measure success of this venture and jointly decide on renewal of the partnership and the terms of such partnership. (b) Breach. If a party is in material breach of this Agreement and has failed to cure such material breach within thirty (30) days after receiving written notice from the other party of such material breach, the party not in breach may terminate this Agreement. Without limiting the foregoing, either party may terminate this Agreement effective upon written notice to the other party stating such party's intention to terminate, in the event the other party: (i) ceases to function as a going concern or to conduct operations in the normal course of business (ii) has a petition filed by or against it under any bankruptcy or insolvency law which petition has not been dismissed or set aside within sixty (60) days of its filing; or (iii) fails to perform any of its obligations under this Agreement so as to be in default hereunder and fails to cure such default within thirty (30) days after written notice of such default. (c) Customer Support. Distributor may continue to use the Product after termination of this Agreement to provide customer support services set forth in Section 3(d) above, provided, however, that Distributor is not in breach or default of payment, pursuant to Sections 5 and 6(a) above. (d) No Liability for Termination. Except as expressly required by law, in the event of termination of this Agreement by either party in accordance with any of the 9 EXHIBIT 10.13 provisions of this Agreement, neither party shall be liable to the other, because of such termination, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases or commitments in connection with the business or goodwill of Supplier or Distributor. Termination shall not, however, relieve either party of obligations incurred prior to the termination. (e) Survival. The following provisions shall survive expiration or any termination of this Agreement: Sections 8, 9(c)-(f), 10, 11, 13, 15 and the last sentence in Section 12(b). (f) Return of Materials. All Software, Documentation, Product, trademarks, marks, trade names, patents, copyrights, designs, drawings, formulas or other data, photographs, samples, literature, and sales and promotional aids of every kind shall remain the property of Supplier. Within thirty (30) days after the effective date of termination of this Agreement, Distributor shall at Supplier's option destroy all tangible items bearing, containing, or contained in, any of the foregoing, in its possession or control and provide written certification of such destruction, or prepare such tangible items for shipment to Supplier or Supplier's designee, as Supplier may direct, at Supplier's expense. Distributor shall not make or retain any copies of any Confidential Information (as defined in Section 10, below), which may have been entrusted to it. 10. CONFIDENTIALITY AND PROPRIETARY RIGHTS: (a) Confidential Information. The term "Confidential Information" shall mean any information disclosed by one party to the other party pursuant to this Agreement or either party's activities hereunder, including, without limitation, technical data, product design and development, sales information, quantity and kind of products licensed, prices and methods of pricing, marketing techniques and plans, product returns, unannounced products, product and process information, and any other information which, if disclosed to others, might be competitively detrimental to either party. (b) Confidentiality. Each party shall treat as confidential all Confidential Information of the other party, shall not use such Confidential Information except to exercise its rights and perform its obligations under this Agreement herein, and shall not disclose such Confidential Information to any third party, except as expressly authorized in Section 10(c) below. Without limiting the foregoing, each of the parties shall use at least the same degree of care it uses to prevent the disclosure of its own confidential information of like importance, to prevent the disclosure of Confidential Information of the other party. Each party shall promptly notify the other party of any actual or suspected misuse or unauthorized disclosure of the other party's Confidential Information. (c) Exceptions. Confidential Information excludes information that: (i) was in the public domain at the time it was disclosed or has become in the public domain through no fault of the receiving party; (ii) was known to the receiving party, without restriction, at the time of disclosure, as demonstrated by files in existence at the time of disclosure; (iii) is disclosed with the prior written approval of the disclosing party; (iv) 10 EXHIBIT 10.13 was independently developed by the receiving party without any use of the Confidential Information; (v) becomes known to the receiving party, without restriction, from a source other than the disclosing party, without breach of this Agreement, by the receiving party; or (vi) is disclosed generally to third parties by the disclosing party without restrictions similar to those contained in this Agreement. The receiving party may disclose the other party's Confidential Information to the extent such disclosure is required by order or requirement of a court, administrative agency, or other governmental body. (d) Proprietary Rights. Distributor agrees that Supplier retains all of its right, title and interest in and to all patent rights, trademarks, trade names, inventions, copyrights, know-how and trade secrets relating to the Product, including modifications, translations, and/or localization of the Product performed by Distributor, or the product lines that include the Product, and the design, manufacture, operation or service of the Product. To the extent that the Product contains or incorporates intellectual property of parties other than Supplier, Distributor agrees to respect such third party rights and abide by any terms and conditions contingent upon grant and use of such rights, and that such third parties retain any such rights, if applicable. The use by Distributor of any of these property rights is authorized only for the purposes herein set forth and upon termination of this Agreement for any reason such authorization will cease, subject to Section 9 (d). Distributor shall not (and shall require that its Customers do not) remove, alter, cover or obfuscate any copyright notices or other proprietary rights notices placed or embedded by Supplier on or in any Product. Distributor hereby irrevocably assigns and agrees to assign to Supplier, without additional consideration, all right, title and interest in and to the Localized Product, whether currently existing or created or developed later, including, without limitation, all copyrights, trademarks, trade secrets, patents, industrial rights and all other intellectual property and proprietary rights related thereto, whether existing now or in the future, effective immediately upon the inception, conception, creation or development thereof. Distributor shall (a) disclose promptly to Supplier the Localized Product and any new version thereof, and (b) whether during or after the term of this Agreement, execute such written instruments and do such other acts as may be necessary in the opinion of Supplier to obtain a patent, register a copyright or otherwise evidence or enforce Supplier's rights in and to such Localized Product (and Distributor hereby irrevocably appoints Supplier and any of its officers as its attorney in fact to undertake such acts in its name). To the extent, if any, that Distributor retains any right, title or interest in or to the Localized Product, Distributor hereby grants to the Supplier a perpetual, irrevocable, fully paid-up, transferable, sublicensable, worldwide right and license (a) to use, reproduce, distribute, display and perform (whether publicly or otherwise), prepare derivative works of and otherwise modify, make, sell, offer to sell, import and otherwise use and exploit (and have others exercise such rights on behalf of Supplier) all or any portion of such Localized Product, in any form or media (now known or later developed); (b) to modify all or any portion of such Localized Product, including, without limitation, the making of additions to or deletions from such Localized Product, regardless of the medium (now or hereafter known) into which such Localized Product may be modified and regardless of the effect of such modifications on the integrity of such Localized Product; and (c) to identify Distributor, or not to identify Distributor, as one or more authors of or contributors to such Localized Product or any portion thereof, whether or not such Localized Product or any portion thereof have been modified. Distributor further waives any "moral" rights or other rights with respect to attribution of 11 EXHIBIT 10.13 authorship or integrity of such Localized Product Distributor may have under any applicable law, whether under copyright, trademark, unfair competition, defamation, right of privacy, contract, tort or other legal theory. 11. PATENT/COPYRIGHT/TRADEMARK WARRANTY AND INDEMNIFICATION (a) Indemnity. Provided Distributor adheres to the Branding Guidelines set forth by Supplier, Supplier represents and warrants that the Product or any part thereof, does not violate or infringe any patent, copyright, trademark, trade secret or other proprietary right of any third party. Supplier agrees, at its own expense, to defend any third party claim, suit or proceeding (collectively, "Action") brought against Distributor alleging the Product infringes any patent, copyright, trademark, trade secret or other proprietary right of Supplier in existence as of the Effective Date, subject to the limitations hereinafter set forth. Supplier agrees to pay, subject to the limitations hereinafter set forth, any final judgment entered against Distributor on such issue in any such Action. Distributor shall notify Supplier promptly in writing of such Action filed against Distributor and shall have the right, but not the obligation, to participate in the defense of any such suit or proceeding at Distributor's expense. Distributor will provide the Supplier with proper and full information and its reasonable assistance in the defense of any claim, suit or proceeding, at Supplier's expense. If it is adjudicatively determined that the Product, or any part thereof, infringe any patent, copyright or trademark, or if the sale or use of the Product, or any part thereof, is, as a result, enjoined, or in the event of any pending or threatened claim of infringement, then Supplier may, at its election, option, and expense: (i) procure for Distributor the right under such patent, copyright or trademark to sell or use, as appropriate, the Product or such part thereof; (ii) modify the Product or part thereof; or (iii) cease distribution of the Product, or part thereof, and refund any payments (including any minimum product purchases under Section 6) paid by Distributor for such Product. (b) Modifications to Branding Guidelines. Supplier reserves the right to modify the Branding Guidelines from time to time, and shall give Distributor notice of any such modifications. Within ninety (90) days of receipt of notice of any modifications to the Branding Guidelines, Distributor shall act to assure that all Product, Product marketing materials or other promotional matter complies with the Branding Guidelines. If at any time Distributor fails to follow the Branding Guidelines, Supplier shall be relieved of any obligation set forth in Section 10 relating to or resulting from such failure. 12. USE OF TRADEMARKS/TRADE NAMES: (a) Trademarks. During the term of this Agreement, Distributor shall have the right to indicate to the public that it is an authorized distributor of Supplier's Product and to advertise such Product under the trademarks, marks, and trade names of Supplier and in the promotion and distribution of the Product; provided, however, that upon thirty (30) days prior written notice to Distributor, Supplier may substitute alternative marks for any or all of such Supplier's 12 EXHIBIT 10.13 trademarks used by Distributor. All representations of Supplier's trademarks that Distributor intends to use shall first be submitted to Supplier for approval (which shall not be unreasonably withheld) of design, color and other details or shall be exact copies of those used by Supplier. In addition, Distributor shall fully comply with all reasonable guidelines, if any, communicated by Supplier concerning the use of Supplier's trademarks. (b) Use. Distributor shall not alter or remove any of Supplier's trademarks affixed to the Product by Supplier. Except as set forth in this Section 12, nothing contained in this Agreement shall grant or shall be deemed to grant to Distributor any right, title or interest in or to Supplier's trademarks. All uses of Supplier's trademarks will inure solely to Supplier and Distributor shall obtain no rights with respect to any of Supplier's trademarks, other than the right to distribute Product as set forth herein, and Distributor irrevocably assigns to Supplier all such right, title and interest, if any, in any of Supplier's trademarks. At no time during or after the term of this Agreement shall Distributor challenge or assist others to challenge Supplier's trademarks (except to the extent expressly prohibited by applicable law) or the registration thereof or attempt to register any trademarks, marks or trade names confusingly similar to those of Supplier. Upon termination of this Agreement, Distributor shall immediately cease to use all Supplier's trademarks (other than for any remaining inventory to be sold during the "Wind Down Period"). 13. LIMITATION OF LIABILITY: EXCEPT FOR DISTRIBUTOR'S OBLIGATIONS UNDER SECTION 15(C), IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR LOST PROFITS, COST OF PROCUREMENT OF SUBSTITUTE GOODS, OR ANY OTHER SPECIAL, RELIANCE, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND UNDER ANY THEORY OF LIABILITY WHETHER BASED IN CONTRACT, TORT (INCLUDING NEGLIGENCE), OR OTHERWISE. THE FOREGOING LIMITATIONS SHALL APPLY REGARDLESS OF WHETHER SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY STATED HEREIN. NEITHER PARTY'S LIABILITY ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL EXCEED THE AGGREGATE AMOUNTS PAID BY DISTRIBUTOR TO SUPPLIER HEREUNDER. NOTWITHSTANDING THE FOREGOING, THIS SECTION 13 SHALL NOT BE APPLICABLE WITH REGARD TO ANY BREACH OR LIABILITY UNDER SECTIONS 10 AND 11. 14. COMPLIANCE WITH LAWS: (a) Export Control. Distributor understands and acknowledges that Supplier is subject to regulation by agencies of the United States Government, including, but not limited to, the U.S. Department of Commerce, which prohibit export or diversion of certain Product and technology to certain countries. Any and all obligations of Supplier to provide the Product, as well as any other technical information or assistance shall be subject in all respects to such United States laws and regulations as shall from time to time govern the license and delivery of technology and Product abroad by persons subject to the jurisdiction of the United States, including the Export Administration Act of 1979, as amended, any successor legislation, and the Export Administration Regulations issued 13 EXHIBIT 10.13 by the Department of Commerce, Bureau of Export Administration. Distributor agrees to cooperate with Supplier including without limitation, providing required documentation, in order to obtain export licenses or exemptions therefrom. Distributor warrants that it will comply with the Export Administration Regulations and other United States laws and regulations governing exports in effect from time to time. Distributor further agrees not to resell Product to any organization, public or private, which engages in the research or production of military devices, armaments, or any instruments of warfare, including biological, chemical and nuclear warfare. (b) Governmental Approvals. Distributor represents and warrants that it has obtained all required approvals of the government within the Territory in connection with this Agreement and that the provisions of this Agreement and the rights and obligations of the parties hereunder, are enforceable under the laws within the Territory. Supplier represents and warrants that it has obtained all required approvals of the United States government in connection with this Agreement and that the provisions of this Agreement and the rights and obligations of the parties hereunder, are enforceable under the laws of the United States of America. 15. MISCELLANEOUS PROVISIONS: (a) Independent Contractors. The relationship of Supplier and Distributor established by this Agreement is that of independent contractors, and neither party is an employee, agent, partner or joint venturer of the other. (b) Assignment. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that neither party shall assign any of its rights, obligations, or privileges (by operation of law or otherwise) hereunder without the prior written consent of the other party which consent shall not be withheld unreasonably. (c) Indemnity. Except for warranty claims for which Supplier is liable under Section 8 and infringement claims covered by Section 11, Distributor agrees to indemnify and hold Supplier harmless against any cost, loss, liability or expense (including attorneys' fees) arising out of third party claims against Supplier relating to Distributor's use and distribution of the Product. (d) No Implied Waivers. The failure of either party at any time to require performance by the other of any provision hereof shall not affect the right of such party to require performance at any time thereafter, nor shall the waiver of either party of a breach of any provision hereof be taken or held to be a waiver of a provision itself. (e) Severability. If any provision of this Agreement is held to be invalid by a court of competent jurisdiction, then the remaining provisions will nevertheless remain in full force and effect. The parties agree to renegotiate in good faith those provisions so held to be invalid to be valid, enforceable provisions which provisions shall reflect as closely as possible the original intent of the parties, and further agree to be bound by the mutually agreed substitute provision. 14 EXHIBIT 10.13 (f) Force Majeure. Except for payment of monies, neither party shall be liable for failure to fulfill its obligations under this Agreement or for delays in delivery due to causes beyond its reasonable control, including, but not limited to, acts of God(s), acts of terror, man-made or natural disasters, earthquakes, fire, riots, flood, material shortages, strikes, delays in transportation or inability to obtain labor or materials through its regular sources. The time for performance of any such obligation shall be extended for the time period lost by reason of the delay. (g) Conflicting Terms. The parties agree that the terms and conditions of this Agreement shall prevail, notwithstanding contrary or additional terms, in any purchase order, sales acknowledgment, confirmation or any other document issued by either party effecting the purchase and/or sale of Product. (h) Authority. The parties executing this Agreement on behalf of Supplier and Distributor represent and warrant that they have the authority from their respective governing bodies to enter into this Agreement and to bind their respective companies to all the terms and conditions of this Agreement. (i) English Language. English shall be used as the authoritative text of this Agreement, regardless of the existence of counterparts translated into another language, and all communications, arbitrations, and other adjudications hereunder shall be made and conducted in English. (j) Recitals. The parties agree that each and every recital of this Agreement shall be a covenant and agreement as well as a recital of this Agreement. (k) Headings. Headings of paragraphs herein are inserted for convenience of reference only and shall not affect the construction or interpretation of this Agreement. (l) Notice. Any notice required or permitted to be given under this Agreement shall be delivered (i) by hand, (ii) by registered or certified mail, postage prepaid, return receipt requested, to the address of the other party provided immediately below, or to such other address as a party may designate by written notice in accordance with this Section 15(i), (iii) by overnight courier with proof of delivery, (iv) by email to an officer of such party, with confirming return email, or (v) by fax with confirming letter mailed under the conditions described in (ii) above. "Supplier" Lindows, Inc 9333 Genessee Ave , Suite 300 San Diego, CA 92121 USA FAX: +1 (858) 587-8095 "Distributor" Questar Srl Via Maglio del Lotto 2 24126 Bergamo BG Italy 15 EXHIBIT 10.13 FAX: +39 (035) 420-1498 (m) Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements relating thereto, written or oral, between the parties. Amendments to this Agreement must be in writing, signed by the duly authorized officers of the parties. This Agreement may be executed in counterparts and delivered by facsimile, all of which shall together be effective as a single original. (n) Governing Law. This Agreement is to be construed in accordance with and governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. This Agreement shall not be governed by the U.N. Convention on Contracts for the International Sale of Goods, the application of which is expressly excluded. Nothing in this Agreement is intended or will be construed to give any person (other than Licensor and Licensee) any legal or equitable right, remedy or claim under this Agreement or any provision hereof. (o) Attorney's Fees. In the event a dispute arises regarding this Agreement, the prevailing party shall be entitled to its reasonable attorney's fees and expenses incurred in addition to any other relief to which it is entitled. (p) Further Assurances. Both parties agree to execute such additional documents and perform such acts as are reasonably necessary to effectuate the intent of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement effective as of the Effective Date. "Supplier" "Distributor" LINDOWS, INC QUESTAR SRL By: /s/ Kevin Carmony By: /s/ David G. Orban --------------------------------- --------------------------- Name: Kevin Carmony Name: David G. Orban --------------------------------- --------------------------- Title: Pres./COO Title: CEO --------------------------------- --------------------------- 16 EXHIBIT 10.13 EXHIBIT "A" "PRODUCT" SOFTWARE - (IN OBJECT CODE FORM ONLY) LindowsOS (OEM Version) LindowsOS (Retail Version) LindowsOS (Developer Version) LindowsOffice with StarSuite LindowsLive (CD) Lindows Laptop Edition SERVICES LindowsPlus Membership VirusSafe SurfSafe DOCUMENTATION 17 EXHIBIT 10.13 EXHIBIT B LindowsOS End User License Agreement BETWEEN LINDOWS, INC. ("LINDOWS") AND EITHER (1) A FAMILY END-USER ("FAMILY") -- AN INDIVIDUAL END-USER AGREEING TO A FAMILY EDITION LICENSE FOR PERSONAL USE AND USE BY MEMBERS OF SUCH INDIVIDUAL'S HOUSEHOLD OR (2) A BUSINESS END-USER ("BUSINESS") AGREEING TO A BUSINESS EDITION LICENSE FOR AN AGREED UPON NUMBER OF SEATS OR NUMBER OF SIMULTANEOUS USERS, BUT NOT BOTH. THE FAMILY OR THE BUSINESS ("YOU" OR "YOUR"), AS APPROPRIATE, AGREES TO CAREFULLY READ THIS LICENSE AGREEMENT (THIS "AGREEMENT") BEFORE INSTALLING OR USING THE LINDOWSOS SOFTWARE PRODUCT (INCLUDING ALL ACCOMPANYING DOCUMENTATION, ENHANCEMENTS, UPGRADES AND EXTENSIONS THERETO "LINDOWSOS"). INSTALLING OR OTHERWISE USING THIS PRODUCT INDICATES YOUR ACKNOWLEDGMENT THAT YOU HAVE READ THIS AGREEMENT AND AGREE TO BE BOUND BY AND COMPLY WITH ITS TERMS. IF YOU DO NOT AGREE TO THIS AGREEMENT, PROMPTLY RETURN LINDOWSOS (WITHOUT INSTALLING IT) TO PLACE OF PURCHASE AND ANY MONEY YOU HAVE PAID FOR LINDOWSOS WILL BE RETURNED. SELECTING THE "I ACCEPT THIS AGREEMENT" OPTION FURTHER CONFIRMS YOUR ACCEPTANCE OF ALL TERMS CONTAINED IN THIS AGREEMENT. 1. LICENSE. 1.1 License. a. Family License: If You are a Family or Individual, You agree to the following terms of this Section 1.1.a: LindowsOS is a modular operating system made up of individual software components (each individual software component and all accompanying documentation, enhancements, upgrades and extensions thereto are referred to herein as "Software Program(s)") that were created either by Lindows or various individuals and entities ("Third Parties"). Subject to the terms and conditions of this Agreement, Lindows grants You a non-exclusive license to use the object code form of LindowsOS for Your personal use in accordance with the accompanying documentation. You may download and use LindowsOS on multiple computers owned, leased or rented by You; provided, however, You and members of Your Household (a "Household" consists of those individuals that currently reside with You) are the only individuals with the right to use Your licensed copy(ies) of LindowsOS. For example, if You have a desktop computer at home and a laptop computer which You travel with, You may download a copy of LindowsOS on both machines for the personal use of members of Your Household and You. You agree that You are responsible for the members of Your Household's compliance with the terms of this Agreement as though they were You and had agreed to all terms and conditions herein. Except as otherwise expressly set forth herein, You may not (and shall not allow any member of Your Household or any other Third Party to) (i) remove any product identification or other notices; (ii) copy LindowsOS (other than for back-up purposes, for Your personal use on Your multiple machines as set forth in this Section 1.1.a, or for archival purposes); (iii) provide, lease, lend, use for timesharing or service bureau purposes or otherwise use or allow others to use LindowsOS to or for the benefit of Third Parties, or (iv) modify LindowsOS or incorporate LindowsOS into or with other software, except as may be provided for in this agreement. b. Business License:If You are a Business, You agree to the following terms of this Section 1.1.b: LindowsOS is a modular operating system made up of individual software components (each individual software component and all accompanying documentation, enhancements, upgrades and extensions thereto are referred to herein as "Software Program(s)") that were created either by Lindows or various individuals and entities ("Third Parties"). Subject to the terms and conditions of this Agreement, Lindows grants You a non-exclusive license for Your authorized users to use the object code form of LindowsOS for Your internal business purposes on Business owned, rented or leased computers in accordance with the accompanying documentation for: (1) solely up to the number of Simultaneous Users purchased by You as set forth at www.lindows.com/businesslicense, regardless of the number of Business owned, rented or leased computers that You download LindowsOS on or (2) solely up to the number of Seats purchased by You as set forth at www.lindows.com/businesslicense. "Simultaneous Users" refers to authorized users that may use LindowsOS at the same time. A "Seat" is a single computer processing unit or "CPU" (including computers with redundant processing systems), whether LindowsOS is installed directly on that CPU or is served from a centralized server. Except as otherwise expressly set forth herein, You and Your authorized users may not (and shall not allow any Third Party or any of Your authorized users to) (i) remove any product identification or other notices; (ii) copy LindowsOS (other than for back-up purposes, for use on multiple Seats as set forth in this Section 1.1.b, or for archival purposes); (iii) provide, lease, lend, use for timesharing or service bureau purposes or otherwise use or allow others to use LindowsOS to or for the benefit of Third Parties, or (iv) modify LindowsOS or incorporate LindowsOS into or with other software, except as may be provided for in this agreement. You shall keep a current record of the location of each copy of LindowsOS You make. 1.2 Third Party Agreements. Many of the Software Programs included in LindowsOS are distributed under the terms of agreements with Third Parties ("Third Party Agreements") which may expand or limit Your rights to use certain Software Programs as set forth in Section 1.1. Certain Software Programs may be licensed (or sublicensed) to You under the GNU General Public License and other similar open source license agreements ("OSLAs") which, among other rights, permit You to copy, modify and redistribute certain Software 18 EXHIBIT 10.13 Programs, or portions thereof, and have access to the source code of certain Software Programs, or portions thereof. In addition, certain Software Programs, or portions thereof, may be licensed (or sublicensed) to You under terms stricter than those set forth in Section 1.1. Please review visit www.lindows.com/licensing for the on-line documentation that accompanies certain Software Programs, or portions thereof, for the applicable Third Party Agreements. To the extent any Third Party Agreements require that Lindows provide rights to use, copy or modify a Software Program that are broader than the rights granted in Section 1.1, then such rights shall take precedence over the rights and restrictions granted in this Agreement solely for such Software Programs. 1.3 Violation of Licensing Terms. Any violation by You of the applicable license terms set forth in Section 1.1 or Section 1.2, as appropriate, shall immediately terminate Your license to use LindowsOS. If You do not agree to comply with and be bound by the terms of the applicable license agreement(s), do not install, distribute or otherwise use LindowsOS. 2. PROPRIETARY RIGHTS. All right, title and interest in LindowsOS, including source code, documentation, appearance, structure and organization, are held by Lindows and/or its licensors and are protected by copyright and other laws. You may not copy or otherwise use LindowsOS, in whole or in part, except as expressly permitted in this Agreement. Title to LindowsOS, or to any copy, modification or merged portion of any of the Software Programs, shall at all times remain with Lindows and/or its licensors, subject to the terms of the applicable Third Party Agreement(s) to the Software Programs under consideration. 3. TRADEMARKS "Lindows.com" and "LindowsOS" are registered trademarks of Lindows.com, Inc., All Rights Reserved. "Linux" is a registered trademark of Linus Torvalds. All other trademarks are the property of their respective owners. While certain Third Party Agreements described in Section 1.2 may allow You to copy, modify and distribute certain Software Programs, they do not permit You to distribute the Software Programs utilizing Lindows.com's trademarks. 4. LIMITED WARRANTY. IF LINDOWSOS WAS DISTRIBUTED TO YOU BY LINDOWS OR A LINDOWS AUTHORIZED DISTRIBUTOR ON CD-ROM OR OTHER TANGIBLE STORAGE MEDIA, LINDOWS WARRANTS THAT THE STORAGE MEDIA IN THIS PRODUCT WILL BE FREE FROM DEFECT IN MATERIALS AND WORKMANSHIP UNDER NORMAL USE FOR A PERIOD OF THIRTY (30) DAYS FROM THE DATE THAT YOU ACQUIRE IT. IF SUCH A DEFECT OCCURS, RETURN THE MEDIA TO LINDOWS AT, LINDOWS.COM, INC., 9333 GENESEE AVE., SAN DIEGO, CA 92121, AND LINDOWS WILL REPLACE IT FREE OF CHARGE. THIS REMEDY IS YOUR EXCLUSIVE REMEDY FOR BREACH OF THIS WARRANTY. EXCEPT WHERE SPECIFICALLY STATED OTHERWISE IN THIS AGREEMENT, LINDOWSOS, INCLUDING WITHOUT LIMITATION EACH SOFTWARE PROGRAM, IS PROVIDED TO YOU ON AN "AS IS" BASIS, WITHOUT ANY OTHER WARRANTIES OR CONDITIONS AND LINDOWS EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THOSE ARISING BY LAW, STATUTE, USAGE OF TRADE, COURSE OF DEALING OR OTHERWISE. ANY WARRANTY OR REMEDY PROVIDED UNDER THIS AGREEMENT EXTENDS ONLY TO THE PARTY WHO PURCHASES A LICENSE TO LINDOWSOS FROM LINDOWS OR A LINDOWS AUTHORIZED DISTRIBUTOR. Some jurisdictions do not allow the exclusion of implied warranties, so the above exclusion may not apply to You. You may have other rights which vary from jurisdiction to jurisdiction. 5. LIMITATION OF LIABILITY. THE ENTIRE RISK AS TO THE RESULTS AND PERFORMANCE OF LINDOWSOS IS ASSUMED BY YOU. NEITHER LINDOWS NOR ITS APPOINTED DEALERS, SUPPLIERS OR LICENSEES SHALL HAVE ANY LIABILITY TO YOU OR ANY OTHER PERSON OR ENTITY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, LOSS OF REVENUE OR PROFIT, LOST OR DAMAGED DATA OR OTHER COMMERCIAL OR ECONOMIC LOSS, EVEN IF LINDOWS OR SUCH DEALER, SUPPLIER OR LICENSEE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, OR THEY ARE FORESEEABLE. OUR MAXIMUM AGGREGATE LIABILITY TO YOU AND THAT OF OUR DEALERS AND SUPPLIERS FOR DIRECT DAMAGES SHALL NOT EXCEED THE AMOUNT PAID BY YOU FOR LINDOWSOS. THE LIMITATIONS IN THIS SECTION SHALL APPLY WHETHER OR NOT THE ALLEGED BREACH OR DEFAULT IS A BREACH OF A FUNDAMENTAL CONDITION OR TERM OR A FUNDAMENTAL BREACH. Some jurisdictions do not allow the limitation or exclusion of liability for incidental or consequential damage, so the above limitation may not apply to You. 6. DISTRIBUTION. If You are permitted to redistribute any Software Programs under an appropriate OSLA, it is Your responsibility to comply with all export laws, rules and regulations in the jurisdictions where the Software Programs are exported from, exported to, or re-exported from time to time. 7. TERM. 19 EXHIBIT 10.13 This Agreement is effective until terminated. You may terminate this license at any time by destroying all copies of LindowsOS. The Agreement will terminate automatically if You fail to comply with any term or condition of the Agreement. The provisions of Sections 1.2 (regarding OSLAs that remain in force) and 2 - 8, shall survive termination. 8. GENERAL. This Agreement, together with the Third Party Agreements, is the entire agreement regarding Your use of LindowsOS, superseding any other agreement or discussions, oral or written, and may not be changed except by a signed agreement. Except as set forth in the appropriate OSLA, You may not assign Your rights or obligations under this Agreement without the prior consent of Lindows. This Agreement shall be governed by and construed in accordance with the laws of the State of California, excluding that body of law applicable to choice of law and excluding the United Nations Convention on Contracts for the International Sale of Goods and any legislation implementing such Convention, if otherwise applicable. The sole jurisdiction and venue for actions related to the subject matter hereof shall be the state and federal courts located in San Diego County. In any action to enforce this Agreement, the prevailing party shall be entitled to costs and attorneys' fees. If any provision of this Agreement is declared by a Court of competent jurisdiction to be invalid, illegal, or unenforceable, such a provision shall be severed from the Agreement and the other provisions shall remain in full force and effect. At no time shall a failure or delay in enforcing any provisions, exercising any option or requiring performance, be construed to be a waiver. 20 EXHIBIT 10.13 EXHIBIT "C" LINDOWS BRANDING GUIDELINES BRANDING FEATURES To be provided on request. TRADEMARK NOTICES The Branding Features are trademarks and service marks of Lindows. The Branding Features shall be accompanied by the superscript "TM" or "(R)" symbol, as specified by Lindows, which must appear to the immediate right of the Branding Features. The footnote "LindowsOS is the trademark of Lindows, Inc." or "Lindows is the trademark of Lindows, Inc.", as applicable, shall accompany each use of the Branding Features (or, if a Branding Feature is used multiple times in a document, screen or packaging, such notice shall accompany the first prominent use in such document, screen or packaging). USING THE BRANDING FEATURES Distributor may only use the Branding Features as an indication that the Software is being offered to end users via distribution pursuant to this Agreement. Distributor may not use the Branding Features in such a way as to suggest that the Branding Features may also apply to any hardware or software other than the Software. When referring to Lindows, Inc., Distributor shall use the name "Lindows." When referring to the Software, Licensee shall use the trademark "LindowsOS." SIZING AND PLACEMENT REQUIREMENTS The digitized, machine-readable file for the artwork of the Branding Features shall be delivered as provided above in this Exhibit C. Distributor shall not alter this file or the Branding Features in any way, including, without limitation, changing the color of any of the logos or artwork, separating any words in the Branding Features from the remainder of the Branding Features or replacing words with any other words. Distributor shall not combine the Branding Features with any other feature, including, without limitation, other marks, words, graphics, photos, slogans, numbers, design features or symbols. The Branding Features shall not be larger or more prominent than the trademark, logo or any Distributor trade name that appears on the same packaging, documentation, advertising or other materials. The Branding Features shall not be smaller or less prominent than any name, trademark or logo of any third party that appears on the same packaging, documentation, advertising or other materials. 21 EX-10.14 11 a97792a4exv10w14.txt EXHIBIT 10.14 EXHIBIT 10.14 *** CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT (INDICATED BY ASTERISKS) HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER 17 C.F.R. SECTIONS 200.80(B)(4), 200.803 AND 230.406 TERRITORIAL SOFTWARE DISTRIBUTION AGREEMENT This Territorial Software Distribution Agreement ("Agreement") is entered into this 14th day of April, 2004 (the "Effective Date"), by and between Lindows, Inc., a Delaware corporation ("Supplier") and livedoor Co., Ltd., a Japanese corporation ("Distributor"). WHEREAS, Supplier and Distributor previously entered into a Software Distribution Agreement dated March 17, 2003 (the "Previous Agreement"); and WHEREAS, the Previous Agreement shall expire on August 29, 2004, and Supplier and Distributor desire to enter into this Agreement to continue the relationship of the parties, whereby Distributor shall remain Supplier's exclusive distributor of the Product in the Territory during the Licensed Term; and WHEREAS, Supplier and Distributor understand and agree that this Agreement shall replace and supersede the Previous Agreement and all provisions thereof, and all other agreements between the parties, written or oral. NOW, THEREFORE, the parties hereby agree as follows: 1. DEFINITIONS: (a) "Branding Guidelines" means Lindows' proprietary trade names, trade dress, service marks, trademarks, logos, and indicia of origin and other distinctive branding features as specified in the Lindows Branding Guidelines attached hereto as Exhibit "C." (b) "Customer" shall mean retail and end user purchasers of the Product within the Territory. (c) "Documentation" shall mean the end user manuals relating to the Software and services and related materials provided by Supplier to Distributor hereunder. 1 (d) "Gold Master" shall mean a master disk image of the Software as made available for delivery to Licensee via electronic download at the Builder website http://www.lindows.com/builder or any successor website thereto or on CD-ROM or other media. (e) "OEM Customer" shall mean computer builders, system integrators of computers, and value-added resellers of computers pre-installing LindowsOS on complete computer systems actually within the Territory and who execute a valid Builder Agreement located at http://www.lindows.com/licenses with Supplier. (f) "Product" shall mean the Software and Documentation listed on Exhibit "A" attached hereto, including any modification, improvements, alterations, translations, localizations, innovations, or changes of any kind performed on the Software or Documentation by Distributor. (g) "Services" shall mean the services set forth in Exhibit "A" attached hereto. (h) "Software" shall mean the computer program(s) listed in Exhibit "A" in machine executable object code format only. (i) "Territory" shall mean the Nation of Japan. (j) "Update" shall mean versions of the Product, including version patches, subsequently released to the public for the purpose of correcting errors and fixing software bugs, which shall be given by Supplier to Distributor, pursuant to the terms set forth in Section 6(c). "Updates" does not include subsequent versions of the Product that contain new features or functionality, or which are considered a new software product. 2. APPOINTMENT: In consideration of the Exclusive Licensing Fee (as defined in Section 5 below), Supplier hereby appoints Distributor, and Distributor hereby accepts the appointment, as Supplier's sole and exclusive distributor in the Territory for the Licensed Term (as defined in Section 9 below) to distribute Localized Product (as defined in Section 2(d) below) on CD-ROM disks and repackaged as set forth in Section 2(a) below directly to Customers in the Territory. Subject to Section 2(j) below, the restrictions set forth in Section (i) below, and the other terms and conditions of this Agreement, Supplier hereby grants to Distributor a non-transferable, personal, non-sublicensable, except as expressly set forth in this Section below, without the right to have Distributor's rights exercised on behalf of Distributor by a third party, limited right and license in the Territory during the Licensed Term of this Agreement to: (a) Copy and install the Software portion of the Localized Product (as defined in Section 2(d) below) in object code format only onto copies of CD-ROM disks and repackage such CD-ROM disks and the Documentation portion of the Localized Product and with an end user license agreement (the "End User License Agreement") with terms substantially the same as those set forth in Exhibit "B," both for distribution to Customers for retail sale within the Territory; 2 (b) Distribute the Localized Product to Customers with and pursuant to the End User License Agreement directly through Distributor's retail locations within the Territory and Distributor's online retail site within the Territory. (c) Set up OEM Customers for the distribution of Software, Documentation and Localized Product pre-installed on the respective OEM Customer's computer system products. Specifically this appointment shall be non-exclusive, Supplier's OEM Customers shall be entitled to sell computer systems with the Software and/or Documentation installed within the Territory, but Supplier will not engage in securing OEM Agreements within the Territory, unless in coordination with, and with compensation to Distributor as provided herein. Distributor shall distribute the Software, Documentation and Localized Product only to OEM Customers who have executed a valid Builder Agreement with Supplier, only for installation in the Territory by such OEM Customer on such OEM Customer's computer systems, only for distribution pre-installed on such OEM Customer's computer systems within the Territory, and only for distribution to Customers with and pursuant to the End User License Agreement. (d) Translate and localize the English version of the Product into appropriate Japanese language using the pre-existing translation applications available to create a localized Product (the "Localized Product"). Supplier reserves the right to terminate this Agreement in its sole and complete discretion in the event that the Localized Product, does not operate effectively or provide all defined functions, or is not accurate. Any translation and localization problems or defects which do not entail Software malfunctioning, operating defects, or inaccuracies shall not be deemed as a failure of Supplier's reasonable requirements and shall not justify the termination of this Agreement. Distributor shall have forty-five (45) days to cure to Supplier's satisfaction after receiving written notification by registered letter of Supplier's intention to terminate this Agreement, which notification shall contain a detailed description of the grounds and requirements which are deemed not to be satisfied. Absent the above-mentioned notice and cure period, any termination shall be void and to not effect. (e) Sublicense to third party distributors in the Territory Distributor's rights under Sections 2(b) and 2(e) only, and to third party retailers in the Territory Distributor's rights under Section 2(b) only, both pursuant to an agreement consistent with and substantially the same as this Agreement (except such agreement shall not include the rights set forth in Sections 2(c), 2(d) and 2(f)). (f) Sublicense the Localized Product to Customers pursuant to the End User License Agreement. (g) Use the Product internally solely for the purpose of providing customer support services, demonstrations and marketing purposes. (h) For clarity, Distributor's rights under Section 2(b) shall include the right for Distributor to distribute downloadable versions of the Localized Product on-line and 3 via the Internet, using both Distributor's facilities and hardware resources for e-commerce, and any services, facilities and hardware resources supplied by third party retailers who are validly sublicensed pursuant to Section 2(e). If deemed necessary by any of the parties, further terms and conditions or the material sale implementation procedures shall be settled with a further agreement between the same parties, which shall be executed within a reasonable amount of time after request in writing from either party. (i) Subject to Section 2(j) below, Distributor shall not, and shall ensure that any OEM Customer, distributor, retailer, Customer, or other third party does not: (a) copy, reproduce, distribute or otherwise make available the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing except as and to the extent expressly authorized herein and by Supplier; (b) translate, adapt, enhance, create derivative works of or otherwise modify the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing, except as expressly set forth in Section 2(d) above, (c) decompile, disassemble or reverse engineer (except as and to the extent permitted by applicable local law), or extract ideas, algorithms, procedures, workflows or hierarchies from, the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing, (d) use the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing to provide facility management, service bureau or similar services to third parties; or (e) reproduce or use in any manner (except solely as and to the extent expressly authorized under Section 2 above), or remove, destroy, obscure or alter any Lindows.com Branding Features or any related materials placed on or contained within the Software, Documentation, or Product or any portion or element of any of the foregoing. Distributor shall not, and shall not allow any other OEM Customer, distributor, or retailer to, make any representation or warranty binding on or purporting to bind Supplier, including but not limited to in connection with the performance, condition, title, non-infringement, merchantability, fitness for a particular purpose, system integration or data accuracy of the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing, and Distributor shall disclaim all warranties implied by law and other warranties to the maximum extent permitted by applicable law. Distributor shall comply strictly with all United States import and export regulations (and any similar regulations in foreign countries) and shall obtain all required licenses, approvals and/or other clearances to export, re-export or import, as applicable, the Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing, and any associated technical data, including, but not limited to, where a Software, Documentation, Product or Localized Product or any portion or element of any of the foregoing is installed on computer system. (j) Certain software, or portions thereof, included in the Software are distributed under the GNU General Public License ("GPL"), other similar open source license agreements and other third party agreements which contain terms that expand (or restrict) Distributor's and/or third parties' rights to certain portions of the Software. The GPL and other similar open source license agreements permit Distributor and/or third parties to copy, modify, redistribute and have access to the source code of certain 4 portions of the Software. The GPL, other similar open source license agreements, other third party agreements, on-line documentation, source code, and other information about all such software programs are available at the website http://www.lindows.com/licenses. To the extent the GPL, other similar open source license agreements or other third party agreements require Supplier to provide rights to the applicable portions of the Software that are broader than the rights granted elsewhere in this Agreement, then the GPL and/or other similar open source license agreements shall take precedence over the rights and restrictions set forth in this Agreement. Nothing in this Section 2(j) shall permit Distributor or any third party to use the Lindows.com Branding Features in connection with exercising the rights granted under the GPL, other similar open source license agreements or other third party agreements. 3. OBLIGATIONS OF DISTRIBUTOR: (a) Diligence. Distributor shall use commercially reasonable efforts to promote the marketing and distribution of the Product to realize the maximum sales potential for the Product in the Territory. Except as expressly set forth herein, Distributor shall be solely responsible for all costs and expenses related to the advertising, marketing, promotion, and distribution of the Product and for performing its obligations hereunder. (b) Repackaging. Any retail repackaging of the Product must be approved by Supplier before the distribution of the Product in the Territory, provided, however, that such approval shall not be unreasonably withheld. (c) Translation; Localization. Distributor shall translate or localize the Product into the Japanese language as provided in Section 2(d), provided, however, that Supplier retain and shall have all ownership rights in and to the Software, Documentation, Product, and Localized Product. Distributor understands and agrees that Supplier shall have the right, at its sole and absolute discretion, to sell and distribute the Localized Product to end users or OEM customers outside of the Territory. Distributor shall provide a copy of any and all publicly released versions of the Localized Product ten (10) days prior to the release of the Localized Product. (d) Product Support. (i) Distributor shall provide reasonable technical support to Customers, including, without limitation: (a) maintaining trained and competent technical and engineering support personnel for the Localized Product who are sufficiently knowledgeable with respect to the Localized Product to answer Customer questions regarding the use and operation of the Product, (b) responding promptly to requests for technical support from Customers, and (c) providing technical support services to address and resolve Customers' support requests with respect to the Localized Product. (ii) Distributor shall ensure that all Customer questions regarding the use or operation of the Localized Product are initially addressed to and answered by Distributor. Unless otherwise agreed in writing by Supplier, Distributor shall not 5 represent to any third party that Supplier is available to answer questions from any Customer directly. (e) End User License. Prior to providing any Customer with any Software, Distributor shall ensure that each Customer has read and agreed to the terms and conditions of, and validly executed, the End User License Agreement, which shall be contained in each software unit. As set forth more fully in Section 2(i), Distributor shall not conduct, support, or permit, and shall not authorize any third party to conduct, support, or permit, the copying, modification, alteration, reverse engineering, disassembly or decompiling of the Product. 4. OBLIGATIONS OF SUPPLIER: (a) Marketing Support. Supplier shall provide Distributor with reasonable marketing support, including providing reasonable quantities of Supplier's advertising and promotional materials, pricing information and technical data related to the Product. Supplier may also from time to time provide, at Supplier's sole discretion, monetary support for certain marketing and promotional activities involving the Product, such as exhibitions, conventions, trade shows, and advertisements. (b) Japanese Language CNR Warehouse Aisle. Supplier shall maintain an aisle within the CNR Warehouse containing references to software applications which may be of interest to Japanese-speaking end users, including, maintaining bandwidth and infrastructure necessary to support such aisle. Supplier shall exercise its sole and absolute discretion as to which software applications to place within such Japanese language aisle. 5. EXCLUSIVE LICENSING FEE: In consideration of Supplier's appointment of Distributor as its exclusive distributor in the Territory pursuant to Section 2 above, Distributor shall pay Supplier a fully earned, nonrefundable, exclusive licensing fee of *** (the "Exclusive Licensing Fee"). The Exclusive Licensing Fee shall be paid in four (4) payments according to the following schedule:
PAYMENT NO. DATE AMOUNT ----------- ---- ------ 1 *** *** 2 *** *** 3 *** *** 4 *** ***
All payments by Distributor to Supplier under this Section 5 shall be in U.S. Dollars via certified check or electronic wire transfer. In the event that Distributor fails to make payment of the Exclusive Licensing Fee according to the schedule above, Supplier shall notify Distributor that Distributor is in breach of this Section 5 pursuant to the Notice provision in Section 15(l) below, and Distributor shall have thirty (30) days from the date Distributor receives such notice to cure such breach, and Supplier shall charge Distributor a one percent (1%) late fee for any such amount due to Supplier (the 6 "Late Fee"). In addition to the Late Fee, the past due amount shall accrue interest at eighteen percent (18%) per annum. If, after thirty (30) days from the date Distributor receives notice of such breach, Distributor has not paid Supplier the amounts due, plus the Late Fee, with interest, Supplier shall, at its sole and absolute discretion, elect to terminate this Agreement, upon which the Exclusive Licensing Fee, in its entirety, plus the Late Fee, with interest, shall immediately become due and payable to Supplier, and Distributor shall no longer be entitled to any of the rights granted in Section 2 above. 6. PRICE/PAYMENT: (a) Per Unit License Fee. Pursuant to Section 2(a) above, for each CD-ROM disk copied from the Gold Master, and for each Service purchased from Supplier, Distributor shall pay a per-unit licensing fee to Supplier (the "Per Unit License Fee"). During the Licensed Term (as defined in Section 9 below), Distributor shall pay Supplier the Per Unit License Fee according to the following schedule:
PRODUCT PRICE ------- ----- LindowsOS (Retail Version) *** LindowsOS (OEM Version) *** LindowsOffice with StarSuite *** LindowsLive (CD) *** Lindows Laptop Edition ***

SERVICE PRICE MINIMUM UNITS PURCHASED ------- ----- ----------------------- LindowsPlus Membership *** *** VirusSafe *** ***
Distributor shall purchase the number of minimum units of services above, and thereafter, shall be able to purchase any number of units without a minimum unit requirement. All payments by Distributor to Supplier under this Section 6(a) shall be made in U.S. Dollars via certified check or electronic wire transfer. Distributor shall provide Supplier, on a monthly basis, sales, shipment, inventory, and other written or electronic reports relating to Distributor's activities under this Agreement during the prior month. All payments made by Distributor to Supplier shall be made within thirty (30) days from the date of each monthly report. (b) Expiration of the Licensed Term. Distributor understands and agrees that the Per Unit License Fee set forth in Section 6(a) above shall only be valid during the Licensed Term of this Agreement. Distributor further understands and agrees that all Product, or Localized Product, copied by Distributor pursuant to the terms of this Agreement shall be shipped from Distributor's manufacturing facility by the end of the Licensed Term. Distributor shall have no right to ship from Distributor's manufacturing facility, any Product, or Localized Product, copied pursuant to the terms of this 7 Agreement, after the expiration of the Licensed Term. Any Product, or Localized Product, copied pursuant to the terms of this Agreement, which remains unsold by Distributor upon expiration of the Licensed Term, if any, shall be destroyed by Distributor, at Distributor's expense, and Distributor shall provide Supplier with a record of all destroyed Product or Localized Product. Any Services purchased pursuant to the terms of this Agreement, which remain unsold by Distributor upon expiration of the Licensed Term, if any, shall be sold within ninety (90) days from the end of the Licensed Term. (c) Updates. In the event Supplier makes available to the public, any Updates for the Products listed in Section 6(a), Supplier shall give such Updates to Distributor, free of charge, with the exception that no Updates shall be given to Distributor after the expiration of the Licensed Term. Distributor understands and agrees that Supplier shall not give any Updates for any of the Products after the expiration of the Licensed Term. Distributor shall have the right to distribute such Updates, pursuant to the license granted in Section 2 of this Agreement. (d) Taxes. The prices set forth in Section 6(a) above do not include any Japanese taxes, including franchise, sales and use taxes, if any. Distributor shall be solely responsible for payment of any and all such taxes or obligations, including any fines, penalties, or interest relating thereto. Notwithstanding the foregoing, any sum required under applicable tax laws to be withheld by Distributor for account of Supplier from payments due to Supplier, shall be withheld and shall be promptly paid by Distributor to the appropriate tax authorities. Distributor shall furnish Supplier official tax receipts or other appropriate evidence issued by tax authorities sufficient to enable Supplier to file a claim for credit in respect of any sum so withheld against its home country's income taxes. (e) Product Identification Numbers. For all Services that Distributor purchases during the Licensed Term pursuant to Section 6(a) above, Supplier shall provide Distributor with the product identification numbers for the corresponding Services within ten (10) days of receipt of Distributor's payment for such Services. (f) Books and Records; Audit. Both parties shall maintain complete books, records and accounts relevant to computation and accounting for amounts payable under this Agreement. Each party agrees to allow an independent certified public accountant the right to audit and examine such books, records and accounts during normal business hours no more than once per year upon ten (10) days notice at such examining party's expense, to verify the accuracy of the reports and payments made under this Section 6. In the event any such audit reveals that a party has knowingly breached a material obligation hereunder, then, in addition to such other remedies as such examining party may have, the audited party shall pay or reimburse to the examining party the cost of such audit. 7. REPLACEMENT OF THE PREVIOUS AGREEMENT: 8 (a) Distributor understands and agrees that the Previous Agreement shall terminate on the Effective Date of this Agreement. Within ten (10) days of the Effective Date of this Agreement, Distributor shall provide Supplier with a full accounting of all Product in Distributor's inventory as of the Effective Date. Any Product remaining in Distributor's inventory as of the Effective Date, shall, at no charge to Distributor, become subject to the terms and conditions of this Agreement. Any new Product copied by Distributor after the Effective Date, and during the Licensed Term of this Agreement, shall be copied at the Per Unit License Fee set forth in Section 6(a) above. (b) Distributor understands and agrees that this Agreement shall replace and supersede the Previous Agreement and all provisions thereof, and all other agreements between the parties, written or oral. Distributor further understands and agrees that the terms and conditions of this Agreement shall prevail in the event of any discrepancy or conflict between this Agreement and the Previous Agreement, unless otherwise agreed to in a document signed by each of the parties hereto. 8. LIMITED WARRANTY: (a) Limited Warranty. Subject to the provisions of this Section 8, Supplier warrants that for a period of sixty (60) days from the date Distributor receives any Gold Master ("Warranty Period"), the Software will conform to the specifications expressly set forth in the Documentation provided by Supplier. In the event that the Software fails to conform to such specifications during the Warranty Period, Supplier shall use commercially reasonable efforts to repair and correct such errors so that the Software conforms to such specifications. (b) Disclaimer of Warranties. EXCEPT AS EXPRESSLY PROVIDED IN SECTION 8(a) ABOVE, SUPPLIER MAKES NO WARRANTIES OR CONDITIONS, EXPRESS, STATUTORY, IMPLIED, OR OTHERWISE, AND SUPPLIER SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES AND CONDITIONS OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING THE FOREGOING, SUPPLIER DOES NOT EXCLUDE LIABILITY TO THE EXTENT THAT SUCH LIABILITY MAY NOT BE EXCLUDED OR LIMITED BY LAW. (c) Customer Claims. Distributor shall ensure that all Customer claims for warranty, repair, or replacement are addressed to Distributor and not to Supplier. 9. TERM AND TERMINATION: (a) Licensed Term. This Agreement shall commence upon the Effective Date and shall continue in full force and effect until August 29, 2005 ("Licensed Term"), unless terminated earlier in accordance with the provisions of this Agreement. (b) Breach. If a party is in material breach of this Agreement and has failed to cure such material breach within thirty (30) days after receiving written notice from the 9 other party of such material breach, the party not in breach may terminate this Agreement. Without limiting the foregoing, either party may terminate this Agreement effective upon written notice to the other party stating such party's intention to terminate, in the event the other party: (i) ceases to function as a going concern or to conduct operations in the normal course of business; (ii) has a petition filed by or against it under any bankruptcy or insolvency law which petition has not been dismissed or set aside within sixty (60) days of its filing; or (iii) fails to perform any of its obligations under this Agreement so as to be in default hereunder and fails to cure such default within thirty (30) days after receiving written notice of such default from the other party. (c) Customer Support. Distributor may continue to use the Product after termination of this Agreement to provide customer support services as set forth in Section 3(d) above, provided, however, that Distributor is not in breach or default of payment, pursuant to Sections 5 and 6(a) above. (d) No Liability for Termination. Except as expressly required by law, in the event of termination of this Agreement by either party in accordance with any of the provisions of this Agreement, neither party shall be liable to the other, because of such termination, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases or commitments in connection with the business or goodwill of Supplier or Distributor. Termination shall not, however, relieve either party of obligations incurred prior to termination. (e) Survival. The following provisions shall survive expiration or any termination of this Agreement: Sections 8, 9(c)-(f), 10, 11, 13, 15, and the last sentence in Section 12(b). (f) Return of Materials. All Software, Documentation, Product, trademarks, marks, trade names, patents, copyrights, designs, drawings, formulas or other data, photographs, samples, literature, and sales and promotional aids of every kind shall remain the property of Supplier. Within thirty (30) days after the effective date of termination of this Agreement, Distributor shall at Supplier's option, destroy all tangible items bearing, containing, or contained in, any of the foregoing, in its possession or control and provide written certification of such destruction, or prepare such tangible items for shipment to Supplier or Supplier's designee, as Supplier may direct, at Supplier's expense. Distributor shall not make or retain any copies of any Confidential Information (as defined in Section 10 below), which may have been entrusted to it. 10. CONFIDENTIALITY AND PROPRIETARY RIGHTS: 10 (a) Confidential Information. The term "Confidential Information" shall mean any information disclosed by one party to the other party pursuant to this Agreement or either party's activities hereunder, including, without limitation, technical data, product design and development, sales information, quantity and kind of products licensed, prices and methods of pricing, marketing techniques and plans, product returns, unannounced products, product and process information, and any other information which, if disclosed to others, might be competitively detrimental to either party. (b) Confidentiality. Each party shall treat as confidential all Confidential Information of the other party, shall not use such Confidential Information except to exercise its rights and perform its obligations under this Agreement herein, and shall not disclose such Confidential Information to any third party, except as expressly authorized in Section 10(c) below. Without limiting the foregoing, each of the parties shall use at least the same degree of care it uses to prevent the disclosure of its own Confidential Information of like importance, to prevent the disclosure of Confidential Information of the other party. Each party shall promptly notify the other party of any actual or suspected misuse or unauthorized disclosure of the other party's Confidential Information. (c) Exceptions. Confidential Information excludes information that: (i) was in the public domain at the time it was disclosed or has become in the public domain through no fault of the receiving party; (ii) was known to the receiving party, without restriction, at the time of disclosure, as demonstrated by files in existence at the time of disclosure; (iii) is disclosed with the prior written approval of the disclosing party; (iv) was independently developed by the receiving party without any use of the Confidential Information; (v) becomes known to the receiving party, without restriction, from a source other than the disclosing party, without breach of this Agreement, by the receiving party; or (vi) is disclosed generally to third parties by the disclosing party without restrictions similar to those contained in this Agreement. The receiving party may disclose the other party's Confidential Information to the extent such disclosure is required by order or requirement of a court, administrative agency, or other governmental body. (d) Proprietary Rights. Distributor agrees that Supplier retains all of its right, title and interest in and to all patent rights, trademarks, trade names inventions, copyrights, know-how and trade secrets relating to the Product, including modifications, translations, and/or localizations of the Product performed by Distributor, or the product lines that include the Product, and the design, manufacture, operation or service of the Product. To the extent that the Product contains or incorporates intellectual property of parties other than Supplier, Distributor agrees to respect such third party rights and abide by any terms and conditions contingent upon grant and use of such rights, and that such third parties retain any such rights, if applicable. The use by Distributor of any of these property rights is authorized only for the purposes herein set forth and upon termination of this Agreement for any reason such authorization will cease, subject to Section 9(d). Distributor shall not (and shall require that its Customers do not) remove, alter, cover or obfuscate any copyright notices or other proprietary rights notices placed or embedded by 11 Supplier on or in any Product. Distributor hereby irrevocably assigns and agrees to assign to Supplier, without additional consideration, all right, title and interest in and to the Localized Product, whether currently existing or created or developed later, including, without limitation, all copyrights, trademarks, trade secrets, patents, industrial rights and all other intellectual property and proprietary rights related thereto, whether existing now or in the future, effective immediately upon the inception, conception, creation or development thereof. Distributor shall (a) disclose promptly to Supplier the Localized Product and any new version thereof, and (b) whether during or after the term of this Agreement, execute such written instruments and do such other acts as may be necessary in the opinion of Supplier to obtain a patent, register a copyright or otherwise evidence or enforce Supplier's rights in and to such Localized Product (and Distributor hereby irrevocably appoints Supplier and any of its officers as its attorney in fact to undertake such acts in its name). To the extent, if any, that Distributor retains any right, title or interest in or to the Localized Product, Distributor hereby grants to the Supplier a perpetual, irrevocable, fully paid-up, transferable, sublicensable, worldwide right and license (a) to use, reproduce, distribute, display and perform (whether publicly or otherwise), prepare derivative works of and otherwise modify, make, sell, offer to sell, import and otherwise use and exploit (and have others exercise such rights on behalf of Supplier) all or any portion of such Localized Product, in any form or media (now known or later developed); (b) to modify all or any portion of such Localized Product, including, without limitation, the making of additions to or deletions from such Localized Product, regardless of the medium (now or hereafter known) into which such Localized Product may be modified and regardless of the effect of such modifications on the integrity of such Localized Product; and (c) to identify Distributor, or not to identify Distributor, as one or more authors of or contributors to such Localized Product or any portion thereof, whether or not such Localized Product or any portion thereof have been modified. Distributor further waives any "moral" rights or other rights with respect to attribution of authorship or integrity of such Localized Product Distributor may have under any applicable law, whether under copyright, trademark, unfair competition, defamation, right of privacy, contract, tort or other legal theory. 11. PATENT/COPYRIGHT/TRADEMARK WARRANTY AND INDEMNIFICATION: (a) Indemnity. Provided Distributor adheres to the Branding Guidelines set forth by Supplier, Supplier represents and warrants that the Product or any part thereof, does not violate or infringe any patent, copyright, trademark, trade secret or other proprietary right of any third party. Supplier agrees, at its own expense, to defend any third party claim, suit or proceeding (collectively, "Action") brought against Distributor alleging the Product infringes any patent, copyright, trademark, trade secret or other proprietary right of Supplier in existence as of the Effective Date, subject to the limitations hereinafter set forth. Supplier agrees to pay, subject to the limitations hereinafter set forth, any final judgment entered against Distributor on such issue in any such Action. Distributor shall notify Supplier promptly in writing of such Action filed against Distributor and shall have the right, but not the obligation, to participate in the defense of any such suit or proceeding at Distributor's expense. Distributor will provide 12 the Supplier with proper and full information and its reasonable assistance in the defense of any claim, suit or proceeding, at Supplier's expense. If it is adjudicatively determined that the Product, or any part thereof, infringes any patent, copyright or trademark, or if the sale or use of the Product, or any part thereof, is, as a result, enjoined, or in the event of any pending or threatened claim or infringement, then Supplier may, at its election, option, and expense: (i) procure for Distributor the right under such patent, copyright or trademark to sell or use, as appropriate, the Product or such part thereof; (ii) modify the Product or part thereof; or (iii) cease distribution of the Product, or part thereof, and refund any payments including (x) any minimum product or services purchases under Section 6 paid by Distributor for such Product/Service and (y) a pro rata portion of any paid installment of the exclusive licensing fees that became due under the schedule set forth in Section 5 within 90 days from the date of such election/option to cease distribution of the Product (for example if such election is made 30 days from the date an installment became due, then Supplier shall refund two-thirds of such installment), and Distributor's obligations to pay all remaining exclusive licensing fee installments shall be terminated. (b) Modifications to Branding Guidelines. Supplier reserves the right to modify the Branding Guidelines from time to time, and shall give Distributor notice of any such modifications. Within thirty (30) days of receipt of notice of any modifications to the Branding Guidelines, Distributor shall act to assure that all Product, Product marketing materials or other promotional matter complies with the Branding Guidelines. If at any time Distributor fails to follow the Branding Guidelines, Supplier shall be relieved of any obligation set forth in Section 10 relating to or resulting from such failure. 12. USE OF TRADEMARKS/TRADE NAMES: (a) Trademarks. During the Licensed Term of this Agreement, Distributor shall have the right to indicate to the public that it is an authorized distributor of Supplier's Product and to advertise such Product under the trademarks, marks, and trade names of Supplier and in the promotion and distribution of the Product; provided, however, that upon thirty (30) days prior written notice to Distributor, Supplier may substitute alternative marks for any or all of such Supplier's trademarks used by Distributor. All representations of Supplier's trademarks that Distributor intends to use shall first be submitted to Supplier for approval (which shall not be unreasonably withheld) of design, color and other details or shall be exact copies of those used by Supplier. In addition, Distributor shall fully comply with all reasonable guidelines, if any, communicated by Supplier concerning the use of Supplier's trademarks. (b) Use. Distributor shall not alter or remove any of Supplier's trademarks affixed to the Product by Supplier. Except as set forth in this Section 12, nothing contained in this Agreement shall grant or shall be deemed to grant to Distributor any right, title or interest in or to Supplier's trademarks. All uses of Supplier's trademarks shall inure solely to the benefit of Supplier and Distributor shall obtain no rights with respect to any of Supplier's trademarks, other than the right to distribute Product as set forth herein, and Distributor irrevocably assigns to Supplier all such right, title and 13 interest, if any, in any of Supplier's trademarks. At no time during or after the term of this Agreement shall Distributor challenge or assist others to challenge Supplier's trademarks (except to the extent expressly prohibited by applicable law) or the registration thereof or attempt to register any trademarks, marks or trade names confusingly similar to those of Supplier. Upon termination of this Agreement, Distributor shall immediately cease to use all of Supplier's trademarks. 13. LIMITATION OF LIABILITY: EXCEPT FOR DISTRIBUTOR'S OBLIGATIONS UNDER SECTION 15(C), IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR LOST PROFITS, COST OF PROCUREMENT OF SUBSTITUTE GOODS, OR ANY OTHER SPECIAL, RELIANCE, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND UNDER ANY THEORY OF LIABILITY WHETHER BASED IN CONTRACT, TORT (INCLUDING NEGLIGENCE), OR OTHERWISE. THE FOREGOING LIMITATIONS SHALL APPLY REGARDLESS OF WHETHER SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING THE FAILURE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY STATED HEREIN. NEITHER PARTY'S LIABILITY ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL EXCEED THE AGGREGATE AMOUNTS PAID BY DISTRIBUTOR TO SUPPLIER HEREUNDER. NOTWITHSTANDING THE FOREGOING, THIS SECTION 13 SHALL NOT BE APPLICABLE WITH REGARD TO ANY BREACH OR LIABILITY UNDER SECTIONS 10 AND 11. 14. COMPLIANCE WITH LAWS: (a) Export Control. Distributor understands and acknowledges that Supplier is subject to regulation by agencies of the United States Government, including, but not limited to, the U.S. Department of Commerce, which prohibit export or diversion of certain products and technology to certain countries. Any and all obligations of Supplier to provide the Product, as well as any other technical information or assistance shall be subject in all respects to such United States laws and regulations as shall from time to time govern the license and delivery of technology and products abroad by persons subject to the jurisdiction of the United States, including the Export Administration Act of 1979, as amended, any successor litigation, and the Export Administration Regulations issued by the Department of Commerce, Bureau of Export Administration. Distributor agrees to cooperate with Supplier including, without limitation, providing required documentation, in order to obtain export licenses or exemptions therefrom. Distributor warrants that it shall comply with the Export Administration Regulations and other United States laws and regulations governing exports in effect from time to time. Distributor further agrees not to resell Product to any organization, public or private, which engages in the research or production of military devices, armaments, or any instrument of warfare, including biological, chemical and nuclear warfare. (b) Governmental Approvals. Distributor represents and warrants that it has obtained all required approvals of the government within the Territory in connection with this Agreement and that the provisions of this Agreement and the rights and obligations 14 of the parties hereunder, are enforceable under the laws within the Territory. Supplier represents and warrants that it has obtained all required approvals of the United States government in connection with this Agreement and that the provisions of this Agreement and the rights and obligations of the parties hereunder, are enforceable under the laws of the United States of America. 15. MISCELLANEOUS PROVISIONS: (a) Independent Contractors. The relationship of Supplier and Distributor established by this Agreement is that of independent contractors, and neither party is an employee, agent, partner or joint venturer of the other. (b) Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that neither party shall assign any of its rights, obligations, or privileges (by operation of law or otherwise) hereunder without the prior written consent of the other party, which consent shall not be withheld unreasonably. (c) Indemnity. Except for warranty claims for which Supplier is liable under Section 8 and infringement claims covered by Section 11, Distributor agrees to indemnify and hold Supplier harmless against any cost, loss, liability, or expense (including attorneys' fees) arising out of third party claims against Supplier relating to Distributor's use and distribution of the Product. (d) No Implied Waivers. The failure of either party at any time to require performance by the other of any provision hereof shall not affect the right of such party to require performance at any time thereafter, nor shall the waiver of either party of a breach of any provision hereof be taken or held to be a waiver of a provision itself. (e) Severability. If any provision of this Agreement is held to be invalid by a court of competent jurisdiction, then the remaining provisions shall nevertheless remain in full force and effect. The parties agree to renegotiate in good faith those provisions so held to be invalid to be valid, enforceable provisions which provisions shall reflect as closely as possible the original intent of the parties, and further agree to be bound by the mutually agreed substitute provision. (f) Force Majeure. Except for payment of monies, neither party shall be liable for failure to fulfill its obligations under this Agreement or for delays in delivery due to causes beyond its reasonable control, including, but not limited to, acts of God, acts of terror, man-made or natural disasters, earthquakes, fire, riots, flood, material shortages, strikes, delays in transportation or inability to obtain labor or materials through its regular sources. The time for performance of any such obligation shall be extended for the time period lost by reason of the delay. (g) Conflicting Terms. The parties agree that the terms and conditions of this Agreement shall prevail, notwithstanding contrary or additional terms, in any purchase 15 order, sales acknowledgement, confirmation or any other document issued by either party effecting the purchase and/or sale of Product. (h) Authority. The parties executing this Agreement on behalf of Supplier and Distributor represent and warrant that they have the authority from their respective governing bodies to enter into this Agreement and to bind their respective companies to all the terms and conditions of this Agreement. (i) English Language. English shall be used as the authoritative text of this Agreement, regardless of the existence of counterparts translated into another language, and all communications, arbitrations, and other adjudications hereunder shall be made and conducted in English. (j) Recitals. The parties agree that each and every recital of this Agreement shall be a covenant and agreement as well as a recital of this Agreement. (k) Headings. Headings of Sections herein are inserted for convenience of reference only and shall not affect the construction or interpretation of this Agreement. (l) Notice. Any notice required or permitted to be given under this Agreement shall be delivered (i) by hand, (ii) by registered or certified mail, postage prepaid, return receipt requested, to the address of the other party provided immediately below, or to such other address as a party may designate by written notice in accordance with this Section 15(i), (iii) by overnight courier with proof of delivery, (iv) by email to an officer of such party, with confirming return email, or (v) by fax with confirming letter mailed under the conditions described in (ii) above. "Supplier" Lindows, Inc. 9333 Genessee Ave., Suite 300 San Diego, CA 92121 FAX: (858) 587-8095 "Distributor" livedoor Co., Ltd. Roppongi Hills 387, 6-10-1 Roppongi Hirato-ku, Tokyo, 106-6138, Japan FAX: 81-3-51213-2237 (m) Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements relating thereto, written or oral, between the parties. Amendments to this Agreement must be in writing and signed by the duly authorized officers of the parties. This Agreement may be executed in counterparts and delivered by facsimile, all of which shall together be effective as a single original. 16 (n) Governing Law. This Agreement is to be construed in accordance with and governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. This Agreement shall not be governed by the U.N. Convention on Contracts for the International Sale of Goods, the application of which is expressly excluded. Nothing in this Agreement is intended or will be construed to give any person (other than Licensor and Licensee) any legal or equitable right, remedy or claim under this Agreement or any provision hereof. (o) Attorney's Fees. In the event a dispute arises regarding this Agreement, the prevailing party shall be entitled to its reasonable attorney's fees and expenses incurred in addition to any other relief to which it is entitled. (p) Further Assurances. Both parties agree to execute such additional documents and perform such acts as are reasonably necessary to effectuate the intent of this Agreement. 17 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement effective as of the Effective Date. "Supplier" "Distributor" LINDOWS, INC. LIVEDOOR CO., LTD. By: /s/ Kevin Carmony By: /s/ Horie Takafumi ----------------------------- ----------------------------------- Name: Kevin Carmony Name: Horie Takafumi ----------------------------- ----------------------------------- Title: Pres./COO Title: President & CEO ----------------------------- ----------------------------------- 18 EXHIBIT "A" "PRODUCT" SOFTWARE - (IN OBJECT CODE FORM ONLY) LindowsOS (OEM Version) LindowsOS (Retail Version) LindowsOffice with StarSuite LindowsLive (CD) Lindows Laptop Edition SERVICES LindowsPlus Membership VirusSafe DOCUMENTATION 19 EXHIBIT "B" END USER LICENSE AGREEMENT LindowsOS End User License Agreement BETWEEN LINDOWS, INC. ("LINDOWS") AND EITHER (1) A FAMILY END-USER ("FAMILY") -- AN INDIVIDUAL END-USER AGREEING TO A FAMILY EDITION LICENSE FOR PERSONAL USE AND USE BY MEMBERS OF SUCH INDIVIDUAL'S HOUSEHOLD OR (2) A BUSINESS END-USER ("BUSINESS") AGREEING TO A BUSINESS EDITION LICENSE FOR AN AGREED UPON NUMBER OF SEATS OR NUMBER OF SIMULTANEOUS USERS, BUT NOT BOTH. THE FAMILY OR THE BUSINESS ("YOU" OR "YOUR"), AS APPROPRIATE, AGREES TO CAREFULLY READ THIS LICENSE AGREEMENT (THIS "AGREEMENT") BEFORE INSTALLING OR USING THE LINDOWSOS SOFTWARE PRODUCT (INCLUDING ALL ACCOMPANYING DOCUMENTATION, ENHANCEMENTS, UPGRADES AND EXTENSIONS THERETO "LINDOWSOS"). INSTALLING OR OTHERWISE USING THIS PRODUCT INDICATES YOUR ACKNOWLEDGMENT THAT YOU HAVE READ THIS AGREEMENT AND AGREE TO BE BOUND BY AND COMPLY WITH ITS TERMS. IF YOU DO NOT AGREE TO THIS AGREEMENT, PROMPTLY RETURN LINDOWSOS (WITHOUT INSTALLING IT) TO PLACE OF PURCHASE AND ANY MONEY YOU HAVE PAID FOR LINDOWSOS WILL BE RETURNED. SELECTING THE "I ACCEPT THIS AGREEMENT" OPTION FURTHER CONFIRMS YOUR ACCEPTANCE OF ALL TERMS CONTAINED IN THIS AGREEMENT. 1. LICENSE. 1.1 License. a. Family License: If You are a Family or Individual, You agree to the following terms of this Section 1.1.a: LindowsOS is a modular operating system made up of individual software components (each individual software component and all accompanying documentation, enhancements, upgrades and extensions thereto are referred to herein as "Software Program(s)") that were created either by Lindows or various individuals and entities ("Third Parties"). Subject to the terms and conditions of this Agreement, Lindows grants You a non-exclusive license to use the object code form of LindowsOS for Your personal use in accordance with the accompanying documentation. You may download and use LindowsOS on multiple computers owned, leased or rented by You; provided, however, You and members of Your Household (a "Household" consists of those individuals that currently reside with You) are the only individuals with the right to use Your licensed copy(ies) of LindowsOS. For example, if You have a desktop computer at home and a laptop computer which You travel with, You may download a copy of LindowsOS on both machines for the personal use of members of Your Household and You. You agree that You are responsible for the members of Your Household's compliance with the terms of this Agreement as though they were You and had agreed to all terms and conditions herein. Except as otherwise expressly set forth herein, You may not (and shall not allow any member of Your Household or any other Third Party to) (i) remove any product identification or other notices; (ii) copy LindowsOS (other than for back-up purposes, for Your personal use on Your multiple machines as set forth in this Section 1.1.a, or for archival purposes); (iii) provide, lease, lend, use for timesharing or service bureau purposes or otherwise use or allow others to use LindowsOS to or for the benefit of Third Parties, or (iv) modify LindowsOS or incorporate LindowsOS into or with other software, except as may be provided for in this agreement. b. Business License: If You are a Business, You agree to the following terms of this Section 1.1.b: LindowsOS is a modular operating system made up of individual software components (each individual software component and all accompanying documentation, enhancements, upgrades and extensions thereto are referred to herein as "Software Program(s)") that were created either by Lindows or various individuals and entities ("Third Parties"). Subject to the terms and conditions of this Agreement, Lindows grants You a non-exclusive license for Your authorized users to use the object code form of LindowsOS for Your internal business purposes on Business owned, rented or leased computers in accordance with the accompanying documentation for: (1) solely up to the number of Simultaneous Users purchased by You as set forth at www.lindows.com/businesslicense, regardless of the number of Business owned, rented or leased computers that You download LindowsOS on or (2) solely up to the number of Seats purchased by You as set forth at www.lindows.com/businesslicense. "Simultaneous Users" refers to authorized users that may use LindowsOS at the same time. A "Seat" is a single computer processing unit or "CPU" (including computers with redundant processing systems), whether LindowsOS is installed directly on that CPU or is served from a centralized server. Except as otherwise expressly set forth herein, You and Your authorized users may not (and shall not allow any Third Party or any of Your authorized users to) (i) remove any product identification or other notices; (ii) copy LindowsOS (other than for back-up purposes, for use on multiple Seats as set forth in this Section 1.1.b, or for archival purposes); (iii) provide, lease, lend, use for timesharing or service bureau purposes or otherwise use or allow others to use LindowsOS to 20 or for the benefit of Third Parties, or (iv) modify LindowsOS or incorporate LindowsOS into or with other software, except as may be provided for in this agreement. You shall keep a current record of the location of each copy of LindowsOS You make. 1.2 Third Party Agreements. Many of the Software Programs included in LindowsOS are distributed under the terms of agreements with Third Parties ("Third Party Agreements") which may expand or limit Your rights to use certain Software Programs as set forth in Section 1.1. Certain Software Programs may be licensed (or sublicensed) to You under the GNU General Public License and other similar open source license agreements ("OSLAs") which, among other rights, permit You to copy, modify and redistribute certain Software Programs, or portions thereof, and have access to the source code of certain Software Programs, or portions thereof. In addition, certain Software Programs, or portions thereof, may be licensed (or sublicensed) to You under terms stricter than those set forth in Section 1.1. Please review visit www.lindows.com/licensing for the on-line documentation that accompanies certain Software Programs, or portions thereof, for the applicable Third Party Agreements. To the extent any Third Party Agreements require that Lindows provide rights to use, copy or modify a Software Program that are broader than the rights granted in Section 1.1, then such rights shall take precedence over the rights and restrictions granted in this Agreement solely for such Software Programs. 1.3 Violation of Licensing Terms. Any violation by You of the applicable license terms set forth in Section 1.1 or Section 1.2, as appropriate, shall immediately terminate Your license to use LindowsOS. If You do not agree to comply with and be bound by the terms of the applicable license agreement(s), do not install, distribute or otherwise use LindowsOS. 2. PROPRIETARY RIGHTS. All right, title and interest in LindowsOS, including source code, documentation, appearance, structure and organization, are held by Lindows and/or its licensors and are protected by copyright and other laws. You may not copy or otherwise use LindowsOS, in whole or in part, except as expressly permitted in this Agreement. Title to LindowsOS, or to any copy, modification or merged portion of any of the Software Programs, shall at all times remain with Lindows and/or its licensors, subject to the terms of the applicable Third Party Agreement(s) to the Software Programs under consideration. 3. TRADEMARKS "Lindows.com" and "LindowsOS" are registered trademarks of Lindows.com, Inc., All Rights Reserved. "Linux" is a registered trademark of Linus Torvalds. All other trademarks are the property of their respective owners. While certain Third Party Agreements described in Section 1.2 may allow You to copy, modify and distribute certain Software Programs, they do not permit You to distribute the Software Programs utilizing Lindows.com's trademarks. 4. LIMITED WARRANTY. IF LINDOWSOS WAS DISTRIBUTED TO YOU BY LINDOWS OR A LINDOWS AUTHORIZED DISTRIBUTOR ON CD-ROM OR OTHER TANGIBLE STORAGE MEDIA, LINDOWS WARRANTS THAT THE STORAGE MEDIA IN THIS PRODUCT WILL BE FREE FROM DEFECT IN MATERIALS AND WORKMANSHIP UNDER NORMAL USE FOR A PERIOD OF THIRTY (30) DAYS FROM THE DATE THAT YOU ACQUIRE IT. IF SUCH A DEFECT OCCURS, RETURN THE MEDIA TO LINDOWS AT, LINDOWS.COM, INC., 9333 GENESEE AVE., SAN DIEGO, CA 92121, AND LINDOWS WILL REPLACE IT FREE OF CHARGE. THIS REMEDY IS YOUR EXCLUSIVE REMEDY FOR BREACH OF THIS WARRANTY. EXCEPT WHERE SPECIFICALLY STATED OTHERWISE IN THIS AGREEMENT, LINDOWSOS, INCLUDING WITHOUT LIMITATION EACH SOFTWARE PROGRAM, IS PROVIDED TO YOU ON AN "AS IS" BASIS, WITHOUT ANY OTHER WARRANTIES OR CONDITIONS AND LINDOWS EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THOSE ARISING BY LAW, STATUTE, USAGE OF TRADE, COURSE OF DEALING OR OTHERWISE. ANY WARRANTY OR REMEDY PROVIDED UNDER THIS AGREEMENT EXTENDS ONLY TO THE PARTY WHO PURCHASES A LICENSE TO LINDOWSOS FROM LINDOWS OR A LINDOWS AUTHORIZED DISTRIBUTOR. Some jurisdictions do not allow the exclusion of implied warranties, so the above exclusion may not apply to You. You may have other rights which vary from jurisdiction to jurisdiction. 5. LIMITATION OF LIABILITY. THE ENTIRE RISK AS TO THE RESULTS AND PERFORMANCE OF LINDOWSOS IS ASSUMED BY YOU. NEITHER LINDOWS NOR ITS APPOINTED DEALERS, SUPPLIERS OR LICENSEES SHALL HAVE ANY LIABILITY TO YOU OR ANY OTHER PERSON OR ENTITY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, LOSS OF REVENUE OR PROFIT, LOST OR DAMAGED DATA OR OTHER COMMERCIAL OR ECONOMIC LOSS, EVEN IF LINDOWS OR SUCH DEALER, SUPPLIER OR LICENSEE HAS BEEN 21 ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, OR THEY ARE FORESEEABLE. OUR MAXIMUM AGGREGATE LIABILITY TO YOU AND THAT OF OUR DEALERS AND SUPPLIERS FOR DIRECT DAMAGES SHALL NOT EXCEED THE AMOUNT PAID BY YOU FOR LINDOWSOS. THE LIMITATIONS IN THIS SECTION SHALL APPLY WHETHER OR NOT THE ALLEGED BREACH OR DEFAULT IS A BREACH OF A FUNDAMENTAL CONDITION OR TERM OR A FUNDAMENTAL BREACH. Some jurisdictions do not allow the limitation or exclusion of liability for incidental or consequential damage, so the above limitation may not apply to You. 6. DISTRIBUTION. If You are permitted to redistribute any Software Programs under an appropriate OSLA, it is Your responsibility to comply with all export laws, rules and regulations in the jurisdictions where the Software Programs are exported from, exported to, or re-exported from time to time. 7. TERM. This Agreement is effective until terminated. You may terminate this license at any time by destroying all copies of LindowsOS. The Agreement will terminate automatically if You fail to comply with any term or condition of the Agreement. The provisions of Sections 1.2 (regarding OSLAs that remain in force) and 2 - 8, shall survive termination. 8. GENERAL. This Agreement, together with the Third Party Agreements, is the entire agreement regarding Your use of LindowsOS, superseding any other agreement or discussions, oral or written, and may not be changed except by a signed agreement. Except as set forth in the appropriate OSLA, You may not assign Your rights or obligations under this Agreement without the prior consent of Lindows. This Agreement shall be governed by and construed in accordance with the laws of the State of California, excluding that body of law applicable to choice of law and excluding the United Nations Convention on Contracts for the International Sale of Goods and any legislation implementing such Convention, if otherwise applicable. The sole jurisdiction and venue for actions related to the subject matter hereof shall be the state and federal courts located in San Diego County. In any action to enforce this Agreement, the prevailing party shall be entitled to costs and attorneys' fees. If any provision of this Agreement is declared by a Court of competent jurisdiction to be invalid, illegal, or unenforceable, such a provision shall be severed from the Agreement and the other provisions shall remain in full force and effect. At no time shall a failure or delay in enforcing any provisions, exercising any option or requiring performance, be construed to be a waiver. 22 EXHIBIT "C" LINDOWS BRANDING GUIDELINES BRANDING FEATURES To be provided on request. TRADEMARK NOTICES The Branding Features are trademarks and service marks of Lindows. The Branding Features shall be accompanied by the superscript "TM" or "(R)" symbol, as specified by Lindows, which must appear to the immediate right of the Branding Features. The footnote "LindowsOS is the trademark of Lindows, Inc." or "Lindows is the trademark of Lindows, Inc.", as applicable, shall accompany each use of the Branding Features (or, if a Branding Feature is used multiple times in a document, screen or packaging, such notice shall accompany the first prominent use in such document, screen or packaging). USING THE BRANDING FEATURES Distributor may only use the Branding Features as an indication that the Software is being offered to end users via distribution pursuant to this Agreement. Distributor may not use the Branding Features in such a way as to suggest that the Branding Features may also apply to any hardware or software other than the Software. When referring to Lindows, Inc., Distributor shall use the name "Lindows." When referring to the Software, Licensee shall use the trademark "LindowsOS." SIZING AND PLACEMENT REQUIREMENTS The digitized, machine-readable file for the artwork of the Branding Features shall be delivered as provided above in this Exhibit C. Distributor shall not alter this file or the Branding Features in any way, including, without limitation, changing the color of any of the logos or artwork, separating any words in the Branding Features from the remainder of the Branding Features or replacing words with any other words. Distributor shall not combine the Branding Features with any other feature, including, without limitation, other marks, words, graphics, photos, slogans, numbers, design features or symbols. The Branding Features shall not be larger or more prominent than the trademark, logo or any Distributor trade name that appears on the same packaging, documentation, advertising or other materials. The Branding Features shall not be smaller or less prominent than any name, trademark or logo of any third party that appears on the same packaging, documentation, advertising or other materials. 23 EX-10.16 12 a97792a4exv10w16.txt EXHIBIT 10.16 EXHIBIT 10.16 FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), is executed and delivered on August 5, 2004, to be effective as of April 1, 2004 (the "Effective Date"), by and between Lindows, Inc., a Delaware corporation (the "Company"), and Michael Robertson, an individual resident of the State of California ("Employee"). RECITALS WHEREAS, the Company and Employee previously executed and delivered an Employment Agreement, dated as of April 1, 2004 (the "Original Agreement"); and WHEREAS, the Company and Employee previously executed and delivered a First Amendment to Employment Agreement, dated as of June 9, 2004 (the "First Amendment"); and WHEREAS, the Company and Employee now wish to enter into this Agreement in order to amend and restate the Original Agreement solely for the purposes of: (i) incorporating herein the terms and conditions set forth in the First Amendment; and (ii) modifying Employee's address set forth on the signature page hereof; NOW, THEREFORE, in consideration of the mutual covenants contained herein and Employee's continued employment pursuant to the terms of this Agreement, the Company and Employee, intending to be legally bound, hereby agree as follows: 1. POSITION AND RESPONSIBILITIES (a) Position. Employee is employed by the Company to render services to the Company in the position of Chief Executive Officer (CEO). Employee shall report directly to the Board of Directors. Employee shall perform such duties and responsibilities as are normally related to such position, in accordance with industry standards, and any additional duties now or hereafter assigned to Employee by the Board of Directors. Employee shall abide by the Company's rules, regulations and practices, as adopted or modified from time to time in the Company's sole discretion. Without limiting the generality of the foregoing, for so long as Employee holds the position of CEO, at the Company's request Employee shall execute all certifications (or back-up certifications) required to be executed by the Company's CEO (or person performing similar functions) pursuant to the regulations adopted by the Securities and Exchange Commission under Section 302 of the Sarbanes-Oxley Act of 2002 ("SOX"), all certifications, back-up certifications or similar items required to be executed by the Company's CEO (or equivalent thereof) pursuant to Section 404 of the SOX or the Company's independent auditors, and all certifications(or back-up certifications) required to be executed by the Company's CEO (or equivalent thereof) pursuant to Section 906 of SOX. (b) Other Activities. Except with the prior written consent of the Company, Employee shall not, during the term of this Agreement, (i) accept any other employment, or (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary gain) that might interfere with Employee's duties and responsibilities hereunder or create a conflict of interest with the Company. Upon receipt of prior approval by the Board of Directors, Employee may serve as a member of the board of directors of any company that does not compete directly with the Company; provided, however, that such restriction shall not apply to any of the three existing private company boards on which Employee serves at the time of the Effective Date. Notwithstanding the foregoing, Employee may also devote reasonable time and attention to civic, charitable or social organizations so long as such activities do not interfere with the performance of his duties to the Company. (c) No Conflict. Employee represents and warrants that Employee's execution of this Agreement, Employee's employment with the Company and the performance of Employee's proposed duties under this Agreement shall not violate any obligations Employee may have to any prior employer, or any other person or entity, including, without limitation, any obligations with respect to proprietary or confidential information of any prior employer, or any other person or entity. (d) Effectiveness of Certain Provisions. Notwithstanding anything to the contrary in this Agreement, Sections 2(a), 2(b) and 3(c) of this Agreement shall not be of any legal force or effect whatsoever unless and until the IPO Closing (as defined below), at which time such sections shall become effective unless Employee has ceased to be employed by the Company prior to the date of the IPO Closing or this Agreement has otherwise been terminated prior to the date of the IPO Closing. If Employee is still employed by the Company upon the IPO Closing, then within five (5) days after the IPO Closing the Company shall pay to Employee an amount equal to: (a) the Base Salary (as defined in Section 2(a) below) pro rated for the period of time between the Effective Date and the IPO Closing; minus (b) the amount of any other salary that the Company paid to Employee for the period of time between the Effective Date and the IPO Closing. As used in this Agreement, the term "IPO Closing" means the closing of the Company's initial public offering under the Securities Act of 1933, as amended. 2. COMPENSATION AND BENEFITS (a) Base Salary. In consideration of the services to be rendered under this Agreement, the Company shall pay to Employee a salary at the rate of Four Hundred Ten Thousand Dollars ($410,000) per year, as adjusted as permitted in this subsection (the "Base Salary"). The Base Salary shall be paid in accordance with the Company's standard bi-weekly payroll practices. The Base Salary will be reviewed and adjusted from time to time in accordance with the Company's procedures for adjusting salaries for senior executives. (b) Bonus. Employee shall be eligible to receive an annual bonus of up to twenty-five percent (25%) of the Base Salary, subject to Employee's attainment of reasonable corporate goals and objectives to be established annually by the Company's Board of Directors (or a compensation committee) with the assistance and agreement of Employee, such goals and objectives to be agreed upon as soon as practicable with respect to fiscal year 2004 and each fiscal year thereafter (the "Bonus"). 2 (c) Stock Options and Change of Control with Respect to Stock Options. (i) Concurrently with the execution and delivery of the Original Agreement, the Company granted to Employee an option (the "Option") to purchase One Million Five Hundred Thousand (1,500,000) shares (pre IPO stock split) of the Company's Common Stock, $0.0001 par value per share (the "Common Stock"), effective as of the date such grant was approved by the Company's Board of Directors (the "Grant Date"), pursuant to the terms of the form stock option agreement under the Company's 2001 Stock Incentive Plan (the "Plan"). A copy of such form stock option agreement is attached hereto as Exhibit B and incorporated in whole by this reference (the "Option Agreement"). The exercise price per share of the Option was Two Dollars and Fifty Cents ($2.50), which is the fair market value per share of the Common Stock that the Board approved as of the Grant Date. The shares subject to the Option become vested and exercisable in equal amounts on a monthly basis over a four year period, commencing on the Effective Date. The Option shall be a Non-Qualified Stock Option (as defined in the Plan). (ii) To the extent determined by the administrator(s) of the respective stock incentive plan(s) under which such options have been or will be granted, all non-vested options to purchase Common Stock granted to Employee will immediately become vested upon any Change in Control or Corporate Transaction that occurs during the term of Employee's employment with the Company. For these purposes, the terms "Change in Control" and "Corporate Transaction" shall have the meanings given to such terms in the respective stock incentive plan(s) under which such options have been or will be granted. (d) Benefits. Effective as of the Effective Date, Employee shall be eligible to participate in any and all benefits made generally available by the Company to executive officers of the Company in accordance with the benefit plans established by the Company, as such plans may be amended from time to time in the Company's sole discretion. Without limiting the generality of the foregoing, effective as of the Effective Date, Employee, and to the extent applicable, Employee's covered dependants, shall be eligible to participate in the Company's 401(k) program and shall receive immediate enrollment for health benefits to the maximum extent possible under the Company's benefit plans. (e) Vacation. Employee shall receive four (4) week of paid vacation time per calendar year, which amount shall increase in accordance with the Company's vacation policy for employees of the Company generally. Employee may take such accrued vacation at such times as are mutually convenient to Employee and the Company. In addition, Employee shall be entitled to all holidays provided under the Company's regular holiday schedule. (f) Business Expenses. The Company will reimburse Employee for reasonable and necessary expenses appropriately incurred by Employee in performing his duties and obligations to the Company in accordance with, and subject to, such policies and procedures regarding executive officer expenses generally as the Company may from time to time have in effect. 3 3. AT-WILL EMPLOYMENT (a) At-Will Termination by Company. The employment of Employee shall be "at-will" at all times. The Company may terminate Employee's employment with the Company at any time, without any advance notice, for any reason or no reason at all, notwithstanding anything to the contrary contained in or arising from any statements, policies or practices of the Company relating to the employment, discipline or termination of its employees. Upon and after the date of such termination, all obligations of the Company shall cease, except as set forth below in Section 3(c). (b) At-Will Termination by Employee. Employee may terminate employment with the Company at any time for any reason or no reason at all, upon two weeks' advance written notice. During such notice period Employee shall continue to diligently perform all of Employee's duties hereunder. The Company shall have the option, in its sole discretion, to make Employee's termination effective at any time prior to the end of such notice period as long as the Company pays Employee all compensation (including all accrued Base Salary (as then in effect), Bonus or vacation and subject to payment of all reimbursable expenses) incurred to which Employee is entitled up through the last day of the two-week notice period. Any and all options to acquire shares of Common Stock that have vested under the Option (or any other option that Employee shall receive while employed by the Company hereunder) shall continue to belong to Employee, subject to the terms of exercise set forth in the related option agreements. Thereafter all obligations of the Company shall cease, except as set forth below in Section 3(c). (c) Termination by Company without Cause or by Employee for Good Reason. (i) If the Company terminates Employee's employment other than for Cause (as defined below) or if Employee terminates his employment for Good Reason (as defined below) or if Employee shall die or become disabled as a direct result of business related activities within nine (9) months of the Effective Date, then (A) within five (5) business days of the date on which Employee's employment is terminated, the Company shall pay to Employee in one lump sum payment that aggregate amount of Base Salary and Bonus that the Company would have paid to Employee during the Severance Period if Employee had remained employed with the Company throughout the Severance Period, (B) during the Severance Period the Company shall continue to make available to Employee the benefits made generally available by the Company to its employees, to the extent permitted under applicable law and the terms of the benefit plans, and (C) all non-vested options to purchase Company stock granted to Employee will immediately become vested. If the date of Employee's termination is on or before the first anniversary of the Effective Date, then for purposes of this Agreement the term "Severance Period" shall mean the period beginning on the date of Employee's termination and ending on the third anniversary of the Effective Date. If the date of Employee's termination is after the first anniversary of the Effective Date, then for purposes of this Agreement the term "Severance Period" shall mean the twenty-four (24)-month period immediately following the date of Employee's termination. This Section 3(c)(i) shall supercede any term to the contrary in all stock option agreements entered into between the Company and Employee, whether now existing or hereinafter executed, and Employee and the 4 Company agree to execute and deliver any amendments to such agreements necessary to effectuate this Section 3(c)(i). (ii) The Company's termination of Employee's employment shall be for "Cause" if Employee: (A) exhibits willful misconduct or dishonesty which materially and adversely effects the business reputation of Employee or the Company; (B) is convicted of a felony; (C) acts (or fails to act) in the performance of his duties to the Company in bad (good) faith and to the Company's detriment; (D) materially breaches this Agreement or any other agreement with the Company, which if curable, is not cured to the Company's reasonable satisfaction within thirty (30) days of written notice thereof; or (E) engages in misconduct that is demonstrably and materially injurious to the Company, including, without limitation, willful and material failure to perform his duties as an officer or employee of the Company or excessive absenteeism unrelated to illness or vacation which if curable, is not cured to the Company's reasonable satisfaction within thirty (30) days of written notice thereof. (iii) For the purposes of this Agreement "Good Reason" means, the occurrence, without the express written consent of Employee, of any of the following events: (A) any reduction or diminution (except temporarily during any period of disability) in Employee's titles or positions assured in Section 1(a) under this Agreement, or any material diminution in Executive's authority, duties, responsibilities with the Company or change from reporting directly to the Board of Directors; (B) a breach by the Company of any material provision of this Agreement, including, but not limited to, any reduction (other than a reduction (not to exceed ten percent (10%)) that applies, in equal percentages, to all officers (within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended) of the Company), in Employee's Base Salary or any material failure to timely pay any part of Employee's compensation (including, without limitation, Base Salary, and bonus) or to materially provide in the aggregate the level of benefits contemplated in this Agreement; (C) the failure of the Company to obtain and deliver to Employee a satisfactory written agreement from any successor to the Company to assume and agree to perform this Agreement; or (D) the Employee is asked to do anything that would be considered illegal or unethical. (iv) Employee's right to receive any payments or other benefits under this Section 3(c) is expressly conditioned upon: (A) Employee's execution of a general release of all claims as of the date of Employee's termination, in substantially the form attached to this Agreement as Exhibit A (the "General Release"); and (B) Employee's compliance with his obligations under this Agreement, and all other agreements between Employee and the Company. (v) Employee's right to receive any payments or other benefits under this Section 3(c) upon his death or disability shall automatically terminate concurrently with the establishment of any death or disability insurance plan or benefit (other than any existing group life or disability insurance program) approved by the Company's Board of Directors for the benefit of Employee. 5 4. TERMINATION OBLIGATIONS (a) Return of Property. Employee agrees that all property (including, without limitation, all equipment, tangible proprietary information, documents, records, notes, contracts and computer-generated materials) furnished to or created or prepared by Employee incident to Employee's employment belongs to the Company and shall be promptly returned to the Company upon termination of Employee's employment. (b) Cooperation. Following any termination of his employment, Employee shall perform any and all acts requested by the Company to ensure the orderly and efficient transition of Employee's duties. Such acts may include, but are not limited to: (i) participating in meetings or telephone conferences; (ii) reviewing, preparing or executing documents; and (iii) providing assistance in connection with any litigation, investigation or audit involving the Company, or any of its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations. 5. NON-DISCLOSURE OF THIRD-PARTY INFORMATION Employee represents and warrants and covenants that Employee shall not disclose to the Company, or use, or induce the Company to use, any proprietary information or trade secrets of others at any time, including but not limited to any proprietary information or trade secrets of any former employer, if any; and Employee acknowledges and agrees that any violation of this provision shall be grounds for Employee's immediate termination and could subject Employee to substantial civil liabilities and criminal penalties. Employee further specifically and expressly acknowledges that no officer or other employee or representative of the Company has requested or instructed Employee to disclose or use any such third-party proprietary information or trade secrets. 6. NONINTERFERENCE; NONSOLICITATION Employee acknowledges and agrees that the Company's relationships with its employees, consultants, customers, vendors and service providers are valuable business assets. Accordingly, Employee agrees that, during his employment with the Company and during the Severance Period after the date of any termination of such employment, he will not (for himself or for any third party) divert or attempt to divert from the Company any business, employee, consultant, customer, vendor or service provider, through solicitation or otherwise, or otherwise interfere with the Company's business or the Company's relationships with its employees, consultants, customers, vendors and service providers. 7. AMENDMENTS; WAIVERS; REMEDIES This Agreement may not be amended or waived except by a writing signed by Employee and by a duly authorized officer of the Company. Failure to exercise any right under this Agreement shall not constitute a waiver of such right. Any waiver of any breach of this Agreement shall not operate as a waiver of any subsequent breaches. All rights or remedies specified for a party herein shall be cumulative and in addition to all other rights and remedies of the party hereunder or under applicable law. 6 8. ASSIGNMENT; BINDING EFFECT (a) Assignment. The performance of Employee is personal hereunder, and Employee agrees that Employee shall have no right to assign and shall not assign or purport to assign any rights or obligations under this Agreement. This Agreement may be assigned or transferred by the Company and nothing in this Agreement shall prevent the consolidation, merger or sale of the Company or a sale of any or all or substantially all of its assets. (b) Binding Effect. Subject to the foregoing restriction on assignment by Employee, this Agreement shall inure to the benefit of and be binding upon each of the parties; the affiliates, officers, directors, agents, legal representatives, successors and assigns of the Company; and the heirs, devisees, spouses, legal representatives and successors of Employee. 9. NOTICES All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered: (a) by hand; (b) by a nationally recognized overnight courier service; or (c) by United States first class registered or certified mail, return receipt requested, to the principal address of the other party, as set forth below on the signature page of this Agreement. The date of notice shall be deemed to be the earlier of (i) actual receipt of notice by any permitted means, or (ii) five (5) business days following dispatch by overnight delivery service or the United States mail. Employee shall be obligated to notify the Company in writing of any change in Employee's address. Notice of change of address shall be effective only when provided in accordance with this Section 9. 10. SEVERABILITY If any provision of this Agreement shall be held by a court or arbitrator to be invalid, unenforceable or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Agreement shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law. 11. TAXES All amounts paid under this Agreement (including, without limitation, the Base Salary) shall be paid less all applicable state and federal tax withholdings and any other withholdings required by any applicable jurisdiction. 12. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to conflicts of law principles. 7 13. INTERPRETATION This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. Sections and section headings contained in this Agreement are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Agreement. Whenever the context requires, references to the singular shall include the plural and the plural the singular. 14. ATTORNEY'S FEES If any action at law or in equity is necessary to enforce or interpret the terms of this letter agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements, in addition to any other relief to which the party may be entitled. 15. OBLIGATIONS SURVIVE TERMINATION OF EMPLOYMENT The parties agree that any and all of the Company's or Employee's obligations under this Agreement shall survive the termination of this Agreement. 16. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement, but all of which together shall constitute one and the same instrument. 17. AUTHORITY Each party represents and warrants that such party has the right, power and authority to enter into and execute this Agreement and to perform and discharge all of the obligations hereunder; and that this Agreement constitutes the valid and legally binding agreement and obligation of such party and is enforceable in accordance with its terms. 18. ENTIRE AGREEMENT This Agreement, and the exhibits attached hereto, are intended to be the final, complete and exclusive statement of the terms of Employee's employment by the Company and may not be contradicted by evidence of any prior or contemporaneous statements or agreements. Notwithstanding the foregoing, this Agreement shall not supersede or otherwise affect any agreements previously or concurrently executed by Employee relating to the Company's proprietary information or intellectual property rights, or relating to Employee's non-interference or non-solicitation obligations relative to the Company's business or employees. To the extent that the practices, policies or procedures of the Company, now or in the future, apply to Employee and are inconsistent with the terms of this Agreement, the provisions of this Agreement shall control. Any subsequent change in Employee's duties, position or compensation shall not affect the validity or scope of this Agreement. 8 19. EMPLOYEE ACKNOWLEDGEMENT Employee acknowledges that Employee has had the opportunity to consult legal counsel concerning this Agreement, that Employee has read and understands this Agreement, that Employee is fully aware of its legal effect and that Employee has entered into this Agreement freely based on Employee's own judgment and not on any representations or promises other than those contained in this Agreement. [SIGNATURE PAGE TO EMPLOYMENT AGREEMENT FOLLOWS] 9 IN WITNESS WHEREOF, the parties hereby execute this First Amended and Restated Employment Agreement as of the Effective Date. LINDOWS, INC. EMPLOYEE: By:/s/ Kevin Carmony /s/ Michael Robertson ----------------------------------- -------------------------------------- Name: Kevin Carmony Michael Robertson Title: COO and President CEO Address for notices: Address for notices: 9333 Genesee Ave., Suite 300 c/o Lindows, Inc. San Diego, CA 92121 9333 Genesee Ave., Suite 300 Attention: Kevin Carmony San Diego, CA 92121 [COUNTERPART SIGNATURE PAGE TO FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT] EXHIBIT A FORM OF GENERAL RELEASE OF CLAIMS THIS GENERAL RELEASE OF CLAIMS (this "Release") is executed and delivered as of _____________, ____, by and between ______________, a Delaware corporation (the "Company"), and the individual named on the signature page hereof (the "Releasor"). Each of the Company and the Releasor is referred to herein as a "Party," and, collectively, as the "Parties." RECITALS WHEREAS, the Company and the Releasor previously executed and delivered a First Amended and Restated Employment Agreement (the "Employment Agreement"); WHEREAS, pursuant to terms and conditions of the Employment Agreement, the Releasor is entitled to certain severance payments in specific circumstances, subject to, among other things, Releasor's execution and delivery of this Release; and WHEREAS, by execution hereof, the Releasor acknowledges and agrees that: (i) this Release is a compromise of doubtful and disputed claims, if any, which remain untested; (ii) there has not been a trial or adjudication of any issue of law or fact herein; (iii) the terms and conditions of this Release are in no way to be construed as an admission of liability on the part of the Company; and (iv) the Company denies any liability and intends merely to avoid litigation with this Release; NOW, THEREFORE, in consideration of the foregoing recitals, and the representations, warranties, covenants and promises contained herein, the adequacy and sufficiency of which are hereby acknowledged, the Parties agree as follows: AGREEMENT 1. Release of the Company by the Releasor. (a) The Releasor does hereby unconditionally, irrevocably and absolutely release and discharge the Company, and its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations, from any and all loss, liability, claims, costs (including, without limitation, attorneys' fees), demands, causes of action, or suits of any type, whether in law and/or in equity, related directly or indirectly or in any way connected with any transaction, affairs or occurrences between them and arising on or prior to the date of this Release, including, but not limited to, the Releasor's employment with the Company, the termination of said employment and claims of emotional or physical distress related to such employment or termination, excepting only Releasor's rights (1) as a participant under various Company benefit and stock plans and programs; (2) to enforce obligations under his Employment Agreement and this Release; and (3) for defense and indemnification in the event of any claims for which such defense or indemnification would be appropriate under Cal. Labor A-1 Code sec. 2802, the California Corporations Code, or any Company bylaw or policy relating to indemnification. This Release specifically applies to any claims for age discrimination in employment, including, without limitation, any claims arising under the Age Discrimination In Employment Act or any other statutes or laws that govern discrimination in employment. (b) The Releasor irrevocably and absolutely agrees that he will not prosecute nor allow to be prosecuted on his behalf in any administrative agency, whether federal or state, or in any court, whether federal or state, any claim or demand of any type related to any of the matters released above, it being an intention of the Parties that with the execution by the Releasor of this Release, the Company, its officers, directors, employees, agents, attorneys, representatives, successors and/or assigns, and any related holding, parent and subsidiary corporations, will be absolutely, unconditionally and forever discharged of and from all obligations to or on behalf of the Releasor related in any way to the matters released above. (c) The Releasor does expressly waive all of the benefits and rights granted to him pursuant to any applicable law or regulation to the effect that: A general release does not extend to claims which the creditor does not know of or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. (d) The Releasor does certify that he has read all of this Release, and that he fully understands all of the same. The Releasor hereby expressly agrees that this Release shall extend and apply to all unknown, unsuspected and unanticipated injuries and damages, as well as those that are now known; provided that this Release shall not apply to Releasor's right to receive any severance payments or benefits during the Severance Period as defined in the Employment Agreement referred to herein.. (e) The Releasor further declares and represents that no promise, inducement or agreement not herein expressed has been made to him and that this Release contains the full and entire agreement between the Parties relating to the Releasor's release of claims, and that the terms of this Release are contractual and not a mere recital. 2. Review and Revocation Periods. The Releasor represents, acknowledges and agrees that: (i) the Company has advised him, in writing, to discuss this Release with an attorney, and that to the extent, if any, that the Releasor has desired, the Releasor has done so; (ii) the Company has given the Releasor twenty-one (21) days to review and consider this Release before signing it, and the Releasor understands that he may use as much of this twenty-one (21) day period as he wishes prior to signing; (iii) that no promise, representation, warranty or agreements not contained herein have been made by or with anyone to cause him to sign this Release; (iv) that he has read this Release in its entirety, and fully understands and is aware of its meaning, intent, contents and legal effect; and (v) he is executing this Release voluntarily, and free of any duress or coercion. The Parties acknowledge that for a period of seven (7) days following the execution of this Release, the Releasor may revoke this Release, and this Release shall not become effective or enforceable until the revocation period has expired. This Release shall become effective eight (8) days after it is signed by the Parties, and in the event the Parties do not sign on the same date, then this Release shall become effective eight (8) days after the date it is signed by the Releasor. A-2 3. Full and Complete Defense. This Release may be pleaded as a full and complete defense and may be used as the basis for an injunction against any action, suit or proceeding that may be prosecuted, instituted or attempted by the Releasor against the Company. 4. Tax Indemnification. As part of this Release, the Releasor agrees to indemnify, hold harmless, and, at the Company's request, defend the Company and its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations, from and against any and all loss, liability, claims, costs (including, without limitation, attorneys' fees), demands, causes of action, or suits of any type, whether in law and/or in equity, related directly or indirectly or in any way connected with any federal or state income or other taxes payable or claimed to be payable as a result of any consideration that the Company pays to the Releasor pursuant to this Release or the Employment Agreement. 5. Amendments, etc. This Release may not be amended or waived except by a writing signed by the Releasor and by a duly authorized officer of the Company. Failure to exercise any right under this Release shall not constitute a waiver of such right. Any waiver of any breach of this Release shall not operate as a waiver of any subsequent breaches. All rights or remedies specified for a Party herein shall be cumulative and in addition to all other rights and remedies of the Party hereunder or under applicable law. 6. Assignment; Binding Effect. The Releasor agrees that he shall have no right to assign and shall not assign or purport to assign any rights or obligations under this Release. This Release may be assigned or transferred by the Company; and nothing in this Release shall prevent the consolidation, merger or sale of the Company or a sale of any or all or substantially all of its assets. 7. Severability. If any provision of this Release shall be held by a court or arbitrator to be invalid, unenforceable or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Release shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law. 8. Governing Law. This Release shall be governed by and construed in accordance with the internal laws of the State of California, without regard to conflicts of law principles. 9. Interpretation. This Release shall be construed as a whole, according to its fair meaning, and not in favor of or against any Party. Sections and section headings contained in this Release are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Release. Whenever the context requires, references to the singular shall include the plural and the plural the singular. 10. Counterparts. This Release may be executed in any number of counterparts, each of which shall be deemed an original of this Release, but all of which together shall constitute one and the same instrument. A-3 11. Authority. Each Party represents and warrants that such Party has the right, power and authority to enter into and execute this Release and to perform and discharge all of the obligations hereunder; and that this Release constitutes the valid and legally binding agreement and obligation of such Party and is enforceable in accordance with its terms. 12. Entire Agreement. This Release is intended to be the final, complete and exclusive statement of the terms set forth herein and may not be contradicted by evidence of any prior or contemporaneous statements or agreements. 13. Opportunity to Consult Legal Counsel. The Releasor acknowledges that he has had the opportunity to consult legal counsel concerning this Release, that he has read and understands this Release, that he is fully aware of its legal effect and that he has entered into this Release freely based on his own judgment and not on any representations or promises other than those contained in this Release. [SIGNATURE PAGE FOLLOWS] A-4 IN WITNESS WHEREOF, the Parties hereby execute this Release as of the date first above written. , RELEASOR: - -------------------- By: ----------------------------------- -------------------------------------- Name: Signature Title: -------------------------------------- Print Name [SIGNATURE PAGE TO GENERAL RELEASE OF CLAIMS] A-5 EXHIBIT B OPTION AGREEMENT See attached. B-1 EX-10.17 13 a97792a4exv10w17.txt EXHIBIT 10.17 EXHIBIT 10.17 FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), is executed and delivered on August 5, 2004, to be effective as of April 1, 2004 (the "Effective Date"), by and between Lindows, Inc., a Delaware corporation (the "Company"), and Kevin Carmony, an individual resident of the State of California ("Employee"). RECITALS WHEREAS, the Company and Employee previously executed and delivered an Employment Agreement, dated as of April 1, 2004 (the "Original Agreement"); and WHEREAS, the Company and Employee previously executed and delivered a First Amendment to Employment Agreement, dated as of June 9, 2004 (the "First Amendment"); and WHEREAS, the Company and Employee now wish to enter into this Agreement in order to amend and restate the Original Agreement solely for the purposes of: (i) incorporating herein the terms and conditions set forth in the First Amendment; and (ii) modifying Employee's address set forth on the signature page hereof; NOW, THEREFORE, in consideration of the mutual covenants contained herein and Employee's continued employment pursuant to the terms of this Agreement, the Company and Employee, intending to be legally bound, hereby agree as follows: 1. POSITION AND RESPONSIBILITIES (a) Position. Employee is employed by the Company to render services to the Company in the position of Chief Operating Officer (COO) and President. Employee shall report directly to Michael Robertson. Employee shall perform such duties and responsibilities as are normally related to such position, in accordance with industry standards, and any additional duties now or hereafter assigned to Employee by Michael Robertson. Employee shall abide by the Company's rules, regulations and practices, as adopted or modified from time to time in the Company's sole discretion. Without limiting the generality of the foregoing, for so long as Employee holds the position of COO and President, at the Company's request Employee shall execute all certifications (or back-up certifications) required to be executed by the Company's COO and President (or person performing similar functions) pursuant to the regulations adopted by the Securities and Exchange Commission under Section 302 of the Sarbanes-Oxley Act of 2002 ("SOX"), all certifications, back-up certifications or similar items required to be executed by the Company's COO and President (or equivalent thereof) pursuant to Section 404 of the SOX or the Company's independent auditors, and all certifications (or back-up certifications) required to be executed by the Company's COO and President (or equivalent thereof) pursuant to Section 906 of SOX. (b) Other Activities. Except with the prior written consent of the Company, Employee shall not, during the term of this Agreement, (i) accept any other employment, or (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary gain) that might interfere with Employee's duties and responsibilities hereunder or create a conflict of interest with the Company. Upon receipt of prior approval by the CEO, Employee may serve as a member of the board of directors of any company that does not compete directly with the Company; provided, however, that such restriction shall not apply to any of the three existing private company boards on which Employee serves at the time of the Effective Date. Notwithstanding the foregoing, Employee may also devote reasonable time and attention to civic, charitable or social organizations so long as such activities do not interfere with the performance of his duties to the Company. (c) No Conflict. Employee represents and warrants that Employee's execution of this Agreement, Employee's employment with the Company and the performance of Employee's proposed duties under this Agreement shall not violate any obligations Employee may have to any prior employer, or any other person or entity, including, without limitation, any obligations with respect to proprietary or confidential information of any prior employer, or any other person or entity. (d) Effectiveness of Certain Provisions. Notwithstanding anything to the contrary in this Agreement, Sections 2(a), 2(b) and 3(c) of this Agreement shall not be of any legal force or effect whatsoever unless and until the IPO Closing (as defined below), at which time such sections shall become effective unless Employee has ceased to be employed by the Company prior to the date of the IPO Closing or this Agreement has otherwise been terminated prior to the date of the IPO Closing. If Employee is still employed by the Company upon the IPO Closing, then within five (5) days after the IPO Closing the Company shall pay to Employee an amount equal to: (a) the Base Salary (as defined in Section 2(a) below) pro rated for the period of time between the Effective Date and the IPO Closing; minus (b) the amount of any other salary that the Company paid to Employee for the period of time between the Effective Date and the IPO Closing. As used in this Agreement, the term "IPO Closing" means the closing of the Company's initial public offering under the Securities Act of 1933, as amended. 2. COMPENSATION AND BENEFITS (a) Base Salary. In consideration of the services to be rendered under this Agreement, the Company shall pay to Employee a salary at the rate of Two Hundred Seventy-Five Thousand Dollars ($275,000) per year, as adjusted as permitted in this subsection (the "Base Salary"). The Base Salary shall be paid in accordance with the Company's standard bi-weekly payroll practices. The Base Salary will be reviewed and adjusted from time to time in accordance with the Company's procedures for adjusting salaries for senior executives. (b) Bonus. Employee shall be eligible to receive an annual bonus of up to twenty-five percent (25%) of the Base Salary, subject to Employee's attainment of reasonable corporate goals and objectives to be established annually by the Company's CEO (or a compensation committee) with the assistance and agreement of Employee, such goals and objectives to be agreed upon as soon as practicable with respect to fiscal year 2004 and each fiscal year thereafter (the "Bonus"). 2 (c) Stock Options and Change of Control with Respect to Stock Options. (i) Concurrently with the execution and delivery of the Original Agreement, the Company granted to Employee an option (the "Option") to purchase One Million (1,000,000) shares (pre IPO stock split) of the Company's Common Stock, $0.0001 par value per share (the "Common Stock"), effective as of the date such grant was approved by the Company's Board of Directors (the "Grant Date"), pursuant to the terms of the form stock option agreement under the Company's 2001 Stock Incentive Plan (the "Plan"). A copy of such form stock option agreement is attached hereto as Exhibit B and incorporated in whole by this reference (the "Option Agreement"). The exercise price per share of the Option was Two Dollars and Fifty Cents ($2.50), which is the fair market value per share of the Common Stock that the Board approved as of the Grant Date. The shares subject to the Option become vested and exercisable in equal amounts on a monthly basis over a four year period, commencing on the Effective Date. The Option shall be an Incentive Stock Option (as defined in the Plan) to the maximum extent permitted by law. (ii) To the extent determined by the administrator(s) of the respective stock incentive plan(s) under which such options have been or will be granted, all non-vested options to purchase Common Stock granted to Employee will immediately become vested upon any Change in Control or Corporate Transaction that occurs during the term of Employee's employment with the Company. For these purposes, the terms "Change in Control" and "Corporate Transaction" shall have the meanings given to such terms in the respective stock incentive plan(s) under which such options have been or will be granted. (d) Benefits. Effective as of the Effective Date, Employee shall be eligible to participate in any and all benefits made generally available by the Company to executive officers of the Company in accordance with the benefit plans established by the Company, as such plans may be amended from time to time in the Company's sole discretion. Without limiting the generality of the foregoing, effective as of the Effective Date, Employee, and to the extent applicable, Employee's covered dependants, shall be eligible to participate in the Company's 401(k) program and shall receive immediate enrollment for health benefits to the maximum extent possible under the Company's benefit plans. (e) Vacation. Employee shall receive four (4) week of paid vacation time per calendar year, which amount shall increase in accordance with the Company's vacation policy for employees of the Company generally. Employee may take such accrued vacation at such times as are mutually convenient to Employee and the Company. In addition, Employee shall be entitled to all holidays provided under the Company's regular holiday schedule. (f) Business Expenses. The Company will reimburse Employee for reasonable and necessary expenses appropriately incurred by Employee in performing his duties and obligations to the Company in accordance with, and subject to, such policies and procedures regarding executive officer expenses generally as the Company may from time to time have in effect. 3 3. AT-WILL EMPLOYMENT (a) At-Will Termination by Company. The employment of Employee shall be "at-will" at all times. The Company may terminate Employee's employment with the Company at any time, without any advance notice, for any reason or no reason at all, notwithstanding anything to the contrary contained in or arising from any statements, policies or practices of the Company relating to the employment, discipline or termination of its employees. Upon and after the date of such termination, all obligations of the Company shall cease, except as set forth below in Section 3(c). (b) At-Will Termination by Employee. Employee may terminate employment with the Company at any time for any reason or no reason at all, upon two weeks' advance written notice. During such notice period Employee shall continue to diligently perform all of Employee's duties hereunder. The Company shall have the option, in its sole discretion, to make Employee's termination effective at any time prior to the end of such notice period as long as the Company pays Employee all compensation (including all accrued Base Salary (as then in effect), Bonus or vacation and subject to payment of all reimbursable expenses) incurred to which Employee is entitled up through the last day of the two-week notice period. Any and all options to acquire shares of Common Stock that have vested under the Option (or any other option that Employee shall receive while employed by the Company hereunder) shall continue to belong to Employee, subject to the terms of exercise set forth in the related option agreements. Thereafter all obligations of the Company shall cease, except as set forth below in Section 3(c). (c) Termination by Company without Cause or by Employee for Good Reason. (i) If the Company terminates Employee's employment other than for Cause (as defined below) or if Employee terminates his employment for Good Reason (as defined below) or if Employee shall die or become disabled as a direct result of business related activities within nine (9) months of the Effective Date, then (A) within five (5) business days of the date on which Employee's employment is terminated, the Company shall pay to Employee in one lump sum payment that aggregate amount of Base Salary and Bonus that the Company would have paid to Employee during the Severance Period if Employee had remained employed with the Company throughout the Severance Period, (B) during the Severance Period the Company shall continue to make available to Employee the benefits made generally available by the Company to its employees, to the extent permitted under applicable law and the terms of the benefit plans, and (C) all non-vested options to purchase Company stock granted to Employee will immediately become vested. If the date of Employee's termination is on or before the first anniversary of the Effective Date, then for purposes of this Agreement the term "Severance Period" shall mean the period beginning on the date of Employee's termination and ending on the third anniversary of the Effective Date. If the date of Employee's termination is after the first anniversary of the Effective Date, then for purposes of this Agreement the term "Severance Period" shall mean the twenty-four (24)-month period immediately following the date of Employee's termination. This Section 3(c)(i) shall supercede any term to the contrary in all stock option agreements entered into between the Company and Employee, whether now existing or hereinafter executed, and Employee and the 4 Company agree to execute and deliver any amendments to such agreements necessary to effectuate this Section 3(c)(i). (ii) The Company's termination of Employee's employment shall be for "Cause" if Employee: (A) exhibits willful misconduct or dishonesty which materially and adversely effects the business reputation of Employee or the Company; (B) is convicted of a felony; (C) acts (or fails to act) in the performance of his duties to the Company in bad (good) faith and to the Company's detriment; (D) materially breaches this Agreement or any other agreement with the Company, which if curable, is not cured to the Company's reasonable satisfaction within thirty (30) days of written notice thereof; or (E) engages in misconduct that is demonstrably and materially injurious to the Company, including, without limitation, willful and material failure to perform his duties as an officer or employee of the Company or excessive absenteeism unrelated to illness or vacation which if curable, is not cured to the Company's reasonable satisfaction within thirty (30) days of written notice thereof. (iii) For the purposes of this Agreement "Good Reason" means, the occurrence, without the express written consent of Employee, of any of the following events: (A) any reduction or diminution (except temporarily during any period of disability) in Employee's titles or positions assured in Section 1(a) under this Agreement, or any material diminution in Executive's authority, duties, responsibilities with the Company or change from reporting directly to Michael Robertson; (B) a breach by the Company of any material provision of this Agreement, including, but not limited to, any reduction (other than a reduction (not to exceed ten percent (10%)) that applies, in equal percentages, to all officers (within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended) of the Company), in Employee's Base Salary or any material failure to timely pay any part of Employee's compensation (including, without limitation, Base Salary, and bonus) or to materially provide in the aggregate the level of benefits contemplated in this Agreement; (C) the failure of the Company to obtain and deliver to Employee a satisfactory written agreement from any successor to the Company to assume and agree to perform this Agreement; or (D) the Employee is asked to do anything that would be considered illegal or unethical. (iv) Employee's right to receive any payments or other benefits under this Section 3(c) is expressly conditioned upon: (A) Employee's execution of a general release of all claims as of the date of Employee's termination, in substantially the form attached to this Agreement as Exhibit A (the "General Release"); and (B) Employee's compliance with his obligations under this Agreement, and all other agreements between Employee and the Company. (v) Employee's right to receive any payments or other benefits under this Section 3(c) upon his death or disability shall automatically terminate concurrently with the establishment of any death or disability insurance plan or benefit (other than any existing group life or disability insurance program) approved by the Company's Board of Directors for the benefit of Employee. 5 4. TERMINATION OBLIGATIONS (a) Return of Property. Employee agrees that all property (including, without limitation, all equipment, tangible proprietary information, documents, records, notes, contracts and computer-generated materials) furnished to or created or prepared by Employee incident to Employee's employment belongs to the Company and shall be promptly returned to the Company upon termination of Employee's employment. (b) Cooperation. Following any termination of his employment, Employee shall perform any and all acts requested by the Company to ensure the orderly and efficient transition of Employee's duties. Such acts may include, but are not limited to: (i) participating in meetings or telephone conferences; (ii) reviewing, preparing or executing documents; and (iii) providing assistance in connection with any litigation, investigation or audit involving the Company, or any of its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations. 5. NON-DISCLOSURE OF THIRD-PARTY INFORMATION Employee represents and warrants and covenants that Employee shall not disclose to the Company, or use, or induce the Company to use, any proprietary information or trade secrets of others at any time, including but not limited to any proprietary information or trade secrets of any former employer, if any; and Employee acknowledges and agrees that any violation of this provision shall be grounds for Employee's immediate termination and could subject Employee to substantial civil liabilities and criminal penalties. Employee further specifically and expressly acknowledges that no officer or other employee or representative of the Company has requested or instructed Employee to disclose or use any such third-party proprietary information or trade secrets. 6. NONINTERFERENCE; NONSOLICITATION Employee acknowledges and agrees that the Company's relationships with its employees, consultants, customers, vendors and service providers are valuable business assets. Accordingly, Employee agrees that, during his employment with the Company and during the Severance Period after the date of any termination of such employment, he will not (for himself or for any third party) divert or attempt to divert from the Company any business, employee, consultant, customer, vendor or service provider, through solicitation or otherwise, or otherwise interfere with the Company's business or the Company's relationships with its employees, consultants, customers, vendors and service providers. 7. AMENDMENTS; WAIVERS; REMEDIES This Agreement may not be amended or waived except by a writing signed by Employee and by a duly authorized officer of the Company. Failure to exercise any right under this Agreement shall not constitute a waiver of such right. Any waiver of any breach of this Agreement shall not operate as a waiver of any subsequent breaches. All rights or remedies specified for a party herein shall be cumulative and in addition to all other rights and remedies of the party hereunder or under applicable law. 6 8. ASSIGNMENT; BINDING EFFECT (a) Assignment. The performance of Employee is personal hereunder, and Employee agrees that Employee shall have no right to assign and shall not assign or purport to assign any rights or obligations under this Agreement. This Agreement may be assigned or transferred by the Company and nothing in this Agreement shall prevent the consolidation, merger or sale of the Company or a sale of any or all or substantially all of its assets. (b) Binding Effect. Subject to the foregoing restriction on assignment by Employee, this Agreement shall inure to the benefit of and be binding upon each of the parties; the affiliates, officers, directors, agents, legal representatives, successors and assigns of the Company; and the heirs, devisees, spouses, legal representatives and successors of Employee. 9. NOTICES All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered: (a) by hand; (b) by a nationally recognized overnight courier service; or (c) by United States first class registered or certified mail, return receipt requested, to the principal address of the other party, as set forth below on the signature page of this Agreement. The date of notice shall be deemed to be the earlier of (i) actual receipt of notice by any permitted means, or (ii) five (5) business days following dispatch by overnight delivery service or the United States mail. Employee shall be obligated to notify the Company in writing of any change in Employee's address. Notice of change of address shall be effective only when provided in accordance with this Section 9. 10. SEVERABILITY If any provision of this Agreement shall be held by a court or arbitrator to be invalid, unenforceable or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Agreement shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law. 11. TAXES All amounts paid under this Agreement (including, without limitation, the Base Salary) shall be paid less all applicable state and federal tax withholdings and any other withholdings required by any applicable jurisdiction. 12. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to conflicts of law principles. 7 13. INTERPRETATION This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. Sections and section headings contained in this Agreement are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Agreement. Whenever the context requires, references to the singular shall include the plural and the plural the singular. 14. ATTORNEY'S FEES If any action at law or in equity is necessary to enforce or interpret the terms of this letter agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements, in addition to any other relief to which the party may be entitled. 15. OBLIGATIONS SURVIVE TERMINATION OF EMPLOYMENT The parties agree that any and all of the Company's or Employee's obligations under this Agreement shall survive the termination of this Agreement. 16. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement, but all of which together shall constitute one and the same instrument. 17. AUTHORITY Each party represents and warrants that such party has the right, power and authority to enter into and execute this Agreement and to perform and discharge all of the obligations hereunder; and that this Agreement constitutes the valid and legally binding agreement and obligation of such party and is enforceable in accordance with its terms. 18. ENTIRE AGREEMENT This Agreement, and the exhibits attached hereto, are intended to be the final, complete and exclusive statement of the terms of Employee's employment by the Company and may not be contradicted by evidence of any prior or contemporaneous statements or agreements. Notwithstanding the foregoing, this Agreement shall not supersede or otherwise affect any agreements previously or concurrently executed by Employee relating to the Company's proprietary information or intellectual property rights, or relating to Employee's non-interference or non-solicitation obligations relative to the Company's business or employees. To the extent that the practices, policies or procedures of the Company, now or in the future, apply to Employee and are inconsistent with the terms of this Agreement, the provisions of this Agreement shall control. Any subsequent change in Employee's duties, position or compensation shall not affect the validity or scope of this Agreement. 8 19. EMPLOYEE ACKNOWLEDGEMENT Employee acknowledges that Employee has had the opportunity to consult legal counsel concerning this Agreement, that Employee has read and understands this Agreement, that Employee is fully aware of its legal effect and that Employee has entered into this Agreement freely based on Employee's own judgment and not on any representations or promises other than those contained in this Agreement. [SIGNATURE PAGE TO EMPLOYMENT AGREEMENT FOLLOWS] 9 IN WITNESS WHEREOF, the parties hereby execute this First Amended and Restated Employment Agreement as of the Effective Date. LINDOWS, INC. EMPLOYEE: By: /s/ Michael Robertson /s/ Kevin Carmony ---------------------------- ---------------------- Name: Michael Robertson Kevin Carmony Title: CEO COO and President Address for notices: Address for notices: 9333 Genesee Ave., Suite 300 c/o Lindows, Inc. San Diego, CA 92121 9333 Genesee Ave., Suite 300 Attention: Michael Robertson San Diego, CA 92121 [COUNTERPART SIGNATURE PAGE TO FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT] 10 EXHIBIT A FORM OF GENERAL RELEASE OF CLAIMS THIS GENERAL RELEASE OF CLAIMS (this "Release") is executed and delivered as of _____________, ____, by and between ______________, a Delaware corporation (the "Company"), and the individual named on the signature page hereof (the "Releasor"). Each of the Company and the Releasor is referred to herein as a "Party," and, collectively, as the "Parties." RECITALS WHEREAS, the Company and the Releasor previously executed and delivered a First Amended and Restated Employment Agreement (the "Employment Agreement"); WHEREAS, pursuant to terms and conditions of the Employment Agreement, the Releasor is entitled to certain severance payments in specific circumstances, subject to, among other things, Releasor's execution and delivery of this Release; and WHEREAS, by execution hereof, the Releasor acknowledges and agrees that: (i) this Release is a compromise of doubtful and disputed claims, if any, which remain untested; (ii) there has not been a trial or adjudication of any issue of law or fact herein; (iii) the terms and conditions of this Release are in no way to be construed as an admission of liability on the part of the Company; and (iv) the Company denies any liability and intends merely to avoid litigation with this Release; NOW, THEREFORE, in consideration of the foregoing recitals, and the representations, warranties, covenants and promises contained herein, the adequacy and sufficiency of which are hereby acknowledged, the Parties agree as follows: AGREEMENT 1. Release of the Company by the Releasor. (a) The Releasor does hereby unconditionally, irrevocably and absolutely release and discharge the Company, and its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations, from any and all loss, liability, claims, costs (including, without limitation, attorneys' fees), demands, causes of action, or suits of any type, whether in law and/or in equity, related directly or indirectly or in any way connected with any transaction, affairs or occurrences between them and arising on or prior to the date of this Release, including, but not limited to, the Releasor's employment with the Company, the termination of said employment and claims of emotional or physical distress related to such employment or termination, excepting only Releasor's rights (1) as a participant under various Company benefit and stock plans and programs; (2) to enforce obligations under his Employment Agreement and this Release; and (3) for defense and indemnification in the event of any claims for which such defense or indemnification would be appropriate under Cal. Labor Code sec. 2802, the California Corporations Code, or any Company bylaw or policy relating to indemnification. This Release specifically applies to any claims for age discrimination in A-1 employment, including, without limitation, any claims arising under the Age Discrimination In Employment Act or any other statutes or laws that govern discrimination in employment. (b) The Releasor irrevocably and absolutely agrees that he will not prosecute nor allow to be prosecuted on his behalf in any administrative agency, whether federal or state, or in any court, whether federal or state, any claim or demand of any type related to any of the matters released above, it being an intention of the Parties that with the execution by the Releasor of this Release, the Company, its officers, directors, employees, agents, attorneys, representatives, successors and/or assigns, and any related holding, parent and subsidiary corporations, will be absolutely, unconditionally and forever discharged of and from all obligations to or on behalf of the Releasor related in any way to the matters released above. (c) The Releasor does expressly waive all of the benefits and rights granted to him pursuant to any applicable law or regulation to the effect that: A general release does not extend to claims which the creditor does not know of or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. (d) The Releasor does certify that he has read all of this Release, and that he fully understands all of the same. The Releasor hereby expressly agrees that this Release shall extend and apply to all unknown, unsuspected and unanticipated injuries and damages, as well as those that are now known; provided that this Release shall not apply to Releasor's right to receive any severance payments or benefits during the Severance Period as defined in the Employment Agreement referred to herein.. (e) The Releasor further declares and represents that no promise, inducement or agreement not herein expressed has been made to him and that this Release contains the full and entire agreement between the Parties relating to the Releasor's release of claims, and that the terms of this Release are contractual and not a mere recital. 2. Review and Revocation Periods. The Releasor represents, acknowledges and agrees that: (i) the Company has advised him, in writing, to discuss this Release with an attorney, and that to the extent, if any, that the Releasor has desired, the Releasor has done so; (ii) the Company has given the Releasor twenty-one (21) days to review and consider this Release before signing it, and the Releasor understands that he may use as much of this twenty-one (21) day period as he wishes prior to signing; (iii) that no promise, representation, warranty or agreements not contained herein have been made by or with anyone to cause him to sign this Release; (iv) that he has read this Release in its entirety, and fully understands and is aware of its meaning, intent, contents and legal effect; and (v) he is executing this Release voluntarily, and free of any duress or coercion. The Parties acknowledge that for a period of seven (7) days following the execution of this Release, the Releasor may revoke this Release, and this Release shall not become effective or enforceable until the revocation period has expired. This Release shall become effective eight (8) days after it is signed by the Parties, and in the event the Parties do not sign on the same date, then this Release shall become effective eight (8) days after the date it is signed by the Releasor. A-2 3. Full and Complete Defense. This Release may be pleaded as a full and complete defense and may be used as the basis for an injunction against any action, suit or proceeding that may be prosecuted, instituted or attempted by the Releasor against the Company. 4. Tax Indemnification. As part of this Release, the Releasor agrees to indemnify, hold harmless, and, at the Company's request, defend the Company and its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations, from and against any and all loss, liability, claims, costs (including, without limitation, attorneys' fees), demands, causes of action, or suits of any type, whether in law and/or in equity, related directly or indirectly or in any way connected with any federal or state income or other taxes payable or claimed to be payable as a result of any consideration that the Company pays to the Releasor pursuant to this Release or the Employment Agreement. 5. Amendments, etc. This Release may not be amended or waived except by a writing signed by the Releasor and by a duly authorized officer of the Company. Failure to exercise any right under this Release shall not constitute a waiver of such right. Any waiver of any breach of this Release shall not operate as a waiver of any subsequent breaches. All rights or remedies specified for a Party herein shall be cumulative and in addition to all other rights and remedies of the Party hereunder or under applicable law. 6. Assignment; Binding Effect. The Releasor agrees that he shall have no right to assign and shall not assign or purport to assign any rights or obligations under this Release. This Release may be assigned or transferred by the Company; and nothing in this Release shall prevent the consolidation, merger or sale of the Company or a sale of any or all or substantially all of its assets. 7. Severability. If any provision of this Release shall be held by a court or arbitrator to be invalid, unenforceable or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Release shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law. 8. Governing Law. This Release shall be governed by and construed in accordance with the internal laws of the State of California, without regard to conflicts of law principles. 9. Interpretation. This Release shall be construed as a whole, according to its fair meaning, and not in favor of or against any Party. Sections and section headings contained in this Release are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Release. Whenever the context requires, references to the singular shall include the plural and the plural the singular. 10. Counterparts. This Release may be executed in any number of counterparts, each of which shall be deemed an original of this Release, but all of which together shall constitute one and the same instrument. A-3 11. Authority. Each Party represents and warrants that such Party has the right, power and authority to enter into and execute this Release and to perform and discharge all of the obligations hereunder; and that this Release constitutes the valid and legally binding agreement and obligation of such Party and is enforceable in accordance with its terms. 12. Entire Agreement. This Release is intended to be the final, complete and exclusive statement of the terms set forth herein and may not be contradicted by evidence of any prior or contemporaneous statements or agreements. 13. Opportunity to Consult Legal Counsel. The Releasor acknowledges that he has had the opportunity to consult legal counsel concerning this Release, that he has read and understands this Release, that he is fully aware of its legal effect and that he has entered into this Release freely based on his own judgment and not on any representations or promises other than those contained in this Release. [SIGNATURE PAGE FOLLOWS] A-4 IN WITNESS WHEREOF, the Parties hereby execute this Release as of the date first above written. ____________________, RELEASOR: By: --------------------------------- --------------------- Name: Signature Title: --------------------- Print Name [SIGNATURE PAGE TO GENERAL RELEASE OF CLAIMS] A-5 EXHIBIT B OPTION AGREEMENT See attached. B-1 EX-10.18 14 a97792a4exv10w18.txt EXHIBIT 10.18 EXHIBIT 10.19 FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), is executed and delivered on August 5, 2004, to be effective as of April 1, 2004 (the "Effective Date"), by and between Lindows, Inc., a Delaware corporation (the "Company"), and Tom Welch, an individual resident of the State of California ("Employee"). RECITALS WHEREAS, the Company and Employee previously executed and delivered an Employment Agreement, dated as of April 1, 2004 (the "Original Agreement"); and WHEREAS, the Company and Employee previously executed and delivered a First Amendment to Employment Agreement, dated as of June 9, 2004 (the "First Amendment"); and WHEREAS, the Company and Employee now wish to enter into this Agreement in order to amend and restate the Original Agreement solely for the purposes of: (i) incorporating herein the terms and conditions set forth in the First Amendment; and (ii) modifying Employee's address set forth on the signature page hereof; NOW, THEREFORE, in consideration of the mutual covenants contained herein and Employee's continued employment pursuant to the terms of this Agreement, the Company and Employee, intending to be legally bound, hereby agree as follows: 1. POSITION AND RESPONSIBILITIES (a) Position. Employee is employed by the Company to render services to the Company in the position of Chief Technology Officer (CTO). Employee shall report directly to Kevin Carmony. Employee shall perform such duties and responsibilities as are normally related to such position, in accordance with industry standards, and any additional duties now or hereafter assigned to Employee by Kevin Carmony. Employee shall abide by the Company's rules, regulations and practices, as adopted or modified from time to time in the Company's sole discretion. Without limiting the generality of the foregoing, for so long as Employee holds the position of CTO, at the Company's request Employee shall execute all certifications (or back-up certifications) required to be executed by the Company's CTO (or person performing similar functions) pursuant to the regulations adopted by the Securities and Exchange Commission under Section 302 of the Sarbanes-Oxley Act of 2002 ("SOX"), all certifications, back-up certifications or similar items required to be executed by the Company's CTO (or equivalent thereof) pursuant to Section 404 of the SOX or the Company's independent auditors, and all certifications (or back-up certifications) required to be executed by the Company's CTO (or equivalent thereof) pursuant to Section 906 of SOX. (b) Other Activities. Except with the prior written consent of the Company, Employee shall not, during the term of this Agreement, (i) accept any other employment, or (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary gain) that might interfere with Employee's duties and responsibilities hereunder or create a conflict of interest with the Company. Upon receipt of prior approval by the COO and President, Employee may serve as a member of the board of directors of any company that does not compete directly with the Company; provided, however, that such restriction shall not apply to any of the three existing private company boards on which Employee serves at the time of the Effective Date. Notwithstanding the foregoing, Employee may also devote reasonable time and attention to civic, charitable or social organizations so long as such activities do not interfere with the performance of his duties to the Company. (c) No Conflict. Employee represents and warrants that Employee's execution of this Agreement, Employee's employment with the Company and the performance of Employee's proposed duties under this Agreement shall not violate any obligations Employee may have to any prior employer, or any other person or entity, including, without limitation, any obligations with respect to proprietary or confidential information of any prior employer, or any other person or entity. (d) Effectiveness of Certain Provisions. Notwithstanding anything to the contrary in this Agreement, Sections 2(a), 2(b) and 3(c) of this Agreement shall not be of any legal force or effect whatsoever unless and until the IPO Closing (as defined below), at which time such sections shall become effective unless Employee has ceased to be employed by the Company prior to the date of the IPO Closing or this Agreement has otherwise been terminated prior to the date of the IPO Closing. If Employee is still employed by the Company upon the IPO Closing, then within five (5) days after the IPO Closing the Company shall pay to Employee an amount equal to: (a) the Base Salary (as defined in Section 2(a) below) pro rated for the period of time between the Effective Date and the IPO Closing; minus (b) the amount of any other salary that the Company paid to Employee for the period of time between the Effective Date and the IPO Closing. As used in this Agreement, the term "IPO Closing" means the closing of the Company's initial public offering under the Securities Act of 1933, as amended. 2. COMPENSATION AND BENEFITS (a) Base Salary. In consideration of the services to be rendered under this Agreement, the Company shall pay to Employee a salary at the rate of Two Hundred Thousand Dollars ($200,000) per year, as adjusted as permitted in this subsection (the "Base Salary"). The Base Salary shall be paid in accordance with the Company's standard bi-weekly payroll practices. The Base Salary will be reviewed and adjusted from time to time in accordance with the Company's procedures for adjusting salaries for senior executives. (b) Bonus. Employee shall be eligible to receive an annual bonus of up to twenty-five percent (25%) of the Base Salary, subject to Employee's attainment of reasonable corporate goals and objectives to be established annually by the Company's COO and President (or a compensation committee) with the assistance and agreement of Employee, such goals and objectives to be agreed upon as soon as practicable with respect to fiscal year 2004 and each fiscal year thereafter (the "Bonus"). 2 (c) Stock Options and Change of Control with Respect to Stock Options. (i) Concurrently with the execution and delivery of the Original Agreement, the Company granted to Employee an option (the "Option") to purchase Seven Hundred Fifty Thousand (750,000) shares (pre IPO stock split) of the Company's Common Stock, $0.0001 par value per share (the "Common Stock"), effective as of the date such grant was approved by the Company's Board of Directors (the "Grant Date"), pursuant to the terms of the form stock option agreement under the Company's 2001 Stock Incentive Plan (the "Plan"). A copy of such form stock option agreement is attached hereto as Exhibit B and incorporated in whole by this reference (the "Option Agreement"). The exercise price per share of the Option was Two Dollars and Fifty Cents ($2.50), which is the fair market value per share of the Common Stock that the Board approved as of the Grant Date. The shares subject to the Option become vested and exercisable in equal amounts on a monthly basis over a four year period, commencing on the Effective Date. The Option shall be an Incentive Stock Option (as defined in the Plan) to the maximum extent permitted by law. (ii) To the extent determined by the administrator(s) of the respective stock incentive plan(s) under which such options have been or will be granted, all non-vested options to purchase Common Stock granted to Employee will immediately become vested upon any Change in Control or Corporate Transaction that occurs during the term of Employee's employment with the Company. For these purposes, the terms "Change in Control" and "Corporate Transaction" shall have the meanings given to such terms in the respective stock incentive plan(s) under which such options have been or will be granted. (d) Benefits. Effective as of the Effective Date, Employee shall be eligible to participate in any and all benefits made generally available by the Company to executive officers of the Company in accordance with the benefit plans established by the Company, as such plans may be amended from time to time in the Company's sole discretion. Without limiting the generality of the foregoing, effective as of the Effective Date, Employee, and to the extent applicable, Employee's covered dependants, shall be eligible to participate in the Company's 401(k) program and shall receive immediate enrollment for health benefits to the maximum extent possible under the Company's benefit plans. (e) Vacation. Employee shall receive four (4) week of paid vacation time per calendar year, which amount shall increase in accordance with the Company's vacation policy for employees of the Company generally. Employee may take such accrued vacation at such times as are mutually convenient to Employee and the Company. In addition, Employee shall be entitled to all holidays provided under the Company's regular holiday schedule. (f) Business Expenses. The Company will reimburse Employee for reasonable and necessary expenses appropriately incurred by Employee in performing his duties and obligations to the Company in accordance with, and subject to, such policies and procedures regarding executive officer expenses generally as the Company may from time to time have in effect. 3 3. AT-WILL EMPLOYMENT (a) At-Will Termination by Company. The employment of Employee shall be "at-will" at all times. The Company may terminate Employee's employment with the Company at any time, without any advance notice, for any reason or no reason at all, notwithstanding anything to the contrary contained in or arising from any statements, policies or practices of the Company relating to the employment, discipline or termination of its employees. Upon and after the date of such termination, all obligations of the Company shall cease, except as set forth below in Section 3(c). (b) At-Will Termination by Employee. Employee may terminate employment with the Company at any time for any reason or no reason at all, upon two weeks' advance written notice. During such notice period Employee shall continue to diligently perform all of Employee's duties hereunder. The Company shall have the option, in its sole discretion, to make Employee's termination effective at any time prior to the end of such notice period as long as the Company pays Employee all compensation (including all accrued Base Salary (as then in effect), Bonus or vacation and subject to payment of all reimbursable expenses) incurred to which Employee is entitled up through the last day of the two-week notice period. Any and all options to acquire shares of Common Stock that have vested under the Option (or any other option that Employee shall receive while employed by the Company hereunder) shall continue to belong to Employee, subject to the terms of exercise set forth in the related option agreements. Thereafter all obligations of the Company shall cease, except as set forth below in Section 3(c). (c) Termination by Company without Cause or by Employee for Good Reason. (i) If the Company terminates Employee's employment other than for Cause (as defined below) or if Employee terminates his employment for Good Reason (as defined below) or if Employee shall die or become disabled as a direct result of business related activities within nine (9) months of the Effective Date, then (A) within five (5) business days of the date on which Employee's employment is terminated, the Company shall pay to Employee in one lump sum payment that aggregate amount of Base Salary and Bonus that the Company would have paid to Employee during the Severance Period if Employee had remained employed with the Company throughout the Severance Period, (B) during the Severance Period the Company shall continue to make available to Employee the benefits made generally available by the Company to its employees, to the extent permitted under applicable law and the terms of the benefit plans, and (C) all non-vested options to purchase Company stock granted to Employee will immediately become vested. If the date of Employee's termination is on or before the first anniversary of the Effective Date, then for purposes of this Agreement the term "Severance Period" shall mean the period beginning on the date of Employee's termination and ending on the third anniversary of the Effective Date. If the date of Employee's termination is after the first anniversary of the Effective Date, then for purposes of this Agreement the term "Severance Period" shall mean the twenty-four (24)-month period immediately following the date of Employee's termination. This Section 3(c)(i) shall supercede any term to the contrary in all stock option agreements entered into between the Company and Employee, whether now existing or hereinafter executed, and Employee and the 4 Company agree to execute and deliver any amendments to such agreements necessary to effectuate this Section 3(c)(i). (ii) The Company's termination of Employee's employment shall be for "Cause" if Employee: (A) exhibits willful misconduct or dishonesty which materially and adversely effects the business reputation of Employee or the Company; (B) is convicted of a felony; (C) acts (or fails to act) in the performance of his duties to the Company in bad (good) faith and to the Company's detriment; (D) materially breaches this Agreement or any other agreement with the Company, which if curable, is not cured to the Company's reasonable satisfaction within thirty (30) days of written notice thereof; or (E) engages in misconduct that is demonstrably and materially injurious to the Company, including, without limitation, willful and material failure to perform his duties as an officer or employee of the Company or excessive absenteeism unrelated to illness or vacation which if curable, is not cured to the Company's reasonable satisfaction within thirty (30) days of written notice thereof. (iii) For the purposes of this Agreement "Good Reason" means, the occurrence, without the express written consent of Employee, of any of the following events: (A) any reduction or diminution (except temporarily during any period of disability) in Employee's titles or positions assured in Section 1(a) under this Agreement, or any material diminution in Executive's authority, duties, responsibilities with the Company or change from reporting directly to Kevin Carmony; (B) a breach by the Company of any material provision of this Agreement, including, but not limited to, any reduction (other than a reduction (not to exceed ten percent (10%)) that applies, in equal percentages, to all officers (within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended) of the Company), in Employee's Base Salary or any material failure to timely pay any part of Employee's compensation (including, without limitation, Base Salary, and bonus) or to materially provide in the aggregate the level of benefits contemplated in this Agreement; (C) the failure of the Company to obtain and deliver to Employee a satisfactory written agreement from any successor to the Company to assume and agree to perform this Agreement; or (D) the Employee is asked to do anything that would be considered illegal or unethical. (iv) Employee's right to receive any payments or other benefits under this Section 3(c) is expressly conditioned upon: (A) Employee's execution of a general release of all claims as of the date of Employee's termination, in substantially the form attached to this Agreement as Exhibit A (the "General Release"); and (B) Employee's compliance with his obligations under this Agreement, and all other agreements between Employee and the Company. (v) Employee's right to receive any payments or other benefits under this Section 3(c) upon his death or disability shall automatically terminate concurrently with the establishment of any death or disability insurance plan or benefit (other than any existing group life or disability insurance program) approved by the Company's Board of Directors for the benefit of Employee. 5 4. TERMINATION OBLIGATIONS (a) Return of Property. Employee agrees that all property (including, without limitation, all equipment, tangible proprietary information, documents, records, notes, contracts and computer-generated materials) furnished to or created or prepared by Employee incident to Employee's employment belongs to the Company and shall be promptly returned to the Company upon termination of Employee's employment. (b) Cooperation. Following any termination of his employment, Employee shall perform any and all acts requested by the Company to ensure the orderly and efficient transition of Employee's duties. Such acts may include, but are not limited to: (i) participating in meetings or telephone conferences; (ii) reviewing, preparing or executing documents; and (iii) providing assistance in connection with any litigation, investigation or audit involving the Company, or any of its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations. 5. NON-DISCLOSURE OF THIRD-PARTY INFORMATION Employee represents and warrants and covenants that Employee shall not disclose to the Company, or use, or induce the Company to use, any proprietary information or trade secrets of others at any time, including but not limited to any proprietary information or trade secrets of any former employer, if any; and Employee acknowledges and agrees that any violation of this provision shall be grounds for Employee's immediate termination and could subject Employee to substantial civil liabilities and criminal penalties. Employee further specifically and expressly acknowledges that no officer or other employee or representative of the Company has requested or instructed Employee to disclose or use any such third-party proprietary information or trade secrets. 6. NONINTERFERENCE; NONSOLICITATION Employee acknowledges and agrees that the Company's relationships with its employees, consultants, customers, vendors and service providers are valuable business assets. Accordingly, Employee agrees that, during his employment with the Company and during the Severance Period after the date of any termination of such employment, he will not (for himself or for any third party) divert or attempt to divert from the Company any business, employee, consultant, customer, vendor or service provider, through solicitation or otherwise, or otherwise interfere with the Company's business or the Company's relationships with its employees, consultants, customers, vendors and service providers. 7. AMENDMENTS; WAIVERS; REMEDIES This Agreement may not be amended or waived except by a writing signed by Employee and by a duly authorized officer of the Company. Failure to exercise any right under this Agreement shall not constitute a waiver of such right. Any waiver of any breach of this Agreement shall not operate as a waiver of any subsequent breaches. All rights or remedies specified for a party herein shall be cumulative and in addition to all other rights and remedies of the party hereunder or under applicable law. 6 8. ASSIGNMENT; BINDING EFFECT (a) Assignment. The performance of Employee is personal hereunder, and Employee agrees that Employee shall have no right to assign and shall not assign or purport to assign any rights or obligations under this Agreement. This Agreement may be assigned or transferred by the Company and nothing in this Agreement shall prevent the consolidation, merger or sale of the Company or a sale of any or all or substantially all of its assets. (b) Binding Effect. Subject to the foregoing restriction on assignment by Employee, this Agreement shall inure to the benefit of and be binding upon each of the parties; the affiliates, officers, directors, agents, legal representatives, successors and assigns of the Company; and the heirs, devisees, spouses, legal representatives and successors of Employee. 9. NOTICES All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered: (a) by hand; (b) by a nationally recognized overnight courier service; or (c) by United States first class registered or certified mail, return receipt requested, to the principal address of the other party, as set forth below on the signature page of this Agreement. The date of notice shall be deemed to be the earlier of (i) actual receipt of notice by any permitted means, or (ii) five (5) business days following dispatch by overnight delivery service or the United States mail. Employee shall be obligated to notify the Company in writing of any change in Employee's address. Notice of change of address shall be effective only when provided in accordance with this Section 9. 10. SEVERABILITY If any provision of this Agreement shall be held by a court or arbitrator to be invalid, unenforceable or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Agreement shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law. 11. TAXES All amounts paid under this Agreement (including, without limitation, the Base Salary) shall be paid less all applicable state and federal tax withholdings and any other withholdings required by any applicable jurisdiction. 12. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to conflicts of law principles. 7 13. INTERPRETATION This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. Sections and section headings contained in this Agreement are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Agreement. Whenever the context requires, references to the singular shall include the plural and the plural the singular. 14. ATTORNEY'S FEES If any action at law or in equity is necessary to enforce or interpret the terms of this letter agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements, in addition to any other relief to which the party may be entitled. 15. OBLIGATIONS SURVIVE TERMINATION OF EMPLOYMENT The parties agree that any and all of the Company's or Employee's obligations under this Agreement shall survive the termination of this Agreement. 16. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement, but all of which together shall constitute one and the same instrument. 17. AUTHORITY Each party represents and warrants that such party has the right, power and authority to enter into and execute this Agreement and to perform and discharge all of the obligations hereunder; and that this Agreement constitutes the valid and legally binding agreement and obligation of such party and is enforceable in accordance with its terms. 18. ENTIRE AGREEMENT This Agreement, and the exhibits attached hereto, are intended to be the final, complete and exclusive statement of the terms of Employee's employment by the Company and may not be contradicted by evidence of any prior or contemporaneous statements or agreements. Notwithstanding the foregoing, this Agreement shall not supersede or otherwise affect any agreements previously or concurrently executed by Employee relating to the Company's proprietary information or intellectual property rights, or relating to Employee's non-interference or non-solicitation obligations relative to the Company's business or employees. To the extent that the practices, policies or procedures of the Company, now or in the future, apply to Employee and are inconsistent with the terms of this Agreement, the provisions of this Agreement shall control. Any subsequent change in Employee's duties, position or compensation shall not affect the validity or scope of this Agreement. 8 19. EMPLOYEE ACKNOWLEDGEMENT Employee acknowledges that Employee has had the opportunity to consult legal counsel concerning this Agreement, that Employee has read and understands this Agreement, that Employee is fully aware of its legal effect and that Employee has entered into this Agreement freely based on Employee's own judgment and not on any representations or promises other than those contained in this Agreement. [SIGNATURE PAGE TO EMPLOYMENT AGREEMENT FOLLOWS] 9 IN WITNESS WHEREOF, the parties hereby execute this First Amended and Restated Employment Agreement as of the Effective Date. LINDOWS, INC. EMPLOYEE: By: /s/ Michael Robertson /s/ Chad Olson ------------------------------ ------------------ Name: Michael Robertson Chad Olson Title: CEO CFO Address for notices: Address for notices: 9333 Genesee Ave., Suite 300 c/o Lindows, Inc. San Diego, CA 92121 9333 Genesee Ave., Suite 300 Attention: Kevin Carmony San Diego, CA 92121 [COUNTERPART SIGNATURE PAGE TO FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT] 10 EXHIBIT A FORM OF GENERAL RELEASE OF CLAIMS THIS GENERAL RELEASE OF CLAIMS (this "Release") is executed and delivered as of _____________, ____, by and between ______________, a Delaware corporation (the "Company"), and the individual named on the signature page hereof (the "Releasor"). Each of the Company and the Releasor is referred to herein as a "Party," and, collectively, as the "Parties." RECITALS WHEREAS, the Company and the Releasor previously executed and delivered a First Amended and Restated Employment Agreement (the "Employment Agreement"); WHEREAS, pursuant to terms and conditions of the Employment Agreement, the Releasor is entitled to certain severance payments in specific circumstances, subject to, among other things, Releasor's execution and delivery of this Release; and WHEREAS, by execution hereof, the Releasor acknowledges and agrees that: (i) this Release is a compromise of doubtful and disputed claims, if any, which remain untested; (ii) there has not been a trial or adjudication of any issue of law or fact herein; (iii) the terms and conditions of this Release are in no way to be construed as an admission of liability on the part of the Company; and (iv) the Company denies any liability and intends merely to avoid litigation with this Release; NOW, THEREFORE, in consideration of the foregoing recitals, and the representations, warranties, covenants and promises contained herein, the adequacy and sufficiency of which are hereby acknowledged, the Parties agree as follows: AGREEMENT 1. Release of the Company by the Releasor. (a) The Releasor does hereby unconditionally, irrevocably and absolutely release and discharge the Company, and its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations, from any and all loss, liability, claims, costs (including, without limitation, attorneys' fees), demands, causes of action, or suits of any type, whether in law and/or in equity, related directly or indirectly or in any way connected with any transaction, affairs or occurrences between them and arising on or prior to the date of this Release, including, but not limited to, the Releasor's employment with the Company, the termination of said employment and claims of emotional or physical distress related to such employment or termination, excepting only Releasor's rights (1) as a participant under various Company benefit and stock plans and programs; (2) to enforce obligations under his Employment Agreement and this Release; and (3) for defense and indemnification in the event of any claims for which such defense or indemnification would be appropriate under Cal. Labor A-1 Code sec. 2802, the California Corporations Code, or any Company bylaw or policy relating to indemnification. This Release specifically applies to any claims for age discrimination in employment, including, without limitation, any claims arising under the Age Discrimination In Employment Act or any other statutes or laws that govern discrimination in employment. (b) The Releasor irrevocably and absolutely agrees that he will not prosecute nor allow to be prosecuted on his behalf in any administrative agency, whether federal or state, or in any court, whether federal or state, any claim or demand of any type related to any of the matters released above, it being an intention of the Parties that with the execution by the Releasor of this Release, the Company, its officers, directors, employees, agents, attorneys, representatives, successors and/or assigns, and any related holding, parent and subsidiary corporations, will be absolutely, unconditionally and forever discharged of and from all obligations to or on behalf of the Releasor related in any way to the matters released above. (c) The Releasor does expressly waive all of the benefits and rights granted to him pursuant to any applicable law or regulation to the effect that: A general release does not extend to claims which the creditor does not know of or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. (d) The Releasor does certify that he has read all of this Release, and that he fully understands all of the same. The Releasor hereby expressly agrees that this Release shall extend and apply to all unknown, unsuspected and unanticipated injuries and damages, as well as those that are now known; provided that this Release shall not apply to Releasor's right to receive any severance payments or benefits during the Severance Period as defined in the Employment Agreement referred to herein.. (e) The Releasor further declares and represents that no promise, inducement or agreement not herein expressed has been made to him and that this Release contains the full and entire agreement between the Parties relating to the Releasor's release of claims, and that the terms of this Release are contractual and not a mere recital. 2. Review and Revocation Periods. The Releasor represents, acknowledges and agrees that: (i) the Company has advised him, in writing, to discuss this Release with an attorney, and that to the extent, if any, that the Releasor has desired, the Releasor has done so; (ii) the Company has given the Releasor twenty-one (21) days to review and consider this Release before signing it, and the Releasor understands that he may use as much of this twenty-one (21) day period as he wishes prior to signing; (iii) that no promise, representation, warranty or agreements not contained herein have been made by or with anyone to cause him to sign this Release; (iv) that he has read this Release in its entirety, and fully understands and is aware of its meaning, intent, contents and legal effect; and (v) he is executing this Release voluntarily, and free of any duress or coercion. The Parties acknowledge that for a period of seven (7) days following the execution of this Release, the Releasor may revoke this Release, and this Release shall not become effective or enforceable until the revocation period has expired. This Release shall become effective eight (8) days after it is signed by the Parties, and in the event the Parties do not sign on the same date, then this Release shall become effective eight (8) days after the date it is signed by the Releasor. A-2 3. Full and Complete Defense. This Release may be pleaded as a full and complete defense and may be used as the basis for an injunction against any action, suit or proceeding that may be prosecuted, instituted or attempted by the Releasor against the Company. 4. Tax Indemnification. As part of this Release, the Releasor agrees to indemnify, hold harmless, and, at the Company's request, defend the Company and its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations, from and against any and all loss, liability, claims, costs (including, without limitation, attorneys' fees), demands, causes of action, or suits of any type, whether in law and/or in equity, related directly or indirectly or in any way connected with any federal or state income or other taxes payable or claimed to be payable as a result of any consideration that the Company pays to the Releasor pursuant to this Release or the Employment Agreement. 5. Amendments, etc. This Release may not be amended or waived except by a writing signed by the Releasor and by a duly authorized officer of the Company. Failure to exercise any right under this Release shall not constitute a waiver of such right. Any waiver of any breach of this Release shall not operate as a waiver of any subsequent breaches. All rights or remedies specified for a Party herein shall be cumulative and in addition to all other rights and remedies of the Party hereunder or under applicable law. 6. Assignment; Binding Effect. The Releasor agrees that he shall have no right to assign and shall not assign or purport to assign any rights or obligations under this Release. This Release may be assigned or transferred by the Company; and nothing in this Release shall prevent the consolidation, merger or sale of the Company or a sale of any or all or substantially all of its assets. 7. Severability. If any provision of this Release shall be held by a court or arbitrator to be invalid, unenforceable or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Release shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law. 8. Governing Law. This Release shall be governed by and construed in accordance with the internal laws of the State of California, without regard to conflicts of law principles. 9. Interpretation. This Release shall be construed as a whole, according to its fair meaning, and not in favor of or against any Party. Sections and section headings contained in this Release are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Release. Whenever the context requires, references to the singular shall include the plural and the plural the singular. 10. Counterparts. This Release may be executed in any number of counterparts, each of which shall be deemed an original of this Release, but all of which together shall constitute one and the same instrument. A-3 11. Authority. Each Party represents and warrants that such Party has the right, power and authority to enter into and execute this Release and to perform and discharge all of the obligations hereunder; and that this Release constitutes the valid and legally binding agreement and obligation of such Party and is enforceable in accordance with its terms. 12. Entire Agreement. This Release is intended to be the final, complete and exclusive statement of the terms set forth herein and may not be contradicted by evidence of any prior or contemporaneous statements or agreements. 13. Opportunity to Consult Legal Counsel. The Releasor acknowledges that he has had the opportunity to consult legal counsel concerning this Release, that he has read and understands this Release, that he is fully aware of its legal effect and that he has entered into this Release freely based on his own judgment and not on any representations or promises other than those contained in this Release. [SIGNATURE PAGE FOLLOWS] A-4 IN WITNESS WHEREOF, the Parties hereby execute this Release as of the date first above written. ____________________, RELEASOR: By: --------------------------------------- -------------------------- Name: Signature Title: -------------------------- Print Name [SIGNATURE PAGE TO GENERAL RELEASE OF CLAIMS] A-5 EXHIBIT B OPTION AGREEMENT See attached. B-1 EX-10.19 15 a97792a4exv10w19.txt EXHIBIT 10.19 EXHIBIT 10.19 FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), is executed and delivered on August 5, 2004, to be effective as of April 1, 2004 (the "Effective Date"), by and between Lindows, Inc., a Delaware corporation (the "Company"), and Tom Welch, an individual resident of the State of California ("Employee"). RECITALS WHEREAS, the Company and Employee previously executed and delivered an Employment Agreement, dated as of April 1, 2004 (the "Original Agreement"); and WHEREAS, the Company and Employee previously executed and delivered a First Amendment to Employment Agreement, dated as of June 9, 2004 (the "First Amendment"); and WHEREAS, the Company and Employee now wish to enter into this Agreement in order to amend and restate the Original Agreement solely for the purposes of: (i) incorporating herein the terms and conditions set forth in the First Amendment; and (ii) modifying Employee's address set forth on the signature page hereof; NOW, THEREFORE, in consideration of the mutual covenants contained herein and Employee's continued employment pursuant to the terms of this Agreement, the Company and Employee, intending to be legally bound, hereby agree as follows: 1. POSITION AND RESPONSIBILITIES (a) Position. Employee is employed by the Company to render services to the Company in the position of Chief Technology Officer (CTO). Employee shall report directly to Kevin Carmony. Employee shall perform such duties and responsibilities as are normally related to such position, in accordance with industry standards, and any additional duties now or hereafter assigned to Employee by Kevin Carmony. Employee shall abide by the Company's rules, regulations and practices, as adopted or modified from time to time in the Company's sole discretion. Without limiting the generality of the foregoing, for so long as Employee holds the position of CTO, at the Company's request Employee shall execute all certifications (or back-up certifications) required to be executed by the Company's CTO (or person performing similar functions) pursuant to the regulations adopted by the Securities and Exchange Commission under Section 302 of the Sarbanes-Oxley Act of 2002 ("SOX"), all certifications, back-up certifications or similar items required to be executed by the Company's CTO (or equivalent thereof) pursuant to Section 404 of the SOX or the Company's independent auditors, and all certifications (or back-up certifications) required to be executed by the Company's CTO (or equivalent thereof) pursuant to Section 906 of SOX. (b) Other Activities. Except with the prior written consent of the Company, Employee shall not, during the term of this Agreement, (i) accept any other employment, or (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary gain) that might interfere with Employee's duties and responsibilities hereunder or create a conflict of interest with the Company. Upon receipt of prior approval by the COO and President, Employee may serve as a member of the board of directors of any company that does not compete directly with the Company; provided, however, that such restriction shall not apply to any of the three existing private company boards on which Employee serves at the time of the Effective Date. Notwithstanding the foregoing, Employee may also devote reasonable time and attention to civic, charitable or social organizations so long as such activities do not interfere with the performance of his duties to the Company. (c) No Conflict. Employee represents and warrants that Employee's execution of this Agreement, Employee's employment with the Company and the performance of Employee's proposed duties under this Agreement shall not violate any obligations Employee may have to any prior employer, or any other person or entity, including, without limitation, any obligations with respect to proprietary or confidential information of any prior employer, or any other person or entity. (d) Effectiveness of Certain Provisions. Notwithstanding anything to the contrary in this Agreement, Sections 2(a), 2(b) and 3(c) of this Agreement shall not be of any legal force or effect whatsoever unless and until the IPO Closing (as defined below), at which time such sections shall become effective unless Employee has ceased to be employed by the Company prior to the date of the IPO Closing or this Agreement has otherwise been terminated prior to the date of the IPO Closing. If Employee is still employed by the Company upon the IPO Closing, then within five (5) days after the IPO Closing the Company shall pay to Employee an amount equal to: (a) the Base Salary (as defined in Section 2(a) below) pro rated for the period of time between the Effective Date and the IPO Closing; minus (b) the amount of any other salary that the Company paid to Employee for the period of time between the Effective Date and the IPO Closing. As used in this Agreement, the term "IPO Closing" means the closing of the Company's initial public offering under the Securities Act of 1933, as amended. 2. COMPENSATION AND BENEFITS (a) Base Salary. In consideration of the services to be rendered under this Agreement, the Company shall pay to Employee a salary at the rate of Two Hundred Thousand Dollars ($200,000) per year, as adjusted as permitted in this subsection (the "Base Salary"). The Base Salary shall be paid in accordance with the Company's standard bi-weekly payroll practices. The Base Salary will be reviewed and adjusted from time to time in accordance with the Company's procedures for adjusting salaries for senior executives. (b) Bonus. Employee shall be eligible to receive an annual bonus of up to twenty-five percent (25%) of the Base Salary, subject to Employee's attainment of reasonable corporate goals and objectives to be established annually by the Company's COO and President (or a compensation committee) with the assistance and agreement of Employee, such goals and objectives to be agreed upon as soon as practicable with respect to fiscal year 2004 and each fiscal year thereafter (the "Bonus"). 2 (c) Stock Options and Change of Control with Respect to Stock Options. (i) Concurrently with the execution and delivery of the Original Agreement, the Company granted to Employee an option (the "Option") to purchase Seven Hundred Fifty Thousand (750,000) shares (pre IPO stock split) of the Company's Common Stock, $0.0001 par value per share (the "Common Stock"), effective as of the date such grant was approved by the Company's Board of Directors (the "Grant Date"), pursuant to the terms of the form stock option agreement under the Company's 2001 Stock Incentive Plan (the "Plan"). A copy of such form stock option agreement is attached hereto as Exhibit B and incorporated in whole by this reference (the "Option Agreement"). The exercise price per share of the Option was Two Dollars and Fifty Cents ($2.50), which is the fair market value per share of the Common Stock that the Board approved as of the Grant Date. The shares subject to the Option become vested and exercisable in equal amounts on a monthly basis over a four year period, commencing on the Effective Date. The Option shall be an Incentive Stock Option (as defined in the Plan) to the maximum extent permitted by law. (ii) To the extent determined by the administrator(s) of the respective stock incentive plan(s) under which such options have been or will be granted, all non-vested options to purchase Common Stock granted to Employee will immediately become vested upon any Change in Control or Corporate Transaction that occurs during the term of Employee's employment with the Company. For these purposes, the terms "Change in Control" and "Corporate Transaction" shall have the meanings given to such terms in the respective stock incentive plan(s) under which such options have been or will be granted. (d) Benefits. Effective as of the Effective Date, Employee shall be eligible to participate in any and all benefits made generally available by the Company to executive officers of the Company in accordance with the benefit plans established by the Company, as such plans may be amended from time to time in the Company's sole discretion. Without limiting the generality of the foregoing, effective as of the Effective Date, Employee, and to the extent applicable, Employee's covered dependants, shall be eligible to participate in the Company's 401(k) program and shall receive immediate enrollment for health benefits to the maximum extent possible under the Company's benefit plans. (e) Vacation. Employee shall receive four (4) week of paid vacation time per calendar year, which amount shall increase in accordance with the Company's vacation policy for employees of the Company generally. Employee may take such accrued vacation at such times as are mutually convenient to Employee and the Company. In addition, Employee shall be entitled to all holidays provided under the Company's regular holiday schedule. (f) Business Expenses. The Company will reimburse Employee for reasonable and necessary expenses appropriately incurred by Employee in performing his duties and obligations to the Company in accordance with, and subject to, such policies and procedures regarding executive officer expenses generally as the Company may from time to time have in effect. 3 3. AT-WILL EMPLOYMENT (a) At-Will Termination by Company. The employment of Employee shall be "at-will" at all times. The Company may terminate Employee's employment with the Company at any time, without any advance notice, for any reason or no reason at all, notwithstanding anything to the contrary contained in or arising from any statements, policies or practices of the Company relating to the employment, discipline or termination of its employees. Upon and after the date of such termination, all obligations of the Company shall cease, except as set forth below in Section 3(c). (b) At-Will Termination by Employee. Employee may terminate employment with the Company at any time for any reason or no reason at all, upon two weeks' advance written notice. During such notice period Employee shall continue to diligently perform all of Employee's duties hereunder. The Company shall have the option, in its sole discretion, to make Employee's termination effective at any time prior to the end of such notice period as long as the Company pays Employee all compensation (including all accrued Base Salary (as then in effect), Bonus or vacation and subject to payment of all reimbursable expenses) incurred to which Employee is entitled up through the last day of the two-week notice period. Any and all options to acquire shares of Common Stock that have vested under the Option (or any other option that Employee shall receive while employed by the Company hereunder) shall continue to belong to Employee, subject to the terms of exercise set forth in the related option agreements. Thereafter all obligations of the Company shall cease, except as set forth below in Section 3(c). (c) Termination by Company without Cause or by Employee for Good Reason. (i) If the Company terminates Employee's employment other than for Cause (as defined below) or if Employee terminates his employment for Good Reason (as defined below) or if Employee shall die or become disabled as a direct result of business related activities within nine (9) months of the Effective Date, then (A) within five (5) business days of the date on which Employee's employment is terminated, the Company shall pay to Employee in one lump sum payment that aggregate amount of Base Salary and Bonus that the Company would have paid to Employee during the Severance Period if Employee had remained employed with the Company throughout the Severance Period, (B) during the Severance Period the Company shall continue to make available to Employee the benefits made generally available by the Company to its employees, to the extent permitted under applicable law and the terms of the benefit plans, and (C) all non-vested options to purchase Company stock granted to Employee will immediately become vested. If the date of Employee's termination is on or before the first anniversary of the Effective Date, then for purposes of this Agreement the term "Severance Period" shall mean the period beginning on the date of Employee's termination and ending on the third anniversary of the Effective Date. If the date of Employee's termination is after the first anniversary of the Effective Date, then for purposes of this Agreement the term "Severance Period" shall mean the twenty-four (24)-month period immediately following the date of Employee's termination. This Section 3(c)(i) shall supercede any term to the contrary in all stock option agreements entered into between the Company and Employee, whether now existing or hereinafter executed, and Employee and the 4 Company agree to execute and deliver any amendments to such agreements necessary to effectuate this Section 3(c)(i). (ii) The Company's termination of Employee's employment shall be for "Cause" if Employee: (A) exhibits willful misconduct or dishonesty which materially and adversely effects the business reputation of Employee or the Company; (B) is convicted of a felony; (C) acts (or fails to act) in the performance of his duties to the Company in bad (good) faith and to the Company's detriment; (D) materially breaches this Agreement or any other agreement with the Company, which if curable, is not cured to the Company's reasonable satisfaction within thirty (30) days of written notice thereof; or (E) engages in misconduct that is demonstrably and materially injurious to the Company, including, without limitation, willful and material failure to perform his duties as an officer or employee of the Company or excessive absenteeism unrelated to illness or vacation which if curable, is not cured to the Company's reasonable satisfaction within thirty (30) days of written notice thereof. (iii) For the purposes of this Agreement "Good Reason" means, the occurrence, without the express written consent of Employee, of any of the following events: (A) any reduction or diminution (except temporarily during any period of disability) in Employee's titles or positions assured in Section 1(a) under this Agreement, or any material diminution in Executive's authority, duties, responsibilities with the Company or change from reporting directly to Kevin Carmony; (B) a breach by the Company of any material provision of this Agreement, including, but not limited to, any reduction (other than a reduction (not to exceed ten percent (10%)) that applies, in equal percentages, to all officers (within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended) of the Company), in Employee's Base Salary or any material failure to timely pay any part of Employee's compensation (including, without limitation, Base Salary, and bonus) or to materially provide in the aggregate the level of benefits contemplated in this Agreement; (C) the failure of the Company to obtain and deliver to Employee a satisfactory written agreement from any successor to the Company to assume and agree to perform this Agreement; or (D) the Employee is asked to do anything that would be considered illegal or unethical. (iv) Employee's right to receive any payments or other benefits under this Section 3(c) is expressly conditioned upon: (A) Employee's execution of a general release of all claims as of the date of Employee's termination, in substantially the form attached to this Agreement as Exhibit A (the "General Release"); and (B) Employee's compliance with his obligations under this Agreement, and all other agreements between Employee and the Company. (v) Employee's right to receive any payments or other benefits under this Section 3(c) upon his death or disability shall automatically terminate concurrently with the establishment of any death or disability insurance plan or benefit (other than any existing group life or disability insurance program) approved by the Company's Board of Directors for the benefit of Employee. 5 4. TERMINATION OBLIGATIONS (a) Return of Property. Employee agrees that all property (including, without limitation, all equipment, tangible proprietary information, documents, records, notes, contracts and computer-generated materials) furnished to or created or prepared by Employee incident to Employee's employment belongs to the Company and shall be promptly returned to the Company upon termination of Employee's employment. (b) Cooperation. Following any termination of his employment, Employee shall perform any and all acts requested by the Company to ensure the orderly and efficient transition of Employee's duties. Such acts may include, but are not limited to: (i) participating in meetings or telephone conferences; (ii) reviewing, preparing or executing documents; and (iii) providing assistance in connection with any litigation, investigation or audit involving the Company, or any of its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations. 5. NON-DISCLOSURE OF THIRD-PARTY INFORMATION Employee represents and warrants and covenants that Employee shall not disclose to the Company, or use, or induce the Company to use, any proprietary information or trade secrets of others at any time, including but not limited to any proprietary information or trade secrets of any former employer, if any; and Employee acknowledges and agrees that any violation of this provision shall be grounds for Employee's immediate termination and could subject Employee to substantial civil liabilities and criminal penalties. Employee further specifically and expressly acknowledges that no officer or other employee or representative of the Company has requested or instructed Employee to disclose or use any such third-party proprietary information or trade secrets. 6. NONINTERFERENCE; NONSOLICITATION Employee acknowledges and agrees that the Company's relationships with its employees, consultants, customers, vendors and service providers are valuable business assets. Accordingly, Employee agrees that, during his employment with the Company and during the Severance Period after the date of any termination of such employment, he will not (for himself or for any third party) divert or attempt to divert from the Company any business, employee, consultant, customer, vendor or service provider, through solicitation or otherwise, or otherwise interfere with the Company's business or the Company's relationships with its employees, consultants, customers, vendors and service providers. 7. AMENDMENTS; WAIVERS; REMEDIES This Agreement may not be amended or waived except by a writing signed by Employee and by a duly authorized officer of the Company. Failure to exercise any right under this Agreement shall not constitute a waiver of such right. Any waiver of any breach of this Agreement shall not operate as a waiver of any subsequent breaches. All rights or remedies specified for a party herein shall be cumulative and in addition to all other rights and remedies of the party hereunder or under applicable law. 6 8. ASSIGNMENT; BINDING EFFECT (a) Assignment. The performance of Employee is personal hereunder, and Employee agrees that Employee shall have no right to assign and shall not assign or purport to assign any rights or obligations under this Agreement. This Agreement may be assigned or transferred by the Company and nothing in this Agreement shall prevent the consolidation, merger or sale of the Company or a sale of any or all or substantially all of its assets. (b) Binding Effect. Subject to the foregoing restriction on assignment by Employee, this Agreement shall inure to the benefit of and be binding upon each of the parties; the affiliates, officers, directors, agents, legal representatives, successors and assigns of the Company; and the heirs, devisees, spouses, legal representatives and successors of Employee. 9. NOTICES All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered: (a) by hand; (b) by a nationally recognized overnight courier service; or (c) by United States first class registered or certified mail, return receipt requested, to the principal address of the other party, as set forth below on the signature page of this Agreement. The date of notice shall be deemed to be the earlier of (i) actual receipt of notice by any permitted means, or (ii) five (5) business days following dispatch by overnight delivery service or the United States mail. Employee shall be obligated to notify the Company in writing of any change in Employee's address. Notice of change of address shall be effective only when provided in accordance with this Section 9. 10. SEVERABILITY If any provision of this Agreement shall be held by a court or arbitrator to be invalid, unenforceable or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Agreement shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law. 11. TAXES All amounts paid under this Agreement (including, without limitation, the Base Salary) shall be paid less all applicable state and federal tax withholdings and any other withholdings required by any applicable jurisdiction. 12. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to conflicts of law principles. 7 13. INTERPRETATION This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. Sections and section headings contained in this Agreement are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Agreement. Whenever the context requires, references to the singular shall include the plural and the plural the singular. 14. ATTORNEY'S FEES If any action at law or in equity is necessary to enforce or interpret the terms of this letter agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements, in addition to any other relief to which the party may be entitled. 15. OBLIGATIONS SURVIVE TERMINATION OF EMPLOYMENT The parties agree that any and all of the Company's or Employee's obligations under this Agreement shall survive the termination of this Agreement. 16. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement, but all of which together shall constitute one and the same instrument. 17. AUTHORITY Each party represents and warrants that such party has the right, power and authority to enter into and execute this Agreement and to perform and discharge all of the obligations hereunder; and that this Agreement constitutes the valid and legally binding agreement and obligation of such party and is enforceable in accordance with its terms. 18. ENTIRE AGREEMENT This Agreement, and the exhibits attached hereto, are intended to be the final, complete and exclusive statement of the terms of Employee's employment by the Company and may not be contradicted by evidence of any prior or contemporaneous statements or agreements. Notwithstanding the foregoing, this Agreement shall not supersede or otherwise affect any agreements previously or concurrently executed by Employee relating to the Company's proprietary information or intellectual property rights, or relating to Employee's non-interference or non-solicitation obligations relative to the Company's business or employees. To the extent that the practices, policies or procedures of the Company, now or in the future, apply to Employee and are inconsistent with the terms of this Agreement, the provisions of this Agreement shall control. Any subsequent change in Employee's duties, position or compensation shall not affect the validity or scope of this Agreement. 8 19. EMPLOYEE ACKNOWLEDGEMENT Employee acknowledges that Employee has had the opportunity to consult legal counsel concerning this Agreement, that Employee has read and understands this Agreement, that Employee is fully aware of its legal effect and that Employee has entered into this Agreement freely based on Employee's own judgment and not on any representations or promises other than those contained in this Agreement. [SIGNATURE PAGE TO EMPLOYMENT AGREEMENT FOLLOWS] 9 IN WITNESS WHEREOF, the parties hereby execute this First Amended and Restated Employment Agreement as of the Effective Date. LINDOWS, INC. EMPLOYEE: By: /s/ Michael Robertson /s/ Tom Welch ----------------------------------- -------------------------------------- Name: Michael Robertson Tom Welch Title: CEO CTO Address for notices: Address for notices: 9333 Genesee Ave., Suite 300 c/o Lindows, Inc. San Diego, CA 92121 9333 Genesee Ave., Suite 300 Attention: Kevin Carmony San Diego, CA 92121 [COUNTERPART SIGNATURE PAGE TO FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT] 10 EXHIBIT A FORM OF GENERAL RELEASE OF CLAIMS THIS GENERAL RELEASE OF CLAIMS (this "Release") is executed and delivered as of _____________, ____, by and between ______________, a Delaware corporation (the "Company"), and the individual named on the signature page hereof (the "Releasor"). Each of the Company and the Releasor is referred to herein as a "Party," and, collectively, as the "Parties." RECITALS WHEREAS, the Company and the Releasor previously executed and delivered a First Amended and Restated Employment Agreement (the "Employment Agreement"); WHEREAS, pursuant to terms and conditions of the Employment Agreement, the Releasor is entitled to certain severance payments in specific circumstances, subject to, among other things, Releasor's execution and delivery of this Release; and WHEREAS, by execution hereof, the Releasor acknowledges and agrees that: (i) this Release is a compromise of doubtful and disputed claims, if any, which remain untested; (ii) there has not been a trial or adjudication of any issue of law or fact herein; (iii) the terms and conditions of this Release are in no way to be construed as an admission of liability on the part of the Company; and (iv) the Company denies any liability and intends merely to avoid litigation with this Release; NOW, THEREFORE, in consideration of the foregoing recitals, and the representations, warranties, covenants and promises contained herein, the adequacy and sufficiency of which are hereby acknowledged, the Parties agree as follows: AGREEMENT 1. Release of the Company by the Releasor. (a) The Releasor does hereby unconditionally, irrevocably and absolutely release and discharge the Company, and its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations, from any and all loss, liability, claims, costs (including, without limitation, attorneys' fees), demands, causes of action, or suits of any type, whether in law and/or in equity, related directly or indirectly or in any way connected with any transaction, affairs or occurrences between them and arising on or prior to the date of this Release, including, but not limited to, the Releasor's employment with the Company, the termination of said employment and claims of emotional or physical distress related to such employment or termination, excepting only Releasor's rights (1) as a participant under various Company benefit and stock plans and programs; (2) to enforce obligations under his Employment Agreement and this Release; and (3) for defense and indemnification in the event of any claims for which such defense or indemnification would be appropriate under Cal. Labor A-1 Code sec. 2802, the California Corporations Code, or any Company bylaw or policy relating to indemnification. This Release specifically applies to any claims for age discrimination in employment, including, without limitation, any claims arising under the Age Discrimination In Employment Act or any other statutes or laws that govern discrimination in employment. (b) The Releasor irrevocably and absolutely agrees that he will not prosecute nor allow to be prosecuted on his behalf in any administrative agency, whether federal or state, or in any court, whether federal or state, any claim or demand of any type related to any of the matters released above, it being an intention of the Parties that with the execution by the Releasor of this Release, the Company, its officers, directors, employees, agents, attorneys, representatives, successors and/or assigns, and any related holding, parent and subsidiary corporations, will be absolutely, unconditionally and forever discharged of and from all obligations to or on behalf of the Releasor related in any way to the matters released above. (c) The Releasor does expressly waive all of the benefits and rights granted to him pursuant to any applicable law or regulation to the effect that: A general release does not extend to claims which the creditor does not know of or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. (d) The Releasor does certify that he has read all of this Release, and that he fully understands all of the same. The Releasor hereby expressly agrees that this Release shall extend and apply to all unknown, unsuspected and unanticipated injuries and damages, as well as those that are now known; provided that this Release shall not apply to Releasor's right to receive any severance payments or benefits during the Severance Period as defined in the Employment Agreement referred to herein.. (e) The Releasor further declares and represents that no promise, inducement or agreement not herein expressed has been made to him and that this Release contains the full and entire agreement between the Parties relating to the Releasor's release of claims, and that the terms of this Release are contractual and not a mere recital. 2. Review and Revocation Periods. The Releasor represents, acknowledges and agrees that: (i) the Company has advised him, in writing, to discuss this Release with an attorney, and that to the extent, if any, that the Releasor has desired, the Releasor has done so; (ii) the Company has given the Releasor twenty-one (21) days to review and consider this Release before signing it, and the Releasor understands that he may use as much of this twenty-one (21) day period as he wishes prior to signing; (iii) that no promise, representation, warranty or agreements not contained herein have been made by or with anyone to cause him to sign this Release; (iv) that he has read this Release in its entirety, and fully understands and is aware of its meaning, intent, contents and legal effect; and (v) he is executing this Release voluntarily, and free of any duress or coercion. The Parties acknowledge that for a period of seven (7) days following the execution of this Release, the Releasor may revoke this Release, and this Release shall not become effective or enforceable until the revocation period has expired. This Release shall become effective eight (8) days after it is signed by the Parties, and in the event the Parties do not sign on the same date, then this Release shall become effective eight (8) days after the date it is signed by the Releasor. A-2 3. Full and Complete Defense. This Release may be pleaded as a full and complete defense and may be used as the basis for an injunction against any action, suit or proceeding that may be prosecuted, instituted or attempted by the Releasor against the Company. 4. Tax Indemnification. As part of this Release, the Releasor agrees to indemnify, hold harmless, and, at the Company's request, defend the Company and its affiliates, directors, officers, employees, agents, attorneys, representatives, stockholders, insurers, divisions, successors and/or assigns and any related holding, parent or subsidiary corporations, from and against any and all loss, liability, claims, costs (including, without limitation, attorneys' fees), demands, causes of action, or suits of any type, whether in law and/or in equity, related directly or indirectly or in any way connected with any federal or state income or other taxes payable or claimed to be payable as a result of any consideration that the Company pays to the Releasor pursuant to this Release or the Employment Agreement. 5. Amendments, etc. This Release may not be amended or waived except by a writing signed by the Releasor and by a duly authorized officer of the Company. Failure to exercise any right under this Release shall not constitute a waiver of such right. Any waiver of any breach of this Release shall not operate as a waiver of any subsequent breaches. All rights or remedies specified for a Party herein shall be cumulative and in addition to all other rights and remedies of the Party hereunder or under applicable law. 6. Assignment; Binding Effect. The Releasor agrees that he shall have no right to assign and shall not assign or purport to assign any rights or obligations under this Release. This Release may be assigned or transferred by the Company; and nothing in this Release shall prevent the consolidation, merger or sale of the Company or a sale of any or all or substantially all of its assets. 7. Severability. If any provision of this Release shall be held by a court or arbitrator to be invalid, unenforceable or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Release shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law. 8. Governing Law. This Release shall be governed by and construed in accordance with the internal laws of the State of California, without regard to conflicts of law principles. 9. Interpretation. This Release shall be construed as a whole, according to its fair meaning, and not in favor of or against any Party. Sections and section headings contained in this Release are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Release. Whenever the context requires, references to the singular shall include the plural and the plural the singular. 10. Counterparts. This Release may be executed in any number of counterparts, each of which shall be deemed an original of this Release, but all of which together shall constitute one and the same instrument. A-3 11. Authority. Each Party represents and warrants that such Party has the right, power and authority to enter into and execute this Release and to perform and discharge all of the obligations hereunder; and that this Release constitutes the valid and legally binding agreement and obligation of such Party and is enforceable in accordance with its terms. 12. Entire Agreement. This Release is intended to be the final, complete and exclusive statement of the terms set forth herein and may not be contradicted by evidence of any prior or contemporaneous statements or agreements. 13. Opportunity to Consult Legal Counsel. The Releasor acknowledges that he has had the opportunity to consult legal counsel concerning this Release, that he has read and understands this Release, that he is fully aware of its legal effect and that he has entered into this Release freely based on his own judgment and not on any representations or promises other than those contained in this Release. [SIGNATURE PAGE FOLLOWS] A-4 IN WITNESS WHEREOF, the Parties hereby execute this Release as of the date first above written. , RELEASOR: - -------------------- By: ----------------------------------- -------------------------------------- Name: Signature Title: -------------------------------------- Print Name [SIGNATURE PAGE TO GENERAL RELEASE OF CLAIMS] A-5 EXHIBIT B OPTION AGREEMENT See attached. B-1 EX-23.1 16 a97792a4exv23w1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the use in this Registration Statement on Amendment No. 4 to Form S-1 of our report dated April 19, 2004, except for Note 12 which is as of July 16, 2004, relating to the financial statements and the financial statement schedule of Lindows, Inc., which appears in such Registration Statement. 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Delaware	7372	33-0976700
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)


THE OFFERING	PER SHARE	TOTAL


Public Offering Price	$	$
Underwriting Discount	$	$
Proceeds to Lindows	$	$



	As of March 31, 2004
	(unaudited) (restated)(1)

							Pro forma
	Actual			Pro forma			As adjusted

Balance Sheet Data:
Cash and cash equivalents	$	5,150,495		$	5,150,495		$	44,320,495
Working capital	$	2,404,302		$	2,404,302		$	41,574,302
Total assets	$	6,064,623		$	6,064,623		$	45,234,623
Total indebtedness	$	10,416,792		$	10,416,792		$	10,416,792
Convertible preferred stock	$	5,275		$	—		$	—
Stockholders’ equity (deficit)	$	(7,474,287	)	$	(7,474,287	)	$	31,695,713



		As of March 31, 2004
		(unaudited) (restated)(1)

								Pro forma
		Actual			Pro forma			As adjusted

Cash and cash equivalents		$	5,150,495		$	5,150,495		$	44,320,495

Long-term debt, including accrued but unpaid interest of $416,792			10,416,792			10,416,792			10,416,792
Stockholders’ equity (deficit):
Series A Convertible Preferred stock, $0.0001 par value; 80,000,000 shares authorized and 52,750,000 shares issued and outstanding, actual; 80,000,000 shares authorized and no shares issued and outstanding, pro forma; 10,000,000 shares authorized and no shares issued and outstanding, pro forma as adjusted			5,275			—			—
Common stock, $0.0001 par value; 70,000,000 shares authorized and 1,803,452 shares issued and outstanding, actual; 70,000,000 shares authorized and 16,255,506 shares issued and outstanding, pro forma; 100,000,000 shares authorized and 20,655,506 shares issued and outstanding, pro forma as adjusted			180			1,626			2,066
Additional paid in capital			6,454,340			6,458,169			45,627,729
Deferred compensation			(453,173	)		(453,173	)		(453,173	)
Accumulated deficit			(13,480,909	)		(13,480,909	)		(13,480,909	)

	Total stockholders’ equity (deficit)		(7,474,287	)		(7,474,287	)		31,695,713

Total capitalization		$	2,942,505		$	2,942,505		$	42,112,505


Assumed initial public offering price per share						$10.00
	Historical net tangible book value per share as of March 31, 2004	$	(4.14	)
	Increase per share due to conversion of all shares of preferred stock		3.68

	Pro forma net tangible book value per share as of March 31, 2004	$	(0.46	)
	Increase in net tangible book value per share attributable to new investors		1.99

Pro forma net tangible book value per share after this offering						1.53

Dilution per share to new investors					$	8.47


Steven G. Rowles, Esq. Clint B. Davis, Esq. Morrison & Foerster LLP 3811 Valley Centre Drive, Suite 500 San Diego, California 92130 (858) 720-5100		Michael S. Umansky, Esq. General Counsel Lindows, Inc. 9333 Genesee Ave., 3rd Floor San Diego, California 92121 (858) 587-6700		Matthew W. Sonsini, Esq. Clay B. Simpson, Esq. Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, California 94304 (650) 493-9300


	Page

Prospectus Summary		1
Risk Factors		7
Special Note Regarding Forward-Looking Statements		22
Use of Proceeds		23
Dividend Policy		23
Capitalization		24
Dilution		25
Selected Financial Data		27
Management’s Discussion and Analysis of Financial Condition and Results Of Operations		30
Business		51
Management		70
Certain Relationships and Related Transactions		85
Principal Stockholders		86
Description of Capital Stock		88
Material U.S. Federal Income Tax Consequences to Non-U.S. Holders		92
Shares Eligible for Future Sale		96
Plan of Distribution		98
Legal Matters		101
Experts		101
Where You Can Find More Information		101
Index to Financial Statements		F-1
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 10.8
EXHIBIT 10.9
EXHIBIT 10.10
EXHIBIT 10.11
EXHIBIT 10.12
EXHIBIT 10.13
EXHIBIT 10.14
EXHIBIT 10.16
EXHIBIT 10.17
EXHIBIT 10.18
EXHIBIT 10.19
EXHIBIT 23.1


	•	Easy to use — The Linspire operating system presents the user with an intuitive and comfortable graphical user interface.

	•	A full-featured platform — The Linspire operating system is configured to perform many common tasks such as email and Internet browsing.

	•	CNR equipped — Our proprietary CNR technology allows users to license, install, manage, update, and configure programs available from our software Warehouse on the Linspire.com website.

	•	Hardware compatible — We believe the Linspire operating system is able to work with many of the most popular PCs and peripheral devices on the market today, including laser and inkjet printers, displays, digital cameras, network cards, and storage devices.

	•	File compatible — Users can work with many common file types used by Microsoft’s office suite.

	•	Stable and secure — We believe the Linspire operating system is currently less prone to virus attacks than other desktop operating systems not based on Linux.


	•	broaden distribution of the Linspire operating system by making it available on a large scale, quickly and at a low cost;

	•	use CNR technology to drive revenues from our value-added software and services;

	•	focus on products and services primarily for desktop and laptop users;

	•	support and leverage the open source community;

	•	increase our penetration into international and emerging markets; and

	•	increase awareness of Linspire and our other brands.


	•	1,053,391 shares of our common stock subject to outstanding options under our 2001 stock incentive plan, having a weighted average exercise price of $0.04 per share; and

	•	510,452 shares of our common stock reserved for future issuance under our 2001 stock incentive plan.


	•	a 1-for-3.65 reverse stock split effected in July 2004;

	•	the conversion of all our outstanding preferred stock into 14,452,054 shares of common stock, which shall occur automatically upon the closing of this offering pursuant to the terms of our currently effective amended and restated certificate of incorporation;

	•	the adoption of our restated certificate of incorporation and restated bylaws to be effective upon the closing of this offering; and

	•	no exercise of the underwriters’ over-allotment option.



		Shares purchased					Total consideration					Average
												price per
		Number		Percent			Amount		Percent			share

Existing stockholders			16,255,506		79	%	$	5,062,180		10	%	$	0.31
New investors			4,400,000		21			44,000,000		90			10.00

	Total		20,655,506		100.0	%	$	49,062,180	$	100.0	%



	As of December 31,								As of
									March 31,
	2001		2002			2003			2004(1)

									(unaudited)
									(restated)
Balance Sheet Data:
Cash and cash equivalents	$	2,906,193	$	113,318		$	250,720		$	5,150,495
Working capital	$	3,381,838	$	(1,045,068	)	$	(1,776,555	)	$	2,404,302
Total assets	$	4,183,735	$	1,027,999		$	933,737		$	6,064,623
Accounts payable and accrued expenses	$	235,645	$	449,806		$	404,943		$	986,611
Total indebtedness	$	—	$	1,499,261		$	4,703,181		$	10,416,792
Convertible preferred stock	$	5,275	$	5,275		$	5,275		$	5,275
Stockholders’ equity (deficit)	$	3,882,405	$	(2,457,799	)	$	(6,093,852	)	$	(7,474,287	)



	Year ended			Three months ended
	December 31,			March 31,
	2003			2003			2004

							(unaudited)
				(unaudited)			(restated)
Net loss	$	(4,075,202	)	$	(1,355,731	)	$	(1,622,104	)

Weighted average common shares outstanding		1,435,387			1,213,898			1,727,917
Common shares issuable upon conversion of outstanding preferred shares		14,452,054			14,452,054			14,452,054

Total weighted average shares outstanding used in computing pro forma net loss per share		15,887,441			15,665,952			16,179,971

Pro forma net loss per share	$	(0.26	)	$	(0.09	)	$	(0.10	)



	Year Ended				Three Months
	December 31,				Ended March 31,

	2002		2003		2003		2004

							(unaudited)
					(unaudited)		(restated)
Operating system sales	$	59,786	$	1,618,596	$	278,492	$	790,180
Other product sales		3,345		455,406		33,181		239,881

	$	63,131	$	2,074,002	$	311,673	$	1,030,061


Roth Capital Partners	JMP Securities


Merriman Curhan Ford & Co.	Kaufman Bros., L.P.


	*Sources of Revenues*


	Channel Partner Revenues



	Payments due by period

			Less than						More than
	Total		1 Year		1 – 3 years		3 – 5 Years		5 Years

Contractual Obligations:
Operating lease	$	1,322,460	$	512,217	$	810,243	$	—	$	—

Note payable (including accrued interest)*		10,416,792		—		10,416,792		—		—

Total	$	11,739,252	$	512,217	$	11,227,035	$	—	$	—


Debian — Linux distribution		Nvu — Web authoring system
GAIM — Instant messenger client		Reiser4 — File system
KDE — Graphical user interface		WINE — Microsoft Windows compatibility environment
Mozilla — Internet web browser and email


File type	Extension		Program(s) used

Microsoft Excel Spreadsheet		.xls	StarOffice, OpenOffice
Microsoft Word Document		.doc	StarOffice, OpenOffice
Microsoft PowerPoint Presentation		.ppt	StarOffice, OpenOffice
StarOffice Text Document		.sxw	StarOffice, OpenOffice
StarOffice Spreadsheet		.sxc	StarOffice, OpenOffice
StarOffice Presentation		.sxi	StarOffice, OpenOffice
Adobe Acrobat File		.pdf	Adobe Acrobat Reader
Real Audio Stream		.ram	RealPlayer
Real Video File		.rm	RealPlayer
Quicktime Movie File (External)		.mov	MPlayer,Xine
Media Type mpeg-1 (External)		.mpg	MPlayer,Xine
Media Type mpeg-1 (Inline)		.mpg	MPlayer,Xine
Media Type mpeg-4		.mp4	MPlayer,Xine
Media Type avi		.avi	MPlayer,Xine
MS Media Type wmv (External)		.wmv	MPlayer,Xine


Software category	Description	Example programs

Audio and MP3	Music authoring, playback and CD creation software	Lsongs, XMMS, Sweep, K3B
Business & Finance	Office productivity programs including word processors, spreadsheets and presentation software	StarOffice, OpenOffice, HancomSheet, Moneydance, GnuCash, Scribus
Desktop Enhancements	Programs to add functionality or customize the Linspire operating system user interface	Elements Wallpaper, Language translations for the Linspire operating system
Games	Entertainment software	Doom, Quake II, Tetris, Math Scrabble
Home & Education	Teaching tools and programs for hobbies	Tux Typing, LargoRecipes
Internet	Browsers, Internet messaging and other communications software	Opera, LimeWire, Ximian Evolution
Multimedia & Design	Development and visual display software	RealPlayer, Acrobat Reader, GIMP, Digikam
Software Development	Tools for programmers	KDevelop, Qt Designer, Nano
Utilities	Programs to increase productivity of a computer and its peripherals	Screen Capture, Citrix Client
Web Authoring	Tools to create web pages and websites	Nvu, Quanta Plus, Bluefish


Name	Age		Position(s)

Directors and Executive Officers
Michael L. Robertson		37	Chairman and Chief Executive Officer
Kevin B. Carmony		44	President, Chief Operating Officer and Director
Chad H. Olson		45	Chief Financial Officer
Thomas C. Welch		41	Chief Technology Officer
Rex E. Bosen(1)(2)(3)		45	Director
David S. Buzby(1)(2)(3)		44	Director
Robin D. Richards(1)(2)(3)		47	Director

Key Employees
Larry M. Kettler		39	Vice President of Global Sales
C. Kevin La Rue		41	Vice President of Marketing
Randy D. Linnell		43	Vice President of Customer Satisfaction
William A. Long		39	Corporate Controller
Michael S. Umansky		35	General Counsel


								Long term
								compensation
		Annual compensation
								Securities
						Other annual		underlying		All other
Name and principal position		Salary		Bonus		compensation		options		compensation

Michael L. Robertson		$	14,040	$	—	$	—		—	$	—
	Chief Executive Officer
Kevin B. Carmony			99,000		25,000		—		—		—
	President and Chief Operating Officer
Chad H. Olson(1)			65,100		5,000		—		273,973		—
	Chief Financial Officer
Thomas C. Welch			140,000		10,000		—		—		—
	Chief Technology Officer



	Option grants in last fiscal year
										Potential realizable value
			Percent of							at assumed annual rates
	Number of		total options							of stock price
	securities		granted to							appreciation for options
	underlying		employees			Exercise				terms(1)
	options		in fiscal			price per		Expiration
Name	granted		year			share		date		5%		10%

Michael L. Robertson		—		—			—		—		—		—
Kevin B. Carmony		—		—			—		—		—		—
Chad H. Olson		273,973		59	%	$	0.0347		04/01/2013	$	4,454,512	$	7,114,373
Thomas C. Welch		—		—			—		—		—		—



					Number of securities
					underlying unexercised				Value of unexercised
					options at				in-the-money options at
	Shares				December 31, 2003				December 31, 2003
	acquired		Value
Name	on exercise		realized		Exercisable		Unexercisable		Exercisable		Unexercisable

Michael L. Robertson		—		—		—		—		—		—
Kevin B. Carmony		—		—		—		—		—		—
Chad H. Olson		—		—		68,493		205,480	$	682,553	$	2,047,670
Thomas C. Welch		—		—		136,986		136,987	$	1,365,107	$	1,365,116



			Percentage beneficially owned
Name and address
of beneficial owner	Shares beneficially owned		Before offering			After offering

Executive Officers and Directors:
Michael L. Robertson(1)		13,232,774		80.8	%		63.7	%
Kevin B. Carmony(2)		867,160		5.3			4.2
Chad H. Olson(3)		291,096		1.8			1.4
Thomas C. Welch(4)		291,096		1.8			1.4
Rex E. Bosen(5)		15,982			*			*
David S. Buzby(6)		13,242			*			*
Robin D. Richards(7)		13,242			*			*
5% Stockholders:
Burcham Community Property Trust dated May 23, 1990(8)		1,390,513		8.5			6.7
Executive officers and directors as a group (seven persons)(9)		14,724,591		86.8	%		68.9	%


	*	less than one percent of the outstanding shares of common stock.


Name		Number of Shares

Roth Capital Partners, LLC
JMP Securities LLC
Merriman Curhan Ford & Co.
Kaufman Bros., L.P.

	Total		4,400,000


	Page

Report of Independent Registered Public Accounting Firm		F-2
Balance Sheets at December 31, 2002 and 2003 and March 31, 2004 (unaudited and restated)		F-3
Statements of Operations for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003 and the three months ended March 31, 2003 and 2004 (unaudited and restated)		F-4
Statements of Changes in Stockholders’ Equity (Deficit) for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003 and the three months ended March 31, 2004 (unaudited and restated)		F-5
Statements of Cash Flows for the period from July 24, 2001 (inception) to December 31, 2001 and for the years ended December 31, 2002 and 2003 and the three months ended March 31, 2003 and 2004 (unaudited and restated)		F-6
Notes to Financial Statements		F-7


													Pro forma
				December 31,									stockholders’
										March 31,			equity (deficit) at
				2002			2003			2004			March 31, 2004

										(unaudited)			(unaudited – note 1)

										(restated – see Note 2)
ASSETS
Current Assets:
	Cash and cash equivalents			$	113,318		$	250,720		$	5,150,495
	Accounts receivable and other receivables, net				—			—			30,003
	Prepaid and other current assets				256,040			36,414			83,389

Total current assets					369,358			287,134			5,263,887
Property and equipment, net					658,641			646,603			572,923
Deferred offering costs					—			—			227,813

Total assets				$	1,027,999		$	933,737		$	6,064,623

LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
	Accounts payable			$	142,609		$	102,642		$	153,902
	Accrued expenses				307,197			302,301			832,709
	Accrued compensation				114,583			212,626			305,063
	Deferred revenue				850,037			1,446,120			1,567,911

Total current liabilities					1,414,426			2,063,689			2,859,585
Deferred revenue — non-current					572,111			260,719			262,533
Note payable to stockholder, including accrued interest of $19,540, $303,181 and $416,792 at December 31, 2002, 2003 and March 31, 2004 (unaudited), respectively					1,499,261			4,703,181			10,416,792

Total liabilities					3,485,798			7,027,589			13,538,910
Commitments & Contingencies (Notes 8 and 9)
Stockholders’ Equity (Deficit):
		Series A Convertible Preferred stock: $.0001 par value; 80,000,000 shares authorized; 52,750,000 shares issued and outstanding at December 31, 2002, 2003 and March 31, 2004 (unaudited) respectively; liquidation preference of $5,000,000 at December 31, 2003 and March 31, 2004 (unaudited); no shares issued and outstanding on a pro forma basis (unaudited)			5,275			5,275			5,275		$	—
		Common stock, $.0001 par value; 70,000,000 shares authorized; 1,494,863, 1,642,613 and 1,803,452 shares issued and outstanding at December 31, 2002, 2003 and March 31, 2004 (unaudited) respectively; 16,255,506 shares issued and outstanding on a pro forma basis (unaudited)			149			164			180			1,626
			Additional paid-in capital		5,440,408			6,016,902			6,454,340			6,458,169
			Deferred compensation		(110,883	)		(248,243	)		(453,173	)		(453,173	)
			Stock subscription receivable		(9,145	)		(9,145	)		—			—
			Accumulated deficit		(7,783,603	)		(11,858,805	)		(13,480,909	)		(13,480,909	)

Total stockholders’ equity (deficit)					(2,457,799	)		(6,093,852	)		(7,474,287	)		(7,474,287	)

Total liabilities and stockholders’ equity (deficit)				$	1,027,999		$	933,737		$	6,064,623



		Series A convertible																				Total
		preferred stock				Common stock				Additional						Stock						stockholders’
										paid-in			Deferred			subscription			Accumulated			equity
		Shares		Par value		Shares		Par value		capital			compensation			receivable			deficit			(deficit)

Balance at July 24, 2001 (inception)			—	$	—		—	$	—	$	—		$	—		$	—		$	—		$	—
Issuance of restricted common stock			—		—		1,130,137		113		39,074			(39,187	)		—			—			—
Issuance of common stock			—		—		273,973		27		9,473			—			—			—			9,500
Issuance of Series A Convertible Preferred stock			52,750,000		5,275		—		—		4,994,370			—			(9,145	)		—			4,990,500
Stock-based compensation related to options issued to employees			—		—		—		—		63,025			(63,025	)		—			—			—
Amortization of deferred compensation			—		—		—		—		—			9,796			—			—			9,796
	Net loss		—		—		—		—		—			—			—			(1,127,391	)		(1,127,391	)

Balance at December 31, 2001			52,750,000		5,275		1,404,110		140		5,105,942			(92,416	)		(9,145	)		(1,127,391	)		3,882,405
Exercise of stock options			—		—		90,753		9		3,139			—			—			—			3,148
Stock-based compensation related to options issued to employees			—		—		—		—		194,944			(194,944	)		—			—			—
Reversal of deferred compensation related to stock option cancellations			—		—		—		—		(2,170	)		2,170			—			—			—
Amortization of deferred compensation			—		—		—		—		—			174,307			—			—			174,307
Stock-based expense related to options issued to consultants			—		—		—		—		138,553			—			—			—			138,553
	Net loss		—		—		—		—		—			—			—			(6,656,212	)		(6,656,212	)

Balance at December 31, 2002			52,750,000		5,275		1,494,863		149		5,440,408			(110,883	)		(9,145	)		(7,783,603	)		(2,457,799	)
Exercise of stock options			—		—		147,750		15		5,108			—			—			—			5,123
Stock-based compensation related to options issued to employees			—		—		—		—		490,835			(490,835	)		—			—			—
Reversal of deferred compensation related to stock option cancellations			—		—		—		—		(11,535	)		11,535			—			—			—
Amortization of deferred compensation			—		—		—		—		—			341,940			—			—			341,940
Stock-based expense related to options issued to consultants			—		—		—		—		92,086			—			—			—			92,086
	Net loss		—		—		—		—		—			—			—			(4,075,202	)		(4,075,202	)

Balance at December 31, 2003			52,750,000		5,275		1,642,613		164		6,016,902			(248,243	)		(9,145	)		(11,858,805	)		(6,093,852	)
Exercise of stock options			—		—		160,839		16		5,561			—			—			—			5,577
Stock-based compensation related to options issued to employees			—		—		—		—		328,565			(328,565	)		—			—			—
Reversal of deferred compensation related to stock option cancellations			—		—		—		—		(55,029	)		55,029			—			—			—
Amortization of deferred compensation			—		—		—		—		—			68,606			—			—			68,606
Stock-based compensation related to options issued to consultants			—		—		—		—		158,341			—			—			—			158,341
Payment of subscription receivable			—		—		—		—		—			—			9,145			—			9,145
Net loss, as restated			—		—		—		—		—			—			—			(1,622,104	)		(1,622,104	)

Balance at March 31, 2004 (unaudited)			52,750,000	$	5,275		1,803,452	$	180	$	6,454,340		$	(453,173	)	$	—		$	(13,480,909	)	$	(7,474,287	)


	*Concentration of Credit Risk and Significant Customers*


2.	Restatement of Results of Operations and Financial Position as of and for the Three Months Ended March 31, 2004 (unaudited)


		Common stock
		options
		available for			Number of			Weighted average
		issuance			shares			exercise price

Balance at July 24, 2001 (inception)			—			—		$	—
	Authorized		1,267,123			—			—
	Granted		(448,493	)		448,493		$	0.0347

Balance at December 31, 2001			818,630			448,493		$	0.0347
	Granted		(391,644	)		672,466		$	0.0347
	Exercised		—			(90,753	)	$	0.0347
	Expired or cancelled		5,068			(5,068	)	$	0.0347

Balance at December 31, 2002			432,054			1,025,138		$	0.0347
	Authorized		547,945			—			—
	Granted		(465,479	)		465,479		$	0.0347
	Exercised		—			(147,750	)	$	0.0347
	Expired or cancelled		29,356			(162,062	)	$	0.0347

Balance at December 31, 2003			543,876			1,180,805		$	0.0347
	Granted		(53,287	)		53,287		$	0.2248
	Exercised		—			(160,838	)	$	0.0347
	Expired or Cancelled		19,863			(19,863	)	$	0.0347

Balance at March 31, 2004			510,452			1,053,391		$	0.0443

Weighted average contractual life (years) at March 31, 2004						8.56

Options exercisable at March 31, 2004						377,843


12.	April 2004 Japanese distribution agreement (unaudited)


Item 13.	*Other Expenses of Issuance and Distribution*


		Amount
		to be paid

SEC registration fee		$	7,286
NASD filing fee			6,250
Nasdaq National Market listing fee			100,000
Nasdaq National Market annual fee (pro rated for 2004)			8,843
Printing and engraving expenses			250,000
Legal fees and expenses			800,000
Accounting fees and expenses			500,000
Blue Sky fees and expenses			5,000
Transfer Agent and Registrar fees			20,000
Miscellaneous fees and expenses			52,621

	Total	$	1,750,000