**CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED ANDFILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**

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**THE `[**]` SYMBOL INDICATES THAT INFORMATION IN THISEXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TORULE 24B-2 AND THAT CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO SUCHOMITTED PORTIONS.**

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**___1___** 

TOSHIBA

TOSHIBA AMERICA ELECTRONICCOMPONENTS, INC.

 

 

 

MASTER PURCHASE AGREEMENT

** **

This Master Purchase Agreement ("Agreement") is enteredinto and is effective as of August 10, 1998 ("Effective Date") by and betweenToshiba America Electronic Components, Inc., a California corporation (asecond-tier subsidiary of "Toshiba Corporation") having its principal place ofbusiness at 9775 Toledo Way, Irvine, California 92618-1811 (hereinafterreferred to as "TAEC") and M-Systems, Inc.,a California corporationhaving its principal place of business at39899 Balentine Drive, Newark, CA., 94560(hereinafter referred to as "M-Systems").

 

#  RECITALS

 

M-Systems Ltd., and Toshiba Corp., have entered into, onJune 5, 1998 a Development and License Agreement for development of anintegrated flash memory device based on Toshiba`s 64MBit NAND flash andM-Systems` flash file system and NAND Flash Disk Controller, known as the MonolithicDiskOnChip or MDOC-64 ("Product"), and granting certain licensing rights toeach other.  The parties desire to enter into this Agreement todefine the general terms and conditions governing Toshiba`s manufacture andsale of the MDOC-64 and other Products to M-Systems. The Exhibits to thisAgreement shall define the terms and conditions specific to each respectiveProduct.  The parties intend that additional Products may be added tothis Agreement by the mutual agreement of the parties.  Terms and conditionsspecific to each such additional Product will be set forth in Exhibits of thesame number.  For example, Exhibits B-1 ("Price Schedule-Product#1"), C-1 ("Quality Requirements-Product #1"), etc., shall apply to the Productset forth in Exhibit A-1 ("Design Specification-Product #1").

 

NOW, THEREFORE, in consideration of the foregoingpremises and the covenants and agreements set forth in this Agreement, theparties agree as follows:

 

##  AGREEMENT

 

**1.      DEFINITIONS**

 

1.1     "ConfidentialInformation" shall mean:  (a) the prices of****the Products;(b) any trade secrets or other proprietary information related to theProducts and designated by the disclosing party as confidential in writing or,if disclosed orally, reduced to writing within thirty (30) days; and(c) the terms, conditions and existence of this Agreement; provided,however that "Confidential Information" shall not include information that:  (i) isor becomes generally known or available by publication, commercial use orotherwise through no fault of the receiving party; (ii) can be shown bydocumentary evidence to have been known and has been reduced to tangible formby the receiving party at the time of disclosure and is not subject torestriction; (iii) can be shown by documentary evidence to have beenindependently developed or learned by the receiving party; (iv) can beshown by documentary evidence to have been lawfully obtained from a third partywho has the right to make such disclosure; or (v) is released forpublication by the disclosing party in writing.

**___2___** 

1.2     "Deliver,Delivered or Delivery" means the complete delivery of a particular PurchaseOrder`s Product quantities to the Delivery Point.

 

1.3     "DeliveryPoint" means the delivery destination identified in the Purchase Order.

 

1.4*        *"Epidemic Failure" means product failures at or above therates set forth in Exhibit C "Quality Requirements" resulting from defects inmaterial, workmanship, manufacturing process and/or design deficienciesattributable to TAEC, including but not limited to use of components withinherent or latent defects, or consistent maladjustments during manufacture.  Thereare two types of Epidemic Failures: (a) product failures attributable to anycause or causes; or (b) product failures attributable to the same root cause.

 

1.5     "LeadTime" means the amount of time in advance of shipment to the Delivery Pointthat TAEC must receive an M-Systems Purchase Order in order to deliver Productsby the requested Delivery date, as set forth in Exhibit D "MiscellaneousProvision".

 

1.6     "OrderAdjustment Schedule" means the schedule for allowable increases or reschedulingof Purchase Order quantities, as set forth in Exhibit D "MiscellaneousProvision".

 

1.7     "PreferredCarrier(s)" means the carrier(s) set forth in Exhibit D "Miscellaneous Provision".

 

1.8     "PriceSchedule" means the prices for each Product as set forth in Exhibit B "PriceSchedule".

 

1.9     "Products"means those products made by Toshiba which are designed to meet theSpecifications.

 

1.10   "PurchaseOrders" means written or electronically transmitted purchase orders to TAEC forthe Products, including the description, quantity, Delivery Point and requestedDelivery date.

 

1.11   "QualityRequirements" means the quality requirements for the Products, as set forth inExhibit C "Quality Requirements".

 

1.12   "Specifications"means the respective specifications for each Product as separately set forth inExhibit A "Specifications".

 

**2.      TERMOF AGREEMENT**

 

This Agreement shall come into force on theEffective Date and will remain in effect until December 31, 2001, unless earlier terminated by either party pursuant to Section 16 "Termination".

**___3___** 

**3.      PRODUCTAVAILABILITY**

 

TAEC shall accept and fill M-Systems` PurchaseOrders for the Products on the terms and at the prices set forth in this Agreement.  TAECmay discontinue a Product under the circumstances set forth in Exhibit B "PriceSchedule". TAEC will guarantee manufacturing capacity for the Product inaccordance with the requirements of Exhibit B "Price Schedule".

** **

**4.      PRICING**

 

4.1     Prices.  Subjectto the terms and conditions of this Agreement, TAECagrees to Deliver the Products at the prices set forth in Exhibit B"Price Schedule".

 

4.2     PriceReductions/Increases.  In the event TAEC is able to achieve anyreduction in component prices, TAEC will reduce the prices of affected Productsaccordingly.  TAEC shall meet with M-Systems every three (3) monthsduring the term of this Agreement to review and establish a plan to negotiate****all reasonable cost reduction opportunities.  In the event TAEC experiencesany increase in component price, TAEC and M-Systems shall meet to review andnegotiate any increase in component price.

 

**5.      FORECASTS, ORDERING, AND ADJUSTMENTS**

 

5.1     Forecasts.  M-Systemswill attempt to**provide TAEC with amonthly**forecast covering the period ofsix (6) calendar months beginning with the month in which such forecast isprovided.  However, M-Systems commits to provide such forecasts everythree (3) months as a minimum.   Such forecast will specify thenumber of units of the Products which M-Systems anticipates purchasing duringsuch six (6) month period.  Such forecast will not be regarded as acommitment to purchase. 

 

5.2*        *Ordering.  M-Systems may issue Purchase Orders toTAEC pursuant to the terms of this Agreement.  Each Purchase Orderwill be issued by M-Systems in accordance with the applicable Lead Time(s) andPricing.  TAEC shall accept each****Purchase Orders within three (3)business days of receipt by sending a Purchase Order Acknowledgement toM-Systems.

 

Purchase Orderswill be sent to:

Toshiba AmericaElectronic Components, Inc.

2460 North First  Street, Suite 180

San Jose, CA 95131

Telephone:  (408)965-4200

Facsimile:    (408)432-8566       

 

Purchase OrderAcknowledgements will be sent to:

M-Systems, Inc.

39899 Balentine Drive

Newark, CA 94560

Telephone:  (510)413-5950

Facsimile:    (510)413-5980

**___4___** 

 

TAEC may change the address for reciept ofPurchase Orders and M‐Systems may change the address for receipt ofPurchase Order Acknowledgements by providing written notice of such change asprovided in Section 26.8 "General, Notices".

 

5.3     Adjustments.  M-Systemsmay increase, or reschedule Product quantities under Purchase Orders prior tothe Delivery, in accordance with the Order Adjustment Schedule set forth inExhibit D "Miscellaneous Provisions".

 

5.4     LeadTime Reduction Program.  TAEC and M-Systems will meetperiodically to discuss options which both parties can implement to effectreductions in Lead Times to allow improved flexibility in ordering anddelivery.  The agenda for each meeting will include identification ofsuch options, schedules for determination of associated cost and schedules forimplementation.

 

**6.      DELIVERY, CARRIER, AND RISK OF LOSS**

 

6.1     Carrier;Risk of Loss.  TAEC shall use thePreferred Carriers for Delivery.  If no carrier is designated byM-Systems, TAEC will select a common carrier at its discretion.  Titleand risk of loss or damage to the Product will pass to M-Systems upon deliveryto the Preferred Carrier, "FOB Shipping Point".

 

6.2*        *Delivery Date.  TAEC shall Deliver Purchase Orderquantities accepted by TAEC****to the Delivery Point on or prior to theTAEC Commit delivery date.  The TAEC Commit delivery date shall notexceed a 10 (ten) day limit beyond the Lead Time set forth in Exhibit D"Miscellaneous Provisions".  

 

6.3     Failure to Meet Delivery Date.  IfTAEC fails to meet TAEC`s Commit Delivery schedule on all or any part of anyPurchase Order, then M-Systems, without prejudice to any other rights orremedies available to M-Systems under law or otherwise, may terminate such orany part of such Purchase Order and procure from other sources, upon such termsand in such manner as M-Systems may deem appropriate, the Product covered bysuch Purchase Order and M-Systems` sole liability to TAEC shall be limited to paymentfor Products Delivered and accepted by M-Systems. TAEC will reimburse M-Systemsfor the difference in aggregate price between the price of the Productsspecified in the Purchase Order and the price paid by M-Systems for substitutedproducts purchased by M-Systems pursuant to this Section.  Withrespect to the portion of such Purchase Order not terminated, if any, the unitprice will not change and TAEC will otherwise continue performance under thisAgreement.

**___5___** 

 

**7.      PURCHASEORDERS AND PURCHASE ORDER ACKNOWLEDGMENTS**

** **

Noprovision contained on any M-Systems Purchase Order or any provision of anyTAEC Purchase Order Acknowledgment will be effective.  Except for thequantities, Delivery Point, and delivery dates specified on the M-Systems`Purchase Orders, the terms governing the manufacture, delivery, acceptance andpayment for the Products will be governed by the terms and conditions of thisAgreement.  In the case of conflict between this Agreement and anyPurchase Order, the terms of this Agreement will prevail.  Anyremedies at law or equity not specifically disclaimed or modified by thisAgreement remain available to both parties.

** **

**8.      PAYMENTS**

 

Upon Delivery of Products, TAEC will provide aninvoice to M-Systems identifying the Purchase Order and confirming the quantityand description of all Products that have been Delivered.  M-Systemswill pay the invoice net thirty (30) days, however, it is understood thatM-Systems` Accounts Payable procedure is to make payments on invoices at theend of each calendar month.  Payment of invoices does not constitutefinal acceptance of the Products and is subject to adjustments for errors,shortages and defects.

 

M-Systems will have an unsecured line of creditwith TAEC for purchases under this Agreement of at least $1,300,000 U.S. TAECwill not require a letter of credit or similar collateral from M-Systems.  M-Systemscredit standing will be re-evaluated if it is sixty (60) or more days late onany payment to TAEC.

 

**9.      QUALITYAND INSPECTION**

 

9.1     QualityRequirements. TAEC**will manufacture the Products in accordance withthe Quality Requirements.  

 

9.2     Quality Control. TAEC will establishand maintain quality control procedures that comply with applicable ISOstandards.  For each respective Product, TAEC will maintain and makeavailable to M-Systems, for a period of three (3) years after the lastshipment, complete records regarding such system.

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9.3     Product Inspection.  AllProducts are subject to inspection by M-Systems and may be rejected andreturned to TAEC if the Products are defective or are not Delivered inaccordance with the accepted****Purchase Order.  If Products arerejected for defects or non-conformance prior to payment, M-Systems shall berelieved of any payment obligation in connection with such returned Products.  IfProducts are rejected for defects or non-conformance after payment, but withinone hundred eighty (180) days of Delivery, M-Systems will be entitled to acredit for the full amount of the purchase price of such defective ornon-conforming Products.

**___6___** 

9.4     Site Inspections.  During theterm of this Agreement and upon reasonable notice to TAEC and its respectivemanufacturing site(s), M-Systems has the right to inspect and, to the extentpracticable, test the Products at all Toshiba sites of manufacture of theProducts.  Such inspection and testing will not relieve TAEC ofliability regarding the Products later found to be defective or liabilityregarding TAEC`s failure to meet its obligations under this Agreement.

 

**10.    LIMITEDWARRANTIES**

 

10.1   (a)  Liens,Materials and Workmanship. TAECwarrants that the Products purchased and Delivered hereunder:  (i)will be free and clear of all liens and encumbrances; and (ii) will, for theperiod specified in Exhibit C commencing from the date of manufacture, be freefrom all defects in material and workmanship and conform to the Specificationsand the Quality Requirements.

 

(b)*   *GeneralRepresentations: Each party****represents and warrants to the other party****that it has the power andauthority to enter into this Agreement.  To the best of TAEC`sknowledge, as of the Effective Date of this Agreement, TAEC will not infringeany patent, copyrights, trade secrets, mask work rights or other proprietary orcontractual rights of any third party in connection with the manufacture andsale of the Product.  

* *

10.2   Warranty Repair/Replacement.  Ifany Product is found to breach the warranty specified in Section10.1(a)(ii) during the period set forth in Exhibit C "Quality Requirements",M-Systems may send a notice to TAEC informing it of the breach of warranty.  Uponreceipt of such notice, TAEC will issue a Return Material Authorization (RMA)authorizing M-Systems to return the defective Products to TAEC.  Upon return of the defective Products, TAEC shall, atTAEC`s expense, and TAEC`s sole discretion, promptly repair or replace suchdefective Products, and return the repaired or replaced units to M-Systemswithin the time set forth in Exhibit C "Quality Requirements".

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10.3   Epidemic Failures.****TAEC shall atTAEC`s own****expense and at M-Systems` option, promptly repair or replaceor give M-Systems a credit for Products Delivered under this Agreement whichexhibit Epidemic Failures within two (2)****years of the date ofmanufacture.

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10.4   Freight and Incidental Costs. TAEC willbe responsible for freight and incidental costs in connection with the repairor replacement of Products under Sections 10.2 or 10.3, including reasonablecosts for labor for inspection and testing, freight charges from M-Systems toTAEC, and freight charges from TAEC to M-Systems.

 

10.5   No Liability. TAEC shall have noliability or obligation to M-Systems under this Section 10 with respect to anyProducts or spare parts which have been subjected to abuse, misuse, improperuse, negligence, accident, alteration, modification,****tampering or faultyrepair; provided, however, that TAEC can demonstrate that such has occurred.

**___7___** 

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10.6*     *No Waiver.  M-Systems` approval of TAEC material ordesign shall not relieve TAEC****of the warranty obligations set forth inthis Section 10, nor will M‐Systems` approval or acceptance of anyProducts which do not meet the Specifications relieve TAEC of the warrantyobligations, unless agreed to by M‐Systems in writing.

 

10.7*     ***NO OTHERWARRANTIES.*****  THEREARE NO OTHER WARRANTIES FROM EITHER TAEC OR TOSHIBA CORPORATION WHICH EXTENDBEYOND THE FACE OF THIS WARRANTY.  ALL OTHER WARRANTIES, EXPRESS ORIMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULARPURPOSE, AND FITNESS FOR USE, ARE EXCLUDED.***

 

**11.    ENVIRONMENTALCOMPLIANCE**

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TAEC represents and warrants that it: (i) has beengranted or issued all permits required for the storage, handling and disposalof all materials or hazardous waste used by TAEC in the performance of thisAgreement; and (ii) has implemented programs necessary to monitor and maintainall required licenses and permits and to prevent releases of materials to theenvironment. TAEC`s employees shall have been trained to properly, safely andlegally (in accordance with all applicable laws and regulations) handlehazardous materials and wastes. TAEC shall notify M-Systems in writing,immediately upon discovery of any regulatory action taken or initiated againstTAEC, whether or not such action relates to or arises out of this Agreement,that may result in fines, penalties, or prosecution, or which may impact TAEC`sability to deliver the Products.  Regulatory compliance andmanagement of  TAEC`s employees, facilities, and processes isstrictly the responsibility of TAEC.  M-Systems has no express orimplied responsibility for the same.

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**12.    DESIGNMODIFICATIONS**

 

12.1   On TAEC`s Notice.  In no eventshall TAEC make any modification to the Products without M-Systems` priorwritten approval.

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12.2   At M-Systems` Request.  ShouldM-Systems desire modifications in the design of the Product, M-Systems shallsubmit its request to TAEC in writing, and TAEC shall respond to such requestin writing within thirty (30) days.  Should TAEC agree to therequested design change, such change will not affect the Products alreadyscheduled or rescheduled for Delivery as of the date such request is agreed toby TAEC.

 

**13.    PACKAGING AND CUSTOMER DOCUMENTATION**

 

M-Systems will provide specifications for packagingof the Products and reproducible copies of all customer documentation and otherin-box materials. TAEC will comply with M-Systems` Specifications in packagingthe Products.  TAEC will, as soon as reasonably possible, incorporateany updates to the customer documentation provided by M-Systems.

**___8___** 

**14.    PROPRIETARYRIGHTS INDEMNITY**

 

14.1   TAEC`s Indemnity Obligation.  TAECshall, at its expense and at M-Systems` request, defend any claim or actionbrought against M-Systems, and M-Systems` subsidiaries, affiliates, directors,officers, employees, agents and independent contractors, (but not M-Systems` customers)to the extent it is based on a claim that the Products provided under thisAgreement infringe or violate any patent, copyright, trade secret, mask workright or other proprietary right of a third party, and TAEC shall indemnify andhold M-Systems harmless from and against any costs, damages and fees reasonablyincurred by M-Systems, including but not limited to fees of attorneys and otherprofessionals, that are attributable to such claim; provided that:  (a)M-Systems gives TAEC reasonably prompt notice in writing of any such suit andpermits TAEC, at its sole control and through counsel of its choice, toanswer the charge of infringement and defend and negotiate for settlement ofsuch claim or suit; (b) M-Systems provides TAEC information,assistance and authority, to enable TAEC to defend such suit; and (c) TAECshall not be responsible for any settlement made by M-Systems without TAEC`swritten permission.  In the event M-Systems agrees to participatein a settlement of the suit, TAEC agrees not todisclose to third parties the terms of the settlement nor to permit the partyclaiming infringement to disclose such terms without first obtaining M-Systems`written permission.

 

14.2*     *Exceptions. TAEC will not have liability under this Section 14to the extent that:  (a) infringement would not have occurredbut for****TAEC`sincorporation of M-Systems Technology into the Products or (b) such claim orsuit would have been avoided but for M-Systems` combination, operation, or useof the Products with devices, parts, or software not supplied by TAEC; or (c)infringement is primarily attributable to a modification or addition to theProducts by M-Systems.

**___9___** 

14.3   M-Systems` Indemnity Obligation.  Inthe event Section 14.2 applies, and TAEC is a defendant in such claim oraction, then M-Systems shall, at its expense and at TAEC`s request, defend anysuch claim or action brought against TAEC, Toshiba Corporation and their****subsidiaries,affiliates, directors, officers, employees, agents and independent contractos,but not TAEC`s customers, to the extent it is based on a claim that theM-Systems Technology incorporated in the Products provided under this Agreementinfringes or violates any patent, copyright, trade secret, mask work right orother proprietary right of a third party, and M-Systems shall indemnify andhold TAEC harmless from and against any costs, damages and fees reasonablyincurred by TAEC, including, but not limited to fees of attorneys and otherprofessionals that are attributable to such claim; provided that: (a) TAECgives M-Systems reasonably prompt notice in writing of any such suit andpermits M-Systems, through counsel of its choice, to answer the charge ofinfringement and defend such claim or suit; (b) TAEC provides M-Systemsinformation, assistance and authority to enable M-Systems to defend such suit;and (c) M-Systems shall not be responsible for any settlement made by TAECwithout M-Systems` written permission.  In the event TAEC agrees tosettle the suit, M-Systems agrees not to disclose to third parties the terms ofthe settlement nor to permit the party claiming infringement to disclose suchterms without first obtaining TAEC`s written permission.

 

14.4   Duty toCorrect.  In addition to its obligations under Section 14.1,should use, sale or other disposition of the Products be enjoined by a court orin the event there is a final judicial determination that the Productsinfringe, a third party`s proprietary right, TAECshall, at TAEC`s  expense andoption:  (a) procure for M-Systems thepast right to make, use and sell and the future right to continue to make, useand sell the Products; or (b) replace or modify the Products to make suchnon-infringing, provided that the replacement or modified Product isfunctionally interchangeable with, and has at least the same performance as thereplaced Product; or (c) refund moneys received by TAEC for the development andmanufacture of products whose use, sale or other disposition was enjoined.

 

14.5   ExclusiveLiability.  The parties obligations set forth in this Section 14constitute the parties` exclusive liability and the parties` sole remedyarising out of any third party`s claim of infringement.

 

**15.    PRODUCTLIABILITY**

** **

TAEC shall, at TAEC`s expense, indemnify, holdharmless and, at M-Systems` request, defend M-Systems, and M-Systems`subsidiaries, affiliates, directors, officers, employees, agents andindependent contractors, from and against any and all loss, cost, liability orexpense (including costs and reasonable fees of attorneys and other professionals)arising out of or in connection with a claim that any of the Products causedinjury or damage to persons or property.  Notwithstanding theforegoing, neither TAEC nor Toshiba Corporation shall have any liability underthis Section 15 to the extent that any such injury or damage to persons orproperty is primarily attributable to TAEC`s incorporation of M-Systems`Technology into the Products.

 

**___10___** 

 

**16.    TERMINATION**

 

16.1   TerminationWithout Cause. M-Systems may, for any reason or for no reason whatsoever,terminate this Agreement or any Purchase Order, in whole, or in part, uponthirty (30) days advance notice to TAEC.

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16.2   Effectof Termination Without Cause or for Cancellation.

 

(a)  Inthe event M-Systems cancels a Purchase Order or terminates this Agreement lessthan thirty (30) days prior to a scheduled Delivery, TAEC may submit a writtenclaim for cancellation charges within thirty (30) days from the date of suchtermination or cancellation. TAEC shall submit its claim together with suchreasonable evidence as M-Systems may reasonably request. TAEC`s claim shall bebased solely upon costs incurred by TAEC as a result of such termination orcancellation, and no profit or opportunity cost shall be considered incalculating such claim.  Upon M-Systems` request, TAEC will makeavailable to M-Systems all relevant information for inspection and audit.  Failureto submit a claim within such thirty (30) day period shall constitute a waiverof any claim by TAEC as a result of M-Systems` termination or cancellation andM‐Systems shall be released from all liability arising out of suchtermination or cancellation.

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(b)  TAECshall reasonably assess open orders, raw materials, work in process andsubassemblies to determine whether or not such items can be used by TAEC forthe manufacture of other products or be diverted for any other purpose, andTAEC`s claim may not include any such usable items.

 

(c)  M-Systems` obligation forcancellation charges will be limited to the following:

 

(i)      The price for Products which TAEC hascompleted manufacture prior to the effective date of M-Systems`termination or cancellation pursuant to an issued Purchase Order and for whichpayment has not been made;

 

(ii)     TAEC`s costs incurred for raw materials,components, subassemblies and work in process at the time of the effective dateof such termination or cancellation which were required to fill the PurchaseOrders canceled by M-Systems; and

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(iii)    TAEC`s reasonable cancellation costs incurredfor components and subcontracted items which TAEC had on order prior to theeffective date of such termination or cancellation, which were necessary tofill the Purchase Orders canceled by M-Systems, and for which TAEC is obligatedto pay cancellation charges.

**___11___** 

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(d)  Notwithstanding anything tothe contrary in this Section 16.2, in no event shall any payments made byM-Systems under this Section 16 exceed the aggregate price specified in thecanceled Purchase Orders, less payments already made.  There will beexcluded from any amounts payable to TAECunder this section all amounts payable with respect to M-Systems property lost,damaged, stolen or destroyed prior to delivery to M‐Systems.

 

16.3   Terminationfor Default.  Either party may suspend its performance and/orterminate this Agreement immediately upon written notice at any time if:

 

(a)*   *The other party isin material breach of any warranty, term, condition or covenant of thisAgreement and fails to cure that breach within ninety (90) days after writtennotice of that breach and of the first party`s intention to suspend itsperformance or terminate;

* *

(b)*   *The other party isin confidentiality breach of any terms and conditions or Covenant of thisAgreement and fails to cure that breach within thirty (30) days after writtennotice of that breach and of the first party`s intention to suspends itsperformance or terminate;

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(c)*   *However, the totalcumulative time for curing breaches for each party during the term of theAgreement will not exceed one hundred and fifty (150) days;

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(d)*   *The other party:  (i)files a voluntary petition in bankruptcy, (ii) is adjudicated bankrupt, (iii)is unable to pay its debts as they become due, or (iv) makes an assignment forthe benefit of creditors; or

 

(e)  The Development and LicenseAgreement terminates.

 

16.4   Effectof Termination in General.  The following terms apply to anytermination under this Agreement, including without limitation, termination forconvenience and for default:

 

(a)  Immediately upon anytermination of this Agreement, TAEC shall,to the extent and at times specified by M-Systems, stop all work on outstandingPurchase Orders, incur no further direct cost, and protect all property inwhich M-Systems has or may acquire an interest pursuant to thisSection 16.

 

(b)  Immediately upon anytermination of this Agreement, each party will return to the other party or,pursuant to the other party`s written instructions, destroy all materials inits possession containing Confidential Information of the other party, unlessthe party in possession of such Confidential Information has continued rightsto retain it pursuant to its license under the Development and LicenseAgreement.  Returned Confidential Information materials shall beshipped freight collect.

**___12___** 

 

(c)  Ifthis Agreement and any Purchase Orders issued hereunder are terminated byM-Systems pursuant to Section 16.1 or 16.3, then M-Systems, in addition to anyother rights provided herein, may require TAEC to transfer title and deliver toM-Systems any completed Products and/or materials that TAEC has produced oracquired for the completion of such Purchase Order(s), including, but notlimited to, materials, components, sub-assemblies, and tooling requiredexclusively for the Products and contract rights for materials required tocomplete such Purchase Orders. TAEC shall protect and preserve for M-Systems`benefit such property in the possession of  TAEC.  

 

(d)  Notwithstanding anytermination of this Agreement, the provisions of Sections 1, 10, 11, 14, 15,16, 17, 20, 22, 23, 24 and 26 shall remain in effect.

 

**17.    CONFIDENTIALITY**

 

For a period of eight (8) years from the date ofdisclosure, each party will protect the other`s Confidential Information fromunauthorized dissemination and use with the same degree of care that each suchparty uses to protect its own like information, but at a minimum, with areasonable degree of care.  Neither party will use the other`sConfidential Information for purposes other than those necessary to performthis Agreement and only employees of the receiving party who have a need toknow such Confidential Information shall have access thereto.  Neitherparty will disclose to third parties the other`s Confidential Informationwithout prior written consent of other party.

 

**18.    AGENCYAPPROVALS**

** **

TAEC will obtain any government agency approvalsnecessary to sell the Products, and will pay all application fees, costs ofsamples, and other reasonable expenses incurred in connection with obtainingsuch approvals.  M-Systems will sign any necessary documents andprovide any necessary information to enable TAEC to complete forms andotherwise obtain such approvals.

 

**19.    TAXESAND FOREIGN SHIPMENTS**

** **

The prices set forth in Exhibit B"Price Schedule" are in United States dollars and are exclusive of any and allstate or local sales, use, excise or similar taxes, which, if applicable, shallbe paid by M-Systems.  Prices set forth in Exhibit B "Price Schedule"are also exclusive of any foreign shipping charges, such as forwarding, agentor brokerage fees, consular invoices, document fees and duties.  Suchcharges shall be paid by M-Systems.

 

**20.    CERTIFICATESOF DELIVERY**

 

UponM-Systems` request, TAEC shall at TAEC`s  expense, provide:  (a)Certificates of Delivery (CD) to M-Systems for Products which were importedinto the United States by TAEC and sold directly to M-Systems as importedgoods; or (b) Certificates of Manufacture and Delivery (CMD) for Products which were imported and then furthermanufactured by TAEC and sold directly to M-Systems. TAEC shall also provide toM-Systems a Certificate of Compliance (COC) with each shipment of Productsshipped to M-Systems.  Descriptions of merchandise on each CD, CMD orCOC must reference both M-Systems` and TAEC`s  part numbers.

**___13___** 

**21.    GRATUITIES**

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Each party represents that it hasnot offered or given and will not offer or give any employee, agent, orrepresentative of the other party any gratuity with a view toward securing anybusiness from such other party or influencing such person with respect to thetransaction of business between the parties.

 

**22.    PROPERTYFURNISHED BY M-SYSTEMS**

 

All tools, computer equipment and other materialsfurnished by M-Systems for use by TAEC in its performance hereunder will beidentified and will remain the property of M-Systems and will be used by TAEConly for purposes of this Agreement.  All specifications, drawings orother documents and data furnished by M-Systems and tools, dies, molds, jigs,fixtures, patterns, hobs, electrodes, punches, artwork, screens, tapes,templates, machinery, special test equipment, and gauges, which have beenfurnished, paid for, or charged against M-Systems, will be deemed M-Systems`property and shall be maintained and preserved for M-Systems` benefit for aperiod of seven (7) years following termination of this Agreement.  Suchproperty will be delivered, upon M-Systems` request and at its expense, toM-Systems in good condition, except for normal wear and tear. TAEC will berelieved of the obligation to supply Products in the event M-Systems requeststhe return of any M-Systems owned property essential for the manufacture anddelivery of the Products by TAEC.

 

**23.    COMPLIANCE WITH LAWS**

 

Each party will comply with allapplicable laws and regulations governing their activities under thisAgreement, including, but not limited to, the export control laws and regulationsof the United States and Japan.  Each party will defend, indemnify,and hold the other party harmless for any loss, cost, or expense resulting as adirect result of the first party`s violation of any law, rule, or ordinance ofany country, state, or any other governmental agency in the performance of thisAgreement.  

 

**24.    LIMITATIONOF LIABILITY**

 

EXCEPT AS EXPRESSLY PROVIDED INTHIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER, OR ANYOTHER PERSON, FOR ANY SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGESOF ANY KIND, INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS OR DAMAGES TO THEOTHER PARTY`S BUSINESS REPUTATION HOWEVER CAUSED, AND ON ANY THEORY OFLIABILITY WHETHER IN AN ACTION FOR CONTRACT, STRICT LIABILITY OR TORT(INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT THE FIRST PARTY HAS BEENADVISED OF THE POSSIBILITY OF SUCH DAMAGE AND NOTWITHSTANDING THE FAILURE OFESSENTIAL PURPOSE OF ANY REMEDY.

**___14___** 

**25.    NOFINDERS OR BROKERS**

** **

The parties hereby state that nofinders, brokers or similar third parties have been used in connection withthis Agreement or negotiations or other discussions culminating in thisAgreement.

 

**26.    GENERAL**

** **

26.1   ForceMajeure.  Neither party shall be liable for any failure or delayin its performance under this Agreement due to causes, including, but notlimited to, acts of God, acts of civil or military authority, fires, epidemics,floods, earthquakes, riots, wars, sabotage, labor shortages or disputes, andgovernmental actions, which are beyond its reasonable control; provided thatthe delayed party:  (i) gives the other party written notice ofsuch cause promptly, and in any event within fifteen (15) days of discoverythereof; and (ii) uses its reasonable efforts to correct such failure ordelay in its performance.  The delayed party`s time for performanceor cure under this Section 26.1 shall be extended for a period equal tothe duration of the cause or sixty (60) days, whichever is less. 

 

26.2   Relationshipof Parties.  The parties to this Agreement are independentcontracting parties and this Agreement does not create a partnership, jointventure, agency or otherwise authorize one party to represent, act on behalfof, or obligate the other party.

 

26.3   Assignment.  Therights and liabilities of the parties hereto will bind and inure to the benefitof their respective successors, executors and administrators, as the case maybe; provided that neither party may assign or delegate its obligations underthis Agreement either in whole or in part, without the prior written consent ofthe other party, except in the event of a merger or acquisition of all orsubstantially all of a party`s assets.  Any attempted assignment inviolation of the provisions of this Section 26.3 will be void.

 

26.4   EquitableRelief.  Because the parties will have access to and becomeacquainted with Confidential Information of the other party, the unauthorizeduse or disclosure of which would cause irreparable harm and significant injurywhich would be difficult to ascertain and which would not be compensable bydamages alone, each party agrees that the other party will have the right toenforce the confidentiality provisions of this Agreement by injunction,specific performance or other equitable relief without prejudice to any otherrights and remedies that the parties may have for breach of this Agreement.

 

26.5   Applicable Law;.  ThisAgreement will be governed by and construed in accordance with the laws of the United  States and the State of California as applied to agreements entered into andto be performed entirely within California between California residents.  Theparties expressly disclaim applicability of the United Nations Convention onContracts for the International Sale of Goods.

**___15___** 

26.6   Dispute Resolution.  The parties shall attemptto resolve any disputes by discussions between appropriate managementrepresentatives of each party.  In the event the parties are unableto resolve disputes through such mechanism, except as provided below, anyclaim, dispute or controversy arising out of or in connection with or relatingto this Agreement shall be submitted by the parties to arbitration by theAmerican Arbitration Association under the commercial arbitration rules then ineffect for that association except as provided herein.  Theproceedings will be held in California.  The parties shall choose, bymutual agreement, one arbitrator within thirty (30) days of receipt of noticeof the intent to arbitrate.  If no arbitrator is appointed withinsuch thirty (30) day period or any extension of time which is mutually agreedupon, the AAA shall make such appointment within thirty (30) days after thetime for a mutually agreed appointment has expired.  All proceedingsshall be held in English.  The arbitrator will determine, in consultationwith the parties, a schedule for preparation and hearing to permit an orderlyand expeditious resolution of the matter. Within 30 days of the selection ofthe arbitrator, each party will provide to the other and to the arbitrator,copies of documents and a list of witnesses, with a summary of their expectedtestimony, that the party intends to rely on at the hearing.  Theparties will provide additional documents and update that list as they becomeaware of additional documents and witnesses that they intend to rely on at thehearing.  A party will not be permitted to introduce at the hearing adocument or witness that has not been identified by one of the parties at least7 days before commencement of the hearing, unless leave of the arbitrator isobtained for good cause shown. The parties will be entitled to request, bycategory, relevant documents in the possession of the other party.  Requestedrelevant documents may be provided in the language in which they wereoriginally prepared.  The arbitrator will issue a written decisioncontaining findings of fact and conclusions of law within 30 days of the closeof the hearing.  The failure of the arbitrator`s decision to be inaccordance with applicable law will be grounds for appeal.  Except asprovided herein and by applicable law, the award rendered by the arbitratorshall be final.  The award shall include costs of arbitration.  Judgmenton such award may be entered in any court having jurisdiction thereof.  Unlessordered otherwise by the arbitrator, each party shall bear its own costs ofappearance, presentation, and participation in the arbitration process,including but not limited to fees of attorneys and expert witnesses.

Nothing inthis Agreement shall be deemed as preventing either party from instituting,prosecuting or defending an action in a court of competent jurisdiction in aclaim: (i) seeking injunctive relief (or any other provisional remedy), (ii)involving the infringement of the intellectual property rights of either party,or (iii) for breach of the provisions of this Agreement which relate to thegrant of license of intellectual property rights or to confidentiality.  Anylitigation between the parties relating to this Agreement shall take place inthe Northern District of California.  The parties consent to thepersonal jurisdiction of and venue in the state and federal courts within thatDistrict.

**___16___** 

26.7   Severability.  If for any reason a court ofcompetent jurisdiction or the arbitrator referred to in the precedingsubsection finds any provision of this Agreement, or portion thereof, to beunenforceable, that provision of the Agreement shall be enforced to the maximumextent permissible so as to effect the intent of the parties, and the remainderof this Agreement shall continue in full force and effect.

 

26.8*     *Notices.  All notices required or permitted under thisAgreement shall be in writing, reference this Agreement, and be deemed givenwhen:  (i) delivered personally; (ii) when sent byconfirmed facsimile; or****(iii) two (2) days after deposit with acommercial courier, with written verification of receipt.  Allcommunications will be sent to the addresses set forth below.  Eitherparty may change its address by giving notice pursuant to this Section 26.8.

 
| M-Systems:            | TAEC:                                       |
|-----------------------|---------------------------------------------|
| M-Systems, Inc.       | Toshiba America Electronic Components, Inc. |
| 39899 Balentine Drive | 9775 Toledo Way                             |
| Newark, CA 94560      | Irvine, CA 92618-1811                       |
| Attn: Legal Dept.     | Attn:  Legal Dept.                |

 

26.9   NoWaiver.  Failure by either party to enforce any provision of thisAgreement shall not be deemed a waiver of future enforcement of that or anyother provision.

 

26.10 NoRights in Third Parties.  This Agreement is made for the benefitof TAEC and M-Systems and theirrespective subsidiaries and affiliates, if any, and not for the benefit of anythird parties.

 

26.11 Counterparts.  ThisAgreement may be executed in one or more counterparts, each of which shall bedeemed an original, but collectively shall constitute but one and the sameinstrument.

 

26.12 Headingsand References.  The headings and captions used in this Agreementare used for convenience only and are not to be considered in construing orinterpreting this Agreement.

 

26.13 Construction.  ThisAgreement has been negotiated by the parties and their respective counsel.  ThisAgreement will be fairly interpreted in accordance with its terms and withoutany strict construction in favor of or against either party.

**___17___** 

26.14 CompleteAgreement.  This Agreement, including all Exhibits, constitutesthe entire agreement between the parties with respect to the subject matterhereof, and supersedes and replaces all prior understandings or agreements,written or oral, regarding such subject matter, including without limitationthe Memorandum of Understanding dated March 26, 1998 between the parties, butexcluding the Development and License Agreement.  No amendment to ormodification of this Agreement shall be binding unless in writing and signed bya duly authorized representative of both parties.  To the extent anyterms and conditions of this Agreement conflict with the terms and conditionsof any invoice, purchase order or purchase order acknowledgment placedhereunder, the terms and conditions of thisAgreement shall govern and control.  The Development and LicenseAgreement will continue in full force and effect until terminated according toits terms, and Exhibit D "Master Purchase Agreement" of that Agreement willcontinue to apply to any Master Purchase Agreement entered into between anyToshiba entity and any M-Systems entity.

** **

** **

IN WITNESS WHEREOF, the parties have caused this Agreementto be executed by their duly authorized representatives as of the EffectiveDate.

 

 
| **Toshiba****America****Electronic Components,  Inc.**

                                   | M-Systems Flash Disk Pioneers, Ltd.                                                          |
|-------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|
| By: /s/ Stephen Marlow

                                                                   | By: /s/ Dana Gross                                                                           |
| Name:          Stephen Marlow                           | Name:      Dana Gross

                                             |
| Title:          VP,  Memory Marketing

  | Title:  Executive  VP, Business  Development                             |
| Date:            August 5, 1998               | Date: ____August 10,  1998__________________         |

 

 

** **

##  Please return one fully-signed original ofthis Agreement to

**TAEC, Attention:  Legal/ContractsAdministration department,**

**9775 Toledo Way****,****Irvine****, CA  92618-1811**

** **

 

 

 

 

 

 

 

**___18___** 

**EXHIBIT A-1**

** **

**DESIGNSPECIFICATION - PRODUCT #1**

[** - 55 pages omitted]

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**___19___** 

**EXHIBIT B-1**

** **

**PRICE SCHEDULE- PRODUCT #1**

** **

#####  Product

MDOC-64 (asdefined in the Development and LicenseAgreement).

** **

**Price**

Prices stated are in United States dollars.**  **Thelower of: (1) $12 in 1999; $9.80 in 2000, and *** in 2001, and (2) the lowestprice TAEC charges a customer for standard 64Mb NAND flash memory multiplied by 1.08, and (3) the lowest price TAEC charges acustomer for MDOC-64.

 

●*       *The "lowest price" will remain in effect untilreplaced by a lower price.  The above formula will be appliedseparately to each shipment of Products at the time of the shipment andnotwithstanding any different price stated on the Purchase Order.

 

●*       **** The maximum price in 2001 will be reduced fromthe maximum price in 2000 by the same percentage that the average price for 64Mbit NAND flash memory has decreased from December 1999 to December 2000.

 

The parties will equally share the burden or benefit ofchanges in the exchange rates.  For example, if the exchange rate onthe Effective Date is 130 yen/dollar and the exchange rate has changed 10% infavor of the dollar at the time a purchase order is placed (143 yen/dollar),then the prices in the above chart will be reduced by 5% (half the exchangerate fluctuation) so they will be: $11.40 in 1999; $9.31 in 2000.  Exchangerate fluctuations will be monitored and this formula applied once each year onthe anniversary of the first commercial shipment of the Product.

 

The prices quoted above are based on the assumptions that:(1) M-Systems purchases the quantities specified below in this Exhibit B, and(2) TAEC will not be required to incurcosts for logic testing.  If these assumptions turn out not to betrue, then an appropriate adjustment will be made to the price to reflect theadditional cost associated with this change in circumstances.

 

In the event all of the following occur commencing afterJan. 1, 2000: (a) during any Royalty Period (as defined in the Development& License Agreement), the average selling price TAEC charges for standard64 Mbit NAND flash memory is below $9.50 in the year 2000 and below $8.50 inthe year 2001; (b) during that same Royalty Period, M-Systems is realizing a60% Gross Margin (revenue less COGS) on the MDOC-64; and (c) the TAEC MarketShare (as defined in the Development & License Agreement) has never at anytime reached or exceeded 20%, then M-Systems will make a payment to TAEC thatequals one half of the Gross Margins in excess of 60% realized by M-Systems onMDOC-64 during such Royalty Period.

 

######  Requirements for Discontinuing Product

In the event TAEC has madethe MDOC-64 commercial samples available in the time required under theDevelopment & License Agreement, but M-Systems has failed to purchase onaverage at least 100,000 units per month either during the second half of theyear 2000 or during the first half of the year 2001, then TAEC may send writtennotice to M-Systems of TAEC`s intent to discontinue production of MDOC-64,which discontinuance shall take effect no earlier than one year from such notice, or at such other time as theparties may agree in writing.

**___20___** 

* *

M-Systems may order anyquantities it requires prior to discontinuance of production for Delivery nomore than six (6) months from the date production ceases.  In theevent of such discontinuance of production, TAEC`s rights under Sections4.3 and 4.4 of the Development and License Agreement shall cease.

 

TAEC will not sell MDOC 64 to any other customer afterdiscontinuing sales of MDOC 64 to M-Systems, unless M-Systems has discontinuedplacing purchase orders for MDOC 64 and has declined to purchase any remaininginventory after being given at least sixty (60) days notice of TAEC`s intent tosell such inventory.  

 

**Capacity Requirements**

TAEC will guarantysufficient capacity to manufacture the following quantities of MDOC-64 forM-Systems in the following years:

 

●*       *$20 million in 1999            

●*       *$35 million in 2000            

●*       *$50 million in 2001            

 

TAEC will be obligatedto meet this commitment only if M-Systems purchases the following quantities offlash memory products (an aggregate of MDOC-64 and standard Flash Memory, theallocation between them being at M-Systems` sole discretion):

 

●*       *  $5 million in 1998

●*       *$10 million in 1999

 

The above stated quantities will include M-Systems`commitment to purchase at least $7 million in MDOC-64 in the first 18 monthsfrom first customer shipment of MDOC-64.  M-Systems will not berequired to purchase these quantities if there is a delay in the developmentschedule of more than ninety (90) days not solely attributable to M-Systems orTAEC materially breaches**otherobligations set forth in the Development and License Agreement.  Inany event, TAEC`s sole remedy in theevent M-Systems fails to meet these purchase levels, is to be relieved of itscapacity guaranty.

 

In addition to TAEC`s****obligation to guaranteecapacity as set forth above, in the event that demand for MDOC-64 exceedsavailable supply, TAEC will make reasonable efforts to provide M-Systems withan equitable allocation of product.

* *

TAEC shall keep and maintain appropriate books andrecords necessary for verification that prices charged for Products meet therequirements of this Agreement. For four (4) years after the end of eachRoyalty Period, M-Systems shall be entitled, not more than once annually toretain independent auditors at M-Systems` expense, to review TAEC`s  booksand records for the purpose of determining whether the prices paid by M-Systemsfor MDOC-64 meet the requirements of this Agreement. Any prices paid byM-Systems to TAEC which are determined as a result of the audit to be incorrectwill immediately be corrected by TAEC**.  **TAEC****will sendout an amended price schedule and reimburse M-Systems for any overpayment  Inthe event the overpayment was more than seven and a half percent (7.5%) of theaggregate payments made for the period being reviewed, TAEC shall pay the costof such audit.

 

** **

**___21___** 

**EXHIBIT C-1**

** **

**QUALITY REQUIREMENTS- PRODUCT #1**

** **

** **

**[Additionalquality requirements to be provided]**

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####  I.       WARRANTY PERIOD

** **

Two (2) years commencing upon Delivery of Product.

** **

**II.     REPLACEMENTTURN-AROUND TIME**

 

Failure report within fourteen (14) days of Toshiba factory****receiving defective units.

* *

Replacementproduct shipped within thirty (30) days of  TAEC receiving defectiveunits.

** **

####  III.    EPIDEMIC FAILURE RATES

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●*       *Single root cause rate:  0.1%

 

●*       *Multiple cause rate:  1%

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**___22___** 

**EXHIBIT D-1**

** **

**MISCELLANEOUSPROVISIONS - PRODUCT #1**

 

** **

#### I.*            *LEAD TIMES

** **

Sixty (60) days.

** **

####  II.     ORDER ADJUSTMENT SCHEDULE

** **

For the purpose of the OrderAdjustment Schedule, the following definitions apply:

 

●*         *"Days" means the number of days from receipt ofwritten notification of the requested adjustment by M-Systems until the scheduledDelivery of the Products.

 

●*         *"Adjustment" means the allowable percentage ofunits ordered that may be either increased over the original purchase orderquantity or rescheduled for later delivery (up to one hundred and eighty (180)days) from the original purchase order delivery date.

** **

DaysAdjustment

*  * 91+             100%

61-90               66%

31-60               33%

 0-30                  0%

** **

**III.    PREFERREDCARRIER(S)**

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**___23___**