Document:

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                                                                    Exhibit 10.8

                              EMPLOYMENT AGREEMENT

     This AGREEMENT, dated /s/ February 12, 2002, is between ZymoGenetics, Inc.,
                           ---------------
a Washington corporation ("Company") and Suzanne Shema ("Executive").
                           -------                       ---------

     1. Employment. Company will employ Executive and Executive will accept
        ----------
employment as Vice President, Intellectual Property and Legal, of the Company.
Executive accepts employment upon the terms and conditions contained in this
Agreement and for the period (hereinafter called the "Term of Employment")
                                                      ------------------
specified in Section 3 below.

     2. Duties. Executive shall, during the Term of Employment, serve the
        ------
Company under the direction of the President of the Company. Executive shall
perform the duties of her position faithfully, diligently and competently and to
the best of her ability, and shall devote her full business time to her
employment. Executive shall perform such other duties as are assigned to her by
the President or the Board of Directors of the Company. Executive shall not
engage in any other business activity (except the management of personal
investments which in the aggregate do not interfere with the performance of
Executive's duties) without first obtaining the written consent of Company, such
consent not to be unreasonably withheld.

     3. Term of Employment; Termination.
        -------------------------------

     Executive's Term of Employment shall be two years from the date of this
Agreement, unless extended or earlier terminated as provided below.

     (a) Termination or Extension of Term of Employment By Company

     The Company shall employ Executive, for a period commencing on the date
hereof and terminating as follows:

                  (i) Two years from the date hereof, if at least thirty (30)
days prior to such date either the Company or Executive has, at its election,
notified the other in writing that this Agreement shall terminate on such date.
If notice of termination is not given, this Agreement shall be deemed to extend
from year to year. It can then be terminated by written notice at least thirty
(30) days prior to the annual renewal date.

                  (ii) With or without "Cause" (as defined below), Company may
terminate the employment of Executive at any time upon giving "Notice of
Termination" (as defined below).

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     (b) By Executive

     Executive may terminate her employment at any time, for any reason, upon
giving Notice of Termination.

     (c) Automatic Termination

     This Agreement and Executive's employment hereunder shall terminate
automatically upon the death or total disability of Executive. The term "total
                                                                         -----
disability" as used herein shall mean Executive's inability to perform the
----------
duties set forth in paragraph 1 hereof for a period or periods aggregating
ninety (90) calendar days in any 12-month period as a result of physical or
mental illness, loss of legal capacity or any other cause beyond Executive's
control, unless Executive is granted a leave of absence by the Board of
Directors of Company. Executive and Company hereby acknowledge that Executive's
ability to perform the duties specified in paragraph 2 hereof is of the essence
of this Agreement. Termination hereunder shall be deemed to be effective (a) at
the end of the calendar month in which Executive's death occurs or (b)
immediately upon a determination by the Board of Directors of Company of
Executive's total disability, as defined herein.

     (d) Notice

     The term "Notice of Termination" shall mean at least thirty (30) days'
               ---------------------
written notice of termination, by either party, of Executive's employment,
during which period Executive's employment and performance of services will
continue; provided, however, that Company may, upon notice to Executive and
without reducing Executive's compensation during such period, excuse Executive
from any or all of her duties during such period. Such a reduction in duties
shall not constitute "good reason" for voluntary termination so as to trigger
termination payments in accordance with subparagraph 4.2. The effective date of
the termination (the "Termination Date") of Executive's employment hereunder
                      ----------------
shall be the date on which such 30-day period expires.

     4. Termination Payments
        --------------------

     In the event of termination of the employment of Executive, all
compensation and benefits set forth in this Agreement shall terminate except as
specifically provided in this paragraph 4:

                                       -2-

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     4.1 Termination by Company

     (a) Upon termination by Company, Company shall pay Executive any unpaid
annual base salary which has accrued for services already performed as of the
Termination Date.

     (b) If Company terminates Executive's employment without Cause, as defined
below, Executive shall be entitled to receive termination payments equal to
twelve (12) months annual base salary. The termination payments shall be
calculated according to Executive's base salary as of the date of Notice of
Termination and the termination payments will be paid semi-monthly in equal
parts in accordance with the same time schedule that Company or a "Successor
                                                                   ---------
Company" (as defined in the Stock Option Agreement and incorporated by reference
-------
herein) makes its customary payroll. Company or a Successor Company may deduct
customary withholdings including social security, federal and state income
taxes, and state disability insurance from these severance payments; however,
any and all such obligations shall be Executive's responsibility. Company will
issue and file appropriate Form 1099 or similar tax documents in connection with
any termination payments. The termination payments described in this paragraph
are expressly contingent upon Executive's full compliance with the terms of his
Employee Inventions and Proprietary Information Agreement with Company (the
"Inventions Agreement"), a copy of which is attached hereto. In the event
 --------------------
Executive were to materially breach this Inventions Agreement, his right to any
termination payments under this paragraph shall be extinguished, Company (and
any Successor Company) shall cease payments, and Executive shall immediately
return to Company or to any Successor Company any severance payments already
made. If Executive is terminated by either Company or any Successor Company for
Cause, Executive shall not be entitled to receive any of the foregoing benefits,
other than those set forth in clause (a) above.

     4.2 Termination by Executive

     In the case of the termination of Executive's employment by Executive for
"good reason," as defined below, Executive shall be entitled to the termination
payments as set forth in clauses 4.1(a) and (b). In the case of termination of
Executive's employment by Executive for any other reason, Executive shall not be
entitled to any termination payments or accelerated vesting benefit, other than
as set forth in clause 4.1(a), above.

                                       -3-

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     4.3 Termination as a Result of Death or Total Disability.

     In the event of termination of Executive's employment pursuant to
subparagraph 3(c), Executive or his estate shall be paid the compensation set
forth in clause 4.1(a) and shall not be entitled to any of the benefits under
clauses 4.1(b).

     4.4 "Good Reason"

     "Good reason" shall mean the occurrence of any of the following events,
      -----------
without the consent of the Executive:

     a)  a demotion or other material reduction in the nature or status of
         Executive's responsibilities; provided, however, that a change in the
         person or office to which Executive reports, without a corresponding
         reduction in duties, status and responsibilities, shall not constitute
         "good reason;"

     b)  a non-voluntary reduction in the Executive's annual base salary;

     c)  requirement by a Successor Company that the Executive relocate her
         principal place of employment to a location that is more than 50 miles
         from the principal place of employment where Executive was employed; or

     d)  the failure of Company to obtain a satisfactory agreement from any
         Successor Company to assume and perform the obligations under this
         Agreement.

     4.5 Cause

     Wherever reference is made in this Agreement to termination being with or
without Cause, "Cause" shall include, without limitation, the occurrence of one
                -----
or more of the following events:

     a)  willful misconduct, insubordination, or dishonesty in the performance
         of Executive's duties or other knowing and material violation of
         Company's or a Successor Company's policies and procedures in effect
         from time to time which results in a material adverse effect on Company
         or a Successor Company;

     b)  willful actions (or intentional failures to act) in bad faith by
         Executive with respect to Company or a Successor Company that
         materially impair Company's or a Successor Company's business, goodwill
         or reputation;

                                       -4-

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     c)  conviction of Executive of a felony involving an act of dishonesty,
         moral turpitude, deceit or fraud, or the commission of acts that could
         reasonably be expected to result in such a conviction; or

     d)  any material violation by Executive of Executive's Inventions Agreement
         with Company.

     5.  Compensation and Fringe Benefits.
         --------------------------------

     (a) The Company shall, during the Term of Employment, pay to the Executive
as compensation for the performance of her duties and obligations a salary of
$190,000 per annum. This compensation is subject to annual review and
adjustment, as appropriate in the judgment of the Company. The compensation
payable pursuant to this Section 5(a) shall be payable in equal semi-monthly
installments on the last day of each such pay period.

     (b) The Executive shall be enrolled and participate in any retirement,
group insurance and other fringe benefit plans and arrangements which are
applicable to the similarly situated personnel of the Company and in effect from
time to time, if the Executive is eligible therefor, in each case in accordance
with and subject to the provisions thereof.

     (c) Stock Options

                  (i) Executive has been granted a ten-year stock option under
the Company's Amended and Restated 2000 Stock Incentive Plan, which allows
Executive to purchase 50,000 shares of the Company's common stock.

                  (ii) Executive shall be eligible to receive future grants of
stock options pursuant to the Company's stock-based bonus program; and

                  (iii) Executive shall be eligible to receive future periodic
(i.e., non bonus-related) grants under the Company's stock incentive programs.

     (d) Executive will also receive the following executive perquisites for the
duration of this contract:

                  (i) Company-paid term life insurance policy in the amount of
$200,000; and

                  (ii) Company-paid use of either a laptop computer or personal
computer, to be upgraded bi-annually at the time this contract is renewed; and

                                       -5-

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                  (iii) Company-paid annual executive health physical, to be
administered by a physician selected by the Company; and

                  (iv) Company-paid expenses for a residential phone and
cellular phone.

         6. Expenses. All travel and other reasonable expenses incident to the
            --------
rendering of service by the Executive hereunder will be paid by the Company. If
such expenses are paid in the first instance by the Executive, the Company will
reimburse her upon presentation of proper expense accounts. Reimbursement
requests, along with supporting documentation, should be submitted within sixty
(60) days of incurring the expense.

         7. Non-competition.
            ---------------

         (a) Upon termination of Executive's employment with the Company for any
reason, and for a period of twelve (12) consecutive months after leaving her
employment with the Company, Executive will not directly or indirectly work or
otherwise engage in research, manufacture, sale or distribution of any product,
method or matter:

                  (i) For any business, whose commercial efforts are in
competition with the products manufactured or marketed by the Company during
Executive's employment with the Company or under research or development by the
Company during Executive's employment with the Company (and on which the Company
has expended at least $500,000); or

                  (ii) For any research institution whose research efforts
pertain to the same products manufactured or marketed by the Company during
Executive's employment with the Company or under research or development by the
Company during Executive's employment with the Company (and on which the Company
has expended at least $500,000), unless the Executive is not involved in any
manner in the design, conduct or supervision of such research efforts, or unless
such research is being conducted solely for scientific and not for commercial
purposes. The executive shall be deemed to be connected with a business if such
business is carried on by partnership in which she is a general or limited
partner, consultant or employee, or a corporation or association of which she is
a shareholder, officer, director, employee, member, consultant or agent;
provided, that nothing herein shall prevent the purchase or ownership by the
Executive of shares of less than 1% of the outstanding shares in a publicly or
privately held corporation.

                                       -6-

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         Said twelve (12) months' period shall commence on the day on which the
Executive actually leaves her employment with the Company, even if this date is
prior to the expiration of any given notice of termination.

         (b) The Company's Board of Directors may, at its own discretion, by
express or written consent, release the Executive from the restriction in
paragraph 6(a).

         (c) For a period of one (1) year after the employment of the Executive
is terminated for any reason, Executive will not directly or indirectly, either
for Executive's account or as representative or agent for any other person,
firm, corporation or entity, solicit the services of, or entice away, any
Executive of the Company, or the Executive of any company affiliated with the
Company.

         (d) In the event that Executive during said period described in
paragraph 6(a) violates any of the Executive's obligations towards the Company,
including but not limited to the Executive accepting a position with a competing
enterprise or Executive violating terms of paragraph 6(c), payment of Severance
or Salary Continuation shall cease automatically without notice, regardless of
whether the Company takes legal action or otherwise tries to enforce its rights.
The Company reserves all rights it may have under contract or law to relief or
damages in addition to termination of the above-described payments.

         8. Binding Effect. This Agreement shall be binding upon and inure to
            --------------
the benefit of the Company and the Executive and their respective heirs, legal
or personal representatives, successors and assigns.

         9. Rights of Assignment or Delegation. This Agreement is personal to
            ----------------------------------
the Executive and shall not be assignable. Company may assign its rights
hereunder to (a) any corporation resulting from any merger, consolidation, or
other reorganization to which Company is a party or (b) any corporation,
partnership, association, or other person to which Company may transfer all or
substantially all of the assets in business of Company existing at such time.
All the terms and provisions of this Agreement shall be binding upon and shall
inure to the benefit and be enforceable by the parties hereto and their
respective successors and permitted assigns.

         10. Waiver. No delay or failure by any party in exercising, protecting
             ------
or enforcing any of its rights, titles, interests, or remedies hereunder and no
course of dealing or performance with respect thereto, shall constitute a
waiver. The express waiver by a party of any right, title, interest, or remedy
in a particular instance or circumstance shall not constitute a waiver in any
other instance or circumstance. All rights and remedies shall be cumulative and
not exclusive or any rights or remedies.

                                       -7-

<PAGE>

         11. Arbitration. Any controversies or claims arising out of or relating
             -----------
to this Agreement shall be finally and fully settled by arbitration of the City
of Seattle, Washington in accordance with the Employment Arbitration Rules of
the American Arbitration Association then in effect (the "AAA Rules"), conducted
by one arbitrator, mutually agreed upon by Company and Executive or chosen in
accordance with the AAA Rules, except the parties thereto shall have any right
to discovery would be permitted by the Federal Rules of Civil Procedure for a
period of 90 days following the commencement of such arbitration and the
arbitrator shall resolve any dispute which arises in connection with such
discovery. The prevailing parties shall be entitled to costs, expenses,
reasonable attorneys' fees, and judgment upon the award rendered by the
arbitrator. The award may be entered in any court having jurisdiction.

         12. Amendments in Writing. No amendment, modification, waiver,
             ---------------------
termination or discharge of any provision of this Agreement, nor consent to any
departure by either party, shall in any event be effective unless the same shall
be in writing, specifically identifying this Agreement and the provision
intended to be amended, modified, waived, terminated, or discharged and assigned
by Company and Executive. Each such amendment, modification, waiver,
termination, or discharge shall be effective only in the specific instance and
for the specific purpose for which given. No provision of this Agreement shall
be varied, contradicted, or explained by any oral agreement, course of dealing
or performance or any other matter not set forth in agreement in writing and
signed by Company and Executive.

         13. Notices. Any notice required or desired to be given hereunder shall
             -------
be in writing and shall be deemed sufficiently given when delivered or when
mailed by first class certified or registered mail, postage prepaid, to the
party for whom intended at the following address:

To the Company:
                           Dr. Bruce L. A. Carter
                           CEO and President
                           ZymoGenetics, Inc.
                           1201 Eastlake Avenue East
                           Seattle, WA 98102
To the Executive:
                           Suzanne Shema
                           Vice President, Intellectual Property and Legal
                           2734 SW 167th Street
                           Burien, WA  98166

                                       -8-

<PAGE>

or to such other address, as to either party, as such party shall from time to
time designate by like notice to the other.

         14. Entire Agreement. This Agreement will, upon the commencement of the
             ----------------
Term of Employment, supersede all prior agreements between the Executive and the
Company, except the Employee Inventions and Proprietary Information Agreement
dated June 7, 2001, and any such prior agreements and the terms and conditions
thereof shall hereafter be null, void and of no effect.

         15. Governing Law. This Agreement is made under and shall be governed
             -------------
by and construed in accordance with the internal laws of the State of
Washington.

         16. Severability. If any provision of this Agreement shall be held
             ------------
invalid, illegal or unenforceable in any jurisdiction, for any reason, including
without limitation, the duration of such provision, it's geographical scope or
the extent of the activities prohibited or required by it, then, to the full
extent permitted by law (a) all other provisions hereof shall remain in full
force and effect and such jurisdiction shall be liberally construed in order to
carry out the intent of the parties as nearly as may be possible, (b) such
invalidity, illegality, or unenforcability shall not effect the validity,
legality or enforceability of any other provision, and (c) any court or
arbitrator having jurisdiction there over shall have the power to reform such
provision to the extent necessary for such provision to be enforceable under
applicable law.

         17. Multiple Copies. This Agreement may be executed in two or more
             ---------------
counterparts of like tenor and effect, each of which shall be deemed an original
but all of which together shall constitute one and the same instrument.

                                    ZYMOGENETICS, INC.
                                    By: /s/ Bruce L. A. Carter
                                        -------------------------------------
                                    Dr. Bruce L. A. Carter, President and CEO

                                    EXECUTIVE:
                                    /s/  Suzanne Shema
                                    -----------------------------------------
                                    Suzanne Shema

                                       -9-<PAGE>

                                                                   EXHIBIT 10.24

               -----------------------------------------------------------------
               Confidential treatment has been requested for portions of this
               exhibit. The copy filed herewith omits the information subject to
               the confidentiality request. Omissions are designated as [*]. A
               complete version of this exhibit has been filed separately with
               the Securities and Exchange Commission.
               -----------------------------------------------------------------

                             MICROSOFT CONFIDENTIAL

                   MICROSOFT XBOX COMPONENT PURCHASE AGREEMENT

This Component Purchase Agreement (the "Agreement") dated and effective as of
December 19, 2000 (the "Effective Date") is by and between Microsoft
Corporation, a Washington corporation, with offices at One Microsoft Way,
Redmond, WA 98052-6399 (including its successors and assigns, "Microsoft") and
Applied Microsystems Corporation, a Washington corporation, with offices at 5020
- 148th Avenue Northeast, P.O. Box 97002, Redmond, Washington 98073-9702
("Supplier" and, together with Microsoft, the "Parties").

                                    RECITALS

A.   Microsoft, a developer of software technologies and hardware products, is
     developing a video game device known internally by Microsoft as Xbox.

B.   Supplier, a manufacturer of a DVD emulation system, desires to sell to
     Microsoft certain Product(s) (as hereinafter defined) for use by Microsoft
     with respect to its Xbox game devices.

C.   The Parties hereto wish to establish the terms and conditions under which
     Supplier will sell to Microsoft and its Subcontractor(s) such Product(s)
     for use with respect to Xbox game devices.

D.   In connection herewith, the Parties have separately entered into a
     Microsoft Corporation Non-Disclosure Agreement dated May 25, 2000 (the
     "NDA"), a Microsoft Corporation Xbox Component Development Kit License
     dated July 20, 2000, a Development & License Agreement dated as of the date
     hereof and the License and Comprehensive Preferred Escrow Agreement dated
     as of the date hereof (the "Escrow Agreement") (this Agreement, together
     with such other agreements, the "Operative Documents").

                                    AGREEMENT

NOW THEREFORE, in consideration of the mutual covenants contained herein, the
parties agree as follows:

1.   Definitions.

          "Buffer Inventory" shall have the meaning described in Article 8 of
          this Agreement.

          "Competitor" means [*] or any other person, company or entity engaged
          in manufacturing or developing video game consoles or video game
          development tools, and any successor to or assign of any of the
          foregoing.

          "Compliance Period" means, with respect to any Product(s), a [*]
          period commencing upon the date of delivery thereof to Microsoft.

          "Derivative Technology" means: (i) for copyrightable or copyrighted
          material, any translation (including translation into other computer
          languages), portation, modification, correction, addition, extension,
          upgrade, improvement, compilation, abridgment or other form in which
          an existing work may be recast, transformed or adapted; (ii) for
          patentable or patented material, any improvement thereon; and (iii)
          for material which is protected by trade secret, any new material
          derived from such existing trade secret material, including new
          material which may be protected by copyright, patent and/or trade
          secret.

          "Escrow Materials" is defined in the Escrow Agreement.

          "Microsoft Jurisdictions" means the United States, [*], or any
          successors thereto.

[*] Confidential treatment requested

<PAGE>

                             MICROSOFT CONFIDENTIAL

          "Product(s)" shall mean the product or products specified in Exhibit A
          hereto, including any cost reduced versions thereof developed in
          accordance herewith.

          "Purchase Order(s)" shall mean purchase orders for Product(s)
          submitted by Microsoft or Subcontractor(s) to Supplier under this
          Agreement.

          "Specifications" means the specifications for the Product(s) as set
          forth in Exhibit A.

          "Subcontractor(s)" means Subcontractor(s) authorized by Microsoft to
          manufacture and/or repair the Xbox and/or components thereof.
          Subcontractor(s) authorized as of Effective Date are listed in Exhibit
          B, which Exhibit B may be amended at any time by Microsoft giving
          written notice to Supplier.

          "Term" shall mean the term of this Agreement as set forth in Article
          14(a).

          "Xbox" shall mean the video game device(s) designed by Microsoft and
          referred to internally by Microsoft as the "Xbox".

2.   Products and Prices.

     (a)  Products. Supplier hereby agrees to sell the Product(s) to Microsoft
          and Subcontractor(s) pursuant to the terms and conditions of this
          Agreement.

     (b)  Prices. The price(s) for the Product(s) are specified on Exhibit A.
          Notwithstanding the foregoing, at all times during the Term, the
          price(s) for the Product(s) purchased by Microsoft and
          Subcontractor(s) hereunder shall not be higher than the lowest price
          charged by Supplier to any other customer purchasing reasonably
          comparable products in quantities similar to or less than the
          aggregate quantities of Product(s) purchased by Microsoft and
          Subcontractor(s) hereunder (regardless of the quantities Microsoft or
          a Subcontractor(s) may purchase individually). In the event that
          Supplier offers any such other customer a lower price, Supplier shall
          immediately notify Microsoft and reduce the price charged hereunder
          for the applicable Product(s). The reduced price shall be applied to
          both future Purchase Orders and to Purchase Orders already submitted
          but not yet filled. Microsoft will be entitled to independent audit to
          ensure compliance with this Article as provided in Article 19(i).

     (c)  Cost Reductions. Supplier and Microsoft agree to pursue cost reduction
          opportunities and to share the benefit of such cost reductions in a
          manner to be mutually agreed upon. Agreed-upon cost reductions shall
          be set forth in written amendments to Exhibit A, which Exhibit also
          contains the Parties' cost reduction goals for the Product(s).

     (d)  No Changes. Supplier shall not change the form, fit, function, design
          or appearance of the Product(s), or make any significant process
          technology changes to the Product(s) during the Term without having
          received the prior written consent of Microsoft (except as provided in
          Article 2(e) below). Microsoft will reasonably promptly respond to
          Supplier's request for its consent and will not unreasonably withhold
          or delay its consent. During the Term, Supplier shall not discontinue
          the manufacture of the Product(s) without Microsoft's written consent.

     (e)  Mandatory Changes. If mandatory changes to the Product(s) are required
          to satisfy governmental standards of any Microsoft Jurisdiction
          (including any subdivision thereof) or for safety reasons (any such
          change, a "Mandatory Change"), Supplier will provide Microsoft with
          ninety (90) days' prior written notice before implementing any such
          changes, and all Product(s) delivered to Microsoft after such
          Mandatory Changes are in effect shall incorporate the Mandatory
          Changes. Supplier shall bear all risks and expenses associated with
          such Mandatory Changes, including, without limitation, all

[*] Confidential treatment requested

                                       -2-

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                             MICROSOFT CONFIDENTIAL

          costs of re-engineering, inspection, testing and labor. Supplier will
          provide related technical support as Microsoft and/or Subcontractor(s)
          may request in connection with any of the foregoing.

     (f)  Purchase Order Terms Excluded. This Agreement shall exclusively govern
          all orders of Product(s) by Microsoft and Subcontractor(s) and except
          for delivery dates stated in Purchase Orders, any additional terms on
          any Purchase Order, acceptance, confirmation or other form shall be of
          no effect and shall be disregarded.

     (g)  Product Updates. If Supplier makes available any updates or other
          improvements to the Products, Supplier agrees to give Microsoft the
          right to purchase such updates or other improvements under the terms
          and conditions of this Agreement and at prices to be mutually agreed
          by Supplier and Microsoft (subject to Article 2(b) above). All such
          updates or other improvements will be offered to Microsoft as early as
          to any of Supplier's other customers.

     (h)  Effect of Microsoft Reviews, Approvals and Consents. Microsoft is
          entitled to certain reviews, approvals and consents as provided in
          this Agreement, but no such review, approval or consent will in any
          way constitute a waiver of Supplier's obligations hereunder, including
          its obligation to deliver Products complying with the Specifications
          and the other terms of this Agreement.

     (i)  No Conflict of Interest. During the Term, Supplier shall not accept
          work, enter into any contract or accept any obligation, the terms of
          which is/are inconsistent or incompatible with Supplier's obligations
          under this Agreement, and Supplier hereby warrants, represents and
          covenants to Microsoft that Supplier is not as of the date hereof
          subject to any such contract or obligation, it being understood that
          Supplier may from time to time accept work or obligations or enter
          into contracts with Competitors on terms that are consistent and
          compatible with its obligations hereunder.

3.   Subcontractor(s).

     (a)  Exercise Through Subcontractors. Microsoft may purchase Product(s) and
          otherwise exercise its rights and/or perform its obligations hereunder
          directly and/or through its authorized Subcontractor(s). Supplier
          agrees to accept and fill, in accordance with the terms hereof,
          Purchase Orders placed by Microsoft and Subcontractor(s).

     (b)  Authorized Subcontractors. Subcontractor(s) authorized as of the
          Effective Date are specified in Exhibit B hereto. Notifications
          concerning Microsoft amendments to Exhibit B shall be sent to the
          following and shall be effective as the date Microsoft sends such
          notice:

          Applied Microsystems Corporation
          5020 - 148th Avenue Northeast
          P.O. Box 97002
          Redmond, WA  98073-9702
          Attn:  Chief Financial Officer

4.   Terms of Payment. Terms of payment are net [*] days from the date of
     delivery to Microsoft or the Subcontractor(s). Supplier shall issue
     invoices only after delivering the Product(s) covered by the invoice.

5.   Forecasts, Purchase Orders, Allocations.

     (a)  Program Forecasts. By the end of the first week of each Microsoft
          fiscal quarter, Microsoft will provide Supplier with a Product(s)
          demand forecast specifying Product(s)

[*] Confidential treatment requested

                                       -3-

<PAGE>

                             MICROSOFT CONFIDENTIAL

          volumes by quarter for the remainder of the Term. The quarterly demand
          forecast will be for general forecasting purposes only.

     (b)  Monthly Forecasts. Microsoft will provide Supplier, on a [*] basis,
          with a [*] month rolling forecast of the anticipated quantity of
          Product(s) required by Microsoft and its Subcontractor(s) for the
          following [*] months (the "[*] Month Rolling Forecast"). The [*] Month
          Rolling Forecast will constitute only Microsoft's good faith estimate
          of intended total purchases of Products and will not constitute a
          commitment to buy. Unless Supplier notifies Microsoft to the contrary
          within five (5) business days after having received the Microsoft [*]
          Month Rolling Forecast, Supplier shall be deemed to have confirmed
          supply of Product(s) for such rolling [*] month period as shown in the
          Microsoft [*] Month Rolling Forecast. Confirmation of the [*] Month
          Rolling Forecast by Supplier constitutes a commitment by Supplier to
          provide the forecasted quantities of Product(s) upon receipt of
          Purchase Orders therefor. In any event, Supplier for each month during
          the Term shall always ensure that it has a minimum supply capacity for
          such month as provided in Exhibit A. Supplier may reject only a [*]
          Month Rolling Forecast that forecasts an average quantity of
          Product(s) per month over the months covered therein that exceeds such
          minimum supply capacity.

     (c)  Purchase Orders. A Purchase Order is Supplier's only authorization to
          ship Product(s) hereunder and Microsoft and Subcontractor(s) may
          return any unauthorized shipment of Product(s) at Supplier's sole risk
          and expense. Microsoft and Subcontractor(s) shall submit Purchase
          Orders in writing and may transmit Purchase Orders by fax or by email.
          Unless Supplier notifies Microsoft or a Subcontractor(s) to the
          contrary within three business (3) days after the date of their
          Purchase Order, Supplier shall be deemed to have accepted and
          confirmed, and shall be obliged to fill, such Purchase Order. Purchase
          Orders will be placed at least [*] days in advance of the date as of
          which the Product(s) are to be delivered. Microsoft may request a
          shorter lead time, and Supplier shall use its commercially reasonable
          efforts to meet such date. During any calendar month, Supplier will
          not be required to deliver a quantity of Product(s) that exceeds the
          sum of (i) the quantity forecast to be delivered for such month under
          the current [*] Month Rolling Forecast and (ii) the required Buffer
          Inventory for such month, unless Supplier otherwise agrees. If
          Microsoft and its Subcontractor(s) at any time increase the quantities
          of Product(s) to be delivered in excess of the foregoing limit,
          Supplier will not be required to deliver the excess quantity within
          the specified time period, but Supplier will use its best efforts to
          do so. Unless Microsoft is in material breach of this Agreement,
          Supplier will not be entitled to reject any Purchase Order which
          complies with the terms of this Agreement. Supplier shall fill all
          Purchase Orders from the Buffer Inventory first, on a "First In -
          First Out" basis as described in Article 8 below.

     (d)  Acceleration. Microsoft and its Subcontractor(s) may at any time
          increase the quantities of Product(s) to be delivered to Microsoft or
          the Subcontractor(s) as shown in the [*] Month Rolling Forecast up to
          a maximum quantity of Product(s) equal to that then available in the
          Buffer Inventory maintained as specified in Article 8 below.

     (e)  Capacity Constraints and Allocation. Supplier shall allocate
          manufacturing capacity, components and parts, for manufacture of the
          Product(s) in sufficient quantity to meet Microsoft's then current [*]
          Month Rolling Forecast. Upon request by Microsoft and/or
          Subcontractor(s), Supplier shall provide up-to-date reports of
          allocations of, and any existing or foreseeable constraints upon,
          Supplier's manufacturing capacity and supplies of components for the
          Product(s). Supplier will provide Microsoft and Subcontractor(s) with
          all reasonable cooperation with respect to their monitoring of such
          capacities, supplies and allocations. Without limiting Supplier's
          other obligations and Microsoft's rights hereunder, if capacity and/or
          supplies of parts or components constrain the availability of
          Product(s) such that Supplier cannot meet the demand stated in
          Microsoft's then current [*] Month Rolling Forecast, Supplier shall
          nevertheless give Microsoft priority

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                             MICROSOFT CONFIDENTIAL

          allocation over that of any other customer of Supplier. At a minimum,
          such priority allocation shall directly reflect the percentage of
          Supplier's business represented by the aggregate of Microsoft's and
          Subcontractor(s)' purchases hereunder based on quantity of Product(s)
          and not on Supplier's margin or profit thereon. If for any reason (but
          without limiting Supplier's right to claim Excusable Delay under
          Article 13(b)) Supplier cannot meet the minimum supply capacity as
          provided in Exhibit A, Microsoft, at its option, may at any time enter
          into commitments with other suppliers for substitute supply for a
          period up to the remainder of the Term and, without limiting
          Supplier's other obligations hereunder, Supplier will be responsible
          for any additional cost of such substitute supply and any expenses
          incurred in connection therewith.

     (f)  Electronic Commerce. Microsoft and Supplier agree to use their best
          efforts to establish systems to implement this Agreement through
          electronic commerce business practices in order to minimize or
          eliminate the use of paper, fax, voice mail and/or e-mail for the
          communication of routine business data, including, but not limited to:
          communications of forecasts and Purchase Orders, placement,
          acknowledgement, acceptance, modification, available to promise,
          completion, ship notification, shipment tracking, product receipt
          notification, and invoicing. To this end, the Parties shall work
          expeditiously to develop an agreed upon framework for electronic
          commerce including plans and allocations of resources by each Party
          necessary to accomplish the implementation of such framework by [*].

     (g)  Minimum Buy Quantities. Subject to Supplier's compliance with the
          terms hereof and any termination of this Agreement pursuant to Article
          14, Microsoft agrees to purchase a minimum of [*] units of Product(s)
          prior [*], but only so long as Supplier is able to produce Product(s)
          that conform to the Specifications and other requirements hereunder
          prior to such date.

6.   Shipment, Packing and Delivery.

     (a)  Terms of Shipment. Supplier shall ship all Product(s) purchased by
          Microsoft and Subcontractor(s) hereunder [*] to such locations as
          shall be specified in the Purchase Order. Supplier shall separately
          itemize and invoice Microsoft for charges for shipping that is in
          accordance with Article 6(b) and for reasonable and customary
          insurance.

     (b)  Selection of Carrier. Supplier will ship the Product(s) only via
          carriers designated by Microsoft or a Subcontractor(s), as the case
          may be. In the absence of written instructions from Microsoft or a
          Subcontractor(s), Supplier shall select a carrier qualified to
          Supplier standards for shipment of similar commodities and arrange for
          shipment of the Product(s) under ordinary and customary terms and
          conditions of carriage.

     (c)  Packing, Marking, Documentation. Supplier will handle, pack, mark and
          ship the Product(s) in accordance with Supplier's standards for
          similar commodities and any packing and labeling specifications
          required by Microsoft or the Subcontractor(s) and notified to Supplier
          at least thirty (30) days prior to shipment. Supplier shall mark the
          Product(s) and packaging with the country of origin as required, and
          provide a certificate of origin and any other documents required for
          customs purposes.

     (d)  Delivery Date. Supplier acknowledges and agrees that the scheduled
          delivery date stated in a Purchase Order is a material term of this
          Agreement, and that time is of the essence for all deliveries of
          Product(s) hereunder. Supplier shall deliver all Product(s) hereunder
          on such scheduled delivery date. Supplier shall not deliver in advance
          of such scheduled delivery date without the prior written consent of
          Microsoft or the Subcontractor(s) that issued the Purchase Order.

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                             MICROSOFT CONFIDENTIAL

     (e)  Delayed Delivery. Without prejudice to the provisions of the foregoing
          Article 6(d), if in the case of any individual Purchase Order, unusual
          circumstances cause Supplier to be unable to make delivery on the
          delivery date specified in such Purchase Order, Supplier shall notify
          Microsoft or the Subcontractor(s), as the case may be, as soon as
          Supplier becomes aware of the delay, and shall state in such notice
          the date on which delivery can be made. Upon such notice, Microsoft or
          the Subcontractor(s) may, at its sole option, require Supplier to ship
          the Product(s) under such Purchase Order by air, and Supplier hereby
          agrees to bear the additional cost of such air shipments and any other
          costs incurred to deliver the Product(s) covered by such Purchase
          Order on or before such revised delivery date.

     (f)  Partial Delivery. If in the case of any individual Purchase Order,
          only a portion of (or none of) Product(s) stipulated on the Purchase
          Order are available to meet the specified delivery date, Supplier
          shall notify Microsoft or the Subcontractor(s) in writing of the
          shortfall as soon as Supplier becomes aware of the shortfall prior to
          the scheduled shipment date, and unless otherwise directed by
          Microsoft or the Subcontractor(s), Supplier shall ship the available
          Product(s) as scheduled.

7.   Cancellations and Reschedules.

     (a)  Cancellation. Upon written notice to Supplier given no less than [*]
          days prior to the scheduled delivery date for any Purchase Order,
          Microsoft or the Subcontractor(s) may cancel all or any part of such
          Purchase Order. Except for cancellations of Purchase Orders associated
          with the termination of this Agreement by Microsoft pursuant to
          Article 14(b)(ii), Microsoft and Subcontractor(s) will not cancel, in
          whole or in part, Purchase Orders scheduled for shipment within [*]
          days.

     (b)  Rescheduling. Upon written notice to Supplier given no less than [*]
          days prior to the scheduled delivery date for any Purchase Order,
          Microsoft or the Subcontractor(s) may reschedule the delivery of all
          or part of the Product(s) covered by such Purchase Order. Unless
          Supplier otherwise agrees, Microsoft may reschedule an order only once
          and cannot reschedule any order for more than [*] days beyond the
          originally scheduled delivery date.

8.   Buffer Inventory.

     Commencing not later than [*] weeks after the first delivery date set forth
     on Microsoft's initial program forecast, in addition to manufacturing the
     quantity of Product(s) necessary to meet Microsoft's forecasts and to fill
     Purchase Orders in accordance with Article 6 above, Supplier shall, at its
     own expense, establish, and thereafter maintain throughout the Term, an
     additional inventory of Product(s) that have passed inspection pursuant to
     Article 9(a) below (the "Buffer Inventory"). The amount of Product(s)
     required to be maintained in the Buffer Inventory shall vary from month to
     month and shall in each month be equal to [*] of the total amount of
     Product(s) Microsoft forecasts to be required during the upcoming [*] month
     period as stated on Microsoft's then current [*] Month Rolling Forecast.
     Supplier shall maintain a Buffer Inventory for each different Product
     listed on Microsoft's then current [*] Month Rolling Forecast. Supplier
     shall maintain the Buffer Inventory at Supplier's final assembly and test
     facility specified in Exhibit A, and Microsoft may inspect the Buffer
     Inventory at any reasonable time upon reasonable notice to Supplier.
     Supplier shall fill Purchase Orders from the Buffer Inventory on a "First
     In - First Out" (FIFO) basis and shall continuously replenish the Buffer
     Inventory to maintain the required amount of Product(s) as described above.
     If due to acceleration of Purchase Orders pursuant to Article 6(d) above
     the Buffer Inventory becomes depleted below the required level, Supplier
     shall re-establish the required amount of Buffer Inventory within [*] days
     of such depletion. If at any time Supplier fails for any reason to maintain
     the amount of Buffer Inventory required hereunder, Microsoft, at its option
     and without limiting its other rights and Supplier's other obligations
     hereunder, may enter into commitments with other suppliers for substitute
     supply for a period up

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                             MICROSOFT CONFIDENTIAL

     to the remainder of the Term and, without limiting Supplier's other
     obligations hereunder, Supplier will be responsible for any additional cost
     of such substitute supply and any expenses incurred in connection
     therewith.

9.   Quality Inspection.

     (a)  Inspection by Supplier. Prior to any Product(s) shipment or inclusion
          in the Buffer Inventory, Supplier shall inspect all Product(s) and
          confirm that all Product(s) are free of defects in design, materials
          and workmanship, conform to the Specifications and meet all quality
          requirements specified in the Microsoft Supplier Quality Requirements
          attached to this Agreement as Exhibit C. Supplier shall not ship or
          include in the Buffer Inventory any unit of Product(s) that fails to
          meet any of the foregoing criteria unless specifically instructed in
          writing by Microsoft to do so.

     (b)  Inspection by Microsoft and Subcontractor(s). Microsoft and
          Subcontractor(s) may inspect the Product(s) within [*] days after
          Microsoft's or the Subcontractor(s)'s actual physical receipt thereof
          and prior to use of the Product(s) in the manufacturing process. If
          such inspection determines that any Product(s) contains any defect in
          design, materials or workmanship or does not conform to the
          Specifications and meet all quality requirements set forth in Exhibit
          C, Microsoft or the Subcontractor(s) will give Supplier written notice
          of the defective Product(s) and the remedy provisions of Article 10(b)
          below shall apply.

     (c)  Conditional Acceptance of Defective Product(s); Price Reduction. Upon
          written notice to Supplier, Microsoft or the Subcontractor(s) may
          conditionally accept Product(s) inspected as described in Article 9(a)
          or (b) above and determined to be defective. In such case:

          (i)  Microsoft or the Subcontractor(s) may, at any time within [*]
               days after such conditional acceptance, reject such defective
               Product(s) in accordance with Article 10(b) below; or

          (ii) if Microsoft or the Subcontractor(s) chooses to utilize the
               defective Product(s), Supplier shall provide Microsoft or the
               Subcontractor(s) with an appropriate reduction in price to be
               agreed upon by the Parties. Any dispute as to an appropriate
               reduction in price shall be handled in accordance with Article
               19(b).

     (d)  No Effect on Warranty. Neither the conduct of or failure to conduct
          inspections, nor the conditional acceptance and/or utilization of
          defective Product(s), pursuant to this Article 9 shall in any way
          affect the application or interpretation of Article 10 below.

10.  Warranties.

     (a)  Product Warranties. Supplier represents and warrants that:

          (i)   All Product(s) will be free from defects in design, material and
                workmanship for a period of [*] following the date of shipment.

          (ii)  All Product(s) will meet the quality requirements set forth in
                Exhibit C and will conform to, and perform in accordance with,
                the Specifications and any additional Supplier-published
                specifications for such Product(s).

          (iii) All Product(s) will be new and unused unless Microsoft requests
                refurbished Product(s) in writing (it being understood that any
                Product(s) repaired by Supplier in accordance with Article
                10(b)(z) shall be considered new and unused for the purpose of
                this subclause (iii)). If Microsoft requests refurbished
                Product(s), they will be clearly marked as such when delivered
                to Microsoft or Subcontractor(s).

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                             MICROSOFT CONFIDENTIAL

          (iv)  Supplier will provide good and marketable title to the
                Product(s), free and clear of any and all liens, claims,
                encumbrances and other restrictions.

          (v)   Supplier has and will continue to have all necessary rights
                and licenses in the Product(s) necessary to allow Microsoft
                and the Subcontractor(s) to directly and indirectly use,
                have used, import, promote, distribute, lease, sell and
                offer for sale the Products in the Microsoft Jurisdictions,
                or [*], anywhere else in the world without restriction or
                additional charge.

          (vi)  The Product(s) do not and will not infringe (i) any patent
                in any Microsoft Jurisdiction; (ii) [*], any patent in any
                other location; or (iii) any copyright, mask work right,
                database right, or other proprietary right, or
                misappropriate any trade secret, of any third party, except
                (A) to the extent that any such infringement results from
                technology provided by Microsoft to Supplier under the
                Development & License Agreement or (B) in the case of any
                patent infringement, to the extent that such infringement
                results from the combination of the Product(s) with such
                other products that it is not reasonably intended to be
                combined with, unless the Product(s) would contributorily
                infringe.

          (vii) The Product(s) conform to and will conform with (i) all
                requirements of applicable laws or regulations of each Microsoft
                Jurisdiction, including any subdivision thereof, including but
                not limited to all applicable health and safety regulations and,
                (ii) [*], any laws or regulations of any other governmental
                authority, in each case, as such laws or regulations are in
                effect during the Compliance Period.

     (b)  Remedies. In the event that: (i) any Product(s) fails to pass
          Microsoft's or a Subcontractor(s)'s inspection in accordance with
          Article 9(b) above; (ii) Microsoft or a Subcontractor(s) determines to
          reject any conditionally accepted Product(s) in accordance with
          Article 9(c)(i) above; and/or (iii) Microsoft or a Subcontractor(s)
          otherwise determines that any Product(s) fails to meet any of the
          warranties stated in Article 10(a) above, Microsoft or the
          Subcontractor(s) will reasonably promptly after Microsoft becomes
          aware of such defect give Supplier notice of the defective Product(s).
          Within [*] days after the date of such notice, Supplier shall provide
          Microsoft or the Subcontractor(s) with a Return Merchandise
          Authorization ("RMA") for the units of Product(s) to be returned to
          Supplier. Without limiting Microsoft's other rights in this Agreement,
          within [*] days of its receipt of such returned units of Product(s),
          Supplier shall, at Microsoft's or the Subcontractor(s)'s option and at
          Supplier's own expense: (x) replace such Product(s) with new
          Product(s) that meet the Specifications and quality requirements
          hereunder and in Exhibit C; (y) issue Microsoft or the
          Subcontractor(s) a refund or credit in the full amount of the price of
          the defective units of Product(s) and all shipping and insurance
          charges associated therewith; or (z) for any Product(s) rejected by
          Microsoft or its Subcontractor(s) prior to installation on a game
          development kit, repair such Product(s) so that such Product(s) meet
          the Specifications and the quality requirements hereunder and in
          Exhibit C. If Supplier fails to replace or repair defective Product(s)
          or credit or refund to Microsoft or the Subcontractor(s) the full
          purchase price of such defective Product(s) and all shipping and
          insurance charges associated therewith as required by this Article
          10(b), in addition to any other remedies available to Microsoft by law
          or under this Agreement, Microsoft may terminate this Agreement for
          cause in accordance with Article 14(b)(ii).

     (c)  Field Failures. In the event that Microsoft or a Subcontractor(s)
          knowingly or unknowingly incorporates any defective Product(s) into
          any Xbox product and a subsequent failure of such Product(s) during
          the Warranty Period for such Product(s) results in returns from end
          users to Microsoft or a Subcontractor(s), then in addition to the
          remedies set forth in Article 10(b) above, Supplier, at its expense,
          shall cooperate and

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                             MICROSOFT CONFIDENTIAL

          coordinate with Microsoft in the establishment of an orderly and
          routine process for handling such returns. Such process shall minimize
          the amount of Product(s) inventory held by Microsoft and
          Subcontractor(s).

     (d)  Failure Analysis, Technical Support, Costs. Supplier shall, within [*]
          days of receipt of returned or rejected units of Product(s), inspect
          and retest such returned units of Product(s) and provide Microsoft or
          the Subcontractor(s) with an failure analysis of the rejected units of
          Product(s) and a corrective action plan to prevent the recurrence of
          similar defects or failures. Supplier shall bear all risks and
          expenses associated with analysis and replacement of defective
          Product(s) including, without limitation, all costs of shipment,
          re-installation, re-engineering, inspection, testing, labor,
          materials, end-user returns and redistribution, as well as providing
          related technical support as Microsoft and Subcontractor(s) may
          reasonably request in connection with any of the foregoing.

     (e)  Epidemic Failure. An "Epidemic Failure" is the occurrence of defects
          (defined as a common or repetitive failure of the same component part
          or product, inclusive of firmware and software): (i) in greater than
          [*]% of the Product(s) received by Microsoft or Subcontractor(s) in
          any particular shipment or (ii) in greater than [*]% of the aggregate
          number of units of Product(s) received by Microsoft or
          Subcontractor(s) within any ninety (90) day period. In the event of an
          Epidemic Failure of any Product(s) within [*] following the date of
          delivery of such Product(s), Supplier agrees to assist Microsoft and
          Subcontractor(s) in the technical resolution thereof, and to be
          responsible for all losses, liabilities, costs and/or expenses
          incurred by Microsoft and/or Subcontractor(s) as a result thereof;
          including, without limitation, the full cost of returns of Xbox
          products into which the defective Product(s) have been incorporated,
          and any additional costs of replacement, re-installation,
          re-inspection, testing and redistribution. If during the Term an
          Epidemic Failure occurs with respect to any Product(s), Microsoft may
          replace such failed Product(s) with replacement Product(s) purchased
          from Supplier at a unit price equal to Supplier's documented cost of
          goods sold as determined in accordance with GAAP.

     (f)  Correction of Programming Errors. For a period of [*] following the
          date of shipment of a Product, Supplier, at its cost and expense, will
          use its best efforts to correct such errors within the time specified
          in Exhibit D (and in any event within [*] days) after becoming aware
          of such error. Supplier shall promptly notify Microsoft in writing of
          all errors of which Supplier is or becomes aware in any version of the
          Product.

11.  Waiver of Certain Damages. EXCEPT AS PROVIDED IN THIS AGREEMENT, IN NO
     EVENT SHALL ANY PARTY OR MICROSOFT'S SUBCONTRACTOR(S) BE LIABLE TO THE
     OTHER PARTY FOR ANY LOSS OF PROFITS, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR
     SPECIAL DAMAGES, REGARDLESS OF WHETHER SUCH PARTY AND/OR SUCH
     SUBCONTRACTOR(S) HAVE ADVANCE NOTICE OF THE POSSIBILITY OF SUCH DAMAGES.

12.  Indemnification.

     (a)  Indemnity. Supplier will, at its expense and Microsoft's request,
          defend, indemnify and hold harmless Microsoft, its Subcontractor(s),
          their respective successors and assigns, and the respective directors,
          officers, employees, agents, customers, affiliates, and distributors
          of each of the foregoing from and against any and all claims, actions,
          demands, legal proceedings, liabilities, damages, losses, judgments,
          authorized settlements, costs and expenses, including, without
          limitation, attorney's fees, arising out of or in connection with any
          actual or alleged:

          (i)  infringement by Supplier and/or any Product(s) of (i) any patent
               in any Microsoft Jurisdiction; (ii) any other patent the
               infringement of which Supplier has knowledge as of the Effective
               Date or that Supplier subsequently comes to know

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               of and does not give notice of as provided in, and comply
               with its obligations under, Article 12(c); or (iii) any
               copyright, mask work right, database right, trade secret,
               trademark or other proprietary right of any third party;
               except (A) to the extent that any such infringement results
               from technology provided by Microsoft to Supplier under the
               Development & License Agreement or (B) in the case of any
               patent infringement, to the extent that such infringement
               results from the combination of the Product(s) with such
               other products that it is not reasonably intended to be
               combined with, unless the Product(s) would contributorily
               infringe;

          (ii)  breach of any representation or warranty made by Supplier
                herein;

          (iii) claim by any person (including any employees of Supplier,
                Microsoft or any Subcontractor(s)) or third party that any
                Product(s) has caused bodily harm (including death) or has
                damaged any real or personal property or environment;

          (iv)  failure of any Product(s) to comply with any applicable law or
                regulation of:

               (i)   any Microsoft Jurisdiction (including any subdivision
                     thereof), as such laws or regulations are in effect at any
                     time during the Compliance Period for such Product;

               (ii)  any Microsoft Jurisdiction (including any subdivision
                     thereof), as such laws or regulations are in effect at any
                     time after the Compliance Period for such Product, of which
                     Supplier comes to know of and does not give notice of as
                     provided in Article 12(d); or

               (iii) any governmental authority (including any subdivision
                     thereof) other than in a Microsoft Jurisdiction, as such
                     laws or regulations are in effect at any time, of which
                     Supplier has knowledge as of the Effective Date or that
                     Supplier subsequently comes to know of and does not give
                     notice as provided in Article 12(d); or

          (v)   violation by Supplier of any applicable law or regulation,
                or any possession, handling, transportation, storage or use
                of hazardous materials or explosives by Supplier or any of
                its direct or indirect subcontractors; or

          (vi)  claim by or on behalf of any direct or indirect subcontractor,
                supplier, employee or agent of Supplier.

     (b)  Procedures. In the event Microsoft becomes aware of any such claim,
          Microsoft shall: (i) reasonably promptly notify Supplier thereof
          (provided that failure to provide such notice will not release
          Supplier from any of its indemnity obligations hereunder except to the
          extent that such failure materially increases Supplier's indemnity
          obligation); (ii) at Supplier's expense, provide Supplier with
          reasonable cooperation in the defense thereof; and (iii) not settle
          any such claim without Supplier's consent (unless such claim or the
          defense thereof could give rise to criminal liability, could have a
          material effect on Microsoft's business in the jurisdiction of such
          proceeding or involves a material risk of the sale, forfeiture or loss
          of, or the creation of any material lien on, the Products or any
          Microsoft property). Supplier shall not unreasonably withhold its
          consent. Microsoft shall have the right to approve the counsel
          selected by Supplier to defend any such claim (such approval not to be
          unreasonably withheld) and shall also have the right to have its own
          counsel participate in the defense of any such claim at Microsoft's
          own expense. Notwithstanding the foregoing, Microsoft will be entitled
          (using its own counsel and without the consent of Supplier) to control
          the defense of, and settle, any claim if Supplier does not, upon
          Microsoft's demand, acknowledge in writing full responsibility to
          indemnify therefor. Payments will be made by Supplier within twenty
          (20) days after demand. Supplier's

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                             MICROSOFT CONFIDENTIAL

          indemnity obligations will be those of a primary obligor, whether or
          not the indemnified party is also indemnified with respect to the same
          matter under the terms of any other agreement or policy, and the
          indemnified party may proceed directly against Supplier without first
          seeking to enforce any other rights of indemnification. Supplier will
          not be entitled to any right of contribution from, or be subrogated to
          any right of the indemnified party against, such other indemnifying
          party. In the event Microsoft and Supplier agree to settle a claim or
          action, Supplier agrees not to publicize the settlement without first
          obtaining Microsoft's written permission.

     (c)  Infringement Claims. In addition to Supplier's obligations as stated
          above, in the event an infringement claim is made or is likely to be
          made, Supplier may (or, in the event that Microsoft reasonably
          believes that Supplier is not likely to prevail with respect to such
          infringement claim, Supplier shall) promptly (and in any event within
          five (5) business days) notify Microsoft of such claim and, at
          Microsoft's option and Supplier's sole risk and expense: (i) procure
          for Microsoft and the Subcontractor(s) the right to continue using and
          selling the infringing or allegedly infringing Product(s); (ii)
          replace such Product(s) with a non-infringing Product(s); or (iii)
          modify such Product(s) so that it becomes non-infringing, provided
          that such replacement or modification meets the Specifications and
          otherwise complies with the requirements of this Agreement, does not
          change Microsoft's specifications for the Xbox, interfere with
          Microsoft's or Subcontractor(s) production schedule or require any
          recall of the Xbox. Microsoft and Subcontractor(s) may return, at
          Supplier's sole risk and expense, any inventory of infringing or
          allegedly infringing Product(s) and Supplier shall refund the full
          purchase price of such returned Product(s) within thirty (30) days of
          receipt thereof. Any disputes as to the reasonableness of Microsoft's
          belief that Supplier is not likely to prevail with respect to an
          infringement claim shall be handled in accordance with Article 19(b).

     (d)  Compliance with Laws. In addition to Supplier's obligations as stated
          above, in the event that Supplier obtains knowledge that any
          Product(s) already delivered to Microsoft violate any law or
          regulation as in effect at any time during the Term, Supplier will
          promptly (and in any event within five (5) business days) notify
          Microsoft of such violation and, with respect to laws or regulations
          of any Microsoft Jurisdiction only (including any subdivision thereof)
          as in effect during the Compliance Period for such Product, at
          Microsoft's option and Supplier's sole risk and expense: (i) replace
          such Product(s) with compliant Product(s) or (ii) modify such
          Product(s) so that it becomes compliant, provided that such
          replacement or modification meets the Specifications and otherwise
          complies with the requirements of this Agreement, does not change
          Microsoft's specifications for the Xbox, interfere with Microsoft's or
          Subcontractor(s) production schedule or require any recall of the
          Xbox. Microsoft and Subcontractor(s) may return, at Supplier's sole
          risk and expense, any inventory of noncompliant Product(s) and
          Supplier shall refund the full purchase price of such returned
          Product(s) within thirty (30) days of receipt thereof. If during the
          Term a Product becomes noncompliant after the end of the Compliance
          Period for such Product, Microsoft may replace such noncompliant
          Product with a compliant Product purchased from Supplier at a unit
          price equal to Supplier's documented cost of goods sold as determined
          in accordance with GAAP.

     (e)  Hazard. In the event either Supplier or Microsoft becomes aware of any
          information which reasonably supports a conclusion that any Product(s)
          may contain a defect that could cause bodily injury (including death)
          to any person or property damage (a "Hazard"), the Party with such
          information shall promptly notify the other Party of the Hazard. If
          permitted by law, such notice shall be given prior to notice to any
          governmental agency. Supplier and Microsoft shall promptly exchange
          all relevant data and may meet to review and discuss the information,
          tests, and conclusions relating to the alleged Hazard and the basis
          for any contemplated recall or other remedial action. Supplier shall
          be responsible for all costs of any such remedial action including,
          but not limited to, the reasonable out-of-pocket costs to Microsoft
          and Subcontractor(s) directly

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                             MICROSOFT CONFIDENTIAL

          related thereto. Each Party shall, on request and at Supplier's
          expense, provide to the other Party reasonable assistance in (i)
          determining how best to deal with the Hazard; and (ii) preparing for
          and making any presentation before any governmental agency which may
          have jurisdiction over Hazards involving the Product(s).

13.  Disaster Recovery Plan; Excusable Delay.

     (a)  Disaster Recovery Plan. Supplier shall maintain a written disaster
          recovery plan (the "Disaster Recovery Plan") for the Product(s) to be
          supplied hereunder in order to ensure the supply of Product(s) to
          Microsoft and Subcontractor(s). Such Plan may include multiple sources
          of supply for the Product(s) and parts and components thereof,
          multiple manufacturing facilities, and/or providing Microsoft with all
          rights, licenses, information, assistance, know-how and/or other
          deliverables as may be required to enable Microsoft and
          Subcontractor(s) to manufacture, test, and support the Product(s), or
          retain one or more contractors to perform any or all of these
          services. Supplier shall submit a proposed Disaster Recovery Plan for
          the Product(s) to Microsoft no later than [*] after the Effective Date
          (with payments to Supplier hereunder after such date being conditioned
          upon approval of the Disaster Recovery Plan). The Disaster Recovery
          Plan and any changes thereto shall be subject to Microsoft's prior
          review and written approval (not to be unreasonably withheld) as part
          of all business reviews conducted between the Parties. Notwithstanding
          Microsoft's review and/or approval of any Disaster Recovery Plan or
          any change thereto, Supplier shall at all times remain solely liable
          for the adequacy and implementation of all disaster recovery plans.
          Supplier agrees to comply fully with the terms of the Disaster
          Recovery Plan upon occurrence of any disaster or similar circumstances
          contemplated therein.

     (b)  Excusable Delay. A delay in the performance of any Party hereunder
          shall be an "Excusable Delay" to the extent caused by extraordinary
          events not within the reasonable control of such Party, its affiliates
          or its subcontractors and their affiliates, and including the
          following events: terrorism, condemnation, confiscation and similar
          acts of a governmental authority in its sovereign capacity; war and
          civil insurrection; and fire, earthquake, flood, epidemic or similar
          act of God. Notwithstanding the foregoing, Excusable Delay events do
          not include events that could be avoided by reasonable foresight and
          reasonable precautions, including risk and disaster contingency
          planning (including the Disaster Recovery Plan). Excusable Delay
          events also do not include events attributable in any respect to
          negligence, intentional act, failure to comply with law or failure to
          comply with this Agreement, whether by such Party or any of its
          affiliates, its subcontractors or any affiliates of such
          subcontractor. Excusable Delay events do not include technological
          difficulties, including any faced in designing, developing or
          producing product, product defects, or failure to properly manage
          inventory. The Party affected by the Excusable Delay shall not be
          liable for non-performance hereunder to the extent caused by the
          Excusable Delay, subject to such Party's compliance with this Article
          13(b). The Party affected by an Excusable Delay will provide the other
          Party written notice of any event giving rise to an Excusable Delay
          immediately upon becoming aware thereof and in no event later than ten
          (10) calendar days after such event occurs (and failure to give such
          notice in a timely fashion will be deemed to be a waiver of such
          Excusable Delay). The Party affected by an Excusable Delay will have
          the burden of establishing such has occurred, the consequences thereof
          and such Party's compliance with its mitigation obligations. If an
          Excusable Delay event occurs, the affected Party will work with the
          utmost diligence to avoid or minimize the impact of such delay. None
          of the terms of this Agreement (including the Product(s) price) will
          be adjusted, and there will be no reimbursement for any additional
          costs incurred. If the Excusable Delay has been in effect (or is
          likely to be in effect) for more than [*] days, the other Party will
          be entitled at any time and in its sole discretion to terminate this
          Agreement without any penalty or further liability of any kind to the
          other Party (and notwithstanding Article 5(g) or Article

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<PAGE>

                             MICROSOFT CONFIDENTIAL

          14(b)(iii)(B)). If Supplier is the affected Party, Microsoft shall be
          entitled to the license and Escrow Materials as described in the
          Escrow Agreement and the assistance as described in Article 14(e).

14.  Term and Termination.

     (a)  Term. This Agreement shall be effective for a period of [*] years from
          the Effective Date (the "Term").

     (b)  Termination.

          (i)  Termination For Convenience. Microsoft may terminate this
               Agreement without cause by giving Supplier ninety (90) days prior
               written notice.

          (ii) Termination For Cause.

               (A)  Microsoft may terminate this Agreement for cause: (i) if
                    Supplier is in material breach or default of any
                    representation, warranty, covenant, obligation or agreement
                    hereunder or under any of the other Operative Documents,
                    which breach or default is not cured within thirty (30) days
                    of written notice from Microsoft; (ii) if Supplier becomes
                    insolvent, upon ten (10) days written notice from Microsoft;
                    or (iii) if Supplier becomes the subject of any proceeding
                    under any bankruptcy, insolvency or liquidation law, whether
                    domestic or foreign and whether voluntary or involuntary,
                    which is not resolved favorably to Supplier within [*] days
                    of commencement thereof; (iv) Supplier becomes subject to
                    property attachment, court injunction or court order which
                    has a material adverse effect on its operations or (v)
                    Supplier at any time breaches its obligation to continue to
                    perform its obligations hereunder, including timely supply
                    of the Product(s), as required under Article 14(c).
                    Microsoft may also terminate this Agreement for cause as set
                    forth in Article 10(b).

               (B)  Supplier may terminate this Agreement for cause (i) if any
                    sum due to Supplier hereunder is not paid within (a) in the
                    case of an invoice sent to Microsoft, [*] after receipt by
                    Microsoft of written notice of such failure to pay, or (b)
                    in the case of an invoice sent to a Subcontractor,
                    forty-five (45) business days after receipt by Microsoft of
                    written notice of such failure to pay; or (ii) upon thirty
                    (30) days written notice to Microsoft if Microsoft becomes
                    the subject of any proceeding under any bankruptcy,
                    insolvency or liquidation law, whether domestic or foreign
                    and whether voluntary or involuntary, which is not resolved
                    favorably to Microsoft within [*] days of commencement
                    thereof.

          (iii) Effect of Termination.

               (A)  In the event of termination of this Agreement by Microsoft
                    for cause as described in Article 14(b)(ii)(A) above,
                    Microsoft and Subcontractor(s) shall have no liability or
                    payment obligation to Supplier for termination other than
                    payment (subject to Microsoft's set-off rights) of any
                    balance due for Product(s) delivered to and accepted by
                    Microsoft and Subcontractor(s) prior to such termination. In
                    connection with any such termination, Microsoft will be
                    entitled to the cost of "cover" or, at Microsoft's option,
                    the difference between the market price and the contract
                    price, as well as any expenses incurred in effecting cover
                    or with respect to rightfully rejected goods, and any other
                    costs or expenses

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<PAGE>

                             MICROSOFT CONFIDENTIAL

                    reasonably related to such breach. The foregoing are not
                    exclusive, but cumulative and in addition to any other
                    remedies existing at law or equity.

               (B)  In the event of termination of this Agreement by Microsoft
                    for convenience as described in Article 14(b)(i) ,
                    Microsoft's and Subcontractor(s) sole liability and
                    Supplier's exclusive remedy is limited to payment for (i)
                    the quantities of Product(s) ordered under confirmed
                    Purchase Orders which are not cancelled due to such
                    termination; (ii) Buffer Inventory manufactured pursuant
                    hereto that Supplier, despite its best efforts, can not use
                    for the manufacture of other products or divert for any
                    other purpose or sale; and (iii) to the extent that there is
                    any remaining Minimum Buy Quantity that Microsoft is
                    obligated to purchase but has failed to do so, Microsoft
                    shall, at its option, either (x) submit Purchase Orders for
                    such unpurchased Product(s), and in such case Supplier shall
                    build and deliver such Product(s) in accordance with the
                    terms hereof (notwithstanding any termination) and of such
                    Purchase Orders; or (y) pay Supplier for its anticipated net
                    profit on such unpurchased Product(s), subject to Supplier
                    providing satisfactory documentation of such lost profit. In
                    the event of termination of this Agreement by Supplier for
                    cause as described in Article 14(b)(ii)(B), Supplier shall
                    also be entitled to the remedies described above in this
                    Article 14(b)(iii)(B), but in such event such remedies shall
                    not be exclusive, but cumulative and in addition to any
                    other remedies of Supplier existing at law or equity;
                    provided, in no event shall Microsoft and Subcontractor(s)
                    have any obligation to pay Supplier for any raw materials or
                    assemblies of work in process.

               (C)  Supplier shall, in accordance with the terms and conditions
                    of this Agreement, deliver to Microsoft or to any
                    Subcontractor(s) designated by Microsoft, all Product for
                    which Microsoft has paid Supplier pursuant to this Article
                    14(b)(iii). Supplier agrees that upon termination, Microsoft
                    and/or Subcontractor(s) may place a final Purchase Order for
                    (and Supplier shall deliver in accordance with the terms and
                    conditions of this Agreement) Products forecast to be
                    required during the period in which such termination occurs.

     (c)  Continuing to Perform. Notwithstanding any other provision in this
          Agreement, Supplier during the pendency of any dispute of any nature
          in connection with this Agreement shall, unless directed otherwise by
          Microsoft in writing, diligently continue to carry out and fulfill all
          its obligations under this Agreement, including the obligation during
          the pendency of the dispute to ensure that the Product(s) are
          delivered to Microsoft and the Subcontractor(s) in the quantities and
          within the time required hereunder; provided that Microsoft shall
          continue to make payments of amounts not disputed in accordance with
          this Agreement. Any failure of Supplier to comply with this Article
          14(c) will constitute a default under Article 14(b)(ii) hereof.

     (d)  Survival. The following Articles of this Agreement shall survive the
          expiration or earlier termination of this Agreement: Article 10
          Warranties; Article 11 Limitation of Liability; Article 12
          Indemnification; Article 14(b)(iii) Effect of Termination; Article 15
          No Obligation; Article 16 Confidentiality; Article 17 Covenant Not to
          Sue; the last sentence of Article 18(a) and of Article 18(b); and
          Article 19 General.

     (e)  License. Without limiting Microsoft's other rights and Supplier's
          other obligations hereunder, in the event that Microsoft terminates
          this Agreement under Article

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                                       -14-

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                             MICROSOFT CONFIDENTIAL

          14(b)(ii)(A), then Microsoft shall be entitled to the license and
          Escrow Materials described in the Escrow Agreement.

          In connection therewith, Supplier shall further, at its sole cost and
          expense, provide technical and such other assistance to Microsoft as
          may be necessary or desirable in connection with the transfer of the
          foregoing license and materials, and shall, at the request of the
          Microsoft, provide such cooperation and do and perform all such other
          and further acts as Microsoft may consider necessary or desirable or
          as may be required by law to use, establish, maintain and protect its
          rights granted under the Escrow Agreement, in each case for the
          purpose of supplying an alternate source of substitute products to be
          used in connection with Microsoft's Xbox program (or any successor
          program thereto).

15.  No Obligation. Notwithstanding any other provision of this Agreement,
     Microsoft and Subcontractor(s) shall have no obligation to use or include
     the Product(s) as part of the Xbox. Nothing in this Agreement will be
     construed as restricting Microsoft's ability to acquire, license, develop,
     manufacture or distribute for itself, or have others acquire, license,
     develop, manufacture or distribute for Microsoft, similar product(s)
     performing the same or similar functions as the Product(s) contemplated by
     this Agreement, or to market and distribute such similar product(s) in
     addition to, or in lieu of, the Product(s) contemplated by this Agreement.

16.  Confidentiality. The Parties shall comply with the terms of the NDA, and
     nothing herein shall be construed to limit the respective rights and
     liabilities of the Parties thereunder.

     Without limiting the foregoing, Supplier agrees that, without Microsoft's
     prior approval, no Competitors, journalists or industry consultants will be
     permitted to view any production areas devoted exclusively or primarily to
     the Products intended for sale hereunder to Microsoft, and access to such
     areas by other third parties shall be limited to the minimum necessary in
     the normal course of Supplier's business and subject to reasonable measures
     to protect the confidentiality of all Microsoft "Confidential Information"
     (as defined in the NDA), and in no event will possession of any Products
     (unless commodity products being sold in the identical specification to
     numerous customers) be transferred to any third party or persons except in
     accordance with Microsoft's express instructions.

17.  Covenant Not to Sue. Supplier covenants that it will not assert against
     Microsoft, Subcontractor(s) or Microsoft's distributors or customers a
     claim of direct or indirect patent or copyright infringement, or trade
     secret misappropriation arising from the manufacture, sale, import,
     distribution or use of the Xbox.

18.  Insurance. At all times during the Term, Supplier shall, at its own
     expense, maintain in force policies of insurance with reputable insurers
     sufficient in coverage and amounts to secure its obligations and potential
     liabilities under this Agreement. All premiums, and any deductibles and/or
     retentions associated with such insurance shall be solely the
     responsibility of Supplier. At the request of Microsoft, Supplier shall
     provide to Microsoft certificates of insurance evidencing such insurance
     coverage, and failure by Supplier to furnish certificates of insurance or
     failure by Microsoft to request same shall not constitute a waiver by
     Microsoft of the insurance requirements set forth herein. If Microsoft so
     requests, Supplier shall provide to Microsoft, or make available for
     Microsoft's review, copies of such insurance policies. At a minimum, such
     insurance policies shall include the following coverage:

     (a)  Commercial general liability insurance with policy limits of not less
          than [*] each occurrence for bodily injury and [*] each occurrence for
          damage to property, or, alternatively, [*] combined single limit each
          occurrence for bodily injury and property damage combined. The policy
          shall be the "occurrence" form and shall include coverage for premises
          and operations, contractual liability (including insurable contractual
          liability

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                                       -15-

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                             MICROSOFT CONFIDENTIAL

          assumed in this Agreement), broad form property damage, and products
          and completed operations. The policy shall name Microsoft as an
          additional insured to the extent of the contractual liability assumed
          by Supplier in this Agreement (without any obligations or any
          liability to pay premiums); shall be primary without right of
          contribution from any other insurance carried by Supplier or
          Microsoft, shall waive any right of the insurers to any set-off
          (including for unpaid premiums), counterclaim or any other deduction,
          by attachment or otherwise; shall expressly provide that all the
          provisions thereof, except the limits of liability, shall operate in
          the same manner as if there were a separate policy covering each
          insured; and shall provide that the insurers waive all rights of
          subrogation that may arise by contract, at law or otherwise against
          Microsoft. Upon expiration or termination of this Agreement, Supplier
          will maintain an active policy complying with the requirements of this
          Agreement and providing coverage through at least twelve (12) months
          after such expiration or termination.

     (b)  Professional liability/errors & omissions insurance with policy limits
          of not less than [*] each claim. Such insurance's retroactive coverage
          date will be no later than the Effective Date of this Agreement. Upon
          expiration or termination of this Agreement, Supplier will either
          maintain an active policy, or purchase an extended reporting period,
          providing coverage for claims first made and reported to the insurance
          company within two years after the expiration or termination of this
          Agreement.

19.  General.

     (a)  Notices. All notices and requests in connection with this Agreement
          shall written in the English language and shall be deemed given as of
          the day they are received either by messenger, delivery service, or in
          the United States of America mails, postage prepaid, certified or
          registered, return receipt requested, and addressed as follows:

     To Supplier:
     Applied Microsystems Corporation
     5020 - 148th Avenue Northeast

     P.O. Box 97002
     Redmond, WA  98073-9702
     Fax:  (425) 883-3049

     To Microsoft:                           with a copy to:

     Microsoft Corporation                   Microsoft Corporation
     One Microsoft Way                       One Microsoft Way
     Redmond, WA  98052-6399                 Redmond, WA  98052-6399
     Attention: Group Manager for Xbox       Attention: Law & Corporate Affairs
     Program Developer Relations             Fax:  (425) 706-7409
     Fax:  (425) 706-7329

     or to such other address as a party may designate pursuant to this notice
     provision.

     (b)  Governing Law; Venue; Attorneys' Fees. This Agreement shall be
          governed by the laws of the State of Washington as though entered into
          between Washington residents and to be performed entirely within the
          State of Washington, and Supplier consents to jurisdiction and venue
          in the state and federal courts sitting in the State of Washington. In
          any action or suit to enforce any right or remedy under this Agreement
          or to interpret any provision of this Agreement, the prevailing Party
          shall be entitled to recover its costs, including reasonable
          attorneys' fees.

          In the event of any dispute or disagreement between the Parties in
          relation to this

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                             MICROSOFT CONFIDENTIAL

          Agreement, either Party may call a meeting, such meeting to be held
          within seven (7) days of the date of the notice calling the same
          (unless otherwise agreed). Each Party shall appoint a senior
          representative to attend that meeting to resolve the dispute. Such
          senior representatives shall meet as often as the Parties jointly deem
          necessary to gather and exchange all applicable information with
          respect to the matter at issue which the Parties believe appropriate,
          and the senior representatives shall negotiate in good faith to that
          end. Without waiving any other rights or remedies of either Party
          under this Agreement, if the representatives are unable to resolve the
          dispute within a further period of two (2) weeks, the Parties shall be
          entitled, in the event of a failure to agree between them on a method
          of dispute resolution, to commence such proceedings as they may
          competently pursue. Notwithstanding the foregoing, either Party may
          commence proceedings at any time without following the above
          procedures if such Party would be irreparably harmed by a delay.

     (c)  Independent Contractors. The Parties are independent contractors, and
          nothing in this Agreement shall be construed as creating an
          employer-employee relationship, a partnership, or a joint venture
          between the Parties. Neither Party has any authority to assume or
          create obligations or liability of any kind on behalf of the other.

     (d)  Severability. If any provision of this Agreement is determined by a
          court of competent jurisdiction to be invalid or unenforceable under
          any applicable law, then such provision shall be deemed modified to
          the extent necessary in order to render such provision valid and
          enforceable; if such provision may not be so saved, it shall be
          severed and the remainder of this Agreement shall remain in full force
          and effect.

     (e)  Assignment; Successors and Assigns; Change in Control. This Agreement
          shall be binding upon and inure to the benefit of each Party's
          respective successors and assigns; provided, however, that this
          Agreement may not be assigned by Supplier in whole or in part without
          the prior written consent of Microsoft, and any attempted assignment
          without Microsoft's consent will be null and void.

          Upon the occurrence of a Change in Control (as defined below),
          Microsoft, in its discretion, will be entitled by written notice to
          terminate this Agreement without any penalty or further liability of
          any kind to Supplier (and notwithstanding Articles 5(g) and
          14(b)(iii)(B)), and Microsoft shall be entitled to the license and
          Escrow Materials described in the Escrow Agreement. A "Change in
          Control" shall mean the occurrence of any one or more of the following
          events: (i) any merger or consolidation involving Supplier where
          Supplier is not the surviving entity, (ii) any other transaction or
          series of transactions whereby a third party acquires direct or
          indirect power to control the management and policies of Supplier,
          whether through the acquisition of voting securities, by contract, or
          otherwise, or (iii) the sale or other transfer of Supplier's business
          or substantial portion of Supplier's assets (whether in a single
          transaction or a series of transaction). Without limiting Supplier's
          obligations under the NDA, Supplier agrees to obtain the consent of
          Microsoft in writing prior to disclosing any terms and conditions of
          this Agreement or any other Operative Document, or any other
          information regarding Xbox, to a third party in connection with any
          Change of Control, unless such information is otherwise in the public
          domain other than through a breach of this Agreement or the NDA.
          Supplier agrees to give Microsoft notice prior to the occurrence of
          any Change in Control as early as practicable.

          Microsoft may assign this Agreement to a successor to or assign of its
          Xbox business or to any subsidiary or affiliate of Microsoft. In
          addition, upon any merger or consolidation involving Microsoft, the
          surviving entity will be entitled to all rights of Microsoft
          hereunder.

     (f)  Language. This Agreement is executed in the English language only and
          shall be interpreted according to the plain meaning of its terms. Any
          translation of this Agreement

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                             MICROSOFT CONFIDENTIAL

          into a language other than English shall be for reference only and
          shall not affect the interpretation hereof.

     (g)  Modification; Wavier. This Agreement shall not be modified except by
          an agreement written in the English language, dated subsequent to the
          date of this Agreement and signed on behalf of Supplier and Microsoft
          by their respective duly authorized representatives. No waiver of any
          breach of any provision of this Agreement shall constitute a waiver of
          any prior, concurrent or subsequent breach of the same or any other
          provisions hereof, and no waiver shall be effective unless made in
          writing and signed by an authorized representative of the waiving
          party. This Agreement has been negotiated by the Parties and their
          respective counsel and will be interpreted fairly in accordance with
          its terms and without any strict construction in favor of or against
          either Party.

     (h)  Government Approvals. Supplier 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 all of the terms and conditions of
          the Agreement including, but not limited to, foreign exchange
          approvals, import and/or export licenses, fair trade approvals and all
          approvals which may be required to realize the purposes of the
          Agreement. Additionally, Supplier, at its expense, will assist
          Microsoft in addressing problems with Product(s) that contribute to a
          failure of Xbox to meet any regulatory requirement due to integration
          of Supplier's Product(s). Supplier shall ensure that each Product
          bears appropriate labels indicating compliance with these
          requirements; provided, that Supplier shall not be required to obtain
          export licenses for any countries to which export is prohibited by
          United States law at the time of export.

     (i)  Records/Audit. Supplier will maintain accurate records in the normal
          course of its business and will grant Microsoft or its authorized
          agent reasonable access to and copies of such records and information
          reasonably requested by Microsoft that pertain to Supplier's
          performance under this Agreement (including quality programs and test
          documentation). Supplier represents that it maintains and will
          continue to maintain its records for a period of at least three (3)
          years.

     (j)  Taxes. Neither Microsoft nor any Subcontractor(s) shall be liable for
          any taxes that Supplier is legally obligated to pay which are incurred
          or arise in connection with or related to the sale of Product(s) under
          this Agreement, and all such taxes (including but not limited to net
          income or gross receipts taxes, franchise taxes, and/or property
          taxes) shall be solely the financial responsibility of Supplier,
          provided that Microsoft and Subcontractor(s) shall pay to Supplier any
          sales or use taxes that are owed by Microsoft or Subcontractor(s)
          solely as a result of purchases of Product(s) under this Agreement and
          which are required to be collected from Microsoft or Subcontractor(s)
          by Supplier under applicable law. Microsoft and Subcontractor(s) may
          provide to Supplier an valid exemption certificate in which case
          Supplier shall not collect the taxes covered by such certificate.
          Supplier agrees to indemnify, defend and hold Microsoft and
          Subcontractor(s) harmless from any taxes (including sales or use taxes
          paid by Microsoft or Subcontractor(s) to Supplier) or claims, causes
          of action, costs (including, without limitation, reasonable attorneys'
          fees) and any other liabilities of any nature whatsoever related to
          such taxes. This tax Article shall govern the treatment of all taxes
          arising as a result of or in connection with this Agreement
          notwithstanding any other Article of this Agreement.

     (k)  Headings. Article headings in this Agreement are solely for
          convenience and will not be considered in its interpretation.

     (l)  Counterparts. This Agreement may be executed in two counterparts, each
          of which will

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<PAGE>

                             MICROSOFT CONFIDENTIAL

          be deemed an original and all of which together will constitute one
          and the same instrument.

     (m)  Entire Agreement. This Agreement constitutes the entire agreement
          between the Parties with respect to the subject matter hereof and
          supersedes all prior and contemporaneous agreements or communications
          with respect to the subject matter hereof.

20.  Exhibits. The following Exhibits are made a part of this Agreement:

     Exhibit A - Products and Pricing
     Exhibit B - Microsoft Authorized Subcontractor(s)
     Exhibit C - Microsoft Supplier Quality Requirements
     Exhibit D - Maintenance Problem Severity and Response Time Schedule

21   Order of Precedence. If there is a conflict or inconsistency between or
     among any of the following documents, unless expressly stated otherwise
     herein, the order of precedent for conflict resolution in descending order
     will be as follows:

     (a)  Change Orders;

     (b)  the NDA;

     (c)  the Development and License Agreement;

     (d)  Microsoft Corporation Xbox Component Development Kit License

     (e)  the body of this Agreement;

     (f)  Exhibit A - Products and Pricing;

     (g)  Exhibit B - Microsoft Authorized Subcontractor(s);

     (h)  Exhibit C - Microsoft Supplier Quality Requirements;

     (i)  Exhibit D - Maintenance Problem Severity and Response Time Schedule;
          and

     (j)  the Escrow Agreement.

AGREED:

MICROSOFT CORPORATION                     APPLIED MICROSYSTEMS CORPORATION

By: /s/ J. Allard                         By: /s/ Stephen J. Verleye
   ---------------------------------         -----------------------------------
Name: J. Allard                           Name: Stephen J. Verleye
     -------------------------------           ---------------------------------
Title: General Manager                    Title: President & CEO
      ------------------------------            --------------------------------
Date: 12/19/00                            Date: 12/19/2000
     -------------------------------           ---------------------------------

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                             MICROSOFT CONFIDENTIAL

                                    EXHIBIT A

                                   Product(s)
<TABLE>
<S>         <C>                                                           <C>                  <C>         <C>
---------- ------------------------------------------------------------- --------------------- ---------- --------------------
                                                                               Product          Price/
  Item                             Description                              Specification        Unit       Manufacturing.
                                                                             Reference #         $ US           Site/s
---------- ------------------------------------------------------------- --------------------- ---------- --------------------
    1        DVD Emulation System - PCI card, hard drive and emulator                          See below      Redmond, WA
                                       card
---------- ------------------------------------------------------------- --------------------- ---------- --------------------
    2                        Emulator card component                                              [*]         Redmond, WA
---------- ------------------------------------------------------------- --------------------- ---------- --------------------

                 ------------------------------------------ -------------------------------------
                            Annual Unit Volume                           Unit Price

                 ------------------------------------------ -------------------------------------
                                    [*]                                     [*]
                 ------------------------------------------ -------------------------------------
                                    [*]                                     [*]
                 ------------------------------------------ -------------------------------------
                                    [*]                                     [*]
                 ------------------------------------------ -------------------------------------
                                    [*]                                     [*]
                 ------------------------------------------ -------------------------------------
</TABLE>

     Note: The above-listed pricing applies to annual quantities delivered to
Microsoft in an annual period commencing with the first shipment of DVD
Emulation Systems to Microsoft. The discounted unit price at higher volumes is
not retroactive to prior quantities delivered during such year.

<TABLE>

Cost Reduction Target
---------- ------------------------------------------------------------- ----------------- ---------------- ------------------
<S>        <C>                                                           <C>               <C>               <C>
                                                                           Annual Cost       Annual Cost       Annual Cost
                                                                            Reduction         Reduction         Reduction
  Item                             Description                               Target            Target            Target
                                                                              Year 1            Year 2            Year 3
---------- ------------------------------------------------------------- ----------------- ---------------- ------------------
    1                          DVD Emulation System                            [*]               [*]               [*]
---------- ------------------------------------------------------------- ----------------- ---------------- ------------------
</TABLE>

Minimum Supply Capacity

Without limiting Supplier's other obligations in the Agreement, Supplier during
the Term shall ensure that for each month of the Term it has a minimum supply
capacity at least equal to the following: [*] greater than the average quantity
of Product(s) ordered per month during the [*]-month period preceding such month
(or, if there are fewer than [*]months since the Effective Date, then the
average quantity of Product(s) ordered per month since the Effective Date,
excluding the initial order). Notwithstanding the foregoing, the minimum supply
capacity for the first month of the Term shall be [*] units of Product(s).

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                             MICROSOFT CONFIDENTIAL

                                    EXHIBIT B

                            Approved Subcontractor(s)
<TABLE>
<S>        <C>                                 <C>                                     <C>                   <C>
---------- ----------------------------------- -------------------------------------- ---------------------- ------------------
Item       Microsoft Subcontractor(s)          Corp. Office Address                   Contact                Activity
---------- ----------------------------------- -------------------------------------- ---------------------- ------------------
1          [*]                                 [*]                                    [*]                    Assembly & Test
---------- ----------------------------------- -------------------------------------- ---------------------- ------------------
</TABLE>

[*] Confidential treatment requested

<PAGE>

                             MICROSOFT CONFIDENTIAL

                                    EXHIBIT C

                     Microsoft Supplier Quality Requirements

                                  See attached.

[*] Confidential treatment requested

<PAGE>

                             MICROSOFT CONFIDENTIAL

                                    EXHIBIT D

             Maintenance Problem Severity and ResPONSE TIME SCHEDULE

<TABLE>

       Severity                           Criteria                                     Time Limit
       --------                           --------                                     ----------
       <S>       <C>                                                                   <C>
          1      Critical:   Problem  which  prevents  or  seriously  impairs  the         [*]
                 performance of substantially all major functions.

          2      Severe Impact:  Problem which  prevents or seriously  impairs the         [*]
                 performance of a major function.

          3      Degraded  Operation:   Problem  which  disables  or  impairs  the         [*]
                 performance of a minor function.
</TABLE>

[*] Confidential treatment requested

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00036-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00036-of-00352.parquet"}]]