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                        CONFIDENTIAL SETTLEMENT AGREEMENT
                          AND MUTUAL RELEASE OF CLAIMS

         This Confidential Settlement Agreement and Mutual Release of Claims
(the "Settlement Agreement") is made effective this 16th day of July, 2004 (the
"Effective Date"), by and between MICROSOFT CORPORATION, a Washington
corporation located at One Microsoft Way, Redmond, Washington 98052
("Microsoft"), and LINDOWS, INC., F/K/A LINDOWS.COM, INC., a Delaware
corporation located at 9333 Genesse Avenue, San Diego, California 92121,
including any subsequent corporate name adopted by Lindows, Inc. ("Lindows").
Microsoft and Lindows each are referred to herein separately as "Party" and are
referred to herein collectively as the "Parties." There are no other parties to
this agreement.

         WHEREAS, A dispute has arisen between the Parties relating to Lindows'
use of "Lindows" and related terms in connection with products and services
offered by Lindows and in Lindows' trade name and website addresses and use by
Lindows of certain copyrighted Windows media files; and

         WHEREAS, Microsoft filed suit against Lindows in United States District
Court for the Western District of Washington, Case No. C01-2115C, and Lindows
has brought counterclaims and other affirmative claims against Microsoft in that
case (hereinafter "Washington Case"); and

         WHEREAS, Microsoft has brought actions against Lindows in foreign
jurisdictions alleging trademark infringement and other claims, and Lindows has
brought counterclaims and other affirmative actions and claims against Microsoft
in these foreign jurisdictions (hereinafter "Foreign Cases"); and

         WHEREAS, Lindows has applied to the U.S. Patent and Trademark Office to
register trademarks containing "Lindows", and Microsoft has opposed said
applications, and in response Lindows has asserted counterclaims in the
Trademark Trial and Appeal Board ("TTAB") seeking to cancel certain of
Microsoft's U.S. registrations for Windows; and

         WHEREAS, the Parties wish to resolve their disputes, including all
claims brought by the Parties in the Washington Case, the Foreign Cases, and the
TTAB;

         NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Parties agree as follows:

         1.  Use of the Lindows Marks

                  a. Except as provided herein, within sixty (60) days of the
Effective Date of this Settlement Agreement, Lindows shall permanently cease all
use of "Lindow" or "Lindows" or


              ----------------------------------------------------
         Confidential Settlement Agreement and Mutual Release of Claims
                                     Page 1


<PAGE>


"Lindoz" or "lindows.com" or "lindowsinc.com" or "lin---s.com" or any other term
including "-indows" or "indoz" (hereinafter referred to as "Lindows Marks"),
including use in or as a trademark, logo, trade name, or corporate name or
portion thereof in any way and in any channel of distribution, throughout the
world. Notwithstanding the foregoing, for a period of (4) four years from the
Effective Date of this Settlement Agreement, Lindows may use www.lindows.com and
www.lindowsinc.com solely for the purpose of redirecting traffic to other
websites. After (4) four years from the Effective Date of this Settlement
Agreement, Lindows will assign the www.lindowsinc.com and www.lindows.com domain
names to Microsoft by signing the Domain Name Assignment attached hereto as
Exhibit A. Lindows further agrees, after (4) years from the Effective Date of
this Settlement Agreement, to change the administrative record for the
www.lindows.com and www.lindowsinc.com domain names to list individuals to be
designated by Microsoft as the Administrative Contact and hereby authorizes
Microsoft and the named Administrative Contact to formally transfer ownership of
the domain name to Microsoft after (4) four years from the Effective Date of
this Settlement Agreement. Lindows further agrees to perform all actions
necessary to maintain ownership of the existing registrations for
www.lindowsinc.com and www.lindows.com domain names and to retain all legal
rights necessary to fulfill the obligations set forth in this paragraph.

                  b. Within sixty (60) days of the Effective Date of this
Settlement Agreement, Lindows shall offer to any third party to which it has
granted distribution rights for its products, including but not limited to
distributors, resellers and builders (herein collectively referred to as
"Distributors"), a modified version of its Linspire operating system product
that does not include any use of the Lindows Marks.

                  c. To the extent Lindows has contractual authority to do so
under its agreements with Distributors, within sixty (60) days of the Effective
Date of this Settlement Agreement, Lindows shall inform its Distributors that
they are to discontinue all further use of the Lindows Marks, and that any
authorization or license from Lindows to use the Lindows Marks is withdrawn and
replaced with Lindows' authorization to use the Linspire mark. Lindows shall
modify its Branding Guidelines to remove any reference to the Lindows Marks.


                  d. To the extent that Lindows does not have the contractual
authority referenced in Sec 1(c) above, Lindows shall within ninety (90) days
inform its Distributors that it has entered into a settlement agreement with
Microsoft regarding the use of the Lindows Marks, that it has acknowledged the
validity of the Windows marks, and that it will not provide Distributors with
indemnity against claims brought by Microsoft arising out of future use of the
Lindows Marks.

                  e. Lindows will not sell or otherwise transfer any ownership
or other rights in the Lindows Marks, including any rights in domain names
containing the Lindows Marks.

                  f. On January 10, 2005, or within fifteen (15) days
thereafter, Lindows will assign the lindows.org, lindowsinc.net, lindowsinc.org,
lindowsos.com, lindos.com, lindoors.com, lindowsemail.com, lindowsfan.com,
lin----s.com, lin---s.com, lin--s.com, lin-s.com, and lindash.com domain names
(the "Company Domains") to Microsoft by signing the Domain

              ----------------------------------------------------
         Confidential Settlement Agreement and Mutual Release of Claims
                                     Page 2



<PAGE>


Name Assignment attached hereto as Exhibit B. Lindows further agrees, on January
10, 2005, to change the administrative record for the Company Domains to list
individuals to be designated by Microsoft as the Administrative Contact and
hereby authorizes Microsoft and the named Administrative Contact to formally
transfer ownership of the domain name to Microsoft after January 10, 2005.
Lindows further agrees to perform all actions necessary to maintain ownership of
the existing registrations for the identified domain names and to retain all
legal rights necessary to fulfill the obligations set forth in this paragraph.

         2.  Use of Windows Media Files

                  a. LindowsOS version 4.0 and LindowsOS version 4.5 (now
renamed Linspire 4.5) include the following copyrighted files owned by
Microsoft: wma9dmod.dll, wmadmod.dll, wmspdmod.dll, wmv9dmod.dll, wmvdmod.dll
(collectively, the "Windows Media Files"). Within ninety (90) days of the
Effective Date of this Settlement Agreement, Lindows shall cease any further use
or distribution of the Windows Media Files in any product or by any method of
distribution. Lindows, its successors in interest, and present and future
subsidiaries agree to make no further use of the Windows Media Files in any
product at any time.

                  b. Within ninety (90) days of the Effective Date of this
Settlement Agreement, Lindows shall offer to its Distributors a modified version
of its renamed Linspire operating system product that does not include the
Windows Media Files.

                  c. Within ninety (90) days of the Effective Date of this
Settlement Agreement, Lindows shall inform its Distributors to discontinue all
further use of any versions of Lindows products that contain the Windows Media
Files and that any authorization or license from Lindows to distribute versions
of Lindows products that contain the Windows Media Files is withdrawn and
replaced with Lindows' authorization or license to use the modified version that
does not contain the Windows Media Files.

                  d. To the extent Lindows does not have the contractual
authority to require Distributors to discontinue the use of versions of Lindows
which contain the Windows Media Files, Lindows shall within ninety (90) days
inform its Distributors that it has entered into a settlement agreement with
Microsoft providing that it will cease distribution of the Windows Media Files,
that Microsoft alleges that unauthorized distribution of the Windows Media Files
infringes its copyrights, and that Lindows will not provide Distributors with
indemnity against claims brought by Microsoft arising out of unauthorized use of
the Windows Media Files.

                  e. Within ninety (90) days of the Effective Date of this
Settlement Agreement Lindows shall review the following products distributed by
Lindows to assure that the Windows Media Files are not included with such
products: Lindows DVD Player, MPlayer, and Xine Lindows. Lindows, and successors
in interest, agree not to post on its website any links or directions to other
locations from which users may download unauthorized copies of the Windows Media
Files from other sources.

         3.  Lindows trademark applications and cancellation proceedings


              ----------------------------------------------------
         Confidential Settlement Agreement and Mutual Release of Claims
                                     Page 3

<PAGE>


         Within thirty (30) days of the Effective Date of this Settlement
Agreement, Lindows agrees to expressly abandon with prejudice any pending
applications for registrations for trademarks or trade names containing the
Lindows Marks in the United States or any foreign jurisdiction, including the
applications listed in Exhibit C hereto. Lindows further agrees to immediately
dismiss with prejudice all claims, counterclaims, or other legal proceedings in
whatever form or forum that Lindows has brought for cancellation of any U.S. or
foreign trademark registration issued to Microsoft containing the term Windows.
The Parties agree to cooperate with each other in promptly completing all acts
and executing all documentation necessary to effect such withdrawals and
dismissals within thirty (30) days from the Effective Date of this Settlement
Agreement.

         4.  Foreign Cases

         Upon execution of this Settlement Agreement the Parties agree to
immediately direct their respective counsel to dismiss with prejudice and
without costs to either Party all actions each has filed and claims each has
asserted against the other in the Foreign Cases in accordance with local law and
procedure. The Parties agree to cooperate with each other to promptly complete
all acts and to execute all documents necessary to dismiss the Foreign Cases
within thirty (30) days from the Effective Date of this Settlement Agreement.
Microsoft further agrees to refrain from filing any new Foreign Cases against
Lindows concerning the Lindows Marks, unless Microsoft has given Lindows thirty
(30) days written notice of the use of the Lindows Marks to which Microsoft
objects. If within the thirty (30) day notice period Lindows provides Microsoft
written confirmation of its intent to cure, Lindows shall have an additional
thirty (30) days to cure such use.

         5.  Acknowledgement of Validity of Windows Trademarks

                  a. Lindows, and successors in interest hereby recognize and
acknowledge Microsoft's ownership rights in and to the trademark Windows
worldwide and all of the goodwill associated therewith. Further, they
acknowledge and agree that the Windows trademark at issue in the Washington
Case, the United States Trademark Registrations Nos. 1,872,264, 1,875,069,
2,005,901, and 2,212,784 therefore (hereinafter "Windows Trademarks"), and all
other foreign and domestic registrations and/or applications comprising or
incorporating Windows, are famous, valid, enforceable, subsisting and owned by
Microsoft. Lindows agrees to publicly acknowledge the validity of the Windows
Trademarks in a joint press release with Microsoft, as hereinafter provided for.

                  b. Lindows, and successors in interest and present and future
subsidiaries agree not to hereafter challenge or contest, directly or
indirectly, the validity, ownership or registration of any Windows trademark
owned by Microsoft, including in any proceeding of any type in any country.

                  c. Lindows, and successors in interest and present and future
subsidiaries agree not to adopt, use, or seek registration for trademarks or
trade names that include "indows" as a portion thereof.

                  d. Lindows, and successors in interest and present and future
subsidiaries acknowledge that the common name used in the industry and by
consumers to identify the class of products including the Windows and Linspire
products is "operating system" and not "windows."


              ----------------------------------------------------
         Confidential Settlement Agreement and Mutual Release of Claims
                                     Page 4

<PAGE>

             d. Lindows, and successors in interest and present and future
subsidiaries acknowledge that the common name used in the industry and by
consumers to identify the class of products including the Windows and Linspire
products is "operating system" and not "windows."

        6. Payment by Microsoft

        Within thirty (30) days of the Effective Date of this Settlement
Agreement Microsoft agrees to pay to Lindows the sum of Fifteen Million Dollars
U.S. ($15,000,000) by wire transfer pursuant to instructions to be provided by
Lindows. Within seven (7) days of the execution and confirmation by Lindows of
the Domain Name Assignment described in Section 1(f) herein, Microsoft shall
make an additional payment to Lindows in the amount of Five Million Dollars U.S.
($5,000,000) by wire transfer pursuant to instructions to be provided by
Lindows.

        7. Windows Media Format Components License

        Microsoft shall enter into a Windows Media Format Components License
with Lindows, consisting of a Windows Media Format Components Source Development
Agreement and Windows Media Format Components Distribution License, as set forth
in the forms attached hereto as Exhibits D and E, respectively.

        8. Covenant Regarding Past Damages

        Microsoft further hereby irrevocably and perpetually covenants not to
sue Lindows, its successors in interest, its past, present and future assigns,
officers, directors, subsidiaries, affiliates, insurers and underwriters, or
otherwise seek recovery from such parties, for "Past Damages." "Past Damages"
means any and all damages that have accrued on account of any and all patent
infringement that has occurred before the Effective Date with respect to
Linspire 4.5, including but not limited to the Click-n-Run technology and
Lindows Office, in the form distributed by Lindows or the functionality in
Linspire 4.5 to the extent incorporated into an earlier Lindows product
(hereinafter "Linspire 4.5 Product"). In no event shall this covenant apply to
(a) modifications of a Linspire 4.5 Product; (b) future distributions of a
Linspire 4.5 Product; or (c) additional copies of a Linspire 4.5 Product that
are made or deployed after the Effective Date, whether such copies are made or
deployed from a Linspire 4.5 Product distributed before or after the Effective
Date.

        9. Releases

             a. Release by Microsoft. Microsoft specifically releases, waives,
and forever discharges Lindows, its successors in interest, its past, present
and future assigns, officers, directors, subsidiaries, affiliates, insurers and
underwriters, from any and all past claims, demands, actions, liabilities and
causes of actions, of every kind and character, whether asserted or unasserted,
whether known or unknown, suspected or unsuspected, in law or in equity, for or
by reason of any matter, cause or thing whatsoever, arising out of the claims
asserted by Microsoft in the Washington Case or the Foreign Cases, and from past
claims arising out of Lindows' distribution of the Windows Media Files prior to
the Effective Date of this Settlement

          ------------------------------------------------------------
         Confidential Settlement Agreement and Mutual Release of Claims
                                     Page 5

<PAGE>
Agreement, excepting only the obligations created by, and the representations,
warranties and covenants made in this Settlement Agreement.

             b. Release by Lindows. Lindows specifically releases, waives, and
forever discharges Microsoft, its successors in interest, its past, present and
future assigns, officers, directors, subsidiaries, affiliates, insurers and
underwriters, from any and all claims, demands, actions, liabilities and causes
of actions, of every kind and character, whether asserted or unasserted, whether
known or unknown, suspected or unsuspected, in law or in equity, for or by
reason of any matter, cause or thing whatsoever, arising out of the claims
asserted by Lindows in the Washington Case or the Foreign Cases, excepting only
the obligations created by, and the representations, warranties and covenants
made in, this Settlement Agreement.

        10. Dismissal of Washington Case

        Upon execution of this agreement the Parties shall direct their counsel
to dismiss the Washington Case with prejudice, each Party to bear its own costs,
and with the form of agreed order attached hereto as Exhibit F. Immediately
following the execution of this Agreement, the Parties shall file with the
United States District Court for the Western District of Washington (the
"Court") the fully executed version of Exhibit F.

        11. Confidentiality

        a. The parties agree to issue a joint press release in the form attached
hereto as Exhibit G.

        b. Except for the Exhibit G joint press release referenced herein, and
except for the filing of this Settlement Agreement as an exhibit to Lindows'
initial public offering registration statement and other required filings with
the Securities and Exchange Commission (along with a description of the terms of
this Settlement Agreement in such filings), where such disclosures are required
by law, the Parties agree to keep confidential and not disclose to any third
party the terms and conditions of this Settlement Agreement, the existence of
this Settlement Agreement, or any of the negotiations and discussions that
preceded its making, except as follows in which cases the Parties will
nevertheless use their best efforts to seek confidential treatment by any
receiving party: (i) as is necessary to dismiss the Washington Case or the
Foreign Cases; (ii) as is necessary to effectuate any term or provision of the
settlement, including any subsequent litigation to enforce the settlement,
except that both Parties shall take all reasonable steps to maintain the
confidentiality of this information including filing documents under seal and
entry of appropriate protective orders; (iii) to either Party's insurers, as
necessary to pursue insurance claims; (iv) to a Party's accountants or lawyers;
(v) as is reasonably necessary to comply with the Securities and Exchange
Commission's disclosure requirements; (vi) as and to the extent deemed necessary
by Microsoft in the course of its normal enforcement efforts with respect to its
Windows trademarks; and (vii) as required by law or court order upon notice to
the other Party sufficiently in advance of such disclosure to permit it to seek
a protective order. Nothing in this Section 11 shall be construed to preclude or
prohibit the Parties from being able to publicly acknowledge that they have
entered into a settlement of the Washington Case, the Foreign Cases,

          ------------------------------------------------------------
         Confidential Settlement Agreement and Mutual Release of Claims
                                     Page 6



<PAGE>

or other proceedings related to the Windows Trademarks, so long as the terms of
this Settlement Agreement are not disclosed other than as specifically and
expressly permitted herein.

        c. Lindows acknowledges that the confidentiality obligations set forth
herein are material considerations for Microsoft's agreement to enter into this
Settlement Agreement, that Microsoft would not have entered into this agreement
without such confidentiality obligations, and that any breach of the
confidentiality obligations would be a material breach of this Settlement
Agreement.


        12. No Admission of Liability

        Each Party acknowledges and agrees that this Settlement Agreement is a
compromise of disputed claims and neither this Settlement Agreement, nor any
consideration provided pursuant to this Settlement Agreement, shall be taken or
construed to be an admission or concession by either Microsoft or Lindows of any
kind with respect to any fact, liability, or fault.

        13. Waiver of Rights under California Civil Code Section 1542

        It is understood and agreed that this Settlement Agreement is intended
to cover and does cover all claims or possible claims of every nature and kind
whatsoever, whether known or unknown, suspected or unsuspected, or hereafter
discovered or ascertained, and all right under Section 1542 of the Civil Code of
California ("Section 1542") are hereby expressly waived. The Parties acknowledge
that they are familiar with Section 1542, which reads as follows:

        A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
        KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
        RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
        SETTLEMENT WITH THE DEBTOR.

The Parties expressly, knowingly, and intentionally waive and relinquish any and
all rights that they have under Section 1542, as well as under any other similar
state or federal statute or common law principle.

        14. Entire Agreement

        This Settlement Agreement constitutes the entire agreement between the
Parties with respect to the subject matter hereof, and there are no inducements,
representations, warranties, or understandings that do not appear within the
terms and provisions of this Settlement Agreement. This Settlement Agreement may
be modified only by a writing signed by both Parties.

        15. Attorneys' Fees

        In the event of litigation between the Parties arising out of or related
to the performance or non-performance of any obligation of any Party to this
Settlement Agreement, the prevailing Party shall be entitled to recover its
attorneys' fees and costs incurred.

          ------------------------------------------------------------
         Confidential Settlement Agreement and Mutual Release of Claims
                                     Page 7



<PAGE>


        16. Authorization

        Each individual signing this Settlement Agreement warrants and
represents that he has the full authority and is duly authorized and empowered
to execute this Settlement Agreement on behalf of the Party for which he signs.

        17. Choice of Law

        The provisions of this Settlement Agreement shall be governed by the
laws of the State of Washington, including any action arising out of this
Settlement Agreement.

        18. Severability and Construction

        If any provision of this Settlement Agreement shall be held by a court
of competent jurisdiction to be illegal, invalid or unenforceable, the remaining
provisions shall remain in full force and effect. This Settlement Agreement has
been negotiated by the Parties and their respective counsel and shall be
interpreted fairly in accordance with its terms and without any strict
construction in favor of or against either Party.

        19. Counterparts

        This Settlement Agreement will be executed by the parties on the
Effective Date and may be executed in one or more counterparts, each of which
when so executed and delivered shall be deemed to be an original, but all of
which taken together form but one and the same instrument.

        20. Binding Effect.

        This Settlement Agreement shall be binding on the Parties, their
successors in interest, and present and future subsidiaries, assignees or
acquirers, including any acquirer of substantially all of the assets of a Party.





       REMAINDER OF PAGE LEFT INTENTIONALLY BLANK. SIGNATURE PAGE FOLLOWS.



          ------------------------------------------------------------
         Confidential Settlement Agreement and Mutual Release of Claims
                                     Page 8






<PAGE>

         IN WITNESS HEREOF, Microsoft and Lindows have caused their duly
authorized representatives to execute this Settlement Agreement to be effective
as of the Effective Date.

MICROSOFT CORPORATION                            LINDOWS, INC.


/s/ Bradford L. Smith                            /s/ Michael Robertson
-------------------------------                  ------------------------------
By (Sign)                                        By (Sign)


Bradford L. Smith                                Michael Robertson
-------------------------------                  ------------------------------
Name (Print)                                     Name (Print)


Senior VP, General Counsel &
Corporate Secretary                              CEO
------------------------------                   ------------------------------
Title                                            Title


         --------------------------------------------------------------
         Confidential Settlement Agreement and Mutual Release of Claims
                                     Page 9



<PAGE>


                                  Exhibit List


     A. Domain Name Transfer Agreement (Lindows.com and Lindowsinc.com)

     B.  Domain Name Transfer Agreement (Company Domains)

     C.  List of Lindows trademark registrations or applications

     D. Windows Media Format Components Source Development Agreement

     E. Windows Media Format Components Distribution License

     F. Stipulated Dismissal with Prejudice

     G. Joint Press Release


         --------------------------------------------------------------
         Confidential Settlement Agreement and Mutual Release of Claims
                                     Page 10


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