Electronic Arts, Inc. and Subsidiaries - Page 7




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          establishment of such an undertaking.  EAPR was incorporated                
          under Delaware law on May 15, 1992, as a subsidiary of EA, to               
          manufacture video games and other software entertainment                    
          products.  EA bought video games from EAPR in each of the years             
          in issue.                                                                   
          B.  Agreements; Procedures                                                  
               EA issued purchase orders to EAPR for video games.  EA                 
          generated these purchase orders in San Mateo, California.  When             
          EAPR, through its manager and employees covered by the                      
          Manufacturing Services Agreement (hereinafter sometimes referred            
          to as the Agreement), shipped completed video games to EA, EAPR’s           
          manager or an employee covered by the Agreement (hereinafter                
          sometimes referred to as a lease employee) input into EAPR’s                
          computerized Material Requirement Planning System (hereinafter              
          sometimes referred to as the MRP System) shipping data relating             
          to the shipment.  (The Agreement, including the arrangements as             
          to lease employees, is described in greater detail infra I.E.)              
          The MRP System was used to manage EAPR’s inventories by tracing             
          (a) raw materials and components as inputs and inventory, (b)               
          production schedules, (c) movements of material and component               
          inventories through stages of the manufacturing process, and (d)            
          finished video games as outputs relating to the manufacture of              
          video games in Puerto Rico.  An invoice from EAPR then was                  
          generated in San Mateo with respect to the completed video games.           






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