10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2002.

or

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ____________ to ____________.

Commission File Number:

000-31633

Kosan Biosciences Incorporated

(Exact name of registrant as specified in its charter)

Delaware	94-3217016
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3832 Bay Center Place, Hayward, California 94545

(Address of principal executive offices)

(510) 732-8400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.    Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.001 par value; 25,320,592 shares outstanding at July 31, 2002.

KOSAN BIOSCIENCES INCORPORATED

Form 10-Q

Quarter Ended June 30, 2002

INDEX

PART I     FINANCIAL INFORMATION		Page
Item 1:	Condensed Financial Statements and Notes (unaudited):
	Condensed Balance Sheets as of June 30, 2002 and December 31, 2001	3
	Condensed Statements of Operations for the three months and six months ended June 30, 2002 and 2001	4
	Condensed Statements of Cash Flows for the six months ended June 30, 2002 and 2001	5
	Notes to Condensed Financial Statements	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	24
PART II     OTHER INFORMATION
Item 1:	Legal Proceedings	25
Item 2:	Changes in Securities and Use of Proceeds	25
Item 3:	Defaults Upon Senior Securities	25
Item 4:	Submission of Matters to a Vote of Security Holders	25
Item 5:	Other Information	25
Item 6:	Exhibits and Reports on Form 8-K	26
SIGNATURES		27

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PART I.    FINANCIAL INFORMATION

Item 1:    Condensed Financial Statements and Notes

KOSAN BIOSCIENCES INCORPORATED

CONDENSED BALANCE SHEETS

(in thousands)

	June 30, 2002			December 31, 2001
	(unaudited)			(1)
Assets
Current assets:
Cash and cash equivalents	$	29,166		$	18,561
Short-term investments		41,024			58,880
Prepaid expenses and other current assets		1,038			617
Total current assets		71,228			78,058
Property and equipment, net		4,997			3,567
Long-term investments		10,910			12,902
Notes receivable from related parties		557			1,041
Other assets		468			244
Total assets	$	88,160		$	95,812
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,125		$	1,439
Accrued liabilities		3,119			1,828
Deferred revenue		563			999
Current portion of capital lease obligation and equipment loans		1,875			1,387
Total current liabilities		6,682			5,653
Equipment loans, less current portion		2,036			1,568
Stockholders’ equity:
Common stock		25			25
Additional paid-in capital		141,865			141,863
Notes receivable from stockholders		(1,533	)		(1,541	)
Deferred stock-based compensation		(2,206	)		(4,430	)
Accumulated other comprehensive gain		157			1,216
Accumulated deficit		(58,866	)		(48,542	)
Total stockholders’ equity		79,442			88,591
Total liabilities and stockholders’ equity	$	88,160		$	95,812

(1) The balance sheet data at December 31, 2001 has been derived from the audited financial statements at that date.

See accompanying notes.

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KOSAN BIOSCIENCES INCORPORATED

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Revenues:
Contract revenue	$	925		$	717		$	1,850		$	1,726
Grant revenue		590			261			1,327			481
Total revenues		1,515			978			3,177			2,207
Operating expenses:
Research and development (including charges for stock-based compensation of $835 and $1,319 in the three months ended June 30, 2002 and 2001, respectively, and $1,634 and $2,831 in the six months ended June 30, 2002 and 2001, respectively)		7,159			6,742			13,106			12,306
General and administrative (including charges for stock-based compensation of $165 and $407 in the three months ended June 30, 2002 and 2001, respectively, and $327 and $651 in the six months ended June 30, 2002 and 2001, respectively)		1,242			1,469			2,502			2,562
Total operating expenses		8,401			8,211			15,608			14,868
Loss from operations		(6,886	)		(7,233	)		(12,431	)		(12,661	)
Other income, net		496			238			2,107			1,743
Net loss	$	(6,390	)	$	(6,995	)	$	(10,324	)	$	(10,918	)
Basic and diluted net loss per common share	$	(0.26	)	$	(0.29	)	$	(0.42	)	$	(0.46	)
Shares used in computing basic and diluted net loss per common share		24,851			24,066			24,742			23,955

See accompanying notes.

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KOSAN BIOSCIENCES INCORPORATED

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Six Months Ended June 30,
	2002			2001
Operating activities
Net loss	$	(10,324	)	$	(10,918	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		777			583
Amortization of investment premiums and discounts, net		163			(654	)
Amortization of stock-based compensation		1,097			3,168
Other stock-based compensation		864			314
Realized (gain)/loss on investment		(990	)		990
Changes in assets and liabilities:
Prepaid expenses and other current assets		(421	)		33
Other assets and notes receivable from related parties		260			16
Accounts payable and accrued liabilities		977			305
Deferred revenue		(436	)		(619	)
Net cash used in operating activities		(8,033	)		(6,782	)
Investing activities
Acquisition of property and equipment		(2,207	)		(1,045	)
Purchase of investments		(19,904	)		(58,107	)
Proceeds from maturity of investments		39,520			58,481
Net cash provided by (used in) investing activities		17,409			(671	)
Financing activities
Proceeds from issuance of common stock, net of repurchases		271			148
Proceeds from the repayment of notes receivable from stockholders		2			—
Proceeds from equipment loans		1,655			—
Principal payments under capital lease obligation and equipment loans		(699	)		(541	)
Net cash provided by (used in) financing activities		1,229			(393	)
Net increase (decrease) in cash and cash equivalents		10,605			(7,846	)
Cash and cash equivalents at beginning of period		18,561			36,425
Cash and cash equivalents at end of period	$	29,166		$	28,579

See accompanying notes.

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KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

1.    Organization and Summary of Significant Accounting Policies

Overview

Kosan Biosciences Incorporated (“Kosan” or the “Company”) was incorporated under the laws of the State of California on January 6, 1995 and commenced operations in 1996. In July 2000, the Company was reincorporated under the laws of the state of Delaware. Kosan has proprietary gene-engineering technologies for the manipulation and production of polyketides, a rich source of pharmaceutical products.

The Company has funded its operations primarily through sales of common stock, convertible preferred stock, contract payments under its collaboration agreements, equipment financing arrangements and government grant awards. Prior to achieving profitable operations, the Company intends to fund operations through the additional sale of equity securities, strategic collaborations, government grant awards and debt financing.

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The information as of June 30, 2002, and for the three and six months ended June 30, 2002 and 2001, reflects all adjustments (including normal recurring adjustments) that the management of the Company believes are necessary for a fair presentation of the results for the periods presented. Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

Use of Estimates

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

Cash Equivalents and Investments

The Company considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. The Company limits its concentration of risk by diversifying its investments among a variety of issuers. All investment securities are classified as available-for-sale and are recorded at fair value based on quoted market prices, with unrealized gains and losses excluded from earnings and reported in other comprehensive income/(loss). Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses and declines in the fair value that are deemed to be other than temporary are reflected in earnings. The cost of securities sold is based on the specific identification method.

The Company holds certain restricted investments consisting of cash. These investments are carried at fair value and are restricted as to withdrawal under a letter of credit agreement related to a facility lease (see Note 7). These investments are held in the Company’s name and are included in long-term investments on the Company’s financial statements.

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KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

(unaudited)

1.    Organization and Summary of Significant Accounting Policies (Continued)

Revenue Recognition

The Company recognizes license and other up-front fees pursuant to research collaboration agreements over the estimated research term of the respective agreement. Payments related to substantive performance milestones that are at risk at the initiation of an agreement are recognized upon successful completion of a performance milestone event. Contract revenues related to collaborative research and development efforts are recognized as revenue on a ratable basis as the related services are performed. Such payments generally are made based on the number of fulltime equivalent researchers assigned to the collaboration project. Revenues related to government grant awards are recognized at the time a grant is awarded and the related research expenses are incurred. Any amounts received in advance of performance are recorded as deferred revenue until earned.

Research and Development

Research and development expenses consist of costs incurred for Company-sponsored and collaborative research and development activities. These costs consist primarily of salaries and other personnel-related expenses, stock-based compensation, facility-related expenses, depreciation of facilities and equipment, lab consumables and fees paid to outside service providers that conduct certain research activities on behalf of the Company. Research and development expenses under government grant awards and collaborative agreements approximated the revenue recognized, excluding milestone payments received under such arrangements.

Net Loss per Share

Basic and diluted net loss per common share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss is not presented separately as the Company is in a net loss position and including potentially dilutive securities in the loss per share computation would be antidilutive.

The following table presents the calculation of basic, diluted and pro forma basic and diluted net loss per share (in thousands, except per share data):

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Net loss	$	(6,390	)	$	(6,995	)	$	(10,324	)	$	(10,918	)
Weighted-average shares of common stock outstanding		25,309			25,195			25,268			25,174
Less: weighted-average shares subject to repurchase		(458	)		(1,129	)		(526	)		(1,219	)
Weighted-average shares used in computing basic and diluted net loss per common share		24,851			24,066			24,742			23,955
Basic and diluted net loss per common share	$	(0.26	)	$	(0.29	)	$	(0.42	)	$	(0.46	)

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KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

(unaudited)

1.    Organization and Summary of Significant Accounting Policies (Continued)

Stock-Based Compensation

The Company accounts for common stock options granted to employees using the intrinsic value method and, thus, recognizes compensation expense for options granted with exercise prices less than the fair value of the Company’s common stock on the date of the grant. Deferred stock compensation calculated for options granted with exercise prices less than the deemed fair value of the common stock is amortized over the vesting period of the individual options, generally four years, using the graded vesting method.

Stock-based compensation expense for options granted to non-employees has been determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and Emerging Issues Task Force (“EITF”) Consensus No. 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The measurement of stock-based compensation to non-employees is subject to periodic adjustment as the underlying securities vest. As such, changes to these measurements could be substantial should the Company experience significant changes in its stock price.

Reclassification

Certain reclassifications of the prior year’s balances have been made to conform to the current year presentation. These reclassifications had no effect on the prior year’s net loss or stockholders’ equity.

2.    Collaborative Research and Development and License Agreements

Johnson & Johnson Pharmaceutical Research and Development, LLC

In September 1998, the Company signed a collaborative agreement with The R.W. Johnson Pharmaceutical Research Institute, LLC and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson companies. In September 2001, the Company amended its collaborative research and development agreement. Under the terms of the amended agreement the research program and funding have been extended until at least December 28, 2002. Effective January 2002, the rights and obligations under the agreement were assigned to Johnson & Johnson Pharmaceutical Research and Development, LLC, a subsidiary of Ortho-McNeil Pharmaceutical, Inc. In February 2001, the Company received, and recognized in full, a $250,000 milestone in connection with this agreement.

License Agreements

The Company has collaborative and license agreements with several academic and medical institutions. For the six months ended June 30, 2002 and 2001, the Company made payments under these agreements of approximately $495,000 and $164,000, respectively.

3.    Realized Gain on Investment

At June 30, 2001, the Company determined that an other-than-temporary decline in fair value of its investment in short-term commercial paper of Southern California Edison, or SoCalEd, a utility company, had occurred. At the time of purchase, the security was a high investment-grade security, but was subsequently downgraded due to the financial uncertainty that resulted from the California energy crisis.

8

KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

(unaudited)

3.    Realized Gain on Investment (Continued)

The security matured on April 18, 2001, and SoCalEd defaulted on payment. The amortized cost of the security was $3.0 million, and the security was valued at approximately 67% of cost at June 30, 2001. Accordingly, the Company recorded a $990,000 loss on the related write-down in the carrying value of the investment. In March 2002, the security was fully repaid. Thus, the Company recorded a realized gain on the investment of $990,000 in the quarter ended March 31, 2002.

4.    Comprehensive Loss

For the three and six months ended June 30, 2002 and 2001, comprehensive loss was as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Net loss	$	(6,390	)	$	(6,995	)	$	(10,324	)	$	(10,918	)
Unrealized gain/(loss) on available-for-sale securities		171			(519	)		(69	)		(222	)
Reclassification of realized (gain)/loss on available-for-sale securities		—			990			(990	)		990
Comprehensive loss	$	(6,219	)	$	(6,524	)	$	(11,383	)	$	(10,150	)

5.    Equipment Financing

The Company finances certain equipment and facility improvements under debt obligations. In April 2002, the Company entered into a $3.0 million equipment line of credit agreement. As of June 30, 2002, the Company had utilized approximately $1.7 million of the line of credit.

The terms of the loan obligations range from 42 to 49 months. Some of the loans have a balloon payment at the end of the term. The interest rates of each of the loans are fixed at the time of the draw down, with the interest rates ranging from 8.71% to 13.86%. Obligations under the loans are secured by the assets financed under the loans.

6.    Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	June 30, 2002		December 31, 2001
Facilities-related	$	405	$	349
Compensation-related		954		827
Professional services		541		289
Research & development-related		903		—
Other		316		363
	$	3,119	$	1,828

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KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

(unaudited)

7.    Facility Leases

In June 2002, the Company expanded its facilities by entering into an assignment of a non-cancelable operating lease, which commenced in June 2002 and expires in 2008, with an option to renew. The Company also extended the terms of its existing facility lease to 2013, with an option to renew. Minimum annual rental commitments at June 30, 2002 are as follows (in thousands):

Year ended December 31,
2002	$	893
2003		1,708
2004		1,588
2005		1,609
2006		1,624
Thereafter		7,635
Total minimum payments	$	15,057

In June 2002, the Company obtained a stand-by letter of credit for approximately $903,000 from a commercial bank as security for the Company’s obligation under one of its facility leases. The letter of credit is secured by $904,000 of cash in an investment account that the Company must maintain for the term of the lease. The investment account is classified within long-term investments on the balance sheet.

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Item 2:    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict, potential or continue, the negative of terms like these or other comparable terminology. Actual events or results may differ materially from those anticipated in these forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks outlined under the caption “Factors That May Affect Results of Operations and Financial Condition” set forth at the end of this Item 2, the Risk Factors set forth in our Annual Report on Form 10-K filed with the SEC and those contained from time to time in our other filings with the SEC. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

We have proprietary gene-engineering technologies for the manipulation and production of polyketides, a rich source of pharmaceutical products. We use our platform technologies to develop product candidates that target large pharmaceutical markets. We are testing Epothilone D (KOS-862), a potential anti-cancer agent, in Phase I human clinical trials. In infectious disease, we have a collaboration with Johnson & Johnson Pharmaceutical Research and Development, LLC, focusing on the development of a next generation antibiotic. We have additional product development and research programs.

We have incurred significant losses since our inception. As of June 30, 2002, our accumulated deficit was approximately $58.9 million. We expect to incur additional operating losses over the next several years as we continue to develop our technologies and fund internal product research and development.

Critical Accounting Policies

Revenue Recognition

We recognize license and other up-front fees over the estimated research term of each respective agreement. If an agreement does not have a specified term, we must apply judgment in determining the appropriate level of recognition. Milestone payments are recognized upon successful completion of a performance milestone event. We apply judgment as to the timing of recognizing milestone payments and whether such payments represent the culmination of a separate earnings process. Contract revenues related to collaborative research and development agreements are recognized on a ratable basis as services are performed. Revenues related to government grants are recognized at the time a grant is awarded and the related research expenses are incurred. Any amounts received in advance of performance are recorded as deferred revenue until earned.

Stock-Based Compensation

We account for common stock options granted to employees using the intrinsic value method and, thus, recognize compensation expense for options granted with exercise prices less than the fair value of our common stock on the date of the grant. We recorded total deferred stock-based compensation of approximately $15.6 million in 2000 and $2.9 million in 1999, which amounts are being amortized to expense using the graded vesting method over the vesting periods of the underlying options, generally four years. We recognized stock-based compensation of approximately $1.1 million and $3.2 million for the six months ended June 30, 2002 and 2001, respectively. Based on deferred stock-based compensation recorded as of June 30, 2002, we expect to record amortization of deferred stock-based compensation approximately as follows: $1.0 million in the remaining six months of 2002, $973,000 in 2003 and $233,000 in 2004.

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Stock-based compensation expense for options granted to non-employees has been determined as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. We recognized other stock-based compensation for non-employees of approximately $864,000 and $314,000 in the six months ended June 30, 2002 and 2001, respectively. In addition, assuming no changes, we expect to recognize other stock-based compensation in connection with stock options granted to non-employees of approximately $889,000 in the remaining six months of 2002, $714,000 in 2003, $529,000 in 2004 and $318,000 in 2005. The measurement of stock-based compensation to non-employees is subject to periodic adjustment as the underlying securities vest. As such, changes to these measurements could be substantial should we experience significant changes in our stock price. See Note 1 of our financial statements.

Investments

We invest in debt and equity securities. The price of these securities is subject to significant volatility. We record an impairment charge when we believe that an investment has experienced a decline in value that is other than temporary. Generally, we review an investment for impairment if its market value has been below its carrying value for each trading day in a six-month period. Changes in the market price of these securities may impact our profitability.

Results of Operations

Revenues

Our revenues were approximately $1.5 million and $3.2 million for the three and six months ended June 30, 2002, respectively, compared to approximately $1.0 million and $2.2 million, respectively, for the same periods in 2001. Grant revenue was $1.3 million for the six months ended June 30, 2002, compared to $481,000 for the same period last year. Total contract revenues under our collaboration with Johnson & Johnson Pharmaceutical Research and Development, LLC, or J&J, were approximately $981,000 for the six months ended June 30, 2002, compared to approximately $1.7 million for the same period in 2001. Included in 2001 contract revenue was a non-recurring $250,000 milestone received in connection with this collaboration. The initial term of the collaboration with J&J has been extended to December 28, 2002. If we do not maintain or further extend this agreement, our revenues will significantly decrease thereafter, unless we enter into additional collaborations.

Research and Development Expenses

Our research and development expenses consist primarily of salaries and other personnel-related expenses, fees paid to outside service providers, stock-based compensation, facility-related expenses, lab consumables and depreciation of facilities and equipment. Research and development expenses increased to approximately $7.2 million and $13.1 million for the three and six months ended June 30, 2002, respectively, from $6.7 million and $12.3 million, respectively, for the same periods in 2001. These increases were primarily attributable to our expanded research and development efforts, including three Phase I studies of KOS-862 (Epothilone D) and continued investment in our internally funded programs and technologies. Additionally, the increase was partially offset by the decrease in stock-based compensation expense for the three and six months ended June 30, 2002, compared to the same periods in 2001. We expect our research and development expenses will increase substantially to advance Epothilone D through clinical development, fund the expansion of our technology platform, support our collaborative research programs, advance other in-house research programs into later stages of development and fund the expansion and improvement of our facilities as we continue to expand our laboratory capabilities.

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General and Administrative Expenses

General and administrative expenses decreased in the three and six months ended June 30, 2002 to approximately $1.2 million and $2.5 million, respectively, from $1.5 million and $2.6 million, respectively, for the same periods in 2001. These decreases were primarily due to lower stock-based compensation. We expect our general and administrative expenses will increase in the future to support the continued growth of our research and development efforts and expansion and improvement of our facilities.

Interest Income

Interest income decreased to approximately $591,000 and $1.3 million for the three and six months ended June 30, 2002, respectively, from $1.3 million and $2.9 million, respectively, for the same periods in 2001. These decreases were attributable to lower average investment balances and lower investment yields associated with the declining interest rate environment.

Interest Expense

Interest expense increased to $95,000 for the three months ended June 30, 2002 from $80,000 for the same period in 2001 and decreased to $173,000 for the six months ended June 30, 2002 from $174,000 for the same period in 2001. The increase for the quarter ended June 30, 2002 from the same period in 2001 resulted from additional debt financing during 2002.

Realized Gain on Investment

At June 30, 2001, we determined that an other-than-temporary decline in the fair value of our investment in short-term commercial paper of Southern California Edison, or SoCalEd, a utility company, had occurred. At the time of purchase, the security was a high investment-grade security, but was subsequently downgraded due to the financial uncertainty that resulted from the California energy crisis. The security matured on April 18, 2001, and SoCalEd defaulted on payment. The amortized cost of the security was $3.0 million, and the security was valued at approximately 67% of cost at June 30, 2001. Accordingly, for the quarter ended June 30, 2001, we recorded a write-down on the carrying value of the investment of $990,000. In March 2002, the security was fully repaid. Thus, we recorded a realized gain on the investment of $990,000 in the three months ended March 31, 2002.

Liquidity and Capital Resources

We have financed our operations from inception primarily through sales of convertible preferred stock and common stock, totaling $119.9 million in net proceeds, contract payments under our collaboration agreement, equipment financing arrangements and government grants. As of June 30, 2002, we had approximately $81.1 million in cash, cash equivalents and investments, compared to approximately $90.3 million as of December 31, 2001. Our funds are currently invested in U.S. Treasury and government agency obligations and corporate obligations.

Our operating activities used cash of $8.0 million for the six months ended June 30, 2002, compared to $6.8 million for the same period in 2001. Our net loss of approximately $10.3 million for the six months ended June 30, 2002 included a $990,000 non-cash realized gain on a previously written-down investment, and was partially offset by non-cash expenses of $2.9 million related to stock-based compensation, depreciation and amortization of investment premiums and discounts. Cash used for the same period in 2001 was used primarily to fund our net operating loss of approximately $10.9 million, that included a $990,000 non-cash write-down of an investment, partially offset by non-cash expenses of $3.4 million related to stock-based compensation, depreciation and amortization of investment premiums and discounts.

Our investing activities, excluding changes in our investments, for the six months ended June 30, 2002 used cash of approximately $2.2 million, compared to $1.0 million for the same period in 2001, reflecting capital expenditures related to the expansion and improvement of our facilities as we continued to expand our laboratory capabilities.

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Cash provided by financing activities was approximately $1.2 million for the six months ended June 30, 2002, compared to cash used in financing activities of $393,000 for the same period in 2001. Financing activities for 2002 included approximately $1.7 million in proceeds from equipment loans, partially offset by normal payments on existing debt.

In April 2002, we entered into a $3.0 million equipment line of credit agreement for facility improvements and capital purchases. As of June 30, 2002, we had utilized approximately $1.7 million of the line of credit. See Note 5 to our financial statements.

We believe our existing cash and investments and anticipated cash flow from existing collaborations will be sufficient to support our current operating plan through the first half of 2004. Our future capital uses and requirements depend on numerous forward-looking factors. These factors include, but are not limited to, the following:

• our ability to establish, and the scope of revenues received under, any new collaborations;

• the progress and number of research programs carried out by us;

• the progress and success of preclinical testing and clinical trials of our drug candidates;

• our ability to maintain or extend our existing collaboration with Johnson & Johnson Pharmaceutical Research and Development, LLC;

• the costs and timing of obtaining, enforcing and defending our patent and intellectual rights;

• the costs and timing of our facilities expansion;

• the costs and timing of regulatory approvals; and

• expenses associated with unforeseen litigation.

In addition, we review from time to time potential opportunities to expand our technologies or add to our portfolio of drug candidates. In the future, we may need further capital in order to acquire or invest in technologies, products or businesses.

We expect that additional financing will be required in the future to fund operations. We expect to finance future cash needs through the sale of equity securities, strategic collaborations, government grant awards and debt financing. We cannot assure you that additional financing or collaboration and licensing arrangements will be available when needed or that, if available, will be on terms favorable to us or our stockholders. Insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs, to lose rights under existing licenses or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose or may adversely affect our ability to operate as a going concern. If additional funds are obtained by issuing equity securities, substantial dilution to existing stockholders may result. In addition, see “Factors That May Affect Results of Operations and Financial Condition”.

Factors That May Affect Results of Operations and Financial Condition

You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations.

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We have a history of net losses and may never become profitable.

We commenced operations in 1996 and are still in an early stage of development. We have not commercialized any products, and we have incurred significant losses to date. As of June 30, 2002, we had an accumulated deficit of approximately $58.9 million. To date, our revenues have been solely from collaborations and government grants. Our expenses have consisted principally of costs incurred in research and development and from general and administrative costs associated with our operations. We have incurred net losses since our inception, including a net loss of approximately $10.3 million for the six months ended June 30, 2002. We expect our expenses to increase and to continue to incur operating losses for at least the next several years as we continue our research and development efforts for our drug candidates. The amount of time necessary to commercialize any of our drug candidates successfully is long and uncertain, and successful commercialization may not occur at all. As a result, we may never become profitable.

If our current corporate collaboration or license agreements are unsuccessful or if conflicts develop with these relationships, our research and development efforts could be delayed.

Our collaboration with Johnson & Johnson Pharmaceutical Research and Development, LLC, is scheduled to expire on December 28, 2002. We may not be able to maintain or extend this collaboration on acceptable terms, if at all. If we do not maintain or extend this collaboration, our research and development efforts could be delayed.

We do not control the amount and timing of resources that our corporate collaborator devotes to our program or potential products. As a result, we do not know if our corporate collaborator will dedicate sufficient resources or if the development or commercialization efforts by our corporate collaborator will be successful. We also do not know whether our current collaborative partner or future collaborative partners, if any, might pursue alternative technologies or develop alternative products either on their own or in collaboration with others, including our competitors, as a means for developing treatments for the diseases targeted by collaborative arrangements with us. In addition, if a business combination involving our existing corporate collaborator were to occur, the effect could diminish, terminate or cause delays in our corporate collaboration. Should our collaborative partner fail to develop or commercialize a compound or product for which it has rights from us, we may not receive any future milestone payments and will not receive any royalties associated with such compound or product. Conflicts might also arise with collaborative partners concerning proprietary rights to particular compounds. If our corporate collaborator were to breach or terminate its agreement with us or otherwise fail to conduct the collaborative activities successfully and in a timely manner, the preclinical or clinical development or commercialization of the affected product candidates or research program could be delayed or terminated.

We are also a party to various license agreements that give us rights to use specified technologies in our research and development processes. The agreements, pursuant to which we have in-licensed technology, permit our licensors to terminate the agreement under certain circumstances. If we are not able to continue to license these future technologies on commercially reasonable terms, our product development and research may be delayed.

If we fail to enter into new collaborative agreements in the future, our business and operations would be negatively impacted.

Our strategy depends upon the formation and sustainability of multiple collaborative arrangements and license agreements with third parties in the future. We expect to rely on these arrangements for not only financial resources, but also for expertise that we expect to need in the future relating to clinical trials, manufacturing, sales and marketing, and for license and technology rights. Although we have established a collaborative arrangement and various license agreements, we do not know if we will be able to establish additional arrangements on favorable terms, or whether current or any future collaborative arrangements will ultimately be successful. There have been, and may continue to be, a significant number of recent business combinations among large pharmaceutical companies that have resulted, and may continue to result, in a reduced number of potential future corporate collaborators, which may limit our ability to find partners who will work with us in developing and commercializing our drug candidates. If we do not enter into new collaborative agreements, then our revenues will be reduced, and our drug candidates may not be developed, manufactured or marketed.

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Our potential products are in an early stage of development, and substantial additional effort will be necessary for development.

Our technologies are new, and our drug candidates are in early stages of research and development. We may not develop products that prove to be safe and effective, meet applicable regulatory standards, are capable of being manufactured at reasonable costs or can be marketed successfully. All of the potential products that we are currently developing will require significant development and investment, including extensive preclinical and clinical testing, before we can submit any application for regulatory approval.

Our products must satisfy rigorous standards of safety and efficacy before they can be approved by the U.S. Food and Drug Administration and international regulatory authorities for commercial use. We will need to conduct significant additional research, preclinical testing and clinical trials, before we can file applications with the FDA for product approval. Clinical trials are expensive and have a high risk of failure. In addition, to compete effectively, our products must be easy to use, cost-effective and economical to manufacture on a commercial scale. We may not achieve any of these objectives. Any of our products may not attain market acceptance. Typically, there is a high rate of attrition for products in preclinical testing and clinical trials. Also, third parties may develop superior products or have proprietary rights that preclude us from marketing our products. If research and testing is not successful or we fail to obtain regulatory approval, we will be unable to market and sell our future product candidates.

The progress and results of our animal and human testing are uncertain.

We must provide the FDA and foreign regulatory authorities with clinical data that demonstrates the safety and efficacy of our products before they can be approved for commercial sale. As a result, commercialization of our product candidates depends upon successful completion of clinical trials. Preclinical testing and clinical development are long, expensive and uncertain processes. It may take us several years to complete our testing, and failure can occur at any stage of testing. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim results of trials do not necessarily predict final results. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. None of the product candidates that we have internally developed or licensed have advanced beyond the stage of human testing designed to determine safety, known as Phase I clinical trials.

We do not know whether planned clinical trials will begin on time or whether any of our clinical trials will be completed on schedule, or at all. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be repeated or a program to be terminated. In October 2001, we initiated clinical trials of Epotholine D (KOS-862), which is directed to the treatment of cancer. Anti-cancer drugs generally have a narrow therapeutic window between efficacy and toxicity. If unacceptable toxicity is observed in clinical trials, the trials may be terminated at an early stage. Drug-related deaths may occur in clinical trials with anti-cancer drugs, because drugs for the treatment of cancer are typically dangerous and cancer patients are critically ill.

Completion of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the drug candidate. Our clinical trials may be suspended at any time if we or the FDA

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believe the patients participating in our studies are exposed to unacceptable health risks. Our commencement and rate of completion of clinical trials may be delayed by many factors, including:

• ineffectiveness or toxicity of the study compound, or perceptions by physicians that the compound is not safe or effective for a particular indication;

• inability to manufacture sufficient quantities of compound for use in clinical trials;

• failure of the FDA to approve our clinical trial protocols;

• slower than expected rate of patient recruitment;

• the death of patients during a clinical trial;

• inconclusive or negative results experienced during the clinical trial;

• third-party clinical investigators may not perform our clinical trials on our anticipated schedule or consistent with a clinical trial protocol, and other third-party organizations may not perform data collection and analysis in a timely or accurate manner; and

• government or regulatory delays.

Any clinical trial may fail to produce results satisfactory to the FDA. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval.

Our product development costs will increase if we have delays in testing or approvals or if we need to perform more or larger clinical trials than planned. If the delays are significant, our financial results and the commercial prospects for our products will be harmed, and our ability to become profitable will be delayed.

We do not know whether our existing or any future clinical trials will demonstrate safety and efficacy sufficient to obtain the requisite regulatory approvals or will result in marketable products. Our failure to adequately demonstrate the safety and efficacy of our products under development will prevent receipt of FDA approval and, ultimately, commercialization of our products. If any current or future clinical trials are not successful, our business, financial condition and results of operations will be harmed.

Any inability to protect our proprietary technologies adequately could harm our ability to successfully commercialize product candidates.

Our commercial success will depend in part on our ability to obtain patents and maintain adequate protection of other intellectual property for our technologies and products in the United States and other countries. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries.

The patent positions of biotechnology companies, including our patent position, involve complex legal and factual questions and, therefore, validity and enforceability cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated or circumvented. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

• we were the first to make the inventions covered by each of our pending patent applications;

• we were the first to file patent applications for these inventions;

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• others will not independently develop similar or alternative technologies or duplicate any of our technologies;

• any of our pending patent applications will result in issued patents;

• any patents issued to us or our licensors will provide a basis for commercially viable products or will provide us with any competitive advantages or will not be challenged by third parties;

• we will develop additional proprietary technologies that are patentable; or

• the patents of others will not have an adverse effect on our business.

We apply for patents covering both our technologies and drug candidates as we deem appropriate. However, we may fail to apply for patents on important technologies or products in a timely fashion or at all. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. In addition, we generally do not control the patent prosecution of technology that we license from others. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we would over our own.

We rely upon trade secret protection for our confidential information. We have taken measures to protect our confidential information. However, these measures may not provide adequate protection for our trade secrets. We seek to protect our confidential information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, we may not be able to protect adequately our trade secrets.

Litigation or other proceedings or third-party claims of intellectual property infringement would require us to spend time and money and could prevent us from developing or commercializing products.

Our commercial success depends in part on not infringing the patents and proprietary rights of other parties and not breaching any licenses that we have entered into with regard to our technologies and products. Others have filed patent applications and issued patents, and in the future are likely to continue to file patent applications and issue patents, claiming drug candidates that we are developing and genes, gene fragments, compounds and technologies we use or may wish to use. If we wish to use the claimed technology in issued and unexpired patents owned by others, we may need to obtain a license from another party, enter into litigation or incur the risk of litigation.

The biotechnology industry is characterized by extensive litigation regarding patents and other intellectual property rights. We are aware of patents and published patent applications that, if valid, and if we are unsuccessful in circumventing or acquiring the rights to these patents, may block our ability to commercialize products based on the drug candidates that we are developing. We cannot be sure that other parties have not filed for or been issued relevant patents that could affect our ability to obtain patents or to operate as we would like to. Others may sue us in the future to challenge our patent rights or claim infringement of their patents. An adverse determination in litigation or in an administrative proceeding to which we may become a party could subject us to significant liabilities to others, require us to license disputed rights from others or require us to cease using the disputed technology.

We are aware of a significant number of patents and patent applications relating to aspects of our technologies and compounds filed by, and issued to, other parties. Others have filed patent applications or have been granted patents claiming inventions also claimed by us, and we may have to participate in an interference proceeding declared by the relevant patent agency or court to determine priority of invention and, thus, the right to a patent for these inventions in the United States. For example, we believe one or more interferences may be declared between patents and applications we own or have exclusively licensed and patents and applications owned by Novartis relating to epothilone biosynthetic genes and Epothilone D and one or more patent applications owned by Gesellschaft für Biotechnologische Forschung mbH relating to Epothilone D; and patents and applications owned by Abbott Laboratories and Biotica Ltd. relating to erythromycin polyketide synthase genes, methods for altering polyketide synthase genes and erythromycin analogs and derivatives. Such a proceeding, or a lawsuit in which we are alleged to have infringed an issued patent, could result in substantial cost to us even if the outcome is favorable, and if the outcome is unfavorable, we could be required to license the other party’s rights, at terms that may be unfavorable to us, or cease using the technology. Even if successful on priority grounds, an interference may result in loss of claims based on patentability grounds raised in the interference. Although patent and intellectual property disputes in the biotechnology area are often settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include ongoing royalties. Furthermore, we cannot be certain that a license would be available to us on satisfactory terms, if at all.

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Other parties may obtain patents in the future and claim that the use of our technologies infringes these patents or that we are employing their proprietary technology without authorization. We could incur substantial costs and diversion of management and technical personnel in defending ourselves against any of these claims or enforcing our patents against others. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief that could effectively block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to:

• pay substantial damages;

• stop using certain products and methods;

• develop non-infringing products and methods; and

• obtain one or more licenses from other parties.

We may not be able to obtain licenses from other parties at a reasonable cost, if at all. In that event, we could encounter substantial delays in product introductions while we attempt to develop alternative methods and products, which we may not be able to accomplish.

Litigation or failure to obtain licenses could prevent us from commercializing available products.

We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily.

If third parties do not successfully carry out their contractual duties or meet expected deadlines, we will not be able to obtain regulatory approvals for our product candidates and will not be able to successfully commercialize our product candidates for targeted diseases. We do not have the ability to independently conduct clinical trials for our product candidates, and we rely on third parties such as contract research organizations, medical institutions and clinical investigators to perform this function. If these third parties do not perform satisfactorily, our clinical trials may be extended or delayed. We may not be able to locate any necessary acceptable replacements or enter into favorable agreements with them, if at all.

If we are unable to manage our growth effectively through recruiting and retaining skilled employees and expand our management and facilities and improve our controls and systems, we may not be able to manage our day-to-day operations.

We have experienced a period of rapid and substantial growth that has placed, and if this growth continues will further place, a strain on our human and capital resources. If we are unable to manage this growth effectively, then our losses could increase. The number of our employees increased from 88 on June 30, 2001 to 104 on June 30, 2002. Retaining our current employees and recruiting qualified scientific personnel to perform future research and development work will be critical to our success. Competition is intense for experienced scientists, and we may not be able to retain or recruit sufficient skilled personnel to allow us to pursue collaborations and develop our products and core technologies to the extent otherwise possible. Additionally, we are highly dependent on the principal members of our management and scientific staff, such as our two co-founders, the loss of whose services would adversely impact the achievement of our objectives. Although we maintain and are the beneficiary of $1.0 million key-man life insurance policies for the lives of each of our two co-founders, Dr. Daniel Santi, our chief executive officer, and Dr. Chaitan Khosla, a director and consultant, we do not believe the proceeds would be adequate to compensate us for their loss.

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Our facilities consist of approximately 118,000 square feet of research and office space located in Hayward, California, of which approximately 44,000, 69,000 and 5,000 square feet are leased to us until 2013, 2008 and 2005, respectively. We have an option to renew our lease on the 44,000 square foot facility for one additional period of five years and an option to renew our lease on the 79,000 square foot facility for two additional periods of five years.

Our ability to manage our operations and growth effectively requires us to continue to expend funds to expand our management and improve our controls and systems. If we are unable to implement successfully these expansions and improvements, then we may not be able to effectively manage our day-to-day operations.

We face intense competition from large pharmaceutical companies, biotechnology companies and academic groups.

We face, and will continue to face, intense competition from organizations such as large biotechnology and pharmaceutical companies, as well as academic and research institutions and government agencies, that are pursuing competing technologies and products. These organizations may develop technologies or products that are superior alternatives to ours. Further, our competitors in the polyketide gene engineering field may be more effective at implementing their technologies to develop commercial products. Some of these competitors have entered into collaborations with leading companies within our target markets to produce polyketides for commercial purposes.

Any products that we develop through our technologies will compete in multiple, highly competitive markets. Development of pharmaceutical products requires significant investment and resources. Many of the organizations competing with us in the markets for such products have greater capital resources, research and development and marketing staffs, facilities and capabilities, and greater experience in modifying DNA, obtaining regulatory approvals and product manufacturing and marketing. Accordingly, our competitors may be able to develop technologies and products more easily, which would render our technologies and products and those of our collaborators obsolete and noncompetitive.

If we face liability claims in clinical trials of a drug candidate, these claims will divert our management’s time and we will incur litigation costs.

We face an inherent business risk of clinical trial liability claims in the event that the use or misuse of our potential products results in personal injury or death. We may experience clinical trial liability claims if our drug candidates are misused or cause harm before regulatory authorities approve them for marketing. Even though we have obtained clinical trial liability insurance, it may not be sufficient to cover claims that may be made against us. Clinical trial liability insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. Any claims against us, regardless of their merit, could materially and adversely affect our financial condition, because litigation related to these claims would strain our financial resources in addition to consuming the time and attention of our management. If we are sued for any injuries caused by our products, our liability could exceed our total assets.

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We use hazardous chemicals and radioactive and biological materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

Our research and development processes involve the controlled use of hazardous materials, including hazardous chemicals and radioactive and biological materials. Some of these materials may be novel, including bacteria with novel properties and bacteria that produce biologically active compounds. Our operations also produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We believe that our current operations comply in all material respects with these laws and regulations. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, we could be sued for injury or contamination that results from our use or the use by third parties or our collaborators of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or commercialization efforts.

We have a stockholders rights plan and anti-takeover provisions in our corporate charter documents that may result in outcomes with which you do not agree.

Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the rights, preferences, privileges and restrictions of those shares without further vote or action by our stockholders. The rights of the holders of any preferred stock that may be issued in the future may adversely affect the rights of the holders of common stock. The issuance of preferred stock could make it more difficult for third parties to acquire a majority of our outstanding voting stock.

Our certificate of incorporation provides for staggered terms for the members of the board of directors and prevents our stockholders from acting by written consent. These provisions and other provisions of our bylaws and of Delaware law applicable to us could delay or make more difficult a merger, tender offer or proxy contest involving us. This could reduce the price that investors might be willing to pay for shares of our common stock and result in the market price being lower than it would be without these provisions.

We have adopted a rights agreement under which all stockholders of record as of October 29, 2001 will receive rights to purchase shares of a new series of preferred stock at an exercise price of $70.00 per one one-hundredth of a share, if a person acquires more than 20% of the our common stock. The rights plan could make it more difficult for a person to acquire a majority of our outstanding voting stock. The rights plan could also reduce the price that investors might be willing to pay for shares of our common stock and result in the market price being lower than it would be without the rights plan.

Some of our existing stockholders can exert control over us and may not make decisions that are in the best interest of all stockholders.

Our officers, directors and affiliates together control approximately 38% of our outstanding common stock. As a result, these stockholders, if they act together, are able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may delay or prevent a change in control of us and might affect the market price of our common stock, even when a change may be in the best interests of all stockholders. In addition, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider.

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Our stock price has been, and may continue to be, extremely volatile.

The trading price of our common stock has been, and is likely to continue to be, highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

• announcements of technological developments in research by us or our competitors;

• delay or failure in initiating, conducting, completing or analyzing clinical trials or unsatisfactory design or results of these trials by us or our competitors;

• achievement of regulatory approvals;

• new products or services introduced or announced by us or our competitors;

• changes in financial estimates by securities analysts;

• announcements of departures or departures of key personnel;

• announcements of litigation or an unfavorable outcome in litigation; and

• sales of our common stock.

In addition, the stock market in general, and the Nasdaq National Market and the market for biotechnology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. If this type of litigation were instituted against us, we would be faced with substantial costs and management’s attention and resources would be diverted, which could in turn seriously harm our business, financial condition and results of operations.

We expect that our quarterly results of operations will fluctuate, and this fluctuation could cause our stock price to decline, creating investor losses.

Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Some of the factors that could cause our operating results to fluctuate include:

• expiration of research contracts with collaborators or government research grants, which may not be renewed or replaced;

• the success rate of our discovery efforts leading to milestones and royalties;

• the timing and willingness of collaborators to commercialize our products; and

• general and industry specific economic conditions, which may affect our collaborators’ research and development expenditures.

A large portion of our expenses is relatively fixed, including expenses for facilities, equipment and personnel. Accordingly, if revenues decline or do not grow due to expiration or termination of research contracts or government research grants, failure to obtain new contracts or other factors, we may not be able to reduce our operating expenses correspondingly. In addition, we expect operating expenses to continue to increase. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period.

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Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would probably decline.

If we fail to obtain the capital necessary to fund our operations, we will be unable to successfully develop products.

We expect that additional financing will be required in the future to fund operations. We do not know whether additional financing will be available when needed, or that, if available, we will obtain financing on terms favorable to our stockholders or us. Insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs, to lose rights under existing licenses or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose or may adversely affect our ability to operate as a going concern. We have consumed substantial amounts of cash to date and expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure and research and development activities.

We believe that existing cash and investment securities and anticipated cash flow from existing collaborations will be sufficient to support our current operating plan through the first half of 2004. We have based this estimate on assumptions that may prove to be wrong. Our future capital requirements depend on many factors that affect our research, development, collaboration and sales and marketing activities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We may raise additional financing through public or private equity offerings, debt financings or additional corporate collaboration and licensing arrangements. To the extent we raise additional capital by issuing equity securities, our stockholders may experience dilution. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to continue developing our products.

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Item 3:    Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The primary objective of our investment activities is to preserve principal while at the same time maximize the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment balance to fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and investment-grade corporate obligations.

The following table represents the fair value balance of our cash, cash equivalents and short-term and long-term investments that are subject to interest rate risk by year of expected maturity and average interest rates as of June 30, 2002 (dollars in thousands):

	2002			2003			2004
Cash and cash equivalents	$	29,166			—			—
Average interest rates		1.89	%
Short-term investments		22,272		$	18,752			—
Average interest rates		3.37	%		3.23	%
Long-term investments		—			7,004		$	3,906
Average interest rates					3.01	%		3.66	%

We did not hold derivative instruments as of June 30, 2002, and we have never held such instruments in the past. In addition, we had outstanding debt, consisting of borrowings under equipment financings, of $3.9 million as of June 30, 2002, with a range of interest rates from 8.71% to 13.86%.

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PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

Not applicable.

Item 2.    Changes in Securities and Use of Proceeds

d)  Use of Proceeds

Our initial public offering of common stock was effected in October 2000, in which we sold 5,750,000 shares of our common stock.

The net proceeds of the 5,750,000 shares registered and sold were approximately $73.4 million. We paid a total of approximately $5.6 million in underwriting discounts and commissions and approximately $1.5 million in other costs and expenses in connection with the offering. None of the expenses were paid, directly or indirectly, to directors, officers or persons owning ten percent or more of our common stock.

Of the net offering proceeds, through June 30, 2002, approximately $1.0 million had been used to purchase property and equipment and approximately $700,000 had been used for general corporate purposes. We intend to use the remaining net proceeds for advancing our drug candidates through preclinical and later stage development, discovering or acquiring new drug candidates, expanding our technology platform, capital expenditures, working capital, general corporate purposes and possible future acquisitions. Pending such uses, the balance has been invested in U.S. Treasury and government agency obligations, investment-grade asset-backed securities and corporate obligations.

Item 3.    Defaults Upon Senior Securities

Not applicable.

Item 4.    Submission of Matters to a Vote of Security Holders

a)  The Company held its Annual Meeting of Stockholders on May 23, 2002.

b)  The stockholders elected Bruce Chabner, M.D., Peter Davis, Ph.D. and Christopher Walsh, Ph.D., Class B directors of the Company, to serve until the 2005 Annual Meeting of Stockholders. Directors whose term of office as a director continued after the meeting are Daniel V. Santi, M.D., Ph.D.; Jean Deleage, Ph.D.; and Chaitan Khosla, Ph.D.

Candidate	Shares Voted In Favor	Shares Withheld
Bruce Chabner, M.D.	17,099,782	999,106
Peter Davis, Ph.D.	16,937,872	1,161,016
Christopher Walsh, Ph.D.	16,395,741	1,703,147

c)  The stockholders approved the amendments to the Company’s 2000 Non-Employee Directors’ Stock Option Plan:

Shares voted in favor	17,779,918
Shares voted against	207,730
Shares abstaining	111,240
Broker non–vote	0

Item 5.    Other Information

None.

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Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits:

Exhibit No.
3.1	Amended and Restated Certificate of Incorporation (1)
3.2	Bylaws of Registrant (2)
4.1	Form of Specimen of Common Stock Certificate (2)
10.4	2000 Non-Employee Director Stock Option Plan, as amended
10.41	Lease Agreement, dated as of June 7, 2002, by and between EOP-Industrial Portfolio, L.L.C. and Registrant
10.42	Landlord Consent to Assignment and Assumption of Lease, dated as of June 20, 2002, by and among EOP-Industrial Portfolio, L.L.C., Aventis Pharmaceuticals, Inc. and Registrant
99.1	Certification, dated as of August 13, 2002, by Chief Executive Officer and Chief Financial Officer

(1) Filed with Kosan’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference.

(2) Filed with Kosan’s Registration Statement on Form S-1, as amended (No. 333-33732), and incorporated herein by reference.

(3) The Certification attached as Exhibit 99.1 accompanies the Quarterly Report on Form 10-Q pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

(b)  Reports on Form 8-K

No Current Reports on Form 8-K were filed during the quarter ended June 30, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	KOSAN BIOSCIENCES INCORPORATED
August 13, 2002	By:	/s/    DANIEL V. SANTI, M.D., PH.D.
		Daniel V. Santi, M.D., Ph.D. Chairman and Chief Executive Officer
August 13, 2002	By:	/s/    SUSAN M. KANAYA
		Susan M. Kanaya Senior Vice President, Finance, Chief Financial Officer and Secretary

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EXHIBIT INDEX

Exhibit No.
3.1	Amended and Restated Certificate of Incorporation (1)
3.2	Bylaws of Registrant (2)
4.1	Form of Specimen of Common Stock Certificate (2)
10.4	2000 Non-Employee Director Stock Option Plan, as amended
10.41	Lease Agreement, dated as of June 7, 2002, by and between EOP-Industrial Portfolio, L.L.C. and Registrant
10.42	Landlord Consent to Assignment and Assumption of Lease, dated as of June 20, 2002, by and among EOP-Industrial Portfolio, L.L.C., Aventis Pharmaceuticals, Inc. and Registrant
99.1	Certification, dated as of August 13, 2002, by Chief Executive Officer and Chief Financial Officer

(1) Filed with Kosan’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference.

(2) Filed with Kosan’s Registration Statement on Form S-1, as amended (No. 333-33732), and incorporated herein by reference.

(3) The certification attached as Exhibit 99.1 accompanies the Quarterly Report on Form 10-Q pursuant to § 906 of the Sarbanes- Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

28

EX-10.4

Exhibit 10.4

KOSAN BIOSCIENCES INCORPORATED

2000 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

Amended as of May 23, 2002

1.  Purposes of the Plan.    The purposes of this 2000 Non-Employee Director Stock Option Plan are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board.

All options granted hereunder shall be nonstatutory stock options.

2.  Definitions.    As used herein, the following definitions shall apply:

(a)  “Board” means the Board of Directors of the Company.

(b)  “Code” means the Internal Revenue Code of 1986, as amended.

(c)  “Committee” means a committee of the Board unless such committee is specifically excluded by the Board.

(d)  “Common Stock” means the common stock of the Company.

(e)  “Company” means Kosan Biosciences Incorporated, a Delaware corporation.

(f)  “Director” means a member of the Board.

(g)  “Disability” means total and permanent disability as defined in section 22(e)(3) of the Code.

(h) “Employee” means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director’s fee by the Company shall not be sufficient in and of itself to constitute “employment” by the Company.

(i)  “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(j)  “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

(i)  If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of grant as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii)  If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock for the last

market trading day prior to the time of grant, as reported in The Wall Street Journal or such other source as the Board deems reliable; or

(iii)  In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board.

(k)  “Inside Director” means a Director who is an Employee.

(l)  “IPO Effective Date” means the date upon which the Securities and Exchange Commission declares the initial public offering of the Company’s common stock as effective.

(m)  “Option” means a stock option granted pursuant to the Plan.

(n)  “Optioned Stock” means the Common Stock subject to an Option.

(o)  “Optionee” means a Director who holds an Option.

(p)  “Outside Director” means a Director who is not an Employee.

(q)  “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

(r)  “Plan” means this 2000 Non-Employee Director Stock Option Plan.

(s)  “Share” means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan.

(t) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986.

3.  Stock Subject to the Plan.    Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 300,000 Shares (the “Pool”), plus an annual increase to be added on January 1 of each year, beginning in 2001, equal to the lesser of (i) 150,000 shares, (ii) .75% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock.

If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan.

4.  Administration and Grants of Options under the Plan.

(a)  Procedure for Grants.    All grants of Options to Outside Directors under this Plan shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions:

(i)  No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options.

(ii)  Each Outside Director shall be automatically granted an Option to purchase 20,000 Shares (the “First Option”) on the date on which the later of the following events occurs: (A) the IPO Effective Date, or (B) the date on which such person first becomes an Outside Director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy; provided, however, that an Inside Director who ceases to be an Inside Director but who remains a Director shall not receive a First Option.

(iii)  Each Outside Director shall be automatically granted an Option to purchase 5,000 Shares (a “Subsequent Option”) each year on the day after the annual stockholders meeting provided he or she is then an Outside Director and if as of such date, he or she shall have served on the Board for at least the preceding six (6) months.

(iv)  Each Outside Director who is a member of a Committee shall be automatically granted an Option to purchase 1,000 Shares (a “Committee Option”) each year on the day after the annual stockholders meeting provided he or she is then an Outside Director. To the extent that an Outside Director serves on more than one Committee, the Outside Director shall receive a Committee Option for service on each such Committee.

(v)  Each Outside Director who is the chairman of a Committee shall be automatically granted an Option to purchase 2,000 Shares (a “Chairman Option”) each year on the day after the annual stockholders meeting provided he or she is then an Outside Director. To the extent that an Outside Director is the chairman of more than one Committee, the Outside Director shall receive a Chairman Option for service as chairman of each such Committee.

(vi)  Notwithstanding the provisions of subsections (ii), (iii), (iv) and (v) hereof, any exercise of an Option granted before the Company has obtained stockholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 16 hereof.

(vii)  The terms of a First Option granted hereunder shall be as follows:

(A)  the term of the First Option shall be ten (10) years.

(B)  the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof.

(C)  the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the First Option.

(D)  subject to Section 10 hereof, the First Option shall become exercisable as to 25% percent of the Shares subject to the First Option on each anniversary of its date of grant, provided that the Optionee continues to serve as a Director on such dates.

(viii)  The terms of a Subsequent Option granted hereunder shall be as follows:

(A)  the term of the Subsequent Option shall be ten (10) years.

(B)  the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof

(C)  the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Subsequent Option.

(D)  subject to Section 10 hereof, the Subsequent Option shall become exercisable as to 100% percent of the Shares subject to the Subsequent Option on the day before the annual shareholders meeting first occurring after the date of grant of the Subsequent Option, provided that the Optionee continues to serve as a Director on such date.

(ix)  The terms of a Committee Option granted hereunder shall be as follows:

(A)  the term of the Committee Option shall be ten (10) years.

(B)  the Committee Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof

(C)  the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Committee Option.

(D)  subject to Section 10 hereof, the Committee Option shall become exercisable as to 100% percent of the Shares subject to the Committee Option on the day before the annual shareholders meeting first occurring after the date of grant of the Committee Option, provided that the Optionee continues to serve as a Director on such date

(x)  The terms of a Chairman Option granted hereunder shall be as follows:

(A)  the term of the Chairman Option shall be ten (10) years.

(B)  the Chairman Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof

(C)  the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Chairman Option.

(D)  subject to Section 10 hereof, the Chairman Option shall become exercisable as to 100% percent of the Shares subject to the Chairman Option on the day before the annual shareholders meeting first occurring after the date of grant of the Chairman Option, provided that the Optionee continues to serve as a Director on such date

(xi)  In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the Board or the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder.

5.  Eligibility.    Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4 hereof.

The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate the Director’s relationship with the Company at any time.

6.  Term of Plan.    The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company as described in Section 16 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan.

7.  Form of Consideration.    The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (iv) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (v) any combination of the foregoing methods of payment.

8.  Exercise of Option.

(a)  Procedure for Exercise; Rights as a Stockholder.    Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until stockholder approval of the Plan in accordance with Section 16 hereof has been obtained.

An Option may not be exercised for a fraction of a Share.

An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person

entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan.

Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

(b)  Termination of Continuous Status as a Director.    Subject to Section 10 hereof, in the event an Optionee’s status as a Director terminates (other than upon the Optionee’s death or Disability), the Optionee may exercise his or her Option, but only within three (3) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

(c)  Disability of Optionee.    In the event Optionee’s status as a Director terminates as a result of Disability, the Optionee may exercise his or her Option, but only within twelve (12) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

(d)  Death of Optionee.    In the event of an Optionee’s death, the Optionee’s estate or a person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and only to the extent that the Optionee was entitled to exercise it on the date of death (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of death, and to the extent that the Optionee’s estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

9.  Non-Transferability of Options.    The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee.

10.  Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.

(a)  Changes in Capitalization.    Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option, the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option.

(b)  Dissolution or Liquidation.    In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it shall terminate immediately prior to the consummation of such proposed action.

(c)  Merger or Asset Sale.    In the event of a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, outstanding Options may be assumed or equivalent options may be substituted by the successor corporation or a Parent or Subsidiary thereof (the “Successor Corporation”). If an Option is assumed or substituted for, the Option or equivalent option shall continue to be exercisable as provided in Section 4 hereof for so long as the Optionee serves as a Director or a director of the Successor Corporation. Following such assumption or substitution, if the Optionee’s status as a Director or director of the Successor Corporation, as applicable, is terminated other than upon a voluntary resignation by the Optionee, the Option or option shall become fully exercisable, including as to Shares for which it would not otherwise be exercisable. Thereafter, the Option or option shall remain exercisable in accordance with Sections 8(b) through (d) above.

If the Successor Corporation does not assume an outstanding Option or substitute for it an equivalent option, the Option shall become fully vested and exercisable, including as to Shares for which it would not otherwise be exercisable. In such event the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and upon the expiration of such period the Option shall terminate.

For the purposes of this Section 10(c), an Option shall be considered assumed if, following the merger or sale of assets, the Option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration

chosen by the holders of a majority of the outstanding Shares). If such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

11.  Amendment and Termination of the Plan.

(a)  Amendment and Termination.    The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with any applicable law, regulation or stock exchange rule, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required.

(b)  Effect of Amendment or Termination.    Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated.

12.  Time of Granting Options.    The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4 hereof.

13.  Conditions Upon Issuance of Shares.    Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law.

Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

14.  Reservation of Shares.    The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

15.  Option Agreement.    Options shall be evidenced by written option agreements in such form as the Board shall approve.

16.  Stockholder Approval.    The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under applicable state and federal law and any stock exchange rules.

EX-10.41

Exhibit 10.41

LEASE

TABLE OF CONTENTS

		Page
	Basic Lease Information	1
	Table of Contents	2
1.	Premises	1
2.	Possession and Lease Commencement	1
3.	Term	1
4.	Use	1
5.	Rules and Regulations	1
6.	Rent	1
7.	Operating Expenses	2
8.	Insurance and Indemnification	4
9.	Waiver of Subrogation	5
10.	Landlord’s Repairs and Maintenance	5
11.	Tenant’s Repairs and Maintenance	5
12.	Alterations	5
13.	Signs	6
14.	Inspection/Posting Notices	6
15.	Services and Utilities	6
16.	Subordination	7
17.	Financial Statements	7
18.	Estoppel Certificate	7
19.	Security Deposit	7
20.	Limitation of Tenant’s Remedies	7
21.	Assignment and Subletting	8
22.	Authority of Tenant	8
23.	Condemnation	8
24.	Casualty Damage	9
25.	Holding Over	9
26.	Default	10
27.	Liens	11
28.	Substitution	11
29.	Transfers by Landlord	11
30.	Right of Landlord to Perform Tenant’s Covenants	11
31.	Waiver	11
32.	Notices	11
33.	Attorney’s Fees	12
34.	Successors and Assigns	12
35.	Force Majeure	12
36.	Surrender of Premises	12
37.	Hazardous Materials	12
38.	Miscellaneous	13
39.	Additional Provisions	14
40.	Jury Trial Waiver	15
	Signatures	15

Exhibits:
	Exhibit A	Rules and Regulations
	Exhibit B	Site Plan, Property Description
	Exhibit C	Lease Improvement Agreement
	Exhibit D	Hazardous Materials Questionnaire
	Exhibit E	Form of Letter of Credit
	Additional Exhibits as Required

i

LEASE

THIS LEASE is made as of the 7th day of June, 2002, by and between EOP-INDUSTRIAL PORTFOLIO, L.L.C., a Delaware limited liability company (hereinafter called “Landlord”), and KOSAN BIOSCIENCES INCORPORATED, a Delaware corporation (hereinafter called “Tenant”).

1.    PREMISES

Landlord leases to Tenant and Tenant leases from Landlord, upon the terms and conditions hereinafter set forth, those premises (the “Premises”) cross-hatched in red on Exhibit B and described in the Basic Lease Information. The Premises shall be all or part of a building (the “Building”) and of a project (the “Project”), which may consist of more than one building and additional facilities, as described in the Basic Lease Information. The Building and Project are outlined in blue and green respectively on Exhibit B.

2.    POSSESSION AND LEASE COMMENCEMENT

This Lease shall commence August 1, 2003.

3.    TERM

The term of this Lease (the “Term”) shall commence on the Term Commencement Date and continue in full force and effect for the number of months specified as the Length of Term in the Basic Lease Information or until this Lease is terminated as otherwise provided herein. If the Term Commencement Date is a date other than the first day of the calendar month, the Term shall be the number of months of the Length of Term in addition to the remainder of the calendar month following the Term Commencement Date.

4.    USE

A.  General.    Tenant shall use the Premises for the permitted use specified in the Basic Lease Information (“Permitted Use”) and for no other use or purpose. Tenant shall control Tenant’s employees, agents, customers, visitors, invitees, licensees, contractors, assignees and subtenants (collectively, “Tenant’s Parties”) in such a manner that Tenant and Tenant’s Parties cumulatively do not exceed the parking density specified in the Basic Lease Information (the “Parking Density”) at any time. So long as Tenant is occupying the Premises, Tenant and Tenant’s Parties shall have the nonexclusive right to use, in common with other parties occupying the Building or Project, the parking areas, driveways and other common areas of the Building and Project, including without limitation the non-exclusive use of four (4) parking stalls per 1,000 square feet occupied hereunder, subject to the terms of this Lease and such rules and regulations as Landlord may from time to time prescribe. Landlord reserves the right, without notice or liability to Tenant, and without the same constituting an actual or constructive eviction, to alter or modify the common areas from time to time, including the location and configuration thereof, and the amenities and facilities which Landlord may determine to provide from time to time.

B.  Limitations.    Tenant shall not permit any odors, smoke, dust, gas, substances, noise or vibrations to emanate from the Premises or from any portion of the common areas as a result of Tenant’s or any Tenant’s Party’s use thereof, nor take any action which would constitute a nuisance or would disturb, obstruct or endanger any other tenants or occupants of the Building or Project or elsewhere, or unreasonably interfere with their use of their respective premises or common areas. Storage outside the Premises of materials, vehicles or any other items is prohibited. Tenant shall not use or allow the Premises to be used for any immoral, improper or unlawful purpose, nor shall Tenant cause or maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer the commission of any waste in, on or about the Premises. Tenant shall not allow any sale by auction upon the Premises, or place any loads upon the floors, walls or ceilings which could endanger the structure Tenant shall not place any harmful substances in the drainage system of the Building or Project except to the extent permitted in accordance with applicable Laws. No waste, materials or refuse shall be dumped upon or permitted to remain outside the Premises except in trash containers placed inside exterior enclosures designated for that purpose by Landlord. Landlord shall not be responsible to Tenant for the non-compliance by any other tenant or occupant of the Building or Project with any of the above-referenced rules or any other terms or provisions of such tenant’s or occupant’s lease or other contract.

        C.  Compliance with Regulations.    By entering the Premises, Tenant accepts the Premises in the condition existing as of the date of such entry. Tenant shall at its sole cost and expense strictly comply with all existing or future applicable municipal, state and federal and other governmental statutes, rules, requirements, regulations, laws and ordinances, including zoning ordinances and regulations, and covenants, easements and restrictions of record governing and relating to the use, occupancy or possession of the Premises, to Tenant’s use of the common areas, or to the use, storage, generation or disposal of Hazardous Materials (hereinafter defined) (collectively “Regulations”). Tenant shall at its sole cost and expense obtain any and all licenses or permits necessary for Tenant’s use of the Premises. Tenant shall at its sole cost and expense promptly comply with the requirements of any board of fire underwriters or other similar body now or hereafter constituted. Tenant shall not do or permit anything to be done in, on, under or about the Project or bring or keep anything which will in any way increase the rate of any insurance upon the Premises, Building or Project or upon any contents therein or cause a cancellation of said insurance. Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord), protect and hold Landlord harmless from and against any loss, cost, expense, damage, attorneys’ fees or liability arising out of the failure of Tenant to comply with any Regulation accruing during the Term or any extension of the Lease. Tenant’s obligations pursuant to the foregoing indemnity shall survive the expiration or earlier termination of this Lease.

5.    RULES AND REGULATIONS

Tenant shall faithfully observe and comply with the building rules and regulations attached hereto as Exhibit A and any other reasonable rules and regulations and any modifications or additions thereto which Landlord may from time to time prescribe in writing for the purpose of maintaining the proper care, cleanliness, safety, traffic flow and general order of the Premises or the Building or Project. Tenant shall cause Tenant’s Parties to comply with such rules and regulations. Landlord shall not be responsible to Tenant for the non-compliance by any other tenant or occupant of the Building or Project with any of such rules and regulations, any other tenant’s or occupant’s lease or any Regulations.

6.    RENT

A.  Base Rent.    Tenant shall pay to Landlord and Landlord shall receive, without notice or demand throughout the Term, Base Rent as specified in the Basic Lease Information, payable in monthly installments in advance on or before the first day of each calendar month, in lawful money of the United States, without deduction or offset whatsoever except as specifically allowed hereunder, at the Remittance Address specified in the Basic Lease Information or to such other place as Landlord may from time to time designate in writing. Base Rent for the first full month of the Term shall be paid by Tenant upon Tenant’s execution of this Lease. If the obligation for payment of Base

1

Rent commences on a day other than the first day of a month, then Base Rent shall be prorated and the prorated installment shall be paid on the first day of the calendar month next succeeding the Term Commencement Date. The Base Rent payable by Tenant hereunder is subject to adjustment as provided elsewhere in this Lease, as applicable. As used herein, the term “Base Rent” shall mean the Base Rent specified in the Basic Lease Information as it may be so adjusted from time to time.

B.  Additional Rent.    All monies other than Base Rent required to be paid by Tenant hereunder, including, but not limited to, Tenant’s Proportionate Share of Operating Expenses, as specified in Paragraph 7 of this Lease, charges to be paid by Tenant under Paragraph 15, the interest and late charge described in Paragraphs 26.D. and E., and any monies spent by Landlord pursuant to Paragraph 30, shall be considered additional rent (“Additional Rent”). “Rent” shall mean Base Rent and Additional Rent.

7.    OPERATING EXPENSES

A.  Operating Expenses.    In addition to the Base Rent required to be paid hereunder, Tenant shall pay as Additional Rent, Tenant’s Proportionate Share of the Building and/or Project (as applicable), as defined in the Basic Lease Information, of Operating Expenses (defined below) in the manner set forth below. Tenant shall pay the applicable Tenant’s Proportionate Share of each such Operating Expenses. “Operating Expenses” shall mean all expenses and costs of every kind and nature which Landlord shall pay or become obligated to pay, because of or in connection with the ownership, management, maintenance, repair, preservation, replacement and operation of the Building or Project and its supporting facilities (as determined in accordance with generally accepted accounting principles) other than those expenses and costs which are specifically attributable to Tenant or which are expressly made the financial responsibility of Landlord or specific tenants of the Building or Project pursuant to this Lease. Operating Expenses shall include, but are not limited to, the following:

(1)  Taxes.    All real property taxes and assessments, possessory interest taxes, sales taxes, personal property taxes, business or license taxes or fees, gross receipts taxes, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, transit charges, and other impositions, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind (including fees “in-lieu” of any such tax or assessment) which are now or hereafter assessed, levied, charged, confirmed, or imposed by any public authority upon the Building or Project, its operations or the Rent (or any portion or component thereof), or any tax, assessment or fee imposed in substitution, partially or totally, of any of the above. Operating Expenses shall also include any taxes, assessments, reassessments, or other fees or impositions with respect to the development, leasing, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, Building or Project or any portion thereof, including, without limitation, by or for Tenant, and all increases therein or reassessments thereof whether the increases or reassessments result from increased rate and/or valuation (whether upon a transfer of the Building or Project or any portion thereof or any interest therein or for any other reason). Operating Expenses shall not include inheritance or estate taxes imposed upon or assessed against the interest of any person in the Project, or taxes computed upon the basis of the net income of any owners of any interest in the Project. If it shall not be lawful for Tenant to reimburse Landlord for all or any part of such taxes, the monthly rental payable to Landlord under this Lease shall be revised to net Landlord the same net rental after imposition of any such taxes by Landlord as would have been payable to Landlord prior to the payment of any such taxes.

(2)  Insurance.    All insurance premiums and costs, including, but not limited to, any deductible amounts, premiums and other costs of insurance incurred by Landlord, including for the insurance coverage set forth in Paragraph 8.A. herein, but excluding earthquake insurance obtained without Tenant’s prior consent.

(3)  Common Area Maintenance.

(a)  Repairs, replacements, and general maintenance of and for the Building and Project and public and common areas and facilities of and comprising the Building and Project, including, but not limited to, the roof and roof membrane, elevators, mechanical rooms, alarm systems, pest extermination, landscaped areas, parking and service areas, driveways, sidewalks, truck staging areas, rail spur areas, fire sprinkler systems, sanitary and storm sewer lines, utility services, heating/ventilation/air conditioning systems, electrical, mechanical or other systems, telephone equipment and wiring servicing, plumbing, lighting, and any other items or areas which affect the operation or appearance of the Building or Project, which determination shall be at Landlord’s discretion, except for: those items to the extent paid for by the proceeds of insurance; and those items attributable solely or jointly to specific tenants of the Building or Project.

(b)  Repairs, replacements, and general maintenance shall include the cost of any improvements made to or assets acquired for the Project or Building that in Landlord’s discretion may reduce any other Operating Expenses, including present or future repair work, are reasonably necessary for the health and safety of the occupants of the Building or Project, or for the operation of the Building systems, services and equipment, or are required to comply with any Regulation, such costs or allocable portions thereof to be amortized in accordance with generally accepted accounting principles, together with interest on the unamortized balance at the rate of 10% per annum.

(c)  Payment under or for any easement, license, permit, operating agreement, declaration, restrictive covenant or instrument relating to the Building or Project.

(d)  All expenses and rental related to services and costs of supplies, materials and equipment used in operating, managing and maintaining the Premises, Building and Project, the equipment therein and the adjacent sidewalks, driveways, parking and service areas, including, without limitation, expenses related to service agreements regarding security, fire and other alarm systems, janitorial services to the extent not addressed in Paragraph 11 hereof, window cleaning, elevator maintenance, Building exterior maintenance, landscaping and expenses related to the administration, management and operation of the Project.

(e)  The cost of supplying any services and utilities which benefit all or a portion of the Premises, Building or Project to the extent not addressed in Paragraph 15 hereof.

(f)  Legal expenses and the cost of audits by certified public accountants; provided, however, that legal expenses chargeable as Operating Expenses shall not include the cost of negotiating leases, collecting rents, evicting tenants, sale of the Building or Premises, nor shall it include costs incurred in legal proceedings with or against any tenant or buyer or to enforce the provisions of any lease or purchase agreement.

(g)  A management and accounting cost recovery fee equal to ten percent (10%) of the sum of the Operating Expenses.

If the rentable area of the Building and/or Project is not fully occupied during any fiscal year of the Term as determined by Landlord, an adjustment shall be made in Landlord’s discretion in computing the Operating Expenses for such year so that Tenant pays an equitable portion of all variable items (e.g., utilities, janitorial services and other component expenses that are affected by variations in occupancy

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levels) of Operating Expenses, as reasonably determined by Landlord; provided, however, that in no event shall Landlord be entitled to collect in excess of one hundred percent (100%) of the total Operating Expenses from all of the tenants in the Building or Project, as the case may be.

To the extent commercially reasonable, Landlord will use third party contractors to perform maintenance, repairs, and other functions under this Paragraph. Landlord will negotiate at arms length with these contractors, suppliers and/or vendors to obtain competitive prices and Landlord will use its efforts during this Lease to obtain competitive pricing for services and products for which tenant is financially responsible under this Paragraph 7.

Notwithstanding the foregoing, Operating Expenses shall not include (i) depreciation on the Building, (ii) real estate brokers’ commissions, (iii) ground lease payments, principal, interest, loan fees and other carrying costs relating to any mortgage or deed of trust on the Building or Project, (iv) costs, fines or penalties for violations by Landlord of any governmental rule, (v) any obligations of Landlord with respect to Hazardous Materials, (vi) any amounts for services paid to entities related to Landlord to the extent said amounts exceed the amounts that would have been paid to unaffiliated entities for the same services; (vii) any costs incurred to remedy any defects in construction of the Building, (viii) any amounts for the acquisition or maintenance of art work located in the Building or Project or the cost of insurance thereon, (ix) costs of repairs expressly the responsibility of Landlord, (x) those repairs paid for by proceeds of insurance or by Tenant or other third parties, and (xi) alterations attributable solely to tenants of the Project other than Tenant, other than ordinary repair and maintenance. If any capital expense borne under Paragraph 7 is above Ten Thousand Dollars ($10,000.00), then the expense will be amortized over the useful life together with interest on the unamortized balance at the rate of ten percent (10%) per annum.

Operating Expenses shall not include the cost of providing tenant improvements or other specific costs incurred for the account of, separately billed to and paid by specific tenants of the Building or Project, the initial construction cost of the Building, or debt service on any mortgage or deed of trust recorded with respect to the Project other than pursuant to Paragraph 7.A.(3)(b) above. Notwithstanding anything herein to the contrary, in any instance wherein Landlord, in Landlord’s reasonable discretion, deems Tenant to be responsible for any amounts greater than Tenant’s Proportionate Share, Landlord shall have the right to allocate costs in any manner Landlord deems reasonably appropriate.

The above enumeration of services and facilities shall not be deemed to impose an obligation on Landlord to make available or provide such services or facilities except to the extent if any that Landlord has specifically agreed elsewhere in this Lease to make the same available or provide the same. Without limiting the generality of the foregoing, Tenant acknowledges and agrees that it shall be responsible for providing adequate security for its use of the Premises, the Building and the Project and that Landlord shall have no obligation or liability with respect thereto, except to the extent if any that Landlord has specifically agreed elsewhere in this Lease to provide the same.

B.  Payment of Estimated Operating Expenses.    “Estimated Operating Expenses” for any particular year shall mean Landlord’s estimate of the Operating Expenses for such fiscal year made with respect to such fiscal year as hereinafter provided. Landlord shall have the right from time to time to revise its fiscal year and interim accounting periods so long as the periods as so revised are reconciled with prior periods in a reasonable manner. During the last month of each fiscal year during the Term, or as soon thereafter as practicable, Landlord shall give Tenant written notice of the Estimated Operating Expenses for the ensuing fiscal year. Tenant shall pay Tenant’s Proportionate Share of the Estimated Operating Expenses with installments of Base Rent for the fiscal year to which the Estimated Operating Expenses applies in monthly installments on the first day of each calendar month during such year, in advance. Such payment shall be construed to be Additional Rent for all purposes hereunder. If at any time during the course of the fiscal year, Landlord determines that Operating Expenses are projected to vary from the then Estimated Operating Expenses by more than ten percent (10%), Landlord may, by written notice to Tenant, revise the Estimated Operating Expenses for the balance of such fiscal year, and Tenant’s monthly installments for the remainder of such year shall be adjusted so that by the end of such fiscal year Tenant has paid to Landlord Tenant’s Proportionate Share of the revised Estimated Operating Expenses for such year, such revised installment amounts to be Additional Rent for all purposes hereunder.

        C.  Computation of Operating Expense Adjustment.    “Operating Expense Adjustment” shall mean the difference between Estimated Operating Expenses and actual Operating Expenses for any fiscal year determined as hereinafter provided. Within ninety (90) days after the end of each fiscal year, or as soon thereafter as practicable, Landlord shall deliver to Tenant a statement of actual Operating Expenses for the fiscal year just ended, accompanied by a computation of Operating Expense Adjustment. If such statement shows that Tenant’s payment based upon Estimated Operating Expenses is less than Tenant’s Proportionate Share of Operating Expenses, then Tenant shall pay to Landlord the difference within twenty (20) days after receipt of such statement, such payment to constitute Additional Rent for all purposes hereunder. If such statement shows that Tenant’s payments of Estimated Operating Expenses exceed Tenant’s Proportionate Share of Operating Expenses, then (provided that Tenant is not in default under this Lease) Landlord shall pay to Tenant the difference within twenty (20) days after delivery of such statement to Tenant. If this Lease has been terminated or the Term hereof has expired prior to the date of such statement, then the Operating Expense Adjustment shall be paid by the appropriate party within twenty (20) days after the date of delivery of the statement. Should this Lease commence or terminate at any time other than the first day of the fiscal year, Tenant’s Proportionate Share of the Operating Expense Adjustment shall be prorated based on the exact number of calendar days and the number of calendar months during such fiscal year that this Lease is in effect. Notwithstanding anything to the contrary contained in Paragraph 7.A or 7.B, Landlord’s failure to provide any notices or statements within the time periods specified in those paragraphs shall in no way excuse Tenant from its obligation to pay Tenant’s Proportionate Share of Operating Expenses.

D.  Net Lease.    This shall be a triple net Lease and Base Rent shall be paid to Landlord absolutely net of all costs and expenses, except as specifically provided to the contrary in this Lease. The provisions for payment of Operating Expenses and the Operating Expense Adjustment are intended to pass on to Tenant and reimburse Landlord for all costs and expenses of the nature described in Paragraph 7.A. incurred in connection with the ownership, management, maintenance, repair, preservation, replacement and operation of the Building and/or Project and its supporting facilities and such additional facilities now and in subsequent years as may be determined by Landlord to be necessary or desirable to the Building and/or Project.

E.  Tenant Audit.    If Tenant shall dispute the amount set forth in any statement provided by Landlord under Paragraph 7.B. or 7.C. above, Tenant shall have the right, not later than twenty (20) days following receipt of such statement and upon the condition that Tenant shall first deposit with Landlord the full amount in dispute, to cause Landlord’s books and records with respect to Operating Expenses for such fiscal year to be audited by certified public accountants selected by Tenant and subject to Landlord’s reasonable right of approval. The Operating Expense Adjustment shall be appropriately adjusted on the basis of such audit. If such audit discloses a liability for a refund in excess of ten percent (10%) of Tenant’s Proportionate Share of the Operating Expenses previously reported, the cost of such audit shall be borne by Landlord; otherwise the cost of such audit shall be paid by Tenant. If Tenant shall not request an audit in accordance with the provisions of this Paragraph 7.E. within twenty (20) days after receipt of Landlord’s statement provided pursuant to Paragraph 7.B. or 7.C., such statement shall be final and binding for all purposes hereof. Tenant acknowledges and agrees that any information revealed in the above described audit may contain proprietary and sensitive information and that significant damage could result to Landlord if such information were disclosed to any party other than Tenant’s auditors. Tenant shall not in any manner disclose, provide or make available any information revealed by the audit to any person or entity without Landlord’s prior written consent, which consent may be withheld by Landlord in its sole and absolute discretion. The information disclosed by the audit will be used by Tenant solely for the purpose of evaluating Landlord’s books and records in connection with this Paragraph 7.E.

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8.    INSURANCE AND INDEMNIFICATION

A.  Landlord’s Insurance.    All insurance maintained by Landlord shall be for the sole benefit of Landlord and under Landlord’s sole control.

(1)  Property Insurance.    Landlord agrees to maintain property insurance insuring the Building against damage or destruction due to risk including fire, vandalism, and malicious mischief in an amount not less than eighty percent (80%) of the replacement cost thereof, in the form and with deductibles and endorsements as selected by Landlord. At its election, Landlord may instead (but shall have no obligation to) obtain “All Risk” coverage, and may also obtain earthquake, pollution, and/or flood insurance in amounts selected by Landlord.

(2)  Optional Insurance.    Landlord, at Landlord’s option, may also (but shall have no obligation to) carry (i) insurance against loss of rent, in an amount equal to the amount of Base Rent and Additional Rent that Landlord could be required to abate to all Building tenants in the event of condemnation or casualty damage for a period of twelve (12) months; and (ii) liability insurance and such other insurance as Landlord may deem prudent or advisable, including, without limitation, liability insurance in such amounts and on such terms as Landlord shall determine. Landlord shall not be obligated to insure, and shall have no responsibility whatsoever for any damage to, any furniture, machinery, goods, inventory or supplies, or other personal property or fixtures which Tenant may keep or maintain in the Premises, or any leasehold improvements, additions or alterations within the Premises.

B.  Tenant’s Insurance.    Tenant shall procure at Tenant’s sole cost and expense and keep in effect from the date of this Lease and at all times until the end of the Term the following:

(1)  Property Insurance.    Insurance on all personal property and fixtures of Tenant and all improvements, additions or alterations made by or for Tenant to the Premises on an “special form” basis, insuring such property for the full replacement value of such property.

(2)  Liability Insurance.    Commercial General Liability insurance covering bodily injury and property damage liability occurring in or about the Premises or arising out of the use and occupancy of the Premises and the Project, and any part of either, and any areas adjacent thereto, and the business operated by Tenant or by any other occupant of the Premises. Such insurance shall include contractual liability coverage. Such coverage shall have a minimum combined single limit of liability of at least Two Million Dollars ($2,000,000.00), and a minimum general aggregate limit of Three Million Dollars ($3,000,000.00), with an “Additional Insured—Managers or Lessors of Premises Endorsement” and the “Amendment of the Pollution Exclusion Endorsement.” All such policies shall be written to apply to bodily injury (including death), property damage or loss, personal and advertising injury and other covered loss, however occasioned, occurring during the policy term, shall be endorsed to add Landlord and any party holding an interest to which this Lease may be subordinated as an additional insured, and shall provide that such coverage shall be “primary” and non-contributing with any insurance maintained by Landlord, which shall be excess insurance only. Such coverage shall also contain endorsements including employees as additional insureds if not covered by Tenant’s Commercial General Liability Insurance. All such insurance shall provide for the severability of interests of insureds; and shall be written on an “occurrence” basis, which shall afford coverage for all claims based on acts, omissions, injury and damage, which occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period.

(3)  Workers’ Compensation and Employers’ Liability Insurance.    Workers’ Compensation Insurance as required by any Regulation, and Employers’ Liability Insurance in amounts not less than One Million Dollars ($1,000,000) each accident for bodily injury by accident; One Million Dollars ($1,000,000) policy limit for bodily injury by disease; and One Million Dollars ($1,000,000) each employee for bodily injury by disease.

(4)  Alterations Requirements.    In the event Tenant shall desire to perform any Alterations, Tenant shall deliver to Landlord, prior to commencing such Alterations (i) evidence satisfactory to Landlord that Tenant carries “Builder’s Risk” insurance covering construction of such Alterations in an amount and form approved by Landlord, and (ii) such other insurance as Landlord shall nondiscriminatorily require.

        (5)  General Insurance Requirements.    All coverages described in this Paragraph 8.B shall be endorsed to (i) provide Landlord with thirty (30) days’ notice of cancellation or change in terms; and (ii) waive all rights of subrogation by the insurance carrier against Landlord. If at any time during the Term the amount or coverage of insurance which Tenant is required to carry under this Paragraph 8.B is, in Landlord’s reasonable judgment, materially less than the amount or type of insurance coverage typically carried by owners or tenants of properties located in the general area in which the Premises are located which are similar to and operated for similar purposes as the Premises or if Tenant’s use of the Premises should change with or without Landlord’s consent, Landlord shall have the right to require Tenant to increase the amount or change the types of insurance coverage required under this Paragraph 8.B. All insurance policies required to be carried by Tenant under this Lease shall be written by companies rated A X or better in “Best’s Insurance Guide” and authorized to do business in the State of California. Tenant shall deliver to Landlord on or before the Term Commencement Date, and thereafter at least thirty (30) days before the expiration dates of the expired policies, certified copies of Tenant’s insurance policies, or a certificate evidencing the same issued by the insurer thereunder; and, if Tenant shall fail to procure such insurance, or to deliver such policies or certificates, Landlord may, at Landlord’s option and in addition to Landlord’s other remedies in the event of a default by Tenant hereunder, procure the same for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Rent.

C.  Indemnification.    Tenant shall indemnify, defend by counsel reasonably acceptable to Landlord, protect and hold Landlord (or any successor), Equity Office Properties Trust, a Maryland real estate investment trust, EOP Operating Limited Partnership, a Delaware limited partnership, Equity Office Properties Management Corp., a Delaware corporation, and each of their respective directors, shareholders, partners, lenders, members, managers, contractors, affiliates, and employees (collectively, “Landlord Indemnities”) harmless from and against any and all claims, liabilities, losses, costs, loss of rents, liens, damages, injuries or expenses, including reasonable attorneys’ and consultants’ fees and court costs, demands, causes of action, or judgments, directly or indirectly arising out of or related to: (1) claims of injury to or death of persons or damage to property occurring or resulting directly or indirectly from the use or occupancy of the Premises, Building or Project by Tenant or Tenant’s Parties, or from activities or failures to act of Tenant or Tenant’s Parties; (2) claims arising from work or labor performed, or for materials or supplies furnished to or at the request of Tenant in connection with performance of any work done for the account of Tenant within the Premises or Project; and (3) claims arising from any breach or default on the part of Tenant in the performance of any covenant contained in this Lease. The foregoing indemnity by Tenant shall not be applicable to claims to the extent arising from the active negligence or willful misconduct of Landlord. Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of or damage to any person or property or business loss in or about the Premises, Building or Project by or from any cause whatsoever (other than Landlord’s negligence or willful misconduct) and, without limiting the generality of the foregoing, whether caused by water leakage of any character from the roof, walls, basement or other portion of the Premises, Building or Project, or caused by gas, fire, oil or electricity in, on or about the Premises, Building or Project, acts of God or of third parties, or any matter outside of the reasonable control of Landlord. Landlord shall defend, indemnify and hold harmless Tenant, its agents, and any and all affiliates of Tenant including, without limitation, any corporations or other

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entities controlling, controlled by or under common control with Tenant, from and against any and all claims or liabilities arising from (i) the negligence or willful misconduct of Landlord, its officers, employees, agents, visitors, invitees or licensees, or (ii) any breach or default in any material warranty or material representation of Landlord hereunder or the performance of any material covenant on Landlord’s part to be performed hereunder. The provisions of this Paragraph shall survive the expiration or earlier termination of this Lease with respect to claims or liability arising in connection with the period prior to such expiration or termination.

9.    WAIVER OF SUBROGATION

Subject to the approval of each insurance carrier affected thereby, Landlord and Tenant each waives any claim, loss or cost it might have against the other for any injury to or death of any person or persons, or damage to or theft, destruction, loss, or loss of use of any property (a “Loss”), to the extent the same is insured against (or is required to be insured against under the terms hereof) under any property damage insurance policy covering the Building, the Premises, Landlord’s or Tenant’s fixtures, personal property, leasehold improvements, or business, regardless of whether the negligence of the other party caused such Loss.

10.    LANDLORD’S REPAIRS AND MAINTENANCE

Landlord shall maintain in good repair, reasonable wear and tear excepted, at Landlord’s expense and not as an Operating Expense except to the extent provided in Article 7 above, the structural soundness of the roof, foundations, and exterior walls of the Building. The term “exterior walls” as used herein shall not include windows, glass or plate glass, doors, dock bumpers or dock plates, special store fronts or office entries. Landlord shall perform on behalf of Tenant and other tenants of the Project the maintenance of the public and common areas of the Project, including, but not limited to, the landscaped areas, parking areas, driveways, the truck staging area, rail spur areas, fire sprinkler systems, sanitary and storm sewer lines, utility services, electric and telephone equipment servicing the Building(s), exterior lighting, and anything that affects the operation and exterior appearance of the Project. Any damage caused by or repairs necessitated by any negligence or act of Tenant or Tenant’s Parties may be repaired by Landlord at Landlord’s option and Tenant’s expense. Tenant shall immediately give Landlord written notice of any defect or need of repairs in such components of the Building for which Landlord is responsible, after which Landlord shall have a reasonable opportunity and the right to enter the Premises at all reasonable times to repair same. Landlord, in the course of its maintenance and repairs, shall use its best efforts to minimize any interference with Tenant’s operations. Landlord’s liability with respect to any defects, repairs, or maintenance for which Landlord is responsible under any of the provisions of this Lease shall be limited to the cost of such repairs or maintenance, and there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant’s business arising from the making of repairs, alterations or improvements in or to any portion of the Premises, the Building or the Project or to fixtures, appurtenances or equipment in the Building, except as provided in Paragraph 24. Landlord, in the course of its maintenance and repairs shall use its best efforts to minimize any interference with Tenant’s operations. If Landlord fails to timely perform its maintenance and repair obligations hereunder and, as a consequence, Tenant’s use of the Premises is substantially impaired, Tenant, in addition to all other remedies available hereunder or by law shall have the right to cause such repair or maintenance to be performed by Landlord. By taking possession of the Premises, Tenant accepts them “as is,” as being in good order, condition and repair and the condition in which Landlord is obligated to deliver them and suitable for the Permitted Use and Tenant’s intended operations in the Premises, whether or not any notice of acceptance is given.

11.    TENANT’S REPAIRS AND MAINTENANCE

Tenant shall at all times during the Term at Tenant’s expense maintain all parts of the Premises and such portions of the Building as are within the exclusive control of Tenant in a good, clean and secure condition and promptly make all necessary repairs and replacements, including but not limited to, all windows, glass, doors, walls, including demising walls, and wall finishes, floors and floor covering, heating, ventilating and air conditioning systems, ceiling insulation, truck doors, hardware, dock bumpers, dock plates and levelers, plumbing work and fixtures, downspouts, entries, skylights, smoke hatches, roof vents, electrical and lighting systems, and fire sprinklers, with materials and workmanship of the same character, kind and quality as the original. Tenant shall at Tenant’s expense also perform regular removal of trash and debris. Tenant shall, at Tenant’s own expense, enter into a regularly scheduled preventative maintenance/service contract with a maintenance contractor for servicing all hot water, heating and air conditioning systems and equipment within or serving the Premises. The maintenance contractor and the contract must be approved by Landlord. The service contract must include all services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective and a copy thereof delivered to Landlord within thirty (30) days after the Term Commencement Date. Nothing herein shall expressly or by implication render Tenant Landlord’s agent or contractor to effect any repairs or maintenance required of Tenant under this Paragraph 11, as to all of which Tenant shall be solely responsible.

12.    ALTERATIONS

        A.  Except with respect to the initial tenant improvements described in Exhibit C attached hereto, which improvements Landlord by execution hereof hereby approves, Tenant shall not make, or allow to be made, any alterations, physical additions, improvements or partitions, including without limitation the attachment of any fixtures or equipment, in, about or to the Premises (“Alterations”) costing more than Ten Thousand Dollars ($10,000.00) in each instance and cumulatively no more than Twenty Five Thousand Dollars ($25,000.00) each year without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld with respect to proposed Alterations which: (a) comply with all applicable Regulations; (b) are, in Landlord’s reasonable opinion, compatible with the Building or the Project and its mechanical, plumbing, electrical, heating/ventilation/air conditioning systems; and (c) in Landlord’s reasonable opinion will not interfere with the use and occupancy of any other portion of the Building or Project by any other tenant or its invitees. Specifically, but without limiting the generality of the foregoing, Landlord shall have the right of written consent for all plans and specifications for Alterations subject to this Section 12, construction means and methods, and any contractor or subcontractor to be employed on the work of Alterations. Tenant shall also supply to Landlord any documents and information reasonably requested by Landlord in connection with Landlord’s consideration of a request for approval hereunder. Tenant shall cause all Alterations to be accomplished in a good and workmanlike manner, and to comply with all applicable Regulations and Paragraph 27 hereof. Tenant shall at Tenant’s sole expense, perform any additional work required under applicable Regulations due to the Alterations hereunder. No review or consent by Landlord of or to any proposed Alteration or additional work shall constitute a waiver of Tenant’s obligations under this Paragraph 12. Tenant shall reimburse Landlord for all costs which Landlord may incur in connection with granting approval to Tenant for any such Alterations, including any costs or expenses which Landlord may incur in electing to have outside architects and engineers review said plans and specifications, provided the cost to Tenant of any such review shall not exceed Five Hundred Dollars ($500.00). All such Alterations shall remain the property of Tenant until the expiration or earlier termination of this Lease, at which time they shall be and become the property of Landlord; provided, however, that Landlord may, at Landlord’s option, by written notice at the time it approves any such Alterations, require that Tenant, at Tenant’s expense, remove any or all Alterations made by Tenant and restore the Premises by the expiration or earlier termination of this Lease, to their condition existing prior to the construction of any such Alterations provided Tenant shall have no obligation to remove the initial tenant improvements described in Exhibit C hereto. All such removals and restoration shall be accomplished in a good and workmanlike manner so as not to cause damage to the Premises or Project. If Tenant fails to remove such Alterations or Tenant’s trade fixtures or furniture or other personal property, Landlord may keep and use them or remove any of them and cause them to be stored or sold in accordance with applicable law, at Tenant’s sole expense. In addition to and wholly apart from Tenant’s obligation to pay Tenant’s Proportionate Share of Operating Expenses, Tenant shall be responsible for and shall pay prior to delinquency any taxes or governmental service fees, possessory interest taxes, fees or charges in lieu of any such taxes, capital levies, or other charges imposed upon, levied with respect to or assessed against its fixtures or personal property, on the value of Alterations within the Premises,

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and on Tenant’s interest pursuant to this Lease, or any increase in any of the foregoing based on such Alterations. To the extent that any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced to Tenant by Landlord.

B.  In compliance with Paragraph 27 hereof, at least ten (10) business days before beginning construction of any Alteration, Tenant shall give Landlord written notice of the expected commencement date of that construction to permit Landlord to post and record a notice of non-responsibility. Upon substantial completion of construction, if the law so provides, Tenant shall cause a timely notice of completion to be recorded in the office of the recorder of the county in which the Building is located.

13.    SIGNS

Tenant shall not place, install, affix, paint or maintain any signs, notices, graphics or banners whatsoever or any window decor which is visible in or from public view, the common areas or the exterior of the Premises or the Building, in or on any exterior window or window fronting upon any common areas or service area or upon any truck doors or man doors without Landlord’s prior written approval which Landlord shall have the right to withhold in its absolute and sole discretion; provided that Tenant’s name shall be included in any Building-standard door and directory signage, if any, in accordance with Landlord’s Building signage program, including without limitation, payment by Tenant of any fee charged by Landlord for maintaining such signage, which fee shall constitute Additional Rent hereunder. Any installation of signs, notices, graphics or banners on or about the Premises or Project approved by Landlord shall be subject to any Regulations and to any other requirements imposed by Landlord. Tenant shall remove all such signs or graphics by the expiration or any earlier termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury to or defacement of the Premises, Building or Project and any other improvements contained therein, and Tenant shall repair any injury or defacement including without limitation discoloration caused by such installation or removal.

14.    INSPECTION/POSTING NOTICES

After reasonable notice, except in emergencies where no such notice shall be required, Landlord and Landlord’s agents and representatives, shall have the right to enter the Premises to inspect the same, to clean, to perform such work as may be permitted or required hereunder, to make repairs, improvements or alterations to the Premises, Building or Project or to other tenant spaces therein, to deal with emergencies, to post such notices as may be permitted or required by law to prevent the perfection of liens against Landlord’s interest in the Project or to exhibit the Premises to prospective tenants, purchasers, encumbrancers or to others, or for any other purpose as Landlord may deem necessary or desirable; provided, however, that Landlord shall use reasonable efforts not to unreasonably interfere with Tenant’s business operations, and further provided that Tenant shall be entitled to have an employee of Tenant accompany the person(s) entering the Premises provided that Tenant makes such employee available at the time Landlord or such other party desires to enter the Premises. Tenant shall not be entitled to any abatement of Rent by reason of the exercise of any such right of entry. Tenant waives any claim for damages for any injury or inconvenience to or interference with Tenant’s business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. Landlord shall have the right to use any and all means which Landlord may deem necessary or proper to open said doors in an emergency, in order to obtain entry to any portion of the Premises, and any entry to the Premises or portions thereof obtained by Landlord by any of said means, or otherwise, shall not be construed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portions thereof. At any time within six (6) months prior to the expiration of the Term or following any earlier termination of this Lease or agreement to terminate this Lease, Landlord shall have the right to erect on the Premises, Building and/or Project a suitable sign indicating that the Premises are available for lease.

15.    SERVICES AND UTILITIES

A.  Tenant shall (where practicable) contract for and pay directly when due, for all water, gas, heat, air conditioning, light, power, telephone, sewer, sprinkler charges, cleaning, waste disposal and other utilities and services used on or from the Premises, together with any taxes, penalties, surcharges or the like pertaining thereto, and maintenance charges for utilities and shall furnish all electric light bulbs, ballasts and tubes used within the Premises. If any such services are not separately billed or metered to Tenant, Tenant shall pay an equitable proportion, as determined in good faith by Landlord, of all charges billed or metered with other premises. All sums payable under this Paragraph 15 shall constitute Additional Rent hereunder.

B.  Tenant acknowledges that Tenant has inspected and accepts the water, electricity, heat and air conditioning and other utilities and services being supplied or furnished to the Premises as of the date Tenant takes possession of the Premises, if any, as being sufficient in their present condition, “as is,” for the Permitted Use, and for Tenant’s intended operations in the Premises.

        C.  If Tenant shall require water or electric current or any other resource in excess of that being furnished or supplied for the use of the Premises as of the date Tenant takes possession of the Premises, if any, as determined by Landlord, Tenant shall first procure the written consent of Landlord which Landlord may refuse, to the use thereof, and Landlord may cause a special meter to be installed in the Premises so as to measure the amount of water, electric current or other resource consumed for any such other use. Tenant shall pay directly to Landlord upon demand as an addition to and separate from payment of Operating Expenses the cost of all such additional resources, energy, utility service and meters (and of installation, maintenance and repair thereof and of any additional circuits or other equipment necessary to furnish such additional resources, energy, utility or service). Landlord may add to the separate or metered charge a recovery of additional expense incurred in keeping account of the excess water, electric current or other resource so consumed. Landlord shall in no case be liable for any damages directly or indirectly resulting from nor shall the Rent or any monies owed Landlord under this Lease herein reserved be abated by reason of: (a) the installation, use or interruption of use of any equipment used in connection with the furnishing of any such utilities or services, or any change in the character or means of supplying or providing any such utilities or services or any supplier thereof; (b) the failure to furnish or delay in furnishing any such utilities or services when such failure or delay is caused by acts of God or the elements, labor disturbances of any character, or otherwise, or because of any interruption of service due to Tenant’s use of water, electric current or other resource in excess of that being supplied or furnished for the use of the Premises as of the date Tenant takes possession of the Premises; or (c) the inadequacy, limitation, curtailment, rationing or restriction on use of water, electricity, gas or any other form of energy or any other service or utility whatsoever serving the Premises or Project otherwise; or (d) the partial or total unavailability of any such utilities or services to the Premises or the Building or the diminution in the quality or quantity thereof, whether by Regulation or otherwise; or (e) any interruption in Tenant’s business operations as a result of any such occurrence; nor shall any such occurrence constitute an actual or constructive eviction of Tenant or a breach of an implied warranty by Landlord. Landlord shall further have no obligation to protect or preserve any apparatus, equipment or device installed by Tenant in the Premises, including without limitation by providing additional or after-hours heating or air conditioning. Landlord shall be entitled to cooperate voluntarily and in a reasonable manner with the efforts of national, state or local governmental agencies or utility suppliers in reducing energy or other resource consumption. The obligation to make services available hereunder shall be subject to the limitations of any such voluntary, reasonable program. In addition, Landlord reserves the right to change the supplier or provider of any such utility or service from time to time. Landlord may, but shall not be obligated to, upon notice to Tenant, contract with or otherwise obtain any electrical or other such service for or with respect to the Premises or Tenant’s operations therein from any supplier or provider of any such service. Tenant shall cooperate with Landlord and any supplier or provider of such services designated by Landlord from time to time to facilitate the delivery of such services to Tenant at the Premises and to the Building and Project, including without limitation allowing Landlord and Landlord’s suppliers or providers, and their respective agents and contractors, reasonable access to the Premises for the purpose of installing, maintaining, repairing, replacing or upgrading such service or any equipment or machinery associated therewith.

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16.    SUBORDINATION

Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be and is hereby declared to be subject and subordinate at all times to: (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Premises and/or the land upon which the Premises and Project are situated, or both; and (b) any mortgage or deed of trust which may now exist or be placed upon the Building, the Project and/or the land upon which the Premises or the Project are situated, or said ground leases or underlying leases, or Landlord’s interest or estate in any of said items which is specified as security. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. If any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord provided that Tenant shall not be disturbed in its possession under this Lease by such successor in interest so long as Tenant is not in default under this Lease. Within ten (10) days after request by Landlord, Tenant shall execute and deliver any additional documents evidencing Tenant’s attornment or the subordination of this Lease with respect to any such ground leases or underlying leases or any such mortgage or deed of trust, in any reasonable form requested by Landlord or by any ground landlord, mortgagee, or beneficiary under a deed of trust, subject to such nondisturbance requirement. If requested in writing by Tenant, Landlord shall use commercially reasonable efforts to obtain a subordination, nondisturbance and attornment agreement for the benefit of Tenant reflecting the foregoing from any ground landlord, mortgagee or beneficiary, at Tenant’s expense, subject to such other terms and conditions as the ground landlord, mortgagee or beneficiary may require. Landlord will attempt to get a non-disturbance agreement from any subsequent mortgagor on the property.

17.    FINANCIAL STATEMENTS

At the request of Landlord from time to time, but not more than twice in any twelve (12) month period, Tenant shall provide to Landlord Tenant’s and any guarantor’s current financial statements or other information discussing financial worth of Tenant and any guarantor, which Landlord shall use solely for purposes of this Lease and in connection with the ownership, management, financing and disposition of the Project.

18.     ESTOPPEL CERTIFICATE

Tenant agrees from time to time, within ten (10) days after request of Landlord, to deliver to Landlord, or Landlord’s designee, an estoppel certificate stating that this Lease is in full force and effect, that this Lease has not been modified (or stating all modifications, written or oral, to this Lease), the date to which Rent has been paid, the unexpired portion of this Lease, that there are no current defaults by Landlord or Tenant under this Lease (or specifying any such defaults), that the leasehold estate granted by this Lease is the sole interest of Tenant in the Premises and/or the land at which the Premises are situated, and such other matters pertaining to this Lease as may be reasonably requested by Landlord or any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or Project or any interest therein. Failure by Tenant to execute and deliver such certificate shall constitute an acceptance of the Premises and acknowledgment by Tenant that the statements included are true and correct without exception. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or Project or any interest therein. The parties agree that Tenant’s obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord’s execution of this Lease.

19.    SECURITY DEPOSIT

        Tenant agrees to deposit with Landlord upon execution of this Lease, a security deposit as stated in the Basic Lease Information (the “Security Deposit”), which sum shall be held and owned by Landlord, without obligation to pay interest, as security for the performance of Tenant’s covenants and obligations under this Lease. The Security Deposit is not an advance rental deposit or a measure of damages incurred by Landlord in case of Tenant’s default. Upon the occurrence of any event of default by Tenant, Landlord may from time to time, without prejudice to any other remedy provided herein or by law, use such fund to the extent necessary to credit against any arrears of Rent or other payments due to Landlord hereunder, and any other damage, injury, expense or liability caused by such event of default, and Tenant shall pay to Landlord, on demand, the amount so applied in order to restore the Security Deposit to its original amount. Although the Security Deposit shall be deemed the property of Landlord, any remaining balance of such deposit shall be returned by Landlord to Tenant at such time after termination of this Lease that all of Tenant’s obligations under this Lease have been fulfilled, reduced by such amounts as may be required by Landlord to remedy defaults on the part of Tenant in the payment of Rent or other obligations of Tenant under this Lease, including any obligation to repair damage to the Premises, Building or Project caused by Tenant or any Tenant’s Parties as required pursuant to this Lease. Landlord is hereby granted a security interest in the Security Deposit in accordance with applicable provisions of the California Commercial Code. Landlord may use and commingle the Security Deposit with other funds of Landlord. Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code, and all other provisions of any Regulations, now or hereinafter in force, which restricts the amount or types of claim that a landlord may make upon a security deposit or imposes upon a landlord (or its successors) any obligation with respect to the handling or return of security deposits.

All of the Security Deposit shall be in the form of an irrevocable letter of credit (the “Letter of Credit”), which Letter of Credit shall: (a) be in the amount of $903,312.00; (b) be issued on the form attached hereto as Exhibit E; (c) name Landlord as its beneficiary; and (d) be drawn on an FDIC insured financial institution satisfactory to the Landlord. The Letter of Credit (and any renewals or replacements thereof) shall be for a term of not less than one (1) year. Tenant agrees that it shall from time to time, as necessary, whether as a result of a draw on the Letter of Credit by Landlord pursuant to the terms hereof or as a result of the expiration of the Letter of Credit then in effect, renew or replace the original and any subsequent Letter of Credit so that a Letter of Credit, in the amount required hereunder, is in effect until a date which is at least thirty (30) days after the Termination Date of the Lease. If Tenant fails to furnish such renewal or replacement at least forty five (45) days prior to the stated expiration date of the Letter of Credit then held by Landlord, Landlord may draw upon such Letter of Credit and hold the proceeds thereof (and such proceeds need not be segregated) as a Security Deposit pursuant to the terms of this Section 19. Any renewal or replacement of the original or any subsequent Letter of Credit shall meet the requirements for the original Letter of Credit as set forth above, except that such replacement or renewal shall be issued by an FDIC insured financial institution satisfactory to the Landlord at the time of the issuance thereof.

If Landlord draws on the Letter of Credit as permitted in this Lease or the Letter of Credit, then, upon demand of Landlord, Tenant shall restore the amount available under the Letter of Credit to its original amount by providing Landlord with an amendment to the Letter of Credit evidencing that the amount available under the Letter of Credit has been restored to its original amount.

20.    LIMITATION OF TENANT’S REMEDIES

The obligations and liability of Landlord to Tenant for any default by Landlord under the terms of this Lease are not personal obligations of Landlord or of the individual or other partners of Landlord or its or their partners, directors, officers, or shareholders, and Tenant agrees to look solely to Landlord’s interest in the Project for the recovery of any amount from Landlord, and shall not look to other assets of Landlord nor seek recourse against the assets of the individual or other partners of Landlord or its or their partners, directors, officers or shareholders. Any lien obtained to enforce any such judgment and any levy of execution thereon shall be subject and subordinate to any

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lien, mortgage or deed of trust on the Project. Under no circumstances shall Tenant have the right to offset against or recoup Rent or other payments due and to become due to Landlord hereunder except as expressly provided in this Lease, which Rent and other payments shall be absolutely due and payable hereunder in accordance with the terms hereof.

21.    ASSIGNMENT AND SUBLETTING

A.  (1)  General.    Tenant shall not assign this Lease or sublet the Premises or any part thereof without Landlord’s prior written consent except as provided herein. If Tenant desires to assign this Lease or sublet any or all of the Premises, Tenant shall give Landlord written notice (the “Transfer Notice”) at least sixty (60) days prior to the anticipated effective date of the proposed assignment or sublease, which shall contain all of the information reasonably requested by Landlord to address Landlord’s decision criteria specified hereinafter. Landlord shall then have a period of thirty (30) days following receipt of the Transfer Notice to notify Tenant in writing whether Landlord elects to consent to the proposed assignment or sublease, subject, however, to Landlord’s prior written consent of the proposed assignee or subtenant and of any related documents or agreements associated with the assignment or sublease. If Landlord should fail to notify Tenant in writing of such election within said period, Landlord shall be deemed to have approved the proposed assignee or subtenant. Landlord’s consent to a proposed assignment or sublease shall not be unreasonably withheld. Consent to any assignment or subletting shall not constitute consent to any subsequent transaction to which this Paragraph 21 applies.

(2)  Conditions of Landlord’s Consent.    Without limiting the other instances in which it may be reasonable for Landlord to withhold Landlord’s consent to an assignment or subletting, Landlord and Tenant acknowledge that it shall be reasonable for Landlord to withhold Landlord’s consent in the following instances: if the proposed assignee does not agree to be bound by and assume the obligations of Tenant under this Lease in form reasonably satisfactory to Landlord; the use of the Premises by such proposed assignee or subtenant would not be a Permitted Use; the proposed assignee or subtenant is not of sound financial condition as determined by Landlord in Landlord’s reasonable discretion. Failure by or refusal of Landlord to consent to a proposed assignee or subtenant shall not cause a termination of this Lease. At the option of Landlord, a surrender and termination of this Lease shall operate as an assignment to Landlord of some or all subleases or subtenancies. Landlord shall exercise this option by giving notice of that assignment to such subtenants on or before the effective date of the surrender and termination.

B.  Bonus Rent.    Any Rent or other consideration realized by Tenant under any such sublease or assignment in excess of the Rent payable hereunder, after amortization of (1) the reasonable cost of any improvements which Tenant has made to the Premises in connection with such sublease or assignment, and (2) reasonable subletting and assignment costs, shall be divided and paid, fifty percent (50%) to Tenant, fifty percent (50%) to Landlord. In any subletting or assignment undertaken by Tenant, Tenant shall diligently seek to obtain the maximum rental amount available in the marketplace for comparable space available for primary leasing.

C.  For purposes of this Lease, an assignment or subletting shall not include any assignment or sublease of all or any portion of the Premises made to any entity which controls, is controlled by, or is under common control with Tenant; to any entity which results from a merger or consolidation with Tenant (including any successor corporation); to any entity engaged in a joint venture with Tenant; or to any entity which acquires substantially all of the stock or assets of Tenant, as a going concern, with respect to the business that is being conducted in the Premises (hereinafter each a “Permitted Transfer”). In addition, a sale or transfer of capital stock of Tenant shall be deemed a Permitted Transfer if (1) such sale or transfer occurs in connection with any bona fide financing or capitalization for the benefit of Tenant, or (2) Tenant is a publicly traded corporation, provided Landlord is in no worse position with respect to Landlord’s economic security under this Lease. Notwithstanding anything to the contrary contained in this Lease, Landlord shall have no right of approval or consent with respect to any Permitted Transfer, nor shall Landlord have any right to any sums or other economic consideration resulting from any Permitted Transfer.

Notwithstanding the foregoing, a transfer shall be a “Permitted Transfer” only if Landlord is in no worse a position with respect to Landlord’s economic security under this Lease (including payment of rent).

D.  Liability.    No assignment or subletting by Tenant, permitted or otherwise, shall relieve Tenant of any obligation under this Lease or any guarantor of this Lease of any liability under its guaranty or alter the primary liability of the Tenant named herein for the payment of Rent or for the performance of any other obligations to be performed by Tenant, including obligations contained in Paragraph 25 with respect to any assignee or subtenant. Landlord may collect rent or other amounts or any portion thereof from any assignee, subtenant, or other occupant of the Premises, permitted or otherwise, and apply the net rent collected to the Rent payable hereunder, but no such collection shall be deemed to be a waiver of this Paragraph 21, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of the obligations of Tenant under this Lease or any guarantor of this Lease of any liability under its guaranty. Any assignment or subletting which conflicts with the provisions hereof shall be void.

22.    AUTHORITY

        Landlord represents and warrants that it has full right and authority to enter into this Lease and to perform all of Landlord’s obligations hereunder and that all persons signing this Lease on its behalf are authorized to do. Tenant represents and warrants that Tenant has full right and authority to enter into this Lease, and to perform all of Tenant’s obligations hereunder, and that all persons signing this Lease on its behalf are authorized to do so.

23.    CONDEMNATION

A.  Condemnation Resulting in Termination.    If the whole or any substantial part of the Premises should be taken or condemned for any public use under any Regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the taking would prevent or materially interfere with the Permitted Use of the Premises, either party shall have the right to terminate this Lease at its option. If any material portion of the Building or Project is taken or condemned for any public use under any Regulation, or by right of eminent domain, or by private purchase in lieu thereof, Landlord may terminate this Lease at its option. In either of such events, the Rent shall be abated during the unexpired portion of this Lease, effective when the physical taking of said Premises shall have occurred.

B.  Condemnation Not Resulting in Termination.    If a portion of the Project of which the Premises are a part should be taken or condemned for any public use under any Regulation, or by right of eminent domain, or by private purchase in lieu thereof, and this Lease is not terminated as provided in Paragraph 23.A. above, the Rent payable hereunder during the unexpired portion of this Lease shall be reduced, beginning on the date when the physical taking shall have occurred, to such amount as may be fair and reasonable under all of the circumstances.

C.  Award.    Landlord shall be entitled to (and Tenant shall assign to Landlord) any and all payment, income, rent, award or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance and Tenant shall have no claim against Landlord or otherwise for any sums paid by virtue of such proceedings, whether or not attributable to the value of any unexpired portion of this Lease, except as expressly provided in this Lease. Notwithstanding the foregoing, any compensation specifically and

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separately awarded Tenant for loss of business, Tenant’s personal property, the unamortized cost of any tenant improvements or alterations and moving costs, or loss of good will, shall be and remain the property of Tenant.

D.  Waiver of CCP§1265.130.    Each party waives the provisions of California Civil Code Procedure Section 1265.130 allowing either party to petition the superior court to terminate this Lease as a result of a partial taking.

24.    CASUALTY DAMAGE

A.  If the Premises should be damaged or destroyed by fire, tornado or other casualty, Tenant shall give immediate written notice thereof to Landlord. Within thirty (30) days of such notice, Landlord shall notify Tenant whether in Landlord’s opinion such repairs can be made either (i) within ninety (90) days, (ii) in more than ninety (90) days but in no less than one hundred eighty (180) days, or (iii) in more than one hundred eighty (180) days from the date of such notice. Landlord’s determination shall be binding on Tenant. If Landlord fails to complete the repairs within one hundred eighty (180) days after the date upon which Landlord is notified of such damage, such period of time to be extended for delays caused by the fault or neglect of Tenant or because of acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord, Tenant may at its option terminate this Lease by delivering written notice of termination to Landlord whereupon this Lease shall terminate thirty (30) days thereafter.

B.  If the Premises should be damaged by fire, tornado or other casualty but only to such extent that rebuilding or repairs can in Landlord’s estimation be completed within ninety (90) days after the date upon which Landlord is notified by Tenant of such damage, this Lease shall not terminate, and Landlord shall at its sole cost and expense thereupon proceed with reasonable diligence to rebuild and repair the Premises to substantially the condition in which they existed prior to such damage, except that Landlord shall not be required to rebuild, repair or replace any part of the partitions, fixtures, additions and other improvements which may have been placed in, on or about the Premises by Tenant. If the Premises are untenantable in whole or in part following such damage, the Rent payable hereunder during the period in which they are untenantable shall be reduced to such extent as may be fair and reasonable under all of the circumstances.

C.  If the Premises or Building should be damaged by fire, tornado or other casualty but only to such extent that rebuilding or repairs can in Landlord’s estimation be completed in more than ninety (90) days but in less than one hundred eighty (180) days, then Landlord shall have the option of either (i) terminating this Lease by written notice given to Tenant within thirty (30) days after the date upon which Landlord is notified by Tenant of such damage, effective upon the date of the occurrence of such damage, in which event the Rent shall be abated during the unexpired portion of the Lease, or (ii) electing to rebuild or repair the Premises to substantially the condition in which they existed prior to such damage except that Landlord shall not be required to rebuild, repair or replace any part of the partitions, fixtures, additions and other improvements which may have been placed in, on or about the Premises by Tenant. If the Premises are untenantable in whole or in part following such damage, the Rent payable hereunder during the period in which they are untenantable shall be reduced to such extent as may be fair and reasonable under all of the circumstances. In the event that Landlord should fail to complete such repairs and rebuilding within one hundred eighty (180) days after the date upon which Landlord is notified of such damage, such period of time to be extended for delays caused by the fault or neglect of Tenant or because of acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the reasonable control of Landlord, Tenant may at its option terminate this Lease by delivering thirty (30) days prior written notice of termination to Landlord as Tenant’s exclusive remedy, whereupon all rights and obligations hereunder shall cease and terminate.

D.  If the Premises should be so damaged by fire, tornado or other casualty that rebuilding or repairs cannot in Landlord’s estimation be completed within one hundred eighty (180) days after the date upon which Landlord is notified by Tenant of such damage, this Lease shall terminate and the Rent shall be abated during the unexpired portion of this Lease, effective upon the date of the occurrence of such damage.

E.  Tenant’s Fault.    Notwithstanding anything herein to the contrary, if the Premises or any other portion of the Building are damaged by Casualty resulting from the fault, negligence, or breach of this Lease by Tenant or any of Tenant’s Parties, Tenant shall be liable to Landlord for the cost and expense of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds.

F.  Insurance Proceeds.    Notwithstanding anything herein to the contrary, if the Premises or Building are damaged or destroyed and are not substantially covered by the insurance proceeds received by Landlord such that a reasonable landlord would not fund the difference, or if the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises requires that the insurance proceeds be applied to such indebtedness, then in either case Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after the date of notice to Landlord that said damage or destruction is not fully covered by insurance or such requirement is made by any such holder, as the case may be, whereupon this Lease shall terminate.

G.  Waiver.    This Paragraph 24 shall be Tenant’s sole and exclusive remedy in the event of damage or destruction to the Premises or the Building. As a material inducement to Landlord entering into this Lease, Tenant hereby waives any rights it may have under Sections 1932, 1933(4), 1941 or 1942 of the Civil Code of California with respect to any destruction of the Premises, Landlord’s obligation for tenantability of the Premises and Tenant’s right to make repairs and deduct the expenses of such repairs, or under any similar law, statute or ordinance now or hereafter in effect.

H.  Tenant’s Personal Property.    In the event of any damage or destruction of the Premises or the Building, under no circumstances shall Landlord be required to repair any injury or damage to, or make any repairs to or replacements of, Tenant’s personal property.

I.  In the event Landlord chooses to rebuild under this Paragraph 24, Landlord agrees to do so without delay and complete such rebuilding in as expeditious a manner as is commercially reasonable given the circumstances.

25.    HOLDING OVER

Unless Landlord expressly consents in writing to Tenant’s holding over, Tenant shall be unlawfully and illegally in possession of the Premises, whether or not Landlord accepts any rent from Tenant or any other person while Tenant remains in possession of the Premises without Landlord’s written consent. If Tenant shall retain possession of the Premises or any portion thereof without Landlord’s consent following the expiration of this Lease or sooner termination for any reason, then Tenant shall pay to Landlord for each day of such retention one hundred fifty percent (150%) of the amount of daily rental as of the last month prior to the date of expiration or earlier termination. Tenant shall also indemnify, defend, protect and hold Landlord harmless from any loss, liability or cost, including consequential and incidental damages and reasonable attorneys’ fees, incurred by Landlord resulting from delay by Tenant in surrendering the Premises. Acceptance of Rent by Landlord following expiration or earlier termination of this Lease, or following demand by Landlord for possession of the Premises, shall not constitute a renewal of this Lease, and nothing contained in this Paragraph 25 shall waive Landlord’s right of reentry or any other right. Additionally, if upon expiration or earlier termination of this Lease, or following demand by Landlord for possession of the Premises, Tenant has not fulfilled its obligation with respect to repairs and cleanup of the Premises or any other Tenant obligations as set forth in this Lease, then Landlord shall have the right to perform any such obligations as it deems necessary

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at Tenant’s sole cost and expense, and any time required by Landlord to complete such obligations shall be considered a period of holding over and the terms of this Paragraph 25 shall apply provided Landlord diligently undertakes to complete such work in a timely manner. The provisions of this Paragraph 25 shall survive any expiration or earlier termination of this Lease.

26.    DEFAULT

A.  Events of Default.    The occurrence of any of the following shall constitute an event of default on the part of Tenant:

(1)  Abandonment.    Abandonment or vacation of the Premises for a continuous period in excess of five (5) days. Tenant waives any right to notice Tenant may have under Section 1951.3 of the Civil Code of the State of California, the terms of this Paragraph 26.A. being deemed such notice to Tenant as required by said Section 1951.3.

(2)  Nonpayment of Rent.    Failure to pay any installment of Rent or any other amount due and payable hereunder upon the date when said payment is due, such failure continuing without cure by payment of the delinquent Rent and late charges or other obligations for a period of five (5) days after written notice of such failure, provided, however, that except as otherwise expressly provided herein, Landlord shall not be required to provide such notice more than twice during any three (3)  year period of the Term, the third such non-payment in such period constituting default for all purposes hereof without requirement of notice, as to which time is of the essence.

(3)  Other Obligations.    Failure to perform any obligation, agreement or covenant under this Lease other than those matters specified in subparagraphs (1) and (2) of this Paragraph 26.A., and in Paragraphs 8, 16, 18 and 25, such failure continuing for fifteen (15) days after written notice of such failure, as to which time is of the essence.

(4)  General Assignment.    A general assignment by Tenant for the benefit of creditors.

(5)  Bankruptcy.    The filing of any voluntary petition in bankruptcy by Tenant, or the filing of an involuntary petition by Tenant’s creditors, which involuntary petition remains undischarged for a period of thirty (30) days. If under applicable law, the trustee in bankruptcy or Tenant has the right to affirm this Lease and continue to perform the obligations of Tenant hereunder, such trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease and provide to Landlord such adequate assurances as may be necessary to ensure Landlord of the continued performance of Tenant’s obligations under this Lease.

(6)  Receivership.    The employment of a receiver to take possession of substantially all of Tenant’s assets or the Premises, if such appointment remains undismissed or undischarged for a period of thirty (30) days after the order therefor.

(7)  Attachment.    The attachment, execution or other judicial seizure of all or substantially all of Tenant’s assets or Tenant’s leasehold of the Premises, if such attachment or other seizure remains undismissed or undischarged for a period of twenty (20) days after the levy thereof.

(8)  Insolvency.    The admission by Tenant in writing of its inability to pay its debts as they become due.

B.  Remedies Upon Default.

(1)  Termination.     In the event of the occurrence of any event of default, Landlord shall have the right to give a written termination notice to Tenant, and on the date specified in such notice, Tenant’s right to possession shall terminate, and this Lease shall terminate unless on or before such date all Rent in arrears and all costs and expenses incurred by or on behalf of Landlord hereunder shall have been paid by Tenant and all other events of default of this Lease by Tenant at the time existing shall have been fully remedied to the satisfaction of Landlord. At any time after such termination, Landlord may recover possession of the Premises or any part thereof and expel and remove therefrom Tenant and any other person occupying the same, including any subtenant or subtenants notwithstanding Landlord’s consent to any sublease, by any lawful means, and again repossess and enjoy the Premises without prejudice to any of the remedies that Landlord may have under this Lease, or at law or equity by any reason of Tenant’s default or of such termination. Landlord hereby reserves the right, but shall not have the obligation, to recognize the continued possession of any subtenant. The delivery or surrender to Landlord by or on behalf of Tenant of keys, entry codes, or other means to bypass security at the Premises shall not terminate this Lease.

        (2)  Continuation After Default.    Even though an event of default may have occurred, this Lease shall continue in effect for so long as Landlord does not terminate Tenant’s right to possession under Paragraph 26.B.(1) hereof. Landlord shall have the remedy described in California Civil Code Section 1951.4 (“Landlord may continue this ease in effect after Tenant’s breach and abandonment and recover Rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations”), or any successor code section. Accordingly, if Landlord does not elect to terminate this Lease on account of any event of default by Tenant, Landlord may enforce all of Landlord’s rights and remedies under this Lease, including the right to recover Rent as it becomes due. Acts of maintenance, preservation or efforts to lease the Premises or the appointment of a receiver under application of Landlord to protect Landlord’s interest under this Lease or other entry by Landlord upon the Premises shall not constitute an election to terminate Tenant’s right to possession.

C.  Damages After Default.    Should Landlord terminate this Lease pursuant to the provisions of Paragraph 26.B.(1) hereof, Landlord shall have the rights and remedies of a Landlord provided by Section 1951.2 of the Civil Code of the State of California, or any successor code sections. Upon such termination, in addition to any other rights and remedies to which Landlord may be entitled under applicable law or at equity, Landlord shall be entitled to recover from Tenant: (1) the worth at the time of award of the unpaid Rent and other amounts which had been earned at the time of termination, (2) the worth at the time of award of the amount by which the unpaid Rent and other amounts that would have been earned after the date of termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; (3) the worth at the time of award of the amount by which the unpaid Rent and other amounts for the balance of the Term after the time of award exceeds the amount of such Rent loss that the Tenant proves could be reasonably avoided; and (4) any other amount and court costs necessary to compensate Landlord for all detriment proximately caused by Tenant’s failure to perform Tenant’s obligations under this Lease or which, in the ordinary course of things, would be likely to result therefrom. The “worth at the time of award” as used in (1) and (2) above shall be computed at the Applicable Interest Rate (defined below). The “worth at the time of award” as used in (3) above shall be computed by discounting such amount at the Federal Discount Rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). If this Lease provides for any periods during the Term during which Tenant is not required to pay Base Rent or if Tenant otherwise receives a Rent concession, then upon the occurrence of an event of default, Tenant shall owe to Landlord the full amount of such Base Rent or value of such Rent concession, plus interest at the Applicable Interest Rate, calculated from the date that such Base Rent or Rent concession would have been payable.

D.    Late Charge.    In addition to its other remedies, Landlord shall have the right without notice or demand to add to the amount of any payment required to be made by Tenant hereunder, and which is not paid and received by Landlord on or before the first day of each calendar month, an amount equal to five percent (5%) of the delinquent amount for each month or portion thereof that the delinquency

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remains outstanding to compensate Landlord for the loss of the use of the amount not paid and the administrative costs caused by the delinquency, the parties agreeing that Landlord’s damage by virtue of such delinquencies would be extremely difficult and impracticable to compute and the amount stated herein represents a reasonable estimate thereof. Any waiver by Landlord of any late charges or failure to claim the same shall not constitute a waiver of other late charges or any other remedies available to Landlord.

E.  Remedies Cumulative.    All of Landlord’s rights, privileges and elections or remedies are cumulative and not alternative, to the extent permitted by law and except as otherwise provided herein.

27.    LIENS

Tenant shall at all times keep the Premises and the Project free from liens arising out of or related to work or services performed, materials or supplies furnished or obligations incurred by or on behalf of Tenant or in connection with work made, suffered or done by or on behalf of Tenant in or on the Premises or Project. If Tenant shall not, within ten (10) days following the imposition of any such lien, cause the same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as Landlord shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord on behalf of Tenant and all expenses incurred by Landlord in connection therefor shall be payable to Landlord by Tenant on demand with interest at the Applicable Interest Rate as Additional Rent. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord, the Premises, the Project and any other party having an interest therein, from mechanics’ and materialmen’s liens, and Tenant shall give Landlord not less than ten (10) business days prior written notice of the commencement of any work in the Premises or Project which could lawfully give rise to a claim for mechanics’ or materialmen’s liens to permit Landlord to post and record a timely notice of non-responsibility, as Landlord may elect to proceed or as the law may from time to time provide, for which purpose, if Landlord shall so determine, Landlord may enter the Premises. Tenant shall not remove any such notice posted by Landlord without Landlord’s consent, and in any event not before completion of the work which could lawfully give rise to a claim for mechanics’ or materialmen’s liens.

28.    SUBSTITUTION

INTENTIONALLY OMITTED

29.    TRANSFERS BY LANDLORD

In the event of a sale or conveyance by Landlord of the Building or a foreclosure by any creditor of Landlord, the same shall operate to release Landlord from any liability upon any of the covenants or conditions, express or implied, herein contained in favor of Tenant, to the extent required to be performed after the passing of title to Landlord’s successor-in-interest. In such event, Tenant agrees to look solely to the responsibility of the successor-in-interest of Landlord under this Lease with respect to the performance of the covenants and duties of “Landlord” to be performed after the passing of title to Landlord’s successor-in-interest. This Lease shall not be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee. Landlord’s successor(s)-in-interest shall not have liability to Tenant with respect to the failure to perform any of the obligations of “Landlord,” to the extent required to be performed prior to the date such successor(s)-in-interest became the owner of the Building.

30.    RIGHT OF LANDLORD TO PERFORM TENANT’S COVENANTS

All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant’s sole cost and expense and without any abatement of Rent. If Tenant shall fail to pay any sum of money, other than Base Rent, required to be paid by Tenant hereunder or shall fail to perform any other act on Tenant’s part to be performed hereunder, including Tenant’s obligations under Paragraph 11 hereof, and such failure shall continue for fifteen (15) days after notice thereof by Landlord, in addition to the other rights and remedies of Landlord, Landlord may make any such payment and perform any such act on Tenant’s part. In the case of an emergency, no prior notification by Landlord shall be required. Landlord may take such actions without any obligation and without releasing Tenant from any of Tenant’s obligations. All sums so paid by Landlord and all incidental costs incurred by Landlord and interest thereon at the Applicable Interest Rate, from the date of payment by Landlord, shall be paid to Landlord on demand as Additional Rent.

31.    WAIVER

If either Landlord or Tenant waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition contained herein, or constitute a course of dealing contrary to the expressed terms of this Lease. The acceptance of Rent by Landlord shall not constitute a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, regardless of Landlord’s knowledge of such preceding breach at the time Landlord accepted such Rent. Failure by either party to enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed to waive or decrease the right of said party to insist thereafter upon strict performance by the other party. Waiver by either party of any term, covenant or condition contained in this Lease may only be made by a written document signed by said party, based upon full knowledge of the circumstances.

32.    NOTICES

Each provision of this Lease or of any applicable governmental laws, ordinances, regulations and other requirements with reference to sending, mailing, or delivery of any notice or the making of any payment by Landlord or Tenant to the other shall be deemed to be complied with when and if the following steps are taken:

A.  Rent.    All Rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at Landlord’s Remittance Address set forth in the Basic Lease Information, or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Tenant’s obligation to pay Rent and any other amounts to Landlord under the terms of this Lease shall not be deemed satisfied until such Rent and other amounts have been actually received by Landlord.

B.  Other.    All notices, demands, consents and approvals which may or are required to be given by either party to the other hereunder shall be in writing and either personally delivered, sent by commercial overnight courier, mailed, certified or registered, postage prepaid or sent by facsimile with confirmed receipt (and with an original sent by commercial overnight courier), and in each case addressed to the party to be notified at the Notice Address for such party as specified in the Basic Lease Information or to such other place as the party to be notified may from time to time designate. Notices shall be deemed served upon receipt or refusal to accept delivery. Tenant appoints as its agent to receive the service of all default notices and notice of commencement of unlawful detainer proceedings the person in charge of or apparently in charge of occupying the Premises at the time, and, if there is no such person, then such service may be made by attaching the same on the main entrance of the Premises.

C.  Required Notices.    Tenant shall immediately notify Landlord in writing of any notice of a violation or a potential or alleged violation of any Regulation that relates to the Premises or the Project, or of any inquiry, investigation, enforcement or other action that is

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instituted or threatened by any governmental or regulatory agency against Tenant or any other occupant of the Premises, or any claim that is instituted or threatened by any third party that relates to the Premises or the Project.

33.    ATTORNEYS’ FEES

If either party places the enforcement of this Lease, or any part thereof, or the collection of any Rent due, or to become due hereunder, or recovery of possession of the Premises in the hands of an attorney or files suit upon the same, the prevailing party shall recover its reasonable attorneys’ fees and court costs, whether incurred at trial, appeal or review.

34.    SUCCESSORS AND ASSIGNS

This Lease shall be binding upon and inure to the benefit of Landlord, its successors and assigns, and shall be binding upon and inure to the benefit of Tenant, its successors, and to the extent assignment is permitted hereunder, Tenant’s assigns.

35.    FORCE MAJEURE

If performance by a party of any portion of this Lease is made impossible by any prevention, delay, or stoppage caused by strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes for those items, government actions, civil commotions, fire or other casualty, or other causes beyond the reasonable control of the party obligated to perform, performance by that party for a period equal to the period of that prevention, delay, or stoppage is excused. Tenant’s obligation to pay Rent, however, is not excused by this Paragraph 35. Whenever a period of time is herein prescribed for action as to non-monetary obligations to be taken by Tenant, Tenant shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strike, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the control of Tenant.

36.    SURRENDER OF PREMISES

Tenant shall, upon expiration or sooner termination of this Lease, surrender the Premises to Landlord in the same condition as existed on the date Tenant originally took possession thereof, normal wear and tear excepted, with all HVAC equipment in operating order and in good repair. Tenant shall remove all of its debris from the Project. At or before the time of surrender, Tenant shall comply with the terms of Paragraph 12.A. hereof with respect to Alterations to the Premises and all other matters addressed in such Paragraph. If the Premises are not so surrendered at the expiration or sooner termination of this Lease, the provisions of Paragraph 25 hereof shall apply. All keys to the Premises or any part thereof shall be surrendered to Landlord upon expiration or sooner termination of the Term. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Premises and shall meet with Landlord for a joint inspection of the Premises at the time of vacating, but nothing contained herein shall be construed as an extension of the Term or as a consent by Landlord to any holding over by Tenant.

37.    HAZARDOUS MATERIALS

A.  General Restrictions.    Tenant shall conduct its business and shall cause each Tenant Party to act in such a manner as to (a) not release or permit the release of any Hazardous Material in, under, on or about the Premises or Project, or (b) not use, store, generate, treat, discharge, disperse, handle, manufacture, transport or dispose of (collectively, “Handle”) any Hazardous Materials (other than incidental amounts of customary cleaning and office supplies) in or about the Premises or Project except in each case in compliance with all applicable laws. “Hazardous Material” means any hazardous, explosive, radioactive or toxic substance, material or waste which is or becomes regulated by any local, state or federal governmental authority or agency, including, without limitation, any material or substance which is (i) defined or listed as a “hazardous waste,” “extremely hazardous waste,” “restricted hazardous waste,” “hazardous substance,” “hazardous material,” “pollutant” or “contaminant” under any Regulation, (ii) petroleum or petroleum derivative, (iii) a flammable explosive, (iv) a radioactive material or waste, (v) a polychlorinated biphenyl, (vi) asbestos or asbestos containing material, (vii) infectious waste, or (viii) a carcinogen.

B.  Required Disclosures.    Prior to Tenant (and at least five (5) days prior to any assignee or any subtenant of Tenant) taking possession of any part of the Premises, Tenant (or such subtenant or assignee, as the case may be) shall deliver to Landlord a completed “Hazardous Materials Questionnaire”, in the form attached hereto as Exhibit D. Tenant (and any subtenant or assignee of Tenant) shall provided Landlord with copies of (i) its Hazardous Materials Management Plan (“HMPP”) for its operations at the Premises, which shall include a description of the types and quantities of Hazardous Materials used and/or stored on the Premises; and (ii) copies of all other similar documents related to Hazardous Materials which Tenant (or any subtenant or assignee of Tenant) has submitted or may submit to the City of Hayward, California, or any other regulatory agencies in connection with its use of the Premises, including any revisions or updated to its HMPP. Tenant represents that its HMPP currently complies with all applicable laws.

        C.  Additional Obligations.    If any Hazardous Materials shall be released into the environment comprising or surrounding the Project as the result of the acts, omissions or operations of Tenant or any Tenant Party, Tenant shall at its sole expense promptly prepare a remediation plan therefor consistent with applicable Regulations and recommended industry practices (and approved by Landlord and all governmental agencies having jurisdiction) to fully remediate such release, and thereafter shall prosecute the remediation plan so approved to completion with all reasonable diligence and to the satisfaction of applicable governmental agencies. If Landlord determines in good faith that any release of any Hazardous Material or violation of Hazardous Materials Regulations may have occurred in, on, under or about the Premises during the Term, Landlord may require Tenant to at Tenant’s sole expense, (i) retain a qualified environmental consultant reasonably satisfactory to Landlord to conduct a reasonable investigation (an “Environmental Assessment”) of a nature and scope reasonably approved in writing in advance by Landlord with respect to the existence of any Hazardous Materials in, on, under or about the Premises and providing a review of all Hazardous Materials activities of Tenant and the Tenant Parties, and (ii) provide to Landlord a reasonably detailed, written report, prepared in accordance with the institutional real estate standards, of the Environmental Assessment.

D.  Indemnity.    Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord), protect and hold Landlord harmless from and against any and all claims, liabilities, losses, costs, loss of rents, liens, damages, injuries or expenses (including attorneys’ and consultants’ fees and court costs), demands, causes of action, or judgments directly or indirectly arising out of or related to the use, generation, storage, release, or disposal of Hazardous Materials by Tenant or any of Tenant’s Parties in, on, under or about the Premises, the Building or the Project or surrounding land or environment, which indemnity shall include, without limitation, damages for personal or bodily injury, property damage, damage to the environment or natural resources occurring on or off the Premises, losses attributable to diminution in value or adverse effects on marketability, the cost of any investigation, monitoring, government oversight, repair, removal, remediation, restoration, abatement, and disposal, and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following the expiration or earlier termination of this Lease. Neither the consent by Landlord to the use, generation, storage, release or disposal of Hazardous Materials nor the strict compliance by Tenant with all laws pertaining to Hazardous Materials shall excuse Tenant from Tenant’s obligation of indemnification pursuant to this Paragraph 37.D. Tenant’s obligations pursuant to the foregoing indemnity shall survive the expiration or earlier termination of this Lease.

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38 MISCELLANEOUS

A.  General.    The term “Tenant” or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations, and their respective successors, executors, administrators and permitted assigns, according to the context hereof.

B.  Time.    Time is of the essence regarding this Lease and all of its provisions. C. Choice of Law. This Lease shall in all respects be governed by the laws of the State of California.

C.  Choice of Law.    This lease shall in all respects be governed by the laws of the State of California.

D.  Entire Agreement.    This Lease, together with its Exhibits, addenda and attachments and the Basic Lease Information, contains all the agreements of the parties hereto and supersedes any previous negotiations. There have been no representations made by the Landlord or understandings made between the parties other than those set forth in this Lease and its Exhibits, addenda and attachments and the Basic Lease Information.

E.  Modification.    This Lease may not be modified except by a written instrument signed by the parties hereto. Both parties accept the area of the Premises as specified in the Basic Lease Information as the approximate area of the Premises for all purposes under this Lease, and acknowledges and agrees that no other definition of the area (rentable, usable or otherwise) of the Premises shall apply. Neither party shall in any event be entitled to a recalculation of the square footage of the Premises, rentable, usable or otherwise.

F.  Severability.    If, for any reason whatsoever, any of the provisions hereof shall be unenforceable or ineffective, all of the other provisions shall be and remain in full force and effect.

G.  Recordation.    Tenant shall not record this Lease or a short form memorandum hereof.

H.  Examination of Lease.    Submission of this Lease to Tenant does not constitute an option or offer to lease and this Lease is not effective otherwise until execution and delivery by both Landlord and Tenant.

I.  Accord and Satisfaction.    No payment by Tenant of a lesser amount than the total Rent due nor any endorsement on any check or letter accompanying any check or payment of Rent shall be deemed an accord and satisfaction of full payment of Rent, and Landlord may accept such payment without prejudice to Landlord’s right to recover the balance of such Rent or to pursue other remedies. All offers by or on behalf of Tenant of accord and satisfaction are hereby rejected in advance.

J.  Easements.    Landlord may grant easements on the Project and dedicate for public use portions of the Project without Tenant’s consent; provided that no such grant or dedication shall materially interfere with Tenant’s Permitted Use of the Premises. Upon Landlord’s request, Tenant shall execute, acknowledge and deliver to Landlord documents, instruments, maps and plats necessary to effectuate Tenant’s covenants hereunder.

K.  Drafting and Determination Presumption.    The parties acknowledge that this Lease has been agreed to by both the parties, that both Landlord and Tenant have consulted with attorneys with respect to the terms of this Lease and that no presumption shall be created against Landlord because Landlord drafted this Lease. Except as otherwise specifically set forth in this Lease, with respect to any consent, determination or estimation of Landlord required or allowed in this Lease or requested of Landlord, Landlord’s consent, determination or estimation shall be given or made solely by Landlord in Landlord’s good faith opinion, and not unreasonably withheld or delayed. If Landlord fails to respond to any request for its consent within the time period, if any, specified in this Lease, Landlord shall be deemed to have disapproved such request, unless this Lease provides otherwise.

L.  Exhibits.    The Basic Lease Information, and the Exhibits, addenda and attachments attached hereto are hereby incorporated herein by this reference and made a part of this Lease as though fully set forth herein.

M.  No Light, Air or View Easement.    Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to or in the vicinity of the Building shall in no way affect this Lease or impose any liability on Landlord.

N.  No Third Party Benefit.    This Lease is a contract between Landlord and Tenant and nothing herein is intended to create any third party benefit.

O.  Quiet Enjoyment.    Upon payment by Tenant of the Rent, and upon the observance and performance of all of the other covenants, terms and conditions on Tenant’s part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the Premises for the term hereby demised without hindrance or interruption by Landlord or any other person or persons lawfully or equitably claiming by, through or under Landlord, subject, nevertheless, to all of the other terms and conditions of this Lease.

P.  Counterparts.    This Lease may be executed in any number of counterparts, each of which shall be deemed an original.

Q.  Multiple Parties.    If more than one person or entity is named herein as Tenant, such multiple parties shall have joint and several responsibility to comply with the terms of this Lease.

R.  Prorations.    Any Rent or other amounts payable to Landlord by Tenant hereunder for any fractional month shall be prorated based on a calendar month. As used herein, the term “fiscal year” shall mean the calendar year or such other fiscal year as Landlord may deem appropriate.

S.  Brokerage Disclosure.    Tenant shall indemnify and hold Landlord, its trustees, members, principals, beneficiaries, partners, officers, directors, employees, and agents harmless from all claims of any other brokers claiming to have represented Tenant in connection with this Lease other than CRESA Partners (“Broker”). Landlord agrees to indemnify and hold Tenant harmless from all claims of any brokers claiming to have represented Landlord in connection with this Lease. Equity Office Properties Management Corp. (“EOPMC”) is an affiliate of Landlord and represents only the Landlord in this transaction. Any assistance rendered by any agent or employee of EOPMC in connection with this Lease or any subsequent amendment or modification hereto has been or will be made as an accommodation to Tenant solely in furtherance of consummating the transaction on behalf of Landlord, and not as agent for Tenant. Landlord agrees to pay a brokerage commission to Broker in accordance with the terms of a separate written commission agreement to be entered into between Landlord and Broker, provided that in no event shall Landlord be obligated to pay a commission to Broker in connection with any extension of the Term or in connection with any additional space that is leased by Tenant pursuant to the terms of this Lease except as may be specifically provided otherwise in such written agreement or future written agreement between Landlord and Broker.

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39.    ADDITIONAL PROVISIONS

A.    Renewal Option.

1.  Grant of Option; Conditions.    Tenant shall have the right to extend the Term (the “Renewal Option”) for one additional period of 5 years commencing on the day following the Termination Date of the initial Term and ending on the 5th anniversary of the Termination Date (the “Renewal Term”), if:

a.  Landlord receives notice of exercise (“Initial Renewal Notice”) not less than 12 full calendar months prior to the expiration of the initial Term and not more than 24 full calendar months prior to the expiration of the initial Term; and

b.  Tenant is not in default under the Lease beyond any applicable cure periods at the time that Tenant delivers its Initial Renewal Notice or at the time Tenant delivers its Binding Notice (as defined below); and

c.  The Lease has not been assigned (other than pursuant to a Permitted Transfer, as defined in Article 21 of the Lease) prior to the date that Tenant delivers its Initial Renewal Notice or prior to the date Tenant delivers its Binding Notice.

2.  Terms Applicable to Premises During Renewal Term.

a.  The initial Base Rent rate per rentable square foot for the Premises during the Renewal Term shall equal the Prevailing Market (hereinafter defined) rate per rentable square foot for the Premises. Base Rent during the Renewal Term shall increase, if at all, in accordance with the increases assumed in the determination of Prevailing Market rate. Base Rent attributable to the Premises shall be payable in monthly installments in accordance with the terms and conditions of Article 6 of the Lease.

3.  Tenant shall pay Additional Rent (i.e. Operating Expenses) for the Premises during the Renewal Term in accordance with Article 6 of the Lease, and the manner and method in which Tenant reimburses Landlord for Tenant’s Proportionate Share of Operating Expenses applicable to such matter, shall be some of the factors considered in determining the Prevailing Market rate for the Renewal Term.

4.  Procedure for Determining Prevailing Market.    Within 30 days after receipt of Tenant’s Initial Renewal Notice, Landlord shall advise Tenant of the applicable Base Rent rate for the Premises for the Renewal Term. Tenant, within 15 days after the date on which Landlord advises Tenant of the applicable Base Rent rate for the Renewal Term, shall either (i) give Landlord final binding written notice (“Binding Notice”) of Tenant’s exercise of its Renewal Option, or (ii) if Tenant disagrees with Landlord’s determination, provide Landlord with written notice of rejection (the “Rejection Notice”). If Tenant fails to provide Landlord with either a Binding Notice or Rejection Notice within such 15 day period, Tenant’s Renewal Option shall be null and void and of no further force and effect. If Tenant provides Landlord with a Binding Notice, Landlord and Tenant shall enter into the Renewal Amendment (as defined below) upon the terms and conditions set forth herein. If Tenant provides Landlord with a Rejection Notice, Landlord and Tenant shall work together in good faith to agree upon the Prevailing Market rate for the Premises during the Renewal Term. When Landlord and Tenant have agreed upon the Prevailing Market rate for the Premises, such agreement shall be reflected in a written agreement between Landlord and Tenant, whether in a letter or otherwise, and Landlord and Tenant shall enter into the Renewal Amendment in accordance with the terms and conditions hereof. Notwithstanding the foregoing, if Landlord and Tenant are unable to agree upon the Prevailing Market rate for the Premises within 30 days after the date Tenant provides Landlord with the Rejection Notice, Tenant’s Renewal Option shall be deemed to be null and void and of no force and effect.

If Tenant and Landlord are unable to agree on a mutually acceptable rental rate for any such increase period within thirty (30) days after notification by Landlord to Tenant of Landlord’s determination of the new Base Rent for the applicable increase period, but in any event no later than the date which is ninety (90) days prior to the expiration of the 115th month of the Term, then on or before such date Landlord and Tenant shall each appoint a licensed real estate broker with at least ten (10) year’s experience in leasing industrial space in the area in which the Building is located to act as arbitrators. The two (2) arbitrators so appointed shall determine the fair market rental value for the Premises for the applicable increase period based on the above criteria and each shall submit his or her determination of such fair market rental value to Landlord and Tenant in writing, within sixty (60) days after their appointment.

If the two (2) arbitrators so appointed cannot agree on the fair market rental value for the applicable increase period within such 60-day period, the two (2) arbitrators shall within five (5) days thereafter appoint a third arbitrator who shall be a licensed real estate broker with at least ten (10) year’s experience in leasing industrial space in the area in which the Building is located. The third arbitrator so appointed shall independently determine the fair market rental value for the Premises for the applicable increase period within thirty (30) days after appointment, by selecting from the proposals submitted by each of the first two arbitrators the one that most closely approximates the third arbitrator’s determination of such fair market rental value. The third arbitrator shall have no right to adopt a compromise or middle ground or any modification of either of the proposals submitted by the first two arbitrators. The proposal chosen by the third arbitrator as most closely approximating the third arbitrator’s determination of the fair market rental value for the applicable increase period shall constitute the decision and award of the arbitrators and shall be final and binding on the parties.

Each party shall pay the fees and expenses of the arbitrator appointed by such party and one-half (1/2) of the fees and expenses of the third arbitrator.

If either party fails to appoint an arbitrator, or if either of the first two arbitrators fails to submit his or her proposal of fair market rental value to the other party, in each case within the time periods set forth above, then the decision of the other party’s arbitrator shall be considered final and binding.

5.  Renewal Amendment.    If Tenant is entitled to and properly exercises its Renewal Option, Landlord shall prepare an amendment (the “Renewal Amendment”) to reflect changes in the Base Rent, Term, Termination Date and other appropriate terms. The Renewal Amendment shall be sent to Tenant within a reasonable time after Landlord’s receipt of the Binding Notice or other written agreement by Landlord and Tenant regarding the Prevailing Market rate, and Tenant shall execute and return the Renewal Amendment to Landlord within 15 days after Tenant’s receipt of same, but, upon final determination of the Prevailing Market rate applicable during the Renewal Term as described herein, an otherwise valid exercise of the Renewal Option shall be fully effective whether or not the Renewal Amendment is

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executed. Within a reasonable time after Landlord’s receipt of the copies of the Renewal Amendment executed by Tenant, Landlord shall execute the same provided Tenant has made no modifications to the Renewal Amendment which have not been agreed to by Landlord.

6.  Definition of Prevailing Market.    For purposes of this Renewal Option, “Prevailing Market” shall mean the arms length fair market annual rental rate per rentable square foot under renewal leases and amendments entered into on or about the date on which the Prevailing Market is being determined hereunder for space comparable to the Premises in the Building and other buildings comparable to the Building in the Hayward, California area. The determination of Prevailing Market shall take into account any material economic differences between the terms of this Lease and any comparison lease or amendment, such as rent abatements, construction costs and other concessions and the manner, if any, in which the landlord under any such lease is reimbursed for operating expenses and taxes; provided, however, the value of any Alterations made to the Premises and paid for solely by Tenant shall not be considered when determining the Prevailing Market rate for the Premises. The determination of Prevailing Market shall also take into consideration any reasonably anticipated changes in the Prevailing Market rate from the time such Prevailing Market rate is being determined and the time such Prevailing Market rate will become effective under this Lease.

B.    Monument Signage.

1.  During the initial Term and any extension thereof, Tenant, at Tenant’s sole cost, but subject to governmental approval, shall have the right to maintain its existing (as of the date of this Lease) sign on the monument sign located at the main entrance to the Building (the “Existing Monument Sign”). Landlord shall have the right to require that all names on the Existing Monument Sign be of the same size and style. Tenant’s right to place its name on the Existing Monument Sign, and the location of Tenant’s name on the Existing Monument Sign, shall be subject to the existing rights of existing tenants in the Project. Although the Existing Monument Sign will be maintained by Landlord, Tenant shall pay its proportionate share of the cost of any maintenance and repair associated with the Existing Monument Sign.

2.  Upon expiration or earlier termination of this Lease or Tenant’s right to possession of the Premises, Landlord shall have the right to remove Tenant’s name from the Existing Monument Sign, at Tenant’s cost, payable as Additional Rent within thirty (30) days after demand therefor, or if Tenant fails to remove the sign or its name, as required, within 30 days after written request from Landlord, then Landlord may remove such signage and Tenant shall pay Landlord all costs related thereto, as Additional Rent, within 30 days after demand therefor.

40.    JURY TRIAL WAIVER

EACH PARTY HERETO (WHICH INCLUDES ANY ASSIGNEE, SUCCESSOR HEIR OR PERSONAL REPRESENTATIVE OF A PARTY) SHALL NOT SEEK A JURY TRIAL, HEREBY WAIVES TRIAL BY JURY, AND HEREBY FURTHER WAIVES ANY OBJECTION TO VENUE IN THE COUNTY IN WHICH THE BUILDING IS LOCATED, AND AGREES AND CONSENTS TO PERSONAL JURISDICTION OF THE COURTS OF THE STATE IN WHICH THE PROPERTY IS LOCATED, IN ANY ACTION OR PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO AGAINST THE OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT’S USE OR OCCUPANCY OF THE PREMISES, OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY STATUTE, EMERGENCY OR OTHERWISE, WHETHER ANY OF THE FOREGOING IS BASED ON THIS LEASE OR ON TORT LAW. EACH PARTY REPRESENTS THAT IT HAS HAD THE OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL CONCERNING THE EFFECT OF THIS PARAGRAPH 40. THE PROVISIONS OF THIS PARAGRAPH 40 SHALL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS LEASE.

IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and the year first above written.

LANDLORD		TENANT
EOP-INDUSTRIAL PORTFOLIO, L.L.C., a Delaware limited liability company		KOSAN BIOSCIENCES INCORPORATED, a Delaware corporation
By:	EOP Operating Limited Partnership, a Delaware limited partnership, its sole member	By:	/s/    MICHAEL S. OSTRACH
		Name:	Michael S. Ostrach
		Its:	President
By:	Equity Office Properties Trust, a Maryland real estate investment trust, its general partner
By:	/s/    MARK GEISREITER	By:	/s/    SUSAN M. KANAYA
Name:	Mark Geisreiter	Name	Susan M. Kanaya
Its:	Senior Vice President	Its:	SVP, Finance and CFO

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EXHIBIT A

Industrial Lease

Rules and Regulations

1.  Driveways, sidewalks, halls, passages, exits, entrances, elevators, escalators and stairways shall not be obstructed by tenants or used by tenants for any purpose other than for ingress to and egress from their respective premises. The driveways, sidewalks, halls, passages, exits, entrances, elevators and stairways are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence, in the judgment of Landlord, shall be prejudicial to the safety, character, reputation and interests of the Building, the Project and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of such tenant’s business unless such persons are engaged in illegal activities. No tenant, and no employees or invitees of any tenant, shall go upon the roof of any Building, except as authorized by Landlord.

2.  All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person or vendor approved by Landlord and shall be removed by Tenant at the time of vacancy at Tenant’s expense.

3.  The directory of the Building or Project will be provided exclusively for the display of the name and location of tenants only and Landlord reserves the right to charge for the use thereof and to exclude any other names therefrom.

4.  Landlord and its agents shall not be liable for damages for any error concerning the admission to, or exclusion from, the Building or the Project of any person.

5.  Tenant shall not alter any lock or access device or install a new or additional lock or access device or bolt on any door of its Premises, without the prior written consent of Landlord. If Landlord shall give its consent, Tenant shall in each case furnish Landlord with a key for any such lock. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys for all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefor.

6.  The restrooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown into them. The expense of any breakage, stoppage, or damage resulting from violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused the breakage, stoppage, or damage.

7.  Tenant shall not use or keep in or on the Premises, the Building or the Project any kerosene, gasoline, or inflammable or combustible fluid or material except in strict accordance with the terms of the Lease.

8. Tenant shall not allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations or interfere in any way with other tenants or those having business therein, nor shall any animals or birds be brought or kept in or about the Premises, the Building, or the Project.

9.  Except with the prior written consent of Landlord, Tenant shall not sell, or permit the sale, at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise in or on the Premises, nor shall Tenant carry on, or permit or allow any employee or other person to carry on, the business of stenography, typewriting or any similar business in or from the Premises for the service or accommodation of occupants of any other portion of the Building, or the business of a public barber shop, beauty parlor, nor shall the Premises be used for any illegal, improper, immoral or objectionable purpose, or any business or activity other than that specifically provided for in such Tenant’s Lease. Tenant shall not accept hairstyling, barbering, shoeshine, nail, massage or similar services in the Premises or common areas except as authorized by Landlord.

10.  Tenant shall not install any radio or television antenna, satellite dish, loudspeaker or any other device on the exterior walls or the roof of the Building, without Landlord’s consent. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building, the Project or elsewhere.

11.  Tenant shall not place a load upon any floor of its Premises which exceeds the load per square foot which such floor was designed to carry or which is allowed by law.

12.  Each tenant shall store all its trash and garbage within the interior of the Premises or as otherwise directed by Landlord from time to time. Tenant shall not place in the trash boxes or receptacles any personal trash or any material that may not or cannot be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the city, without violation of any law or ordinance governing such disposal.

13.  Canvassing, soliciting, distribution of handbills or any other written material and peddling in the Building and the Project are prohibited and each tenant shall cooperate to prevent the same. No tenant shall make room-to-room solicitation of business from other tenants in the Building or the Project, without the written consent of Landlord.

14.  Landlord shall have the right, exercisable without notice and without liability to any tenant, to change the name and address of the Building and the Project.

15.  Landlord reserves the right to exclude or expel from the Project any person who, in Landlord’s judgment, is under the influence of alcohol or drugs or who commits any act in violation of any of these Rules and Regulations.

16.  Without the prior written consent of Landlord, Tenant shall not use the name of the Building or the Project or any photograph or other likeness of the Building or the Project in connection with, or in promoting or advertising, Tenant’s business except that Tenant may include the Building’s or Project’s name in Tenant’s address.

17.  Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency.

18.  Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed.

19.  Landlord reserves the right to designate the use of the parking spaces on the Project. Tenant or Tenant’s guests shall park between designated parking lines only, and shall not occupy two parking spaces with one car. No truck tractors, trailers or fifth wheel are allowed to be parked anywhere at any time within the Project other than in Tenant’s own truck dock well. Vehicles in violation of the above shall be subject to tow-away, at vehicle owner’s expense. No tenant of the Building shall park in visitor or reserved parking areas or loading areas. Any tenant found parking in such designated visitor or reserved parking areas or loading areas or unauthorized areas shall be subject to tow-away at vehicle owner’s expense. The parking areas shall not be used to provide car wash, oil changes, detailing,

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automotive repair or other services unless otherwise approved or furnished by Landlord. Tenant will from time to time, upon the request of Landlord, supply Landlord with a list of license plate numbers of vehicles owned or operated by its employees or agents.

20.  No Tenant is allowed to unload, unpack, pack or in any way manipulate any products, materials or goods in the common areas of the Project including the parking and driveway areas of the Project. All products, goods and materials must be manipulated, handled, kept, and stored within the Tenant’s Premises and not in any exterior areas, including, but not limited to, exterior dock platforms, against the exterior of the Building, parking areas and driveway areas of the Project. Tenant also agrees to keep the exterior of the Premises clean and free of nails, wood, pallets, packing materials, barrels and any other debris produced from their operation. All products, materials and goods are to enter and exit the Premises by being loaded or unloaded through dock high doors into trucks and or trailers, over dock high loading platforms into trucks and or trailers or loaded or unloaded into trucks and or trailers within the Premises through grade level door access.

21.  Tenant shall be responsible for the observance of all of the foregoing Rules and Regulations by Tenant’s employees, agents, clients, customers, invitees and guests.

22.  These Rules and Regulations are in addition to, and shall not be construed to in any way modify, alter or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of any premises in the Project. In the event of any conflict between these rules and the provisions of the Lease, the provisions of the Lease shall control.

23.  Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all tenants of the Building.

Landlord reserves the right to make such other and reasonable non-discriminatory rules and regulations as in its judgment may from time to time be needed for safety and security, for care and cleanliness of the Building and the Project and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations herein stated and any additional rules and regulations which are adopted.

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EXHIBIT B

SITE PLAN, PROPERTY DESCRIPTION

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EXHIBIT C

LEASE IMPROVEMENT AGREEMENT

This Exhibit is attached to and made a part of the Lease, by and between EOP-INDUSTRIAL PORTFOLIO, L.L.C., a Delaware limited liability company (“Landlord”) and KOSAN BIOSCIENCES INCORPORATED, a Delaware corporation (“Tenant”) for space in the Building located at 3832 Bay Center Place, Hayward, California.

As used in this Work Letter, the “Premises” shall be deemed to mean the Premises, as initially defined in the attached Lease.

I.    Alterations and Allowance.

A.  Tenant, following the delivery of the Premises by Landlord and the full and final execution and delivery of the Lease to which this Exhibit is attached and all prepaid rental and security deposits required under such agreement, shall have the right to perform alterations and improvements in the Premises (the “Initial Alterations”). Notwithstanding the foregoing, Tenant and its contractors shall not have the right to perform Initial Alterations in the Premises unless and until Tenant has complied with all of the terms and conditions of Article 12 of the Lease, including, without limitation, approval by Landlord of the final plans for the Initial Alterations and the contractors to be retained by Tenant to perform such Initial Alterations. Tenant shall be responsible for all elements of the design of Tenant’s plans (including, without limitation, compliance with law, functionality of design, the structural integrity of the design, the configuration of the premises and the placement of Tenant’s furniture, appliances and equipment), and Landlord’s approval of Tenant’s plans shall in no event relieve Tenant of the responsibility for such design. Landlord’s approval of the contractors to perform the Initial Alterations shall not be unreasonably withheld. The parties agree that Landlord’s approval of the general contractor to perform the Initial Alterations shall not be considered to be unreasonably withheld if any such general contractor (i) does not have trade references reasonably acceptable to Landlord, (ii) does not maintain insurance as required pursuant to the terms of this Lease, (iii) does not have the ability to be bonded for the work in an amount of no less than 150% of the total estimated cost of the Initial Alterations, (iv) does not provide current financial statements reasonably acceptable to Landlord, or (v) is not licensed as a contractor in the state/municipality in which the Premises is located. Tenant acknowledges the foregoing is not intended to be an exclusive list of the reasons why Landlord may reasonably withhold its consent to a general contractor.

B.    Provided Tenant is not in default, Landlord agrees to contribute the sum of $5,000.00 (the “Allowance”) toward the cost of performing the Initial Alterations in preparation of Tenant’s occupancy of the Premises. The Allowance may only be used for hard costs in connection with the Initial Alterations. The Allowance shall be paid to Tenant or, at Landlord’s option, to the order of the general contractor that performed the Initial Alterations, within 30 days following receipt by Landlord of (1) receipted bills covering all labor and materials expended and used in the Initial Alterations; (2) a sworn contractor’s affidavit from the general contractor and a request to disburse from Tenant containing an approval by Tenant of the work done; (3) full and final waivers of lien; (4) as-built plans of the Initial Alterations; and (5) the certification of Tenant and its architect that the Initial Alterations have been installed in a good and workmanlike manner in accordance with the approved plans, and in accordance with applicable laws, codes and ordinances. The Allowance shall be disbursed in the amount reflected on the receipted bills meeting the requirements above. Notwithstanding anything herein to the contrary, Landlord shall not be obligated to disburse any portion of the Allowance during the continuance of an uncured default under the Lease, and Landlord’s obligation to disburse shall only resume when and if such default is cured.

C.  In no event shall the Allowance be used for the purchase of equipment, furniture or other items of personal property of Tenant. If Tenant does not submit a request for payment of the entire Allowance to Landlord in accordance with the provisions contained in this Exhibit by December 31, 2004, any unused amount shall accrue to the sole benefit of Landlord, it being understood that Tenant shall not be entitled to any credit, abatement or other concession in connection therewith. Tenant shall be responsible for all applicable state sales or use taxes, if any, payable in connection with the Initial Alterations and/or Allowance

D.  Tenant agrees to accept the Premises in its “as-is” condition and configuration, it being agreed that Landlord shall not be required to perform any work or, except as provided above with respect to the Allowance, incur any costs in connection with the construction or demolition of any improvements in the Premises.

E.  This Exhibit shall not be deemed applicable to any additional space added to the Premises at any time or from time to time, whether by any options under the Lease or otherwise, or to any portion of the original Premises or any additions to the Premises in the event of a renewal or extension of the original Term of the Lease, whether by any options under the Lease or otherwise, unless expressly so provided in the Lease or any amendment or supplement to the Lease.

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EXHIBIT D

HAZARDOUS MATERIALS QUESTIONNAIRE

This questionnaire is designed to solicit information regarding Tenant’s proposed use, generation, treatment, storage, transfer or disposal of hazardous or toxic materials, substances or wastes. If this Questionnaire is attached to or provided in connection with a lease, the reference herein to any such items shall include all items defined as “Hazardous Materials,” “Hazardous Substances,” “Hazardous Wastes,” “Toxic Materials,” “Toxic Substances, “Toxic Wastes,” or such similar definitions contained in the lease. Please complete the questionnaire and return it to Landlord for evaluation. If your use of materials or substances, or generation of wastes is considered to be significant, further information may be requested regarding your plans for hazardous and toxic materials management. Your cooperation in this matter is appreciated. If you have any questions, do not hesitate to call us for assistance.

1.    PROPOSED TENANT

Name (Corporation, Individual, Corporate or Individual DBA, or Public Agency):                                                                                                              

Standard Industrial Classification Code (SIC):                                                                                                                             

Street Address:                                                                                                                                                                                         

City, State, Zip Code:                                                                                                                                                                            

Contact Person & Title:                                                                                                                                                                         

Telephone Number: (        )                                              Facsimile Number: (        )                                              

2.    LOCATION AND ADDRESS OF PROPOSED LEASE

Street Address:                                                                                                                                                                                         

City, State, Zip Code:                                                                                                                                                                            

Bordering Streets:                                                                                                                                                                                   

Streets to which Premises has Access:                                                                                                                                            

3.    DESCRIPTION OF PREMISES

Floor Area:                                                                                                                                                                                                

Number of Parking Spaces:                                                                                                                                                                 

Date of Original Construction:                                                                                                                                                            

Past Uses of Premises:                                                                                                                                                                           

Dates and Descriptions of Significant Additions, Alterations or Improvements:                                                              

Proposed Additions, Alterations or Improvements, if any:                                                                                                      

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4.    DESCRIPTION OF PROPOSED PREMISES USE

Describe proposed use and operation of Premises including (i) services to be performed, (ii) nature and types of manufacturing or assembly processes, if any, and (iii) the materials or products to be stored at the Premises.

Will the operation of your business at the Premises involve the use, generation, treatment, storage, transfer or disposal of hazardous wastes or materials? Do they now? Yes          No          If the answer is “yes,” or if your SIC code number is between 2000 to 4000, please complete Section V.

5.    PERMIT DISCLOSURE

Does or will the operation of any facet of your business at the Premises require any permits, licenses or plan approvals from any of the following agencies?

U.S. Environmental Protection Agency	Yes	No
City or County Sanitation District	Yes	No
State Department of Health Services	Yes	No
U.S. Nuclear Regulator Commission	Yes	No
Air Quality Management District	Yes	No
Bureau of Alcohol, Firearms and Tobacco	Yes	No
City or County Fire Department	Yes	No
Regional Water Quality Control Board	Yes	No
Other Governmental Agencies (if yes,	Yes	No
identify:                                                      )

If the answer to any of the above is “yes,” please indicate permit or license numbers, issuing agency and expiration date or renewal date, if applicable.

If your answer to any of the above is “yes,” please complete Sections VI and VII.

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6.     HAZARDOUS MATERIALS DISCLOSURE

Will any hazardous or toxic materials or substances be stored on the Premises? Yes          No          If the answer is “yes,” please describe the materials or substances to be stored, the quantities thereof and the proposed method of storage of the same (i.e., drums, aboveground or underground storage tanks, cylinders, other), and whether the material is a Solid (S), Liquid (L) or Gas (G):

Material/ Substance Quantity to be Stored on Premises Storage Method Amount to be Stored on a Monthly Basis Maximum Period of Premises Storage

Attach additional sheets if necessary.

Is any modification of the Premises improvements required or planned to mitigate the release of toxic or hazardous materials substance or wastes into the environment? Yes          No          If the answer is “yes,” please describe the proposed Premises modifications:

7.     HAZARDOUS WASTE DISCLOSURE

Will any hazardous waste, including recyclable waste, be generated by the operation of your business at the Premises? Yes          No          If the answer is “yes,” please list the hazardous waste which is expected to be generated (or potentially will be generated) at the Premises, its hazard class and volume/frequency of generation on a monthly basis.

Waste Name Hazard Class Volume/Month Maximum Period of Premises Storage

Attach additional sheets if necessary.

If the answer is “yes,” please also indicate if any such wastes are to be stored within the Premises and the proposed method of storage (i.e., drums, aboveground or underground storage tanks, cylinders, other).

Waste Name Storage Method

Attach additional sheets if necessary.

If the answer is “yes,” please also describe the method(s) of disposal for each waste. Indicate where disposal will take place including the methods, equipment and companies to be used to transport the waste:

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Is any treatment or processing of hazardous wastes to be conducted at the Premises? Yes          No          If the answer is “yes,” please describe proposed treatment/processing methods:

Which agencies are responsible for monitoring and evaluating compliance with respect to the storage and disposal of hazardous materials or wastes at or from the Premises? (Please list all agencies):

Have there been any agency enforcement actions regarding Tenant (or any affiliate thereof), or any existing Tenant’s (or any affiliate’s) facilities, or any past, pending or outstanding administrative orders or consent decrees with respect to Tenant or any affiliate thereof? Yes         No         If the answer is “yes,” have there been any continuing compliance obligations imposed on Tenant or its affiliates as a result of the decrees or orders? Yes         No         If the answer is “yes,” please describe:

Has Tenant or any of its affiliates been the recipient of requests for information, notice and demand letters, cleanup and abatement orders, or cease and desist orders or other administrative inquiries? Yes         No         If the answer is “yes,” please describe:

Are there any pending citizen lawsuits, or have any notices of violations been provided to Tenant or its affiliates or with respect to any existing facilities pursuant to the citizens suit provisions of any statute? Yes         No         If the answer is “yes,” please describe:

Have there been any previous lawsuits against the company regarding environmental concerns? Yes         No         If the answer is “yes,” please describe how these lawsuits were resolved:

Has an environmental audit ever been conducted at any of your company’s existing facilities? Yes         No         If the answer is “yes,” please describe:

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Does your company carry environmental impairment insurance? Yes           No           If the answer is “yes,” what is the name of the carrier and what are the effective periods and monetary limits of such coverage?

8.    EQUIPMENT LOCATED OR TO BE LOCATED AT THE PREMISES

Is (or will there be) any electrical transformer or other equipment containing polychlorinated biphenyls located at the Premises? Yes           No           If the answer is “yes,” please specify the size, number and location (or proposed location):

Is (or will there be) any tank for storage of a petroleum product located at the Premises? Yes           No           If the answer is “yes,” please specify capacity and contents of tank; permits, licenses and/or approvals received or to be received therefor and any spill prevention control or conformance plan to be taken in connection therewith:

9.    ONGOING ACTIVITIES (APPLICABLE TO TENANTS IN POSSESSION)

Has any hazardous material, substance or waste spilled, leaked, discharged, leached, escaped or otherwise been released into the environment at the Premises? Yes           No           If the answer is “yes,” please describe including (i) the date and duration of each such release, (ii) the material, substance or waste released, (iii) the extent of the spread of such release into or onto the air, soil and/or water, (iv) any action to clean up the release, (v) any reports or notifications made of filed with any federal, state, or local agency, or any quasi-governmental agency (please provide copies of such reports or notifications) and (vi) describe any legal, administrative or other action taken by any of the foregoing agencies or by any other person as a result of the release:

This Hazardous Materials Questionnaire is certified as being true and accurate and has been completed by the party whose signature appears below on behalf of Tenant as of the date set forth below.

DATED:                                                                             

Signature                                                                                      

Print Name                                                                                   

Title                                                                                              

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EXHIBIT E

FORM OF LETTER OF CREDIT

[Name of Financial Institution]

Irrevocable Standby  

Letter of Credit

No.                                                   

Issuance Date:                             

Expiration Date:                         

Applicant: Kosan Biosciences Incorporated

Beneficiary

EOP-Industrial Portfolio, L.L.C.

2200 Powell Street

Suite 200

Emeryville, California 94608

Attention: Leasing Director

Ladies/Gentlemen:

We hereby establish our Irrevocable Standby Letter of Credit in your favor for the account of the above referenced Applicant in the amount of Nine Hundred Three Thousand Three Hundred Twelve and 00/100 U.S. Dollars ($903,312.00) available for payment at sight by your draft drawn on us when accompanied by the following documents:

1. An original copy of this Irrevocable Standby Letter of Credit.

2. Beneficiary’s dated statement purportedly signed by an authorized signatory or agent reading: “This draw in the amount of             U.S.Dollars ($            ) under your Irrevocable Standby Letter of Credit No.        represents funds due and owing to us pursuant to the terms of that certain lease by and between             , as landlord, and             , as tenant, and/or any amendment to the lease or any other agreement between such parties related to the lease.”

It is a condition of this Irrevocable Standby Letter of Credit that it will be considered automatically renewed for a one year period upon the expiration date set forth above and upon each anniversary of such date, unless at least 60 days prior to such expiration date or applicable anniversary thereof, we notify you in writing, by certified mail return receipt requested or by recognized overnight courier service, that we elect not to so renew this Irrevocable Standby Letter of Credit. A copy of any such notice shall also be sent, in the same manner, to: Equity Office Properties Trust, 2 North Riverside Plaza, Suite 2100, Chicago, Illinois 60606, Attention: Treasury Department. In addition to the foregoing, we understand and agree that you shall be entitled to draw upon this Irrevocable Standby Letter of Credit in accordance with 1 and 2 above in the event that we elect not to renew this Irrevocable Standby Letter of Credit and, in addition, you provide us with a dated statement purportedly signed by an authorized signatory or agent of Beneficiary stating that the Applicant has failed to provide you with an acceptable substitute irrevocable standby letter of credit in accordance with the terms of the above referenced lease. We further acknowledge and agree that: (a) upon receipt of the documentation required herein, we will honor your draws against this Irrevocable Standby Letter of Credit without inquiry into the accuracy of Beneficiary’s signed statement and regardless of whether Applicant disputes the content of such statement; (b) this Irrevocable Standby Letter of Credit shall permit partial draws and, in the event you elect to draw upon less than the full stated amount hereof, the stated amount of this Irrevocable Standby Letter of Credit shall be automatically reduced by the amount of such partial draw; and (c) you shall be entitled to transfer your interest in this Irrevocable Standby Letter of Credit from time to time and more than one time without our approval and without charge. In the event of a transfer, we reserve the right to require reasonable evidence of such transfer as a condition to any draw hereunder.

This Irrevocable Standby Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 revision) ICC Publication No. 500.

We hereby engage with you to honor drafts and documents drawn under and in compliance with the terms of this Irrevocable Standby Letter of Credit.

All communications to us with respect to this Irrevocable Standby Letter of Credit must be addressed to our office located at                                  to the attention of                              .

Very truly yours,

[name]

[title]

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EX-10.42

Exhibit 10.42

LANDLORD CONSENT TO ASSIGNMENT AND ASSUMPTION OF LEASE

THIS LANDLORD CONSENT TO ASSIGNMENT AND ASSUMPTION OF LEASE (the “Consent Agreement”) is entered into as of June 20, 2002, by and among EOP-INDUSTRIAL PORTFOLIO, L.L.C., a Delaware limited liability company (“Landlord”), AVENTIS PHARMACEUTICALS INC., a Delaware corporation (“Assignor”) and KOSAN BIOSCIENCES, INCORPORATED, a Delaware corporation (“Assignee”).

RECITALS:

A.  Landlord (as successor in interest to Spieker Properties, L.P., a California limited partnership), as landlord, and Assignor (formerly named Rhone-Poulenc Rorer Pharmaceuticals, Inc., a Delaware corporation), as tenant, are parties to that certain lease dated December 1, 1997 (the “Lease”). Pursuant to the Lease, Landlord has leased to Assignor space currently containing approximately 69,512 rentable square feet (the “Premises”) of industrial space located at 3825 Bay Center Place, Building A, Hayward, California (the “Building”) in the project commonly known as Bay Center III Business Park.

B.  Assignor and Assignee have entered into that certain agreement (“Assignment Agreement”) attached hereto as Exhibit A whereby Assignor assigned all of its right, title and interest in and to the Lease to Assignee.

C.  Assignor and Assignee have requested Landlord’s consent to the Assignment Agreement and the transaction described therein.

D.  Landlord has agreed to give such consent upon the terms and conditions contained in this Consent Agreement.

NOW THEREFORE, in consideration of the foregoing recitals which by this reference are incorporated herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord, Assignor and Assignee agree and represent as follows:

1.  Assignment Agreement.    Assignor and Assignee hereby represent and warrant that: (a) a true, complete and correct copy of the Assignment Agreement is attached hereto as Exhibit A; and (b) the Assignment Agreement fully assigns all of Assignor’s right, title and interest in the Lease to Assignee (the “Transfer”).

2.  Representations.    Assignor hereby represents and warrants that Assignor (i) has full power and authority to assign its entire right, title and interest in the Lease to Assignee; (ii) has not transferred or conveyed its interest in the Lease to any person or entity, collaterally or otherwise; and (iii) has full power and authority to enter into the Assignment Agreement and this Consent Agreement. Assignee hereby represents and warrants that Assignee has full power and authority to enter into the Assignment Agreement and this Consent Agreement.

3.  Assumption.    Notwithstanding anything to the contrary contained in the Assignment Agreement, Assignee, for itself and its successors and assigns, hereby assumes and agrees to perform and be bound by all of the covenants, agreements, provisions, conditions and obligations of the tenant under the Lease, including but not limited to, the obligation to pay Landlord for all adjustments of rent and other additional charges payable pursuant to the terms of the Lease. Nothing contained in the Assignment Agreement shall be deemed to amend, modify or alter in any way the terms, covenants and conditions set forth in the Lease.

4.  No Release.    Nothing contained in the Assignment Agreement or this Consent Agreement shall be construed as relieving or releasing the Assignor from any of its obligations under the Lease, and it is expressly understood that Assignor shall remain liable for such obligations notwithstanding the subsequent assignment(s), sublease(s) or transfer(s) of the interest of the tenant under the Lease. Notwithstanding the foregoing to the contrary, in the event Assignee properly exercises the Renewal Option set forth in Section 38 E of the Lease, Landlord shall release and discharge Assignor from any obligations, agreements, and covenants to be observed and performed by the “Tenant” under the Lease relating to or arising out of the period from and after the expiration of the initial term of the Lease; and such release and discharge shall be, and is hereby declared to be, effective without the execution by Landlord of any other documents provided that

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Assignor transfers to Landlord prior to the expiration of the initial term of the Lease the full amount of the Security Deposit (as defined in the Assignment) then held by Assignor pursuant to Section 15 of the Assignment.

In the event Assignee properly exercises the Renewal Option set forth in Section 38 E of the Lease, Assignor agrees to deposit with Landlord the Security Deposit, then held by Assignor, as stated in Section 15 of the Assignment. Notwithstanding any provision of the Lease to the contrary, the Security Deposit shall be held and owned by Landlord, without obligation to pay interest, as security for the performance of Assignee’s covenants and obligations under the Lease. The Security Deposit is not an advance rental deposit or a measure of damages incurred by Landlord in case of Assignee’s default. Upon the occurrence of any event of default by Assignee under the Lease, Landlord may from time to time, without prejudice to any other remedy provided in the Lease or by law, use such fund to the extent necessary to credit against any arrears of Rent or other payments due to Landlord under the terms and provisions of the Lease and any other damage, injury, expense or liability caused by an event of default under the Lease, and Assignee shall pay to Landlord, on demand, the amount so applied in order to restore the Security Deposit to its original amount throughout the term of the Lease as extended. Although the Security Deposit shall be deemed the property of Landlord, any remaining balance of such deposit shall be promptly returned by Landlord to Assignee at such time after termination of the Lease that all of Assignee’s obligations under the Lease have been fulfilled and in any event within forty five (45) days from the date of termination, reduced by such amounts as may be required by Landlord to remedy defaults on the part of Assignee in the payment of Rent or other obligations of Assignee under the Lease, including any obligation to repair damage to the Premises, Building or Project caused by Assignee or any Assignee’s Parties as required pursuant to the Lease. Landlord is hereby granted a security interest in the Security Deposit in accordance with applicable provisions of the California Commercial Code. Landlord may use and commingle the Security Deposit with other funds of Landlord. Assignee hereby waives the provisions of Section 1950.7 of the California Civil Code, and all other provisions of any Regulations, (as defined in the lease) now or hereinafter in force, which restricts the amount or types of claim that a landlord may make upon a security deposit or imposes upon a landlord (or its successors) any obligation with respect to the handling or return of security deposits.

In no event shall the Assignment Agreement or this Consent Agreement be construed as granting or conferring upon the Assignor or the Assignee any greater rights than those contained in the Lease nor shall there be any diminution of the rights and privileges of the Landlord under the Lease, nor shall the Lease be deemed modified in any respect, except as provided above. Without limiting the scope of the preceding sentence, any construction or alterations performed in or to the Premises shall be performed with Landlord’s prior written approval and in accordance with the terms and conditions of the Lease. Landlord acknowledges that Assignee intends to perform certain tenant improvements in the Premises in accordance with the provisions of Exhibit A of the Assignment Agreement. Landlord hereby generally approves of the type of work to be performed by Assignee, provided that the specific work to be performed by Assignee shall be subject to Landlord’s further prior approval as set forth in the Lease, and further provided that such work shall otherwise be performed in accordance with the provisions of the Lease. It is specifically understood that Landlord is not a party to the Assignment Agreement and, notwithstanding anything to the contrary contained in the Assignment Agreement, is not bound by any terms, provisions, representations or warranties contained in the Assignment Agreement and is not obligated to Assignor or Assignee for any of the duties and obligations contained therein.

5.  Improvement Payment.    Landlord acknowledges that pursuant to Section 9 of the Assignment Agreement, Assignor is receiving a payment in the amount of $1,000,000.00 (the “Improvement Payment”) from Assignee in connection with the assignment of all of Assignor’s right, title and interest (if any) in and to the improvements constructed by Assignor in the Premises and that the Improvement Payment does not constitute Bonus Rent payable in whole or in part to Landlord pursuant to Section 21.B. of the Lease. Notwithstanding any of the foregoing or anything in the Assignment Agreement to the contrary, Assignor and Assignee acknowledge and agree that pursuant to Section 12 of the Lease, all Alterations and improvements to the Premises (including but not limited to the improvements constituting consideration for the Improvement Payment) shall be and become the property of Landlord if Landlord so elects at the expiration or earlier termination of the Lease and that the provisions of Section 12 of the Lease supersede any

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rights of Assignor or Assignee in and to the Alterations in the Premises which are granted or conveyed pursuant to the Assignment Agreement.

6.  In addition, Assignor and Assignee further acknowledge and agree that in the event of any subsequent assignment of the Lease or sublease of all or a portion of the Premises, any consideration received by Assignor and Assignee which is attributable to the current (as of the date of this Consent Agreement) Alterations or improvements to the Premises (the “Current Alterations”) shall be divided and paid 50% percent to Assignee or Assignor (as the case may be) and 50% to Landlord. In the alternative, in the event consideration is paid in connection with such assignment or sublease, but none of the consideration so paid is allocated to the Current Alterations, then Assignor and Assignee agree that the cost or value of the Current Improvements shall not be deducted from the consideration received in connection with such assignment or sublease for purposes of determining the Bonus Rent payable to Landlord in connection with such assignment or sublease.

7.  Tenant Default.    Notwithstanding anything in the Lease to the contrary, Landlord agrees that in the event of a default by Assignee under the Lease which continues beyond any applicable notice and cure period set forth therein, Landlord shall not terminate the Lease or Assignee’s right to possession thereunder or exercise any other right or remedy relating thereto, unless and until Landlord has provided Assignor with written notice of Assignee’s default under the Lease and Assignor has failed to cure such default within 3 business days of Assignor’s receipt of written notice of such default from Landlord.

8.  Review Fee.    Upon Assignor’s execution and delivery of this Consent Agreement, Assignor shall pay to Landlord the sum of $0.00 in consideration for Landlord’s review of the Assignment Agreement and preparation of this Consent Agreement.

9.  Landlord’s Consent.    In reliance upon the agreements and representations contained in this Consent Agreement, Landlord hereby consents to the Transfer. This Consent Agreement shall not constitute a waiver of the obligation of the tenant under the Lease to obtain the Landlord’s consent to any subsequent assignment, sublease or other transfer under the Lease, nor shall it constitute a waiver of any existing defaults under the Lease.

10.  Notice Address.    Any notices to Assignee shall be effective when served to Assignee at the Premises in accordance with the terms of the Lease. From and after the effective date of the Assignment, notices to Assignor shall be served at the following address Aventis Pharmaceuticals, Building 200, 200 Crossing Blvd., Bridgewater, NJ 08807 Attention: VP Legal Corporate Development, Mail Stop BX2-700A; with a copy to Aventis Pharmaceuticals, 400 Somerset Corporate Blvd., Box 6912 Bridgewater, NJ 08807-0912 Attention: North America Real Estate, Mail Stop SC4-725B:

11.  Copies of Notice.    From and after the effective date of the Assignment, in accordance with the terms of the Lease, Landlord will provide copies of all notices to Assignor and Assignee.

12.  Authority.    Each signatory of this Consent Agreement represents hereby that he or she has the authority to execute and deliver the same on behalf of the party hereto for which such signatory is acting.

13.  Counterparts.    This Consent Agreement may be executed in counterparts and shall constitute an agreement binding on all parties notwithstanding that all parties are not signatories to the original or the same counterpart provided that all parties are furnished a copy or copies thereof reflecting the signature of all parties.

14.  Future Improvements.    As to any improvements made by Assignee to the Premises, that are approved by Landlord, Landlord agrees to look solely to Assignee to restore Premises in the event such restoration is required under the Lease.

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IN WITNESS WHEREOF, Landlord, Assignor and Assignee have executed this Consent Agreement on the day and year first above written.

LANDLORD:

EOP-INDUSTRIAL PORTFOLIO, L.L.C., a Delaware limited liability company

By: EOP Operating Limited Partnership, a Delaware limited partnership, its sole member

By: Equity Office Properties Trust, a Maryland real estate investment trust, its general partner

By:	/s/    MARK GEISREITER
Name: Title:	Mark Geisreiter Senior Vice President

ASSIGNOR:

AVENTIS PHARMACEUTICALS INC., a Delaware corporation
By:	/s/    CHARLES D. DUTTON
Name: Title:	Charles D. Dutton VP—Legal Corp. Development

ASSIGNEE:

KOSAN BIOSCIENCES, INCORPORATED, a Delaware corporation
By:	/s/    MICHAEL S. OSTRACH
Name: Title:	Michael S. Ostrach President

By:	/s/    SUSAN M. KANAYA
Name: Title:	Susan M. Kanaya S.V.P., Finance & C.F.O.

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EXHIBIT A

COPY OF ASSIGNMENT AGREEMENT

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ASSIGNMENT OF LEASE

THIS ASSIGNMENT OF LEASE (the “Assignment”) is made and entered into as of this 21st day of June, 2002 (“Execution Date”), by and between AVENTIS PHARMACEUTICALS INC., formerly named Rhone-Poulenc Rorer Pharmaceuticals, Inc., a Delaware corporation (“Assignor”) and KOSAN BIOSCIENCES, INCORPORATED, a Delaware corporation (“Assignee”).

RECITALS

A.  Aventis Pharmaceuticals Inc., formerly named Rhone-Poulenc Rorer Pharmaceuticals, Inc., a Delaware corporation, as tenant, and Spieker Properties, L.P., a California limited partnership (“Spieker”), as landlord, entered into that certain Lease dated as of December 1, 1997 (the “Lease”), whereby Assignor leased from Spieker those certain premises located at 3825 Bay Center Place, Building “A” of Bay Center III Business Park, Hayward, California 94545 (herein the “Premises”).

B.  EOP—Industrial Portfolio, L.L.C., a Delaware limited liability company (“Landlord”) is the successor in interest to Spieker.

C.  On the terms and conditions set forth below, Assignor desires to assign all of its right, title and interest in and to the Lease to Assignee, and Assignee desires to assume all of Assignor’s rights, duties, and obligations in and to the Lease which first accrue on and after the Effective Date (defined below).

NOW, THEREFORE, for good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, Assignor and Assignee hereby covenant and agree as follows:

1.  Assignment of Lease.    If and when the Effective Date occurs, Assignor conveys, transfers and assigns to Assignee all of Assignor’s right, title and interest in and to the Lease, together with all of Assignor’s right, title, and interest (if any) in and to, and the right to use, all building alterations and improvements constructed by Assignor and its employees, agents, and contractors in the Premises, including all heating, ventilating, and air conditioning fixtures, chillers, boilers and laboratory casework, (the “Improvements”) but specifically excluding from the Improvements all biological safety cabinets, security, phone, and voice-mail systems, office, library, and laboratory furniture, all systems and equipment leased by Assignor (including but not limited to the deionized water system), and all other tangible personal property located at the Premises (the “Improvements”). ASSIGNEE UNDERSTANDS THAT THE IMPROVEMENTS ARE BEING CONVEYED “AS IS, WHERE IS”, WITH ANY AND ALL FAULTS, AND WITHOUT ANY REPRESENTATION OR WARRANTY BY ASSIGNOR, EXPRESS OR IMPLIED, OF OWNERSHIP, MERCHANTABILITY, FITNESS, CONDITION, QUALITY, OR CAPACITY THEREOF.

2.  Assumption of Obligations.    If and when the Effective Date occurs, Assignee accepts the foregoing assignment and agrees to assume, pay and perform all terms and obligations of Assignor under the Lease first accruing on and after the Effective Date.

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3.  Sale of Tangible Personal Property.    If and when the Effective Date occurs, Assignor conveys, transfers and assigns to Assignee all of Assignor’s right, title, and interest in and to certain tangible personal property, as further described in and pursuant to the Bill of Sale (“Bill of Sale”) attached hereto as Exhibit C, for the sum of Thirty-Eight Thousand One Hundred Ten Dollars ($38,110).

4.  Conditions Precedent.    This Assignment and the Bill of Sale shall become effective on the date by which all of the conditions precedent stated in this Section have been satisfied or waived (the “Effective Date”), but in no event shall the Effective Date be any earlier than June 1, 2002, nor any later than June 14, 2002. If any of the conditions precedent stated in this Section are not waived in writing or satisfied on or before June 14, 2002, then (a) this Assignment shall become void, whereupon neither Assignor nor Assignee shall have any further rights or obligations under this Assignment, and (b) Assignor shall continue to be bound by and to perform its obligations under the Lease, as if this Assignment had not been executed. The conditions precedent are as follows:

A.  Assignor has vacated and surrendered possession of the Premises and Improvements to Assignee in broom-clean condition and in the same configuration and condition existing on the Execution Date;

B.  All of the representations made herein by Assignor in Section 5 and by Assignee in Section 6 are true and correct as of the Execution Date and again as of the Effective Date;

C.  Landlord shall have approved this Assignment in writing on terms reasonably acceptable to both Assignor and Assignee;

D.  Assignee’s receipt of written approval from Landlord, in a form reasonably acceptable to Assignee, to construct the tenant improvements to the Premises described in Exhibit A attached hereto;

E.  Assignor has received from Assignee payment in full of One Million Dollars (US $1,000,000.00) as set forth in Section 9;

F.  Assignor has received from Assignee payment in full of Thirty-Eight Thousand One Hundred Ten Dollars ($38,110) as set forth in Section 3;

G.  Assignor has received from Assignee payment in full of Two Hundred Forty Thousand Dollars ($240,000), as a security deposit as set forth in Section 15; and

H.  Assignor has provided Assignee satisfactory evidence that it has closed out all permits issued to it by city, county, and state agencies as to Assignor’s use of the Premises and that Assignor has obtained all necessary closing certifications from applicable governmental authorities.

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5.  Assignor’s Representations.    Assignor represents to Assignee (as of the Execution Date and again as of the Effective Date) as follows: (i) The Lease has not been modified, amended, supplemented, terminated, extended or renewed except as set forth in Exhibit B, and a true and correct copy of the Lease, including any amendments thereto, is attached as Exhibit B; (ii) Assignor has not previously assigned its interest in the Lease or sublet the Premises or any portion thereof or entered into any agreement permitting any person or entity to use or occupy any portion of the Premises or the Improvements; (iii) the Lease is in full force and effect and there exists no default under the Lease on the part of Assignor or, to the current actual knowledge of Assignor, Landlord, nor has any event occurred which, with the giving of notice or the passage of time or both, could constitute a breach or default by Assignor or, to the current actual knowledge of Assignor, Landlord under the Lease; (iv) Assignor has paid all base rent, additional rent, and all other charges presently due and payable under the Lease through and including June 30, 2002, subject to reconciliation of Operating Expenses (as that term is defined in Lease) by Landlord for calendar year 2001, if any; (v) Assignor is a corporation in good standing under Delaware law and is authorized to do business in California and the person signing this Assignment on behalf of Assignor has the full power and authority to bind Assignor to this Assignment; (vi) Assignor has not received written notice of any pending or threatened litigation which affects Assignor’s use of or operations on the Premises; and (vii) the “Commencement Date” of the Lease was March 1, 1998 and the “Expiration Date” of the Lease is February 29, 2008.

6.  Assignee’s Representations.    Assignee represents and warrants to Assignor that Assignee is a corporation in good standing under Delaware law and authorized to do business in California and the person signing this Assignment on behalf of Assignee has the full power and authority to bind Assignee to this Assignment.

7.  Indemnity.    If and when the Effective Date shall occur: (i) Assignor shall indemnify, defend (with counsel reasonably acceptable to Assignee), protect and hold harmless Assignee and its officers, directors, employees, agents and assigns from and against all claims, demands, losses, costs (including reasonable attorney’s fees and costs) or liabilities (a) arising under the Lease as a consequence of Assignor’s breach or default of the obligations of tenant under the Lease or relating to or resulting from Assignor’s use or occupancy of the Premises accruing prior to the Effective Date, and (b) arising from the breach of any of Assignor’s covenants, obligations, or representations in Section 5 under this Assignment; and (ii) Assignee shall indemnify, defend (with counsel reasonably acceptable to Assignor), protect and hold harmless Assignor and its officers, directors, employees, agents and assigns from and against all claims, demands, losses, costs (including reasonable attorney’s fees and costs) or liabilities (a) arising under the Lease as a consequence of Assignee’s breach or default of the obligations of the tenant under the Lease or relating to or resulting from Assignee’s use or occupancy of the Premises accruing on or after the Effective Date, and (b) arising from the breach of any of Assignee’s covenants, representations or obligations under this Assignment. The foregoing indemnity provisions shall survive the expiration or termination of the Lease and this Assignment.

8.  Proration of Costs.    All rent, operating expense pass-throughs and any other periodic charges payable by Assignor under the Lease shall be prorated between Assignor and Assignee as of the Effective Date, it being understood that Assignee shall have no obligation to

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pay any portion of Base Rent, Tenant’s Proportionate Share of Operating Expenses or any other Additional Rent or other sums accruing under the Lease at any time prior to the Effective Date, and it being further understood that Assignor shall have no obligation to pay any portion of Base Rent, Tenant’s Proportionate Share of Operating Expenses or any other Additional Rent or other sums accruing under the Lease on and after the Effective Date. The foregoing prorations shall include any operating expense reconciliation made by Landlord under the Lease, and shall be calculated as soon as is feasible. Any sums owed shall bear interest at the rate of twelve percent (12%) per anum or the highest amount allowed by law, whichever is less, if payment is not made by the responsible party within twenty (20) days after its receipt of a bill for any amounts owed.

9.  Improvement Payment.    If and when the Effective Date shall occur, then as consideration for Assignor’s assignment to Assignee of all of Assignor’s right, title and interest (if any) in and to the Improvements constructed by Assignor in the Premises, and as consideration for Assignee’s right to use the Improvements (which Improvements were constructed by Assignor at its cost), and not as consideration for the assignment of the Lease, Assignee shall pay to Assignor on the Effective Date the non-refundable cash sum of One Million Dollars (US $1,000,000.00) by wire transfer of immediately available funds.

10.  Brokerage Commissions.    Assignee and Assignor (i) represent to each other that they have not had any dealings with any real estate brokers, leasing agents or salesmen, or incurred any obligations for the payment of real estate brokerage commissions or finder’s fees which would be earned or due and payable by reason of the execution of this Assignment, except a possible fee claimed by Cresa Partners, and (ii) agree to indemnify, defend and hold harmless each other from any claim for any such commission or fees which result from the actions of the indemnifying party; provided, however Assignor shall be responsible for the payment of the commission claimed by Cresa Partners (if any) in connection with this Assignment.

11.  Notices.    Unless at least five (5) days’ prior written notice is given in the manner set forth in this Section, the address of each party for all purposes connected with this Assignment shall be that address set forth below their signatures, at the end of this Assignment. All notices, demands or communications in connection with this Assignment shall be properly addressed and (i) submitted to an overnight courier service, charges prepaid, or (ii) deposited in the mail (registered or certified, return receipt requested, and postage prepaid). Notices shall be deemed effective on the first business day following receipt or refusal to accept delivery.

12.  Default.    In the event of any event of default under the Lease by Assignee that continues after the expiration of any applicable notice and cure periods or in the event of any breach of Assignee’s covenants in this Assignment, then at Assignor’s sole option and after Assignor’s notice to Assignee that Assignor intends to exercise its right of re-entry and reversion if the default is not cured by Assignee within five (5) days of Assignor’s notice to Assignee, this Assignment (except Assignee’s and Assignor’s obligations under Section 7) and all of Assignee’s rights hereunder shall terminate, and Assignor reserves a right of re-entry and all of Assignee’s right, title, estate, and other interest in, to, and under the Lease shall revert to Assignor. Failure by Assignor to exercise its reversion right in one instance does not waive Assignor’s right to exercise such right in the future. In the event of Assignor’s exercise of its reversion right, Assignor shall be entitled to immediate possession of the Premises.

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13.  Notices.    Assignee covenants and agrees to deliver promptly to Assignor copies of all notices received from Landlord relating to defaults, events of default, breaches, non-compliance, notices of sale, change of addresses, requests for estoppel certificates, and all other notices relating to matters which could affect Assignor’s liabilities under the Lease, and Assignor agrees that it will promptly forward to Assignee a copy of any notices given by Landlord to Assignor relating to said matters as described in this Section.

14.  Copies of Amendments, Assignments and Subleases.    As a condition precedent to Assignee’s right to amend the Lease and as a condition precedent to Assignee’s rights under the Lease to sublet the Premises or assign its interest in the Lease, Assignee shall provide Assignor with copies of all proposed amendments, subleases or assignments which Assignee may consider entering into and Assignor shall have the right to approve such amendments, subleases or assignments, which approval shall not be unreasonably withheld, delayed, or conditioned; provided, however, that Assignee shall be entitled to make the Permitted Transfers described in Section 21.F of the Lease in accordance with that Section 21.F without Assignor’s consent, so long as the conditions of said Section 21.F are satisfied, and Assignor shall have no right to withhold its consent to an assignment or sublease consented to by Landlord. Any amendment or assignment of the Lease or subletting of the Premises by Assignee shall not operate to release Assignee from its obligations pursuant to this Assignment to perform the covenants and obligations of tenant contained in the Lease.

15.  Security Deposit.    Concurrently with its execution of this Assignment, Assignee shall deliver to Assignor the sum of Two Hundred, Forty Thousand Dollars ($240,000) as security for the performance by Assignee of every covenant and condition of this Assignment and the Lease to be performed by Assignee (the “Security Deposit”). Said Security Deposit may be co-mingled with other funds of Assignor and shall bear no interest. If Assignee shall default with respect to any covenant or condition of the Lease or this Assignment, whether monetary or non-monetary, including, but not limited to the payment of rent, Assignor may apply the whole or any part of such Security Deposit to the payment of any sum in default under the Lease or any sum which Assignor may be required to spend by reason of Assignee’s default under the Lease. If any portion of the Security Deposit is so applied, Assignee, upon demand by Assignor and notice from Assignor that said sums have been applied to Lease obligations will deposit cash with Assignor in an amount sufficient to restore the Security Deposit to its original amount. The Security Deposit or any balance thereof shall be returned to Assignee within thirty (30) days after expiration or earlier termination of the Lease term.

16.  Miscellaneous.    The parties hereto shall execute and deliver such additional documents and take such additional actions as either may reasonably request to carry out the purposes of this Assignment. This Assignment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the obligations of Assignee under this Assignment shall not be assignable without Assignor’s prior written consent (except as provided in Section 14 above), nor shall Assignee grant or allow to exist any mortgage, security interest, or other liens in respect to the leasehold estate created by the Lease or Assignee’s interest therein without the prior written consent of Assignor, which consent may be withheld in Assignor’s reasonable discretion (provided, however, that Assignee shall be entitled to grant a security interest in its equipment and personal property pursuant to the Lease). If any party brings an action or legal proceeding with respect to this Assignment

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against the other party hereto, the prevailing party shall be entitled to recover its reasonable attorneys’ fees and costs. All captions contained in this Assignment are for convenience of reference only and shall not affect the construction of this Assignment. This Assignment constitutes the entire agreement between Assignor and Assignee regarding the Lease and the Premises, and there are no binding agreements or representations between the parties except as expressed herein. No subsequent change or addition to this Assignment shall be binding unless in writing and signed by the party sought to be bound thereby. This Assignment may be executed in or more counterparts, each of which shall be an original, but all of which, taken together, shall constitute one and the same Assignment. This Assignment shall be governed by and construed in accordance with the laws of the State of California.

17.  Other Agreements.    Assignor and Assignee each acknowledges and agrees that this Assignment is subject to certain additional agreements, terms, provisions, and covenants as contained in the Landlord’s consent described in Section 4.C of this Assignment.

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IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first set forth above.

Assignor:

AVENTIS PHARMACEUTICALS INC., formerly named Rhone-Poulenc Rorer Pharmaceuticals, Inc.
By:	/s/    Charles D. Dalton
Name:	Charles D. Dalton
Title:	Vice President, Legal & Corporate Development

Address: 200 Crossing Boulevard

Bridgewater, NJ 08807

Attn: VP Legal Corporate Development

Mail Stop—BX2-700A

With a copy to:

Aventis Pharmaceuticals Inc.

400 Somerset Corporate Boulevard

Bridgewater, NJ 08807

Attn: North America Real Estate

Mail Stop—SC4-725A

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Assignee:

KOSAN BIOSCIENCES, INCORPORATED, a Delaware corporation
By:	/s/    Michael S. Ostrach
Name:	Michael S. Ostrach
Title:	President
Address:	3832 Bay Center Place Hayward, CA 94545

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EXHIBIT A

Description of Tenant Improvements

The planned modifications of 3825 Bay Center Place by Kosan Biosciences, Incorporated (“Kosan”) include the following. Kosan will modify office area to suit its needs by installing cubicles in a design that best utilizes the space available. Kosan will modify existing labs to suit its needs. Such modifications may include, but not be limited to, the addition of chemical hoods, addition of biological hoods and HVAC modifications to accommodate the hoods, installation of warm room(s) and/or clean room(s), as well as addition of bench space to suit needs. Other modifications may include, but not be limited to, the installation of additional voice and data cabling, installation of telecommunications system, and miscellaneous plumbing modifications as needed.

Kosan also plans to build out the existing shell space that would be similar to the build out of the already improved space.

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EXHIBIT B

Copy of Lease

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EXHIBIT B

LEASE

THIS LEASE is made as of the 1st day of December, 1997, by and between Spieker Properties, L.P. a California limited partnership (hereinafter called “Landlord”), and Rhone-Poulenc Rorer Pharmaceuticals, Inc., a Delaware Corporation (hereinafter called “Tenant:)

1.    PREMISES

Landlord leases to Tenant and Tenant leases from Landlord, upon the terms and conditions hereinafter set forth, these premises (the “Premises”) outlined in red on Exhibit A and described in the Basic Lease Information. The Building and Project are outlined in blue and green respectively on Exhibit A. Additionally, the number of buildings which constitute the Project may change from time to time, in which event Tenant’s Proportionate Share of the Project shall he recalculated. Tenant accepts the area of the Premises as specified in this Lease as the approximate area of the Premises, and acknowledges and agrees that Tenant, absent manifest error, shall in no event be entitled to a recalculation of the square footage of the Premises and that, absent manifest error, no such recalculation shall reduce Tenant’s obligations under this Lease in any manner, including without limitation the amount of Base Rent payable by Tenant or Tenant’s Proportionate Share of the Building and of the Project.

2.    POSSESSION AND LEASE COMMENCEMENT

B.    Construction Improvements

The term commencement date (“Term Commencement Date”) shall be March 1, 1998, provided that the Term Commencement Dale shall be extended one day I’m each day that delivery of the Premises in Building Shell condition (as defined in Paragraph 38.11 of the Lease) by Landlord to Tenant is delayed beyond the date of full execution of this Lease. Tenant shall not be liable for any Rent for any period prior to the Term Commencement Date (but without affecting any obligations of Tenant under any work letter appended to this Lease.) Tenant shall not be liable for any Rent for any period prior to the Term Commencement Date (but without affecting any obligations of’ Tenant under any work letter appended to this lease). Upon Landlord’s request, Tenant shall promptly execute and return to Landlord a tenant shall agree, among other things, to acceptance of the Premises and to the determination of the Term Commencement Date, in accordance with the terms of this Lease.

3.    POSSESSION AND LEASE COMMENCEMENT

The term of this Lease (the “Term”) shall commence on the Term Commencement Date and continue in full force and effect for the number of years specified as the Length of Term in the Basic Lease Information or until this Lease is terminated as otherwise provided herein. If the Term Commencement Date is a date other than the first day of the calendar month, the Term shall be the number of years of the Length of Term in addition to the remainder of the calendar month following the Term Commencement Date.

4.    USE

A.    General.    Tenant shall use the Premises for the permitted use specified in the Basic Lease Information (“Permitted Use”) and for no other use or purpose. Tenant shall control Tenant’s employees, agents, customers, visitors, invitees, licenses, contractors, assignees and subtenants (collectively, “Tenant’s Parties”) in such a manner that Tenant and Tenant’s Parties cumulatively do not exceed the parking density specified in the Basic Lease Information (the “Parking Density”) at any time. Notwithstanding the foregoing, Tenant may utilize the loading dock areas associated with the Building for Tenant parking, subject to applicable City of Hayward parking codes and regulations. Tenants and Tenant’s Parties shall have nonexclusive right to use, in common with other parties occupying the Project, the parking areas, driveways and other common areas of the Project, subject to such rules and regulations as Landlord may from time to time prescribe, subject to Paragraph 5 hereof.

B.    Limitations.    Tenant shall not permit any unreasonable odors, smoke, dust, gas, substances, noise or vibrations to emanate from the Premises or from any portion of the common areas as a result of Tenant’s or any Tenant’s Party’s use thereof; nor take any action which would constitute a nuisance or would unreasonably disturb, obstruct or endanger any other tenants or occupants of the Building or Project or unreasonably interfere with their use or their respective premises or common areas. Storage outside the Premises of materials, vehicles- or any other items is prohibited. Tenant shall not use or allow the Premises to be used for any immoral, improper or unlawful purpose, nor shall Tenant cause or maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer the commission of any waste in, on or about the Premises. Tenant shall not allow any sale by auction upon the Premises, or place any loads upon the floors, walls or ceilings which endanger the structure, or place any harmful substances in the drainage system of the Building or Project. No waste, materials or refuse shall be dumped upon or permitted to remain outside the Premises except in trash containers placed inside exterior enclosures designated for that purpose by Landlord. Landlord shall not be responsible to Tenant for the non-compliance by any other tenant or occupant of the Building or Project with any of the above-referenced rules or any other terms or provisions of such tenant’s or occupant’s lease or other contract.

C.    Compliance with Regulations.    By entering the Premises, Tenant accepts the Premises in the condition existing as of the date of such entry. Tenant shall at its sole cost and expense strictly comply with all existing or future applicable municipal, stale and federal and other governmental statutes, rules, requirements, regulations, laws and ordinances, including zoning ordinances and regulations, and covenants, casements and restrictions of record governing and relating to the use, Occupancy or possession of the Premises, to Tenant’s use of the common areas, or to the use, storage, generation or disposal of Hazardous Materials (hereinafter defined) (collectively “Regulations”). Tenant shall at its sole cost and expense obtain any and all licenses or permits necessary for Tenant’s particular use of the Premises. Tenant shall at its sole cost and expense promptly comply with the requirements of any board of Fire underwriters or other similar body now or hereafter constituted. Tenant shall not do or permit anything to be done in, on, under or about the Project or bring or keep anything which will in any way increase the rate of any insurance upon the Premises, Building or project or upon any contents therein or cause a cancellation of said insurance or otherwise affect said insurance in any manner. Tenant

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shall indemnify, defend, protect and hold Landlord harmless from and against any loss, cost, expense, damage, reasonable attorneys’ fees or liability arising out of the failure of ‘tenant to comply with any Regulation. Tenant’s obligations pursuant to the foregoing indemnity shall survive the expiration or earlier termination of this Lease.

Notwithstanding any of the foregoing, Landlord warrants to Tenant that as of the Term Commencement Date, the Premises and any improvements (including, without limitation the Tenant improvements defined in Paragraph 39.Q to be constructed by Landlord (a) shall be free from material structural defects (b) shall comply with all applicable covenants and restrictions of record, statutes, ordinances, codes rules regulations orders and requirements including “title 24 of the California Administrative Code and the Americans with Disabilities Act In the event of a breach of the foregoing warranties Landlord shall promptly rectify such breach at its sole cost and expense. Landlord shall also protect indemnify, defend and hold Tenant harmless form and against any and all liability, loss, suit claims actions, costs and expense (including without limitation attorneys’ tees) arising from any breach of the foregoing warranties. The provisions of this section shall survive the termination of this Lease.

Notwithstanding any of the foregoing, Tenant shall not be responsible for making any structural changes to the Premises in order to bring. the Premises into compliance with any Regulations unless (i) such structural changes are necessitated as a direct result of Tenant’s particular use of the Premises or (ii) the requirements for such changes are triggered as a direct result of any action by Tenant on the Premises.

D.    Hazardous Materials.    As used in this Lease, “Hazardous Materials” shall include, but not be limited to, hazardous, toxic and radioactive materials and those substances defined as “hazardous substances,” “hazardous materials,” “hazardous wastes,” “toxic substances,” or other similar designations in any Regulation. Tenant shall not cause, or allow any of Tenant’s Parties to cause, any Hazardous Materials to be used, generated, stored or disposed of on or about the Premises, the Building or the Project or surrounding land or environment in violation of any Regulations. Notwithstanding the foregoing, Tenant may handle, store, use, and dispose of any such Hazardous Materials in a safe and lawful manner and never allow such Hazardous Materials to contaminate the Premises, Building, or Project or the Project of which Tenant becomes aware, whether or not caused by Tenant. Except to the extent covered by Landlord’s indemnification obligations pursuant to Paragraph 8B(6), Tenant shall indemnify, defend, protect and hold Landlord harmless from and against all liabilities, losses, costs and expenses (including attorney’s and consultant’s fees), demands against all liabilities, losses, costs and expenses (including attorneys’ and consultants’ fees), demands, causes of action, claims or judgments directly or indirectly arising out of the use, generation, storage, release, or disposal of Hazardous Materials by Tenant or any of tenant’s Parties in, on or about the Premises, the Building or the Project or surrounding land or environment, which indemnity shall include, without limitation, damages for personal or bodily injury, property damage, damage to the environment Or natural resources occurring on or off Premises, losses attributable to diminution in value or adverse effects on marketability, the cost of any investigation, monitoring, government oversight, repair, removal, remediation restoration, abatement, and disposal, and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following the expiration or earlier termination of this Lease. Neither the consent by Landlord to the use, generation, storage, release or disposal of Hazardous Materials nor the strict compliance by Tenant with all laws pertaining to Hazardous Materials shall excuse Tenant from Tenant’s obligation of indemnification pursuant to this Paragraph 4.D. Tenant’s obligations pursuant to the foregoing indemnity shall survive the expiration or earlier termination of this Lease. Tenant agrees to provide Landlord with the following (i) a Hazardous Materials Management Plan (“HMMP”) which includes the types and quantities of’ Hazardous Materials used and/or stored on the Premises, and; (ii) copies of tiny other documents related to Hazardous Materials submitted to the City of Hayward or any other regulatory agencies.

Landlord shall indemnify defend and hold Tenant its affiliates their respective directors. officers employees and agents harmless from and against any and all claims, judgements damages penalties fines costs liabilities or losses and attorneys fees arising out of any Hazardous Material in on or about the Project or the Premises which was created handled placed stored used. transported of disposed of by Landlord. excluding however, any Hazardous Material whose presence was caused by Tenant or its affiliates or their respective agents. Landlord represents and warrants that the attached Compliance and Closure report dated March 14, 1996 (Exhibit C) is the most recent report obtained by Landlord concerning Hazardous Materials with respect to the Project To the best of Landlord’s knowledge, Landlord is unaware of any presence of any Hazardous Materials on the Project that is in violation of applicable laws.

5.    RULES AND REGULATIONS

Tenant shall faithfully observe and comply with any rules and regulations and any modifications or additions thereto which Landlord may from time to time prescribe in writing for the purpose of maintaining the proper care, cleanliness, safety, traffic flow and general order of the Premises or the Building or Project, provided that any such rules and regulations and any modifications or additions thereto shall not unreasonably interfere with Tenant’s use of the Premises. Tenant shall cause Tenant’s Parties to comply with such rules and regulations. Landlord shall not be responsible to Tenant for the non-compliance by any other tenant or occupant of the Building or Project with any of such rules and regulations, any other tenant’s or occupant’s lease or any Regulations. Notwithstanding any provisions of this paragraph to the contrary. Landlord shall require all tenants of the Building and Project to comply with the rules and regulations and shall consistently and evenhandedly enforce the rules and regulations.

6.    RENT

A.    Base Rent.    Tenant shall pay to Landlord and landlord shall receive, without notice or demand throughout the Term Base Rent as specified in the Basic Lease Information, payable in monthly installments in advance on or before the first day of each calendar month, in lawful money of the United States, without deduction or offset whatsoever, at the Remittance Address specified in the Basic Lease Information or to such other place as Landlord may from time to time designate in writing. Base Rent for the first full month of the Term shall be paid by Tenant upon Tenant’s execution of this Lease11’ the obligation for payment of Base Rent commences on other than the first day or a month, then Base Rent shall be prorated and the prorated installment shall be paid on the first day of the calendar month next succeeding the Term Commencement Date. The Base Rent payable by Tenant hereunder is subject to adjustment as provided in addenda appended to this Lease (if referred to in Paragraph 38.A.). As used herein, the terns “Base Rent” shall mean the Base Rent specified in the Basic Lease information as it may be so adjusted from time to time.

B.    Additional Rent.    All monies other than Base rent required to be paid by Tenant hereunder, including, but not limited to, Tenant’s Proportionate Share of Operating Expenses, as specified in Paragraph 7 of this Lease, the interest and late charge described in Paragraphs 26.C. and D., and any monies spent by Landlord pursuant to Paragraph 30, shall he considered additional rent (“Additional Rent”). “Rent” shall mean Base Rent and Additional Rent.

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7.    OPERATING EXPENSES

A.    Operating Expenses.    In addition to the Base Rent required to be paid hereunder, Tenant shall pay the applicable Tenant’s Proportionate Share of each such Operating Expenses. Landlord and Tenant acknowledge that if’ the number of buildings which constitute the Project increases or decreases, Landlord shall reasonably adjust Tenant’s Proportionate Share of the Project to reflect the change. Landlord’s determination of Tenant’s Proportionate Share of the Building and of’ the Project shall be conclusive so long as it is reasonably and consistently applied. “Operating Expenses” shall mean all expenses and costs of every kind and nature which landlord shall pay or become obligated to pay, because of or in connection with the ownership, management, maintenance, repair, preservation, replacement and operation of’ the Building or Project and its supporting facilities (as determined in a reasonable manner) other than those expenses and costs which are specifically attributable to Tenant or which are expressly made the financial responsibility of Landlord pursuant to the Lease. Operating Expenses shall include, but are not limited to, the following:

(1)    Taxes.    All real property taxes and assessments, possessory interest taxes, sales taxes, personal properly taxes, business or license taxes or fees, gross receipts taxes, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, transit charges, and other impositions, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind (including fees “in-lieu” of any such lax or assessment) which are now or hereafter assessed, levied, charged, confirmed, or imposed by any public authority upon the Building or Project, its operations or the Rent (or any portion or component thereof), or any tax, assessment or fee imposed in substitution, partially or totally, of any of the above. Operating Expenses shall also include any taxes, assessments, or other fees or impositions with respect to the development, leasing, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof, or upon this transaction or any document creating or transferring an interest in the Premises, but shall exclude any corporate income taxes. In the event that it shall not be lawful for Tenant to reimburse Landlord for all or any part of such taxes, the monthly rental payable to Landlord under this Lease shall be revised to net Landlord the same net rental after imposition of any such taxes by Landlord as would have been payable to Landlord prior to the payment of any such taxes.

(2)    Insurance.    All insurance premiums and costs, including, but not limited to, any deductible amounts, premiums and other costs of insurance incurred by Landlord for the insurance coverage set forth in Paragraph 8.A. herein.

(3)    Common Area Maintenance

(a)    Repairs, replacements, and general maintenance of and for the Building and Project and public and common areas of the Building and Project, including, but not limited to, the roof, pest extermination, landscaped areas, parking and service areas, driveways, truck staging areas, fire sprinkler systems, sanitary and storm sewer lines, utility services, electric and telephone equipment and wiring servicing, exterior lighting, and any other items or areas which affect the operation or exterior appearance of the Building or Project, which determination shall be at Landlord’s reasonable discretion, except for: those items expressly made the financial responsibility of Landlord pursuant to Paragraph 10 hereof; those items to the extent paid for by the proceeds of insurance; and those items attributable solely or jointly to specific tenants of the Building or Project.

(b)    Repairs, replacements, and general maintenance shall include the cost of any capital improvements made to or capital assets acquired for the Project or Building that in Landlord’s reasonable discretion may reduce any other Operating Expenses, including present or future repair work, are reasonably necessary for the health and safety of the occupants of the Building or Project, or are required under any governmental law or regulation, such costs or allocable portions thereof to be amortized over the useful live of such items together with interest on the unamortized balance at the “prime rate” charged by Wells Fargo Bank, N.A. (San Francisco) or its successor at the time such improvements or capital assets are constructed or acquired, plus two (2) percentage points, but in no event more than the maximum rate permitted by law.

(c)    Payment under or for any easement, license, permit, operating agreement, declaration, restrictive covenant or instrument relating to the Building or Project.

(d)    All expenses related to services and costs of supplies and equipment used in maintaining the Premises, Building and Project, the equipment therein and the adjacent sidewalks, driveways, parking and service areas, including, without limitation, expenses related to service agreements regarding security and fire and other alarm systems, janitorial services to the extent not addressed in Paragraph 1 l hereof, window cleaning, elevator maintenance, Building exterior maintenance, landscaping and expenses related to the administration, management and operation of the Project, including without limitation salaries, wages and benefits.

(4)    Utilities.    The cost of supplying any utilities which benefit all or a portion of the Premises or the common areas of the Building or Project to the extent not addressed in Paragraph 15 hereof.

(5)    Management Fee.    A management and accounting cost recovery fee equal to three percent (3%) of the sum of Base Rent and Tenant’s Proportionate Share of Operating Expenses.

In the event that the Building and/or Project is not fully occupied during any fiscal year of the Term as determined by Landlord, an adjustment shall be made in computing the Operating Expenses for such year so that Tenant pays an equitable portion of all variable items (i.e. Component expenses that are affected by variations in occupancy levels) of Operating Expenses, as reasonably determined by Landlord; provided, however, that in no event shall Landlord be entitled to collect in excess of one hundred percent (100%) of the total Operating Expenses from all of the tenants in the Building of Project, as the ease may be.

Notwithstanding anything to the contrary contained herein the following shall not he included in the Operating Expenses referred to herein (I) leasing commissions attorneys’ fees, cost, disbursements and other expenses incurred in connection with negotiations or disputes with tenants or in connection with leasing; renovating;. or improving space for tenants or other occupants or prospective tenants or other occupants of the Building or Project: (2) the cost of any service sold to any tenant (including Tenant) or other occupant for Which Landlord is entitled to be reimbursed as an additional charge or rental over and above the basic rent and escalations payable under the lease with that tenant (3) any depreciation on the Building (4) except as otherwise set forth in Paragraph 7A(3)(b) costs of a capital nature including but not limited to capital improvements and alterations capital repairs capital equipment and capital tools as determined in accordance with generally accepted accounting principles: (5) overhead profit increments paid to Landlord’s subsidiaries or affiliates for management or other services on or to the Building or Project or for supplies or other materials to the extent that the cost of the services supplies or materials exceeds the cost that would have been paid had the services supplies. or materials been provided h1 unaffiliated parties on a competitive basis (6) all interest loan fees and other carrying costs related to any mortgage to

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deed of trust or related to any capital item and all rental and other payments due under any ground or underlying lease, or any lease liar any equipment ordinarily considered to be of a capital nature (except janitorial equipment which is not affixed to the Building): (7) any compensation paid to clerks attendants or other persons in commercial concessions operated by Landlord: (8) advertising and promotional expenditures (9) costs of repair and other work occasioned by lire, windstorm or other casually which are covered by insurance (or would have otherwise been covered but for Landlord’s failure to carry insurance required under this(Lease): (10) any costs, lines or penalties incurred due to violations by Landlord of any governmental rule or authority, this Lease or any other lease in. the Project or on the land upon which the Premise are located or due to Landlord’s negligence or willful misconduct: (11) costs for sculpture, paintings or other objects of art (nor insurance thereon or extraordinary security in connection therewith); (12) wages, salaries, or other compensation paid to any executive employees above the grade of building manager; (13) the cost of correcting any building code or other violations which were violations prior to the Term Commencement Date (14) the cost of containing, removing, or otherwise remediating tam, contamination of the Building or project (including the underlying land and groundwater) by any toxic or Hazardous Materials (including, without limitation, asbestos and “PCB’s”) where such contamination was not caused by Tenant; (15) Landlord’s taxes not constituting taxes payable as Operating Expenses pursuant to Paragraph 7A(1) (16) any increase on more than one (1) occasion in real property assessments on the land on which the Premises are located as a result of reassessment under Proposition 13, and: (17) any other expenses that antler generally accepted accounting principles and practice consistently applied would not be considered a normal maintenance or operating expense.

Notwithstanding anything herein to the contrary, in any instance wherein Landlord, in Landlord’s reasonable discretion, deems Tenant to be responsible for any amounts greater than Tenant’s Proportionate Share, Landlord shall have the right to allocate costs in any reasonable manner Landlord deems appropriate.

The above enumeration of services and facilities shall not be deemed to impose an obligation on Landlord to make available or provide such services or facilities except to the extent Landlord has specifically agreed elsewhere in this Lease to make the same available or provide the same. Without limiting the generality of the foregoing, Tenant acknowledges and agrees that it shall be responsible for providing adequate security for its use of the Premises and Project and that Landlord shall have no obligation or liability with respect thereto, except to the extent Landlord has specifically agreed elsewhere in this Lease to provide the same.

B.    Payment of Estimated Operating Expenses.    “Estimated Operating Expenses” for any particular year shall mean Landlord’s reasonable estimate of the Operating Expenses for such fiscal year made with respect to such fiscal year as hereinafter provided. Landlord shall have the right from time to time to revise its fiscal year and interim accounting periods so long as the periods as so revised are reconciled with prior periods in a reasonable manner. During the last month of each fiscal year during the Term, or as soon thereafter as practicable, Landlord shall give Tenant written notice of the Estimated Operating Expenses for the ensuing fiscal year. Tenant shall pay Tenant’s Proportionate Share of the Estimated Operating Expenses with installments of Base Rent for the fiscal year to which the Estimated Operating Expenses applies in monthly installments on the first day of each calendar month during such year, in advance. If at any time during the course of the fiscal year, Landlord determines that Operating Expenses are projected to vary from the then Estimated Operating Expenses by more than ten percent (10%), Landlord may, by written notice to Tenant, revise the Estimated Operating Expenses for the balance of such fiscal year, and Tenant’s monthly installments for the remainder of such year shall be adjusted so that by the end of such fiscal year Tenant has paid to Landlord Tenant’s Proportionate Share of the revised Estimated Operating Expenses for such year.

C.    Computation of Operating Expense Adjustment.    “Operating Expense Adjustment” shall mean the difference between Estimated Operating Expenses and actual Operating Expenses for any fiscal year determined as hereinafter provided. Within one hundred twenty (120) days after the end of each fiscal year, Landlord shall deliver to Tenant a statement of actual Operating Expenses for the fiscal year just ended, accompanied by a computation of Operating Expense Adjustment. If such statement shows that Tenant’s payment based upon Estimated Operating Expenses is less than Tenant’s Proportionate Share of Operating Expenses, then (provided that Tenant is not in default beyond the expiration of any applicable cure period under this Lease) Landlord shall pay to Tenant the difference within twenty (20) days after delivery of such statement to Tenant. If this Lease has been terminated or the Term hereof has expired prior to the date of such statement, then the Operating Expense Adjustment shall be paid by the appropriate party with twenty (20) days after the date of delivery of the statement. Should this Lease commence or terminate at any time other than the first day of the fiscal year, Tenant’s Proportionate Share of the Operating Expense Adjustment shall be prorate by reference to the exact number of calendar days during such fiscal year that this Lease is in effect.

D.    Net Lease.    This shall be a triple net Lease and Base Rent shall be paid to Landlord absolutely net of all costs and expenses, except as specifically provided to the contrary in this Lease. The provisions for payment of Operating Expenses and the Operating Expense Adjustment are intend to pass on to Tenant and reimburse Landlord for all costs and expenses of the nature described in Paragraph 7.A. incurred in connection with the ownership, management, maintenance, repair, preservation, replacement and operation of the Building and/or Project and such additional facilities now laid in subsequent years as may be reasonably determined by Landlord to be necessary to the Building anti/or Project.

E.    Tenant Audit.    In the event that Tenant shall dispute the amount set forth in any statement provided by Landlord under Paragraph 7.B. or 7.C. above, Tenant shall have the right, not later than thirty (30) days following receipt of Such statement and upon the condition that Tenant shall first deposit with Landlord the full amount in dispute, to cause Landlord’s books and records with respect to Operating Expenses for such fiscal year to be audited by certified public accountants selected by Tenant and subject to Landlord’s reasonable right of approval. The Operating Expense Adjustment shall be appropriately adjusted on the basis of such audit. If such audit discloses a liability for a refund in excess of ten percent (10%) of Tenant’s Proportionate Share of the Operating Expense Adjustment previously reported, the cost of such shall be borne by Landlord; otherwise the cost of such audit shall be paid by

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Notwithstanding anything to the contrary in this Lease, Landlord shall indemnify, defend by counsel reasonably acceptable to Tenant, protect and hold Tenant harmless from and against any and all claims, liabilities, losses, costs, damages, injuries or expenses, including reasonable attorneys’ Ices and court costs, to the extent arising out of or related to the sale negligence or willful misconduct of Landlord or Landlord’s employees agents contractors or representatives (collectively “Landlord’s Parties”) claims arising from any breach or default on the part of Landlord of this Lease and: any claims or causes of action arising prior to the Term Commencement Date. Tenant shall indemnity, defend by counsel reasonably acceptable to Landlord, protect and hold Landlord harmless from and against any and all claims, liabilities, losses, costs, loss of rents, liens, damages, injuries or expenses, including reasonable attorneys’ fees and court costs, arising out of or related to: (1) claims of injury to or death of persons or damage to property occurring or resulting directly or indirectly from the use or occupancy of [he Premises by Tenant or Tenant’s Parties, or front activities of tenant or Tenant’s Parties; (2) claims arising from work or labor performed, or for materials or supplies furnished to or at the request of Tenant in connection with performance of any work done for the account of Tenant within the Premises or Project; (3) claims arising from any breach or default on the part of’ Tenant in the performance of any covenant contained in this Lease; and (4) claims arising from the negligence or willful misconduct Tenant or Tenant’s Parties. The foregoing indemnity by Tenant shall not be applicable to claims to the extent arising from the negligence or willful misconduct of Landlord. The provisions of this Paragraph shall survive the expiration or earlier termination of this Lease.

9.    WAIVER OF SUBROGATION

To the extent permitted by law and without affecting the coverage provided by insurance to be maintained hereunder or any other rights or remedies, Landlord and Tenant each waive any right to recover against the other for: (a) damages for injury to or death of persons; (b) damages to property, including personal property; (c) damages to the Premises or any part thereof; and (d) claims arising by reason of the foregoing due to hazards covered by insurance to the extent of proceeds recovered therefrom. This provision is intended to waive fully, any rights and/or claims arising by reason of the foregoing, but only to the extent that any of the foregoing damages and/or claims referred to above are covered, and only to the extent of such coverage, by insurance actually carried by either Landlord or Tenant. This provision is also intended to waive fully, and for the benefit of each party, any rights and/or claims which might give rise to a right of subrogation on any insurance carrier. Subject to all qualifications of this Paragraph 9, Landlord waives its rights as specified in this Paragraph 9 with respect to any subtenant that it has approved pursuant to Paragraph 21 but only in exchange for the written waiver of such rights to be given by such subtenant to Landlord. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any policy.

10.    LANDLORD’S REPAIRS AND MAINTENANCE

Landlord shall at Landlord’s expense maintain in good repair, reasonable wear and tear excepted, the structural soundness of the roof (structural and membrane), foundations, and exterior walls or the Building. The term “exterior walls” as used herein shall not include windows, glass or plate glass, doors, duck bumpers or duck plates, special store fronts or office entries. Landlord shall perform on behalf of Tenant and other tenants of ills project tale maintenance of the public and common areas of the Project including, but not limited to the landscaped areas parking areas driveways the truck staging areas, fire sprinkler systems, sanitary and storm sewer lines, utility services, electric and telephone equipment servicing the Buildings(s) exterior lighting and anything which effects the operation and exterior appearance of the Project, which determination shall be at Landlord’s sole discretion. Tenant shall reimburse Landlord for all such costs in accordance with Paragraph 7. Any damage caused by or repairs necessitated by any act of tenant or Tenant’s Parties may be repaired by Landlord Lit Landlord’s option and Tenant’s expense. Tenant shall immediately give landlord written notice of any defect or need or repairs in such components of’ the Building tiller which Landlord shall have a reasonable opportunity and the right to enter the Premises at alt reasonable tines with one (1) business day’s notice to repair same. Landlord shall use reasonable efforts to minimize any interference caused to Tenant as a result of any such repairs and entry. Landlord’s liability with respect to any defects repairs, or maintenance for which Landlord is responsible under any of the provisions of this Lease shall be limited to the cost of such repairs or maintenance, and there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant’s business arising from the making of repairs, alterations or improvements in or to any portion of the Premises or Project or to fixtures, appurtenances or equipment in the Building, except as provided in Paragraph 24 and 8B(6).

11.    TENANT’S REPAIRS AND MAINTENANCE

Except as provided in Paragraph 10, Tenant shall at all times during the Term at Tenant’s expense maintain all parts of the Premises in good repair, reasonable wear and tear and event of casualty excluded and promptly make all necessary repairs and replacements, as reasonably determined by Landlord, including but not limited to, all windows, glass, doors, walls, including demising walls, and wall finishes, floors and floor covering, heating, ventilating and air conditioning systems, ceiling insulation, truck doors, hardware, dock bumpers, dock plates and levelers, plumbing work and fixtures, downspouts, entries, skylights (glass but not frame), electrical and lighting systems, and fire sprinklers, with materials and workmanship of substantially the same character, kind and quality as the original. Tenant shall, at Tenant’s own expense, enter into a regularly scheduled preventative maintenance/service contract with a maintenance contractor for servicing all hot water, heating and air conditioning systems and equipment (“HVAC”) within or serving the Premises. The maintenance contractor and the contract must be approved by Landlord, which approval shall not be unreasonably withheld or delayed. The service contract must include all reasonable and customarily obtained services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective and a copy thereof delivered to Landlord within thirty (30) days after the Term Commencement Date. Landlord may, upon notice to Tenant, enter into such a service contract on behalf of Tenant or perform the work and in either case charge Tenant the cost thereof along with a reasonable amount for Landlord’s overhead. Notwithstanding anything to the contrary contained herein, Tenant shall, at its expense, promptly repair any damage to the Premises or the Building or Project resulting from or caused by any act or Tenant or Tenant’s Parties. Notwithstanding anything to the contrary contained herein Tenant may elect to maintain the HVAC equipment which specifically services Tenant’s laboratory operations.

12.    ALTERATIONS

A.    Tenant shall not make, or allow to be made, any alterations, physical additions, improvements or partitions, including without limitation the attachment of any fixtures or equipment, in, about or to the Premises but excluding the Tenant improvements (collectively “Alterations”), without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed with respect to proposed Alterations which: (a) comply with all applicable Regulations; (b) are, in Landlord’s reasonable opinion, compatible with the Project and its mechanical,

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plumbing, electrical, heating/ventilation/air conditioning systems; and (c) will not unreasonably interfere with the use and occupancy or any other portion of the Building or Project by any other tenant or its invitees. Notwithstanding the foregoing, in addition to being permitted to complete without any further right of approval by Landlord, all the Tenant Improvements to be constructed with respect to the entire Premises. Tenant shall have the right to _make any non-structural Alteration, the cost of which shall not exceed $0,000 or in the case of HVAC electrical and plumbing work $25.000, without first obtaining Landlord’s consent, provided that Tenant give Landlord written notice of Tenant’s intent to make such Alteration. Specifically, but without limiting the generality of the foregoing, with retard to any other Alteration which exceeds $10,000 in cost or $25,000 involving HVAC, electrical and plumbing work. Landlord shall have the right of written consent, which consent shall not be unreasonably withheld or delayed, for all plans and specifications for the proposed Alteration, construction means and methods, all appropriate permits and licenses, any contractor or subcontractor to be employed on the work of such Alteration, and the time for performance of such work, and may impose reasonable rules and regulations for contractors and subcontractors performing such work. Tenant shall also supply to Landlord any documents and information reasonably requested by Landlord in connection with Landlord’s consideration of a request for approval hereunder. Tenant shall cause all Alterations to be accomplished in a good and workmanlike manner, and to comply with all applicable Regulations. Tenant shall at Tenant’s sole expense, perform any additional work required under applicable Regulations due to the Alterations hereunder. No consent by Landlord to any proposed Alteration or additional work shall constitute a waiver of tenant’s obligations under this Paragraph 12. Tenant shall reimburse Landlord for all reasonable costs which Landlord may incur in connection with granting approval to Tenant for any such Alterations, including any reasonable costs or expenses which Landlord may incur in electing to have outside architects and engineers review said plans and specifications. All such Alterations shall remain the property of Tenant until the expiration or earlier termination of this Lease, at which time they shall be and become the property of Landlord if Landlord so elects; provided, however, that Landlord may, at Landlord’s option, require that Tenant, at Tenant’s expense, remove any or all Alterations made by Tenant, provided that each such Alteration exceeds $10.000 in cost. or $25,000 involving HVAC, electrical and plumbing work, and restore the Premises by the expiration or earlier termination of this Lease, to their condition existing prior to the construction of any such Alterations. All such removals and restoration shall be accomplished in a good and workmanlike manner so as not to leave any damage to the Premises or Project whatsoever. If Tenant fails to remove such Alterations or Tenant’s trade Fixtures or furniture, landlord may keep and use them or remove any of them and cause them to be stored or sold in accordance with applicable law at Tenant’s sole expense. In addition to and wholly apart from Tenant’s obligation to pay Tenant’s Proportionate Share of Operating Expenses, Tenant shall be responsible for and shall pay prior to delinquency any taxes or governmental service fees, possessory interest taxes, fees or charges in lieu of any such taxes, capital levies, or other charges imposed upon, levied with respect to or assessed against its personal property Oil the value of Alterations within the Premises, and on Tenant’s interest pursuant to this Lease, or any increase in tiny of the foregoing bused on such Alterations, provided that Tenant shall have the right to contest such amounts in good faith. To the extent that any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced to Tenant by Landlord, provided that Landlord shall provide Tenant with reasonable evidence supporting Landlord’s calculation or such amount. Notwithstanding anything to the contrary contained herein, in Paragraph 36 or elsewhere in the Lease, Tenant (i) shall be permitted, but shall have no obligation, at any time to remove any trade fixtures constructed at any time by or on behalf of Tenant in the Premises, provided that Tenant repairs any damage caused by such removal and (ii) shall be permitted at any time to remove its personal property and equipment from the Premises, provided that Tenant repairs any damage caused by such removal.

B.    In compliance with Paragraph 27 hereof, at least ten (10) business days before beginning construction of any Alteration, Tenant shall give Landlord written notice of the expected commencement date of that construction to permit Landlord to post and record a notice of non-responsibility. Upon substantial completion of construction, Tenant shall cause a timely notice of completion to be recorded in the office of the recorder of the county in which the Building is located.

13.    SIGNS

All signs, notices and graphics of every kind or character, visible in or from public view or corridors, the common areas or the exterior of the Premises, shall be subject to Landlord’s prior written approval, which Landlord shall have the right to withhold in its reasonable discretion. Tenant shall not place or maintain any banners whatsoever or any window decor in or on any exterior window or window fronting upon any common areas or service area or upon any truck doors or man doors without Landlord’s prior written approval which Landlord shall have the right to withhold in its reasonable discretion. Any installation of signs or graphics on or about the Premises or Project shall be subject to any Regulations and to any other requirements imposed by Landlord. “Tenant shall remove all such signs or graphics by the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury to or defacement of the Premises, Building or Project and any other improvements contained therein, and Tenant shall repair any injury or defacement including without limitation discoloration caused by such installation or removal.

14.    INSPECTION/POSTING NOTICES

Alter reasonable notice, except in emergencies where no such notice shall be required, Landlord and Landlord’s agents and representatives shall have the right to enter the Premises to inspect the same, to clean, to perform such work as may be permitted or required hereunder, to make repairs or alterations to the Premises or Project, to deal with emergencies, to post such notices as may be permitted or required by law to prevent the perfection of liens against Landlord’s interest in the Project or to exhibit the Premises to prospective tenants, purchasers, encumbrancers or to others, or for any other purpose as Landlord may reasonably deem necessary or desirable; provided, however, that Landlord shall use reasonable efforts not to unreasonably interfere with Tenant’s business operations. Tenant shall not be entitled to any abatement of Rent by reason of the exercise of any such right of entry. At any time within six (6) months prior to the expiration of the Term or following any earlier termination of this Lease or agreement to terminate this Lease, Landlord shall have the right to erect on the Premises and/or Project a suitable sign indicating that the Premises are available for lease

15.    UTILITIES

Tenant shall pay a proportion, as reasonably determined by Landlord, of all charges jointly serving other premises. Landlord shall not be liable for any damages directly or indirectly resulting from nor shall the Rent or any monies owed Landlord under this Lease herein reserved be abated by reason of. (a) the installation, use or interruption of use of any equipment used in connection with the furnishing of any such utilities or services; (b) the failure to furnish or delay in furnishing any such utilities or services when such failure or delay is caused by acts of God or the elements, labor disturbances of any character, or any other ;accidents or other conditions beyond the reasonable control of Landlord; or (c) the limitation, curtailment, rationing or restriction on use of water, electricity, gas or any other form of energy or any other service or utility whatsoever serving the Premises or Project; except to the extent that any of the foregoing is the result of the negligence or willful misconduct of Landlord or any of Landlord’s Parties. Landlord shall be entitled to cooperate voluntarily and in a reasonable manner with the efforts of national, state or local

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governmental agencies or utility suppliers in reducing energy or other resource consumption, provided that any such reduction shall not unreasonably interfere with Tenant’s use of the Premises for its intended purpose. The obligation to make services available hereunder shall be subject to the limitations of any such voluntary, reasonable program.

16.    SUBORDINATION

Without the necessity of any additional document being executed by Tenant for the purpose oh effecting a subordination, the Lease shall be subject and subordinate at all times to: (a) all ground leases or underlying teases which may now exist or hereafter be executed affecting the premises and/or the land upon which [tie Premises and Project are situated, or both; and (b) any mortgage or deed of’ trust which may now exist or be placed upon the Building, the Project and/or the land upon which the Premises or the Project are situated, or said ground leases or underlying leases, or Landlord’s interest or estate in any of said items which is specified as security. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or deed of’ trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of’ the successor in interest to Landlord and Tenant shall not be disturbed in its possession under this Lease by such successor in interest so long as Tenant is not in default under this Lease. Within ten (10) business clays alter request b), Landlord, Tenant shall execute and deliver any reasonable additional documents evidencing “tenant’s attornment or the subordination of this Lease with respect to any such ground leases or underlying leases or any such mortgage or deed of trust, in the form reasonably requested by Landlord or by any ground landlord, mortgage or beneficiary under a deed of trust, subject to such nondisturbance requirement. If requested in writing, by Tenant Landlord shall use commercially reasonable efforts to obtain n subordination, nondisturbance and attornment agreement for the benefit of Tenant reflecting the foregoing from any ground landlord, mortgagee or beneficiary at no material cost to Landlord subject to such other reasonable terms and conditions as the ground landlord, mortgage or beneficiary may require.

17.    FINANCIAL STATEMENTS

At the request of Landlord Prom time to tune, but not more than twice annually, Tenant shall provide to Landlord Tenant’s current financial statements, which may be in the form of consolidated statements, or other public information discussing Financial worth of Tenant, which Landlord shall use solely for purposes of this Lease and in connection with the ownership, management, financing Laid disposition of the Project.

18.    ESTOPPEL CERTIFICATE

Both parties agree from time to time, within ten (10) days after request of the other party handheld, to deliver an estoppel certificate stating that this Lease is in Full force and effect, that this Lease has not been modified (or stating all modifications, written or oral, to this Lease), the date to which Rent has been paid, the unexpired portion of this Lease, that there are no current defaults by either party under this Lease (or specifying any such defaults), and such other matters pertaining to this Lease as may be reasonably requested. Failure by either party to execute and deliver such certificate shall constitute an acceptance of the Premises and exception. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph maybe relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Project or any interest therein. The parties agree that Tenant’s obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord’s execution of the Lease, and shall be an event of default if Tenant fails to fully comply or knowingly makes any material misstatement in any such certificate.

20.    TENANT’S REMEDIES

The obligations and liability of’ Landlord to Tenant for any default by Landlord under the terms of’ this Lease are not personal obligations of’ Landlord or of the individual or other partners of’ Landlord or its or their partners, directors, officers, or shareholders, and Tenant agrees to look solely to Landlord’s interest in the Project for the recovery of any amount Prom Landlord, and shall not look to other assets of Landlord nor seek recourse against the assets of’ the individual or other partners of Landlord or its or their partners, directors, officers or shareholders. Any lien obtained to enforce any such judgment and tiny levy of execution thereon shall be subject and subordinate to any lien, mortgage or deed of trust on the Project.

21.    ASSIGNMENT AND SUBLETTING

A    (1) General.    Tenant shall not assign or pledge this Lease or sublet the Premises or any part thereof, whether voluntarily or by operation of law, or permit the use or occupancy of the Premises or any part thereof by anyone other than Tenant, or permit any such assignment, pledge, subleasing or occupancy, without Landlord’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed, except as provided herein. If Tenant desires to assign this Lease or sublet any or all of the Premises, Tenant shall give Landlord written notice (the “Transfer Notice”) at least thirty (30) days prior to the anticipated effective date of the proposed assignment or sublease, which shall contain all of the information reasonably requested by landlord to address Landlord’s decision criteria specified hereinafter, Landlord shall then have a period of thirty (:all) days following receipt of the Transfer Notice to notify “Tenant in writing that Landlord elects either: (1) to terminate this lease as to the space so affected as of the date so requested by Tenant, provided however, that in the event that Landlord notifies Tenant that Landlord elects such right of termination Tenant shall have the right to be exercised within ten (10) business days of Tenant’s receipt of such notice from Landlord to retract Tenant’s request for consent to such proposed assignment or sublease is applicable, in which case this Lease shall continue in full force and effect, as if such request by Tenant had never been made; or (2) to consent to the proposed assignment or sublease, subject, however, to Landlords prior written consent of the proposed assignee or subtenant and of any related documents or agreements associated with assignment or sublease. If Landlord should fail to notify Tenant in writing of such election within said period, Landlord shall be deemed to have waived option (1) above, but written consent by Landlord of the proposed assignee or subtenant shall be required. If Landlord does not exercise option (1) above, Landlord’s consent to a proposed assignment or sublet shall not be unreasonably withheld, conditioned or delayed.

(2)    Conditions of Landlord’s Consent.    Without limiting the other instances in which it may be reasonable for Landlord to withhold Landlord’s consent to an assignment or subletting, Landlord and Tenant acknowledge that it shall be reasonable for Landlord to withhold Landlord’s consent in the following instances: the use of the Premises by such proposed assignee or subtenant would not be a Permitted Use or would violate any exclusivity arrangement which Landlord has with any other tenant or occupant or would increase the Parking Density of the Building or Project the

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proposed assignee Or subtenant is not of sound financial condition as determined by Landlord in Landlord’s safe reasonable discretion; die proposed assignee or subtenant is a governmental agency; the proposed assignee Or subtenant does not have a good reputation as a tenant of property; the proposed assignee or subtenant is a person with whom Landlord is negotiating to (case space in the Project or is a present tenant of the or Tenant is in default of any obligation of-Tenant under this Lease beyond cure periods set Forth in the Lease. Failure by Landlord to consent to a proposed assignee or subtenant shall not cause a termination of this Lease. Upon termination under Paragraph 21.A.(1), Landlord may lease the Premises to any party, including parties with whom Tenant has negotiated an assignment or sublease, without incurring any liability to Tenant. At the option of Landlord, a surrender and termination of this Lease shall operate as an assignment to Landlord of some or all subleases or subtenancies. Landlord shall exercise this option by giving notice of that assignment to such subtenants on or before the effective date of the surrender and termination.

B.    Bonus Rent.    Any Rent or other consideration realized by Tenant under any such sublease or assignment, except for those permitted under Paragraph 21F, in excess of the Rent payable hereunder, alter deducting Tenant’s actual out-of-pocket costs of such assignment or subletting including without limitation Tenant’s reasonable architectural engineering and legal fees, brokerage commissions free rent or other economic concessions tenant improvements which total costs shall be deducted by Tenant and fully recovered before sharing any rent with Landlord shall be divided and paid, fifty percent (50%) to Tenant, fifty percent (50%) to Landlord. In any subletting or assignment undertaken by Tenant, Tenant shall diligently seek to obtain the maximum rental amount available in the marketplace for comparable space available for primary leasing.

C.    Corporation.    If Tenant is a corporation, a transfer of corporate shares by sale, assignment, bequest, inheritance, operation of law or other disposition (including such a transfer to or by a receiver or trustee in federal or state bankruptcy, insolvency or other proceedings) resulting in a change in the present control of such corporation or any of its parent corporations by the person or persons owning a majority of said corporate shares, shall constitute an assignment for purposes or this Lease.

D.    Unincorporated Entity.    If Tenant is a partnership, joint venture, unincorporated limited liability company or other unincorporated business form, a transfer of the interest of persons, firms or entities responsible for managerial control of Tenant by sale, assignment, bequest, inheritance, operation of law or other disposition, so as to result in a change in the present control of said entity and/or a change in the identity of the persons responsible for the general credit obligations of said entity shall constitute an assignment for all purposes or this Lease.

E.    Liability.    No assignment or subletting by Tenant, permitted or otherwise, shall relieve Tenant of any obligation under this Lease or alter the primary liability of the Tenant named herein for the payment of Rent or for the performance of any other obligations to be performed by Tenant, including obligations contained in Paragraph 25 with respect to any assignee or subtenant. Any assignment or subletting which conflicts with the provisions hereof shall be void.

F.    Permitted Transfers.    Tenant shall be permitted without Landlord’s consent to assign or sublet tiny or all of the Premises to my entity controlling, controlled by or in common control with Tenant or in connection with any safe of assets, restructuring, merger or consolidation by Tenant provided that such entity has worth adequate to support this Lease in Landlord’s reasonable discretion. In addition a sale or transfer of the capital stock of-Tenant shall be permitted without Landlord’s consent provided, that (i) such safe or transfer occurs in connection with any bona fide Financing or capitalization for the benefit of Tenant or (ii) Tenant becomes a publicly traded corporation.

22.    AUTHORITY

Landlord represents and warrants that it has full right and authority to enter into this Lease and to perform all of Landlord’s obligations hereunder and that all persons signing this Lease on its behalf are authorized to do. Tenant represents and warrants that it has full right and authority to enter into this Lease and to perform all of Tenant’s obligations hereunder and that all persons signing this Lease on its behalf are authorized to do.

23.    CONDEMNATION

A.    Condemnation Resulting in Termination.    If the whole or any substantial part of the Project of which the Premises are a part should be taken or condemned for any public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the taking would prevent or materially interfere with the Permitted Use of the Premises, this Lease, at Tenant’s option, shall terminate and the Rent shall be abated during the unexpired portion of this Lease, effective when the physical taking on said Premises shall have occurred.

B.    Condemnation Not Resulting in Termination.    If a portion of the Project of which the Premises are a part should be taken or condemned for any public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and this Lease is not terminated as provided in Paragraph 23.A. above, the Rent payable hereunder during the unexpired portion of the Lease shall be proportionately reduced, beginning on the date when the physical taking shall have occurred, based upon the proportion of the Premises subject to such taking or condemnation.

C.    Award.    Landlord shall be entitled to any and all payment, income, rent, award or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired portion of this Lease. Notwithstanding the foregoing, any compensation specifically and separately awarded Tenant for Tenant’s personal property, equipment, trade fixtures, the unamortized value of leasehold improvements provided that Landlord’s award will not be substantially reduced, and moving costs, shall be and remain the property of Tenant.

D.    Waiver of CCP§1265.130.    Each party waives the provisions of California Civil Code Procedure Section 1265.130 allowing either party to petition the superior court to terminate this Lease as a result of a partial taking.

24.    CASUALTY DAMAGE

A.    General.    If the Premises or Building should be damaged or destroyed by fire, tornado, or other casualty (collectively, “Casualty”), Tenant shall give immediate written notice thereof to Landlord. Within thirty (30) days after landlord’s receipt of such notice, landlord shall notify Tenant whether in Landlord’s reasonable estimation material restoration of the Premises can reasonably be made either: (I) within ninety (90) days; (2) in more than ninety (90) days but within one hundred eighty (180) days; or (3) in more than one hundred eighty (180) days from the date of such notice and receipt of required permits for such restoration. Landlord’s determination shall be binding on Tenant.

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B.    Within 90 Days.    If the Premises or Building should be damaged by Casualty to such extent that material restoration can in landlord’s estimation be reasonably completed within ninety (90) days after the date of such damage and receipt of required permits for such restoration, this lease shall not terminate. To the extent that insurance proceeds are received by Landlord (or would have otherwise been received by Landlord but for its failure to carry insurance required under this Lease) to repair the damage, Landlord shall proceed to rebuild and repair the Premises, except that Landlord shall not be required to rebuild, repair or replace any part of the Alterations which may have been placed on or about the Premises by Tenant. If the Premises are untenantable in whole or in part following such damage, the Rent payable hereunder during the period in which they are untenantable shall be abated proportionately, but only to the extent or rental abatement insurance proceeds received by Landlord (or would have otherwise been received by Landlord but for its failure to carry insurance required under this lease) during the time and to the extent the Premises are unfit for occupancy.

C.    Greater than 90 Days.    If the Premises or Building should be damaged by Casualty to such extent that rebuilding or repairs can in Landlord’s estimation be reasonably completed fn more than ninety (90) days but within one hundred eighty (180) days after the date of such damage and receipt of required permits for such rebuilding or repair, then Landlord shall have the option of either: (1) terminating this lease effective upon the date of the occurrence of such damage, in which event the Rent shall be abated during the unexpired portion of this Lease; or (2) electing to rebuild or repair the Premises. Notwithstanding the above, landlord shall not be required to rebuild, repair or replace any part of the Alterations which may have been placed, on or about the Premises by Tenant. If the Premises are untenantable in whole or in part Following such damage, the Rent payable hereunder during the period in which they are untenantable shall be abated proportionately, but only to the extent of rental abatement insurance proceeds received by Landlord (or would have otherwise been received by landlord but for its failure to carry insurance required under this lease) during the time and to the extent the Premises are unfit for occupancy. In the event that landlord should fall to complete such repairs and rebuilding within one hundred eighty (180) days after the date upon which Landlord is notified by Tenant of such damage and receipt of required permits, such period of time to be extended for delays caused by the fault or neglect of Tenant or otherwise by Tenant or because of acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, or delays of the contractors or subcontractors or any other causes or contingencies beyond the reasonable control of Landlord, Tenant may at Tenant’s option within ten (10) days after the expiration of such one hundred eighty (180) day period (as such may be extended), terminate this Lease by delivering written notice of termination to landlord as Tenant’s exclusive remedy, whereupon all rights hereunder shall cease and terminate thirty (30) days after Landlord’s receipt of such termination notice.

D.    Greater than 180 Days.    If the Premises or Building should be so damaged by Casualty that rebuilding or repairs cannot in landlord’s estimation be completed one hundred eighty (180) clays after such damage and receipt of required permits for such rebuilding or repair, this lease shall terminate and the Rent shall be abated during the unexpired portion of this lease, effective upon the dale of the occurrence of such damage.

E.    Tenant’s Fault.    Notwithstanding anything herein to the contrary, if the Premises or any other portion of’ the Building are damaged by Casualty resulting From the fault, negligence, or breach of this lease by Tenant or any of Tenant’s Parties, Base Rent and Additional Rent shall not be diminished during the repair of such damage and Tenant shall be liable to Landlord for the cost and expense of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds.

G.    Waiver.    This Paragraph 24 shall be Tenant’s sole and exclusive remedy in the event of damage or destruction to the Premises or the Building as a result of Casualty. As a material inducement to landlord entering into this lease, Tenant hereby waives any rights it may have under Sections 1932 (2), 1933(4), 194-1 or 1942 of the Civil Code of California with respect to any destruction of the Premises, and Tenant’s right to make repairs and deduct the expenses of such repairs, or under any similar law, statute or ordinance now or hereafter in effect.

H.    Tenant’s Personal Property.    In the event of any damage or destruction of the Premises or the Building, under no circumstances shall Landlord be required to repair any injury or damage to, or make any repairs to or replacements of, Tenant’s personal property, unless such damage or destruction shall be the result of the negligence or willful misconduct of landlord or any of Landlord’s Parties.

25.    HOLDING OVER

Unless Landlord expressly consents in writing to Tenant’s holding over, Tenant shall be only a Tenant al, sufferance whether or not Landlord accepts any Rent front Tenant or any other person while Tenant is holding over without Landlord’s written consent. If Tenant shall retain possession of the Premises or any portion thereof (a) with Landlord’s consent then Tenant shall become a tenant from month to month upon the terms herein specified at a monthly rental equivalent to the then prevailing; monthly Rent payable by Tenant at the expiration of the term or this lease, or (h) without landlord’s consent following the expiration of this Lease or sooner termination for any reason, then Tenant shall pay to landlord for each day of such retention one hundred fifty percent (150%) of the amount or daily rental as of the last month prior to the date of expiration or earlier termination. Tenant shall also indemnify, defend, protect and hold landlord harmless from any loss, liability or cost, including reasonable attorneys’ fees, resulting from delay by Tenant in surrendering the Premises, including, without limitation, any actual damages proven by the succeeding tenant feed to have been suffered as a result of such delay. Acceptance of Rent by Landlord following expiration or earlier termination shall not constitute a renewal of this lease, and nothing contained in this Paragraph 25 shall waive landlord’s right of reentry or any other right. Additionally, in the event that upon expiration or earlier termination of this Lease, Tenant has not fulfilled its obligation with respect to repairs and cleanup of lire Premises or any other Tenant obligations as set forth in this Lease, then Landlord shall have the right to perform any such obligations as it deems reasonably necessary at Tenant’s sole cost and expense, and any time reasonably required by Landlord to complete such obligations shall be considered a period of holding over and the terms of this Paragraph 25 shall apply. The provisions of this Paragraph 25 shall survive any expiration or earlier termination of this Lease.

26.    DEFAULT

A.    Events of Default.    The occurrence of any of the following shall constitute an event of default on the part of Tenant:

(1)    Abandonment.    Abandonment of the Premises for a continuous period in excess of ten (10) business days. Tenant waives any right to notice Tenant may have under Section 1951.3 of the Civil Code of the State of California, the terms of this Paragraph 26.A. being deemed such notice to Tenant as required by said Section 1951.3.

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(2)    Nonpayment of Rent.    Failure to pay any installment of Rent or any other amount due and payable hereunder within three (3) business days of Tenant’s receipt of written notice that payment is due. Such notice shall he provided by Landlord to Tenant two (2) times during any 12 month period provided however, that on the third instance of Tenant’s failure to pay Rent when said payment is due during any 12 month period such nonpayment will constitute a default as defined in this Paragraph 26.

(3)    Other Obligations.    Failure to perform any obligation, agreement or covenant under this Lease other than those matters specified in subparagraphs (1) and (2) of this Paragraph 26.A., such failure continuing for thirty (30) days after written notice of such failure.

(4)    General Assignment.    A general assignment by Tenant for the benefit of creditors.

(5)    Bankruptcy.    The filing of ally voluntary petition in bankruptcy by Tenant, or the filing of an involuntary petition by Tenant’s creditors, which involuntary petition remains undischarged or unstaved for a period of thirty (30) days. In the event that under applicable law, the trustee in bankruptcy or Tenant has the right to affirm this lease and continue to perform the obligations of Tenant hereunder, such trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease and provide to Landlord such adequate assurances as may be reasonably necessary to ensure Landlord of the continued performance of tenant’s obligations under this Lease.

(6)    Receivership.    The employment of a receiver to take possession of substantially all of Tenant’s assets or the Premises, if such appointment remains undismissed, undischarged or unstaved for a period of thirty (30) days after the order therefor.

(7)    Attachment.    The attachment, execution or other judicial seizure of all or substantially all of Tenant’s assets or the Premises, if such attachment or other seizure remains undismissed, undischarged or unstaved for a period of thirty (30) days after the levy thereof.

B.    Remedies Upon Default.

(1)    Termination.    In the event of the occurrence of any event of default, landlord shall have the right to give a written termination notice to Tenant, and on the date specified in such notice, Tenant’s right to possession shall terminate, and this Lease shall terminate unless on or before such date all Rent in arrears and all reasonable costs and expenses incurred by or on behalf of Landlord hereunder shall have been paid by Tenant trod all other events of default of this Lease by Tenant at the time existing shall have been fully remedied to the satisfaction of Landlord. At any time after such termination, Landlord may recover possession of the Premises or any part thereof and expel and remove therefrom Tenant and any other person occupying the same, by any lawful means, and again repossess and enjoy the Premises without prejudice to any of the remedies that landlord may have under this Lease, or at law or equity by any reason of Tenant’s default or of such termination. Landlord hereby reserves the right to recognize the continued possession of any subtenant.

(2)    Continuation After Default.    Even though an event of default may have occurred, this Lease shall continue in effect for so long as landlord does not terminate Tenant’s right to possession under Paragraph 26.B. (1) hereof, and Landlord may enforce all of landlord’s rights and remedies under this Lease and at law or in equity, including without limitation, the right to recover Rent as it becomes due, and Landlord, without terminating this Lease, may exercise all of the rights and remedies of a landlord under Section 1951.4 of the Civil Code of the Slate of California or any successor code section. Acts of maintenance, preservation or efforts to lease the Premises or the appointment of a receiver under application of Landlord to protect Landlord’s interest under this Lease or other entry by Landlord upon the Premises shall not constitute an election to terminate Tenant’s right to possession.

C.    Damages After Default.    Should Landlord terminate this Lease pursuant to the provisions of Paragraph 26.13.(1) hereof, Landlord shall have the rights and remedies of a Landlord provided by Section 1951.2 of the Civil Code of the State of California, orally successor code sections. Upon such termination, in addition to airy other rights and remedies to which Landlord may be entitled under applicable law or at equity, Landlord shall be entitled to recover from Tenant: (1) the worth at the time of award of the unpaid Rent and other amounts which had been earned at the time of termination, (2) the worth at the time of award of the amount by which the unpaid Rent that would have been earned offer the date of termination until the tune of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; and (4) any other amount and court costs reasonably necessary to compensate Landlord for all detriment proximately caused by Tenant’s failure to perform Tenant’s obligations under this Lease or which, in the ordinary course of things, would be likely to result therefrom. The “worth at the time of award” as used in (1) and (2) above shall be computed at the lesser of the “prime rate,” as announced from time to time by Wells Fargo Bank, N.A. (San Francisco) or its successor, plus five (5) percentage points, or the maximum interest rate allowed by law (“Applicable Interest Rate”). The “worth at the time of award” as used in (3) above shall be computed by discounting such amount at the Federal Discount Rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%).

D.    Late Charge.    In addition to its other remedies, Landlord shall have the right without notice or demand to add to the amount of any payment required to be made by Tenant hereunder, and which is not paid and received by Landlord on or before the first stay of each calendar month, an amount equal to ten percent (10%) of the delinquency for each month or portion thereof that the delinquency remains amounts to Landlord under the terms of this Lease shall not be deemed satisfied until such Rent and other amounts have been actually received by Landlord. Notwithstanding anything herein to the contrary, Tenant shall be given thirty (30) days to pay invoices for amounts owed other than Rent before being assessed a late charge as defined above.

E.    Remedies Cumulative.    All rights, privileges and elections or remedies of the parties are cumulative and not alternative, to the extent permitted by law and except as otherwise provided herein.

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27.    LIENS

Tenant shall at all times keep the Premises and the Project free front liens arising out of or related to work or services performed materials or supplies furnished or obligations incurred by Tenant or in connection with work made, suffered or done by or on behalf’ of Tenant in or on the Premises or Project, excluding any such lien or any tax lien on the Premises or Project for sums not vet clue or for sums contested in good faith by Tenant. In tile event that Tenant shall not, within thirty (30) days following the imposition of any such lien, cause tile same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not tile obligation, to cause the same to be released by such means as Landlord shall reasonably deem proper, including payment of the claim giving rise to such lien. All reasonable sums paid by Landlord on behalf of “tenant and all reasonable expenses incurred by Landlord in connection therefor shall be payable to Landlord by Tenant on demand with interest al the Applicable Interest Rate. Landlord shall have the right al all times to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall reasonably deem proper, for the protection of’ Landlord, the Premises, the Project and any other party having an interest therein, from mechanics’ and materialmen’s liens, and Tenant shall give Landlord not less than ten (10) business days prior written notice of the commencement of any work in the Premises or Project which could lawfully give rise to a claim for mechanics’ or materialmen’s liens to permit Landlord to post and record a timely notice of non-responsibility.

29.    TRANSFERS BY LANDLORD

In the event of a sale or conveyance by Landlord of the Building or a forclosure by any creditor of Landlord, the same shall operate to release Landlord from any liability upon any of the covenants or conditions, express or implied, herein contained in favor of Tenant, to the extent required to be performed after the passing of title to Landlord’s successor-in-interest: In such event, Tenant agrees to look solely to tile responsibility of the successor-in-interest of Landlord under this lease with respect to the performance of the covenants and duties of “Landlord” to be performed after tile passing of’ title to Landlord’s successor-in-interest. This Lease shall riot be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee. Landlord’s successor(s)-in-interest shall not have liability to Tenant with respect to the failure to perform any of the obligations of “Landlord,” to tile extent required to be performed prior to the date such Successor(s)-in-interest beeline tile owner of the Building.

30.    RIGHT OF LANDLORD TO PERFORM TENANT’S COVENANTS

All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant’s sole cost and expense and without any abatement of Rent, except as otherwise provided herein. If Tenant shall fail to pay any sum of money other than Base Rent, required to be paid by Tenant hereunder or shall fail to perform any other act on Tenant’s part to be performed hereunder, including Tenant’s obligations under Paragraph 11 hereof, and such failure shall continue for the longer of (a) any applicable cure period and (b) fifteen (15) days after notice thereof by Landlord, in addition to the other rights and remedies of Landlord, Landlord may make any such payment and perform any such act on Tenant’s part. In tile case of an emergency, no prior notification by Landlord shall be required. Landlord may take such actions without any obligation and without releasing Tenant from any of Tenant’s obligations. All sums so paid by Landlord and all incidental costs incurred by Landlord and interest thereon at the Applicable Interest Rate, from the date of payment by Landlord, shall be paid to Landlord on demand as Additional Rent.

31.    WAIVER

If either Landlord or Tenant waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition contained herein. Tile acceptance of Rent by Landlord shall not constitute a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, regardless of Landlord’s knowledge of such preceding breach at the time Landlord accepted such Rent. Failure by Landlord to enforce any of tile terms, covenants or conditions of this Lease for any length of time shall not be deemed to waive or decrease the right of Landlord to insist thereafter upon strict performance by Tenant. Waiver by either party of any term, covenant or condition contained in this Lease may only be made by a written document signed by such party.

32.    NOTICES

Each provision of this Lease or of any applicable governmental laws, ordinances, regulations and other requirements with reference to sending, mailing, or delivery of any notice or the making of any payment by Landlord or Tenant to the other shall be deemed to be complied with when and if the following steps are taken:

A.    Rent.    All Rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at Landlord’s Remittance Address set forth in the Basic Lease Information, or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Subject to Paragraph 26A(2), Tenant’s obligation to pay Rent and any other amounts to Landlord under the terms of this Lease shall not be deemed satisfied until such Rent and other amounts have been actually received by Landlord.

B.    Other.    All notices, demands, consents and approvals which may or are required to be given by either party to the other hereunder shall be in writing and either personally delivered, sent by commercial overnight courier, or mailed, certified or registered, postage prepaid, and addressed to the party to be notified at the Notice Address for such party as specified in the Basic lease Information or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days notice to the notifying party. Notices shall be deemed served upon receipt or refusal to accept delivery. Tenant appoints as its agent to receive the service craft default notices and notice of commencement of unlawful detainer proceedings the person in charge of or apparently in charge of occupying the Premises at the time.

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33.    ATTORNEY’S FEES

In any action which Landlord or Tenant brings to enforce its respective rights hereunder, the unsuccessful party shall pay all costs incurred by the prevailing party including reasonable attorneys’ fees, to be fixed by the court, and said costs and attorneys’ fees shall be a part of the judgment in said action.

34.    SUCCESSORS AND ASSIGNS

This lease shall be binding upon and inure to the benefit of Landlord, its successors and assigns, and shall be binding upon and inure to the benefit of Tenant, its successors, and to the extent assignment is approved by Landlord as provided hereunder, Tenant’s assigns.

35.    FORCE MAJEURE

If performance by a party of any portion of this Lease is made impossible by any prevention, delay, or stoppage caused by strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes for those items, government actions, civil commotions, (ire or other casualty, or other causes beyond the reasonable control of the party obligated to perform, performance by that party for a period equal to the period of that prevention, delay, or stoppage is excused. Tenant’s obligation to pay Rent, however, is not excused by this Paragraph 35.

36.    SURRENDER OF PREMISES

Subject to Paragraph 12A. Tenant shall, upon expiration or sooner termination of this lease, surrender the Premises to landlord in substantially the same condition as existed on the date Tenant originally took possession thereof, reasonable wear and tear, damage by event of casualty and repairs and replacements required pursuant to this Lease excepted provided, that Tenant shall have no obligation to remove any of the Tenant Improvements except as specifically provided in paragraph 38.D of this Lease. Tenant shall remove all of its debris from the Project. At or before the time of surrender, Tenant shall comply with the terms of Paragraph 12.A. hereof with respect to Alterations to the Premises and all other matters addressed in such Paragraph. If the Premises are not so surrendered at the expiration or sooner termination of this Lease, the provisions of Paragraph 25 hereof shall apply. All keys to the Premises or any part thereof shall be surrendered to expiration or sooner termination of’ the Term. Tenant shall meet with landlord for a joint inspection of the Premises at the time of vacating. In the event of Tenant’s failure to participate in such joint inspection for any reason other than landlord’s failure to make itself reasonably available for such inspection, Landlord’s inspection at or alter Tenant’s vacating the Premises shall conclusively be deemed correct for purposes of determining Tenant’s responsibility for repairs and restoration.

37.    MISCELLANEOUS

A.    General.    The term “Tenant” or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations, and their respective successors, executors, administrators and permitted assigns, according to the context hereof.

B.    Time.    Time is of the essence regarding this Lease and all of its provisions.

C.    Choice of Law.    This lease shall in all respects be governed by the laws of the State of California.

D.    Entire Agreement.    This Lease, together with its Exhibits contains all the agreements or the parties hereto and supersedes any previous negotiations. There have been no representations made by the Landlord or its agents or understandings made between the parties other than those set forth in this Lease and its Exhibits.

E.    Modification.    This Lease may not be modified except by a written instrument signed by the parties hereto.

F.    Severability.    If, for any reason whatsoever, any of the provisions hereof shall be unenforceable or ineffective, all of the other provisions shall be and remain in full force and effect

G.    Recordation.    Tenant shall not record this Lease or a short form memorandum hereof.

H.    Examination of Lease.    Submission of this Lease to Tenant does not constitute an option or offer to (case and this Lease is not effective otherwise until execution and delivery by both Landlord and Tenant.

I.    Accord and Satisfaction.    No payment by Tenant of a lesser amount than the total Rent due nor any endorsement on any check or letter accompanying any check or payment of Rent shall be deemed an accord and satisfaction of full payment of Rent, and Landlord may accept such payment without prejudice to Landlord’s right to recover the balance of such Rent or to pursue other remedies.

J.    Easements.    Landlord may grant easements on the Project and dedicate for public use portions of the Project without Tenant’s consent; provided that no such grant or dedication shall materially interfere with Tenant’s Permitted Use of the Premises. Upon Landlord’s request, Tenant shall execute, acknowledge and deliver to Landlord documents, instruments, maps and plats necessary to effectuate Tenant’s covenants hereunder.

K.    Drafting and Determination Presumption    The parties acknowledge that this lease has been agreed to by both the parties, that both Landlord and tenant have consulted with attorneys with respect to the terms of this Lease and that no presumption shall be created against landlord because landlord drafted this lease. Except as otherwise specifically set forth in this lease, with respect to any consent, determination or estimation of Landlord required or allowed in this Lease or requested of Landlord, landlord’s consent, determination or estimation shall be given or made solely by Landlord in Landlord’s geed faith reasonable opinion,

L.    Exhibits.    The Exhibits attached hereto are hereby incorporated herein by this reference.

M.    No Light, Air or View Easement.    Any diminution or shutting u11 of light, air or view by any structure which only be erected on lands adjacent to or in the vicinity of the Building shall in no way affect this Lease or impose any liability on landlord.

N.    No Third Party Benefit.    This lease is a contract between landlord and Tenant and nothing herein is intended to create any thief party benefit.

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O.    Quiet Enjoyment.    Upon payment by Tenant oh the Rent, and upon the observance and performance oh all of the other covenants, terms and conditions on Tenant’s part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the Premises for the term hereby demised without hindrance or interruption by landlord or any other person or persons lawfully or equitably claiming by, through or under Landlord, subject, nevertheless, to all of the other terms and conditions of this Lease. Landlord shall not be liable for any hindrance, interruption, interference or disturbance by other tenants or third persons, nor shall Tenant be released from any obligations under this lease because of such hindrance, interruption, interference or disturbance.

P.    Counterparts.    This Lease may be executed in any number of counterparts, each of which shall be deemed an original.

Q.    Multiple Parties.    If more than one person or entity is named herein as Tenant, such multiple parties shall have joint and several responsibility to comply with the terms of this Lease.

38.    ADDITIONAL PROVISIONS

A.    Base Rent Adjustment.    Base Rent during the term of the Lease shall be adjusted according to the following schedule:

MONTHS	BASE RENT
01-02	$21,549 per month
03-18	$43,097 per month
19-36	$45,183 per month
37-54	$47,268 per month
55-72	$49,354 per month
73-90	$51,439 per month
91-108	$53,524 per month
109-120	$55,610 per month

B.    Building Shell.    Landlord shall, at its sole cost and expense and with no right of reimbursement from Tenant, pay all costs of constructing the building shell and associated site improvements which shall mean the shell of’ the Building and the following items in substantial accordance with the plans and specifications dated May 22, 1997, by CRI Associates (all of which shall be collectively referred to as the “Building Shell”):

General: 3825 Bay Center Place, Hayward, California, an approximately 69,512 square foot, single story, tilt-up concrete building.

Roof Membrane: The finished roof shall have a new, built-up three ply membrane with a mineral surfaced cap sheet.

Roof Structure: New roof structure is a panelized system consisting of 1/2” plywood sheathing over open web steel trusses and 3X wood stiffeners.

Walls: All exterior walls will be a concrete tilt-up panel with medium texcoat finish with integral color. Colors to be selected by Landlord and consistent throughout the Project.

Glass: All window glazing will be single-pane glass. The aluminum storefront system and window glazing color will be selected by the Landlord.

Floors: Concrete slab will be 5” thick and wire-mesh reinforced.

Roof Hatch: The building will have one standard metal roof hatch with access ladder.

Overhead Doors: All truck dock doors and drive-in doors will be 24 gauge rolled form galvanized steel, painted to be compatible with the building exterior.

Exit Doors: Exit doors other than main storefront entries shall be hollow metal, painted to be compatible with the building exterior.

Fire Protection: The building shall have a fully automatic, sprinklered fire protection system.

Domestic Water: The building shall be supplied with a 2” diameter city metered water line.

Electrical: The building shall be supplied with an electrical transformer. Power will be feed into two interior, gypsum board finished rooms with main electrical service at 2000 AMPS at 277/480V.

Natural Gas: Natural gas shall be supplied to the exterior wall of the building.

Plumbing: A sanitary sewer gut line will be provided within the office portion of the building with clean-outs at standard intervals final fit-up and distribution is not included in the shell construction.

Site Lighting: Landlord shall provide one dedicated monument sign al a location to be determined by landlord and to be approved by the City of Hayward. Tenant to provide Tenant’s signage at Tenant’s cost.

Truck Docks: The truck dock areas shall have concrete paving with concrete retaining walls and guardrails.

Landscaping: The site shall be professionally landscaped per the City of Hayward Design Guidelines, including a fully automatic irrigation system.

Shell Warranties: Landlord shall grant Tenant the benefit of’ any expressed warranties received covering shell construction to the extent that such warranties are assignable.

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The Building Shell shall be completed in a good and workmanlike manner and all materials and equipment incorporated into the Shell (i) will be new and free of defects, (ii) will conform to all applicable laws, ordinances and regulations of the City of Hayward.

C.    Tenant Improvements.    Tenant will, with the Tenant’s Architect(s), complete plans and specifications for Tenant’s interior improvements. “Tenant Improvements” shall mean all initial interior improvement work being completed in the entire Premises including both improvements described in the initial Plans and specifications submitted by Tenant to Landlord for approval (“Initial Improvements”) such plans to he substantially similar to those described on Exhibit B attached hereto as prepared by WHI Architects dated November 26, 1997, as well as improvements to be constructed by Tenant in the balance of the Premises (“Expansion Improvements”). Tenant Improvements shall include but not be limited to the following:

a) Architectural design and structural engineering;

b) HVAC system, including roof screens and any necessary structural upgrades;

c) Interior lighting;

d) Insulation;

e) Interior walls, partitions and painting;

f) Plumbing within the Premises;

g) Floor and wall coverings, if required

h) Aft electrical distribution panels for Tenant power and lighting, distribution lines and outlets, circuits, switches and related metering and hook-up charges;

i) Water and gas distribution and related metering and hook-up charges;

j) Telephone switch room, panel, distribution system;

k) Window coverings, if required;

l) Fire safety systems;

m) Restrooms; and,

n) Any City of Hayward permits or other related agency fees.

Landlord may reasonably disapprove of said plans and specifications within ten (10) business days of receipt thereof for reasons including, but not limited to: location, distribution and percentage of floor coverings, dropped ceiling, restrooms, plumbing, electrical, and/or mechanical systems which arc inconsistent with the future flexibility of the building only if such items differ front the plan attached as Exhibit B. All substantive changes to the originally-agreed-upon plans must be approved by Landlord, which approval shall not be unreasonably withheld or delayed. Said originally-agreed-upon plans and specifications to be attached to this lease as Exhibit B.

Landlord agrees to contribute One Million Forty Two Thousand Six Hundred Eighty Dollars ($1,042,680.00) as a “Tenant Improvement Allowance” toward the total cost of design, engineering, permits, city and other agency fees, and all other hard and soft costs relating to the construction of the Tenant Improvements. Tenant agrees to pay for all ‘tenant Improvement costs incurred with Tenant’s approval above Landlord’s maximum contribution of $1,042,680.00.

Within ten (10) business days after completion of a “Guaranteed Maximum Price” contract between general contractor and Tenant, Landlord agrees to deposit with Tenant the “Tenant Improvement Allowance”.

All Tenant Improvements shall be completed in a good and workmanlike manner and all materials and equipment incorporated into the Tenant Improvements (i) will be new and free of defects, (ii) will conform to all applicable laws, ordinances and regulations of the City of Hayward.

D.    Restoration of Premises.    Landlord and Tenant agree that upon the expiration or earlier termination of this Lease, as the same may be extended Tenant shall be responsible at its sole cost and expense to restore the portion of the Premises improved by the Expansion Improvements such area shown on Exhibit B attached hereto as the “Expansion Area” to include approximately thirty percent (30%’) or said area as office space such office space to be located along the glass entry area of the Building, as well as a restroom core. Notwithstanding the above Tenant shall not be responsible for such restoration if the Expansion Improvements are constructed such that the Expansion Area includes at least thirty percent (30%) office space located along the glass entry area of the Building and a restroom core.

E.    Renewal Option.    Provided Tenant is not in default of its obligations under this Lease beyond the expiration or any applicable cure period. Tenant shall have two (2) options, each for a term of five (5) years, to extend this Lease at fair market rent for comparable space in terms of location identity, tenant improvements (specifically excluding the value of the improvements made by Tenant), age and condition in the Hayward area. In no event will the monthly rental for the renewal period be less than the rental for the last month of the previous term.

Tenant shall give landlord written notice of its intent to exercise its option at least two hundred forty (240) days prior to the expiration of the then current lease term. Within fifteen (15) days after Tenant exercises its option to renew, Landlord will provide Tenant with the fair market rent, as determined by Landlord. Tenant shall have fifteen (15) clays from notification by Landlord of proposed rent to accept or reject Landlord’s market rent. If Tenant does not accept Landlord’s rental figure within the fifteen (15) day period, the parties shall attempt to determine the rent as follows:

Within ten (10) days after Tenant’s rejection of Landlord’s rent determination, each party hereto shall appoint one representative who shall be a licensed real estate broker with at least ten (10) years experience in leasing R&D/ Manufacturing space in the County of Alameda to act as an arbitrator. The two (2) arbitrators so appointed shall attempt in good faith to agree upon the then current rental value for the subsequent five (5) nears for the use to which Tenant is then utilizing the leased Premises pursuant to the terms and conditions of this Lease.

In the event that the arbitrators are unable to reach agreement upon the rent to be paid for the Premises during any extended term within sixty (60) days from notification by Landlord to Tenant or Landlord’s rental determination for such extended term either party shall thereafter have the right to terminate discussions with respect to the extension option at any time prior to any such agreement, and neither purls shall thereafter have any obligation or liability with respect to such extension option.

F.    Equipment Financing.    Landlord agrees that Tenant shall have the right at its discretion to mortgage hypothecate or convey a security interest in Tenant’s equipment and personal property within the Premises to a lienholder (each, a “Lienholder” as security for its obligations under

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any equipment lease or other financing arrangement related to the conduct of Tenant’s business, provided that (i) Landlord is not required to execute any documentation or perform any act ill connection herewith, (ii) no lienholder shall conduct ill sale, public or private of any property on the Premises, (iii) in the event that any Lienholder shall damage the Premises ill removing any such equipment or personal property, such Lienholder shall agree to repair such damage to the extent necessary to restore the Premises to its condition immediately prior to such removal and (iv) in the event that Lienholder shall fail to remove any such equipment or personal property from the Premises on or before termination of this Lease, Lienholder shall agree to pay Landlord Rent prorated for the period of time during which such equipment or personal property shall remain on the Premises following such termination. Notwithstanding the foregoing any rights granted to a Lienholder shall be subject to the rights of any mortgage of Landlord with a secured interest in the property of which the Premises are a part.

G.    Early Occupancy.    Tenant shall have the right to occupy the Premises thirty (30) days prior to the Scheduled Term Commencement date in order to move Tenant’s equipment into the Premises. During said Early Occupancy period, Tenant shall be subject to all of the terms and conditions of the Lease, with the exception of the payment of Rent.

H.    Addenda.    Exhibits A and B attached hereto are hereby incorporated into and made a part of this Lease as though fully set forth herein.

IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and the year first above written.

Landlord
Spieker Properties, L.P. a California limited partnership
By:	Spieker Properties, Inc., a Maryland corporation, its general partner
	By:
	Its: Senior Vice President
	Date: December 1, 1997
Tenant
Rhone-Poulenc Rorer Pharmaceuticals, Inc.
a Delaware Corporation
	By:
	Its: Senior Vice President
	Date:

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EXHIBIT C

Copy of Bill of Sale

THIS BILL OF SALE is entered into this 21st day of June, 2002, by and between AVENTIS PHARMACEUTICALS INC., formerly named Rhone-Poulenc Rorer Pharmaceuticals, Inc., a Delaware corporation (“API”) and KOSAN BIOSCIENCES, INC., a Delaware corporation (“Kosan”).

WHEREAS, API and Kosan have entered into an Assignment of Lease dated as of June 21, 2002 (“Assignment”); and

WHEREAS, in connection with the Assignment, API desires to transfer, convey, assign, and deliver to Kosan all of API’s right, title and interest in and to the assets described on Exhibit A attached hereto and incorporated by reference herein (“Assets”), and Kosan desires to accept the transfer, conveyance, assignment and delivery thereof.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, API has bargained, sold, transferred, assigned, set over, and conveyed, and by these presents hereby bargains, sells, transfers, conveys, assigns, sets over, and delivers to Kosan and its successors and assigns the Assets, to have and to hold the Assets by Kosan, its successors and assigns, to its and their use and behalf forever, free and clear of all liens and encumbrances.

API hereby represents and warrants to Kosan that API has good and marketable title to the Assets and that it will warrant and defend such title to the Assets against the claims of all persons; that the Assets are free and clear of all liens, charges and encumbrances; and that API has full right, power and authority to sell the Assets and to make this Bill of Sale.

This Bill of Sale shall be and become effective as provided in the Assignment.

IN WITNESS WHEREOF, the undersigned have caused their duly authorized officers to execute this Bill of Sale on the day and year first above written.

AVENTIS PHARMACEUTICALS INC.
By:	/s/    CHARLES D. DALTON
Name: Title	Charles D. Dalton VP—Legal/Corporate Development
Accepted by Kosan this 21st day of June, 2002.

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KOSAN BIOSCIENCES, INC.
By:	/s/    MICHAEL S. OSTRACH
Name: Title:	Michael S. Ostrach President

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EX-99.1

Exhibit 99.1

CERTIFICATION

Pursuant to Section 906 of the Public Company Accounting Reform Investor and Protection Act of 2002 (18 U.S.C. § 1350, as adopted) (the “Sarbanes-Oxley Act of 2002”), Daniel V. Santi, M.D., Ph.D., the Chief Executive Officer of Kosan Biosciences Incorporated, a Delaware corporation (the “Company”), and Susan M. Kanaya, the Chief Financial Officer of the Company, each hereby certifies that, to his or her knowledge:

(a) The Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, to which this Certification is attached as Exhibit 99.1 (the “Periodic Report”), fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934, as amended; and

(b) The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the periods covered by the Periodic Report and the results of operations of the Company for the periods covered by the Periodic Report.

This certification accompanies the Periodic Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

Dated: August 13, 2002

/s/    DANIEL V. SANTI, M.D., PH.D.

Daniel V. Santi, M.D., Ph.D.

Chief Executive Officer

/s/    SUSAN M. KANAYA

Susan M. Kanaya

Chief Financial Officer