10-Q

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

o 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 0-10605

ODETICS, INC.
(Exact name of registrant as specified in its charter)

Delaware	95-2588496
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1515 South Manchester Avenue	92802
Anaheim, California	(Zip Code)
(Address of principal executive office)

(714) 774-5000
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all documents and 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 such filing requirements for the past 90 days.

Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Number of shares of Common Stock outstanding as of AUGUST 08, 2002:

Class A Common Stock—11,580,914 shares.
Class B Common Stock—1,035,841 shares.  

INDEX

PART I    FINANCIAL INFORMATION
ITEM 1.	CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2002 (UNAUDITED)	3
	CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2002 AND JUNE 30, 2002 (UNAUDITED)	4
	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2002 (UNAUDITED)	5
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	6
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	9
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	25
SIGNATURES		26

In this Report, "Odetics," the "Company," "we," "us" and "our" collectively refers to Odetics, Inc. and its subsidiaries.

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PART I    FINANCIAL INFORMATION

ODETICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)

			Three Months Ended June 30,
			2001			2002
Net sales and contract revenues:
	Net sales		$	10,700		$	9,088
	Contract revenues			5,684			6,215
		Total net sales and contract revenues		16,384			15,303
Costs and expenses:
	Cost of sales			7,178			4,583
	Cost of contract revenues			3,820			4,099
		Gross profit		5,386			6,621
	Selling, general and administrative expense			7,010			5,189
	Research and development expense			2,137			1,754
		Total operating expenses		9,147			6,943
Operating loss				(3,761	)		(322	)
Non-operating items
	Other income			—			605
	Interest expense, net			(595	)		(555	)
Loss before income taxes				(4,356	)		(272	)
	Income tax benefit			—			—
Loss from continuing operations before minority interest				(4,356	)		(272	)
	Minority interest in earnings of subsidiary			—			1,028
Loss from continuing operations				(4,356	)		(1,300	)
Loss from discontinued operations, net of taxes of $0				(2,969	)		—
Extraordinary loss from early extinguishment of debt, net of tax of $0				(450	)		—
Net loss			$	(7,775	)	$	(1,300	)
Loss per share:
	Basic and diluted
		Loss from continuing operations	$	(0.41	)	$	(0.10	)
		Loss from discontinued operations		(0.28	)		(0.00	)
		Extraordinary loss from the early extinguishment of debt		(0.04	)		(0.00	)
		Loss per share	$	(0.74	)	$	(0.10	)
Shares used in calculating loss per share:
	Basic and diluted			10,552			12,587

See notes to consolidated financial statements

3

ODETICS, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands)

			March 31, 2002 (Audited)			June 30, 2002 (Unaudited)
ASSETS:
Current assets
	Cash		$	408		$	1,344
	Trade accounts receivable, net			10,301			11,711
	Costs and estimated earnings in excess of billings on uncompleted contracts			3,565			3,418
	Inventories:
		Finished goods		1,034			3,117
		Work in process		103			489
		Materials and supplies		7,275			3,976
	Total inventories			8,412			7,582
	Income taxes receivable			785			98
	Prepaid expenses			1,045			881
	Assets to be disposed of from discontinued operations			205			285
Total current assets				24,721			25,319
Restricted cash				—			3,016
Property, plant and equipment:
	Land			2,060			—
	Buildings and improvements			19,014			50
	Equipment, furniture and fixtures			28,087			28,196
	Less accumulated depreciation			(31,441	)		(24,572	)
	Net property, plant and equipment			17,720			3,674
Goodwill, net				9,769			9,807
Other assets				28			144
	Total assets		$	52,238		$	41,960
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Trade accounts payable		$	6,611		$	6,746
	Accrued payroll and related			5,295			5,575
	Accrued expenses			1,373			1,022
	Contract loss accrual			600			525
	Billings in excess of costs and estimated earnings on uncompleted contracts			2,236			2,100
Liabilities of discontinued operations				1,800			1,070
Current portion of long-term debt				16,133			115
Total current liabilities				34,048			17,153
Revolving line of credit				2,017			1,250
Long-term debt, less current portion				25			—
Deferred gain on sale of building				—			7,436
Minority interest				10,893			11,921
Stockholders' equity
	Preferred stock, 2,000,000 shares authorized; none issued			—			—
	Common stock, 50,000,000 shares of Class A and 2,600,000 shares of Class B authorized; 11,580,914 shares of Class A and 1,035,841 shares of Class B issued and outstanding at June 30, 2002, $.10 par value			1,252			1,262
	Paid-in capital			89,134			89,500
	Treasury stock			(1	)		(1	)
	Notes receivable from associates			(51	)		(51	)
	Retained earnings			(85,320	)		(86,620	)
	Accumulated other comprehensive income			241			110
Total stockholders' equity				5,255			4,200
Total liabilities and stockholders' equity			$	52,238		$	41,960

See notes to consolidated financial statements

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ODETICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

			Three Months Ended June 30,
			2001			2002
Operating activities
	Net income (loss) from continuing operations		$	(4,806	)	$	(1,300	)
	Net loss from discontinued operations			(2,969	)		—
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization		1,212			395
		Minority interest in earnings of subsidiary		—			1,028
		Gain on sale and leaseback transactions		—			(640	)
		Other		(108	)		166
		Changes in operations assets and liabilities:
		(Increase) decrease in accounts receivable		1,396			(1,410	)
		(Increase) decrease in net costs and estimated earnings in excess of billings		107			11
		(Increase) decrease in inventories		1,115			830
		(Increase) decrease in prepaids and other assets		(637	)		685
		Change in net assets of discontinued operations		—			(810	)
		Increase (decrease) in accounts payable and accrued expenses		(664	)		(11	)
Net cash provided by (used in) operating activities				(5,354	)		(1,056	)
Investing activities
	Purchases of property, plant and, equipment			(464	)		(114	)
	Proceeds from sale of property, plant and equipment			1,112			18,951
	Other			345			(131	)
Net cash provided by (used in) investing activities				993			18,706
Financing activities
	Proceeds from revolving line of credit and long-term borrowings			16,659			—
	Principal payments on line of credit, long-term debt and capital lease obligations			(12,279	)		(17,056	)
	Proceeds from sale of Iteis common stock			—			201
	Proceeds from issuance of common stock			12			141
Net cash provided by (used in) financing activities				4,392			(16,714	)
Increase in cash				31			936
Cash at beginning of year				2,218			408
Cash at June 30			$	2,249		$	1,344
Non-cash transactions
	Stock issuance to former shareholders of Meyer, Mohaddes Associates, Inc.			250			—
	Issuance of warrants			1,357			—
	Restricted cash received on sale of building			—			3,016
	Contribution of common stock to 401K			—			141

See notes to consolidated financial statements

5

ODETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1—Basis of Presentation and Operations

        In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the consolidated financial position of Odetics, Inc. as of June 30, 2002 and the consolidated results of operations and cash flows for the three months ended June 30, 2001 and 2002. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the Unites States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations for the three months ended June 30, 2002 are not necessarily indicative of those to be expected for the entire year. The accompanying consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended March 31, 2002 filed with the Securities and Exchange Commission.

        During the three months ended June 30, 2002, we used $1.1 million of cash to fund our operations, which reflects our net loss of $1.3 million increased by non-cash gains of $640,000 related to the sale of our real estate assets, and reduced by non-cash charges of $395,000 for depreciation and amortization, $1.0 million in charges related to the minority interest in our Iteris subsidiary, and an aggregate of $880,000 related to the net change in inventories, prepaid expenses, and accounts receivable. As of June 30, 2002, we had cash and cash equivalents of $1.3 million.

        In May 2002, we completed the sale and leaseback of our Anaheim, California facilities for an aggregate sale price of $22.6 million. Approximately $16.4 million of the proceeds from this sale were used to repay the outstanding indebtedness under the 2001 promissory note, which was secured by a first deed of trust on our Anaheim facilities. In connection with the sale and leaseback, the Company pledged cash of $3.0 million to secure its obligations under the lease. The pledged amounts will be released to the Company based upon its continued compliance with financial covenants and performance under the lease. The balance of the proceeds from this sale was used for general working capital purposes. We committed to lease one of the two buildings on the property for a period of ten years, and to lease the other building for a period of 30 months.

        We have lease commitments for facilities in various locations throughout the United States. The annual commitment under these noncancelable operating leases including the leaseback of the Anaheim facilities at June 30, 2002 is as follows:

Fiscal Year	(in Thousands)
2003	$	2,133
2004	$	2,677
2005	$	2,341
2006	$	1,825
2007	$	1,825
Thereafter	$	9,429

        We expect that our operations will continue to use net cash at least through the second quarter of fiscal 2003. We also expect to have an ongoing need to raise cash by securing additional debt or equity financing, or by divesting certain assets to fund our operations until we return to profitability and positive operating cash flows. However we cannot be certain that we will be able to secure additional debt or equity financing or divest of certain assets on terms acceptable to us, or at all. Our future cash requirements will be highly dependent upon our ability to control expenses, as well as the successful

6

execution of the revenue plans by each of our business units. As a result, any projections of future cash requirements and cash flows are subject to substantial uncertainty.

        These conditions, together with our recurring operating losses, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or liabilities that may result from the outcome of this uncertainty.

Note 2—Income Taxes

        Income tax expense (benefit), if any, for the three months ended June 30, 2001 and 2002 has been provided at the estimated annualized effective tax rates based on the estimated income tax liability or assets and change in deferred taxes for their respective fiscal years. Deferred taxes result primarily from temporary differences in the reporting of income for financial statement and income tax purposes. These differences relate principally to the use of accelerated cost recovery depreciation methods for tax purposes, capitalization of interest and taxes for tax purposes, capitalization of computer software costs for financial statement purposes, deferred compensation, other payroll accruals, reserves for inventory and accounts receivable for financial statement purposes and general business tax credit and alternative minimum tax credit carryforwards for tax purposes. We did not provide income tax benefit for the losses incurred in the three months ended June 30, 2001 and June 30, 2002 due to the uncertainty as to the ultimate realization of the benefit at that time.

Note 3—Long-Term Debt

	March 31, 2002		June 30, 2002
	(in thousands)
Revolving line of credit	$	2,017	$	1,250
Notes payable		15,756		—
Contracts payable		402		115
		18,175		1,365
Less current portion		16,133		115
	$	2,042	$	1,250

Note 4—Legal Proceedings

        We are not a party to any material legal proceedings.

Note 5—Comprehensive Income (Loss)

        The components of comprehensive income (loss) are as follows (in thousands):

	Three Months Ended June 30,
	2001			2002
Net income (loss)	$	(7,775	)	$	(1,300	)
Foreign currency translation adjustment		345			(131	)
Comprehensive income (loss)	$	(7,431	)	$	(1,431	)

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Note 6—Business Segment Information

        Odetics operates in three reportable segments: intelligent transportation systems ("ITS"), video products, which include products for the television broadcast and video security markets, and telecom products. Selected financial information for our reportable segments for the three months ended June 30, 2001 and 2002 are as follows (in thousands):

	Intelligent Transportation Systems		Video Products			Telecom Products			Total
Three Months Ended June 30, 2001
Revenue from external customers	$	7,712	$	7,428		$	1,244		$	16,384
Segment loss		32		(1,291	)		(1,050	)		(2,309	)
Three Months Ended June 30, 2002
Revenue from external customers		10,259		2,673			2,371			15,303
Segment income (loss)		927		(451	)		(64	)		412

        The following reconciles segment income (loss) to consolidated income (loss) before income taxes (in thousands):

	Three Months Ended June 30,
	2001			2002
Total profit or loss for reportable segments		(2,309	)		412
Unallocated amounts:
Corporate and other expenses		(1,452	)		(734	)
Other income		—			605
Interest expense		(595	)		(555	)
Loss from continuing operations	$	(4,356	)	$	(272	)

Note 7—Recent Accounting Pronouncements

        In 2001, the FASB issued Statement No. 141, Business Combinations ("SFAS 141"), and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which we adopted on April 1, 2002. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but, instead, will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. We have applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003. At June 30, 2002, we had goodwill of approximately $9.8 million. Pursuant to SFAS 142, we tested our goodwill for impairment and determined there was no requirement for an impairment charge.

        On a pro forma basis, application of the non-amortization provision of SFAS 141 would have resulted in a net loss in the three months ended June 30, 2001 of $7.3 million.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in this Report and in the Annual Report on Form 10-K of Odetics. When used in this Report, the words "expect(s)," "feel(s)," "believe(s)," "intends," "plans," "will," "may," "anticipate(s)" and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, among other things, statements concerning our ability to obtain a new credit line and secure other sources of capital, our ability to sell existing assets, projected revenues, expenses and results of operations, cash requirements, supply issues, market acceptance of new products, our business strategy, and involve a number of risks and uncertainties, including without limitation, those set forth at the end of this Item 2 under the caption "Risk Factors." Our actual results may differ materially from any forward-looking statements discussed herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

General

        We define our business segments as ITS, video products and telecom products. The ITS segment consists of our majority-owned subsidiary, Iteris, Inc. The video products segment includes our wholly-owned subsidiaries, Broadcast, Inc. and MAXxess Systems, Inc. (previously known as Gyyr Incorporated). The telecom products segment consists of Zyfer, Inc., our wholly-owned subsidiary (formerly known as our Communications division). In April 2001, Gyyr separated its operations into two divisions, the Gyyr CCTV Products line, which manufactures analog and digital storage solutions, and the Gyyr Electronic Access Control line, which manufactures enterprise security management systems. In September 2001, we sold substantially all of the assets and certain liabilities of the Gyyr CCTV Products line. In connection with the sale, we changed the name of Gyyr to MAXxess Systems, Inc. to reflect the focus of the business on electronic access control systems.

        All references to our subsidiaries in this report include the prior business and results of operations of such subsidiaries as our business units prior to their incorporation.

        During the quarter ended December 31, 2000, we began a restructuring to reduce our overall expenses and to focus our business on those areas that we believe would provide the highest return for stockholder capital. This restructuring resulted in a 25% reduction in our workforce in the fiscal year ended March 31, 2001 and the discontinuation of certain product lines. The restructuring efforts in fiscal 2001 also resulted in restructuring charges of approximately $6.3 million for severance costs and the write down of certain assets. In September 2001, in connection with continued cost control efforts and the slowdown in the telecommunications industry, our Board of Directors approved the immediate discontinuation of Mariner Networks, Inc., our wholly-owned subsidiary. Mariner had previously been included within our telecom products segment. Losses from the operations of Mariner are included in the loss from discontinued operations of $3.0 million during the three months ended June 30, 2001.

        As a result of the sale of the Gyyr CCTV Products line and the discontinuation of Mariner, in September 2001, we reorganized our European operations and reduced our corporate staff. The reorganization of the European operations included the discontinuation of our Odetics Europe Ltd., Gyyr Europe Ltd., Mariner France and Mariner Europe Ltd. operations, and the transition of our Broadcast and MAXxess international operations to branch office operations with the intent of lowering our international costs.

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Critical Accounting Policies And Estimates

        Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements included herein, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates and assumptions, including those related to the collectibility of accounts receivable, the valuation of inventories, the recoverability of long-lived assets, including goodwill, and reserves for restructuring and related activities. We base these estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions by their nature involve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or assumptions are inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

        The following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

        Revenue Recognition.    We record product revenues and related cost of sales on the date of shipment or, if required, upon acceptance by the customer, provided that we believe collectibility of the net sales amount is probable. Accordingly, at the date revenue is recognized, the significant uncertainties concerning the sale have been resolved. Unless otherwise stated in our product literature, we generally provide a one to two year warranty on all products materials and workmanship, and establish reserves for potential warranty returns as products are shipped. Defective products will be either repaired or replaced, at our option, upon meeting certain criteria.

        Contract revenue is derived primarily from long-term contracts with governmental agencies. Contract revenue includes costs incurred plus a portion of estimated fees or profits determined on the percentage of completion method of accounting based on the relationship of costs incurred to total estimated costs. We record a charge to earnings for any anticipated losses on contracts in the period in which such losses are identified. Changes in job performance and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to cost and revenue and are recognized in the period in which the revisions are determined. We include in revenue profit incentives in the period in which their realization is reasonably assured.

        We sell certain products that include software, which is integral to the functionality of the product. When such products do not require significant production, modification or customization of the software, we recognize revenue upon delivery, assuming the fee is fixed and collectibility is probable. If an arrangement requires significant production, modification or customization of the software, we account for the arrangement on the percentage of completion method of accounting as the costs are incurred.

        We record revenues from follow-on service and support, for which we charge separately, in the period in which such services are performed. We record revenues from computer software maintenance agreements ratably over the term of the agreements. When computer software maintenance is included in a software license agreement, we defer an appropriate portion of the license fee and recognize it over the maintenance period.

        Accounts Receivable.    We estimate the collectibility of customer receivables on an ongoing basis by periodically reviewing balances outstanding over a certain period of time. We have recorded reserves

10

for receivables deemed to be at risk for collection as well as a general reserve based on our historical experience. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make required payments, additional allowances may be required which could adversely affect our operating results.

        Inventory.    We state our inventories at the lower of cost or market and provide reserves for potentially excess and obsolete inventory. In assessing the ultimate realization of inventories, we make judgments as to future demand requirements and compare that with the current or committed inventory levels. Reserves are established for inventory levels that exceed future demand. It is possible that reserves over and above those already established may be required in the future if market conditions for our products should deteriorate.

        Impairment of Assets and Restructuring.    We assess the impairment of long lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. Changes in our strategic plan and/or market conditions could significantly impact these judgments and require adjustments to recorded asset balances.

        On April 1, 2002, we adopted FASB 142. Under SFAS 142, goodwill is subject to annual impairment tests based upon a comparison of the fair value of each of our reporting units, as defined, and the carrying value of the reporting units' net assets, including goodwill. Pursuant to SFAS 142, we tested our goodwill for impairment, and determined there was no requirement for an impairment charge.

        During fiscal 2002, we recorded reserves in connection with the discontinuation of out Mariner Networks subsidiary, the sale of the assets of our Gyyr CCTV Products line and the restructuring of our European operations. These reserves include estimates pertaining to employee separation costs and facility closure costs. Although we do not anticipate significant changes, the actual costs to settle such liabilities may differ from the amounts estimated.

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Results of Operations

        The following table sets forth certain income statement data as a percentage of total net sales and contract revenues for the periods indicated and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations.

		Three Months Ended June 30,
		2001		2002
Net sales		65.3	%	59.4	%
Contract revenues		34.7		40.6
	Total net sales and contract revenues	100.0	%	100.0	%
Gross profit—net sales		32.9		49.6
Gross profit—contract revenues		32.8		34.0
Selling, general and administrative expense		42.8		33.9
Research and development expense		13.0		11.5
Operating loss		(23.0	)	(2.1	)
Non-operating income (expense):
	Other income	—		3.9
	Interest expense, net	(3.6	)	(3.6	)
Income taxes (benefit)		—		—
Minority interest in earnings of subsidiary		—		(6.7	)
Loss from discontinued operations, net of income taxes		(18.1	)	—
Extraordinary loss from early extinguishment of debt		(2.8	)	—
Net loss		(47.5	)%	(8.5	)%

        Net Sales and Contract Revenues.    Net sales and contract revenues consist of (i) sales of products and services to commercial and municipal agencies ("net sales") and (ii) revenues derived from contracts with state, county and municipal agencies for ITS projects and ("contract revenues"). Contract revenues also include revenue from contracts with agencies of the United States government and foreign entities for space-borne recorders. Total net sales and contract revenues decreased 6.6% to $15.3 million for the three months ended June 30, 2002 compared to $16.4 million for the corresponding period of the prior fiscal year.

        Net sales decreased 15.1% to $9.1 million for the three months ended June 30, 2002 compared to $10.7 million in the corresponding period of the prior fiscal year. The decrease in net sales in the three months ended June 30, 2002 was attributable to our sale of the Gyyr CCTV Products division ("CCTV") in September 2001. CCTV product sales comprised $4.9 million of net sales in the three months ended June 30, 2001. The Company experienced increased sales in Broadcast, Zyfer and Iteris in the three months ended June 30, 2002 compared to the corresponding period of the prior fiscal year. Iteris sales growth reflects increased unit sales of Vantage video detection systems. Broadcast experienced increased unit sales of its AIRO automation systems, and Zyfer experienced increased sales of its CommSynch II products and revenue contribution from the sale of its E-911 position location systems used in cellular base station applications, which began shipping in the three months ended June 30, 2002. Zyfer did not offer the E-911 product offering in the three months ended June 30, 2001. MAXxess sales were relatively flat in the three months ended June 30, 2002 compared to the corresponding period of the prior fiscal year.

        Contract revenues increased 9.3% to $6.2 million in the three months ended June 30, 2002 compared to $5.7 million in the corresponding period of the prior fiscal year. The increase in contract

12

revenues largely reflects an increase in Iteris' contract revenues for ITS systems design and consulting projects.

        Contract revenues derived from Iteris represented 90.0% of total contract revenues in the three months ended June 30, 2002 compared to 88.4% of total contract revenues in the corresponding period of the prior fiscal year. Contract revenues derived from the sale of space-borne recorders and related service and equipment to agencies of the United States Government were relatively flat during the three months ended June 30, 2002 compared to the corresponding period of the prior fiscal year.

        Gross Profit.    Total gross profit increased 22.9% to $6.6 million in the three months ended June 30, 2002 compared to $5.4 million in the corresponding period of the prior fiscal year. Total gross profit as a percent of net sales and contract revenues increased to 43.3% in the three months ended June 30, 2002 compared to 32.9% in the corresponding period of the prior fiscal year. Gross profit as a percentage of net sales increased to 49.6% in the three months ended June 30, 2002 compared to 32.9% in the corresponding period of the prior fiscal year.

        The increase in gross profit in the three months ended June 30, 2002 compared to the corresponding period of the prior fiscal year reflects increased gross profit on net sales in Iteris, Broadcast and Zyfer. Iteris' gross profits improved primarily as a result of a 69.1% increase in Vantage sales and related improved manufacturing efficiencies. Broadcast experienced improved gross profit as a result of its focus on the sale of higher margin AIRO Automation Systems, and fewer sales of automated tape libraries, which historically had low gross profits relative to sales. Zyfer's gross profits improved as a result an 88.3% growth in Zyfer revenues accompanied by an improved mix of products containing higher gross profits. The increase in gross profit in the three months ended June 30, 2002 also reflects the benefit of the divestiture of the Gyyr CCTV Product line in September 2001, which historically had low gross margins relative to net sales.

        Gross profit as a percent of contract revenues increased to 34.0% in the three months ended June 30, 2002 compared to 32.8% in the corresponding period of the prior fiscal year. We recognize contract revenues and related gross profit using percentage of completion contract accounting, and the underlying mix of contract activity primarily affects the related gross profit recognized in any given period.

        Selling, General and Administrative Expense.    Selling, general and administrative expense decreased 26.0% to $5.2 million (or 33.9% of total net sales and contract revenues) in the three months ended June 30, 2002 compared to $7.0 million (or 42.8% of total net sales and contract revenues) in the corresponding period of the prior fiscal year. Approximately $477,000 of the decrease reflects the impact of Statement 142, which we adopted on April 1, 2002. As a result of our adoption of Statement 142, we did not incur expense for the amortization of goodwill during the three months ended June 30, 2002. Approximately $360,000 of the decrease reflects reductions associated with the restructuring of the Broadcast product line and related sales and marketing organization associated with its general reorganization. The balance of the decrease is primarily associated with the divestiture of the assets of the Gyyr CCTV product line in September 2001, which resulted in a substantial reduction in selling, general and administrative expenses.

        Research and Development Expense.    Research and development expense decreased 17.9% to $1.7 million (or 11.5% of total net sales and contract revenues) in the three months ended June 30, 2002 compared $2.1 million (or 13.0% of total net sales and contract revenues) in the corresponding period of the prior fiscal year. Product development activity and costs related to the Gyyr CCTV product line were eliminated concurrent with the divestiture of the Gyyr CCTV Product line in September 2001. Most of the decrease in research and development is related to the divestiture of the CCTV product line, partially offset by increased development costs to support continued development of our AutoVue product line at Iteris. Most of our development costs are incurred for payroll and

13

related benefits and prototype material and consulting fees. For competitive reasons, we closely guard the confidentiality of specific development projects.

        Other Income.    In May 2002, we completed the sale and leaseback of our Anaheim, California facilities for an aggregate sale price of $22.6 million. In connection with the sale, the Company realized a gain of $8.2 million, of which approximately $640,000 was recognized in the three months ended June 30, 2002. The balance of the gain is expected be recognized over the related leaseback periods.

        Interest Expense.    Interest expense decreased 6.7% in the three months ended June 30,2002 compared to the corresponding period of the prior fiscal year. As a result of sale and leaseback of our Anaheim, California facilities, the $16.4 million outstanding indebtedness under the 2001 promissory note was repaid. The decrease in interest expense in the three months ended June 30, 2002 reflects lower average outstanding borrowings compared to the corresponding period of the prior fiscal year

        Extraordinary Item.    The extraordinary loss recognized in the three months ended June 30, 2001 relates to a prepayment penalty on the retirement of our mortgage note payable resulting from the refinancing of our Anaheim real property.

        Income Taxes.    We have not provided income tax benefit for the losses incurred in the three months ended June 30, 2002 and the corresponding period of the prior fiscal year due to the uncertainty as to the ultimate realization of the related benefit.

Liquidity and Capital Resources

        During the three months ended June 30, 2002, we used $1.1 million of cash to fund our operations, which reflects our net loss of $1.3 million increased by non-cash gains of $640,000 related to the sale of our real estate assets, and reduced by non-cash charges of $395,000 for depreciation and amortization, $1.0 million in charges related to the minority interest in our Iteris subsidiary, and an aggregate of $880,000 related to the net change in inventories, prepaid expenses and accounts receivable. As of June 30, 2002, we had cash and cash equivalents of $1.3 million.

        In May 2002, we completed the sale and leaseback of our Anaheim, California facilities for an aggregate sale price of $22.6 million. Approximately $16.4 million of the proceeds from this sale were used to repay the outstanding indebtedness under the 2001 promissory note, which was secured by a first deed of trust on our Anaheim facilities. In connection with the sale and leaseback, the Company pledged cash of $3.0 million to secure its obligations under the lease. The pledged amounts will be released to the Company based upon its continued compliance with financial covenants and performance under the lease. The balance of the proceeds from this sale was used for general working capital purposes. We committed to lease one of the two buildings on the property for a period of ten years, and to lease the other building for a period of 30 months.

        The Company's contractual obligations are as follows at June 30, 2002

		Payments Due by Period (in thousands)
		Total		1 year or less		2-3 years		4-5 years		After 5 years
Lines of credit		$	1,250	$	—	$	1,250	$	—	$	—
Capital lease obligations			115		115		0		—		—
Operating leases			20,230		2,843		4,764		3,650		8,973
	Total		21,595		2,958		6,014		3,650		8,973

        We expect that our operations will continue to use net cash at least through the second quarter of fiscal 2003. We also expect to have an ongoing need to raise cash by securing additional debt or equity financing, or by divesting certain assets to fund our operations until we return to profitability and

14

positive operating cash flows. However, we cannot be certain that we will be able to secure additional debt or equity financing or divest of certain assets on terms acceptable to us, or at all. Our future cash requirements will be highly dependent upon our ability to control expenses, as well as the successful execution of the revenue plans by each of our business units. As a result, any projections of future cash requirements and cash flows are subject to substantial uncertainty.

        These conditions, together with our recurring operating losses, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or liabilities that may result from the outcome of this uncertainty.

Recent Accounting Pronouncements

        In 2001, the FASB issued Statement No. 141, Business Combinations ("SFAS 141"), and Statement No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which we adopted on April 1, 2002. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but, instead, will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. We have applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003. At June 30, 2002, we had goodwill of approximately $9.8 million. Pursuant to SFAS 142, we tested our goodwill for impairment and determined there was no requirement for an impairment charge.

        On a pro forma basis, application of the non-amortization provision of SFAS 141 would have resulted in a net loss in the three months ended June 30, 2001 of $7.3 million.

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RISK FACTORS

Before deciding to invest in Odetics or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the SEC, including our reports on Forms 10-Q and 8-K. 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 may also affect our business operations. If any of these risks actually occur, our business, financial condition or results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment.

        We Have Experienced Substantial Losses and Expect Future Losses.    We experienced operating losses of $0.3 million in the three months ended June 30, 2002, $10.8 million in the year ended March 31, 2002, $37.9 million in the year ended March 31, 2001 and $32.9 million in the year ended March 31, 2000. In the quarter ended September 30, 2001, we downsized our business in connection with our sale of the Gyyr CCTV Products line, the discontinuation of the business of our Mariner Networks subsidiary and the reorganization of our European operations. We cannot assure you that our efforts to downsize our operations will improve our financial performance, or that we will be able to achieve profitability on a quarterly or annual basis in the future. Most of our expenses are fixed in advance, and we generally are unable to reduce our expenses significantly in the short-term to compensate for any unexpected delay or decrease in anticipated revenues. As a result, we may continue to experience losses, which would make it difficult to fund our operations and achieve our business plan, and could cause the market price of our common stock to decline.

        We Will Need to Raise Additional Capital in the Future and May Not Be Able to Secure Adequate Funds on Terms Acceptable to Us, or at All.    We have generated significant net losses in recent periods, and have experienced negative cash flows from operations of $1.1 million in the three months ended June 30, 2002, $18.2 million in the year ended March 31, 2002 and $20.1 million in the year ended March 31, 2001. Although we completed the sale of our Anaheim, California property in May 2002, the majority of the proceeds of such sale were used to repay outstanding short-term indebtedness. We anticipate that we will need to raise additional capital in the future. Our Iteris subsidiary currently maintains a line of credit with a maximum availability of $5.0 million, which expires in August 2004. Substantially all of the assets of Iteris have been pledged to the lender to secure the outstanding indebtedness under this facility (although there were no amounts outstanding under the line of credit at June 30, 2002). We also incurred cash obligations in the amount of $3.0 million payable over the next seven months related to the discontinuation of Mariner Networks and the reorganization of our European operations. We plan to raise additional capital in the near future, either through bank borrowings, other debt or equity financings, or the divestiture of business units or select assets. We cannot assure you that any additional capital will be available on a timely basis, on acceptable terms, or at all. These conditions, together with our recurring losses and cash requirements, raise substantial doubt about our ability to continue as a going concern.

        Our capital requirements will depend on many factors, including:

•

our ability to control costs;



•

market acceptance of our products and the overall level of sales of our products;



•

our ability to generate operating income;



•

increased research and development funding, and required investments in our business units;



•

increased sales and marketing expenses;



•

technological advancements and our competitors' response to our products;

16

•

capital improvements to new and existing facilities;



•

potential acquisitions of businesses and product lines;



•

our relationships with customers and suppliers; and



•

general economic conditions including the effects of the current economic slowdown and international conflicts.

        If our capital requirements are materially different from those currently planned, we may need additional capital sooner than anticipated. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and such securities may have rights, preferences and privileges senior to our common stock. Additional financing may not be available on favorable terms or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to continue our operations as planned, develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or respond to competitive pressures.

        The Trading Price of Our Common Stock Is Volatile.    The trading price of our common stock has been subject to wide fluctuations in the past. Since January 2000, our common stock has traded at prices as low as $1.27 per share and as high as $29.44 per share. In April 2002, because we failed to meet the minimum stockholder's equity requirement for continued listing on the Nasdaq National Market, both our Class A common stock and Class B common stock were delisted from the Nasdaq National Market and subsequently approved for listing on the Nasdaq SmallCap Market. If our stock price continues to decline or declines below $1.00 per share for a period of time, our common stock could be subject to delisting from the Nasdaq SmallCap Market and there may not be a market for our stock. We may not be able to increase or sustain the current market price of our common stock in the future. As such, you may not be able to resell your shares of common stock at or above the price you paid for them. The market price of our common stock could continue to fluctuate in the future in response to various factors, including, but not limited to:

•

quarterly variations in operating results;



•

our ability to control costs and improve cash flow;



•

shortages announced by suppliers;



•

announcements of technological innovations or new products by our competitors, customers or us;



•

acquisitions or businesses, products or technologies;



•

changes in pending litigation or new litigation;



•

changes in investor perceptions;



•

our ability to spin-off any business unit;



•

applications or product enhancements by us or by our competitors; and



•

changes in earnings estimates or investment recommendations by securities analysts.

        The stock market in general has recently experienced volatility, which has particularly affected the market prices of equity securities of many high technology companies. This volatility has often been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, companies that have experienced volatility in the market price of their securities have been the subject of securities class action litigation. If we were to become the subject of a class action lawsuit, it could result in substantial losses and divert management's attention and resources from other matters.

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        We Depend on Government Contracts and Subcontracts and Face Additional Risks Related to Fixed Price Contracts.    A significant portion of the sales by Iteris and a portion of our sales by Zyfer were derived from contracts with governmental agencies, either as a general contractor, subcontractor or supplier. Government contracts represented approximately 24%, 26% and 38% of our total net sales and contract revenues for the years ended March 31, 2000, 2001 and 2002, respectively. We anticipate that revenue from government contracts will continue to increase in the near future. Government business is, in general, subject to special risks and challenges, including:

•

long purchase cycles or approval processes;



•

competitive bidding and qualification requirements;



•

performance bond requirements;



•

changes in government policies and political agendas;



•

delays in funding, budgetary constraints and cut-backs; and



•

milestone requirements and liquidated damage provisions for failure to meet contract milestones.

        In addition, a large number of our government contracts are fixed price contracts. As a result, we may not be able to recover for any cost overruns. These fixed price contracts require us to estimate the total project cost based on preliminary projections of the project's requirements. The financial viability of any given project depends in large part on our ability to estimate these costs accurately and complete the project on a timely basis. In the event our costs on these projects exceed the fixed contractual amount, we will be required to bear the excess costs. These additional costs adversely affect our financial condition and results of operations. Moreover, certain of our government contracts are subject to termination or renegotiation at the convenience of the government, which could result in a large decline in our net sales in any given quarter. Our inability to address any of the foregoing concerns or the loss or renegotiation of any material government contract could seriously harm our business, financial condition and results of operations.

        We are Exposed to the Risks Associated with the Recent Worldwide Economic Slowdown and Related Uncertainties.    Concerns about inflation, decreased consumer confidence, reduced corporate profits and capital spending, and recent international conflicts and terrorist and military actions have resulted in a downturn in worldwide economic conditions, particularly in the United States. As a result of these unfavorable economic conditions, we have experienced a slowdown in customer orders, cancellations and rescheduling of backlog and higher overhead costs. In addition, recent political and social turmoil related to international conflicts and terrorist acts can be expected to put further pressure on economic conditions in the U.S. and worldwide. These political, social and economic conditions make it extremely difficult for our customers, our suppliers and us to accurately forecast and plan future business activities. If such conditions continue or worsen, our business, financial condition and results of operations will likely be materially and adversely affected.

        Our Quarterly Operating Results Fluctuate as a Result of Many Factors.    Our quarterly revenues and operating results have fluctuated and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. Factors that could affect our revenues include, among others, the following:

•

our ability to raise additional capital;



•

our significant investment in research and development for our subsidiaries and business units;



•

our ability to control costs;



•

international conflicts and acts of terrorism;

18

•

our ability to develop, introduce, market and gain market acceptance of new products applications and product enhancements in a timely manner;



•

the size, timing, rescheduling or cancellation of significant customer orders;



•

the introduction of new products by competitors;



•

the availability of components used in the manufacture of our products;



•

changes in our pricing policies and the pricing policies by our suppliers and competitors, pricing concessions on volume sales, as well as increased price competition in general;



•

the long lead times associated with government contracts or required by vehicle manufacturers;



•

our success in expanding and implementing our sales and marketing programs;



•

the effects of technological changes in our target markets;



•

our relatively small level of backlog at any given time;



•

the mix of sales among our business units;



•

deferrals of customer orders in anticipation of new products, applications or product enhancements;



•

the risks inherent in our acquisitions of technologies and businesses;



•

risks and uncertainties associated with our international business;



•

currency fluctuations and our ability to get currency out of certain foreign countries; and



•

general economic and political conditions.

        In addition, our sales in any quarter may consist of a relatively small number of large customer orders. As a result, the timing of a small number of orders may impact our quarter-to-quarter results. The loss of or a substantial reduction in orders from any significant customer could seriously harm our business, financial condition and results of operations.

        Due to all of the factors listed above and other risks discussed in this report, our future operating results could be below the expectations of securities analysts or investors. If that happens, the trading price of our common stock could decline. As a result of these quarterly variations, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance.

        Our Operating Strategy for Developing Companies is Expensive and May Not Be Successful.    Our business strategy historically has required us to make significant investments in our business units. These investments are expensive and require the commitment of significant time and resources. We expect to continue to invest in the development of certain of our business units with the goal of achieving profitability in each of our business units, and to a lesser extent, to monetize those business units for the benefit of our stockholders through an initial public offering, spin-off or sale to a strategic buyer. We may not recognize the benefits of this investment for a significant period of time, if at all. Our ability to achieve profitability in any business unit, to complete any private or public offerings of securities by any of our business units, and/or to spin-off our interest in the business unit to our stockholders will depend upon many factors, including:

•

the overall performance and results of operations of the particular business unit;



•

the potential market for our business unit;



•

our ability to assemble and retain a qualified management team for the business unit;



•

our financial position and cash requirements;

19

•

the business unit's customer base and product line;



•

the current tax treatment of spin-off and sale transactions, and our ability to obtain favorable determination letters from the Internal Revenue Service; and



•

general economic and market conditions, including the receptiveness of the stock markets to initial public offerings and private placements.

        We may not be able to achieve profitability in our business units, to complete a successful private or public offering or to spin-off of any of our business units in the near future, or at all. During fiscal 2001, we attempted to complete the initial public offering of Iteris, but withdrew the offering due to adverse market conditions. Even if we are able to achieve profitability and the market is receptive to public offerings, we may decide not to complete any further offerings, spin-off a particular business unit, or delay the spin-off until a later date.

        We Must Keep Pace with Rapid Technological Change to Remain Competitive.    Our target markets are in general characterized by the following factors:

•

rapid technological advances;



•

downward price pressure in the marketplace as technologies mature;



•

changes in customer requirements;



•

frequent new product introductions and enhancements; and



•

evolving industry standards and changes in the regulatory environment.

        Our future success will depend upon our ability to anticipate and adapt to changes in technology and industry standards, and to effectively develop, introduce, market and gain broad acceptance of new products and product enhancements incorporating the latest technological advancements.

        We believe that we must continue to make substantial investments to support ongoing research and development in order to remain competitive. We need to continue to develop and introduce new products that incorporate the latest technological advancements in hardware, storage media, operating system software and applications software in response to evolving customer requirements. Our business and results of operations could be adversely affected if we do not anticipate or respond adequately to technological developments or changing customer requirements. We cannot assure you that any such investments in research and development will lead to any corresponding increase in revenue.

        Our Future Success Depends on the Successful Development and Market Acceptance of New Products.    We believe our revenue growth and future operating results will depend on our ability to complete development of new products and enhancements, introduce these products in a timely, cost-effective manner, achieve broad market acceptance of these products and enhancements, and reduce our product costs. We may not be able to introduce any new products or any enhancements to our existing products on a timely basis, or at all. In addition, the introduction of any new products could adversely affect the sales of our certain of our existing products.

        Our future success will also depend in part on the success of several recently introduced products including CommSync II, a Zyfer solution for applying precision and timing and synchronization systems to high performance communication systems; AutoVue, our lane departure warning system; and AIRO 9.0, our broadcast automation solution. Market acceptance of our new products depends upon many factors, including our ability to accurately predict market requirements and evolving industry standards, our ability to resolve technical challenges in a timely and cost-effective manner and achieve manufacturing efficiencies, the perceived advantages of our new products over traditional products and the marketing capabilities of our independent distributors and strategic partners. Our business and results of operations could be seriously harmed by any significant delays in our new product

20

development. Certain of our new products could contain undetected design faults and software errors or "bugs" when first released by us, despite our testing. We may not discover these faults or errors until after a product has been installed and used by our customers. Any faults or errors in our existing products or in any new products may cause delays in product introduction and shipments, require design modifications or harm customer relationships, any of which could adversely affect our business and competitive position.

        Iteris currently outsources the manufacture of its AutoVue product line to a single manufacturer. This manufacturer may not be able to produce sufficient quantities of this product in a timely manner or at a reasonable cost, which could materially and adversely affect our ability to launch or gain market acceptance of AutoVue.

        We Have Significant International Sales and Are Subject to Risks Associated with Operating in International Markets.    International sales represented 6% of our net sales and contract revenues for the three months ended June 30, 2002, 10% of our net sales and contract revenues for the fiscal year ended March 31, 2002 and 20% for the fiscal year ended March 31, 2001. During the fiscal year ended March 31, 2002, we reorganized our European operations, which included the discontinuation of our Odetics Europe Ltd., MAXxess Europe Ltd., Mariner France and Mariner Europe Ltd. operations, and the transition of our Broadcast and MAXxess international operations to branch office operations with the intent of lowering our international costs. This reorganization may result in significantly lower international sales in future periods and unanticipated liabilities related to the closures and we may not achieve the anticipated cost savings. We may also face challenges in managing and transitioning our international operations due to our limited experience operating through branch offices. In addition, the recent terrorist attacks in the United States and heightened security may adversely impact our international sales and could make our international operations more expensive.

        International business operations are also subject to other inherent risks, including, among others:

•

unexpected changes in regulatory requirements, tariffs and other trade barriers or restrictions;



•

longer accounts receivable payment cycles;



•

difficulties in managing and staffing international operations;



•

potentially adverse tax consequences;



•

the burdens of compliance with a wide variety of foreign laws;



•

import and export license requirements and restrictions of the United States and each other country in which we operate;



•

exposure to different legal standards and reduced protection for intellectual property rights in some countries;



•

currency fluctuations and restrictions; and



•

political, social and economic instability.

        We believe that international sales will continue to represent a significant portion of our revenues, and that continued growth and profitability may require further expansion of our international operations. Nearly all of our international sales from this point on are denominated in U.S. dollars. As a result, an increase in the relative value of the dollar could make our products more expensive and potentially less price competitive in international markets. We do not engage in any transactions as a hedge against risks of loss due to foreign currency fluctuations.

        Any of the factors mentioned above may adversely effect our future international sales and, consequently, effect our business, financial condition and operating results. Furthermore, as we increase our international sales, our total revenues may also be affected to a greater extent by seasonal

21

fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of the world.

        We Need to Manage Operations and the Integration of Our Acquisitions.    Over the past few years, we have expanded our operations and made several substantial acquisitions of diverse businesses, including Intelligent Controls, Inc., International Media Integration Services, Ltd., Meyer Mohaddes Associates, Inc., Viggen Corporation, and certain assets of the Transportation Systems business of Rockwell International. We may engage in acquisitions of complementary businesses, products and technologies. Acquisitions may require significant capital infusions and, in general, acquisitions also involve a number of special risks, including:

•

potential disruption of our ongoing business and the diversion of our resources and management's attention;



•

the failure to retain or integrate key acquired personnel;



•

the challenge of assimilating diverse business cultures, and the difficulties in integrating the operations, technologies and information system of the acquired companies;



•

increased costs to improve managerial, operational, financial and administrative systems and to eliminate duplicative services;



•

the incurrence of unforeseen obligations or liabilities;



•

potential impairment of relationships with employees or customers as a result of changes in management; and



•

increased interest expense and amortization of acquired intangible assets.

        Acquisitions may also materially and adversely affect our operating results due to large write-offs, contingent liabilities, substantial depreciation, deferred compensation charges or goodwill amortization, or other adverse tax or audit consequences. Our failure to manage growth and integrate our acquisitions successfully could adversely affect our business, financial condition and results of operations.

        Our competitors are also soliciting potential acquisition candidates, which could both increase the price of any acquisition targets and decrease the number of attractive companies available for acquisition. We cannot assure you that we will be able to consummate any additional acquisitions, successfully integrate any acquisitions or realize the benefits anticipated from any acquisition.

        The Markets in Which We Operate Are Highly Competitive and Have Many More Established Competitors.    We compete with numerous other companies in our target markets and we expect such competition to increase due to technological advancements, industry consolidations and reduced barriers to entry. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could seriously harm our business, financial condition and results of operations. Many of our competitors have far greater name recognition and greater financial, technological, marketing and customer service resources than we do. This may allow them to respond more quickly to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources to the development, promotion, sale and support of their products than we can. Recent consolidations of end users, distributors and manufacturers in our target markets have exacerbated this problem. As a result of the foregoing factors, we may not be able to compete effectively in our target markets and competitive pressures could adversely affect our business, financial condition and results of operations.

        We Cannot Be Certain of Our Ability to Attract and Retain Key Personnel and We Do Not Have Employment Agreements with Any Key Personnel.    Due to the specialized nature of our business, we

22

are highly dependent on the continued service of our executive officers and other key management, engineering and technical personnel, particularly Joel Slutzky, our Chairman of the Board, who recently retired as our Chief Executive Officer, and Gregory A. Miner, our Chief Executive Officer and Chief Financial Officer. The leadership transition between Mr. Slutzky and Mr. Miner could adversely affect our business. We do not have any employment contracts with any of our officers or key employees. The loss of any of these individuals could adversely affect our business, financial condition or results of operations.

        Our success will also depend in large part upon our ability to continue to attract, retain and motivate qualified engineering and other highly skilled technical personnel. Competition for employees, particularly development engineers, is intense. We may not be able to continue to attract and retain sufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of our current key employees could adversely affect upon our business, financial condition and results of operations.

        We May Not be Able to Adequately Protect or Enforce Our Intellectual Property Rights.    If we are not able to adequately protect or enforce the proprietary aspects of our technology, competitors could be able to access our proprietary technology and our business, financial condition and results of operations will likely be seriously harmed. We currently attempt to protect our technology through a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and similar means. Despite our efforts, other parties may attempt to disclose, obtain or use our technologies or solutions. Our competitors may also be able to independently develop products that are substantially equivalent or superior to our products or design around our patents. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. As a result, we may not be able to protect our proprietary rights adequately in the United States or abroad.

        From time to time, we have received notices that claim we have infringed upon the intellectual property of others. Even if these claims are not valid, they could subject us to significant costs. We have engaged in litigation in the past, and litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation may also be necessary to defend against claims of infringement or invalidity by others. An adverse outcome in litigation or any similar proceedings could subject us to significant liabilities to third parties, require us to license disputed rights from others or require us to cease marketing or using certain products or technologies. We may not be able to obtain any licenses on terms acceptable to us, or at all. We also may have to indemnify certain customers or strategic partners if it is determined that we have infringed upon or misappropriated another party's intellectual property. Any of these results could adversely affect on our business, financial condition and results of operations. In addition, the cost of addressing any intellectual property litigation claim, both in legal fees and expenses, and the diversion of management resources, regardless of whether the claim is valid, could be significant and could seriously harm our business, financial condition and results of operations.

        We Are Controlled by Certain of Our Officers and Directors.    As of June 30, 2002, our officers and directors beneficially owned approximately 24% of the total combined voting power of the outstanding shares of our Class A common stock and Class B common stock. As a result of their stock ownership, our management will be able to significantly influence the election of our directors and the outcome of corporate actions requiring stockholder approval, such as mergers and acquisitions, regardless of how our other stockholders may vote. This concentration of voting control may have a significant effect in delaying, deferring or preventing a change in our management or change in control and may adversely affect the voting or other rights of other holders of common stock.

        Our Stock Structure and Certain Anti-Takeover Provisions May Affect the Price of Our Common Stock or Discourage Certain Corporate Transactions.    Certain provisions of our certificate of

23

incorporation and our stockholder rights plan could make it difficult for a third party to acquire us, even though an acquisition might be beneficial to our stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Our Class A common stock entitles the holder to one-tenth of one vote per share and our Class B common stock entitles the holder to one vote per share. The disparity in the voting rights between our common stock, as well as our insiders' significant ownership of the Class B common stock, could discourage a proxy contest or make it more difficult for a third party to effect a change in our management and control. In addition, our Board of Directors is authorized to issue, without stockholder approval, up to 2,000,000 shares of preferred stock with voting, conversion and other rights and preferences superior to those of our common stock, as well as additional shares of Class B common stock. Our future issuance of preferred stock or Class B common stock could be used to discourage an unsolicited acquisition proposal.

        In March 1998, we adopted a stockholder rights plan and declared a dividend of preferred stock purchase rights to our stockholders. In the event a third party acquires more than 15% of the outstanding voting control of our company or 15% of our outstanding common stock, the holders of these rights will be able to purchase the junior participating preferred stock at a substantial discount off of the then current market price. The exercise of these rights and purchase of a significant amount of stock at below market prices could cause substantial dilution to a particular acquiror and discourage the acquiror from pursuing our company. The mere existence of a stockholder rights plan often delays or makes a merger, tender offer or proxy contest more difficult.

        We Do Not Pay Cash Dividends.    We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends on either class of our common stock in the foreseeable future.

        We May Be Subject to Additional Risks.    The risks and uncertainties described above are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business operations.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

        Substantially all of our debt outstanding at June 30, 2002 bears interest at prime plus 4%. A 10% increase in interest rate would not have a material impact on our financial position, operating results, or cash flows. In addition, we believe that the carrying value of our debt outstanding approximate fair value.

24

PART II.    OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        We are not a party to any material legal proceedings

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

        None

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

        None

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None

ITEM 5.    OTHER INFORMATION

        None

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

10.1      American Industrial Real Estate Association Standard Industrial/Commercial Lease for 1515 S. Manchester Ave, Anaheim, CA.

10.2      American Industrial Real Estate Association Standard Industrial/Commercial Lease for 1585 S. Manchester Ave, Anaheim, CA.

99.1      Periodic Report Certification

(b)

Reports on Form 8-K

In connection with the sale and leaseback of its headquarters and principal operating facilities in Anaheim, California (the "Property") at 1515 S. Manchester Ave on May 28, 2002, we filed a Form 8-K to report the transaction. The Sale-Leaseback was consummated pursuant to a Purchase and Sale agreement and two leases between Odetics and 1515 S. Manchester, LLC, pursuant to which Odetics sold the Property for $22.6 million and will continue to lease one of the three buildings located on the Property for an initial ten-year period at a rate of $152,150 per month and a second building located on the Property for a period of 30 months at a rate of approximately $57,553 per month.

25

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.

	ODETICS, INC. (Registrant)
	By:	/s/  GREGORY A. MINER Gregory A. Miner Chief Executive Officer and Chief Financial Officer (Principal Financial Officer)
	By:	/s/  GARY SMITH Gary Smith Vice President and Controller (Principal Accounting Officer)
Dated: August 14, 2002

26

QuickLinks

INDEX
PART I FINANCIAL INFORMATION
ODETICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (unaudited)
ODETICS, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
ODETICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
ODETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

RISK FACTORS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

EX-10.1

                                                                    EXHIBIT 10.1

               [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
            STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
                (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

1.   Basic Provisions ("Basic Provisions").

     1.1  Parties: This Lease ("Lease"), dated for reference purposes only,
January 22, 2002, is made by and between 1515 South Manchester, LLC, a
California limited liability company, Dartbrook-Twin Oaks, LP, a Texas limited
partnership, and William T. White, III, LLC a California limited liability
company ("Lessor") and Odetics Inc., a Delaware corporation ("Lessee"),
(collectively the "Parties," or individually a "Party").

     1.2  Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 1515 S. Manchester Ave., Anaheim, located in the County of Orange,
State of California, and generally described as (describe briefly the nature of
the property and, if applicable, the "Project", if the property is located
within a Project) approximately 179,000 square feet of freestanding building
which (together with approximately 78,840 square feet of building commonly known
as 1585 S. Manchester Avenue) is situated on 13.67 acres of land area
("Premises"). (See also Paragraph 2)

     1.3  Term: ten (10) years and zero (0) months ("Original Term") commencing
on the Closing Date ("Commencement Date") and ending ten years from the Closing
Date ("Expiration Date"). (See also Paragraph 3)

     1.4  Early Possession: not applicable ("Early Possession Date"). (See also
Paragraphs 3.2 and 3.3)

     1.5  Base Rent: $152,150 per month ("Base Rent"), payable on the first day
of each month commencing on the Closing Date. (See also Paragraph 4)

/X/  If this box is checked, there are provisions in this Lease for the Base
     Rent to be adjusted.

     1.6  Base Rent and Other Monies Paid Upon Execution:

          (a)  Base Rent: $152,150.00 plus $4,908.00 for each day from and
including the Commencement Date through and including May 31, 2002 for the
period commencing the Commencement Date through June 30, 2002.

          (b)  Security Deposit: $n/a ("Security Deposit"). (See also
Paragraph 5)

          (c)  Association Fees: $n/a for the period n/a

          (d)  Other: $l,000.00 for management fee, payable to CEO Management,
LLC c/o Lessor, as a monthly management fee, such fee to be payable with each
payment of base rent and to be increased annually by the same percentage Base
Rent is increased per paragraph 51.

          (e)  Total Due Upon Closing Date $see 1.6 (a).

     1.7  Agreed Use: light manufacturing, assembly and related office uses (See
also Paragraph 6)

     1.8  Insuring Party: Lessee is the "Insuring Party" unless otherwise stated
herein. (See also Paragraph 8)

     1.9  Real Estate Brokers: (See also Paragraph 15)

     1.10 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by n/a ("Guarantor"). (See also Paragraph 37)

     1.11 Attachments. Attached hereto are the following, all of which
constitute a part of this Lease:

/X/  an Addendum consisting of Paragraphs 51 through 56;

/ / a plot plan depicting the Premises;

/ / a current set of the Rules and Regulations;

/ / a Work Letter;



/ / other (specify): ___________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

2.   Premises.

     2.1  Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of size set forth in this Lease, or that may have been
used in calculating Rent, is an approximation which the Parties agree is
reasonable and any payments based thereon are not subject to revision whether or
not the actual size is more or less. Note: Lessee is advised to verify the
actual size prior to executing this Lease.

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Initials                                                                Initials

                                  Page 1 of 12


     2.4  Acknowledgements. Lessee acknowledges that: (a) it has been advised by
Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements and the Americans with Disabilities Act), and their suitability for
Lessee's intended use, (b) Lessee has made such investigation as it deems
necessary with reference to such matters and assumes all responsibility therefor
as the same relate to its occupancy of the Premises, and (c) neither Lessor,
Lessor's agents, nor Brokers have made any oral or written representations or
warranties with respect to said matters other than as set forth in this Lease.
In addition, Lessor acknowledges that: (i) Brokers have made no representations,
promises or warranties concerning Lessee's ability to honor the Lease or
suitability to occupy the Premises, and (ii) it is Lessor's sole responsibility
to investigate the financial capability and/or suitability of all proposed
tenants.

     2.5  Lessee as Prior Owner/Occupant. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.

3.   Term.

     3.1  Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.

     3.4  Lessee Compliance. Lessor shall not be required to deliver possession
of the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.
Further, if Lessee is required to perform any other conditions prior to or
concurrent with the Start Date, the Start Date shall occur but Lessor may elect
to withhold possession until such conditions are satisfied.

4.   Rent.

     4.1  Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").

     4.2  Payment. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States on or before the day on which it is due,
without offset or deduction (except as specifically permitted in this Lease).
Rent for any period during the term hereof which is for less than one full
calendar month shall be prorated based upon the actual number of days of said
month. Payment of Rent shall be made to Lessor at its address stated herein or
to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating. In the event that any check,
draft, or other instrument of payment given by Lessee to Lessor is dishonored
for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any
Late Charge and Lessor, at its option, may require all future payments to be
made by Lessee to be by cashier's check. Payments will be applied first to
accrued late charges and attorney's fees, second to accrued interest, then to
Base Rent and Operating Expense Increase, and any remaining amount to any other
outstanding charges or costs.

     4.3  Association Fees. In addition to the Base Rent, Lessee shall pay to
Lessor each month an amount equal to any owner's association or condominium fees
levied or assessed against the Premises. Said monies shall be paid at the same
time and in the same manner as the Base Rent.

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Initials                                                            Initials

                                  Page 2 of 12


5.   Use.

     6.1  Use. Lessee shall use and occupy the Premises only for the Agreed Use,
or any other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a manner that
is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of
or causes damage to neighboring premises or properties. Lessor shall not
unreasonably withhold or delay its consent to any written request for a
modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, and/or is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after
such request give written notification of same, which notice shall include an
explanation of Lessor's objections to the change in the Agreed Use.

     6.2  Hazardous Substances.

          (a)  Reportable Uses Require Consent. The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, or waste whose
presence, use, manufacture, disposal, transportation, or release, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "Reportable Use" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, ordinary office
supplies (copier toner, liquid paper, glue, etc.) and common household cleaning
materials, so long as such use is in compliance with all Applicable
Requirements, is not a Reportable Use, and does not expose the Premises or
neighboring property to any meaningful risk of contamination or damage or expose
Lessor to any liability therefor. In addition, Lessor may condition its consent
to any Reportable Use upon receiving such additional assurances as Lessor
reasonably deems necessary to protect itself, the public, the Premises and/or
the environment against damage, contamination, injury and/or liability,
including, but not limited to, the installation (and removal on or before Lease
expiration or termination) of protective modifications (such as concrete
encasements) and/or increasing the Security Deposit.

          (b)  Duty to Inform Lessor. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor, and provide Lessor
with a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.

          (c)  Lessee Remediation. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, comply with all Applicable Requirements and take
all investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of the Premises or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance brought onto the Premises
during the term of this Lease, by or for Lessee, or any third party.

          (d)  Lessee Indemnification. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out of
or involving any Hazardous Substance brought onto the Premises by or for Lessee,
or any third party (including without limitation any Hazardous Substances on or
under the Premises by reason of above ground or underground migration of any



Hazardous Substance under the Premises from adjacent properties not caused or
contributed to by Lessee). Lessee's obligations shall include, but not be
limited to, the effects on or of any contamination or injury to person, property
or the environment created or suffered by Lessee, and the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease. No termination, cancellation or release
agreement entered into by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessor in writing at the time of such agreement.

          (e)  Lessor Indemnification. Lessee and its successors and assigns
shall indemnify, defend, reimburse and hold Lessor, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which result from Hazardous Substances which existed on the
Premises prior to Lessee's occupancy. Lessee's obligations, as and when required
by the Applicable Requirements, shall include, but not be limited to, the cost
of Investigation removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease.

          (f)  Investigations and Remediations. Lessee shall have the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to Lessee's occupancy.

          (g)  Lessor Termination Option. If a Hazardous Substance Condition
(see Paragraph 9.1(e)) occurs during the term of this Lease, Lessee shall make
the investigation and remediation thereof required by the Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(d) and Paragraph 13.

     6.3  Lessee's Compliance with Applicable Requirements. Lessee shall, at
Lessee's sole expense, fully, diligently and in a timely manner, materially
comply with all Applicable Requirements, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants which relate in any manner to the such
Requirements, without regard to whether such Requirements are now in effect or
become effective after the Start Date. Lessee shall, within 10 days after
receipt of Lessor's written request, provide Lessor with copies of all permits
and other documents, and other information evidencing Lessee's compliance with
any Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of any
threatened or actual claim, notice, citation, warning, complaint or report
pertaining to or involving the failure of Lessee or the Premises to comply with
any Applicable Requirements.

     6.4  Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in
Paragraph 30) and consultants shall have the right to enter into Premises at any
time, in the case of an emergency, and otherwise at reasonable times after
reasonable notice, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease. The cost of any such
inspections shall be paid by Lessor, unless a violation of Applicable
Requirements, or a Hazardous Substance Condition (see paragraph 9.1) is found to
exist or be imminent, or the inspection is requested or ordered by a
governmental authority. In such case, Lessee shall upon request reimburse Lessor
for the cost of such inspection, so long as such inspection is reasonably
related to the violation or contamination. In addition, Lessee shall provide
copies of all relevant material safety data sheets (MSDS) to Lessor within 10
days of the receipt of a written request therefor.

7.   Maintenance; Repairs, Utility Installations; Trade Fixtures and
     Alterations.

     7.1  Lessee's Obligations.

          (a)  In General. Subject to the provisions of Paragraph 9 (Damage or
Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense,
keep the Premises, Utility Installations (intended for Lessee's exclusive use,
no matter where located), and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, HVAC equipment,
electrical, lighting facilities, boilers, pressure vessels, fire protection
system, fixtures, walls (interior and exterior), foundations, ceilings, roofs,
roof drainage systems, floors, windows, doors, plate glass, skylights,
landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks
and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the
Premises in good order, condition



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Initials                                                             Initials

                                  Page 3 of 12


and repair, shall exercise and perform good maintenance practices, specifically
including the procurement and maintenance of the service contracts required by
Paragraph 7.1(b) below. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition (including, e.g. graffiti
removal) consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary, the exterior
repainting of the Building.

          (b)  Service Contracts. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) clarifiers (vii) basic utility feed to the perimeter of the
Building, and (viii) any other equipment, if reasonably required by Lessor.
However, Lessor reserves the right, upon notice to Lessee, to procure and
maintain any or all of such service contracts, and if Lessor so elects, Lessee
shall reimburse Lessor, upon demand, for the cost thereof.

          (c)  Failure to Perform. If Lessee fails to perform Lessee's
obligations under this Paragraph 7.1, Lessor may enter upon the Premises after
10 days' prior written notice to Lessee (except in the case of an emergency, in
which case no notice shall be required), perform such obligations on Lessee's
behalf, and put the Premises in good order, condition and repair, and Lessee
shall promptly pay to Lessor a sum equal to 115% of the cost thereof.

     7.2  Lessor's Obligations. Subject to the provisions of Paragraphs 9
(Damage or Destruction) and 14 (Condemnation), it is intended by the Parties
hereto that Lessor have no obligation, in any manner whatsoever, to repair and
maintain the Premises, or the equipment therein, all of which obligations are
intended to be that of the Lessee. It is the intention of the Parties that the
terms of this Lease govern the respective obligations of the Parties as to
maintenance and repair of the Premises, and they expressly waive the benefit of
any statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease.

     7.3  Utility Installations; Trade Fixtures; Alterations.

          (a)  Definitions. The term "Utility Installations" refers to all floor
and window coverings, air and/or vacuum lines, power panels, electrical
distribution, security and fire protection systems, communication cabling,
lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises.
The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can
be removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. `Lessee Owned
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor pursuant
to Paragraph 7.4(a).

          (b)  Consent. Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without such consent but upon notice to Lessor, as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, will not affect the
electrical, plumbing, HVAC, and/or life safety systems, and the cumulative cost
thereof during this Lease as extended does not exceed a sum equal to 3 month's
Base Rent in the aggregate or a sum equal to one month's Base Rent in any one
year. Notwithstanding the foregoing, Lessee shall not make or permit any roof
penetrations and/or install anything on the roof without the prior written
approval of Lessor. Lessor may, as a precondition to granting such approval,
require Lessee to utilize a contractor chosen and/or approved by Lessor. Any
Alterations or Utility Installations that Lessee shall desire to make and which
require the consent of the Lessor shall be presented to Lessor in written form
with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i)
acquiring all applicable governmental permits, (ii) furnishing Lessor with
copies of both the permits and the plans and specifications prior to
commencement of the work, and (iii) compliance with all conditions of said
permits and other Applicable Requirements in a prompt and expeditious manner.
Any Alterations or Utility Installations shall be performed in a workmanlike
manner with good and sufficient materials. Lessee shall promptly upon completion



furnish Lessor with as-built plans and specifications. For work which costs an
amount in excess of one month's Base Rent, Lessor may condition its consent upon
Lessee providing a lien and completion bond in an amount equal to 150% of the
estimated cost of such Alteration or Utility Installation and/or upon Lessee's
posting an additional Security Deposit with Lessor.

          (c)  Liens; Bonds. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than 10 days notice prior to the commencement of any work
in, on or about the Premises, and Lessor shall have the right to post notices of
non-responsibility. If Lessee shall contest the validity of any such lien, claim
or demand, then Lessee shall, at its sole expense defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof. If
Lessor shall require, Lessee shall furnish a surety bond in an amount equal to
150% of the amount of such contested lien, claim or demand, indemnifying Lessor
against liability for the same. If Lessor elects to participate in any such
action, Lessee shall pay Lessor's attorneys' fees and costs.

     7.4  Ownership; Removal; Surrender; and Restoration.

          (a)  Ownership. Subject to Lessor's right to require removal or elect
ownership as hereinafter provided, all Alterations and Utility Installations
made by Lessee shall be the property of Lessee, but considered a part of the
Premises. Lessor may, at any time, elect in writing to be the owner of all or
any specified part of the Lessee Owned Alterations and Utility Installations.
Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or termination of
this Lease, become the property of Lessor and be surrendered by Lessee with the
Premises.

          (b)  Removal. By delivery to Lessee of written notice from Lessor not
earlier than 90 and not later than 30 days prior to the end of the term of this
Lease, Lessor may require that any or all Lessee Owned Alterations or Utility
Installations be removed by the expiration or termination of this Lease. Lessor
may require the removal at any time of all or any part of any Lessee Owned
Alterations or Utility Installations made without the required consent.

          (c)  Surrender; Restoration. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice. Notwithstanding the
foregoing, if this Lease is for 12 months or less, then Lessee shall surrender
the Premises in the same condition as delivered to Lessee on the Start Date with
NO allowance for ordinary wear and tear. Lessee shall repair any damage
occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee
owned Alterations and/or Utility Installations, furnishings, and equipment as
well as the removal of any storage tank installed by or for Lessee. Lessee shall
completely remove from the Premises any and all Hazardous Substances brought
onto the Premises by or for Lessee, or any third party (including Hazardous
Substances which were deposited via underground migration from areas outside of
the Premises, or if applicable, the Project) even if such removal would require
Lessee to perform or pay for work that exceeds statutory requirements. Trade
Fixtures shall remain the property of Lessee and shall be removed by Lessee. Any
personal property of Lessee not removed on or before the Expiration Date or any
earlier termination date shall be deemed to have been abandoned by Lessee and
may be disposed of or retained by Lessor as Lessor may desire. The failure by
Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without
the express written consent of Lessor shall constitute a holdover under the
provisions of Paragraph 26 below.

8.   Insurance; Indemnity.

     8.1  Payment For Insurance. Lessee shall pay for all insurance required
under Paragraph 8 including the liability insurance carried by Lessor under
Paragraph 8.2(b) in excess of $l0,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor
within 10 days following receipt of an invoice.

     8.2  Liability Insurance.

          (a)  Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability policy of insurance protecting Lessee and Lessor as



an additional insured against claims for bodily injury, personal injury and
property damage based upon or arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. Such insurance
shall be on an occurrence basis providing single limit coverage in an amount not
less than $10,000,000 per occurrence with an annual aggregate of not less than
$15,000,000, an "Additional Insured-Managers or Lessors of Premises Endorsement"
and contain the "Amendment of the Pollution Exclusion Endorsement" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this Lease as an "insured
contract" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance shall not, however, limit the liability of
Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by
Lessee shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.

          (b)  Carried by Lessor. Lessor shall at Lessee's expense maintain
liability insurance as described in Paragraph 8.2(a), in addition to, and not in
lieu of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.

     8.3  Property Insurance - Building, Improvements and Rental Value.

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          (a)  Building and Improvements. The Insuring Party shall obtain and
keep in force a policy or policies in the name of Lessor, with loss payable to
Lessor, any ground-lessor, and to any Lender insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lender, but in no event more than the commercially reasonable
and available insurable value thereof. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's
personal property shall be insured by Lessee under Paragraph 8.4 rather than by
Lessor. Such policy or policies shall insure against all risks of direct
physical loss or damage (including the perils of flood and/or earthquake),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence. and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.

          (b)  Rental Value. The Insuring Party shall obtain and keep in force a
policy or policies in the name of Lessor with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one year with an extended period
of indemnity for an additional 180 days ("Rental Value insurance"). Said
insurance shall contain an agreed valuation provision in lieu of any coinsurance
clause, and the amount of coverage shall be adjusted annually to reflect the
projected Rent otherwise payable by Lessee, for the next 12 month period. Lessee
shall be liable for any deductible amount in the event of such loss.

          (c)  Adjacent Premises. If the Premises are part of a larger building,
or of a group of buildings owned by Lessor which are adjacent to the Premises,
the Lessee shall pay for any increase in the premiums for the property insurance
of such building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.

     8.4  Lessee's Property; Business Interruption Insurance.

          (a)  Property Damage. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.

          (b)  Business Interruption. Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.

          (c)  No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.

     8.5  Insurance Policies. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after 30 days prior written notice
to Lessor. Lessee shall, at least 30 days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. Such policies shall be for a term of at least one year, or the length of
the remaining term of this Lease, whichever is less. If either Party shall fail
to procure and maintain the insurance required to be carried by it, the other



Party may, but shall not be required to, procure and maintain the same.

     8.6  Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.

     8.7  Indemnity. Except for Lessor's gross negligence or willful misconduct,
Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor
and its agents, Lessor's master or ground lessor, partners and Lenders, from and
against any and all claims, loss of rents and/or damages, liens judgments,
penalties, attorneys' and consultants' fees, expenses and/or liabilities arising
out of, involving, or in connection with, the use and/or occupancy of the
Premises by Lessee. If any action or proceeding is brought against Lessor by
reason of any of the foregoing matters, Lessee shall upon notice defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be defended or indemnified.

     8.8  Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor nor from
the failure of Lessor to enforce the provisions of any other lease in the
Project. Notwithstanding Lessor's negligence or breach of this Lease, Lessor
shall under no circumstances be liable for injury to Lessee's business or for
any loss of Income or profit therefrom.

     8.9  Failure to Provide Insurance. Lessee acknowledges that any failure on
its part to obtain or maintain the insurance required herein will expose Lessor
to risks and potentially cause Lessor to incur costs not contemplated by this
Lease, the extent of which will be extremely difficult to ascertain.
Accordingly, for any month or portion thereof that Lessee does not maintain the
required insurance and/or does not provide Lessor with the required binders or
certificates evidencing the existence of the required insurance, the Base Rent
shall be automatically increased, without any requirement for notice to Lessee,
by an amount equal to 10% of the then existing Base Rent or $100, whichever is
greater. The parties agree that such increase in Base Rent represents fair and
reasonable compensation for the additional risk/ costs that Lessor will incur by
reason of Lessee's failure to maintain the required insurance. Such increase in
Base Rent shall in no event constitute a waiver of Lessee's Default or Breach
with respect to the failure to maintain such insurance, prevent the exercise of
any of the other rights and remedies granted hereunder, nor relieve Lessee of
its obligation to maintain the insurance specified in this Lease.

9.   Damage or Destruction.

     9.1  Definitions.

          (a)  "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which can reasonably be repaired in 12 months or less from the
date of the damage or destruction. Lessor shall notify Lessee in writing within
30 days from the date of the damage or destruction as to whether or not the
damage is Partial or Total.

          (b)  "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility installations and
Trade Fixtures, which cannot reasonably be repaired in 12 months or less from
the date of the damage or destruction. Lessor shall notify Lessee in writing
within 30 days from the date of the damage or destruction as to whether or not
the damage is Partial or Total.

          (c)  "Insured Loss" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations
and Trade Fixtures, which was caused by an event required to be



covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.

          (d)  "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable Requirements, and without
deduction for depreciation.

          (e)  "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises which requires repair, remediation, or restoration.

     9.2  Partial Damage - Insured Loss. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Lessee shall promptly contribute the shortage in proceeds as and when required
to complete said repairs. In the event, such shortage was due to the fact that,
by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessee shall
provide Lessor with the funds to cover same, or adequate assurance thereof,
within 10 days following receipt of written notice of such shortage and request
therefor. If Lessor receives said funds or adequate assurance thereof within
said 10 day period, the party responsible for making the repairs shall complete
them as soon as reasonably possible and this Lease shall remain in full force
and effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within 10 days thereafter to: (i) make such
restoration and repair as is commercially reasonable with Lessee paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or

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(ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled
to reimbursement of any funds contributed by Lessee to repair any such damage or
destruction. Premises Partial Damage due to flood or earthquake shall be subject
to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but
the net proceeds of any such insurance shall be made available for the repairs
if made by either Party.

     9.3  Partial Damage - Uninsured Loss. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage, or direct Lessee to repair such
damage as soon as reasonably possible in each case at Lessee's expense, in which
event Lessee shall promptly pay for such repairs and this Lease shall continue
in full force and effect, or (ii) terminate this Lease by giving written notice
to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence
of such damage. Such termination shall be effective 60 days following the date
of such notice.

     9.4  Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate 60 days following
such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.

     9.5  Damage Near End of Term. If at any time during the last 6 months of
this Lease there is damage for which the cost to repair exceeds one month's Base
Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective
60 days following the date of occurrence of such damage by giving a written
termination notice to Lessee within 30 days after the date of occurrence of such
damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable
option to extend this Lease or to purchase the Premises, then Lessee may
preserve this Lease by, (a) exercising such option and (b) providing Lessor with
any shortage in insurance proceeds (or adequate assurance thereof) needed to
make the repairs on or before the earlier of (i) the date which is 10 days after
Lessee's receipt of Lessor's written notice purporting to terminate this Lease,
or (ii) the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's commercially reasonable expense, repair such damage as soon
as reasonably possible and this Lease shall continue in full force and effect.
If Lessee fails to exercise such option and provide such funds or assurance
during such period, then this Lease shall terminate on the date specified in the
termination notice and Lessee's option shall be extinguished.

     9.6  Abatement of Rent; Lessee's Remedies.

          (a)  Abatement. In the event of Premises Partial Damage or Premises
Total Destruction the Rent payable by Lessee for the period required for the
repair, remediation or restoration of such damage shall be abated in proportion
to the degree to which Lessee's use of the Premises is impaired, but not to
exceed the proceeds received by Lessor from the Rental Value insurance. All
other obligations of Lessee hereunder shall be performed by Lessee, and Lessor
shall have no liability for actually any such damage, destruction, remediation,
repair or restoration except as provided herein.

          (b)  Remedies. If Lessor shall be obligated to repair or restore the
Premises and does not commence, in a substantial and meaningful way, such repair
or restoration within 90 days after such obligation shall accrue, Lessee may, at
any time prior to the commencement of such repair or restoration, give written
notice to Lessor and to any Lenders of which Lessee has actual notice, of
Lessee's election to terminate this Lease on a date not less than 60 days
following the giving of such notice. If Lessee gives such notice and such repair
or restoration is not commenced within 30 days thereafter, this Lease shall
terminate as of the date specified in said notice. If the repair or restoration
is commenced within such 30 days, this Lease shall continue in full force and
effect. "Commence" shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.

     9.7  Termination; Advance Payments. Upon termination of this Lease pursuant
to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor.

     9.8  Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with



respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.

10.  Real Property Taxes.

     10.1 Definition. EAs used herein, the term "Real Property Taxes" shall
include any form of assessment; real estate, general, special, ordinary or
extraordinary, or rental levy or tax (other than inheritance, personal income or
estate taxes); improvement bond; and/or license fee imposed upon or levied
against any legal or equitable interest of Lessor in the Premises or the
Project, Lessor's right to other income therefrom, and/or Lessor's business of
leasing, by any authority having the direct or indirect power to tax and where
the funds are generated with reference to the Building address and where the
proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. Real
Property Taxes shall also include any tax, fee, levy, assessment or charge, or
any increase therein: (i) imposed by reason of events occurring during the term
of this Lease, including but not limited to, a change in the ownership of the
Premises, and (ii) levied or assessed on machinery or equipment provided by
Lessor to Lessee pursuant to this Lease.

     10.2 Payment of Taxes. In addition to Base Rent, Lessee shall pay to Lessor
an amount equal to the Real Property Tax installment due at least 20 days prior
to the applicable delinquency date. If any such installment shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such installment shall be prorated. In the event Lessee incurs
a late charge on any Rent payment, Lessor may estimate the current Real Property
Taxes, and require that such taxes be paid in advance to Lessor by Lessee
monthly in advance with the payment of the Base Rent. Such monthly payments
shall be an amount equal to the amount of the estimated installment of taxes
divided by the number of months remaining before the month in which said
installment becomes delinquent. When the actual amount of the applicable tax
bill is known, the amount of such equal monthly advance payments shall be
adjusted as required to provide the funds needed to pay the applicable taxes. If
the amount collected by Lessor is insufficient to pay such Real Property Taxes
when due, Lessee shall pay Lessor, upon demand, such additional sum as is
necessary. Advance payments may be intermingled with other moneys of Lessor and
shall not bear interest. In the event of a Breach by Lessee in the performance
of its obligations under this Lease, then any such advance payments may be
treated by Lessor as an additional Security Deposit.

     10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.

     10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause its Lessee Owned Alterations and
Utility Installations, Trade Fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property of
Lessor. If any of Lessee's said property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee's property
within 10 days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.

11.  Utilities and Services. Lessee shall pay for all water, gas, heat, light,
power, telephone, trash disposal and other utilities and services supplied to
the Premises, together with any taxes thereon. If any such services are not
separately metered or billed to Lessee, Lessee shall pay a reasonable
proportion, to be determined by Lessor, of all charges jointly metered or
billed. There shall be no abatement of rent and Lessor shall not be liable in
any respect whatsoever for the inadequacy, stoppage, interruption or
discontinuance of any utility or service due to riot, strike, labor dispute,
breakdown, accident, repair or other cause beyond Lessor's reasonable control or
in cooperation with governmental request or directions,

12.  Assignment and Subletting.

     12.1 Lessor's Consent Required.

          (a)  Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "assign or assignment") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.



          (b)  Unless Lessee is a corporation and its stock is publicly traded
on a national stock exchange, a change in the control of Lessee shall constitute
an assignment requiring consent. The transfer, on a cumulative basis, of 25% or
more of the voting control of Lessee shall constitute a change in control for
this purpose.

          (c)  The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than 25%
of such Net Worth as it was represented at the time of the execution of this
Lease or at the time of the most recent assignment to which Lessor has
consented, or as it exists immediately prior to said transaction or transactions
constituting such reduction, whichever was or is greater, shall be considered an
assignment of this Lease to which Lessor may withhold its consent. "Net Worth of
Lessee" shall mean the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles.

          (d)  An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unapproved assignment or subletting as a noncurable Breach, Lessor
may either: (i) terminate this Lease, or (ii) upon 30 days written notice,
increase the monthly Base Rent to 110% of the Base Rent then in effect. Further,
in the event of such Breach and rental adjustment, (i) the purchase price of any
option to purchase the Premises held by Lessee shall be subject, to similar
adjustment to 110% of the price previously in effect, and (ii) all fixed and
non-fixed rental adjustments scheduled during the remainder of the

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Lease term shall be increased to 110% of the scheduled adjusted rent.

          (e)  Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall
be limited to compensatory damages and/or injunctive relief.

     12.2 Terms and Conditions Applicable to Assignment and Subletting.

          (a)  Regardless of Lessor's consent, no assignment or subletting
shall: (i) be effective without the express written assumption by such assignee
or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee
of any obligations hereunder, or (iii) alter the primary liability of Lessee for
the payment of Rent or for the performance of any other obligations to be
performed by Lessee.

          (b)  Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.

          (c)  Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.

          (d)  In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefor to Lessor, or any security held by Lessor.

          (e)  Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a fee of $500 as
consideration for Lessor's considering and processing said request. Lessee
agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested. (See also Paragraph 36)

          (f)  Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed to have
assumed and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.

          (g)  Lessor's consent to any assignment or subletting shall not
transfer to the assignee or sublessee any Option granted to the original Lessee
by this Lease unless such transfer is specifically consented to by Lessor in
writing. (See Paragraph 39.2)

     12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:

          (a)  Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. In the event that the amount collected by Lessor
exceeds Lessee's obligations any such excess shall be refunded to Lessee. Lessor
shall not, by reason of the foregoing or any assignment of such sublease, nor by
reason of the collection of Rent, be deemed liable to the sublessee for any
failure of Lessee to perform and comply with any of Lessee's obligations to such
sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written notice from Lessor stating that a Breach exists in the
performance of Lessee's obligations under this Lease, to pay to Lessor all Rent
due and to become due under the sublease. Sublessee shall rely upon any such
notice from Lessor and shall pay all Rents to Lessor without any obligation or
right to inquire as to whether such Breach exists, notwithstanding any claim
from Lessee to the contrary.

          (b)  In the event of a Breach by Lessee, Lessor may, at its option,
require sublessee to attorn to Lessor, in which event Lessor shall



undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.

          (c)  Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.

          (d)  No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.

          (e)  Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.

13   Default; Breach; Remedies.

     13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants, conditions or Rules and
Regulations under this Lease. A "Breach" is defined as the occurrence of one or
more of the following Defaults, and the failure of Lessee to cure such Default
within any applicable grace period:

          (a)  The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, or where the
coverage of the property insurance described in Paragraph 8.3 is jeopardized as
a result thereof, or without providing reasonable assurances to minimize
potential vandalism.

          (b)  The failure of Lessee to make any payment of Rent or any Security
Deposit required to be made by Lessee hereunder, whether to Lessor or to a third
party, when due, to provide reasonable evidence of insurance or surety bond, or
to fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of 3 business days following
written notice to Lessee.

          (c)  The failure by Lessee to provide (i) reasonable written evidence
of compliance with Applicable Requirements, (ii) the service contracts, (iii)
the rescission of an unauthorized assignment or subletting, (iv) an Estoppel
Certificate, (v) a requested subordination, (vi) evidence concerning any
guaranty and/or Guarantor, (vii) any document requested under Paragraph 42,
(viii) material safety data sheets (MSDS), or (ix) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of 10 days following
written notice to Lessee.

          (d)  A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c ), above, where
such Default continues for a period of 30 days after written notice; provided,
however, that if the nature of Lessee's Default is such that more than 30 days
are reasonably required for its cure, then it shall not be deemed to be a Breach
if Lessee commences such cure within said 30 day period and thereafter
diligently prosecutes such cure to completion.

          (e)  The occurrence of any of the following events: (i) the making of
any general arrangement or assignment for the benefit of creditors; (iii)
becoming a "debtor" as defined in 11 U.S.C. (S)I01 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within 60 days); (iii) the appointment of a trustee or receiver to
take possession of substantially all of Lessee's assets located at the Premises
or of Lessee's interest in this Lease, where possession is not restored to
Lessee within 30 days; or (iv) the attachment, execution or other judicial
seizure of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within 30
days; provided, however, in the event that any provision of this subparagraph
(e) is contrary to any applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining provisions.

          (f)  The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.

          (g)  If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the



subject or a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within 60 days following written
notice of any such event, to provide written alternative assurance or security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease

     13.2 Remedies. If Lessee fails to perform any of its affirmative duties
or obligations, within 10 days after written notice (or in case of an emergency,
without notice), Lessor may, at its option, perform such duty or obligation on
Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs and
expenses incurred by Lessor in such performance upon receipt of an invoice
therefor. In the event of a Breach, Lessor may, with or without further notice
or demand, and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such Breach:

          (a)  Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination: (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent. Efforts by Lessor to mitigate damages
caused by Lessee's Breach of this Lease shall not waive Lessor's right to
recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the

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failure of Lessee to cure the Default within the greater of the two such grace
periods shall constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in this Lease and/or by said
statute.

          (b)  Continue the Lease and Lessee's right to possession and recover
the Rent as it becomes due, as provided in California Civil Code Section 1951.4
(Lessor may continue lease in effect after Lessee's breach and abandonment and
recover rent as it becomes due, if Lessee has the right to sublet or assign,
subject only to reasonable limitations) in which event Lessee may sublet or
assign, subject only to reasonable limitations. Acts of maintenance, efforts to
relet, and/or the appointment of a receiver to protect the Lessor's interests,
shall not constitute a termination of the Lessee's right to possession.

          (c)  Pursue any other remedy now or hereafter available under the laws
or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.

     13.3 Inducement Recapture. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into this
Lease, all of which concessions are hereinafter referred to as "Inducement
Provisions," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.

     13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within 5 days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall immediately pay
to Lessor a one-time late charge equal to 10% of each such overdue amount or
$100, whichever is greater. The Parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of such late payment. Acceptance of such late charge by Lessor shall in
no event constitute a waiver of Lessee's Default or Breach with respect to such
overdue amount, nor prevent the exercise of any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder, whether
or not collected, for 3 consecutive installments of Base Rent, then
notwithstanding any provision of this Lease to the contrary, Base Rent shall, at
Lessor's option, become due and payable quarterly in advance.

     13.5 Interest. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments (such as
Base Rent) or within 30 days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the 31st day after it was due as to non-scheduled
payments. The interest ("Interest") charged shall be computed at the rate of 10%
per annum but shall not exceed the maximum rate allowed by law. Interest is
payable in addition to the potential late charge provided for in Paragraph 13.4.

     13.6 Breach by Lessor.

          (a)  Notice of Breach. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than 30 days after receipt by Lessor, and any
Lender whose name and address shall have been furnished Lessee in writing for
such purpose, of written notice specifying wherein such obligation of Lessor has
not been performed; provided, however, that if the nature of Lessor's obligation
is such that more than 30 days are reasonably required for its performance, then
Lessor shall not be in breach if performance is commenced within such 30 day
period and thereafter diligently pursued to completion.



          (b)  Performance by Lessee on Behalf of Lessor. In the event that
neither Lessor nor Lender cures said breach within 30 days after receipt of said
notice, or if having commenced said cure they do not diligently pursue it to
completion, then Lessee may elect to cure said breach at Lessee's expense and
offset from Rent the actual and reasonable cost to perform such cure, provided
however, that such offset shall not exceed an amount equal to the greater of one
month's Base Rent or the Security Deposit, reserving Lessee's right to seek
reimbursement from Lessor. Lessee shall document the cost of said cure and
supply said documentation to Lessor.

14.  Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than 10% of the Building, or more than 25% of that portion
of the Premises not occupied by any building, is taken by Condemnation, Lessee
may, at Lessee's option, to be exercised in writing within 10 days after Lessor
shall have given Lessee written notice of such taking (or In the absence of such
notice, within 10 days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.

15.  Brokerage Fees.

     15.3 Representations and Indemnities of Broker Relationships. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.

16.  Estoppel Certificates.

          (a)  Each Party (as "Responding Party") shall within 10 days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Estoppel Certificate" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.

          (b)  If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such 10 day period, the Requesting Party may execute
an Estoppel Certificate stating that: (i) the Lease is in full force and effect
without modification except as may be represented by the Requesting Party, (ii)
there are no uncured defaults in the Requesting Party's performance, and (iii)
if Lessor is the Requesting Party, not more than one month's rent has been paid
in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.

          (c)  If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past 3 years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.



17.  Definition of Lessor. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be

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performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined.

18.  Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.

19.  Days. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.

20.  Limitation on Liability. The obligations of Lessor under this Lease shall
not constitute personal obligations of Lessor or its partners, members,
directors, officers or shareholders, and Lessee shall look to the Premises, and
to no other assets of Lessor, for the satisfaction of any liability of Lessor
with respect to this Lease, and shall not seek recourse against Lessor's
partners, members, directors, officers or shareholders, or any of their personal
assets for such satisfaction.

21.  Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.

22.  No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the use, nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.

23.  Notices.

     23.1 Notice Requirements. All notices required or permitted by this Lease
or applicable law shall be in writing and may be delivered in person (by hand or
by courier) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission,
and shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notices. Either Party
may by written notice to the other specify a different address for notice,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.

     23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given 48 hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantee next day
delivery shall be deemed given 24 hours after delivery of the same to the Postal
Service or courier. Notices transmitted by facsimile transmission or similar
means shall be deemed delivered upon telephone confirmation of receipt
(confirmation report from fax machine is sufficient), provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday, Sunday or
legal holiday, it shall be deemed received on the next business day.

24.  Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of moneys or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no



force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.

25.  Disclosures Regarding The Nature of a Real Estate Agency Relationship.

          (a)  When entering into a discussion with a real estate agent
regarding a real estate transaction, a Lessor or Lessee should from the outset
understand what type of agency relationship or representation it has with the
agent or agents in the transaction. Lessor and Lessee acknowledge being advised
by the Brokers in this transaction, as follows:

               (i)   Lessor's Agent. A Lessor's agent under a listing agreement
with the Lessor acts as the agent for the Lessor only. A Lessor's agent or
subagent has the following affirmative obligations: To the Lessor: A fiduciary
duty of utmost care, integrity, honesty, and loyalty in dealings with the
Lessor. To the Lessee and the Lessor: a. Diligent exercise of reasonable skills
and care in performance of the agent's duties. b. A duty of honest and fair
dealing and good faith. c. A duty to disclose all facts known to the agent
materially affecting the value or desirability of the property that are not
known to or within the diligent attention and observation of, the Parties. An
agent is not obligated to reveal to either Party any confidential information
obtained from the other Party which does not involve the affirmative duties set
forth above.

               (ii)  Lessee's Agent. An agent can agree to act as agent for the
Lessee only. In these situations, the agent is not the Lessor's agent, even if
by agreement the agent may receive compensation for services rendered, either in
full or in part from the Lessor. An agent acting only for a Lessee has the
following affirmative obligations. To the Lessee: A fiduciary duty of utmost
care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee
and the Lessor: a. Diligent exercise of reasonable skills and care in
performance of the agent's duties. b. A duty of honest and fair dealing and good
faith. c. A duty to disclose all facts known to the agent materially affecting
the value or desirability of the property that are not known to, or within the
diligent attention and observation of, the Parties. An agent is not obligated to
reveal to either Party any confidential information obtained from the other
Party which does not involve the affirmative duties set forth above.

               (iii) Agent Representing Both Lessor and Lessee. A real estate
agent, either acting directly or through one or more associate licenses, can
legally be the agent of both the Lessor and the Lessee in a transaction, but
only with the knowledge and consent of both the Lessor and the Lessee. In a dual
agency situation, the agent has the following affirmative obligations to both
the Lessor and the Lessee: a. A fiduciary duty of utmost care, integrity,
honesty and loyalty in the dealings with either Lessor or the Lessee. b. Other
duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii)
In representing both Lessor and Lessee, the agent may not without the express
permission of the respective Party, disclose to the other Party that the Lessor
will accept rent in an amount less than that indicated in the listing or that
the Lessee is willing to pay a higher rent than that offered. The above duties
of the agent in a real estate transaction do not relieve a Lessor or Lessee from
the responsibility to protect their own interests. Lessor and Lessee should
carefully read all agreements to assure that they adequately express their
understanding of the transaction. A real estate agent is a person qualified to
advise about real estate. If legal or tax advice is desired, consult a competent
professional.

          (b)  Brokers have no responsibility with respect to any default or
breach hereof by either Party. The liability (including court costs and
attorneys' fees), of any Broker with respect to any breach of duty, error or
omission relating to this Lease shall not exceed the fee received by such Broker
pursuant to this Lease; provided, however, that the foregoing limitation on each
Broker's liability shall not be applicable to any gross negligence or willful
misconduct of such Broker.

          (c)  Lessor and Lessee agree to identify to Brokers as "Confidential"
any communication or information given Brokers that is considered by such Party
to be confidential.

26.  No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
150% of the Base Rent applicable immediately preceding the expiration or
termination. Nothing contained herein shall be construed as consent by Lessor to
any holding over by Lessee.

27.  Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.



28.  Covenants and Conditions; Construction of Agreement. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
Parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the Parties, but rather
according to its fair meaning as a whole, as if both Parties had prepared it.

29.  Binding Effect; Choice of Law. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.

30.  Subordination; Attornment; Non-Disturbance.

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                                  Page 9 of 12


     30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lender") shall have no liability or obligation to perform any of
the obligations of Lessor under this Lease. Any Lender may elect to have this
Lease and/or any Option granted hereby superior to the lien of its Security
Device by giving written notice thereof to Lessee, whereupon this Lease and such
Options shall be deemed prior to such Security Device, notwithstanding the
relative dates of the documentation or recordation thereof.

     30.2 Attornment. In the event that Lessor transfers title to the Premises,
or the Premises are acquired by another upon the foreclosure or termination of a
Security Device to which this Lease is subordinated (i) Lessee shall, subject to
the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and
upon request, enter into a new lease, containing all of the terms and provisions
of this Lease, with such new owner for the remainder of the term hereof, or, at
the election of such new owner, this Lease shall automatically become a new
Lease between Lessee and such new owner, upon all of the terms and conditions
hereof, for the remainder of the term hereof, and (ii) Lessor shall thereafter
be relieved of any further obligations hereunder and such new owner shall assume
all of Lessor's obligations hereunder, except that such new owner shall not: (a)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership; (b) be subject to any offsets or
defenses which Lessee might have against any prior lessor, (c) be bound by
prepayment of more than one month's rent, or (d) be liable for the return of any
security deposit paid to any prior lessor.

     30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within 60 days after the execution of this Lease, Lessor
shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which 1s secured
by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee's
option, directly contact Lender and attempt to negotiate for the execution and
delivery of a Non-Disturbance Agreement.

     30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31.  Attorneys' Fees. If any Party or Broker brings an action or proceeding
involving the Premises whether founded in tort, contract or equity, or to
declare rights hereunder, the Prevailing Party (as hereafter defined) in any
such proceeding, action, or appeal thereon, shall be entitled to reasonable
attorneys' fees. Such fees may be awarded in the same suit or recovered in a
separate suit, whether or not such action or proceeding is pursued to decision
or judgment. The term, "Prevailing Party" shall include, without limitation, a
Party or Broker who substantially obtains or defeats the relief sought, as the
case may be, whether by compromise, settlement, judgment, or the abandonment by
the other Party or Broker of its claim or defense. The attorneys' fees award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorneys' fees reasonably incurred. In addition,
Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach ($200 is a reasonable minimum per
occurrence for such services and consultation).

32.  Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times after reasonable prior notice for
the purpose of showing the same to prospective purchasers, lenders, or tenants,
and making such alterations, repairs, improvements or additions to the Premises
as Lessor may deem necessary or desirable and the erecting, using and
maintaining of utilities, services, pipes and conduits through the Premises



and/or other premises as long as there is no material adverse effect to Lessee's
use of the Premises. All such activities shall be without abatement of rent or
liability to Lessee.

33.  Auctions. Lessee shall not conduct, nor permit to be conducted, any auction
upon the Premises without Lessor's prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.

34.  Signs. Lessor may place on the Premises ordinary "For Sale" signs at any
time and ordinary "For Lease" signs during the last 6 months of the term hereof.
Except for ordinary "for sublease" signs, Lessee shall not place any sign upon
the Premises without Lessor's prior written consent. All signs must comply with
all Applicable Requirements.

35.  Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within 10 days following any such event
to elect to the contrary by written notice to the holder of any such lesser
interest, shall constitute Lessor's election to have such event constitute the
termination of such interest.

36.  Consents. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within 10 business days following such request.

37.  Guarantor.

     37.1 Execution. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.

     37.2 Default. It shall constitute a Default of the Lessee if any Guarantor
fails or refuses, upon request to provide: (a) evidence of the execution of the
guaranty, including the authority of the party signing on Guarantor's behalf to
obligate Guarantor, and in the case of a corporate Guarantor, a certified copy
of a resolution of its board of directors authorizing the making of such
guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d)
written confirmation that the guaranty is still in effect.

38.  Quiet Possession. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.

39.  Options. If Lessee is granted an Option, as defined below, then the
following provisions shall apply:

     39.1 Definition. "Option" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.

     39.2 Options Personal To Original Lessee. Any Option granted to Lessee in
this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original



Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.

     39.3 Multiple Options. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later Option cannot be exercised unless the prior
Options have been validly exercised.

     39.4 Effect of Default on Options.

          (a)  Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default and continuing until
said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given 3 or more notices of separate Default, whether or not the Defaults
are cured, during the 12 month period immediately preceding the exercise of the
Option.

          (b)  The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).

          (c)  An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term or completion of the
purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), or (ii) if
Lessee commits a Breach of this Lease.

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40.  Multiple Buildings. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by and conform to all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, and care of said properties, including the care and
cleanliness of the grounds and including the parking, loading and unloading of
vehicles, and to cause its employees, suppliers, shippers, customers,
contractors and invitees to so abide and conform. Lessee also agrees to pay its
fair share of common expenses incurred in connection with such rules and
regulations.

41.  Security Measures. Lessee hereby acknowledges that the Rent payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises. Lessee,
its agents and invitees and their property from the acts of third parties.

42.  Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.

43.  Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.

44.  Authority; Multiple Parties; Execution.
          (a)  If either Party hereto is a corporation, trust, limited liability
company, partnership, or similar entity, each individual executing this Lease on
behalf of such entity represents and warrants that he or she is duly authorized
to execute and deliver this Lease on its behalf. Each party shall, within 30
days after request, deliver to the other party satisfactory evidence of such
authority.
          (b)  If this Lease is executed by more than one person or entity as
"Lessee", each such person or entity shall be jointly and severally liable
hereunder. It is agreed that any one of the named Lessees shall be empowered to
execute any amendment to this Lease, or other document ancillary thereto and
bind all of the named Lessees, and Lessor may rely on the same as if all of the
named Lessees had executed such document.
          (c)  This Lease may be executed by the Parties in counterparts, each
of which shall be deemed an original and all of which together shall constitute
one and the same instrument.

45.  Conflict. Any conflict between the printed provisions of this Lease and
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.

46.  Offer. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.

47.  Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.

48.  Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT
OF THIS AGREEMENT.

49.  Mediation and Arbitration of Disputes. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease /_/ is /X/ is not attached to this Lease.

50.  Americans with Disabilities Act. Since compliance with the Americans with
Disabilities Act (ADA) is dependent upon Lessee's specific use of the Premises.



Lessor makes no warranty or representation as to whether or not the Premises
comply with ADA or any similar legislation. In the event that Lessee's use of
the Premises requires modifications or additions to the Premises in order to be
in ADA compliance, Lessee agrees to make any such necessary modifications and/or
additions at Lessee's expense.

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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:

1.   SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2.   RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.

WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.

The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.

Executed at: ___________________________   Executed at: ________________________
on: ____________________________________   on: _________________________________

By LESSOR:                                 By LESSEE:

1515 South Manchester, LLC, a California   Odetics Inc., a Delaware corporation
- ----------------------------------------   ------------------------------------
limited liability company on behalf of     _____________________________________
- ----------------------------------------
   itself and the other entities
         constituting Lessor

By:                                        By:
    ------------------------------------      ----------------------------------
Name Printed: William McFarland            Name Printed: Gregory A. Miner
              --------------------------                ------------------------
Title:                                     Title: Chief Executive Officer
      ----------------------------------          ------------------------------

By:                                        By:
    ------------------------------------       ---------------------------------
Name Printed:                              Name Printed:
              --------------------------                 -----------------------
Title:                                     Title:
       ---------------------------------          ------------------------------
Address: 18800 Von Karman Ave., Ste. 100   Address: 1515 S. Manchester Ave.
Irvine, CA 92612                           Anaheim, CA 92802
Telephone/Facsimile: 949-474-7999/         Telephone/Facsimile: 714-780-7802/
                     949-474-8258                               714-780-7857

Federal ID No. _________________________  Federal ID No. _______________________

- ----------
NOTE: These forms are often modified to meet the changing requirements of law
      and industry needs. Always write or call to make sure you are utilizing
      the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700
      So. Flower Street, Suite 600, Los Angeles, California 90017. (213)
      687-8777. Fax No. (213) 687-8616

(C) Copyright 1997 - By American Industrial Real Estate Association. All rights
     reserved. No part of these works may be reporduced in any form without
                             permission in writing.

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                                  Page 12 of 12

EX-10.2

>

                                                                   EXHIBITS 10.2

                   AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

            STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET

                (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

1.   Basic Provisions ("Basic Provisions").

     1.1  Parties: This Lease ("Lease"), dated for reference purposes only, May
13 2002, is made by and between 1515 South Manchester LLC, a California limited
liability company, Dartbrook-Twin Oaks, LP, a Texas limited partnership, and
William T. White, III, LLC, a California limited liability company ("Lessor")
and Odetics Inc., a Delaware corporation ("Lessee"), (collectively the
"Parties," or individually a "Party").

     1.2  Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 1585 S. Manchester Ave., Anaheim located in the County of Orange, State
of California, and generally described as (describe briefly the nature of the
property and, if applicable, the "Project", if the property is located within a
Project) approximately 78,740 square feet of freestanding building which
(together with approximately 179,000 square feet of buildings commonly known as
1515 S. Manchester Avenue) is situated on 13.67 acres of land area ("Premises").
(See also Paragraph 2)

     1.3  Term: two years and six months ("Original Term") commencing on the
Closing Date (which is the date of the closing of Lessor's purchase of the
premised from Lessee) ("Commencement Date") and ending 30 months from the
Closing Date ("Expiration Date"). (See also Paragraph 3)

     1.4  Early Possession: not applicable ("Early Possession Date"). (See also
Paragraphs 3.2 and 3.3)

     1.5  Base Rent: $57,553.20 per month ("Base Rent"), payable on the first
day of each month commencing on the Closing Date (See also Paragraph 4)

/X/ If this box is checked, there are provisions in this Lease for the Base Rent
    to be adjusted.

     1.6  Base Rent and Other Monies Paid Upon Execution:

          (a)  Base Rent: $57,553.20 plus $1,856.55 for each day from and
including the Commencement Date through and including May 31, 2002 for the
period commencing the Commencement Date through June 30, 2002.

          (b)  Security Deposit: $n/a ("Security Deposit"). (See also
Paragraph 5)

          (c)  Association Fees: $n/a for the period n/a

          (d)  Other: $______________ for _______________

          (e)  Total Due Upon Closing Date: $ see 1.6 (a)

     1.7  Agreed Use: light manufacturing, assembly and related office uses (See
also Paragraph 6)

     1.8  Insuring Party: Lessee is the "Insuring Party" unless otherwise stated
herein. (See also Paragraph 8)

     1.9  Real Estate Brokers: (See also Paragraph 15)

     1.10 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by n/a ("Guarantor"). (See also Paragraph 37)

     1.11 Attachments. Attached hereto are the following, all of which
constitute a part of this Lease:

/X/ an Addendum consisting of Paragraphs 51 through 54;

/ / a plot plan depicting the Premises;

/ / a current set of the Rules and Regulations;



/ / a Work Letter;

/ / other (specify): ___________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

2.   Premises.

     2.1  Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of size set forth in this Lease, or that may have been
used in calculating Rent, is an approximation which the Parties agree is
reasonable and any payments based thereon are not subject to revision whether or
not the actual size is more or less. Note: Lessee is advised to verify the
actual size prior to executing this Lease.



     2.4  Acknowledgements. Lessee acknowledges that: (a) it has been advised by
Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements and the Americans with Disabilities Act), and their suitability for
Lessee's intended use, (b) Lessee has made such investigation as it deems
necessary with reference to such matters and assumes all responsibility therefor
as the same relate to its occupancy of the Premises, and (c) neither Lessor,
Lessor's agents, nor Brokers have made any oral or written representations or
warranties with respect to said matters other than as set forth in this Lease.
In addition, Lessor acknowledges that: (i) Brokers have made no representations,
promises or warranties concerning Lessee's ability to honor the Lease or
suitability to occupy the Premises, and (ii) it is Lessor's sole responsibility
to investigate the financial capability and/or suitability of all proposed
tenants.

     2.5  Lessee as Prior Owner/Occupant. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.

3.   Term.

     3.1  Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.

     3.4  Lessee Compliance. Lessor shall not be required to deliver possession
of the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.
Further, if Lessee is required to perform any other conditions prior to or
concurrent with the Start Date, the Start Date shall occur but Lessor may elect
to withhold possession until such conditions are satisfied.

4.   Rent.

     4.1  Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").

     4.2  Payment. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States on or before the day on which it is due,
without offset or deduction (except as specifically permitted in this Lease).
Rent for any period during the term hereof which is for less than one full
calendar month shall be prorated based upon the actual number of days of said
month. Payment of Rent shall be made to Lessor at its address stated herein or
to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating. In the event that any check,
draft, or other instrument of payment given by Lessee to Lessor is dishonored
for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any
Late Charge and Lessor, at its option, may require all future payments to be
made by Lessee to be by cashier's check. Payments will be applied first to
accrued late charges and attorney's fees, second to accrued interest, then to
Base Rent and Operating Expense Increase, and any remaining amount to any other
outstanding charges or costs.

     4.3  Association Fees. In addition to the Base Rent, Lessee shall pay to
Lessor each month an amount equal to any owner's association or condominium fees
levied or assessed against the Premises. Said monies shall be paid at the same
time and in the same manner as the Base Rent.

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6.   Use.

     6.1  Use. Lessee shall use and occupy the Premises only for the Agreed Use,
or any other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a manner that
is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of
or causes damage to neighboring premises or properties. Lessor shall not
unreasonably withhold or delay its consent to any written request for a
modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, and/or is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after
such request give written notification of same, which notice shall include an
explanation of Lessor's objections to the change in the Agreed Use.

     6.2  Hazardous Substances.

          (a)  Reportable Uses Require Consent. The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, or waste whose
presence, use, manufacture, disposal, transportation, or release, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "Reportable Use" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, ordinary office
supplies (copier toner, liquid paper, glue, etc.) and common household cleaning
materials, so long as such use is in compliance with all Applicable
Requirements, is not a Reportable Use, and does not expose the Premises or
neighboring property to any meaningful risk of contamination or damage or expose
Lessor to any liability therefor. In addition, Lessor may condition its consent
to any Reportable Use upon receiving such additional assurances as Lessor
reasonably deems necessary to protect itself, the public, the Premises and/or
the environment against damage, contamination, injury and/or liability,
including, but not limited to, the installation (and removal on or before Lease
expiration or termination) of protective modifications (such as concrete
encasements) and/or increasing the Security Deposit.

          (b)  Duty to Inform Lessor. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor, and provide Lessor
with a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.

          (c)  Lessee Remediation. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, comply with all Applicable Requirements and take
all investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of the Premises or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance brought onto the Premises
during the term of this Lease, by or for Lessee, or any third party.

          (d)  Lessee Indemnification. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out of
or involving any Hazardous Substance brought onto the Premises by or for Lessee,
or any third party (including without limitation any Hazardous Substances on or
under the Premises by reason of above ground or underground migration of any



Hazardous Substance under the Premises from adjacent properties not caused or
contributed to by Lessee). Lessee's obligations shall include, but not be
limited to, the effects on or of any contamination or injury to person, property
or the environment created or suffered by Lessee, and the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease. No termination, cancellation or release
agreement entered into by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessor in writing at the time of such agreement.

          (e)  Lessor Indemnification. Lessee and its successors and assigns
shall indemnify, defend, reimburse and hold Lessor, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which result from Hazardous Substances which existed on the
Premises prior to Lessee's occupancy. Lessee's obligations, as and when required
by the Applicable Requirements, shall include, but not be limited to, the cost
of Investigation removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease.

          (f)  Investigations and Remediations. Lessee shall have the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to Lessee's occupancy.

          (g)  Lessor Termination Option. If a Hazardous Substance Condition
(see Paragraph 9.1(e)) occurs during the term of this Lease, Lessee shall make
the investigation and remediation thereof required by the Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(d) and Paragraph 13.

     6.3  Lessee's Compliance with Applicable Requirements. Lessee shall, at
Lessee's sole expense, fully, diligently and in a timely manner, materially
comply with all Applicable Requirements, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants which relate in any manner to the such
Requirements, without regard to whether such Requirements are now in effect or
become effective after the Start Date. Lessee shall, within 10 days after
receipt of Lessor's written request, provide Lessor with copies of all permits
and other documents, and other information evidencing Lessee's compliance with
any Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of any
threatened or actual claim, notice, citation, warning, complaint or report
pertaining to or involving the failure of Lessee or the Premises to comply with
any Applicable Requirements.

     6.4  Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in
Paragraph 30) and consultants shall have the right to enter into Premises at any
time, in the case of an emergency, and otherwise at reasonable times after
reasonable notice, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease. The cost of any such
inspections shall be paid by Lessor, unless a violation of Applicable
Requirements, or a Hazardous Substance Condition (see paragraph 9.1) is found to
exist or be imminent, or the inspection is requested or ordered by a
governmental authority. In such case, Lessee shall upon request reimburse Lessor
for the cost of such inspection, so long as such inspection is reasonably
related to the violation or contamination. In addition, Lessee shall provide
copies of all relevant material safety data sheets (MSDS) to Lessor within 10
days of the receipt of a written request therefor.

7.   Maintenance; Repairs, Utility Installations; Trade Fixtures and
     Alterations.

     7.1  Lessee's Obligations.

          (a)  In General. Subject to the provisions of Paragraph 9 (Damage or
Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense,
keep the Premises, Utility Installations (intended for Lessee's exclusive use,
no matter where located), and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, HVAC equipment,
electrical, lighting facilities, boilers, pressure vessels, fire protection
system, fixtures, walls (interior and exterior), foundations, ceilings, roofs,
roof drainage systems, floors, windows, doors, plate glass, skylights,
landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks
and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the
Premises in good order, condition



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and repair, shall exercise and perform good maintenance practices, specifically
including the procurement and maintenance of the service contracts required by
Paragraph 7.1(b) below. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition (including, e.g. graffiti
removal) consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary, the exterior
repainting of the Building.

          (b)  Service Contracts. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) clarifiers (vii) basic utility feed to the perimeter of the
Building, and (viii) any other equipment, if reasonably required by Lessor.
However, Lessor reserves the right, upon notice to Lessee, to procure and
maintain any or all of such service contracts, and if Lessor so elects, Lessee
shall reimburse Lessor, upon demand, for the cost thereof.

          (c)  Failure to Perform. If Lessee fails to perform Lessee's
obligations under this Paragraph 7.1, Lessor may enter upon the Premises after
10 days' prior written notice to Lessee (except in the case of an emergency, in
which case no notice shall be required), perform such obligations on Lessee's
behalf, and put the Premises in good order, condition and repair, and Lessee
shall promptly pay to Lessor a sum equal to 115% of the cost thereof.

     7.2  Lessor's Obligations. Subject to the provisions of Paragraphs 9
(Damage or Destruction) and 14 (Condemnation), it is intended by the Parties
hereto that Lessor have no obligation, in any manner whatsoever, to repair and
maintain the Premises, or the equipment therein, all of which obligations are
intended to be that of the Lessee. It is the intention of the Parties that the
terms of this Lease govern the respective obligations of the Parties as to
maintenance and repair of the Premises, and they expressly waive the benefit of
any statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease.

     7.3  Utility Installations; Trade Fixtures; Alterations.

          (a)  Definitions. The term "Utility Installations" refers to all
floor and window coverings, air and/or vacuum lines, power panels, electrical
distribution, security and fire protection systems, communication cabling,
lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises.
The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can
be removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned"
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor pursuant
to Paragraph 7.4(a).

          (b)  Consent. Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without such consent but upon notice to Lessor, as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, will not affect the
electrical, plumbing, HVAC, and/or life safety systems, and the cumulative cost
thereof during this Lease as extended does not exceed a sum equal to 3 month's
Base Rent in the aggregate or a sum equal to one month's Base Rent in any one
year. Notwithstanding the foregoing, Lessee shall not make or permit any roof
penetrations and/or install anything on the roof without the prior written
approval of Lessor. Lessor may, as a precondition to granting such approval,
require Lessee to utilize a contractor chosen and/or approved by Lessor. Any
Alterations or Utility Installations that Lessee shall desire to make and which
require the consent of the Lessor shall be presented to Lessor in written form
with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i)
acquiring all applicable governmental permits, (ii) furnishing Lessor with
copies of both the permits and the plans and specifications prior to
commencement of the work, and (iii) compliance with all conditions of said
permits and other Applicable Requirements in a prompt and expeditious manner.
Any Alterations or Utility Installations shall be performed in a workmanlike
manner with good and sufficient materials. Lessee shall promptly upon completion



furnish Lessor with as-built plans and specifications. For work which costs an
amount in excess of one month's Base Rent, Lessor may condition its consent upon
Lessee providing a lien and completion bond in an amount equal to 150% of the
estimated cost of such Alteration or Utility Installation and/or upon Lessee's
posting an additional Security Deposit with Lessor.

          (c)  Liens; Bonds. Lessee shall pay, when due, all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than 10 days notice prior to the commencement of any work
in, on or about the Premises, and Lessor shall have the right to post notices of
non-responsibility. If Lessee shall contest the validity of any such lien, claim
or demand, then Lessee shall, at its sole expense defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof. If
Lessor shall require, Lessee shall furnish a surety bond in an amount equal to
150% of the amount of such contested lien, claim or demand, indemnifying Lessor
against liability for the same. If Lessor elects to participate in any such
action, Lessee shall pay Lessor's attorneys' fees and costs.

     7.4  Ownership; Removal; Surrender; and Restoration.

          (a)  Ownership. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.

          (b)  Removal. By delivery to Lessee of written notice from Lessor
not earlier than 90 and not later than 30 days prior to the end of the term of
this Lease, Lessor may require that any or all Lessee Owned Alterations or
Utility Installations be removed by the expiration or termination of this Lease.
Lessor may require the removal at any time of all or any part of any Lessee
Owned Alterations or Utility Installations made without the required consent.

          (c)  Surrender; Restoration. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice. Notwithstanding the
foregoing, if this Lease is for 12 months or less, then Lessee shall surrender
the Premises in the same condition as delivered to Lessee on the Start Date with
NO allowance for ordinary wear and tear. Lessee shall repair any damage
occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee
owned Alterations and/or Utility Installations, furnishings, and equipment as
well as the removal of any storage tank installed by or for Lessee. Lessee shall
completely remove from the Premises any and all Hazardous Substances brought
onto the Premises by or for Lessee, or any third party (including Hazardous
Substances which were deposited via underground migration from areas outside of
the Premises, or if applicable, the Project) even if such removal would require
Lessee to perform or pay for work that exceeds statutory requirements. Trade
Fixtures shall remain the property of Lessee and shall be removed by Lessee. Any
personal property of Lessee not removed on or before the Expiration Date or any
earlier termination date shall be deemed to have been abandoned by Lessee and
may be disposed of or retained by Lessor as Lessor may desire. The failure by
Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without
the express written consent of Lessor shall constitute a holdover under the
provisions of Paragraph 26 below.

8.   Insurance; Indemnity.

     8.1  Payment For Insurance. Lessee shall pay for all insurance required
under Paragraph 8 including the liability insurance carried by Lessor under
Paragraph 8.2(b) in excess of $l0,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor
within 10 days following receipt of an invoice.

     8.2  Liability Insurance.

          (a)  Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability policy of insurance protecting Lessee and Lessor as
an additional insured against claims for bodily injury, personal injury and



property damage based upon or arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. Such insurance
shall be on an occurrence basis providing single limit coverage in an amount not
less than $10,000,000 per occurrence with an annual aggregate of not less than
$15,000,000, an "Additional Insured-Managers or Lessors of Premises Endorsement"
and contain the "Amendment of the Pollution Exclusion Endorsement" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this Lease as an "insured
contract" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance shall not, however, limit the liability of
Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by
Lessee shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.

          (b)  Carried by Lessor. Lessor shall at Lessee's expense maintain
liability insurance as described in Paragraph 8.2(a), in addition to, and not in
lieu of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.

     8.3  Property Insurance - Building, Improvements and Rental Value.

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          (a)  Building and Improvements. The Insuring Party shall obtain and
keep in force a policy or policies in the name of Lessor, with loss payable to
Lessor, any ground-lessor, and to any Lender insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lender, but in no event more than the commercially reasonable
and available insurable value thereof. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's
personal property shall be insured by Lessee under Paragraph 8.4 rather than by
Lessor. Such policy or policies shall insure against all risks of direct
physical loss or damage (including the perils of flood and/or earthquake),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence. and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.

          (b)  Rental Value. The Insuring Party shall obtain and keep in force a
policy or policies in the name of Lessor with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one year with an extended period
of indemnity for an additional 180 days ("Rental Value insurance"). Said
insurance shall contain an agreed valuation provision in lieu of any coinsurance
clause, and the amount of coverage shall be adjusted annually to reflect the
projected Rent otherwise payable by Lessee, for the next 12 month period. Lessee
shall be liable for any deductible amount in the event of such loss.

          (c)  Adjacent Premises. If the Premises are part of a larger building,
or of a group of buildings owned by Lessor which are adjacent to the Premises,
the Lessee shall pay for any increase in the premiums for the property insurance
of such building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.

     8.4  Lessee's Property; Business Interruption Insurance.

          (a)  Property Damage. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.

          (b)  Business Interruption. Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.

          (c)  No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.

     8.5  Insurance Policies. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after 30 days prior written notice
to Lessor. Lessee shall, at least 30 days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. Such policies shall be for a term of at least one year, or the length of
the remaining term of this Lease, whichever is less. If either Party shall fail
to procure and maintain the insurance required to be carried by it, the other



Party may, but shall not be required to, procure and maintain the same.

     8.6  Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.

     8.7  Indemnity. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
liens judgments, penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the use and/or
occupancy of the Premises by Lessee. If any action or proceeding is brought
against Lessor by reason of any of the foregoing matters, Lessee shall upon
notice defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be defended or indemnified.

     8.8  Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor nor from
the failure of Lessor to enforce the provisions of any other lease in the
Project. Notwithstanding Lessor's negligence or breach of this Lease, Lessor
shall under no circumstances be liable for injury to Lessee's business or for
any loss of Income or profit therefrom.

     8.9  Failure to Provide Insurance. Lessee acknowledges that any failure on
its part to obtain or maintain the insurance required herein will expose Lessor
to risks and potentially cause Lessor to incur costs not contemplated by this
Lease, the extent of which will be extremely difficult to ascertain.
Accordingly, for any month or portion thereof that Lessee does not maintain the
required insurance and/or does not provide Lessor with the required binders or
certificates evidencing the existence of the required insurance, the Base Rent
shall be automatically increased, without any requirement for notice to Lessee,
by an amount equal to 10% of the then existing Base Rent or $100, whichever is
greater. The parties agree that such increase in Base Rent represents fair and
reasonable compensation for the additional risk/ costs that Lessor will incur by
reason of Lessee's failure to maintain the required insurance. Such increase in
Base Rent shall in no event constitute a waiver of Lessee's Default or Breach
with respect to the failure to maintain such insurance, prevent the exercise of
any of the other rights and remedies granted hereunder, nor relieve Lessee of
its obligation to maintain the insurance specified in this Lease.

9.   Damage or Destruction.

     9.1  Definitions.

          (a)  "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which can reasonably be repaired in 12 months or less from the
date of the damage or destruction. Lessor shall notify Lessee in writing within
30 days from the date of the damage or destruction as to whether or not the
damage is Partial or Total.

          (b)  "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility installations and
Trade Fixtures, which cannot reasonably be repaired in 12 months or less from
the date of the damage or destruction. Lessor shall notify Lessee in writing
within 30 days from the date of the damage or destruction as to whether or not
the damage is Partial or Total.

          (c)  "Insured Loss" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility



Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.

          (d)  "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable Requirements, and without
deduction for depreciation.

          (e)  "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises which requires repair, remediation, or restoration.

     9.2  Partial Damage - Insured Loss. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Lessee shall promptly contribute the shortage in proceeds as and when required
to complete said repairs. In the event, such shortage was due to the fact that,
by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessee shall
provide Lessor with the funds to cover same, or adequate assurance thereof,
within 10 days following receipt of written notice of such shortage and request
therefor. If Lessor receives said funds or adequate assurance thereof within
said 10 day period, the party responsible for making the repairs shall complete
them as soon as reasonably possible and this Lease shall remain in full force
and effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within 10 days thereafter to: (i) make such
restoration and repair as is commercially reasonable with Lessee paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or

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(ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled
to reimbursement of any funds contributed by Lessee to repair any such damage or
destruction. Premises Partial Damage due to flood or earthquake shall be subject
to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but
the net proceeds of any such insurance shall be made available for the repairs
if made by either Party.

     9.3  Partial Damage - Uninsured Loss. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage, or direct Lessee to repair such
damage as soon as reasonably possible in each case at Lessee's expense, in which
event Lessee shall promptly pay for such repairs and this Lease shall continue
in full force and effect, or (ii) terminate this Lease by giving written notice
to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence
of such damage. Such termination shall be effective 60 days following the date
of such notice.

     9.4  Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate 60 days following
such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.

     9.5  Damage Near End of Term. If at any time during the last 6 months of
this Lease there is damage for which the cost to repair exceeds one month's Base
Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective
60 days following the date of occurrence of such damage by giving a written
termination notice to Lessee within 30 days after the date of occurrence of such
damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable
option to extend this Lease or to purchase the Premises, then Lessee may
preserve this Lease by, (a) exercising such option and (b) providing Lessor with
any shortage in insurance proceeds (or adequate assurance thereof) needed to
make the repairs on or before the earlier of (i) the date which is 10 days after
Lessee's receipt of Lessor's written notice purporting to terminate this Lease,
or (ii) the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's commercially reasonable expense, repair such damage as soon
as reasonably possible and this Lease shall continue in full force and effect.
If Lessee fails to exercise such option and provide such funds or assurance
during such period, then this Lease shall terminate on the date specified in the
termination notice and Lessee's option shall be extinguished.

     9.6  Abatement of Rent; Lessee's Remedies.

          (a)  Abatement. In the event of Premises Partial Damage or Premises
Total Destruction the Rent payable by Lessee for the period required for the
repair, remediation or restoration of such damage shall be abated in proportion
to the degree to which Lessee's use of the Premises is impaired, but not to
exceed the proceeds received by Lessor from the Rental Value insurance. All
other obligations of Lessee hereunder shall be performed by Lessee, and Lessor
shall have no liability for actually any such damage, destruction, remediation,
repair or restoration except as provided herein.

          (b)  Remedies. If Lessor shall be obligated to repair or restore the
Premises and does not commence, in a substantial and meaningful way, such repair
or restoration within 90 days after such obligation shall accrue, Lessee may, at
any time prior to the commencement of such repair or restoration, give written
notice to Lessor and to any Lenders of which Lessee has actual notice, of
Lessee's election to terminate this Lease on a date not less than 60 days
following the giving of such notice. If Lessee gives such notice and such repair
or restoration is not commenced within 30 days thereafter, this Lease shall
terminate as of the date specified in said notice. If the repair or restoration
is commenced within such 30 days, this Lease shall continue in full force and
effect. "Commence" shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.

     9.7  Termination; Advance Payments. Upon termination of this Lease pursuant
to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor.

     9.8  Waive Statutes. Lessor and Lessee agree that the terms of this



Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.

10.  Real Property Taxes.

     10.1 Definition. EAs used herein, the term "Real Property Taxes" shall
include any form of assessment; real estate, general, special, ordinary or
extraordinary, or rental levy or tax (other than inheritance, personal income or
estate taxes); improvement bond; and/or license fee imposed upon or levied
against any legal or equitable interest of Lessor in the Premises or the
Project, Lessor's right to other income therefrom, and/or Lessor's business of
leasing, by any authority having the direct or indirect power to tax and where
the funds are generated with reference to the Building address and where the
proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. Real
Property Taxes shall also include any tax, fee, levy, assessment or charge, or
any increase therein: (i) imposed by reason of events occurring during the term
of this Lease, including but not limited to, a change in the ownership of the
Premises, and (ii) levied or assessed on machinery or equipment provided by
Lessor to Lessee pursuant to this Lease.

     10.2 Payment of Taxes. In addition to Base Rent, Lessee shall pay to Lessor
an amount equal to the Real Property Tax installment due at least 20 days prior
to the applicable delinquency date. If any such installment shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such installment shall be prorated. In the event Lessee incurs
a late charge on any Rent payment, Lessor may estimate the current Real Property
Taxes, and require that such taxes be paid in advance to Lessor by Lessee
monthly in advance with the payment of the Base Rent. Such monthly payments
shall be an amount equal to the amount of the estimated installment of taxes
divided by the number of months remaining before the month in which said
installment becomes delinquent. When the actual amount of the applicable tax
bill is known, the amount of such equal monthly advance payments shall be
adjusted as required to provide the funds needed to pay the applicable taxes. If
the amount collected by Lessor is insufficient to pay such Real Property Taxes
when due, Lessee shall pay Lessor, upon demand, such additional sum as is
necessary. Advance payments may be intermingled with other moneys of Lessor and
shall not bear interest. In the event of a Breach by Lessee in the performance
of its obligations under this Lease, then any such advance payments may be
treated by Lessor as an additional Security Deposit.

     10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.

     10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause its Lessee Owned Alterations and
Utility Installations, Trade Fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property of
Lessor. If any of Lessee's said property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee's property
within 10 days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.

11.  Utilities and Services. Lessee shall pay for all water, gas, heat, light,
power, telephone, trash disposal and other utilities and services supplied to
the Premises, together with any taxes thereon. If any such services are not
separately metered or billed to Lessee, Lessee shall pay a reasonable
proportion, to be determined by Lessor, of all charges jointly metered or
billed. There shall be no abatement of rent and Lessor shall not be liable in
any respect whatsoever for the inadequacy, stoppage, interruption or
discontinuance of any utility or service due to riot, strike, labor dispute,
breakdown, accident, repair or other cause beyond Lessor's reasonable control or
in cooperation with governmental request or directions,

12.  Assignment and Subletting.

     12.1 Lessor's Consent Required.

          (a)  Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "assign or assignment") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.



          (b)  Unless Lessee is a corporation and its stock is publicly traded
on a national stock exchange, a change in the control of Lessee shall constitute
an assignment requiring consent. The transfer, on a cumulative basis, of 25% or
more of the voting control of Lessee shall constitute a change in control for
this purpose.

          (c)  The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than 25%
of such Net Worth as it was represented at the time of the execution of this
Lease or at the time of the most recent assignment to which Lessor has
consented, or as it exists immediately prior to said transaction or transactions
constituting such reduction, whichever was or is greater, shall be considered an
assignment of this Lease to which Lessor may withhold its consent. "Net Worth of
Lessee" shall mean the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles.

          (d)  An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unapproved assignment or subletting as a noncurable Breach, Lessor
may either: (i) terminate this Lease, or (ii) upon 30 days written notice,
increase the monthly Base Rent to 110% of the Base Rent then in effect. Further,
in the event of such Breach and rental adjustment, (i) the purchase price of any
option to purchase the Premises held by Lessee shall be subject, to similar
adjustment to 110% of the price previously in effect, and (ii) all fixed and
non-fixed rental adjustments scheduled during the remainder of the

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Lease term shall be increased to 110% of the scheduled adjusted rent.

          (e)  Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall
be limited to compensatory damages and/or injunctive relief.

     12.2 Terms and Conditions Applicable to Assignment and Subletting.

          (a)  Regardless of Lessor's consent, no assignment or subletting
shall: (i) be effective without the express written assumption by such assignee
or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee
of any obligations hereunder, or (iii) alter the primary liability of Lessee for
the payment of Rent or for the performance of any other obligations to be
performed by Lessee.

          (b)  Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.

          (c)  Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.

          (d)  In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefor to Lessor, or any security held by Lessor.

          (e)  Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a fee of $500 as
consideration for Lessor's considering and processing said request. Lessee
agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested. (See also Paragraph 36)

          (f)  Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed to have
assumed and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.

          (g)  Lessor's consent to any assignment or subletting shall not
transfer to the assignee or sublessee any Option granted to the original Lessee
by this Lease unless such transfer is specifically consented to by Lessor in
writing. (See Paragraph 39.2)

     12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:

          (a)  Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. In the event that the amount collected by Lessor
exceeds Lessee's obligations any such excess shall be refunded to Lessee. Lessor
shall not, by reason of the foregoing or any assignment of such sublease, nor by
reason of the collection of Rent, be deemed liable to the sublessee for any
failure of Lessee to perform and comply with any of Lessee's obligations to such
sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written notice from Lessor stating that a Breach exists in the
performance of Lessee's obligations under this Lease, to pay to Lessor all Rent
due and to become due under the sublease. Sublessee shall rely upon any such
notice from Lessor and shall pay all Rents to Lessor without any obligation or
right to inquire as to whether such Breach exists, notwithstanding any claim
from Lessee to the contrary.

          (b)  In the event of a Breach by Lessee, Lessor may, at its option,
require sublessee to attorn to Lessor, in which event Lessor shall



undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
6of such sublessor.

          (c)  Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.

          (d)  No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.

          (e)  Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.

13   Default; Breach; Remedies.

     13.1 Default; Breach. A "Default" is defined as a failure by the Lessee
to comply with or perform any of the terms, covenants, conditions or Rules and
Regulations under this Lease. A "Breach" is defined as the occurrence of one or
more of the following Defaults, and the failure of Lessee to cure such Default
within any applicable grace period:

          (a)  The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, or where the
coverage of the property insurance described in Paragraph 8.3 is jeopardized as
a result thereof, or without providing reasonable assurances to minimize
potential vandalism.

          (b)  The failure of Lessee to make any payment of Rent or any Security
Deposit required to be made by Lessee hereunder, whether to Lessor or to a third
party, when due, to provide reasonable evidence of insurance or surety bond, or
to fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of 3 business days following
written notice to Lessee.

          (c)  The failure by Lessee to provide (i) reasonable written evidence
of compliance with Applicable Requirements, (ii) the service contracts, (iii)
the rescission of an unauthorized assignment or subletting, (iv) an Estoppel
Certificate, (v) a requested subordination, (vi) evidence concerning any
guaranty and/or Guarantor, (vii) any document requested under Paragraph 42,
(viii) material safety data sheets (MSDS), or (ix) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of 10 days following
written notice to Lessee.

          (d)  A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c ), above, where
such Default continues for a period of 30 days after written notice; provided,
however, that if the nature of Lessee's Default is such that more than 30 days
are reasonably required for its cure, then it shall not be deemed to be a Breach
if Lessee commences such cure within said 30 day period and thereafter
diligently prosecutes such cure to completion.

          (e)  The occurrence of any of the following events: (i) the making of
any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "debtor" as defined in 11 U.S.C. (S)101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within 60 days); (iii) the appointment of a trustee or receiver to
take possession of substantially all of Lessee's assets located at the Premises
or of Lessee's interest in this Lease, where possession is not restored to
Lessee within 30 days; or (iv) the attachment, execution or other judicial
seizure of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within 30
days; provided, however, in the event that any provision of this subparagraph
(e) is contrary to any applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining provisions.

          (f)  The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.

          (g)  If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject or a
bankruptcy filing, (iv) a Guarantor's refusal to honor the



guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within 60 days following written
notice of any such event, to provide written alternative assurance or security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease

     13.2 Remedies. If Lessee fails to perform any of its affirmative duties
or obligations, within 10 days after written notice (or in case of an emergency,
without notice), Lessor may, at its option, perform such duty or obligation on
Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs and
expenses incurred by Lessor in such performance upon receipt of an invoice
therefor. In the event of a Breach, Lessor may, with or without further notice
or demand, and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such Breach:

          (a)  Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination: (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent. Efforts by Lessor to mitigate damages
caused by Lessee's Breach of this Lease shall not waive Lessor's right to
recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit, If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the

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failure of Lessee to cure the Default within the greater of the two such grace
periods shall constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in this Lease and/or by said
statute.

          (b)  Continue the Lease and Lessee's right to possession and recover
the Rent as it becomes due, as provided in California Civil Code Section 1951.4
(Lessor may continue lease in effect after Lessee's breach and abandonment and
recover rent as it becomes due, if Lessee has the right to sublet or assign,
subject only to reasonable limitations) in which event Lessee may sublet or
assign, subject only to reasonable limitations. Acts of maintenance, efforts to
relet, and/or the appointment of a receiver to protect the Lessor's interests,
shall not constitute a termination of the Lessee's right to possession.

          (c)  Pursue any other remedy now or hereafter available under the laws
or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.

     13.3 Inducement Recapture. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into this
Lease, all of which concessions are hereinafter referred to as "Inducement
Provisions," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.

     13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within 5 days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall immediately pay
to Lessor a one-time late charge equal to 10% of each such overdue amount or
$100, whichever is greater. The Parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of such late payment. Acceptance of such late charge by Lessor shall in
no event constitute a waiver of Lessee's Default or Breach with respect to such
overdue amount, nor prevent the exercise of any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder, whether
or not collected, for 3 consecutive installments of Base Rent, then
notwithstanding any provision of this Lease to the contrary, Base Rent shall, at
Lessor's option, become due and payable quarterly in advance.

     13.5 Interest. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments (such as
Base Rent) or within 30 days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the 31st day after it was due as to non-scheduled
payments. The interest ("Interest") charged shall be computed at the rate of 10%
per annum but shall not exceed the maximum rate allowed by law. Interest is
payable in addition to the potential late charge provided for in Paragraph 13.4.

     13.6 Breach by Lessor.

          (a)  Notice of Breach. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than 30 days after receipt by Lessor, and any
Lender whose name and address shall have been furnished Lessee in writing for
such purpose, of written notice specifying wherein such obligation of Lessor has
not been performed; provided, however, that if the nature of Lessor's obligation
is such that more than 30 days are reasonably required for its performance, then
Lessor shall not be in breach if performance is commenced within such 30 day
period and thereafter diligently pursued to completion.



          (b)  Performance by Lessee on Behalf of Lessor. In the event that
neither Lessor nor Lender cures said breach within 30 days after receipt of said
notice, or if having commenced said cure they do not diligently pursue it to
completion, then Lessee may elect to cure said breach at Lessee's expense and
offset from Rent the actual and reasonable cost to perform such cure, provided
however, that such offset shall not exceed an amount equal to the greater of one
month's Base Rent or the Security Deposit, reserving Lessee's right to seek
reimbursement from Lessor. Lessee shall document the cost of said cure and
supply said documentation to Lessor.

14.  Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than 10% of the Building, or more than 25% of that portion
of the Premises not occupied by any building, is taken by Condemnation, Lessee
may, at Lessee's option, to be exercised in writing within 10 days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within 10 days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.

15.  Brokerage Fees.

     15.3 Representations and Indemnities of Broker Relationships. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.

16.  Estoppel Certificates.

          (a)  Each Party (as "Responding Party") shall within 10 days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Estoppel Certificate" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.

          (b)  If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such 10 day period, the Requesting Party may execute
an Estoppel Certificate stating that: (i) the Lease is in full force and effect
without modification except as may be represented by the Requesting Party, (ii)
there are no uncured defaults in the Requesting Party's performance, and (iii)
if Lessor is the Requesting Party, not more than one month's rent has been paid
in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.

          (c)  If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past 3 years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.

17.  Definition of Lessor. The term "Lessor" as used herein shall mean the owner



or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be

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performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined.

18.  Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.

19.  Days. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.

20.  Limitation on Liability. The obligations of Lessor under this Lease shall
not constitute personal obligations of Lessor or its partners, members,
directors, officers or shareholders, and Lessee shall look to the Premises, and
to no other assets of Lessor, for the satisfaction of any liability of Lessor
with respect to this Lease, and shall not seek recourse against Lessor's
partners, members, directors, officers or shareholders, or any of their personal
assets for such satisfaction.

21.  Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.

22.  No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the use, nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.

 23. Notices.

     23.1 Notice Requirements. All notices required or permitted by this Lease
or applicable law shall be in writing and may be delivered in person (by hand or
by courier) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission,
and shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notices. Either Party
may by written notice to the other specify a different address for notice,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.

     23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given 48 hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantee next day
delivery shall be deemed given 24 hours after delivery of the same to the Postal
Service or courier. Notices transmitted by facsimile transmission or similar
means shall be deemed delivered upon telephone confirmation of receipt
(confirmation report from fax machine is sufficient), provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday, Sunday or
legal holiday, it shall be deemed received on the next business day.

24.  Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of moneys or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no



force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.

25.  Disclosures Regarding The Nature of a Real Estate Agency Relationship.

          (a)  When entering into a discussion with a real estate agent
regarding a real estate transaction, a Lessor or Lessee should from the outset
understand what type of agency relationship or representation it has with the
agent or agents in the transaction. Lessor and Lessee acknowledge being advised
by the Brokers in this transaction, as follows:

               (i)    Lessor's Agent. A Lessor's agent under a listing
agreement with the Lessor acts as the agent for the Lessor only. A Lessor's
agent or subagent has the following affirmative obligations: To the Lessor: A
fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with
the Lessor. To the Lessee and the Lessor: a. Diligent exercise of reasonable
skills and care in performance of the agent's duties. b. A duty of honest and
fair dealing and good faith. c. A duty to disclose all facts known to the agent
materially affecting the value or desirability of the property that are not
known to or within the diligent attention and observation of, the Parties. An
agent is not obligated to reveal to either Party any confidential information
obtained from the other Party which does not involve the affirmative duties set
forth above.

               (ii)   Lessee's Agent. An agent can agree to act as agent for
the Lessee only. In these situations, the agent is not the Lessor's agent, even
if by agreement the agent may receive compensation for services rendered, either
in full or in part from the Lessor. An agent acting only for a Lessee has the
following affirmative obligations. To the Lessee: A fiduciary duty of utmost
care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee
and the Lessor: a. Diligent exercise of reasonable skills and care in
performance of the agent's duties. b. A duty of honest and fair dealing and good
faith. c. A duty to disclose all facts known to the agent materially affecting
the value or desirability of the property that are not known to, or within the
diligent attention and observation of, the Parties. An agent is not obligated to
reveal to either Party any confidential information obtained from the other
Party which does not involve the affirmative duties set forth above.

               (iii)  Agent Representing Both Lessor and Lessee. A real estate
agent, either acting directly or through one or more associate licenses, can
legally be the agent of both the Lessor and the Lessee in a transaction, but
only with the knowledge and consent of both the Lessor and the Lessee. In a dual
agency situation, the agent has the following affirmative obligations to both
the Lessor and the Lessee: a. A fiduciary duty of utmost care, integrity,
honesty and loyalty in the dealings with either Lessor or the Lessee. b. Other
duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii)
In representing both Lessor and Lessee, the agent may not without the express
permission of the respective Party, disclose to the other Party that the Lessor
will accept rent in an amount less than that indicated in the listing or that
the Lessee is willing to pay a higher rent than that offered. The above duties
of the agent in a real estate transaction do not relieve a Lessor or Lessee from
the responsibility to protect their own interests. Lessor and Lessee should
carefully read all agreements to assure that they adequately express their
understanding of the transaction. A real estate agent is a person qualified to
advise about real estate. If legal or tax advice is desired, consult a competent
professional.

          (b)  Brokers have no responsibility with respect to any default or
breach hereof by either Party. The liability (including court costs and
attorneys' fees), of any Broker with respect to any breach of duty, error or
omission relating to this Lease shall not exceed the fee received by such Broker
pursuant to this Lease; provided, however, that the foregoing limitation on each
Broker's liability shall not be applicable to any gross negligence or willful
misconduct of such Broker.

          (c)  Lessor and Lessee agree to identify to Brokers as "Confidential"
any communication or information given Brokers that is considered by such Party
to be confidential.

26.  No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
150% of the Base Rent applicable immediately preceding the expiration or
termination. Nothing contained herein shall be construed as consent by Lessor to
any holding over by Lessee.

27.  Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.



28.  Covenants and Conditions; Construction of Agreement. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
Parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the Parties, but rather
according to its fair meaning as a whole, as if both Parties had prepared it.

29.  Binding Effect; Choice of Law. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.

30.  Subordination; Attornment; Non-Disturbance.

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     30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lender") shall have no liability or obligation to perform any of
the obligations of Lessor under this Lease. Any Lender may elect to have this
Lease and/or any Option granted hereby superior to the lien of its Security
Device by giving written notice thereof to Lessee, whereupon this Lease and such
Options shall be deemed prior to such Security Device, notwithstanding the
relative dates of the documentation or recordation thereof.

     30.2 Attornment. In the event that Lessor transfers title to the Premises,
or the Premises are acquired by another upon the foreclosure or termination of a
Security Device to which this Lease is subordinated (i) Lessee shall, subject to
the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and
upon request, enter into a new lease, containing all of the terms and provisions
of this Lease, with such new owner for the remainder of the term hereof, or, at
the election of such new owner, this Lease shall automatically become a new
Lease between Lessee and such new owner, upon all of the terms and conditions
hereof, for the remainder of the term hereof, and (ii) Lessor shall thereafter
be relieved of any further obligations hereunder and such new owner shall assume
all of Lessor's obligations hereunder, except that such new owner shall not: (a)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership; (b) be subject to any offsets or
defenses which Lessee might have against any prior lessor, (c) be bound by
prepayment of more than one month's rent, or (d) be liable for the return of any
security deposit paid to any prior lessor.

     30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within 60 days after the execution of this Lease, Lessor
shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which 1s secured
by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee's
option, directly contact Lender and attempt to negotiate for the execution and
delivery of a Non-Disturbance Agreement.

     30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31.  Attorneys' Fees. If any Party or Broker brings an action or proceeding
involving the Premises whether founded in tort, contract or equity, or to
declare rights hereunder, the Prevailing Party (as hereafter defined) in any
such proceeding, action, or appeal thereon, shall be entitled to reasonable
attorneys' fees. Such fees may be awarded in the same suit or recovered in a
separate suit, whether or not such action or proceeding is pursued to decision
or judgment. The term, "Prevailing Party" shall include, without limitation, a
Party or Broker who substantially obtains or defeats the relief sought, as the
case may be, whether by compromise, settlement, judgment, or the abandonment by
the other Party or Broker of its claim or defense. The attorneys' fees award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorneys' fees reasonably incurred. In addition,
Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach ($200 is a reasonable minimum per
occurrence for such services and consultation).

32.  Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times after reasonable prior notice for
the purpose of showing the same to prospective purchasers, lenders, or tenants,
and making such alterations, repairs, improvements or additions to the Premises
as Lessor may deem necessary or desirable and the erecting, using and
maintaining of utilities, services, pipes and conduits through the Premises
and/or other



premises as long as there is no material adverse effect to Lessee's use of the
Premises. All such activities shall be without abatement of rent or liability to
Lessee.

33.  Auctions. Lessee shall not conduct, nor permit to be conducted, any auction
upon the Premises without Lessor's prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.

34.  Signs. Lessor may place on the Premises ordinary "For Sale" signs at any
time and ordinary "For Lease" signs during the last 6 months of the term hereof.
Except for ordinary "for sublease" signs, Lessee shall not place any sign upon
the Premises without Lessor's prior written consent. All signs must comply with
all Applicable Requirements.

35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within 10 days following any such event
to elect to the contrary by written notice to the holder of any such lesser
interest, shall constitute Lessor's election to have such event constitute the
termination of such interest.

36.  Consents. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within 10 business days following such request.

37.  Guarantor.

     37.1 Execution. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.

     37.2 Default. It shall constitute a Default of the Lessee if any Guarantor
fails or refuses, upon request to provide: (a) evidence of the execution of the
guaranty, including the authority of the party signing on Guarantor's behalf to
obligate Guarantor, and in the case of a corporate Guarantor, a certified copy
of a resolution of its board of directors authorizing the making of such
guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d)
written confirmation that the guaranty is still in effect.

38.  Quiet Possession. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.

39.  Options. If Lessee is granted an Option, as defined below, then the
following provisions shall apply:

     39.1 Definition. "Option" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.

     39.2 Options Personal To Original Lessee. Any Option granted to Lessee in
this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with



Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.

     39.3 Multiple Options. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later Option cannot be exercised unless the prior
Options have been validly exercised.

     39.4 Effect of Default on Options.

          (a)  Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default and continuing until
said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given 3 or more notices of separate Default, whether or not the Defaults
are cured, during the 12 month period immediately preceding the exercise of the
Option.

          (b)  The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).

          (c)  An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term or completion of the
purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), or (ii) if
Lessee commits a Breach of this Lease.

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40.  Multiple Buildings. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by and conform to all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, and care of said properties, including the care and
cleanliness of the grounds and including the parking, loading and unloading of
vehicles, and to cause its employees, suppliers, shippers, customers,
contractors and invitees to so abide and conform. Lessee also agrees to pay its
fair share of common expenses incurred in connection with such rules and
regulations.

41.  Security Measures. Lessee hereby acknowledges that the Rent payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises. Lessee,
its agents and invitees and their property from the acts of third parties.

42.  Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.

43.  Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.

44.  Authority; Multiple Parties; Execution.

          (a)  If either Party hereto is a corporation, trust, limited liability
company, partnership, or similar entity, each individual executing this Lease on
behalf of such entity represents and warrants that he or she is duly authorized
to execute and deliver this Lease on its behalf. Each party shall, within 30
days after request, deliver to the other party satisfactory evidence of such
authority.

          (b) If this Lease is executed by more than one person or entity as
"Lessee", each such person or entity shall be jointly and severally liable
hereunder. It is agreed that any one of the named Lessees shall be empowered to
execute any amendment to this Lease, or other document ancillary thereto and
bind all of the named Lessees, and Lessor may rely on the same as if all of the
named Lessees had executed such document.

          (c) This Lease may be executed by the Parties in counterparts, each of
which shall be deemed an original and all of which together shall constitute one
and the same instrument.

45.  Conflict. Any conflict between the printed provisions of this Lease and
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.

46.  Offer. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.

47.  Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.

48.  Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT
OF THIS AGREEMENT.

49.  Mediation and Arbitration of Disputes. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease / / is /X/ is not attached to this Lease.



50.  Americans with Disabilities Act. Since compliance with the Americans with
Disabilities Act (ADA) is dependent upon Lessee's specific use of the Premises.
Lessor makes no warranty or representation as to whether or not the Premises
comply with ADA or any similar legislation. In the event that Lessee's use of
the Premises requires modifications or additions to the Premises in order to be
in ADA compliance, Lessee agrees to make any such necessary modifications and/or
additions at Lessee's expense.

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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:

1.   SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2.   RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.

WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.

The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.

Executed at: ___________________________  Executed at: _________________________
on: ____________________________________  on: __________________________________

By LESSOR:                                By LESSEE:

1515 South Manchester, LLC, a California  Odetics Inc., a Delaware corporation
limited liability company on behalf of
   itself and the other entities
         constituting Lessor

By:                                       By:
    ------------------------------------     -----------------------------------
Name Printed: William McFarland           Name Printed: Gregory A. Miner
              --------------------------                ------------------------
Title: Manager                            Title: Chief Executive Officer
       ---------------------------------         -------------------------------

By:                                       By:
    ------------------------------------      ----------------------------------
Name Printed:                             Name Printed:
              --------------------------                ------------------------
Title:                                    Title:
       ---------------------------------         -------------------------------
Address: 18800 Von Karman Ave., Ste. 100  Address: 1515 S. Manchester Ave.
Irvine, CA 92612                          Anaheim, CA 92802
Telephone/Facsimile: 949-474-7999/        Telephone/Facsimile: 714-780-7802/
                     949-474-8258                              714-780-7857
Federal ID No. _________________________  Federal ID No. _______________________

- ----------
NOTE: These forms are often modified to meet the changing requirements of law
      and industry needs. Always write or call to make sure you are utilizing
      the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700
      So. Flower Street, Suite 600, Los Angeles, California 90017. (213)
      687-8777. Fax No. (213) 687-8616

(C) Copyright 1997 - By American Industrial Real Estate Association. All rights
     reserved. No part of these works may be reporduced in any form without
                             permission in writing.

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Initials                                                            Inititals

                                  Page 12 of 12

EX-99.1

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Exhibit 99.1

PERIODIC REPORT CERTIFICATION
of the Chief Executive Officer and Chief Financial Officer

        I, Gregory A. Miner, the Chief Executive Officer and Chief Financial Officer of Odetics, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

        (1)  the Report of the Company on Form 10-Q for the quarterly period ending June 30, 2002 2002, as filed with the Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

        (2)  the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/  GREGORY A. MINER Gregory A. Miner,
Chief Executive Officer and
Chief Financial Officer

August 14, 2002

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Exhibit 99.1

PERIODIC REPORT CERTIFICATION of the Chief Executive Officer and Chief Financial Officer