10KSB

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-KSB

ý Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2004

o  Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from        to       .

Commission File Number 0-15982

NATIONAL MERCANTILE BANCORP

(Exact name of small business issuer in its charter)

California	95-3819685
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1880 Century Park East Los Angeles, California	90067
(Address to principal executive offices)	(Zip Code)
Issuer’s telephone number, including area code:  (310) 277-2265 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value Series A Noncumulative Convertible Perpetual Preferred Stock (Title of Class)

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

Check if there is no disclosure of delinquent filers to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the registrant’s knowledge, in definitive in response or information statements incorporated by reference in Part III of this Form 10-KSB. o

The issuer’s revenues for its most recent fiscal year:  $21.0 million.

The aggregate market value of the voting common equity held by nonaffiliates of the registrant, based upon the closing sale price of its Common Stock as reported by the National Association of Securities Dealers Automated Quotation System on March 21, 2004, was approximately $39.1 million.

The number of shares of Common Stock, no par value, of the issuer outstanding as of March 21, 2004 was 3,004,334.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of the Company’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934 in connection with the Company’s 2005 Annual Meeting of Shareholders are incorporated by reference in Part III, Items 9-12 and 14 and is of this Annual Report on Form 10-KSB.

Transitional Small Business Disclosure Format (Check one):    o  Yes    ý   No

NATIONAL MERCANTILE BANCORP

Table of Contents

Form 10-KSB

For the Fiscal Year Ended December 31, 2004

PART I
Item 1.	Description of Business
Item 2.	Description of Property
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
PART II
Item 5.	Market for Common Equity and Related Shareholder Matters
Item 6.	Management’s Discussion and Analysis or Plan of Operation
Item 7.	Financial Statements
Item 8.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 8A.	Controls and Procedures
Item 8B.	Other Information
PART III
Item 9.	Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act
Item 10.	Executive Compensation
Item 11.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 12.	Certain Relationships and Related Transactions
Item 13.	Exhibits
Item 14.	Principal Accountant Fees and Services
Signatures
Financial Statements
Index to Exhibits

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ANNUAL REPORT ON FORM 10-K

Certain matters discussed in this Form 10-KSB may constitute forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”) and as such may involve risks and uncertainties.  These forward-looking statements relate to, among other things, expectations of the business environment in which National Mercantile Bancorp (referred to as “we” or “the Company” when such reference includes National Mercantile Bancorp and its subsidiaries, collectively, “National Mercantile” when referring only to the parent company and “the Banks” when referring only to National Mercantile’s banking subsidiaries, Mercantile National Bank and South Bay Bank, N.A.) operates, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision.  Our actual results, performance, or achievements may differ significantly from the results, performance, or achievements expressed or implied in such forward-looking statements.  Statements regarding policies and procedures are not intended to imply, and should not be interpreted to mean, that we will conduct our business in accordance with such policies for any particular period of time, as we may at any time and from time to time amend or repeal such policies and adopt new policies.  For discussion of the factors that might cause such a difference, see “Item 6.  Management’s Discussion and Analysis of Financial Condition or Plan of Operation— Factors Which May Affect Future Operating Results”.

PART I

ITEM 1.   DESCRIPTION OF BUSINESS

National Mercantile is a bank holding company whose principal assets are the capital stock of two bank subsidiaries: Mercantile National Bank (“Mercantile”) and South Bay Bank, N.A.  (“South Bay”).  National Mercantile has been authorized by the Federal Reserve Bank of San Francisco to engage in lending activities separate from the Banks but to date has not done so.

Our present business strategy is to attract individual and small- to mid-sized business borrowers in specific market niches located in our primary service areas by offering a variety of loan products and a full range of banking services coupled with highly personalized service.  Our lending products include revolving lines of credit, term loans, commercial real estate loans, construction loans and consumer and home equity loans, which often contain terms and conditions tailored to meet the specific demands of the market niche in which the borrower operates.  Additionally, we provide a wide array of deposit and investment products that are also designed to meet specific customer needs.

We operate throughout the west side of Los Angeles County including the South Bay, Century City and San Fernando Valley with banking offices in Century City, Torrance, Encino and El Segundo and a loan production office in Beverly Hills.  Additionally, we target Orange County businesses through our loan production office in Costa Mesa, California. 

Our targeted market niches for businesses include the entertainment industry, the healthcare industry, professional services providers, the real estate escrow industry, property managers, public works contractors and community-based nonprofit organizations.    Entertainment industry clients include television, music and film production companies, talent agencies, individual performers, directors and producers (whom we attract by establishing relationships with business management firms) and others affiliated with the entertainment industry.  Healthcare organizations include primarily outpatient healthcare providers such as physician medical groups, independent practice associations and surgery centers.  Professional service customers include legal, accounting, insurance, advertising firms and their individual directors, officers, partners and shareholders. 

We also engage in real estate and construction lending.  Our real estate loans are for the purchase or finance of principally smaller commercial properties, including owner-occupied business facilities and retail properties, and to a lesser extent multi-family and single family residential properties.  We make construction loans for small commercial, multi-family and single residential properties, including tract developments and luxury homes for resale.  

In order to grow and expand our array of products and services, we may from time to time open de novo branch banking offices or acquire other financial service-related companies including “in-market” acquisitions with banks of similar size and market presence.  No assurance can be made that we will identify a company which can be acquired on terms and conditions acceptable to us or that we could obtain the necessary regulatory approvals for such an acquisition.

We believe that banking clients value doing business with locally managed institutions that can provide a full service commercial banking relationship through an understanding of the clients’ financial needs and the flexibility to deliver customized solutions through our menu of products and services.  We also believe that our subsidiary Banks are better able to build successful client relationships as the holding company provides cost effective administrative support services while promoting bank autonomy and flexibility in serving client needs.

To implement this philosophy, we operate each of our bank subsidiaries by retaining their independent names.  Each bank

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subsidiary has established strong client followings in its market areas through attention to client service and an understanding of client needs.

In an effort to capitalize on the identities and reputations of the Banks, we intend to continue to market our services under each Bank’s name, primarily through each Bank’s relationship managers.  The primary focus for the Banks’ relationship managers is to cultivate and nurture their client relationships.  Relationship managers are assigned to each borrowing client to provide continuity in the relationship.  This emphasis on personalized relationships requires that all of the relationship managers maintain close ties to the communities or industry niche in which they serve, so they are able to capitalize on their efforts through expanded business opportunities for the Banks.

Client service decisions and day-to-day operations are maintained at the Banks.  National Mercantile offers the advantages of affiliation with a multi-bank holding company by providing expanded client support services, such as increased client lending capacity, business cash management, and centralized administrative functions, including client services, support in credit policy formulation and review, investment management, data processing, accounting, loan servicing and other specialized support functions.  All of these centralized services are designed to enhance the ability of the relationship managers to expand their client relationship base.

At December 31, 2004, we had total assets of  $391.1 million, total loans, net, of $309.9 million and total deposits of $313.5 million.

Corporate History

Mercantile was organized in 1981 as a national banking association and commenced operations through an office in Century City in 1982.  In 1983 National Mercantile was organized under the laws of the State of California and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the ‘‘BHCA’’), to serve as a holding company for Mercantile.

In March 2001, Mercantile opened a regional office in Encino, California which expanded our client-focused niche banking services to the San Fernando Valley area of Los Angeles.  In January 2004, Mercantile opened a loan production office in Beverly Hills, California to focus on providing banking services to those affiliated with the entertainment industry.

In December 2001, National Mercantile acquired South Bay, which had offices in Torrance and El Segundo.   In January 2004, South Bay opened a loan production office in Costa Mesa, California to expand our lending services to the Orange County area of Southern California.

Competition

The banking and financial services industry in California generally, and in the Banks’ market areas specifically, is highly competitive.  The increasingly competitive environment is primarily a result of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers.  Our primary service area is dominated by a relatively small number of major banks that have many offices operating over a wide geographical area.  We compete for loans, deposits, and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other nonbank financial service providers.  Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than us.  Nondepository institutions can be expected to increase the extent to which they act as financial intermediaries.  Large institutional users and sources of credit may also increase the extent to which they interact directly, meeting business credit needs outside the banking system.  Furthermore, the geographic constraints on portions of the financial services industry can be expected to erode.  In addition, many of the major commercial banks operating in our primary service area offer services, such as trust services, which are not offered directly by us and, by virtue of their greater total capitalization, such banks have substantially higher lending limits.

To compete with other financial institutions in our primary service area, we rely principally upon personal contact by our officers, directors and employees and providing, through third parties, specialized services such as messenger, accounting and other related services.  For clients whose loan demands exceed our legal lending limit, we arrange for such loans on a participation basis with other banks.  We also assist clients requiring other services not offered by us in obtaining such services from other providers.

Economic Conditions and Government Policies

Our profitability, like most financial institutions, is primarily dependent on interest rate differentials.  In general, the difference between the interest rates paid by us on our interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by us on our interest-earning assets, such as loans and investment securities, comprise the major portion of our earnings. 

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These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment, and the impact which future changes in domestic and foreign economic conditions might have on us cannot be predicted.

The monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors of the Fede ral Reserve System (the “Federal Reserve”), influence our business.  The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations in U.S.  Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions.  The actions of the Federal Reserve in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities.  We cannot fully predict the nature and impact on us of any future changes in monetary and fiscal policies.

Supervision and Regulation

General

Banking is a highly regulated industry.  Congress and the states have enacted numerous laws that govern banks, bank holding companies and the financial services industry, and have created several largely autonomous regulatory agencies which have authority to examine and supervise banks and bank holding companies, and to adopt regulations furthering the purpose of the statutes.  The primary goals of the regulatory scheme are to maintain a safe and sound banking system, to protect depositors and the Federal Deposit Insurance Corporation (“FDIC”) insurance fund, and to facilitate the conduct of sound monetary policy; they were not adopted for the benefit of shareholders of the Company.  As a result, the Company’s financial condition, results of operations, ability to grow and engage in various business activities can be affected not only by management decisions and general economic conditions, but the requirements of applicable federal and state laws, regulations and the policies of the various regulatory authorities.

Further, these laws, regulations and policies are reviewed often by Congress, state legislatures and federal and state regulatory agencies.  Changes in laws, regulations and policies can materially increase the cost of doing business, limit certain business activities, require additional capital, or materially adversely affect competition between banks and other financial intermediaries.  While it can be predicted that significant changes will occur, what changes, when they will occur, and how they will impact the Company cannot be predicted.

Set forth below is a summary description of certain of the material laws and regulations that relate to the operations of National Mercantile and the Banks.  The description does not purport to be a complete description of these laws and regulations and is qualified in its entirety by reference to the applicable laws and regulations.

National Mercantile

As a registered bank holding company, National Mercantile and its subsidiaries are subject to the Federal Reserve’s supervision, regulation and examination under the Bank Holding Company Act.

National Mercantile is required to obtain the Federal Reserve’s prior approval before acquiring ownership or control of more than 5% of the outstanding shares of any class of voting securities, or substantially all the assets, of any company, including a bank or bank holding company.  Further, National Mercantile is generally allowed to engage, directly or indirectly, only in banking and other activities that the Federal Reserve deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

Under Federal Reserve regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner.  In addition, it is the Federal Reserve’s policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary ban ks.  A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both.

The Banks

Both Banks are national banks and members of the Federal Reserve System.  The Banks are subject to primary supervision, examination, and regulation by the Office of the Comptroller of the Currency (the “OCC”) and are also subject to regulations of the Federal Deposit Insurance Corporation (“FDIC”) and the Federal Reserve.  The Banks are subject to requirements and restrictions

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under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and limitations on the types of investments that may be made and services that may be offered.  Various consumer laws and regulations also affect the Banks’ operations.  These laws primarily protect depositors and other customers of the Banks, rather than National Mercantile and its shareholders.

The OCC and the Federal Reserve have various remedies if they should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of a bank’s operations are unsatisfactory or that a bank or its management is violating or has violated any law or regulation.  These remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the bank’s deposit insurance.

USA Patriot Act of 2001

The USA Patriot Act of 2001 (“Patriot Act”) is intended to strengthen the U.S law enforcement and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including: (i) due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-US persons; (ii) standards for verifying customer identification at account opening; (iii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; and (iv) reports by non-financial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000, and filing of suspicious activities reports by securities brokers and dealers if they believe a customer may be violating U.S. laws and regulations.

On April 30, 2003, the U.S. Treasury issued final regulations to implement section 326 of the Patriot Act requiring institutions to incorporate into their written money laundering policies a customer identification program implementing reasonable procedures for: (i) verifying the identity of any person seeking to open an account, to the extent reasonable and practicable; (ii) maintaining records of the information used to verify the person’s identity; and (iii) determining whether the person appears on any list of known or suspected terrorists or terrorist organizations.  We have established policies and procedures implementing the requirements of the Patriot Act.

Privacy

Federal banking rules limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to these rules, financial institutions must provide: (i) initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; (ii) annual notices of their privacy policies to current customers; and (iii) a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties.

These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. We have implemented our privacy policies in accordance with the law.

In recent years, a number of states have implemented their own versions of privacy laws. For example, in 2003, California adopted standards that are more restrictive than federal law, allowing bank customers the opportunity to bar financial companies from sharing information with their affiliates.

Interagency Guidance on Response Programs to Protect Against Identity Theft

On August 12, 2003, the Federal bank and thrift regulatory agencies requested public comment on proposed guidance that would require financial institutions to develop programs to respond to incidents of unauthorized access to customer information, including procedures for notifying customers under certain circumstances. The proposed guidance: (i) interprets previously issued interagency customer information security guidelines that require financial institutions to implement information security programs designed to protect their customers’ information; and (ii) describes the components of a response program and sets a standard for providing notice to customers affected by unauthorized access to or use of customer information that could result in substantial harm or inconvenience to those customers, thereby reducing the risk of losses due to fraud or identity theft.

FDIC

The Banks are subject to examination and regulation by the FDIC under the Federal Deposit Insurance Act because their deposit accounts are insured by the FDIC under the Bank Insurance Fund (“BIF”).

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Under FDIC regulations, each insured depository institution is assigned to one of three capital groups for insurance premium purposes — “well capitalized,” “adequately capitalized” and “undercapitalized” — which are defined in the same manner as under prompt corrective action rules, as discussed under “Capital Adequacy Requirements” below.  These three groups are then divided into subgroups, which are based on supervisory evaluations by the institution’s primary federal regulator, resulting in nine assessment classifications.  Currently, assessment rates for BIF-insured banks range from 0% of insured deposits for well-capitalized banks with minor supervisory concerns to 0.027% of insured deposits for undercapitalized banks with substantial supervisory concerns.  The FDIC may increase or decrease the assessment rate schedule semiannually.

The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices.  As with the OCC’s enforcement authority, the FDIC’s authority to terminate deposit insurance is not limited to cases of capital inadequacy, financial weakness rendering an institution unable  to continue operations, violations of any applicable law or regulation or violation of any order or any condition imposed in writing by the FDIC.  In addition, FDIC regulations provide that any insured institution that falls below a 2% minimum leverage ratio (see below) will be subject to FDIC deposit insurance termination proceedings unless it has submitted, and is in compliance with, a capital plan with its primary federal regulator and the FDIC.  The FDIC may also suspend deposit insurance temporarily during the hearing process if the institution has no tangible capital.  The FDIC is additionally authorized by statute to appoint itself as conservator or receiver of an insured depository institution (in addition to the powers of the institution’s primary federal regulatory authority) in cases, among others, of unsafe or unsound conditions or practices or willful violations of cease and desist orders.

All FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation ( “FICO”), a federal corporation chartered under the authority of the Federal Housing Finance Board.  The bonds, commonly referred to as FICO bonds, were issued to capitalize the Federal Savings and Loan Insurance Corporation.  The FICO has established assessment rates effective for the first quarter of 2005 at approximately $.0144 per $100 annually for assessable deposits. The FICO assessments are adjusted quarterly to reflect changes in the assessment bases of the FDIC’s insurance funds and do not vary depending on a depository institution’s capitalization or supervisory evaluations.

Dividends and Capital Distributions

Dividends and capital distributions from the Banks constitute the principal ongoing source of cash to National Mercantile.  National Mercantile is a legal entity separate and distinct from the Banks, and as such has separate and distinct financial obligations including debt service and operating expenses.  The Banks are subject to various statutory and regulatory restrictions on their ability to pay dividends and capital distributions to National Mercantile.

OCC approval is required for a national bank to pay a dividend if the total of all dividends declared in any calendar year exceeds the total of the bank’s net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years, less any required transfer to surplus or a fund for the retirement of any preferred stock.  A national bank may not pay any dividend that exceeds its retained net earnings, as defined by the OCC.   The OCC and the Federal Reserve have also issued banking circulars emphasizing that the level of cash dividends should bear a direct correlation to the level of a national bank’s current and expected earnings stream, the bank’s need to maintain an adequate capital base and other factors.

National banks that are not in compliance with regulatory capital requirements generally are not permitted to pay dividends.  The OCC also can prohibit a national bank from engaging in an unsafe or unsound practice in its business.  Depending on the bank’s financial condition, payment of dividends could be deemed to constitute an unsafe or unsound practice.  Except under certain circumstances, and with prior regulatory approval, a bank may not pay a dividend if, after so doing, it would be undercapitalized.  The

Banks’ ability to pay dividends in the future is, and could be, further influenced by regulatory policies or agreements and by capital guidelines.

Mercantile has a substantial accumulated deficit and does not anticipate having positive retained earnings for the foreseeable future.  South Bay had retained earnings of $1.6 million as of December 31, 2004.  Mercantile and South Bay may from time to time be permitted to make capital distributions to National Mercantile with the consent of the OCC.  It is not anticipated that such consent could be obtained unless the distributing bank were to remain “well capitalized” following such distribution.

Transactions with Affiliates

The Banks are subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, National Mercantile or other affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of National Mercantile or other affiliates.  Such restrictions prevent National Mercantile and such other affiliates from borrowing from the Banks unless the loans are secured by marketable obligations of designated amounts.  Further, such secured loans and investments by the Banks to or in National Mercantile or to or in any other affiliate are limited, individually, to 10% of the respective Bank’s capital and surplus (as defined by federal

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regulations), and such secured loans and investments are limited, in the aggregate, to 20% of the respective Bank’s capital and surplus (as defined by federal regulations).

Capital Adequacy Requirements

Both the Federal Reserve and the OCC have adopted similar, but not identical, “risk-based” and “leverage” capital adequacy guidelines for bank holding companies and national banks, respectively.  Under the risk-based capital guidelines, different categories of assets are assigned different risk weights, ranging from zero percent for assets considered risk-free (e.g., cash) to 100% for assets considered relatively high-risk (e.g., commercial loans).  These risk weights are multiplied by corresponding asset balances to determine a risk-adjusted asset base.  Certain off-balance sheet items (e.g., standby letters of credit) are added to the risk-adjusted asset base.  The minimum required ratio of total capital to risk-weighted assets for both bank holding companies and national banks is presently 8%.  At least half of the total capital is required to be “Tier 1 capital,” consisting principally of common shareholders’ equity, a limited amount of perpetual preferred stock and minority interests in the equity, less goodwill, intangible assets and certain other items.  The remainder (Tier 2 capital) may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, preferred stock and a limited amount of the general loan-loss allowance.

The minimum Tier 1 leverage ratio (Tier 1 capital to average adjusted total assets) is 3% for bank holding companies and national banks that have the highest regulatory examination rating and are not contemplating significant growth or expansion.  All other bank holding companies and national banks are expected to maintain a ratio of at least 1% to 2% or more above the stated minimum.

Prompt Corrective Action Rules

The OCC has adopted regulations establishing capital categories for national banks and prompt corrective actions for undercapitalized institutions.  The regulations create five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.  A bank may be reclassified by the OCC to the next level below that determined by its regulatory capital if the OCC finds that it is in an unsafe or unsound condition or if it has received a less-than-satisfactory rating for any of the categories of asset quality, management, earnings or liquidity in its most recent examination and the deficiency has not been corrected, except that a bank cannot be reclassified as critically undercapitalized for such reasons.

The OCC may subject national banks which are not at least “adequately capitalized” to a broad range of restrictions and regulatory requirements.  An undercapitalized bank may not pay management fees to any person having control of the institution, nor, except under certain circumstances and with prior regulatory approval, make any capital distribution.  Undercapitalized banks are subject to increased monitoring by the OCC, are restricted in their asset growth, must obtain regulatory approval for certain corporate activities, such as acquisitions, new branches and new lines of business, and, in most cases, must submit to the OCC a plan to bring their capital levels to the minimum required in order to be classified as adequately capitalized.  The OCC may not approve a capital restoration plan unless each company that controls the bank guarantees that the bank will comply with it.  Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit resources to support each such bank.  In addition, a bank holding company is required to guarantee that its subsidiary bank will comply with any capital restoration plan.  The amount of such a guarantee is limited to the lesser of (i) 5% of the bank’s total assets at the time it became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all applicable capital standards as of the time the bank fails to comply with the capital restoration plan.  A holding company guarantee of a capital restoration plan results in a priority claim to the holding company’s assets ahead of its other unsecured creditors and shareholders that is enforceable even in the event of the holding company’s bankruptcy or the subsidiary bank’s insolvency.

If any one or more of a bank’s ratios are below the minimum ratios required to be classified as undercapitalized, it will be classified as significantly undercapitalized provided that if its ratio of tangible equity to total assets is 2% or less, it will be classified as critically undercapitalized.  Significantly and critically undercapitalized banks are subject to additional mandatory and discretionary restrictions and, in the case of critically undercapitalized institutions, must be placed into conservatorship or receivership unless the OCC and the FDIC agree otherwise.

Safety and Soundness Standards

The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and benefits.

In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards.  These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating.  Under these standards, an insured depository institution should (i) conduct periodic asset

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quality reviews to identify problem assets; (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses; (iii) compare problem asset totals to capital; (iv) take appropriate corrective action to resolve problem assets; (v) consider the size and potential risks of material asset concentrations; and (vi) provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk.

These new guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves.

Cross Guarantees

The Banks are also subject to cross-guaranty liability under federal law.  This means that if one FDIC-insured depository institution subsidiary of a multi-institution bank holding company fails or requires FDIC assistance, the FDIC may assess commonly controlled depository institutions for the estimated losses suffered by the FDIC.  Such a liability could have a material adverse effect on the financial condition of any assessed subsidiary institution and on National Mercantile as the common parent.  While the FDIC’s cross-guaranty claim is generally junior to the claim of depositors, holders of secured liabilities, general creditors and subordinated creditors, it is generally superior to the claims of shareholders and affiliates.

< p style="margin:0in 0in .0001pt .2in;">Community Reinvestment Act and Fair Lending

The Banks are subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (“CRA”) activities.  A bank may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws.  The CRA requires the Banks to ascertain and meet the credit needs of the communities it serves, including low- and moderate-income neighborhoods.  The Banks’ compliance with the CRA is reviewed and evaluated by the OCC, which assigns the Banks a publicly available CRA rating at t he conclusion of the examination.

The CRA regulations emphasize measurements of performance in the area of lending (specifically, a bank’s home mortgage, small business, small farm and community development loans), investment (a bank’s community development investments) and service (a bank’s community development services and the availability of its retail banking services), although examiners are still given a degree of flexibility in taking into account unique characteristics and needs of a bank’s community and its capacity and constraints in meeting such needs.  The regulations also require certain levels of collection and reporting of data regarding certain kinds of loans.

Further, the federal banking agencies may take compliance with such laws and CRA obligations into account when regulating and supervising other activities.  An assessment of CRA compliance is required in connection with applications for OCC approval of certain activities, including establishing or relocating a branch office that accepts deposits or merging or consolidating with, or acquiring the assets or assuming the liabilities of, a federally regulated financial institution.  An unfavorable rating may be the basis for OCC denial of such an application, or approval may be conditioned upon improvement of the applicant’s CRA record.  In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the CRA re cord of each subsidiary bank of the applicant, and such records may be the basis for denying the application.  The federal banking agencies have established annual reporting and public disclosure requirements for certain written agreements that are entered into between insured depository institutions or their affiliates and nongovernmental entities or persons that are made pursuant to, or in connection with, the fulfillment of the CRA.

In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of “outstanding”, “satisfactory”, “needs to improve” or “substantial noncompliance”.  Each of the Banks received a “satisfactory” rating in its most rec ent exam.

Employees

At December 31, 2004, we had 80 full-time equivalent employees.  None of the employees is covered by a collective bargaining agreement.  We consider our employee relations to be satisfactory.

ITEM 2< /font>.  DESCRIPTION OF PROPERTY.

National Mercantile leases approximately 13,880 square feet in an office building at 1880 Century Park East, Los Angeles, California, which serves as its administrative headquarters.  The rent for the period January 2004 to April 2014 is $2.23 per square foot or $30,952 per month, subject to an annual CPI adjustment and for changes in property taxes and operating costs.

Mercantile’s p rincipal banking office is located in 1,800 square feet in an office building at 1880 Century Park East, Los Angeles, California.  The effective rent is $3.00 per square foot or $5,401 per month.  The lease expires in June 2014. 

9

Mercantile leases approximately 1,650 square feet in an office building in Encino, California for the primary purpose of providing branch banking operations in the San Fernando Valley.  The effective rent is $2.73 per square foot or $4,500 per month.  The lease expires in June 2008.  Mercantile also leases 1,555 square feet in an office building in Costa Mesa, California as a loan production office in Orange County.  The office has been designed to serve as a full service branch banking office in the future.  The effective rent is $1.85 per square foot, or $2,877 per month.  The lease expires February 2009.  Additionally, Mercantile leases 2,559 square feet in an office building in Beve rly Hills as a loan production office, primarily for the entertainment industry.  The effective rent is $2.88 per square foot, or $7,754 per month and the lease expires June 2009.

South Bay owns a two-story stand alone office building at 2200 Sepulveda Boulevard, Torrance, California, which serves as its principal banking office.  South Bay also leases approximately 1,500 square foot in a retail shopping center in El Segundo, California for the primary purpose of providing branch banking operations in the Los Angeles airport area.  The El Segundo lease expires in May 2005 and we anticipate relocating the branch in a nearby office building.

We believe our present facilities are adequate for our present needs but anticipate the need for additional facilities as we continue to grow.  We believe that, if necessary, we could secure suitable alternative facilities on similar terms without adversely affecting operations.

ITEM 3.  LEGAL PROCEEDINGS.

From time to time, we are involved in certain legal proceedings arising in the normal course of our business.  We believe that the outcome of these matters existing as of December 31, 2004 will not have a material adverse effect on us.

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

There was no submission of matters to a vote of s hareholders during the quarter ended December 31, 2004.

PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Common Stock of National Mercantile is traded on the Nasdaq Small Cap Market under the symbol MBLA.  The Series A Noncumulative Convertible Perpetual Preferred Stock (the “Series A Preferred”) traded on the Nasdaq Small Cap Market through December 1, 2004.  Since that date it trades on the OTC Bulletin Board.  The following table shows the high and low trade prices of the Common Stock and Series A Preferred for each quarter of 2003 and 2004 as reported by the Nasdaq. Additionally, there may have been transactions at prices other than those shown during that time.

	Common Stock				Series A Preferred
Quarter Ended:	High		Low		High		Low
March 31, 2003	$	7.45	$	6.52	$	15.75	$	12.00
June 30, 2003	7.35		6.57		14.60		13.00
September 30, 2003	8.39		7.09		16.50		14.25
December 31, 2003	12.32		7.45		25.50		16.00
March 31, 2004	11.80		9.24		26.00		22.00
June 30, 2004	10.45		9.18		26.00		15.00
September 30, 2004	10.63		9.45		15.00		15.00
December 31, 2004	13.75		10.41		15.00		15.00

At March 21, 2005, National Mercantile had 163 shareholders of record for its Common Stock and 15 shareholders of record for its Series A Preferred.  The number of beneficial owners for the Common Stock and Series A Preferred is higher as many people hold their shares in “street” name.  At March 21, 2005, approximately 20% and 10% of the Common Stock and Series A Preferred, respectively, were held in street name.

National Mercantile has not paid a cash dividend on its Common Stock for more than 10 years, and has never paid a cash dividend on the Series A Preferred.  The Series A Preferred is entitled to a noncumulative cash dividend at a rate of 6.5% of its liquidation preference quarterly on the first day of January, April, July and October of each year, before any dividend may be declared upon or paid upon the Common Stock.  As a California corporation, under the California General Corporation Law, generally National Mercantile may not pay dividends in cash or property except (i) out of positive retained earnings or (ii) if, after giving effect to the distribution, National Mercantile’s assets would be at least 1.25 times its liabilities and its current assets would exceed its current liabilities (determined on a consolidated basis under generally accepted accounting principles).  At December 31, 2004, National

10

Mercantile had an accumulated deficit of $11.7 million.  Further, it is unlikely that its assets will ever be at least 1.25 times its liabilities.  Accordingly, National Mercantile must generate net income in excess of $11.7 million before it can pay a dividend in cash or property.

In addition, National Mercantile may not pay dividends on its capital stock if it is in default or has elected to defer payments of interest under its trust preferred securities.

Outstanding Awards Under All Equity Compensation Plans.  The following table sets forth as of December 31, 2004 information regarding outstanding options under all of our equity compensation plans and the number of shares available for future option grants under equity compensation plans currently in effect.

	(a)	(b)		(c)
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders (1)	480,158	$	7.34	63,509

(1) Includes the 1996 Stock Incentive Plan and two stock option plans which have been terminated but under which there remain outstanding options to purchase an aggregate of 50,779 shares of National Mercantile Common Stock.

ITEM 6.MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

EXECUTIVE LEVEL OVERVIEW

We recorded net income of $2.2 million for 2004 compared to net income of $207,000 for 2003.  This represents for 2004 basic earnings per share of $0.75 and fully-diluted earnings per share of $0.48 compared to basic earnings per share of $0.08 per share and fully-diluted earnings per share of $0.05 for 2003. The increase in net income for 2004 was largely due to a $2.5 million increase in net interest income resulting from interest rate swaps, increases in the prime rate lending index, a greater volume of interest earning assets, particularly higher yielding loans receivable and securities available-for-sale, and a favorable change in earning asset and funding liability composition.  Additionally, the provision for credit losses declined $1.0 million for 2004 compared to 2003 due to improved credit quality in the loan portfolio.  Other operating expenses increased $732,000 in 2004, largely due to greater salaries and related expense.

Return on average assets for 2004 was 0.57% compared to 0.06% for 2003.  Return on average equity for 2004 was 6.61% compared to 0.66% for 2003.

Total assets at December 31, 2004 were $391.1 million compared to $355.2 million at year-end 2003.  Loans receivable and securities available-for-sale increased $53.3 million and $6.1 million, respectively.  Partly offsetting this growth, cash and due from banks-demand declined $10.4 million and federal funds sold and securities purchased under agreements to resell declined $10.0 million.  The increase in loans receivable was due to added business development staff, the funding of previously approved construction loans and stronger new construction and commercial real estate loan demand.

The allowance for credit losses at December 31, 2004 was $3.9 million compared to $3.6 million at December 31, 2003 reflecting the provision for loan losses during the year of $220,000 as well as net recoveries of loans previously charged off of $73,000.

Total deposits at December 31, 2004 were $313.5 million compared to $298.7 million at year-end 2003.  The composition of deposits at December 31, 2004 reflects a $14.0 million increase in money market accounts, a $13.8 million increase in certificates of deposit $100,000 and over and a $5.6 million increase in interest-bearing demand deposits, offset by a $6.1 million decrease in noninterest-bearing demand deposits, a $6.7 million decrease in savings accounts and a $5.7 million decrease in certificates of deposit under $100,000.  Other borrowed funds were $25.0 million at December 31, 2004 compared to $7.5 million at year-end 2003.

In July 2001, National Mercantile formed National Mercantile Capital Trust (the “Trust”) as a Delaware statutory business trust

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for the exclusive purpose of issuing and selling trust preferred securities (the “Trust Preferred Securities”).  The trust utilized the proceeds from the issuance of the Trust Preferred Securities to purchase National Mercantile’s junior subordinated interest debentures (the “Junior Subordinated Debentures”).  Through June 30, 2003, the Company’s financial statements reflected the Trust as a consolidated subsidiary, with its Trust Preferred Securities reflected on the consolidated balance sheet as mezzanine equity, shown as guaranteed preferred beneficial interests in the Company’s Junior Subordinated Debentures, net, and interest payments on the Trust Preferred Securities set forth as expenses and classified as minority interest in the Company’s income of the guaranteed preferred beneficial interest in the Junior Subordinated Debentures.

The Company implemented FASB Interpretation No. 46 (“FIN 46”) Consolidation of Variable Interest Entities effective July 1, 2003 resulting in the Trust no longer being a consolidated subsidiary of the Company for financial reporting purposes.  As a result: (i) the Company’s balance sheets as of dates on or after July 1, 2003 no longer reflect the Trust Preferred Securities as mezzanine equity but instead reflect the Junior Subordinated Debentures as liabilities, and (ii) the Company’s statements of operations incorporating periods on or after July 1, 2003, no longer reflect interest payments on the Junior Subordinated Debentures for periods on or after July 1, 2003 as expenses classified as minority interest  in the Company’s income of the guaranteed preferred beneficial interest in the Company’s Junior Subordinated Debentures but rather as interest expense.  As discussed below, this change in accounting has a significant effect on comparisons of net interest income for periods prior to July 1, 2003 and after implementation.

Table 1

Operations Summary

	Year Ended		Increase					Year Ended
	December 31,		(Decrease)					December 31,
	2004		Amount			%		2003
	(Dollars in thousands)
Interest income	$	19,454	$	2,330		13.6	%	$	17,124
Interest expense	3,004		(176		)	(5.5	)%	3,180
Net interest income	16,450		2,506			18.0	%	13,944
Provision for credit losses	220		(1,045		)	(82.6	)%	1,265
Other operating income	1,567		191			13.9	%	1,376
Other operating expense	14,028		732			5.5	%	13,296
Minority interest in the Company’s income of the:
Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debenture-net	—		(456		)	(100.0	)%	456
Series A Preferred Stock of South Bay Bank, N.A	—		—			N/A		—
Income before income taxes	3,769		3,466			1143.9	%	303
Income taxes	1,583		1,487			1549.0	%	96
Net income	$	2,186	$	1,979		956.0	%	$	207

CRITICAL ACCOUNTING POLICIES

Our accounting policies are integral to understanding the results reported.  These policies are described in detail in Note 1 of the Notes to Consolidated Financial Statements.  Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies.  We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period.  In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner.  The following is a brief description of our current accounting policies involving significant management valuation judgments.

Allowance for Credit Losses

The allowance for credit losses represents management’s best estimate of losses inherent in the existing loan portfolio. The allowance for credit losses is increased by the provision for credit losses charged to expense and reduced by loans charged off, net of recoveries. The allowance for credit losses is determined based on management’s assessment of several factors: (i) reviews and evaluation of individual loans including underlying cash flow and collateral values, (ii) the level of and changes in classified and nonperforming loans, (iii) historical loan loss experiences, (iv) changes in the nature and volume of the loan portfolio, and (v) current economic conditions and the related impact on specific borrowers and industry groups.

We review and manage the credit quality of the loan portfolio through a process that includes a risk grading system, uniform underwriting criteria, early identification of problem credits, regular monitoring of any classified assets graded as ‘‘criticized’’ by our internal grading system, and an independent loan review process.  The calculation of the adequacy of the allowance for credit losses is based on this internal risk grading system as well as other factors including loan grade migration trends and collateral values.

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The internal risk grading utilizes a 10-level grading system – six pass grades for unclassified loans based upon our assessment of the borrower’s ability to service the loan and the quality of the collateral and four classification grades for “criticized” loans depending on the severity of the underwriting weakness and likelihood of loss.  We use a statistical grading migration analysis as part of our allowance for credit losses evaluation for unclassified loans, which is a method by which the types and gradings of historical loans charged-off are related to the current loan portfolio.  This analysis attempts to use historical trends in loan risk grading, nonperforming assets and concentrations that are characteristic to our portfolio and consider other factors affecting loan losses that are specific to our marketplace and customer demographic.

An allowance based upon the migration analysis is established for various loan types and unclassified grades ranging from zero for loans secured by cash or marketable securities to 1.0% for unsecured commercial loans.  This methodology assumes, among other things, (i) consistency in underwriting standards and internal risk grading between the current loan portfolio and the historical sample, (ii) that the factors that resulted in historical loans charged-off, such as industry economic condition, will be the same factors that cause future loans to be charged-off, and (iii) the economic environment experienced during the period of historical loans charged-off is similar to the future economic environment.

Generally, the allowance for credit losses established for classified loans that are collateral-dependent is based on the net realizable value of the collateral.  In measuring the net realizable value of the collateral, management uses current appraisals that, among other techniques, observe market transactions of similar property and adjust for differences.  Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for credit losses and the associated provision for credit losses.

On a periodic basis -twice in 2004- we engage an outside loan review firm to review our loan portfolio, risk grade accuracy and the reasonableness of loan evaluations.  Annually, this outside loan review team analyzes our methodology for calculating the allowance for credit losses based on our loss histories and policies.

Each Bank’s board of directors reviews the adequacy of that Bank’s allowance for credit losses on a quarterly basis.  We utilize our judgment to determine the provision for credit losses and establish the allowance for credit losses.  We believe, based on information known to management, that the allowance for credit losses at December 31, 2004 was adequate to absorb inherent losses in the existing loan portfolio.  However, credit quality is affected by many factors beyond our control, including local and national economies, and facts may exist which are not known to us that adversely affect the likelihood of repayment of various loans in the loan portfolio and realization of collateral upon a default.  Accordingly, no assurance can be given that we will not sustain loan losses materially in excess of the allowance for credit losses.  In addition, the OCC, as an integral part of its examination process, periodically reviews the allowance for credit losses and could require additional provisions for credit losses.

Goodwill and Other Intangible Assets

As discussed in Note 2 of the Notes to Consolidated Financial Statements, we must assess goodwill and other intangible assets each year, or more frequently upon the occurrence of certain events, for impairment.  Impairment is the condition that exists when the carrying amount of the asset exceeds its implied fair value.

The goodwill impairment test involves comparing the fair value of South Bay with its carrying amount, including goodwill.  We retained an independent valuation consultant to evaluate the goodwill as of October 1, 2004.  The valuation consultant conducted the analysis utilizing two valuation methods – the income approach and the market approach.

The income approach measures the present worth of anticipated future net cash flows generated by South Bay.  Net cash flow forecasts require analysis of the significant variables influencing revenues, expenses, working capital and capital investment as well as residual value and cost of capital.  Our forecasts were for a three-year period reflecting average annual asset growth of 11%, an average loan to deposit ratio of 110%, an average net interest margin of 5.54%, and average annual return on assets of 1.65%.  A 10.7% cost of capital and a $59.7 million residual value was utilized in the analysis to discount the projected cash flows.

The market approach derives a valuation by analyzing the prices at which shares of capital stock of reasonably similar companies are trading in the public market, or the transaction price at which similar companies have been acquired.  The analysis identified eighteen transactions during the period from October 2002 through September 2004 involving acquired companies located in the state of California with similarities to South Bay in size and operating characteristics.  Transaction multiples were considered for purchase price to (i) earnings, and (ii) tangible book value.  The purchase price to earnings multiple for the South Bay acquisition was 11.38 compared to a range from 6.88 to 91.00 with an average of 27.56 for the transactions studied.  The South Bay transaction purchase price to tangible book value multiple was 1.55 compared to a range of 1.33 to 3.08 with an average of 2.17 for the comparable transactions.

The consultant also analyzed our stock price as part of its market approach analysis.  This analysis involved applying price multiples based on our stock price at or near the valuation date to the performance measures of South Bay.  Additionally, the consultant considered guideline companies operating in the same market segment as South Bay.  The stock trading values of similar companies were not considered reliable due to the small volume of trading activity, however, the results were not inconsistent with those of the transaction method.

The fair value indications derived from the income approach was $55.7 million and from the two market approaches, transaction

13

and stock price analysis, $35.6 million and $30.1 million, respectively.  The fair value of South Bay under both approaches exceeds the carrying value at October 1, 2004 of $22.1 million, therefore, goodwill is not considered impaired.  The testing of goodwill and other intangible assets for impairment requires re-measurement of fair values.  If the future fair values were materially less than the recorded value, we would be required to take a charge against earnings to write down the goodwill and other intangible assets to the lower value.

Deferred Tax Assets

At December 31, 2004 we had total deferred tax assets of $5.3 million of which $4.7 million is represented by (i) federal NOLs of $13.1 million, which begin to expire in 2009; (ii) a federal AMT credit carry forward of $364,000 and (iii) a California AMT credit carryforward of $20,000.  In order to utilize the benefit of the deferred tax assets related to the NOLs, we must generate aggregate taxable income equal to the amount of the NOLs during the period prior to their expiration.

If future taxable income should prove non-existent or less than the amount of the NOLs that created the deferred tax assets within the tax years to which they may be applied, the asset may not be realized.  A valuation allowance may be established to reduce the deferred tax asset to its realizable value.  Any adjustment required to the valuation allowance is coupled with a related entry to income tax expense.  A charge to earnings will be made in the event that we determine that a valuation allowance to the deferred tax asset is necessary.  Our deferred tax assets are described further in Note 6 of the Notes to Consolidated Financial Statements.

We use estimates of future taxable income to evaluate if it is more likely than not that the benefit of our deferred tax assets will be realized.  Our analysis utilizes alternative scenarios reflecting a range of assumptions for asset growth rates, loan to deposit ratios, interest rates and inflation rates.  The results of the analysis support our position that it is more likely than not that our deferred tax assets will be realized.

Loss Contingencies

From time to time, we are involved in certain conditions, situations, or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur.  We establish reserves for loss contingencies when both (i) available information indicates that it is probable that an asset has been impaired or a liability has been incurred, and (ii) the amount of loss can be reasonably estimated.  In estimating the loss, we assess the relative merits of our position in the contingency and the various risks of the situation taking into account legal counsel guidance.  If we are unaware of certain facts in performing our assessment or the circumstances surrounding the contingency change, our actual losses may be larger than our reserves for loss contingencies and can materially affect our operating results for any particular period.

Derivative Instruments and Hedging

We utilize derivative instruments to manage our risk to changes in interest rates.  Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133) requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.  If certain conditions are met, a derivative may be specifically designated as a hedge and earnings are affected only to the extent to which the hedge is not effective in achieving offsetting changes in fair value or cash flows of the hedged item.  We have designated our derivative instruments as hedges and consider them highly effective.  Circumstances may change increasing the extent that the hedge is not effective resulting in a greater portion of the change in value of the derivative instruments being reported in earnings.

OPERATIONS SUMMARY ANALYSIS

Net Interest Income

Our earnings depend largely upon the difference between the income earned on our loans and other investments and the interest paid on our deposits and borrowed funds.  This difference is net interest income.  Our ability to generate net interest income is largely dependent on our ability to maintain sound asset quality and appropriate levels of capital and liquidity.  Our inability to maintain strong asset quality, capital or liquidity may adversely affect (i) the ability to accommodate desirable borrowing customers, thereby inhibiting growth in quality higher-yielding earning assets; (ii) the ability to attract comparatively stable, lower-cost deposits; and (iii) the costs of wholesale funding sources.

Net interest income increased $2.5 million to $16.5 million during 2004 compared to $13.9 million during 2003 due to a $2.3 million increase in interest income and a $176,000 decrease in interest expense.

Loan interest income increased $2.1 million due to $22.7 million greater average volume of loans receivable and a 26 basis point increase in yield, resulting primarily from interest rate swaps and increases in the prime rate lending index.  The increase in loans receivable is due to the added business development staff, the funding of previously approved construction loans and stronger new construction and commercial real estate loan demand.   On July 1, 2004, we entered into interest rate swaps in which we exchanged an adjustable rate interest based on the prime rate lending index for a fixed rate payment of 6.925% on an aggregate notional principal

14

amount of $50.0 million (see Note 13 of Notes to the Consolidated Financial Statements for details of the swap terms).  The interest rate swaps contributed 20 basis points to the increase in loan yield.  During the second half of 2004, the Federal Reserve Bank increased interest rates 25 basis points on five occasions after a prolonged period of accommodative monetary policy in response to signs of stronger expansion of the economy.  Approximately 77% of our $313.8 million loans receivable have adjustable interest rates; accordingly, rising interest rates positively affect interest income partially offset by greater payments for the $50 million interest rate swaps.

Interest income from securities available-for-sale increased $324,000 during 2004 compared to 2003 due to $15.9 million greater average volume and despite a 58 basis point decline in yield.  The decline in the yield from securities available-for-sale was due to lower yields on the newly purchased securities and the maturity or pay down of higher-yielding securities in the portfolio acquired in earlier periods of higher interest rates.  The growth in securities was a result of the redeployment of lower yielding federal funds sold, which averaged $26.2 million less than 2003.  The decline in average federal funds sold more than offset an 18 basis point increase in yield resulting in a $264,000 decline in interest income on federal funds sold in 2004.

Overall, interest-earning assets were $15.5 million greater during 2004 than 2003 and the higher yields and favorable change in composition to higher-yielding assets resulted in a 44 basis point increase in weighted average yield on interest-earning assets.

Interest expense decreased $176,000 for 2004 despite a $16.8 million increase in average interest-bearing liabilities, due to a lower cost of funds and a favorable change in deposit composition.  Interest expense would have reflected an even greater decrease but for the inclusion of interest on the Junior Subordinated Debentures due to the accounting change discussed above.  Average interest-bearing deposits were $4.5 million greater than 2003; however, interest expense on deposits decreased $644,000 due to a 36 basis point decline in weighted average cost.  Relatively low costing interest-bearing demand deposits and money market and savings deposits averaged $3.2 million and $9.2 million greater, respectively, in 2004 compared to 2003.  Relatively high cost time certificates of deposit averaged $7.9 million less during 2004 than 2003.  This favorable change in deposit composition is due to a combination of emphasis on developing business banking, which results in greater volumes of transactional deposits, and limited increases in pricing on typically retail certificates of deposit.  The cost of certificates of deposit declined 50 basis points due to the maturity of higher yielding deposits and repricing during the sustained low interest rate environment.  While market rates of interest increased during the second half of 2004, the cost of interest-bearing demand deposits and money market and savings deposits declined 19 basis points and 22 basis points, respectively, compared to 2003.  We strategically elected to generally hold deposit rates stable and fund earning asset growth mostly with relatively inexpensive overnight other borrowings.  Other borrowings during 2004 averaged $12.6 million, or $5.1 million greater than 2003.  The cost of other borrowings was 2.65% and 4.81% for 2004 and 2003, respectively, representing a decline of 216 basis points in 2004.  In a sustained rising interest rate environment, increases in deposit interest rates will be required to prevent net deposit withdrawals.  Noninterest-bearing demand deposits averaged $124.7 million in 2004, a $4.9 million increase compared to 2003.

The Company altered its liquidity strategy during 2004, maintaining a significantly lower level of short-term assets, primarily federal funds sold, and relying on overnight other borrowings, against pledged loans and securities, to fund loan growth and deposit outflows.  Liquidity was supplemented with brokered time certificates of deposit.

Table 2

Ratios to Average Assets

	2004		2003
Net interest income	4.32	%	3.82	%
Other operating income	0.41	%	0.38	%
Provision for credit losses	(0.06	)%	(0.35	)%
Other operating expense	(3.68	)%	(3.64	)%
Minority interest in the Company’s junior subordinated deferrable interest debenture-net	—		(0.12	)%
Income before income taxes	0.99	%	0.09	%
Net income	0.57	%	0.06	%

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Interest Rate Spread and Net Interest Margin

We analyze earnings performance using, among other measures, the interest rate spread and net interest margin.  The interest rate spread represents the difference between the weighted average yield received on interest earning assets and the weighted average rate paid on interest bearing liabilities.  Net interest margin (also called the net yield on interest earning assets) is net interest income expressed as a percentage of average total interest earning assets.  Our net interest margin is affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes, and changes to the relative amount of interest earning assets and interest bearing liabilities.  Interest rates charged on our loans are affected principally by the demand for such loans, the supply of money available for lending purposes, and other competitive factors.  These factors are in turn affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and actions of the Federal Reserve Board.  Table 3 presents information concerning the change in interest income and interest expense attributable to changes in average volume and average rate.  Table 4 presents the weighted average yield on each category of interest earning assets, the weighted average rate paid on each category of interest bearing liabilities, and the resulting interest rate spread and net yield on interest earning assets for 2004, 2003 and 2002.  We had no tax exempt interest income for 2004, 2003 or 2002.

Our net interest margin increased 54 basis points from 4.29% during 2003 to 4.83% in 2004.  Our net interest margin remains high in comparison with the interest rate spread due to the continued significance of noninterest-bearing demand deposits relative to total funding sources.  Average noninterest bearing demand deposits totaled $124.7 million, representing 39.1% of average deposits, during 2004, compared to $119.8 million, representing 38.7% of average deposits, during 2003.  Of these noninterest bearing demand deposits during 2004, $16.2 million or 13.0% of average noninterest bearing deposits were represented by real estate title and escrow company deposits, compared to $27.0 million or 22.5% of average noninterest bearing deposits during 2003.  While these deposits are noninterest bearing, they are not cost free funds.  Customer service expenses, primarily costs related to external accounting and data processing services provided to title and escrow company depositors are incurred by us to the extent that such depositors maintain certain average noninterest bearing deposits.  Customer service expense is classified as other operating expense.  If customer service expenses related to escrow customers had been classified as interest expense, our reported net interest income for 2004 and 2003, would have been reduced by $137,000 and $132,000, respectively, and the net interest margin for 2004 and 2003 would have decreased 4 basis points and 6 basis points, respectively.  Similarly, this would create identical reductions in other operating expense.  The expense associated with these deposits increased in 2004 from 2003 despite the decrease in volume due to a greater allowance for customer services provided for these depositors.

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Table 3

Increase (Decrease) in Interest Income/Expense Due to Change in

Average Volume and Average Rate (1)

	2004 vs 2003												2003 vs 2002
	Increase (decrease)								Net				Increase (decrease)							Net
	due to:								Increase				due to:							Increase
	Volume				Rate				(Decrease)				Volume				Rate			(Decrease)
	(Dollars in thousands)
Interest Income:
Federal funds sold and securities purchased under agreement to resell	$	(278		)	$	14			$	(264		)	$	119			$	(192	)	$	(73		)
Due from banks - interest bearing	29				10				39				5				—			5
Securities available-for-sale	565				(241			)	324				(370			)	(371		)	(741			)
Securities held-to-maturity	10				105				115				38				—			38
Loans receivable (2)	1,373				743				2,116				435				(2,112		)	(1,677			)
Total interest-earning assets	1,699				631				2,330				227				(2,675		)	(2,448			)
Interest Expense:
Interest-bearing deposits:
Demand	$	14			$	(60		)	$	(46		)	$	3			$	(199	)	$	(196		)
Money market and savings	84				(240			)	(156			)	203				(724		)	(521			)
Time certificates of deposit:
$100,000 or more	(36			)	(96			)	(132			)	(307			)	(3		)	(310			)
Under $100,000	(140			)	(170			)	(310			)	(200			)	(476		)	(676			)
Total time certificates of deposit	(176			)	(266			)	(442			)	(507			)	(479		)	(986			)
Total interest-bearing deposits	(78			)	(566			)	(644			)	(301			)	(1,402		)	(1,703			)
Other borrowings	243				(272			)	(29			)	(161			)	44			(117			)
Junior subordinated debentures (3)	512				—				512				454				—			454
Federal funds purchased and securities sold under agreements to repurchase	(13			)	(2			)	(15			)	(98			)	(20		)	(118			)
Total interest-bearing liabilities	664				(840			)	(176			)	(106			)	(1,378		)	(1,484			)
Net interest income	$		1,035		$		1,471		$		2,506		$		333		$	(1,297	)	$		(964	)

(1)The change in interest income or interest expense that is attributable to both changes in average balance and average rate has been allocated to the  changes due to (i) average balance and (ii) average rate in proportion to the relationship of the absolute amounts of changes in each.

(2)Table does not include interest income that would have been earned on nonaccrual loans.

(3)The implementation of FASB Interpretation No. 46, effective July 1, 2003 resulted in the reclassification of the Company’s Junior Subordinated Debentures from mezzanine equity to liabilities and the related interest to interest expense after June 30, 2003.

17

Table 4

Average Balance Sheet and

Analysis of Net Interest Income

	2004							2003							2002
						Weighted							Weighted							Weighted
				Interest		Average					Interest		Average					Interest		Average
	Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/
	Amount			Expense		Rate		Amount			Expense		Rate		Amount			Expense		Rate
	(Dollars in thousands)
Assets:
Federal funds sold and securities purchased under agreements to resell	$	7,651		$	95	1.24	%	$	33,829		$	359	1.06	%	$	26,514		$	432	1.63	%
Due from banks -interest bearing	3,566			56		1.57	%	1,304			17		1.30	%	1,348			12		0.89	%
Securities available-for-sale	41,603			1,235		2.97	%	25,672			911		3.55	%	33,077			1,652		4.99	%
Securities held-to-maturity	4,085			153		3.75	%	3,254			38		1.17	%	—			—		—
Loans receivable (1) (2)	283,415			17,915		6.32	%	260,756			15,799		6.06	%	254,424			17,476		6.87	%
Total interest earning assets	340,320			$	19,454	5.72	%	324,815			$	17,124	5.27	%	315,363			$	19,572	6.21	%
Noninterest earning assets:
Cash and due from banks - demand	22,874							22,171							20,775
Other assets	463							21,859							28,348
Allowance for credit losses and net	21,066
unrealized (loss) gain on sales of securities available-for-sale	(3,753		)					(4,025		)					(5,652		)
Total assets	$	380,970						$	364,820						$	358,834
Liabilities and shareholders’ equity:
Interest-bearing deposits:
Demand	$	31,484		$	80	0.25	%	$	28,269		$	126	0.45	%	$	28,024		$	322	1.15	%
Money market and savings	107,981			749		0.69	%	98,763			905		0.92	%	86,444			1,426		1.65%
Time certificates of deposit:
$100,000 or more	27,179			403		1.48	%	29,150			535		1.84	%	45,770			845		1.85%
Under $100,000	27,345			473		1.73	%	33,316			783		2.35	%	38,606			1,459		3.78%
Total time certificates of deposit	54,524			876		1.61	%	62,466			1,318		2.11	%	84,376			2,304		2.73%
Total interest-bearing deposits	193,989			1,705		0.88	%	189,498			2,349		1.24	%	198,844			4,052		2.04%
Other borrowings	12,550			332		2.65	%	7,500			361		4.81	%	11,308			478		4.23%
Junior subordinated debentures (3)	15,464			966		6.25	%	7,733			454		5.87	%	—			—		—
Federal funds purchased and securities sold under agreements to repurchase	113			1		0.88	%	609			16		2.63	%	2,294			134		5.84%
Total interest-bearing liabilities	222,116			3,004		1.35	%	205,340			3,180		1.55	%	212,446			4,664		2.20%
Noninterest-bearing liabilities:
Noninterest bearing demand deposits	124,699							119,789							102,213
Other liabilities	1,086							845							3,716
Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures, net (3)	—							7,267							14,525
Shareholders’ equity	33,069							31,579							25,934
Total liabilities and shareholders’ equity	$	380,970						$	364,820						$	358,834
Net interest income (interest rate spread)				$	16,450	4.36	%				$	13,944	3.72	%				$	14,908	4.01	%
Net yield on earning assets (2)						4.83	%						4.29	%						4.73	%

(1)The average balance of nonperforming loans has been included in loans receivable.

(2)Yields and amounts earned on loans receivable include loan fees of $1,383,000, $882,000 and $645,000 for the years ended December 31, 2004,  2003 and 2002, respectively.

(3)The implementation of FASB Interpretation No. 46, effective July 1, 2003 resulted in the reclassification of the Company’s Junior Subordinated Debentures from mezzanine equity to liabilities and the related interest to interest expense after June 30, 2003.

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Provision for Credit Losses

Provisions for credit losses charged to operations reflect management’s judgment of the adequacy of the allowance for credit losses and are determined through periodic analysis of the loan portfolio.  This analysis includes a detailed review of the classification and categorization of problem loans and loans to be charged off; an assessment of the overall quality and collectibility of the loan portfolio; and consideration of the loan loss experience, trends in problem loan concentrations of credit risk, as well as current and expected future economic conditions (particularly Southern California).  Management, in combination with an outside firm, performs a periodic risk and credit analysis, the results of which are reported to the Board of Directors.

During 2004, we provided $220,000 to the allowance for credit losses to maintain an adequate allowance following relatively significant growth in loans receivable.  In 2004 net recoveries were $73,000 compared to net charge offs of $2.5 million in 2003.

Assuming continued loan growth, and based on the relative uncertainty regarding the state of the economy, the level of nonperforming loans and a relatively constant level of charge offs, it is anticipated that regular provisions for credit losses will be made during 2005.  Credit quality will be influenced by underlying trends in the economic cycle, particularly in Southern California, and other factors, which are beyond management’s control.  Accordingly, no assurance can be given that we will not sustain loan losses that in any particular period are sizable in relation to the allowance for credit losses.  Subsequent evaluation of the loan portfolio, in light of factors then prevailing, by us and our regulators may indicate a requirement for increases in the allowance for credit losses through additions to the provision for credit losses.

Other Operating Income

Other operating income was $1.6 million and $1.4 million in 2004 and 2003, respectively.  During 2004 we recorded a net loss of $197,000 on sales of securities available-for-sale.  In 2003, there was a net gain of $51,000 on sales of securities available-for-sale.  Fee income related to international services was $59,000 in 2004 compared to $44,000 in 2003.  Investment services fees were $53,000 in 2004 compared to $84,000 in 2003.  Fees for deposit related services were $1.7 million in 2004 as compared to $1.3 million in 2003, a $319,000 increase due to new services offered and increases in fee rates.  In 2003 we recorded a loss of $136,000 on the sale or write-down of OREO compared to no loss in 2004.

Other Operating Expenses

Other operating expense increased $732,000 to $14.0 million in 2004, compared to $13.3 million during 2003.  Salaries and related benefits increased $351,000 or 4.9% to $7.5 million, primarily due to the addition of business development staff in late 2003 and early 2004, as well as greater commissions paid to business development staff for loan production.  Net occupancy expense decreased $202,000 or 15.2% to $1.1 million primarily due to the relocation of our administrative offices and the Century City banking office.  The decrease in net occupancy expense was partially offset by the opening of loan production offices in Beverly Hills and Costa Mesa, California. Insurance and regulatory expenses increased 13.6% to $433,000 during 2004 from $381,000 during 2003 due to increased premiums and increased assessments.  Other expenses increased $458,000 largely due to a $250,000 reserve established in a dispute over our lien on the collateral for a loan as well as several unrelated and nonrecurring operating losses.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between financial reporting and tax reporting bases of assets and liabilities, as well as for operating losses and tax credit carryforwards, using enacted tax laws and rates.  Deferred tax assets will be reduced through a valuation allowance whenever it becomes more likely than not that all or some portion will not be realized.  Deferred income tax expense (benefit) represents the net change in the deferred tax asset or liability balance during the year. This amount, together with income taxes currently payable or refundable in the current year, represents the total tax expense for the year.

At December 31, 2004, our deferred tax asset totaled $5.3 million, respectively, with no recorded valuation allowance.

For tax purposes at December 31, 2004, we had (i) federal NOLs of $13.1 million, which begin to expire in 2009; (ii) a federal alternative minimum tax (“AMT”) credit carryforward of $364,000, and (iii) a California AMT credit carryforward of $20,000.  The AMT credits carryforward indefinitely.

An income tax provision of $1.6 million was recorded for 2004.  During 2003, a $96,000 income tax provision was recorded.

Federal and state income tax laws provide that following an ownership change of a corporation with NOLs, a net unrealized built-in loss or tax credit carryovers, the amount of annual post-ownership change taxable income that can be offset by pre-ownership change NOLs, built-in losses or tax credit carryovers generally cannot exceed a prescribed annual limitation.  The annual limitation generally equals the product of the fair market value of the corporation immediately before the ownership change (subject to certain

19

adjustments) and the federal long-term tax-exempt rate prescribed monthly by the Internal Revenue Service.  If such limitations were to apply to us, our ability to reduce future taxable income by the NOLs could be severely limited.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income is comprised of the unrealized gain or loss on available-for-sale securities and the unrealized gain or loss on interest rate swaps designated as cash flow hedges, net of taxes.  At December 31, 2004 the net unrealized loss on available-for-sale securities was $39,000 compared to a net unrealized gain of $71,000 at December 31, 2003.  The interest rate swaps designated as cash flow hedges had an unrealized gain of $314,000 at December 31, 2004.  There were no such swaps at December 31, 2003.

FINANCIAL CONDITION

Regulatory Capital

The following table sets forth, as of December 31, 2004:  (i) the minimum regulatory capital requirements for National Mercantile and the Banks; (ii) the capital requirements for the Banks to be “well capitalized” under the prompt corrective action rules; and (iii) the regulatory capital ratios of National Mercantile and the Banks.

Table 5

Regulatory Capital Information

of the National Mercantile and Banks

	Minimum
	For Capital		Well
	Adequacy		Capitalized		December 31,
	Purposes		Standards		2004		2003
National Mercantile Bancorp:
Tier 1 capital to average assets	4.00	%	N/A		9.87	%	8.69	%
Tier 1 capital to risk weighted assets	4.00	%	N/A		10.39	%	11.02	%
Total capital to risk weighted assets	8.00	%	N/A		12.42	%	13.84	%
Mercantile National Bank:
Tier 1 capital to average assets	4.00	%	5.00	%	8.99	%	8.13	%
Tier 1 capital to risk weighted assets	4.00	%	6.00	%	10.44	%	10.88	%
Total capital to risk weighted assets	8.00	%	10.00	%	11.60	%	12.13	%
South Bay Bank, NA:
Tier 1 capital to average assets	4.00	%	5.00	%	9.32	%	9.44	%
Tier 1 capital to risk weighted assets	4.00	%	6.00	%	9.32	%	11.18	%
Total capital to risk weighted assets	8.00	%	10.00	%	10.29	%	12.37	%

National Mercantile’s Tier I capital, which is comprised of shareholders’ equity as modified by certain regulatory adjustments, was $38.2 million and $31.2 million at December 31, 2004 and 2003, respectively.  National Mercantile’s Tier 1 capital increased in 2004 as a result of net income, exercised stock options and a reduction of the portion of deferred tax asset disallowed for regulatory capital purposes.  Federal Reserve capital rules allow trust preferred securities to represent up to 25% of Tier 1 capital with the balance treated as Tier 2 capital for the Total risk-based Capital ratio.  At December 31, 2004 and 2003, Trust Preferred Securities represented $11.5 million and $10.6 million, respectively, of National Mercantile’s Tier 1 capital, and $3.5 million and $4.4 million, respectively, of its Tier 2 capital.  Disallowed against National Mercantile’s Tier 1 capital is $3.2 million of goodwill recorded in the acquisition of South Bay, $1.6 million of other intangible assets and $2.7 million of deferred tax asset based upon estimated earnings. 

Mercantile’s Tier 1 capital was $19.4 million and $15.7 million at December 31, 2004 and 2003, respectively.  The increase in Tier 1 capital during 2004 was due to net income and the decrease of the portion of deferred tax asset disallowed for regulatory capital purposes. 

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South Bay’s Tier 1 capital at December 31, 2004 was $17.1 million compared to $15.4 million at December 31, 2003.  The increase is due to net income in 2004.

Liquidity Management

The objective of liquidity management is to maintain cash flow adequate to fund our operations and meet obligations and other commitments on a timely and cost effective basis.  We manage to this objective primarily through the selection of asset and liability maturity mixes.  Our liquidity position is enhanced by the ability to raise additional funds as needed through available borrowings or accessing the wholesale deposit market.

Our deposit base provides the majority of our funding requirements.  Deposits, a relatively stable and low-cost source of funds has, along with shareholders’ equity, provided 92.3% and 84.8 % of funding for average total assets during 2004 and 2003, respectively.  The other borrowings, specifically Federal Home Loan Bank (“FHLB”) advances, which averaged $12.6 million during 2004 compared to $7.5 million during 2003, and federal funds purchased and securities sold under agreements to repurchase, which averaged $113,000 in 2004 compared to $609,000 in 2003, comprise the balance of the liability funding.  The increase in relatively high-cost other borrowings during 2004 was used to fund higher yielding loans and securities.

Also, federal funds sold and securities purchased under resale agreements that may be immediately converted to cash at minimal cost. The aggregate of these assets averaged $7.7 million during 2004, as compared to $33.8 million during 2003.

The portfolio of available-for-sale securities is an additional source of liquidity, which averaged $41.6 million during 2004 compared to $25.7 million in 2003.  The securities available-for-sale increased in 2004 due to the deployment of funds into securities pending redeployment into loans.  Except for a relatively small amount of securities pledged to collateralize public funds, deposits of bankruptcy estates and our swaps, our securities are pledged to the FHLB to secure immediately available borrowings.   At December 31, 2004, $27.0 million of securities were pledged to the FHLB and an additional $2.1 million borrowing capacity remained.  The unpledged portion of investment securities at December 31, 2004 totaled $4.1 million and was available as collateral for additional borrowings.  Maturing loans also provide liquidity, of which $112.4 million of the Banks’ loans are scheduled to mature in 2005.

Net cash provided by operating activities totaled $5.4 million in 2004 compared to $2.4 million in 2003.  The primary source of funds is net income from operations adjusted for provision for credit losses and depreciation and amortization.  Net cash used in investing activities totaled $61.0 million in 2004 compared to $426,000 net cash provided by investing activities in 2003.  The increase in cash used by investing activities was primarily due to an increase in loan originations, net of loan paydowns and payoffs.  Net cash provided by financing activities was $33.2 million in 2004 compared to $581,000 used in financing activities in 2003.  The increase in 2004 net cash provided resulted primarily from an increase in other borrowed funds and by an increase in certificates of deposit.

Interest Rate Risk Management

Interest rate risk management seeks to maintain a stable growth of income and manage the risk associated with changes in interest rates.  Net interest income, the primary source of earnings, is affected by interest rate movements.  Changes in interest rates have a lesser impact the more that assets and liabilities reprice in approximately equivalent amounts at basically the same time intervals.  Imbalances in these repricing opportunities at any point in time constitute interest sensitivity gaps, which is the difference between interest sensitive assets and interest sensitive liabilities.

Interest rate risk, including interest rate sensitivity and the repricing characteristics of assets and liabilities, is managed by our Balance Sheet Management Committee (“BSMC”).  The principal objective of BSMC is to maximize net interest income within acceptable levels of risk established by policy.

We manage interest rate sensitivity by matching the repricing opportunities on our earning assets to those on our funding liabilities.  We use various strategies to manage the repricing characteristics of our assets and liabilities to ensure that exposure to interest rate fluctuations is limited within guidelines of acceptable levels of risk-taking.  Hedging strategies, including the terms and pricing of loans and deposits, the use of derivative financial instruments and managing the deployment of our securities are used to reduce mismatches in interest rate repricing opportunities of portfolio assets and their funding sources.  Interest rate risk is measured using financial modeling techniques, including stress tests, to measure the impact of changes in interest rates on future earnings.  These static measurements do not reflect the results of any projected activity and are best used as early indicators of potential interest rate exposures.

An asset sensitive gap means an excess of interest sensitive assets over interest sensitive liabilities, whereas a liability sensitive gap means an excess of interest sensitive liabilities over interest sensitive assets.  In a changing rate environment, a mismatched gap

21

position generally indicates that changes in the income from interest earning assets will not be proportionate to changes in the cost of interest bearing liabilities, resulting in net interest income volatility.

Table 6 compares our interest rate gap position as of December 31, 2004 and 2003.  The gap report shows a cumulative one year interest rate asset sensitivity gap of $55.8 million at December 31, 2004, a change from an asset sensitivity gap of $85.9 million at December 31, 2003.  The decrease in asset sensitivity was due to: (i) a reduction of $10.0 million of federal funds sold and securities purchased under agreements to resell maturing or repricing in less than one year, (ii) a decrease of  $7.5 million in securities-available-for-sale maturing or repricing in less than one year, (iii) a decrease of $2.0 million of due from banks-time maturing or repricing in less than one year, (iv) an increase in immediately repricable interest-bearing demand, money market and savings deposits of $12.9 million, (v) an increase in time certificates of deposit of $5.6 million maturing in less than one year and (vi) an increase of $25.5 million of other borrowings maturing or repricing in less than one year partially offset by (vii) an $33.4 million increase in loans receivable maturing or repricing in less than one year.  The greater volume of loans repricing within one year is due to the greater emphasis on growth in commercial loans, which are typically adjustable rate loans.  The increase in interest-bearing demand, money market and savings deposits is due similarly to the emphasis on commercial borrowers.  In the low interest rate environment, depositors have moved maturing time certificates of deposits to savings deposits.

Since interest rate changes do not affect all categories of assets and liabilities equally or simultaneously, a cumulative gap analysis alone cannot be used to evaluate the interest rate sensitivity position.  To supplement traditional gap analysis, interest rate sensitivities are also monitored through the use of simulation modeling techniques that apply alternative interest rate scenarios to periodic forecasts of future business activity and estimate the related impact on net interest income.  The use of simulation modeling assists management in its continuing efforts to achieve earnings growth in varying interest environments.

Key assumptions in the model include anticipated prepayments on mortgage-related instruments, contractual cash flow and maturities of all financial instruments, anticipated future business activity, deposit rate sensitivity and changes in market conditions.  These assumptions are inherently uncertain and, as a result, these models cannot  precisely estimate the impact that higher or lower rate environments will have on net interest income.  Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, changes in cash flow patterns and market conditions, as well as changes in management’s strategies.  The model results are consistent with the gap analysis reflecting our asset sensitivity position.

Our asset sensitive position during a period of slowly declining interest rates is not expected to have a significant negative impact on net interest income since we have a large base of immediately adjustable interest bearing demand, savings and money market deposits.  However, since we are asset sensitive, in a period of rapidly declining interest rates, the rapid decline will have a negative effect on our net interest income as changes in the rates of interest bearing deposits historically have not changed proportionately with changes in market interest rates.  Additionally, in low and declining interest rate environments, such as the environment experienced in 2003, the interest rates paid on funding liabilities may begin to reach floors preventing further downward adjustments while rates on earning assets continue to adjust downward.  This condition will likewise have a negative impact on our net interest income.

Conversely, our asset sensitivity in a rising interest rate environment is expected to have a positive affect on earnings as a greater amount of earning assets than funding liabilities reprice upward and historically the rates of interest bearing deposits adjust upward more slowly and in smaller increments.

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Table 6

Rate-Sensitive Assets and Liabilities

	December 31, 2004
	Maturing or repricing in
	Less			After three			After one
	than			months			year
	three			but within			but within			After
	months			one year			5 years			5 years			Total
	(Dollars in thousands)
Rate-Sensitive Assets:
Securities available-for-sale, at amortized cost	$	500		$	6,696		$	15,885		$	13,939		$	37,020
Securities held to maturity	—			—			—			3,507			3,507
Due from banks - time	2,728			—			—			—			2,728
FRB and other stock, at cost	—			—			—			3,076			3,076
Loans receivable (1)	251,134			10,468			40,991			11,236			313,829
Total rate-sensitive assets	254,362			17,164			56,876			31,758			360,160
Rate-Sensitive Liabilities: (2)
Interest bearing deposits:
Demand, money market and savings.	136,591			—			—			—			136,591
Time certificates of deposit	26,708			26,543			9,848			—			63,099
Other borrowings	25,900			—			—			—			25,900
Total rate-sensitive liabilities	189,199			26,543			9,848			—			225,590
Interest rate-sensitivity gap	65,163			(9,379		)	47,028			31,758			134,570
Cumulative interest rate-sensitivity gap	$	65,163		$	55,784		$	102,812		$	134,570
Cumulative ratio of rate sensitive assets to rate-sensitive liabilities	134		%	126		%	146		%	160		%

(1)Loans receivable excludes nonaccrual loans.

(2)Deposits which are subject to immediate withdrawal are presented as repricing within three months or less. The distribution of other time deposits is based on scheduled maturities.

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Rate-Sensitive Assets and Liabilities

	December 31, 2003
	Maturing or repricing in
	Less			After three			After one
	than			months			year
	three			but within			but within			After
	months			one year			5 years			5 years			Total
	(Dollars in thousands)
Rate-Sensitive Assets:
Federal funds sold and securities purchased under agreements to resell	$	10,000		$	—		$	—		$	—		$	10,000
Securities available-for-sale, at amortized cost	10,507			4,186			4,875			11,309			30,877
Securities held to maturity	—			—			—			4,597			4,597
Due from banks - time	—			4,728			—			—			4,728
FRB and other stock, at cost	—			—			—			1,872			1,872
Loans receivable (1)	221,578			6,647			27,973			4,341			260,539
Total rate-sensitive assets	242,085			15,561			32,848			22,119			312,613
Rate-Sensitive Liabilities: (2)
Interest bearing deposits:
Demand, money market and savings	123,696			—			—			—			123,696
Time certificates of deposit	28,427			19,263			7,333			—			55,023
Other borrowings	—			399			—			—			399
Total rate-sensitive liabilities	152,123			19,662			7,333			—			179,118
Interest rate-sensitivity gap	89,962			(4,101		)	25,515			22,119			133,495
Cumulative interest rate-sensitivity gap	$	89,962		$	85,861		$	111,376		$	133,495
Cumulative ratio of rate sensitive assets to rate-sensitive liabilities	159		%	150		%	162		%	175		%

(1)Loans receivable excludes nonaccrual loans.

(2)Deposits which are subject to immediate withdrawal are presented as repricing within three months or less. The distribution of other time deposits is based on scheduled maturities.

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Investment Securities

We invest in investment securities consisting primarily of U.S. agency securities and mortgage-related securities to: (i) generate interest income pending the ability to deploy those funds in loans meeting our lending strategies; (ii) increase net interest income where the rates earned on such investments exceed the related cost of funds, consistent with the management of interest rate risk; and (iii) provide sufficient liquidity in order to maintain cash flow adequate to fund our operations and meet obligations and other commitments on a timely and cost efficient basis.

We generally classify our investment securities as available-for-sale except for investment securities we have the ability and the positive intent to hold to maturity which are classified as held-to-maturity securities.  

Table 7 provides certain information regarding our investment securities.

25

Table 7

Estimated Fair Values of and Unrealized

Gains and Losses on Investment Securities

	December 31, 2004
	Total		Gross		Gross		Estimated
	amortized		unrealized		unrealized		fair
	cost		gains		loss		value
	(Dollars in thousands)
Available-For-Sale:
U.S. Treasury securities	$	696	$	—	$	2	$	694
GNMA-issued/guaranteed mortgage pass through certificates	164		7		—		171
Other U.S. government and federal agency securities	23,958		—		128		23,830
FHLMC/FNMA-issued mortgage pass through certificates	9,288		76		1		9,363
CMO’s and REMIC’s issued by U.S. government-sponsored agencies	38		—		—		38
Privately issued corporate bonds, CMO and REMIC securities	2,876		1		19		2,858
	$	37,020	$	84	$	150	$	36,954
FRB and other equity stocks	$	3,076	—		—		$	3,076

	December 31, 2004
	Total		Gross		Gross		Estimated
	amortized		unrealized		unrealized		fair
	cost		gains		loss		value
	(Dollars in thousands)
Held-to-Maturity:
FHLMC/FNMA-issued mortgage pass through certificates	$	3,507	$	40	$	—	$	3,547
	$	3,507	$	40	$	—	$	3,547

	December 31, 2003
	Total		Gross		Gross		Estimated
	amortized		unrealized		unrealized		fair
	cost		gains		loss		value
	(Dollars in thousands)
Available-For-Sale:
U.S. Treasury securities	$	600	$	—	$	1	$	599
GNMA-issued/guaranteed mortgage pass through certificates	351		12		—		363
Other U.S. government and federal agency securities	12,758		45		4		12,799
FHLMC/FNMA-issued mortgage pass through certificates	3,828		161		—		3,989
CMO’s and REMIC’s issued by U.S. government-sponsored agencies	56		1		—		57
Mortgage mutual funds	10,000		—		98		9,902
Privately issued corporate bonds, CMO and REMIC securities	3,163		5		—		3,168
	$	30,756	$	224	$	103	$	30,877
FRB and other equity stocks	$	1,872	—		—		$	1,872

	December 31, 2003
	Total		Gross		Gross		Estimated
	amortized		unrealized		unrealized		fair
	cost		gains		loss		value
	(Dollars in thousands)
Held-to-Maturity:
FHLMC/FNMA-issued mortgage pass through certificates	$	4,597	$	43	$	—	$	4,640
	$	4,597	$	43	$	—	$	4,640

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At December 31, 2004, we held no securities from any issuer other than by U.S. government agencies and corporations in which the aggregate book value exceeded 10% of our shareholders’ equity.

Our present strategy is to stagger the maturities of investment securities to meet our overall liquidity requirements.  Table 8 sets forth information concerning the contractual maturity of and weighted average yield of our investment securities at December 31, 2004.

Table 8

Maturities of and Weighted Average Yields on

Investment Securities

					After one but					After five but										Weighted
	Within one year				within five years					within ten years				After ten years						Average
	Amount		Yield		Amount			Yield		Amount		Yield		Amount		Yield		Total		Yield
	(Dollars in thousands)
Securities available for-sale:
U.S Treasury securities	$	694	2.56	%	$	—		—		$	—	—		$	—	—		$	694	2.56	%
GNMA-issued/guaranteed mortgage pass-through certificates	—		—		—			—		—		—		171		5.11	%	171		5.11	%
Other U.S. government and federal agencies	6,451		1.98	%	15,401			2.74	%	1,977		3.16	%	—		—		23,829		2.57	%
FHLMC/FNMA-issued mortgage pass-through certificates	—		—		427			4.93	%	206		6.93	%	8,731		4.64	%	9,364		4.70	%
CMO’s and REMIC’s issued by U.S. government-sponsored agencies	—		—		—			—		3		5.51	%	35		—		38		0.44	%
Privately issued corporate bonds, CMO’s and REMIC’s securities	—		—		—			—		721		2.97	%	2,137		—		2,858		0.75	%
	$	7,145	2.04	%	$	15,828		2.80	%	$	2,907	3.38	%	$	11,074	3.74	%	$	36,954	2.98	%
Amortized Cost	$	7,196			$		15,885			$	2,913			$	11,026			$	37,020
Federal Reserve Bank and other equity stocks	$	3,076	—		$		—	—		$	—	—		$	—	—		$	3,076	—

				After one but			After five but									Weighted
	Within one year			within five years			within ten years				After ten years					Average
	Amount		Yield	Amount		Yield	Amount		Yield		Amount		Yield	Total		Yield
	(Dollars in thousands)
Securities held-to-maturity:
FHLMC/FNMA-issued mortgage pass-through certificate	$	—	—	$	—	—	$	3,507	4.07	%	$	—	—	$	3,507	4.07	%
	$	—	—	$	—	—	$	3,507	4.07	%	$	—	—	$	3,507	4.07	%

Actual maturities may differ from contractual maturities to the extent that borrowers have the right to call or prepay obligations with or without call or repayment penalties.

Lending Activities

We engage in commercial banking, serving small to medium-sized businesses in the niche markets of entertainment, healthcare, business banking, real estate development, operations of multi-family and commercial properties, as well as community-based nonprofit organizations, business executives, professionals and other individuals.  Our primary geographic focus is the Los Angeles basin of Los Angeles County, with four branch banking offices consisting of Mercantile Bank’s offices located in Century City and Encino, and South Bay Bank’s offices located in Torrance and El Segundo.  We offer a full range of loan, deposit and investment products, which are designed to meet specific customer needs and are offered with highly personalized service.

Loan products include commercial real estate loans, construction financing, revolving lines of credit, term loans and consumer and home equity loans, along with an array of deposits and investment accounts that often contain terms and conditions tailored to meet the specific demands of the market niche in which the borrower operates, including the ability to evaluate the revenue streams

27

and other sources of repayment supporting the loan.  In order to provide the personalized service required by these customers, we use a team approach to customer service combining an experienced relationship management officer with operations support personnel.

Entertainment industry customers include television, music and film production companies, talent agencies, individual performers, directors and producers (whom we attract by establishing relationships with business management firms), and others affiliated with the entertainment industry.   Professional service customers include legal, accounting, insurance, advertising firms and their individual directors, officers, partners and shareholders.  Healthcare organizations include primarily outpatient healthcare providers such as physician medical groups, independent practice associations and surgery centers.

Loan Portfolio

The following table sets forth the composition of our loan portfolio at the dates indicated:

Table 9

Loan Portfolio Composition

	December 31,
	2004						2003					2002					2001					2000
	Amount				Percent		Amount			Percent		Amount(1)			Percent		Amount			Percent		Amount				Percent
Commercial loans - secured and unsecured	$		98,429		31	%	$	76,699		29	%	$	86,015		32	%	$	85,292		33	%	$		53,433		48	%
Real estate loans:
Secured by commercial real properties	135,944				43		132,320			51		119,872			44		95,142			36		40,540				37
Secured by one to four family residential properties	9,405				3		8,167			3		10,797			4		27,069			10		6,578				6
Secured by multifamily residential properties	18,330				6		13,071			5		12,596			4		8,492			3		3,765				3
Total real estate loans	163,679				52		153,558			59		143,265			52		130,703			49		50,883				46
Construction and land development	50,289				16		27,210			11		37,934			14		30,811			12		1,890				2
Consumer installment, home equity and unsecured loans to individuals	2,516				1		3,510			1		5,566			2		15,306			6		4,373				4
Total loans outstanding	314,913				100	%	260,977			100	%	272,780			100	%	262,112			100	%	110,579				100	%
Deferred net loan origination fees and purchased loan discount	(1,066			)			(728		)			(458		)			(144		)			(331			)
Loans receivable, net	$	313,847					$	260,249				$	272,322				$	261,968				$	110,248

(1) Increase in loans receivable commencing in 2001 reflects the acquisition of South Bay in December, 2001.

Most of the commercial loans are generally within $100,000 to $3.0 million and our consumer and home equity loans generally are less than $100,000.  Our lending officers have limited authority to originate loans and require approvals from our more senior credit officers or our loan approval committee for loans over $150,000.  The Banks may not make any loan, with certain limited exceptions, in excess of their loan to one borrower limit under applicable regulations ($3.2 million for Mercantile and $2.8 million for South Bay at December 31, 2004).  If a Bank’s borrower requests a loan in excess of these amounts we may originate the loan with the participation of the other Bank or other lenders.  At December 31, 2004 we had $13.5 million in loans originated and serviced by other banks in which we purchased a non-recourse participation.  These participation loans had $21.5 million of unfunded commitments as of December 31, 2004.  We generally purchase participations in loans from other banks in which we have a reciprocal alliance to purchase loan participations from us.  We have not taken a subordinate credit position on any loan participations purchased or sold.  The bank originating the loan services the loan, typically without compensation, and retains the right to repurchase the participation.

Commercial Loans.  We offer adjustable and fixed rate secured and unsecured commercial loans for working capital, the purchase of assets and other business purposes.  We underwrite these loans primarily on the basis of the borrower’s ability to service the debt from cash flow without reliance on the liquidation of the underlying collateral, where applicable.  These loans generally have maturity terms of 12 months and are typically renewed.

Collateral for commercial loans may include commercial or residential real property, accounts receivable, inventory, equipment, marketable securities or other assets.  Unsecured commercial loans include short-term term loans and lines of credit. Our underwriting guidelines for these loans generally require that the borrower have low levels of existing debt, working capital sufficient to cover the loan and a history of earnings, appropriate liquidity, and positive cash flow from operations. Typically, unsecured lines of credit must be unused for a continuous 30-day period within each year to demonstrate the borrower’s ability to have sufficient funds to operate without the credit line.

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Real Estate Loans.  We offer adjustable and fixed rate secured loans to finance the purchase or holding of commercial real estate, one to four family residences and multi-family residences.  These loans generally have maturities ranging from three to fifteen years and payments based on a 15 to 25 years amortization schedule.  The original principal amount of a real estate loan generally does not exceed 65% to 75% of the appraised value of the property (or the lesser of the appraised value or the purchase price for the property if the loan is made to finance the purchase of the property).

Construction and Land Development Loans.  Real estate construction and land development loans are short-term secured loans made to finance the construction of commercial, one to four-family and multifamily residential properties or for improvements to raw land.  These loans include financing for developers for the construction of residential tract homes and custom homes.  Our real estate construction and loan development loans are primarily for properties located in Southern California.  These loans typically have adjustable rates with terms of twelve to fifteen months.  We monitor the progress of the construction and disburse the loan proceeds directly to the various contractors during stages of improvement.  Generally, the amount of a construction loan does not exceed 65% of the appraised completion value and the borrower’s funds are disbursed prior to disbursement of the construction loan.

Consumer Installment Loans and Home Equity Lines of Credit.  We offer consumer loans and home equity lines of credit. Home equity lines of credit provide the borrower with a line of credit in an amount that generally does not exceed 80% of the appraised value of the borrower’s residence net of senior mortgages.  Consumer loans are primarily adjustable rate open ended unsecured loans (such as credit card loans) but also include fixed rate term loans (generally under five years) to purchase personal property, which are secured by that personal property. These loans (other than purchase money loans) generally provide for monthly payments of interest and a portion of the outstanding principal balance.

Industry Concentrations

We provide banking services to the entertainment industry in Southern California.  Table 10 below presents information about the loans outstanding to entertainment related customers at December 31, 2004 and 2003.

Table 10

Industry Concentrations of Loans

	December 31,
	2004			2003
	(Dollars in thousands)
Entertainment industry-related loans:
Loans for single production motion picture and television feature films	$	5,630		$	9,218
Other loans to entertainment-related enterprises, such as television, music, film and talent agencies	23,229			15,508
Loans to individuals involved primarily in the entertainment industry	176			1,796
Total entertainment industry-related loans	$	29,035		$	26,522
Percent of total loans outstanding	9.2		%	10.2		%

Other loans to entertainment related enterprises, such as television, music film and talent agencies include commercial real estate loans and commercial loans representing working capital lines of credit and term loans secured by direct assignments of equipment or contracts.

The Board has limited our exposure to industry concentration by policy and we regularly monitor such concentration based upon our borrowers’ North American Industry Classification System codes.  Loans to the healthcare industry and community-based nonprofit organizations, individually, were less than 10% of total loans outstanding at December 31, 2004 and 2003.

Loan Rate Composition and Maturities

Of our total loans outstanding, excluding loans on nonaccrual, 77.1% and 81.7% had adjustable rates at December 31, 2004 and 2003, respectively.  Adjustable rate loans generally have interest rates tied to the prime rate and adjust with changes in the rate on a daily, monthly or quarterly basis.

Of our total loans outstanding, excluding nonaccrual loans, at December 31, 2004, 36.3% were due in one year or less, 46.9% were due in 1-5 years and 16.8% were due after 5 years.   As is customary in the banking industry, loans can be renewed by mutual agreement between the borrower and us.  Because we are unable to estimate the extent to which its borrowers will renew their loans, Table 11 is based on contractual maturities.

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Table 11

Loan Maturities

	December 31, 2004
	Interest rates		Interest rates
	are floating		are fixed or
	or adjustable		predetermined		Total
	(Dollars in thousands)
Aggregate maturities of total loans outstanding:
Commercial loans -
In one year or less	$	35,638	$	13,818	$	49,456
After one year but within five years	24,648		10,323		34,971
After five years	4,599		5,000		9,599
Real estate loans -
In one year or less	10,537		4,384		14,921
After one year but within five years	69,618		25,165		94,783
After five years	35,910		5,361		41,271
Construction and land development loans -
In one year or less.	47,341		548		47,889
After one year but within five years	12,158		5,372		17,530
After five years	1,502		481		1,983
Consumer installment, home equity lines of credit and unsecured loans to individuals -
In one year or less	796		1,381		2,177
After one year but within five years	143		132		275
After five years	—		40		40
Total loans outstanding (1)	$	242,890	$	72,005	$	314,895

(1) Excluding nonaccrual loans

Off-Balance Sheet Loan Commitments and Contingent Obligations

We are a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of our customers.  In addition to undisbursed commitments to extend credit under loan facilities, these instruments include conditional obligations under standby and commercial letters of credit.  Our  exposure to credit loss in the event of nonperformance by customers is represented by the contractual amount of the instruments.

Loan commitments are agreements to lend to a customer a specified amount subject to certain conditions.  Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  We had outstanding loan commitments aggregating $130.5 million at December 31, 2004, substantially all of which were for real estate construction and commercial lines of credit.

Standby letters of credit are conditional commitments issued by us to secure the financial performance of a customer to a third party and are primarily issued to support private borrowing arrangements. The credit risk involved in issuing a letter of credit for a customer is essentially the same as that involved in extending a loan to that customer. We use the same credit underwriting policies in accepting such contingent obligations as we do for loans. When deemed necessary, we hold appropriate collateral supporting those commitments. The nature of collateral obtained varies and may include deposits held in financial institutions and real properties.  At December 31, 2004 letters of credit amounted to $272,000.  Many of these commitments are expected to expire without being drawn upon and, as such, the total commitment amounts do not necessarily represent future cash requirements.

Asset Quality and Credit Risk Management

We assess and manage credit risk on an ongoing basis through diversification guidelines, lending limits, credit review and approval policies and internal monitoring.  As part of the control process, an independent credit review firm regularly examines our

loan portfolio, related products, including unused commitments and letters of credit, and other credit processes.  In addition to this credit review process, our loan portfolio is subject to examination by external regulators in the normal course of business.  Underlying trends in the economic and business cycle will influence credit quality.  We seek to manage and control credit risk through diversification of the portfolio by type of loan, industry concentration and type of borrower.

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Nonperforming Assets

Nonperforming assets consist of nonperforming loans and other real estate owned.  Nonperforming loans are (i) loans which have been placed on nonaccrual status, (ii) troubled debt restructurings (“TDR’s”), or (iii) loans which are contractually past due ninety days or more with respect to principal or interest, and have not been restructured or placed on nonaccrual status, and are accruing interest as described below.  Other real estate owned consists of real properties securing loans of which we have taken title in partial or complete satisfaction of the loan.  Other than loans included in nonperforming assets at December 31, 2004, we had no loans that cause management to have serious doubts about the ability of the borrower to comply with the present loan repayment terms and we had no other interest earning assets that were considered impaired at December 31, 2004.  Information about nonperforming assets is presented in Table 12.

Table 12

Nonperforming Assets

	December 31,
	2004			2003
	(Dollars in thousands)
Nonaccrual loans	$	18		$	438
Troubled debt restructurings	—			—
Loans contractually past due ninety or more days with respect to either principal or interest and still accruing interest	1,804			—
Nonperforming loans	1,822			438
Other real estate owned	1,056			925
Total nonperforming assets	$	2,878		$	1,363
Allowance for credit losses as a percent of nonaccrual loans	21822.2		%	829.9		%
Allowance for credit losses as a percent of nonperforming loans	215.6		%	829.9		%
Total nonperforming assets as a percent of loans receivable	0.9		%	0.5		%
Total nonperforming assets as a percent of total shareholders’ equity	8.3		%	4.3		%

Nonaccrual Loans. Nonaccrual loans are those loans for which management has discontinued accrual of interest because there exists reasonable doubt as to the full and timely collection of either principal or interest.  Our policy is to place a loan on nonaccrual status if either principal or interest payments are past due in excess of ninety days unless the loan is both well secured and in process of collection, or if full collection of interest or principal becomes uncertain, regardless of the time period involved.

When a loan is placed on nonaccrual status, all interest previously accrued but uncollected is reversed against current period operating results. Income on such loans is then recognized only to the extent that cash is received, and, where the ultimate collection of the carrying amount of the loan is probable, after giving consideration to the borrower’s current financial condition, historical repayment performance and other factors. Accrual of interest is resumed only when (i) principal and interest are brought fully current, and (ii) such loans are either considered, in management’s judgment, to be fully collectible or otherwise become well secured and in the process of collection. (See ‘‘Net Interest Income’’ for a discussion of the effects on operating results of nonperforming loans.)

Nonaccrual loans decreased to $18,000 at December 31, 2004, from $438,000 at December 31, 2003.  The decrease was primarily due to the charge off and collection of nonaccrual loans.  Nonaccrual loans at December 31, 2004 were comprised primarily of secured commercial loans.  The value of the collateral securing these loans may not be adequate to avoid a charge off of a portion of the credit.  The additional interest income that would have been recorded from nonaccrual loans, if the loans had not been on nonaccrual status, was $12,000 and $48,000 for 2004 and 2003, respectively.  Interest payments received on nonaccrual loans are applied to principal unless there is no doubt as to ultimate full repayment of principal, in which case, the interest payment is recognized as interest income.  Interest income not recognized on nonaccrual loans reduced the net yield on earning assets by 0 basis points and 1 basis point for 2004 and 2003, respectively.

Troubled Debt Restructurings. A TDR is a loan for which we have, for economic or legal reasons related to a borrower’s financial difficulties, granted a concession to the borrower we would not otherwise consider, including modifications of loan terms to alleviate the burden of the borrower’s near-term cash flow requirements in order to help the borrower to improve its financial condition and eventual ability to repay the loan.  At December 31, 2004 and 2003 and for the years then ended we had no TDRs and accordingly, no

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interest income was recorded in 2004 and 2003 on TDRs.

Loans Contractually Past Due 90 or More Days. Loans contractually past due 90 or more days are those loans which have become contractually past due at least ninety days with respect to principal or interest. Interest accruals may be continued on these loans when such loans are well secured and in the process of collection and, accordingly, management has determined such loans to be fully collectible as to both principal and interest.

For this purpose, a loan is considered well secured if the collateral has a realizable value in excess of the amount of principal and accrued interest outstanding and/or is guaranteed by a financially capable party. A loan is considered to be in the process of collection if collection of the loan is proceeding in due course either through legal action or through other collection efforts which management reasonably expects to result in repayment of the loan or its restoration to a current status in the near future.

There was $1.8 million in loans contractually past due 90 days and still accruing interest at December 31, 2004 and no loans at December 31, 2003.  This balance at year-end 2004 represents a single loan secured by a commercial real estate property.  Our loan amount represents 67% of the appraised value of the property, which the borrower has entered into an agreement for sale and is pending escrow.

Other Real Estate Owned. We carry OREO at the lesser of our recorded investment or the fair value less estimated costs to sell. We periodically revalue OREO properties and charge other expenses for any further write-downs.  At December 31, 2004 we had $1.1 million recorded as OREO and at December 31, 2003 we had $925,000 recorded as OREO.  The increase in OREO during 2004 represents amounts that we expended for development improvements to the property.

Impaired Loans.  Due to the size and nature of the our loan portfolio, impaired loans are determined by a periodic evaluation on an individual loan basis.  At December 31, 2004 none of our loans were impaired.  At December 31, 2003 we had classified $408,000 of our loans as impaired for which $408,000 of specific reserves were allocated.  The impaired loans are included in nonaccrual loans.  The average recorded investment in impaired loans during the year ended December 31, 2004, was $265,000 and no interest income was recognized on these loans.

Foregone interest income attributable to nonperforming loans amounted to $12,000 in 2004 and $48,000 in 2003.  This resulted in a reduction in yield on average loans receivable of 1 basis point and 2 basis points for the years ended December 31, 2004 and 2003, respectively.

Allowance for Credit Losses

The calculation of the adequacy of the allowance for credit losses is based on a variety of factors (see Allowance for Credit Losses under Critical Accounting Policies).  Table 13 presents, at December 31, 2004 and the prior four years, the composition of our allocation of the allowance for credit losses to specific loan categories.  Our current practice is to make specific allocations of the allowance for credit losses to criticized and classified loans, and unspecified allocations to each loan category based on our risk assessment.  This allocation should not be interpreted as an indication that loan charge-offs will occur in the future in these amounts or proportions, or as an indication of future charge-off trends.  In addition, the portion of the allowance for credit losses allocated to each loan category does not represent the total amount available for future losses that may occur within such categories, since the total allowance for credit losses is applicable to the entire portfolio.

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Table 13

Allocation of Allowance For Credit Losses

	December 31,
	2004		%(1)		2003		%(1)		2002		%(1)		2001		%(1)		2000		%(1)
	(Dollars in thousands)
Commercial loans - secured and unsecured	$	1,228	31	%	$	1,068	29	%	$	1,528	31	%	$	2,128	33	%	$	1,355	48	%
Real estate loans:
Secured by commercial real properties	1,696		43		1,843		51		2,129		44		2,376		36		842		37
Secured by one to four family residential properties	117		3		114		3		192		4		675		10		155		6
Secured by multifamily residential properties	229		6		182		5		224		5		212		3		73		3
Total real estate loans	2,042		52		2,139		59		2,545		53		3,264		49		1,070		46
Construction and land development	627		16		379		11		674		14		769		12		47		2
Consumer installment, home equity lines of credit and unsecured loans to individuals (1)	31		1		49		1		99		2		381		6		125		4
Allowance allocable to loans receivable	$	3,928	100	%	$	3,635	100	%	$	4,846	100	%	$	6,541	100	%	$	2,597	100	%

(1) Percentage of loans in each category to total loans.

The allowance for credit losses at December 31, 2004 was $3.9 million compared to $3.6 million at December 31, 2003.  The increase is due to $220,000 provision for credit losses and net recoveries of $73,000.  Total loans charged-off in 2004 were $57,000.

The additional provisions to the allowance were recorded based upon our analysis of the adequacy of allowance for credit losses.  The allowance for credit losses for classified loans graded as “criticized” by our internal grading system that are collateral-dependent is based upon the net realizable value of the collateral that we periodically evaluate.  The allowance for unsecured classified loans is based upon the severity of the credit weakness ranging from 3.0% for “special mention”, 15.0% for “substandard” to 50% for “doubtful”.  The volume of more severely classified loans – “substandard” and “doubtful” – increased to $8.8 million at December 31, 2004 from $690,000 at year end 2003.

The increase in the more severely classified loans at December 31, 2004 was primarily due to three borrowers.  Loans to one corporate borrower in the aggregate amount of $2.3 million (including loan commitments) was classified “substandard” due to a significant legal judgment rendered against the borrower and its principals.  Our collateral includes: (i) a first lien on the borrower’s assets with a book value of approximately $7.0 million at December 31, 2004; and (ii) a second trust deed in the amount of $1.5 million on a commercial property with an appraised value of $3.3 million and an underlying first trust deed of $1.6 million.  Our liens are superior to the legal judgment against the borrower.  All scheduled principal and interest payments have been made on a timely basis.  We are currently receiving accelerated monthly principal reductions from the net free cash flow of the borrower.  At this time we expect to receive all amounts contractually due on this loan. 

We have classified another loan with an outstanding principal balance of $1.8 million as “substandard” as a result of being contractually past due more than 90 days and issues with the borrower.  This loan is secured by a first trust deed on a commercial property with an appraised value of $2.7 million.  The borrower has entered into an agreement to sell the property for $2.4 million with a closing expected to occur by May 2005.  If this property is sold pursuant to this agreement, we expect to receive all amounts due on the loan upon such sale.

We have classified two loans to one borrower with aggregate out standing balance of $4.0 million as “substandard” because of a significant recent balance sheet adjustment to the borrower’s assets and the borrower’s deteriorating financial performance.  One loan to this borrower is a term loan with an outstanding balance of $3.1 million secured by a first trust deed on a commercial property that was recently appraised at $4.2 million.  The other loan to this borrower is a term loan with an outstanding balance of $900,000 secured by a first rust deed on a commercial property that was recently appraised at $1.7 million.  All principal and interest payment on both loans have been made on a timely basis.  Both loans amortize over a 20-year term and mature in May 2007.  At this time we expect to receive all amounts contractually due us on these loans.

Table 14 presents an analysis of changes in the allowance for credit losses during the periods indicated:

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Table 14

Analysis of Changes in Allowance for Credit Losses

	December 31,
	2004			2003
	(Dollars in thousands)
Balance, beginning of period	$	3,635		$	4,846
Loans charged off:
Commercial loans - secured and unsecured	49			2,697
Real estate loans:	—			—
Secured by commercial real properties	—			75
Secured by one to four family residential properties	—			38
Secured by multifamily residential properties	—			—
Total real estate loans	—			113
Construction and land development	—			—
Consumer installment, home equity and unsecured loans to individuals	8			41
Total loans charged-off	57			2,851
Recoveries of loans previously charged off:
Commercial loans - secured and unsecured	94			291
Real estate loans:
Secured by commercial real properties	—			13
Secured by one to four family residential properties	—			1
Secured by multifamily residential properties	—			—
Total real estate loans	—			14
Construction and land development	6			—
Consumer installment, home equity and unsecured loans to individuals	30			70
Total recoveries of loans previously charged off	130			375
Net (recoveries) charge-offs	(73		)	2,476
Provision for credit losses	220			1,265
Balance, end of period	$	3,928		$	3,635
Net loans (recoveries) charged-off as a percentage of allowance for credit losses	-1.86		%	68.12		%
Net loans (recoveries) charged-off as a percentage of average gross loans outstanding during the period	-0.03		%	0.95		%
Recoveries of loans previously charged off as a percentage of loans charged off in the previous year	4.56		%	9.23		%

Deposits

We emphasize developing business client relationships at both Banks in order to increase our core deposit base.  We offer internet-based cash management services, and for many business customers, provide regular courier service between their business locations and our banking offices.  Additionally, we attract deposits in serving the specific market niches of escrow and title companies and community-based nonprofit organizations.  Each Bank offers its own rates in order to compete in its specific markets.  We have entered new geographic markets first with loan production offices with the intention of later converting the offices to full service branch banking offices.

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Table 15

Average Deposit Composition

	December 31,
	2004				2003				2002
	Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)
Noninterest-bearing demand deposits:
Real estate title and escrow company customers	$	16,247	5	%	$	26,990	9	%	$	26,104	9	%
Other noninterest-bearing demand	108,452		34	%	92,799		30	%	76,109		25	%
Interest-bearing demand	31,484		10	%	28,269		9	%	28,024		9	%
Money market and savings	107,981		34	%	98,763		32	%	86,444		29	%
Time certificates of deposit:
Money desk	—		—		—		—		2,558		1	%
Other:
$100,000 or more	27,179		8	%	29,150		9	%	43,212		14	%
Under $100,000	27,345		9	%	33,316		11	%	38,606		13	%
Total time certificates of deposit	54,524		17	%	62,466		20	%	84,376		27	%
Total deposits	$	318,688	100	%	$	309,287	100	%	$	301,057	100	%

During 2003 and 2004 we added business development officers to specifically increase our emphasis on business banking.  This emphasis resulted in increases in noninterest-bearing demand deposits and money market and savings accounts and provided for an orchestrated reduction in higher-costing certificates of deposit.  During 2004, competition from other financial institutions and a decline in residential purchase and refinance activity resulted in a decline in noninterest-bearing deposits for real estate title and escrow company customers.

The Federal Reserve Bank increased the target fed funds rate five times beginning in the second half of 2004 and market short term interest rates likewise increased.  In order to improve net interest margins, we increased the rates paid on our nonmaturity deposits relatively little.  Other financial institutions have increased the rates paid on their deposits more rapidly.  While our customers are typically less rate sensitive due to the business relationships with us, it is difficult to grow deposits without offering very competitive rates.  Consequently, during the second half of 2004 we began offering very competitive rates on certain certificates of deposit targeted to new customers in order to fund our asset growth and any deposit runoff.  While certificates of deposit are relatively high costing deposits, the higher rates impact only the incremental deposits acquired through these means.

Additionally, the period 2001 through the first half of 2004 experienced historically low interest rates.    During periods of low interest rates, depositors tend to maintain greater deposit balances in low yielding but readily accessible transaction accounts due to relatively low opportunity costs.  As interest rates rise, and opportunity costs increase, depositors tend to redeploy their funds into higher yielding alternatives.  Assuming rates continue to rise, we expect continued growth in certificates of deposit and a resulting change in the composition of our deposits.

We use brokered deposits to supplement our liquidity.  Brokered deposits are wholesale certificates of deposit placed by rate sensitive customers that do not have any other significant relationship with us.  Professionals operating under established investment criteria manage most wholesale funds and the brokered deposits are typically in amounts that exceed the FDIC deposit insurance limit.  As a result, these funds are generally very sensitive to credit risk and interest rates, and pose greater liquidity risk to a bank.  They may refuse to renew the certificates of deposit at maturity if higher rates are available elsewhere or if they perceive that creditworthiness is deteriorating.  At December 31, 2004 we had total brokered deposits of $6.9 million all of which had maturities less than nine months.

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Table 16

Maturities of Time Certificates of Deposit

$100,000 or more

	December 31,
	2004			2003
	(Dollars in thousands)
Time certificates of deposit maturing:
In three months or less	$		19,680	$	15,494
After three months but within six months	5,562			4,176
After six months but within twelve months	10,548			5,570
After twelve months	5,321			2,068
Total time certificates of deposit $100,000 or more	$	41,111		$		27,308

Deposit Concentration

At December 31, 2004 no single depositor represented more than 1% of total deposits and the ten largest depositors represented 4.4% of total deposits.

Borrowed Funds

Borrowed funds and related weighted average rates are summarized below in Table 17.

Table 17

Borrowed Funds

	2004								2003								2002
	Year-end				Average				Year-end				Average				Year-end				Average
	Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate
	(Dollars in thousands)
Federal funds purchased and securities sold under repurchase agreements	$	—	—		$	113	0.88	%	$	399	2.20	%	$	609	2.63	%	$	1,476	4.65	%	$	2,294	5.84	%
Other borrowings	25,900		2.32	%	12,550		2.65	%	7,500		4.70	%	7,500		4.81	%	7,500		4.70	%	11,308		4.23	%

We had no securities sold with agreements to repurchase during 2004.  The maximum amount of securities sold with agreements to repurchase at any month end during 2003 and 2002 was $800,000 and $11.7 million, respectively.

The maximum amount of other borrowings at any month end was $31.9 million during 2004, $7.5 million during 2003 and $17.5 million during 2002. .

At December 31, 2004, we had $25.9 million of borrowed funds, including $19.0 million of overnight borrowings and the balances scheduled to mature during 2005.

Junior Subordinated Debentures/Trust Preferred Securities

In 2001, National Mercantile, through National Mercantile Capital Trust I (the “Trust”), issued 15,000 of 10.25% fixed rate securities (the “Trust Preferred Securities”), with an aggregate liquidation amount of $15.0 million due July 25, 2031.  The Trust Preferred Securities represent undivided beneficial interests in the assets of the Trust and are unconditionally guaranteed by National Mercantile with respect to distributions and payments upon liquidation, redemption and otherwise pursuant to the terms of a Guarantee Agreement.  National Mercantile issued the Trust Preferred Securities to generate regulatory capital at a relatively low cost

36

(as payments of interest are deductible for income tax purposes).

The primary assets of the Trust are $15.5 million aggregate principal amount of National Mercantile 10.25% fixed rate junior subordinated deferrable interest debentures due July 25, 2031 (“Junior Subordinated Debentures”) that pay interest each January 26 and July 26.  The interest is deferrable, at National Mercantile’s option, for a period up to ten consecutive semi-annual payments, but in any event not beyond June 25, 2031.  The debentures are redeemable, in whole or in part, at National Mercantile’s option on or after five years from issuance at declining premiums to maturity.

In January 2003, National Mercantile entered into a interest rate swap agreement pursuant to which it exchanged a fixed rate payment obligation of 10.25% on a notional principal amount of $15.0 million for a floating interest rate based on the six-month London InterBank Offered Rate plus 458 basis points for a 29-year period ending July 25, 2031.  The interest rate swap agreement results in the company paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amounts.  The differential paid or received on the interest rate swap is recognized as an adjustment to interest expense.  At

December 31, 2004, we were paying an interest rate of 6.51% under the terms of the swap.  The counter party to the swap has the option to call the swap under a declining premium schedule beginning July 2006.

The interest rate swap reduces the adverse impact of our 10.25% fixed rate Trust Preferred Securities in a low interest rate environment.  We do not utilize derivatives for speculative purposes.  Under Statement of Financial Accounting Standards No. 133 this swap transaction is designated as a fair value hedge.  Accordingly, the effective portion of the change in the fair value of the swap transaction is recorded each period in current income.  The terms of the swap are symmetrical with the terms of the Trust Preferred Securities, including the payment deferral terms, and considered highly effective in offsetting changes in fair value of the Trust Preferred Securities.  Accordingly, no ineffectiveness will be recorded to current earnings related to the interest rate swap.

Off-Balance Sheet Arrangements

Interest Rate Swaps

We utilize interest rate swaps to manage the risk associated with changes in interest rates and to help us maintain a stable growth of income (see Interest Rate Risk Management above and Note 13 of the Notes to the Consolidated Financial Statements).  Our interest rate swaps increased interest income $571,000 and reduced interest expense $597,000 for the year ended December 31, 2004.  Certain of our interest rate swaps are designated cash flow hedges.  The change in market value of cash flow hedges, net of income taxes, is included in Accumulated Other Comprehensive Income.  As of December 31, 2004 we had $314,000 Accumulated Other Comprehensive Income related to our interest rate swaps.   During periods of declining interest rates, the benefits from our interest rate swaps will increase partially offsetting the negative effect that declining interest rates have on our income.  Conversely, during periods of rising interest rates, the benefits from our interest rate swaps will decline but will be more than offset by the positive effect that rising interest rates have on our income from loans.

Contractual Obligations

The following table provides the amounts due under specified contractual obligations for the periods indicated as of December 31, 2004.

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Table 18

Contractual Obligations

	Payments Due
			After one		After three
			year		years
	Twelve months		but within		but within		After
	and less		three years		five years		five years			Total
	(Dollars in thousands)
Commitment to fund loans	$	130,529	$	—	$	—	$		—	$	130,529
Commitments under letters of credit	272		—		—		—			272
Deposits	303,694		9,848		—		—			313,542
Borrowings	25,900		—		—		15,464			41,364
Interest expense	1,629		3,170		3,170		42,136			50,106
Operating lease obligations	705		1,349		1,231		1,942			5,227
Other liabilities	1,734		—		—		—			1,734
Total	$	464,463	$	14,367	$	4,401	$	59,542		$	542,774

The obligations are categorized by their contractual due dates.  Approximately $65.7 million of the commitments to fund loans relate to real estate construction and are expected to fund within the next 12 months.  The balance of the commitments to fund loans is primarily revolving lines of credit or other commercial loans, and many of these commitments are expected to expire without being drawn upon.  Additionally, payments due for deposits reflect the contractual terms with our depositors to withdraw deposits, however, we do not anticipate the withdrawal of these deposits.  Total contractual obligations, therefore, do not necessarily represent future cash requirements.  We may, at our option, prepay certain borrowings prior to their maturity date.  Furthermore, the actual payment of certain current liabilities may be deferred into future periods.

Selected Financial Ratios

The following Table 19 sets forth selected financial ratios:

Table 19

Selected Performance Ratios

	For the Year Ended
	December 31,
	2004		2003		2002
Return on average assets	0.57	%	0.06	%	-0.07	%
Return on average shareholders’ equity	6.61	%	0.66	%	-0.98	%
Average shareholders’ equity to average assets	8.68	%	8.66	%	7.23	%

Recent Accounting Pronouncements

See Recent Accounting Pronouncements in Note 1-Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements.

FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS

We face risk from changes in interest rates.

The success of our business depends, to a large extent, on our net interest income.  Changes in market interest rates can affect our net interest income by affecting the spread between our interest-earning assets and interest-bearing liabilities.  This may be due to the different maturities of our interest-earning assets and interest-bearing liabilities, as well as an increase in the general level of interest rates.  Changes in market interest rates also affect, among other things:

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•Our ability to originate loans;

•The ability of our borrowers to make payments on their loans;

•The value of our interest-earning assets and our ability to realize gains from the sale of these assets;

•The average life of our interest-earning assets;

•Our ability to generate deposits instead of other available funding alternatives; and

•Our ability to access the wholesale funding market.

Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control.

We face risk from possible declines in the quality of our assets.

Our financial condition depends significantly on the quality of our assets.  While we have developed and implemented underwriting policies and procedures to guide us in the making of loans, compliance with these policies and procedures in making loans does not guarantee repayment of the loans.  If the level of our non-performing assets rises, our results of operations and financial condition will be affected.  A borrower’s ability to pay its loan in accordance with its terms can be adversely affected by a number of factors, such as a decrease in the borrower’s revenues and cash flows due to adverse changes in economic conditions or a decline in the demand for the borrower’s products and/or services.

Our allowances for credit losses may be inadequate.

We establish allowances for credit losses against each segment of our loan portfolio.  At December 31, 2004, our allowance for credit losses equaled 1.25% of loans receivable and 215.6% of nonperforming loans.  Although we believed that we had established adequate allowances for credit losses as of December 31, 2004, the credit quality or our assets is affected by many factors beyond our control, including local and national economic conditions, and the possible existence of facts which are not known to us which adversely affect the likelihood of repayment of various loans in our loan portfolio and realization of the collateral upon a default.  Accordingly, we can give no assurance that we will not sustain loan losses materially in excess of the allowance for credit losses.  In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for credit losses and could require additional provisions for credit losses.  Material future additions to the allowance for credit losses may also be necessary due to increases in the size and changes in the composition of our loan portfolio.  Increases in our provisions for credit losses would adversely affect our results of operations.

Economic conditions may worsen.

Our business is strongly influenced by economic conditions in our market area (principally, the Greater Los Angeles metropolitan area) as well as regional and national economic conditions and in our niche markets, including the real estate and entertainment industries in Southern California.  During the past several years economic conditions, particularly in the real estate industry, have been favorable.  Should the economic condition in this market area deteriorate, the financial condition of our borrowers could weaken, which could lead to higher levels of loan defaults or a decline in the value of collateral for our loans.  In addition, an unfavorable economy could reduce the demand for our loans and other products and services.

Because a significant amount of the loans we make are to borrowers in California, our operations could suffer as a result of local recession or natural disasters in California.

At December 31, 2004, almost all of our loans outstanding were collateralized by real properties located in California.  Because of this concentration in California, our financial position and results of operations have been and are expected to continue to be influenced by general trends in the California economy and its real estate market.  Real estate market declines may adversely affect the values of the properties collateralizing loans.  If the principal balances of our loans, together with any primary financing on the mortgaged properties, equal or exceed the value of the mortgaged properties, we could incur higher losses on sales of properties collateralizing foreclosed loans.  In addition, California historically has been vulnerable to certain natural disaster risks, such as earthquakes and erosion-caused mudslides, which are not typically covered by the standard hazard insurance policies maintained by borrowers.  Uninsured disasters may adversely impact our ability to recover losses on properties affected by such disasters and adversely impact our results of operations.

Our business is very competitive.

There is intense competition in Southern California and elsewhere in the United States for banking customers.  We experience competition for deposits from many sources, including credit unions, insurance companies, money market funds and mutual funds, as well as other commercial banks and savings institutions.  We compete for loans and deposits primarily with other commercial banks,  mortgage companies, commercial finance companies and savings institutions.  In recent years out-of-state financial institutions have entered the California market, which has also increased competition.  Many of our competitors have greater financial strength,

39

marketing capability and name recognition than we do, and operate on a statewide or nationwide basis.  In addition, recent developments in technology and mass marketing have permitted larger companies to market loans more aggressively to our small business customers.  Such advantages may give our competitors opportunities to realize greater efficiencies and economies of scale than we can.  We can provide no assurance that we will be able to compete effectively against our competition.

Our business is heavily regulated.

Both National Mercantile, as a bank holding company, and the Banks, are subject to significant governmental supervision and regulation, which is intended primarily for the protection of depositors.  Statutes and regulations affecting us may be changed at any time, and the interpretation of these statutes and regulations by examining authorities also may change.  We cannot assure you that future changes in applicable statutes and regulations or in their interpretation will not adversely affect our business.

Recent accounting changes may give rise to a future regulatory capital event that would reduce our consolidated capital ratios.

In accordance with the provisions of Financial Accounting Standard Board (“FASB”) Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities” (“FIN 46”), we have deconsolidated the subsidiary trust which issued Trust Preferred Securities for National Mercantile, and effective July 1, 2003 its financial position and results of operations are not included in our consolidated financial position and results of operations.  Accordingly, the Trust Preferred Securities, which had previously been reported as a minority interest have been replaced by the subordinated debt, issued by National Mercantile to the trusts and are reported as a liability.

Under current regulatory guidelines, a portion of the Trust Preferred Securities qualifies as Tier I capital, and the remaining portion qualifies as Tier II capital.  In July 2003, the Federal Reserve Board issued Supervisory Letter (SR 03-13) affirming the historical capital treatment of trust preferred securities as Tier I capital despite the deconsolidation of the trusts holding the securities. SR 03-13 remained in effect at December 31, 2004, and we continue to include these securities in our Tier I capital. There remains the potential that the Federal Reserve Board may change the regulatory capital treatment of trust preferred securities in the future.

If Tier I capital treatment for our Trust Preferred Securities were disallowed, there would be a reduction in our consolidated capital ratios. The following table shows as of December 31, 2004 (i) National Mercantile’s regulatory capital position, (ii) its pro forma capital position if the trust preferred securities qualify only as Tier II capital, (iii) its pro forma capital position if the Federal Reserve Board excludes trust preferred securities from capital, and (iv) the minimum regulatory capital requirements.

	Leverage ratio		Tier I risk-based capital ratio		Total risk-based capital ratio
(i) National Mercantile Bancorp	9.87	%	10.39	%	12.42	%
(ii) Assuming Trust Preferred Securities only qualified as Tier II capital	6.90	%	7.26	%	12.42	%
(iii) Assuming Trust Preferred Securities are excluded entirely from capital	6.90	%	7.26	%	8.33	%
(iv) Minimum regulatory requirements	4.00	%	4.00	%	8.00	%

Our ability to use our net operating losses may be limited.

As of December 31, 2004, we had NOLs of $13.1 million for federal tax purposes, which begin to expire in 2009.  Our ability to use the NOLs in the future would be significantly limited if we experience an “ownership change” within the meaning of Section 382 of the Internal  Revenue Code.  If our use of these NOLs is limited, we would be required to charge off the portion of our deferred tax asset related to the NOL limitation, and our net income would be lower.

A significant portion of our loan portfolio consists of construction loans, which have greater risks than loans secured by completed real properties

At December 31, 2004, we had outstanding construction and land development loans in the amount of $50.3 million, representing 16.0% of our loan portfolio, and commitments to fund an additional $40.6  million of construction loans.  These types of loans generally have greater risks than loans on completed homes, multifamily properties and commercial properties.  A construction loan generally does not cover the full amount of the construction costs, so the borrower must have adequate funds to pay for the balance of the project.  Price increases, delays and unanticipated difficulties can materially increase these costs.  Further, even if completed, there is no assurance that the borrower will be able to sell the project on a timely or profitable basis, as these are closely related to real estate market conditions, which can fluctuate substantially between the start and completion of the project.  If the borrower defaults prior to

40

completion of the project, the value of the project will likely be less than the outstanding loan, and we could be required to complete construction with our own funds to minimize losses on the project.

We have goodwill from the acquisition of South Bay, which must be evaluated regularly for impairment

In connection with the acquisition of South Bay in December 2001, we recorded goodwill in the amount of $2.2 million.  We must evaluate the goodwill regularly for impairment. We had an unaffiliated consultant conduct goodwill impairment testing in the fourth quarter of 2004, and we determined that this goodwill was not impaired.  If in the future we determine that the goodwill is impaired, we would be required to write-off some or all of the goodwill, which could have a material adverse effect on our financial condition and results of operations.

We have a significant deferred tax asset and our ability to realize that asset depends in part on the certainty of future earnings

At December 31, 2004, we had a deferred tax asset of $5.3 million relating primarily to our NOLs.  If future taxable income should be less than the amount of the NOLs within the tax years to which it may be applied, the deferred tax asset may not be realized.  To support our position that the benefits of this asset will be realized, we must estimate future earnings.  These estimates are based on many factors, including prior periods results.  If we are unable to generate future earnings in an amount sufficient to support the asset, we would have to establish a valuation allowance and corresponding charge to earnings to reduce the deferred tax asset to its realizable value.  A material valuation allowance on this asset would have a material adverse effect on our results of operations and financial condition.

ITEM 7.FINANCIAL STATEMENTS

The consolidated financial statements required by this Item are included herewith as a separate section of this Report as follows:

1.Financial Statements

Report of Independent Registered Public Accounting Firm – Ernst & Young LLP

Consolidated Balance Sheet at December 31, 2004

Consolidated Statements of Operations for the years ended December 31, 2004 and 2003

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2004 and 2003

Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003

Notes to Consolidated Financial Statements for the two years ended December 31, 2004

ITEM 8.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 8A.  CONTROLS AND PROCEDURES

Our management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended, within 90 days of the filing of this annual report.  Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in this annual report has been made known to them in a timely manner.

During the quarter ended December 31, 2004, there were no significant changes in our internal controls or in other factors that could significantly affect those controls.

ITEM 8B.  OTHER INFORMATION

Not applicable.

41

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The information required by this item will appear under the captions “Election of Directors,’’ ‘‘ Executive Officers,’’ and ‘‘Compliance with Section 16(a) Beneficial Ownership Reporting’’ in the Company’s proxy statement for the 2005 Annual Meeting of Shareholders (the ‘‘2005 Proxy Statement’’), and such information shall be deemed to be incorporated herein by reference to that portion of the 2005 Proxy Statement, if filed with the Securities and Exchange Commission not later than 120 days after the end of  our most recently completed fiscal year.

ITEM 10 EXECUTIVE COMPENSATION

The information required by this item will appear under the captions “Compensation of Executive Officers,” “Compensation of Directors,’’ ‘‘Summary Compensation Table,’’ ‘‘Report on Executive Compensation for 2004,’’ ‘‘2004 Option Exercises and Year-End Option Values” and “Compensation Committee Interlocks and Insider Participation’’ in the 2005 Proxy Statement, and such information shall be deemed to be incorporated herein by reference to those portions of the 2005 Proxy Statement, if filed with the Securities and Exchange Commission not later than 120 days after the end of our most recently completed fiscal year.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item will appear under the caption ‘‘Security Ownership of Principal Shareholders and Management’’ in the 2005 Proxy Statement, and such information either shall be deemed to be incorporated herein by reference to that portion of the 2005 Proxy Statement, if filed with the Securities and Exchange Commission not later than 120 days after the end of our most recently completed fiscal year.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will appear under the caption ‘‘Certain Relationships and Related Transactions’’ in the 2005 Proxy Statement, and such information shall be deemed to be incorporated herein by reference to that portion of the 2005 Proxy Statement, if filed with the Securities and Exchange Commission not later than 120 days after the end of our most recently completed fiscal year.

ITEM 13. EXHIBITS

See Index to Exhibits on page 66 of this Form 10-KSB

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item will appear under the caption “Independent Public Accountants” in the 2005 Proxy Statement, and such information shall be deemed to be incorporated herein by reference to that portion of the 2005 Proxy Statement, if filed with the Securities and Exchange Commission not later than 120 days after the end of our most recently completed fiscal year.

42

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	NATIONAL MERCANTILE BANCORP
	(Registrant)
	By	/s/  SCOTT A. MONTGOMERY
		Scott A. Montgomery
Date: March 31, 2005		Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature		Title	Date
/s/	ROBERT E. GIPSON
	Robert E. Gipson	Chairman of the Board	March 31, 2005
/s/	ROBERT E. THOMSON
	Robert E. Thomson	Vice Chair	March 31, 2005
/s/	DONALD E. BENSON
	Donald E. Benson	Director	March 31, 2005
/s/	JOSEPH N. COHEN
	Joseph N. Cohen	Director	March 31, 2005
/s/	W. DOUGLAS HILE
	W. Douglas Hile	Director	March 31, 2005
/s/	ANTOINETTE HUBENETTE, M.D.
	Antoinette Hubenette, M.D.	Director	March 31, 2005
/s/	SCOTT A. MONTGOMERY
	Scott A. Montgomery	Director, Chief Executive Officer	March 31, 2005
/s/	DION G. MORROW
	Dion G. Morrow	Director	March 31, 2005
/s/	CARL R. TERZIAN
	Carl R. Terzian	Director	March 31, 2005
/s/	DAVID R. BROWN
	David R. Brown	Principal Financial and Principal Accounting Officer	March 31, 2005

43

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

of National Mercantile Bancorp and subsidiaries:

We have audited the consolidated balance sheet of National Mercantile Bancorp (a California corporation) and subsidiaries (collectively, the “Company”) as of December 31, 2004, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2004.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company’s internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Mercantile Bancorp and subsidiaries as of December 31, 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Los Angeles, California

March 28, 2005

44

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

	December 31, 2004
	(Dollars in thousands)
ASSETS
Cash and due from banks-demand	$	14,187
Due from banks-interest bearing	2,728
Cash and cash equivalents	16,915
Securities available-for-sale, at fair value; aggregate amortized cost of $37,020	36,954
Securities held-to-maturity, at amortized cost	3,507
Federal Reserve Bank and other stock	3,076
Loans receivable	313,847
Allowance for credit losses	(3,928		)
Net loans receivable	309,919
Premises and equipment, net	5,804
Other real estate owned	1,056
Deferred tax asset, net	5,286
Goodwill	3,225
Intangible assets, net	1,630
Accrued interest receivable and other assets	3,750
Total assets	$	391,122
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	113,852
Interest-bearing demand	34,961
Money market	69,431
Savings	32,199
Time certificates of deposit:
$100,000 or more	41,111
Under $100,000	21,988
Total deposits	313,542
Other borrowings	25,900
Junior subordinated deferrable interest debentures	15,464
Accrued interest payable and other liabilities	1,734
Total liabilities	356,640
Shareholders’ equity:
Preferred stock, no par value - authorized 1,000,000 shares:
Series A non-cumulative convertible perpetual preferred stock; authorized 990,000 shares; outstanding 666,273 shares	5,442
Series B non-cumulative convertible perpetual preferred stock; authorized 1,000 shares; outstanding 1,000 shares	1,000
Common stock, no par value; authorized 10,000,000 shares; outstanding 2,954,128 shares	39,491
Accumulated deficit	(11,725		)
Accumulated other comprehensive income	274
Total shareholders’ equity	34,482
Total liabilities and shareholders’ equity	$	391,122

See accompanying notes to consolidated financial statements.

45

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Year Ended December 31,
	2004			2003
	(Dollars in thousands, except per share data)
Interest income:
Loans, including fees	$	17,915		$	15,799
Securities	1,388			949
Due from banks - interest bearing	56			17
Federal funds sold and securities purchased under agreements to resell	95			359
Total interest income	19,454			17,124
Interest expense:
Interest-bearing demand	80			126
Money market and savings	749			905
Time certificates of deposit:
$100,000 or more	403			535
Under $100,000	473			783
Total interest expense on deposits	1,705			2,349
Federal funds purchased and securities sold under agreements to repurchase	1			16
Junior subordinated deferrable interest debentures	966			454
Other borrowings	332			361
Total interest expense	3,004			3,180
Net interest income before provision for credit losses	16,450			13,944
Provision for credit losses	220			1,265
Net interest income after provision for credit losses	16,230			12,679
Other operating income:
Net gain (loss) on sale of securities available-for-sale	(197		)	51
International services	59			44
Investment division	53			84
Deposit-related and other customer services	1,652			1,333
Loss on sale of other real estate owned	—			(136		)
Total other operating income	1,567			1,376
Other operating expenses:
Salaries and related benefits	7,508			7,157
Net occupancy	1,127			1,329
Furniture and equipment	485			464
Printing and communications	546			504
Insurance and regulatory assessments	433			381
Client services	590			563
Computer data processing	965			994
Legal services	464			473
Other professional services	854			833
Amortization of core deposit intangible	223			223
Promotion and other expenses	833			375
Total other operating expenses	14,028			13,296
Income before income tax provision and minority interests	3,769			759
Minority interest in the Company’s income of the:
Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures, net	—			456
Income before income tax provision	3,769			303
Income tax provision	1,583			96
Net income	$	2,186		$	207
Earnings per share:
Basic	$	0.75		$	0.08
Diluted	$	0.48		$	0.05

See accompanying notes to consolidated financial statements.

46

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

																	Accumulated
												Additional					Other
	Preferred Stock Series A					Preferred Stock Series B			Common Stock			Paid-in		Accumulated			Comprehensive
	# of Shares		Amount			# of Shares	Amount		# of Shares	Amount		Capital		Deficit			Income			Total
	(Dollars in thousands except share data)
Balance at December 31, 2002	734,985		$	6,003		1,000	$	1,000	2,679,544	$	38,054	$	—	$	(14,055	)	$	202		$	31,204
Preferred stock converted into common stock on a 2:1 basis	(5,400	)	(44		)				10,800	44										—
Stock options exercised									81,935	504										504
Cumulative effect of change in accounting principal (Note 1)														(63		)				(63		)
Comprehensive income (loss):
Unrealized holding loss during the period, net																	(131		)	(131		)
Net income														207						207
Comprehensive income																				76
Balance at December 31, 2003	729,585		5,959			1,000	1,000		2,772,279	38,602		—		(13,911		)	71			31,721
Preferred stock converted into common stock on a 2:1 basis	(63,312	)	(517		)				126,624	517										—
Stock options exercised									55,225	372										372
Comprehensive income:
Unrealized holding gain during the period, net																	203			203
Net income														2,186						2,186
Comprehensive income																				2,389
Balance at December 31, 2004	666,273		$	5,442		1,000	$	1,000	2,954,128	$	39,491	$	—	$	(11,725	)	$	274		$	34,482

See accompanying notes to consolidated financial statements.

47

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Year Ended December 31,
	2004			2003
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	2,186		$	207
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	409			479
Provision for credit losses	220			1,265
Valuation allowance for OREO	—			75
Loss (gain) on sale of securities available for sale	197			(51		)
Loss on sales of OREO	—			61
Net amortization of premium on securities available-for-sale	250			239
Net amortization of premium on securities held-to-maturity	47			24
Net amortization of core deposit intangible	223			223
Net amortization of premium on loans purchased	190			281
Decrease in accrued interest receivable and other assets	1,333			132
Increase (decrease) in accrued interest payable and other liabilities	329			(545		)
Net cash provided by operating activities	5,384			2,390
Cash flows from investing activities:
Purchase of securities available-for-sale	(34,987		)	(33,339		)
Proceeds from sales of securities available-for-sale	11,759			2,545
Proceeds from repayments and maturities of securities available-for-sale	16,517			25,674
Purchase of securities held-to-maturity	—			(5,021		)
Proceeds from repayments and maturities of securities held-to-maturity	1,043			400
Proceeds from sales of OREO	—			474
Loan originations and principal collections, net	(53,178		)	8,782
Redemption (purchase) of Federal Reserve stock and other stocks	(1,204		)	146
Expenditures on OREO improvements	(132		)	—
Purchases of premises and equipment	(769		)	(87		)
Net cash used in investing activities	(60,951		)	(426		)
Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts	6,749			20,333
Net increase (decrease) in time certificates of deposit	8,076			(20,341		)
Net decrease in securities sold under agreements to repurchase and federal funds purchased	(399		)	(1,077		)
Net increase in other borrowings	18,400			—
Net proceeds from exercise of stock options	372			504
Net cash provided by (used in) financing activities	33,198			(581		)
Net increase (decrease) in cash and cash equivalents	(22,369		)	1,383
Cash and cash equivalents, January 1	39,284			37,901
Cash and cash equivalents, December 31	$	16,915		$	39,284
Supplemental disclosures of cash flow information:
Cash paid for interest	$	3,229		$	3,885
Cash paid for income taxes	51			—
Unrealized loss (gain) on securitites available-for-sale, net of tax effect	(40		)	71
Unrealized gain on swap, net of tax effect	314			—
Transfers to OREO from loans receivable, net	$	—		$	535

See accompanying notes to consolidated financial statements.

48

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of National Mercantile Bancorp (“National Mercantile” when referring only to the parent company or the “Company” when such reference includes National Mercantile Bancorp and its subsidiaries, collectively) and of its wholly owned subsidiaries, Mercantile National Bank (“Mercantile”) and South Bay Bank, N.A. (“South Bay”) (and collectively, the “Banks”).  All intercompany transactions and balances have been eliminated.  Certain prior year amounts have been reclassified to conform to the current year presentation.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States and to prevailing practices within the banking industry.  The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during reported periods.  Actual results could differ from those estimates.

The Company, through the Banks, engages in commercial banking in the Los Angeles area providing commercial and residential real estate financing, real estate construction financing and commercial lending serving niche markets represented by professional service providers, entertainment, healthcare and community-based nonprofit borrowers, and associated individuals with commercial banking and personal banking needs.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks-demand, due from banks – interest bearing, federal funds sold and securities purchased under agreements to resell.

Securities

Securities available-for-sale are carried at fair value.  Unrealized gains or losses on available-for-sale securities are excluded from earnings and reported as accumulated other comprehensive income, net of deferred income taxes, in a separate component of shareholders’ equity until realized.  Realized gains or losses on sales of available-for-sale securities are recorded using the specific identification method.

Securities held-to-maturity are debt instruments in which management has the positive intent and ability to hold to maturity and are carried at amortized cost.

Premiums or discounts on available-for-sale and held-to-maturity securities are amortized or accreted into income using the effective interest method.

Loans

Loans are generally carried at principal amounts outstanding less unearned income.  Unearned income includes deferred unamortized fees net of direct incremental loan origination costs.

Interest income is accrued as earned.  Net deferred fees are accreted into interest income using the effective yield method.

Loans are placed on nonaccrual status when a loan becomes 90 days past due as to interest or principal unless the loan is both well secured and in process of collection.  Loans are also placed on nonaccrual status when the full collection of interest or principal becomes uncertain.  When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the accretion of deferred loan fees is ceased.  Thereafter, interest collected on the loan is accounted for on the cash collection method until qualifying for return to accrual status.  Generally, a loan may be returned to accrual status when all delinquent principal and interest are brought current in accordance with the terms of the loan agreement and certain performance criteria have been met.

49

The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the impairment is measured by using the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

When the measurement of the impaired loan is less than the recorded amount of the loan, impairment is recognized by creating a valuation allowance with a corresponding charge to the provision for credit losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for credit losses.

The Company’s policy is to record cash receipts received on impaired and nonaccrual loans first as reductions to principal and then to interest income.

Allowance for Credit Losses

The provisions for credit losses charged to operations reflect management’s judgment of the adequacy of the allowance for credit losses and are determined through periodic analysis of the loan portfolio, problem loans and consideration of such other factors as the Company’s loan loss experience, trends in problem loans, concentrations of credit risk, and economic conditions (particularly Southern California), as well as the results of the Company’s ongoing examination process and its regulatory examinations.

The calculation of the adequacy of the allowance for credit losses is based on a variety of factors, including loan classifications, migration trends and underlying cash flow and collateral values.  On a periodic basis, management engages an outside loan review firm to review the Company’s loan portfolio, risk grade accuracy and the reasonableness of loan evaluations.  Annually, this outside loan review team analyzes the Company’s methodology for calculating the allowance for credit losses based on the Company’s loss histories and policies.  The Company uses a migration analysis as part of its allowance for credit losses evaluation, which is a method by which specific charge-offs are related to the prior life of the same loan compared to the total loan pools in which the loan was graded.  This method allows for management to use historical trends that are relative to the Company’s portfolio rather than use outside factors that may not take into consideration trends relative to the specific loan portfolio.  In addition, this analysis takes into consideration other trends that are qualitative relative to the Company’s marketplace, demographic trends, amount and trends in nonperforming assets and concentration factors.

Premises and Equipment, Net

Premises and equipment are presented at cost less accumulated amortization and depreciation.  Depreciation of furniture, fixtures and equipment is determined using the straight-line method over the estimated useful lives (3 years to 5 years) of each type of asset.  Leasehold improvements are amortized using the straight-line method over the term of the related leases or the service lives (10 years to 20 years) of the improvements, whichever is shorter.  Gains and losses on dispositions are reflected in current operations.  Maintenance and repairs are charged to other operating expenses as incurred.

Other Real Estate Owned

Other Real Estate Owned (‘‘OREO’’) is comprised of real estate acquired in satisfaction of loans.  Properties acquired by foreclosure or deed in lieu of foreclosure are transferred to OREO and are initially recorded at the lower of the loan balance or fair value at the date of transfer of the property, establishing a new cost basis.  Subsequently, OREO is carried at the lower of cost or fair value less costs to sell.  The fair value of the OREO property is based upon a current appraisal.  Losses that result from the ongoing periodic valuation of these properties are charged to other operating expenses in the period in which they are identified.  Expenses for holding costs are charged to other operating expenses as incurred.

Income Taxes

The Company and the Banks file consolidated federal income tax returns and combined state income tax returns.

Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between financial reporting and tax reporting bases of assets and liabilities, as well as for operating losses and tax credit carryforwards, using enacted tax laws and rates.  Deferred tax assets will be reduced through a valuation allowance whenever it becomes more likely than not that all or some portion will not be realized.  Deferred income taxes (benefit) represents the net change in deferred tax asset or liability balance during the year.  This amount, together with income taxes currently payable or refundable in the current year, represents the total tax expense (benefit) for the year.

50

Comprehensive Income

Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from nonowner sources.  The accumulated balance of other comprehensive income is required to be displayed separately from retained earnings in the consolidated balance sheet.

The components of other comprehensive income together with total comprehensive income are reported in the consolidated statements of changes in shareholders’ equity.  The accumulated balance of other comprehensive income is reported as a net amount after taxes.

Earnings per Share

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period.  The weighted average number of common shares outstanding used in computing basic earnings per share for the years ended December 31, 2004 and 2003 was 2,895,309 and 2,707,931, respectively.  Diluted earnings per share for the year ended December 31, 2004 was $0.48.  The weighted average number of common shares and common share equivalents outstanding used in computing diluted earnings per share for the year ended December 31, 2004 was 4,555,622.  The following table is a reconciliation of net income and shares used in the computation of basic and diluted earnings per share:

	Earnings available to shareholders			Weighted Average Shares	Per share amount
	(in thousands)
For the year ended December 31, 2004:
Basic EPS	$		2,186	2,895,309	$	0.75
Effect of dilutive securities:
Options				153,461
Convertible preferred stock				1,506,852
Diluted earnings per share	$		2,186	4,555,622	$	0.48
For the year ended December 31, 2003
Basic EPS	$	207		2,707,931	$	0.08
Effect of dilutive securities:
Options				76,294
Convertible preferred stock				1,626,169
Diluted earnings per share	$	207		4,410,394	$	0.05

Fair Value of Financial Instruments

Estimated fair value amounts have been determined using available market information and appropriate valuation methodologies.  Considerable judgment is required to interpret market data and to develop the estimates of fair value.  Accordingly, the estimates of fair value in the financial statements are not necessarily indicative of the amounts the Company could realize in a current market exchange.  The use of different market assumptions and estimation methodologies may have a material effect on the estimated fair value amounts.

Stock Options

The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for the stock incentive plans.  SFAS No. 123, ‘‘Accounting for Stock-Based Compensation,’’ encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. Compensation expense is recorded on the date of grant

51

only if the current market price of the underlying stock exceeded the exercise price.  All options were granted at current market prices, accordingly, no compensation cost has been recognized for the plans.  Pro forma net income and pro forma earnings per share disclosures for employee stock option grants are based on recognition as expense, over the vesting period, the fair value on the date of grant of all stock-based awards made during 2004 and 2003.

Note 2—Goodwill and Other Intangible Assets

As of December 31, 2004, the Company had goodwill of $3.2 million and core deposit intangibles of $1.6 million from the acquisition of South Bay in 2001.  In accordance with SFAS No. 142 goodwill is not amortized.  SFAS No. 142 also requires an analysis of impairment of goodwill annually or more frequently upon the occurrence of certain events.    The Company has no other indefinite-lived intangible assets.  The core deposit intangibles were estimated to have an original life of 10 years and 4 months. Amortization for intangibles for 2004 was, and for each of the next five years is estimated to be, $223,000.  During 2004, the required impairment tests of goodwill and core deposit intangibles were conducted, and based upon these evaluations, the Company’s goodwill and core deposit intangibles were not impaired at December 31, 2004.

Note 3—Investment Securities

The following is a summary of amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair values of the Company’s investment securities available-for-sale and held-to-maturity at the date indicated:

	December 31, 2004
	Total amortized cost				Gross unrealized gains		Gross unrealized loss		Estimated fair value
	(Dollars in thousands)
Available-For-Sale
U.S. Treasury securities	$			696	$	—	$	2	$	694
GNMA-issued/guaranteed mortgage pass through certificates	164				7		—		171
Other U.S. government and federal agency securities	23,958				—		128		23,830
FHLMC/FNMA-issued mortgage pass through certificates	9,288				76		1		9,363
CMO’s and REMIC’s issued by U.S. government-sponsored agencies	38				—		—		38
Privately issued corporate bonds, CMO’s and REMIC’s securities	2,876				1		19		2,858
	$		37,020		$	84	$	150	$	36,954
FRB and other equity stocks	$	3,076			$	—	$	—	$	3,076

	December 31, 2004
	Total amortized cost			Gross unrealized gains		Gross unrealized loss		Estimated fair value
	(Dollars in thousands)
Held-to-Maturity
FHLMC/FNMA-issued mortgage pass through certificates	$		3,507	$	40	$	—	$	3,547
	$	3,507		$	40	$	—	$	3,547

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The Company had gross proceeds and gross realized losses related to the sale of investment securities of $11.8 million and $197,000, respectively, for the year ended December 31, 2004.  The Company had gross proceeds and gross realized gains related to the sale of investment securities of $2.5 million and $100,000, respectively, and gross realized losses related to a valuation reserve of $49,000 established on other-than-temporarily impaired securities, for the year ended December 31, 2003.

The estimated fair value and amortized cost of securities available-for-sale and held-to-maturity at December 31, 2004 by contractual maturity, are shown below:

Maturities of and Weighted Average Yields on Investment Securities

	Within one year				After one but within five years				After five but within ten years				After ten years				Weighted Average
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield
	(Dollars in thousands)
Securities available-for-sale:
U.S Treasury securities	$	694	2.56	%	$	—	—		$	—	—		$	—	—		$	694	2.56	%
GNMA-issued/guaranteed mortgage pass-through certificates	—		—		—		—		—		—		171		5.11	%	171		5.11	%
Other U.S. government and federal agencies	6,451		1.98	%	15,401		2.74	%	1,977		3.16	%	—		—		23,829		2.57	%
FHLMC/FNMA-issued mortgage pass-through certificates	—		—		427		4.93	%	206		6.93	%	8,731		4.64	%	9,364		4.70	%
CMO’s and REMIC’s issued by U.S. government-sponsored agencies	—		—		—		—		3		5.51	%	35		—		38		0.44	%
Privately issued corporate bonds, CMO’s and REMIC’s securities	—		—		—		—		721		2.97	%	2,137		—		2,858		0.75	%
	$	7,145	2.04	%	$	15,828	2.80	%	$	2,907	3.38	%	$	11,074	3.74	%	$	36,954	2.98	%
Amortized Cost	$	7,196			$	15,885			$	2,913			$	11,026			$	37,020
Federal Reserve Bank and  other equity stocks	$	3,076	—		$	—	—		$	—	—		$	—	—		$	3,076	—

	Within one year			After one but within five years			After five but within ten years				After ten years					Weighted Average
	Amount		Yield	Amount		Yield	Amount		Yield		Amount		Yield	Total		Yield
	(Dollars in thousands)
Securities held-to-maturity:
FHLMC/FNMA-issued mortgage pass-through certificates	$	—	—	$	—	—	$	3,507	4.07	%	$	—	—	$	3,507	4.07	%
	$	—	—	$	—	—	$	3,507	4.07	%	$	—	—	$	3,507	4.07	%

Actual maturities may differ from contractual maturities to the extent that borrowers have the right to call or prepay obligations with or without call or repayment penalties.

Investment securities totaling $1.1 million were pledged to secure government tax deposits, bankruptcy deposits, or for other purposes required or permitted by law at December 31, 2004.

Impaired Securities

In November 2003, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus requiring certain disclosures for impaired securities as described in EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”.  Any security for which the current fair value is less than the carrying value is considered impaired. On a quarterly basis, impaired securities are evaluated to determine if the impairments are other-than-temporary.  For those securities that are identified as having an other-than-temporary impairment, the loss is reported as a reduction in current period income.  For all other temporary impairments, the current period unrealized losses are recorded to other comprehensive income.

53

As of December 31, 2004, temporarily impaired securities had a fair value of $27.5 million and unrealized losses of $185,000.  Securities that were not impaired had a fair value of $13.0 million and unrealized gains of $119,000 at December 31, 2004.  The following table shows fair value and unrealized loss positions of temporarily impaired securities, categorized by whether the securities have been impaired for less than twelve months or if they have been impaired for twelve months or more as of December 31, 2004.

	Less than 12 months					12 months or longer				Total
	Fair value		Unrealized losses			Fair value		Unrealized losses		Fair value		Unrealized losses
	(Dollars in thousands)
U.S. Treasury securities	$	694	$	(2	)	$	—	$	—	$	694	$	(2	)
Other U.S. government and federal agency securities	24,639		(164		)	—		—		24,639		(164		)
Privately issued corporate bonds, CMO’s and REMIC’s securities	2,137		(19		)	—		—		2,137		(19		)
Total temporarily impaired securities	$	27,470	$	(185	)	$	—	$	—	$	27,470	$	(185	)

The U.S. Treasury securities and other U.S. government and federal agency securities are impaired due to declines in fair values resulting from increases in market interest rates from the time of purchase.  In total, there are fourteen impaired securities at December 31, 2004.  None of these securities has exhibited a notable decline in value as a result of changes in credit risk.  These debt securities are relatively short in duration, accordingly, any unrealized loss in an individual issue will diminish as the security approaches its maturity, irrespective of market rates of interest.  Furthermore, we may borrow funds utilizing these securities as collateral at market rates of interest in amounts representing nearly all of the market value.  For that reason the securities achieve their primary purpose of providing liquidity without being sold.  As such, management does not consider the impairments on these securities to be other-than-temporary.

Note 4 - Loans Receivable and Allowance for Credit Losses

The following is a summary of the major categories of loans outstanding at December 31, 2004:

	2004
	(Dollars in thousands)
Commercial loans - secured and unsecured	$	98,429
Real estate loans:
Secured by commercial real properties	135,944
Secured by one to four family residential properties	9,405
Secured by multifamily residential properties	18,330
Total real estate loans	163,679
Construction and land development	50,289
Consumer installment, home equity and unsecured loans to individuals	2,516
Total loans outstanding	314,913
Deferred net loan origination fees and purchased loan discount	(1,066		)
Loans receivable, net	$	313,847
Weighted average yield for loans at December 31	6.71		%

At December 31, 2004, the Company had no impaired loans and no specific allowances established for impaired loans.   The average recorded investment of impaired loans was $265,000 and $1.7 million during 2004 and 2003, respectively.  No interest income was recognized on impaired loans during the years ended December 31, 2004 and 2003.

In the normal course of business, the Banks may make loans to officers and directors as well as loans to companies and individuals affiliated with or guaranteed by officers and directors of the Company and the Banks.  Such loans are made in the ordinary course of  business at rates and terms no more favorable than those offered to other customers with a similar credit standing.  The

54

outstanding principal balance of these loans was $4.5 million at December 31, 2004 and December 31, 2003.  During 2004 there were $4.5 million of advances and $5.3 million of repayments.  Interest income recognized on these loans amounted to $374,000 and $322,000 during 2004 and 2003, respectively.  At December 31, 2004, none of these loans were on nonaccrual status. Based on analysis of information presently known to management about the loans to officers and directors and their affiliates, management believes all have the ability to comply with the present loan repayment terms.

The following is a summary of activity in the allowance for credit losses for the year ended December 31, 2004:

	2004
	(Dollars in thousands)
Balance, beginning of year	$	3,635
Provision for credit losses	220
Loans charged off	(57		)
Recoveries of loans previously charged off	130
Balance, end of year	$	3,928

Total loans charged-off in 2004 were $57,000.  The additional provision for credit losses was recorded based upon the analysis of the adequacy of allowance for credit losses.  The allowance for credit losses for classified loans graded as “criticized” by the Company’s internal grading system that are collateral-dependent is based upon the net realizable value of the collateral that is periodically evaluated.  The allowance for unsecured classified loans is based upon the severity of the credit weakness.

The following is a summary of nonperforming loans at December 31, 2004:

	2004
	(Dollars in thousands)
Nonaccrual loans	$	18
Troubled debt restructurings	—
Loans contractually past due ninety or more days with respect to either principal or interest and still accruing interest	1,804
	$	1,822

Interest foregone on nonperforming loans outstanding at December 31, 2004 and 2003 was $12,000 and $47,000, respectively.  Foregone interest on nonperforming loans does not include interest forgone on loans on nonperforming status that were restored to performing status prior to year end, or subsequent to either being charged off prior to year end or transferred to OREO prior to year end.

The ability of the Company’s borrowers to honor their loan agreements is substantially dependent upon economic conditions and real estate market values throughout the Company’s market area.  At December 31, 2004, loans aggregating $214.0 million were collateralized by liens on residential and commercial real properties, nearly all of which are located in California.  While the Company’s loan portfolio is generally diversified with regard to the industries represented, at December 31, 2004, the Company’s loans to businesses and individuals engaged in entertainment industry related activities amounted to $29.0 million.

Troubled Debt Restructurings. A TDR is a loan for which the Company has, for economic or legal reasons related to a borrower’s financial difficulties, granted a concession to the borrower it would not otherwise consider, including modifications of loan terms to alleviate the burden of the borrower’s near-term cash flow requirements in order to help the borrower to improve its financial condition and eventual ability to repay the loan.  At December 31, 2004, the Company had no TDRs.

Note 5 – Premises and Equipment and Lease Commitments

The following is a summary of major components of premises and equipment at December 31, 2004:

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	2004
	(Dollars in thousands)
Land	$	1,392
Buildings.	3,870
Leasehold improvements	1,764
Furniture, fixtures and equipment	5,858
	12,883
Less accumulated amortization and depreciation	(7,080		)
	$	5,804

Depreciation and amortization expense was $409,000 in 2004 and $479,000 in 2003.  Rental expense on operating leases included in occupancy expense in the Consolidated Statements of Operations was $669,000 in 2004 and $808,000 in 2003.

The future minimum annual rental commitments at December 31, 2004 are summarized below.

	2004
	(Dollars in thousands)
For the year ended December 31,
2005	$	705
2006	673
2007	676
2008	689
2009	542
Thereafter	1,942
	$	5,227

Note 6—Income Taxes

The components of income tax provision consisted of the following for the years ended December 31:

	2004		2003
	(Dollars in thousands)
Current taxes (benefit)	$	65	$	(679	)
Deferred taxes	1,518		775
Total income tax provision	$	1,583	$	96

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A reconciliation of the amounts computed by applying the federal statutory rate of 34% for 2004 and 2003 to the income before income tax provision and the effective tax rate are as follows:

	2004		2003
	(Dollars in thousands)
Tax provision at statutory rate	$	1,281	$	103
Increase (reduction) in taxes resulting from:
State taxes	270		—
Book deductions without tax benefit	—		(22		)
Permanent differences	32		15
	$	1,583	$	96

The major components of the net deferred tax asset at December 31, 2004 are as follows:

	2004
	(Dollars in thousands)
Deferred tax assets:
Net operating losses	$	4,725
Accrued expenses	304
Alternative minimum tax credits	384
Nonaccrual interest	89
Loan fees	285
Bad debt expense	313
Core deposits	86
Securities	47
State taxes	63
Other real estate owned	31
Other	7
Total deferred tax assets	6,334
Deferred tax liabilities:
Depreciation	(671		)
Securities available for sale	(196		)
FHLB stock dividend	(42		)
Loan premium amortization	(145		)
Total deferred tax liabilities	(1,054		)
Net deferred tax asset	$	5,280

For tax purposes at December 31, 2004, the Company had (i) federal NOLs of $13.1 million, which begin to expire in 2009;  (ii) a federal AMT credit carryforward of $364,000; and (iii) a California AMT credit carryforward of $20,000.  The AMT credits carryforward indefinitely.

The Company believes that it is more likely than not that the deferred tax asset will be realized.  Accordingly, no valuation allowance has been established against the deferred tax asset.

Note 7—Benefit Plans

Stock Incentive Plans.  At December 31, 2004, the Company had active one stock incentive plan pursuant to which up to a total of 668,510 shares of common stock may be issued.  Under this plan, the Company may grant to directors, officers, employees and consultants stock-based incentive compensation in a variety of forms, including without limitation nonqualified options, incentive options, sales and bonuses of common stock and stock appreciation rights, on such terms and conditions as the Board determines. However, the exercise price of options granted to nonemployee directors may not be less than the fair market value of the common

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stock on the date of grant.  At December 31, 2004, the only outstanding awards under this plan were stock options, and at that date 63,509 shares were available for future awards.

At December 31, 2004, there were also outstanding options and tandem stock appreciation rights granted under two prior stock incentive plans.

The following summarizes option grants, cancellations and exercises under the stock incentive plans for the periods indicated .

			Option Price Range Per Share
Outstanding, December 31, 2002	420,843		$	4.31	-	$	8.52
Granted	165,200		6.75		-	11.50
Cancelled	(10,800	)	5.75		-	8.52
Exercised	(81,935	)	4.47		-	8.52
Outstanding, December 31, 2003	493,308		$	4.31	-	$	11.50
Granted	81,200		9.48		-	11.45
Cancelled	(39,125	)	4.59		-	10.26
Exercised	(55,225	)	4.50		-	9.75
Outstanding, December 31, 2004	480,158		$	4.31	-	$	11.50

Of the outstanding options at December 31, 2004:  (i) options to purchase 356,133 shares were vested and exercisable; and (ii) the remaining options become exercisable as follows: 2005  — 97,850 and 2006 — 26,175.  Options granted to employees expire on the tenth anniversary of the date of the grant and vest (i) 100% one year from the date of the grant for grants less than 500 shares; and (ii) 50% after one year and 50% after two years from the date of the grant for grants of 500 shares or more.  Options granted to nonemployee directors expire on the sixth anniversary of the date of the grant and vest one year from the date of the grant.

The estimated per share weighted average fair value of options granted was $7.22 and $8.83 during 2004 and 2003.  The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for the stock incentive plans.  SFAS No. 123, ‘‘Accounting for Stock-Based Compensation,’’ encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value.  Accordingly, no compensation cost has been recognized for the plans.  Had compensation cost for the options granted been determined based on the fair value at the grant dates for awards under the plans consistent with the method of SFAS No. 123, the Company’s net earnings for 2004 would have been decreased by $156,000 and the net earnings for 2003 would have decreased by $141,000.  Basic and diluted earnings per share would have decreased by $0.05 and  $0.03 for 2004, respectively.  Basic and diluted earnings per share would have decreased by $0.05 and $0.03 for 2003, respectively.

The fair values of options granted during 2004 and 2003 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: 2004— no dividend yield, expected volatility of 56%, risk-free interest rate of 4.23%, and an expected life of 10 years; 2003— no dividend yield, expected volatility of 62%, risk-free interest rate of 4.28%, and an expected life of 10 years.

Defined Contribution Retirement Plan. The Company maintains a defined contribution retirement plan under section 401(k) of the Internal Revenue Code. Employees are eligible to participate followingsix months of continuous employment. Under the plan, the Company has partially matched employee contributions since May 1, 2001.  Such matching contributions become fully vested when the employee reaches three years of service.  The Company’s matching contributions for 2004 and 2003 were $115,000 and $89,000, respectively.

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Note 8 - Borrowed Funds

	2004
	Year-end				Average
	Balance		Weighted Average Rate		Balance		Weighted Average Rate
	(Dollars in thousands)
Federal funds purchased and securities sold under repurchase agreements	$	—	—		$	113	0.88	%
Other borrowings	25,900		2.32	%	12,550		2.65	%

The maximum amount of federal funds purchased and securities sold under agreements to repurchase at any month-end was $3.0 million during 2004.

Other borrowings are primarily comprised of Federal Home Loan Bank (“FHLB”) advances.  At December 31, 2004 FHLB advances included: (i) a $19.0 million overnight borrowing maturing January 2005 with a fixed annual rate of 2.25%, (ii) fixed-rate borrowings of $2.0 million maturing February 2005 with an annual rate of 1.74%; (iii) fixed-rate borrowings of $2.0 million maturing April 2005 with an annual rate of 4.45%; (iv) fixed-rate borrowings of $1.9 million maturing April 2005 with an annual rate of 1.56%; and (v) fixed-rate borrowings of $1.0 million maturing May 2005 with an annual rate of 2.01%.  The maximum amount of other borrowings outstanding at any month-end during 2004 was $31.9 million.

The Banks had $2.1 million of unused borrowing capacity from the FHLB at December 31, 2004 based upon pledged securities.

Note 9—Junior Subordinated Deferrable Interest Debentures

In July 2001 the Company issued $15.5 million aggregate principal amount of 10.25% fixed rate junior subordinated deferrable interest debentures due July 25, 2031 (“Junior Subordinated Debentures’) that pay interest each January 26 and July 26.  The interest is deferrable, at the Company’s option, for a period up to ten consecutive semi-annual payments, but in any event not beyond June 25, 2031.  The debentures are redeemable, in whole or in part, at the Company’s option on or after five years from issuance at declining premiums to maturity.  The recorded balance of Junior Subordinated Debentures was $15.5 million at December 31, 2004

The Junior Subordinated Debentures are held by National Mercantile Capital Trust I (the “Trust”), a Delaware business trust, formed by the Company for the sole purpose of issuing certain securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in the Junior Subordinated Debentures.  In July 2001 the Trust issued and sold:  (i) to the Company 464 common securities (liquidation amount of $1,000 per common security) of the Trust, representing common beneficial interests in the assets of the Trust; and (ii) $15,000,000 of 10.25% fixed rate securities due July 26, 2031 (the “Trust Preferred Securities”).  The Trust Preferred Securities are unconditionally guaranteed by the Company with respect to distributions and payments upon liquidation, redemption and otherwise to the extent provided in and pursuant to the terms of a Guarantee Agreement.

Note 10—Availability to National Mercantile of Funds from Banks; Restrictions on Cash Balances; Regulatory Capital

National Mercantile is a legal entity separate and distinct from the Banks, and as such has separate and distinct financial obligations including annual deferrable debt service of $1.6 million on the Junior Subordinated Debenture and other modest operating expenses.  While National Mercantile from time to time holds short-term investments,  its assets primarily consist of the common shares of the Banks and it has historically not engaged in any other business activity.  Accordingly, dividends and capital distributions from the Banks constitute the principal source of cash to the Company.  The Banks are subject to various statutory and regulatory restrictions on their ability to pay dividends to the Company.

OCC approval is required for a national bank to pay a dividend if the total of all dividends declared in any calendar year exceeds the total of the bank’s net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years, less any required transfer to surplus or a fund for the retirement of any preferred stock.  A national bank may not pay any dividend that exceeds its retained net earnings, as defined by the OCC.  The OCC and the Federal Reserve Board have also issued banking circulars emphasizing that the level of cash dividends should bear a direct correlation to the level of a national bank’s current and expected earnings stream, the bank’s need to maintain an adequate capital base and other factors.

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National banks that are not in compliance with regulatory capital requirements generally are not permitted to pay dividends.  The OCC also can prohibit a national bank from engaging in an unsafe or unsound practice in its business.  Depending on the bank’s financial condition, payment of dividends could be deemed to constitute an unsafe or unsound practice.  Except under certain circumstances, and with prior regulatory approval, a bank may not pay a dividend if, after so doing, it would be undercapitalized.  The Banks’ ability to pay dividends in the future is, and could be, further influenced by regulatory policies or agreements and by capital guidelines.

Mercantile has no retained earnings, and therefore is presently unable to pay dividends.  Mercantile has a substantial accumulated deficit and does not anticipate having positive retained earnings for the foreseeable future.  South Bay had retained earnings of $1.6 million as of December 31, 2004.  Mercantile and South Bay may from time to time be permitted to make capital distributions to National Mercantile with the consent of the OCC.  It is not anticipated that such consent could be obtained unless the distributing bank were to remain “well capitalized” following such distribution.

Federal law restricts the Banks’ extension of credit to, the issuance of a guarantee or letter of credit on behalf of, investments in or taking as collateral stock or other securities of National Mercantile.  Restrictions prevent National Mercantile from borrowing from the Banks unless the loans are secured by designated amounts of marketable obligations.  Further, secured loans to and investments in National Mercantile or its affiliates by a bank are limited to 10% of  the bank’s capital stock and surplus (as defined by federal regulations) and are limited, in the aggregate, to 20% of the bank’s contributed capital (as defined by federal regulations).

Federal Reserve Board regulations require the Banks to maintain certain minimum reserve balances.  Cash balances maintained to meet reserve requirements are not available for use by the Banks or National Mercantile.  During 2004 and 2003, the average reserve balances for the Banks were approximately $6.5 million and $6.2 million, respectively.  Neither National Mercantile nor the Banks is required to maintain compensating balances to assure credit availability under existing borrowing arrangements.

National Mercantile and the Banks are subject to various capital requirements administered by the federal banking regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on National Mercantile’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, National Mercantile and Banks must meet specific capital guidelines that involve quantitative measures of National Mercantile’s and the Banks’ assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. National Mercantile’s and the Banks’ capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require National Mercantile and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined).  Management believes, as of December 31, 2004, National Mercantile and Banks meet all capital adequacy requirements to which they are subject.

At December 31, 2004, each Bank was categorized as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized under the prompt corrective action rules, each Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.  There are no conditions or events since the most recent notification which management believes have changed the Banks’ category.

The following table presents, at the dates indicated, certain information regarding the regulatory capital of National Mercantile and the Banks and the required amounts of regulatory capital for National Mercantile and the Banks to meet applicable regulatory capital requirements and, in the case of the Banks, to be well capitalized under the prompt corrective action rules.

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									To be Categorized
									as Well
									Capitalized under
					For Capital				Prompt Corrective
	Actual				Adequacy Purposes				Action Rules
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of December 31, 2004
Total Capital to Risk Weighted Assets
National Mercantile Bancorp	$	45,617	12.42	%	$	29,391	>=8.0	%	$	N/A	N/A
Mercantile National Bank	21,515		11.60	%	14,843		>=8.0	%	18,554		>=10.0	%
South Bay Bank, N.A	18,930		10.29	%	14,718		>=8.0	%	18,398		>=10.0	%
Tier 1 Capital to Risk Weighted Assets
National Mercantile Bancorp	38,182		10.39	%	14,695		>=4.0	%	N/A		N/A
Mercantile National Bank	19,375		10.44	%	7,421		>=4.0	%	11,132		>=6.0	%
South Bay Bank, N.A	17,142		9.32	%	7,359		>=4.0	%	11,039		>=6.0	%
Tier 1 Capital to Average Assets
National Mercantile Bancorp	38,182		9.87	%	15,475		>=4.0	%	N/A		N/A
Mercantile National Bank	19,375		8.99	%	8,619		>=4.0	%	10,774		>=5.0	%
South Bay Bank, N.A	17,142		9.32	%	7,356		>=4.0	%	9,195		>=5.0	%

Note 11—Commitments and Contingencies

In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk.  These financial instruments include commitments to extend credit, letters of credit and financial guarantees.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in the consolidated balance sheet.

Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

The Company had $272,000 of outstanding letters of credit at December 31, 2004.

Loan commitments are agreements to lend to a customer a specified amount subject to certain conditions.  Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since portions of the commitments are expected to expire without being drawn upon, the total amount of commitments does not necessarily represent future cash requirements. The Company had outstanding loan commitments aggregating $130.5 million at December 31, 2004, substantially all of which were for adjustable rate loans.

The Company from time to time is party to lawsuits, which arise in the normal course of business. The Company does not believe that any pending lawsuit at December 31, 2004 will have a material adverse effect on the financial position or results of operations of the Company.

Note 12—Disclosures about the Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value.

Cash, cash equivalents and interest bearing deposits:  For these short-term investments, the carrying amount is a reasonable estimation of fair value.

Securities available-for-sale and securities held-to-maturity:  For securities classified as available-for-sale, fair value equals quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Federal Reserve Bank (FRB) and other stock:  FRB and other stock may be redeemed at the carrying amount, therefore, the carrying amount is a reasonable estimation of fair value.

Loans:  Variable rate loans have carrying amounts that approximate fair value. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In establishing the credit risk component of the fair value calculations for loans, the Company concluded the allowance for credit losses represented a reasonable estimate of the credit risk component of the fair value at December 31, 2004.

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Interest rate swaps:  The fair value of the interest rate swap is based upon an estimate derived from broker quotations or proprietary broker models that consider the relevant characteristics of the instrument.

Deposits:  The fair value of demand and interest checking deposits, money market accounts and savings deposits is the amount payable on demand at the reporting date.  The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar maturities.

Federal funds purchased and securities sold under agreements to repurchase:  The fair value of fixed-rate securities sold under agreements to repurchase is estimated by discounting the future cash flows using the rates currently offered for instruments of similar maturities.

Junior subordinated debentures:  The fair value of the junior subordinated debentures is estimated by discounting the future cash flows using a rate determined by applying (i) the spread between the fixed rate of the junior subordinated debentures and the rate of thirty-year U.S. Treasury securities at the time of issuance of the junior subordinated debentures to (ii) the rate of current U.S. Treasury securities for a term similar to the remaining term of the junior subordinated debentures.

Other borrowings:  The fair value of fixed-rate borrowings is estimated by discounting the future cash flows using the rates currently offered for borrowings of similar maturities.  Borrowings with maturities greater than one year bear interest at variable rates and approximate fair value.

The estimated fair values of financial instruments at the date indicated are presented below.

	December 31, 2004
	Carrying		Fair
	Amount		Value
	(Dollars in thousands)
Financial assets:
Cash, cash equivalents and deposit with other financial institutions	$	16,915	$	16,915
Securities available-for-sale	36,954		36,954
Securities held-to-maturity	3,507		3,547
FRB and other stock .	3,076		3,076
Loans, net of allowance for credit losses	309,919		309,847
Interest rate swaps.	355		355
Financial liabilities:
Demand deposits, money market and savings	250,443		250,443
Time certificates of deposit	63,099		63,400
Junior subordinated debentures	15,464		16,731
Other borrowings	25,900		25,898

Note 13—Derivatives

In January 2003, National Mercantile entered into an interest rate swap agreement pursuant to which it exchanged a fixed rate payment obligation of 10.25% on a notional principal amount of $15.0 million for a floating rate interest based on the six-month London InterBank Offered Rate plus 458 basis points for a 29-year period ending July 25, 2031.  The interest rate swap agreement results in National Mercantile paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amounts.  The differential paid or received on the interest rate swap is recognized as an adjustment to interest expense.  At December 31, 2004, the Company was paying an interest rate of 6.51% under the terms of the swap.  The counter party to the swap has the option to call the swap under a declining premium schedule beginning July 2006.

The interest rate swap reduces the adverse impact of the Company’s 10.25% Junior Subordinated Debentures in a declining interest rate environment.  The Company does not utilize derivatives for speculative purposes.  Under Statement of Financial Accounting Standards No. 133 this swap transaction is designated as a fair value hedge.  Accordingly, the effective portion of the change in the fair value of the swap transaction is recorded each period in current income.  The terms of the swap are symmetrical with the terms of the Trust Preferred Securities, including the payment deferral terms, and considered highly effective in offsetting changes in fair value of the Trust Preferred Securities.  Accordingly, no ineffectiveness will be recorded to current earnings related to the interest rate swap.

On July 1, 2004, the Banks entered into interest rate swaps in which they exchanged an adjustable rate interest based on the prime rate lending index for a fixed rate payment of 6.925% on an aggregate notional principal amount beginning at $50.0 million for a 4-year period, declining to $30.0 million for the fifth year and $10.0 million for the sixth year with a final maturity of June 30, 2010.  The interest rate swaps result in the Banks paying or receiving the difference between the fixed and floating rates at monthly intervals calculated on the notional amounts.  The differential paid or received on the interest rate swaps has been recognized as an adjustment to interest income.  At December 31, 2004, the Banks were paying an interest rate of 5.25% under the terms of the swaps.

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These interest rate swaps reduce the current asset sensitivity of the Company’s balance sheet moderating the potential negative impact on earnings in the event of declining interest rates.  The Company does not utilize derivatives for speculative purposes.  Under Statement of Financial Accounting Standards No. 133 these swap transactions have been designated as cash flow hedges.  Accordingly, the change in fair value of the swaps is recorded each period as other comprehensive income and any ineffective portion of the change in the fair value is recorded in current income.  The Company has a large portion of its loan portfolio that adjusts to changes in the prime rate lending index and therefore the swaps are currently considered highly effective in offsetting changes in the cash flows of the loan portfolio.

Note 14—Parent Company Information

The following financial information presents the condensed balance sheet of the Company on a parent-only basis as of December 31, 2004, and the related condensed statements of operations and cash flows for each of the years in the two-year period ended December 31, 2004.

Balance Sheet

	December 31,
	2004
	(Dollars in thousands)
Cash with Banks	$	174
Due from banks - time	1,651
Securities available-for-sale	983
Investment in the Banks	45,387
Other assets	2,442
Total assets	$	50,637
Junior subordinated deferrable interest debentures	$	15,464
Other liabilities	691
Total liabilities	16,155
Shareholders’ equity:
Preferred stock	6,442
Common stock	39,491
Accumulated deficit	(11,725		)
Accumulated other comprehensive income	274
Total shareholders’ equity	34,482
Total liabilities and shareholders’ equity	$	50,637

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Statements of Operations

	Year ended December 31,
	2004			2003
	(Dollars in thousands)
Interest income	$	33		$	42
Interest expense	966			934
Net interest expense	(933		)	(892		)
Other operating income	144			14
Other operating expense	238			290
Loss before equity in undistributed net income of the Bank	(1,027		)	(1,168		)
Equity in undistributed net income of subsidiaries	2,790			944
Income before income tax provision (benefit)	1,763			(224		)
Income tax benefit	423			479
Net income	$	2,186		$	255

Statements of Cash Flow
	Year ended December 31,
	2004			2003
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	2,186		$	255
Adjustment to reconcile net income to net cash provided by operating activities.:
Equity in undistributed net income of subsidiaries, net	(2,790		)	(944		)
Net increase in other assets and other liabilities.	(615		)	(687		)
Net cash used in operations	(1,219		)	(1,376		)
Cash flows from investing activities:
Purchase of available-for-sale securities	(1,290		)	(1,586		)
Sales and maturities of available-for-sale securities	1,800			—
Net cash provided by (used in) investing activities	510			(1,586		)
Cash flows from financing activities:
Proceeds from stock options exercised.	372			504
Net cash provided by financing activities	372			504
Net decrease in cash and cash equivalents	(337		)	(2,458		)
Cash and cash equivalents, beginning of the year	2,162			4,620
Cash and cash equivalents, end of the year	$	1,825		$	2,162
Supplemental disclosures of cash flow information:
Cash paid for Interest	$	1,020		$	1,328
Cash paid for Income taxes, net	$	51		$	—

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INDEX TO EXHIBITS

Exhibit
3.1	Amended and Restated Articles of Incorporation, dated June 20, 1997 (1); Certificate of Amendment of the Articles of Incorporation, filed May 4, 2000 (6); Certificate of Determination of Rights, Preferences and Privileges of Series B Convertible Perpetual Preferred Stock filed December 14, 2001(8)
3.2	Bylaws of the Company, as amended, restated as of December 18, 1992 (2)
4.1	Indenture for Junior Subordinated Debt Securities dated as of July 16, 2001 (7)
10.1	Employment Agreement dated January 1, 1999 between Mercantile National Bank and Scott A. Montgomery (3); Assignment, Assumption — Amendment of Employment Agreement among National Mercantile Bancorp, Mercantile National Bank and Scott A. Montgomery
10.2	Form of Indemnity Agreement between the Company and its directors (4)
10.3	National Mercantile Bancorp Amended 1996 Stock Incentive Plan (10)
10.4	Form of Agreement for National Mercantile Bancorp Amended 1996 Stock Incentive Plan
10.5	Registration Rights Agreement between the Company and Conrad Company (5)
10.6	Amended and Restated Declaration of Trust of National Mercantile Capital Trust I, dated as of June 27, 2001 (7)
10.7	Guarantee Agreement of National Mercantile Bancorp for trust preferred securities dated July 16, 2001 (7)
10.8	Severance Agreement dated November 14, 2002 between National Mercantile Bancorp and David Brown (9)
10.9	Severance Agreement dated September 26, 2003 between National Mercantile Bancorp and Robert Bartlett (11)
10.10	Lease dated as of November 12, 2003 between Century Park and Mercantile National Bank relating to Suite 800 offices at 1880 Century Park East, Los Angeles, California (11)
10.11	Lease dated as of September 19, 2003 between Metropolitan Life Insurance Company and Mercantile National Bank relating to offices at 3070 Bristol Street, Costa Mesa, California
10.12	Lease dated as of November 12, 2003 between Century Park and Mercantile National Bank relating to ground floor offices at 1880 Century Park East, Los Angeles, California
10.13	Lease dated as of March 29, 2005 between Brighton Enterprises, LLC and Mercantile National Bank relating to offices at 9601 Wilshire Boulevard, Beverly Hills, California
10.14	Lease dated as of September 10, 2004 between Encino Corporate Plaza, LP and Mercantile National Bank relating to offices at 16661 Ventura Boulevard, Encino, California
10.15	Mercantile National Bank Deferred Compensation Plan and Form of Agreement
11.	Statement regarding computation of per share earnings (see ‘‘Note 1-Summary of Significant Accounting Policies-Earnings Per Share’’—of the ‘‘Notes to the Consolidated Financial Statements’’ in “Item 7. Financial Statements” in this Annual Report on Form 10-KSB)
21.	Subsidiaries of the Registrant
23.	Consent of Ernst & Young LLP
31.1	Certification of Scott A. Montgomery under Section 302 of Sarbanes-Oxley Act
31.2	Certification of David R. Brown under Section 302 of Sarbanes-Oxley Act

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32.1	Certification of Scott A. Montgomery under Section 906 of Sarbanes-Oxley Act
32.2	Certification of David R. Brown under Section 906 of Sarbanes-Oxley Act

(1)	Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997.
(2)	Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference.
(3)	Filed as an exhibit to the Company’s Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference.
(4)	Filed as an exhibit to Company’s Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference.
(5)	Filed as an exhibit to the Company’s Registration Statement on Form S-2 dated February 10, 1997 and amendments thereto and incorporated herein by reference.
(6)	Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 21, 2000 and incorporated herein by reference.
(7)	Filed as an exhibit to the Company’s Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference.
(8)	Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 21, 2001 and incorporated herein by reference.
(9)	Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 21, 2002 and incorporated herein by reference.
(10)	Filed as an exhibit to the Company’s Registration Statement on Form S-8 dated June 20, 2003 and incorporated herein by reference.
(11)	Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 21, 2003 and incorporated herein by reference.

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EX-10.4

Exhibit 10.4

NATIONAL MERCANTILE BANCORP

1996 Stock Option Plan

Incentive Stock Option Agreement

This INCENTIVE STOCK OPTION AGREEMENT (the “Agreement”) is made as of the xxth day of Month, 200x between NATIONAL MERCAN­TILE BANCORP, a California corporation (the “Company”), and OPTIONEE  (the “Optionee”).

R E C I T A L S

A.            The Board of Directors of the Company adopted the 1996 Stock Incentive Plan (the “1996 Plan”) on March 28, 1996 and April 25, 1997, and the 1996 Plan was approved by the shareholders of the Company on June 18, 1997 and amendments to the 1996 Plan were approved by shareholders on April 23, 1998, April 29, 1999, April 26, 2001, June 6, 2002 and May 29, 2003.

B.            The 1996 Plan provides for the granting of options to purchase shares of Common Stock of the Company to directors, officers, employees or independent contractors of the Company or any subsidiary of the Company, as the Stock Option Committee (the “Committee”) appointed by the Board of Directors may from time to time determine, and, pursuant to Section 10 of the 1996 Plan, an automatic grant to new directors of the Company who are not also employees of the Company.

C.            The Committee has determined that it is in the best interests of the Company and its shareholders to grant, pursuant to the 1996 Plan, an incentive stock option to the Optionee to purchase NUMBER OF SHARES (xxx) shares of the Company’s Common Stock on the terms and conditions hereinafter set forth.

D.            The option granted hereby is intended to qualify as an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), to the extent possible.

NOW, THEREFORE, the parties hereto agree as follows:

1.             GRANT OF OPTION.  The Company hereby grants to the Optionee as of the date hereof (the “Date of Grant”) an incentive stock option (the “Option”) to purchase, on the terms and conditions hereinafter set forth, NUMBER OF SHARES (xxx) shares of the Company’s Common Stock, no par value (the “Option Shares”), at a purchase price of $xx.xx per share.

2.             VESTING.  The Option shall vest and become exercisable as follows:

xxx shares on or after DATE

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provided, however, that no portion of the Option may be exercised by the Optionee to the extent that such exercise would cause an ownership change to occur pursuant to Section 382 of the Code.  Section 382 of the Code provides, among other things, that utilization of net operating losses will be restricted if there is a change in ownership of the loss corporation.  Changes in ownership are determined by reference to 5% shareholders.

3.             EXPIRATION OF OPTION AND CERTAIN LIMITATIONS ON RIGHT TO EXERCISE.

(a)           The Option shall expire on the tenth anniversary of the Date of Grant (the “Expiration Date”), except that (i) if the Optionee ceases, on or before the Expiration Date, for any reason other than death or permanent disability, to be employed by the Company or a subsidiary of the Company, the Option shall expire as provided in Section 6 below, and (ii) if the Optionee ceases, on or before the Expiration Date, to be employed by the Company or a subsidiary of the Company, by reason of death or permanent disability, the Option shall expire as provided in Section 7 below.  The term “Employee” as used in this Option means an officer or other employee of the Company or any subsidiary (including an officer who is also a director of the Company or any subsid­iary).

(b)           The Option may be exercised in whole or in part from time to time on or after December 30, 2004 until the Expiration Date (subject to the provisions hereof), except that not less than one hundred (100) shares may be purchased at any time unless the number of shares then purchasable hereunder shall be less than one hundred.

(c)           Except as provided in Sections 6 and 7 below, none of the Option Shares may be purchased hereunder unless the Optionee, at the time he exercises the Option, is employed by the Company or a subsidiary of the Company, since the date hereof.  A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for any purpose of this Option.

4              METHOD OF EXERCISE OF OPTION.  The Option may be exercised only by delivery to the Company of a written notice of exercise specifying the number of Option Shares which the Optionee then elects to purchase, accompanied by payment in full of the aggregate exercise price for such shares (the “Exercise Price”), in cash or by check payable to the Company, or in shares of the Company’s Common Stock, represented by a certificate duly endorsed, transferring to the Company good and valid title to such shares, such shares to be valued on the basis of the aggregate Fair Market Value (as defined in the 1996 Plan) thereof on the date of such exercise.

5              NON-TRANSFERABILITY OF OPTION.  The Option shall not be transferable by the Optionee otherwise than by will or the laws of descent and distribution, and it shall be exercisable, during the lifetime of the Optionee only by him or by his guardian or legal representative regardless of any community property interest therein of the spouse of the Optionee or such spouse’s successors in interest.

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6.             TERMINATION OF EMPLOYMENT.

(a)            If the Optionee ceases to be employed by the Company or a subsidiary of the Company for any reason other than death or permanent disability, the Option shall expire three (3) months after the date the Optionee ceases to be so employed, unless by its terms it expires sooner.  The Option may be exercised by the Optionee within such three month period to the extent it was exercisable on the date of such cessation of employment.

(b)            The Option confers no right upon the Optionee with respect to the continuation of his employment with the Company or any of its subsidiaries, and shall not interfere with the right of the Company or a subsidiary, or of the Optionee, to terminate his employ­ment at any time.

7.             DEATH OR PERMANENT DISABILITY OF OPTIONEE.  If the Optionee ceases to be employed by the Company or a subsidiary of the Company by reason of death or permanent disability, the Option shall expire one (1) year after the date of such death or disability, unless by its terms it expires sooner.  The Option may be exercised only by the heirs of the Optionee within such one year period to the extent it was exercisable on the date of such death or disability.

8.             ADJUSTMENTS UPON THE OCCURRENCE OF CERTAIN EVENTS.

(a)           If the outstanding shares of the Company’s Common Stock are increased, decreased, or exchanged for or converted into cash, property or a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, merger, consolidation, restructuring, stock dividend, stock split, reverse stock split or other similar transaction, or if substantially all of the property and assets of the Company are sold, then, unless the terms of such transaction provide otherwise, an appropriate and proportionate adjustment shall be made in the Option Shares pursuant to which the Options relate.  Any such adjustment in the outstanding Options shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Options but with a corresponding adjustment in the price for each Option Share.

(b)           No adjustment provided for in this Section 8 shall require the Company to sell a fractional share under the Options.

9.             DELIVERY OF STOCK CERTIFICATES.  Upon the exercise of all or a portion of the Option, the Company, as promptly as practicable, shall mail or deliver to the Optionee a stock certificate or certificates representing the shares then purchased, and will pay all stamp taxes payable in connection therewith.  The issuance of such shares and delivery of the certificate or certificates therefor shall, however, be subject to any delay necessary to complete (a) the listing of such shares on any stock exchange upon which shares of the same class are then listed or quoted on the Nasdaq, (b) such registration or other qualification of such shares under any state or federal law, rule, or regulation as the Company may determine to be necessary or advisable, and (c) the making of provision for the payment or withholding of any taxes required to be withheld pursuant to any applicable law, in respect of the exercise of the Option or the receipt of such shares.

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10.           NOTICES, ETC.

(a)            Any notice hereunder by the Optionee shall be given to the Company in writing and such notice and any payment by the Optionee hereunder shall be deemed duly given or made only upon receipt thereof at the Company’s corporate offices at 1840 Century Park East, Los Angeles, California 90067, or at such other address as the Company may designate by notice to the Optionee.

(b)            Any notice or other communication to the Optionee shall be in writing and any such communication and any delivery to the Optionee hereunder shall be deemed duly given or made if mailed or delivered to the Optionee at such address as the Optionee shall have on file with the Company or in care of the Company at the address of its corporate offices indicated above.

11.           WAIVER.  The waiver by the Company of any provision of the Option shall not operate as or be construed to be a waiver of the same pro­vision or any other provision hereof at any subsequent time or for any other purpose.

12.           IRREVOCABILITY.  The Option shall be irrevocable until it expires as herein provided.

13.           EFFECTIVE DATE.  The Option shall be deemed granted and effec­tive on the Date of Grant.

14.           INTERPRETATION AND CONSTRUCTION.  The interpretation and construction of the Option by the Committee shall be final, binding and conclu­sive.  The section headings in this Agreement are for convenience of reference only and shall not be deemed part of, or germane to the interpretation or construction of, this Agreement.

NATIONAL MERCANTILE BANCORP
By:
	Scott A. Montgomery
	President & CEO
	Optionee

By his or her signature below, the spouse of the Optionee agrees to be bound by all of the terms and conditions of the foregoing Agreement.

Spouse of Optionee

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EX-10.11

Exhibit 10.11

OFFICE LEASE

BETWEEN

METROPOLITAN LIFE INSURANCE COMPANY (LANDLORD)

AND

SOUTH BAY BANK (TENANT)

SOUTH COAST CORPORATE CENTER

Costa Mesa, California

TABLE OF CONTENTS

ARTICLE ONE - BASIC LEASE PROVISIONS
1.01	BASIC LEASE PROVISIONS
1.02	ENUMERATION OF EXHIBITS
1.03	DEFINITIONS
ARTICLE TWO - PREMISES, TERM, FAILURE TO GIVE POSSESSION 6
2.01	LEASE OF PREMISES
2.02	TERM
2.03	FAILURE TO GIVE POSSESSION
2.04	AREA OF PREMISES
2.05	CONDITION OF PREMISES
2.06	TEMPORARY SPACE
2.07	ATM LICENSE
ARTICLE THREE - RENT
ARTICLE FOUR - RENT ADJUSTMENTS AND PAYMENTS
4.01	RENT ADJUSTMENTS
4.02	STATEMENT OF LANDLORD
4.03	BOOKS AND RECORDS
4.04	PARTIAL OCCUPANCY
4.05	TENANT OR LEASE SPECIFIC TAXES
ARTICLE FIVE - SECURITY DEPOSIT
ARTICLE SIX - SERVICES
6.01	LANDLORD’S GENERAL SERVICES
6.02	TELEPHONE SERVICES
6.03	DELAYS IN FURNISHING SERVICES
6.04	CHOICE OF SERVICE PROVIDER
ARTICLE SEVEN - POSSESSION, USE AND CONDITION OF PREMISES
7.01	POSSESSION AND USE OF PREMISES
7.02	LANDLORD ACCESS TO PREMISES; APPROVALS
7.03	QUIET ENJOYMENT
ARTICLE EIGHT - MAINTENANCE
8.01	LANDLORD’S MAINTENANCE
8.02	TENANT MAINTENANCE
ARTICLE NINE - ALTERATIONS AND IMPROVEMENTS
9.01	TENANT ALTERATIONS
9.02	LIENS
ARTICLE TEN - ASSIGNMENT AND SUBLETTING
10.01	ASSIGNMENT AND SUBLETTING
10.02	RECAPTURE
10.03	EXCESS RENT
10.04	TENANT LIABILITY
10.05	ASSUMPTION AND ATTORNMENT
ARTICLE ELEVEN - DEFAULT AND REMEDIES
11.01	EVENTS OF DEFAULT
11.02	LANDLORD’S REMEDIES
11.03	ATTORNEY’S FEES
11.04	BANKRUPTCY
11.05	LANDLORD’S DEFAULT
ARTICLE TWELVE - SURRENDER OF PREMISES
12.01	IN GENERAL
12.02	LANDLORD’S RIGHTS
ARTICLE THIRTEEN - HOLDING OVER

ARTICLE FOURTEEN - DAMAGE BY FIRE OR OTHER CASUALTY
14.01	SUBSTANTIAL UNTENANTABILITY
14.02	INSUBSTANTIAL UNTENANTABILITY
14.03	RENT ABATEMENT
14.04	WAIVER OF STATUTORY REMEDIES
ARTICLE FIFTEEN - EMINENT DOMAIN
15.01	TAKING OF WHOLE OR SUBSTANTIAL PART
15.02	TAKING OF PART
15.03	COMPENSATION
ARTICLE SIXTEEN - INSURANCE
16.01	TENANT’S INSURANCE
16.02	FORM OF POLICIES
16.03	LANDLORD’S INSURANCE
16.04	WAIVER OF SUBROGATION
16.05	NOTICE OF CASUALTY
ARTICLE SEVENTEEN - WAIVER OF CLAIMS AND INDEMNITY
17.01	WAIVER OF CLAIMS
17.02	INDEMNITY BY TENANT
17.03	WAIVER OF CONSEQUENTIAL DAMAGES
ARTICLE EIGHTEEN - RULES AND REGULATIONS
18.01	RULES
18.02	ENFORCEMENT
ARTICLE NINETEEN - LANDLORD’S RESERVED RIGHTS
ARTICLE TWENTY - ESTOPPEL CERTIFICATE
20.01	IN GENERAL
20.02	ENFORCEMENT
ARTICLE TWENTY-ONE - INTENTIONALLY OMITTED
ARTICLE TWENTY-TWO - REAL ESTATE BROKERS
ARTICLE TWENTY-THREE - MORTGAGEE PROTECTION
23.01	SUBORDINATION AND ATTORNMENT
23.02	MORTGAGEE PROTECTION
ARTICLE TWENTY-FOUR - NOTICES
ARTICLE TWENTY-FIVE - PARKING
ARTICLE TWENTY-SIX - MISCELLANEOUS
26.01	LATE CHARGES
26.02	NO JURY TRIAL; VENUE; JURISDICTION
26.03	INTENTIONALLY OMITTED
26.04	OPTION
26.05	TENANT AUTHORITY
26.06	ENTIRE AGREEMENT
26.07	MODIFICATION OF LEASE FOR BENEFIT OF MORTGAGEE
26.08	EXCULPATION
26.09	ACCORD AND SATISFACTION
26.10	LANDLORD’S OBLIGATIONS ON SALE OF BUILDING
26.11	BINDING EFFECT
26.12	CAPTIONS
26.13	TIME; APPLICABLE LAW
26.14	ABANDONMENT
26.15	LANDLORD’S RIGHT TO PERFORM TENANT’S DUTIES
26.16	SECURITY SYSTEM
26.17	NO LIGHT, AIR OR VIEW EASEMENTS
26.18	RECORDATION
26.19	OPTION TO EXTEND
26.20	SIGNAGE
26.21	SURVIVAL

OFFICE LEASE

ARTICLE ONE

BASIC LEASE PROVISIONS

1.01BASIC LEASE PROVISIONS - In the event of any conflict between these Basic Lease Provisions and any other Lease provision, such other Lease provision shall control.

(1)	BUILDING AND ADDRESS:
	3070 Bristol Street
	Costa Mesa, California 92626
(2)	LANDLORD AND ADDRESS:
	Metropolitan Life Insurance Company,
	a New York corporation
	Notices to Landlord shall be addressed:
			Metropolitan Life Insurance Company
			c/o South Coast Corporate Center Property Manager
			3070 Bristol Street, Suite 440
			Costa Mesa, CA 92626
			with copies to the following:
				Metropolitan Life Insurance Company
				333 South Hope Street, Suite 2950
				Los Angeles, CA 90071
				Attention: Equity Investments Management
				and
				Metropolitan Life Insurance Company
				400 South El Camino Real, 8th Floor
				San Mateo, CA 94402
				Attention: Associate General Counsel
(3)	TENANT AND CURRENT ADDRESS:
	(a)	Name:   South Bay Bank
	(b)	a National Association
	(c)	Federal Tax Identification Number:
		Tenant shall promptly notify Landlord of any change in the foregoing items.
	Notices to Tenant shall be addressed:
(4)	DATE OF LEASE: as of September 19, 2003
(5)	LEASE TERM: sixty-three (63) months
(6)	PROJECTED COMMENCEMENT DATE: December 1, 2003
(7)	PROJECTED EXPIRATION DATE: February 28, 2009
(8)	MONTHLY BASE RENT:

Months	Monthly		Monthly Rate/SF of Rentable Area
01 to 03		-0-		-0-*
04 to 15	$	2,876.75	$	1.85
16 to 27	$	2,954.50	$	1.90
28 to 39	$	3,032.25	$	1.95
40 to 51	$	3,110.00	$	2.00
52 to 63	$	3,187.75	$	2.05

(9)		BASE BUILDING OPERATING EXPENSES:  The amount of Building Operating Expenses for the 2004 calendar year.
(10)	RENTABLE AREA OF THE BUILDING:  123,420 square feet
(11)	RENTABLE AREA OF THE PREMISES:  1,555 square feet
(12)	RENTABLE AREA OF THE PROJECT:   362,139 square feet
(13)	USABLE AREA OF THE PREMISES:    1,378 square feet
(14)	SECURITY DEPOSIT:  three thousand one hundred eighty-seven and 75/100 dollars ($3,187.75)
(15)	SUITE NUMBER OF PREMISES:  160
(16)	TENANT’S SHARE:  1.2599%
(17)	BUILDING SHARE:  34.0%
(18)	TENANT’S USE OF PREMISES:  General office use.
(19)	PARKING SPACES:
	Starting on the Commencement Date and continuing during the Term, Tenant shall have the use of parking stalls of the number and type described below, for which the monthly charge shall be the prevailing rates as described in Article 25, which as of the date of this Lease are agreed to be the amounts set forth below, and it is understood and agreed such rates are subject to increase from time to time as provided in Article 25.
	6   unassigned single vehicle stalls (parking a total of  6 vehicles), initially at $30.00/stall/month for months 1-36, $40.00/stall/month for months 37-60 0   assigned tandem stalls (parking a total of  0 vehicles), initially at $65.00/stall/month for months 1-36, $75.00/stall/month for months 37-60
(20)	BROKERS:
	Landlord’s Broker:     Cushman & Wakefield
	Tenant’s Broker:     Voit Commercial Brokerage

1.02     ENUMERATION OF EXHIBITS

The Exhibits and Rider(s) set forth below and attached to this Lease are incorporated in this Lease by this reference:

EXHIBIT A  Plan of Premises

EXHIBIT B  Workletter Agreement

EXHIBIT C  Current Janitorial Specifications

EXHIBIT D  Rules and Regulations

EXHIBIT E  Project

EXHIBIT F  Current Parking Rules

EXHIBIT G  Rentable Area & Usable Area

RIDER 1     Commencement Date Agreement

1.03     DEFINITIONS

For purposes hereof, the following terms shall have the following meanings:

ADJUSTMENT YEAR:  The applicable calendar year or any portion thereof after the year specified in the definition of Base Building Operating Expenses for which a Rent Adjustment computation is being made.

AFFILIATE:  Any Person (as defined below) which is currently owned or controlled by, owns or controls, or is under common ownership or control with Tenant.  For purposes of this definition, the word “control,” as used above means, with respect to a Person that is a corporation, the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the shares of the controlled corporation and, with respect to a Person that is not a corporation, the possession, directly or indirectly, of the power at all times to direct or cause the direction of the management and policies of the controlled Person.  The word Person means an individual, partnership, trust, corporation, firm or other entity.

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BASE BUILDING OPERATING EXPENSES:  The amount of Building Operating Expenses specified in Section 1.01(9).

BUILDING:  The office building located at the address specified in Section 1.01(1).

BUILDING OPERATING EXPENSES:  Building Operating Expenses means all Operating Expenses directly and separately identifiable to the Building and the Building’s Share of Project Operating Expenses.

BUILDING SHARE:  The percentage specified in Section 1.01(17), which represents the ratio of the Rentable Area of the Building to the Rentable Area of the Project.

COMMENCEMENT DATE:  The date specified in Section 1.01(6) as the Projected Commencement Date, unless changed by operation of Article Two.

COMMON AREAS:  All areas of the Project made available by Landlord from time to time for the general common use or benefit of the tenants of the Building or Project, and their employees and invitees, or the public, as such areas currently exist and as they may be changed from time to time.

DECORATION:  Tenant Alterations which do not require a building permit and which do not involve any of the structural elements of the Building, or any of the Building’s systems, including its electrical, mechanical, plumbing, security, heating, ventilating, air-conditioning, communication, and fire and life safety systems.

DEFAULT RATE:  The lesser of fifteen percent (15%) or the maximum rate permitted by Law.

ELECTRICITY USE EXPENSES:  The separate category of Operating Expenses defined in the definition of Operating Expenses below in this Section 1.03.

ENVIRONMENTAL LAWS:  All Laws governing the use, storage, disposal or generation of any Hazardous Material, including the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, and the Resource Conservation and Recovery Act of 1976, as amended.

EXPIRATION DATE:  The date specified in Section 1.01(7) unless changed by operation of Article Two.

FORCE MAJEURE:  Any accident, casualty, act of God, war or civil commotion, strike or labor troubles, or any cause whatsoever beyond the reasonable control of Landlord, including water shortages, energy shortages or governmental preemption in connection with an act of God, a national emergency, or by reason of Law, or by reason of the conditions of supply and demand which have been or are affected by act of God, war or other emergency.

GENERAL EXPENSES:  The separate category of Operating Expenses defined in the definition of Operating Expenses below in this Section 1.03.

HAZARDOUS MATERIAL:  Such substances, material and wastes which are or become regulated under any Environmental Law; or which are classified as hazardous or toxic under any Environmental Law; and explosives and firearms, radioactive material, asbestos, and polychlorinated biphenyls.

INDEMNITEES:  Collectively, Landlord, any Mortgagee or ground lessor of the Property, the property manager and the leasing manager for the Property and their respective directors, officers, agents and employees.

LAND:  The parcel(s) of real estate on which the Building and Project are located.

LANDLORD WORK:  The construction or installation of improvements to the Premises, to be furnished by Landlord, specifically described in the Workletter or other Exhibits attached hereto.

LAWS OR LAW:  All laws, ordinances, rules, regulations, other requirements, orders, rulings or decisions adopted or made by any governmental body, agency, department or judicial authority having jurisdiction over the Property, the Premises or Tenant’s activities at the Premises and any covenants, conditions or restrictions of record which affect the Property.

LEASE:  This instrument and all exhibits and riders attached hereto, as may be amended from time to time.

LEASE YEAR:  The twelve month period beginning on the first day of the first month following the Commencement Date (unless the Commencement Date is the first day of a calendar month in which case beginning on the Commencement Date), and each subsequent twelve month, or shorter, period until the Expiration Date.

MONTHLY BASE RENT:  The monthly rent specified in Section 1.01(8), subject to the provisions of Section 2.04.

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MORTGAGEE:  Any holder of a mortgage, deed of trust or other security instrument encumbering the Property.

NATIONAL HOLIDAYS:  New Year’s Day, President’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day and other holidays recognized by the Landlord and the janitorial and other unions servicing the Building in accordance with their contracts.

OPERATING EXPENSES:  All Taxes, costs, expenses and disbursements of every kind and nature which Landlord shall pay or become obligated to pay in connection with the ownership, management, operation, maintenance, replacement and repair of the Property (including the amortized portion of any capital expenditure or improvement, together with interest thereon, and the cost of changing utility service providers). Operating Expenses shall not include, (i) costs of alterations of the premises of tenants of the Project, (ii) costs of capital improvements to the Project (except for amortized portion of capital improvements installed for the purpose of reducing or controlling Operating Expenses or complying with applicable Laws enacted after the Commencement Date), (iii) depreciation charges, (iv) interest and principal payments on loans (except for loans for capital expenditures or improvements which Landlord is allowed to include in Operating Expenses as provided above), (v) ground rental payments, (vi) real estate brokerage and leasing commissions, (vii) advertising and marketing expenses, (viii) costs of Landlord reimbursed by insurance proceeds, (ix) expenses incurred in negotiating leases of other tenants in the Project or enforcing lease obligations of other tenants in the Project and (x) Landlord’s or Landlord’s property manager’s corporate general overhead or corporate general administrative expenses.  If any Operating Expense, though paid in one year, relates to more than one calendar year, at the option of Landlord such expense may be proportionately allocated among such related calendar years. Operating Expenses shall for all purposes be calculated and payable in two separate categories as follows:  (a) charges for electricity consumption (“Electricity Use Expenses”) and all other Operating Expenses (“General Expenses”); (b) all references to Operating Expenses (including, for example, Building Operating Expenses, Project Operating Expenses, Base Building Operating Expenses and Tenant’s Share of Building Operating Expenses) shall mean Electricity Use Expenses and General Expenses as separate categories, and an increase in one such category shall not be offset by a decrease in another category; and (c) no expense shall be double counted.

PREMISES:  The space located in the Building at the Suite Number listed in Section 1.01(15) and depicted on Exhibit A attached hereto.

PROJECT:  The Project consists of (a) three buildings (including the Building) whose present street addresses are 3070, 3080 and 3090 Bristol Street, Costa Mesa, California; (b) associated parking facilities, landscaping and other improvements; (c) the Land on which the foregoing are located and any associated interests in real property; and (d) the personal property, fixtures, machinery, equipment, systems and apparatus located in or used in conjunction with any of the foregoing.  A diagram of certain elements of the Project is set forth on Exhibit E hereto.

PROJECT OPERATING EXPENSES:  Project Operating Expenses means all Operating Expenses except those directly and separately identifiable to the Building or to other Project office buildings.

PROPERTY:  The Project and all elements thereof.

REAL PROPERTY:  The Property excluding any personal property.

RENT:  Collectively, Monthly Base Rent, Rent Adjustments and Rent Adjustment Deposits, and all other charges, payments, late fees or other amounts required to be paid by Tenant under this Lease.

RENT ADJUSTMENT:  Any amounts owed by Tenant for payment of Building Operating Expenses.  The Rent Adjustments shall be determined and paid as provided in Article Four.

RENT ADJUSTMENT DEPOSIT:  An amount equal to Landlord’s estimate of the Rent Adjustment attributable to each month of the applicable Adjustment Year.  On or before the beginning of each Adjustment Year or with Landlord’s Statement (defined in Article Four), Landlord may estimate and notify Tenant in writing of its estimate of the excess, if any, of Building Operating Expenses over Base Building Operating Expenses.  Prior to the first determination by Landlord of the amount of Base Building Operating Expenses, Landlord may estimate that amount in the foregoing calculation.  The last estimate by Landlord shall remain in effect as the applicable Rent Adjustment Deposit unless and until Landlord notifies Tenant in writing of a change.

RENTABLE AREA OF THE BUILDING:  The amount of square footage set forth in Section 1.01(10), which represents the sum of the rentable area of all space intended for occupancy in the Building.  Such square footage has been determined by Landlord in accordance with the provisions of Exhibit G hereto and is subject to the provisions of Section 2.04.

RENTABLE AREA OF THE PREMISES:  The amount of square footage set forth in Section 1.01(11), subject to the provisions of Section 2.04.

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RENTABLE AREA OF THE PROJECT:  The amount of square footage set forth in Section 1.01(12), which represents the sum of the rentable area of all space intended for occupancy in the Project.  Such square footage has been determined by Landlord in accordance with the provisions of Exhibit G hereto and is subject to the provisions of Section 2.04.

SECURITY DEPOSIT:  The funds specified in Section 1.01(14), if any, deposited by Tenant with Landlord as security for Tenant’s performance of its obligations under this Lease.

STANDARD OPERATING HOURS:  Monday through Friday from 8 A.M. to 6 P.M. and on Saturdays from 8 A.M. to 1 P.M., excluding National Holidays.

SUBSTANTIALLY COMPLETE:  The completion of the Landlord Work or Tenant Work, as the case may be, except for minor insubstantial details of construction, decoration or mechanical adjustments which remain to be done.

TAXES:  All federal, state and local governmental taxes, assessments and charges  of every kind or nature, whether general, special, ordinary or extraordinary, which Landlord shall pay or become obligated to pay because of or in connection with the ownership, leasing, management, control or operation of the Property or any of its components (including any personal property used in connection therewith), which may also include any rental or similar taxes levied in lieu of or in addition to general real and/or personal property taxes.  For purposes hereof, Taxes for any year shall be Taxes which are assessed for any period of such year, whether or not such Taxes are billed and payable in a subsequent calendar year.  There shall be included in Taxes for any year the amount of all fees, costs and expenses (including reasonable attorneys’ fees) paid by Landlord during such year in seeking or obtaining any refund or reduction of Taxes.  Taxes for any year shall be reduced by the net amount of any tax refund received by Landlord attributable to such year.  If a special assessment payable in installments is levied against any part of the Property, Taxes for any year shall include only the installment of such assessment and any interest payable or paid during such year.  Taxes shall not include any federal or state inheritance, general income, gift or estate taxes, except that if a change occurs in the method of taxation resulting in whole or in part in the substitution of any such taxes, or any other assessment, for any Taxes as above defined, such substituted taxes or assessments shall be included in the Taxes.

TENANT ADDITIONS:  Collectively, Landlord Work, Tenant Work and Tenant Alterations.

TENANT ALTERATIONS:  Any alterations, improvements, additions, installations or construction in or to the Premises or any Real Property systems serving the Premises (excluding Landlord Work or Tenant Work); and any supplementary air-conditioning systems installed by Landlord or by Tenant at Landlord’s request pursuant to Section 6.01(b).

TENANT DELAY:  Any event or occurrence which delays the Substantial Completion of the Landlord Work which is caused by or is described as follows:

(i)  special work, changes, alterations or additions requested or made by Tenant in the design or finish in any part of the Premises after approval of the plans and specifications (as described in the Workletter);

(ii)  Tenant’s delay in submitting plans, supplying information, approving plans, specifications or estimates, giving authorizations or otherwise;

(iii)  failure to approve and pay for such Tenant Work as Landlord undertakes to complete at Tenant’s expense;

(iv)  the performance or completion by Tenant or any person engaged by Tenant of any work in or about the Premises; or

(v)  failure to perform or comply with any obligation or condition binding upon Tenant pursuant to the Workletter, including the failure to approve and pay for such Landlord Work or other items if and to the extent the Workletter provides they are to be approved or paid by Tenant.

TENANT WORK:  All work installed or furnished to the Premises by Tenant pursuant to the Workletter.

TENANT’S SHARE:  The percentage specified in Section 1.01(16) which represents the ratio of the Rentable Area of the Premises to the Rentable Area of the Building, subject to the provisions of Section 2.04.

USABLE AREA OF THE PREMISES:  The amount of square footage set forth in Section 1.01(13), subject to the provisions of Section 2.04.

TERM:  The term of this Lease commencing on the Commencement Date and expiring on the Expiration Date.

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TERMINATION DATE:  The Expiration Date or such earlier date as this Lease terminates or Tenant’s right to possession of the Premises terminates.

WORKLETTER:  The Agreement regarding the manner of completion of Landlord Work and Tenant Work set forth on Exhibit B attached hereto.

ARTICLE TWO

PREMISES, TERM, FAILURE TO GIVE POSSESSION

2.01LEASE OF PREMISES

Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises for the Term and upon the terms, covenants and conditions provided in this Lease.  In the event Landlord delivers possession of the Premises to Tenant prior to the Commencement Date, Tenant shall be subject to all of the terms, covenants and conditions of this Lease (except with respect to the payment of Rent) as of the date of such possession.

2.02TERM

                (a)           The Commencement Date shall be the date determined as follows:

                (1)           If the Landlord Work is Substantially Complete on or before the Projected Commencement Date then on the date which is the earlier to occur of

                                (i)  the Projected Commencement Date, or

                                (ii)  the date Tenant first occupies all or part of the Premises for the conduct of business; or

                (2)           If the Landlord Work is not Substantially Complete by the Projected Commencement Date, then on the date on which the Landlord Work is Substantially Complete.

                (b)           Within thirty (30) days following the occurrence of the Commencement Date, Landlord and Tenant shall enter into an agreement (which is attached hereto as Rider 1) confirming the Commencement Date and the Expiration Date.  If Tenant fails to enter into such agreement, then the Commencement Date and the Expiration Date shall be the dates designated by Landlord in such agreement.

2.03FAILURE TO GIVE POSSESSION

If the Landlord shall be unable to give possession of the Premises on the Projected Commencement Date by reason of the following: (i) the Building has not been sufficiently completed to make the Premises ready for occupancy, (ii) the Landlord Work is not Substantially Complete, (iii) the holding over or retention of possession of any tenant, tenants or occupants, or (iv) for any other reason, then Landlord shall not be subject to any liability for the failure to give possession on said date.  Under such circumstances the Rent reserved and covenanted to be paid herein shall not commence until the Premises are made available to Tenant by Landlord, and no such failure to give possession on the Projected Commencement Date shall affect the validity of this Lease or the obligations of the Tenant hereunder.  At the option of Landlord to be exercised within thirty (30) days of the delayed delivery of possession to Tenant, the Lease shall be amended so that the Term shall be extended by the period of time possession is delayed.  The said Premises shall be deemed to be ready for Tenant’s occupancy and Substantially Complete in the event Landlord’s Work is Substantially Complete in fact, or if the delay in the availability of the Premises for occupancy shall be due to any Tenant Delay and/or default on the part of Tenant and/or its subtenant or subtenants.  In the event of any dispute as to whether the Landlord Work is Substantially Complete, the decision of Landlord’s architect shall be final and binding on the parties.

2.04AREA OF PREMISES

Landlord and Tenant agree that for all purposes of this Lease the Rentable Area of the Premises, the Usable Area of the Premises, the Rentable Area of the Building and the Rentable Area of the Project as set forth in Article One are controlling, and are not subject to revision after the date of this Lease except as otherwise provided herein.  In the event that the demising walls of the Premises are to be built or modified after the date of execution of the Lease (either upon Tenant’s initial occupancy or any subsequent change in the Premises pursuant to other provisions of this Lease), then when such demising walls are substantially complete, Landlord shall have the right to verify or correct such square footage and accordingly adjust other amounts hereunder based upon such square footage in accordance with the provisions of Exhibit G hereto.

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2.05CONDITION OF PREMISES

Tenant shall notify Landlord in writing within thirty (30) days after the later of Substantial Completion of the Landlord Work or when Tenant takes possession of the Premises of any defects in the Premises or in the materials or workmanship furnished by Landlord in completing the Landlord Work.  Except for defects stated in such notice, Tenant shall be conclusively deemed to have accepted the Premises “AS IS” in the condition existing on the date Tenant first takes possession, and to have waived all claims relating to the condition of the Premises.  Landlord shall proceed diligently to correct the defects stated in such notice unless Landlord disputes the existence of any such defects.  In the event of any dispute as to the existence of any such defects, the decision of Landlord’s architect shall be final and binding on the parties.  No agreement of Landlord to alter, remodel, decorate, clean or improve the Premises or the Real Property and no representation regarding the condition of the Premises or the Real Property has been made by or on behalf of Landlord to Tenant, except as may be specifically stated in this Lease or in the Workletter.

2.06TEMPORARY SPACE

                a.             Notwithstanding anything to the contrary contained in this Lease and as an accommodation to Tenant, pending completion of the Landlord Work in the Premises, Landlord shall provide Tenant with certain temporary space known as Suite 660 (the “Temporary Space”).  However, Landlord hereby reserves the right to substitute temporary comparable space in the Project during the term of the temporary use.

                b.             Within thirty (30) days after execution of this Lease, Tenant shall be entitled to possession upon mutual execution and delivery of this Lease.  Tenant shall occupy and use the Temporary Space only for the uses specified in Section 1.01(18) to conduct Tenant’s business. Tenant shall surrender possession of the Temporary Space no later than three (3) days after the Commencement Date of this Lease, unless possession is terminated earlier as provided for herein. Upon any termination or expiration of this Lease, Tenant shall remove all its personal property from the Temporary Space and shall return to Landlord all keys to the Temporary Space and shall vacate and surrender the Temporary Space in broom clean condition, reasonable wear and tear excepted.

                c.             Tenant understands, acknowledges and agrees that the Temporary Space shall be delivered “AS IS” with no obligation of Landlord to do any work therein or supply any materials in connection therewith.

                d.             Upon occupancy of the Temporary Space, Tenant shall be obligated to pay to Landlord Rent in the amount of One Thousand and No/100 Dollars ($1,000.00) per month in connection with the Temporary Space, plus the parking charges set forth in this Lease, which payments shall be prorated for any partial months.

e.             Tenant shall maintain at its expense, in an amount equal to full replacement cost, fire and extended coverage insurance on all of its personal property, including removable trade fixtures, located in the Temporary Space.  In addition, Tenant shall maintain a policy of comprehensive general liability insurance with respect to Tenant’s activities in the Temporary Space, which shall provide minimum protection of not less than One Million and No/100 dollars ($1,000,000.00) combined single limit coverage of bodily injury, property damage, or combination thereof.  Tenant shall provide Landlord with current certificates of insurance evidencing Tenant’s compliance with this requirement.

2.07ATM LICENSE

Landlord shall grant a license to Tenant, without charge, to establish and install one (1) automatic teller machine and night depository (collectively, the “ATM”) as set forth in Exhibit H attached hereto and made a part hereof which ATM will dispense cash and perform such other transactions as are permitted by applicable law.  Tenant shall be solely responsible for all service, repairs and maintenance to the ATM and all costs associated therewith and agrees to manage, operate and maintain the ATM.

ARTICLE THREE

RENT

Tenant agrees to pay to Landlord at the first office specified in Section 1.01(2), or to such other persons, or at such other places designated by Landlord, without any prior demand therefor in immediately available funds and without any deduction or offset whatsoever, Rent, including Monthly Base Rent and Rent Adjustments in accordance with Article Four, during the Term. Monthly Base Rent shall be paid monthly in advance on the first day of each month of the Term, except that the first installment of Monthly Base Rent shall be paid by Tenant to Landlord concurrently with the execution of this Lease.  Monthly Base Rent shall be prorated for partial months within the Term.  Unpaid Rent shall bear interest at the Default Rate from the date due until paid.  Tenant’s covenant to pay Rent shall be independent of every other covenant in this Lease.

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ARTICLE FOUR

RENT ADJUSTMENTS AND PAYMENTS

4.01RENT ADJUSTMENTS

Tenant shall pay to Landlord Rent Adjustments with respect to each Adjustment Year as follows:

(i)            The Rent Adjustment Deposit representing Tenant’s Share of Building Operating Expenses for the applicable Adjustment Year in excess of Base Building Operating Expenses, monthly during the Term with the payment of Monthly Base Rent; and

(ii)           Any Rent Adjustments due in excess of the Rent Adjustment Deposits in accordance with Section 4.02.  Rent Adjustments due from Tenant to Landlord for any Adjustment Year shall be Tenant’s Share of Building Operating Expenses for such year in excess of Base Building Operating Expenses.

4.02STATEMENT OF LANDLORD

Within one hundred and twenty (120) days after the expiration of the year specified in the definition of Base Building Operating Expenses and each Adjustment Year thereafter, Landlord will furnish Tenant a statement (“Landlord’s Statement”) showing the following:

(i)  Base Building Operating Expenses and thereafter Building Operating Expenses for the last Adjustment Year;

(ii)  The amount of Rent Adjustments due Landlord for the last Adjustment Year, less credit for Rent Adjustment Deposits paid, if any; and

(iii)  Any change in the Rent Adjustment Deposit due monthly in the current Adjustment Year, including the amount or revised amount due for months preceding any such change pursuant to Landlord’s Statement.

Tenant shall pay to Landlord within thirty (30) days after receipt of such statement any amounts for Rent Adjustments then due in accordance with Landlord’s Statement.  Any amounts due from Landlord to Tenant pursuant to this Section shall be credited to the Rent Adjustment Deposit next coming due, or refunded to Tenant if the Term has already expired provided Tenant is not in default hereunder.  No interest or penalties shall accrue on any amounts which Landlord is obligated to credit or refund to Tenant by reason of this Section 4.02.  Landlord’s failure to deliver Landlord’s Statement or to compute the amount of the Rent Adjustments shall not constitute a waiver by Landlord of its right to deliver such items nor constitute a waiver or release of Tenant’s obligations to pay such amounts.  The Rent Adjustment Deposit shall be credited against Rent Adjustments due for the applicable Adjustment Year.  During the last complete calendar year or during any partial calendar year in which the Lease terminates, Landlord may include in the Rent Adjustment Deposit its estimate of Rent Adjustments which may not be finally determined until after the termination of this Lease.  Tenant’s obligation to pay Rent Adjustments survives the expiration or termination of the Lease.  Notwithstanding the foregoing, in no event shall the sum of Monthly Base Rent and the Rent Adjustments be less than the Monthly Base Rent payable.

4.03BOOKS AND RECORDS

Landlord shall maintain books and records showing Building Operating Expenses in accordance with sound accounting and management practices, consistently applied.  The Tenant or its representative (which representative shall be a certified public accountant licensed to do business in the state in which the Property is located and whose primary business is certified public accounting) shall have the right, for a period of thirty (30) days following the date upon which Landlord’s Statement is delivered to Tenant, to examine the Landlord’s books and records with respect to the items in the foregoing statement of Building Operating Expenses during normal business hours, upon written notice, delivered at least three (3) business days in advance. If Tenant does not object in writing to Landlord’s Statement within sixty (60) days of Tenant’s receipt thereof, specifying the nature of the item in dispute and the reasons therefor, then Landlord’s Statement shall be considered final and accepted by Tenant.  Any amount due to the Landlord as shown on Landlord’s Statement, whether or not disputed by Tenant as provided herein shall be paid by Tenant when due as provided above, without prejudice to any such written exception.

4.04         PARTIAL OCCUPANCY

For purposes of determining Rent Adjustments, if the Building is not fully occupied during all or a portion of any year during the Term, Landlord shall make appropriate adjustments to the Operating Expenses for such year employing sound accounting and management principles consistently applied, to determine the amount of Operating Expenses that would have been paid or incurred by Landlord had the Building been 95% occupied, and the amount so determined shall be deemed to have been the amount includable in Operating Expenses for such year.  In the event that the Real Property is not fully assessed for all or a portion of any year during the Term, then Taxes shall be adjusted to an amount which would have been payable in such year if the Real Property had been fully assessed.  In the event any other tenant in the

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Building provides itself with a service of a type which Landlord would supply under the Lease without an additional or separate charge to Tenant, then Operating Expenses shall be deemed to include the cost Landlord would have incurred had Landlord provided such service to such other tenant.

4.05         TENANT OR LEASE SPECIFIC TAXES

In addition to Monthly Base Rent, Rent Adjustments, Rent Adjustment Deposits and other charges to be paid by Tenant, Tenant shall pay to Landlord, upon demand, any and all taxes payable by Landlord (other than federal or state inheritance, general income, gift or estate taxes) whether or not now customary or within the contemplation of the parties hereto:  (a) upon, allocable to, or measured by the Rent payable hereunder, including any gross receipts tax or excise tax levied by any governmental or taxing body with respect to the receipt of such rent; or (b) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (c) upon the measured value of Tenant’s personal property located in the Premises or in any storeroom or any other place in the Premises or the Property, or the areas used in connection with the operation of the Property, it being the intention of Landlord and Tenant that, to the extent possible, such personal property taxes shall be billed to and paid directly by Tenant; or (d) resulting from Landlord Work, Tenant Work or Tenant Alterations to the Premises, whether title thereto is in Landlord or Tenant; or (e) upon this transaction.  Taxes paid by Tenant pursuant to this Section 4.05 shall not be included in any computation of Taxes payable as part of Building Operating Expenses pursuant to Sections 4.01 and 4.02.

ARTICLE FIVE

SECURITY DEPOSIT

Tenant concurrently with the execution of this Lease shall pay to Landlord in immediately available funds the Security Deposit.  The Security Deposit may be applied by Landlord to cure, in whole or part, any default of Tenant under this Lease, and upon notice by Landlord of such application, Tenant shall replenish the Security Deposit in full by paying to Landlord within ten (10) days of demand the amount so applied.  Landlord’s application of the Security Deposit shall not constitute a waiver of Tenant’s default to the extent that the Security Deposit does not fully compensate Landlord for all losses, damages, costs and expenses incurred by Landlord in connection with such default and shall not prejudice any other rights or remedies available to Landlord under this Lease or by Law.  Landlord shall not pay any interest on the Security Deposit.  Landlord shall not be required to keep the Security Deposit separate from its general accounts.  The Security Deposit shall not be deemed an advance payment of Rent, nor a measure of damages for any default by Tenant under this Lease, nor shall it be a bar or defense of any action which Landlord may at any time commence against Tenant.  In the absence of evidence satisfactory to Landlord of an assignment of the right to receive the Security Deposit or the remaining balance thereof, Landlord may return the Security Deposit to the original Tenant, regardless of one or more assignments of this Lease.  Upon the transfer of Landlord’s interest under this Lease, Landlord’s obligation to Tenant with respect to the Security Deposit shall terminate upon transfer to the transferee of the Security Deposit, or any balance thereof.  If Tenant shall fully and faithfully comply with all the terms, provisions, covenants, and conditions of this Lease, the Security Deposit, or any balance thereof, shall be returned to Tenant within thirty (30) days after Landlord recovers possession of the Premises or such longer time as may be permissible under Law.  Tenant hereby waives any and all rights of Tenant under the provisions of Section 1950.7 of the California Civil Code or other Law regarding security deposits.

ARTICLE SIX

SERVICES

6.01LANDLORD’S GENERAL SERVICES

                (a)           So long as the Lease is in full force and effect, Landlord shall furnish or cause to be furnished to the Premises the utilities and services described below, subject to the conditions and in accordance with the standards set forth below:

                (1)           Landlord shall provide automatic elevator facilities 24 hours per day, seven (7) days per week.

                (2)           Landlord shall ventilate the Premises during Standard Operating Hours and shall furnish heat or air conditioning when in the judgment of Landlord it is required for the comfortable occupancy of the Premises during Standard Operating Hours, subject to any requirements or standards relating to, among other things, energy conservation, imposed or established by governmental agencies.  Upon request, Landlord shall make available at Tenant’s expense heat or air conditioning for use at all other times, provided that such request is made at least one hour before the end of the Standard Operating Hours preceding such service and provided further that the minimum use of such additional heat or air conditioning and the cost thereof shall be  determined by Landlord and confirmed in writing to Tenant as the same may change from time to time.

                (3)           Landlord shall furnish electric current to the Premises at all times.  Tenant’s use of electric current shall at no time exceed the capacity of the feeders to the Building or the risers or wiring installation therein.  Tenant shall not install or use or permit the installation or use of any

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computer or electronic data processing equipment in the Premises other than personal computers without the prior written consent of Landlord.

                (4)           Landlord shall furnish water for drinking, cleaning and lavatory purposes only in the Common Areas of the Building.

                (5)           Provided that the Premises are used exclusively as offices and are kept reasonably in order by Tenant, Landlord shall provide janitorial services to the Premises as specified on Exhibit C hereto, if any, as that Exhibit shall be modified by Landlord from time to time in its reasonable discretion; however, in no event materially less than such services then being provided in comparable office buildings in the Costa Mesa market.  If the Premises are not used exclusively as offices (provided Section 1.01(18) permits such use), Tenant or persons approved by Landlord shall keep the Premises clean and in order to the satisfaction of Landlord, but at Tenant’s sole expense. No persons other than Tenant and those persons approved by Landlord shall be permitted to enter the Premises for the purpose of keeping the Premises clean and in order.  Tenant shall pay to Landlord the cost of removal of any of Tenant’s refuse and rubbish, to the extent that such refuse and rubbish removed by Landlord exceeds the refuse and rubbish usually attendant upon the use of premises as offices.

                (6)           Landlord shall replace, as necessary, the light bulbs in the Building standard lighting fixtures installed by Landlord.  Tenant shall replace, as necessary, all bulbs and fluorescent tubes in non-Building standard lighting fixtures, if any, installed in the Premises.  If Tenant shall fail to make any such replacement within five (5) days after written notice from Landlord, Landlord may make such replacement and charge the cost of labor and materials involved therein to Tenant, as additional rent.

                (b)           In addition to any after-hours use of the Building’s heating, ventilation or air conditioning systems under Section 6.01(a)(2) above, Landlord may impose a reasonable charge upon Tenant for all utilities and services used by Tenant or at the Premises which involves (1) any substantial recurrent use of the Premises at any time other than Standard Operating Hours, (2) any use beyond that which Landlord is required to furnish under Section 6.01(a) above, (3) any special cooling or ventilating needs created in certain areas of the Premises by special telephone equipment, computers or other similar equipment or uses by Tenant, or (4) any use of electrical service in the Premises (including, without limitation, all lighting) in excess of seven (7) watts per square foot of Usable Area of the Premises per hour during Standard Operating Hours.  At any time and from time to time during the term of this Lease, Landlord may in its sole discretion install meters or other similar devices in the Premises or the Building for the purpose of measuring the electricity or other utilities supplied to the Premises.  If such meter or other device shows at any time that utilities have been supplied to the Premises for which Landlord may impose a charge as provided in this Section 6.01(b), then the cost of such meter or similar device and the cost of installation thereof shall be borne by Tenant and Tenant shall reimburse Landlord for such costs within ten (10) days of receipt of Landlord’s invoice thereof.

                (c)           Tenant agrees to cooperate fully with Landlord and to abide by all regulations and requirements which Landlord may prescribe for the use of the above-described utilities and services to be provided by Landlord.  Any failure to pay any excess costs as described above shall constitute a breach of the obligation to pay Rent under this Lease and shall entitle Landlord to the rights granted herein, at law or in equity as a result of such a breach.

                (d)           Notwithstanding anything to the contrary above, Landlord reserves the right from time to time to make reasonable modifications to the above standards for utilities and services.

6.02         TELEPHONE SERVICES

All telegraph, telephone, and communication connections which Tenant may desire shall be subject to Landlord’s prior written approval, in Landlord’s sole discretion, and the location of all wires and the work in connection therewith shall be performed by contractors approved by Landlord and shall be subject to the direction of Landlord, except that such approval is not required as to Tenant’s telephone equipment (including cabling) within the Premises and from the Premises in a route designated by Landlord to any telephone cabinet or panel provided (as existing or as installed as part of Landlord’s Work, if any) on Tenant’s floor for Tenant’s connection to the telephone cable serving the Building, so long as Tenant’s equipment does not require connections different than or additional to those to the telephone cabinet or panel provided.  Except to the extent of such cabling within the Premises or from the Premises to such telephone cabinet or panel, Landlord reserves the right to designate and control the entity or entities providing telephone or other communication cable installation, removal, repair and maintenance in the Building and to restrict and control access to telephone cabinets or panels.  In the event Landlord designates a particular vendor or vendors to provide such cable installation, removal, repair and maintenance for the Building, Tenant agrees to abide by and participate in such program.  Tenant shall be responsible for and shall pay all costs incurred in connection with the installation of telephone cables and communication wiring in the Premises, including any hook-up, access and maintenance fees related to the installation of such wires and cables in the Premises and the commencement of service therein, and the maintenance thereafter of such wire and cables; and there shall be included in Operating Expenses for the Building all installation, removal, hook-up or maintenance costs incurred by Landlord in connection

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with telephone cables and communication wiring serving the Building which are not allocable to any individual users of such service but are allocable to the Building generally.  If Tenant fails to maintain all telephone cables and communication wiring in the Premises and such failure affects or interferes with the operation or maintenance of any other telephone cables or communication wiring serving the Building, Landlord or any vendor hired by Landlord may enter into and upon the Premises forthwith and perform such repairs, restorations or alterations as Landlord deems necessary in order to eliminate any such interference (and Landlord may recover from Tenant all of Landlord’s costs in connection therewith).  No later than the Termination Date, Tenant agrees to remove all telephone cables and communication wiring installed by Tenant for and during Tenant’s occupancy, which Landlord shall request Tenant to remove.  Tenant agrees that neither Landlord nor any of its agents or employees shall be liable to Tenant, or any of Tenant’s employees, agents, customers or invitees or anyone claiming through, by or under Tenant, for any damages, injuries, losses, expenses, claims or causes of action because of any interruption, diminution, delay or discontinuance at any time for any reason in the furnishing of any telephone or other communication service to the Premises and the Building.

6.03DELAYS IN FURNISHING SERVICES

In the event of any failure to furnish or delay in furnishing the services, including any utilities, to be supplied by Landlord, Landlord shall use good faith efforts to have service promptly resumed.  Where the cause of any such failure, stoppage or interruption of such utilities or services is within the system or control of a utility company or public or quasi-public entity outside Landlord’s control, notification to such utility or entity of such failure, stoppage or interruption and request to remedy the same shall constitute “good faith efforts” by Landlord to have service promptly resumed.  Should any equipment or machinery furnished by Landlord break down or for any cause cease to function properly, Landlord shall use reasonable diligence to repair same promptly, but Tenant shall have no claim for abatement of Rent or damages on account of any interruption of service occasioned thereby or resulting therefrom.  Tenant agrees that Landlord shall not be in breach of this Lease nor be liable to Tenant for damages or otherwise, for any failure to furnish, or a delay in furnishing, or a change in the quantity or character of any service when such failure, delay or change is occasioned, in whole or in part, by repairs, improvements or mechanical breakdowns by the act or default of Tenant or other parties or by an event of Force Majeure.  No such failure, delay or change shall be deemed to be an eviction or disturbance of Tenant’s use and possession of the Premises, or relieve Tenant from paying Rent or from performing any other obligations of Tenant under this Lease, without any deduction or offset.  Failure to any extent to make available, or any slowdown, stoppage, or interruption of, the specified utility services resulting from any cause, including changes in service provider or Landlord’s compliance with any voluntary or similar governmental or business guidelines now or hereafter published or any requirements now or hereafter established by any governmental agency, board, or bureau having jurisdiction over the operation of the Property, shall not render Landlord liable in any respect for damages to either persons, property, or business, nor be construed as an eviction of Tenant or work an abatement of Rent, nor relieve Tenant of Tenant’s obligations for fulfillment of any covenant or agreement hereof.

6.04             CHOICE OF SERVICE PROVIDER

Tenant acknowledges that Landlord may, at Landlord’s sole option, to the extent permitted by applicable law, elect to change, from time to time, the company or companies which provide services (including electrical service, gas service, water, telephone and technical services) to the Building, the Premises and/or its occupants.  Notwithstanding anything to the contrary set forth in this Lease, Tenant acknowledges that Landlord has not and does not make any representations or warranties concerning the identity or identities of the company or companies which provide services to the Building and the Premises or its occupants and Tenant acknowledges that the choice of service providers and matters concerning the engagement and termination thereof shall be solely that of Landlord. The foregoing provision is not intended to modify, amend, change or otherwise derogate any provision of this Lease concerning the nature or type of service to be provided or any specific information concerning the amount thereof to be provided. Tenant agrees to cooperate with Landlord and each of its service providers in connection with any change in service or provider.

ARTICLE SEVEN

POSSESSION, USE AND CONDITION OF PREMISES

7.01POSSESSION AND USE OF PREMISES

                (a)           Tenant shall be entitled to possession of the Premises when the Landlord Work is Substantially Complete.  Tenant shall occupy and use the Premises only for the uses specified in Section 1.01(18) to conduct Tenant’s business.  Tenant shall not occupy or use the Premises (or permit the use or occupancy of the Premises) for any purpose or in any manner which: (1) is unlawful or in violation of any Law or Environmental Law; (2) may be dangerous to persons or property or which may increase the cost of, or invalidate, any policy of insurance carried on the Building or covering its operations; (3) is contrary to or prohibited by the terms and conditions of this Lease or the rules and regulations of the Building set forth in Article Eighteen; or (4) would tend to create or continue a nuisance.

                (b)           Tenant shall comply with all Environmental Laws pertaining to Tenant’s occupancy and use of the Premises and concerning the proper storage, handling and disposal of any Hazardous Material

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introduced to the Premises, the Building or the Property by Tenant or other occupants of the Premises, or their employees, servants, agents, contractors, customers or invitees. Landlord shall comply with all Environmental Laws applicable to the Property other than those to be complied with by Tenant pursuant to the preceding sentence.  Tenant shall not generate, store, handle or dispose of any Hazardous Material in, on, or about the Property without the prior written consent of Landlord, which may be withheld in Landlord’s sole discretion, except that such consent shall not be required to the extent of Hazardous Material packaged and contained in office products for consumer use in general business offices in quantities for ordinary day-to-day use provided such use does not give rise to, or pose a risk of, exposure to or release of Hazardous Material.  In the event that Tenant is notified of any investigation or violation of any Environmental Law arising from Tenant’s activities at the Premises, Tenant shall immediately deliver to Landlord a copy of such notice.  In such event or in the event Landlord reasonably believes that a violation of Environmental Law exists, Landlord may conduct such tests and studies relating to compliance by Tenant with Environmental Laws or the alleged presence of Hazardous Material upon the Premises as Landlord deems desirable, all of which shall be completed at Tenant’s expense.  Landlord’s inspection and testing rights are for Landlord’s own protection only, and Landlord has not, and shall not be deemed to have assumed any responsibility to Tenant or any other party for compliance with Environmental Laws, as a result of the exercise, or non-exercise of such rights.  Tenant hereby indemnifies, and agrees to defend, protect and hold harmless, the Indemnitees from any and all loss, claim, demand, action, expense, liability and cost (including attorneys’ fees and expenses) arising out of or in any way related to the presence of any Hazardous Material introduced to the Premises or the Property during the Lease Term by Tenant or other occupants of the Premises, or their employees, servants, agents, contractors, customers or invitees.  In case of any action or proceeding brought against the Indemnitees by reason of any such claim, upon notice from Landlord, Tenant covenants to defend such action or proceeding by counsel chosen by Landlord, in Landlord’s sole discretion.  Landlord reserves the right to settle, compromise or dispose of any and all actions, claims and demands related to the foregoing indemnity.  If any Hazardous Material is released, discharged or disposed of on or about the Property and such release, discharge or disposal is not caused by Tenant or other occupants of the Premises, or their employees, servants, agents, contractors customers or invitees, such release, discharge or disposal shall be deemed casualty damage under Article Fourteen to the extent that the Premises are affected thereby; in such case, Landlord and Tenant shall have the obligations and rights respecting such casualty damage provided under such Article.

                (c)           Landlord and Tenant acknowledge that the Americans With Disabilities Act of 1990 (42 U.S.C. §12101 et seq.) and regulations and guidelines promulgated thereunder, as all of the same may be amended and supplemented from time to time (collectively referred to herein as the “ADA”) establish requirements for business operations, accessibility and barrier removal, and that such requirements may or may not apply to the Premises, the Building and the Project depending on, among other things: (1) whether Tenant’s business is deemed a “public accommodation” or “commercial facility”, (2) whether such requirements are “readily achievable”, and (3) whether a given alteration affects a “primary function area” or triggers “path of travel” requirements.  The parties hereby agree that: (a) Landlord shall be responsible for ADA Title III compliance in the Common Areas, except as provided below, (b) Tenant shall be responsible for ADA Title III compliance in the Premises, including any leasehold improvements or other work to be performed in the Premises under or in connection with this Lease, (c) Landlord may perform, or require that Tenant perform, and Tenant shall be responsible for the cost of, ADA Title III “path of travel” requirements triggered by Tenant Alterations in the Premises, and (d) Landlord may perform, or require Tenant to perform, and Tenant shall be responsible for the cost of, ADA Title III compliance in the Common Areas necessitated by the Building being deemed to be a “public accommodation” instead of a “commercial facility” as a result of Tenant’s use of the Premises.  Tenant shall be solely responsible for requirements under Title I of the ADA relating to Tenant’s employees.Notwithstanding anything to the contrary in this Section 7.01(c), if Tenant is required to pay for the cost of ADA Title III compliance in the Common Areas as a result of the Building being deemed to be a “public accommodation” as a result of Tenant’s use of the Premises, and the cost of such compliance is in excess of $75,000 , then Tenant shall have the option of terminating this Lease in lieu of paying for such compliance costs.  If Tenant elects to terminate the Lease, Tenant shall pay to Landlord, as a termination fee, the aggregate sum of (i) the unamortized cost of tenant improvements paid for by Landlord, (ii) the unamortized cost of brokers fees paid for by Landlord, and (iii) two month’s then escalated rent.

                (d)           Landlord and Tenant agree to cooperate and use commercially reasonable efforts to participate in traffic management programs generally applicable to businesses located in or about the Costa Mesa, California area and Tenant shall encourage and support van and car pooling by, and staggered and flexible working hours for, its office workers and service employees to the extent reasonably permitted by the requirements of Tenant’s business.  Neither this Section or any other provision of this Lease is intended to or shall create any rights or benefits in any other person, firm, company, governmental entity or the public.

                (e)           Tenant agrees to cooperate with Landlord and to comply with any and all guidelines or controls concerning energy management imposed upon Landlord by federal or state governmental organizations or by any energy conservation association to which Landlord is a party or which is applicable to the Building.

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7.02LANDLORD ACCESS TO PREMISES; APPROVALS

                (a)           Tenant shall permit Landlord to erect, use and maintain pipes, ducts, wiring and conduits in and through the Premises, so long as Tenant’s use, layout or design of the Premises is not materially affected or altered.  Landlord or Landlord’s agents shall have the right to enter upon the Premises in the event of an emergency, or to inspect the Premises, to perform janitorial and other services, to conduct safety and other testing in the Premises and to make such repairs, alterations, improvements or additions to the Premises or the Building or other parts of the Property as Landlord may deem necessary or desirable (including all alterations, improvements and additions in connection with a change in service provider or providers).  Janitorial and cleaning services shall be performed after normal business hours.  Any entry or work by Landlord may be during normal business hours and Landlord may use reasonable efforts to ensure that any entry or work shall not materially interfere with Tenant’s occupancy of the Premises.

                (b)           If Tenant shall not be personally present to permit an entry into the Premises when for any reason an entry therein shall be necessary or permissible, Landlord (or Landlord’s agents), after attempting to notify Tenant (unless Landlord believes an emergency situation exists), may enter the Premises without rendering Landlord or its agents liable therefor, and without relieving Tenant of any obligations under this Lease.

                (c)           Landlord may enter the Premises for the purpose of conducting such inspections, tests and studies as Landlord may deem desirable or necessary to confirm Tenant’s compliance with all Laws and Environmental Laws or for other purposes necessary in Landlord’s reasonable judgment to ensure the sound condition of the Property and the systems serving the Property.  Landlord’s rights under this Section 7.02(c) are for Landlord’s own protection only, and Landlord has not, and shall not be deemed to have assumed, any responsibility to Tenant or any other party, as a result of the exercise or non-exercise of such rights, for compliance with Laws or Environmental Laws or for the accuracy or sufficiency of any item or the quality or suitability of any item for its intended use.

                (d)           Landlord may do any of the foregoing, or undertake any of the inspection or work described in the preceding paragraphs without such action constituting an actual or constructive eviction of Tenant, in whole or in part, or giving rise to an abatement of Rent by reason of loss or interruption of business of the Tenant, or otherwise.

                (e)           The review, approval or consent of Landlord with respect to any item required or permitted under this Lease is for Landlord’s own protection only, and Landlord has not, and shall not be deemed to have assumed, any responsibility to Tenant or any other party, as a result of the exercise or non-exercise of such rights, for compliance with Laws or Environmental Laws or for the accuracy or sufficiency of any item or the quality or suitability of any item for its intended use.

7.03         QUIET ENJOYMENT

Landlord covenants, in lieu of any implied covenant of quiet possession or quiet enjoyment, that so long as Tenant is in compliance with the covenants and conditions set forth in this Lease, Tenant shall have the right to quiet enjoyment of the Premises without hindrance or interference from Landlord or those claiming through Landlord, and subject to the covenants and conditions set forth in the Lease and to the rights of any Mortgagee or ground lessor.

ARTICLE EIGHT

MAINTENANCE

8.01LANDLORD’S MAINTENANCE

Subject to the provisions of Article Fourteen, Landlord shall maintain and make necessary repairs to the foundations, roofs, exterior walls, and the structural elements of the Building, the electrical, plumbing, heating, ventilating, air-conditioning, mechanical, communication, security and the fire and life safety systems of the Building and those corridors, washrooms and lobbies in the Common Areas of the Building, except that:  (a) Landlord shall not be responsible for the maintenance or repair of any floor or wall coverings in the Premises or any of such systems which are located within the Premises and are supplemental or special to the Building’s standard systems; and (b) the cost of performing any of said maintenance or repairs whether to the Premises or to the Building caused by the negligence of Tenant, its employees, agents, servants, licensees, subtenants, contractors or invitees, shall be paid by Tenant, subject to the waivers set forth in Section 16.04.  Landlord shall not be liable to Tenant for any expense, injury, loss or damage resulting from work done in or upon, or in connection with the use of any adjacent or nearby building, land, street or alley.

8.02TENANT MAINTENANCE

Subject to the provisions of Article Fourteen, Tenant, at its expense, shall keep and maintain the Premises and all Tenant Additions in good order, condition and repair and in accordance with all Laws and Environmental Laws.  Tenant shall not permit waste and shall promptly and adequately repair all damages to the Premises and replace or repair all damaged or broken glass in the interior of the Premises, fixtures or appurtenances.  Any repairs or maintenance shall be completed with materials of similar quality to the

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original materials, all such work to be completed under the supervision of Landlord.  Any such repairs or maintenance shall be performed only by contractors or mechanics approved by Landlord, which approval shall not be unreasonably withheld, and whose work will not cause or threaten to cause disharmony or interference with Landlord or other tenants in the Building and their respective agents and contractors performing work in or about the Building.  If Tenant fails to perform any of its obligations set forth in this Section 8.02, Landlord may, in its sole discretion and upon 24 hours prior notice to Tenant (except without notice in the case of emergencies), perform the same, and Tenant shall pay to Landlord any costs or expenses incurred by Landlord upon demand.

ARTICLE NINE

ALTERATIONS AND IMPROVEMENTS

9.01TENANT ALTERATIONS

                (a)           The following provisions shall apply to the completion of any Tenant Alterations:

(1)Tenant shall not, except as provided herein, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, make or cause to be made any Tenant Alterations in or to the Premises or any Property systems serving the Premises.  Prior to making any Tenant Alterations, Tenant shall give Landlord ten (10) days prior written notice (or such earlier notice as would be necessary pursuant to applicable Law) to permit Landlord sufficient time to post appropriate notices of non-responsibility. Subject to all other requirements of this Article Nine, Tenant may undertake Decoration work without Landlord’s prior written consent.  Tenant shall furnish Landlord with the names and addresses of all contractors and subcontractors and copies of all contracts.  All Tenant Alterations shall be completed at such time and in such manner as Landlord may from time to time designate, and only by contractors or mechanics approved by Landlord, which approval shall not be unreasonably withheld, provided, however, that Landlord may, in its sole discretion, specify the engineers and contractors to perform all work relating to the Building’s systems (including the mechanical, heating, plumbing, security, ventilating, air-conditioning, electrical, communication and the fire and life safety systems in the Building).  The contractors, mechanics and engineers who may be used are further limited to those whose work will not cause or threaten to cause disharmony or interference with Landlord or other tenants in the Building and their respective agents and contractors performing work in or about the Building.  Landlord may further condition its consent upon Tenant furnishing to Landlord and Landlord approving prior to the commencement of any work or delivery of materials to the Premises related to the Tenant Alterations such of the following as specified by Landlord:  architectural plans and specifications, opinions from Landlord’s engineers stating that the Tenant Alterations will not in any way adversely affect the Building’s systems, necessary permits and licenses, certificates of insurance, and such other documents in such form reasonably requested by Landlord.  Landlord may, in the exercise of reasonable judgment, request that Tenant provide Landlord with appropriate evidence of Tenant’s ability to complete and pay for the completion of the Tenant Alterations such as a performance bond or letter of credit.  Upon completion of the Tenant Alterations, Tenant shall deliver to Landlord an as-built mylar and digitized (if available) set of plans and specifications for the Tenant Alterations.

(2)Tenant shall pay the cost of all Tenant Alterations and the cost of decorating the Premises and any work to the Property occasioned thereby.  In connection with completion of any Tenant Alterations, Tenant shall pay Landlord a construction fee at Landlord’s then standard rate.  Upon completion of Tenant Alterations, Tenant shall furnish Landlord with contractors’ affidavits and full and final waivers of lien and receipted bills covering all labor and materials expended and used in connection therewith and such other documentation reasonably requested by Landlord or Mortgagee.

(3)Tenant agrees to complete all Tenant Alterations (i) in accordance with all Laws, Environmental Laws, all requirements of applicable insurance companies and in accordance with Landlord’s standard construction rules and regulations, and (ii) in a good and workmanlike manner with the use of good grades of materials.  Tenant shall notify Landlord immediately if Tenant receives any notice of violation of any Law in connection with completion of any Tenant Alterations and shall immediately take such steps as are necessary to remedy such violation.  In no event shall such supervision or right to supervise by Landlord nor shall any approvals given by Landlord under this Lease constitute any warranty by Landlord to Tenant of the adequacy of the design, workmanship or quality of such work or materials for Tenant’s intended use or of compliance with the requirements of Section 9.01(a)(3)(i) and (ii) above or impose any liability upon Landlord in connection with the performance of such work.

                (b)           Except for personal property and trade fixtures, all Tenant Additions whether installed by Landlord or Tenant, shall without compensation or credit to Tenant, become part of the Premises and the property of Landlord at the time of their installation and shall remain in the Premises, unless pursuant to Article Twelve, Tenant may remove them or is required to remove them at Landlord’s request.

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9.02LIENS

Tenant shall not permit any lien or claim for lien of any mechanic, laborer or supplier or any other lien to be filed against the Building, the Land, the Premises, or any other part of the Property arising out of work performed, or alleged to have been performed by, or at the direction of, or on behalf of Tenant.  If any such lien or claim for lien is filed, Tenant shall within ten (10) days of receiving notice of such lien or claim (a) have such lien or claim for lien released of record or (b) deliver to Landlord  a bond in form, content, amount, and issued by surety, satisfactory to Landlord, indemnifying, protecting, defending and holding harmless the Indemnitees against all costs and liabilities resulting from such lien or claim for lien and the foreclosure or attempted foreclosure thereof.  If Tenant fails to take any of the above actions, Landlord, in addition to its rights and remedies under Article Eleven, without investigating the validity of such lien or claim for lien, may pay or discharge the same and Tenant shall, as payment of additional Rent hereunder, reimburse Landlord upon demand for the amount so paid by Landlord, including Landlord’s expenses and attorneys’ fees.

ARTICLE TEN

ASSIGNMENT AND SUBLETTING

10.01       ASSIGNMENT AND SUBLETTING

                (a)           Without the prior written consent of Landlord, which may be withheld in Landlord’s sole discretion, Tenant may not sublease, assign, mortgage, pledge, hypothecate or otherwise transfer or permit the transfer of this Lease or the encumbering of Tenant’s interest therein in whole or in part, by operation of Law or otherwise or permit the use or occupancy of the Premises, or any part thereof, by anyone other than Tenant, provided, however, if Landlord chooses not to recapture the space proposed to be subleased or assigned as provided in Section 10.02, Landlord shall not unreasonably withhold its consent to a subletting or assignment under this Section 10.01. Tenant agrees that the provisions governing sublease and assignment set forth in this Article Ten shall be deemed to be reasonable.  If Tenant desires to enter into any sublease of the Premises or assignment of this Lease, Tenant shall deliver written notice thereof to Landlord (“Tenant’s Notice”), together with the identity of the proposed subtenant or assignee and the proposed principal terms thereof and financial and other information sufficient for Landlord to make an informed judgment with respect to such proposed subtenant or assignee at least thirty (30) days prior to the commencement date of the term of the proposed sublease or assignment.  If Tenant proposes to sublease less than all of the Rentable Area of the Premises, the space proposed to be sublet and the space retained by Tenant must each be a marketable unit as reasonably determined by Landlord and otherwise in compliance with all Laws.  Landlord shall notify Tenant in writing of its approval or disapproval of the proposed sublease or assignment or its decision to exercise its rights under Section 10.02 within fifteen (15) days after receipt of Tenant’s Notice (and all required information).  In no event may Tenant sublease any portion of the Premises or assign the Lease to any other tenant of the Building.  Tenant shall submit for Landlord’s approval (which approval shall not be unreasonably withheld) any advertising which Tenant or its agents intend to use with respect to the space proposed to be sublet.

                (b)           With respect to Landlord’s consent to an assignment or sublease, Landlord may take into consideration any factors which Landlord may deem relevant, and the reasons for which Landlord’s denial shall be deemed to be reasonable shall include, without limitation, the following:

(i)            the business reputation or creditworthiness of any proposed subtenant or assignee is not acceptable to Landlord; or

(ii)           in Landlord’s reasonable judgment the proposed assignee or subtenant would diminish the value or reputation of the Building or Landlord; or

(iii)          any proposed assignee’s or subtenant’s use of the Premises would violate Section 7.01 of the Lease or would violate the provisions of any other leases of tenants in the Project;

(iv)          the proposed assignee or subtenant is either a governmental agency, a school or similar operation, or a medical related practice; or

(v)           the proposed subtenant or assignee is a bona fide prospective tenant of Landlord in the Project as demonstrated by a written proposal dated within ninety (90) days prior to the date of Tenant’s request; or

(vi)          the proposed subtenant or assignee would materially increase the estimated pedestrian and vehicular traffic to and from the Premises and the Building.

In no event shall Landlord be obligated to consider a consent to any proposed assignment of the Lease which would assign less than the entire Premises.  In the event Landlord wrongfully withholds its consent to any proposed sublease of the Premises or assignment of the Lease, Tenant’s sole and exclusive remedy therefor shall be to seek specific performance of Landlord’s obligations to consent to such sublease or assignment.

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                (c)           Any sublease or assignment shall be expressly subject to the terms and conditions of this Lease.  Any subtenant or assignee shall execute such documents as Landlord may reasonably require to evidence such subtenant or assignee’s assumption of the obligations and liabilities of Tenant under this Lease.  Tenant shall deliver to Landlord a copy of all agreements executed by Tenant and the proposed subtenant and assignee with respect to the Premises.  Landlord’s approval of a sublease, assignment, hypothecation, transfer or third party use or occupancy shall not constitute a waiver of Tenant’s obligation to obtain Landlord’s consent to further assignments or subleases, hypothecations, transfers or third party use or occupancy.

                (d)           For purposes of this Article Ten, an assignment shall be considered to include a change in the majority ownership or control of Tenant unless Tenant is a corporation whose stock is traded publicly.

                Notwithstanding the foregoing, any sublease of the Premises or assignment of this Lease to (i) a parent or affiliate of Tenant, (ii) an entity resulting from the merger or consolidation of Tenant with a third party, or (iii) an entity purchasing all or substantially all of the assets of Tenant, shall not require the consent of Landlord, provided that the entity to whom the Premises are subleased or the Lease is assigned delivers to Landlord a written assumption of all duties, obligations of Tenant under this Lease.

                (e)           Notwithstanding anything to the contrary contained in this Article Ten and provided there is no uncured default under this Lease, Tenant shall have the right, without the prior written consent of Landlord, to assign this Lease to an Affiliate or to sublease the Premises or any part thereof to an Affiliate, but (i) no later than fifteen (15) days prior to the effective date of the assignment or sublease, the assignee shall execute documents satisfactory to Landlord to evidence such assignee’s assumption of the obligations and liabilities of Tenant under this Lease, unless Landlord modifies or waives such requirement in the case of any assignment which occurs by operation of law (and without a written assignment) as a consequence of merger, consolidation or non-bankruptcy reorganization, and the subtenant shall execute documents satisfactory to Landlord to evidence that the sublease is subject to the terms and conditions of this Lease and that the subtenant shall perform and be bound by all the terms and conditions of this Lease (except payment of Monthly Base Rent and Rent Adjustments hereunder and other obligations which the sublease expressly provides are to be performed by Tenant as the sublessor) to the extent applicable to the space and period covered by the sublease; (ii) within ten (10) days after the effective date of such assignment or sublease, give notice to Landlord which notice shall include the full name and address of the assignee or subtenant, and a copy of all agreements executed between Tenant and the assignee or subtenant with respect to the Premises or part thereof, as may be the case; and (iii) within fifteen (15) days after Landlord’s written request, provide such reasonable documents or information which Landlord reasonably requests for the purpose of substantiating whether or not the assignment or sublease is to an Affiliate.

10.02       RECAPTURE

Except as provided in Section 10.01(e) Landlord shall have the option to exclude from the Premises covered by this Lease (“recapture”), the space proposed to be sublet or subject to the assignment, effective as of the proposed commencement date of such sublease or assignment.  If Landlord elects to recapture, Tenant shall surrender possession of the space proposed to be subleased or subject to the assignment to Landlord on the effective date of recapture of such space from the Premises, such date being the Termination Date for such space.  Effective as of the date of recapture of any portion of the Premises pursuant to this section, the Monthly Base Rent, Rentable Area of the Premises and Tenant’s Share shall be adjusted accordingly.

10.03       EXCESS RENT

Tenant shall pay Landlord on the first day of each month during the term of the sublease or assignment, fifty percent (50%) of the amount by which the sum of all rent and other consideration (direct or indirect) due from the subtenant or assignee for such month exceeds: (i) that portion of the Monthly Base Rent and Rent Adjustments due under this Lease for said month which is allocable to the space sublet or assigned; and (ii) the following costs and expenses for the subletting or assignment of such space: (1) brokerage commissions and attorneys’ fees and expenses; (2) the actual costs paid in making any improvements or substitutions in the Premises required by any sublease or assignment; and (3) “free rent” periods, costs of any inducements or concessions given to subtenant or assignee, moving costs, and other amounts in respect of such subtenant’s or assignee’s other leases or occupancy arrangements.  All such costs and expenses shall be amortized over the term of the sublease or assignment pursuant to sound accounting principles.

10.04       TENANT LIABILITY

In the event of any sublease or assignment, whether or not with Landlord’s consent, Tenant shall not be released or discharged from any liability, whether past, present or future, under this Lease, including any liability arising from the exercise of any renewal or expansion option, to the extent such exercise is expressly permitted by Landlord.  Tenant’s liability shall remain primary, and in the event of default by any subtenant, assignee or successor of Tenant in performance or observance of any of the covenants or conditions of this Lease, Landlord may proceed directly against Tenant without the necessity of exhausting

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remedies against said subtenant, assignee or successor.  After any assignment, Landlord may consent to subsequent assignments or subletting of this Lease, or amendments or modifications of this Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto, and such action shall not relieve Tenant or any successor of Tenant of liability under this Lease.  If Landlord grants consent to such sublease or assignment, Tenant shall pay all reasonable attorneys’ fees and expenses incurred by Landlord with respect to such assignment or sublease.  In addition, if Tenant has any options to extend the term of this Lease or to add other space to the Premises, such options shall not be available to any subtenant or assignee, directly or indirectly without Landlord’s express written consent, which may be withheld in Landlord’s sole discretion.

10.05       ASSUMPTION AND ATTORNMENT

If Tenant shall assign this Lease as permitted herein, the assignee shall expressly assume all of the obligations of Tenant hereunder in a written instrument satisfactory to Landlord and furnished to Landlord not later than fifteen (15) days prior to the effective date of the assignment.  If Tenant shall sublease the Premises as permitted herein, Tenant shall, at Landlord’s option, within fifteen (15) days following any request by Landlord, obtain and furnish to Landlord the written agreement of such subtenant to the effect that the subtenant will attorn to Landlord and will pay all subrent directly to Landlord.

ARTICLE ELEVEN

DEFAULT AND REMEDIES

11.01EVENTS OF DEFAULT

The occurrence or existence of any one or more of the following shall constitute a “Default” by Tenant under this Lease:

                (i)            Tenant fails to pay any installment or other payment of Rent including Rent Adjustment Deposits or Rent Adjustments within three (3) days after the date when due;

                (ii)           Tenant fails to observe or perform any of the other covenants, conditions or provisions of this Lease or the Workletter and fails to cure such default within thirty (30) days after written notice thereof to Tenant, unless the default involves a hazardous condition, which shall be cured forthwith or unless the failure to perform is a Default for which this Lease specifies there is no cure or grace period;

                (iii)          the interest of Tenant in this Lease is levied upon under execution or other legal process;

                (iv)          a petition is filed by or against Tenant to declare Tenant bankrupt or seeking a plan of reorganization or arrangement under any Chapter of the Bankruptcy Act, or any amendment, replacement or substitution therefor, or to delay payment of, reduce or modify Tenant’s debts, which in the case of an involuntary action is not discharged within thirty (30) days;

                (v)           Tenant is declared insolvent by Law or any assignment of Tenant’s property is made for the benefit of creditors;

                (vi)          a receiver is appointed for Tenant or Tenant’s property, which appointment is not discharged within thirty (30) days;

                (vii)         any action taken by or against Tenant to reorganize or modify Tenant’s capital structure in a materially adverse way which in the case of an involuntary action is not discharged within thirty (30) days;

                (viii)        upon the dissolution of Tenant;

                (ix)           upon the third occurrence within any Lease Year that Tenant fails to pay Rent when due or has breached a particular covenant of this Lease (whether or not such failure or breach is thereafter cured within any stated cure or grace period or statutory period);

                (x)            any vacation or abandonment of the Premises by Tenant;

                (xi)           any warranty, representation or statement made or furnished by Tenant to Landlord at any time in connection with this Lease or any other agreement to which Tenant and Landlord are parties is determined to have been false or misleading in any material respect when made or furnished; or

                (xii)          Tenant makes any sublease, assignment, mortgage, pledge, hypothecation or other transfer, or permit any transfer of this Lease or encumbering of Tenant’s interest, or permit the use or occupancy of the Premises or any part thereof in violation of Article Ten.

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11.02LANDLORD’S REMEDIES

                (a)           A Default shall constitute a breach of the Lease for which Landlord shall have the rights and remedies set forth in this Section 11.02 and all other rights and remedies set forth in this Lease or now or hereafter allowed by Law, whether legal or equitable, and all rights and remedies of Landlord shall be cumulative and none shall exclude any other right or remedy.

                (b)           With respect to a Default, at any time Landlord may terminate Tenant’s right to possession by written notice to Tenant stating such election.  Any written notice required pursuant to Section 11.01 shall constitute notice of unlawful detainer pursuant to California Code of Civil Procedure Section 1161 if, at Landlord’s sole discretion, it states Landlord’s election that Tenant’s right to possession is terminated after expiration of any period required by Law or any longer period required by Section 11.01.  Upon the expiration of the period stated in Landlord’s written notice of termination (and unless such notice provides an option to cure within such period and Tenant cures the Default within such period), Tenant’s right to possession shall terminate and this Lease shall terminate, and Tenant shall remain liable as hereinafter provided.  Upon such termination in writing of Tenant’s right to possession, Landlord shall have the right, subject to applicable Law, to re-enter the Premises and dispossess Tenant and the legal representatives of Tenant and all other occupants of the Premises by unlawful detainer or other summary proceedings, or otherwise as permitted by Law, regain possession of the Premises and remove their property (including their trade fixtures, personal property and those Tenant Additions which Tenant is required or permitted to remove under Article Twelve), but Landlord shall not be obligated to effect such removal, and such property may, at Landlord’s option, be stored elsewhere, sold or otherwise dealt with as permitted by Law, at the risk of, expense of and for the account of Tenant, and the proceeds of any sale shall be applied pursuant to Law.  Landlord shall in no event be responsible for the value, preservation or safekeeping of any such property.  Tenant hereby waives all claims for damages that may be caused by Landlord’s removing or storing Tenant’s personal property pursuant to this Section or Section 12.01, and Tenant hereby indemnifies, and agrees to defend, protect and hold harmless, the Indemnitees from any and all loss, claims, demands, actions, expenses, liability and cost (including attorneys’ fees and expenses) arising out of or in any way related to such removal or storage.  Upon such written termination of Tenant’s right to possession and this Lease, Landlord shall have the right to recover damages for Tenant’s Default as provided herein or by Law, including the following damages provided by California Civil Code Section 1951.2:

                (1) the worth at the time of award of the unpaid Rent which had been earned at the time of termination;

                (2) the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could reasonably have been avoided;

                (3) the worth at the time of award of the amount by which the unpaid Rent for the balance of the term of this Lease after the time of award exceeds the amount of such Rent loss that Tenant proves could be reasonably avoided; and

                (4) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom.  The word “rent” as used in this Section 11.02 shall have the same meaning as the defined term Rent in this Lease.  The “worth at the time of award” of the amount referred to in clauses (1) and (2) above is computed by allowing interest at the Default Rate.  The worth at the time of award of the amount referred to in clause (3) above is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).  For the purpose of determining unpaid Rent under clause (3) above, the monthly Rent reserved in this Lease shall be deemed to be the sum of the Monthly Base Rent, monthly storage space rent (if any), and the amounts last payable by Tenant as Rent Adjustments for the calendar year in which Landlord terminated this Lease as provided hereinabove.

                (c)           Even if Tenant is in Default and/or has abandoned the Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant’s right to possession by written notice as provided in Section 11.02(b) above, and Landlord may enforce all its rights and remedies under this Lease, including the right to recover Rent as it becomes due under this Lease.  In such event, Landlord shall have all of the rights and remedies of a landlord under California Civil Code Section 1951.4 (lessor may continue Lease in effect after Tenant’s Default and abandonment and recover Rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations), or any successor statute.  During such time as Tenant is in Default, if Landlord has not terminated this Lease by written notice and if Tenant requests Landlord’s consent to an assignment of this Lease or a sublease of the Premises, subject to Landlord’s option to recapture pursuant to Section 10.02, Landlord shall not unreasonably withhold its consent to such assignment or sublease.  Tenant acknowledges and agrees that the provisions of Article Ten shall be deemed to constitute reasonable limitations of Tenant’s right to assign or sublet.  Tenant acknowledges and agrees that in the absence of written notice pursuant to Section 11.02(b) above terminating Tenant’s right to possession, no other act of Landlord shall constitute a termination of Tenant’s right to possession or an acceptance of Tenant’s surrender of the Premises,

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including acts of maintenance or preservation or efforts to relet the Premises or the appointment of a receiver upon initiative of Landlord to protect Landlord’s interest under this Lease or the withholding of consent to a subletting or assignment, or terminating a subletting or assignment, if in accordance with other provisions of this Lease.

                (d)           In the event that Landlord seeks an injunction with respect to a breach or threatened breach by Tenant of any of the covenants, conditions or provisions of this Lease, Tenant agrees to pay the premium for any bond required in connection with such injunction.

                (e)           Tenant hereby waives any and all rights to relief from forfeiture, redemption or reinstatement granted by Law (including California Civil Code of Procedure Sections 1174 and 1179) in the event of Tenant being evicted or dispossessed for any cause or in the event of Landlord obtaining possession of the Premises by reason of Tenant’s Default or otherwise.

                (f)            When this Lease requires giving or service of a notice, that notice shall replace rather than supplement any equivalent or similar statutory notice, including any equivalent or similar notices required by California Code of Civil Procedure Section 1161 or any similar or successor statute.  When a statute requires service of a notice in a particular manner, service of that notice (or a similar notice required by this Lease) in the manner required by Article Twenty-four shall replace and satisfy the statutory service—of—notice procedures, including those required by Code of Civil Procedure section 1162 or any similar or successor statute.

                (g)           The voluntary or other surrender or termination of this Lease, or a mutual termination or cancellation thereof, shall not work a merger and shall terminate all or any existing assignments, subleases, subtenancies or occupancies permitted by Tenant, except if and as otherwise specified in writing by Landlord.

                (h)           No delay or omission in the exercise of any right or remedy of Landlord upon any default by Tenant, and no exercise by Landlord of its rights pursuant to Section 26.15 to perform any duty which Tenant fails timely to perform, shall impair any right or remedy or be construed as a waiver.  No provision of this Lease shall be deemed waived by Landlord unless such waiver is in a writing signed by Landlord.  The waiver by Landlord of any breach of any provision of this Lease shall not be deemed a waiver of any subsequent breach of the same or any other provision of this Lease.

11.03ATTORNEY’S FEES

In the event any party brings any suit or other proceeding with respect to the subject matter or enforcement of this Lease, the prevailing party (as determined by the court, agency or other authority before which such suit or proceeding is commenced) shall, in addition to such other relief as may be awarded, be entitled to recover attorneys’ fees, expenses and costs of investigation as actually incurred, including court costs, expert witness fees, costs and expenses of investigation, and all attorneys’ fees, costs and expenses in any such suit or proceeding (including in any action or participation in or in connection with any case or proceeding under the Bankruptcy Code, 11 United States Code Sections 101 et seq., or any successor statutes, in establishing or enforcing the right to indemnification, in appellate proceedings, or in connection with the enforcement or collection of any judgment obtained in any such suit or proceeding).

11.04       BANKRUPTCY

The following provisions shall apply in the event of the bankruptcy or insolvency of Tenant:

                (a)           In connection with any proceeding under Chapter 7 of the Bankruptcy Code where the trustee of Tenant elects to assume this Lease for the purposes of assigning it, such election or assignment, may only be made upon compliance with the provisions of (b) and (c) below, which conditions Landlord and Tenant acknowledge to be commercially reasonable.  In the event the trustee elects to reject this Lease then Landlord shall immediately be entitled to possession of the Premises without further obligation to Tenant or the trustee.

                (b)           Any election to assume this Lease under Chapter 11 or 13 of the Bankruptcy Code by Tenant as debtor-in-possession or by Tenant’s trustee (the “Electing Party”) must provide for:

The Electing Party to cure or provide to Landlord adequate assurance that it will cure all monetary defaults under this Lease within fifteen (15) days from the date of assumption and it will cure all nonmonetary defaults under this Lease within thirty (30) days from the date of assumption.  Landlord and Tenant acknowledge such condition to be commercially reasonable.

                (c)           If the Electing Party has assumed this Lease or elects to assign Tenant’s interest under this Lease to any other person, such interest may be assigned only if the intended assignee has provided adequate assurance of future performance (as herein defined), of all of the obligations imposed on Tenant under this Lease.

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For the purposes hereof, “adequate assurance of future performance” means that Landlord has ascertained that each of the following conditions has been satisfied:

                (i)  The assignee has submitted a current financial statement, certified by its chief financial officer, which shows a net worth and working capital in amounts sufficient to assure the future performance by the assignee of Tenant’s obligations under this Lease; and

                (ii)  Landlord has obtained consents or waivers from any third parties which may be required under a lease, mortgage, financing arrangement, or other agreement by which Landlord is bound, to enable Landlord to permit such assignment.

                (d)           Landlord’s acceptance of Rent or any other payment from any trustee, receiver, assignee, person, or other entity will not be deemed to have waived, or waive, the requirement of Landlord’s consent, Landlord’s right to terminate this Lease for any transfer of Tenant’s interest under this Lease without such consent, or Landlord’s claim for any amount of Rent due from Tenant.

11.05           LANDLORD’S DEFAULT

Landlord shall be in default hereunder in the event Landlord has not begun and pursued with reasonable diligence the cure of any failure of Landlord to meet its obligations hereunder within thirty (30) days after the receipt by Landlord of written notice from Tenant of the alleged failure to perform. In no event shall Tenant have the right to terminate or rescind this Lease as a result of Landlord’s default as to any covenant or agreement contained in this Lease. Tenant hereby waives such remedies of termination and rescission and hereby agrees that Tenant’s remedies for default hereunder and for breach of any promise or inducement shall be limited to a suit for damages and/or injunction. In addition, Tenant hereby covenants that, prior to the exercise of any such remedies, it will give the Mortgagee notice and a reasonable time to cure any default by Landlord.

ARTICLE TWELVE

SURRENDER OF PREMISES

12.01       IN GENERAL

Upon the Termination Date, Tenant shall surrender and vacate the Premises immediately and deliver possession thereof to Landlord in a clean, good and tenantable condition, ordinary wear and tear, and damage caused by Landlord excepted.  Tenant shall deliver to Landlord all keys to the Premises.  Tenant shall remove from the Premises all movable personal property of Tenant and Tenant’s trade fixtures, including, subject to Section 6.02, cabling for any of the foregoing.  Tenant shall be entitled to remove such Tenant Additions which at the time of their installation Landlord and Tenant agreed may be removed by Tenant.  Tenant shall also remove such other Tenant Additions as required by Landlord, including any Tenant Additions containing Hazardous Material.  Tenant immediately shall repair all damage resulting from removal of any of Tenant’s property, furnishings or Tenant Additions, shall close all floor, ceiling and roof openings and shall restore the Premises to a tenantable condition as reasonably determined by Landlord.  If any of the Tenant Additions which were installed by Tenant involved the lowering of ceilings, raising of floors or the installation of specialized wall or floor coverings or lights, then Tenant shall also be obligated to return such surfaces to their condition prior to the commencement of this Lease.   Tenant shall also be required to close any staircases or other openings between floors. In the event possession of the Premises is not delivered to Landlord when required hereunder, or if Tenant shall fail to remove those items described above, Landlord may (but shall not be obligated to), at Tenant’s expense, remove any of such property and store, sell or otherwise deal with such property as provided in Section 11.02(b), including the waiver and indemnity obligations provided in that Section, and undertake, at Tenant’s expense, such restoration work as Landlord deems necessary or advisable.

12.02       LANDLORD’S RIGHTS

All property which may be removed from the Premises by Landlord shall be conclusively presumed to have been abandoned by Tenant and Landlord may deal with such property as provided in Section 11.02(b), including the waiver and indemnity obligations provided in that Section.  Tenant shall also reimburse Landlord for all costs and expenses incurred by Landlord in removing any of Tenant Additions and in restoring the Premises to the condition required by this Lease at the Termination Date.

ARTICLE THIRTEEN

HOLDING OVER

Tenant shall pay Landlord one hundred and fifty percent (150%) of the fair market rental value of the Premises as reasonably determined by Landlord for each month or portion thereof that Tenant retains possession of the Premises, or any portion thereof, after the Termination Date (without reduction for any partial month that Tenant retains possession).  Tenant shall also pay all damages sustained by Landlord by reason of such retention of possession.  The provisions of this Article shall not constitute a waiver by Landlord of any re-entry rights of Landlord and Tenant’s continued occupancy of the Premises shall be as a tenancy in sufferance.

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ARTICLE FOURTEEN

DAMAGE BY FIRE OR OTHER CASUALTY

14.01SUBSTANTIAL UNTENANTABILITY

                (a)           If any fire or other casualty (whether insured or uninsured) renders all or a substantial portion of the Premises or the Building untenantable, Landlord shall, with reasonable promptness after the occurrence of such damage, estimate the length of time that will be required to substantially complete the repair and restoration and shall by notice advise Tenant of such estimate (“Landlord’s Notice”).  If Landlord estimates that the amount of time required to substantially complete such repair and restoration will exceed one year from the date such damage occurred, then Landlord, or Tenant if all or a substantial portion of the Premises is rendered untenantable, shall have the right to terminate this Lease as of the date of such damage upon giving written notice to the other at any time within twenty (20) days after delivery of Landlord’s Notice, provided that if Landlord so chooses, Landlord’s Notice may also constitute such notice of termination.  Further, in the event that the Building is damaged or destroyed to the extent of more than twenty-five percent (25%) of its replacement cost or to any extent if no insurance proceeds or insufficient insurance proceeds are receivable by Landlord, Landlord may elect by written notice to Tenant given within thirty (30) days after the occurrence of the casualty to terminate this Lease in lieu of so restoring the Premises and Building, in which event this Lease shall terminate as of the date of such damage.

                (b)           Unless this Lease is terminated as provided in the preceding subparagraph, Landlord shall proceed with reasonable promptness to repair and restore the Premises to its condition as existed prior to such casualty, subject to reasonable delays for insurance adjustments and Force Majeure delays, and also subject to zoning Laws and building codes then in effect.  Landlord shall have no liability to Tenant, and Tenant shall not be entitled to terminate this Lease if such repairs and restoration are not in fact completed within the time period estimated by Landlord so long as Landlord shall proceed with reasonable diligence to complete such repairs and restoration.

                (c)           Tenant acknowledges that Landlord shall be entitled to the full proceeds of any insurance coverage, whether carried by Landlord or Tenant, for damages to the Premises, except for those proceeds of Tenant’s insurance of its own personal property and equipment which would be removable by Tenant at the Termination Date.  All such insurance proceeds shall be payable to Landlord whether or not the Premises are to be repaired and restored, provided, however, if this Lease is not terminated and the parties proceed to repair and restore Tenant Additions at Tenant’s cost, to the extent Landlord received proceeds of Tenant’s insurance covering Tenant Additions, such proceeds shall be applied to reimburse Tenant for its cost of repairing and restoring Tenant Additions.

                (d)           Notwithstanding anything to the contrary herein set forth:  (i) Landlord shall have no duty pursuant to this Section to repair or restore any portion of any Tenant Additions or to expend for any repair or restoration of the Premises or Building amounts in excess of insurance proceeds paid to Landlord and available for repair or restoration; and (ii) Tenant shall not have the right to terminate this Lease pursuant to this Section if any damage or destruction was caused by the act or neglect of Tenant, its agent or employees.  Whether or not the Lease is terminated pursuant to this Article Fourteen, in no event shall Tenant be entitled to any compensation or damages for loss of the use of the whole or any part of the Premises or for any inconvenience or annoyance occasioned by any such damage, destruction, rebuilding or restoration of the Premises or the Building or access thereto.

                (e)           Any repair or restoration of the Premises performed by Tenant shall be in accordance with the provisions of Article Nine hereof.

14.02       INSUBSTANTIAL UNTENANTABILITY

If the Premises or the Building is damaged by a casualty but neither is rendered substantially untenantable and Landlord estimates that the time to substantially complete the repair or restoration will not exceed one hundred eighty (180) days from the date such damage occurred, then Landlord shall proceed to repair and restore the Building or the Premises other than Tenant Additions, with reasonable promptness, unless such damage is to the Premises and occurs during the last six (6) months of the Term, in which event either Tenant or Landlord shall have the right to terminate this Lease as of the date of such casualty by giving written notice thereof to the other within twenty (20) days after the date of such casualty.  Notwithstanding the foregoing, Landlord’s obligation to repair shall be limited in accordance with the provisions of Section 14.01 above.

14.03RENT ABATEMENT

Except for the negligence or willful act of Tenant or its agents, employees, contractors or invitees, if all or any part of the Premises are rendered untenantable by fire or other casualty and this Lease is not terminated, Monthly Base Rent and Rent Adjustments shall abate for that part of the Premises which is untenantable on a per diem basis from the date of the casualty until Landlord has Substantially Completed the repair and restoration work in the Premises which it is required to perform, provided, that as a result of such casualty, Tenant does not occupy the portion of the Premises which is untenantable during such period.

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14.04       WAIVER OF STATUTORY REMEDIES

The provisions of this Lease, including this Article Fourteen, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, the Premises or the Property or any part of either, and any Law, including Sections 1932(2), 1933(4), 1941 and 1942 of the California Civil Code, with respect to any rights or obligations concerning damage or destruction shall have no application to this Lease or to any damage to or destruction of all or any part of the Premises or the Property or any part of either, and are hereby waived.

ARTICLE FIFTEEN

EMINENT DOMAIN

15.01TAKING OF WHOLE OR SUBSTANTIAL PART

In the event the whole or any substantial part of the Building or of the Premises is taken or condemned by any competent authority for any public use or purpose (including a deed given in lieu of condemnation) and is thereby rendered untenantable, this Lease shall terminate as of the date title vests in such authority, and Monthly Base Rent and Rent Adjustments shall be apportioned as of the Termination Date.  Notwithstanding anything to the contrary herein set forth, in the event the taking is temporary (for less than the remaining term of the Lease), Landlord may elect either (i) to terminate this Lease or (ii) permit Tenant to receive the entire award attributable to the Premises in which case Tenant shall continue to pay Rent and this Lease shall not terminate.

15.02TAKING OF PART

In the event a part of the Building or the Premises is taken or condemned by any competent authority (or a deed is delivered in lieu of condemnation) and this Lease is not terminated, the Lease shall be amended to reduce or increase, as the case may be, the Monthly Base Rent and Tenant’s Share to reflect the Rentable Area of the Premises or Building, as the case may be, remaining after any such taking or condemnation.  Landlord, upon receipt and to the extent of the award in condemnation (or proceeds of sale) shall make necessary repairs and restorations to the Premises (exclusive of Tenant Additions) and to the Building to the extent necessary to constitute the portion of the Building not so taken or condemned as a complete architectural and economically efficient unit.  Notwithstanding the foregoing, if as a result of any taking, or a governmental order that the grade of any street or alley adjacent to the Building is to be changed and such taking or change of grade makes it necessary or desirable to substantially remodel or restore the Building or prevents the economical operation of the Building, Landlord shall have the right to terminate this Lease upon ninety (90) days prior written notice to Tenant.

15.03       COMPENSATION

Landlord shall be entitled to receive the entire award (or sale proceeds) from any such taking, condemnation or sale without any payment to Tenant, and Tenant hereby assigns to Landlord Tenant’s interest, if any, in such award; provided, however, Tenant shall have the right separately to pursue against the condemning authority a separate award in respect of the loss, if any, to Tenant Additions paid for by Tenant without any credit or allowance from Landlord so long as there is no diminution of Landlord’s award as a result.

ARTICLE SIXTEEN

INSURANCE

16.01       TENANT’S INSURANCE

Tenant, at Tenant’s expense, agrees to maintain in force, with a company or companies acceptable to Landlord, during the Term: (a) Commercial General Liability Insurance on a primary basis and without any right of contribution from any insurance carried by Landlord covering the Premises on an occurrence basis against all claims for personal injury, bodily injury, death and property damage, including contractual liability covering the indemnification provisions in this Lease.  Such insurance shall be for such limits that are reasonably required by Landlord from time to time but not less than a combined single limit of Two Million Dollars ($2,000,000.00); (b) Workers’ Compensation and Employers’ Liability Insurance to the extent required by and in accordance with the Laws of the State of California; (c) “All Risks” property insurance in an amount adequate to cover the full replacement cost of all Tenant Additions, equipment, installations, fixtures and contents of the Premises in the event of loss; and (d) business interruption or loss of income insurance in an amount equal to the Monthly Base Rent for a period of at least one year commencing with the date of loss (and the proceeds of such insurance shall be paid to Landlord to the extent of any abatement of Rent under the Lease).

16.02       FORM OF POLICIES

Each policy referred to in 16.01 shall satisfy the following requirements.  Each policy shall (i) name Landlord and the Indemnitees as additional insureds (except Workers’ Compensation and Employers’ Liability Insurance), (ii) be issued by one or more responsible insurance companies licensed to do

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business in the State of California reasonably satisfactory to Landlord, (iii) where applicable, provide for deductible amounts satisfactory to Landlord and not permit co-insurance, (iv) shall provide that such insurance may not be canceled or amended without thirty (30) days’ prior written notice to the Landlord, and (v) each policy of “All-Risks” property insurance shall provide that the policy shall not be invalidated should the insured waive in writing prior to a loss, any or all rights of recovery against any other party for losses covered by such policies.  Tenant shall deliver to Landlord, certificates of insurance and at Landlord’s request, copies of all policies and renewals thereof to be maintained by Tenant hereunder, not less than ten (10) days prior to the Commencement Date and not less than ten (10) days prior to the expiration date of each policy.

16.03       LANDLORD’S INSURANCE

Landlord agrees to purchase and keep in full force and effect during the Term hereof, including any extensions or renewals thereof, insurance under policies issued by insurers of recognized responsibility, qualified to do business in the State of California on the Building in amounts not less than the greater of eighty (80%) percent of the then full replacement cost (without depreciation) of the Building (above foundations and excluding Tenant Additions) or an amount sufficient to prevent Landlord from becoming a co-insurer under the terms of the applicable policies, against fire and such other risks as may be included in standard forms of all risk coverage insurance reasonably available from time to time.  Landlord agrees to maintain in force during the Term, Commercial General Liability Insurance covering the Building on an occurrence basis against all claims for personal injury, bodily injury, death and property damage.  Such insurance shall be for a combined single limit of Five Million Dollars ($5,000,000.00).  Neither Landlord’s obligation to carry such insurance nor the carrying of such insurance shall be deemed to be an indemnity by Landlord with respect to any claim, liability, loss, cost or expense due, in whole or in part, to Tenant’s negligent acts or omissions or willful misconduct.  Without obligation to do so, Landlord may, in its sole discretion from time to time, carry insurance in amounts greater and/or for coverage additional to the coverage and amounts set forth above.

16.04       WAIVER OF SUBROGATION

                (a)           Landlord agrees that, if obtainable at no, or minimal, additional cost, and so long as the same is permitted under the laws of the State of California, it will include in its “All Risks” policies appropriate clauses pursuant to which the insurance companies (i) waive all right of subrogation against Tenant with respect to losses payable under such policies and/or (ii) agree that such policies shall not be invalidated should the insured waive in writing prior to a loss any or all right of recovery against any party for losses covered by such policies.

                (b)           Tenant agrees to include, if obtainable at no, or minimal, additional cost, and so long as the same is permitted under the laws of the State of California, in its “All Risks” insurance policy or policies on Tenant Additions, whether or not removable, and on Tenant’s furniture, furnishings, fixtures and other property removable by Tenant under the provisions of this Lease appropriate clauses pursuant to which the insurance company or companies (i) waive the right of subrogation against Landlord and/or any tenant of space in the Building with respect to losses payable under such policy or policies and/or (ii) agree that such policy or policies shall not be invalidated should the insured waive in writing prior to a loss any or all right of recovery against any party for losses covered by such policy or policies.  If Tenant is unable to obtain in such policy or policies either of the clauses described in the preceding sentence, Tenant shall, if legally possible and without necessitating a change in insurance carriers, have Landlord named in such policy or policies as an additional insured.  If Landlord shall be named as an additional insured in accordance with the foregoing, Landlord agrees to endorse promptly to the order of Tenant, without recourse, any check, draft, or order for the payment of money representing the proceeds of any such policy or representing any other payment growing out of or connected with said policies, and Landlord does hereby irrevocably waive any and all rights in and to such proceeds and payments.

                (c)           Provided that Landlord’s right of full recovery under its policy or policies aforesaid is not adversely affected or prejudiced thereby, Landlord hereby waives any and all right of recovery which it might otherwise have against Tenant, its servants, agents and employees, for loss or damage occurring to the Real Property and the fixtures, appurtenances and equipment therein, except Tenant Additions, to the extent the same is covered by Landlord’s insurance, notwithstanding that such loss or damage may result from the negligence or fault of Tenant, its servants, agents or employees.  Provided that Tenant’s right of full recovery under its aforesaid policy or policies is not adversely affected or prejudiced thereby, Tenant hereby waives any and all right of recovery which it might otherwise have against Landlord, its servants, and employees and against every other tenant of the Real Property who shall have executed a similar waiver as set forth in this Section 16.04(c) for loss or damage to Tenant Additions, whether or not removable, and to Tenant’s furniture, furnishings, fixtures and other property removable by Tenant under the provisions hereof to the extent the same is coverable by Tenant’s insurance required under this Lease, notwithstanding that such loss or damage may result from the negligence or fault of Landlord, its servants, agents or employees, or such other tenant and the servants, agents or employees thereof.

                (d)           Landlord and Tenant hereby agree to advise the other promptly if the clauses to be included in their respective insurance policies pursuant to Sections (a) and (b) above cannot be obtained on the terms hereinbefore provided and thereafter to furnish the other with a certificate of insurance or copy of such policies showing the naming of the other as an additional insured, as aforesaid.  Landlord

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and Tenant hereby also agree to notify the other promptly of any cancellation or change of the terms of any such policy which would affect such clauses or naming.  All such policies which name both Landlord and Tenant as additional insureds shall, to the extent obtainable, contain agreements by the insurers to the effect that no act or omission of any additional insured will invalidate the policy as to the other additional insureds.

16.05       NOTICE OF CASUALTY

Tenant shall give Landlord notice in case of a fire or accident in the Premises promptly after Tenant is aware of such event.

ARTICLE SEVENTEEN

WAIVER OF CLAIMS AND INDEMNITY

17.01WAIVER OF CLAIMS

To the extent permitted by Law, Tenant releases the Indemnitees from, and waives all claims for, damage to person or property sustained by the Tenant or any occupant of the Premises or the Property resulting directly or indirectly from any existing or future condition, defect, matter or thing in and about the Premises or the Property, or any part of either, or any equipment or appurtenance therein, or resulting from any accident in or about the Premises or the Property, or resulting directly or indirectly from any act or neglect of any tenant or occupant of the Property or of any other person, including Landlord’s agents and servants, except to the extent caused by the gross negligence or willful misconduct of any of the Indemnitees. If any such damage, whether to the Premises or the Property or any part of either, or whether to Landlord or to other tenants in the Property, results from any act or neglect of Tenant, its employees, servants, agents, contractors, invitees or customers, Tenant shall be liable therefor and Landlord may, at Landlord’s option, repair such damage and Tenant shall, upon demand by Landlord, as payment of additional Rent hereunder, reimburse Landlord within ten (10) days of demand for the total cost of such repairs, in excess of amounts, if any, paid to Landlord under insurance covering such damages.  Tenant shall not be liable for any such damage caused by its acts or neglect if Landlord or a tenant has recovered the full amount of the damage from proceeds of insurance policies and the insurance company has waived its right of subrogation against Tenant.

17.02INDEMNITY BY TENANT

To the extent permitted by Law, Tenant hereby indemnifies, and agrees to protect, defend and hold the Indemnitees harmless, against any and all actions, claims, demands, liability, costs and expenses, including attorneys’ fees and expenses for the defense thereof, arising from Tenant’s occupancy of the Premises, from the undertaking of any Tenant Additions or repairs to the Premises, from the conduct of Tenant’s business on the Premises, or from any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed pursuant to the terms of this Lease, or from any willful act or negligence of Tenant, its agents, contractors, servants, employees, customers or invitees, in or about the Premises or the Property or any part of either.  In case of any action or proceeding brought against the Indemnitees by reason of any such claim, upon notice from Landlord, Tenant covenants to defend such action or proceeding by counsel chosen by Landlord, in Landlord’s sole discretion.  Landlord reserves the right to settle, compromise or dispose of any and all actions, claims and demands related to the foregoing indemnity.  The foregoing indemnity shall not operate to relieve Indemnitees of liability to the extent such liability is caused by the willful and wrongful act of Indemnitees.  Further, the foregoing indemnity is subject to and shall not diminish any waivers in effect in accordance with Section 16.04 by Landlord or its insurers to the extent of amounts, if any, paid to Landlord under its “All-Risks” property insurance.

17.03WAIVER OF CONSEQUENTIAL DAMAGES

To the extent permitted by law, Tenant hereby waives and releases the Indemnitees from any consequential damages, compensation or claims for inconvenience or loss of business, rents or profits as a result of any injury or damage, whether or not caused by the willful and wrongful act of any of the Indemnitees.

ARTICLE EIGHTEEN

RULES AND REGULATIONS

18.01       RULES

Tenant agrees for itself and for its subtenants, employees, agents, and invitees to comply with the rules and regulations listed on Exhibit D attached hereto and with all reasonable modifications and additions thereto which Landlord may make from time to time.

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18.02       ENFORCEMENT

Nothing in this Lease shall be construed to impose upon the Landlord any duty or obligation to enforce the rules and regulations as set forth on Exhibit D or as hereafter adopted, or the terms, covenants or conditions of any other lease as against any other tenant, and the Landlord shall not be liable to the Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees.

ARTICLE NINETEEN

LANDLORD’S RESERVED RIGHTS

Landlord shall have the following rights exercisable without notice to Tenant and without liability to Tenant for damage or injury to persons, property or business and without being deemed an eviction or disturbance of Tenant’s use or possession of the Premises or giving rise to any claim for offset or abatement of Rent:  (1) to change the Building’s name or street address upon thirty (30) days’ prior written notice to Tenant; (2) to install, affix and maintain all signs on the exterior and/or interior of the Building; (3) to designate and/or approve prior to installation, all types of signs, window shades, blinds, drapes, awnings or other similar items, and all internal lighting that may be visible from the exterior of the Premises; (4) upon reasonable notice to Tenant, to display the Premises to prospective purchasers at reasonable hours at any time during the Term and to prospective tenants at reasonable hours during the last twelve (12) months of the Term; (5) to grant to any party the exclusive right to conduct any business or render any service in or to the Building, provided such exclusive right shall not operate to prohibit Tenant from using the Premises for the purpose permitted hereunder; (6) to change the arrangement and/or location of entrances or passageways, doors and doorways, corridors, elevators, stairs, washrooms or public portions of the Building, and to close entrances, doors, corridors, elevators or other facilities, provided that such action shall not materially and adversely interfere with Tenant’s access to the Premises or the Building; (7) to have access for Landlord and other tenants of the Building to any mail chutes and boxes located in or on the Premises as required by any applicable rules of the United States Post Office; and (8) to close the Building after Standard Operating Hours, except that Tenant and its employees and invitees shall be entitled to admission at all times, under such regulations as Landlord prescribes for security purposes.

ARTICLE TWENTY

ESTOPPEL CERTIFICATE

20.01IN GENERAL

Within fifteen (15) days after request therefor by Landlord, Mortgagee or any prospective mortgagee or owner, Tenant agrees as directed in such request to execute an Estoppel Certificate in recordable form, binding upon Tenant, certifying (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, a description of such modifications and that this Lease as modified is in full force and effect); (ii) the dates to which Rent has been paid; (iii) that Tenant is in the possession of the Premises if that is the case; (iv) that Landlord is not in default under this Lease, or, if Tenant believes Landlord is in default, the nature thereof in detail; (v) that Tenant has no offsets or defenses to the performance of its obligations under this Lease (or if Tenant believes there are any offsets or defenses, a full and complete explanation thereof); (vi) that the Premises have been completed in accordance with the terms and provisions hereof, that Tenant has accepted the Premises and the condition thereof and of all improvements thereto and has no claims against Landlord or any other party with respect thereto; (vii) that if an assignment of rents or leases has been served upon the Tenant by a Mortgagee, Tenant will acknowledge receipt thereof and agree to be bound by the provisions thereof; (viii) that Tenant will give to the Mortgagee copies of all notices required or permitted to be given by Tenant to Landlord; and (ix) to any other information reasonably requested.

20.02ENFORCEMENT

In the event that Tenant fails to deliver an Estoppel Certificate, then such failure shall be a Default for which there shall be no cure or grace period. In addition to any other remedy available to Landlord, Landlord may impose a charge equal to Five Hundred Dollars ($500.00) for each day that Tenant fails to deliver an Estoppel Certificate and Tenant shall be deemed to have irrevocably appointed Landlord as Tenant’s attorney-in-fact to execute and deliver such Estoppel Certificate.

ARTICLE TWENTY-ONE

INTENTIONALLY OMITTED

ARTICLE TWENTY-TWO

REAL ESTATE BROKERS

Tenant represents that, except for the broker(s) listed in Section 1.01(20) Tenant has not dealt with any real estate broker, sales person, or finder in connection with this Lease, and no such person initiated or participated in the negotiation of this Lease, or showed the Premises to Tenant.  Tenant hereby agrees to indemnify, protect, defend and hold Landlord and the Indemnitees, harmless from and against any and all liabilities and claims for commissions and fees arising out of a breach of the foregoing representation.  Landlord agrees to pay any commission to which Landlord’s Broker listed in Section 1.01(20) is entitled in

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connection with this Lease pursuant to Landlord’s written agreement with such broker.  Landlord and Tenant agree that any commission payable to Tenant’s Broker shall be paid by Tenant except to the extent that Tenant’s Broker and Landlord’s Broker have entered into a separate agreement between themselves to share the commission paid to Landlord’s Broker by Landlord.

ARTICLE TWENTY-THREE

MORTGAGEE PROTECTION

23.01       SUBORDINATION AND ATTORNMENT

This Lease is and shall be expressly subject and subordinate at all times to (i) any ground or underlying lease of the Real Property, now or hereafter existing, and all amendments, extensions, renewals and modifications to any such lease, and (ii) the lien of any mortgage or trust deed now or hereafter encumbering fee title to the Real Property and/or the leasehold estate under any such lease, and all amendments, extensions, renewals, replacements and modifications of such mortgage or trust deed and/or the obligation secured thereby, unless such ground lease or ground lessor, or mortgage, trust deed or Mortgagee, expressly provides or elects that the Lease shall be superior to such lease or mortgage or trust deed.  If any such mortgage or trust deed is foreclosed (including any sale of the Real Property pursuant to a power of sale), or if any such lease is terminated, upon request of the Mortgagee or ground lessor, as the case may be, Tenant shall attorn to the purchaser at the foreclosure sale or to the ground lessor under such lease, as the case may be, provided, however, that such purchaser or ground lessor shall not be (i) bound by any payment of Rent for more than one month in advance except payments in the nature of security for the performance by Tenant of its obligations under this Lease; (ii) subject to any offset, defense or damages arising out of a default of any obligations of any preceding Landlord; or (iii) bound by any amendment or modification of this Lease made without the written consent of the Mortgagee or ground lessor; or (iv) liable for any security deposits not actually received in cash by such purchaser or ground lessor.  This subordination shall be self-operative and no further certificate or instrument of subordination need be required by any such Mortgagee or ground lessor.  In confirmation of such subordination, however, Tenant shall execute promptly any reasonable certificate or instrument that Landlord, Mortgagee or ground lessor may request.  Tenant hereby constitutes Landlord as Tenant’s attorney-in-fact to execute such certificate or instrument for and on behalf of Tenant upon Tenant’s failure to do so within fifteen (15) days of a request to do so.  Upon request by such successor in interest, Tenant shall execute and deliver reasonable instruments confirming the attornment provided for herein.

23.02       MORTGAGEE PROTECTION

Tenant agrees to give any Mortgagee or ground lessor, by registered or certified mail, a copy of any notice of default served upon the Landlord by Tenant, provided that prior to such notice Tenant has received notice (by way of service on Tenant of a copy of an assignment of rents and leases, or otherwise) of the address of such Mortgagee or ground lessor.  Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the Mortgagee or ground lessor shall have an additional thirty (30) days after receipt of notice thereof within which to cure such default or if such default cannot be cured within that time, then such additional notice time as may be necessary, if, within such thirty (30) days, any Mortgagee or ground lessor has commenced and is diligently pursuing the remedies necessary to cure such default (including commencement of foreclosure proceedings or other proceedings to acquire possession of the Real Property, if necessary to effect such cure).  Such period of time shall be extended by any period within which such Mortgagee or ground lessor is prevented from commencing or pursuing such foreclosure proceedings or other proceedings to acquire possession of the Real Property by reason of Landlord’s bankruptcy.  Until the time allowed as aforesaid for Mortgagee or ground lessor to cure such defaults has expired without cure, Tenant shall have no right to, and shall not, terminate this Lease on account of default.  This Lease may not be modified or amended so as to reduce the Rent or shorten the Term, or so as to adversely affect in any other respect to any material extent the rights of the Landlord, nor shall this Lease be canceled or surrendered, without the prior written consent, in each instance, of the ground lessor or the Mortgagee.

ARTICLE TWENTY-FOUR

NOTICES

                (a)           All notices, demands or requests provided for or permitted to be given pursuant to this Lease must be in writing and shall be personally delivered, sent by Federal Express or other reputable overnight courier service, or mailed by first class, registered or certified United States mail, return receipt requested, postage prepaid.

                (b)           All notices, demands or requests to be sent pursuant to this Lease shall be deemed to have been properly given or served by delivering or sending the same in accordance with this Section, addressed to the parties hereto at their respective addresses listed in Sections 1.01(2) and (3).

                (c)           Notices, demands or requests sent by mail or overnight courier service as described above shall be effective upon deposit in the mail or with such courier service.  However, the time period in which a response to any such notice, demand or request must be given shall commence to run from (i) in the case of delivery by mail, the date of receipt on the return receipt of the notice, demand or request by the addressee thereof, or (ii) in the case of delivery by Federal Express or other overnight courier service,

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the date of acceptance of delivery by an employee, officer, director or partner of Landlord or Tenant.  Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given, as indicated by advice from Federal Express or other overnight courier service or by mail return receipt, shall be deemed to be receipt of notice, demand or request sent.  Notices may also be served by personal service upon any officer, director or partner of Landlord or Tenant, and shall be effective upon such service.

                (d)           By giving to the other party at least thirty (30) days written notice thereof, either party shall have the right from time to time during the term of this Lease to change their respective addresses for notices, statements, demands and requests, provided such new address shall be within the United States of America.

ARTICLE TWENTY-FIVE

PARKING

                (a)           Tenant shall be entitled to use up to the total number of parking spaces specified in Section 1.01(19), including unreserved as well as any reserved spaces, at Landlord’s then current rates, in parking facilities of the Project, subject to the terms, covenants and conditions set forth below.  Landlord’s current monthly parking charges at the Project are Thirty Dollars ($30.00) per automobile for unreserved parking and are Sixty-Five Dollars ($65.00) per automobile for reserved parking.  All of the payments and charges provided in this Article shall be collectable as additional Rent under the Lease.  Notwithstanding any provision of the foregoing to the contrary, upon written request by Tenant to Landlord, Tenant may convert one (1) unreserved parking space to one (1) reserved parking space and pay the then-current rate therefore and Landlord shall designate as reserved for Tenant said space.

                (b)           Tenant and its employees and business invitees shall not park any vehicle in any stall designated for the exclusive use of any other person and Tenant further agrees to employ reasonable measures to assure that its employees do not park in any such stall.  Tenant shall furnish Landlord with a list of its and its employees’ vehicle license numbers within fifteen (15) days after the Commencement Date and thereafter notify Landlord of any change in such list within fifteen (15) days after such change occurs.  Tenant agrees to assume responsibility for compliance by its employees with all Parking Rules and for all losses (including the loss of parking entrance key-cards, if any) and other damages caused by Tenant or Tenant’s agents, servants, employees, contractors, visitors or licensees occurring during or relating to any use of the Building’s parking facilities.  In addition to all other remedies available to Landlord under the Lease, at law or in equity, in the event any of Tenant’s employees park in violation of the Parking Rules, Landlord may charge Tenant a “violation fee” therefor set by Landlord from time to time.  Landlord’s current violation fee is Fifteen Dollars ($15.00) per automobile for each day or partial day each such vehicle is so parked in violation of the Parking Rules.  Tenant hereby authorizes Landlord to tow away from the Project or attach violation stickers, devices or notices to any vehicle belonging to Tenant or its employees which Landlord in good faith determines is parked in violation of the Parking Rules.  All costs of any such towing or violation device and all applicable violation fees shall be payable by Tenant immediately upon demand by Landlord and, at Landlord’s option, such payment may be required prior to the release of the towed vehicle to its owner.

                (c)           A condition of any parking shall be compliance by the vehicle operator with all Parking Rules, including, without limitation, displaying any sticker or complying with any other identification system from time to time established by Landlord.  The current Parking Rules are set forth on Exhibit F hereto, and the Parking Rules are subject to change by Landlord from time to time.  Landlord expressly reserves the right to refuse to permit any person or vehicle in violation of the Parking Rules to enter or remain in the parking areas of the Project and to demand return therefrom of all parking stickers or other identification supplied by Landlord and Tenant hereby agrees to assist Landlord in enforcing all Parking Rules.

                (d)           In the event any surcharge, regulatory fee or parking tax is at any time imposed by any governmental authority, Tenant shall pay all such amounts applicable to Tenant’s parking privileges hereunder to Landlord either in advance on the first day of each calendar month concurrently with its installments of Monthly Base Rent or as otherwise billed from time to time by Landlord.

                (e)           All parking privileges hereunder are personal to Tenant and, accordingly, in the event Tenant assigns or sublets all or any portion of the Premises, all of the same shall be reduced proportionately based on the Usable Area so assigned or sublet and any assignee or subtenant of Tenant shall receive only then prevailing parking privileges at the full then prevailing rates therefor.

                (f)            Landlord shall not be responsible for enforcing Tenant’s exclusive right to use any of its reserved parking stalls under the Lease nor shall Tenant have any right to impound, tow or impose any penalty on vehicles occupying such spaces.

                (g)           Landlord makes available a number of parking spaces for visitors to the Project at Landlord’s then current rates, and Tenant’s shall have the non-exclusive right, in common with others, to the use of such spaces by its visitors, to the extent such spaces are available on a first-come, first-served basis subject to payment at Landlord’s then current rates for such use.  Tenant may purchase validation coupons, stamps or tickets in the manner made available by Landlord for Tenant to give its visitors to present at the time payment of parking charges is due to defray such charges.  Any visitor not presenting

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the appropriate validation shall pay the then current rate for parking.  Notwithstanding the foregoing, Landlord shall provide Tenant, at no charge to Tenant, with fifty (50) hours of parking validation per month on a non-cumulative basis for Tenant’s visitor parking use

.

ARTICLE TWENTY-SIX

MISCELLANEOUS

26.01LATE CHARGES

                (a)           The Monthly Base Rent, Rent Adjustments, Rent Adjustment Deposits and Parking charges shall be due when specifically provided above.  Except for such payments and late charges described below, which late charge shall be due when provided below (without notice or demand), all other payments required hereunder to Landlord shall be paid within ten (10) days after Landlord’s demand therefor.  All Rent and charges, except late charges, not paid when due shall bear interest from the date due until the date paid at the Default Rate in effect on the date such payment was due.

                (b)           In the event Tenant is more than five (5) days late in paying any installment of Rent due under this Lease, Tenant shall pay Landlord a late charge equal to five percent (5%) of the delinquent installment of Rent.  The parties agree that (i) such delinquency will cause Landlord to incur costs and expenses not contemplated herein, the exact amount of which will be difficult to calculate, including the cost and expense that will be incurred by Landlord in processing each delinquent payment of rent by Tenant, (ii) the amount of such late charge represents a reasonable estimate of such costs and expenses and (iii) that such late charge shall be paid to Landlord for each delinquent payment in addition to all Rent otherwise due hereunder.  The parties further agree that the payment of late charges and the payment of interest provided for in subparagraph (a) above are distinct and separate from one another in that the payment of interest is to compensate Landlord for its inability to use the money improperly withheld by Tenant, while the payment of late charges is to compensate Landlord for its additional administrative expenses in handling and processing delinquent payments.

                (c)           Payment of interest at the Default Rate and/or of late charges shall not excuse or cure any default by Tenant under this Lease, nor shall the foregoing provisions of this Article or any such payments prevent Landlord from exercising any right or remedy available to Landlord upon Tenant’s failure to pay Rent when due, including the right to terminate this Lease.

26.02       NO JURY TRIAL; VENUE; JURISDICTION

Each party hereto (which includes any assignee, successor, heir or personal representative of a party) shall not seek a jury trial, hereby waives trial by jury, and hereby further waives any objection to venue in the County in which the Project is located, and agrees and consents to personal jurisdiction of the courts of the State of California, in any action or proceeding or counterclaim brought by any party hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant’s use or occupancy of the Premises, or any claim of injury or damage, or the enforcement of any remedy under any statute, emergency or otherwise, whether any of the foregoing is based on this Lease or on tort law.  No party will seek to consolidate any such action in which a jury has been waived with any other action in which a jury trial cannot or has not been waived.  It is the intention of the parties that these provisions shall be subject to no exceptions.  By execution of this Lease the parties agree that this provision may be filed by any party hereto with the clerk or judge before whom any action is instituted, which filing shall constitute the written consent to a waiver of jury trial pursuant to and in accordance with Section 631 of the California Code of Civil Procedure.  No party has in any way agreed with or represented to any other party that the provisions of this Section will not be fully enforced in all instances.  The provisions of this Section shall survive the expiration or earlier termination of this Lease.

26.03       INTENTIONALLY OMITTED

26.04       OPTION

This Lease shall not become effective as a lease or otherwise until executed and delivered by both Landlord and Tenant. The submission of the Lease to Tenant does not constitute a reservation of or option for the Premises, but when executed by Tenant and delivered to Landlord, the Lease shall constitute an irrevocable offer by Tenant in effect for fifteen (15) days to lease the Premises on the terms and conditions herein contained.

26.05       TENANT AUTHORITY

Tenant represents and warrants to Landlord that it has full authority and power to enter into and perform its obligations under this Lease, that the person executing this Lease is fully empowered to do so, and that no consent or authorization is necessary from any third party.  Landlord may request that Tenant provide Landlord evidence of Tenant’s authority.

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26.06ENTIRE AGREEMENT

This Lease, the Exhibits and Rider(s) attached hereto contain the entire agreement between Landlord and Tenant concerning the Premises and there are no other agreements, either oral or written, and no other representations or statements, either oral or written, on which Tenant has relied.  This Lease shall not be modified except by a writing executed by Landlord and Tenant.

26.07       MODIFICATION OF LEASE FOR BENEFIT OF MORTGAGEE

If any Mortgagee requires a modification of this Lease which shall not result in any increased cost or expense to Tenant or in any other substantial and adverse change in the rights and obligations of Tenant hereunder, then Tenant agrees that the Lease may be so modified.

26.08       EXCULPATION

Tenant agrees, on its behalf and on behalf of its successors and assigns, that any liability or obligation of Landlord in connection with this Lease shall only be enforced against Landlord’s equity interest in the Building up to a maximum of Three Million Dollars ($3,000,000.00) and in no event against any other assets of the Landlord, or Landlord’s officers or directors, partners or members, and that any liability of Landlord with respect to this Lease shall be so limited and Tenant shall not be entitled to any judgment in excess of such amount.

26.09ACCORD AND SATISFACTION

No payment by Tenant or receipt by Landlord of a lesser amount than any installment or payment of Rent due shall be deemed to be other than on account of the amount due, and no endorsement or statement on any check or any letter accompanying any check or payment of Rent shall be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such installment or payment of Rent or pursue any other remedies available to Landlord.  No receipt of money by Landlord from Tenant after the termination of this Lease or Tenant’s right of possession of the Premises shall reinstate, continue or extend the Term.  Receipt or acceptance of payment from anyone other than Tenant, including an assignee of Tenant, is not a waiver of any breach of Article Ten, and Landlord may accept such payment on account of the amount due without prejudice to Landlord’s right to pursue any remedies available to Landlord.

26.10LANDLORD’S OBLIGATIONS ON SALE OF BUILDING

In the event of any sale or other transfer of the Building, Landlord shall be entirely freed and relieved of all agreements and obligations of Landlord hereunder accruing or to be performed after the date of such sale or transfer; provided that all of Landlord’s obligations hereunder are specifically assumed by the buyer or transferee; and further provided that any remaining liability of Landlord with respect to this Lease shall be limited to Three Million Dollars ($3,000,000.00) and Tenant shall not be entitled to any judgment in excess of such amount.

26.11BINDING EFFECT

Subject to the provisions of Article Ten, this Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, legal representatives, successors and permitted assigns.

26.12CAPTIONS

The Article and Section captions in this Lease are inserted only as a matter of convenience and in no way define, limit, construe, or describe the scope or intent of such Articles and Sections.

26.13TIME; APPLICABLE LAW; CONSTRUCTION

Time is of the essence of this Lease and each and all of its provisions.  This Lease shall be construed in accordance with the Laws of the State of California.  If more than one person signs this Lease as Tenant, the obligations hereunder imposed shall be joint and several.  If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each item, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by Law.  Wherever the term “including” or “includes” is used in this Lease, it shall have the same meaning as if followed by the phrase “but not limited to”.  The language in all parts of this Lease shall be construed according to its normal and usual meaning and not strictly for or against either Landlord or Tenant.

26.14ABANDONMENT

In the event Tenant vacates or abandons the Premises but is otherwise in compliance with all the terms, covenants and conditions of this Lease, Landlord shall have the right to enter into the Premises in order to

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show the space to prospective tenants.  Tenant expressly acknowledges that in the absence of written notice pursuant to Section 11.02(b) or pursuant to California Civil Code Section 1951.3 terminating Tenant’s right to possession, none of the foregoing acts of Landlord or any other act of Landlord shall constitute a termination of Tenant’s right to possession or an acceptance of Tenant’s surrender of the Premises, and the Lease shall continue in effect.

26.15LANDLORD’S RIGHT TO PERFORM TENANT’S DUTIES

If Tenant fails timely to perform any of its duties under this Lease, Landlord shall have the right (but not the obligation), to perform such duty on behalf and at the expense of Tenant without prior notice to Tenant, and all sums expended or expenses incurred by Landlord in performing such duty shall be deemed to be additional Rent under this Lease and shall be due and payable upon demand by Landlord.

26.16       SECURITY SYSTEM

Landlord shall not be obligated to provide or maintain any security patrol or security system.  Landlord shall not be responsible for the quality of any such patrol or system which may be provided hereunder or for damage or injury to Tenant, its employees, invitees or others due to the failure, action or inaction of such patrol or system.

26.17       NO LIGHT, AIR OR VIEW EASEMENTS

Any diminution or shutting off of light, air or view by any structure which may be erected on lands of or adjacent to the Project shall in no way affect this Lease or impose any liability on Landlord.

26.18       RECORDATION

Neither this Lease, nor any notice nor memorandum regarding the terms hereof, shall be recorded by Tenant.  Any such unauthorized recording shall be a Default for which there shall be no cure or grace period. Tenant agrees to execute and acknowledge, at the request of Landlord, a memorandum of this Lease, in recordable form.

26.19       OPTION TO EXTEND

                (a)           Landlord hereby grants Tenant a single option to extend the initial Term of the Lease for an additional period of five (5) years (such period may be referred to as the “Option Term”), as to the entire Premises as it may then exist, upon and subject to the terms and conditions of this Section (the “Option To Extend”), and provided that at the time of exercise of such right:  (i) Tenant must be in occupancy of the entire Premises; and (ii) there has been no material adverse change in Tenant’s financial position from such position as of the date of execution of the Lease, as certified by Tenant’s independent certified public accountants, and as supported by Tenant’s certified financial statements, copies of which shall be delivered to Landlord with Tenant’s written notice exercising its right hereunder.

                (b)           Tenant’s election (the “Election Notice”) to exercise the Option To Extend must be given to Landlord in writing no later than the date which is nine (9) months before the Expiration Date.  If Tenant either fails or elects not to exercise its Option to Extend by not timely giving its Election Notice, then the Option to Extend shall be null and void.

                (c)           The Option Term shall commence immediately after the expiration of the initial Term of the Lease.  Tenant’s leasing of the Premises during the Option Term shall be upon and subject to the same terms and conditions contained in the Lease except that:  (i) the Monthly Base Rent shall be amended to an amount to equal the “Option Term Rent”, defined and determined in the manner set forth in the immediately following Subsection (and otherwise, Tenant shall continue to pay Rent Adjustments, all other Rent and all other charges pursuant to the Lease); (ii) the Security Deposit, if any, shall be increased within fifteen (15) days after the Prevailing Market Rent has been determined to equal one hundred percent (100%) of the highest monthly installment of Monthly Base Rent thereunder, but in no event shall the Security Deposit be decreased; (iii) Tenant shall accept the Premises in its “AS-IS” condition without any obligation of Landlord to repaint, remodel, repair, improve or alter the Premises or to provide Tenant any allowance therefor; and (iv) there shall be no further option or right to extend the term of the Lease.  If Tenant timely and properly exercises the Option To Extend, references in the Lease to the Term shall be deemed to mean the initial Term as extended by the Option Term unless the context clearly requires otherwise.

                (d)           The Option Term Rent shall mean the “Prevailing Market Rent” (defined below). As used herein, “Prevailing Market Rent” shall mean the base rent and all other monetary payments and escalations, including consumer price increases, payable by a tenant that Landlord could obtain from a third party desiring to lease the Premises for a term equal to the Option Term and commencing when the Option Term is to commence under market leasing conditions, and taking into account the following:  the size, location and floor levels of the Premises; the type and quality of tenant improvements; age and location of the Project; quality of construction of the Project; services to be provided by Landlord or by tenant; the rent, all other monetary payments and escalations obtainable for new leases of space comparable to the Premises in the Project and in comparable buildings in the surrounding geographic

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submarkets, and other factors that would be relevant to such a third party in determining what such party would be willing to pay therefor.  The determination of Prevailing Market Rent based upon the foregoing criteria shall be made by Landlord, in the good faith exercise of Landlord’s business judgment.  Within thirty (30) days after Tenant’s exercise of the Option To Extend, Landlord shall notify Tenant of Landlord’s determination of Option Term Rent for the Premises.  If Tenant, in Tenant’s sole discretion, disagrees with the amount of Prevailing Market Rent determined by Landlord, Tenant may elect to revoke and rescind the exercise of the option by giving written notice thereof to Landlord within thirty (30) days after notice of Landlord’s determination of Prevailing Market Rent.

                (e)           This Option to Extend is personal to South Bay Bank and may not be used by, and shall not be transferable or assignable (voluntarily or involuntarily) to any person or entity.

                (f)            Upon the occurrence of any of the following events, Landlord shall have the option, exercisable at any time prior to commencement of the Option Term, to terminate all of the provisions of this Section with respect to the Option to Extend, with the effect of canceling and voiding any prior or subsequent exercise so this Option to Extend is of no force or effect:

                (i)   Tenant’s failure to timely exercise the Option to Extend in accordance with the provisions of this Section.

                (ii)  The existence at the time Tenant exercises the Option to Extend or at the commencement of the Option Term of any default on the part of Tenant under the Lease or of any state of facts which with the passage of time or the giving of notice, or both, would constitute such a default.

                (iii) Tenant’s third monetary default under the Lease prior to the commencement of the Option Term, notwithstanding that all such defaults may subsequently be cured.

(g)           Without limiting the generality of any provision of the Lease, time shall be of the essence with respect to all of the provisions of this Section.

26.20       SIGNAGE

Tenant shall have the right to Building standard directory listing and suite signage at Tenant’s cost. Except as hereinprovided, Tenant shall not display, maintain or affix on any place on or about the Building any sign, notice, legend or advertisement.

26.21       SURVIVAL

The waivers of the right of jury trial, the other waivers of claims or rights, the releases and the obligations of Tenant under this Lease to indemnify, protect, defend and hold harmless Landlord and/or Indemnitees shall survive the expiration or termination of this Lease, and so shall all other obligations or agreements which by their terms survive expiration or termination of the Lease.

IN WITNESS WHEREOF, this Lease has been executed as of the date set forth in Section 1.01(4) hereof.

TENANT:		LANDLORD:
South Bay Bank,		Metropolitan Life Insurance Company,
a National Association		a New York corporation
By		By
	(Print Name)		(Print Name)
Its		Its
(Chairman of Board, President or Vice President)
By
	(Print Name)
Its
(Secretary, Assistant Secretary, CFO or Assistant Treasurer)

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EXHIBIT A

PLAN OF PREMISES

EXHIBIT B

WORKLETTER AGREEMENT

(Allowance)

                This Workletter Agreement (“Workletter”) is attached to and a part of a certain Office Lease dated as of September 19, 2003 by and between Metropolitan Life Insurance Company, a New York corporation, as Landlord, and South Bay Bank, a National Association, as Tenant, for the Premises (the “Lease”).

                1.             Defined Terms.  Capitalized terms used in this Workletter shall have the same meanings set forth in the Lease except as otherwise specified herein and except for terms capitalized in the ordinary course of punctuation.  For purposes of this Workletter the following capitalized terms have the following meanings:

                1.1.          “Design Documents” means the layout plans and specifications for the real property improvements to be constructed by Landlord in the Premises which are the final product of the preliminary space planning and which (i) include, among other things, all partitions, doors, HVAC (heating, ventilating and air conditioning systems) distribution, ceiling systems, light fixtures, plumbing installations, electrical installations and outlets, telephone installations and outlets, any other installations required by Tenant, fire and life-safety systems, wall finishes and floor coverings, whether to be newly installed or requiring changes from the as-is condition of the Premises as of the date of execution of the Lease, all in sufficient detail for Landlord to commence preparation of the Construction Drawings (as defined below); and (ii) comply with all Law as applicable and as interpreted at the time of construction of the Tenant Improvements (as defined below), including all building codes and the ADA (as defined in the Lease);

                1.2           “Construction Drawings” means the final architectural plans and specifications, and engineering plans and specifications, for the real property improvements to be constructed by Landlord in the Premises in sufficient detail to be submitted for governmental approvals and building permits and to serve as the detailed construction drawings and specifications for the contractor, and shall (i) include, among other things, all partitions, doors, HVAC (heating, ventilating and air conditioning systems) distribution, ceiling systems, light fixtures, plumbing installations, electrical installations and outlets, telephone installations and outlets, any other installations required by Tenant, fire and life-safety systems, wall finishes and floor coverings, whether to be newly installed or requiring changes from the as-is condition of the Premises as of the date of execution of the Lease; and (ii) comply with all Law as applicable and as interpreted at the time of construction of the Tenant Improvements, including all building codes and the ADA;

                1.3           “Tenant Improvements” means all real property improvements to be constructed by Landlord as shown on the Construction Drawings, as they may be modified as provided herein; and

                1.4           “Landlord Work” means the construction and installation of the Tenant Improvements.

                2.             Design Matters.

                2.1.          Landlord, through its architects and/or space planners (“Landlord’s Architect”), shall prepare the Design Documents and the Construction Drawings, as they may be modified as provided herein, in accordance with the design specified by Tenant and reasonably approved by Landlord.

                2.2.          Tenant shall be responsible for the suitability for the Tenant’s needs and business of the design and function of all Tenant Improvements.  Tenant, at its own expense, shall devote such time and provide such instructions as may be necessary to enable Landlord to complete the matters described below, and Tenant shall approve such matters, within the times described below:

                                (a)  to provide no later than                 , 2003, all information necessary or appropriate for Landlord’s Architect to prepare the Design Documents;

                                (b)  to provide Tenant’s written approval of the Design Documents within five (5) days after receipt of the proposed Design Documents;

                                (c)  to provide Tenant’s written approval of a nonbinding preliminary estimate (“Landlord’s Preliminary Estimate”) provided by Landlord of the cost of the Tenant Improvements shown on the Design Documents within three (3) days after receipt of such estimate; and

                                (d)  to provide Tenant’s written approval of the Construction Drawings within five (5) days after receipt of the proposed Construction Drawings.

                3.             Construction; Landlord’s  Contribution; Tenant Improvement Costs.

                3.1.          Construction; Landlord’s Contribution.  Landlord, through its contractor, shall complete the construction of the Tenant Improvements in a good and workmanlike manner, up to a maximum cost to Landlord of Thirty-Four Thousand Four Hundred Fifty and No/100 Dollars ($34,450.00), which shall be binding upon the parties unless and until Landlord measures the Premises pursuant to Exhibit G of the Lease and such measurement shows the Premises is larger or smaller than 1,378 square feet of Usable Area, in which event Landlord shall recalculate such amount at the rate of Twenty-Five and No/100 Dollars

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($25.00) per square foot of Usable Area of the Premises (“Landlord’s Maximum Contribution”), and within ten days after Landlord’s notice of such measurement (if any), recalculation (if any) and amount owing (if any) from either party with respect to the Landlord’s Maximum Contribution and the Tenant Improvement Costs (as defined below), the owing party shall credit (if Landlord owes Tenant) or pay (if Tenant owes Landlord) the other the amount due.

                3.2.          Tenant Improvement Costs.  The cost of the Tenant Improvements (“Tenant Improvement Costs”) to be paid by Landlord from, but not in excess of, Landlord’s Maximum Contribution shall include:

                                (a)  The costs of Landlord’s Architect and any other consultants retained by Landlord in connection with the preparation of Design Documents and Constructions Drawings, and engineering costs associated with completion of the State of California energy utilization calculations under Title 24 legislation;

                                (b)  All costs of obtaining from the City of Costa Mesa and any other governmental authority, approvals, building permits and occupancy permits, if any;

                                (c)  All costs of interior design and finish schedule plans and specifications including as-built drawings;

                                (d)  All direct and indirect costs of procuring, installing and constructing the Tenant Improvements, including:  (i) the construction fee in the amount of three percent (3%) of the total construction costs for overhead and profit and the cost of all on-site supervisory and administrative staff, office, equipment and temporary services rendered or provided by Landlord’s contractor in connection with construction of the Tenant Improvements; (ii) the cost of any services or utilities made available by Landlord; and (iii) a construction management fee payable to Landlord of no more than three percent (3%);

                                (e)  Without limiting the generality of the foregoing, the Tenant Improvement Costs include all costs of designing, procuring, constructing and installing Tenant Improvements in compliance with Law as applicable and as interpreted at the time of construction of the Tenant Improvements, including all building codes and the ADA; and

                                (f)  All fees payable to Landlord’s architectural and engineering firm if it is required by Tenant to redesign any portion of the Tenant Improvements following Tenant’s approval of the Construction Drawings, and all costs in connection with any approved Change Order (as defined below) in accordance with the provisions of this Workletter.

In no event shall the Tenant Improvement Costs include (i) any costs of procuring or installing in the Premises any trade fixtures, equipment, furniture, furnishings, telephone equipment, cabling for any of the foregoing or other personal property (“Personal Property”) to be used in the Premises by Tenant, and the cost of such Personal Property shall be paid by Tenant, or (ii) any costs or expenses of any consultants retained by Tenant with respect to design, procurement, installation or construction of improvements or installations, whether real or personal property, for the Premises.

                3.3.          Limitations of Landlord’s Obligations.  Upon Substantial Completion of the Tenant Improvements, Landlord shall have no further obligation to construct improvements or construct modifications to or changes in the Tenant Improvements, except to complete the punchlist of Landlord Work remaining to be completed or correct any part thereof not in compliance with the Construction Drawings and any approved modifications thereof, as provided in the Lease.  If Landlord’s Maximum Contribution exceeds the Tenant Improvement Costs, then Landlord shall retain such excess and shall have no obligation or liability to Tenant with respect to such excess.

                4.             Costs of Tenant Improvements in Excess of Landlord’s  Maximum Contribution.  As soon as reasonably available after completion and approval by both parties of the Construction Drawings, Landlord shall notify Tenant in writing of the costs, if any, of the Tenant Improvements in excess of the Landlord’s Maximum Contribution (such notification shall be referred to as “Landlord’s Cost Statement”).  Within five (5) business days after receipt of Landlord’s Cost Statement, Tenant shall, in writing, give Landlord authorization to complete the Tenant Improvements in accordance with the Construction Drawings, and to the extent that there remain any costs of the Tenant Improvements in excess of the Landlord’s Maximum Contribution, Tenant shall accompany said authorization with a good check made payable to the order of Landlord in the amount of the excess cost authorized by Tenant of the Tenant Improvements over Landlord’s Maximum Contribution.  In such authorization, Tenant may, pursuant to the provisions of this Workletter, request a Change Order to the approved Construction Drawings to reduce or delete all or part of such excess costs, but any delay in completion of the Premises resulting from such request for a Change Order or from the changes so made or necessitated shall be chargeable as Tenant Delay.  If such written authorization and check (if applicable) are not received by Landlord, Landlord shall not be obligated to commence work on the Premises and any resulting delay in the completion of the Premises shall be chargeable against Tenant as Tenant Delay as provided in Section 6 of this Workletter and in the Lease.

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                5.             Changes. If Tenant shall request any change, addition or alteration in the approved Construction Drawings, any such request and Change Order pursuant thereto shall be subject to Landlord’s approval, which shall not unreasonably be withheld, and subject to such approval, Landlord shall promptly give Tenant a written estimate of (a) the cost of engineering and design services and the construction contractor services to prepare a change order (the “Change Order”) in accordance with such request, (b) the cost of work to be performed pursuant to such Change Order, and (c) the time delay expected because of such requested Change Order.  Within three (3) business days following Tenant’s receipt of the foregoing written estimate, Tenant shall notify Landlord in writing whether it approves such written estimate.  If Tenant approves such written estimate and if such cost is in excess of Landlord’s Maximum Contribution, Tenant shall accompany such approval with a good check made payable to the order of Landlord in the amount of the estimated cost of preparing the Change Order and performing the work thereto, and the foregoing shall constitute Landlord’s authorization to proceed.  If such written authorization, and check if required, are not received by Landlord within such three (3) business day period, Landlord shall not be obligated to prepare the Change Order or perform any work in connection therewith.  Upon completion of the work of the Change Order and submission of the final cost thereof by Landlord to Tenant, Tenant shall promptly pay to Landlord any such additional amounts in excess of Landlord’s Maximum Contribution.

                6.             Tenant Delay.  If the Substantial Completion of the Tenant Improvements in the Premises is delayed due to Tenant Delay, then Tenant shall be responsible for all costs and any expenses occasioned by such delay, including any costs and expenses attributable to increases in labor or materials, and the provisions of Article Two of the Lease shall apply.

                7.             Entry by Tenant.  Tenant may, with Landlord’s consent, which will not unreasonably be withheld, enter the Premises during construction and prior to the Commencement Date for the Premises solely for the purpose of installing Tenant’s Personal Property (defined in Section 3.2 above) as long as such entry will not interfere with the timely and orderly construction and completion of the Premises.  Tenant shall notify Landlord of its desired time(s) of entry and shall submit for Landlord’s approval the scope of the work to be performed and the name(s) of the contractor(s) who will perform such work.  Such work and such contractors shall be subject to Landlord’s approval in the same manner as for work subject to Section 9.01(a) of the Lease.  Such entry shall be without payment of Monthly Base Rent or Rent Adjustments, but such entry and all acts and omissions in connection with it are subject to and governed by all other provisions of the Lease, including Tenant’s indemnification obligations, insurance obligations, obligations under Article Seven and the provisions of Section 9.02.

                8.             Force and Effect.  The terms and conditions of this Workletter supplement the Lease and shall be construed to be a part of the Lease and are incorporated in the Lease.  Should any inconsistency arise between this Workletter and the Lease as to the specific matters which are the subject of this Workletter, the terms and conditions of this Workletter shall control.

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EXHIBIT C

CURRENT JANITORIAL SPECIFICATIONS

                This Exhibit is attached to and a part of a certain Office Lease dated as of September 19, 2003 by and between Metropolitan Life Insurance Company, a New York corporation, as Landlord, and South Bay Bank, a National Association, as Tenant, for the Premises (the “Lease”).

I.  Five times per week, excluding National Holidays:

(1)Sweep and damp mop all hard flooring and vacuum all carpeted areas.  Spot clean as necessary.

(2)Empty and clean all wastepaper containers, ash trays, receptacles, etc., and damp wipe as necessary.

(3)Remove wastepaper and waste materials to a designated area or areas.

(4)Dust and wipe clean all furniture, hand reached fixtures, baseboards, and window sills.

(5)When applicable, clean restrooms and water fountains.

II.  One time per week (and as necessary):

(1)Remove all finger marks, smudges, and other marks from walls, doors, windows and other surfaces.

III.  One time per month (and as necessary):

(1)Scrub and wax hard flooring.

(2)High dust.

IV.  Two times per year (and as necessary):

(1)Clean all windows inside, including sills and frames, and outside.

V.  One time per year (and as necessary):

(1)Wash, clean, and dust ceiling fixtures and light panels.

EXHIBIT D

RULES AND REGULATIONS

                This Exhibit is attached to and a part of a certain Office Lease dated as of September 19, 2003 by and between Metropolitan Life Insurance Company, a New York corporation, as Landlord, and South Bay Bank, a National Association, as Tenant, for the Premises (the “Lease”).

                1.             No sidewalks, entrance, passages, courts, elevators, vestibules, stairways, corridors or halls shall be obstructed or encumbered by Tenant or used for any purpose other than ingress and egress to and from the Premises or the Project.

                2.             No awning or other projection shall be attached to the outside walls or windows of the Project without the prior written consent of Landlord.  No curtains, blinds, shades, drapes or screens shall be attached to or hung in, or used in connection with any window or door of the Premises, without the prior written consent of Landlord.  Such awnings, projections, curtains, blinds, shades, drapes, screens and other fixtures must be of a quality, type, design, color, material and general appearance approved by Landlord, and shall be attached in the manner approved by Landlord.  All electrical fixtures hung in offices or spaces along the perimeter of the Premises must be fluorescent, of a quality, type, design, bulb color, size and general appearance approved by Landlord, which approval shall not be unreasonably withheld.

                3.             No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by Tenant on any part of the outside or inside of the Premises or of the Project without the prior written consent of Landlord.  In the event of the violation of the foregoing by Tenant, Landlord may remove same without liability, and may charge the expense incurred by such removal to Tenant.  Interior signs on doors and directly tablet shall be inscribed, painted or affixed for Tenant by Landlord at the expense of Tenant, and shall be of a quality, quantity, type, design, color, size style, composition, material, location and general appearance acceptable to Landlord.

                4.             The sashes, sash doors, skylights, windows, and doors that reflect or admit light or air into the halls passageways or other public places in the Project shall not be covered or obstructed by Tenant, nor shall any bottles, parcels, or other articles be placed on the window sills, or in the public portions of the Project.

                5.             No show cases or other articles shall be put in front of or affixed to any part of the exterior of the Project, nor placed in public portions thereof without the prior written consent of Landlord.

                6.             The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags or other substances shall be thrown therein.  All damages resulting from any misuse of the fixtures by Tenant shall be borne by Tenant to the extent that Tenant or Tenant’s agents, servants, employees, contractors, visitors, or licensees shall have caused the same.

                7.             Tenant shall not paint, mark, drill into or in any way deface any part of the Premises or the Project.  No boring or cutting shall be permitted, except with the prior written consent of Landlord, and as Landlord may direct.

                8.             No animal or bird of any kind shall be brought into or kept in or about the Premises or the Project.

                9.             Prior to leaving the Premises for the day, Tenant shall reasonably draw or lower window coverings and extinguish all lights.

                10.           Tenant shall not make, or permit to be made, any unseemly or disturbing noises or interfere with occupants of the Project or neighboring buildings or premises or those having business with them.  Tenant shall not throw anything out of the doors, windows or skylights or down the passageways.

                11.           Except as otherwise permitted under Section 9 of the Lease, neither Tenant nor any of Tenant’s agents, servants, employees, contractors, visitors or licensees shall at any time bring or keep upon the Premises any flammable, combustible or explosive fluid, chemical or substance.

                12.           No additional locks, bolts or mail slots of any kind shall be placed upon any of the doors or windows by Tenant, nor shall any change be made in existing locks or the mechanism thereof; however, the foregoing shall not apply to any card key system which Tenant installs in full compliance with all other provisions of the Lease at its sole expense and with respect to which Landlord is provided with all access cards necessary to fully exercise all of its entry rights under the Lease with respect to the Premises.  Tenant must, upon the termination of the tenancy, restore to Landlord all keys of stores, offices and toilet rooms either furnished to or otherwise procured by Tenant and, in the event of the loss of any keys so furnished, Tenant shall pay to Landlord the cost thereof.

                13.           All removals, or the carrying in or out of any safes, freight, furniture, fixtures, bulky matter or heavy equipment of any description must take place during the hours which Landlord or its agent may determine from time to time.  Landlord reserves the right to prescribe the weight and position of all safes, which must be placed upon two-inch thick plank strips to distribute the weight.  The moving of safes,

freight, furniture, fixtures, bulky matter or heavy equipment of any kind must be made upon previous notice to the Superintendent of the Building and in a manner and at the time prescribed by him, and the persons employed by Tenant for such work are subject to Landlord’s prior approval.  Landlord reserves the right to inspect all safes, freight or other bulky articles to be brought into the Project and to exclude from the Project all safes, freight or other bulky articles which violate any of these Rules and Regulations or the lease of which these Rules and Regulations are a part.

                14.           Tenant shall not occupy or permit any portion of the Premises to be occupied as an office that is not generally consistent with the character and nature of an ordinary desk-type office.  Nor shall Tenant permit any portion of the Premises to be used (a) for an employment agency, a public stenographer or typist, a labor union  office, a physician’s or dentist’s office, a dance or music studio, a school, a beauty salon or barber shop, the business of photographic or multilith or multigraph reproductions or offset printing (not precluding using any part of the Premises for photographic, multilith or multigraph reproductions solely in connection with Tenant’s own business and/or activities), a restaurant or bar, an establishment for the sale of confectionery or soda or beverages or sandwiches or ice cream or baked goods, an establishment for the preparation or dispensing or consumption of food or beverages (of any kind) in any manner whatsoever, or as a news or cigar stand, or as a radio or television or recording studio, theater or exhibition hall, for manufacturing, for the storage of merchandise or for the sale of merchandise, goods or property of any kind at auction, or for lodging, sleeping or for any immoral purpose, or for any business which would tend to generate a large amount of foot traffic in or about the Project or any of the areas used in connection with the operation thereof, including but not limited to any use (i) as a government office or foreign embassy or consulate, or (vi) as a tourist or travel bureau, or (b) a use which conflicts with any so-called “exclusive” then in favor of, or is for any use the same as that stated in any percentage lease to, another tenant of the Project, or (c) a use which would be prohibited by any other portion of the Lease (including but not limited to any Rules and Regulations then in effect) or in violation of Law.  Tenant shall not engage or pay for any employees on the Premises other than those working at the Premises, nor shall Tenant advertise for laborers giving an address at the Premises.

                15.           Tenant shall not purchase spring water, towels, janitorial or maintenance or other like service from any company or persons not reasonably approved by Landlord.  Landlord shall approve a sufficient number of sources of such service to provide Tenant with a reasonable selection, but only in such instances and to such extent as Landlord in its judgment shall consider consistent with security and proper operation of the Project.

                16.           Landlord shall have the right to prohibit any advertising or business conducted by Tenant referring to the Project which, in Landlord’s opinion, tends to impair the reputation of the Project or its desirability as a first class building for offices and, upon notice from Landlord, Tenant shall refrain from or discontinue such advertising.

                17.           Landlord reserves the right to exclude from the Project between the hours of 6:00 P.M. and 8:00 A.M. on all days, and at all hours on Saturdays, Sundays and National Holidays, all persons who do not present a pass to the Project issued by Landlord.  Landlord may furnish passes to Tenant so that Tenant may validate and issue same.  Tenant shall safeguard said passes and shall be responsible for all acts of persons in or about the Project who possess a pass issued to Tenant.

                18.           Tenant’s contractors shall, while in the Project, be subject to and under the control and direction of the Superintendent of the Building (but not as agent or servant of said Superintendent or of Landlord) except for supervision of work.

                19.           If the Premises is or becomes infested with vermin as a result of the use or any misuse or neglect of the Premises by Tenant, its agents, servants, employees, contractors, visitors, or licensees, Tenant shall forthwith at Tenant’s expense cause the same to be exterminated from time to time to the satisfaction of Landlord and shall employ such licensed exterminators as shall be approved in writing in advance by Landlord.

                20.           The requirements of Tenant will be attended to only upon application at or call to the office of the Project.  Project personnel shall not perform any work or do anything outside of their regular duties, unless under special instructions from the office of the Landlord.

                21.           Canvassing, soliciting and peddling in the Project are prohibited and Tenant shall cooperate to prevent the same.

                22.           No water cooler, air conditioning unit or system or other apparatus shall be installed or used by Tenant without the written consent of Landlord.

                23.           There shall not be used in any Common Areas, public halls, plaza areas, lobbies or other space in the Project, either by Tenant or by jobbers or others, in the delivery or receipt of merchandise, any hand trucks or dollies, except those equipped with rubber tires and side guards.

                24.           Tenant, Tenant’s agents, servants, employees, licensees or visitors shall not park any vehicles in any driveways, service entrances, or areas posted “No Parking.”

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                25.           Tenant shall install and maintain, at Tenant’s sole cost and expense, an adequate visibly marked (at all times property operational) fire extinguisher next to any duplicating or photocopying machine or similar heat producing equipment, which may or may not contain combustible material, in the Premises.

                26.           Tenant shall reasonably keep its window coverings closed during any period of the day when the sun is shining directly on the windows of the Premises.

                27.           Tenant shall not use the name of the Project for any purpose other than as the address of the business to be conducted by Tenant in the Premises, nor shall Tenant use any picture of the Project in its advertising, stationary or in any other manner without the prior written permission of Landlord.  Landlord expressly reserves the right at any time to change said name without in any manner being liable to Tenant therefor.

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EXHIBIT E

PROJECT

EXHIBIT F

CURRENT PARKING RULES

                This Exhibit is attached to and a part of a certain Office Lease dated as of September 19, 2003 by and between Metropolitan Life Insurance Company, a New York corporation, as Landlord, and South Bay Bank, a National Association, as Tenant, for the Premises (the “Lease”).

                1.  Cars must be parked entirely within painted stall lines.

                2.  All directional signs and arrows must be observed.

                3.  All posted speed limits for the parking areas shall be observed.  If no speed limit is posted for an area, the speed limit shall be five (5) miles per hour.

                4.  Parking is prohibited:

                                (a)  in areas not striped for parking;

                                (b)  in aisles;

                                (c)  where “no parking” signs are posted;

                                (d)  on ramps;

                                (e)  in cross-hatched areas; and

                                (f)  in such other areas as may be designated by Landlord.

                5.  Handicap and visitor stalls shall be used only by handicapped persons or visitors, as applicable.

                6.  Parking stickers or any other device or form of identification supplied by Landlord from time to time (if any) shall remain the property of Landlord.  Such parking identification device must be displayed as requested and may not be mutilated in any manner.  The serial number of the parking identification device may not be obliterated.  Devices are not transferable and any device may not be obliterated.  Devices are not transferable and any device in the possession of an unauthorized holder will be void.  There will be a replacement charge payable by the parker and such parker’s appropriate tenant equal to the amount posted from time to time by Landlord for loss of any magnetic parking card or any parking sticker.

                7.  Every parker is required to park and lock his or her own car.  All responsibility for damage to cars or persons is assumed by the parker.

                8.  Loss or theft of parking identification devices must be reported to Landlord, and a report of such loss or theft must be filed by the parker at that time.  Any parking identification devices reported lost or stolen found on any unauthorized car will be confiscated and the illegal holder will be subject to prosecution.  Lost or stolen devices found by the parker must be reported to Landlord immediately to avoid confusion.

                9.  Parking spaces are for the express purpose of parking one automobile per space.  Washing, waxing, cleaning or servicing of any vehicle by the parker and/or such person’s agents is prohibited.  The parking areas shall not be used for overnight or other storage for vehicles of any type.

                10. Landlord reserves the right to refuse the issuance of parking identification or access devices to any tenant and/or such tenant’s agents or representatives who willfully refuse to comply with the Parking Rules and/or all applicable governmental ordinances, laws or agreements.

                11. Tenant shall acquaint its employees and visitors with the Parking Rules, as they may be in effect from time to time.

                12. Any monthly rate for rental of a parking space shall be paid one month in advance prior to the first day of such month.  Failure to do so will automatically cancel parking privileges, and a charge of the prevailing daily rate will be due.  No deductions or allowances from the monthly rate will be made for days a parker does not use the parking facilities.

                13. Each parker shall pay a reasonable deposit for any parking card issued to such person.  Such deposit shall be paid at the time the parking card is issued and shall be forfeited if the parking card is lost.  Such deposit shall be returned without interest, at the time such person ceases to utilize the parking facilities, upon surrender of the parking card.  A reasonable replacement charge shall be paid to replace a lost card and an amount in excess of the initial deposit may be charged as the replacement fee.

EXHIBIT G

RENTABLE AREA & USABLE AREA

                This Exhibit is attached to and a part of a certain Office Lease dated as of September 19, 2003 by and between Metropolitan Life Insurance Company, a New York corporation, as Landlord, and South Bay Bank, a National Association, as Tenant, for the Premises (the “Lease”).

                “Rentable Area” and “Usable Area” under the Lease shall be determined by Landlord in any reasonable fashion consistently applied throughout the Project which substantially conforms with BOMA standards, modified as follows:

                (a)           As to each floor of the Building on which the entire space rentable to tenants is or will be leased to one tenant, the Rentable Area attributable to such tenant shall be the total of (i) the entire area bounded by the interior surface of the exterior walls of the Building on such floor, including all areas used for elevator lobbies, corridors, special stairways and elevators, restrooms, mechanical rooms, electrical rooms and telephone closets; however, excluding the area contained within the Building stairs, fire towers, vertical ducts, elevator shafts, flues, vents, stacks and pipe shafts, but without deduction for columns or other structural portions of the Building or any other vertical penetrations; and (ii) that portion of the covered or enclosed Common Areas which constitute a part of the Building and which are maintained by Landlord for the common benefit of all tenants of the Building which bears the same proportion to the total area of such Common Areas as the Rentable Area of such tenant under (i) above bears to the Rentable Area of the Building (excluding such common facilities).

                (b)           As to each floor of the Building on which space is or will be leased to more than one tenant, the Rentable Area attributable to each such tenant shall be the total of (i) the entire area included within such tenant’s premises, as bounded by the interior surface of any exterior walls of the Building bounding such premises, the exterior surface of all walls separating such premises from any public corridors or other public areas on such floor, and the centerline of all walls separating such premises from other areas leased or to be leased to other tenants on such floor; however, excluding the area contained within the Building stairs, fire towers, vertical ducts, elevator shafts, flues, vents, stacks and pipe shafts, but without deduction for columns or other structural portions of the Building or any other vertical penetrations; (ii) that portion of the area used for elevator lobbies, corridors, restrooms, mechanical rooms, electrical rooms and telephone closets situated on such floor which bears the same proportion to the total area of such facilities as the Rentable Area of such tenant under (i) above bears to the Rentable Area of such floor (excluding such facilities); and (iii) that portion of the covered or enclosed Common Areas which constitute a part of the Building and which are maintained by Landlord for the common benefit of all tenants of the Building which bears the same proportion to the total area of such Common Areas as the Rentable Area of such tenant under (i) and (ii) above bears to the Rentable Area of the Building (excluding such common facilities).

                (c)           For purposes of establishing the Monthly Base Rent, Tenant’s Share, Building Share and Landlord’s Maximum Contribution, if any, pursuant to the Workletter as of the date of the Lease, the Rentable Area of the Premises is deemed to be as set forth in Section 1.01(11), the Usable Area of the Premises is deemed to be as set forth in Section 1.01(13), the Rentable Area of the Building is deemed to be as set forth in Section 1.01(10), and the Rentable Area of the Project is deemed to be as set forth in Section 1.01(12), which on a per building basis is deemed to be 123,420 square feet for Building A, 3070 Bristol Street, and 123,420 square feet for Building B, 3090 Bristol, and 115,299 square feet for Building C, 3080 Bristol.  In the event that the demising walls of the Premises are to be built or modified after the date of execution of the Lease (either upon Tenant’s initial occupancy or any subsequent change in the Premises pursuant to other provisions of this Lease), then when such demising walls are substantially complete, Landlord shall have the right to verify or correct the square footage of the Rentable Area of the Premises and the Usable Area of the Premises and accordingly adjust other amounts under the Lease based upon such square footage.  At such time(s) at Landlord’s option, Landlord’s architect shall determine and certify in writing to Tenant and Landlord the actual Rentable Area of the Premises and Usable Area of the Premises, which such determinations and certifications shall be conclusive, and thereupon Landlord shall accordingly adjust other amounts under the Lease based upon such square footage, including the Monthly Base Rent,  Tenant’s Share and Landlord’s Maximum Contribution, if any, pursuant to the Workletter.

                (d)           The term “Usable Area” shall mean only that portion of the Rentable Area determined under subsection (a)(i) or (b)(i) above, as the case may be, subject to the provisions of subsection (c) above.

EXHIBIT H

ATM LICENSE

                This Exhibit is attached to and a part of a certain Office Lease dated as of September 19, 2003 by and between Metropolitan Life Insurance Company, a New York corporation, as Landlord, and South Bay Bank, a National Association, as Tenant, for the Premises (the “Lease”).

LICENSE AGREEMENT

FOR

AUTOMATED TELLER MACHINE

                This agreement (the “Agreement”) dated                  , 2003, is made by and between METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation (“Licensor”), and SOUTH BAY BANK, a                                    (“Licensee”).

1.             Premises.  Licensor hereby grants a license to Licensee to establish and install one (1) automatic teller machine and night depository (collectively, the “ATM”) on the exterior wall or window adjacent to the front door of the building commonly known as South Coast Corporate Center (the “Building”), located at 3070 Bristol Street, Costa Mesa, California as shown on Exhibit A attached hereto and made a part hereof (the “Premises”) which ATM will dispense cash and perform such other transactions as are permitted by applicable law.  Licensee is solely responsible for all service, repairs and maintenance to the ATM and all costs associated therewith and agrees to manage, operate and maintain the ATM.  Without limiting the foregoing, Licensee shall:

(a)Handle mechanical malfunctions in a timely manner;

(b)Deal directly with ATM service providers such as ATM repair persons (Licensor shall not be required to handle these relationships except as incidental to its ownership or control of the Building); and

(c)Shall have the right to install such additional, ancillary improvements that may be required by Law or as deemed necessary by Tenant such as security cameras and lights.

2.             Term.  The term of this Agreement shall commence on                       , 2003 and shall be coterminous with that certain lease between Licensor and Licensee dated                    , 2003 (the “Lease”) including any extension of the term of the Lease.

3.             Installation and Maintenance.  Installation and maintenance of the ATM shall be at Licensee’s sole cost  The selection of contractors chosen by Licensee to install the ATM must be approved by Licensor prior to installation of the ATM.  Licensee shall submit its plans (including plans for the proposed design and location of signs on the ATM) for installation which shall also include the estimated weight of the ATM to be installed to Licensor prior to the commencement of the installation thereof for Licensor’s review and approval.  Licensee shall not make any alterations, additions or improvements to the Premises without the prior written consent of Licensor.  Installation process, installation location and maintenance shall be coordinated with Licensor and subject to supervision by Licensor or its building staff, without charge.  Contractors must abide by the building rules and regulations, provide adequate insurance and evidence of such insurance upon request of Licensor and hold harmless Licensor, except for Licensor’s gross negligence or willful misconduct. Licensee shall avoid and minimize any disturbance to the operation of the Building and to the tenants of the Building during installation, alteration or maintenance of the ATM.

4.             Licensee Covenants.  Licensee shall at all times observe the following rules and regulations with respect to the Premises: (a) Licensee shall maintain the ATM in a clean, sanitary, attractive and safe condition and in good repair; (b) Licensee shall not perform any act or carry on any practice which may injure the Premises or any portion of the Building or any person at the Building, or which may void any of Licensor’s insurance on the Building or increase the premium rate therefor; (c) Licensee shall not keep or display any merchandise in the floor area adjacent to the Premises or otherwise obstruct said area; (d) Licensee shall not overload the floor of the Premises; (e) Licensee shall at all times comply with all laws pertaining to the Premises or the conduct of Licensee’s business thereat; and (f) Licensee shall perform all loading and unloading of goods only at such times and in such places as is designated by Licensor for such purpose.  Licensee shall comply with such other reasonable rules and regulations as Licensor may from time to time adopt with respect to the Building.

5.             Liens.  Licensee shall promptly pay for any work done or material furnished by or on behalf of Licensee in or about the Premises or Building and shall not permit or suffer any lien to attach to the Premises or all or any part of the Building and Licensee shall have no authority or power, express or implied, to create or cause any lien, charge or encumbrance of any kind against the Premises or all or any part of the Building.  If any lien shall at any time be filed against the Premises or against any part of the Building by reason of work, labor, services or materials alleged to have been performed or furnished by, for or to Licensee or to anyone holding the Premises through or under Licensee, Licensee shall forthwith cause the same to be discharged of record or bonded to the satisfaction of Licensor.  If Licensee shall fail to cause such lien forthwith to be so discharged or bonded after being notified of the filing thereof, then, in

addition to any other right or remedy of Licensor, Licensor may discharge the same by paying the amount claimed to be due, and the amount so paid by Licensor and all costs and expenses, including reasonable attorneys’ fees incurred by Licensor, in procuring the discharge of such lien, shall be due and payable by Licensee to Licensor as an additional amount on the first day of the next following month.  Licensor shall take all reasonable steps necessary to maintain the ATM free from any mortgage, security agreement, lien or encumbrance, except liens arising by operation of law for taxes not yet due and payable.

6.             Governmental Regulation.  Licensee has the sole obligation to secure, and shall secure without expense to Licensor, any building permits, changes in zoning variances and approvals which are or may be required for the ATM from local, state and any governmental agency which regulates such systems.  Licensor’s approval of the design or installation of the ATM does not constitute agreement that any of the requisite governmental permits or approvals have been issued or granted.  Licensee shall comply with any and all laws, ordinances and/or regulations applicable to the ownership, deployment, operation or maintenance of the ATM, including without limitation Federal Regulation E and any such laws, ordinances and/or regulations which are applicable to financial settlement of ATM transactions, electronic transfers of funds or the operation of so-called “electronic branches” or ATMs generally.

7.             Financial Settlement.  Licensee shall be solely responsible for all financial settlements of, and any and all obligations or liabilities arising from or with respect to, all ATM transactions.  Without limiting the generality of the foregoing, Licensee shall be responsible for daily financial settlement with electronic funds transfer (EFT) networks and any other relevant third party payers, obligors or their respective agents, and Licensee shall bear sole responsibility with respect to any shortages of cash or other ATM inventory in connection with any such financial settlements.

8.             Interference.  Licensee must modify or remove the ATM and Licensor may terminate this Agreement if the ATM, in Licensor’s sole judgment, causes any interference or disturbs the operation of any other equipment of Licensor or any tenants of the Building or creates or maintains any noise, odor or nuisance tending to disturb any occupant of the Building or areas adjacent thereto.  Licensee must immediately shut the ATM off upon notification of interference and may be allowed to restart a modified ATM to test for interference only with Licensor’s permission.

9.             Interruption.  Licensor may from time to time and on reasonable advance notice to Licensee (except in the event of an emergency), require temporary interruption of service for repairs, maintenance, modification of the Premises or Building, including, but not limited to, roofing, structural, electrical or mechanical repairs.

10.           Damage.  Licensee is solely responsible for damage to the Premises, Building, equipment, property, or bodily personal injury related to or caused by the ATM, except for damage due to the negligent or intentional acts of Licensor, its agents, employees or contractors.  Licensee agrees that Licensor shall not be liable, responsible or accountable for any loss, injury, death or damage to persons or property which at any time may be suffered or sustained by Licensee or by any person occurring in, on or about the Premises or as a consequence, direct or indirect, of the existence, installation, repairs to, maintenance or removal of the ATM, and Licensee agrees to protect, defend, indemnify and save Licensor harmless from any and all claims, liabilities, losses, damages, costs, attorneys’ fees and expenses arising out of any such loss, injury, death or damage, except where such claims, liabilities, losses, damages, costs, attorneys’ fees and expenses are due to the negligent or intentional acts of Licensor, its agents, employees or contractors.  Licensee agrees to pay for all damage done to the Premises or Building by Licensee, or any person or persons brought onto the Premises or into the Building by Licensee in connection with the ATM.

11.           License.

(a)Licensee, Repair people, etc.  Licensor hereby grants Licensee and Licensee’s agents, officers and employees a non-exclusive right to enter upon the Premises during normal business hours with prior notice to Licensor and approval by Licensor of the date and time of entry in each instance (which approval will not be unreasonably withheld) for the purpose of performing Licensee’s duties under this Agreement, including, without limitation, the installation, management and maintenance of the ATM and any cameras or other security equipment.

(b)Regulators.  Licensor shall also permit any and all regulators, examiners and auditors of Licensee or any automatic teller machine network, as well as officers, employees and agents of any such automatic teller machine network itself, to have access to the ATM during normal business hours, upon presentation of proper identification.

12.Covenants of Licensor.  Provided Licensee complies with all of the terms, covenants and conditions of this Agreement, Licensor shall:

(a)Site Maintenance.  Maintain the Premises in a clean condition and in good repair.

(b)Utilities.  Pay all electrical bills associated with the installation, maintenance and operation of the ATM and any related security cameras.

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13.           Restoration.  Upon termination of this Agreement, Licensee, at Licensee’s expense, must remove the ATM and promptly restore the Premises to the condition as existed on the date of installation of the ATM.  Licensee shall also promptly repair any damage to the Premises or any other areas caused by removal of the ATM.  Any part of the ATM which Licensee fails to remove from the Premises at the expiration of the term of this Agreement shall be deemed abandoned by Licensee and shall become the property of Licensor.

14.           Cost Recovery.  If Licensee does not comply with the terms hereof, Licensor may elect to hire its own contractor to remedy any condition after ten (10) days written notice to Licensee and may charge related costs to Licensee which shall be payable by Licensee to Licensor within thirty (30) days after Licensor renders a statement to Licensee therefor.

15.           Insurance.  Licensee shall carry insurance during the entire term of this agreement insuring Licensee and Licensor as their interest may appear with terms, coverages and limits and with companies satisfactory to Licensor.  Licensee shall maintain the following coverages in the following amounts:

(a)In case of personal injury to or death of any person or persons, not less than One Million Dollars ($1,000,000.00) for each injury to or death of a person and Three Million Dollars ($3,000,000.00) for each occurrence; and in case of property damage, not less than One Million Dollars ($1,000,000.00) for any one (1) occurrence; and

(b)In case of fire, sprinkler leakage, malicious mischief, vandalism and other extended coverage perils, for the full replacement value of all additions, improvements and alterations to the Premises.

                Licensee  shall, prior to the commencement of this agreement and thereafter during the term of this agreement, upon request by Licensor, furnish to Licensor certificates evidencing such coverage, which certificates shall state that such insurance coverage may not be changes or canceled without at least thirty (30) days prior written notice to Licensor and Licensee.

                Licensor and Licensee each hereby waive any and every claim for recovery from the other for any and all loss or damage to the Premises or the contents thereof, which loss or damage is covered by valid and collectable fire and extended coverage insurance policies to the extent that such loss or damage is recoverable under said insurance policies.  Inasmuch as this mutual waiver will preclude the assignment of any such claim by subrogation (or otherwise) to an insurance company (or any other person), Licensor and Licensee each agree to give to each insurance company which has issued, or in the future may issue, its policies of fire and extended coverage insurance, written notice of the terms of this mutual waiver and to have said insurance policies properly endorse, if necessary, to prevent the invalidation of said insurance coverage by reason of said waiver.

16.           Signs.  Except as maybe approved by Licensor pursuant to Paragraph 4, Licensee shall not inscribe, paint or affix any sign, advertisement, display or notice on any part of the Premises, ATM or the Building without obtaining Licensor’s prior written consent in each instance.

17.           Representations.  Licensee represents as follows:  Any servicing other than routine replenishment of currency in the ATM will be coordinated with Licensor; the ATM is UL approved; the ATM will not emit radiation; and the ATM will not interfere with other existing building equipment.

18.           Termination.  Either party shall have the right to terminate this agreement at any time for cause on not less than thirty (30) days written notice to the other party, it being understood that “cause” shall be limited to a default under this agreement past any applicable cure period.

19.           Assignment.  Licensee shall not assign this Agreement or otherwise transfer all or a portion of its rights hereunder without the prior written consent of Licensor which may be granted or denied in Licensor’s sole and absolute discretion, it being understood that Licensee may, in connection with a similar assignment of the Lease, assign this Agreement to (i) a parent or affiliate of Licensee, (ii) an entity resulting from the merger or consolidation of Licensee with a third party, or (iii) an entity purchasing all or substantially all of the assets of Licensee.  Licensor shall have the right to assign this Agreement to any party who becomes an owner of the Building or otherwise obtains an interest in the Building, and upon such assignment, the assignee shall be deemed to have fully assumed all liabilities and obligations of Licensor hereunder, and the original Licensor shall be free from all liabilities and obligations accruing after the date of said assignment.  Licensor shall also have the right to collaterally assign this Agreement to any lender or for other security purposes.

20.           Exculpation.  Licensee agrees, on its behalf and on behalf of its successors and any permitted assigns, that any liability of Licensor with respect to this Agreement shall never exceed the amount of Five Million and No/100 Dollars ($5,000,000) and Licensee shall not be entitled to any judgment in excess of such amount.

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21.           Notices.

(a)All notices, demands or requests provided for or permitted to be given pursuant to this Agreement must be in writing and shall be personally delivered, sent by Federal Express or other overnight courier service, or mailed by first class, registered or certified mail, return receipt requested, postage prepaid.

(b)All notices, demands or requests to be sent pursuant to this Agreement shall be deemed to have been properly given or served by delivering or sending the same in accordance with this Section, addressed to the parties hereto at their respective addresses listed in the Lease.

(c)If notices, demands or requests are sent by registered or certified mail, said notices, demands or requests shall be effective upon being deposited in the United States mail.  However, the time period in which a response to any such notice, demand or request must be given shall commence to run from the date of receipt on the return receipt of the notice, demand or request by the addressee thereof.  Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to be receipt of notice, demand or request sent.

Notices may also be served by personal service upon any officer, director or partner of Licensor or Licensee or in the case of delivery by Federal Express or other overnight courier service, notices shall be effective upon acceptance of delivery by an employee, officer, director or partner of Licensor or Licensee.

(d)By giving to the other party at least thirty (30) days written notice thereof, either party shall have the right from time to time during the term of this Agreement to change their respective addresses for notices, statements, demands and requests, provided such new address shall be within the United States of America.

22.Miscellaneous.

(a)Independent Contractors.  The parties hereto agree that they are independent contractors and that neither party is an agent of the other.

(b)Successors.  This Agreement shall bind and inure to the benefit of the parties and their respective successors and permitted assigns.

(c)Captions.  Captions in this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof.  References herein to Sections or provisions without reference to the document in which they are contained are references to this Agreement.

(d)Singular and Plural.  Unless the context requires otherwise, wherever used herein the singular shall include the plural and vice versa, and the use of one gender shall also denote the other.

(e)Construction.  This Agreement and any document or instrument executed in connection herewith shall be governed by, and construed and interpreted in accordance with, the laws of the State of California and any applicable federal law, and shall be deemed to have been executed in the State of California.  If any term, covenant or condition of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each item, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law.

(f)Authorization.  Each party represents and warrants to the other that the execution, delivery and performance of this Agreement and its obligations hereunder have been duly authorized and are within such party’s rights and powers.

(g)Submission to Jurisdiction; Venue.  The parties irrevocably agree that all suits, actions or other proceedings (including without limitation ancillary proceedings) in any way, manner or respect arising out of or from or related to this Agreement or any document or instrument executed in connection herewith shall be subject to litigation in courts having situs within                        , California.  The parties hereby consent and submit to the jurisdiction of any local, state or federal court located within said city and state.  IN CONNECTION WITH ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT IN ACCORDANCE WITH THIS SECTION THE PARTIES HEREBY WAIVE ANY RIGHT TO (i) REQUEST OR DEMAND TRIAL BY JURY, (ii) TRANSFER OR CHANGE VENUE, OR (iii) CLAIM THAT SUCH PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

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(h)Access.  The general public shall have access to the ATM during Standard Operating Hours.

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(i)Entire Agreement.  This Agreement and the Lease contain the entire agreement between Licensor and Licensee concerning the Premises and there are no other agreements, either oral or written between Licensor and Licensee concerning the Premises.  This Agreement shall not be modified except by a writing executed by Licensor and Licensee.

                IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

LICENSOR:		LICENSEE:
South Bay Bank,		Metropolitan Life Insurance Company,
a National Association		a New York corporation
By		By
	(Print Name)		(Print Name)
Its		Its
(Chairman of Board, President or Vice President)
By
	(Print Name)
Its
(Secretary, Assistant Secretary, CFO or Assistant Treasurer)

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RIDER 1

COMMENCEMENT DATE AGREEMENT

Metropolitan Life Insurance Company, a New York corporation (“Landlord”), and South Bay Bank, a National Association (“Tenant”), have entered into a certain Office Lease dated as of September 19, 2003 (the “Lease”).

                WHEREAS, Landlord and Tenant wish to confirm and memorialize the Commencement Date and Expiration Date of the Lease as provided for in Section 2.02(b) of the Lease;

                NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein and contained in the Lease, Landlord and Tenant agree as follows:

                1.             Unless otherwise defined herein, all capitalized terms shall have the same meaning ascribed to them in the Lease.

                2.             The Commencement Date (as defined in the Lease) of the Lease is                         .

                3.             The Expiration Date (as defined in the Lease) of the Lease is                           .

                4.             Tenant hereby confirms the following:

                (a)           That it has accepted possession of the Premises pursuant to the terms of the Lease;

                (b)           That the Landlord Work is Substantially Complete;

                (c)           That the Rentable Area of the Premises is        ; and

                (d)           That the Lease is in full force and effect.

                5.             Except as expressly modified hereby, all terms and provisions of the Lease are hereby ratified and confirmed and shall remain in full force and effect and binding on the parties hereto.

                6.             The Lease and this Commencement Date Agreement contain all of the terms, covenants, conditions and agreements between the Landlord and the Tenant relating to the subject matter herein.  No prior other agreements or understandings pertaining to such matters are valid or of any force and effect.

TENANT:		LANDLORD:
South Bay Bank,		Metropolitan Life Insurance Company,
a National Association		a New York corporation
By		By
	(Print Name)		(Print Name)
Its		Its
(Chairman of Board, President or Vice President)
By
	(Print Name)
Its
(Secretary, Assistant Secretary, CFO or Assistant Treasurer)

EX-10.12

Exhibit 10.12

LEASE

THIS LEASE (“Lease”), dated for reference purposes only as of November 12, 2003, is made by and between Century Park, a California Limited Partnership (“Landlord”) and Mercantile National Bank, N.A., a national bank (“Tenant”), upon the following terms and conditions:

1.		Premises and Basic Lease Information
			1.1.	Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, upon the terms and conditions set
forth in this Lease, those certain premises (the “Premises”) described in Article 1.1.1 below and diagrammed in Exhibit “A” attached hereto and hereby made a part hereof, as well as the right to use, in common with others, the Common Areas (as hereinafter defined). The Premises are situated in that certain office building (the “Building”) located at 1880 Century Park East, Los Angeles, California 90067. The land upon which the Building is located together with the Building and related facilities and appurtenances and Common Areas shall hereinafter be referred to as the “Project.” The terms and conditions of this Lease include, without limitation, the following:
			1.1.1	Premises:		Suite 110  consisting of approximately 2,118 rentable square feet on the
ground floor of the Building (see the attached Exhibit “A”). The exact area of the Premises shall be determined by applying the BOMA method of measurement (ANSI Z65.1-1996) to calculate the square footage per the final space plan for the Premises. Should the square footage measured from the space plan vary from that set forth in this Article 1.1.1, Landlord shall revise all figures in this Lease that are affected by the square footage, and Landlord and Tenant shall amend this Lease accordingly. Landlord may re-measure the Premises once within twenty (20) days of the Commencement Date of the Initial Term. Landlord may re-measure the Premises thereafter; provided, however that such re-measurement does affect the economics specified in Article 1.1.4 or Article 1.1.7 herein.
			1.1.2	Lease Term:		Except for Tenant’s occupancy of the Temporary Space pursuant to the
terms and conditions of this Lease as set forth in Article 41 of the Lease Addendum, the term of this Lease (the “Lease Term” or “Term”) shall begin on the earlier of the following dates (the “Commencement Date”): (a) October 1, 2004, or, where applicable, (b) upon Substantial Completion of the Tenant Improvements, as defined in the construction agreement attached hereto as Exhibit “B” and herein incorporated by reference, and, unless terminated pursuant to Article 42 in the Lease Addendum, shall expire on the last day of the month that is one hundred twenty (120) months after the first day of the month after the Commencement Date, unless sooner terminated pursuant to this Lease.
			1.1.3	Holding Over.		If Tenant, with or without Landlord’s written consent, remains in
possession of all or any portion of the Premises after the expiration or sooner termination of the Lease, such holding over (“Holdover”) shall constitute and be construed as a tenancy from month-to-month only, subject to such terms and conditions contained herein as may reasonably and logically be construed to apply to the Holdover, and any and all options or other preferential rights of Tenant shall be deemed to have lapsed and to be of no further force or effect. Either party may terminate such month-to-month tenancy by giving the other party at least thirty (30) days written notice thereof. During such Holdover, Base Rent (as defined below) shall be one hundred fifty percent (150%) of the Base Rent in effect immediately prior to such Holdover. Acceptance by Landlord of any Rent after the expiration or termination of the Lease shall not be deemed to constitute Landlord’s consent to such Holdover.
			1.1.4	Base Rent:		The base rent (“Base Rent”) for the Premises shall be $2.55  per rentable
square foot ($5,400.90) per month, subject to an annual CPI adjustment (see Article 3.2; see also Article 41 relating to the payment of rent in the Temporary Space.).
			1.1.5	Additional Rent:		Amounts which are due as Additional Rent by reason of increases in
Estimated Pass-through Costs (as both capitalized terms are defined in Article 4 below) and all other amounts payable by Tenant pursuant to the provisions of this Lease.
			1.1.6	Base Year:		2004 is the Base Year.
			1.1.7	Tenant’s Percentage Share:		0.68% “Tenant’s Percentage Share” shall be a fraction, the numerator of
which shall be the rentable square footage of the Premises and the denominator of which shall be 311,400 approximate rentable square feet for the Building.
			1.1.8	Security Deposit:		None
			1.1.9	Permitted Use:		General offices and uses related thereto that do not conflict with the
Building’s certificate of occupancy, that comply with all applicable codes and statutes, and that are uses commonly found in similar office buildings in the Project vicinity.
			1.1.10		Address For Notices:
	Tenant (prior to Commencement Date)						Tenant (after Commencement Date)
	Mercantile National Bank 1840 Century Park East Los Angeles, CA  90067						Mercantile National Bank 1880 Century Park East, Suite 800 Los Angeles, CA 90067
	Contact: Mr. Scott A. Montgomery Phone:  310/282-6778						Contact: Mr. Scott A. Montgomery Phone: 310/ 282-6778
							With a Copy to:
							Ted Simpson
							Cushman & Wakefield
							601 Figueroa Street, Suite 4700
							Los Angeles, CA 90017
							Telephone:  213/955-5100

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LandlordCentury Park, a California limited partnership, c/o Held Properties, Inc., 1880 Century Park East, Suite 500, Los Angeles, CA 90067.                     See also Article 25 of this Lease.

1.1.11      Parking Rights:  Two and One-Half automobile spaces per 1,000 rentable square feet, currently calculated as Six (6) automobile spaces at the Building’s prevailing parking rates.  See also Article 31 herein.  See also Article 46 of the Lease Addendum.

1.1.12      Guarantor(s):                        N/A

1.1.13      Broker:                                 Cushman & Wakefield of California, Inc.

1.2           Common Areas.   The term “Common Area(s)” as used in this Lease shall mean all areas and facilities in the Project which are provided and designated from time to time by Landlord for the general use and convenience of Tenant and other tenants of the Project and their respective employees and invitees. Common Areas include, without limitation, the lobby areas, walkways, parking facilities, landscaped areas, sidewalks, corridors, washrooms (if not part of the Premises), stairways, elevators, walls, common telephone and electrical closets, loading docks, plazas, service areas, and all other areas of the Project intended for common use.  Floors wholly occupied by Tenant or any other tenant shall not have any facilities which shall be used in common with other tenants, except for elevators, fire stairs, shafts, utility and service closets, and similar installations.  Tenant, its employees and invitees shall have a nonexclusive right to use the Common Areas, subject to Landlord’s rights and duties as hereinafter set forth.  Without Tenant’s consent and without liability to Tenant, so long as Tenant’s access to the Premises and parking area or Tenant’s ability to conduct business therefrom is not materially impaired and provided that Landlord uses reasonable effort (including performing such work after normal business hours, if reasonably required) to minimize any interference with Tenant’s use and access of the Premises and parking areas during normal business hours, Landlord shall have the right to do the following:

1.2.1        Establish and enforce in a nondiscriminatory, consistently applied manner, reasonable rules and regulations concerning the maintenance, management, use and operation of the Common Areas;

1.2.2        Temporarily close any Common Area for maintenance, alterations or improvements;

1.2.3        Select, appoint and/or contract with any person or entity for the purpose of operating and maintaining the Common Areas; and

1.2.4        Change, except for the number and location of parking spaces, the size, use, shape or nature of the Common Area provided that doing so does not materially affect the existing ingress and egress to the Building, or change the character of the Building to less than a first class office building.

2. Commencement Date; Early Entry

2.1           Except as set forth in Article 42, this Lease shall not be void or voidable, nor shall Landlord be subject to any liability as a result of any delay in the Commencement Date for any reason.  Except for Tenant Delays, as defined in the Construction Agreement, payment of rent shall not commence until the Premises are available for occupancy by Tenant with all work to be performed pursuant to the Construction Agreement substantially completed and the Department of Building and Safety has signed the permit card, indicating that occupancy is permitted.

2.2           Within thirty (30) business days after Tenant’s occupancy of the Premises, or as soon thereafter as possible, the Landlord shall draft a statement, and the parties hereto shall execute a written statement setting forth the Commencement Date and the date of expiration of this Lease; provided, however, the enforceability of this Lease and the Commencement Date shall not be affected should either party fail or refuse to execute such statement.

2.3           Provided that Tenant or Tenant’s agents do not interfere with or delay the Substantial Completion of Landlord’s Work in the Premises, or otherwise cause additional cost or expense to Landlord, Tenant and Tenant’s agents shall be permitted to enter the Premises up to fourteen (14) days prior to the Commencement Date for the purpose of installing telephones, cabling, fixtures and equipment.  Such early entry shall be subject to all the terms of such permission and all the provisions of this Lease which could be reasonably and logically construed as applying thereto, except that Tenant shall not be required to pay Rent.

3.             Base Rent; Adjustments; General Rent Provisions.

3.1           Tenant shall pay to Landlord as Base Rent for the Premises, without prior notice or demand, the amount specified in Article 1.1.4, in advance, on or before the first day of each and every calendar month during the Lease Term.  All payments received by Landlord from Tenant shall be applied to the oldest payment obligation owed by Tenant to Landlord.

3.2           Base Rent as set forth in Section 1.1.4 above shall be increased effective as of each anniversary of the Commencement Date during the term (“Adjustment Date”) to an amount which shall be determined by adding to the Base Rent an amount equal to the Base Rent multiplied by the percentage of increase, if any, of the “Consumer Price Index for All Urban Consumers, Los Angeles-Anaheim-Riverside, California, Subgroup All Items (1982-1984=100)”, published by the United States Department of Labor, Bureau of Labor Statistics (the “CPI”) for the calendar month which is four (4) months immediately preceding the month in which the Adjustment Date occurs (the “Adjustment Index”) as compared with the CPI for the calendar month which is four (4) months immediately preceding the Commencement Date (the “Base Index”); provided, however, that in no event shall the adjusted and then current rent be decreased.

                For example, if (i) the Base Rent as of the Commencement Date is $1,000; (ii) the Base Index is 300; (iii) the Adjustment Index for the first Adjustment Date is 315; (iv) the Adjustment Index for the Second Adjustment Date is 327; and (v) the Adjustment Index for the third Adjustment Date is 330; the Base Rent shall be increased as follows:

A)As of the first Adjustment Date —   315/300 = 1.05 x $1,000 = $1,050

B)As of the second Adjustment Date — 327/300 = 1.09 x $1,000 = $1,090

C)As of the third Adjustment Date — 330/300 = 1.10 x $1,000 = $1,100

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                If the Adjustment Index is unavailable on the date on which the first installment of Base Rent as adjusted shall become due, Tenant shall continue to pay the then effective Rent payable by Tenant until the Adjustment Index is available, and the adjustment, if any, shall be paid retroactively with Base Rent for the first month in which the Adjustment Index is available.  If the Bureau of Labor Statistics ceases to use the 1982-1984 base of 100 as the basis of calculation for the CPI, then the Base Index and the Adjustment Index shall be adjusted in accordance with the conversion formula published by the Bureau of Labor Statistics.  If, at any time required for the determination of the amount of any adjustment in Base Rent, the CPI is no longer published or issued, Landlord shall reasonably select a reliable governmental or other non-partisan publication evaluating the information theretofore used in determining the CPI.

3.3           For any period during the Lease Term which is less than one (1) month, Base Rent, Additional Rent (defined in Article 4.1), and any other sums which are payable by Tenant under the Lease (all of which shall be deemed “Rent”) shall be prorated based upon a thirty (30) day month.

3.4           Rent under this Lease shall be paid to Landlord, without deduction, offset or abatement (except as otherwise may be specifically set forth in this Lease) at Landlord’s address as specified in Article 1.1.10 above. Landlord shall have the right to accept all payments of Rent and other payments, whether full or partial, and to negotiate checks in payment thereof without any waiver of its rights, irrespective of any conditions to the contrary sought to be imposed by Tenant.  Rent paid by check shall not be deemed paid to Landlord until funds clear and the check is honored.  If any noncash payment is not paid by the bank or other financial institution on which it is drawn, Landlord shall have the right to require Tenant to make future payments by certified funds.

4.             Additional Rent.

4.1           Computation of Additional Rent  During each December of the Lease Term, or as soon thereafter as reasonably practical, Landlord shall provide Tenant with its good faith written estimate of the amount, if any, by which the Tax Costs (as defined in Article 4.3 below) and/or the Operating Costs (as defined in Article 4.4 below) for the coming calendar year are projected to exceed those of the Base Year (collectively referred to as “Estimated Pass-through Costs”).  On or before the first day of each month during the ensuing calendar year, Tenant shall pay to Landlord as additional rent (“Additional Rent”), in addition to and at the time provided for payment of Base Rent, one-twelfth (1/12^th) of the amount computed by multiplying Tenant’s Percentage Share by the amount of the Estimated Pass-through Costs for Taxes and/or one-twelfth (1/12^th) of the amount computed separately with respect to Operating Costs.  In the event that Landlord does not provide Tenant with such written estimate in December, Tenant shall continue to make monthly payments of Additional Rent on the basis of the prior year’s Estimated Pass-through Costs until the first day of the month after Landlord provides such written estimate to Tenant, at which time Tenant shall commence making monthly Additional Rent payments based upon the revised Estimated Pass-through Costs, and additionally shall pay to Landlord a one-time retroactive sum for each month that has elapsed since December the amount by which the Additional Rent payable pursuant to the revised Estimated Pass-through Costs exceeds the amount Tenant paid based on the prior year’s Estimated Pass-through Costs.  Landlord shall use its commercially best efforts to deliver its written estimate within six (6) months of the end of the calendar year.  Under no circumstances shall the provisions of this Article 4 cause the Base Rent to be reduced.  Neither Landlord’s failure to deliver, nor the late delivery of such statement or statements shall constitute a default by Landlord hereunder, nor a waiver of Landlord’s right to receive any Additional Rent or to later collect Additional Rent accrued as provided hereinabove.  The Tax Costs and Operating Costs for the Base Year shall be deemed to constitute Landlord’s agreed contribution to Operating Costs and Tax Costs and is neither a representation nor a warranty that such Base Year costs will reflect actual Operating Costs or Tax Costs for any succeeding year.  If, during any calendar year including the Base Year, the Building is less than ninety-five percent (95%) occupied, then for the purpose of computing Additional Rent due hereunder, the variable components of the Operating Costs and Tax Costs actually incurred during such calendar year shall be increased to approximate the amounts which would have been payable if the Building had been ninety-five percent (95%) occupied.

4.2           Reconciliation of Estimated Pass-through Costs to Actual  By July 1^st of each year, Landlord shall furnish to Tenant a written statement of reconciliation (the “Reconciliation”), showing Landlord’s actual Operating Costs and Taxes for the preceding calendar year, together with a statement of adjustments necessary to reconcile any sums paid by Tenant hereunder during such calendar year pursuant to Article 4.1 with those sums actually payable and due hereunder for such calendar year.  Any reference to Landlord’s “actual” Operating Costs or Tax Costs in this Article 4 shall be deemed to include an allowance for adjustment to reflect the level of occupancy of the Building to the extent provided above.  If the Reconciliation shows that Tenant owes additional sums hereunder, Tenant shall pay such sums to Landlord within thirty (30) days after receipt of the Reconciliation.  If the Reconciliation shows that Tenant overpaid Additional Rent, such overpayment shall be refunded or credited to Tenant within thirty (30) days after Tenant’s receipt of the Reconciliation. Landlord’s obligation to reconcile, Tenant’s obligation to pay, and Landlord’s obligation to credit or refund shall survive the expiration or sooner termination of the Lease. Landlord’s failure to deliver the Reconciliation to Tenant as provided herein shall not constitute a default by Landlord nor waive Landlord’s right to collect all Additional Rent and other sums due hereunder.  Where only a portion of a calendar year falls within the Lease Term, Landlord shall reasonably prorate the estimated (or actual) Operating Costs and/or Tax Costs for such calendar year.

4.3           Tax Costs.  “Tax Costs” shall mean the sum of the following: any and all real property taxes, assessments (including, but not limited to, general and special assessments and possessory interests), charges, surcharges, license and other fees, levies, cost of improvement bonds and any and all other taxes (other than income, franchise, inheritance and estate or gift taxes of Landlord) on or relating to all or a portion of the Project including any legal or equitable interest of Landlord therein, that may be imposed, levied, assessed or charged for any reason by any authority having the direct or indirect power to tax including, but not limited to, the United States or the state, county or city in which the Project is located, or any other local governmental authority, agency, district or political subdivision thereof, together with personal property taxes, assessments, fees and charges (other than those paid by Tenant pursuant to Article 26 below) and fees of tax consultants and attorneys retained to seek a reduction, to contest or to act in some other manner in connection with any of the foregoing Tax Costs, together with any tax, assessment or other amounts (including, without limitation, commercial rental taxes) imposed, levied or charged as a substitute for or a supplement to the foregoing.  Except as provided in Article 45 in the Lease Addendum, Tax Costs shall

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include increases caused by increases in tax rates as well as increases caused by additional or increased assessed values for any reason including transfers of title to the Building or the Project, to the extent not precluded elsewhere in this Lease.   See also, Paragraph 48 of the Lease Addendum.

4.4           Operating Costs.

4.4.1        Definition of Operating Costs.   “Operating Costs” shall mean the sum of any and all costs, expenses and disbursements of any kind paid or incurred by Landlord in connection with the management, operation, security, maintenance, and repair of the Project, calculated in accordance with the audited financial statements of Landlord, including, but not be limited to, salaries, wages, benefits and related costs for employees; management fees, either as charged to Landlord by outside management companies or not exceeding the amount typically charged by outside management companies if Landlord or Landlord’s affiliate manages the Project; charges for utilities and services provided to all tenants in accordance with Article 13.1 herein, including but not limited to janitorial services, window cleaning, elevator services, HVAC services, security services (including any taxes thereon); the cost of insurance as specified in Article 12.6 herein; outside accounting fees; office supplies; building cleaning supplies and materials; garbage and waste collection; and a reasonable allowance for depreciation (or amortization) with respect to machinery and equipment and other capital expenditures and improvements; provided, however, that the only depreciation (or amortization and expenditures) includable in Operating Costs shall be a reasonable allowance for depreciation (or amortization) over the useful life of the improvements, as determined by Landlord’s accountants to conform with applicable tax laws.  See Paragraph 49 of the Lease Addendum.

4.4.2        Definition of Required Alterations  “Required Alterations” are any changes, alterations or improvements to the Project (excluding those attributable exclusively to Tenant’s specific use and occupancy of the Premises, which alterations shall be Tenant’s sole responsibility), including, but not limited to, the installation or modification of electrical, mechanical, water sprinkler, or other energy or life safety systems or components, required by any rule, regulation or law which became enacted and effective after the Commencement Date.  The capital costs relating to such Required Alterations, including all related financing costs, shall be amortized over the useful life of the Required Alterations, as determined by Landlord’s accountants to conform with applicable tax laws.

4.5           Audit.     If Tenant disputes the amount of any Additional Rent due under Article 4, Tenant shall have the right, after reasonable notice, to inspect Landlord’s accounting records at Landlord’s accounting office during its normal business hours and, if after such inspection Tenant still disputes the amount of Additional Rent owed, Tenant may retain a mutually-acceptable national or regionally-recognized independent certified public accounting firm to certify to the parties its determination of the proper amount of Operating Costs and Tax Costs payable by Tenant.  After such determination has been made, and if a dispute continues to exist between Tenant and Landlord, an independent accountant mutually-agreed upon by both Landlord and Tenant may be retained to determine the amount of any Additional Rent due or credited.  If the certification discloses that the Operating Costs and Tax Costs charged to Tenant exceed the audited operating costs by more than five percent (5%), the cost of such certification shall be borne by Landlord. Otherwise, the cost of the certification shall be borne by Tenant.

5.             Security Deposit. [Intentionally Deleted]

6.             Restrictions on Use; Compliance with Laws.

6.1           Tenant shall use and occupy the Premises only for the specific uses, and those related thereto, specified in Article 1.1.9 above for no other uses whatsoever.  Tenant shall use and occupy the Premises in accordance with Article 36, Rules and Regulations.  In addition to the rules and regulations in Article 36, Tenant shall not: (a) do or permit anything to be done in or about the Premises which will in any way obstruct or materially interfere with the rights of other tenants or occupants of the Building or injure or annoy them; (b) use or allow the Premises to be used for any unlawful purpose; (c) cause or maintain or permit any nuisance in or about the Premises; (d) cause or permit any hazardous or toxic waste, substance or material, other than generally used office materials, to be brought to the Premises or used, handled, stored or disposed of in or about the Premises; (e) conduct business or other activity in or about the Premises that places an unreasonable or excessive burden upon the public and Common Areas or the utility systems of the Project; or (f) commit or suffer the commission of any waste in or about the Premises.

6.2           Tenant shall not place a load upon any floor that exceeds 70 pounds per square foot, without Landlord’s prior written approval.  Tenant shall not install any equipment, apparatus or device in the Premises which causes vibrations or excessive noise.

6.3           Tenant shall not use the Premises or permit anything to be done in or about the Premises which in any way conflicts with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated.  With respect to the condition of the Premises, Tenant shall, at its sole cost and expense, promptly comply with all applicable laws, statutes, ordinances and governmental rules, regulations and requirements now in force or which may hereafter be in force and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting Tenant’s specific nature of use of the Premises and to all building codes requiring modifications to the Premises due to the improvements made by or for Tenant in the Premises.  Notwithstanding anything to the contrary in this Lease, except for grandfathered rights and variances, it shall be Landlord’s obligation, at Landlord’s cost and expense, to comply with all applicable laws relating to the Building and the Building’s systems in general, without regard to specific use, including modifications required to obtain the necessary building permits for the Work to be performed in accordance with the Construction Agreement attached hereto as Exhibit B.  Tenant shall not knowingly do or permit anything to be done in or about the Premises or bring or keep anything therein which will in any way increase the rate of any insurance upon the Building or any of its contents, or cause cancellation of said insurance or otherwise affect said insurance in any manner.  Tenant shall be responsible for any increase in cost of Landlord’s insurance caused by or resulting from Tenant’s breach of the obligations contained herein.

6.4           Pursuant to Article 6.1(d) above, other than commonly used business office supplies, Tenant shall not permit nor use, generate, store, transport or dispense on the Premises any flammable, radioactive materials, hazardous wastes, chemicals, environmental poisons, pollutants, contaminants, or other substances demonstrated as hazardous or toxic pursuant to the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended; the Hazardous Materials

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Transportation Act; the Resource Conservation and Recovery Act; the California Health and Safety Code, or regulations issued under any of said acts (collectively, “Applicable Environmental Laws”) without the prior written consent of Landlord.  Any such Landlord consent shall be conditioned upon (a) Tenant’s separate written agreement to handle, store, use and dispose of such materials in accordance with all applicable environmental laws, and (b) Tenant’s separate written agreement to indemnify and hold Landlord harmless from any and all liability including consequential damages directly or indirectly arising out of Tenant’s storage, use, or disposal of such materials, including without limitation the cost of any required or necessary repair, clean up or detoxification as a result thereof.  Tenant’s failure to provide a separate written agreement to handle, store, use and dispose and to indemnify Landlord shall not abrogate or eliminate Tenant’s obligations hereunder.

6.5           As used herein, the term “Hazardous Material” means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the state in which the Project is located or the United States government.  The term “Hazardous Material” includes, without limitation, any material or substance that is (i) defined as a “Hazardous Substance” under appropriate state law provisions, (ii) petroleum, (iii) asbestos, (iv) designated as a “Hazardous Substance” pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. section 1321), (v) defined as a “Hazardous Waste” pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. section 6901 et seq. (42 U.S.C. section 6903), (vi) defined as a “Hazardous Substance” pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. sections 9601 et seq. (42 U.S.C. section 9601), or (vii) defined as a “Regulated Substance” pursuant to Subchapter IX, Solid Waste Disposal Act (Regulation of Underground Storage Tanks), 42, U.S.C. sections 6991 et seq.

6.6           Excluding commonly used business office supplies, as well as any preexisting asbestos and asbestos containing materials (“ACMs”) in the Building, Tenant shall, at Tenant’s sole expense and with counsel reasonably acceptable to Landlord, indemnify, defend and hold harmless Landlord and Landlord’s shareholders, directors, officers, employees, partners, affiliates, and agents (“Landlord Indemnities”) with respect to all losses arising out of or resulting from the release of any Hazardous Material in or about the Premises or the Project, by Tenant, Tenant’s Agents, contractors or invitees other than Landlord or Landlord’s Indemnitees or the violation of any Applicable Environmental Law, by Tenant or Tenant’s agents, contractors or invitees (other than Landlord and Landlord Indemnities) pursuant to Article 6.4(b) above.  This indemnification includes all losses, liabilities, obligations, penalties, fines, claims, actions (including remedial or enforcement actions of any kind and administrative or judicial proceedings, orders or judgments), damages (including consequential damages and punitive damages) and costs (including attorney, consultant and expert fees and expenses) resulting from the release of any Hazardous Substances or violation of any Applicable Environmental Law by Tenant or Tenant’s agents, contractors or invitees other than Landlord and Landlord’s Indemnitees.  This indemnification shall survive the expiration or sooner termination of the Lease. (See Lease Addendum Paragraph 50 and 51.)

7.             Improvements and Alterations.

7.1           Alterations, Additions or Improvements.  Without the prior written consent of Landlord, and except for non-structural, cosmetic alterations costing less than Fifty Thousand Dollars ($50,000) (“Cosmetic Alterations”), Tenant shall not make nor cause alterations, additions, or improvements in, on or to any part of the Premises or the Project, except to install freestanding furniture and floor coverings, where such freestanding furniture does not place a load on the floor that exceeds 70 pounds per square foot.  Except as provided above, any alterations, additions or improvements to the Premises desired by Tenant shall be made in accordance with plans and specifications approved in advance in writing by Landlord and pursuant to any applicable governmental permits.  Landlord’s approval of Tenant’s plans and specifications shall not constitute Landlord’s representation or warranty as to the adequacy of the plans and specifications or their compliance with applicable laws.

7.2           Contractors for Improvements.  Except for any Cosmetic Alterations, any alterations, additions or improvements to the Premises desired by Tenant, other than any specified in the Approved Plans as defined in Exhibit B, if any, shall be made by Landlord or contractors selected by Landlord for Tenant’s account.  Landlord’s contractor shall have all major work items bid by three subcontractors or vendors.  Landlord’s contractor and Tenant shall mutually approve subcontractors for major work items (i.e., items that cost more than Thirty Thousand Dollars ($30,000).  Landlord’s contractor shall use its best efforts to hire such mutually approved qualified subcontractors with the lowest bids.

7.3           Landlord’s Consent to Improvements.  Landlord may impose as a condition to its consent to alterations, additions or improvements to the Premises desired by Tenant such requirements as Landlord may reasonably deem necessary including, without limitation, requirements relating to the manner in which the work is done and the times during which the work is to be accomplished so long as such requirements do not impose additional costs.  At Landlord’s request, but at Tenant’s sole cost and expense, at the expiration or sooner termination of this Lease, Tenant shall have Landlord’s contractor remove any and all improvements, additions or personal property that are not typical in comparable first class buildings in the Premises caused to be installed by Tenant other than the initial Tenant Improvements described in Article 7.5 below. At the time Landlord approves such improvements, Landlord shall specify which improvements it will require Tenant to remove at the end of the Lease Term.  Landlord’s contractor at Tenant’s sole cost and expense shall repair any damage done to the Premises in connection with such removal.

7.4           Changes to Structure or Mechanical or Electrical Systems.  Notwithstanding any provision herein that permits Tenant to make its own alterations, additions or improvements to the Premises, Tenant shall not make any alterations, additions or improvements to the Premises which would negatively affect the Building’s structure or its mechanical or electrical systems, or which would materially interfere with or disrupt other tenants in the Building or any work then being carried out therein by Landlord or its contractors.

7.5           Initial Tenant Improvements.  Landlord shall construct or have Landlord’s contractor construct the improvements in the Premises (the “Tenant Improvements”), if any, pursuant to Exhibit B, if any.  Tenant may install certain movable personal property (e.g., file systems, furniture) in the Premises, which Tenant shall remove upon the expiration or earlier termination of the Lease.

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7.6           Standard for Improvements.  Any alterations, additions or improvements to the Premises shall be manufactured and installed in a good, workmanlike, diligent, prompt and expeditious manner in compliance with all Building specifications, applicable laws and Applicable Environmental Laws.

8.             Repairs and Maintenance.

8.1           The Premises at Tenant’s move-in will be in good operating condition, free of debris and structurally sound in accordance with industry standards in the Project area.  By taking possession of the Premises, Tenant shall be deemed to have conclusively agreed to accept the Premises as being in good order, condition and repair, subject to “punchlist” items and latent defects and any representations or warranties that may be set forth elsewhere in this Lease.  Except as required by Article 20 below and ordinary wear and tear and subject to Article 8.2 with regard to any Building Systems in or about the Premises, Tenant shall, at all times during the Lease Term hereof and at Tenant’s sole cost and expense, keep the Premises and every part thereof in good condition, order and repair except repairs resulting from the negligence, recklessness or willful wrongful act of Landlord or Landlord’s representatives, employees or other agents (collectively, “Landlord’s Agents”).  Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof, or maintain any nonstandard items installed in the Premises by or at the request of Tenant, except as specified in Articles 13 and 20 below or in Exhibit B, if any.  No representations relating to the condition of the Premises, the Building or the Project have been made by Landlord or Landlord’s Agents to Tenant, except as may be specifically set forth in this Lease.

8.2           Subject to the provisions of Article 8.1 above and Article 20 below, Landlord shall maintain the Common Areas, the foundation and structural portions of the Building (which shall include but not limited to floor/ceiling slabs, roof, curtain wall, exterior glass and mullions, columns, beams, shafts (including elevator shafts) parking areas, plazas, pavement and curbs (collectively, “Building Structures”), and the plumbing, heating, ventilation and air conditioning (“HVAC”), fire, life, safety, mechanical and electrical systems (collectively, “Building Systems”) providing the services and utilities to be furnished by Landlord pursuant to Article 13.1 below, in good order and condition; provided, however if any maintenance and repairs are caused by the act, neglect, fault, or omission of any duty by Tenant or Tenant’s agents, servants, employees, or invitees (collectively, “Tenant’s Agents”), Tenant shall pay to Landlord the reasonable cost of such maintenance and repairs.  Landlord shall not be liable for any failure to make any such repairs or to perform any maintenance unless such failure persists for an unreasonable time after Tenant gives written notice to Landlord of the need for such repairs or maintenance.  Notwithstanding anything in this Lease to the contrary, in the event of an interruption in essential services to the Premises (defined for these purposes as the failure to provide HVAC service, electrical service, elevator service, water or restroom facilities) or Tenant’s access to Premises is materially impaired, and such interruption or impairment continues for a period of five (5) consecutive days or twenty (20) days in any one calendar year, Tenant shall be entitled to an abatement of Rent for the period that such services are not provided where such interruption or impairment materially interferes with the normal business conduct of Tenant in the Premises.  If any such interruption occurs during a period when Tenant is not otherwise required to pay Rent, Tenant’s free rent period shall be extended for the number of days that the services were not provided.  Tenant waives the right to make repairs at Landlord’s expense under any law, statute or ordinance now or hereafter in effect.

9.             Liens.     Tenant shall keep the Project free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant.  If within twenty (20) days following the imposition of any lien and written notice thereof to Tenant, Tenant does not cause the lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and at law or in equity, the right to cause the lien to be released by such means as it deems proper including, but not limited to, payment of the claim giving rise to such lien.  All such sums paid by Landlord and all expenses incurred in connection therewith shall be considered Additional Rent and shall be payable to Landlord by Tenant within thirty (30) days after receipt of notice from Landlord, with interest at the Interest Rate (as defined in Article 27 below).  Landlord shall have the right at all times to post and keep posted on the Premises, any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord, the Project and by other parties having an interest therein from mechanic’s and materialmen’s liens.  Tenant shall give Landlord at least 15 business days prior written notice of commencement of any work on the Premises.

10.           Assignment and Subletting.

10.1         Tenant shall not have the right to assign the Lease, or sublease all or any portion of the Premises without Landlord’s consent, which shall not be unreasonably withheld, conditioned or delayed.  If Landlord consents to an assignment or sublease, such assignment or sublease shall be subject to all the terms and conditions of the Lease, and on Landlord-approved forms.  Any assignment, sublease or other transfer without Landlord’s prior written consent shall be void.

10.2         In determining whether to consent to an assignment or a sublease, Landlord may consider the nature of the proposed use and business and the financial stature of the proposed transferee.  In addition, Landlord reserves the right to condition any such consent upon its reasonable determination that the proposed assignee’s or subtenant’s use of the Premises will not adversely materially impact on the Common Areas or utility systems of the Building.

10.3         Tenant shall not enter into any proposed assignment, sublease or other transfer of any interest herein or in the Premises which would (a) detract from the first-class character or image of the Building, or (b) cause a breach by Landlord of any loan obligation or agreement, any covenants, conditions, restrictions and lease obligations of record, or any insurance policy.  (Upon Tenant’s request, Landlord shall provide Tenant with a list of any existing rights in favor of any other tenant in the Building.)

10.4         Tenant shall give Landlord fifteen (15) days prior written notice of its intention to assign, sublease or otherwise transfer its Lease.  Tenant shall submit the following information on Landlord-approved forms with such notice and with a written request for Landlord’s consent to any assignment, sublease or transfer: (a) all transfer and related documents, (b) financial statements or other financial information, certified by a certified public accountant or officer of the Company, sufficient to enable Landlord to make an informed judgment as to the financial capabilities of the proposed transferee, and (c) such other information, related to the proposed transfer and the parties involved therein as Landlord reasonably requests in writing.  Landlord, at its option, may void any transaction that does not comply with provisions of this Article 10.

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10.5         If Landlord does not consent to the proposed sublease or assignment, or other transfer, within fifteen (15) days, Tenant shall not complete such proposed assignment or sublease.  On the other hand, if Landlord consents to such proposed sublease or assignment, or other transfer, Tenant shall be required to pay Landlord’s reasonable legal and administrative fees not to exceed $1,000 for any assignment or sublease.  In addition, if Landlord consents to the proposed assignment or sublease: (a) any subtenant shall agree that if Landlord gives such subtenant notice that Tenant is in default under this Lease, such subtenant shall thereafter make all sublease or other payments directly to Landlord, which sublease payments will be received by Landlord without any liability to honor the sublease (except to credit such payments against sums due under the Lease) and any subtenant shall agree to attorn to Landlord or its successors and assigns should the Lease be terminated for any reason, voluntarily, or otherwise, except that in no event shall Landlord or its successors or assigns be obligated to accept such attornment and (b) Landlord may require that subtenant not then be in default hereunder in any respect.

10.6         The parties acknowledge that Landlord’s economic stake in the Project is significantly greater than Tenant’s economic stake in this Lease.  Accordingly, the parties have expressly bargained for the following allocation of any “Profits” (as defined in Article 59 in the Lease Addendum) to be derived by Tenant from any assignment or subletting or other transfer of this Lease.  Except in the case of a Permitted Transferee as defined in Article 10.9 below (in which case no Transfer Premium is due), in the event Tenant assigns or subleases more than fifty percent (50%) of the Premises, Tenant shall be required to pay Landlord fifty percent (50%) of any rent, key money, transfer consideration, or other premiums of any kind or nature on the sublease, assignment or transfer in excess of the Base Rent payable by Tenant under this Lease on a per rentable square foot basis net of Tenant’s costs incurred to facilitate the transfer (the “Transfer Premium”).  Such payments shall be paid, in the same manner and at the same time as Tenant receives such Transfer Premium, whether such Transfer Premium is in the form of an increased rental, a lump sum payment or any other form of consideration.  If such sublease, assignment or transfer pertains to a portion of the Premises only, any Transfer Premium shall be computed on the assumption that Tenant’s Rent and other sums due hereunder are allocable on a pro rata per square foot basis.  [See Lease Addendum Article 52]

10.7         The provisions of this Article 10 shall apply regardless of whether such assignment, sublease or other transfer is made in compliance with the provisions of this Lease.  Any payments made to Landlord pursuant to this Article 10 shall not cure any default under this Lease arising from such assignment, sublease or transfer. Tenant shall not artificially structure any sublease, assignment or other transfer or take any other steps to circumvent or to reduce the amount payable to Landlord under this Article 10.  The amount payable to Landlord under this Article 10 shall be the amount that would have been payable to Landlord had the Tenant not artificially structured the sublease, assignment or transfer or otherwise tried to circumvent this Article 10.

10.8         No assignment, sublease or other transfer shall release Tenant from any of its obligations hereunder.  Landlord’s consent to any one transfer shall apply only to the specific transaction thereby authorized and such consent shall not waive the duty of Tenant or any transferee to obtain Landlord’s consent to any other or subsequent transfer, or modify or limit Landlord’s rights hereunder in any way.  Landlord’s acceptance of Rent directly from any assignee, subtenant or other transferee shall not be construed as Landlord’s consent thereto nor Landlord’s agreement to accept the attornment of any subtenant in the event of any termination of this Lease.  In no event shall Landlord’s enforcement of any provision of this Lease against transferee be deemed a waiver of Landlord’s right to enforce any Lease provision against Tenant or other person.

10.9         If Tenant is a corporation, an unincorporated association or a partnership (including, without limitation, a limited liability company (“LLC”) or a limited liability partnership (“LLP”)), any cumulative transfer, assignment or hypothecation of any stock or interest in such corporation, association or partnership greater than forty-nine percent (49%) thereof, or any cumulative transfer, assignment or hypothecation (other than in the ordinary course of business) of any asset of such corporation, association, partnership, LLC or LLP greater than forty-nine percent (49%) thereof (“Change in Control”), shall be deemed an assignment within the meaning and provisions of this Article 10.  The foregoing shall not apply to corporations, where forty-nine percent (49%) or more of the stock is traded through a regional, national or over-the-counter exchange.  Provided that the transferee’s use is permitted under the Lease and provided that Tenant notifies Landlord of its intention at least thirty (30) days prior to such assignment or sublease, then notwithstanding anything in this Lease to the contrary, Tenant shall have the right, without obtaining Landlord’s consent or paying any Transfer Premium, to do the following: (a) assign this Lease or sublet all or any part of the Premises to a parent, wholly-owned subsidiary or affiliate of Tenant; (b) transfer a majority or controlling interest in the Tenant to an entity with a financial strength sufficient to meet the obligations set forth in this Lease; (c) assign this Lease or sublet all or any part of the Premises to an entity into which Tenant is merged or by which it has been acquired; (d)  assign this Lease or sublet all or any part of the Premises to an entity or entities of the Tenant created by the division of Tenant into one or more separate corporations and/or partnerships (collectively, a “Permitted Transferee”).

10.10       Notwithstanding any of the foregoing provisions, covenants and conditions to the contrary, in the event that this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. 101 et seq. (the “Bankruptcy Code”), any and all moneys or other consideration payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of the Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all moneys or other consideration constituting Landlord’s property under the preceding sentence not paid or delivered to Landlord shall be held in trust by the bankruptcy trustee in possession or debtor in possession for the benefit of the Landlord and shall promptly be paid to or turned over to Landlord.  If Tenant proposes to assign this Lease pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to Tenant, then notice of such proposed assignment setting forth (a) the name and address of such person, (b) all of the terms and conditions of such offer, (c) the adequate assurance provided by Tenant to assure such person’s future performance under the Lease including, without limitation, the assurance referred to in Section 365 of the Bankruptcy Code, or any such successor or substitute legislation or rule thereto, shall be given to Landlord by Tenant no later than twenty (20) days after receipt of such bona fide offer by Tenant.  Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assignment and assumption.  Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person, less any brokerage commissions, attorneys’ fees, tenant improvement costs or other charges which may be payable out of the consideration to be paid by such person for the assignment of this Lease.  Any person or entity to which this Lease is assigned

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pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment.  Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption.  Subject to this Article 10 and Article 20 below, the Lease provisions shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns.

11.           Waiver; Indemnity.

11.1         Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to personal property of Tenant, or injury to persons in or about the Premises, except to the extent caused by the negligence, recklessness or willful misconduct of Landlord or Landlord’s Agents.  Notwithstanding any contrary provision herein, and except to the extent arising from the negligence, recklessness or willful misconduct of the Landlord, or Landlord’s Agents, Landlord shall not be liable and Tenant hereby waives all claims against Landlord for any injury or damage to any person or property or any other loss (including, but not limited to loss of income), which may be sustained by the person, goods, wares, merchandise or property of Tenant, or Tenant’s Agents, or any other person in or about the Premises, the Building, or the Project by or from any cause whatsoever.  Without limiting the generality of the foregoing, except to the extent caused by negligence, recklessness or willful misconduct of the Landlord or Landlord’s Agents, Landlord shall not be liable for any damage caused by or resulting from: (a) water leakage of any character from the roof, walls, windows, basement, or any other portion of the Premises or the Project; (b) fire, steam, electricity, gas or oil, or by any interruption of utilities or services, or by any tenant, occupant, or other person; or (c) any other cause whatsoever, in, on or about the Premises or the Project.  Notwithstanding any contrary provision in this Lease, Landlord shall not in any event be liable for consequential damages hereunder.

11.2         Subject to Article 12.7 below, except to the extent that claims arise from the negligence, recklessness or willful misconduct of Landlord, Tenant shall indemnify and hold Landlord (as used in this Article 11.2, “Landlord” shall refer to Landlord and Landlord’s Agents) harmless from and against any and all claims, demands, losses, damages, liabilities, costs and expenses (including, but not limited to, reasonable attorney’s fees) arising from Tenant’s use or occupancy of the Premises, from the conduct of Tenant’s business, from any act or omission, work or thing done, permitted or suffered by Tenant (or any officer, employee, agent, contractor, representative, licensee, guest, invitee or visitor thereof) in or about the Project, or from any default under this Lease by Tenant. If any action or proceeding is brought against Landlord by reason of any such matter, Tenant shall, upon notice from Landlord, defend Landlord in such action or proceeding at Tenant’s expense.  The provisions of this Article 11 shall survive the expiration or termination of this Lease for a period of ninety (90) days with respect to any claims or liability arising from events occurring prior to such expiration or termination.

11.3         Notwithstanding anything in this Lease to the contrary, except to the extent that claims arise from the negligence, recklessness or willful misconduct of Tenant, Tenant (as used in this Article 11.3, “Tenant” shall refer to Tenant and Tenant’s Agents) shall not be liable for and Landlord shall indemnify Tenant and hold Tenant harmless from and against all suits, actions, damages, liability and expense in connection with loss of life, bodily or personal injury or property damage arising from or out of any occurrence, in, upon, at or from the Project.

12.           Insurance.

12.1         Throughout the Lease Term hereof, Tenant shall carry and maintain, at its own expense, the following types, amounts and forms of insurance:

12.1.1      Commercial General Liability Insurance.A policy of commercial general liability insurance with a combined single limit of One Million Dollars ($1,000,000) per occurrence with Two Million Dollars ($2,000,000) aggregate coverage, in the name of Tenant (naming, as additional insureds, Landlord, its management company Held Properties, Inc., and, if requested by Landlord, any mortgagee, trust deed holder, or secured party with an interest in this Lease).  Tenant’s liability coverage shall include, without limitation, all coverage typically provided by the Broad Form Comprehensive General Liability Endorsement, including broad form property damage, and premises-operations coverage, products-completed operations coverage, owners and contractors protective coverage, and the broadest form of contractual liability coverage, the last of which shall cover the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements in Article 11 above. Such policy shall provide coverage on an occurrence basis.  The amount of such insurance required hereunder shall be subject to adjustment from time to time as reasonably requested by Landlord, but Landlord shall not raise such coverage amounts to an extent where they materially exceed that customarily carried by prudent tenants in first class office buildings in the Project area.

12.1.2      Tenant’s Property Insurance.  Tenant shall procure and maintain property insurance coverage for: (a) all office furniture, trade fixtures, office equipment, merchandise and all other items of Tenant’s property in, on or about the Premises and the Project, including property installed by, for or at the expense of Tenant and (b) Tenant Improvements.  Tenant’s property insurance shall be written on the broadest available “all risk” (special causes of loss) policy form and shall include an agreed amount endorsement for no less than one hundred percent (100%) of the full replacement cost (new, without deduction for depreciation) of the covered items and property.  The property insurance coverage shall include vandalism and malicious mischief coverage, sprinkler leakage coverage and earthquake sprinkler leakage coverage.

12.1.3     Plate Glass Insurance.       Tenant shall, at Tenant’s cost and expense, procure and maintain insurance coverage for all plate glass.

12.2         Recovery for Tenant’s Negligence.  All of the policies that Tenant is required to obtain pursuant to the provisions of Article 12.1 above shall be issued by companies legally authorized to do business in California.  Although named as an additional insured and subject to the provisions of Article 12.7 of this Lease, Landlord shall be entitled to recover under said policies for any loss occasioned to it, its servants, agents and employees, by reason of the negligence, recklessness or willful misconduct of Tenant.

12.3         Delivery of Certificate, Policy and Endorsements.  Prior to Tenant’s occupancy of the Premises, Tenant shall provide Landlord with evidence of compliance with Tenant’s insurance requirements under the Lease, including the endorsements specified in Article 12.1, and, as available, certified certificates for all insurance policies regarding the Premises, executed by an authorized agent of the insurer or insurers.  Each insurance policy shall provide that it may not be modified or

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canceled without ten (10) days prior written notice to Landlord (by any means described in Article 27 below) and to any other additional insureds.  At least ten (10) days prior to the expiration of any of such policies, Tenant shall furnish Landlord with a renewal or binder therefor.

12.4         Blanket Insurance.  Tenant may carry insurance by a combination of primary, excess and umbrella policies, provided that the policies are absolutely concurrent in all respects regarding the coverage afforded by the policies.  The coverage of any excess or umbrella policy must be at least as broad as the coverage of the primary policy.  All insurance policies carried by Tenant for Tenant’s Premises and personal property shall be primary and non-contributory with respect to any other insurance available to and purchased by Landlord.

12.5         Tenant’s Failure to Obtain Insurance.  If Tenant fails to carry any insurance policy required hereunder or to furnish certificates pursuant hereto, Landlord may, upon no less than ten (10) business days prior written notice, and without waiving Tenant’s default, obtain such insurance.  In such case, Tenant, with the next month’s Rent due hereunder, shall reimburse Landlord for the cost thereof including interest at the Interest Rate specified in Article 27.

12.6         Landlord’s Insurance.  During the Lease Term, Landlord shall procure and maintain property and liability insurance for the Project in such reasonable amounts, and with such reasonable coverage, as would be carried by a prudent owner of a similar building in the Project area, or as any lienholder may require.  Tenant acknowledges that it shall not be a named insured or an additional insured in such policies, and that it has no right to receive any proceeds from any such insurance policies carried by Landlord.  Landlord may but shall not be required to carry insurance coverage for damages caused by flood or earthquake.

12.7         Waiver of Subrogation.  Landlord and Tenant hereby waive all causes of action and rights of recovery against each other, against all subtenants or assignees of Tenant and against any other person or entity holding an interest in the Project (together, the “Affected Parties”) and against the agents, officers and employees of the Affected Parties for any loss occurring to the property of the Affected Parties resulting from any of the perils insured against under any and all insurance policies (including self-insurance) in effect at the time of any such loss or which, under this Lease, were required to be insured against, regardless of cause or origin of such loss, including the negligence, recklessness or willful misconduct of the Affected Parties or the agents, officers or employees of the Affected Parties.  Landlord and Tenant shall each use commercially reasonably efforts to cause their respective insurers to issue an endorsement denying such insurer any rights of subrogation against the other party.

12.8         Increases in Premiums due to Tenant’s Use or Occupancy.  If, after Landlord provides notice to Tenant that the insurance carrier is proposing increased premiums to the Project due to Tenant’s use or occupancy of the Premises, and Tenant fails to cease the offending use within ten (10) business days after receipt of such notice, Tenant shall pay said increases in insurance premiums.

13.           Services and Utilities.     13.1            Throughout the Lease Term, Landlord shall provide the following services and utilities twenty-four (24) hours per day on every day during the Lease Term, unless otherwise stated below.

13.1.1      Subject to all governmental rules, regulations and guidelines applicable thereto, Landlord shall provide heating, ventilation and air conditioning (“HVAC”) to the Premises in a manner consistent with a first class office building from Monday through Friday, from 8:00 a.m. to 6:00 p.m. and on Saturday from 9:00 a.m. to 1:00 p.m., except for the celebratory days of the following holidays: New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas (collectively “Business Hours”).   After hours HVAC is currently available to Tenant at no direct charge for the first five (5) years of the Lease Term but shall be included in Operating Costs under Article 4.  Thereafter, Landlord may charge Tenant for after-hours HVAC cost, at Landlord’s actual cost, calculated to include wear and tear and amortization of equipment and electrical.

13.1.2      Landlord shall at all times provide electricity to the Premises for lighting and power of not less than three (3) watts per rentable square foot demand load on a continuous annualized basis.  Landlord shall also provide electrical lighting in all Common Areas, parking facilities or storage areas and replace building standard lamps and ballasts as required.

13.1.3      Landlord shall provide hot and cold water to the Building’s rest rooms (and, as applicable, to any sink, refrigerator or dishwasher in the Premises).

13.1.4      Landlord shall provide passenger elevator service at all times; provided, however, after Business Hours, Landlord may decrease the availability of passenger elevator service so long as at least one car services the floor on which the Premises are located.

13.1.5      Landlord shall provide non-exclusive freight elevator service to Tenant, subject to reasonable and non-discriminatory scheduling by Landlord. After Business Hours, Tenant may be charged at a rate equal to Landlord’s cost of providing such freight elevator service.

13.1.6      Landlord shall provide 24-hour security for the Project in a manner consistent with the security systems, equipment and procedures maintained in comparable first class office buildings in the Project area. In addition to Landlord’s covenant to provide 24-hour security to the Project, Tenant shall provide to the Premises its own security system.

13.1.7      Landlord shall provide normal janitorial services five (5) days per week, similar to that furnished in comparable first class office buildings in the Project area and in accordance with the building standard janitorial and cleaning service specifications.

13.1.8      Landlord shall provide grounds care, including the sweeping of walkways and parking areas, removal of rainwater (as may be required) and maintenance of the landscaping in an attractive manner consistent with other office buildings in the Project area.

13.1.9      Landlord shall operate and maintain the Project in accordance with the standards of maintenance and operation as are customary for other comparable first class buildings in the Project area.

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13.1.10    Landlord shall provide controlled access to the Premises 24 hours a day, every day.

13.2         Without the prior written consent of Landlord, Tenant shall not use in the Premises any apparatus, device, machine or equipment that uses excess lighting, heating, ventilation or air conditioning, electricity or water; nor shall Tenant connect any apparatus or device to sources of electrical current or water except through existing electrical outlets or water pipes in the Premises.  If Tenant requires electricity in excess of the amount provided pursuant to Article 13.1.2 herein, or any other resource in excess of that customarily supplied for use of similar premises in comparable first class buildings in the Project area, Tenant shall first request the consent of Landlord.  As a condition to its consent, Landlord may cause a separate metering device to be installed in the Premises, at Tenant’s cost and expense.  Tenant shall promptly pay the cost of all excess resources consumed within the Premises, together with any additional administrative expenses incurred by Landlord in connection therewith.  Any sums payable by Tenant to Landlord under this Article 13 also shall be considered Additional Rent and may be included in any installment of Rent thereafter becoming due.  Landlord shall have the same remedies for a default in payment of such sums as for a default in the payment of Rent.

13.3         Except as provided otherwise in this Lease, Landlord shall not be in default or be liable for any damages directly or indirectly resulting from any interruption of utilities or services caused by: (a) the installation or repair of any equipment in connection with the furnishing of utilities or services; (b) acts of God or the elements, labor disturbances of any character, any other accidents or any other conditions beyond the reasonable control of Landlord, or due to repairs or improvements to the Premises or the Project; or (c) the limitation, curtailment, rationing or restriction imposed by any governmental agency or service or utility supplier on use of water or electricity, gas or any other form of energy or any other service or utility whatsoever serving the Premises or the Project.  .

14.           Estoppel Certificate            Within twenty (20) days after any written request from Landlord, Tenant shall execute and deliver to Landlord a certificate (the “Estoppel Certificate”) provided by Landlord’s current or prospective lender or prospective purchaser stating: (a) that this Lease is then in full force and effect and has not been modified (or if modified, setting forth all modifications or attaching all amendments to the Lease), (b) the then current Base Rent and the date to which said Rent has been paid, and (c) whether or not Landlord is then under default of this Lease and if so, the nature of such default and date notice of default was given Landlord. Landlord and Tenant intend that any existing or prospective lender or any prospective purchaser or assignee of Tenant may rely on such Estoppel Certificate.  Failure of Tenant to provide, within five (5) days after notice and opportunity to cure, Landlord with a Estoppel Certificate as provided above shall be a default under the Lease.

15.           Subordination; Requirements of Lenders.

15.1         This Lease shall be subject and subordinate at all times to (a) all ground leases or underlying leases which may now exist affecting all or any portion of the Project, and (b) the lien of any mortgage or deed of trust which may now exist affecting all or any portion of the Project.

15.2         If any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a deed in lieu of foreclosure is made for any reason, then Tenant shall, notwithstanding any subordination, attorn to and become the tenant of the successor-in-interest.   It shall be a condition to any future subordination of this Lease that the ground lessor, air space lessor, or mortgagee or beneficiary requesting such subordination shall agree that so long as Tenant is not in default under this Lease as defined Article 17, Tenant’s possession of the Premises shall not be disturbed as a result of such termination, foreclosure or deed in lieu of foreclosure. Tenant shall execute and deliver, within thirty (30) days of demand by Landlord, any additional, commercially reasonable documents evidencing the priority or subordination of this Lease and the attornment of Tenant with respect to any such ground leases or underlying leases or the lien of any such mortgage or deed of trust. [See Article 44 of the Lease Addendum.]

16.           Access by Landlord.

16.1         Landlord (and its agents, contractors and employees) reserves the right, without abatement of Rent, to enter the Premises at reasonable times and after reasonable advance notice (except in cases of emergency) to inspect it, to supply janitorial services and any other service to be provided by Landlord to Tenant hereunder, to show the Premises to any prospective purchaser, beneficiary, mortgagee, to post notices of non-responsibility, to make any alteration, improvement or repair to the Premises required by law or consented to by Tenant, or, during the last six (6) months of the Lease Term, to show it to prospective tenants.  For the purpose of making any alterations, improvement or repair to the Premises or any portion of the Project, Landlord may erect, use and maintain scaffolding, pipes, conduits and other necessary structures in and through the Project and the Premises where reasonably required by the character of the work to be performed and in conformance with good construction practices, provided that entrance to the Premises shall not be blocked thereby, and provided further that Landlord works expeditiously and uses its best efforts to minimize any interference with Tenant’s use of and access to the Premises.  At Tenant’s election, Tenant may accompany Landlord and all persons entering under the authority or right of Landlord, during any such entry.  Tenant hereby waives any claim for damages or abatement of Rent for any injury or inconvenience to or interference with Tenant’s business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby, except as otherwise set forth in the Lease or to the extent arising from the negligence, recklessness or willful misconduct of Landlord or Landlord’s employees, agents, representatives, contractors, or invitees.

16.2         For each of the aforesaid purposes, Landlord shall at all times have and retain a key to all of the doors in, upon and about the Premises, excluding Tenant’s vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem reasonably necessary or proper to open said doors in any emergency, and any such entry to the Premises or portions thereof by Landlord shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. If at any time during the Lease Term Tenant wishes to re-key its Premises, all such re-keying shall be done by Landlord with locks and hardware supplied by Landlord all at Tenant’s sole cost and expense.

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17.           Default by Tenant.

17.1         The occurrence of any of the following shall constitute a breach of the Lease, and a default if not cured by Tenant after notice and a reasonable opportunity to cure such breach:

17.1.1      Failure by Tenant to pay Rent or any amount due hereunder when such amount becomes payable in accordance with this Lease, or to duly, promptly and completely perform any obligation of Tenant under Articles 14 or 15 above, and continuation of such failure for a period of three (3) business days after receipt of the written statutory notice from Landlord to Tenant specifying the nature of such failure.

17.1.2      Failure by Tenant in the due, prompt and complete performance or observance of any other express or implied covenant, agreement or obligation of Tenant contained in this Lease, and the continuation of such failure for a period of thirty (30) days after written notice from Landlord to Tenant specifying the nature of such failure; provided, however, that if any such failure cannot reasonably be cured within such period, Tenant shall not be deemed to be in default hereunder if Tenant promptly commences such cure within such period and thereafter diligently pursues such cure to completion.

17.1.3      Tenant’s abandoning the Premises, which shall mean for these purposes, Tenant’s absence for a period of more than two (2) weeks from the Premises while otherwise in default of this Lease as described in this Article 17.

17.1.4      Tenant, its assignee, sublessee, other transferee, successor or any guarantor of this Lease gives to Landlord any financial statement or representation which proves to be materially false or materially misleading.

17.1.5      The insolvency of Tenant; the making by Tenant of any assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy, insolvency or creditors’ rights in general (unless in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); the appointment of a trustee or receiver to take possession of all or a substantial part of Tenant’s assets or of Tenant’s interest under this Lease, where such seizure is not discharged within sixty (60) days.  The occurrence of any of the acts or events referred to in this Article with respect to any Guarantor of this Lease shall also constitute a default hereunder.

17.1.6      The attachment, execution or other judicial seizure of a substantial portion of Tenant’s assets or of Tenant’s interest in this Lease, where such seizure is not discharged within sixty (60) days.

17.2         The notices referred to in Article 17.1.1 and 17.1.2 above shall be in lieu of, and not in addition to, any notice required under Section 1161 et seq. of the California Code of Civil Procedure.

18.           Remedies of Landlord.

18.1         In the event of Tenant’s default under this Lease as provided in Article 17 above, Landlord, at Landlord’s option, and without limiting Landlord in the exercise of any other right or remedy Landlord may have on account of such default, and without any further demand or notice, may terminate this Lease, recover possession of the Premises and/or, to the extent permitted by California Civil Code Section 1951.3 or any other law, remove all persons and property from the Premises, which property shall be stored by Landlord at a warehouse or elsewhere at the risk, expense and for the account of Tenant.

18.2         On termination of this Lease as provided in Article 18.1 above, Landlord shall be entitled to recover from Tenant the aggregate of:

18.2.1      The worth at the time of the award of the unpaid Rent, as defined in Article 3.2, late charges and interest earned as of the date of the termination hereof;

18.2.2      The worth at the time of the award of the amount by which the unpaid Rent, late charges, interest and other amounts due hereunder, which would have been earned after the date of termination hereof until the time of the award, exceeds the amount of such unpaid Rent, late charges and interest that Tenant proves could have been reasonably avoided by Landlord mitigating its damages;

18.2.3      The worth at the time of the award of the amount by which the unpaid Rent for the balance of the term hereof after the time of the award exceeds the amount of such unpaid Rent, interest and late charges that Tenant proves could have been reasonably avoided by Landlord mitigating its damages; and

18.2.4      Any other amount necessary to compensate Landlord for the detriment proximately caused by Tenant’s uncured default under this Lease, including but not limited to brokerage commissions and advertising expenses, expenses incurred for removing and storing any of Tenant’s property remaining on the Premises, expenses of remodeling the Premises for a new tenant and any special concessions made to obtain a new tenant.

18.3         For the purposes of this Article 18, the “time of the award” shall mean the date upon which the judgment in any action brought by Landlord against Tenant by reason of such default is entered or such earlier date as the court may determine; the “worth at the time of award” (referred to in Articles 18.2.1 and 18.2.2) shall be computed by including interest at the Interest Rate and late charges set forth in Article 27 below; and the “worth at the time of award” (referred to in Article 18.2.3) shall be computed by applying the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%) per annum.

18.4         Nothing in this Article 18 shall be deemed to alter Landlord’s right to indemnification under the indemnification clause or clauses contained in this Lease for claims or liabilities arising from events occurring prior to the termination of this Lease.

18.5         Notwithstanding anything to the contrary set forth herein, Landlord’s reentry into the Premises to perform acts of maintenance or preservation of, or in connection with efforts to relet the Premises, or any portion thereof, or the appointment of a receiver upon Landlord’s initiative to protect Landlord’s interest under this Lease shall not terminate Tenant’s right to possession of the Premises or any portion thereof and, until Landlord does elect to terminate this Lease, this Lease shall continue in full force and Landlord may pursue all its remedies hereunder including, without limitation, the right to recover from Tenant as they become due hereunder all Rent and other charges required to be paid by Tenant under the terms of this Lease.

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18.6         If Tenant abandons the Premises, or if Landlord elects to reenter or take possession of the Premises pursuant to any legal proceeding or pursuant to any notice provided by law, and until Landlord elects to terminate this Lease, Landlord may, from time to time, without terminating this Lease, recover all Rent as it becomes due under Article 18.5 above, subject to interest and late charges as set forth in Article 27, and/or relet the Premises or any part thereof for the account of and on behalf of Tenant, on any terms, for any term (whether or not longer than the Lease Term) and at any rental rate as Landlord in its reasonable discretion may deem advisable, and Landlord may make any alterations and repairs to the Premises in connection therewith.  In the event that Landlord shall elect to so relet the Premises on behalf of Tenant, then base rent and additional rent received by Landlord from such reletting shall be applied:

18.6.1      First, to reimburse Landlord for the reasonable costs and expenses of such reletting (including, without limitation, legal and other costs and expenses of repossessing the Premises, removing persons and property therefrom, obtaining new tenants, brokerage fees, costs of preparing the Premises for occupancy by such new tenants, and, if Landlord maintains and operates the Premises, the costs thereof).

18.6.2      Second, to the payment of any indebtedness of Tenant to Landlord other than Base Rent, adjustments to Base Rent, Additional Rent and other sums due and unpaid hereunder.

18.6.3      Third, to the payment of Rent and other sums due and unpaid hereunder; the residue, if any, shall be held by Landlord and applied in payment of other or future obligations of Tenant to Landlord as they may become due and payable.

18.7         Should the rent received from such reletting, when applied in the manner and order indicated above, be less than the total amount owing from Tenant pursuant to this Lease, then Tenant shall pay such deficiency to Landlord, and if Tenant does not pay such deficiency within five (5) days of its receipt of written notice, Landlord may bring an action against Tenant for recovery of such deficiency or pursue its other remedies hereunder or under California Civil Code Section 1951.8, California Code of Civil Procedure Section 1161 et seq., or any similar, successor or related provision of law.

18.8         All rights, powers and remedies of Landlord under the Lease and any other agreement between Landlord and Tenant shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Landlord at law or in equity.  The exercise of any one or more of such rights or remedies shall not impair Landlord’s right to exercise any other right or remedy, including, without limitation, any and all rights and remedies of Landlord under California Civil Code Section 1951.8, California Code of Civil Procedure Section 1161 et seq., or any similar, successor or related provision of law.

18.9         [Intentionally Deleted]

18.10       If Tenant abandons the Premises and leaves behind any items of personal property, then Landlord shall store such property at Tenant’s cost and expense at a warehouse or any other location at the risk of Tenant, and Tenant’s property shall be released only upon Tenant’s payment of any and all moving and storage charges, as well as any expense or damages incurred as a result of the removal, moving and storage of such property, together with all sums due and owing under this Lease. If Tenant does not reclaim such property within the period permitted by law, Landlord may sell such property in accordance with law and apply the proceeds of such sale to any sums due and owing hereunder, or retain said property, granting Tenant credit against sums due and owing hereunder for the reasonable value of such property.

18.11       To the extent permitted by law, Tenant and Landlord each hereby waive all provisions of, and protection under, any decisions, statutes, rules, regulations and other laws of the State of California to the extent same are inconsistent and in conflict with specific terms and provisions of this Article 18.

19.           Default by Landlord; Limitation of Liability.

19.1         Landlord shall not be deemed to be in default hereunder unless Landlord does not perform its material obligations under the Lease after written notice of Landlord’s breach by Tenant to Landlord and to such other parties whose names and addresses are furnished to Tenant.  The notice shall specify that Landlord has failed to perform such obligations; provided, however, that if the nature of such obligations is such that more than thirty (30) days are reasonably required for their cure, Landlord shall not be deemed to be in default hereunder if Landlord or any such other party(ies) commences such cure within such thirty (30) day period and thereafter diligently pursues such cure to completion.

19.2         If Landlord is in default hereunder and, as a consequence thereof, Tenant recovers a judgment against Landlord, such judgment may be satisfied only out of the right, title and interest of Landlord in the Project and out of the rent or other revenue receivable by Landlord from the Project, or out of the proceeds receivable by Landlord from the sale or other disposition of all or any portion of Landlord’s right, title and interest in the Project. Neither Landlord nor any of the partners of Landlord shall be personally liable for any deficiency or otherwise.

20.           Damage and Destruction.

20.1         If the Project (whether or not including the Premises) is damaged by an insured casualty (or a casualty for which Landlord is required to insure under the terms of this Lease) occurring more than six (6) months prior to the expiration of this Lease and any extensions thereof, Landlord shall forthwith repair same, or cause same to be repaired, to the extent that insurance proceeds are made available to Landlord therefor and provided that such repairs can, in Landlord’s reasonable opinion, be made within one hundred eighty (180) days from the date of such damage  under the laws and regulations of the federal, state and local governmental authorities having jurisdiction thereof.  Landlord agrees to repair any casualty damage as long as the uninsured portion of such casualty damage does not exceed $15.00 per rentable square foot.

20.2         If (a) the Premises or the Project is damaged by an uninsured casualty which costs more than $15.00 per rentable square foot to repair, (b) the casualty repair requires more than one hundred eighty (180) days to complete without payment of overtime or other premium or (c) if the Premises, or the Project is damaged by a casualty as described in Article 20.1 above within the last six (6) months of this Lease and any extensions thereof, then Landlord shall have the option within thirty (30) days from the date of such damage either to (1) notify the Tenant of its election to continue the Lease, in which event Landlord shall thereafter repair such damage; or (2) notify the Tenant of its election to immediately terminate this Lease, in which event this Lease shall be so terminated.  Landlord shall refund to Tenant any Rent previously paid for any period of

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time subsequent to the earlier of such termination or untenantability of the Premises.  Notwithstanding any contrary provision herein, Landlord shall not be required to repair any casualty damage to the property of Tenant or to repair or replace any paneling, decorations, railings, floor coverings, alterations, additions, fixtures or improvements installed on the Premises by or at the expense of Tenant.  To the extent permitted by law, Tenant hereby waives the provisions of Section 1932, subdivision 2, and Section 1933, subdivision 4, of the Civil Code of California, and any similar law, statute or ordinance now or hereafter in effect.

20.3         Until the Premises are restored, Rent shall be abated in the proportion that the area of the Premises rendered unusable by Tenant bears to the total area of the Premises.  Except for abatement of Rent, Tenant shall have no claim against the Landlord for any damage suffered by reason of (a) any damage to the Premises, (b) such repairs, or (c) any inconvenience, interruption, annoyance, loss of business, or continued expense of operation caused by such damage or repair, except to the extent resulting from the negligence, recklessness or willful misconduct of Landlord, its employees agents, representatives, contractors or invitees.

20.4         Should the Premises be damaged or destroyed by fire or other casualty insured under a standard fire and casualty insurance policy (or which could be insured under a standard fire and casualty insurance policy), Landlord shall within forty-five (45) days of the date of the casualty, notify Tenant in writing of Landlord’s good faith estimate of the time necessary to repair and rebuild the Premises.  If such estimate sets forth a period of one hundred eighty (180) days or less, Landlord shall, except as otherwise provided herein this Article, repair and/or rebuild the same with reasonable diligence.  Landlord’s obligation hereunder shall be limited to the Building and Tenant Improvements originally provided by Landlord at the Commencement Date, and any alterations provided by Landlord that Landlord has not requested Tenant to remove upon expiration of the Lease Term.

21.           Eminent Domain.

21.1         If the entire Premises, or enough thereof so as to render the balance thereof not reasonably usable for the conduct of Tenant’s business, is taken or appropriated by a governmental agency under the power of eminent domain or conveyed in lieu thereof, either party hereto may terminate this Lease by serving written notice upon the other party hereto within thirty (30) days thereafter.  If any substantial part of the Project excluding the Premises is taken or appropriated by a governmental agency under the power of eminent domain or conveyed in lieu thereof, Landlord may so terminate this Lease.  In either event, Landlord shall receive (and Tenant shall assign to Landlord upon demand by Landlord) any income, Rent, award or any interest therein which may be paid in connection therewith, and Tenant shall have no claim for any part of any sum so paid, whether or not attributable to the value of the unexpired Lease Term; provided, however, that nothing herein shall prevent Tenant from pursuing a separate award in connection with the taking of Tenant’s removable tangible personal property placed in the Premises solely at Tenant’s expense, for Tenant’s relocation costs and for loss of goodwill.

21.2         If a part of the Premises is so taken, appropriated or conveyed by a governmental agency, and neither party hereto elects to terminate this Lease, then Base Rent and Additional Rent payable hereunder shall be abated in the proportion that the portion of the Premises so taken, appropriated or conveyed bears to the area of the entire Premises.

21.3         Notwithstanding anything to the contrary contained in this Article 21, if the temporary use or occupancy of any part of the Premises (for a period not to exceed 60 days) is taken or appropriated by a governmental agency under the power of eminent domain or conveyed in lieu thereof during the Lease Term, this Lease shall be and remain unaffected by such taking, appropriation or conveyance and Tenant shall continue to pay in full all Rent payable by Tenant.  In the event of any such temporary taking, appropriation or conveyance, Tenant shall be entitled to receive that portion of any award that represents compensation for loss of this use or occupancy of the Premises during the Lease Term, and Landlord shall be entitled to receive the balance of such award.  To the extent that it is inconsistent with the above, each party hereto hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure allowing either party to petition a court to terminate this Lease in the event of a partial taking of the Premises.

22.           Sale by Landlord.  If Landlord sells or transfers all or any portion of the Project including the Premises, Landlord shall, upon consummation of the sale or transfer, be released from any liability relating to its obligations or covenants thereafter to be performed or observed under this Lease, and Tenant agrees to look solely to Landlord’s successor-in-interest with respect to such liability.  If Landlord transfers or credits any security deposit or prepaid Rent to Landlord’s successor-in-interest, then upon such transfer Landlord shall be discharged from any further liability therefor.

23.           Surrender of Premises.  Upon the expiration or sooner termination of the Lease, Tenant shall surrender to Landlord the Premises broom clean and free of debris, with all repairs, changes, alterations, additions and improvements thereto, in good order, condition and repair, ordinary wear and tear and damage from insured casualty excepted.  At Tenant’s sole cost and expense, Tenant shall upon expiration or sooner termination of the Lease: (a) remove its personal property from the Premises; (b) remove any improvements to the Premises caused to be installed by Tenant that Landlord may require Tenant to remove pursuant to Article 7.3; and (c) repair any damage caused by the removal of any such property or improvements.  If Tenant leaves any personal property at the Premises, Landlord may remove such personal property and dispose of it, at Tenant’s expense.

24.           Quiet Enjoyment.  So long as Tenant is not in default hereunder, Tenant shall have the right to the quiet peaceful enjoyment and possession of the Premises and the use of the Common Areas during the Lease Term, subject to the terms and conditions of this Lease.

25.           Notices.  Any notice, demand or other communication to be given under the provisions of this Lease shall be in writing to the appropriate address set forth in Article 1.1.10 (or such address furnished by either party hereto to the other party hereto in writing) and shall be (a) personally served, (b) mailed by United States registered or certified mail, return receipt requested, postage prepaid, (c) sent by a nationally recognized courier service (e.g. Federal Express) for next day delivery, to be confirmed in writing by such courier or (d) sent by electronic facsimile with appropriate provisions for confirmation of receipt.  Service by mail shall be deemed complete on the day of actual delivery as shown by the addressee’s registered or certified mail receipt or at the expiration of the third business day after the date of mailing, whichever first occurs.  Service by personal service or

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courier shall be deemed complete on receipt.  Service by electronic facsimile shall be deemed complete on confirmation of receipt if received prior to the close of business, and on the next business day if received after the close of business.

26.           Personal Property Taxes.  Tenant shall pay before delinquency all taxes, assessments, license fees and other charges (collectively, “Tenant’s Taxes”) that are levied and assessed against Tenant’s trade fixtures and other personal property installed or located in or on the Premises that become payable during the Lease Term.  On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of such payments.  If any taxes on Tenant’s personal property are levied against Landlord or Landlord’s property, or if the assessed value of the Building is increased by the inclusion of a value placed on Tenant’s personal property or above-standard leasehold improvements, Tenant, on demand, shall immediately reimburse Landlord for any such taxes.  Landlord shall have the right to pay these taxes regardless of the validity of the levy.  Notwithstanding the foregoing, Landlord agrees to: (a) notify Tenant in writing prior to paying any taxes under this Article 26 on Tenant’s behalf (“Landlord’s Tax Notice”), and (b) not pay any such taxes on Tenant’s behalf if Tenant notifies Landlord in writing within five (5) business days after it receives Landlord’s Tax Notice that Tenant, in good faith, disputes that the assessed taxes are properly due and owing by Tenant, provided that Tenant diligently pursues such dispute with the appropriate taxing authority in good faith within thirty (30) days from notice.

27.           Interest and Late Charges.  Any Rent, Additional Rent or other amount not paid by Tenant to Landlord when due hereunder shall bear interest from the due date until paid, unless otherwise specifically provided herein, at a rate (the “Interest Rate”) equal to the lesser of (a) the rate per annum announced from time to time by Bank of America, N.A. as its prime rate (or, if such bank fails to announce such rate, then the prime rate announced by the Chase Manhattan Bank, USA, N.A.) plus two (2) percentage points, or (b) the maximum rate permitted by law.  The payment of such interest shall not excuse or cure any such default by Tenant under this Lease.  In addition to such interest, if any Rent, Additional Rent or other amount is not paid within ten (10) days of when due, a late charge equal to five percent (5%) of such amount shall be assessed against Tenant, which late charge Tenant hereby agrees is a reasonable estimate of the damages Landlord would suffer as a result of Tenant’s late payment.  The parties agree that it would be impracticable and extremely difficult to fix Landlord’s actual damages in such event.  Such interest and late charges are separate and cumulative and are in addition to and shall not diminish or substitute for any or all of Landlord’s rights or remedies under any other provision of this Lease.

28.           Collection Agency and Attorneys’ Fees.Tenant shall pay the costs incurred by Landlord if Landlord uses a collection agency or attorneys to collect any moneys unpaid by Tenant or to enforce the terms of this Lease. In any action to enforce or interpret this Lease, including any suit by Landlord for the recovery of Rent or possession of the Premises, the non-prevailing party shall pay to the prevailing party its actual attorneys’ fees.  The prevailing party will be determined by the court, arbitrator or arbitration panel before whom the action was brought based upon an assessment of which party’s major arguments or positions could fairly be said to have prevailed. Any attorneys’ fees and other costs and expenses incurred by the prevailing party in enforcing a judgment under this Lease shall be recoverable separately from and in addition to any other amount included in such judgment in favor or the prevailing party.

29.           Light and Air.  Tenant covenants and agrees that no diminution of light, air or view by any structure that may hereafter be erected shall entitle Tenant to any reduction of Rent under this Lease, result in any liability of Landlord to Tenant, or in any other way affect this Lease or Tenant’s obligations hereunder.

30.           Signs and Directory.

30.1         Without the prior written consent of Landlord, Tenant shall not place, construct or maintain any sign, advertisement, awning, banner or other decoration on or visible from, or otherwise use, the exterior of the Premises or any other portion of the Project.  All door signs on the exterior of the Premises must be installed by Landlord, at Tenant’s sole cost and expense or as part of any tenant improvement allowance, that the Landlord provides for installation of improvements to the Premises, and must conform to standards of the Project as to size, style, placement, color and number of the names, and other matters as reasonably determined by Landlord.  In the event that Tenant violates the foregoing, Landlord may remove the sign without any liability, and may charge Tenant the expense incurred, including but not limited to the cost incurred for the repair of the wall, door surface or other area on which the sign was mounted.

30.2         Landlord shall place, construct and maintain a directory in the Building lobby and in such other locations, if any, as Landlord, in its sole discretion, may determine, which directory(ies) shall be for the display of the business names of Building tenants and their respective suite numbers.  Landlord shall have the sole right to determine and change from time to time the type of such directory(ies) and all common Project signage, including, but not limited to, size of letters, style, color content and placement.  Tenant shall have the right at Landlord’s cost to three (3) lines per directory per 1,000 rentable square feet of the Premises, but listings on such directory(ies) shall be limited to professional personnel of Tenant located principally at the Premises.  Tenant shall notify Landlord in writing of the business names that it desires to include on any such directory and shall, upon demand by Landlord, pay the cost associated with any subsequent changes to such names on the directory.

31.           Parking.  Subject to applicable rules and regulations any other charges, fees and taxes to be collected by Landlord, or other parking operator, Tenant shall have the right, but not the obligation, throughout the Lease Term to lease the number of parking spaces in the parking facility that serves the Building at such parking rate(s) and upon such other terms as may be specified in Article 1.1.11.  Notwithstanding anything to the contrary contained herein, Tenant shall be obligated to lease at least fifty percent (50%) of the parking spaces designated in Article 1.1.11 for the entire Lease Term.    Tenant may lease additional parking spaces on an “as available” monthly basis.  If Tenant desires to relinquish any of the spaces that Tenant is leasing, Tenant shall give not less than thirty (30) days notice thereof to Landlord.  Tenant may not sell, assign or transfer its parking rights hereunder, except pursuant to a permitted sublease or assignment of this Lease.  Except as may otherwise be specifically provided elsewhere in this Lease, Tenant shall not be entitled to any designated, reserved, assigned or valet parking. Landlord reserves the right to establish and alter, from time to time, on a non-discriminatory basis, all parking rates, rules and regulations, provided said rates shall be comparable to rates charged by other similar buildings in the Project area.  Tenant may purchase validation stickers at the prevailing rate then charged by the Project. See also Article 46 of the Lease Addendum.

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32.           Brokerage Fees.  Landlord shall have no obligation to pay commissions or fees to any real estate broker, finder or intermediary other than Tenant’s Broker, if any, listed in Article 1.1.13 and Held Properties, Inc., who represents Landlord.  Landlord and Tenant each warrant that with respect to this Lease neither has dealt with any other real estate broker, finder or intermediary.  To the extent that Tenant breaches the foregoing, any commissions or fees payable with respect to this Lease shall be paid exclusively by Tenant, and Landlord shall have no obligation of any kind with respect to such commissions or fees.  Landlord agrees to pay a commission to Tenant’s Broker pursuant to a separate agreement.

33.           Relocation Right.                [Intentionally Deleted]

34.           Authority.  If Tenant is a corporation, trust or partnership, each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to so execute and deliver this Lease, and within ten (10) days after its execution shall deliver to Landlord satisfactory evidence of such authority.  If Tenant or Guarantor is a corporation, it shall, upon demand, also deliver satisfactory evidence of (a) good standing in California, and in Tenant’s or Guarantor’s state of incorporation, (b) qualification to do business in California, and (c) a corporate resolution duly certified by the secretary of Tenant or Guarantor authorizing execution and delivery of this Lease or Guarantee, as the case may be, by the parties who have signed it on behalf of Tenant or Guarantor.

35.           Miscellaneous.

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

35.2         Any voluntary or other early surrender of this Lease by Tenant, mutual termination hereof or prior termination hereof by Landlord shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or sub-tenancies.  If Landlord elects to assume any sublease or enter into a lease with any subtenant, such assumption shall not relieve Tenant of any remaining liability under this Lease.

35.3         This Lease shall not be recorded; and no memorandum of lease shall be recorded without Landlord’s prior written consent.

35.4         Rent, Additional Rent and all other sums payable under this Lease must be paid in lawful money of the United States of America.

35.5         This Lease may be executed in counterparts with the same effect as if both parties hereto had executed the same document.  Both counterparts shall be construed together and shall constitute a single lease.

35.6         Nothing contained in this Lease shall be construed to create the relationship of principal and agent, partnership, joint venture or any other relationship between the parties hereto, other than the relationship of Landlord and Tenant.

35.7         Any provision of this Lease that proves to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof, and such other provisions shall remain in full force and effect.

35.8         The term “Premises” shall be deemed to include (unless, based on the context, such meaning would clearly be unintended) the space hereby demised and all improvements on or at any time hereafter constructed or built in such space.

35.9         The term “Tenant” or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individual, firms or corporations, and any Tenant’s successor in interest.

35.10       The section headings herein are for convenience of reference only and shall in no way define, increase, limit or describe the scope or intent of any provision of this Lease.

35.11       If this Lease is entered into by co-tenants, the obligations of such co-tenants hereunder shall be joint and several.

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

35.13       The laws of California shall in all respects govern this Lease.  The parties acknowledge that the laws of California may change by virtue of legislative enactment or judicial decision.  The parties further acknowledge that they have entered into this Lease based on the laws of California at the time of the execution of this Lease, and each hereby expressly waives any future rights, benefits, or advantages derived from or as a result of any future changes in the law of California to the extent not inconsistent with the terms of the Lease.  In any action or proceeding arising therefrom, Tenant hereby consents to (a) the jurisdiction of any competent court within the state of California, (b) service of process by any means authorized by the laws of the state of California, and (c) trial without a jury except for actions primarily based upon personal injury.

35.14       This Lease contains the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes any previous negotiations, and may not be modified, except by a written document executed by the parties hereto.  There have been no representations or understandings made between the parties other than those set forth in this Lease.  Without limiting the generality of the foregoing, Tenant specifically acknowledges and agrees that neither Landlord nor any broker, agent or representative thereof has made any warranty or representation with respect to the tenant mix of the Building, the identity of prospective tenants or other tenants of the Building, profitability or suitability of the Premises for Tenant’s use, the state of repair of the Project and the Premises, or the amount and extent of provided services, except as otherwise specifically set forth herein.

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35.15       If any guarantee of this Lease is required by Landlord, such guarantee shall be in the form and content attached hereto or, if none, as supplied and/or approved by Landlord.

35.16       The words “person” and “persons” as used herein shall include individuals, firms, partnerships, associations and corporations.

35.17       The language in all parts of this Lease shall be construed simply according to its fair meaning, and not strictly for or against Landlord or Tenant.  Any reference to any Article herein shall be deemed to include all subsections thereof unless otherwise specified or reasonably required from the context.  Any reference to “days” or “months” herein shall refer to calendar days or months, respectively, unless specifically provided to the contrary.  Unless clearly inconsistent with the context, any reference herein to the “term hereof” or “the Lease Term” shall refer to the term of this Lease as the same may be extended pursuant to any extension option(s) contained herein.  The terms “herein”, “hereunder” and “hereof” as used in this Lease shall mean “in this Lease” and “under this Lease” or “of this Lease” respectively, except as otherwise specifically set forth in this Lease.

35.18       All exhibits and the addendum referred to in this Lease are incorporated herein as a part hereof.

35.19       Tenant hereby acknowledges and agrees that the exterior walls of the Building and the area between the demising walls of premises and the finished ceilings and floors of the Premises and the slab of the floor above or below have not been demised hereby and that the use thereof, together with the right to install, maintain, use, repair and replace pipes, ducts, conduits and wires leading through, under, above or alongside the Premises, is hereby reserved unto Landlord.

35.20       The submittal of this Lease by Landlord or its agent or representative for examination or execution by Tenant does not constitute an option or offer to lease the Premises upon the terms and conditions contained herein or a reservation of the Premises in favor of Tenant.  This Lease shall become effective only upon the execution hereof by Landlord and Tenant and delivery of a fully executed counterpart hereof to Tenant.

35.21       Tenant warrants and represents that neither its execution of this Lease nor its performance hereunder will violate any agreement, instrument, contract, law, rule or regulation by which Tenant is bound.  Tenant shall indemnify Landlord against any loss, cost, damage or liability including, without limitation, reasonable attorneys’ fees and related costs arising out of Tenant’s breach of this warranty and representation.

36.           Rules and Regulations.  Tenant shall observe and comply with the rules and regulations set forth in this Article 36 and any and all reasonable modifications thereof and additions thereto established in writing by Landlord written notice of which has been given to Tenant.  Landlord shall not be responsible for the non-observance of, or noncompliance with, any of said rules and regulations by any other tenant or occupant of the Building, but Landlord shall use its reasonable efforts to enforce the rules and regulations in a non-discriminatory and consistent manner.  In the event of any conflict between said rules and regulations and other provisions hereof, the latter shall control.

36.1         Tenant shall not obstruct, encumber or use any sidewalks, entrance, passages, courts, elevators, vestibules, stairways, corridors or halls or Common Area for any purpose other than ingress and egress to and from the Premises or the Building.

36.2         Tenant shall neither attach any awning or other projection to the outside walls or windows of the Building, nor attach or hang any curtains, blinds, shades, drapes or screen to, in or on any window or door of the Premises without the prior written consent of Landlord.  Such awnings, projections, curtains, blinds, shades, drapes, screens and other fixtures must be of a quality, type, design, color, material, installation and general appearance approved by Landlord.  All electrical fixtures hung in offices or spaces along the window perimeter of the Premises must be of a quality, type, design, bulb color, size and general appearance approved by Landlord and must be installed by Landlord at Tenant’s cost.

36.3         Tenant shall not cover or obstruct the sashes, sash doors, skylights, windows, and doors that admit light or air into the interior Common Areas, nor shall any articles be placed on the windowsills of the Project.

36.4         No articles or signs shall be placed in front of or affixed to any part of the exterior of the Building, nor placed in public portions thereof without the prior written consent of Landlord.

36.5         The water and janitorial closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags or other substances shall be thrown or stored therein.  All damages resulting from any misuse of the fixtures shall be borne by Tenant to the extent caused by Tenant or Tenant’s agents, servants, employees, contractors, visitors or licensees.

36.6         Except for Cosmetic Alterations, Tenant shall not mark, paint, drill into or in any way deface any part of the Premises or the Project, or string any wires except with the prior written consent of Landlord and as Landlord may direct. Notwithstanding the foregoing, Landlord hereby consents to the hanging of normal office decorations.

3.67         No animal (except for seeing-eye dogs or other ADA-approved animals), bird of any kind, or bicycles shall be brought into or kept in or about the Premises or the Building.

36.8         Prior to leaving the Premises for the day, Tenant shall use its best efforts to conserve energy and electricity, including but not limited to drawing or lowering window coverings and extinguishing all lights.

36.9         Tenant shall not make, or permit to be made, any unseemly or disturbing noises or smells, or disturb or interfere with occupants of or visitors to the Building or neighboring buildings.  Tenant shall not throw anything out of the doors, windows or skylights or down the passageways.  Tenant shall at all times keep the doors closed from Tenant’s suite into the Common Areas of the Project except upon prior written approval of Landlord.

36.10       Tenant shall not permit any principal, agent, servant, employee, contractor, visitor or licensee to smoke any tobacco products or any non-tobacco products.  No smoking of any substance will be allowed in the Building at any time.  Landlord reserves the right to exclude or expel from the Building any person who, in Landlord’s judgment, is smoking any tobacco or non-tobacco products.  If, in Landlord’s judgment, Tenant, or Tenant’s principals, agents, servants, employees,

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contractors, visitors or licensee continue to smoke after adequate warning continues to smoke any tobacco or non-tobacco product, then Landlord may provide Tenant with a notice of default and give Tenant 30 days to cure or quit the premises.

36.11       Neither Tenant nor any of Tenant’s agents, servants, employees, contractors, visitors or licensees shall at any time bring or keep upon the Premises any inflammable, combustible or explosive fluid, chemical or substance except in such small quantities and in original manufacturer’s containers as may reasonably be required for the proper operation and maintenance of Tenant’s office equipment.  All quantities of the inflammable, combustible or explosive fluids, chemicals or substances shall be stored as per guidelines set forth on their containers in a safe manner. After use, any hazardous wastes shall be disposed of by certified hazardous waste methods in accordance with the manufacturers’ instructions.

36.12       Landlord shall deliver keys to Tenant upon Tenant’s occupancy.  Tenant shall not place any additional locks, bolts or mail slots of any kind upon any of the doors or windows, nor shall Tenant change any existing locks or the mechanism thereof without Landlord’s prior written consent.  Upon the termination of the tenancy, Tenant must turn over to Landlord all keys for the Premises or the Project and, in the event of the loss of any keys so furnished, Tenant shall pay to Landlord the cost thereof.

36.13       Delivery or removal of any safes, freight, furniture, fixtures, bulky matter or heavy equipment of any description must take place during the hours which Landlord or its agent may reasonably determine from time to time, upon previous notice to the Landlord and in a manner and at times reasonably prescribed by Landlord, and the persons employed by Tenant for such work are subject to Landlord’s reasonable prior approval.  Landlord reserves the right to prescribe the weight and position of all safes, or other extra heavy equipment or furniture or improvements so as to distribute the weight or to require reinforcing at the cost of Tenant.  Landlord reserves the right to inspect all safes, freight or other bulky articles to be brought into the Building and to exclude from the Building all safes, freight or other bulky articles which violate any of these Rules and Regulations of this Lease, normal office equipment excluded.

36.14       Tenant shall not occupy or permit any portion of the Premises to be occupied in a way that is not otherwise permitted by and consistent with Article 1.1.9, or is not generally consistent with the character and nature of all other tenancies in the Building.

36.15       Tenant shall not purchase janitorial or maintenance or other like service from any company or persons not approved by Landlord, except that Landlord’s approval shall not be required in connection with any maintenance or other like service that does not affect the structure or other major systems of the Building.  Landlord shall approve a sufficient number of sources of such services to provide Tenant with a reasonable selection, but only in such instances and to such extent, as Landlord in its judgment considers consistent with security and proper operation of the Building.

36.16       Landlord shall have the right to prohibit any advertising or business conducted by Tenant referring to the Building which, in Landlord’s opinion, tends to impair the reputation of the Building or its desirability as a first class office building, and upon notice from Landlord, Tenant shall refrain from or cease such advertising.

36.17       Outside of Business Hours, Landlord reserves the right to exclude from the Building all persons who are not otherwise authorized by Tenant to enter the Premises.

36.18       Tenant’s interior designers and installers of Tenant’s decoration, furniture, carpentry, wall coverings, and window coverings, shall, while in the Building or elsewhere in the Project, be subject to and under the control and direction of the Building manager (but not as agent or servant of said manager or of Landlord).

36.19       If the Premises is or becomes infested with vermin as a result of the use or any misuse or neglect by Tenant, its agents, servants, employees, contractors, visitors or licensees, then Landlord shall forthwith at Tenant’s expense cause the same to be exterminated by licensed exterminators to the satisfaction of Landlord and, as necessary, from time to time thereafter.

36.20       Tenant shall make requests for services at and as instructed by the office of the Building.

36.21       Canvassing, soliciting and peddling in the Building are prohibited and Tenant shall cooperate to prevent the same.

36.22       No air conditioning unit(s) shall be installed or used by Tenant without Landlord’s written consent.

36.23       No hand trucks or dollies, except those equipped with rubber tires and side guards, may be used in any space in the Project, either by Tenant or by jobbers or others. Tenant shall not permit its customers, clients or invitees to wait in the public corridors of the Building.  Tenant shall not permit its employees to loiter or smoke in the interior Common Areas.

36.24       Tenant, Tenant’s agents, servants, employees, contractors, licensees or visitors shall not park or stop any vehicles in any driveways, service entrances, or areas posted as “No Parking” or “No Stopping.”

36.25       Landlord shall install and maintain for the Premises, at Landlord’s sole cost and expense, such safety equipment as may be mandated by applicable governmental authority.

36.26       Tenant shall not use the name of the Building for any purpose other than as the address of the Tenant’s business in the Premises, nor shall Tenant use any picture of the Building in its advertising, stationery or in any other manner without the prior written permission of Landlord.  Landlord expressly reserves the right at any time to change name of the Building or Project without in any manner being liable to Tenant therefor.

37.           Compliance with Laws.  Landlord shall pay the cost of any repairs, capital additions, replacements or take any other actions necessary to cause the Building to comply with governmental laws, statutes or regulations that are in effect, applicable to and enforced with respect to the Building and/or the Premises as of the Commencement Date, including but not limited to American with Disabilities Act (“ADA”).

38.           Good Faith.  Without regard to any references to the terms “sole” or “absolute”, except for matters which could adversely affect the Building’s plumbing, HVAC or electrical systems, or its exterior appearance (in which case Landlord shall have the right to act in its sole and absolute discretion, exercised in good faith), any time the consent of Landlord or Tenant is

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required, such consent shall not be unreasonably withheld or delayed.  Whenever the Lease grants Landlord or Tenant the right to take action, exercise discretion, establish rules and regulations or make allocations or other determinations, Landlord and Tenant shall act reasonably and in good faith and take no action which might result in the frustration of the reasonable expectations of a sophisticated tenant or landlord concerning the Lease.

IN WITNESS WHEREOF, the parties hereto have executed this Lease as of                                            , 2003.

LANDLORD		TENANT
Century Park,		Mercantile National Bank, N.A., a National Bank
a California limited partnership
By:	Held Properties, Inc.
Its:	Director of Leasing
By:		By:
	Joel R. Delman		Scott A. Montgomery
Its:	Management Company	Its:	President and Chief Executive Officer

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LEASE ADDENDUM

This Addendum is attached to and made a part of that certain office lease (this “Lease”) dated November 12, 2003 between Century Park, a California limited partnership, as Landlord (“Landlord”) and Mercantile National Bank, N.A., a National Bank, as Tenant (“Tenant”) relating to the premises (“Premises”) known as Suite 110 consisting of approximately 2,118 rentable square feet on the 1st floor of the Building located at 1880 Century Park East, Los Angeles, California.  The provisions set forth below shall supersede any inconsistent provisions set forth in the Lease.  Except as otherwise provided below, capitalized items used below shall have their respective meaning set forth in the Lease.

39.           Option to Renew.  Provided that Tenant is not in default under this Lease and provided that the Lease has not been terminated as a result of Tenant’s default or other acts or failures to act by Tenant, Tenant shall have an option to renew the Lease for two additional five (5) year terms (each an “Extended Term”).  Tenant shall provide Landlord with at least six (6) months but not more than twelve (12) months prior written notice indicating its intention to exercise such option to renew.  The rights contained in this Article 39 shall be personal to the originally named Tenant and may not be assigned nor transferred except with Landlord’s written consent.

                                39.1         The monthly base rent during the Extended Term shall be an amount equal to the Prevailing Rate (as hereinafter defined) at the time of the commencement of the Extended Term for space leased within the previous six months that are Comparable Transactions, as defined below.  The term “Prevailing Rate” shall mean the monthly rent per rentable square foot that Landlord has accepted in contemporaneous transactions between nonaffiliated parties for non-expansion, renewal and non-equity tenants of comparable creditworthiness, for comparable space, comparable use and comparable lease terms (collectively, “Comparable Transactions”) in the Building.  If there are no Comparable Transactions in the Building, then the Prevailing Rate shall be prevailing fair market rental value for Comparable Transactions in the Project area.  In any determination of Comparable Transactions, appropriate consideration shall be given to the rental rates, abatement provisions or other concessions, brokerage commissions, if any, that actually have been paid by Landlord (or other landlords) in similar transactions, length of the lease term, size and location of the premises being leased, building standard tenant improvement allowances, if any, and other generally applicable conditions of tenancy.  The intent is that Tenant will obtain the same rent and other economic benefits that Landlord would otherwise give in Comparable Transactions and that Landlord will make and receive the same economic payments and concessions that Landlord would otherwise make and receive in Comparable Transactions.

                                39.2         If Landlord and Tenant are unable to agree on the Prevailing Rate, then Landlord and Tenant shall agree upon, and jointly appoint, one arbitrator who shall be an active real estate broker in the Project area over the most recent 5-year period.  If the Landlord and Tenant fail to agree upon and appoint an arbitrator, then the appointment of the arbitrator shall be made by the Presiding Judge of the Superior Court, or if he or she refuses to act, by any judge having jurisdiction over the parties.  Within five (5) business days after said appointment, Landlord and Tenant may submit to the arbitrator (with a copy to the other party) any market data and additional information that such party deems relevant to the determination of the Prevailing Rate and the other party may submit a reply in writing within five (5) business days thereafter.  The determination of the arbitrator shall be limited solely to the issue of whether Landlord’s or Tenant’s submitted Prevailing Rate is the closest to the actual fair market rent for the Premises, taking into account the criteria of Comparable Transactions.  Neither Landlord nor Tenant may consult with such arbitrator as to his or her opinion of the fair market rent prior to the appointment or resolution of the issue regarding Prevailing Rate for the Premises.

                                39.3         Within fifteen (15) days of being appointed, the arbitrator shall decide whether the parties shall use Landlord’s or Tenant’s submitted Prevailing Rate, and shall so notify Landlord and Tenant.  The decision of the arbitrator shall be binding upon the Landlord and Tenant.  The cost of the arbitration shall be paid by the Landlord and Tenant equally.

                                39.4         Rent during the Extended Term shall continue to be subject to adjustment based upon Tenant’s pro-rata share of increases in Recurring Operating Costs except that the new base year shall be the calendar year in which the Extended Term commences.

                                39.5         If Tenant fails to exercise in a timely manner the option to renew herein provided, said option to renew shall expire and have no further force and effect.  Tenant’s exercise of said option to renew shall not operate to cure any uncured default by Tenant under this Lease, nor to extinguish or impair any rights or remedies of Landlord arising by virtue of such default.  If the Lease or Tenant’s right to possession of the Premises terminates in any manner whatsoever before Tenant exercises the option to renew herein provided, such option to renew shall terminate; or if Tenant has assigned the Premises to an unaffiliated, independent third party, then immediately upon such assignment, the transferability of the option to renew shall be reasonably approved by Landlord, provided Tenant notifies Landlord in writing at the time of such assignment of its desire to transfer the option provided hereunder.

40.           Tenant Improvements.  In the event Tenant does not use the entire allowance, Tenant shall have the right to use up to $15.00 per usable square foot as a rent credit amortized over the first sixty (60) months of the Lease Term.

41.           First Class Financial Institute Use Provisions.

41.1.1      During the Lease Term, Tenant shall not: (a) do or permit anything to be done in or about the Premises, the Building or the Project that has been prohibited or may hereafter be enacted or promulgated by governmental authorities to be prohibited, or in any way obstruct or interfere with the rights of others;  (b) use or allow the Premises to be used for any improper, immoral or objectionable purpose or do any act tending to injure the reputation of the Building or the Project; or (c) commit or allow to be committed any waste upon the Premises, or any nuisance or other act or thing that may disturb the quiet enjoyment of any other occupant or tenant of the Project.

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41.1.2      In the event Landlord has approved Tenant’s remaining open for business after normal business hours, the, unless otherwise provided herein, such approval shall be conditioned upon Tenant paying, as Additional Rent, all additional costs incurred by Landlord as a result thereof.

41.1.3      Tenant shall, at Tenant’s cost and expense, keep the Premises orderly, neat, safe, clean and free from rubbish and dirt, shall provide, at its cost and expense, for janitorial services in furtherance thereof, and shall store all trash, garbage and other solid waste within the Premises in such areas as Landlord may designate for such storage.

                41.1.4      Tenant shall, at its own cost and expense, provide its own security system, including separate keys for the Premises.  Tenant shall provide Landlord with copies of the main keys for use in event of emergency only.

                41.1.5      Tenant shall, at its own cost and expense, provide for its plate glass windows to be washed and cleaned on a regular basis.

42.           Option to Terminate.

                42.1         Option to Terminate (Ground Floor).  Landlord will use its best efforts to reach and execute, by April 1, 2004, an agreement with Krueger International (the “Ground Floor Tenant”) an agreement to amend the Ground Floor Tenant’s lease to reduce its space, which reduced space will become the subject of a lease (the “Ground Floor Lease”) between Tenant and Landlord.  If Landlord and Ground Floor Tenant fail to execute by April 1, 2004, such amendment of the Ground Floor Tenant’s Lease, or if Landlord fails to deliver the Ground Floor Premises by October 1, 2004, Tenant shall have the right to terminate this Lease by written notice.  If Tenant terminates this Lease pursuant to this Article 42.1, this Lease shall become null and void.  Furthermore, Landlord and Tenant have entered into that certain Lease of even date herewith under which Tenant is to lease Suite 800 in the Building (the “Suite 800 Lease”).  Pursuant to Paragraph 42.2 of the Suite 800 Lease, Tenant may terminate the Suite 800 Lease if Landlord or Landlord’s contractor is unable to deliver Suite 800 to Tenant in accordance with the terms of the Suite 800 Lease.  If Tenant terminates the Suite 800 Lease, this Lease will terminate on the same day as the Suite 800 Lease, and as of such date, this Lease shall become null and void, and Tenant shall have no further obligation or liability hereunder.

42.2         Option to Terminate (Fifth Year Anniversary).  At any time prior to the date nine months prior to the fifth (5th) anniversary date of the Commencement Date, Tenant shall have the option, with written notice to Landlord, to terminate the Lease.  The Premises subject to the termination notice shall be referred to as the “Canceled Premises.”  The termination shall be effective as of the day before the fifth (5^th) anniversary date of the Commencement Date.  Tenant’s delivery of the Termination Notice to Landlord shall be accompanied by an amount equal to the Lease Termination Fee, which will be equal to the unamortized Tenant Improvement Allowance and leasing commissions plus three (3) months Base Rent, which amount shall be Sixty-One Thousand One Hundred Fifty-Seven Dollars ($61,157.00)

43.           Signage.

43.1         Tenant’s Monument Sign. Tenant shall have the non-exclusive right to have its name (including its logo) displayed, at Landlord’s sole cost and expense, on a monument sign located in the front of the Building (the “Monument Sign”).   Such signage shall be no smaller than any other tenant’s sign.  Until the Monument Sign has been installed, Tenant shall have the right at Tenant’s cost and expense to have a temporary sign to be installed at a mutually agreed location that is visible by a passing vehicle from Century Park East.

43.2         Requirements.  Tenant’s right to maintain its name on the Monument Sign shall be subject to the following requirements:

a.All expenses in connection with the construction, installation and maintenance of Tenant’s sign shall be paid by Landlord.

b.The design, size, location, materials, colors and lighting of the Monument Sign shall be determined by Tenant and Landlord.

c.Landlord shall have the right to relocate, redesign or reconstruct the Monument Sign from time to time so long as the Monument Sign is visible by a passing vehicle, as described in sub-section (e).

d. The cost of graphics related to Tenant’s portion of sign will be part of the Tenant Improvement Allowance.

e.             The Monument Sign shall be visible by a passing vehicle on Century Park East.

Tenant shall also have the right to install tasteful signage, similar to that used by other banks in the geographic area, regarding its services in its windows facing the lobby and exterior of the building.

44.           Non-Disturbance.  Landlord shall use its best efforts to secure as soon as commercially possible a commercially reasonable Non-Disturbance Agreement from the Lender, the form of which shall be provided to Tenant prior to lease execution.

45.           Proposition 13.  [See Article 48.1]

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46.           Parking.  Tenant shall have the right, during the Lease Term or any extension thereof, to lease two and one-half (2.5) parking spaces per every 1,000 rentable square foot leased, at the then current prevailing rates.  However, the parking rates shall not be increased during the first twelve (12) months of the Lease Term.  Tenant shall be entitled to lease twenty-five percent (25%) of such parking spaces as “VIP Call-Down” spaces.  Tenant shall receive a twenty percent (20%) discount on parking validation sticker books purchased in quantities of Five Thousand Dollars ($5,000.00) or more.

47.           Option to Negotiate for Additional Space.      Subject to the rights of existing tenants that have been granted as of the date hereof, Tenant shall have an option during the Lease Term to negotiate for additional space (“ONAS”) on the ground floor (“ONAS Space”) by giving Landlord written notice of Tenant’s desire for additional space.  Provided that Tenant is not in default under the Lease, and subject to availability of ground floor space, Landlord shall offer ONAS Space to Tenant (subject to Tenant’s right of renewal set forth in this Lease) at a prevailing rent and base year determined in the same manner as during the Extended Term as set forth in Article 39; provided, however, that if Tenant exercises its option in the first year of the Lease Term, the terms and conditions for the ONAS Space shall be the same as those contained in this Lease.  Tenant shall have a period of ten (10) business days in which to either accept or reject Landlord’s offer.  If Tenant does not timely accept the ONAS Space specified in Landlord’s notice, Landlord may lease the ONAS Space to any third party.  If Tenant exercises the ONAS, Landlord and Tenant promptly shall execute and deliver an amendment to this Lease reflecting the terms of the ONAS Space. This ONAS shall be personal to Tenant or any entity described in Article 10 and may not be assigned nor otherwise transferred to any assignee or sub-tenant without Landlord’s consent.

48.           Exclusions from Tax Costs.  Notwithstanding anything in this Lease to the contrary, the following items shall be excluded from the definition of Tax Costs.

                                48.1         Any increases in Tax Costs resulting from a reassessment due to a sale or change of ownership in the Project occurring during the Initial Lease Term, except for change in ownership resulting from a non-voluntary foreclosure sale, deed in lieu of foreclosure or similar transfer of interest.

                                48.2         Tax Costs for the Base Year and any subsequent year shall be calculated without taking into account any decreases in real estate taxes that may be obtained in connection with Revenue and Taxation Code Section 51 (“Proposition 8”).

                                48.3         Any excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes and other taxes to the extent applicable to Landlord’s general or net income (as opposed to rents or receipts);

                                48.4         Any Tax Costs based on taxes on tenant improvements in any space in the Building based upon an assessed level in excess of Building standard improvements, to the extent that the related taxes are separately designated on the tax bill;

                                48.5         Any Tax Costs based on penalties incurred as a result of Landlord’s negligence, inability or unwillingness to pay, and/or to file any tax or informational returns with respect to, any real property taxes when due, and any additional costs arising as a result of Landlord’s failure to pay taxes in the maximum number of installments;

                                48.6         Any Tax Costs based on increase of, or reassessment in, real property taxes and assessments resulting from major alterations, improvements, modifications or renovations to the Project, to the extent that the related taxes are separately designated on the tax bill;

                                48.7         Any costs or expenses incurred by Landlord for personal property taxes, leasehold taxes in lieu thereof, or taxes or assessments levied in lieu thereof, or in addition thereto;

                                48.8         Any other taxes or assessments charged or levied against Landlord that are not directly incurred as a result of the operation of the Building.

49.           Exclusions from Operating Costs.   Notwithstanding anything in this Lease to the contrary, the following items shall be excluded from the definition of Operating Costs:

                                49.1.        Costs incurred for repairs or other work to the Project occasioned by fire, windstorm or other insurable casualty or by the exercise of eminent domain or any expenditures for which Landlord is reimbursed.

                                49.2         Marketing costs, advertising costs, promotional expenses, leasing commissions, attorneys’ fees, space planning costs, and other costs and expenses incurred in connection with any lease, sublease and/or assignment negotiations and transactions with current or prospective tenants or other occupants of the Building.

                                49.3         Costs incurred for renovating or otherwise improving or decorating, painting or redecorating space for other tenants or occupants of the Building.

                                49.4         The cost incurred for special services or utilities separately chargeable to other tenants.

                                49.5         Depreciation and amortization except as provided above.

                                49.6         Expenses incurred for services or other benefits that are not offered to Tenant but which are provided to another tenant or occupant of the Building.

                                49.7         Legal fees and related costs, together with any damages awarded by a court of law or arbitration panel to Tenant or any other tenants, or any repair and maintenance costs incurred by Landlord due to the violation by Landlord or any tenant of the terms and conditions of any lease in the Building.

                                49.8         Overhead and profit increment paid to subsidiaries or affiliates of Landlord for services on or to the Project, to the extent that the costs of such services exceed competitive costs of such services for similar buildings in the Project area.

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                                49.9         Interest on debt or amortization payments on any mortgage or mortgages, and rental under any ground or underlying lease or leases, or other financing costs, including points, commitment fees, or legal costs related thereto.

                                49.10       Landlord’s in-house accounting or legal costs, general overhead and executive salaries, except for salaries of project manager, project engineer or other employees to the extent directly related to the operation and management of the Project.

                                49.11       Any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord.

                                49.12       All items and services for which Tenant reimburses Landlord or pays directly to third parties.

                                49.13       Any costs, fines or penalties incurred due to violations by Landlord of any governmental rule or authority, or due to Landlord’s negligence, recklessness or willful misconduct.

                                49.14       Costs incurred for sculpture, paintings or other objects of art.

                                49.15       Rentals and other related expenses incurred in leasing air-conditioning systems, elevators or other equipment ordinarily considered of a capital nature, except equipment which is used in providing janitorial services and which is not affixed to the Building.

                                49.16       Costs incurred in the testing, encapsulation or other treatment or removal of asbestos, Hazardous Materials as defined herein, or other substances considered detrimental to the health or the environment of occupants of the Building including, without limitation, the cost and expense incurred by or on behalf of Landlord in removing and disposing any cooling or chilling system and the chemicals used in the HVAC system from either (1) the Building or (2) another tenant’s premises within the Building, or (3) Tenant’s Premises.

                                49.17       The value of any lost income to Landlord of any office space in the Project that is utilized for the management of the Building.

                                49.18       Costs incurred by Landlord to remedy any defects in the design, installation, construction, or materials used in any part of the Project.

                                49.19       Costs incurred by Landlord in compliance with the Americans with Disabilities Act (the “ADA”) or statutes, laws regulations or other legislation of similar import.

                                49.20       Costs of Landlord’s charitable or political contributions.

                                49.21       Insurance premiums to the extent any tenant causes Landlord’s existing insurance premiums to increase or requires Landlord to purchase additional insurance, to the extent that any related premiums are separately designated on the insurance bill.

                                49.22       Increases in reserves not presently being maintained for future expenses.

                                49.23       Costs associated with the ownership of the Project or Landlord or Landlord’s property manager, as distinguished from the cost of Building operations, including the costs of partnership or corporate accounting (other than partnership tax preparation) and legal matters, selling or syndicating any of Landlord’s interest in the Project; and disputes between Landlord and Landlord’s property manager.

                                49.24       Maintenance to or replacement of any utility, mechanical or other system solely dedicated to the single use of any other tenant.

                                49.25       Costs relating to any areas leased on a triple net basis.

                                49.26       Premiums for earthquake or flood insurance, unless included in recalculating the Operating Costs for the Base Year, or other costs relating to expansion in scope of services or addition of new services not included in the Base Year.

                                49.27      Costs of items considered capital repairs, replacements, improvements and equipment under generally accepted accounting principles consistently applied or otherwise (“Capital Items”) except for (i) the annual amortization (amortized as provided in Article 4.4) of costs, including financing costs, if any, incurred by Landlord after the Commencement Date for any capital improvements installed or paid for by Landlord and required by any new (or change in) laws, rules or regulations of any governmental or quasi-governmental authority which are enacted after the Commencement Date; (ii)  the annual amortization (amortized as provided in Article 4.4) of costs, including financing costs, if any, of any equipment, device or capital improvement purchased or incurred as a labor-saving measure or to affect other economics in the operation or maintenance of the Building (provided the annual amortized costs does not exceed the actual cost savings realized and such savings do not redound primarily to the benefit of any particular tenant.

                50.           Tenant acknowledges that Landlord has advised Tenant that the Building contains or, because of its age, is likely to contain asbestos-containing materials (“ACMs”).  If Tenant undertakes any alterations, additions, or improvements to the Premises, as permitted by Article 7, Tenant shall, in addition to complying with the requirements of Article 7, undertake the alterations, additions, or improvements in a manner that avoids disturbing ACMs in the Building.  If ACMs are likely to be disturbed in the course of such work, Tenant shall notify Landlord, and Landlord shall, at its sole cost, encapsulate or remove the ACMs in accordance with an approved asbestos-removal plan and otherwise in accordance with all applicable Environmental Laws, including giving all notices required by Health and Safety Code sections 2591-25919.7.

51.           Landlord has removed or has caused to be removed all accessible, friable ACMs in the Premises.  Landlord shall use its best efforts to comply with all Applicable Environmental Laws in the Premises, and throughout the Project during the Lease Term. Landlord shall, at Landlord’s sole expense and with counsel reasonably acceptable to Tenant, indemnify, defend and hold harmless Tenant and Tenant’s shareholders, directors, officers, employees, partners, affiliates and agents (“Tenant Indemnitees”) with respect to all losses arising out of or resulting from the release of any Hazardous Material in or about the Premises or the Project, or the violation of any Applicable Environmental Laws, existing prior to the

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Commencement Date or brought onto the Premises or Project by Landlord, or Landlord’s agents, employees, contractors or invitees (other than Tenant and Tenant Indemnitees).  This indemnification includes all losses, liabilities, obligations, penalties, fines, claims, actions (including remedial or enforcement actions of any kind and administrative or judicial proceedings, orders or judgments), damages (including consequential damages and punitive damages), and costs (including attorneys, consultants or experts fees and expenses) resulting from the release or violation. This indemnification shall survive the expiration or sooner termination of the Lease.

                52.          Profits (Article 10.6).         For the purposes of Article 10.6, “Profits” shall mean the gross revenue received from the assignee or sublessee during the assignment or the sublease term with respect to the space covered by the assignment or sublease (“Transferred Space”) less: (i) the gross revenue paid to Landlord by Tenant during the period of the assignment or sublease term with respect to the Transferred Space; (b) any improvement allowance or other economic concession (planning allowance, moving expenses, etc.) paid by Tenant to sublessee or assignee; (c) brokers’ commissions; (d) attorneys’ fees; (e) costs of advertising the space for sublease or assignment; (f) unamortized cost of initial and subsequent improvements to the Premises by Tenant; and (g) any other costs actually paid in assigning or subletting the Transferred Space or in negotiating or effectuating the assignment or sublease. \

                53.  Night Depository and ATM.  Landlord grants to Tenant the exclusive right to install and maintain an automated teller machine (“ATM”) at the Building during the term of this Lease and any extensions hereof.  The ATM shall be located in a mutually agreed to location on the exterior of the Building adjacent to the Premises such that deposits will go directly into the Tenant’s safe in the interior of the Premises.  Tenant shall also have the right to install a night depository window into its Premises.  Tenant shall pay the cost of the installation and maintenance of the ATM and night depository, including installation of any required lighting; provided, however, that Tenant may use a portion of the Tenant Improvement Allowance for such purposes.  Tenant shall comply with all regulations and laws related to the installation, maintenance, and use of the ATM and night depository.

IN WITNESS WHEREOF, the parties hereto have executed this Lease as of                                          , 2003.

LANDLORD		TENANT
Century Park,		Mercantile National Bank, N.A., a National Bank
a California limited partnership
By:	Held Properties, Inc.
Its:	Management Company
By:		By:
	Joel R. Delman		Scott A. Montgomery
Its:	Director of Leasing	Its:	President and Chief Executive Officer

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EX-10.13

Exhibit 10.13

OFFICE LEASE

Between

BRIGHTON ENTERPRISES, LLC,
a California limited liability company

as Landlord

and

MERCANTILE NATIONAL BANK, N.A.,
a California “C” corporation

as Tenant

Dated

March 30, 2005

Initial Initial Initial Initial

OFFICE LEASE
BASIC LEASE INFORMATION

	Date:	March 29, 2005
	Landlord:	BRIGHTON ENTERPRISES, LLC, a California limited liability company
	Tenant:	MERCANTILE NATIONAL BANK, N.A., a California “C” corporation
SECTION
1.1	Premises:	9601 Wilshire Boulevard, Suite 250 Beverly Hills, California 90210
1.4	Rentable Area of Premises:	approximately 2,559 square feet
1.4	Usable Area of Premises:	approximately 2,084 square feet
2.1	Term:	Five (5) Years and Three (3) Months
	Anticipated Commencement Date:	April 1, 2004 (as modified by Section 2.1)
	Anticipated Expiration Date:	June 30, 2009 (as modified by Section 2.1)
3.1	Fixed Monthly Rent:	$7,369.92
3.3	Fixed Monthly Rent Increase	Three percent (3%)
	Date of First Increase:
		SEE SECTION 3.3
	Frequency of Increase:	SEE SECTION 3.3
3.7	Security Deposit:	$0.00
4.1	Tenant’s Share	.79%
4.2	Base Year for Operating Expenses:	2004
6.1	Use of Premises:	General office use consistent with the operation of a first-class office building in the Beverly Hills area
16.1	Tenant’s Address for Notices:
	Before the Commencement Date:	9601 Wilshire Boulevard, Suite 600 Beverly Hills, California 90210 With a copy to: Mr. David Brown Chief Financial Officer Mercantile National Bank, N.A. 1880 Century Park East, Suite 1200 Los Angeles, California 90067
	After the Commencement Date:	9601 Wilshire Boulevard, Suite 250 Beverly Hills, California 90210 With a copy to: Mr. David Brown Chief Financial Officer Mercantile National Bank, N.A. 1880 Century Park East, Suite 1200 Los Angeles, California 90067
	Contact:	Mr. Chuck Avis
	Landlord’s Address for Notices:	BRIGHTON ENTERPRISES, LLC c/o Douglas, Emmett and Company Director of Property Management 808 Wilshire Boulevard, Suite 200 Santa Monica, California 90401

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20.5	Brokers:	Douglas, Emmett and Company 808 Wilshire Boulevard, Suite 200 Santa Monica, California 90401 and First Property Realty Corporation 350 South Beverly Drive, Suite 340 Beverly Hills, California 90212-4820
21.1	Parking Permits:	Five (5) permits for unreserved spaces

Except as noted hereinbelow, the foregoing Basic Lease Information is hereby incorporated into and made a part of the Lease.  The Section reference in the left margin of the Basic Lease Information exists solely to indicate where such reference initially appears in the Lease document.  Except as specified hereinbelow, each such reference in the Lease document shall incorporate the applicable Basic Lease Information.  However, in the event of any conflict between any reference contained in the Basic Lease Information and the specific wording of the Lease, the wording of the Lease shall control.

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OFFICE LEASE
TABLE OF CONTENTS

ARTICLE
ARTICLE 1	DEMISE OF PREMISES
ARTICLE 2	COMMENCEMENT DATE AND TERM
ARTICLE 3	PAYMENT OF RENT, LATE CHARGE
ARTICLE 4	ADDITIONAL RENT
ARTICLE 5	ETHICS
ARTICLE 6	USE OF PREMISES
ARTICLE 7	CONDITION UPON VACATING & REMOVAL OF PROPERTY
ARTICLE 8	UTILITIES AND SERVICES
ARTICLE 9	TENANT’S INDEMNIFICATION AND LIMITATION ON LANDLORD’S LIABILITY
ARTICLE 10	COMPLIANCE WITH LAWS
ARTICLE 11	ASSIGNMENT AND SUBLETTING
ARTICLE 12	MAINTENANCE, REPAIRS, DAMAGE, DESTRUCTION, RENOVATION AND/OR ALTERATION
ARTICLE 13	CONDEMNATION
ARTICLE 14	MORTGAGE SUBORDINATION; ATTORNMENT AND MODIFICATION OF LEASE
ARTICLE 15	ESTOPPEL CERTIFICATES
ARTICLE 16	NOTICES
ARTICLE 17	DEFAULT AND LANDLORD’S OPTION TO CURE
ARTICLE 18	DAMAGES; REMEDIES; RE-ENTRY BY LANDLORD; ETC.
ARTICLE 19	INSURANCE
ARTICLE 20	MISCELLANEOUS
ARTICLE 21	PARKING
ARTICLE 22	CONCIERGE SERVICES
ARTICLE 23	OPTION TO EXTEND TERM
ARTICLE 24	RIGHT OF FIRST OFFER

Exhibits
	A —	Premises Plan
	B —	Improvement Construction Agreement
	B-1 —	Construction by Tenant During Term
	C —	Rules and Regulations
	D —	First Amendment — Commencement Date and Term
	E —	Guaranty of Lease — INTENTIONALLY DELETED
	F —	Asbestos Rider
	G —	Form of Letter of Credit — INTENTIONALLY DELETED
	H —	Form of Subordination, Non-Disturbance and Attornment Agreement

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OFFICE LEASE

        This Office Lease, dated March 30, 2005, is by and between BRIGHTON ENTERPRISES, LLC, a California limited liability company (“Landlord”), with an office at 808 Wilshire Boulevard, Suite 200, Santa Monica, California  90401, and MERCANTILE NATIONAL BANK, N.A., a California “C” corporation (“Tenant”), with an office at 1880 Century Park East, Suite 1200, Los Angeles, California 90067.

ARTICLE 1
DEMISE OF PREMISES

Section 1.1.  Demise.  Subject to the covenants and agreements contained in this Lease, Landlord leases to Tenant and Tenant hires from Landlord, Suite Number 250 (the “Premises”) on the second (2^nd) floor, in the building located at 9601 Wilshire Boulevard, Los Angeles, California  90210 (the “Building”). The configuration of the Premises is shown on Exhibit A, attached hereto and made a part hereof by reference, and Landlord and Tenant acknowledge and agree that the intent of both parties hereto is that said configuration shall not be materially altered by construction of the demising walls separating the same from the balance of the space from which it is being demised.

        Tenant acknowledges that it has made its own inspection of and inquiries regarding the Premises, which are already improved.  Therefore, except for the improvements to be completed pursuant to Exhibit B, attached hereto and made a part hereof by reference, Tenant accepts the Premises in their “as-is” condition, subject to the representations and warranties contained in this Lease and its Exhibits, and to any latent defects.  Tenant further acknowledges that Landlord has made no representation or warranty, express or implied, except as are contained in this Lease and its Exhibits, regarding the condition, suitability or usability of the Premises or the Building for the purposes intended by Tenant.  Landlord hereby represents and warrants to Tenant that to the best of Landlord’s knowledge as of the date hereof: (i) the existing structure of the Building (including, without limitation, the roof, foundations and the exterior walls) and all building systems serving the Premises (including, without limitation, the plumbing, electrical, and heating, ventilating and air conditioning systems) are in good operating condition and repair, (ii) the second (2^nd) floor of the Building (including, without limitation, the Premises and the common areas thereof) are (x) in compliance with all applicable Codes (as such term is defined in Section 10.1 of this Lease), including, without limitation, all applicable covenants or restrictions of record and all applicable building codes, regulations and ordinances in effect as of the Commencement Date, and (y) free of all hazardous substances, including, but not limited to, any asbestos-containing materials (whether or not friable) and lead-based paint.

        The Building, the Building’s parking facilities, any outside plaza areas, land and other improvements surrounding the Building which are designated from time to time by Landlord as common areas appurtenant to or servicing the Building, and the land upon which any of the foregoing are situated, are herein sometimes collectively referred to as the “Real Property.”

Section 1.2.  Tenant’s Non-Exclusive Use.  Subject to the contingencies contained herein, Tenant is granted the nonexclusive use of the common corridors and hallways, stairwells, elevators, restrooms, parking facilities, lobbies and other public or common areas located on the Real Property.  However, the manner in which such public and common areas are maintained and operated shall be at the reasonable discretion of Landlord, and Tenant’s use thereof shall be subject to such reasonable and non-discriminatory rules, regulations and restrictions as Landlord may make from time to time.

Section 1.3.  Landlord’s Reservation of Rights.  Landlord specifically reserves to itself use, control and repair of the structural portions of all perimeter walls of the Premises, any balconies, terraces or roofs adjacent to the Premises (including any flagpoles or other installations on said walls, balconies, terraces or roofs) and any space in and/or adjacent to the Premises used for shafts, stairways, pipes, conduits, ducts, mail chutes, conveyors, pneumatic tubes, electric or other utilities, sinks, fan rooms or other Building facilities, and the use thereof, as well as access thereto through the Premises.  Landlord also specifically reserves to itself the following rights:

a)To designate all sources furnishing sign painting or lettering;

b)To constantly have pass keys to the Premises;

c)To grant to anyone the exclusive right to conduct any particular business or undertaking in the Building, so long as Landlord’s granting of the same does not prohibit Tenant’s use of the Premises for Tenant’s Specified Use or Particular Usage, each as defined in Article 6;

d)To enter the Premises at any reasonable time with reasonable notice (except for emergencies) to inspect, repair, alter, improve, update or make additions to the Premises or the Building, so long as Tenant’s access to and use of the Premises is not materially impaired thereby;

e)During the last six (6) months of the Term, to exhibit the Premises to prospective future tenants upon not less than 24 hours prior notice and accompanied by a representative of Tenant;

f)Subject to the provisions of Article 12, to, at any time, and from time to time, whether at Tenant’s request or pursuant to governmental requirement, repair, alter, make additions to, improve, or decorate all or any portion of the Real Property, Building or Premises at any reasonable time with reasonable notice (except for emergencies), so long as Tenant’s access to and use of the Premises and the parking facilities is not materially impaired thereby.  In connection therewith, and without limiting the generality of the foregoing rights, Landlord shall specifically have the right to remove, alter, improve or rebuild all or any part of the lobby of the Building as the same is presently or shall hereafter be constituted, so long as following any such alteration or rebuilding, the Building has a first-class lobby;

g)Subject to the provisions of Article 12, Landlord reserves the right to make alterations or additions to or change the location of elements of the Real Property and any common areas appurtenant thereto at any reasonable time with reasonable notice (except for emergencies), so long as Tenant’s access to and use of the Premises and the parking facilities is not materially impaired thereby; and/or

h)To take such other actions as may reasonably be necessary when the same are required to preserve, protect or improve the Premises, the Building, or Landlord’s interest therein at any reasonable time with reasonable notice (except for emergencies), so long as Tenant’s access to and use of Premises and the parking facilities is not materially impaired thereby.

Section 1.4.  Area.  Since the Premises are not yet fully demised, once the exact location of the demising walls is established, Landlord and Tenant agree that a one-time recalculation of the Rentable Area of the Premises shall be made by Stevenson Systems, Inc., an independent planning firm, in accordance with the June, 1996 standards set forth by the Building Owners and Managers Association (the “Premises Remeasurement”).  Such determination shall be determinative unless patently unreasonable.  Tenant and Landlord agree to execute an amendment to this Lease, documenting the revised Usable Area and Rentable Area as documented by Stevenson Systems, it being expressly understood and agreed that there shall be no further re-measurement of the Premises following the Premises Remeasurement.  The parties further expressly acknowledge and agree that there shall be no increase or decrease in the Fixed Monthly Rent or Tenant’s Share as a result of the Premises Re-measurement.

        Landlord and Tenant further agree that the Rentable Area of the Premises shall be calculated on the basis of 1.2277 times the estimated Usable Area, regardless of what actual common areas of the Building may be, or whether they may be more or less than 22.77% of the total estimated Usable Area of the Building, and is provided solely to give a general basis for comparison and pricing of this space in relation to other spaces in the market area.

        Landlord and Tenant further agree that once the Rentable Area and Usable Area of the Premises have been determined by the Premises Remeasurement as specified hereinabove, even if later either party alleges that the actual Rentable Area or Usable Area of the Premises is more or less than the figures stated herein; and whether or not such figures are inaccurate, the Rentable and Usable figures agreed upon shall be conclusively deemed to be the Rentable Area or Usable Area of the Premises, as the case may be; provided, however, that if the Usable Area and the Rentable Area are increased pursuant to this Section 1.4, it is expressly understood and agreed that there shall be no change in the initial Fixed Monthly Rent payable for the Premises and  there shall be no change in Tenant’s Share (as described in Section 4.2 d) below).

Section 1.5.  Quiet Enjoyment.  So long as Tenant is not in default beyond any applicable notice and/or cure period set forth in this Lease, and subject to the limitations imposed under Article 14 of this Lease, Tenant shall lawfully and quietly hold, occupy and enjoy the Premises during the Term.

Section 1.6.  No Light, Air or View Easement.  Any diminution or shutting off of light, air or view by any structure which is now or may hereafter be erected on lands adjacent to the Building shall in no way affect this Lease or impose any liability on Landlord.  Noise, dust or vibration or other ordinary incidents to new construction of improvements on lands adjacent to the Building, whether or not by Landlord, shall in no way affect this Lease or impose any liability on Landlord.

Section 1.7.  Relocation.  Landlord shall have the one-time right at any time, except during the last six (6) months of the Term, and after giving Tenant a minimum of ninety (90) days prior written notice, to:

a)provide and furnish Tenant with space elsewhere in the Building (but not on a lower floor) of approximately the same size, views, configuration and quality of tenant improvements as the Premises (the “Substitute Premises”) and

b)relocate Tenant to such Substitute Premises.

        Landlord shall pay all costs and expenses incurred as a result of such relocation (including (i) Tenant’s reasonable reprinting costs for announcements, stationery and business cards, and (ii) costs incurred in connection with the relocation of Tenant’s telephone and data cabling equipment.  If Landlord moves Tenant to the Substitute Premises, each and every term, covenant and condition of this Lease shall remain in full force and effect and be deemed applicable to the Substitute Premises, as though Landlord and Tenant had entered into an express written amendment of this Lease with respect thereto, except that if the approximate Rentable square footage of the Substitute Premises is less than that of the Premises, the Fixed Monthly Rent and Tenant’s Share  shall be appropriately reduced, and if the approximate Rentable square footage of the Substitute Premises is more than that of the Premises, the Fixed Monthly Rent and Tenant’s Share shall be based on the square footage of the Premises prior to the relocation, and shall not increase.

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        If Tenant refuses to permit Landlord to relocate Tenant as specified above, Landlord shall have the right to terminate this Lease effective ninety (90) days from the date Landlord provided Tenant with the original notification of intent to relocate.

ARTICLE 2          
COMMENCEMENT DATE AND TERM

Section 2.1.  Commencement Date and Term.  This Lease shall commence five (5) business days following the date Landlord substantially completes the Improvements contemplated under Exhibit B (the “Commencement Date”), and shall end, unless sooner terminated as otherwise provided herein, at midnight on the last calendar day of the calendar month which occurs five (5) years and three (3) months after the Commencement Date (the “Termination Date”). The anticipated Commencement Date is April 1, 2004.  Landlord and Tenant shall promptly execute an amendment to this Lease (the “First Amendment”) substantially in the form attached hereto as Exhibit D, confirming the finalized Commencement Date and Term as soon as they are determined.

        For purposes of establishing the Commencement Date, substantial completion shall be defined as that point in the construction process when all of the structural, mechanical, plumbing and electrical work specified herein has been performed; the paint, carpet, hard flooring materials, base moldings, and millwork, if any, have been installed, and a majority of the other finish work specified in Tenant’s plans has been completed in such a manner that Tenant could, if it took possession of the Premises, enjoy beneficial occupancy thereof.

        Tenant’s taking possession of the Premises for the purpose of conducting Tenant’s normal business operations in the Premises shall be deemed conclusive evidence that, as of the Commencement Date:

a)Landlord has substantially completed the Tenant Improvements contemplated hereunder, except for any minor punchlist items to be completed; and

b)the Premises are in good order and repair, subject to latent defects and the representations and warranties set forth in this Lease.

        Provided that Tenant does not delay Landlord’s completion of the Improvements that Landlord is required to complete, Tenant may take possession of the Premises up to two (2) weeks (but not less than one (1) week) prior to the anticipated Commencement Date, solely for the purpose of installing Tenant’s furniture, fixtures and equipment, computer and telephone cabling.  Said early possession shall be subject to Tenant complying with all of the provisions and covenants contained herein, except that Tenant shall not be obligated to pay Fixed Monthly Rent or Additional Rent until the Commencement Date.  If Tenant’s early possession does so delay completion of the Improvements, the Commencement Date shall be the date the Improvements would have been completed had no such delay occurred.

        If for any reason (including Landlord’s inability to complete the Improvements called for hereunder) Landlord is unable to deliver possession of the Premises to Tenant on the anticipated Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any damage resulting from Landlord’s inability to deliver such possession.  However, Tenant shall not be obligated to pay the Fixed Monthly Rent or Additional Rent that Tenant is required to pay pursuant to Section 3.1 until such possession of the Premises has been delivered to Tenant by Landlord.  Except for such delay in the commencement of Rent, Landlord’s failure to give possession on the anticipated Commencement Date shall in no way affect Tenant’s obligations hereunder.

        If possession of the Premises is not tendered by Landlord within ninety (90) days after the anticipated Commencement Date, then Tenant shall have the right to terminate this Lease by giving written notice to Landlord within ten (10) days after such failure.  If such notice of termination is not so given by Tenant within said ten (10) day time period, then this Lease shall continue in full force and effect.

        Section 2.2.  Holding Over.  If Tenant fails to deliver possession of the Premises on the Termination Date, but holds over after the expiration or earlier termination of this Lease without the express prior written consent of Landlord, such tenancy shall be construed as a tenancy from month-to-month on the same terms and conditions as are contained herein, except that the Fixed Monthly Rent payable by Tenant during the first thirty (30) days of holding over (the “Initial Holdover Period”) shall automatically increase as of the Termination Date to an amount equal to one hundred twenty-five  percent (125%) of the Fixed Monthly Rent payable by Tenant for the calendar month immediately prior to the date when Tenant commences such holding over (the “Holdover Rent”).  After the expiration of the Initial Holdover Period, the Holdover Rent shall be increased to one hundred fifty percent (150%) of the Fixed Monthly Rent payable by Tenant for the calendar month immediately prior to the date when Tenant commenced such holding over.  Such Holdover Rent shall be paid during such period as Tenant retains possession of the Premises.  However, Tenant’s payment of such Holdover Rent, and Landlord’s acceptance thereof, shall not constitute a waiver by Landlord of any of Landlord’s rights or remedies with respect to such holding over, nor shall it be deemed to be a consent by Landlord to Tenant’s continued occupancy or possession of the Premises past the time period covered Tenant’s payment of the Holdover Rent.

        Furthermore, if Tenant fails to deliver possession of the Premises to Landlord upon the expiration or earlier termination of this Lease, and Landlord has theretofore notified Tenant in writing that Landlord requires possession of the Premises for a succeeding tenant, then, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys’ fees and expenses) and liability resulting from such failure, including without limiting the foregoing, any claims made by any succeeding tenant arising out of Tenant’s failure to so surrender, and any lost profits to Landlord resulting therefrom.

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        Notwithstanding the provisions contained hereinabove regarding Tenant’s liability for a continuing holdover, Landlord agrees to use commercially reasonable efforts to insert into any future lease of another tenant proposing to occupy the Premises provisions  permitting mitigation of Tenant’s damages arising out of Tenant’s temporary holdover.

ARTICLE 3          
PAYMENT OF RENT, LATE CHARGE

Section 3.1.  Payment of Fixed Monthly Rent and Additional Rent.  “Rent” shall mean: all payments of monies in any form whatsoever required under the terms and provisions of this Lease, and shall consist of:

a)“Fixed Monthly Rent,” which shall be payable in equal monthly installments of $7,369.92; plus

b)Additional Rent as provided in Article 4 and elsewhere in this Lease.

Section 3.2.  Manner of Payment.  Tenant shall pay Fixed Monthly Rent and Additional Rent immediately upon the same becoming due and payable, without demand therefor, and without any abatement, set off or deduction whatsoever, except as may be expressly provided in this Lease.  Landlord’s failure to submit statements to Tenant stating the amount of Fixed Monthly Rent or Additional Rent then due, including Landlord’s failure to provide to Tenant a calculation of the adjustment as required in Section 3.3 or the Escalation Statement referred to in Article 4, shall not constitute Landlord’s waiver of Tenant’s requirement to pay the Rent called for herein, unless Landlord fails to provide the Escalation Statement described in Article 4 within one (1) year after the expiration of the calendar year to which such Escalation Statement is applicable, in which event Landlord shall be deemed to have waived its right to collect any Additional Rent for such calendar year for which Tenant had not theretofore been billed.  Tenant’s failure to pay Additional Rent as provided herein shall constitute a material default equal to Tenant’s failure to pay Fixed Monthly Rent when due.

        Rent shall be payable in advance on the first day of each and every calendar month throughout the Term, in lawful money of the United States of America, to Landlord at 9601 Wilshire Boulevard, Suite GL-25, Beverly Hills, California  90210, or at such other place(s) as Landlord designates in writing to Tenant.  Tenant’s obligation to pay Rent shall begin on the Commencement Date and continue throughout the Term, without abatement, setoff or deduction, except as otherwise specified hereinbelow.

        On or before April 1, 2004, Tenant shall pay to Landlord the Fixed Monthly Rent due for the first month of the Term.

Section 3.3.  Fixed Monthly Rent Increase.  Commencing on the date that is ninety (90) days following the Commencement Date, and continuing through the last calendar day of the twelfth (12^th) calendar month of the Term, the Fixed Monthly Rent payable by Tenant shall increase from $7,369.92 per month to $7,753.77 per month.

        Commencing the first calendar day of the thirteenth (13^th) calendar month of the Term, and continuing through the last calendar day of the twenty-fourth (24^th) calendar month of the Term, the Fixed Monthly Rent payable by Tenant shall increase from $7,753.77 per month to $7,986.38 per month.

        Commencing the first calendar day of the twenty-fifth (25^th) calendar month of the Term, and continuing through the last calendar day of the thirty-sixth (36^th) calendar month of the Term, the Fixed Monthly Rent payable by Tenant shall increase from $7,986.38 per month to $8,225.97 per month.

        Commencing the first calendar day of the thirty-seventh (37^th) calendar month of the Term, and continuing the last calendar day of the forty-eighth (48^th) calendar month of the Term, the Fixed Monthly Rent payable by Tenant shall increase from $8,225.97 per month to $8,472.75 per month.

        Commencing the first calendar day of the forty-ninth (49^th) calendar month of the Term, and continuing the last calendar day of the sixtieth (60^th) calendar month of the Term, the Fixed Monthly Rent payable by Tenant shall increase from $8,472.75 per month to $8,726.94 per month.

        Commencing the first calendar day of the sixty-first (61^st) calendar month of the Term, and continuing throughout the remainder of the initial Term, the Fixed Monthly Rent payable by Tenant shall increase from $8,726.94 per month to $8,988.74 per month.

        Landlord and Tenant shall, in the First Amendment, confirm the actual dates upon which the changes in Fixed Monthly Rent specified above shall occur.

        Notwithstanding the foregoing, Tenant shall be permitted to defer one hundred percent (100%) of the Fixed Monthly Rent due for the second (2^nd), third (3^rd), thirteenth (13^th), twenty-fifth (25^th) and thirty-seventh (37^th) months of the Term (collectively, the “Rent Deferral Amount”).  So long as Tenant does not commit a material, uncured default during the Term that has resulted in Landlord filing an unlawful detainer action against Tenant, the entire Rent Deferral Amount shall be abated and forgiven as of the Termination Date.

Section 3.4.  Tenant’s Payment of Certain Taxes.  Tenant shall, within thirty (30) days following Tenant’s receipt of substantiating documentation from Landlord, reimburse Landlord, as Additional Rent, for any and all taxes, surcharges, levies, assessments, fees and charges payable by Landlord when:

a)assessed on, measured by, or reasonably attributable to

the cost or value of Tenant’s equipment, furniture, fixtures and other personal property located in the Premises;

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b)on or measured by any rent payable hereunder, including, without limitation, any gross income tax, gross receipts tax, or excise tax levied by the City of Beverly Hills or the County of Los Angeles or any other governmental body with respect to the receipt of such rent (computed as if such rent were the only income of Landlord), but solely when levied by the appropriate City or County agency in lieu of, or as an adjunct to, such business license(s), fees or taxes as would otherwise have been payable by Tenant directly to such taxing authority. Notwithstanding the foregoing, the Beverly Hills City Rental Tax shall be paid by Landlord and included in Operating Expenses.  Tenant shall not be billed directly for such tax; or

c)upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof. If it becomes unlawful for Tenant so to reimburse Landlord, the rent payable to Landlord under this Lease shall be revised to net Landlord the same rent after imposition of any such tax as would have been payable to Landlord prior to the imposition of any such tax.

        Said taxes shall be due and payable whether or not now customary or within the contemplation of Landlord and Tenant.  Notwithstanding the above, in no event shall the provisions of this Section 3.4 serve to entitle Landlord to reimbursement from Tenant for any federal, state, county or city income tax payable by Landlord or the managing agent of Landlord.

Section 3.5.  Certain Adjustments.  If:

a)the Commencement Date occurs on other than January 1st of a calendar year, or the Lease expires or terminates on other than December 31st of a calendar year;

b)the size of the Premises or the Building changes during a calendar year;

c)or any abatement of Fixed Monthly Rent or Additional Rent occurs during a calendar year,

then the amount payable by Tenant or reimbursable by Landlord during such year shall be adjusted proportionately on a daily basis, and the obligation to pay such amount shall survive the expiration or earlier termination of this Lease.

        If the Commencement Date occurs on other than the first day of a calendar month, or the Lease expires on a day other than the last day of a calendar month, then the Fixed Monthly Rent and Additional Rent payable by Tenant shall be appropriately apportioned on a prorata basis for the number of days remaining in the month of the Term for which such proration is calculated.

        If the amount of Fixed Monthly Rent or Additional Rent due is modified pursuant to the terms of this Lease, such modification shall take effect the first day of the calendar month immediately following the date such modification would have been scheduled.

Section 3.6.  Late Charge and Interest.  Tenant acknowledges that late payment by Tenant to Landlord of Fixed Monthly Rent or Additional Rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which are extremely difficult and impracticable to fix.  Such costs include, without limitation, processing and accounting charges and late charges that may be imposed on Landlord by the terms of any encumbrance and note secured by any encumbrance covering the Premises.  Therefore, if any installment of Fixed Monthly Rent or Additional Rent and other payment due from Tenant hereunder is not received by Landlord within five (5) days of the date it becomes due, Tenant shall pay to Landlord on demand an additional sum equal to five percent (5%) of the overdue amount as a late charge.  The parties agree that this late charge represents a fair and reasonable settlement against the costs that Landlord will incur by reason of Tenant’s late payment.  Acceptance of any late charge shall not constitute a waiver of Tenant’s default with respect to the overdue amount, or prevent Landlord from exercising any of the other rights and remedies available to Landlord.

        Every installment of Fixed Monthly Rent and Additional Rent and any other payment due hereunder from Tenant to Landlord which is not paid within twelve (12) days after the same becomes due and payable shall, in addition to any Late Charge already paid by Tenant, bear interest at the rate of ten percent (10%) per annum from the date that the same originally became due and payable until the date it is paid.  Landlord shall bill Tenant for said interest, and Tenant shall pay the same within five (5) days of receipt of Landlord’s billing.

        Notwithstanding the foregoing, Tenant shall not be assessed any late charge or interest for the first two (2) late payments in each twelve (12) month period of the Term so long as Tenant pays such amount within five (5) days of Tenant’s receipt of written notice that such amount has not been paid.

Section 3.7.  Security Deposit.  INTENTIONALLY DELETED

ARTICLE 4
ADDITIONAL RENT

Section 4.1.  Certain Definitions.  As used in this Lease:

a)“Escalation Statement” means a statement by Landlord, setting forth the amount payable by Tenant or by Landlord, as the case may be, for a specified calendar year pursuant to this Article 4.

b)“Operating Expenses” means the following in a referenced calendar year, including the Base Year as hereinafter defined, calculated, as to expenses that vary with occupancy, assuming the Building is at least ninety-five percent (95%) occupied:  all costs of management, operation, maintenance, and repair of the Building.

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        By way of illustration only, Operating Expenses shall include, but not be limited to: management fees paid by Landlord to any third-party, which shall not exceed those reasonable and customary in the geographic area in which the Building is located; water and sewer charges; any and all insurance premiums not otherwise directly payable by Tenant; license, permit and inspection fees; air conditioning (including repair of same); heat; light; power and other utilities; steam; labor; cleaning and janitorial services; guard services; supplies; materials; equipment and tools.

Operating Expenses shall also include the cost or portion thereof of those capital improvements made to the Building by Landlord during the Term:

i)to the extent that such capital improvements reduce other direct expenses, when the same were made to the Building by Landlord after the Commencement Date, or

ii)that are required under any governmental law or regulation that was not applicable to the Building as of the Commencement Date.

        Said capital improvement costs, or the allocable portion thereof (as referred to in clauses (i) and (ii) above), shall be amortized on a straight-line basis over the useful life of any such capital improvement pursuant to generally-accepted accounting principles, together with interest on the unamortized balance at the rate of ten percent (10%) per annum.

        Operating Expenses shall also include all general and special real estate taxes, increases in assessments or special assessments and any other ad valorem taxes, rates, levies and assessments paid during a calendar year (or portion thereof) upon or with respect to the Building and the personal property used by Landlord to operate the Building, whether paid to any governmental or quasi-governmental authority, and all taxes specifically imposed in lieu of any such taxes (but excluding taxes referred to in Section 3.4 for which Tenant or other tenants in the Building are liable) including fees of counsel and experts, reasonably incurred by, or reimbursable by Landlord in connection with any application for a reduction in the assessed valuation of the Building and/or the land thereunder or for a judicial review thereof, (collectively “Appeal Fees”), but solely to the extent that the Appeal Fees result directly in a reduction of taxes otherwise payable by Tenant.  However, in no event shall the portion of Operating Expenses used to calculate any billing to Tenant attributable to real estate taxes and assessments for any expense year be less than the billing for real estate taxes and assessments during the Base Year.

        Operating Expenses shall also include, but not be limited to, the premiums for the following insurance coverage: all-risk, structural, fire, boiler and machinery, liability, earthquake and for replacement of tenant improvements to a maximum of $35.00 per usable square foot, and for such other coverage(s), and at such policy limit(s) as Landlord deems reasonably prudent and/or are required by any lender or ground lessor, which coverage and limits Landlord may, in Landlord’s reasonable discretion, change from time to time.

        If, in any calendar year following the Base Year, as defined hereinbelow (a “Subsequent Year”), a new expense item (e.g. earthquake insurance, concierge services; entry card systems), is included in Operating Expenses which was not included in the Base Year Operating Expenses, then the cost of such new item shall be added to the Base Year Operating Expenses for purposes of determining the Additional Rent payable under this Article 4 for such Subsequent Year.  During each Subsequent Year, the same amount shall continue to be included in the computation of Operating Expenses for the Base Year, resulting in each such Subsequent Year Operating Expenses only including the increase in the cost of such new item over the Base Year, as so adjusted.  However, if in any Subsequent Year thereafter, such new item is not included in Operating Expenses, no such addition shall be made to Base Year Operating Expenses.

        Conversely, as reasonably determined by Landlord, when an expense item that was originally included in the Base Year Operating Expenses is, in any Subsequent Year, no longer included in Operating Expenses, then the cost of such item shall be deleted from the Base Year Operating Expenses for purposes of determining the Additional Rent payable under this Article 4 for such Subsequent Year.  The same amount shall continue to be deleted from the Base Year Operating Expenses for each Subsequent Year thereafter that the item is not included.  However, if such expense item is again included in the Operating Expenses for any Subsequent Year, then the amount of said expense item originally included in the Base Year Operating Expenses shall again be added back to the Base Year Operating Expenses.

c)Exclusions from Operating Expenses.  Notwithstanding anything contained in the definition of Operating Expenses as set forth in Subsection 4.1 b) of this Lease, Operating Expenses shall not include the following:

i)             Any ground lease rental;

ii)            The costs of repairs to the Building, if the costs of such repairs is reimbursed by the insurance carried by Landlord or subject to award under any eminent domain proceeding;

iii)           Costs, including permit, license and inspection costs, incurred with respect to the installation of Tenant’s or other occupant’s improvements or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for Tenant or other occupants of the Building;

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iv)            Depreciation, amortization and interest payments, except as specifically permitted herein or except on materials, tools supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party’s services.  In such a circumstance, the inclusion of all depreciation, amortization and interest payments shall be determined pursuant to generally accepted accounting principles, consistently applied, amortized over the reasonably anticipated useful life of the capital item for which such amortization, depreciation or interest allocation was calculated;

v)             Marketing costs, including leasing commissions, attorneys’ fees incurred in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with present or prospective tenants or other occupants of the Building;

vi)            Expenses for services not offered to Tenant or for which Tenant is charged directly, whether or not such services or other benefits are provided to another tenant or occupant of the Building;

vii)          Costs incurred due to Landlord’s or any tenant of the Building’s violation, other than Tenant, of the terms and conditions of any lease or rental agreement in the Building;

viii)         That portion of any billing by Landlord, its subsidiaries or affiliates for goods and/or services in the Building, to the extent that such billing exceeds the costs of such goods and/or services if rendered by an unaffiliated third parties on a competitive basis;

ix)           Costs incurred by Landlord for structural earthquake repairs necessitated by the January 17, 1994 earthquake that occurred in the vicinity of the Building;

x)             Interest, principal, points and fees on debts or amortization on any mortgage or mortgages or any other debt instrument encumbering the Building or the land thereunder;

xi)           Costs associated with operating the entity which constitutes Landlord, as the same are distinguished from the costs of operation of the Building, including partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except as the actions of Tenant may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord’s interest in the Building, costs (including attorneys’ fees and costs of settlement judgments and payments in lieu thereof) arising from claims, disputes or potential disputes in connection with potential or actual claims, litigation or arbitration pertaining to Landlord’s ownership of the Building;

xii)          Advertising and promotional expenditures, and costs of signs in or on the Building identifying the owner of the Building, or other tenants signs;

xiii)         Electric, gas or other power costs for with Landlord has been directly reimbursed by another tenant or occupant of the Building, or for which any tenant directly contracts with the local public service company;

xiv)          Tax penalties and interest incurred as a result of Landlord’s negligent or willful failure to make payments and/or to file any income tax or informational return(s) when due, unless such non-payment is due to Tenant’s nonpayment of rent;

xv)           Costs incurred by Landlord to comply with notices of violation of the Americans With Disabilities Act, as amended, when such notices are for conditions existing prior to the Commencement Date;

xvi)          Any charitable or political contributions;

xvii)        The purchase or rental price of any sculpture, paintings or other object of art, whether or not installed in, on or upon the Building;

xviii)       Any compensation paid or expenses reimbursed to clerks, attendants or other persons working in any commercial concession(s) operated by Landlord, and any services provided, taxes attributable to and costs incurred in connection with the operation of any retail or restaurant operations in the Building;

xix)         Any accelerated payment(s) made at Landlord’s election on obligations, including, without limitation, taxes and assessments, undertaken by of which would not otherwise become due, to the extent that such accelerated payment(s) exceed the amount otherwise payable had Landlord not elected to accelerate payment thereof.  Notwithstanding such exclusion, the balance of such accelerated payment shall be included by Landlord in operating expense calculations for succeeding years, as if the payment had been made when originally due prior to such acceleration.

xx)           Costs, including attorneys’ fees and settlement judgments and/or payments in lieu thereof, arising from actual or potential claims, disputes, litigation or arbitration pertaining to Landlord and/or the Building;

xxi)         Insurance deductibles in excess of reasonable and customary deductible amounts, and/or whether or not reasonable and/or customary, in excess of $250,000 in any calendar year;

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xxii)	Costs of repairs which would have been covered by casualty insurance but for Landlord’s failure to maintain casualty insurance to cover the replacement value of the Building as required by this Lease;
xxiii)	Capital expenditures not otherwise permitted hereunder;
xxiv)	The assessment or billing of operating expenses that results in Landlord being reimbursed more than one hundred percent (100%) of the total expenses for the calendar year in question;
xxv)	Costs to remove or abate or remediate hazardous materials or comply with laws regulating hazardous materials;
xxvi)	Any bad debt loss, rent loss or reserves for bad debts or rent loss; and
xxvii)	Costs incurred by Landlord to comply with applicable Codes (as such term is defined in Section 10.1 of this Lease), when compliance is in connection with conditions existing prior to the Commencement Date.

d) “Tenant’s Share” means .79%, which is derived by dividing the usable square footage of the Premises (2,084) by the usable square footage of the Building (265,105).

Section 4.2.  Calculation of Tenant’s Share of Increases in Operating Expenses.  If, commencing with the calendar year 2005, the Operating Expenses for any calendar year during the Term, or portion thereof, (including the last calendar year of the Term), have increased over the Operating Expenses for the calendar year 2004 (the “Base Year”), then within thirty (30) days after Tenant’s receipt of Landlord’s computation of such increase (an “Escalation Statement”), Tenant shall pay to Landlord, as Additional Rent, an amount equal to the product obtained by multiplying such increase by Tenant’s Share.

        Landlord may, at or after the start of any calendar year subsequent to the Base Year, notify Tenant of the amount which Landlord estimates will be Tenant’s monthly share of any such increase in Operating Expenses for such calendar year over the Base Year and the amount thereof shall be added to the Fixed Monthly Rent payments required to be made by Tenant in such year.  If Tenant’s Share of any such increase in rent payable hereunder as shown on the Escalation Statement is greater or less than the total amounts actually billed to and paid by Tenant during the year covered by such statement, then within thirty (30) days thereafter, Tenant shall pay in cash any sums owed Landlord or, if applicable, Tenant shall either receive a credit against any Fixed Monthly Rent and/or Additional Rent next accruing for any sum owed Tenant, or if Landlord’s Escalation Statement is rendered after the expiration or earlier termination of this Lease and indicates that Tenant’s estimated payments have exceeded the total amount to which Tenant was obligated, then provided that Landlord is not owed any other sum by Tenant, Landlord shall issue a cash refund to Tenant within thirty (30) days after Landlord’s completion of such Escalation Statement.

        Within one hundred fifty (150) days after receipt of a statement by Tenant, if Tenant disputes the amount of Additional Rent set forth in the statement, Tenant may review Landlord’s records with respect to such statement at Landlord’s offices.  Tenant may, after such review, but within one hundred fifty (150) days after receipt of a statement, retain an independent certified public accountant (“Tenant’s Accountant”) to, after reasonable notice to Landlord and at reasonable times, inspect Landlord’s records with respect to such statement at Landlord’s offices, provided that Tenant is not then in default under this Lease beyond any applicable notice and/or cure period and Tenant has paid all amounts required to be paid under the applicable statement.  In connection with such inspection, Tenant and Tenant’s agents must agree in advance to follow Landlord’s reasonable rules and procedures regarding inspections of Landlord’s records, and shall execute a commercially reasonable confidentiality agreement regarding such inspection.  Tenant’s failure to dispute the amount of Additional Rent set forth in any Statement within one hundred fifty (150) days of Tenant’s receipt of such statement shall be deemed to be Tenant’s approval of such statement and Tenant, thereafter, waives the right or ability to dispute the amounts set forth in such statement.  If after such inspection, Tenant still disputes such Additional Rent, a determination as to the proper amount shall be made, at Tenant’s expense, by an independent certified public accountant (“Landlord’s Accountant”) selected by Landlord and subject to Tenant’s reasonable approval; provided that if such determination by Landlord’s Accountant proves that Operating Expenses were overstated by more than five percent (5%), then the cost of  Landlord’s Accountant and Tenant’s Accountant and the costs of such determination shall be paid for by Landlord.  Tenant hereby acknowledges that Tenant’s sole right to inspect Landlord’s books and records and to contest the amount of Operating Expenses payable by Tenant shall be as set forth in this Section 4.2 and Tenant hereby waives any and all other rights pursuant to applicable law to inspect such books and records and/or to contest the amount of Operating Expenses payable by Tenant.

Section 4.3.  Tenant’s Payment of Direct Charges as Additional Rent.  Tenant shall promptly and duly pay all costs and expenses incurred for or in connection with any Tenant Change or Tenant Service, and discharge any mechanic’s or other lien created against the Premises, Building or the Real Property arising as a result of or in connection with any Tenant Change or Tenant Service as Additional Rent by paying the same, bonding or manner otherwise provided by law.

        Any other cost, expense, charge, amount or sum (other than Fixed Monthly Rent) payable by Tenant as provided in this Lease shall also be considered Additional Rent.

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        Certain individual items of cost or expense may, in the reasonable determination of Landlord, be separately charged and billed to Tenant by Landlord, either alone or in conjunction with another party or parties, if they are deemed in good faith by Landlord to apply solely to Tenant and/or such other party or parties and are not otherwise normally recaptured by Landlord as part of normal operating expenses.  Landlord shall give Tenant prior notice and the opportunity to cure any circumstance that would give rise to such separate and direct billing.

        Said separate billing shall be paid as Additional Rent, regardless of Tenant’s Share.  Such allocations by Landlord shall be binding on Tenant unless patently unreasonable, and shall be payable within thirty (30) days after receipt of Landlord’s billing therefor.

ARTICLE 5
ETHICS

INTENTIONALLY DELETED

ARTICLE 6
USE OF PREMISES

Section 6.1.  Use.  The Premises shall only be for general office use consistent with the operation of a first-class office building in the Beverly Hills area (the “Specified Use”) and for no other purposes, without Landlord’s prior written consent, which consent shall be in Landlord’s sole discretion.  Any proposed revision of the Specified Use by Tenant shall be for a use consistent with those customarily found in first-class office buildings.  Reasonable grounds for Landlord withholding its consent shall include, but not be limited to:

a)the proposed use will place a disproportionate burden on the Building systems;

b)the proposed use is for governmental or medical purposes or for a company whose primary business is that of conducting boiler-room type transactions or sales;

c)the proposed use would generate excessive foot traffic to the Premises and/or Building.

        So long as Tenant is in control of the Premises, Tenant covenants and agrees that it shall not use, suffer or permit any person(s) to use all or any portion of the Premises for any purpose in violation of the laws of the United States of America, the State of California, or the ordinances, regulations or requirements of the City or County of Los Angeles, or other lawful authorities having jurisdiction over the Building.

        Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or unreasonably interfere with the rights of other tenants or occupants of the Building, or injure or annoy them.  Tenant shall not use or allow the Premises to be used for any pornographic or violent purposes, nor shall Tenant cause, commit, maintain or permit the continuance of any nuisance or waste in, on or about the Premises.  Tenant shall not use the Premises in any manner that in Landlord’s reasonable judgment would adversely affect or interfere with any services Landlord is required to furnish to Tenant or to any other tenant or occupant of the Building, or that would interfere with or obstruct the proper and economical rendition of any such service.

Section 6.2.  Exclusive Use.  Landlord represents that Tenant’s Specified Use of the Premises and its usage for private banking and investment banking and related activities (“Particular Usage”) does not conflict with exclusive use provisions granted by Landlord in other leases for the Building.  Landlord further agrees that it shall, in the future, not grant an exclusive use privilege to any other tenant in the Building that will prevent Tenant from continuing to use the Premises for its Specified Use or the Particular Usage.

        Tenant acknowledges and agrees that it shall not engage in any of the uses specified hereinbelow, for which Landlord has already granted exclusive rights:

a)     Gymnasium or private fitness training; and

b)    Designer shoes

        Provided that Tenant has received written notice of the same from Landlord, and further provided that Landlord does not grant a future exclusive use right that prohibits Tenant from engaging in the Specified Use or the Particular Usage, then Tenant agrees that it shall not violate any exclusive use provision(s) granted by Landlord to other tenants in the Building.

Section 6.3.  Rules and Regulations.  Tenant shall observe and comply with the rules and regulations set forth in Exhibit C, and such other and further reasonable and non-discriminatory rules and regulations as Landlord may make or adopt and communicate to Tenant in writing at any time or from time to time, when said rules, in the reasonable judgment of Landlord, may be necessary or desirable to ensure the first-class operation, maintenance, reputation or appearance of the Building. However, if any conflict arises between the provisions of this Lease and any such rule or regulation, the provisions of this Lease shall control.

        Provided Landlord makes commercially reasonable efforts to seek compliance by all occupants of the Building with the rules and regulations adopted by Landlord, Landlord shall not be responsible to Tenant for the failure of any other tenants or occupants of the Building to comply with said rules and regulations.

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ARTICLE 7
CONDITION UPON VACATING & REMOVAL OF PROPERTY

Section 7.1.  Condition upon Vacating.  At the expiration or earlier termination of this Lease, Tenant shall:

a)terminate its occupancy of, quit and surrender to Landlord, all or such portion of the Premises upon which this Lease has so terminated, broom-clean and in the same condition as received except for:

i)ordinary wear and tear, or

ii)loss or damage by fire or other casualty; and

b)surrender the Premises free of any and all debris and trash and any of Tenant’s personal property, furniture, fixtures and equipment that do not otherwise become a part of the Real Property, pursuant to the provisions contained in Section 7.2 hereinbelow; and

c)at Tenant’s sole expense, forthwith and with all due diligence remove any Tenant Change made by Tenant and restore the Premises to their original condition, reasonable wear and tear excepted.  However, Tenant shall only be obligated to remove said Tenant Change if it was made without Landlord’s approval and/or if Landlord notified Tenant of its obligation to do so at the time Landlord approved Tenant’s request for a Tenant Change.  If Tenant fails to complete such removal and/or to repair any damage caused by the removal of any Tenant Change, Landlord may do so and may charge the cost thereof to Tenant.  For purposes of this Section 7.1, a Tenant Change shall not include any of the Tenant Improvements to be made in accordance with Exhibit B of this Lease or any wiring or cabling.

Section 7.2.  Tenant’s Property.  All fixtures, equipment, improvements and installations attached or built into the Premises at any time during the Term shall, at the expiration or earlier termination of this Lease, be deemed the property of Landlord; become a permanent part of the Premises and remain therein.  However, if said equipment, improvements and/or installations can be removed without causing any structural damage to the Premises, then, provided after such removal Tenant restores the Premises to the condition existing prior to installation of Tenant’s trade fixtures or equipment, Tenant shall be permitted, at Tenant’s sole expense, to remove said trade fixtures and equipment.

ARTICLE 8
UTILITIES AND SERVICES

Section 8.1.  Normal Building Hours / Holidays.  The “Normal Business Hours” of the Building, during which Landlord shall furnish the services specified in this Article 8 are defined as 6:00 A.M. to 7:00 P.M., Monday through Friday, and 7:00 A.M. to 2:00 P.M. on Saturday, any one or more Holiday(s) excepted.

        The “Holidays” which shall be observed by Landlord in the Building are defined as any federally-recognized holiday and any other holiday specified herein, which are: New Years Day, Presidents’ Day, Memorial Day, the 4th of July, Labor Day, Thanksgiving Day, the day after Thanksgiving, and Christmas Day (each individually a “Holiday”).  Tenant acknowledges that the Building shall be closed on each and every such Holiday, and Tenant shall not be guaranteed access to Landlord or Landlord’s managing agent(s) on each such Holiday.

Section 8.2.  Access to the Building and General Services.       Subject to Force Majeure and any power outage(s) which may occur in the Building when the same are out of Landlord’s reasonable control, Landlord shall furnish the following services to the Premises twenty-four (24) hours per day, seven days per week:

a)during Normal Business Hours, bulb replacement for building standard lights;

b)access to and use of the parking facilities for persons holding valid parking permits or customers or guests of Tenant;

c)access to and use of the elevators and the Premises, it being expressly understood and agreed that there shall be no charge for use of the freight elevators;

d)use of electrical lighting on an as-needed basis within the Premises; and

e)use of a reasonable level of water for kitchen and toilet facilities in the Premises and common area bathrooms.

Section 8.3.  Janitorial Services.  Landlord shall furnish the Premises with a level of janitorial services consistent with the level of janitorial services provided by landlords of comparable first-class office buildings in the Beverly Hills area (“Comparable Buildings”) five (5) business days per week, except when the Building is closed on any Holiday.  Landlord shall retain the sole discretion to choose and/or revise the janitorial company providing said services to the Premises and/or Building, subject to Landlord’s compliance with the first sentence of this Section 8.3, and maintaining the Building in a first-class manner.

Section 8.4.  Security Services.  Tenant acknowledges that Landlord currently provides uniformed guard service to the Building twenty-four (24) hours per day, seven (7) days per week, solely for the purposes of providing surveillance of, information and directional assistance to persons entering the Building.

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        Tenant acknowledges that such guard service shall not provide any measure of security or safety to the Building or the Premises, and that Tenant shall take such actions as it may deem necessary and reasonable to ensure the safety and security of Tenant’s property or person or the property or persons of Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders.  Tenant agrees and acknowledges that, except in the case of the gross negligence or willful misconduct of Landlord or its directors, employees, officers, partners or shareholders, Landlord shall not be liable to Tenant in any manner whatsoever arising out of the failure of Landlord’s guard service to secure  any person or property from harm.

        Tenant agrees and acknowledges that Landlord, in Landlord’s sole discretion, shall have the option, but not the obligation to add, decrease, revise the hours of and/or change the level of services being provided by any guard company serving the Building, so long as the level of security services provided to the Building remains consistent with the level of security services provided by landlords of Comparable Buildings.  Tenant further agrees that Tenant shall not engage or hire any outside guard or security company without Landlord’s prior written consent, which shall be in Landlord’s sole discretion.

Section 8.5.  Utilities.  During Normal Business Hours Landlord shall furnish a reasonable and comfortable level of water, heat, ventilation and air conditioning (“HVAC”), and a sufficient amount of electric current to provide customary business lighting and to operate ordinary office business machines, such as a single personal computer and ancillary printer per one hundred and twenty (120) Rentable square feet contained in the Premises, facsimile machines, small copiers customarily used for general office purposes, and such other equipment and office machines as do not result in above-standard use of the existing electrical system.  So long as the same remain reasonably cost competitive and are of first-class quality, Landlord shall retain the sole discretion to choose the utility vendor(s) to supply such services to the Premises and the Building.

        Except with the prior written consent of Landlord, which shall not be unreasonably withheld, conditioned and/or delayed, Tenant shall not install or use any equipment, apparatus or device in the Premises that requires the installation of a 220 voltage circuit; consumes more than five (5) kilowatts per hour per item; or the aggregate use of which will in any way increase the connected load to more than 5 Watts per square foot, or cause the amount of electricity to be furnished or supplied for use in the Premises to more than 1.2 kWh per usable square foot, per month.

        Except with the prior written consent of Landlord, Tenant shall not connect any electrical equipment to the electrical system of the Building, except through electrical outlets already existing in the Premises, nor shall Tenant pierce, revise, delete or add to the electrical, plumbing, mechanical or HVAC systems in the Premises.

Section 8.6.  After Hours HVAC and/or Excess Utility Usage.  If Tenant requires HVAC service during other than Normal Business Hours (“Excess HVAC”), Tenant shall use reasonable efforts to make its request at least six (6) hours before the close of the normal business day. If less notice is given, Landlord shall use reasonable efforts to provide Excess HVAC.  Tenant’s request shall be deemed conclusive evidence of its willingness to pay the costs specified herein.  The current cost of Excess HVAC is $100.00 per hour, which shall increase only to the extent that Landlord’s actual, out-of-pocket costs of providing Excess HVAC increase.

If Tenant requires electric current in excess of the amounts specified hereinabove,  water or gas in excess of that customarily furnished to the Premises as office space (“Excess Utility Use”), Tenant shall first procure Landlord’s prior written consent to such Excess Utility Use, which Landlord may reasonably refuse.

        In lieu of Landlord’s refusal, Landlord may cause a meter or sub-meter to be installed to measure the amount of water, gas and/or electric current consumed by Tenant in the Premises.  The cost of any such meter(s), and the installation, maintenance, and repair thereof, shall be paid by Tenant as Additional Rent.

        After completing installation of said meter(s), and/or if Tenant requests Excess HVAC, then Tenant shall pay, as Additional Rent, within thirty (30) calendar days after Tenant’s receipt of Landlord’s billing, for the actual amounts of all water, steam, compressed air, electric current and/or Excess HVAC consumed beyond the normal levels Landlord is required herein to provide.  Said billing shall be calculated on the usage indicated by such meter(s), sub-meter(s), or Tenant’s written request therefor, and shall be issued by Landlord at the rates charged for such services by the local public utility furnishing the same, plus any additional expense reasonably incurred by Landlord in providing said Excess Utility Use and/or in keeping account of the water, steam, compressed air and electric current so consumed, plus an administrative and billing fee equal to ten percent (10%) of the costs so billed.

Section 8.7.  Changes affecting HVAC.  Tenant shall also pay as Additional Rent for any additional costs Landlord incurs to repair any failure of the HVAC equipment and systems to perform their function when said failure arises out of or in connection with any change in, or alterations to, the arrangement of partitioning in the Premises after the Commencement Date, or from occupancy by, on average, more than one person for every one hundred and twenty-five (125) usable square feet of the Premises, or from Tenant’s failure to keep all HVAC vents within the Premises free of obstruction.

Section 8.8.  Damaged or Defective Systems.  Tenant shall give prompt notice to Landlord after Tenant acquires actual knowledge of any alleged damage to, or defective condition in any part or appurtenance of the Building’s sanitary, electrical, HVAC or other systems serving, located in, or passing through, the Premises.  Provided that the repair or remedy of said damage or defective condition is within the reasonable control of Landlord, it shall be remedied by Landlord with reasonable diligence.  Otherwise, Landlord shall make such commercially reasonable efforts as may be available to Landlord to effect such

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remedy or repair, but except in the case of Landlord’s gross negligence and/or willful misconduct or the gross negligence and/or willful misconduct of Landlord’s agents, contractors, directors, employees, officers, partners, and/or shareholders, Landlord shall not be liable to Tenant for any failure thereof.

        Tenant shall not be entitled to claim any damages arising from any such damage or defective condition nor shall Tenant be entitled to claim any eviction by reason of any such damage or defective condition unless:

a)the same was caused by Landlord’s gross negligence or willful misconduct while operating or maintaining the Premises or the Building;

b)the damage or defective condition has substantially prevented Tenant from conducting its normal business operations or obtaining access to at least seventy-five percent (75%) of the Premises; and

c)Landlord shall have failed to commence the remedy thereof and proceeded with reasonable diligence to complete the same after Landlord’s receipt of notice thereof from Tenant.

        Furthermore, if such damage or defective condition was caused by, or is attributed to, a Tenant Change or the unreasonable or improper use of such system(s) by Tenant or its employees, licensees or invitees:

d)the cost of the remedy thereof shall be paid by Tenant as Additional Rent pursuant to the provisions of Section 4.3;

e)in no event shall Tenant be entitled to any abatement of rent as specified above; and

f)Tenant shall be estopped from making any claim for damages arising out of Landlord’s repair thereof.

Section 8.9.  Limitation on Landlord’s Liability for Failure to Provide Utilities and/or Services.  Except in the case of Landlord’s gross negligence or willful misconduct or the gross negligence or willful misconduct of Landlord’s agents, contractors, directors, employees, licensees, officers, partners or shareholders, Tenant hereby releases Landlord from any liability for damages, by abatement of rent or otherwise, for any failure or delay in furnishing any of the services or utilities specified in this Article 8 (including, but not limited to telephone and telecommunication services), or for any diminution in the quality or quantity thereof.

        Tenant’s release of Landlord’s liability shall be applicable when such failure, delay or diminution is occasioned, in whole or in part, by repairs, replacements, or improvements, by any strike, lockout or other labor trouble, by Landlord’s inability to secure electricity, gas, water or other fuel at the Building after Landlord’s reasonable effort to do so, by accident or casualty whatsoever, by act or default of Tenant or parties other than Landlord, or by any other cause beyond Landlord’s reasonable control.  Such failures, delays or diminution shall never be deemed to constitute a constructive eviction or disturbance of Tenant’s use and possession of the Premises, or serve to relieve Tenant from paying Rent or performing any of its obligations under the Lease.

        Furthermore, Landlord shall not be liable under any circumstances for a loss of, injury to, or interference with, Tenant’s business, including, without limitation, any loss of profits occurring or arising through or in connection with or incidental to Landlord’s failure to furnish any of the services or utilities required by this Article 8.

        Notwithstanding the above, Landlord shall use commercially reasonable efforts to remedy any delay, defect or insufficiency in providing the services and or utilities required hereunder.

        Notwithstanding the foregoing, if Tenant is prevented from using and does not use, the Premises or any portion thereof, as a result of (i) Landlord’s failure to provide services or utilities as required by this Lease, or (ii) Landlord’s exercise of its rights under Section 12.11 below (an “Abatement Event”), then Tenant shall give Landlord Notice of such Abatement Event and if such Abatement Event continues for five (5) consecutive business days after Landlord’s receipt of any such Notice (the “Eligibility Period”), and such failure is in no way attributable to, or caused by, the acts of Tenant,  then the Fixed Monthly Rent shall be abated or reduced, as the case may be, after expiration of the Eligibility Period for such time that Tenant continues to be so prevented from using, and does not use, the Premises, or a portion thereof, in the proportion that the rentable area of the portion of the Premises that Tenant is prevented from using, and does not use (“Unusable Area”), bears to the total rentable area of the Premises; provided, however, in the event that Tenant is prevented from using, and does not use, the Unusable Area for a period of time in excess of the Eligibility Period and the remaining portion of the Premises is not sufficient to allow Tenant to effectively conduct its business therein and if Tenant does not conduct its business from such remaining portion, then for such time after expiration of the Eligibility Period during which Tenant is so prevented from effectively conducting its business therein, the Fixed Monthly Rent and Additional Rent for the entire Premises shall be abated for such time as Tenant continues to be so prevented from using, and does not use, the Premises.  If, however, Tenant reoccupies any portion of the Premises during such period, the Rent allocable to such reoccupied portion, based on the proportion that the rentable area of such reoccupied portion of the Premises bears to the total rentable area of the Premises, shall be payable by Tenant from the date Tenant reoccupies such portion of the Premises.  Such right to abate Fixed Monthly Rent and Additional Rent shall be Tenant’s sole and exclusive remedy at law or in equity for an Abatement Event.

Section 8.10.  Tenant Provided Services.  Tenant shall make no contract or employ any labor in connection with the maintenance, cleaning or other servicing of the physical structures of the Premises or for installation of any computer, telephone or other cabling, equipment or materials provided in or to the Premises (collectively and individually a “Tenant Service”) without the prior consent of Landlord, which consent shall not be unreasonably withheld.  Tenant shall not permit the use of any labor, material

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or equipment in the performance of any Tenant Service if the use thereof, in Landlord’s reasonable judgment, would violate the provisions of any agreement between Landlord and any union providing work, labor or services in or about the Premises, Building and/or create labor disharmony in the Building.

ARTICLE 9          
TENANT’S INDEMNIFICATION AND LIMITATION ON LANDLORD’S LIABILITY

Section 9.1.  Tenant’s Indemnification and Hold Harmless.  For the purposes of this Section 9.1, “Indemnitee(s)” shall jointly and severally refer to Landlord and Landlord’s agents, clients, contractors, directors, employees, officers, partners, and/or shareholders.

        Tenant shall indemnify and hold Indemnitees harmless from and against all claims, suits, demands, damages, judgments, costs, interest and expenses (including attorneys fees and costs incurred in the defense thereof) to which any Indemnitee may be subject or suffer to the extent the same arise out of the negligence or willful misconduct of Tenant or the negligence or willful misconduct of Tenant’s agents, contractors, directors, employees, licensees, officers, partners or shareholders in connection with the use of, work in, construction to, or actions in, on, upon or about the Premises, including any actions relating to the installation, placement, removal or financing of any Tenant Change, improvements, fixtures and/or equipment in, on, upon or about the Premises.

        Tenant’s indemnification (if required pursuant to the above paragraph) shall extend to any and all claims and occurrences, whether for injury to or death of any person or persons, or for damage to property (including any loss of use thereof), or otherwise, occurring during the Term or prior to the Commencement Date (if Tenant has been given early access to the Premises for whatever purpose), and to all claims arising from any condition of the Premises due to or resulting from any default by Tenant in the keeping, observance or performance of any covenant or provision of this Lease, or from the negligence or willful misconduct of Tenant or the negligence or willful misconduct of Tenant’s agents, contractors, directors, employees, licensees, officers, partners or shareholders.

Section 9.2.  Nullity of Tenant’s Indemnification in Event of Negligence.  Notwithstanding anything to the contrary contained in this Lease, Tenant’s indemnification shall not extend to the negligence or willful misconduct of Landlord or the negligence or willful misconduct of Landlord’s agents, contractors, directors, employees, officers, partners or shareholders, nor to such events and occurrences for which Landlord otherwise carries insurance coverage.

Section 9.3.  Tenant’s Waiver of Liability.  Provided and to the extent that any injury or damage suffered by Tenant or Tenant’s agents, clients, contractors, directors, employees, invitees, officers, partners, and/or shareholders did not arise out of the  negligence or willful misconduct of Landlord or the negligence or willful misconduct of Landlord’s agents, contractors, employees, officers, partners or shareholders, Tenant shall make no claim against Landlord and Landlord shall not be liable or responsible in any way for, and Tenant hereby waives all claims against Landlord with respect to or arising out of injury or damage to any person or property in or about the Premises by or from any cause whatsoever under the reasonable control or management of Tenant.

Section 9.4.  Limitation of Landlord’s Liability.  Tenant expressly agrees that, notwithstanding anything in this Lease and/or any applicable law to the contrary, the liability of Landlord and Landlord’s agents, contractors, directors, employees, licensees, officers, partners or shareholders, including any successor in interest thereto (collectively and individually the “Landlord Parties”), and any recourse by Tenant against Landlord or the Landlord Parties shall be limited solely and exclusively to an amount which is equal to the interest of Landlord in the Building, including rental income and proceeds from insurance.

        Tenant specifically agrees that neither Landlord nor any of the Landlord Parties shall have any personal liability therefor.  Further, Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant.

Section 9.5.  Transfer of Landlord’s Liability.  Tenant expressly agrees that, to the extent that any transferee assumes the obligations of Landlord hereunder in writing, and provided Landlord has either transferred the complete Security Deposit held pursuant to this Lease or refunded the same to Tenant as of the date of such transfer, then the covenants and agreements on the part of Landlord to be performed under this Lease which arise and/or accrue after the date of such transfer shall not be binding upon Landlord herein named from and after the date of transfer of its interest in the Building.

Section 9.6.  Landlord’s Indemnification.  Notwithstanding any contrary provision of this Lease, Landlord shall indemnify, and hold Tenant and Tenant’s agents, clients, directors, officers, partners, employees, shareholders and contractors harmless from and against, any and all claims, causes of action, liabilities, losses, reasonable costs and expenses, including reasonable attorney’s fees and court costs, arising from or in connection with:

a)any activity occurring, or condition existing, at or in the Building and/or the Real Property (other than in the Premises) when such activity or condition is under the reasonable control of Landlord, except and to the extent the same is caused by the negligence or willful misconduct of Tenant or Tenant’s employees, agents, licensee, invitees, or contractors, or by Tenant’s breach or default in the performance of any obligation under this Lease;

b)any activity occurring, or condition existing in the Premises when and to the extent caused by the negligence or willful misconduct of Landlord or Landlord’s employees, agents or contractors; or

c)     any breach by Landlord of any of Landlord’s obligations under this Lease.

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ARTICLE 10
COMPLIANCE WITH LAWS

Section 10.1.  Tenant’s Compliance with Laws.  Tenant shall not use, permit to be used, or permit anything to be done in or about all or any portion of the Premises which will in any way violate any laws, statutes, ordinances, rules, orders or regulations duly issued by any governmental authority having jurisdiction over the Premises, or by the Board of Fire Underwriters (or any successor thereto) (collectively “Codes”).

Section 10.2.  Tenant to Comply at Sole Expense.  Tenant shall, at its sole expense, promptly remedy any violation of such Codes relating to the condition of the Premises, provided, however, that nothing contained in this Section 10.2 shall require Tenant to make any structural changes, or other alterations, additions or improvements of a capital nature to the Premises, unless such changes are required due to either Tenant or Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders use of the Premises for purposes other than general office purposes consistent with a Class A office building.

Section 10.3.  Conclusive Evidence of Violation.  The judgment of any court of competent jurisdiction; Tenant’s admission; or the admission of any one or more of Tenant’s agents, contractors, directors, employees, officers, partners or shareholders in any action against Tenant, whether or not Landlord is a party thereto, that Tenant has so violated any one or more Codes shall be conclusive evidence of such violation as between Landlord and Tenant.

Section 10.  Landlord’s Compliance with Law.  Landlord represents that to the best of Landlord’s knowledge, and except as expressly provided in this Lease (including any of the exhibits attached hereto) Landlord has not received any notice of any non-compliance with any law, regulation or code affecting the Premises or the Building from any applicable governmental authority having jurisdiction.  If Landlord is cited for any such non-compliance, and:

a)     Landlord chooses to not dispute such citation (or Landlord disputes such citation and is unsuccessful); and

b)    The existence of such condition materially affects Tenant’s reasonable occupancy and beneficial use of the Premises, then Landlord shall commence to cure said non-compliance at Landlord’s expense if such non-compliance is due to a condition that existed prior to the Commencement Date, and as part of Operating Expenses of the Building if such non-compliance is due to a condition that arises after the Commencement Date.

ARTICLE 11
ASSIGNMENT AND SUBLETTING

Section 11.1.  Permission Required for Assignment or Sublet.  Unless Landlord’s prior written consent has been given, which consent shall not be unreasonably withheld, conditioned and/or delayed (subject to the express provisions of this Article 11), this Lease shall not, nor shall any interest herein, be assignable as to the interest of Tenant by operation of law; nor shall Tenant:

a)assign Tenant’s interest in this Lease; or

b)sublet the Premises or any part thereof or permit the Premises or any part thereof to be utilized by anyone other than Tenant, whether as by a concessionaire, franchisee, licensee, permittee or otherwise (collectively, a “sublease”)

        In addition, except for Transfers under clauses (a) or (b), Tenant shall not mortgage, pledge, encumber or otherwise transfer this Lease, the Term and/or estate hereby granted or any interest herein without Landlord’s prior written consent, which consent may be granted or withheld in Landlord’s sole and absolute discretion.

        Any assignment, mortgage, pledge, encumbrance, transfer or sublease (collectively, any “Transfer”) without Landlord’s prior written consent shall be voidable, and, in Landlord’s sole election, shall constitute a material default under this Lease.

Section 11.2.  Voluntary Assignment due to Changes in Structure of Tenant.  A change of stock ownership or control of Tenant shall not require the consent of Landlord; provided, however, that Tenant shall give Landlord not less than ten (10) days’ prior notice of any such transfer of ownership or control.

        Any withdrawal or change (whether voluntary, involuntary, or by operation of law) in the partnership by one or more partners who own, in the aggregate fifty percent (50%) or more of the partnership, or the dissolution of the partnership, shall be deemed a voluntary assignment.

        If Tenant is comprised of more than one individual, a purported assignment (whether voluntary, involuntary, or by operation of law), by any one of the persons executing this Lease shall be deemed a voluntary assignment.

Section 11.2.1.  Affiliated Companies/Restructuring of Business Organization.  Any contrary provision of this Article 11 notwithstanding, the assignment or subletting by Tenant of all or any portion of this Lease or the Premises to (i) a parent or subsidiary of Tenant, or (ii) any person or entity which controls, is controlled by or under common control with Tenant, or (iii) any entity which purchases all or substantially all of the stock or assets of Tenant, or (iv) any entity into which Tenant is merged or consolidated (all such persons or entities described in (i), (ii), (iii) and (iv) being sometimes hereinafter referred to as “Affiliates”) shall not be deemed a Transfer under this Article 11 and thus shall not be subject  to Landlord’s prior consent, and Landlord shall not be entitled to any Net Rental Profit resulting therefrom, provided that:

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a)  Any such Affiliate was not formed as a subterfuge to avoid the obligations of this Article 11;

b)  Tenant gives Landlord at least ten (10) days’ prior notice of any such assignment or sublease to an Affiliate;

c)  The successor of Tenant and Tenant have as of the effective date of any such assignment or sublease a tangible net worth, in the aggregate, computed in accordance with generally accepted accounting principles (but excluding good will as an asset), which is sufficient to meet the then-remaining obligations of Tenant under this Lease;

d)  Any such assignment or sublease shall be subject and subordinate to all of the terms and provisions of this Lease, and such assignee or sublessee shall assume, in a written document reasonably satisfactory to Landlord and delivered to Landlord upon or prior to the effective date of such assignment or sublease, all the obligations of Tenant under this Lease with respect to that portion of the Premises which is the subject of such Transfer (other than the amount of Fixed Monthly Rent payable by Tenant with respect to a sublease); and

e)  Tenant and any guarantor shall remain fully liable for all obligations to be performed by Tenant under this Lease.

Section 11.3.  Request to Assign or Sublease.  If at any time during the Term, Tenant wishes to assign this Lease or any interest therein, or to sublet all or any portion of the Premises, then at least twenty (20) days prior to the date when Tenant desires the assignment or sublease to be effective, Tenant shall give written notice to Landlord setting forth the name, address, and business of the proposed assignee or sublessee, business and personal credit applications completed on Landlord’s standard application forms, and information (including references and such financial documentation as Landlord shall reasonably prescribe) concerning the character and financial condition of the proposed assignee or sublessee, the effective date of the assignment or sublease, and all the material terms and conditions of the proposed assignment, and with reference solely to a sublease: a detailed description of the space proposed to be sublet, together with any rights of the proposed sublessee to use Tenant’s improvements and/or ancillary services with the Premises.  Tenant expressly acknowledges and agrees that if Tenant proposes to assign this Lease or sublet all of the Premises to an entity other than an Affiliate (as such term is defined in Section 11.2.1 of this Lease), and the financial status and creditworthiness of the entity is such that Landlord would ordinarily require the payment of a security deposit, Tenant shall provide Landlord with a security deposit equal to the Fixed Monthly Rent payable by Tenant under this Lease as of the effective date of the proposed Transfer.

Section 11.4.  Landlord’s Consent.  Landlord shall have twenty (20) days after Tenant’s notice of assignment and/or sublease is received with the financial information reasonably requested by Landlord to advise Tenant of Landlord’s (i) consent to such proposed assignment or sublease, (ii) withholding of consent to such proposed assignment or sublease, or (iii) election to terminate this Lease, such termination to be effective as of the date of the commencement of the proposed assignment or subletting.  If Landlord shall exercise its termination right hereunder, Landlord shall have the right to enter into a lease or other occupancy agreement directly with the proposed assignee or subtenant, and Tenant shall have no right to any of the rents or other consideration payable by such proposed assignee or subtenant under such other lease or occupancy agreement, even if such rents and other consideration exceed the rent payable under this Lease by Tenant.  Landlord shall have the right to lease the Premises to any other tenant, or not lease the Premises, in its sole and absolute discretion.  Landlord and Tenant specifically agree that Landlord’s right to terminate this Lease under clause (iii) above is a material consideration for Landlord’s agreement to enter into this Lease and such right may be exercised in Landlord’s sole and absolute discretion and no test of reasonableness shall be applicable thereto; provided, however, that Landlord may exercise the termination right described in said clause (iii) only if Tenant proposes to assign this Lease or sublet the entire Premises.

        Tenant acknowledges that Landlord’s consent shall be based upon the criteria listed in Sections 11.4 (a) through (e) below, and subject to Landlord’s right to unilaterally disapprove of any proposed assignment and/or sublease, based on the existence of any condition contained within Section 11.5 hereinbelow.  If Landlord either provides its consent or fails to respond within the time period specified, Tenant shall be free to complete the assignment and/or sublet such space to the party contained in Tenant’s notice, subject to the following conditions:

a)The assignment and/or sublease shall be on the same terms as were set forth in the notice given to Landlord;

b)The assignment and/or sublease shall be documented in a written format that is reasonably acceptable to Landlord, which form shall specifically include the assignee’s and/or sublessee’s acknowledgement and acceptance of the obligation contained in this Lease, in so far as applicable;

c)The assignment and/or sublease shall not be valid, nor shall the assignee or sublessee take possession of the Premises, or subleased portion thereof, until an executed duplicate original of such sublease and/or assignment has been delivered to Landlord;

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d)In the event of any Transfer, Landlord shall receive as Additional Rent hereunder (and without affecting or reducing any other obligation of Tenant under this Lease) fifty percent (50%) of Tenant’s “Net Rental Profit” derived from such Transfer.  If Tenant shall elect to Transfer, Tenant shall use reasonable and good faith efforts to secure consideration from any such Transferee which would be generally equivalent to then-current market rent for a sublease of the square footage and for the term then being offered by Tenant, but in no event shall Tenant’s monetary obligations to Landlord, as set forth in this Lease, be reduced.   Net Rental Profit shall mean all rent, additional rent or other consideration payable (in lieu of or in addition to rent) by such Transferee in connection with the Transfer in excess of the Rent and Additional Rent payable by Tenant under this Lease during the term of the Transfer on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Tenant in connection with such Transfer for (i) any improvement allowance or other economic concessions (space planning allowance, moving expenses, etc.) paid by Tenant or Transferee in connection with such Transfer, (ii) any brokerage commissions incurred by Tenant in connection with the Transfer, and (iii) reasonable attorneys’ fees incurred by Tenant in connection with the Transfer.

Tenant shall deliver to Landlord a statement within thirty (30) days after the end of each calendar year and/or within thirty (30) days after the expiration or earlier termination of the Term of this Lease in which any Transfer has occurred, specifying for each such Transfer:

i)the date of its execution and delivery, the number of square feet of the Rentable Area demised thereby, and the Term thereof, and

ii)a computation in reasonable detail showing the amounts (if any) paid and payable by Tenant to Landlord pursuant to this Section 11.4 with respect to such Transfer for the period covered by such statement, and the amounts (if any) paid and payable by Tenant to Landlord pursuant to this Section 11.4 with respect to any payments received from a Transferee during such period but which relate to an earlier period.

Section 11.5.  Reasonable Grounds for Denial of Assignment and/or Sublease.  Landlord and Tenant agree that, in addition to such other reasonable grounds as Landlord may assert for withholding its consent, it shall be reasonable under this Lease and any applicable law for Landlord to withhold its consent to any proposed Transfer, where any one or more of the following conditions exists:

a)The proposed sublessee or assignee (a “Transferee”) is, in Landlord’s reasonable judgment, of a character or reputation which is not consistent with those businesses customarily found in a Class A office building;

b)The Transferee is engaged in a business or intends to use all or any portion of the Premises for purposes which are not consistent with those generally found in the Building or other Class A office buildings in the vicinity of the Building, provided, however, that in no event shall Landlord be permitted to decline Tenant’s request for a Transfer solely on the basis of said Transferee’s intent to change the Specified Use from that of Tenant, unless such proposed change shall violate any Exclusive Use provision already granted by Landlord;

c)The Transferee is either a governmental agency or instrumentality thereof;

d)The Transfer will result in more than a reasonable and safe number of occupants within the Premises;

e)The Transferee is not a party of reasonable financial worth and/or financial stability in light of the responsibilities involved under the sublease, if a sublessee, or the Lease, if an assignee, on the date consent is requested, or has demonstrated a prior history of credit instability or unworthiness;

f)The Transfer will cause Landlord to be in violation of another lease or agreement to which Landlord is a party, or would give another occupant of the Building a right to cancel its lease;

g)The Transferee will retain any right originally granted to Tenant to exercise a right of renewal, right of expansion, right of first offer or other similar right held by Tenant;

h)Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee is a tenant in the Building at the time Tenant requests approval of the proposed Transfer, or is engaged in on-going negotiations with Landlord to lease space in the Building at the time Tenant requests approval of the proposed Transfer, and Landlord can make space available in the Building comparable to the space that is the subject of the proposed Transfer; or

i)The Transferee intends to use all or a portion of the Premises for medical procedures or for a primary business which is as a boiler-room type sales or marketing organization.

Section 11.6.  Tenant’s Continued Obligation.  Any consent by Landlord to an assignment of this Lease and/or sublease of the Premises shall not release Tenant from any of Tenant’s obligations hereunder or be deemed to be a consent by Landlord to any subsequent hypothecation, assignment, subletting, occupation or use by another person, and Tenant shall remain liable to pay the Rent and/or perform all other obligations to be performed by Tenant hereunder.  Landlord’s acceptance of Rent or Additional Rent from any other person shall not be deemed to be a waiver by Landlord of any provision of this Lease.  Landlord’s consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting.

        If any assignee or sublessee of Tenant or any successor of Tenant defaults in the performance of any of the provisions of this Lease, whether or not Landlord has collected Rent directly from said assignee or

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sublessee, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, sublessee or other successor-in-interest.

        Provided that in no event shall any further assignment, sublease, amendment or modification to this Lease serve to either increase Tenant’s liability or expand Tenant’s duties or obligations hereunder, or relieve Tenant of its liability under this Lease, then Landlord may consent to subsequent assignments or subletting of this Lease or amendments or modifications to this Lease with any assignee, without notifying Tenant or any successor of Tenant, and without obtaining their consent thereto.

Section 11.7.  Tenant To Pay Landlord’s Costs.  If Tenant assigns or sublets the Premises or requests the consent of Landlord to any assignment, subletting or other modification of this Lease, or if Tenant requests the consent of Landlord for any act that Tenant proposes to do, whether or not Landlord shall grant consent thereto, then Tenant shall, concurrent with Tenant’s submission of any written request therefor, pay to Landlord the non-refundable sum of $1,000 as reasonable consideration for Landlord’s considering and processing the applicable request.

Section 11.8.  Successors and Assigns.  Subject to the provisions contained herein, the covenants and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant, their respective successors and assigns and all persons claiming by, through or under them.

ARTICLE 12
MAINTENANCE, REPAIRS, DAMAGE, DESTRUCTION, RENOVATION AND/OR ALTERATION

Section 12.1.  Tenant’s Obligation to Maintain.  Tenant shall, at Tenant’s sole expense, maintain the non-structural portions of the Premises in good order and repair, and shall also keep clean any portion of the Premises which Landlord is not obligated to clean.  Such obligation shall include the clean-out; repair and/or replacement of Tenant’s garbage disposal(s), Instant-Heat or other hot water producing equipment, if any, and the cleaning and removal of any dishes and/or food prior to the same becoming unsanitary.  If Tenant becomes obligated to repair anything within the Premises and desires that Landlord make the repair, Tenant shall advise Landlord’s managing agent of such need, which request shall be presumed conclusive evidence of Tenant’s obligation and willingness to reimburse Landlord a fair and reasonable charge for such repair(s), unless such repair is Landlord’s obligation as described in this Section 12.1 or in the event of a casualty.

        Further, Tenant shall pay the cost of any injury, damage or breakage in, upon or to the Premises created by Tenant’s gross negligence or willful misconduct or the gross negligence or willful misconduct of Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders.

        Subject to Tenant’s obligation for reimbursement to Landlord, if applicable, as specified herein, Landlord shall make all repairs to the Premises. Landlord shall maintain in first-class operating condition and repair, the Common Areas, the exterior walls, foundation and roof of the Building, the structural portions of the floors of the Building, structural elements of the Premises, all of the systems and equipment of the Building and the Tenant Improvements installed in the Premises.  The allocation of the foregoing costs of such maintenance and repair shall be governed by Article 4.  However, if such repairs, maintenance or cleaning are required due to Tenant’s gross negligence or willful misconduct or the gross negligence or willful misconduct of Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders, then, Tenant shall, within thirty (30) days after receipt of Landlord’s billing therefor, reimburse Landlord, as Additional Rent, for any expense of such repairs, cleaning and/or maintenance in excess of any insurance proceeds available for reimbursement thereof, including for any deductible anticipated in connection therewith.

        Tenant hereby waives all right to make repairs at Landlord’s expense under the provisions of Section 1932(1), 1941 and 1942 of the Civil Code of California.

Section 12.2.  Repair Period Notice.  Tenant shall give prompt notice to Landlord of Tenant’s actual knowledge of any damage or destruction to all or any part of the Premises or Building resulting from or arising out of any fire, earthquake, or other identifiable event of a sudden, unexpected or unusual nature (individually or collectively a “Casualty”).The time periods specified in this Section 12.2. shall commence on the earlier of the date of Landlord’s actual knowledge of the Casualty or after Landlord receives said written notice from Tenant of the occurrence of a Casualty.  After the earlier of Landlord ‘s actual knowledge or receipt of Tenant’s written notice that a Casualty has occurred, Landlord shall, within the later of:

a)sixty (60) days after the date on which Landlord determines the full extent of the damage caused by the Casualty; or

b)thirty (30) days after Landlord has determined the extent of the insurance proceeds available to effectuate repairs, but

c)in no event more than ninety (90) days after the Casualty,

        provide written notice to Tenant indicating the anticipated time period for repairing the Casualty (the ”Repair Period Notice”).  The Repair Period Notice shall also state, if applicable, Landlord’s election either to repair the Premises, or to terminate this Lease, pursuant to the provisions of Section 12.3, and if Landlord elects to terminate this Lease, Landlord shall use commercially reasonable efforts to provide Tenant with a minimum period of ninety (90) days within which to fully vacate the Premises.

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Section 12.3.  Landlord’s Option to Terminate or Repair.  Notwithstanding anything to the contrary contained herein, Landlord shall have the option, but not the obligation to elect not to rebuild or restore the Premises and/or the Building if one or more of the following conditions is present:

a)repairs to the Premises cannot reasonably be completed within one hundred and eighty (180) days after the date of the Casualty (when such repairs are made without the payment of overtime or other premiums);

b)repairs required cannot be made pursuant to the then-existing laws or regulations affecting the Premises or Building, or the Building cannot be restored except in a substantially different structural or architectural form than existed before the Casualty;

c)the holder of any mortgage on the Building or ground or underlying lessor with respect to the Real Property and/or the Building shall require that all or such large a portion of the insurance proceeds be used to retire the mortgage debt, so that the balance of insurance proceeds remaining available to Landlord for completion of repairs shall be insufficient to repair said damage or destruction;

d)the holder of any mortgage on the Building or ground or underlying lessor with respect to the Real Property and/or the Building shall terminate the mortgage, ground or underlying lease, as the case may be;

e)provided Landlord has carried the coverage Landlord is required to obtain under Section 19.1 of this Lease, the damage is not fully covered, except for deductible amounts, by Landlord’s insurance policies;

f)more than thirty-three and one-third percent (33 1/3%) of the Building is damaged or destroyed, whether or not the Premises is affected, provided that Landlord elects to terminate all other leases for offices of a similar size in the Building.

        If Landlord elects not to complete repairs to the Building or Premises, pursuant to this Section 12.3, Landlord’s election to terminate this Lease shall be stated in the Repair Period Notice, in which event this Lease shall cease and terminate as of the date contained in Landlord’s Repair Period Notice.

        If one hundred percent of the Building is damaged or destroyed, as certified by an independent building inspector, this Lease shall automatically terminate after Tenant’s receipt of written notice of such termination from Landlord, and without action beyond the giving of such notice being required by either Landlord or Tenant.

        Upon any termination of this Lease pursuant to this Section 12.3, Tenant shall pay its prorata share of Fixed Monthly Rent and Additional Rent, properly apportioned up to the date of such termination, reduced by any abatement of Rent to which Tenant is entitled under Section 12.5; after which both Landlord and Tenant shall thereafter be freed and discharged of all further obligations under the Lease, except for those obligations which by their provisions specifically survive the expiration or earlier termination of the Term.

Section 12.4.  Tenant’s Option to Terminate.  If

a)the Repair Period Notice provided by Landlord indicates that the anticipated period for repairing the Casualty (the “Repair Period”) exceeds one hundred and eighty (180) days after the Casualty, or

b)the Casualty to the Premises occurs during the last twelve (12) months of the Term;

then Tenant shall have the option, but not the obligation, to terminate this Lease by providing written notice (“Tenant’s Termination Notice”) to Landlord within thirty (30) days after receiving the Repair Period Notice in the case of 12.4 (a); or within thirty (30) days after the Casualty, in the case of Section 12.4 (b).  Furthermore, if

Landlord has not completed the repairs thereafter on or before thirty (30) days after the expiration of the Repair Period,

then Tenant shall also have the option, but not the obligation, to terminate this Lease by giving Landlord written notice of its intention to so terminate, which notice shall be given not more than forty-five (45) days after expiration of the Repair Period.

        Tenant’s failure to provide Landlord with Tenant’s Termination Notice within the time periods specified hereinabove shall be deemed conclusive evidence that Tenant has waived its option to terminate this Lease.

Section 12.5.  Temporary Space and/or Rent Abatement During Repairs or Renovation.  During the Repair Period or during any such period that Landlord completes Work (as defined hereinbelow) or Renovations (as defined in Section 12.11 hereinbelow), if available, and if requested by Tenant, Landlord shall make available to Tenant other space in the Building which, in Tenant’s reasonable opinion, is suitable for the temporary conduct of Tenant’s business.  However, if such temporary space is smaller than the Premises, Tenant shall pay Fixed Monthly Rent and Additional Rent for the temporary space based upon the calculated rate per Rentable square foot payable hereunder for the Premises, times the number of Rentable square feet available for Tenant’s use in the temporary space.  If such temporary space is larger than the Premises, Tenant shall pay Fixed Monthly Rent and Additional Rent for the temporary space based upon the square footage of the Premises initially leased to Tenant, and Landlord shall pay the costs of the move in to the temporary space and the move back to the Premises initially leased to Tenant, including the cost of the relocation of all telephone and computer cabling.

        If no temporary space is available that is reasonably satisfactory to Tenant, and any part of the Premises is rendered untenantable by reason of such Casualty, Work or Renovation, then to the extent that all or said portion of the usable area of the Premises is so rendered untenantable by reason of such Casualty, Work or Renovation, Tenant shall be provided with a proportionate abatement of Fixed

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Monthly Rent and Additional Rent.  Said proportional abatement shall be based on the Usable Square Footage of the Premises that cannot and is not actually used by Tenant, divided by the total Usable square feet contained in the Premises; provided, however, if the remaining portion of the Premises is not usable for Tenant’s business purposes, then Tenant shall be entitled to a full abatement of Fixed Monthly Rent and Additional Rent.  That proportional abatement (or full abatement, as the case may be), if any, shall be provided during the period beginning on the later of:

a)the date of the Casualty; or

b)the actual date on which Tenant ceases to conduct Tenant’s normal business operations in all or any portion of the Premises,

and shall end on the date Landlord achieves substantial completion of restoration of the Premises.  Tenant’s acceptance of said abatement of Rent shall be deemed conclusive evidence of Tenant’s waiver of any further claim or right of future claim for any loss or damage asserted by Tenant arising out of the Casualty Repair, Work or Renovation, as the case may be.

Section 12.6.  Tenant’s Waiver of Consequential Damages.  Subject to Section 12.4, the provisions contained in Section 12.5 are Tenant’s sole remedy arising out of any Casualty.  Landlord shall not be liable to Tenant or any other person or entity for any direct, indirect, or consequential damage (including but not limited to lost profits of Tenant or loss of or interference with Tenant’s business), unless caused by the gross negligence or willful misconduct of Landlord or the gross negligence or willful misconduct of Landlord’s agents, contractors, directors, employees, licensees, officers, partners or shareholders, due to, arising out of, or as a result of the Casualty (including but not limited to the termination of the Lease in connection with the Casualty).

Section 12.7. Restoration of the Premises.  If the cost of repair of any Casualty is covered under one or more of the insurance policies Landlord is required herein to provide, then Landlord shall restore the base core and shell of the Premises to its condition prior to the Casualty and repair and/or replace the Improvements previously installed in the Premises.

        If Landlord has elected to complete repairs to the Premises, and has not elected to terminate this Lease, as specified in Section 12.3, then Landlord shall complete such repairs within the Repair Period, in a manner, and at times, which do not unreasonably interfere with Tenant’s use of that portion of the Premises remaining unaffected by the Casualty.  Provided Landlord has elected to make the repairs required hereunder, this Lease shall not be void or voidable during the Repair Period, nor shall Landlord be deemed to have constructively evicted Tenant thereby.

Section 12.8.  Waiver.  Tenant hereby waives the provisions of California Civil Code Sections 1932(2) and 1933(4) and the provisions of any successor or other law of like import.

Section 12.9.  Repair of the Building.  Except as specified hereinabove, unless Landlord terminates this Lease as permitted hereinabove, Landlord shall repair the Building, parking structure or other supporting structures and facilities within two hundred ten (210) days after Landlord becomes aware of such damage and/or destruction.

Section 12.10.  Government-Required Repairs.  If, during the Term, additional inspections other than those standard annual or biannual inspections to which the Building may generally be subject; testing, repairs and/or reconstruction (collectively the “Work”) are required by any governmental authority, or if, upon the recommendation of its engineers, Landlord independently elects to undertake all or any portion of the Work prior to being required to do so by such governmental authority, Landlord shall give notice thereof to Tenant and shall use its best efforts not to unreasonably interfere with Tenant’s use of the Premises while completing the Work.  Tenant shall cooperate fully with Landlord in connection with the Work and, upon the prior written request of Landlord, shall make the Premises available for completion of the Work.  Tenant agrees that Landlord shall allocate all costs associated with completion of the Work to the Building’s Operating Expenses, when permitted to under the provisions of Section 4.1 of this Lease.

        If Landlord elects to undertake the Work during the Term, then Tenant shall be entitled to an abatement of rent, pursuant to the provisions of Section 12.5 hereinabove, and Landlord shall be completely responsible for repair of any damage to the Premises and all costs associated with the removal, moving and/or storage of Tenant’s furniture, artwork, office equipment and files.  If Tenant is moved to alternate space, then Landlord shall pay the costs of the move in to the alternate space and the move back to the Premises, including the cost of the relocation of all telephone and computer cabling.  Landlord will restore any and all areas damaged by completion of the Work to their previous quality and pay all clean-up costs.  Landlord further agrees that it shall use commercially reasonable efforts to see that all construction, such as coring or power nailing that could be disruptive to Tenant’s normal business operations shall, in so far as is reasonably possible, be performed between the hours of 7:00 p.m. to 7:00 a.m. Monday through Friday; after 1:00 p.m. on Saturdays and/or at any time on Sundays.

        Except in the case of Landlord’s gross negligence and/or willful misconduct or the gross negligence and/or willful misconduct of Landlord’s agents, contractors, directors, employees, officers, partners, and/or shareholders, Tenant shall not have the right to terminate this Lease as a result of Landlord undertaking the Work, nor shall Tenant or any third party claiming under Tenant be entitled to make any claim against Landlord for any interruption, interference or disruption of Tenant’s business or loss of profits therefrom as a result of the Work, and Tenant hereby releases Landlord from any claim which Tenant may have against Landlord arising from or relating to, directly or indirectly, the performance of the Work by Landlord.

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Section 12.11.  Optional Landlord Renovation.  It is specifically understood and agreed that Landlord has no obligation and has made no promises to alter, remodel, improve, renovate or decorate the Premises, Building, or any part thereof and that, except as set forth herein, no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant.

        However, at any time and from time to time during the Term, Landlord may elect, in Landlord’s sole discretion, to otherwise renovate, improve, alter or modify elements of the Real Property, the Building and/or the Premises (collectively, “Renovations”) including without limitation, the parking facilities, common areas, systems, equipment, roof, and structural portions of the same, which Renovations may include, without limitation:

a)modifying the common areas and tenant spaces to comply with applicable laws and regulations, including regulations relating to the physically disabled, seismic conditions and building safety and security, and

b)installing new carpeting, lighting and wall covering in the Building common areas.

        In connection with such Renovations, Landlord may, among other things, erect scaffolding or other necessary structures in or about the Building, limit or eliminate access to portions of the Building, common areas or parking facilities serving the Building, or perform other work in or about the Building, which work may create noise, dust or debris that remains in the Building.

        Landlord shall have the right to access through the Premises as well as the right to take into and upon and through all or any part of the Premises, or any other part of the Building, all materials that may reasonably be required to make such repairs, alterations, decorating, additions or improvements pursuant to the provisions of this Section 12.11.  So long as Tenant shall maintain reasonable access to the Premises, the Building and the parking facilities, Landlord shall also have the right, in the course of the Renovations, to close entrances, doors, corridors, elevators, or other building facilities, or temporarily to abate the operation of such facilities.

        So long as Tenant is not required to vacate the Premises for any reason arising out of the Renovations, and maintains reasonable access to the Premises and the parking facilities, Tenant shall permit all of the Renovations to be done, and except in the case of Landlord’s gross negligence or willful misconduct or the gross negligence or willful misconduct of Landlord’s contractors, directors, employees, officers, partners or shareholders, without claiming Landlord is guilty of the constructive eviction or disturbance of Tenant’s use and possession.

        Landlord shall not be liable to Tenant in any manner (except as expressly provided otherwise in this Lease), whether for abatement of any Rent or other charge, reimbursement of any expense, injury, loss or damage to Tenant’s property, business, or any person claiming by or under Tenant, by reason of interference with the business of Tenant or inconvenience or annoyance to Tenant or the customers of Tenant resulting from any Renovations done in or about the Premises or the Building or to any adjacent or nearby building, land, street or alley.  However, Landlord agrees that the Renovations shall be scheduled insofar as is commercially reasonable to permit Tenant to continue its normal business operations, with advance notice thereof, and in such commercially reasonable manner so as to minimize Tenant’s inconvenience.

Section 12.12.  Optional Tenant Changes During the Term.  After completion of the initial Improvements contemplated hereunder, if any, Tenant shall make no alteration, change, addition, removal, demolition, improvement, repair or replacement in, on, upon, to or about the Premises, or at any time to any portion of the Building (collectively or individually a “Tenant Change”), without the prior written consent of Landlord, which consent shall be in Landlord’s reasonable discretion.  Notwithstanding the foregoing, Tenant shall have the right, without Landlord’s consent but upon ten (10) days prior notice to Landlord, to make non-structural additions and alterations (“Cosmetic Alterations”) to the Premises that do not (i) involve the expenditure of more than $50,000.00 in the aggregate in any twelve (12) month period during the Term, (ii) affect the exterior appearance of the Building, or (iii) affect the Building systems or the Building structure.  Except as otherwise specified in Article 7, any Tenant Change shall, at the termination of this Lease, become a part of the Building and belong to Landlord, pursuant to the provisions of Article 7.  Any application for Landlord’s consent to a Tenant Change, and the completion thereof, shall be in conformance with the provisions of Exhibit B-1, attached hereto and made a part hereof by reference.

        Tenant shall not knowingly permit Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders to deface the walls, floors and/or ceilings of the Premises, nor mark, drive nails, screws or drill holes into, paint, or in any way mar any surface in the Building.  Notwithstanding the above, Tenant is hereby permitted to install such pictures, certificates, licenses, artwork, bulletin boards and similar items as are normally used in Tenant’s business, so long as such installation is carefully attached to the walls by Tenant in a manner reasonably prescribed by Landlord.

        If Tenant desires, as a part of any Tenant Change, to make any revisions whatsoever to the electrical, HVAC, mechanical, plumbing, or structural systems of the Building or Premises, such revisions must be completed by subcontractors specified by Landlord and in the manner and location(s) reasonably prescribed by Landlord.  If Tenant desires to install any telephone outlets, the same shall be installed in the manner and location(s) reasonably prescribed by Landlord.

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        If Landlord consents to any requested Tenant Change, Tenant shall give Landlord a minimum of fifteen (15) days written notice prior to commencement thereof.  Landlord reserves the option, but not the obligation, to enter upon the Premises for the purpose of posting and maintaining such notices on the Premises as may be reasonably necessary to protect Landlord against mechanic’s liens, material man’s liens or other liens, and/or for posting any other notices that may be proper and necessary in connection with Tenant’s completion of the Tenant Change.

        If any alterations, additions or improvements made by Tenant result in Landlord being required to make any alterations to other portions of the Building in order to comply with any applicable statutes, ordinances or regulations (e.g., “handicap ordinances”) then Tenant shall reimburse Landlord upon demand for all costs and expenses incurred by Landlord in making such alterations.

Section 12.13.  Express Agreement.  The provisions of this Lease, including those contained in this Article 12, constitute an express agreement between Landlord and Tenant that applies in the event of any Casualty to the Premises, Building or Real Property.  Tenant, therefore, fully waives the provisions of any statute or regulations, including California Civil Code Sections 1932(2) and 1933(4), and any other law or statute which purports to govern the rights or obligations of Landlord and Tenant concerning a Casualty in the absence of express agreement.  Tenant and Landlord expressly agree and accept that any successor or other law of like import shall have no application hereunder.

ARTICLE 13
CONDEMNATION

Section 13.1.  Condemnation of the Premises.  If more than twenty five percent (25%) of the Premises is lawfully condemned or taken in any manner for any public or quasi-public use, or if any portion of the Building is condemned or taken in such a manner that Tenant is reasonably prevented from obtaining access to the Building or the Premises, this Lease may, within ten (10) business days of such taking, be terminated at the option of either Landlord or Tenant by one party giving the other thirty (30) days written notice of its intent to do so.  If either Landlord or Tenant provide the other party written notice of termination, the Term and estate hereby granted shall forthwith cease and terminate as of the earlier of the date of vesting of title in such condemnation or taking or the date of taking of possession by the condemning authority.

        If less than twenty-five percent (25%) of the Premises is so condemned or taken, then the term and estate hereby granted with respect to such part shall forthwith cease and terminate as of the earlier of the date of vesting of title in such condemnation or taking or the date of taking of possession by the condemning authority, and the Fixed Monthly Rent payable hereunder (and Additional Rent payable pursuant to Articles 3 or 4) shall be abated on a prorated basis, by dividing the total number of Usable square feet so taken by the total number of Usable square feet contained in the Premises, then multiplying said percentage on a monthly basis, continuing from the date of such vesting of title to the date specified in this Lease for the expiration of the Term hereof.

Section 13.2.  Condemnation of the Building.  If less than twenty-five percent (25%) of the Building is so condemned or taken, then Landlord shall, to the extent of the proceeds of the condemnation payable to Landlord and with reasonable diligence, restore the remaining portion of the Building as nearly as practicable to its condition prior to such condemnation or taking; except that, if such proceeds constitute less than ninety percent (90%) of Landlord’s estimate of the cost of rebuilding or restoration, then Landlord may terminate this Lease on thirty (30) days prior written notice to Tenant.

        If more than twenty-five percent (25%) of the Building is so condemned or taken, but the Premises are unaffected thereby, then Landlord shall have the option but not the obligation, which election shall be in Landlord’s sole discretion, to terminate this Lease, effective the earlier of the date of vesting of title in such condemnation or the date Landlord delivers actual possession of the Building and Premises to the condemning authority, which election by Landlord shall be provided to Tenant in writing.

Section 13.3.  Award.  If any condemnation or taking of all or a part of the Building takes place, Tenant shall be entitled to join in any action claiming compensation therefore, and Landlord shall be entitled to receive that portion of the award made for the value of the Building, Premises, leasehold improvements made or reimbursed by Landlord, or bonus value of the Lease, and Tenant shall only be entitled to receive any award made for the value of the estate vested by this Lease in Tenant, including Tenant’s proximate damages to Tenant’s business and reasonable relocation expenses.  Nothing shall preclude Tenant from intervening in any such condemnation proceeding to claim or receive from the condemning authority any compensation to which Tenant may otherwise lawfully be entitled in such case in respect of Tenant’s property or for moving to a new location.

Section 13.4.  Condemnation for a Limited Period.  Notwithstanding the provisions of Section 13.1, 13.2 or 13.3, except during the final twelve (12) months of the Term, if all or any portion of the Premises are condemned or taken for governmental occupancy for a limited period (i.e. -  anticipated to be no longer than sixty (60) days), then this Lease shall not terminate; there shall be no abatement of Fixed Monthly Rent or Additional Rent payable hereunder; and Tenant shall be entitled to receive the entire award therefor (whether paid as damages, rent or otherwise).

        If, during the final twelve (12) months of the Term, all or any portion of the Premises are condemned or taken for governmental occupancy for a limited period anticipated to be in excess of sixty (60) days, or for a period extended after the expiration of the initial Term, Tenant shall have the option, but not the obligation, to terminate this Lease, in which case, Landlord shall be entitled to such part of such award as shall be properly allocable to the cost of restoration of the Premises, and the balance of such award shall be apportioned between Landlord and Tenant as of the date of such termination.

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        If the termination of such governmental occupancy is prior to expiration of this Lease, and Tenant has not elected to terminate this Lease, Tenant shall, upon receipt thereof and to the extent an award has been made, restore the Premises as nearly as possible to the condition in which they were prior to the condemnation or taking.

ARTICLE 14
MORTGAGE SUBORDINATION; ATTORNMENT AND MODIFICATION OF LEASE

Section 14.1.  Subordination.  This Lease, the Term and estate hereby granted, are and shall be subject and subordinate to the lien of each mortgage which may now or at any time hereafter affect Landlord’s interest in the real property, Building, parking facilities, common areas or portions thereof and/or the land thereunder (an “underlying mortgage”), regardless of the interest rate, the terms of repayment, the use of the proceeds or any other provision of any such mortgage.  Tenant shall from time to time execute and deliver such instruments as Landlord or the holder of any such mortgage may reasonably request to confirm the subordination provided in this Section 14.1.  Tenant shall execute and deliver to Landlord three (3) copies of the Subordination, Non-Disturbance and Attornment Agreement attached as Exhibit H hereto and made a part hereof (the “SNDA”) concurrently with Tenant’s execution and delivery of this Lease.  Within thirty (30) days following the full execution of this Lease, Landlord shall deliver to Tenant a copy of the SNDA executed by Landlord and Landlord’s lender.

Section 14.2.  Attornment.  Tenant confirms that if by reason of a default under an underlying mortgage the interest of Landlord in the Premises is terminated, provided Tenant is granted in writing continued quiet enjoyment of the Premises pursuant to the terms and provisions of this Lease, Tenant shall attorn to the holder of the reversionary interest in the Premises and shall recognize such holder as Tenant’s landlord under this Lease, but in no event shall such holder be bound by any payment of Rent paid more than one month in advance of the date due under this Lease.  Tenant shall, within fifteen (15) calendar days after request therefor, execute and deliver, at any time and from time to time, upon the request of Landlord or of the holder of an underlying mortgage any instrument which may be necessary or appropriate to evidence such attornment.

Section 14.3.  Modification of Lease; Notice of Default.  If any current or prospective mortgagee or ground lessor for the Building requires a modification or modifications of this Lease, which modification or modifications will not cause an increased cost or expense to Tenant or in any other way changes the rights and obligations of Tenant or the obligations of Landlord hereunder, then in such event, Tenant agrees that this Lease may be so modified.  Tenant agrees to execute and deliver to Landlord within fifteen (15) calendar days following the request therefor whatever documents are required to effectuate said modification.  Should Landlord or any such current or prospective mortgagee or ground lessor require execution of a short form of Lease for recording, containing, among other customary provisions, the names of the parties, a description of the Premises and the Term, Tenant agrees to execute and deliver to Landlord such short form of Lease within fifteen (15) calendar days following the request therefor.  Further, Tenant shall give written notice of any default by Landlord under this Lease to any mortgagee and ground lessor of the Building and shall afford such mortgagee and ground lessor a reasonable opportunity to cure such default prior to exercising any remedy under this Lease.

ARTICLE 15
ESTOPPEL CERTIFICATES

Section 15.1.  Estoppel Certificates.  Tenant shall, within fifteen (15) business days after receipt of Landlord’s written request therefor, execute, acknowledge and deliver to Landlord an Estoppel Certificate, which may be conclusively relied upon by any prospective purchaser, mortgagee or beneficiary under any deed of trust covering the Building or any part thereof.  Said Estoppel Certificate shall certify the following:

a)that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature of each modification);

b)the date, if any, to which rental and other sums payable hereunder have been paid;

c)that no notice has been received by Tenant of any default which has not been cured, except as to defaults specified in the certificate;

d)that, to Tenant’s actual knowledge, Landlord is not in default under this Lease or, if so, specifying such default; and

e)such other factual matters as may be reasonably requested by Landlord.

        Tenant’s failure to deliver the Estoppel Certificate within five (5) days following Tenant’s receipt of Landlord’s second (2^nd) written request therefor shall constitute a material default under the Lease, and Landlord shall have the option, but not the obligation, to enforce the remedies contained in Article 18.

ARTICLE 16
NOTICES

Section 16.1.  Notices.  Any notice, consent, approval, agreement, certification, request, bill, demand, statement, acceptance or other communication hereunder (a “notice”) shall be in writing and shall be considered duly given or furnished when:

a)delivered personally or by messenger or overnight delivery service, with signature evidencing such delivery;

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b)upon the date of delivery, after being mailed in a postpaid envelope, sent certified mail, return receipt requested, when addressed to Landlord as set forth in the Basic Lease Information and to Tenant at the Premises and any other address for Tenant specified in the Basic Lease Information; or to such other address or addressee as either party may designate by a written notice given pursuant hereto; or

c)upon confirmation of good transmission if sent via facsimile machine to such phone number as shall have been provided in writing by Landlord or Tenant, one to the other.

        If Tenant fails to provide another valid address, other than the Premises, upon which service to Tenant can be perfected, then Tenant hereby appoints as its agent to receive the service of all dispossessory or distraint proceedings and notices thereunder the person in charge of or occupying the Premises at the time, and if no person shall be in charge of or occupy the same, then such service may be made by attaching the same to the main entrance of the Premises.

ARTICLE 17
DEFAULT AND LANDLORD’S OPTION TO CURE

Section 17.1.  Tenant’s Default.  For the purposes of this Section 17.1, if the term “Tenant”, as used in this Lease, refers to more than one person, then, such term shall be deemed to include all of such persons or any one of them; if any of the obligations of Tenant under this Lease are guaranteed, the term “Tenant,” as used in Section 17.1(e) and Section 17.1(f), shall be deemed to also include the guarantor or, if there is more than one guarantor, all or any one of them; and if this Lease has been assigned, the term “Tenant,” as used in Sections 17.1 (a) through (h), inclusive, shall be deemed to include the assignee and assignor, jointly and severally, unless Landlord shall have, in connection with such assignment, previously released the assignor from any further liability under this Lease, in which event the term “Tenant,” as used in said subparagraphs, shall not include the assignor that was previously released.

        Tenant’s continued occupancy and quiet enjoyment of the Premises and this Lease and the covenants and estate hereby granted are subject to the limitation that:

a)if Tenant fails to make any payment of Fixed Monthly Rent or Additional Rent within five (5) business days following Tenant’s receipt of written notice from Landlord that any such amount is due and unpaid, or

b)if Tenant abandons or vacates the Premises and concurrently discontinues the payment of Rent, or

c)if Tenant defaults in the keeping, observance or performance of any covenant or agreement set forth in Sections 6.1, 6.2 or 19.3, and if such default continues and is not cured by Tenant before the expiration of Landlord’s written 3-Day Notice to Cure or Quit; or

d)if Tenant defaults in the keeping, observance or performance of any covenant or agreement including any provisions of the rules and regulations established by Landlord (other than a default of the character referred to in Sections 17.1 (a), (b) or (c)), and if such default continues and is not cured by Tenant within thirty (30) days after Landlord has given to Tenant a notice specifying the same, or, in the case of such a default which for causes beyond Tenant’s reasonable control (including occupancy of a sublessee) cannot with due diligence be cured within such period of thirty (30) days, if Tenant:

i)does not, promptly upon Tenant’s receipt of such notice, advise Landlord of Tenant’s intention duly to institute all steps necessary to cure such default or

ii)does not duly institute and thereafter diligently prosecute to completion all steps (including, if appropriate, legal proceedings against a defaulting sublessee) necessary to cure the same, or

e)if Tenant fails to deliver the Estoppel Certificate required under Article 15 hereof within the time period specified, or

f)if Tenant:

i)applies for or consents to the appointment of, or the taking of possession by a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property;

ii)admits in writing its inability, or is generally unable, to pay its debts as such debts become due;

iii)makes a general assignment for the benefit of its creditors;

iv)commences a voluntary case under federal bankruptcy laws (as now or hereafter in effect);

v)files a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding up, or composition or adjustment of debts;

vi)fails to controvert in a timely or appropriate manner, or acquiesces in writing to, any petition filed against it in an involuntary case under such bankruptcy laws;

vii)take any action for the purpose of effecting any of the foregoing, or

g)if a proceeding or case is commenced, without the application or consent of Tenant, in any court of competent jurisdiction, seeking:

i)the liquidation, reorganization, dissolution, winding up, or composition or readjustment of debts, of Tenant; or

ii)the appointment of a trustee, receiver, custodian, liquidator or the like of Tenant or of all or a substantial part of its assets; or

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iii)similar relief with respect of Tenant under any law relating to bankruptcy, insolvency, reorganization, winding up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of sixty (60) days, or an order for relief against Tenant shall be entered in an involuntary case under such bankruptcy laws, or

h)if Tenant fails to take possession of and move into the Premises within fifteen (15) calendar days after Landlord tenders the same in writing to Tenant, unless Tenant acknowledges and accepts the Commencement Date as occurring within such fifteen-day time period, and pays Rent thereon from such Commencement Date;

then, in any or each such event, Tenant shall be deemed to have committed a material default under this Lease.

Section 17.2.  Landlord’s Option to Cure Tenant’s Default.  If Tenant enters into a default under this Lease, in lieu of Landlord’s issuance of a written notice, as specified hereinbelow, Landlord may cure the same at the sole expense of Tenant:

a)immediately and without notice in the case of emergency; if said default is specified in Sections 17.1 (a), (b) or (c), or if such default unreasonably interferes with the use by any other tenant of the Building; with the efficient operation of the Building; or will result in a violation of law or in a cancellation of any insurance policy maintained by Landlord, and

b)after the expiration of Landlord’s 3-Day Notice of Intent to Cure, in the case of any default other than those specified in Section 17.2 (a) hereinabove.

Section 17.3.  Landlord’s Option to Terminate this Lease.  In addition to any other remedies Landlord may have at law or in equity, Landlord shall be entitled to give to Tenant a written notice of intention to terminate this Lease at the expiration of three (3) days from the date of the giving of such notice (which notice shall be in addition to the notices described in Section 17.1, and shall not be given unless and until the cure period described in Section 17.1 has expired and the default has not been cured, except that this notice shall constitute the notice described in Section 17.1 (a)), and if such notice is given by Landlord, and Tenant fails to cure the defaults specified therein, then this Lease and the Term and estate hereby granted (whether or not the Commencement Date has already occurred) shall terminate upon the expiration of such three (3) day period (a “Default Termination”), with the same effect as if the last of such three (3) days were the Termination Date, except that Tenant shall remain liable for damages as provided hereinbelow or pursuant to law.

Section 17.4.  Certain Payments.  Bills for all reasonable costs and expenses incurred by Landlord in connection with any performance by it under Section 17.2 shall be payable, as Additional Rent, pursuant to the provisions of Section 4.3.

Section 17.5.  Certain Waivers.  Unless Tenant has submitted documentation that it validly disputes Landlord’s billing for Fixed Monthly Rent hereunder, or is completing an audit of Landlord’s Operating Expense Statement, if Tenant is in default in payment of Fixed Monthly Rent or Additional Rent hereunder, Tenant waives the right to designate the items against which any payments made by Tenant are to be credited.  In lieu thereof, Landlord may apply any payments received from Tenant to the then-oldest billing remaining unpaid on Tenant’s rental account or to any other payment due from Tenant, as Landlord sees fit.

Section 17.6.  Landlord Default.  Notwithstanding anything to the contrary set forth in this Lease, Landlord shall not be in default in the performance of any obligation required to be performed by Landlord pursuant to this Lease unless:

a)in the event such default is with respect to the payment of money, Landlord fails to pay such unpaid amounts within five (5) business days of written notice from Tenant that the same was not paid when due, or

b)in the event such default is other than the obligation to pay money, Landlord fails to perform such obligation within thirty (30) days after the receipt of notice from Tenant specifying in detail Landlord’s failure to perform; provided, however, if the nature of Landlord’s obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be in default under this Lease if it shall commence such performance within such thirty (30) days period and thereafter diligently pursue the same to completion within a reasonable time period.

        Upon any such default by Landlord under this Lease, Tenant may, except as otherwise specifically provided in this Lease to the contrary, exercise any of its rights provided at law or in equity.

ARTICLE 18
DAMAGES; REMEDIES; RE-ENTRY BY LANDLORD; ETC.

Section 18.1.  Damages.  If Landlord terminates this Lease, pursuant to the provisions of Section 17.3 (a “Default Termination”), then Landlord may recover from Tenant the total of:

a)the worth at the time of award of the unpaid Fixed Monthly Rent and Additional Rent earned to the date of such Default Termination; and

b)the worth at the time of award of the amount by which the unpaid Fixed Monthly Rent and Additional Rent which would have been earned after the date of such Default Termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; and

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c)the worth at the time of award of the amount by which the unpaid Fixed Monthly Rent and Additional Rent which would have been earned for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; and

d)any other amount reasonably necessary to compensate Landlord for all of the detriment proximately caused by Tenant’s failure to observe or perform any of its covenants and agreements under this Lease or which in the ordinary course of events would be likely to result therefrom, including, without limitation, the payment of the reasonable expenses incurred or paid by Landlord in re-entering and securing possession of the Premises and in the reletting thereof (including, without limitation, altering and preparing the Premises for new tenants and brokers’ commission); and

e)at Landlord’s sole election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time under applicable California laws.

Section 18.2.  Computations:  The “worth at the time of award” is computed:

a)in paragraphs (a) and (b) above, by allowing interest at the rate of ten percent (10%) per annum (but in no event in excess of the maximum rate permitted by law); and

b)in paragraph (c) above, by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).

c)For purposes of computing unpaid rental which would have accrued and become payable under this Lease, unpaid rental shall consist of the sum of:

i)the total Fixed Monthly Rent for the balance of the Term, plus

ii)a computation of Tenant’s Share of Additional Rent due under the Lease including, without limitation, Tenant’s Proportionate Share of any increase in Operating Expenses (including real estate taxes) for the balance of the Term.  For purposes of computing any increases due Landlord hereunder, Additional Rent for the calendar year of the default and for each future calendar year in the Term shall be assumed to be equal to the Additional Rent for the calendar year prior to the year in which default occurs, compounded at a rate equal to the mean average rate of inflation for the preceding five calendar years as determined by the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index (All Urban Consumers, all items, 1982-84 equals 100) for the metropolitan area or region of which Los Angeles, California is a part.  If such index is discontinued or revised, the average rate of inflation shall be determined by reference to the index designated as the successor or substitute index by the government of the United States.

Section 18.3.  Re-Entry by Landlord.

a)If a Default Termination occurs or any default specified in Sections 17.1 (a) through (g) occurs and continues beyond the period of grace (if any) therefor, Landlord or Landlord’s authorized representatives may re-enter the Premises and remove all persons and all property therefrom, either by summary dispossession proceedings or by any suitable action or proceeding at law, without being liable to indictment, prosecution or damages therefor, and may repossess and enjoy the Premises.  No re-entry or repossession of the Premises by Landlord or its representatives under this Section 18.3 shall be construed as an election to terminate this Lease unless a notice of such election is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction.  The words “re-enter”, “re-entry” and “re-entering” as used herein are not restricted to their technical legal meanings.

b)If any default specified in Sections 17.1 (a) through (g) occurs and continues beyond the period of grace (if any) therefor, then if Landlord does not elect to terminate this Lease Landlord may, from time to time and without terminating this Lease, enforce all its rights and remedies under this Lease, including the right to recover the Fixed Monthly Rent and Additional Rent as the same becomes payable by Tenant hereunder.

i)If Landlord consents thereto, Tenant may sublet the Premises or any part thereof (which consent Landlord agrees will not be unreasonably withheld), subject to Tenant’s compliance with the requirements of Article 11 of this Lease.  So long as Landlord is exercising this remedy it will not terminate Tenant’s right to possession of the Premises, but it may engage in the acts permitted by Section 1951.4(c) of the California Civil Code.

c)If Tenant abandons the Premises in breach of this Lease, Landlord shall have the right to relet the Premises or any part thereof on such terms and conditions and at such rentals as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs in and to the Premises necessary to reletting.  If Landlord so elects to relet, then gross rentals received by Landlord from the reletting shall be applied:

i)first, to the payment of the reasonable expenses incurred or paid by Landlord in re-entering and securing possession of the Premises and in the reletting thereof (including, without limitation, altering and preparing the Premises for new tenants and brokers’ commissions);

ii)second, to the payment of the Fixed Monthly Rent and Additional Rent payable by Tenant hereunder; and

iii)third, the remainder, if any, to be retained by Landlord and applied to the payment of future Fixed Monthly Rent and Additional Rent as the same become due.

        Should the gross rentals received by Landlord from the reletting be insufficient to pay in full the sums stated in Section 18.3 (a) and (b) hereinabove, Tenant shall, upon demand, pay the deficiency to Landlord.

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Section 18.4.  Certain Waivers.  After Landlord has actually obtained possession of the Premises pursuant to any lawful order of possession granted in a valid court of law, Tenant thereafter waives and surrenders for Tenant, and for all claiming under Tenant, all rights and privileges now or hereafter existing to redeem the Premises (whether by order or judgment of any court or by any legal process or writ); to assert Tenant’s continued right to occupancy of the Premises; or to have a continuance of this Lease for the Term hereof.  Tenant also waives the provisions of any law relating to notice and/or delay in levy of execution in case of an eviction or dispossession for nonpayment of rent, and of any successor or other law of like import.

Section 18.5.  Cumulative Remedies.  The remedies of Landlord provided for in this Lease are cumulative and are not intended to be exclusive of any other remedies to which Landlord may be lawfully entitled.  The exercise by Landlord of any remedy to which it is entitled shall not preclude or hinder the exercise of any other such remedy.

ARTICLE 19
INSURANCE

Section 19.1.  Landlord Obligations:

a)Landlord shall secure and maintain during the Term of this Lease the following insurance:

i)Commercial General Liability and Umbrella Liability insurance relating to Landlord’s operation of the Building, for personal and bodily injury and death, and damage to other’s property.

ii)All risk of standard fire insurance and extended coverage including vandalism and malicious mischief and sprinkler leakage endorsements relating to the Building, the parking facilities, the common area improvements and any and all improvements installed in, on or upon the Premises and affixed thereto (but excluding Tenant’s fixtures, furnishings, equipment, personal property or other elements of Tenant’s Property), and provided that the premium cost for coverage of the Improvements to the Premises in excess of a total value equal to Thirty-Five Dollars ($35.00) per square foot of Usable Area in the Premises shall be directly reimbursed from Tenant to Landlord, pursuant to the provisions of Section 4.3 of this Lease;

iii)Such other insurance (including, without limitation, boiler and machinery, rental loss, earthquake and/or flood insurance) as Landlord reasonably elects to obtain or any Lender requires.

b)Insurance effected by Landlord under this Section 19.1 will be:

i)In amounts which Landlord from time to time determines sufficient or which any Lender requires; and

ii)Subject to such deductibles and exclusions as Landlord deems appropriate.

c)Notwithstanding any contribution by Tenant to the cost of insurance premiums as provided herein, Tenant acknowledges that Tenant has no right to receive any proceeds from any insurance policies carried by Landlord.

Section 19.2.  Tenant Obligations.

a)At least ten (10) days prior to the earlier of the Commencement Date or Tenant’s anticipated early possession date of the Premises and thereafter during the Term of this Lease, Tenant shall secure and maintain, at its own expense throughout the Term of this Lease the following minimum types and amounts of insurance, in form and in companies acceptable to Landlord, insuring Tenant, its employees, agents and designees:

i)Workers’ Compensation Insurance, the amount and scope of which shall be the greater of (1) the insurance currently maintained by Tenant, or (2) the amount and scope required by statute or other governing law.

ii)Employer’s Liability Insurance in amounts equal to the greater of (1) the insurance currently maintained by Tenant, or (2) the following:  Bodily Injury by accident - $1,000,000 each accident; Bodily Injury by disease - $1,000,000 policy limit; and Bodily Injury by disease - $1,000,000 each employee.

iii)Commercial General Liability and Umbrella Liability Insurance on an occurrence basis, without claims-made features, with bodily injury and property damage coverage in an amount equal to the greater of (1) the insurance currently maintained by Tenant or (2) a combined single limit of $1,000,000; and such insurance shall include the following coverages:  (A) Premises and Operations coverage with X, C, and U exclusions for explosion, collapse, and underground property damage deleted under both premises/operations and contractual liability coverage parts, if applicable; (B) Owner and Contractor Protective coverage; (C) Products and Completed Operations coverage; (D) Blanket Contractual coverage, including both oral and written contracts; (E) Personal Injury coverage; (F) Broad Form Comprehensive General Liability coverage (or its equivalent); and (G) Broad Form Property Damage coverage, including completed operations.

iv)All risk of standard fire insurance and extended coverage with vandalism and malicious mischief and sprinkler leakage endorsements, insuring fixtures, glass, equipment, merchandise, inventory and other elements of Tenant’s Property in and all other contents of the Premises.  Such insurance shall be in an amount equal to 100% of the replacement value thereof (and Tenant shall re-determine the same as frequently as necessary in order to comply herewith).  The proceeds of such insurance, so long as this Lease remains in effect, shall be used to repair and/or replace the items so insured.

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v)A commercially reasonable and customary policy of business interruption insurance with respect to the operation of Tenant’s business.

vi)Any other forms of insurance Landlord’s lender may require from time to time, in form and amounts and for insurance risks against which a prudent tenant of comparable size in a comparable business would protect itself, and as requested by other landlords of similar buildings in the Beverly Hills area for similarly sized premises and uses.

b)All insurance policies maintained to provide the coverages required herein shall:

i)Be issued by insurance companies authorized to do business in the state in which the leased premises are located, and with companies rated, at a minimum “A- VII” by A.M. Best, so long as such rating is available on a commercially reasonable basis;

ii)Be subject to the prior approval of Landlord (which approval shall not be unreasonably withheld) as to form, substance and insurer;

iii)Provide for a deductible only so long as Tenant shall remain liable for payment of any such deductible in the event of any loss;

iv)Contain appropriate cross-liability endorsements denying Tenant’s insurers the right of subrogation against Landlord as to risks covered by such insurance, without prejudice to any waiver of indemnity provisions applicable to Tenant and any limitation of liability provisions applicable to Landlord hereunder, of which provisions Tenant shall notify all insurance carriers;

v)Contain provisions for at least ten (10) days advance written notice to Landlord of cancellation due to non-payment and of material modification resulting in a violation of the requirements of this Section 19.2 or cancellation for any reason other than non-payment; and

vi)Stipulate that coverages afforded under such policies are primary insurance as respects Landlord and that any other insurance maintained by Landlord are excess and non-contributing with the insurance required hereunder.

c)No endorsement limiting or excluding a required coverage is permitted.

d)Tenant shall deliver to Landlord upon execution of this Lease, written evidence of insurance coverages required herein.  Tenant shall deliver to Landlord no less than fifteen (15) days prior to the expiration of any required coverage, written evidence of the renewal or replacement of such coverage.  Landlord’s failure at any time to object to Tenant’s failure to provide the specified insurance or written evidence thereof (either as to the type or amount of such insurance) shall not be deemed as a waiver of Tenant’s obligations under this Section.

e)Landlord shall be named as an additional insured on the Tenant’s policies of General Liability and Umbrella Liability insurance and as a loss payee on the Tenant’s policies of All Risk insurance as their interest may appear.  Tenant shall deliver to Landlord the appropriate endorsements evidencing additional insured and loss payee status.  Any claim for loss under said insurance policies shall be payable notwithstanding any act, omission, negligence, representation, misrepresentation or other conduct or misconduct of Tenant which might otherwise cause cancellation, forfeiture or reduction of such insurance.

f)The insurance requirements in this Section shall not in any way limit, in either scope or amount, the indemnity obligations separately owed by Tenant to Landlord under the Lease.

g)Nothing herein shall in any manner limit the liability of Tenant for non-performance of its obligations or for loss or damage for which Tenant is responsible.  The aforementioned minimum limits of policies shall in no event limit the liability of Tenant hereunder.

h)Tenant may, at its option, satisfy its insurance obligations hereunder by policies of so-called blanket insurance carried by Tenant provided that the same shall, in all respects, comply with the provisions hereof.  In such event, Tenant shall not be deemed to have complied with its obligations hereunder until Tenant shall have obtained and delivered to Landlord a copy of each such policy together with an appropriate endorsement or certificate applicable to and evidencing full compliance with the specific requirements of the Lease (irrespective of any claim which may be made with respect to any other property or liability covered under such policy), and until the same shall have been approved by Landlord in writing.

Section 19.3.  Compliance with Building Insurance Requirements.  After Tenant takes occupancy of the Premises, Tenant shall not violate or permit in, on or upon the Premises the violation of any condition imposed by such standard fire insurance policies as are normally issued for office buildings in the City or County in which the Building is located.  Tenant shall not do, suffer or permit anything to be done, or keep, suffer or permit anything to be kept, in the Premises which would increase the risk ratings or premium calculation factors on the Building or property therein (collectively an “Increased Risk”), or which would result in insurance companies of good standing refusing to insure the Building or any property appurtenant thereto in such amounts and against such risks as Landlord may reasonably determine from time to time are appropriate.

        Notwithstanding the above, if additional insurance is available to cover such Increased Risk, Tenant shall not be in default hereunder if:

a)Tenant authorizes Landlord in writing to obtain such additional insurance; and

b)prepays the annual cost thereof to Landlord for such additional coverage, as well as the additional costs, if any, of any increase in Landlord’s other insurance premiums resulting from the existence or continuance of such Increased Risk.

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Section 19.4.  Mutual Waiver of Subrogation.   Tenant and Landlord agree that if a loss occurs due to any of the perils for which they are required hereunder to provide insurance, each party shall look solely to the insurance policies covering such loss or risk for recovery and each party waives all claims of recovery against the other for damage or loss to its property due to hazards covered by the insurance maintained by that party or which would have been covered by the policies of insurance which should have been obtained pursuant to this Lease or which should have been covered thereby.  Landlord and Tenant hereby grant to each other, on behalf of any insurer providing insurance to either of them with respect to the demised premises, a waiver of any right of subrogation that any such insurer of one party may acquire against the other by virtue of payment of any loss under such insurance.

Section 19.5.  Failure to Secure.  If at any time during the Term, and after expiration of ten (10) business days prior written demand therefore from Landlord, Tenant fails to:

a)provide Landlord with access to a registered insurance broker of record that can verify Tenant’s compliance with  the requirement contained in this Article 19; or

b)provide documentation reasonably acceptable to Landlord that Tenant has secured and maintained the insurance coverage required hereunder,

then such failure shall be considered a material default under the Lease, and Landlord shall have the option, but not the obligation, without further notice or demand to obtain such insurance on behalf of or as the agent of Tenant and in Tenant’s name.

        Tenant shall pay Landlord’s billing for the premiums associated with such insurance policy or policies within fifteen (15) days after receipt of Landlord’s billing, as well as such other reasonable costs and fees arising out of such default, together with interest on the entire amount so advanced by Landlord, at the rate of ten percent (10%) per annum, computed from the date of such advance.  Such advances, if made by Landlord, shall be construed as and considered Additional Rent under this Lease.

ARTICLE 20
MISCELLANEOUS

Section 20.1.  Entire Agreement.  This Lease, including the exhibits and guaranty of lease, if any, annexed hereto, contains all of the agreements and understandings relating to the leasing of the Premises and the obligations of Landlord and Tenant in connection therewith and neither party and no agent or representative thereof has made or is making, and neither party in executing and delivering this Lease is relying upon, any warranties or representations, except to the extent set forth in this Lease.  All understandings and agreements heretofore had between Landlord and Tenant relating to the leasing of the Premises are merged in this Lease, which alone fully and completely expresses their agreement.  The Riders (if any) and Exhibits annexed to this Lease and the Construction Agreement are hereby incorporated herein and made a part hereof.   This Lease includes, and incorporates herein, Exhibits A , B, C, D, F and H.

Section 20.2.  No Waiver or Modification.  The failure of Landlord or Tenant to insist in any instance upon the strict keeping, observance or performance of any covenant or agreement contained in this Lease or to exercise any election herein contained shall not be construed as a waiver or relinquishment for the future of such covenant or agreement, but the same shall continue and remain in full force and effect.  No waiver or modification by either Landlord or Tenant of any covenant or agreement contained in this Lease shall be deemed to have been made unless the same is in writing executed by the party whose rights are being waived or modified.  No surrender of possession of any part of the Premises shall release Tenant from any of its obligations hereunder unless accepted in writing by Landlord.  The receipt and retention by Landlord, and the payment by Tenant, of Fixed Monthly Rent or Additional Rent with knowledge of the breach of any covenant or agreement contained in this Lease shall not be deemed a waiver of such breach by either Landlord or Tenant.

Section 20.3.  Time of the Essence.  Time is of the essence of this Lease and of all provisions hereof, except in respect to the delivery of possession of the Premises at the Commencement Date.  Nothing set forth herein negates any notice and cure periods set forth in this Lease.

Section 20.4.  Force Majeure.  For the purposes of this Lease, “Force Majeure” shall be defined as any or all prevention, delays or stoppages and/or the inability to obtain services, labor, materials or reasonable substitutes therefor, when such prevention, delay, stoppage or failure is due to strikes, lockouts, labor disputes, acts of God, governmental actions, civil commotion, fire or other casualty, and/or other causes beyond the reasonable control of the party obligated to perform, except that Force Majeure may not be raised as a defense for Tenant’s non-performance of any obligations imposed by the Lease with regard to the payment of Fixed Monthly Rent and/or Additional Rent.

        Notwithstanding anything to the contrary contained in this Lease, Force Majeure shall excuse the performance of such party for a period equal to any such prevention, delay, stoppage or inability.  Therefore, if this Lease specifies a time period for performance of an obligation by either party, that time period shall be extended by the period of any delay in such party’s performance caused by a Force Majeure.

Section 20.5.  Broker.  Landlord and Tenant represent to one another that each has dealt with no broker in connection with this Lease other than Douglas, Emmett and Company and First Property Realty Corporation.  Landlord and Tenant shall hold one another harmless from and against any and all liability, loss, damage, expense, claim, action, demand, suit or obligation arising out of or relating to a breach by the indemnifying party of such representation.  Landlord agrees to pay all commissions due to the brokers listed above created by Tenant’s execution of this Lease.

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Section 20.6.  Governing Law.  This Lease shall be governed by and construed in accordance with the laws of the State of California.

Section 20.7.  Submission of Lease.  Whether or not rental deposits have been received by Landlord from Tenant, and whether or not Landlord has delivered to Tenant an unexecuted draft version of this Lease for Tenant’s review and/or signature, no contractual or other rights shall exist between Landlord and Tenant with respect to the Premises, nor shall this Lease be valid and/or in effect until this Lease has been fully executed and a duplicate original of said fully-executed Lease has been delivered to both Landlord and Tenant.

        The submission of this Lease to Tenant shall be for examination purposes only, and does not and shall not constitute a reservation of or an option for Tenant to lease, or otherwise create any interest by Tenant in the Premises or any other offices or space situated in the Building.  Execution of this Lease by Tenant and its return to Landlord shall not be binding upon Landlord, notwithstanding any time interval, until Landlord has in fact executed and delivered a fully-executed duplicate original of this Lease to Tenant.  Landlord and Tenant agree hereby to authorize transmission of all or portions of documents, including signature lines thereon, by facsimile machines, and further authorize the other party to rely conclusively upon such facsimile transmissions as if the original had been received.

Sections 20.8.  Captions.  The captions in this Lease are for convenience only and shall not in any way limit or be deemed to construe or interpret the terms and provisions hereof.

Section 20.9.  Singular and Plural, Etc.  The words “Landlord” and “Tenant”, as used herein, shall include the plural as well as the singular.  Words used in the masculine gender include the feminine and neuter.  If there be more than one Landlord or Tenant the obligations hereunder imposed upon Landlord and Tenant shall be joint and several.

Section 20.10.  Independent Covenants.  Except where the covenants contained in one Article of this Lease are clearly affected by or contingent upon fulfillment by either party of another Article or paragraph of this Lease, this Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any actions hereunder at Landlord’s expense or to any set-off of the Rent or other amounts owing hereunder against Landlord; provided, however, that the foregoing shall in no way impair the right of Tenant to commence a separate action against Landlord for the violation by Landlord of the provisions hereof so long as notice is first given to Landlord and any holder of a mortgage or deed of trust covering the Building, Real Property or any portion thereof, of whose address Tenant has theretofore been notified, and an opportunity is granted to Landlord and such holder to correct such violations as provided above.

Section 20.11.  Severability.  If any covenant or agreement of this Lease or the application thereof to any person or circumstance shall be held to be invalid or unenforceable, then and in each such event the remainder of this Lease or the application of such covenant or agreement to any other person or any other circumstance shall not be thereby affected, and each covenant and agreement hereof shall remain valid and enforceable to the fullest extent permitted by law.

Section 20.12.  Warranty of Authority.  If Landlord or Tenant signs as a corporation, limited liability company or a partnership, each of the persons executing this Lease on behalf of Landlord or Tenant hereby covenant and warrant that each is a duly authorized and existing entity, that each has and is qualified to do business in California, that the persons signing on behalf of Landlord or Tenant have full right and authority to enter into this Lease, and that each and every person signing on behalf of either Landlord or Tenant are authorized to do so.

Section 20.13.  No Representations or Warranties.  Neither Landlord nor Landlord’s agents or attorneys have made any representations or warranties with respect to the Premises, the Building or this Lease, except as expressly set forth herein, and no rights, easements or licenses are or shall be acquired by Tenant by implication or otherwise.

Section 20.14.  No Joint Venture or Partnership.  This Lease shall not be deemed or construed to create or establish any relationship of partnership or joint venture or similar relationship or arrangement between Landlord and Tenant hereunder.

Section 20.15.  Tenant’s Obligations At Its Sole Expense.  Notwithstanding the fact that certain references in this Lease to acts required to be performed by Tenant hereunder, or to breaches or defaults of this Lease by Tenant, omit to state that such acts shall be performed at Tenant’s sole expense, or omit to state that such breaches or defaults by Tenant are material, unless the context clearly implies to the contrary each and every act to be performed or obligation to be fulfilled by Tenant pursuant to this Lease shall be performed or fulfilled at Tenant’s sole expense, and all breaches or defaults by Tenant hereunder shall be deemed material if not cured with any applicable notice and/or cure period.

Section 20.16.  Attorneys’ Fees.  If litigation is instituted between Landlord and Tenant, the cause for which arises out of or in relation to this Lease, the prevailing party in such litigation shall be entitled to receive its costs (not limited to court costs), expenses and reasonable attorneys’ fees from the non-prevailing party as the same may be awarded by the court.

Section 20.17.  Waiver of Trial by Jury.  In the interest of saving time and expense, Landlord and Tenant hereby consent to trial without a jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other or their successor-in-interest in respect to any matters arising out of or relating to this Lease.

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Section 20.18.  No Merger.  The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord terminate all or any existing subleases or subtenancies, or may, at the option of Landlord, operate as an assignment to it of any or all such subleases or subtenancies.

Section 20.19.  Prohibition Against Recording.  Except as provided in Section 14.3 of this Lease, neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant, and the recording thereof in violation of this provision shall make this Lease null and void at Landlord’s election.

Section 20.20.  Hazardous Waste.  Tenant specifically agrees that, except for such limited quantities of office materials and supplies as are customarily used in Tenant’s normal business operations, Tenant shall not engage or permit at any time, any operations or activities upon, or any use or occupancy of the Premises, or any portion thereof, for the purpose of or in any way involving the handling, manufacturing, treatment, storage, use, transportation, spillage, leakage, dumping, discharge or disposal (whether legal or illegal, accidental or intentional) of any hazardous substances, materials or wastes, or any wastes regulated under any local, state or federal law.

        Tenant shall, during the Term, remain in full compliance with all applicable laws governing the handling, manufacturing, treatment, storage, disposal, discharge, use, and transportation of hazardous substances, materials or wastes, and any wastes regulated under any local, state or federal law.  Tenant will remain in full compliance with the terms and conditions of all permits and licenses issued to it by any governmental authority on account of any or all of its activities on the Premises.

        Landlord shall not cause or permit any hazardous material to be brought, kept, or used in or about the Real Property in violation of any Code, and shall indemnify, defend, and hold Tenant harmless from and against any and all claims, demands, obligations, penalties, fines, liabilities, losses and expenses (including, without limitation, reasonable attorneys’ fees and costs) arising out of or resulting from the presence of any hazardous material in, on or under the Building, except to the extent arising from any hazardous material introduced into the Building by Tenant or Tenant’s agents, employees, representatives or contractors.

Section 20.21.  Transportation Management.  Tenant shall, at Tenant’s sole expense, fully comply with all present or future programs intended to manage parking, transportation or traffic in and around the Building, when the same have been mandated by an outside governmental authority having jurisdiction therefor and not when required for the convenience of Landlord.

        In connection therewith, Tenant shall be responsible for the transportation planning and management for all of Tenant’s employees while located at the Premises, by working directly with Landlord, any governmental transportation management organization or any other transportation-related committees or entities reasonably designated by Landlord.  Such programs may include, without limitation:

a)restrictions on the number of peak-hour vehicle trips generated by Tenant;

b)requirements for increased vehicle occupancy;

c)implementing an in-house ride-sharing program and/or appointing an employee transportation coordinator;

d)working with employees of any Building (or area-wide) ridesharing program manager;

e)instituting employer-sponsored incentives (financial or in-kind) to encourage employees to ridesharing; and

f)utilizing flexible work shifts for employees.

Section 20.22.  Signage.  Tenant may not install, inscribe, paint or affix any awning, shade, sign, advertisement or notice on or to any part of the outside or inside of the Building, or in any portion of the Premises visible to the outside of the Building or common areas without Landlord’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed.

        All signage and/or directory listings installed on behalf of Tenant, whether installed in, on or upon the public corridors, doorways, Building directory and/or parking directory (if any), or in any other location whatsoever visible outside of the Premises, shall be installed by Landlord, at Tenant’s sole expense.

        Tenant’s identification on or in any common area of the Building shall be limited to Tenant’s name and suite designation, and in no event shall Tenant be entitled to the installation of Tenant’s logo in any portion of the Building or common areas.  Furthermore, the size, style, and placement of letters to be used in any of Tenant’s signage shall be determined by Landlord, in Landlord’s sole discretion, in full conformance with previously-established signage program for the Building.

        Except as specified hereinbelow, Tenant shall only be entitled to one (1) listing on the Building directory, or any parking directory ancillary thereto, which shall only show Tenant’s business name and suite designation.  Tenant shall also be entitled to a maximum of two (2) additional listings on said Building and/or parking directory, which listings shall be limited solely to Tenant’s officers, employees, subsidiaries, affiliates and/or sublessees, if any.Landlord shall permit Tenant to designate the names connected with Tenant on the directory board in the lobby of the Building.  Tenant may elect to have its names grouped in one location on the directory board in any area designated by Landlord in addition to having such names listed alphabetically, one (1) line per 1,000 rentable square feet lease, not to exceed 20 lines, subject to availability.  Tenant shall also be entitled to building standard suite identity signage at the entrance of the Premises.

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Section 20.23.  Disclosure.  Landlord and Tenant acknowledge that principals of Landlord have a financial interest in Douglas Emmett Realty Advisors and P.L.E. Builders.

Section 20.24.  Confidentiality.  Landlord and Tenant agree that the covenants and provisions of this Lease shall not be divulged to anyone not directly involved in the management, administration, ownership, lending against, or subleasing of the Premises, which permitted disclosure shall include, but not be limited to, the board members, legal counsel and/or accountants of either Landlord or Tenant.

Section 20.25.  Guaranty.  INTENTIONALLY DELETED

Section 20.26.  Asbestos Notification.  Tenant acknowledges that it has received and reviewed Exhibit F attached hereto and incorporated herein.

ARTICLE 21
PARKING

Section 21.1.  Parking.  Throughout the Term, Tenant shall have the right, but not the obligation, to purchase and assign to its employees up to the number of parking permits set forth in Section 21.1 of the Basic Lease Information (“BLI”).  Notwithstanding the foregoing, Tenant shall be obligated, during each month of the Term, to purchase no fewer than 1.5 parking permits per each 1,000 usable square feet then leased by Tenant under this Lease.  In addition, if, during any calendar month of the Term, Tenant elects to purchase less than the total number of parking permits to which Tenant is entitled hereunder, Tenant shall thereafter lose the right to purchase the number of parking permits which Tenant so elected not to purchase.  Except as otherwise permitted by Landlord’s management agent in its reasonable discretion, and based on the availability thereof, in no event shall Tenant be entitled to purchase more than the number of parking permits listed in the BLI.  If additional parking permits are available on a month-to-month basis, which determination shall be in the sole discretion of Landlord’s parking agent, Tenant shall be permitted to purchase one or more of said permits on a first-come, first-served basis.

        The current rates for such permits are:  $165.00 per single unreserved permit; $220.00 per single reserved permit; $175.00 per single VIP permit, for Level P-1; $140.00 per single unreserved permit for Level P-2; and $120.00 per single unreserved permit in Levels 3 and 4, per month.

        Said parking permits shall allow Tenant to park in the Building parking facility at the prevailing monthly parking rate then in effect, which rate may be thereafter changed from time to time, in Landlord’s sole discretion.  Notwithstanding the foregoing, the rate payable by Tenant for each such category of parking shall not increase by more than six percent (6%) per annum, on a cumulative basis. Landlord shall retain sole discretion to designate the location of each parking space, and whether it shall be assigned, or unassigned, unless specifically agreed to otherwise in writing between Landlord and Tenant.

        Guests and invitees of Tenant shall have the right to use, in common with guests and invitees of other tenants of the Building, the transient parking facilities of the Building at the then-posted parking rates and charges, or at such other rate or rates and charges as may be agreed upon from time to time between Landlord and Tenant in writing.  Such rate(s) or charges may be changed by Landlord from time to time in Landlord’s sole discretion, and shall include, without limitation, any and all fees or taxes relating to parking assessed to Landlord for such parking facilities.  Landlord shall make parking validations available to Tenant upon Tenant’s payment of then-prevailing rate therefor.

        Tenant or Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders continued use of said transient, as well as monthly parking, shall be contingent upon Tenant and Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders continued compliance with the reasonable and non-discriminatory rules and regulations adopted by Landlord, which rules and regulations may change at any time or from time to time during the Term hereof in Landlord’s sole discretion.

ARTICLE 22
CONCIERGE SERVICES

Section 22.1.  Provision of Services.  Landlord and Tenant acknowledge and understand that Landlord may, from time to time, make it possible for Tenant to use or purchase a variety of personal services which may include, but not be limited to, personal shopping, assistance with choosing or obtaining travel reservations, accommodations and/or tickets; tickets to performances, recommendations to eating establishments; and the like (collectively “Concierge Services”).

        Tenant acknowledges that said Concierge Services are provided by Landlord solely as an accommodation to and for the convenience of Tenant and Tenant’s agents, contractors, directors, employees, licensees, officers, partners or shareholders, and Landlord does not make any representation, warranty or guarantee, express or implied, as to the quality, value, accuracy, or completeness of said Concierge Services, or whether or not Tenant shall be satisfied with the services and/or goods so provided and/or recommended. Landlord hereby disclaims any control over the variety or sufficiency of such services to be provided.

        Tenant acknowledges that Tenant is not required to use such Concierge Services as a condition precedent to compliance with the Lease; that Tenant’s use of such Concierge Services is strictly voluntary, and at the sole discretion and control of Tenant.  Tenant shall independently make such financial arrangements for payment of the services provided as Tenant deems reasonable and of value.

Section 22.2.  Indemnification and Release by Tenant.  Notwithstanding anything to the contrary contained in the Lease, any city, county, state or federal ordinance, statute, regulation or law, Tenant’s

31

signature hereon indicates Tenant’s agreement that solely as it relates to the purchase or use of Concierge Services by Tenant or the agents, contractors, employees, officers, partners, and/or shareholders of Tenant, Tenant, on behalf of itself and its agents, contractors, directors, employees, licensees, officers, partners or shareholders, does and shall hereby forever hold Landlord and Landlord’s affiliates, agents, assigns, contractors, directors, employees, officers, parent organization, partners, representatives, shareholders, and subsidiaries (collectively the “Indemnitees”) harmless from and forever release, remise, discharge, acquit and relieve the Indemnitees from and against any and all claims, demands, causes of action, obligations, liabilities, agreements, damages, cost (including, without limitation, reasonable attorneys’ fees), loss, or liability of any kind or nature, whether asserted, known or unknown, suspected or unsuspected, in any way connected with, which any one or more of the Indemnitees may sustain or incur by reason of, related to, associated with, or arising out of the provision, use or the rendering of any such Concierge Services or the delivery of such Concierge Services to Tenant or Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders.

        Solely as it relates to the purchase or use of Concierge Services by Tenant or the agents, contractors, employees, officers, partners, and/or shareholders of Tenant, Tenant hereby expressly waives all rights and benefits conferred by the provisions of Section 1542 of the Civil Code of the State of California, which reads as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release and which, if known by him, must have materially affected his settlement with the debtor.”

In so doing, Tenant acknowledges that it will be unable to make any claim against Landlord or any other Indemnitees for damages that may exist as of the date or after the date of this release, but which Tenant does not know to exist, and which, if known, would materially have affected Tenant’s decision to execute this document, regardless of whether Tenant’s lack of knowledge, if any, is the result of ignorance, oversight, error, negligence or other cause.

ARTICLE 23
OPTION TO EXTEND TERM

Section 23.1.  Option to Extend Term.  Provided Tenant is not in material default after the expiration of notice and the opportunity to cure on the date Tenant gives notice to Landlord of Tenant’s intent to exercise its rights pursuant to this Article 23, Tenant is given the option to extend the term for an additional five (5) year period (the “Extended Term”), commencing the next calendar day after the expiration of the Term (the “Option”).  The Option shall apply only to the entirety of the Premises, and Tenant shall have no right to exercise the Option as to only a portion of the Premises.

        Tenant’s exercise of this Option is contingent upon Tenant giving written notice to Landlord (the “Option Notice”) of Tenant’s election to exercise its rights pursuant to this Option by Certified Mail, Return Receipt Requested, or by reputable overnight courier, or by personal delivery, with signed receipt, no more than twelve (12) and no less than eight (8) months prior to the Termination Date.

Section 23.2.  Fixed Monthly Rent Payable.  The Rent payable by Tenant during the Extended Term (“Option Rent”) shall be equal to the Fair Market Value of the Premises as of the commencement date of the Extended Term.  The term “Fair Market Value” shall be defined as the annual rent per rentable square foot that Landlord has accepted in other current similar transactions in the Building, or if there are not a sufficient number of comparable current similar transactions in the Building, then what a willing, comparable new, non-equity tenant would pay, and what a willing comparable landlord in the Beverly Hills area would accept at arms length, in either case giving appropriate consideration to brokerage commissions, if any, which would be payable by Landlord in similar transactions, all economic benefits achievable by Landlord, such as Fixed Monthly Rent (including periodic adjustments), Additional Rent in the form of Operating Expense reimbursements, and any and all  monetary or non-monetary concessions (including [x] a then-current base year or expense stop number, as the case may be, [y] any tenant improvement allowance, and [z] any rent abatement, if any) that may be given in the market place to a comparable new tenant, as is chargeable for a similar use of comparable space for a comparable term in a Comparable Building.

        .

        Landlord and Tenant shall have thirty (30) days (the “Negotiation Period”) after Landlord receives the Option Notice in which to agree on the Fair Market Value.  If Landlord and Tenant agree on the Fair Market Value during the Negotiation Period, they shall immediately execute an amendment to the Lease extending the Term and stating the Fair Market Value.

Section 23.3.  Appraisers to Set Fixed Rent.  If Landlord and Tenant are unable to agree on the Fair Market Value during the Negotiation Period, then:

a)Landlord and Tenant, each at its own cost, shall select an independent real estate appraiser with at least ten (10) years full-time commercial appraisal experience in the area in which the Premises are located, and shall provide written notice to the other party of the identity and address of the appraiser so appointed.  Landlord and Tenant shall make such selection within ten (10) days after the expiration of the Negotiation Period.

b)Within thirty (30) days of having been appointed to do so (the “Appraisal Period”), the two (2) appraisers so appointed shall meet and set the Fair Market Value for the Extended Term.  In setting the Fair Market Value, the appraisers shall solely consider the use of the Premises for general office purposes.

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Section 23.4.  Failure by Appraisers to Set Fair Market Value.  If the two (2) appointed appraisers are unable to agree on the Fair Market Value within ten (10) days after expiration of the Appraisal Period, they shall elect a third appraiser of like or better qualifications, and who has not previously acted in any capacity for either Landlord or Tenant.  Landlord and Tenant shall each bear one half of the costs of the third appraiser’s fee.

        Within thirty (30) days after the selection of the third appraiser (the “Second Appraisal Period”) the Fair Market Value for the Extended Term shall be set by a majority of the appraisers now appointed.

        If a majority of the appraisers are unable to set the Fair Market Value within the Second Appraisal Period, the three (3) appraisers shall individually render separate appraisals of the Fair Market Value, and their three (3) appraisals shall be added together, then divided by three (3); resulting in an average of the appraisals, which shall be the Fair Market Value during the Extended Term.

        However, if the low appraisal or high appraisal varies by more than ten percent (10%) from the middle appraisal, then one (1) or both shall be disregarded.  If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2), and the resulting average shall be the Fair Market Value.  If both the low and high appraisal are disregarded, the middle appraisal shall be the Fair Market Value for the Premises during the Extended Term.  The appraisers shall immediately notify Landlord and Tenant of the Fair Market Value so established, and Landlord and Tenant shall immediately execute an amendment to the Lease, extending the Term and revising the Fixed Rent payable pursuant to the Fair Market Value so established.

        Landlord and Tenant shall execute such amendment establishing the Fair Market Value within thirty (30) days following the determination of the Fair Market Value and if Tenant is the party failing to so execute, this Option shall become null and void and of no further force or effect.

Section 23.5.  No Right of Reinstatement or Further Extension.  Once Tenant has either failed to exercise its rights to extend the term pursuant to this Article 23 or failed to execute the amendment called for hereunder, it shall have no right of reinstatement of its Option to Extend the Term, nor shall Tenant have any right to a further or second extension of the Term beyond the period stated in Section 23.1 hereinabove.

Section 23.6.  No Assignment of Option.  This Option may be exercised only by the original Tenant signing this Lease or an Affiliate (as such term is defined in Section 11.2.1 above), and shall be null, void and of no further force or effect as of the date that Tenant assigns this Lease to an unaffiliated entity and/or subleases more than forty-nine percent (49%) of the total Rentable Area of the Premises.

ARTICLE 24
RIGHT OF FIRST OFFER

Section 24.1.  Right of First Offer.  Landlord hereby grants to the originally named Tenant herein (and any Affiliate, as such term is defined in Section 11.2.1 above) a one-time right of first offer with respect to the first tenant space contiguous to the Premises becoming available on the second (2^nd) floor of the Building (the “First Offer Space”).  Notwithstanding the foregoing, such first offer right of Tenant shall commence only following the expiration or earlier termination of the existing lease (including renewals) of the First Offer Space and only after the First Offer Space is actually vacated and becomes available for lease, and such right of first offer shall be subordinate to the holders of all existing rights of expansion, rights of first refusal or rights of first offer (collectively, the “Superior Right Holders”) with respect to the First Offer Space.  Tenant’s right of first offer shall be on the terms and conditions set forth in this Article 24.

Section 24.2.  Procedure for Offer.  So long as Tenant theretofore notified Landlord in writing that Tenant desires to lease the First Offer Space, Landlord shall notify Tenant (the “First Offer Notice”) when the First Offer Space becomes available for lease to third parties, provided that no Superior Right Holder wishes to lease the First Offer Space.  The First Offer Notice shall specify the terms and conditions upon which Landlord is willing to lease the First Offer Space to Tenant.

Section 24.3.  Procedure for Acceptance.  If Tenant wishes to exercise Tenant’s right of first offer with respect to the First Offer Space, then within ten (10) business days of delivery of the First Offer Notice to Tenant, Tenant shall deliver notice to Landlord of Tenant’s intention to exercise its right of first offer with respect to the First Offer Space.  If Tenant does not so notify Landlord within such ten (10) business day period, then Landlord shall be free to lease the First Offer Space to anyone to whom Landlord desires on terms not materially different than the terms contained in the Offer Notice.  Notwithstanding anything to the contrary contained herein, Tenant must elect to exercise its right of first offer, if at all, with respect to all of the First Offer Space, and Tenant may not elect to lease only a portion thereof.

Section 24.4.  Amendment to Lease.  If Tenant timely exercises Tenant’s right to lease the First Offer Space as set forth herein, Landlord and Tenant shall within fifteen (15) days thereafter execute an amendment to this Lease for such First Offer Space upon the terms and conditions as set forth in the First Offer Notice and this Article 24.

[INTENTIONALLY LEFT BLANK]

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Section 24.5.  Termination of Right of First Offer.  The rights contained in this Article 24 may only be exercised by Tenant or an Affiliate and only if Tenant or an Affiliate occupies the entire Premises.  The right of first offer granted herein shall terminate as to the First Offer Space upon the failure by Tenant to exercise its right of first offer with respect to the First Offer Space.  Tenant shall not have the right to lease the First Offer Space, as provided in this Article 24, if, as of the date of the attempted exercise of any right of first offer by Tenant, or as of the scheduled date of delivery of the First Offer Space to Tenant, Tenant is in material default under this Lease beyond any applicable notice and/or cure period.

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease, effective the day and year first above written.

LANDLORD:		TENANT:
BRIGHTON ENTERPRISES, LLC, a California limited liability company		MERCANTILE NATIONAL BANK, N.A., a California “C” corporation_________
By:	DOUGLAS, EMMETT AND COMPANY,
	a California corporation,
	its agent
By:		By:
	Michael J. Means, Vice President	Its:
Dated:		By:
		Its:
		Dated:

34

EXHIBIT A — PREMISES PLAN

Suite 250 at 9601 Wilshire Boulevard, Beverly Hills, California  90210

Rentable Area:  approximately 2,559 square feet

Usable Area:  approximately 2,084 square feet

(Measured pursuant to the provisions of Section 1.4 of the Lease)

EXHIBIT B

TENANT WORK LETTER

This Tenant Work Letter shall set forth the terms and conditions relating to the construction of the tenant improvements in the Premises.  This Tenant Work Letter is essentially organized chronologically and addresses the issues of the construction of the Premises, in sequence, as such issues will arise during the actual construction of the Premises.  All references in this Tenant Work Letter to Articles or Sections of “this Lease” shall mean the relevant portion of Articles 1 through 24 of the Office Lease to which this Tenant Work Letter is attached as Exhibit B and of which this Tenant Work Letter forms a part, and all references in this Tenant Work Letter to Sections of “this Tenant Work Letter” shall mean the relevant portion of Sections 1 through 6 of this Tenant Work Letter.

SECTION 1

CONSTRUCTION DRAWINGS FOR THE PREMISES

Landlord shall cause the improvements in the Premises (the “Improvements”) to be constructed by PLE Builders, Inc. (“PLE”) pursuant to those certain drawings T-1, A-1, A-2, D-1, each dated December 30, 2003, and that certain Bulletin #1, dated February 17, 2004, prepared by WWCOT (collectively, the “Approved Working Drawings”) in strict compliance with the Approved Working Drawings, all Codes, and with first-class workmanship and the materials described in the Approved Working Drawings.  Tenant shall make no changes or modifications to the Approved Working Drawings without the prior written consent of Landlord, which consent may be withheld in Landlord’s sole discretion if such change or modification would directly or indirectly delay the substantial completion of, or increase the cost of designing or constructing, the Improvements.

SECTION 2

 TENANT’S CONTRIBUTION; CHANGE ORDERS

Concurrently with Tenant’s execution and delivery of this Lease, Tenant shall pay to Landlord the sum of $2,865.00 as Tenant’s contribution toward the cost of the Improvements (“Tenant’s Contribution”).  In the event that after Tenant’s execution of this Lease, any revisions, changes, or substitutions shall be made to the Approved Working Drawings or the Improvements, any additional costs which arise in connection with such revisions, changes or substitutions shall be paid by Tenant to Landlord immediately upon Landlord’s request.

SECTION 3

CONTRACTOR’S WARRANTIES AND GUARANTIES

Landlord hereby assigns to Tenant all warranties and guaranties by the contractor who constructs the Tenant Improvements (the “Contractor”) relating to the Improvements, and Tenant hereby waives all claims against Landlord relating to, or arising out of the construction of, the Improvements; provided, however, that Landlord shall assist Tenant in the enforcement of all warranties and guaranties, based upon Landlord’s relationship with the Contractor.

SECTION 4

TENANT’S COVENANTS

INTENTIONALLY OMITTED.

SECTION 5

COMPLETION OF THE IMPROVEMENTS;

COMMENCEMENT DATE

Except as provided in this Section 5, the Commencement Date shall occur as set forth in Section 2.1 of the Lease.  If there shall be a delay or there are delays in the substantial completion of the Improvements or in the occurrence of any of the other conditions precedent to the Commencement Date, as set forth in of the Lease, then, to the extent the delay is the result of:

5.2.1  Tenant’s failure to timely approve any matter requiring Tenant’s approval;

5.2.2  A breach by Tenant of the terms of this Tenant Work Letter or the Lease;

5.2.3  Tenant’s request for changes in the Approved Working Drawings;

5.2.4  Tenant’s requirement for materials, components, finishes or improvements which are not available in a commercially reasonable time given the anticipated date of substantial completion of the Improvements, as set forth in the Lease, or which are different from, or not included in, Landlord’s standard improvement package items for the Building;

5.2.5  Changes to the base, shell and core work of the Building required by the Approved Working Drawings; or

5.2.6  Any other acts or omissions of Tenant, or its agents, or employees;

then, notwithstanding anything to the contrary set forth in the Lease or this Tenant Work Letter and regardless of the actual date of the substantial completion of the Improvements, the date of substantial completion of the Improvements shall be deemed to be the date the substantial completion of the Improvements would have occurred if the act or omission of Tenant causing the delay or delays, as set forth above, had not occurred.

SECTION 6

MISCELLANEOUS

6.1           Tenant’s Entry Into the Premises Prior to Substantial Completion.  Provided that Tenant and its agents do not interfere with Contractor’s work in the Building and the Premises, Contractor shall allow Tenant access to the Premises prior to the substantial completion of the Improvements for the purpose of Tenant installing furniture, equipment or fixtures (including Tenant’s data and telephone equipment) in the Premises.  Tenant shall hold Landlord harmless from and indemnify, protect and defend Landlord against any loss or damage to the Building or Premises and against injury to any persons caused by Tenant’s actions pursuant to this Section 6.1, except and to the extent caused by the negligence or willful misconduct of Landlord, its agents, employees or contractors (including Contractor).

6.2           Freight Elevators.  Landlord shall, consistent with its obligations to other tenants of the Building, make the freight elevator reasonably available to Tenant in connection with initial decorating, furnishing and moving into the Premises.

6.3           Tenant’s Representative.  Tenant has designated _Chuck Avisas its sole representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Landlord, shall have full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work Letter.

6.4           Landlord’s Representative.  Landlord has designated Mary Lowe as its sole representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Tenant, shall have full authority and responsibility to act on behalf of the Landlord as required in this Tenant Work Letter.

6.5           Tenant’s Agents.  All subcontractors, laborers, materialmen, and suppliers retained directly by Tenant shall all be union labor in compliance with the then existing master labor agreements.

6.6           Time of the Essence in This Tenant Work Letter.  Unless otherwise indicated, all references herein to a “number of days” shall mean and refer to calendar days.  In all instances where Tenant is required to approve or deliver an item, if no written notice of approval is given or the item is not delivered within the stated time period, at Landlord’s sole option, at the end of such period the item shall automatically be deemed approved or delivered by Tenant and the next succeeding time period shall commence.

6.7           Tenant’s Lease Default.  Notwithstanding any provision to the contrary contained in this Lease, if an event of default that is not cured within the applicable notice and/or cure period as described in the Lease, or a default by Tenant under this Tenant Work Letter that is not cured with the applicable notice and/or cure period (and a default under this Tenant Work Letter shall be entitled to the notice and cure period described in Section 17.1 (d) of the Lease), has occurred at any time on or before the substantial completion of the Improvements, then (i) in addition to all other rights and remedies granted to Landlord pursuant to the Lease, Landlord shall have the right to cause Contractor to cease the construction of the Premises (in which case, Tenant shall be responsible for any delay in the substantial completion of the Improvements caused by such work stoppage as set forth in Section 5 of this Tenant Work Letter), and (ii) all other obligations of Landlord under the terms of this Tenant Work Letter shall be forgiven until such time as such default is cured pursuant to the terms of the Lease.

6.8           Move-In.  Landlord shall thoroughly clean the Premises prior to and subsequent to Tenant’s move-in to the Premises.

LANDLORD:		TENANT:
BRIGHTON ENTERPRISES, LLC, a California limited liability company		MERCANTILE NATIONAL BANK, N.A., a California “C” corporation_________
By:	DOUGLAS, EMMETT AND COMPANY,
	a California corporation,
	its agent
By:		By:
	Michael J. Means, Vice President	Its:
Dated:		By:
		Its:
		Dated:

B-2

EXHIBIT B-1
CONSTRUCTION BY TENANT DURING TERM

1.If Tenant wishes to make a Tenant Change, as specified in Section 12.12 of the Lease (other than a Cosmetic Alteration, as defined in Section 12.12 of the Lease), such Tenant Change shall be completed pursuant to the provisions of Section 12.12. of the Lease and this Exhibit B-1.  Tenant shall bear all costs of said Tenant Change, which shall be paid directly to Tenant’s general contractor (“Contractor”).

2.     Contractor shall complete construction to the Premises pursuant to the final Plans and Specifications approved in writing by Landlord and Tenant (the “Tenant Change”), in compliance with all applicable codes and regulations. Tenant’s selections of finishes and materials shall be indicated on the Plans and Specifications, and shall be equal to or better than the minimum Building standards and specifications.  All work not shown on the final Plans and Specifications, but which is to be included in the Tenant Change, including but not limited to, telephone service installation, furnishings or cabinetry, shall be installed pursuant to Landlord’s reasonable directives.

3.     Prior to commencing any work:

a)Tenant’s proposed Contractor and the Contractor’s proposed subcontractors and suppliers shall be approved in writing by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed.   As a condition of such approval, so long as the same are reasonably cost competitive, then Contractor shall use Landlord’s Heating, Venting, and Air-conditioning, plumbing, and electrical subcontractors for such work.

b)During completion of any Tenant Change, neither Tenant or Contractor shall permit any sub-contractors, workmen, laborers, material or equipment to come into or upon the Building if the use thereof, in Landlord’s reasonable judgment, would violate Landlord’s agreement with any union providing work, labor or services in or about the Building.

c)Contractor shall submit to Landlord and Tenant a written bid for completion of the Tenant Change.  Said bid shall include Contractor’s overhead, profit, and fees, and, if the proposed Tenant Change is for cosmetic work in excess of $50,000 in aggregate value per occurrence or for structural work of any kind, Contractor shall:

ipre-pay to Landlord’s managing agent $250.00 as partial payment of said managing agent’s construction administration fee, as specified hereinbelow, and

iiupon completion of said Tenant Change, pay an administration fee for supervision of said Tenant Change equal to fifty dollars ($50.00) per hour, to a maximum of three percent (3%) of the total cost of the Tenant Change, to defray said agent’s costs for supervision of the construction;

4.     Tenant or Contractor shall submit all Plans and Specifications to Landlord, and no work on the Premises shall be commenced before Tenant has received Landlord’s final written approval thereof, which shall not be unreasonably withheld, delayed or conditioned;

5.     Contractor shall complete all architectural and planning review and obtain all permits, including signage, required by the city, state or county in which the Premises are located; and

6.     Contractor shall submit to Landlord verification of public liability and worker’s compensation insurance adequate to fully protect Landlord and Tenant from and against any and all liability for death or injury to persons or damage to property caused in or about or by reason of the construction of any work done by Contractor or Contractor’s subcontractors or suppliers.

7.     INTENTIONALLY DELETED

8.     Contractor and Contractor’s subcontractors and suppliers shall be subject to Landlord’s reasonable administrative control and supervision.  Landlord shall provide Contractor and Contractor’s subcontractors and suppliers with reasonable access to the Premises.

9.     During construction of the Tenant Change, Contractor shall adhere to the procedures contained hereinbelow, which represent Landlord’s minimum requirements for completion of the Tenant Change.

10.  Upon completion of the Tenant Change, Tenant shall provide Landlord with such evidence as Landlord may reasonably request that the Contractor has been paid in full, and Contractor shall provide Landlord with lien releases as requested by Landlord, confirmation that no liens have been filed against the Premises or the Building.  If any liens arise against the Premises or the Building as a result of the Tenant Change, Tenant shall immediately, at Tenant’s sole expense, remove such liens and provide Landlord evidence that the title to the Building and Premises have been cleared of such liens.

11.  Whether or not Tenant or Contractor timely complete the Tenant Change, unless the Lease is otherwise terminated pursuant to the provisions contained therein, Tenant acknowledges and agrees that Tenant’s obligations under the Lease to pay Fixed Monthly Rent and/or Additional Rent shall continue unabated.

CONSTRUCTION POLICY

        The following policies outlined are the construction procedures for the Building.  As a material consideration to Landlord for granting Landlord’s permission to Tenant to complete the construction contemplated hereunder, Tenant agrees to be bound by and follow the provisions contained hereinbelow:

1.     Administration

a)Contractors to notify the management office for the Building prior to starting any work.  All jobs must be scheduled by the general contractor or sub-contractor when no general contractor is being used.

b)The general contractor is to provide the Building Manager with a copy of the projected work schedule for the suite, prior to the start of construction.

c)Contractor will make sure that at least one set of drawings will have the Building Manager’s initials approving the plans and a copy delivered to the Building Office.

d)As-built construction, including mechanical drawings and air balancing reports will be submitted at the end of each project.

e)The HVAC contractor is to provide the following items to the Building Manager upon being awarded the contract from the general contractor:

i)A plan showing the new ducting layout, all supply and return air grille locations and all thermostat locations.  The plan sheet should also include the location of any fire dampers.

ii)An Air Balance Report reflecting the supply air capacity throughout the suite, which is to be given to the Chief Building Engineer at the finish of the HVAC installation.

f)All paint bids should reflect a one-time touch-up paint on all suites.  This is to be completed approximately five (5) days after move-in date.

g)The general contractor must provide for the removal of all trash and debris arising during the course of construction.  At no time are the building’s trash compactors and/or dumpsters to be used by the general contractor’s clean-up crews for the disposal of any trash or debris accumulated during construction.  The Building Office assumes no responsibility for bins.  Contractor is to monitor and resolve any problems with bin usage without involving the Building Office.  Bins are to be emptied on a regular basis and never allowed to overflow.  Trash is to be placed in the bin.

h)Any problems with construction per the plan, will be brought to the attention of and documented to the Building Manager.  Any changes that need additional work not described in the bid will be approved in writing by the Building Manager.  All contractors doing work on this project should first verify the scope of work (as stated on the plans) before submitting bids; not after the job has started.

2.Building Facilities Coordination

a)All deliveries of material will be made through the parking lot entrance.

b)Construction materials and equipment will not be stored in any area without prior approval of the Building Manager.

c)Only the freight elevator is to be used by construction personnel and equipment.  Under no circumstances are construction personnel with materials and/or tools to use the “passenger” elevators.

3.Housekeeping

a)Suite entrance doors are to remain closed at all times, except when hauling or delivering construction materials.

b)All construction done on the property that requires the use of lobbies or common area corridors will have carpet or other floor protection.  The following are the only prescribed methods allowed:

i)Mylar:  Extra heavy-duty to be taped from the freight elevator to the suite under construction.

ii)Masonite:  1/4 inch Panel, Taped to floor and adjoining areas.  All corners, edges and joints to have adequate anchoring to provide safe and “trip-free” transitions.  Materials to be extra heavy-duty and installed from freight elevator to the suite under construction.

c)Restroom wash basins will not be used to fill buckets, make pastes, wash brushes, etc.  If facilities are required, arrangements for utility closets will be made with the Building Office.

d)Food and related lunch debris are not to be left in the suite under construction.

e)All areas the general contractor or their sub-contractors work in must be kept clean.  All suites the general contractor works in will have construction debris removed prior to completion inspection.  This includes dusting of all window sills, light diffusers, cleaning of cabinets and sinks.  All common areas are to be kept clean of building materials at all times so as to allow tenants access to their suites or the building.

4.Construction Requirements

a)All Life and Safety and applicable Building Codes will be strictly enforced (i.e. tempered glass, fire dampers, exit signs, smoke detectors, alarms, etc.).  Prior coordination with the Building Manager is required.

b)Electric panel schedules must be brought up to date identifying all new circuits added.

c)All electrical outlets and lighting circuits are to be properly identified.  Outlets will be labeled on back side of each cover plate.

d)All electrical and phone closets being used must have panels replaced and doors shut at the end of each day’s work.  Any electrical closet that is opened with the panel exposed must have a work person present.

B1-2

e)All electricians, telephone personnel, etc. will, upon completion of their respective projects, pick up and discard their trash leaving the telephone and electrical rooms clean.  If this is not complied with, a clean-up will be conducted by the building janitors and the general contractor will be back-charged for this service.

f)Welding or burning with an open flame will not be done without prior approval of the Building Manager.  Fire extinguishers must be on hand at all times.

g)All “anchoring” of walls or supports to the concrete are not to be done during normal working hours (7:30 AM - 6:00 PM, Monday through Friday).  This work must be scheduled before or after these hours during the week or on the weekend.

h)All core drilling is not to be done during normal working hours (7:30 AM - 6:00 PM, Monday through Friday).  This work must be scheduled before or after these hours during the week or on the weekend.

i)All HVAC work must be inspected by the Building Engineer.  The following procedures will be followed by the general contractor:

i)A preliminary inspection of the HVAC work in progress will be scheduled through the Building Office prior to the reinstallation of the ceiling grid.

ii)A second inspection of the HVAC operation will also be scheduled through the Building Office and will take place with the attendance of the HVAC contractor’s Air Balance Engineer.  This inspection will take place when the suite in question is ready to be air-balanced.

iii)The Building Engineer will inspect the construction on a periodic basis as well.

j)All existing thermostats, ceiling tiles, lighting fixtures and air conditioning grilles shall be saved and turned over to the Building Engineer.

        Good housekeeping rules and regulations will be strictly enforced.  The building office and engineering department will do everything possible to make your job easier.  However, contractors who do not observe the construction policy will not be allowed to perform within this building.  The cost of repairing any damages that are caused by Tenant or Tenant’s contractor during the course of construction shall be deducted from Tenant’s Allowance or Tenant’s Security Deposit, as appropriate.

LANDLORD:		TENANT:
BRIGHTON ENTERPRISES, LLC, a California limited liability company		MERCANTILE NATIONAL BANK, N.A., a California “C” corporation_________
By:	DOUGLAS, EMMETT AND COMPANY,
	a California corporation,
	its agent
By:		By:
	Michael J. Means, Vice President	Its:
Dated:		By:
		Its:
		Dated:

B1-3

EXHIBIT C
RULES AND REGULATIONS

BUILDING RULES AND REGULATIONS

1.     Access.  Tenant and/or Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders shall only use the sidewalks, entrances, lobby(ies), garage(s), elevators, stairways, and public corridors as a means of ingress and egress, and shall take such actions as may reasonably be necessary to ensure that the same remain unobstructed at all times.

        The entrance and exit doors to the Premises are to be kept closed at all times except as required for orderly passage to and from the Premises.  Except on balconies available for the joint or exclusive use of Tenant as otherwise specified hereinabove, Tenant shall not permit its agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders to loiter in any part of the Building or obstruct any means of ingress or egress.  Tenant shall not cover any doors, and shall not cover any window, other than with vertical or mini-blinds pre-approved in writing by Landlord.  Landlord specifically disapproves the installation of any film or foil covering whatsoever on the windows of the Premises.

        Neither Tenant, nor its agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders shall go up on the roof or onto any balcony serving the Building, except upon such roof, portion thereof, or balcony as may be contiguous to the Premises and is designated in writing by Landlord as a roof-deck, roof-garden area, or exclusive use balcony area.

2.     Restroom Facilities.  The toilet rooms, toilets, urinals, wash bowls and other apparatus (the “Restroom Facilities”), whether contained in the common areas of the Building and/or the interior of the Premises, shall not be used for any purpose other than that for which they were designed.  Tenant shall not permit its agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders to throw foreign substances of any kind whatsoever or papers not specifically designated for use in the Restroom facilities down any toilet, or to dispose of the same in any way not in keeping with the instructions provided to Tenant by the management of the Building regarding same, and Tenant hereby specifically agrees to reimburse Landlord directly for the expense of any breakage, stoppage or damage resulting from Tenant’s violation of this rule.

3.     Heavy Equipment.  Landlord reserves the right, in Landlord’s sole discretion, to decline, limit or designate the location for installation of any safes, other unusually heavy, or unusually large objects to be used or brought into the Premises the Building.  In each case where Tenant requests installation of one or more such unusually heavy item(s), which request shall be conclusively evidenced by Tenant’s effort to bring such item(s) into the Building or Premises, Tenant shall reimburse Landlord for the costs of any engineering or structural analysis required by Landlord in connection therewith.  In all cases, each such heavy object shall be placed on a metal stand or metal plates or such other mounting detail of such size as shall be prescribed by Landlord.

        Tenant hereby indemnifies Landlord against any damage or injury done to persons, places, things or the Building or its common areas when such damage or injury primarily arises out of Tenant’s installation or use of one or more unusually heavy objects.  Tenant further agrees to reimburse Landlord for the costs of repair of any damage done to the Building or property therein by putting in, taking out, or maintaining such safes or other unusually heavy objects.

INTENTIONALLY DELETED

4.     Flammable Materials.  Except for such limited quantities of office materials and supplies as are customarily utilized in Tenant’s normal business operations, Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline, flammable or combustible fluid or material, other than those limited quantities of normal business operating materials as may reasonably be necessary for the operation or maintenance of office equipment.  Nor shall Tenant keep or bring into the Premises or the Building any other toxic or hazardous material specifically disallowed pursuant to California state law.

5.     Cooking / Odors / Nuisances.  Tenant shall not permit its agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders to engage in the preparation and/or serving of foods unless the Premises includes a self-contained kitchen area.  Notwithstanding the foregoing, Tenant may use a coffeemaker, toaster oven, microwave oven and refrigerator in the Premises, regardless of whether or not the Premises contain a self-contained kitchen.  Tenant shall not permit the odors arising from such cooking, or any other improper noises, vibrations, or odors to emanate from the Premises.  Tenant shall not obtain for use in the Premises, ice, drinking water, food, beverage, towel or other similar services except at such reasonable hours and under such reasonable regulations as may be specified by Landlord.

        Tenant hereby agrees to instruct all persons entering the Premises to comply with the requirements of the Building, by advising all persons entering the Premises that smoking of any tobacco or other substance is prohibited at all times, except in such common areas located outside the Building as may be designated by the Building management.

        Tenant shall not permit Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders to interfere in any way with other tenants of the Building or with those having business with them.

        Tenant shall not permit its agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders to bring or keep within the Building any animal, bird or bicycle, except such seeing-eye dog or other disability assistance type animal as may comply with the requirements of any handicapped ordinances having jurisdiction therefor.

        Tenant shall store its trash and garbage within the Premises.  No material shall be placed in the trash boxes or receptacles if such material is a hazardous waste or toxic substance or is of such a nature that its disposal in Landlord’s ordinary and customary manner of removing and disposing of trash and garbage would be a violation of any law, ordinance or company regulation governing such disposal.  All garbage and refuse disposal shall be made only through entry ways and elevators provided for such purposes and at such times as Landlord shall designate.  As and when directed by Landlord and/or if required by any governmental agency having jurisdiction therefor, Tenant shall comply with all directives for recycling and separation of trash.

        Tenant shall not employ any person to do janitorial work in any part of the Premises without the prior written consent of Landlord, which consent may be withheld in Landlord’s sole discretion.

        Landlord reserves the right to exclude or expel from the Building any person who in Landlord’s sole discretion is intoxicated or under the influence of liquor or drugs or who, in any manner, engages in any act in violation of the Rules and Regulations of the Building.

        Tenant shall not conduct any public or private auction, fire sale or other sale of Tenant’s personal property, furniture, fixtures or equipment or any other property located in or upon the Premises, without Landlord’s prior written consent, which consent shall be in Landlord’s sole discretion.

6.     Storage.  Tenant may only store goods, wares, or merchandise on or in the Premises in areas specifically designated by Landlord for such storage.

7.     Directives to Management.  Tenant’s requirements, other than those Landlord specifically agrees to perform elsewhere in this Lease, shall only be attended to upon the Building management’s receipt of Tenant’s written request therefor.  Landlord’s employees shall not perform any work or do anything outside of their regular duties unless under special instruction from the Building management.  No security guard, janitor or engineer or other employee of the Building management shall admit any person (Tenant or otherwise) to the Premises without specific instructions from the Office of the Building and written authorization for such admittance from Tenant.

8.     Keys and Locks.  Landlord shall furnish Tenant with two keys to each door lock existing in the Premises.  Tenant shall reimburse Landlord a reasonable charge for these and any additional keys. Tenant shall not be permitted to have keys made, nor shall Tenant alter any lock or install a new or additional lock or bolts on any door of the Premises without Landlord’s prior written consent.  Tenant shall, in each case, furnish Landlord with a key for any additional lock installed or changed by Tenant or Tenant’s agent(s).  Tenant, upon the expiration or earlier termination of this Lease, shall deliver to Landlord all keys in the possession of Tenant or Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders for doors in the Building, whether or not furnished to Tenant by Landlord.  If Tenant, or Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders, lose or misplace any key(s) to the Building, Landlord shall, in Landlord’s sole discretion, either replace said key(s) or re-key such locks as may be affected thereby, and Tenant shall reimburse Landlord for all such costs of such re-keying and/or replacement.

9.     Solicitation.  Tenant and/or its agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders shall not permit any canvassing, peddling, soliciting and/or distribution of handbills or any other written materials to occur in the Premises and/or the Building, nor shall Tenant or Tenant’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders engage in such solicitation or distribution activities.

10.  Retail Sales, Services and Manufacturing Prohibited.  Except with the prior written consent of Landlord, Tenant shall not sell, or permit the retail sale of, newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises, nor shall Tenant carry on or permit or allow any employee or other person to carry on the independent business of stenography, typewriting or any similar business in or from the Premises for the service or accommodation of other occupants of any other portion of the Building.  Tenant shall not permit the Premises to be used for manufacturing or for any illegal activity of any kind, or for any business or activity other than for Tenant’s specific use.

11.  Change in Name or Address.  Landlord shall have the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building.

12.  Projections from Premises.  Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or the exterior walls of the Building or in any area projecting outside the interior walls of the Premises.  Tenant shall not install or permit to be installed any awnings, air conditioning units or other projections, without the prior written consent of Landlord.

13.  Superiority of Lease.  These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the covenants, agreements or provisions of this Lease.  If a conflict or disagreement between the Lease and these Rules becomes apparent, this Lease shall prevail.

C-2

14.  Changes to Rules and Regulations.  Provided such changes do not harm Tenant’s ability to conduct its normal business operations, Landlord shall retain the right to change, add or rescind any rule or regulation contained herein, or to make such other and further reasonable and non-discriminatory Rules and Regulations as in Landlord’s sole judgment may, from time to time, become necessary for the management, safety, care and cleanliness of the Premises, the Building or the Parking Facilities, or for the preservation of good order therein, or for the convenience of other occupants and tenants therein, so long as such recision, addition, deletion or change is thereafter reasonably applied to all occupants of the Building affected thereby.

PARKING RULES AND REGULATIONS

A.Tenant shall strictly comply with all posted speed limits, directional signs, yield signs, stops signs and all other signs within or about the parking facilities.

B.Tenant shall register all vehicle license plate numbers with the Building management.

C.Tenant shall be responsible for the cost of repairing any damage to the parking facilities or cleaning any debris created or left by Tenant, including, without limitation, oil leakage from motor vehicles parked in the parking facilities under its auspices.

D.Landlord, in addition to reserving the right to designate one or more areas solely for visitor parking, which areas may be changed by Landlord from time to time with or without prior notice to Tenant, reserves the right to allocate additional visitor spaces on any floor of the parking facilities.  Tenant shall not park any vehicles in any spaces designated as visitor only spaces or customer spaces within the parking facilities.

E.Tenant shall strictly comply with all rules, regulations, ordinances, speed limits, and statutes affecting handicapped parking and/or access, and shall not park any vehicles within the fire lanes, along parking curbs or in striped areas.

F.Tenant shall only use the number of parking permits allocated to it and shall not permit more than one of its employees to utilize the same parking permit.  Landlord reserves the right to assign or re-assign parking spaces within the Parking facilities to Tenant from time to time, and provided Landlord is required to do so by reason of any action arising out of a governmental mandate imposed on Landlord, Landlord further reserves the right at any time to substitute an equivalent number of parking spaces in a parking facilities or subterranean or surface parking facility within a reasonable distance of the Premises.

G.Except with Landlord’s managing agent(s)’ prior written consent, Tenant shall not leave vehicles in the parking facilities overnight, nor park any vehicles in the parking facilities other than automobiles, motorcycles, motor-driven or non-motor-driven bicycles or four-wheeled trucks or vans.  Landlord may, in its sole discretion, designate separate areas for bicycles and motorcycles.  Tenant shall ensure that vehicles parking in the parking facilities by using the parking permits assigned to Tenant shall be parked entirely within the striped lines designating a single space and are not so situated or of such a width or length as to impede access to or egress from vehicles parked in adjacent areas or doors or loading docks.  Further, all vehicles utilizing Tenant’s parking permits shall not be higher than any height limitation that may be posted, or of such a size, weight or dimension so that entry of such vehicle into the parking facilities would cause any damage or injury thereto.

H.Tenant shall not allow any of the vehicles parked using Tenant’s permits, or the vehicles of any of Tenant’s suppliers, shippers, customers or invitees to be loaded or unloaded in any area other than those specifically designated by Landlord for loading.

I.Tenant shall not use or occupy the parking facilities in any manner which will unreasonably interfere with the use of the parking facilities by other tenants or occupants of the Building.  Without limitation, Tenant agrees to promptly turn off any vehicle alarm system activated and sounding an alarm in the parking facilities.  In the event said alarm system fails to turn off and no longer sound an intruder alert fifteen (15) minutes after commencing such an alarm, Landlord shall reserve the right to remove the vehicle from the parking facilities at Tenant’s sole expense.

J.Tenant acknowledges that the Rules and Regulations as posted herein shall be in effect twenty-four hours per day, seven days per week, without exception.

[INTENTIONALLY LEFT BLANK]

C-3

K.Tenant acknowledges that the uniformed guard officers and parking attendants serving the parking facilities are authorized to issue verbal and written warnings of Tenant’s violations of any of the rules and regulations contained herein.  Except in the case of a car alarm continuing to sound in excess of a maximum of fifteen minutes, in which case no further notice by Landlord shall be required.  If Tenant or Tenant’s agents, contractors, directors, employees, officers, partners or shareholders continue to materially breach these rules and regulations after expiration of written notice and the opportunity to cure has been given to Tenant, then in addition to such other remedies and request for injunctive relief it may have, Landlord shall have the right, without additional notice, to remove or tow away the vehicle involved and store the same, all costs of which shall be borne exclusively by Tenant.

LANDLORD:		TENANT:
BRIGHTON ENTERPRISES, LLC, a California limited liability company		MERCANTILE NATIONAL BANK, N.A., a California “C” corporation_________
By:	DOUGLAS, EMMETT AND COMPANY,
	a California corporation,
	its agent
By:		By:
	Michael J. Means, Vice President	Its:
Dated:		By:
		Its:
		Dated:

C-4

EXHIBIT D
FIRST AMENDMENT - COMMENCEMENT DATE AND TERM

        This First Amendment, dated March 30, 2005, is by and between BRIGHTON ENTERPRISES, LLC, a California limited liability company (“Landlord”), with an office at 808 Wilshire Boulevard, Suite 200, Santa Monica, California  90401, and MERCANTILE NATIONAL BANK, N.A., a California “C” corporation (“Tenant”), with an office at 1880 Century Park East, Suite 1200, Los Angeles, California 90067.

WHEREAS,

A.    Landlord, pursuant to the provisions of that certain written, dated March 30, 2005 (the “Lease”), leased to Tenant and Tenant leased from Landlord space in the property located at 9601 Wilshire Boulevard, Beverly Hills, California  90210 (the “Building”), commonly known as Suite 250 (the “Premises”);

B.    The provisions of said Lease specify that the Commencement Date shall be the date that is five (5) days following the date Landlord substantially completes the Improvements for which Landlord is obligated under the Lease;

C.    Tenant took possession of the Premises for the purpose of conducting its business on ;

NOW, THEREFORE, in consideration of the covenants and provisions contained herein, and other good and valuable consideration, the sufficiency of which Landlord and Tenant hereby acknowledge, Landlord and Tenant agree:

1.Confirmation of Defined Terms.  Unless modified herein, all terms previously defined and capitalized in the Lease shall hold the same meaning for the purposes of this  Amendment.

2.Confirmation of Commencement Date and Term.  The Commencement Date is hereby confirmed to be           , and the Term is hereby confirmed from and including            to and including                              .

3.Revision in Fixed Monthly Rent.  Tenant acknowledges and agrees commencing                    , and continuing through                    , Tenant shall pay the initial Fixed Monthly Rent of $                     per month.  Furthermore, as of the Commencement Date, the provisions of Section 3.3 are hereby deleted in their entirety, and replaced in lieu thereof, with the following:

“      Commencing on the date that is ninety (90) days following the Commencement Date, and continuing through the last calendar day of the twelfth (12^th) calendar month of the Term, the Fixed Monthly Rent payable by Tenant shall increase from $         per month to $          per month.

        Commencing the first calendar day of the thirteenth (13^th) calendar month of the Term, and continuing through the last calendar day of the twenty-fourth (24^th) calendar month of the Term, the Fixed Monthly Rent payable by Tenant shall increase from $         per month to $           per month.

        Commencing the first calendar day of the twenty-fifth (25^th) calendar month of the Term, and continuing through the last calendar day of the thirty-sixth (36^th) calendar month of the Term, the Fixed Monthly Rent payable by Tenant shall increase from $           per month to $           per month.

        Commencing the first calendar day of the thirty-seventh (37^th) calendar month of the Term, and continuing the last calendar day of the forty-eighth (48^th) calendar month of the Term, the Fixed Monthly Rent payable by Tenant shall increase from $           per month to $           per month.

        Commencing the first calendar day of the forty-ninth (49^th) calendar month of the Term, and continuing the last calendar day of the sixtieth (60^th) calendar month of the Term, the Fixed Monthly Rent payable by Tenant shall increase from $           per month to $           per month.

        Commencing the first calendar day of the sixty-first (61^st) calendar month of the Term, and continuing throughout the remainder of the initial Term, the Fixed Monthly Rent payable by Tenant shall increase from $           per month to $           per month.

        Notwithstanding the foregoing, Tenant shall be permitted to defer one hundred percent of the Fixed Monthly Rent due for the second (2^nd), third (3^rd), thirteenth (13^th), twenty-fifth (25^th) and thirty-seventh (37^th) months of the Term (collectively, the “Rent Deferral Amount”).  So long as Tenant does not commit a material, uncured default during the Term that has resulted in Landlord filing an unlawful detainer action against Tenant, the entire Rent Deferral Amount shall be abated and forgiven as of the Termination Date.

4.Acceptance of Premises.  Tenant acknowledges and agrees that Landlord has completed the Improvements for which Landlord was obligated under the Lease.

5.Warranty of Authority. If Landlord or Tenant signs as a corporation, or a limited liability company, or a partnership, each of the persons executing this  Amendment on behalf of Landlord or Tenant hereby covenants and warrants that the applicable entity is a duly authorized and existing entity that is qualified to do business in California; that the person(s) signing on behalf of either Landlord or Tenant have full right and authority to enter into this  Amendment; and that each and every person signing on behalf of either Landlord or Tenant are authorized in writing to do so.

6.Broker Representation.  Landlord and Tenant represent to one another that it has dealt with no broker in connection with this  Amendment other than Douglas, Emmett and Company and First Property Realty Corporation.  Landlord and Tenant shall hold one another harmless from and against any and all liability, loss, damage, expense, claim, action, demand, suit or obligation arising out of or relating to a breach by the indemnifying party of such representation.  Landlord agrees to pay all commissions due to the brokers listed above created by Tenant’s execution of this  Amendment.

7.Successors and Heirs.  The provisions of this  Amendment shall inure to the benefit of Landlord’s and Tenant’s respective successors, assigns, heirs and all persons claiming by, through or under them.

8.Confidentiality.  Landlord and Tenant agree that the covenants and provisions of this  Amendment shall not be divulged to anyone not directly involved in the management, administration, ownership, lending against, or subleasing of the Premises, other than Tenant’s or Landlord’s counsel-of-record or leasing or sub-leasing broker of record.

9.Disclosure.  Landlord and Tenant acknowledge that principals of Landlord have a financial interest in Douglas Emmett Realty Advisors, Douglas Emmett and Company, and P.L.E. Builders.

10.Governing Law.  The provisions of this Amendment shall be governed by the laws of the State of California.

11.Reaffirmation.  Landlord and Tenant acknowledge and agree that the Lease, as amended herein, constitutes the entire agreement by and between Landlord and Tenant, and supersedes any and all other agreements written or oral between the parties hereto.  Furthermore, except as modified herein, all other covenants and provisions of the Lease shall remain unmodified and in full force and effect.

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this document as of the day and year written below.

LANDLORD:		TENANT:
BRIGHTON ENTERPRISES, LLC, a California limited liability company		MERCANTILE NATIONAL BANK, N.A., a California “C” corporation_________
By:	DOUGLAS, EMMETT AND COMPANY,
	a California corporation,
	its agent
By:		By:
	Michael J. Means, Vice President	Its:
Dated:		By:
		Its:
		Dated:

D-2

EXHIBIT F

ASBESTOS RIDER

        As you are probably aware, many buildings constructed during the 20th Century through the mid to late 1970s, such as this property, utilized some degree of asbestos in the construction process; such practice was formerly a standard in the building trade. Asbestos is the commercial name for a naturally-occurring family of fibrous minerals which was used in building materials mainly as a fireproofing, reinforcing and insulating agent, and is typically encountered in wrapped heating system insulation, structural fire-proofing, acoustical ceilings, vinyl flooring and roofing felts. Asbestos was regularly used in many other building and non-building products as well. In fact, asbestos fibers are generally present in urban air and water.

        Extensive governmental regulation of asbestos now exists, and proposals have been made for additional regulations. No federal laws, regulations or standards, however, require wholesale removal of asbestos from an occupied building. Indeed, the EPA has concluded that “The presence of asbestos in a building does not mean that the health of building occupants is endangered. If asbestos-containing material remains in good condition and is unlikely to be disturbed, exposure will be negligible.” Guidance for Controlling Asbestos-Containing Materials in Buildings (EPA 560/5-85-024 June 1985), page 1-1. According to the experts, the health risks associated with asbestos arise only when and if fibers become airborne and are inhaled, for example, as a result of maintenance or repairs conducted without proper controls. When inhaled, asbestos fibers can cause certain diseases, including asbestosis, mesothelioma and lung cancer (and risks for smokers are dramatically compounded). The thrust of both current EPA and OSHA requirements and non-binding guidance is to identify the materials that are releasing or could release asbestos fibers into the air, implement proper response actions when such materials are located, maintain asbestos in good condition, and follow appropriate work practices when disturbance of asbestos is unavoidable.

        It is the policy of the property owner to provide a healthy environment by repairing, removing or otherwise abating any damaged asbestos materials that pose a health risk, and by complying with all regulations concerning asbestos at the property and following procedures that will minimize or avoid disturbance of asbestos-containing materials (ACM). We have engaged a qualified asbestos consultant to survey the property for asbestos and assist in implementing an asbestos management plan which includes, among other things, periodic reinspection and surveillance, air monitoring, information and training programs for building engineering and maintenance staff, cleaning procedures, emergency fiber release and training programs for building engineering and maintenance staff, cleaning procedures, emergency fiber release procedures, work procedures and other measures to minimize potential fiber releases, as well as recordkeeping requirements.

        Because any tenant alterations or other work at the property could disturb ACM and possibly release asbestos fibers into the air, we must require the property manager’s written approval prior to beginning such projects. This includes major alterations, but might also include such activities as drilling or boring holes, installing electrical, telecommunications or computer lines, sanding floors, removing ceiling tiles, or other work which might disturb ACM. In many cases, such activities will not affect ACM, but you must check with the property manager in advance, just in case, and the property manager may make available such instructions as may be required. Any such work should not be attempted by an individual or contractor who is not qualified to handle ACM.

        In connection with the foregoing, we are adopting the following new rules under tenant leases: (1) the owner, and representatives of the owner, including, without limitation, the owner’s ACM consultant, are entitled to enter into the premises of any tenant to inspect for ACM, perform air tests and abatement which may be legally required or prudent, and otherwise to comply with legal requirements or recommended practices relating to ACM; (2) any tenant, contractor, or other party must obtain the property manager’s prior written approval before performing any alterations on any tenant space, or performing any other work at the property that might disturb ACM or involve exposure to asbestos fibers as described above.

[INTENTIONALLY LEFT BLANK]

        We trust that the implementation of the aforesaid requirements will not unduly inconvenience you. If you have any questions or concerns about asbestos, please contact the property manager. Thank you for your cooperation in this mutual endeavor.

LANDLORD:		TENANT:
BRIGHTON ENTERPRISES, LLC, a California limited liability company		MERCANTILE NATIONAL BANK, N.A., a California “C” corporation_________
By:	DOUGLAS, EMMETT AND COMPANY,
	a California corporation,
	its agent
By:		By:
	Michael J. Means, Vice President	Its:
Dated:		By:
		Its:
		Dated:

D-2

EXHIBIT H
SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT

(Lease)

THIS AGREEMENT made as of March 30, 2005 between TRIANGLE LENDERS, LLC, a California limited liability company, having an address at 808 Wilshire Boulevard, Suite 200, Santa Monica, California 90401 (the “Leasehold Mortgagee”), BRIGHTON ENTERPRISES, LLC, a California limited liability company, having an address at 808 Wilshire Boulevard, Suite 200, Santa Monica, California 90401 (the “Ground Lessor”), and MERCANTILE NATIONAL BANK, a California “C” corporation, having an office at 1880 Century Park East, Suite 1200, Los Angeles, California 90067 (the “Tenant”);

W I T N E S S E T H:

WHEREAS the Ground Lessor and Brighton Enterprises, LLC, a California limited liability company, successor-in-interest to Wilshire-Camden Associates, a California limited partnership (the “Ground Lessee”), are the current parties to that certain Amended and Restated Ground Lease (the “Ground Lease”), pursuant to which the Ground Lessee is leasing certain land located in the County of Los Angeles, City of Beverly Hills and State of California, known as 9601 Wilshire Boulevard, as more particularly described in Exhibit “A” attached hereto and incorporated herein by this reference (the “Land”) from the Ground Lessor;

WHEREAS the Leasehold Mortgagee is the present owner and holder of a certain deed of trust or deeds of trust (the “Leasehold Deed of Trust”) encumbering the Ground Lessee’s interest in the Ground Lease, as well as that certain office building together with the four-level subterranean parking garage located on the Land (the “Improvements”);

WHEREAS the Tenant is the holder of a leasehold estate in a portion of the Improvements under and pursuant to the provisions of a certain lease dated September     , 2002 with Ground Lessee, as landlord (the “Lease”); and

WHEREAS the Tenant has agreed to subordinate the Lease to the Leasehold Deed of Trust and the Ground Lease, and to the lien of each of the same, and the Leasehold Mortgagee and the Ground Lessor have each agreed to grant non-disturbance to the Tenant under the Lease on the terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of Ten Dollars ($10) and other good and valuable consideration, the receipt of which is hereby acknowledged, the Leasehold Mortgagee, the Ground Lessor and the Tenant hereby covenant and agree as follows:

1.             The Tenant agrees that the Lease and all of the terms, covenants and provisions thereof and all rights, remedies and options of the Tenant thereunder are and shall at all times continue to be subject and subordinate in all respects to (i) the Leasehold Deed of Trust and all of the terms, covenants and provisions thereof and to the lien thereof and to any and all increases, renewals, modifications, spreaders, consolidations, replacements and extensions thereof, and to any and all sums secured thereby, with the same force and effect as if the Leasehold Deed of Trust had been executed, delivered and recorded prior to the execution and delivery of the Lease, and (ii) the Ground Lease and all of the terms, covenants and provisions thereof and to any and all amendments, modifications, replacements and extensions thereof, and to any and all amounts required to be paid thereunder, with the same force and effect as if the Ground Lease had been executed, delivered and recorded prior to the execution and delivery of the Lease.

2.             The Leasehold Mortgagee and the Ground Lessor, respectively, agree that provided  (i) the Lease shall be in full force and effect, and (ii) the Tenant shall not be in default under any of the terms, covenants or conditions of the Lease or of this Agreement on the part of the Tenant to be observed or performed thereunder or hereunder, the right of possession of Tenant to the leased premises shall not be affected or disturbed by (a) the Leasehold Mortgagee in the exercise of any of its rights under the Leasehold Deed of Trust and any sale of the Improvements pursuant to the exercise of any rights and remedies under the Leasehold Deed of Trust or otherwise shall be made subject to Tenant’s right of possession under the Lease, and (b) the Ground Lessor in the exercise of any of its rights under the Ground Lease and any termination of the Ground Lease pursuant to the exercise of any rights and remedies under the Ground Lease or otherwise shall be made subject to Tenant’s right of possession under the Lease.

3.             The Tenant agrees that (i) if the Leasehold Mortgagee or any successors in interest to the Leasehold Mortgagee shall become the owner of the Improvements and the leasehold interest in the Ground Lease by reason of the foreclosure of the Leasehold Deed of Trust or the acceptance of a deed or assignment in lieu of foreclosure or otherwise, or (ii) if the Ground Lease is terminated and Ground Lessor or any successors in interest to the Ground Lessor shall become the owner of the Improvements, the Lease shall not be terminated or affected thereby but shall continue in full force and effect as a direct lease between the Leasehold Mortgagee and the Ground Lessor, as applicable, and the Tenant upon all of the terms, covenants and conditions set forth in the Lease and in that

event the Tenant agrees to attorn to the Leasehold Mortgagee and the Ground Lessor, as applicable, and the Leasehold Mortgagee and the Ground Lessor, as applicable, agrees to accept such attornment, provided, however, that the provisions of the Leasehold Deed of Trust shall govern with respect to the disposition of any casualty insurance proceeds or condemnation awards and neither the Leasehold Mortgagee or the Ground Lessor, as applicable, shall be (i) obligated to complete any construction work required to be done by the Landlord (as hereinafter defined) pursuant to the provisions of the Lease or to reimburse the Tenant for any construction work done by the Tenant, (ii) liable for any accrued obligation of the Landlord, or for any act or omission of the Landlord, whether prior to or after such foreclosure, sale or termination, as applicable, (iii) liable under any indemnity provision of whatever nature contained in the Lease, including, but not limited to, any environmental indemnification, (iv) required to make any repairs to the Premises (as hereinafter defined) and/or to the premises demised under the Lease as a result of fire or other casualty or by reason of condemnation, (v) required to make any capital improvements to the Premises and/or to the premises demised under the Lease which the Landlord may have agreed to make, but had not completed, or to perform or provide any services not related to possession or quiet enjoyment of the premises demised under the Lease, (vi) subject to any offsets, claims or counterclaims which shall have accrued to the Tenant against the Landlord prior to the date on which the Leasehold Mortgagee or the Ground Lessor, as applicable, or its respective successor in interest shall become the owner of the Premises, (vii) liable for any security deposit or other monies not actually received by the Leasehold Mortgagee or the Ground Lessor, as applicable.

4.             The Tenant shall not, without the prior written consent of the Leasehold Mortgagee and the Ground Lessor (which consent shall not be unreasonably withheld) (i) enter into any agreement decreasing the amount of rent payable under the Lease, (ii) prepay any of the rents, additional rents or other sums due under the Lease for more than one (1) month in advance of the due date thereof, (iii) voluntarily surrender the premises demised under the Lease or terminate the Lease without cause or shorten the term thereof, or (iv) assign the Lease or sublet the premises demised under the Lease or any part thereof except as expressly permitted by the terms of the Lease; and any such amendment, modification, termination, prepayment, voluntary surrender, assignment or subletting, without the prior written consent of the Leasehold Mortgagee and the Ground Lessor shall not be binding on the Leasehold Mortgagee or the Ground Lessor, respectively.

5.             The Tenant hereby represents and warrants to the Leasehold Mortgagee and the Ground Lessor that as of the date hereof (i) the Tenant is the owner and holder of the tenant’s interest under the Lease, (ii) the Lease has not been modified or amended, (iii) the Lease is in full force and effect and the term thereof will commence as provided in accordance withthe provisions thereof , (iv) neither the Tenant nor the Landlord is in default under any of the terms, covenants or provisions of the Lease and the Tenant to the best of its knowledge knows of no event which but for the passage of time or the giving of notice or both would constitute an event of default by the Tenant or the Landlord under the Lease, (v) neither the Tenant nor the Landlord has commenced any action or given or received any notice for the purpose of terminating the Lease, (vi) all rents, additional rents and other sums due and payable under the Lease have been paid in full and no rents, additional rents or other sums payable under the Lease have been paid for more than one (1) month in advance of the due dates thereof, and (vii) there are no offsets or defenses to the payment of the rents, additional rents, or other sums payable under the Lease.

6.             The Tenant shall notify the Leasehold Mortgagee and the Ground Lessor of any default by the Landlord under the Lease or any other circumstance which would entitle the Tenant to cancel or terminate the Lease or abate the rents, additional rents or other sums payable thereunder, and agrees that, notwithstanding any provisions of the Lease to the contrary, no notice of cancellation, termination or abatement thereof shall be effective unless the Leasehold Mortgagee and the Ground Lessor shall have received notice of the default or other circumstance giving rise to such cancellation, termination or abatement and shall have failed within sixty (60) days after receipt of such notice to cure such default or remedy such circumstance, or if such default cannot be cured within sixty (60) days, shall have failed within sixty (60) days after receipt of such notice to commence and to thereafter diligently pursue any action necessary to cure such default or remedy such circumstance, as the case may be.

7.             Anything herein or in the Lease to the contrary notwithstanding, in the event that the Leasehold Mortgagee or the Ground Lessor shall acquire title to the Premises, or shall otherwise become liable for any obligations of the Landlord under the Lease, neither the Leasehold Mortgagee nor the Ground Lessor, as applicable, shall have any obligation, nor incur any liability, beyond the then interest, if any, of the Leasehold Mortgagee or the Ground Lessor, as applicable, in the Premises and the Tenant shall look exclusively to such interest of the Leasehold Mortgagee or the Ground Lessor, as applicable, if any, in the Premises for the payment and discharge of any obligations imposed upon the Leasehold Mortgagee or the Ground Lessor, as applicable, hereunder or under the Lease and the Leasehold Mortgagee and the Ground Lessor, as applicable, are hereby released or relieved of any other liability hereunder and under the Lease.  The Tenant agrees that with respect to any money judgment which may be obtained or secured by the Tenant against the Leasehold Mortgagee or the Ground Lessor, as applicable, the Tenant shall look solely to the estate or interest

owned by the Leasehold Mortgagee or the Ground Lessor, as applicable, in the Premises and the Tenant will not collect or attempt to collect any such judgment out of any other assets of the Leasehold Mortgagee or the Ground Lessor, as applicable.

8.             Any notice, request, demand, statement, authorization, approval or consent made hereunder shall be in writing and shall be sent by Federal Express, or other reputable courier service, or by postage pre-paid registered or certified mail, return receipt requested, and shall be deemed given when received or refused (as indicated on the receipt) and addressed as follows:

If to the Leasehold Mortgagee:

Triangle Lenders, LLC

c/o Douglas Emmett Realty Advisors

808 Wilshire Boulevard, Suite 200

Santa Monica, California 90401

Attention: Mr. Jordan Kaplan and Mr. William Kamer

If to the Ground Lessor:

Douglas Emmett Realty Fund 2000

c/o Douglas Emmett Realty Advisors

808 Wilshire Boulevard, Suite 200

Santa Monica, California 90401

Attention: Mr. Jordan Kaplan and Mr. William Kamer

If to the Tenant:

Mr. David Brown

Chief Financial Officer

Mercantile National Bank, N.A.

1880 Century Park East, Suite 1200

Los Angeles, California 90067

it being understood and agreed that each party will use reasonable efforts to send copies of any notices to the addresses marked “With a copy to” hereinabove set forth; provided, however, that failure to deliver such copy or copies shall have no consequence whatsoever to the effectiveness of any notice made to the Tenant, the Leasehold Mortgagee and/or the Ground Lessor.  Each party may designate a change of address by notice given, as hereinabove provided, to the other party, at least fifteen (15) days prior to the date such change of address is to become effective.

9.             This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

10.           The term “Leasehold Mortgagee” as used herein shall include the successors and assigns of the Leasehold Mortgagee and any person, party or entity which shall become the owner of the Premises by reason of a foreclosure of the Leasehold Deed of Trust or the acceptance of a deed or assignment in lieu of foreclosure or otherwise.  The term “Ground Lessor” as used herein shall include the successors and assigns of the Ground Lessor and any person, party or entity which shall become the owner of the Improvements by reason of a termination of the Ground Lease.  The term “Landlord” as used herein shall mean and include the present landlord under the Lease and such landlord’s predecessors and successors in interest under the Lease.  The term “Premises” as used herein shall mean the Land, the Improvements, any other improvements now or hereafter located on the Land and/or the estates therein encumbered by the Leasehold Deed of Trust and/or the Ground Lease.

11.           This Agreement may not be modified in any manner or terminated except by an instrument in writing executed by the parties hereto.

[INTENTIONALLY OMITTED]

12.           This Agreement shall be governed by and construed under the laws of the State in which the Premises are located.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written.

TRIANGLE LENDERS, LLC,
a California limited liability company
By:	Douglas Emmett Realty Advisors,
	a California corporation,
	Manager
By:
Name:
Title:
Dated:

BRIGHTON ENTERPRISES, LLC,
a California limited liability company
By:	Douglas, Emmett and Company,
	a California corporation,
	Its agent
By:
Name:
Title:
Dated:

MERCANTILE NATIONAL BANK, N.A.,

a California “C”________

By:

Name:

Title:

Dated:

By:

Name:

Title:

Dated:

STATE OF	)
	) ss:
COUNTY OF	)

On                              , before me,                              , a Notary Public, personally appeared                              , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Notary Public

STATE OF	)
	) ss:
COUNTY OF	)

On                               , before me,                              , a Notary Public, personally appeared                              , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Notary Public

STATE OF	)
	) ss:
COUNTY OF	)

On                              , before me,                              , a Notary Public, personally appeared                              , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Notary Public

EXHIBIT “A”

LEGAL DESCRIPTION

Lots 8, 9, 10, 11, 12, 13 and 14, in Block 18, of Beverly, in the City of Beverly Hills, County of Los Angeles, State of California, as per map recorded in Book 11, Pages 94 and 95 of Maps, in the Office of the County Recorder of said County.

FIRST AMENDMENT TO OFFICE LEASE

                This First Amendment to Office Lease (the “First Amendment”), dated March 30, 2005, is made by and between BRIGHTON ENTERPRISES, LLC, a California limited liability company (“Landlord”), with an office at 808 Wilshire Boulevard, Suite 200, Santa Monica, California 90401, and MERCANTILE NATIONAL BANK, N.A., a California “C” corporation (“Tenant”), with offices at 9601 Wilshire Boulevard, Suite 250, Beverly Hills, California 90210.

WHEREAS,

A.    Landlord, pursuant to the provisions of that certain written Office Lease, dated  March 11, 2004 (the “Lease”) leased to Tenant and Tenant leased from Landlord space in the property located at 9601 Wilshire Boulevard, Beverly Hills, California 90210 (the “Building”), commonly known as Suite 250 (the “Premises”);

                B.    The provisions of the Lease specify that the Commencement Date shall commence five (5) business days following the date Landlord substantially completes the Improvements for which Landlord is obligated under the Lease;

                C.    The Improvements were completed on May 25, 2004;

                D.    The provisions of the Lease further specify that the Rentable Area and all other economic provisions of the Lease shall be appropriately adjusted based upon the final certification of the Usable Area;

                E.     Certification of the Usable Area has now been received.

NOW, THEREFORE, in consideration of the covenants and provisions contained herein, and other good and valuable consideration, the sufficiency of which Landlord and Tenant hereby acknowledge, Landlord and Tenant agree:

1.Confirmation of Defined Terms.  Unless modified herein, all terms previously defined and capitalized in the Lease shall hold the same meaning for the purposes of this First Amendment.

2.Confirmation of Commencement Date and Term.  The Commencement Date is hereby confirmed to be June 1, 2004 and the Term is hereby confirmed from and including June 1, 2004 to and including August 31, 2009.

3.Confirmation of Usable and Rentable Area.  The Usable Area of the Premises is hereby confirmed to be 2,084 square feet and the Rentable Area of the Premises is hereby confirmed to be 2,559 square feet.

        Landlord and Tenant agree that even if the Rentable or Usable Area of the Premises and/or the total Building Area are later determined to be more or less than the figures stated herein, for all purposes of the Lease, the figures stated herein shall be conclusively deemed to be the actual Rentable or Usable Area of the Premises, as the case may be.

4.Revision in Fixed Monthly Rent.  Tenant acknowledges and agrees commencing June 1, 2004 and continuing through August 31, 2004, the initial Fixed Monthly Rent payable by Tenant shall be $7,369.92 per month.  Furthermore, as of the Commencement Date, the provisions of Section 3.3 are hereby deleted in their entirety, and replaced in lieu thereof, with the following:

        “Commencing September 1, 2004 and continuing through May 31, 2005, the Fixed Monthly Rent payable by Tenant shall increase from $7,369.92 per month to $7,753.77 per month;

        Commencing June 1, 2005 and continuing through May 31, 2006 the Fixed Monthly Rent payable by Tenant shall increase from $7,753.77 per month to $7,986.38 per month;

        Commencing June 1, 2006 and continuing through May 31, 2007, the Fixed Monthly Rent payable by Tenant shall increase from $7,986.38 per month to $8,225.97 per month; and

        Commencing June 1, 2007 and continuing through May 31, 2008 the Fixed Monthly Rent payable by Tenant shall increase from $8,225.97 per month to $8,472.75 per month;

        Commencing June 1, 2008 and continuing through May 31, 2009, the Fixed Monthly Rent payable by Tenant shall increase from $8,472.75 per month to $8,726.94 per month; and

        Commencing June 1, 2009 and continuing throughout the remainder of the initial Term, the Fixed Monthly Rent payable by Tenant shall increase from $8,726.94 per month to $8,988.74 per month.”

        Notwithstanding the foregoing, Tenant shall be permitted to defer one hundred percent (100%) of the Fixed Monthly Rent due for the months of July 2004, August 2004, June 2005, June 2006, and June 2007 (collectively, the “Rent Deferral Amount”).  So long as Tenant does not commit a material, uncured default during the Term that has resulted in Landlord filing an unlawful detainer action against Tenant, the entire Rent Deferral Amount shall be abated and forgiven as of the Termination Date.

5.Acceptance of Premises.   Tenant acknowledges and agrees that Landlord has completed the Improvements for which Landlord was obligated under the Lease.

6.Warranty of Authority. If Landlord or Tenant signs as a corporation or a partnership, each of the persons executing this First Amendment on behalf of Landlord or Tenant hereby covenants and warrants that the corporation executing hereinbelow is a duly authorized and existing entity that is qualified to do business in California; that the person(s) signing on behalf of either Landlord or Tenant have full right and authority to enter into this First Amendment; and that each and every person signing on behalf of either Landlord or Tenant are authorized in writing to do so.

7.Broker Representation.  Landlord and Tenant represent to one another that it has dealt with no broker in connection with this First Amendment other than Douglas, Emmett and Company and First Property Realty Corporation.  Landlord and Tenant shall hold one another harmless from and against any and all liability, loss, damage, expense, claim, action, demand, suit or obligation arising out of or relating to a breach by the indemnifying party of such representation.  Landlord agrees to pay all commissions due to the brokers listed above created by Tenant’s execution of this First Amendment.

8.Successors and Heirs.  The provisions of this First Amendment shall inure to the benefit of Landlord’s and Tenant’s respective successors, assigns, heirs and all persons claiming by, through or under them.

9.Confidentiality.  Landlord and Tenant agree that the covenants and provisions of this First Amendment shall not be divulged to anyone not directly involved in the management, administration, ownership, lending against, or subleasing of the Premises, other than Tenant’s or Landlord’s counsel-of-record or leasing or sub-leasing broker of record.

10.Disclosure.  Landlord and Tenant acknowledge that principals of Landlord have a financial interest in Douglas Emmett Realty Advisors, Douglas Emmett and Company, and P.L.E. Builders.

11.Governing Law.  The provisions of this First Amendment shall be governed by the laws of the State of California.

12.Reaffirmation.  Landlord and Tenant acknowledge and agree that the Lease, as amended herein, constitutes the entire agreement by and between Landlord and Tenant relating to the Premises, and supersedes any and all other agreements written or oral between the parties hereto.  Furthermore, except as modified herein, all other covenants and provisions of the Lease shall remain unmodified and in full force and effect.

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this document as of the day and year written below.

LANDLORD:		TENANT:
BRIGHTON ENTERPRISES, LLC, a California limited liability company		MERCANTILE NATIONAL BANK, N.A., a California “C” corporation
By:	DOUGLAS, EMMETT AND COMPANY,
	a California corporation,
	its agent
By:		By:
	Michael J. Means, Vice President	Signer's Name
		o President o Vice President or o Chief Executive Officer (Check Title Above)
Dated:
		and
		By:
		Signer's Name
		o President o Vice President or o Chief Executive Officer (Check Title Above)
		Dated:

EX-10.14

Exhibit 10.14

OFFICE BUILDING LEASE

This Lease, dated, for reference purposes only, on this    10^th      day of     September  20 04  , is made between LANDLORD and TENANT,

WITNESSETH:

1.  TERMS AND DEFINITIONS.For the purpose of this Lease, the following terms shall have the following definitions and eanings:

a.LANDLORD:   Encino Corporate Plaza, L.P.                                                                            

b.        LANDLORD’s Representative:(The authorized representative of LANDLORD for all rental payments and all notices as provided herein)   Milbank Real Estate Services, Inc.

727 West 7^th Street, Suite 800, Los Angeles, California 90017

c. TENANT:   Mercantile National Bank, N.A., a national bank

d.TENANT’s Address:

                   16661 Ventura Boulevard, Suite 110, Encino, California  91436                                                       

e.        Building’s Name and Address:  Encino Corporate Plaza,    16661 Ventura Blvd., Encino, California 91436    

f.Suite Number:110, consisting of approximately1650 rentable square feet

g.Floor(s) upon which the Premises are located:   First   

h.        Premises:Those certain Premises described in Paragraph 2.

i.Term:   Sixty (60)     months and    -0-   days.

j.Commencement Date:    June 1, 2004                              

k.Expiration Date:        May 31, 2009                                 

l.Monthly Basic Rent:    Four Thousand Five Hundred and No/100 Dollars ($4,500.00)                              

m.TENANT’s Percentage Share:          1.01%                            

n.Security Deposit:   Four Thousand Five Hundred and No/100 Dollars ($4,500.00)                                  

o.Permitted Use:     Commercial Bank Branch, including ATM and Night Depository

p. Parking:   See Paragraph 1 of the Exhibit “B”

q.Brokers:Milbank Real Estate Services, Inc., for the Landlord, and Cushman Wakefield for the Tenant

r.        Initial Payment Upon Execution of Lease:

i.	1st Month Basic Rent:	$	4,500.00
ii.	Last Month Basic Rent:	$	0.00
iii.	Security Deposit:	$	4,500.00
iv.	1st Month Parking:	$	0.00
v.	Miscellaneous:	$	0.00
	Total:	$	9,000.00

s. Additional documents: Attached to this Lease and incorporated herein by reference are:  Exhibits “A” and “B”

LANDLORD’s Initials:	TENANT’s Initials:
	TENANT’s Initials:

1

2.   PREMISES LEASED.  For and in consideration of the covenants hereinafter mentioned, LANDLORD leases to TENANT and TENANT hereby leases from LANDLORD the Premises contained within suite designated in Paragraph 1.f.  The rent hereunder is a negotiated sum determined by a number of factors including but not limited to:  (i) the location of the Premises within in the Building, (ii) the extent of the improvements in the Premises,(iii) the length of the Lease term, (iv) the intended use of the Premises, (v) the credit worthiness of the TENANT, (vi) LANDLORD’s prior business dealings with the TENANT,  and (vii) the approximate rentable square footage of the Premises. The term “approximate rentable square footage” contained in this Lease, includes a portion of all common areas in the Building and areas dedicated to the service of the Building which essentially comprises the whole floor upon which the premises are located, without deduction for columns and projections necessary to the Buildings structure, plus the ground floor common areas located within the Building.  The rentable square footage of the Premises and the Building are determined by LANDLORD’s architect, which such determination shall be conclusive and binding upon the parties herein.

3.    TERM. The term of this Lease shall be for the period designated in Paragraph 1.i, commencing on the Commencement Date and ending on the Expiration Date, unless the term hereby demised shall be sooner terminated as hereinafter provided.  If TENANT, with LANDLORD’s consent, takes possession of the Premises prior to the commencement of this Lease, then TENANT shall be subject to all the covenants and conditions hereof, and shall pay rent for the period beginning with the date TENANT takes possession at the monthly rate prescribed in Paragraph 1.l.

4.    MONTHLY BASIC RENT. The TENANT agrees to pay the LANDLORD as basic rent for said leased Premises, for the initial period of the Lease as set forth in Paragraph 1.i, in monthly installments as set forth in Paragraph 1.l (the basic monthly rental) subject to adjustments as hereinafter provided (plus such other sums as are hereinafter provided for), each installment payable in advance on the first day of each and every calendar month during the term hereof, commencing on the Commencement Date as set forth in Paragraph 1.j of this Lease in lawful money of the United States of America, which the TENANT agrees to pay to the LANDLORD without deduction or offset, prior notice or demand, at the office of the Building or such other place as the LANDLORD may designate, except that if the Commencement Date occurs on a day other than the first day of the month, then the Basic Rent for the fraction  of the month starting with the Commencement Date shall be paid on said Commencement Date, prorated on the basis of the actual number of days in said month.  If the term hereof ends on a day other than the last day of a month, then the Basic Rent for the month during which said expiration occurs shall be prorated on the basis of the actual number of days TENANT occupies the Premises and a 30 day month.  In addition to said Basic Rent, TENANT agrees to pay “Additional Rent” as and when hereinafter provided in this Lease.  Basic Rent and Additional Rent are hereinafter sometimes referred to collectively as the “rent”.

           Upon execution of this lease, TENANT shall pay the LANDLORD the sums as set forth in Paragraph 1.r. The time of payment of Basic Rent and additional rent hereunder is of the essence of this Lease and, in addition to all of the other remedies available to LANDLORD, hereunder shall bear interest at the maximum rate permitted by law after due date until paid in full.

5.  LATE CHARGES.  TENANT hereby acknowledges that late payment by TENANT to LANDLORD of rent and other sums due hereunder will cause LANDLORD to incur costs not contemplated by this Lease, the exact amount of which will be impractical or extremely difficult to ascertain.  Such costs include, but are not limited to, processing and accounting charges and late charges which may be imposed on LANDLORD by the terms of the trust deed encumbering the Premises.  Accordingly, if any installment of rent or any other sum due from TENANT shall not be received by LANDLORD within five (5) days after such amount shall be due, TENANT shall pay to LANDLORD a late charge equal to 10% of such overdue amount.  The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs LANDLORD will incur by reason of late payment. TENANT acknowledges that the aforesaid amount of 10% is not a penalty, but is an amount that is acknowledged by the parties as the amount representing the liquidated damages that LANDLORD will suffer as a result of the late payment, taking into consideration all facts and circumstances known to the parties at this time and represents a fair and reasonable estimate of the costs the LANDLORD will incur by reason of the late payment. The parties further agree that proof of actual damage would be costly or inconvenient.  The late charge shall be considered Additional Rent as defined in Paragraph 4 of this Lease, and shall be in addition to all of LANDLORD’s other rights and remedies hereunder or at law. In addition to the late charge described herein, any Monthly Basic Rent, or other amounts owed by TENANT to LANDLORD which are not paid on or before the date they are due, shall thereafter bear interest until paid in full at a rate equal to twelve percent (12%) per annum, provided that in no event shall such rate exceed the highest rate permitted by applicable law.  The Late Charge and interest payable hereunder shall be considered Rent.  If TENANT’s check is returned by the bank, in addition to the late charge of 10% as specified above, TENANT shall also pay to LANDLORD the charge made by the bank for the returned check and LANDLORD’s return check charge of $15.00 per check returned.Notwithstanding anything to the contrary in this Paragraph 5, LANDLORD shall not impose interest or late charges unless 3 days’ prior written notice has been given to TENANT of late rent; provided further, that such notice shall only be required once in every 12 month period.

LANDLORD’s Initials:	TENANT’s Initials:
	TENANT’s Initials:

6.  C.P.I. ADJUSTMENTS.  LANDLORD shall have the additional right to increase each year the monthly basic rent as specified in Paragraph 1.l on the first day of the month following the anniversary date of the commencement of the term and in accordance with the following formula:

           The Consumer Price Index for all Urban Consumers for the Los Angeles-Long Beach metropolitan area, published in the U.S. Department of Labor, Bureau of Labor Statistics (Index) which is published for the month which is three (3) months prior to such anniversary date (the “Extension Index”) shall be compared with the Index (the “Beginning Index”) published for the month which is three (3) months prior to the “Beginning Month”.  For the purposes of this Paragraph 6, the “Beginning Month” shall be defined as the month of the latest adjustment made in accordance with this Paragraph 6, or, if there has been no previous adjustment, the month in which the original Lease Term commenced.

LANDLORD’s Initials:	TENANT’s Initials:
	TENANT’s Initials:

2

           If the Extension Index has increased over the Beginning Index, the monthly rent payable during the next year shall be set by multiplying the monthly basic rent for the Beginning Month by a fraction, the numerator of which is the Extension Index and denominator of which is the Beginning Index. As soon as the monthly basic rent is set, LANDLORD shall notify TENANT of the amount of the increase of the rental, if any, for the next year of the term. The failure of LANDLORD to notify TENANT of an increase shall not preclude LANDLORD from enforcing its rights hereunder for such year or any subsequent year.

           If the Index is changed so that the base year differs from that used in the Beginning Month, the Index shall be converted in accordance with the conversion factor published by the U.S. Department of Labor, Bureau of Labor Statistics.  If the index is discontinued or revised during the Term, such other government index, as selected by LANDLORD in its reasonable discretion,  or computation with which it is replaced shall be used in order to obtain substantially the same result as would be obtained if the Index had not been discontinued or revised.

7.  OPERATING EXPENSES AND REAL PROPERTY TAX ADJUSTMENTS.  TENANT shall pay to LANDLORD upon receipt of a statement therefor, as additional rent, such proportion of the following items as the rentable square footage rented by TENANT bears to the total rentable square footage of the Building as set forth in Paragraph 1.m of this Lease:

i.  Any increase in expenses paid or incurred by LANDLORD in the operation or maintenance of the Building, above such expenses paid or incurred by LANDLORD during the base year (hereinafter defined); and

ii.  Any increase in the city, county, special district and state “real estate taxes” in excess of the real estate taxes levied against the land and Building (including parking structure ancillary thereto) of which the Premises are a part, for the base year (hereinafter defined).

                 a. Definition of Terms. For the purposes of this Paragraph 7, the following terms are defined as follows:

                     i.  Expenses: Expenses shall consist of all direct costs of operation and maintenance of the Building, including parking structure ancillary thereto and the common areas as determined by standard accounting practices, including the following costs by way of illustration, but not limitation: water and sewer charges; the net cost and expense of insurance for which LANDLORD is responsible hereunder or which LANDLORD or any mortgagee with a lien affecting the Premises reasonably deems necessary in connection with the operation of the Building; utilities; janitorial services; security; labor, parking expenses; utilities surcharges; or any other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulation or interpretations thereof, promulgated by any federal, state, regional, municipal or local government authority in connection with the use or occupancy of the Building or the Premises or the parking facilities serving the Building or the Premises; the cost (amortized over such reasonable period as LANDLORD shall determine together with interest at the maximum rate allowed by law on the unamortized balance) of (A) any capital improvements made to the Building by the LANDLORD after the first year of the term of the Lease that reduce other Expenses, or made to the Building by LANDLORD after the date of the Lease that are required under any governmental law or regulation that was not applicable to the Building as of the Commencement Date of this Lease, or (B) replacement of any Building equipment needed to operate the Building at the same quality levels as prior to the replacement; costs incurred in the management of the Building, if any (including supplies, wages and salaries of employees used in the management, operation and maintenance of the Building, payroll taxes and similar governmental charges with respect thereto, Building management office rental if said office is located in the Building, and a management fee); air-conditioning; waste disposal; heating; ventilating; elevator maintenance; supplies; materials; equipment; tools; repair and maintenance of the structural portions of the Building, plumbing, heating, ventilating, air-conditioning and electrical systems installed or furnished by LANDLORD; maintenance costs and upkeep of all parking and commons areas, including rental of personal property used in such maintenance and upkeep; costs and expenses of gardening and landscaping; maintenance of signs (other than TENANT’s signs); personal property taxes levied on or attributable to personal property used in connection with the entire Building, including the Common Areas and ancillary parking structure; reasonable audit or verification fees; and costs and expenses of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning, refuse removal, security and similar items, including appropriate reserves.  Expenses shall not include depreciation on the Building or equipment therein; LANDLORD’s executive salaries; the commission of real estate brokers or leasing agents, and other costs related to leasing the Building, including marketing expenses and tenant improvements; interest expense on Building financing; amortization of the cost of Leasehold Improvements in the Building; ground rent; income and franchise taxes; dividends; and attorney’s fees and expenses which are not related to the operation of the Building; amounts paid to LANDLORD or subsidiaries or affiliates of LANDLORD for goods or services provided for the Building to the extent that such costs exceed competitive costs of such goods or services provided by unaffiliated third parties; costs paid or reimbursed by insurance or other tenants.

                     ii. Real Estate Taxes.  As used herein, the “real estate taxes” shall include any form of assessment, license fee, license tax, business license fee, commercial rental tax, levy, charge, penalty, tax or similar imposition imposed by any authority having the direct power to tax, including any city, country, state or federal government, or any school, agricultural, lighting drainage or other improvements or special assessment district thereof, as against any legal or equitable interest of LANDLORD in the Premises, including, but not limited to, the following:

(1)  Any tax on LANDLORD’s “right” to rent or “right” to other income from the Premises or as against LANDLORD’s business of leasing the Premises;

(2) Any assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real estate tax, it being acknowledged by TENANT and LANDLORD that Proposition 13 was adopted by the voters of the State of California in the June, 1978 Election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants.  It is the intention of TENANT and LANDLORD that all such new and increased assessments, taxes, fees, levies and charges to be included within the definition of “real property taxes” for the purposes of this Lease;

(3) Any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or the rent payable hereunder, including, without limitation, any gross income tax or excise tax levied by the state, city or federal government, or any political subdivision thereof, with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by TENANTS of the Premises, or any portion thereof;

(4) Any assessment, tax, fee, levy or charge upon this transaction or any document to which TENANT is a party creating or transferring an interest or an estate in the Premises;

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(5) Any assessment, tax, fee, levy or charge by any governmental agency related to any transportation plan, fund or system instituted within the geographic area of which the Building is a part; or

(6) Reasonable legal and other professional fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce real property taxes.

           Notwithstanding any provision of this Paragraph 7 expressed or implied to the contrary, “real estate taxes” shall not include LANDLORD’s federal or state income, franchise, inheritance or estate taxes

iii.  Base Year for Expenses.  The base year for the determination of any increase in expenses incurred by LANDLORD in the operation or maintenance of the Building, is the calendar year commencing January 1, and ending December 31 in which the term of this Lease commenced.

iv.  Base Year for Real Estate Taxes. The base year for the determination of any increase in the city, county, special district and state “real estate taxes” in excess of the real estate taxes levied against the land, Building, common areas (including parking structure ancillary thereto) of which the Premises are a part is the fiscal tax year commencing July 1 and ending the following June 30 in which the term of this Lease commences.

           With respect to any portion of a Lease year which does not conform to a fiscal tax year (a tax year ends June 30th), the additional payments provided under this Paragraph 7 shall be prorated accordingly.

                     b. Estimate Statement and Actual Statement. At the time of making and entering into of this Lease and by the first day of March of each calendar year during the term of this Lease, LANDLORD shall endeavor to deliver to TENANT a statement (“Estimate Statement”) wherein LANDLORD shall estimate the Expenses and Real Estate Taxes for the current calendar year; provided, however, that if LANDLORD determines that TENANT’s Percentage Share of the Expenses for such current calendar year is greater than that set forth in the Estimate Statement, then LANDLORD may deliver on the first day of June, September, or December, as appropriate, a revised Estimate Statement and TENANT shall pay to LANDLORD, within ten (10) days of the delivery of such revised Estimate Statement, the difference between such revised Estimate Statement and the original Estimate Statement for the portion of the current calendar year which has then expired, and TENANT shall pay during the balance of such current calendar year through February of the succeeding calendar year a fraction of the balance of such difference as would fully amortize such excess over the remaining months of the then current calendar year through and including February of the succeeding calendar year.  Subsequent installments shall be paid concurrently with the regular monthly rent payments for the balance of the calendar year and shall continue until the next calendar year’s Estimate Statement is rendered.  By the first day of March of each succeeding calendar year during the term of this Lease, LANDLORD shall endeavor to deliver to TENANT a statement (“Actual Statement”) wherein LANDLORD shall state the actual Expenses for the preceding calendar year.  If the Actual Statement reveals a greater increase in TENANT’s Percentage Share of Expenses than was estimated by LANDLORD in the Estimated Statement delivered as provided herein, then upon receipt of the Actual Statement from LANDLORD, TENANT shall pay a lump sum equal to said total increase over the Expenses and Real Estate Taxes, less the total of the monthly installments of increases set forth on the Estimate Statement which were paid in the previous calendar year. If, in any calendar year, TENANT’s Percentage Share of Expenses is less than the preceding calendar year, then upon receipt of LANDLORD’s Actual Statement, any overpayment made by TENANT on the monthly installment basis provided above shall be credited toward the next monthly rent falling due and the monthly installment of TENANT’s Percentage Share of Expenses to be paid pursuant to the then current Estimate Statement shall be adjusted to reflect such lower expenses for the most recent calendar year, or if this Lease has been terminated, such excess shall be credited against any amount which TENANT owes LANDLORD pursuant to this Lease and, to the extent all amounts which TENANT owes LANDLORD pursuant to this Lease have been paid, LANDLORD shall promptly pay such excess to TENANT.  Any delay or failure by LANDLORD in delivering any Estimate or Actual Statement pursuant to this Paragraph 7 shall not constitute a waiver of its right to require an increase in rent nor shall it relieve TENANT of its obligations pursuant to this Paragraph 7, except that TENANT shall not be obligated to make any payments based on such Estimate or Actual Statement until ten (10) days after receipt of such Estimate or Actual statement.

           Even though the term has expired and TENANT has vacated the Premises, when the final determination is made of TENANT’s Percentage Share of Expenses for the year in which this Lease terminates, TENANT shall immediately pay any increase due over the estimated expenses paid and conversely any overpayment made in the event said expenses decrease shall be immediately rebated by LANDLORD to TENANT.

           Notwithstanding anything contained in this Paragraph 7, the rental payable by TENANT shall in no event be less than the rent specified in Paragraph 1.l  hereof.

   c.  Disputes Regarding Actual Statement.  In the event TENANT disputes any and all amounts set forth in the Actual Statement, TENANT shall provide LANDLORD with written notice of same within sixty (60) days of receipt of the Actual Statement. As a condition precedent to contesting the amount set forth in the Actual Statement shall be the payment by TENANT in a timely manner of the amount claimed due and owing by LANDLORD.  Failure to provide such notice in said timely fashion and pay in the full the amounts claimed due and owing by LANDLORD will constitute a waiver by TENANT of the right to dispute the validity of the Actual Statement amounts so set forth. After TENANT has timely given the written notice and paid the amount claimed by LANDLORD in full, TENANT shall have the right no later than sixty (60) days after such notice and payment, to cause LANDLORD’s books and records with respect to the preceding calendar year to be audited by a certified public accountant mutually acceptable to LANDLORD and TENANT. The amounts payable under this Paragraph 7 by LANDLORD to TENANT or by TENANT to LANDLORD, as the case may be, shall be appropriately adjusted on the basis of such audit. If such audit discloses a liability for further refund by LANDLORD to TENANT in excess of fifteen (15%) of the payments previously made by TENANT for such calendar year, the cost of such audit shall be borne by LANDLORD; otherwise, the cost of such audit shall be borne by TENANT.

8.  DELAY IN OCCUPANCY.  TENANT agrees that in the event of the inability of LANDLORD to deliver to TENANT possession of the Premises at the commencement of said term, LANDLORD shall not be liable for any damage caused thereby, nor shall this Lease be void or voidable if possession is given to TENANT within 180 days after the date set for commencement of this Lease, but in no event shall TENANT be liable for rent until such time as LANDLORD offers to deliver possession of the Premises to TENANT.  However, the term hereof shall not be extended by such delay.

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  9. TERMINATION. Except if terminated as otherwise provided in this Lease, this Lease shall terminate on the Expiration date set forth in Paragraph 1.k without the necessity of notice from either party to the other party.

                 10. HOLDING OVER. If TENANT holds over after the termination of this Lease without the express written consent of the LANDLORD, TENANT shall be a tenant-at-sufferance, and TENANT shall pay to LANDLORD rent at the rate of one and one half times the amount of rental paid by TENANT for the last month of the lease term, in addition to all other payments required to be made by TENANT for the time during which TENANT retains possession of the Premises, but this shall not waive any of the LANDLORD’s other rights and remedies therefore.  TENANT EXPRESSLY ACKNOWLEDGES THAT THE ACCEPTANCE BY THE LANDLORD OF ANY LESSER AMOUNT FOR RENT DURING SUCH PERIOD THE TENANT IS A TENANT-AT-SUFFERANCE, SHALL NOT AFFECT LANDLORD’s RIGHT TO THE BALANCE OF THE RENT PROVIDED FOR IN THIS PARAGRAPH AND SHALL NOT BE CONSTRUED AS CREATING AN ACCOUNT STATED BETWEEN LANDLORD AND TENANT AS TO THE AMOUNT OF RENT DUE AND OWING DURING THE HOLDING OVER PERIOD. The foregoing provisions of this Paragraph 10 are in addition to and do not affect LANDLORD’s right of reentry or any rights of LANDLORD hereunder or as otherwise provided by law.  If TENANT fails to surrender the Premises upon the expiration of this lease. TENANT shall indemnify and hold LANDLORD harmless from all loss, cost or damage (including reasonable attorney fees and court costs), including without limitation, any claim made by any succeeding Tenant founded on or resulting from such failure to surrender.

11. TAXES ON TENANT’s PROPERTY.

a.  Payment of Personal Property Taxes. TENANT shall be liable for and shall pay before delinquency taxes levied against any personal property or trade fixtures placed by TENANT in or about the Premises. If any such taxes on TENANT’s personal or trade fixtures are levied against LANDLORD or LANDLORD’s property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of TENANT and if LANDLORD, after written notice to TENANT, pays the taxes based upon such increased assessments, which LANDLORD shall have the right to do regardless of the validity thereof, but only under proper protest if requested by TENANT.  TENANT shall upon demand repay to LANDLORD the taxes levied against LANDLORD, or the proportion of such taxes resulting from such increase in the assessment, provided however,  that in such event, at TENANT’s sole cost and expense, TENANT shall have the right, in the name of LANDLORD and with LANDLORD’s full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes so paid under protest, any amount so recovered to belong to TENANT.

b.     Taxation of Leasehold Improvements. If the Leasehold Improvements in the Premises, whether installed and/or paid for by LANDLORD or TENANT and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which Leasehold Improvements conforming to LANDLORD’s “Building Standard” in other  space in the Building are assessed, then the real property taxes and assessment levied against LANDLORD or the property by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of TENANT and shall be governed by the provisions of Paragraph 11.a above.  If the records of the County Assessor are available and sufficiently detailed as same as a basis for determining whether said Leasehold Improvements are assessed at a higher valuation than LANDLORD’s “Building Standard” such records shall be binding on  both LANDLORD and TENANT.  If the records of the County Assessors are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used.

12. SECURITY DEPOSIT.   Upon execution of this lease, TENANT shall deposit with the LANDLORD the sum as set forth in Paragraph 1.n of this Lease, which sum shall be held by LANDLORD for security for the faithful performance by TENANT of all of the terms, covenants, and conditions of this Lease by TENANT to be kept and performed during the term hereof or any extension hereof.

           If TENANT defaults beyond any applicable notice and cure period with respect to any provision of this lease, including but not limited to, the provisions relating the payment of rent, LANDLORD may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any rent or any other sum in default, or for the payment of any amount which LANDLORD may spend or become obligated to spend by reason of TENANT’s default, or to compensate LANDLORD for any other loss or damage which LANDLORD may suffer by reason of TENANT’s default.  If any portion of said deposit is so used or applied, TENANT shall, within thirty days after written demand therefor, deposit cash with LANDLORD in an amount sufficient to restore the security deposit to its originalamount, and TENANT’s failure to do so shall be in default under this lease.  LANDLORD shall not be required to keep this security deposit separate from its general funds and TENANT shall not be entitled to interest on such deposit.

           If TENANT is not in default of the terms of this Lease beyond any applicable notice and cure period as of the last day of the Term (as it maybe extended), the security deposit or any balance thereof shall be returned to TENANT (or, at LANDLORD’s option, to the last assignee of TENANT’s interest hereunder) within ninety days from expiration of the Lease term, provided that the LANDLORD may retain the security deposit for a period not to exceed the longer of six months or until such time as any amount due from TENANT in accordance with different provisions of this Lease has been determined and paid in full. TENANT shall not apply the security deposit to the last month’s rent. TENANT expressly agrees that if it should attempt to apply the security deposit to the last month’s rent, then the last month’s rent shall be increased to 150% of the amount otherwise scheduled as the last month’s rent. LANDLORD and TENANT hereby agree that the increase of rent set forth above will be considered as liquidated damages for the failure to pay the last month’s rent and not a penalty. At the time of the making and entering into of this Lease, LANDLORD and TENANT agree that it would be difficult, costly, and inconvenient to determine the amount of damages that LANDLORD would sustain as a result of the failure of TENANT to pay the last month’s rent.  Therefore, LANDLORD and TENANT hereby agree that the increase in rent as set forth in this Paragraph 12 is a fair and reasonable estimation of the damages that LANDLORD would suffer. In the event of bankruptcy or other debtor-creditor proceedings against TENANT, TENANT’s security deposit shall be deemed to be applied first to the payment of rent, and other sums due LANDLORD for all periods prior to filing of such proceedings.

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13.  USE OF PREMISES.In addition to the use provided for in Paragraph 1.o, TENANT shall use the Premises for general office purposes and shall not use or permit the Premises to be used for any other purposes without consent of LANDLORD., which consent shall not be unreasonably withheld, conditioned, or delayed  Notwithstanding anything to the contrary in this Lease,   During the term of this Lease and any extensions thereof, LANDLORD hereby grants to TENANT the right to maintain the existing night depository window into the Premises, and further to install and maintain an automated teller machine (“ATM”) including installation of any required lighting.  The location for installation of the ATM shall be as set forth in attached Exhibit “A”.

           TENANT shall not do or permit anything to be done in or about the Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect any fire or other insurance upon the Premises or any of its contents or cause cancellation of any insurance policy covering the Premises or any part thereof or any of its contents and TENANT shall comply with all rules orders, regulations and requirements of any organization which sets out standards, requirements, or recommendations commonly referred to by major fire insurance underwriters including without limitation thereto, the installation of fire extinguishers or an automatic dry chemical extinguishing system.  TENANT shall within five days upon demand, reimburse LANDLORD as additional rent for any additional premiums charged for insurance policies by reason of TENANT’s failure to comply with the provisions of this Paragraph 13.

           TENANT shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other TENANTS or occupants of the Building or injure or annoy them or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose nor shall TENANT cause, maintain or permit any nuisance in, on or about the Premises.

           TENANT shall not commit or suffer to be committed any waste in or upon the Premises and shall keep the Premises in first class repair and appearance.  The Premises shall not be used for cooking(provided, however, that TENANT may use small kitchen devices typically used in offices, such as coffee makers, microwave ovens, toaster ovens), lodging, sleeping or for immoral purposes and no objectionable noise, vibration or odor shall be permitted to escape from the Premises.

           TENANT warrants that it is not a political organization, and agrees that the Premises shall not be used for political offices or political meetings.  TENANT shall at its sole cost and expense promptly comply with all laws, statutes, ordinances and governmental regulations or requirements now in force or which may hereafter be in force relating to or affecting TENANT’s specific and unique use of the Premises or the Building.  Nothing contained herein shall require TENANT to make any structural changes, capital improvements, or other alterations, additions or improvements to the Premises, unless such changes are required due to either TENANT or TENANT’s agents, clients, contractors, directors, employees, invitees, licensees, officers, partners or shareholders use of the Premises for purposes other than general office purposes.

           TENANT may not solicit TENANT’s services, such as but not limited to telecommunications, data processing, or word processing, to any unaffiliated tenant in the Building without LANDLORD’s prior written consent which consent may be withheld by LANDLORD at its sole and absolute discretion; provided, however, that TENANT may serve as a bank to any other tenant of the Building without obtaining LANDLORD’s consent.  TENANT shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. TENANT shall be responsible for any and all acts in contravention to the provisions of this Paragraph 13 committed by TENANT, its agents, servants, employees, customers, contractors, clients, visitors, patients and invitees.  TENANT shall not be allowed to use name of the Building in which the Premises are located, or words to that effect, in connection with any business carried on in the Premises (except as TENANT’s address) without consent of LANDLORD.

14. CONDITION OF THE PREMISES. TENANT hereby accepts the Premises “AS IS”, with all faults, and without any representation or warranties by LANDLORD. TENANT acknowledges that LANDLORD has not promised to make any changes or improvements to the Premises, except for those improvements described in writing and signed by LANDLORD.

           The entry of the TENANT into the possession of the Premises shall be a conclusive acknowledgment on TENANT’s part that the Premises are in good and tenantable condition as far as visual inspection discloses.  At the expiration, or sooner termination of this lease, TENANT shall deliver the Premises to LANDLORD in a state of repair in which the Premises existed at the commencement of the term hereof, reasonable wear and tear excepted.

TENANT warrants that it has inspected the Premises and the suitability of the same for TENANT’s purposes, and that neither LANDLORD, nor any agent or employee of LANDLORD, has made any representation or warranty with respect to the Premises, the size of the suite, or the Building with respect to the suitability of the Building or the Premises for the conduct of the TENANT’s BUSINESS.

15.  ALTERATIONS AND REPAIRS DURING OCCUPANCY.  The Premises shall not be altered, repaired, or changed without the written consent of the LANDLORD first had and obtained, which consent shall not be unreasonably withheld or delayed, and all such alterations, improvements or changes shall be at the sole cost of the TENANT. Notwithstanding the foregoing, TENANT shall have the right, without LANDLORD’s consent but upon ten (10) days prior notice to LANDLORD, to make non-structural additions and alterations (“Cosmetic Alterations”) to the Premises that do not (i) involve the expenditure of more than $25,000.00 in the aggregate in any twelve (12) month period during the Term, (ii) affect the exterior appearance of the Building, or (iii) affect the Building systems (electrical, plumbing or mechanical) or the Building structure.  After LANDLORD’s written consent has been obtained by the TENANT (except for Cosmetic Alterations), TENANT shall enter into an agreement for the performance of the work to be done pursuant to this Paragraph 15 with LANDLORD’s contractor or a contractor selected by TENANT and approved by LANDLORD, in LANDLORD’s reasonable judgment.  In any event, TENANT agrees to pay to LANDLORD, as additional rent, the cost of such construction, within 30 days following receipt from LANDLORD of invoice from time to time during the course of such construction.  All costs and expenses incurred in changes shall be paid by TENANT within thirty (30) days after each billing by LANDLORD or any such contractor(s).  If LANDLORD approves the construction of the specific interior improvements in the Premises by other contractors chosen by TENANT from a list prepared by LANDLORD at TENANT’s request, then TENANT’s contractors shall obtain on behalf of TENANT and at TENANT’s sole cost and expense all necessary governmental permits and certificates for the commencement and prosecution of TENANT’s

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changes and for final approval thereof upon completion and a completion and lien indemnity bond, or other surety, satisfactory to LANDLORD, for the changes.; provided that the completion and lien bond shall only be required if the proposed improvements exceed $25,000.  In the event TENANT shall request any changes in the work to be performed after the submission of plans referred to in this Paragraph 15 such additional changes shall be subject to the same approvals and notices as the changes initially submitted by the TENANT.  TENANT shall pay to LANDLORD for LANDLORD’s services in the event LANDLORD performs as a general contractor in connection with the work performed pursuant to this Paragraph 15, a fee equal to fifteen percent (15%) of the total cost the changes and LANDLORD’s reasonable overhead related thereto.  Such fee shall be five percent (5%) in order to cover LANDLORD’s reasonable overhead if LANDLORD or its agent does not perform as such general contractor.  All such alterations, repairs, additions or improvements, except trade fixtures, counters, appliances, shelving, bookcases and other personal property that is attached to the walls for seismic safety purposes only, and movable partitions placed therein by the LANDLORD for the requirement of TENANT’s business, shall, unless otherwise provided by written agreement, become the property of the LANDLORD and shall remain upon and be surrendered with the Premises upon the expiration of this lease or any sooner termination thereof.

16. DUTY OF TENANT WITH REGARD TO PREMISES. TENANT shall take good care of the Premises and fixtures therein and shall make, as and when needed, as a result of misuse or neglect by TENANT, all repairs in and about the Premises necessary to preserve them in good order and condition, which repairs shall be in quality and class equal to the original work.  However, LANDLORD may repair, at the expense of TENANT, after notice to TENANT, if TENANT fails to make the repairs, all damage or injury to the Premises, or to the Building or to its fixtures, appurtenances or equipment, done by TENANT or by TENANT’s agents, servants, employees, contractors, visitors or licensees or caused by moving property of TENANT in or out of the Building, or by installation or removal of furniture or other property, or resulting from fire, heating, ventilating or air conditioning unit or system, short circuits, overflow or leakage of water, steam, gas, sewer gas, sewage or odors, or by frost or by bursting or leaking pipes or plumbing works or gas, or from any other cause,if due to the carelessness, negligence or improper conduct of TENANT, or TENANT’s agents, servants, employees, contractors, visitors or licensees.  LANDLORD shall have the right to replace, at the expense of TENANT, any and all plate and other glass damages or broken from any cause whatsoever in or about the Premises unless caused by or due to the negligence of LANDLORD, LANDLORD’s agents, servants or employees.  Except as otherwise specifically provided in Paragraph 26.c hereof, there shall be no allowance to TENANT for diminution of rental value, and no liability of the part of LANDLORD by reason of inconvenience, annoyance, or injury to TENANT’s business arising from the making of any repairs, alterations, decorations, additions or improvements in or to any portion of the Building or Premises  (so long as there is no material interference with TENANT’s and TENANT’s customers, employees, and visitors, access to and use of the Premises and the parking facility, or in or to fixtures, appurtenances or equipment, and no liability upon LANDLORD (except in the event of Landlord’s gross negligence or willful misconduct) for failure to make any repairs, alterations, decorations, additions or improvements in or to any portion of the Building or Premises, or in or to the fixtures, appurtenances or equipment or by reason of the act or neglect of TENANT or any other TENANT or occupant of the Building.

17. WAIVER OF RIGHT TO MAKE REPAIRS AT EXPENSE OF LANDLORD.  TENANT hereby waives all rights under the provisions of Sections 1932, 1933, 1941, and 1942 of the Civil Code of the State of California, and all rights under any law in existence during the term of this Lease authorizing a TENANT to make repairs at the expense of a LANDLORD or to terminate a Lease upon the complete or partial destruction of the leased Premises.

18.           LIENS.  TENANT shall hold the LANDLORD, the Premises, and the Building harmless and free from any liens or any claims therefor, and all other liabilities, claims and demands arising out of any work performed, materials furnished or obligations incurred by TENANT, and from all actions, suits, and costs of suits by any person to enforce any such lien or claim of lien, liability, claims or demands, together with the costs of suits and attorney’s fees incurred by LANDLORD in connection therewith.  If any such liens are filed, LANDLORD may, but in no way is obligated to, without waiving its rights and remedies based on such breach of TENANT and without releasing TENANT from any of its obligations, cause such liens to be released by any means it shall deem proper, including payment in satisfaction of the claim giving rise to such lien.  TENANT shall pay to LANDLORD at once, upon notice by LANDLORD, any sum paid by LANDLORD to remove such liens, together with interest at the maximum rate per annum permitted by law from the date of such payment by LANDLORD.  Any amount payable by TENANT pursuant to this Paragraph 18, shall be deemed additional rent, and LANDLORD shall be entitled to exercise the same rights and remedies upon default in these payments as for a default in payment of basic rent.

19.           AUTOMOBILE PARKING.  LANDLORD hereby grants to the TENANT, in common with other TENANTS in said Building, of which the Premises are a part thereof, the right to use during normal business hours, certain designated space for automobile parking purposes.  The designated space for automobile parking purposes to be selected at the discretion of the LANDLORD. TENANT and its designated employees will be limited to the number of cars designated in Paragraph 1.p at the prevailing rates in the Building, payable in advance on the 1st of each month, said rates being subject to change by LANDLORD applicable to all TENANTS during the term upon thirty (30) days written notice. LANDLORD’s right to change said rates being limited to once in any one calendar year, except that LANDLORD shall have the right to change said rates at any time to include in said rates the payment of any and all amounts levied, assessed, imposed or required to be paid by any governmental authority upon the parking of motor vehicles, including without limiting the generality of the foregoing, all sums required to be paid pursuant to transportation controls imposed by the Environmental Protection Agency under the Clean Air Act of 1970, or otherwise required to be paid pursuant to any other law, ordinance, rule or regulation imposed by the State of California or any City, County or any authority thereof, or by any authority of the United States of America with respect to the parking, use, or transportation of motor vehicles, or the reduction or control of motor vehicle traffic, and/or motor vehicle pollution.  TENANT shall not use more parking spaces than said number. In the event LANDLORD has not assigned specific parking spaces to TENANT, TENANT shall not use any spaces which have been so specifically assigned by LANDLORD to other TENANTS or for such other uses as visitor parking or which have been designated by governmental entities with competent jurisdiction as being restricted to certain uses.

           TENANT shall not permit or allow any vehicles that belong to or are controlled by TENANT or TENANT’s employees, suppliers, shipper, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by LANDLORD for such activities.

           If TENANT permits or allows any of the prohibited activities described in this Paragraph 19, then LANDLORD shall have the right without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to TENANT,

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which cost shall be immediately payable upon demand by LANDLORD. TENANT and Authorized Users shall comply with all rules and regulations for Parking Structure.  LANDLORD reserves the right to modify, add to, or delete from time to time such Parking Rules and Regulations as it deems reasonably necessary for the operations of said parking.  LANDLORD may refuse to permit any person who violates with unreasonable frequency the Parking Rules and Regulations to park in the Building parking facility, and any violation of the rules shall subject the car to removal.  TENANT agrees to use its best efforts to acquaint all Authorized Users and visitors with the Parking Rules and Regulations. TENANT agrees that it will use its best efforts to cooperate in programs which are required by the local municipalities or governmental agencies to reduce peak levels of consumer traffic.  Such programs may include, but shall not be limited to, carpools, vanpools and other ride sharing programs, public and private transit, and flexible work hours, if required by law.

           TENANT shall submit a written notice in a form reasonably specified by LANDLORD, containing the names, home and office addresses and telephone numbers of those persons who are authorized by TENANT to use the parking spaces on a monthly basis (the “Authorized Users”) and shall use its best efforts to identify each automobile by make, model and license number.  Such notice shall be served upon LANDLORD prior to the beginning of the term of this Lease.  Such notice, as amended from time to time, is hereafter referred to as the “Parking Notice.”  No person whose name and address is not contained in the Parking Notice shall have any right to park an automobile in the area of the Building parking facilities designated for monthly parking and no person whether or not his name is included in the Parking Notice shall have any right to park an automobile not identified in the Parking Notice without (in either case) paying the parking charge then applicable for daily parking in the Building parking facilities and parking in the area designated for daily parking.

           The automobiles entitled to such parking shall be designated to LANDLORD by TENANT and shall be identified by LANDLORD’s automobile window stickers and only such designated cars will be permitted the use of such automobile parking space.  Additional automobile parking space, subject to availability, shall be extended to TENANT’s invitees at reasonable parking rates to be established by LANDLORD.  LANDLORD reserves the sole right and option as to whether or not an attendant will be furnished for such automobile parking area or areas.  If no attendant is furnished, LANDLORD will provide suitable designation of the parking space granted to TENANT.

           These parking spaces will be solely for the accommodation of the TENANT and TENANT expressly agrees that LANDLORD assumes no responsibility of any kind whatsoever in reference to such automobile parking areas or the use thereof by the TENANT, its designated employees or invitees. TENANT shall repair or cause to be repaired at its sole cost and expense any and all damages to the Building parking facility or any part thereof caused by TENANT or its Authorized Users or resulting from vehicles of Authorized Users.

20.  UTILITIES.

a.     LANDLORD agrees to furnish to the Premises, at its expense, so long as TENANT is not in default hereunder, during the usual business hours on business days, air conditioning and heat, electric current for normal lighting and fractional horsepower for office machines and, on the same floor as the Premises, water for lavatory, all in such reasonable quantities as in the judgment or LANDLORD is reasonably necessary for the comfortable occupancy of the Premises.  Maintenance service will be furnished 5 days per week.  LANDLORD shall not be liable for, and there shall be no rent abatement as a result of any stoppage, reduction or interruption of any such services caused by governmental rules, regulations or ordinances, riot, strike, labor disputes, breakdowns, accidents, necessary repairs or any other causes.  Except as specifically provided in this Paragraph 20, TENANT agrees to pay for all utilities and other services utilized by TENANT for all overtime or additional building services furnished to TENANT not uniformly furnished to all TENANTS of the Building at LANDLORD’s expense.  LANDLORD’s obligation to render to the Premises the services set forth in this Paragraph 20 is conditional upon the payment by TENANT of all sums due under this Lease, including but not limited to sum which are in dispute.

b.   TENANT shall not permit the consumption at any one time in the Premises of more than 5watts per net usable square foot in the Premises for all purposes including lighting and power outlets.  If such limits are exceeded, LANDLORD shall have the right to remove any lighting fixture or any fluorescent tube or bulb therein as it deems necessary and/or to charge TENANT for the cost of the additional electricity consumed.  TENANT will not without consent of LANDLORD use any apparatus or devise in the Premises, including without limitation electronic data processing machines, punch card machines and machines using current in excess of 110 volts, which will in any way increase the amount of electricity or water usually furnished or supplied for use of the Premises as general office space; nor connect any apparatus, machine or device with water pipes or electric current (except through existing electrical outlets in the Premises), for the purposes of using electric current or water.

c.   If TENANT shall require electric current in excess of that which LANDLORD is obligated to furnish under Paragraphs 20.a, 20.b herein, TENANT shall first obtain the consent of LANDLORD, which LANDLORD may refuse, to the use thereof and LANDLORD may cause an electric current meter to be installed in the Premises to measure the amount of electric current consumed for any such other use.  The cost of any meter and/or installation, maintenance and repair thereof shall be paid for by TENANT and TENANT agrees to pay to LANDLORD promptly upon demand therefor by LANDLORD for all such electric current consumed by any such use as shown by said meter, at the rates charged for such services by the public utility providing the service.

 d.  If any lights, machines or equipment (including but not limited to computers) are used by TENANT in the Premises which materially affect the temperature otherwise maintained by the air conditioning system, or generate substantially more heat in the Premises than would be generated by the Building Standard lights and usual fractional horsepower office equipment, LANDLORD shall have the right to install any machinery and equipment which LANDLORD reasonably deems necessary to restore temperature balance, including but not limited to modifications to the standard air conditioning equipment, and cost thereof, including the cost of installation and any additional cost of operation and maintenance occasioned thereby, shall be paid by TENANT to LANDLORD upon demand by LANDLORD.  LANDLORD shall not be liable under any circumstance for loss of or injury to property, however occurring, through or in connection with or incidental to failure of any of the foregoing.

e.   If TENANT requires heating, ventilation and/or air conditioning during times other than provided in Paragraph 20.a above, TENANT shall give LANDLORD such advance notice as LANDLORD shall reasonably require and shall pay for the use of such equipment, at reasonable fee or charge as LANDLORD shall require.

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21.            ASSIGNMENT.

                                a.  TENANT shall not, either voluntarily or by operation of law, sell, hypothecate, assign, transfer, or otherwise encumber its interest in this Lease or in the Premises, or sublease all or any part of the Premises, or allow any other person or entity (except TENANT’s authorized representatives) to occupy or use all or any part of the Premises, without first obtaining LANDLORD’s written consent, which consent shall not be unreasonably withheld or delayed.  If LANDLORD does not respond to a written request for consent within 30 days after LANDLORD’s receipt thereof, LANDLORD shall be deemed to have consented to the proposed assignment or sublease.  Any sale, assignment, mortgage, transfer or subletting of this Lease which is not in compliance with the provisions of this Paragraph 21 shall be voidable and, at LANDLORD’s election, shall constitute a default.  No consent to any assignment, encumbrance, or sublease shall constitute a further waiver of the  provisions of this Paragraph 21. Notwithstanding the consent of the LANDLORD to a subletting or assignment of the Premises, in the event that the assignment or sublease by the TENANT should be for a rental rate which is greater than that paid to the LANDLORD by TENANT, such 50% of such excess shall be paid to the LANDLORD, after deduction for TENANT’s costs of obtaining the assignment or sublease, including brokers’ fees and attorneys’ fees.

           If TENANT is a partnership, a withdrawal or change, voluntary or involuntary, or by operation of law, of partners owning 25% or more of the partnership, or the dissolution of the partnership, shall be deemed a voluntary assignment.  If TENANT consists of more than one person, a purported assignment, voluntary, involuntary, or by operation of law, from one person to the other shall be deemed a voluntary assignment.

If TENANT is a corporation, any dissolution, merger, consolidation or other reorganization of TENANT, or the sale or other transfer of a controlling percentage of the capital stock of TENANT or the sale of 51% of the value of the assets of TENANT, shall be deemed a voluntary assignment.  The phrase “controlling percentage” means the ownership of, and the right to vote, stock possessing at least 51% of the total combined voting power of all classes of TENANT’s capital stock issued, outstanding and entitled to vote for the election of directors.  This paragraph shall not apply to corporations, the stock of which is traded through an exchange or over the counter, and shall not apply to a change in the stock ownership of TENANT, if following the change in ownership, TENANT remains a national bank and TENANT’s networth after the change in ownership remains at least as much as it was prior to the change of ownership, but in no event less than $25,000,000.

b.  Except in the case of an Affiliate (as defined in the First Amendment to this Lease), where LANDLORD’s consent to a proposed subletting of greater than 50% of the total square footage of the Premises or where assignment of the Lease is sought hereunder, LANDLORD, at its option, may grant such consent, in which case TENANT’s financial obligations under this Lease shall not be affected, refuse to grant same or, in the alternative, may cancel this Lease upon providing TENANT thirty days’ written notice of LANDLORD’s cancellation.  In the event of cancellation, this Lease shall be deemed to terminate effective as of the commencement date of the proposed assignment or sublease.

Without limiting LANDLORD’s grounds for disapproval, LANDLORD’s disapproval shall be deemed reasonable if it is based on LANDLORD’s analysis of the following:

                                                i.              A conflict with other uses in the Building;

                                                ii.            Incompatibility of the proposed use with others within the Building;

                                                iii.           Financial inadequacy of the proposed sublessee or assignee;

                                                iv.            A proposed use or user which would cause a diminution in the reputation of the Building or the other businesses located therein;

                                                v.             A proposed user whose impact on the common facilities or the other TENANTS in the Building would be disadvantageous;

                                                vi.            A proposed assignee or sublessee who is an existing tenant of LANDLORD in the Building, or has negotiated with LANDLORD concerning the leasing of premises from LANDLORD within the prior 120 days, and LANDLORD has available space that meets the needs of the proposed assignee or sublessee.

c.  Notwithstanding the foregoing, the following conditions shall apply to any proposed assignment or sublease hereunder (including but not limited to this Paragraph 21 or any other provision of this Lease affecting assignment.

                                          i.  Each and every covenant, condition, or obligation imposed upon TENANT by this Lease and each and every right, remedy, or benefit afforded LANDLORD by this Lease shall not be impaired or diminished as a result of such assignment or sublease;

                                          ii.  TENANT shall assign to LANDLORD 50% ofany and all consideration paid directly or indirectly for the assignment by TENANT to the assignee of TENANT’s leasehold interest or 50% of any and all sub-rentals payable by subtenants which are in excess of the Minimum Rental provided herein (computed on a square footage basis) after deduction of TENANT’s costs of the assignment or sublease;

                                          iii.  TENANT shall reimburse LANDLORD as additional rent for LANDLORD’s reasonable costs and attorney’s fees incurred in conjunction with the processing and documentation of any such requested assignment, subletting, transfer, change of ownership, or hypothecation of this Lease or LANDLORD’s interest in and to the Premises; not to exceed $1,000.00, which includes the payment by TENANT of $500.00 as hereinafter set forth; As a condition precedent to LANDLORD’S duty to consider a request for consent to a proposed assignment or subletting by a TENANT, shall be the payment of $500.00 for the reasonable costs and attorney fees to be incurred by LANDLORD in considering such request for consent to assignment or subletting, which amount shall be non refundable and paid by TENANT at the time of the request.

                                          iv.  Intentionally deleted.

                                          v.  No subletting or assignment, even with the consent of LANDLORD, shall relieve TENANT of its obligation to pay the rent and to perform all other obligations to be performed by TENANT hereunder.  The acceptance of rent by LANDLORD from any person shall not be deemed to be a waiver by LANDLORD of any provision of this Lease or to be consent to any assignment or subletting;

                                          vi.  Notwithstanding anything to the contrary contained herein, at LANDLORD’s election, the following provisions shall be in effect:

                                                     a.  Except in the case of an Affiliate (as defined in the First Amendment to this Lease), in the event that at any time or from time to time during the term of this Lease, TENANT desires to assign or sublet all or part of the Premises, TENANT shall notify LANDLORD in writing (hereinafter referred to as “Transfer Notice”) of the terms of the proposed assignment or sublet and shall give the LANDLORD the right to accept an assignment or to sublet from TENANT such space (hereinafter referred to as “Transfer Space”) on the same terms as those contained in this Lease, including the rent which TENANT is then paying for such space.  Such option shall be exercisable by LANDLORD in writing for a period of thirty (30) days after receipt of the Transfer Notice.

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                                                     b.  If LANDLORD fails to exercise such option, and TENANT fails to complete negotiations for a valid and bona fide assignment to or sublease with a third party within ninety (90) days thereafter in accordance with the terms of the Transfer Notice, TENANT shall again comply with all the conditions of this Paragraph 21, as if the notice and option hereinabove referred to had not been given and received.

                                                     c.  In the event LANDLORD does not exercise its option and TENANT completes negotiations for an assignment or sublease with a third party within the ninety (90) day period, TENANT shall deliver an executed copy of such assignment or sublease to LANDLORD to obtain its consent as required by the provisions of this Paragraph 21.  If the LANDLORD consents to a sublease, then such sublease shall be subject and made upon the following terms:

(1)Any such sublease shall be subject to the terms of this Lease and the term thereof may not extend beyond the expiration of the terms of this Lease;

(2)The use to be made of the Transferred Space shall be in keeping with the character of the Building;

(3)Such assignment or sublease shall not violate any negative covenant as to use contained in any deed of trust affecting Building and shall not violate any exclusives granted by LANDLORD to any other TENANTS in the Building;

(4)No Sublessee shall have a right to further sublet;

(5)No permitted assignment or sublease shall be valid and no assignee or sublessee shall take possession of the Premises assigned or sublet unless, within ten (10) days after the execution thereof, TENANT shall deliver to LANDLORD a duly executed duplicate original of such assignment of sublease in form satisfactory to LANDLORD which provides that (i) the assignee (sublessee) assumes TENANT’s obligations for the payment of rent and for the full and faithful observance and performance of the covenants, terms and conditions contained herein, and (ii) that said assignee or sublessee will, at LANDLORD’s election, attorn directly to LANDLORD in the event TENANT’s Lease is terminated for any reason.

                                                     d.  TENANT shall have the right without the consent of LANDLORD, but upon prior written notice to LANDLORD, to assign this Lease to a company incorporated or to be incorporated by TENANT provided that TENANT owns or beneficially controls 50% or more of the issued and outstanding shares in the capital stock of the corporation.  Such assignment shall not, however, relieve TENANT from its obligations for the payment of rent and for the full and faithful observance of the covenants, terms and conditions contained herein.

22.            BANKRUPTCY.  It is further agreed that if at any time during the term of this Lease, through any judicial action or proceeding in any Court against TENANT or any of the TENANT’s heirs or assigns,  a receiver or other officer or agent be appointed to take charge of the Premises or the business conducted therein, and shall be in possession thereof, or if this Lease or the interest or estate created thereby vests in any other person or persons by operations of law or otherwise, except by consent, as aforesaid, of LANDLORD, or in the event of any action taken by or against TENANT under Federal Bankruptcy Laws or other applicable statutes of the United States, or any State, or if TENANT shall make an assignment for the benefit of creditors, or if an attachment or execution is levied upon the TENANT’s property or interest under this Lease which is not satisfied or released within thirty (30) days thereafter, the occurrence of any such event shall be deemed to be a breach of this Lease by TENANT, and LANDLORD shall have all the rights herein provided in the event of any such breach, including the right at LANDLORD’s option to terminate this Lease immediately and enter the Premises and remove all persons and remove all persons and property therefrom.

23.            RIGHTS OF LANDLORD.  So long as the LANDLORD’s exercise of these rights does not materially interfere with TENANT’s or TENANT’s customers, employees, or visitors access to and use of the Premises and the parking facility, the LANDLORD reserves the following rights: (a) to change the name of the Building without notice or liability to TENANT; (b) to designate all sources furnishing sign painting or lettering, ice, bottled water and toilet supplies used on the Premises; (c) constantly to have pass keys to the  Premises; (d) to grant to anyone the exclusive right to conduct any particular business or undertaking in the Building in which Premises are situated; (e) to enter the Premises at any time for inspections, repairs, alterations or additions to the Premises or the Building in which the Premises are situated, to exhibit the Premises to others, to affix and display “For Rent” signs, and for any purpose whatsoever related to the safety, protection, preservation or improvement of the Premises, the said Building, or the LANDLORD’s interest, without being deemed guilty of an eviction or disturbance of TENANT’s use and possession, and without being liable in any manner to the TENANT on account thereof; (f) at any time, and from time to time, whether at the instance of LANDLORD or pursuant to government requirements, at LANDLORD’s expense, to make repairs, alterations, additions, improvements or decorating, whether structural or otherwise, in or to the Building or any part thereof, including the Premises.  Without limiting the generality of the foregoing rights LANDLORD shall specifically have the right to remove, alter, improve or rebuild the lobby of the Building as the same is presently or shall hereafter be constructed, or the light court of said Building as the same is presently or shall hereafter be constituted, or any part or parts thereof.  LANDLORD shall not be liable to TENANT for any expense, injury, loss, or damage resulting from any work so done in or about the Premises or the Building or any adjacent or nearby the Building, land, street or alley.  All claims against LANDLORD for any and all such liability being hereby expressly released by TENANT.  In connection with making repairs, alterations, decorating, additions or improvements under the terms of this Paragraph 23, the LANDLORD shall have the right to access through the Premises as well as the right to take into and upon and through the Premises of any other part of the Building, all material that may be required to make such repairs, alterations, decorating, additions or improvements, as well as the right in the course of such work to close entrances, doors, corridors, elevators, or other Building facilities, without being deemed or held guilty of an eviction of TENANT and without liability for damages to TENANT’s property, business or person and without liability to TENANT by reason of interference with the business of TENANT or inconvenience or annoyance to the TENANT or the customers of the TENANT.  The rent reserved herein shall in no ways abate while said repairs, alterations, decorating, additions or improvements are being made and TENANT shall not be entitled to maintain any set-off or counter-claim for damages of any kind against LANDLORD by reason thereof, all such claims being hereby expressly released by the TENANT. LANDLORD reserves and shall have the right to enter upon the Premises for the purpose of posting and maintaining such notices on the Premises as may be necessary to protect LANDLORD against mechanic’s, material-men’s or other liens and any other notices that may be proper and necessary.

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24.INDEMNITY; EXEMPTION OF LANDLORD FROM LIABILITY.

a.   TENANT shall indemnify, defend and hold LANDLORD harmless from any activity, work or thing which may be permitted or suffered by TENANT in or about the Premises and shall further indemnify, defend and hold harmless from and against any and all claims arising from any breach or default in the performance of any obligation on TENANT’s part to be performed under this Lease or arising from any negligence of TENANT or any of its agents, contractors, employees or invitees, patrons, customers or members and from any and all costs, attorney’s fees, expenses and liabilities incurred in the defense of any claim or any action or proceeding brought thereon, including negotiations in connection therewith.  TENANT hereby assumes all risk of damage to property or injury to persons in or about the Premises from any cause, and TENANT hereby waives all claims in respect thereof against LANDLORD, excepting where the damage is caused solely by a willful or gross negligence of LANDLORD.

b.   LANDLORD shall not be liable for injury to TENANT’s business, or loss of income therefrom, or for damage that may be sustained by the person, or property of TENANT, its employees, invitees, customers, agents, or contractors, or any other person in, on or about the Premises directly or indirectly caused by or resulting from fire, steam, electricity, gas, water, or rain which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, light fixtures, or mechanical or electrical systems, or from any other cause whatsoever, whether such damage or injury results from conditions arising upon the Premises or upon other portions of the Building or from other sources or places; and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to TENANT, except in connection with damage or injury resulting from the gross negligence or willful misconduct of LANDLORD, or its authorized agents.  LANDLORD shall not be liable to TENANT for any damages arising from any act or neglect of any other TENANT of the Building.  LANDLORD shall not be liable for any damage to property entrusted to employees of the Building.  LANDLORD shall not be liable for losses due to theft, vandalism, or like causes.  TENANT shall defend, indemnify, and hold LANDLORD harmless from any such claims made by any employee, licensee, invitee, contractor, agent or person whose presence in, on or about the Premises or the Building is attendant to the business of TENANT.

c.  TENANT acknowledges that LANDLORD’s election to provide mechanical surveillance or to post security guards in the Building is solely at LANDLORD’s discretion;  LANDLORD shall have no liability in connection with the decision whether or not to provide such services and TENANT hereby waives all claims based thereon.

25.           INSURANCE.

a.  TENANT’s Insurance.  TENANT shall pay at all times during the term of this Lease, and at its own cost and expense, procure and continue in force the following insurance coverage: (i) Comprehensive General Liability Insurance with a combined single limit for bodily injury and property damages of not less than $1,000,000.00 including the Broad Form comprehensive General Liability endorsement, covering the insuring provisions of this Lease and the performance by TENANT of the indemnity agreements of TENANT as set forth in Paragraph 24 of this Lease, and other indemnity agreement of TENANT contained in this Lease; (ii) a policy of standard fire, extended coverage and special extended coverage insurance (all risks), including a vandalism and malicious mischief endorsement, sprinkler leakage coverage, where sprinklers are provided, in an amount equal to the full replacement value new without deduction for depreciation of all fixtures, furniture, and leasehold improvements installed by or at the expense of TENANT; (iii) insurance on all plate or tempered glass in or enclosing the Premises; for the replacement cost of such glass.  Additionally, TENANT shall maintain Worker’s Compensation insurance as required by law and shall provide LANDLORD with evidence of coverage.

b.   Form of Policies.  The aforementioned minimum limits of policies shall in no event limit the liability of TENANT hereunder.  Such Insurance shall name LANDLORD and such other persons or firms with insurable interests, as LANDLORD specifies from time to time, as additional insured and shall be with companies having a rating of not less than the A+ in Best’s Insurance Guide.  No such policy shall be cancelable or subject to reduction of coverage or other modification or cancellation except after 30 days prior written notice to LANDLORD by the insurer.  All such policies shall be endorsed to agree that TENANT’s policy is primary and that any insurance covered by LANDLORD is excess and not contributing with any insurance requirement hereunder.  TENANT shall furnish to LANDLORD, from the insurance companies, or cause the insurance companies to furnish, certificates of coverage.  TENANT shall, at least 20 days prior to the expiration of such policies furnish LANDLORD with renewals or binders.  TENANT agrees that if TENANT does not take out and maintain such insurance or furnish LANDLORD with renewals or binders, LANDLORD may (but shall not be required to) procure said insurance on TENANT’s behalf and charge TENANT the cost thereof, which amount shall be payable by TENANT upon demand with interest from the date such sums are extended.  TENANT shall have the right to provide such insurance coverage, pursuant to blanket policies obtained by TENANT, provided such blanket policies expressly afford coverage to the Premises and to TENANT as required by this Lease.

c.   LANDLORD’s Insurance.  The cost of Insurance carried by LANDLORD shall be included in Operating Costs.  TENANT understands that LANDLORD will not carry insurance of any kind on TENANT’s furniture, furnishings, fixtures, or equipment, and that LANDLORD shall not be obligated to repair any damage thereto or replace the same.

d.   Waiver of Subrogation.  The parties release each other and their respective authorized representatives from any claims for damage to any person or the Premises, and to the fixtures, personal property, improvements, and alterations of either LANDLORD or TENANT, in or on the Premises and the Building, to the extent that they are covered by any insurance polices in force at the time of any such damage.  Each party shall cause each insurance policy obtained by it to provide that the insurance company waives its rights of subrogation.

26.            DAMAGE OR DESTRUCTION (PARTIAL OR TOTAL).

a.   In the event the Building, the Premises or any insured alterations, are damaged by fire or other perils covered by LANDLORD’s extended coverage insurance to an extent not exceeding twenty-five percent (25%) of the full insurable value thereof, and if the damage thereto is such that the Building, and any insured alterations may be repaired, reconstructed or restored within a period of ninety (90) days from the date of the happening of such casualty and LANDLORD will receive insurance proceeds sufficient to cover the cost of such repairs, LANDLORD shall commence and proceed diligently with the work or repair, reconstruction and restoration and the Lease shall continue in full force and effect.  If such work or repair, reconstruction and restoration is such as to require a period longer than ninety (90) days to complete or exceeds twenty-five percent (25%) of the full insurable value of the Building and any insured alterations, or if said insurance proceeds will not be sufficient to

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cover the cost of such repairs, reconstruction, or restoration, LANDLORD either  may elect to so repair, reconstruct or restore the Building, the Premises and any insured alterations and the Lease shall continue in full force and effect or  not to repair, reconstruct or restore the Building, the Premises and any insured alterations and the Lease shall in such event terminate.  Under any of the conditions of this Paragraph 26.a, LANDLORD shall give written notice to TENANT of its intention within thirty (30) days from the date of such event of damage or destruction.  In the event LANDLORD elects not to restore said Building and any insured alterations, this Lease shall be deemed to have terminated as of the date of such partial destruction.

b.   Upon any termination of this Lease under any of the provisions of this Paragraph, the parties shall be released thereby without further obligation to the other from the date the possession of the Premises is surrendered to LANDLORD except for items which have theretofore accrued and are then unpaid.

c.   In the event of repair, reconstruction and restoration by LANDLORD as herein provided in this Paragraph 26, the rent provided to be paid under this Lease shall be abated proportionately with the degree to which TENANT’s use of the Premises is impaired during the period of such repair, reconstruction or restoration.  TENANT shall not be entitled to any compensation or damages for loss in the use of the whole or any part of the Premises and/or any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration.

d.   TENANT shall be released from any of its obligations under this Lease except to the extent and upon the conditions expressly stated in this Paragraph 26.  Notwithstanding anything to the contrary contained in this Paragraph 26 should LANDLORD be delayed or prevented from repairing or restoring the damaged Premises within six (6) months after the occurrence of such damage or destruction, by reason of acts of God, war, governmental restrictions, inability to procure the necessary labor or materials, or other cause beyond the control of LANDLORD, LANDLORD shall be relieved of its obligation to make such repairs or restoration and TENANT shall be released from its obligations under this Lease as of the end of said six (6) month period.

e.   In the event that damages is due to any cause other than fire or other peril covered by extended coverage insurance, LANDLORD may elect to terminate this Lease.

f.    It is hereby understood that if LANDLORD is obligated to or elects to repair or restore as herein provided, LANDLORD shall be obligated to make repairs or restoration only of those portions of the Building and the Premises which were originally provided at LANDLORD’s expense or which were insured by either party and the proceeds of such insurance have been received by LANDLORD, and the repair and restoration of items not provided at LANDLORD’s expense shall be the obligation of TENANT.

g.   Notwithstanding anything to the contrary contained in this Paragraph 26, LANDLORD shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this Paragraph 26 occurs during the last twelve (12) months of the term of this Lease or any extension hereof.

27.            DAMAGE TO TENANT’S PROPERTY.  Subject to the provisions of Paragraph 24, LANDLORD or its agents shall not be liable for any damage to property entrusted to employees of the Building, nor for loss of or damage to any property by theft or otherwise, nor for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein or from the roof, street or sub-surface or from any other place or resulting from dampness or any other patent or latent cause whatsoever.  LANDLORD or its agents shall not be liable for interference with the light or other incorporeal hereditaments.  TENANT shall give prompt notice to LANDLORD in case of fire or accidents in the Premises or in the Building or of defects therein or in the fixtures or equipment located therein.

28.            EMINENT DOMAIN.

a.   Should LANDLORD at any time during the continuance in force of this Lease be deprived of the Building in which the Premises are situated, or any part thereof, or any part of the land on which it is situated by condemnation or eminent domain proceedings, this Lease shall terminate, at LANDLORD’s option, on the date when LANDLORD is actually deprived of possession of said land or Building, or some part thereof, and thereupon the parties hereto shall be released from all further obligations hereunder, and LANDLORD shall thereupon repay to TENANT any rental theretofore paid by TENANT and unearned at the date of such termination. TENANT shall not be entitled to any compensation, allowance, claim or offset of any kind against the LANDLORD, as damages, or otherwise, by reason of such condemnation or eminent domain proceedings or by reason of being deprived of the Premises or the termination of this lease, and said TENANT does hereby waive, renounce and quit-claim to LANDLORD any right in and to any award, judgment, payment or compensation which shall or may be made or given because of the taking of the Premises, or any portion thereof, by virtue of any such condemnation or eminent domain proceedings, whether received in any such action or in settlement or compromise thereof by said LANDLORD.

b.   In the event of taking of the Premises or any part thereof for temporary use, this Lease shall be and remain unaffected thereby and rent shall not abate, and TENANT shall be entitled to receive for itself such portions of any award made for such use with respect to the period of the taking which is within the term, provided that if such taking shall remain in force at the expiration or earlier termination of this Lease, TENANT shall then pay to LANDLORD a sum equal to the reasonable cost of performing TENANT’s obligations under Paragraph 36 with respect  to surrender of the Premises and upon such payment shall be excused from such obligations. For the purposes of this subparagraph b, a temporary taking shall be defined as a taking for a period of 270 days or less.

29.            RIGHT OF REPOSSESSION.  If, in compliance with any law or ordinance now or hereafter enacted, or if required to comply with the directions or requirements of any public officer, board or commission, it becomes necessary for LANDLORD to acquire permanently all or any portion of the Premises, LANDLORD or its assigns shall have the right to repossess the Premises, or any portion thereof, at any time upon thirty days written notice to TENANT, and when said space shall have been so permanently repossessed, the LANDLORD shall, in lieu of any and all claims for damages, allow TENANT a credit on TENANT rent in the proportion that space taken bears to the whole of the Premises;  provided, however, that if the space taken is of such an amount or size as to make the remaining space undesirable to TENANT, then the LANDLORD, upon thirty (30) days written notice from TENANT, will endeavor, if available, to furnish TENANT with comparable space elsewhere in the Building(which must be on the ground floor), and to place TENANT in such new space and this Lease and each and all of the terms, covenants and conditions therefore, shall thereupon remain in full force and effect and be deemed applicable to such new space; provided, however, that if the LANDLORD shall be unable to provide TENANT with such other space, then this Lease shall thereupon cease and terminate.  No exercise by LANDLORD of any right herein reserved shall entitle TENANT to damages for any injury or inconvenience occasioned thereby, nor shall TENANT by reason thereof be entitled to any abatement in rent (except as above set forth in case of taking of space permanently).

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30.            DEFAULT- REMEDIES OF LANDLORD.  In the event of default at any time by TENANT in the payment of the rent herein provided for, or any part thereof, or in the performance of any other terms, covenants or conditions to be kept or performed by TENANT, or if TENANT shall abandon or vacate the Premises (as defined below)without the written consent of LANDLORD, then after three days’ written notice of any default in payment of rent and after fifteen days’ written notice of any default other than payment of rent (if such default is not cured within such period; provided, however, that if the cure cannot reasonably be accomplished within 15 days, TENANT shall not be in default so long as TENANT has commenced the cure within the 15 day period and diligently prosecutes it to completion), the LANDLORD, at its option, shall have the right to deem this Lease to be in default and LANDLORD shall have the right, at its option, to enter upon the Premises or any part thereof, either with or without process of law, and to expel, remove or put out TENANT or any other person or persons who may be thereon, together with all personal property found therein; and in event of TENANT’s default, LANDLORD shall have the following cumulative remedies:

a.   The right to terminate TENANT’s right to possession in any manner permitted by law;

b.     Upon termination of such right to possession or upon abandonment of the property by TENANT, the remedies prescribed by Civil Code Section 1951.2(a), Paragraphs (1), (2), (3), and (4).  In connection with such Paragraph (3), it is hereby provided that damages that LANDLORD may recover include 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 rental loss for the same period that the TENANT proves could be reasonably avoided;

c.   If there be such abandonment but not such termination of such right to possession, this Lease shall continue in effect (unless and until there be such a termination) and LANDLORD may enforce all rights and remedies under this lease, including, without limitation, the right to recover the rent as it becomes due under this lease.  In this connection, it is hereby expressly provided that TENANT may sublet the property, assign TENANT’s interest in this lease, or both, with the consent of the LANDLORD, and such consent to be as provided in Paragraph 21 hereof.  Such abandonment as an event of default shall be grounds for determination at LANDLORD’s option of such right to possession at any time unless and until (i) such default be cured by occupancy by an assignee or sublessee so consented to by LANDLORD or re-occupancy by TENANT, and (ii) any other events of default be cured;

d.   Such other remedies, legal and equitable, as the law may, from time to time, provide or allow.

     As used above “abandonment” shall be deemed to occur only if:

(i)  TENANT ceased to regularly occupy the property during business hours and gives written notice to LANDLORD of abandonment; or

(ii)  TENANT ceased to regularly occupy the property during business hours during the term of the Lease or any extension or renewals thereof, for a cumulative period of six (6) months or longer

           The parties have, by such definition of “abandonment,” tried to make more certain the application of the remedies hereunder.  If it should be held invalid for them to have so contracted as to such definition, such invalidity shall not affect the enforceability of the provision hereof which shall then be read as if there were no such definition in this lease.  A waiver by LANDLORD of any default by TENANT in the performance of any of the covenants, terms or conditions hereof shall not be considered or treated as a waiver of any subsequent or other default as to the same or any other matter.

           Any and all of the following actions shall constitute a default of this leasefollowing the expiration of the notice and cure period described above:

i.   Use of the Premises for any purpose other than as authorized in this lease, or

ii.Default in the payment of rent or any other sums owing when due; or

iii. Abandonment or vacation (as defined above)of TENANT from the Premises; or

iv. Assignment of the Premises by TENANT, either voluntarily or by operation of law, whether by judgment, execution, death or any other means, without the consent of LANDLORD; or

v.A filing by TENANT or any other person of a voluntary or involuntary petition in bankruptcy or

an arrangement by or against TENANT; the adjudication of TENANT as a bankrupt or insolvent; the appointment of a receiver of the business or of the assets of TENANT, except a receiver appointed at the instance or request of LANDLORD; the general or any other assignment by TENANT for the benefits of its creditors; or

vi.   A default in the performance of any of the terms, covenants, and conditions herein contained; or

vii.TENANT’s failure to pay the rent herein or to perform any of the terms, covenants, or conditions herein by him to be kept or performed; or

viii. A default by TENANT in the payment of rent or the performance of any other terms, covenants or conditions to be kept or performed by TENANT under any other lease or tenancy wherein this LANDLORD is also LANDLORD therein, whether or not said lease has terminated, expired, or been replaced.

31.            SUBORDINATION.   TENANT expressly agrees that at the sole option of the LANDLORD this Lease may be subject and subordinate or paramount to all mortgages, Deeds of Trust or any other encumbrances now placed or which may be placed in the future upon the said real property, of which the Premises are a part, by the owners thereof, and TENANT further agrees that whenever requested to do so by LANDLORD, TENANT will execute, sign, acknowledge and deliver any documents required to effectuate such subordination or superiority.  Should TENANT fail to execute, acknowledge and deliver such instruments within five (5) days after written notice so to do, TENANT hereby appoints the LANDLORD and LANDLORD’s successors and assigns the TENANT’s attorney in fact irrevocably, to execute, acknowledge and deliver any such instrument or instruments for and on behalf of TENANT.

32.            ESTOPPEL CERTIFICATE.   TENANT agrees during the term of this Lease and any extension or renewal of the term hereof, within ten (10) days after request therefor by LANDLORD, from time to time, to execute, acknowledge and deliver a certificate or certificates in recordable form to LANDLORD or to any mortgagee, trust deed beneficiary or proposed mortgagee, or purchaser, certifying that TENANT has accepted its Premises, the commencement date of the Lease term, that it is in occupancy under this Lease, that the Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified is in full force and effect), and that there are no defenses or offsets thereto and no rental offsets or claims by TENANT, the date to which the rental and other sums payable under this Lease have been paid, the amount of security deposit held by LANDLORD, the fact that there are no current defaults under

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this Lease by LANDLORD, except as specified in TENANT’s statement, and such other matters requested by LANDLORD.

           Should TENANT fail to deliver such statement within said ten (10) days, LANDLORD, at its option, following:the termination of the applicable notice and cure period (provided, however, that such cure period shall not, in this case, be more than 10 days following notice of default)

declare TENANT in default under this Lease, and LANDLORD may, at its option, terminate the Lease, provided written notice of such termination is received by TENANT prior to LANDLORD’s receipt of said statement.

If TENANT fails to deliver the statement within said ten (10) days, Landlord, after service of a five (5) day notice on TENANT, may complete the statement and execute and deliver the statement to a third party.  In such event the statement prepared and executed by LANDLORD on behalf of the TENANT shall be in full force and effect and TENANT shall be governed by it.

           If this Lease is assigned by LANDLORD to any mortgagee or trust deed beneficiary or purchaser, within ten (10) days of written request by LANDLORD, TENANT shall acknowledge in writing receipt of such assignment to the assignee upon receipt of a copy of notice thereof.

33.            MODIFICATION FOR LENDER.  If in connection with obtaining construction, interim or permanent financing for the Building, the lender shall request reasonable modifications in this Lease as a condition to such financing, TENANT will not unreasonably withhold or delay its consent thereto, provided that such modifications do not increase the obligations of TENANT hereunder or materially adversely affect the leasehold interest hereby created or TENANT’s rights hereunder.

34.PLANNING PROGRAM.  Intentionally Deleted.

35.            BUILDING RULES.  TENANT hereby promises and agrees to keep and perform each and all of the rules and regulations of said Building hereinafter set forth which are hereby referred to and made a part hereof.  LANDLORD shall have the right to amend said rules and to make other and different reasonable rules, and regulations limiting, restricting and regulating the privileges of TENANTS in the said Building, and all such rules and regulations so made by LANDLORD, after notice thereof to TENANT, shall be binding upon TENANT and become conditions of TENANT’s tenancy and covenants on the part of and to be performed by TENANT.

36.            SURRENDER OF PREMISES; REMOVAL OF PROPERTY.  Upon the expiration of the term of this Lease, or upon any earlier termination of this Lease, TENANT shall: (i) surrender possession of the Premises to LANDLORD in as good order and condition as they were as of the Commencement Date hereof and hereafter may be improved by LANDLORD, ordinary wear and tear excepted (ii) remove from the Premises all debris and rubbish, and (iii)  remove from the Premises, all furniture, equipment, business and trade fixtures, freestanding cabinet work, moveable partitioning and other articles of personal property owned by TENANT or installed or placed by TENANT in the Premises, and all similar articles of any other persons claiming under TENANT unless (i) LANDLORD exercises its option to have any subleases or subtenancies assigned to it. TENANT shall repair all damage to the Premises resulting from the installation and removal of such items. Any floor covering and/or window covering whether or not allowance is given by LANDLORD to TENANT, shall become the property of the LANDLORD and remain in the Premises.  All cabling shall become the property of LANDLORD and shall not be removed from the Premises, unless LANDLORD requests the removal thereof.

           The voluntary or other surrender of this Lease by TENANT to LANDLORD, or a mutual termination hereof, shall not work a merger, and shall at the option of LANDLORD, operate as an assignment to it of any or all subleases or subtenancies affecting the Premises.  TENANT shall also surrender all keys for the Premises to LANDLORD, properly sorted and labeled, at the place then fixed for payment of rent and shall inform LANDLORD of all combinations on locks, safes and vaults, if any, in the Premises.  If TENANT fails to properly identify the keys or fails to provide LANDLORD with the combinations, LANDLORD may deduct the cost of identifying or replacing the keys and re-setting the combinations from TENANT’s security deposit.  The delivery of keys to LANDLORD, any employee of LANDLORD, or LANDLORD’s agent or any employee thereof, shall not be sufficient to constitute a termination of this Lease or a surrender of the Premises.

37.            ATTORNEY FEES.  If any action is commenced for the breach of any covenants or conditions of this lease, or for any rent or for the possession of the Premises, or if the LANDLORD necessarily intervenes in, or becomes a party to, any action or actions occurring out of this Lease in order to protect its rights, then the TENANT will pay to the LANDLORD a reasonable attorney’s fees in such action or actions, which fees shall be fixed by the Court as a part of the costs thereof.  If TENANT is successful in the aforesaid litigation with LANDLORD (except in a Declaratory Relief Action), LANDLORD shall pay to TENANT reasonable attorney’s fees as fixed by court as part of the costs hereof.

38.            CONDITIONS AND COVENANTS - TIME.  It is further expressly understood and agreed that each and all of the provisions of this Lease are conditions precedent to be faithfully and fully performed and observed by said TENANT to entitle TENANT to continue in possession of the Premises hereunder; that said conditions are also covenants on the part of TENANT; that time of performance of each is of the essence of this agreement.

39.            WAIVER.  No modification, alteration or waiver of any term, covenant or condition of this Lease shall be valid unless in writing, subscribed by the LANDLORD or by an officer of LANDLORD, authorized in writing.  No waiver of a breach of any covenant or condition shall be construed to be a waiver of any other provisions hereof or any succeeding breach by TENANT of the same or any other provision.  No act, delay or omission done, suffered or permitted by the LANDLORD shall be deemed to exhaust or impair any right, remedy or power of the LANDLORD hereunder.

            No act or thing done by LANDLORD or LANDLORD’s agents during the term of this Lease shall be deemed as acceptance of a surrender of Premises, and no agreement to accept such surrender shall be valid unless in writing and signed by LANDLORD.

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           The failure of LANDLORD to seek redress for violation of, or to insist upon strict performance of, any term, covenant or condition of this Lease or the Rules and Regulations attached hereto shall not be deemed a waiver of such violation or prevent a subsequent act which would have originally constituted a violation from having all the force and effect of any original violations, nor shall the failure of LANDLORD to enforce any of said Rules and Regulations against any other TENANT of the Building be deemed a waiver of any such Rule or Regulation, nor shall any custom or practice which may become established between the parties in the administration of the terms hereof be deemed a waiver of, or in any way affect, the right of LANDLORD to insist upon the performance by TENANT in strict accordance with said terms.

40.            JOINT AND SEVERAL LIABILITY OF TENANT. If more than one person executes this Lease as TENANT, (a) each of them is jointly and severally liable for the keeping, observing and performing of all of the terms, conditions, covenants, provisions, and agreements of this Lease to be kept, observed and performed by TENANT, and (b) the term “TENANT” as used in this Lease shall mean and include each of them jointly and severally and the act of or notice from, or notice or refund to, or the signature of, any one or more of them, with respect to the tenancy of this Lease, including, but not limited to any renewal, extension, expiration, termination or modification of this Lease shall be binding upon each and all of the persons executing this Lease as TENANT with the same force and effect as if each and all of them had so acted or so given or received such notice or refund or so signed.

41.            PARTNERSHIP AND CORPORATION AUTHORIZATION.  If TENANT executes this Lease as a corporation, trust, or general partnership each individual executing this Lease on behalf of TENANT represents and warrants that the individuals executing this Lease on TENANT’s behalf are duly authorized to execute and deliver this Lease on behalf of the TENANT.

42.            FINANCIAL STATEMENT.  At any time during the term of this Lease, TENANT shall, upon ten (10) days prior written notice from LANDLORD provide LANDLORD with current financial statements and financial statements of the two (2) years prior to the current financial statement year.  Such statement shall be prepared in accordance with generally accepted accounting principles in a manner consistently applied in all financial statements and, if such is the normal practice of TENANT, shall be audited by an independent certified public accountant.

43.            COVENANT BY TENANT.  TENANT covenants to hold LANDLORD free and harmless from all loss, cost or damage (including reasonable attorney fees and court costs) resulting from TENANT’s violation of any term or provisions of this lease, the use, misuse or neglect of the Premises or appurtenances and from all claims arising out of any alleged defective or unsafe condition thereof.

           TENANT agrees to pay for all loss, cost or damages (including reasonable attorney fees and court costs) which may be caused to the LANDLORD or the Building in which the Premises are situated, or any TENANT or occupant thereof by any act or failure to act of the TENANT or any of TENANT’s invitees, guests, visitors or employees, and TENANT further agrees not to use or suffer to be used the Premises in any manner which will increase the present rate of premium for insurance on said Building, or cause a cancellation of any insurance policy relating to said Building, or keep or suffer to be kept therein any gasoline, distillate, petroleum or explosive products.  TENANT and TENANT’s officers, agents and employees shall not cause any corrosive acids or caustic substances of any kind to be emptied or discharged into any basins, drains, toilets or other plumbing facilities installed in the Premises which might cause injury or damage to same; and agrees during the term to take good care of the Premises and to keep the interior thereof in good order, repair and condition, natural deterioration with careful use and injury by fire, the elements or acts of God excepted.  TENANT and TENANT’s officers, agents, and employees shall not cause or permit any noxious or offensive odors to be emitted from the Premises during the term of this lease.

44.            COMPLIANCE.  Subject to the terms of Paragraph 13 of this Lease,TENANT agrees to comply with all laws, ordinances and all regulations and requirements of Municipal, State and Federal governments, boards, and authorities relative to the TENANT’s occupancy of the Premises or to the business to be conducted therein and will keep the said Premises in a clean and orderly condition according to all laws and ordinances and the direction of all public officers, and, as far as reasonably possible will keep all immoral and disreputable persons out of the Premises to the end that the reputation of the Premises and the said Building as a first class office building may be preserved.

45.            HAZARDOUS WASTE.

a.Except for small quantities of ordinary office supplies, which shall be used and disposed of in accordance with law, TENANT shall not cause or permit any Hazardous Material (as defined in Paragraph 45.c below) to be brought, kept or used in or about the Building by TENANT, its agents, employees, contractors, or invitees.  TENANT shall indemnify LANDLORD from and against any  breach by TENANT of the obligations stated in the preceding sentence, and agrees to defend and hold LANDLORD harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities, or losses, (including without limitation, diminution in value of the Building, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Building, damages arising from any adverse impact on marketing of space in the Building, and sums paid in settlement of claims, attorney’s fees, consultant fees, and expert fees) which arise during or after the term of this Lease as a result of such breach.  This indemnification of LANDLORD by TENANT includes, without limitation, costs incurred in connection with any investigation of site conditions of any cleanup, remedial removal, or restoration work required by any federal, state, or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the Building. Without the limiting the foregoing, if the presence of any Hazardous Material in the Building caused or permitted by TENANT results in any contamination of the Building, TENANT shall promptly take all actions, at its sole expense, as are necessary to return the Building to the condition existing prior to the introduction of any such Hazardous Material.

b.   LANDLORD and TENANT acknowledge that LANDLORD may become legally liable for the costs of complying with Laws (as defined in Paragraph 45.d below) relating to Hazardous Material which are not the responsibility of LANDLORD or the responsibility of TENANT, including the following: (i) Hazardous Material present in the soil or ground water on the Building of which LANDLORD has no knowledge as of the effective date of this Lease; (ii) a change in Laws which relate to Hazardous Material which make that Hazardous Material which is present on the Property as of the effective date of this Lease, whether known or unknown to LANDLORD, a violation of such new Laws:  (iii) Hazardous Material that migrates, flows, percolates, diffuses, or in any way moves on, to, or under the Building after the effective date of this Lease; or Hazardous Material present on or under the Building as a result of any discharge, dumping or spilling (whether accidental or otherwise) on

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	TENANT’s Initials:

15

the Building by other  TENANTS of the Building or their agents, employees, contractors, or invitees, or by others.  Accordingly, LANDLORD and TENANT agree that the cost of complying with Laws relating to Hazardous Material in or under the Building for which LANDLORD is legally liable and which are paid or incurred by LANDLORD shall be an Operating Cost (and TENANT shall pay TENANT’s Percentage Share thereof in accordance with Paragraph 1.m); unless the cost of such compliance, as between LANDLORD and TENANT, is made the responsibility of TENANT pursuant to Paragraphs 45.a above.  To the extent any such Operating Cost relating to Hazardous Material is subsequently recovered or reimbursed, TENANT shall be entitled to a proportionate reimbursement to the extent it has paid its share of such Operating Cost to which such recovery or reimbursement relates.

c.   As used herein, the term “Hazardous Material” means any hazardous or toxic substance, material, or waste which is or becomes regulated by any local governmental authority, the State of California or the United States Government.  The term “Hazardous Material” includes, without limitation, any material or substance which is (i) defined as “hazardous waste”, “extremely hazardous waste”, or “restricted Hazardous Waste”  under Section 25115, 25117, or 25122.7, or listed pursuant to Section 25140 of the California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined as “hazardous substance” under Section 25316 of the California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous Substance Account Act), (iii) defined as a “hazardous material”, “hazardous substance”, or “hazardous waste” under Section 25501 of the California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and Inventory), (iv) defined as a “hazardous substance” under Section 25281 of the California Health and Safety Code, Division 20, chapter 6.7 (Underground Storage of Hazardous Substances), (v) petroleum, (vi) asbestos, (vii) listed under Article 9 or defined hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 20, (viii) designated as a “hazardous substance” pursuant to section 311 of the Federal Water Pollution control Act (33 U.S.C. & 1317), (ix) defined as a “hazardous waste” pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. & 6901) et seq. (42 U.S.C. & 6903), or (x) defined as a “hazardous substance” pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. & 6901 et seq. (42 U.S.C. & 9601).

d.   As used herein, the term “Laws” mean any applicable federal, state or local laws, ordinances, or regulation relating to any Hazardous Material affecting the Building including, without limitation, the laws, ordinances, and regulations referred to in Paragraph 45.c above.

46.           ACCORD AND SATISFACTION.  Any payment by TENANT or receipt by LANDLORD of an amount less than the total amount then due hereunder shall be deemed to be in partial payment only thereof and not a waiver of the balance due or an accord and satisfaction, notwithstanding any statement or endorsement to the contrary on any check or any other instrument delivered concurrently herewith or in reference thereto.  Accordingly, LANDLORD may accept any such amount, and negotiate any such check without prejudice to LANDLORD’s right to recover all balances due and owing and to pursue its rights against TENANT under this Lease, regardless of whether LANDLORD makes any notation on such instrument of payment or otherwise notifies TENANT that such acceptance or negotiation is without prejudice to LANDLORD’s right to recover all balances due an owing and to pursue its other rights against TENANT under this Lease. TENANT agrees that the foregoing shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by any statute or at common law.

47.            ATTORNMENT.  In the event of the exercise of power of sale or the foreclosure under any deed of trust or mortgage placed by LANDLORD against all or any portion of the Premises, or upon the Building and real estate of which the Premises are a part or in which the Premises are located, TENANT shall upon demand attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the LANDLORD under this Lease.

48.  BROKERS.  The parties recognize that the brokers who negotiated this Lease are the brokers whose names are stated in Paragraph 1.q and agree that LANDLORD shall be solely responsible for the payment of brokerage commissions to said brokers, and that TENANT shall have no responsibility therefor.  As part of the consideration for the granting of this Lease, TENANT represents and warrants to LANDLORD that to TENANT’s knowledge no other broker, agent or finder negotiated or was instrumental in negotiating or consummating this Lease and that TENANT knows of no other real estate broker, agent or finder who is, or might be entitled to a commission or compensation in connection with this Lease. Any broker, agent, or finder of TENANT whom TENANT has failed to disclose herein shall be paid by TENANT.  TENANT shall hold LANDLORD harmless from all loss, cost or damages (including reasonable attorney fees and court costs) and indemnify LANDLORD for all loss, cost or damages (including reasonable attorney’s fees and court costs) paid or incurred by LANDLORD resulting from any claims that may be asserted against LANDLORD by any broker, agent, or finder undisclosed by TENANT herein.

49.           TRANSFER OF LANDLORD’s INTEREST.  If LANDLORD transfers its interest in the Premises or in the real property of which the Premises are a part, other than a transfer for security purposes only, the transferor shall be automatically relieved of any and all obligations and liabilities on the part of LANDLORD from and after the date of such transfer.  LANDLORD shall transfer TENANT’s Security Deposit hereunder to the purchaser of the property.  Upon such transfer, LANDLORD shall be relieved from any further liability with respect to said security deposit.  In the event of an assignment or sublease consented to by LANDLORD, the assigning TENANT’s interest in the security deposit shall be deemed transferred to such assignee or sublessee (to the pro rata extent applicable).  Neither LANDLORD or any successor in interest of LANDLORD shall be personally liable with respect to any of the terms, covenants and conditions of this Lease, and TENANT shall look solely to the equity of LANDLORD in the Building and the rent payable by TENANT for the satisfaction of each and every remedy by TENANT, such exculpation of liability to be absolute and without any exception whatsoever.

50.           EXAMINATION OF LEASE.  The submission of this Lease to TENANT for examination by TENANT does not constitute an option or offer to lease the Premises upon the terms and conditions contained herein or a reservation of the Premises for TENANT.  This Lease shall only become effective upon the execution hereof by LANDLORD.  The negotiation of checks tendered by TENANT and delivery of a copy of this Lease signed by TENANT to LANDLORD, shall not constitute an acceptance of TENANT’s offer to lease as contained herein until such time as LANDLORD makes and executes this Lease and delivers a signed copy thereof to TENANT.

51.           ETHICS. If the TENANT is a member of any profession, he agrees to abide by the Code of Ethics of the Association recognized as representing that particular profession in the County of Los Angeles, State of California.

LANDLORD’s Initials:	TENANT’s Initials:
	TENANT’s Initials:

16

52.            GENERAL PROVISIONS.

a.    Prior Agreements.  This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose.  No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest.  This Lease shall not be effective or binding on any party until fully executed by both parties hereto.  This paragraph is subject to the provisions of Paragraph 30 concerning default by TENANT in any other lease or tenancy wherein the LANDLORD is also LANDLORD therein.

b.    Inability to Perform.  This Lease and the obligations of the TENANT hereunder shall not be affected or impaired because the LANDLORD is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, acts of God, or any other cause beyond the reasonable control of LANDLORD.

c.    Partial Invalidity.  Any provisions of this Lease which shall prove to be invalid, void, or illegal shall in no way affect, impair or invalidate any other provisions hereof and such other provisions shall remain in full force and effect.

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

e.     Successors.  The words “LANDLORD” and “TENANT” as used herein, shall include, apply to, and bind and benefit the heirs, executors, administrators, assigns and successors of the LANDLORD and TENANT, subject to the aforementioned restrictions on assignment of this Lease on the part of the TENANT.

f.     Gender.  In this lease, whenever the context so requires, the masculine gender herein used shall include the feminine or neuter and the singular number shall include the plural.

g.    Paragraph Headings.  Paragraph headings do not constitute part of the text of this lease, but are inserted in this Lease for paragraph identification only.

h.     Notices.  All notices to be given hereunder by LANDLORD to TENANT shall be in writing, and may be served either personally or by depositing the same in the United States mail, postage fully prepaid, either by ordinary, registered or certified mail, and addressed to TENANT at the Premises,with a copy, at the same time, mailed to:

Chief Financial Officer

Mercantile National Bank, N.A.

1880 Century Park East, Suite 800

Los Angeles, California 90067.

If there may be more than one TENANT, then notice on any one of them shall constitute notice to all.

           Any notices desired to be served on LANDLORD by TENANT must be sent by United States registered mail to the LANDLORD at the address set forth in Paragraph 1.b, which may be changed from time to time upon giving of written notice to TENANT.

     53.  SPECIAL CONDITIONS.         Exhibit “A” (Floor Plan) and Exhibit “B” (First Amendment to Office Building Lease) are attached hereto and incorporated herein by this reference.

LANDLORD:		TENANT:
Encino Corporate Plaza, L.P.		Mercantile National Bank, N.A., national bank
By:	Milbank Real Estate Services, Inc.
Its:	Authorized Agent
By:		By:
	Solyman Yashouafar, COO		Scott A. Montgomery
		For:	Mercantile National Bank
		Its:	President and CEO
		By:
			David Brown
		For:	Mercantile National Bank
		Its:	Vice President and Chief Financial Officer

17

RULES AND REGULATIONS OF THE BUILDING REFERRED TO HEREIN

WHICH CONSTITUTE A PART OF THIS LEASE

In the event of a conflict between these Rules and Regulations and the Lease, the terms of the Lease shall control.

           1.  TENANT, and TENANT’s employees, shall not loiter in the entrance or corridors, or in any way obstruct the sidewalks, entry passages, halls, stairways and elevators, and shall use the same only as passage ways and means of passage to and from their respective offices.  The entry and exit doors of all suites are to be kept closed at all times except as required for the orderly passage to and from the suite.

           2.  The sash doors, sashes, windows, glass doors, lights and skylights that reflect or admit light into the halls or other places of the Building, shall not be covered or obstructed, nor shall any bottles, parcels, or other articles be placed on the windowsills.

           3.  TENANT shall not mark, drive nails, screw or drill into, paint, or in any way deface the wall, ceilings, partitions, floors, wood, stone or iron work, except with the written consent of LANDLORD.  The expenses of any breakage, stoppage or damage resulting from a violation of this rule shall be borne by TENANT who has caused such breakage, stoppage or damage.

           4.  No awning, shade, sign, advertisement, or notice shall be inscribed, painted or affixed on or to any part of the outside or inside of the Building except by the written consent of LANDLORD, and except it be of such color, size and style and in such place upon or in the Building as may be designated by LANDLORD. If TENANT desires window coverings in addition to those already in and owned by LANDLORD, they must be of such uniform shape, color, material and make as may be prescribed by LANDLORD and must be put up in the manner as directed by LANDLORD and paid for by TENANT.  All signs on doors will be provided for TENANT by LANDLORD, but the cost of providing same shall be paid by TENANT.  There will be no signs on the windows or the roof.

           5.  Electric wiring of every kind shall be introduced and connected by LANDLORD, and no boring or cutting for wires shall be allowed except with the written consent of LANDLORD.

           6.  LANDLORD shall prescribe the weight, size and position of all safes used in the Building and such safes shall in all cases stand on wood or metal of such size as shall be designated by LANDLORD.  All damage done to the Building by putting in, taking out, or maintaining a safe shall be repaired at the expense of TENANT.

           7.  TENANT shall not conduct any auction on the Premises and shall not store goods, wares or merchandise on the leased Premises without the prior written consent of LANDLORD, which consent shall be granted or withheld in LANDLORD’s sole and uncontrolled discretion.  Articles of unusual size and weights are not permitted in the Building.

           8.  All freight, furniture and fixtures must be moved into, within and out of the Building under the supervision of LANDLORD, and according to such regulations, and at such hours as set by LANDLORD, which might change from time to time, but LANDLORD will not be responsible for loss or damage to such freight from any cause.  TENANT shall be responsible for any damages to the hallways, elevators and other parts of the Building resulting from move of such furniture or fixture. TENANT may only use the freight elevator after 6:00 p.m., but before 7:30 a.m. during the weekdays, and during weekends and holidays, with prior written approval of LANDLORD. However, should TENANT’s use of the freight elevator be one load or less, then TENANT may use the freight elevator outside the hours stated above, except that under no circumstances may TENANT use the freight elevator between the hours of 8:00 a.m. to 9:30 a.m., 12:00 noon to 1:00 p.m., and 4:30 p.m. to 5:30 p.m. on weekdays.

           9.  The requirements of TENANT will be attended to only upon application at the office of the Building. LANDLORD’s employees shall not perform any work or do anything outside of their regular duties unless under special instruction from the office, and no such employee shall admit any person (TENANT or otherwise) to any office without specific instructions from the office of the Building.

           10.  TENANT shall promptly notify LANDLORD of any accident to, or defect in the Building, including plumbing, water pipes, electric wires or heating apparatus so that such defects can be promptly fixed.

           11.  All keys shall be obtained from LANDLORD and all keys shall be returned to LANDLORD upon the termination of this lease.  If the keys are not returned to LANDLORD immediately upon termination of this lease, LANDLORD may replace all of the locks in the Premises with new locks, all at TENANT’s sole expense.  No additional locks or bolts of any kind shall be placed upon any of the doors by TENANT, nor shall any changes be made in existing locks or the mechanisms thereof unless LANDLORD is first notified thereof, gives written approval, and the mechanism thereof is placed on LANDLORD’s Master Key.

           12.  It is understood and agreed between LANDLORD and TENANT that no assent or consent to any waiver of any provision of this Lease, or any part thereof by LANDLORD, shall be deemed or taken as made except if such assent or consent is done in writing and attached to or endorsed hereon by LANDLORD.

           13.  TENANT shall comply with all safety, fire protection and evacuation procedures and regulations instituted by LANDLORD or any governmental agency.  TENANT shall comply with all relevant non-smoking laws applicable to the Building.

           14.  TENANT shall not obtain for use on the Premises cleaning, interior glass polishing, rubbish removal, towel or other similar services, or accept barbering or bootblacking, or coffee cart services, milk, soft drinks or other like services on the Premises, except from persons authorized by LANDLORD and at the hours and under regulations fixed by LANDLORD.  No vending machines or machines of any description shall be installed, maintained or operated upon the Premises without LANDLORD’s prior written consent.

           15.  Toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than for which they were constructed and no foreign substance of any kind whatsoever (ie. cigarette butts, sanitary napkins, or paper), shall be thrown therein.

           16.  Before TENANT or the last employee to leave the Premises, such individual shall see that the doors of the Premises are closed and locked and be sure that all water faucets, coffee pots, heat generating objects, lights and appliances are turned off to prevent waste and damage.  TENANT shall avoid all situations which could be fire hazards including placing trash near or on wires and the careless disposal of cigarettes, or other pipes.

           17.  No graffiti or writing on any walls, or toilet partitions are tolerated. LANDLORD at its sole discretion may either cancel the Lease of TENANT, or charge TENANT the cost of restoring the damaged area to its original condition prior to damage, plus an overhead cost of 15%.

           18.  TENANT shall not use or keep in the Premises or Building any kerosene, gasoline, or flammable, explosive or combustible fluid or material, or use any method of heating or air-conditioning other than that supplied by LANDLORD.  TENANT may not tamper with any electric or air conditioning repair or installation.

LANDLORD’s Initials:	TENANT’s Initials:
	TENANT’s Initials:

18

           19.  TENANT shall not lay linoleum, tile, carpet, or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by LANDLORD.

           20.  TENANT shall cooperate with LANDLORD in obtaining maximum effectiveness of the cooling system by closing drapes or blinds when the sun’s rays fall directly on windows of the Premises and by keeping the windows closed.  TENANT shall not obstruct, alter, or in any way impair the efficient operation of LANDLORD’s heating, ventilating and air-conditioning system.  TENANT shall not tamper with or change the setting of any thermostats or control valves.  No heating or air conditioning unit or other similar apparatus shall be installed or used by any TENANT without the prior written consent of LANDLORD.

           21.  TENANT shall not make, or permit to be made, any unseemly or disturbing noises, or disturb or interfere with occupants of Building or neighboring buildings or premises or those having business with it by the use of any  musical instrument, radio, photographs or unusual noise, or in any other way. If TENANT does not eliminate objectionable noise coming from the Premises after notice from LANDLORD, LANDLORD may, in its sole discretion, cancel this Lease or enter the Premises and add such soundproofing material and take such other steps as may be necessary to prevent such noise from being heard outside the Premises.  The cost of such soundproofing shall be paid by TENANT to LANDLORD upon demand.

           22.  No bicycles, vehicles or animals of any kind shall be brought into or kept in or about the Premises, and no cooking shall be done or permitted by any TENANT in the Premises, except that the preparation of coffee, tea, hot chocolate and similar items for TENANT’s, their employees and visitors shall be permitted.  No TENANT shall cause or permit any unusual or objectionable odors to be produced in or permeate from or throughout the Premises.

           23.  LANDLORD shall have the right to prohibit any advertising by any TENANT which, in LANDLORD’s opinion, tends to impair the reputation of the Building or its desirability as an office building and upon written notice from LANDLORD, any TENANT shall immediately refrain from and discontinue said advertising.

           24.  All areas of the Building other than those leased to TENANTS, including the public halls, lobby and stairs, shall be under the sole and absolute control of LANDLORD who shall have the exclusive right to regulate and control these areas.  LANDLORD may exclude from such areas all persons whose presence LANDLORD considers, in its sole discretion, to be prejudicial to the safety, character, reputation and interests of the Building and the TENANTS. LANDLORD reserves the right to exclude or expel from the Building any person who, in the judgement of LANDLORD is intoxicated or under the influence of drugs or liquor, or who shall in any manner act in violation of the rules of the Building.  The hours the Building shall be open are 7:00 AM to 6:00 PM, Monday through Friday, excluding legal holidays.  LANDLORD reserves the right to control access to the Building by all persons after reasonable hours of generally recognized business days and at all hours on Saturdays and Sundays and legal holidays.  Each TENANT shall be responsible for all persons for whom he requests after-hours access and shall be liable to LANDLORD for all acts of such persons.  LANDLORD shall not be liable for damages for any error with regard to the admission or exclusion from the Building of any person.  In the case of invasion, mob, riot, public excitement, or any other circumstances rendering such action advisable in LANDLORD’s sole and absolute discretion, LANDLORD reserves the right to prevent access to the Building during the continuances thereof by such actions as LANDLORD deems appropriate, including closing and locking the doors.

           25.  Any person employed by TENANT to do janitorial work shall be, while in the Building and outside of the Premises, subject to and under the control and discretion of the Office of the Building (but not as an agent or servant of LANDLORD, and TENANT shall be responsible for all acts of such persons).

           26.  Canvassing, soliciting and peddling in the Building are prohibited and each TENANT and its employees shall not buy from such peddlers and shall cooperate to prevent and discourage the same.  Any solicitors must be asked by TENANTS to leave the Building immediately, and notify Building’s manager.

           27.  There shall not be used in any space, or in the public halls of the Building, either by any TENANT or others, any hand trucks or dollies except those equipped with rubber tires and side guards.

           28.  TENANT shall not go on the roof of the Building nor shall TENANT install any type of antenna on the roof or walls of the Building.  TENANT shall not operate any equipment in the Premises which causes electromagnetic interference with the equipment of any other person.

           29.  LANDLORD reserves the right at any time to change or rescind any one or more of these rules and regulations or to make such other and further reasonable rules and regulations as in LANDLORD’s judgment may from time to time be necessary for the safety, care and cleanliness of the Premises, and for the preservation of good order therein.

           30.  TENANT shall faithfully comply with any nondiscriminatory rules and regulations that LANDLORD shall from time to time promulgate.  Any such new rules and regulations shall be binding upon TENANT upon delivery of a copy of the rules to TENANT.  LANDLORD shall not be responsible for the noncompliance with any rules and regulations by any other TENANT.

LANDLORD’s Initials:	TENANT’s Initials:
	TENANT’s Initials:

19

Exhibit “A”

Floor Plan

LANDLORD’s Initials:	TENANT’s Initials:
	TENANT’s Initials:

20

Exhibit “B”

First Amendment to Office Building Lease

On this 30^th day of August 2004, this Exhibit “B” shall serve as the First Amendment (“1^st Amendment”) to that certain Office Building Lease, dated May 24, 2004 (“Lease”), by and between ENCINO CORPORATE PLAZA, LP (“LANDLORD”) and MERCANTILE NATIONAL BANK, N.A., a national bank (“TENANT”) for the premises located at 16661 Ventura Boulevard, Suite 110, Encino, California 91436 (“Premises”).  In the event of a conflict, the provisions of this 1^st Amendment shall supersede the provisions of the Lease.

1.Parking.  Throughout the Term (as it may be extended),TENANT shall have the right to lease seven (7) parking spaces in the Building’s parking structure plus two (2) additional parking spaces to be used by TENANT’s visitors, all at prevailing rates in the Building.  All of these spaces are rented on a monthly basis, and TENANT may only cancel a parking space upon at least thirty (30) days’ prior written notice to LANDLORD, which notice shall be effective to cancel a parking space on the first (1^st) day of the month which is at least thirty (30) days after LANDLORD’s receipt of the notice.

2.HVAC.  Notwithstanding anything to the contrary in the provisions of Paragraph 20 of the Lease, LANDLORD shall furnish to the Premises heating, ventilating and air conditioning Monday through Friday, from 8:00 a.m. to 6:00 p.m, and Saturdays from 9:00 a.m. to 1:00 p.m. at no additional charge.

3.Condition of Premises.  TENANT hereby accepts the Premises in its “AS-IS” and present condition without any improvements to be performed by LANDLORD.

4.Rent Credit.  Provided TENANT is not in default of any of the terms and conditions of the Lease beyond any applicable notice and cure period, at the time of the applicable rent credit, then, TENANT shall be entitled to the total of six (6) monthly credits, each credit shall be equal to the then Monthly Basic Rent payable hereunder and shall be applied during the months of August 2004, December 2004, July 2005, July 2006, July 2007 and July 2008.

5.Signage.  TENANT shall have the right to maintain its existing signage on the facade of the Building.  In addition, LANDLORD, at TENANT’s cost, shall provide TENANT with space for two (2) designated names per one thousand square feet of rentable square footage leased by TENANT on the building directory board in the lobby of the Building.

6.Option to Extend Term.

           i) TENANT and its Affiliates (as defined in Paragraph 8 of this First Amendment, but not anythird party assignee of TENANT)  is given the option to extend the term of this Lease for a five (5) year period (“Extended Term”) following expiration of the initial term by giving written notice of exercise of the option (“Option Notice”) to LANDLORD at least nine (9) months but not more than twelve (12) months prior to the expiration of the initial term.  Provided that, if the TENANT is in default beyond any applicable notice and cure period on the date of giving the Option Notice or if the TENANT is in defaultbeyond any applicable notice and cure period on the date the Extended Term is commenced, the Option Notice shall be totally ineffective, the Extended Term shall not commence and the Lease shall expire at the end of the initial term. Similarly, in the event TENANT, during the initial term, failed to curea monetary default within the applicable cure period as defined in the Lease, then the Option Notice shall be totally ineffective, the Extended Term shall not commence and the Lease shall expire at end of the initial term.

The rent for the Extended Term shall be ninety-five percent (95%) of the then prevailing Market Rent as defined below.   In each and every other respect the remaining terms, covenants, conditions and provisions of the Lease shall remain in full force and effect during the Extended Term.

 ii)  Within sixty days after receipt of TENANT’s notice of its intention to exercise its option to renew

the Lease, LANDLORD shall notify TENANT in writing as to the then prevailing Market Rent for the Premises. The Market Rent for the purposes of this Paragraph 6.ii shall be defined as rent for a space substantially similar to the demised premises as to size and visibility, located on the ground floor of a high rise building on Ventura Boulevard, in Encino between Sepulveda Boulevard and Balboa Boulevard.  If TENANT does not agree with the Market Rent, TENANT shall notify LANDLORD as to its disagreement within 10 business days from receipt of LANDLORD’s notice, in which case both LANDLORD and TENANT shall each appoint an experienced real estate broker (for the purposes of the Lease, an experienced broker shall be defined as one who has had at least five years of experience in leasing and marketing of office/retail space in Encino.) Such two brokers shall within thirty days from their appointment attempt to agree on the then Market Rent.  If the two appointed brokers are unable to agree on the Market Rent, then the matter shall be submitted to American Arbitration Association inLos Angeles, California for arbitration.  The appointed arbitrator shall choose between the rents each party claimed to be the Market Rent as defined in this Paragraph 6.ii, and select the rent which to the arbitrator’s mind is closer to the Market Rent.  Both LANDLORD and TENANT agree to be bound by the decision of the appointed arbitrator.  Each party shall advance one half of the cost of the arbitration, and the party whose rate has been selected by the arbitrator shall recover its advance costs by the other party.

          iii)  In the event that at the commencement date of the Extended Term, the new rent has not been established, TENANT shall commence making rental payments as provided in Paragraph 10 of the Lease, for a hold over tenant.  At such time as the Market Rent is established, if the amount is in excess of the amount paid as rent by TENANT, then TENANT shall pay to LANDLORD within 15 days after determination of the Market Rent the excess of the Market Rent over the rent provided in Paragraph 10.  In the event the Market Rent is less than the holdover rate, then TENANT shall receive credit on its future rental payments.

LANDLORD’s Initials:	TENANT’s Initials:
	TENANT’s Initials:

21

7.       Right of First Acceptance.

           i) At any time during the term of the Lease, upon prior written notice to LANDLORD (“Expansion Notice”), TENANT shall have the Right of First Acceptance to lease any contiguous space (“Additional Premises”)  that is then available for lease or becomes available for lease within two (2) months of the date of the Expansion Notice (the “Additional Premises Period”).   Within ten (10) business days from receipt of Expansion Notice, or within ten (10) business days after any Additional Premises becomes available during Additional Premises Period, the  LANDLORD shall provide TENANT with a letter  which shall set forth the description of Additional Premises and LANDLORD’s proposed material terms and conditions (“Economic Terms”) applicable to TENANT’s lease of the Additional Premises (“First Acceptance Notice”).  Except for the Economic Terms and the number of parking spaces, all of the terms for the lease of the Additional Premises shall be the terms of this Lease, as amended by this First Amendment.

           ii) If TENANT wishes to exercise TENANT’s Right of First Acceptance with respect to the Additional Premises, then within ten (10) business days after LANDLORD’s delivery of the First Acceptance Notice to TENANT, TENANT shall deliver notice to LANDLORD of TENANT’s unconditional and irrevocable exercise of its Right of First Acceptance with respect to the entire Additional Premises andthe Economic Terms set forth in the First Acceptance Notice.  TENANT may not elect to lease only a portion of the Additional Premises.  If TENANT does not unconditionally and irrevocably exercise its Right of First Acceptance within the ten (10) day period, or if TENANT exercises its Right of First Acceptance but objects to LANDLORD’s proposed Economic Terms, then LANDLORD shall be free to lease the Additional Premises, or any portion thereof, to anyone to whom LANDLORD desires; provided, however, that if the Economic Terms on which LANDLORD is willing to lease the Additional Premises to a third party are more favorable than the terms offered to TENANT (as adjusted for the difference in the term of the proposed lease). then LANDLORD shall again offer the Additional Premises to TENANT on such terms. Unless otherwise expressly set forth to the contrary in LANDLORD’s First Acceptance Notice, TENANT shall accept the Additional Premises in its “AS-IS” condition.   Any space leased by TENANT under the provisions of this Paragraph 7 shall be for a term that is co-terminous with the term of the Lease, however, in no event less than 24 months.

          iii) The rights contained in this Paragraph 7 shall be personal to TENANT or an Affiliate of TENANT (as defined in Paragraph 8 below) and may only be exercised by TENANT or an Affiliate of TENANT, and not any third party assignee or subtenant.  TENANT shall not have the right to lease the Additional Premises if as of the date of the Expansion Notice, or, at LANDLORD’s option, as of the scheduled date of delivery of the Additional Premises to TENANT, TENANT is in default of the Lease or has been previoiusly in default of the Lease beyond anyapplicable notice and cure period.

8.Assignment and Sublease. Notwithstanding anything to the contrary contained in Paragraph 21 of the Lease, LANDLORD’s prior consent to assignment or sublease shall not be required for any transfer to TENANT’s affiliate defined as (i) a corporation or entity into or with which all of TENANT is merged or consolidated, or (ii) a corporation or entity which controls the TENANT or is controlled by TENANT,or is under common control with TENANT, or (iii) a corporation which acquires all of the stock or assets of TENANT; provided however, that TENANT (a) notifies LANDLORD of any such assignment or sublease at least 15 days prior to the effective date of such assignment or sublease, (b) promptly supplies LANDLORD with any documents or information requested by LANDLORD regarding such assignment or sublease, (c) the proposed assignee assumes in writing for the express benefit of LANDLORD all of the liabilities and obligations of TENANT under the Lease, in a form and substance satisfactory to LANDLORD, and (d) such assignment or sublease is not a subterfuge by TENANT to avoid its obligations under the Lease.  “Control” as used in this Paragraph 8 shall mean the ownership, directly or indirectly, of at least fifty-one percent (51%) of the voting securities of, or possession of the right to vote, in the ordinary direction of its affairs, of at least fifty-one percent (51%) of the voting interest in, any person or entity.

LANDLORD’s Initials:	TENANT’s Initials:
	TENANT’s Initials:

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EX-10.15

Exhibit 10.15

MERCANTILE NATIONAL BANK

DEFERRED COMPENSATION PLAN

This Deferred Compensation Plan (the “Plan”) of Mercantile National Bank, a national banking institution organized and existing under the laws of the United States (the “Bank”) documents a deferred compensation plan approved by the Board by resolution dated October 30, 2000 (the “Effective Date”).

The purpose of this Plan is to provide specified benefits to a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Bank.  This Plan shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended from time to time.

Article 1
Definitions

Whenever used in this Plan, the following words and phrases shall have the meanings specified:

1.1           “Beneficiary” means each designated person, or the estate of a deceased Participant, entitled to benefits, if any, upon the death of a Participant determined pursuant to Article 7.

1.2           “Board” means the Board of Directors of the Bank as from time to time constituted.

1.3           “Beneficiary Designation Form” means the form established from time to time by the Plan Administrator that a Participant completes, signs and returns to the Plan Administrator to designate one or more beneficiaries.

1.4           “Code” means the Internal Revenue Code of 1986, as amended.

1.5           “Compensation” means the salary and bonus that would be paid to a Participant during a Plan Year by Bank, the parent of Bank and an affiliate of Bank, absent deferrals, less FICA taxes associated with such salary and bonus.

1.6           “Deferral Account” means the Bank’s accounting of a Participant’s accumulated Deferrals, plus accretions to such accumulated Deferrals.

1.7           “Deferrals” means the amount of a Participant’s Compensation which the Participant elects to defer according to this Plan.

1.8           “Election Form” means the form established from time to time by the Plan Administrator that a Participant completes, signs and returns to the Plan Administrator to make an election under the Plan.

1.9           “Distribution Date” means the date which is 90 days after a Participant’s Termination of Employment.

1.10         “Participant” shall mean any employee (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Participation Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Participation Agreement, Election Form and Beneficiary Designation Form are accepted by the Plan Administrator, (v) who commences participation in the Plan, and (vi) whose Participation Agreement has not terminated.

1.11         “Participation Agreement” shall mean a written agreement, as may be amended from time to time, which is entered into by and between the Bank and a Participant.  Each Participation Agreement executed by a Participant and the Bank shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Participation Agreement, the Participation Agreement bearing the latest date of acceptance by the Bank shall supersede all previous Participation Agreements in their entirety and shall govern such entitlement.

1.12         “Plan Administrator” means the plan administrator described in Article 9.

1.13         “Plan Year” means a calendar year except that the initial Plan Year shall commence on the Effective Date of this Plan.

1.14         “Termination of Employment” means that the Participant ceases to be employed by the Bank for any reason, voluntary or involuntary, other than by reason of a leave of absence approved by the Bank.

Article 2
Selection, Enrollment and Eligibility

2.1           Selection by Plan Administrator.  Participation in the Plan shall be limited to a select group of management and highly compensated employees of the Bank, as determined by the Plan Administrator in its sole discretion.  From that group, the Plan Administrator shall select, in its sole discretion, employees to participate in the Plan.

2.2           Enrollment Requirements.  As a condition to participation, each selected employee shall complete, execute and return to the Plan Administrator a Participation Agreement, an Election Form and a Beneficiary Designation Form, all within thirty (30) days after the employee is notified by the Plan Administrator of his or her selection to participate in the Plan.  In addition, the Plan Administrator shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary.

2.3           Eligibility; Commencement of Participation.  Provided an employee selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Plan Administrator, including returning all required documents to the Plan Administrator within the specified time period, that employee shall commence participation in the Plan on the first day of the month following the month in which the employee completes all enrollment requirements (the “Participation Date”).  If an employee fails to meet all such requirements within the period required, in accordance with Section 2.2, that employee shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Plan Administrator of the required documents.

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2.4           Termination of Participation and/or Deferrals.  If the Plan Administrator determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 40l(a)(l) of ERISA, the Plan Administrator shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant’s membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the Participant’s then vested Deferral Account and terminate the Participant’s participation in the Plan.

Article 3
Deferral Election

3.1           Initial Election.  A Participant shall make an initial deferral election under this Plan by delivering to the Plan Administrator a signed Participation Agreement, Election Form and Beneficiary Designation Form within thirty (30) days after being notified by the Plan Administrator of selection for participation in the Plan.  The Election Form shall set forth the amount of Compensation to be deferred and shall be effective to defer only Compensation earned as of the calendar month commencing after the date the Election Form is received by the Plan Administrator.

3.2           Election Changes

3.2.1        Generally.  The Participant may modify the amount of Compensation to be deferred annually by filing a new Election Form with the Plan Administrator at any time within a period of thirty (30) days prior to the first day of the Plan Year in which the Compensation is to be deferred.

3.2.2        Unforeseeable Financial Emergency.  If an unforeseeable financial emergency arising from the death of a family member, divorce, sickness, injury, catastrophe or similar event outside the control of the Participant occurs (“Unforeseeable Financial Emergency”), the Participant, by written request to the Plan Administrator, may reduce future deferrals under this Agreement.

Article 4
Deferral Account

4.1           Establishing and Crediting.  The Bank shall establish a Deferral Account on its books for the Participant and shall credit to the Deferral Account the following amounts:

4.1.1        Deferrals.  The Compensation deferred by the Participant as of the time the Compensation would have otherwise been paid to the Participant.

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4.1.2        Accretions.  At the end of each calendar month and immediately prior to the payment of any benefits, accretions shall be credited to the Deferral Account at a rate equal to the Wall Street Journal Prime Rate plus one and one half percent (1.5%), from time-to-time in effect, compounded monthly; provided, however, that the monthly compounded rate shall not be less than five percent (5%) per annum nor more than nine percent (9%) per annum.

4.2           Statement of Accounts.  The Plan Administrator shall provide to the Participant, within ninety (90) days after the end of each Plan Year, a statement setting forth the Deferral Account balance.

4.3           Accounting Device Only.  The Deferral Account is solely a device for measuring amounts to be paid under this Plan.  The Deferral Account is not a trust fund of any kind.  The Participant is a general unsecured creditor of the Bank for the payment of benefits when due.  The benefits represent the mere Bank promise to pay such benefits.  The Participant’s rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Participant’s creditors.

Article 5
Benefits During Lifetime

5.1           Benefit.  Upon a Participant’s Termination of Employment, the Bank shall commence the payment to the Participant on the Distribution Date of the benefit described under this Article 5.

5.2           Amount of Benefit.  The amount of the Participant’s Deferral Account as of the date of Termination of Employment (after which no further Deferrals are permissible) plus accretions to the Distribution Date.

5.3           Payment of Benefit.  The Benefit shall be paid in a lump sum or in monthly installments for up to a period of five years, as elected by the Participant on the Election Form, and during the installment period accretions shall continue to be credited to the balance of the Deferral Account as reduced by the Benefit payments.  Monthly installments during a calendar year shall be approximately equal, with adjustments to be made at the beginning of each calendar year based on the Deferral Account balance as of that time; and in the last year of the installment period, the final installment shall be such as to pay the entire remaining balance.

5.4           Hardship Distribution.  If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Plan Administrator to suspend Deferrals of Compensation required to be made by such Participant, to the extent deemed necessary by the Plan Administrator to satisfy the Unforeseeable Financial Emergency.  If suspension of Deferrals is not sufficient to satisfy the Participant’s Unforeseeable Financial Emergency, or if

(i)            reimbursement or compensation by insurance or otherwise; or

(ii)           liquidation of Participant’s assets (to the extent the liquidation would not itself cause severe financial hardship)

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cannot satisfy the Participant’s Unforeseeable Financial Emergency, then the Participant may further petition the Plan Administrator to receive a partial or full payout of the Participant’s Deferral Account.  The Participant shall only receive a payment to the extent it is deemed necessary by the Plan Administrator to satisfy the Participant’s Unforeseeable Financial Emergency, plus an amount necessary to pay taxes reasonably anticipated as a result of the payment and in no event will such amount exceed the balance of the Deferral Account.

If the Plan Administrator, in its sole discretion, approves a Participant’s petition for suspension, the Participant’s deferrals under this Plan shall be suspended as of the date of such approval.  If the Plan Administrator, in its sole discretion, approves a Participant’s petition for suspension and payout, the Participant’s deferrals under this Plan shall be suspended as of the date of such approval and the Participant shall receive a payout from the Plan within sixty (60) days of the date of such approval.

Article 6
Death of Participant

6.1           Death During Active Service.  If the Participant dies while in the employment of the Bank, the Bank shall pay to the Beneficiary one hundred percent (100%) of the Deferral Account balance as of the date of the Participant’s death in a lump sum within thirty (30) days following the Participant’s death.

6.2           Death During Payment of a Benefit.  If the Participant dies after any benefit payments have commenced under this Plan but before receiving all such payments, the Bank shall pay to the Beneficiary the remaining Deferral Account balance as of the date of the Participant’s death in a lump sum within thirty (30) days following the Participant’s death.

6.3           Death After Termination of Employment But Before Benefit Payments Commence.  If the Participant is entitled to benefit payments under this Plan, but dies prior to the commencement of said benefit payments, the Bank shall pay to the Beneficiary the Deferral Account balance as of the date of the Participant’s death in a lump sum within thirty (30) days following the Participant’s death.

Article 7
Beneficiaries

7.1           Beneficiary.  Each Participant shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant.  The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of the Bank in which the Participant participates.

7.2           Beneficiary Designation:  Change: Spousal Consent.  A Participant shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent.  If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Plan Administrator, must be signed by that Participant’s spouse and returned to the Plan Administrator.  The Participant’s beneficiary designation shall be deemed automatically revoked

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if the beneficiary predeceases the Participant or if the Participant names a spouse as beneficiary and the marriage is subsequently dissolved.  A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time.  Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled.  The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Plan Administrator prior to the Participant’s death.

7.3           Acknowledgment.  No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent.

7.4           No Beneficiary Designation.  If the Participant dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Participant, then the Participant’s spouse shall be the designated Beneficiary.  If the Participant has no surviving spouse, the benefits shall be made to the personal representative of the Participant’s estate.

7.5           Facility of Payment.  If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct payment of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person.  The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit.  Any payment of a benefit shall be a payment for the account of the Participant and the Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.

Article 8
General Limitations

8.1           Termination for Cause.  Notwithstanding any provision of this Plan to the contrary, the Bank shall not pay any benefit under this Plan that is in excess of the Participant’s Deferrals (i.e., accretions previously credited to the Participant’s Deferral Account will be eliminated) if the Board terminates the Participant’s employment for:

(a)           Gross negligence or gross neglect of duties to the Bank;

(b)           Commission of a felony or of a gross misdemeanor involving moral turpitude in connection with the Participant’s employment with the Bank;

(c)           Fraud, disloyalty, dishonesty or willful violation of any law or significant Bank policy committed in connection with the Participant’s employment and resulting in an adverse effect on the Bank; or

(d)           The Participant’s becoming subject to a final removal or prohibition order issued by an appropriate federal banking agency pursuant to Section 8(e) of the Federal Deposit Insurance Act (“FDIA”).

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Article 9
Administration Of Plan

9.1           Plan Administrator Duties.  This Plan shall be administered by a Plan Administrator which shall consist of the Board, or such Plan Administrator or person(s) as the Board shall appoint.  Members of the Plan Administrator may be Participants under this Plan.  The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan.

9.2           Agents.  In the administration of this Plan, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Bank.

9.3           Binding Effect of Decisions.  The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

9.4           Indemnity of Plan Administrator.  The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Plan Administrator or any of its members.

9.5           Bank Information.  To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters relating to the Compensation of its Participants, the date and circumstances of their Termination of Employment or death, and such other pertinent information as the Plan Administrator may reasonably require.

Article 10
Claims and Review Procedures

10.1         Claims Procedure.  A Participant or Beneficiary (“claimant”) who has not received benefits under the Plan that he or she believes should be paid shall make a claim for such benefits as follows:

10.1.1      Initiation - - Written Claim.  The claimant initiates a claim by submitting to the Plan Administrator a written claim for the benefits.

10.1.2      Timing of Plan Administrator Response.  The Plan Administrator shall respond to such claimant within 90 days after receiving the claim.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period -is required.  The

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notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

10.1.3      Notice of Decision.  If the Plan Administrator denies part or all of the claim, the Plan Administrator shall notify the claimant in writing of such denial.  The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

(a)           The specific reasons for the denial,

(b)           A reference to the specific provisions of the Plan on which the denial is based,

(c)           A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,

(d)           An explanation of the Plan’s review procedures and the time limits applicable to such procedures, and

(e)           A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

10.2         Review Procedure.  If the Plan Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Board of the denial, as follows:

10.2.1      Initiation - - Written Request.  To initiate the review, the claimant, within 60 days after receiving the Plan Administrator’s notice of denial, must file with the Plan Administrator a written request for review.

10.2.2      Additional Submissions - Information Access.  The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim.  The Plan Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.

10.2.3      Considerations on Review.  In considering the review, the Board shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

10.2.4      Timing of Bank Response.  The Board shall respond in writing to such claimant within 60 days after receiving the request for review.  If the Board determines that special circumstances require additional time for processing the claim, the Board can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Board expects to render its decision.

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10.2.5      Notice of Decision.  The Board shall notify the claimant in writing of its decision on review.  The Bank shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

(a)           The specific reasons for the denial,

(b)           A reference to the specific provisions of the Plan on which the denial is based,

(c)           A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits, and

(d)           A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).

Article 11
Amendments and Termination

11.1         Termination.  The Bank reserves the right to terminate the Plan at any time with respect to any or all of its Participants, by action of its Board.  Upon the termination of the Plan, the Participation Agreements of the affected Participants shall terminate and their Deferral Account balances shall be paid to the affected Participants in a lump sum within thirty (30) days following such Plan termination.  The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Bank shall have the right to accelerate applicable installment payments without a premium or prepayment penalty by paying the Deferral Account balance in a lump sum within thirty (30) days following such termination.

11.2         Amendment.  The Bank may, at any time, amend or modify the Plan in whole or in part by the action of its Board; provided, however, that: (i) no amendment or modification shall be effective to decrease or restrict the value of a Participant’s Deferral Account balance in existence at the time the amendment or modification is made and (ii) no amendment or modification of this Section 11.2 of the Plan shall be effective.  The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided,.  however, that the Bank shall have the right to accelerate applicable installment payments by paying the Deferral Account balance in a lump sum within thirty (30) days following such amendment.

11.3         Participation Agreement.  Despite the provisions of Sections 11.1 and 11.2 above, if a Participant’s Participation Agreement contains benefits or limitations that are not in this Plan document, the Bank may only amend or terminate such provisions with the consent of the Participant.

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Article 12
Miscellaneous

12.1         Binding Effect.  This Plan shall bind the Participant and the Bank and their beneficiaries, survivors, executors, administrators and transferees.

12.2         No Guarantee of Employment.  This Plan is not a contract for employment.  It does not give the Participant the right to remain an employee of the Bank, nor does it interfere with the Bank’s right to discharge the Participant.  It also does not require the Participant to remain an employee nor interfere with the Participant’s right to terminate employment at any time.

12.3         Non-Transferability.  Benefits under this Plan cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

12.4         Tax Withholding.  The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Plan.

12.5         Applicable Law.  The Plan and all rights hereunder shall be governed by the internal laws of the State of California, except to the extent preempted by the laws of the United States of America.

12.6         Unfunded Arrangement.  The Participant and the Beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Plan.  The benefits represent the mere promise by the Bank to pay such benefits.  The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors.  Any insurance on the Participant’s life is a general asset of the Bank to which the Participant and the Beneficiary have no preferred or secured claim.

12.7         Reorganization.  The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another Bank, firm, or person unless such succeeding or continuing Bank, firm, or person agrees to assume and discharge the obligations of the Bank under this Plan or the Bank terminates the Plan and makes lump sum payments of the Participants’ Deferral Account balances.

12.8         Entire Agreement.  This Plan and the Participant’s Participation Agreement constitute the entire agreement between the Bank and the Participant as to the subject matter hereof.  No rights are granted to the Participant by virtue of (i) this Plan other than those specifically set forth herein; or (ii) the Participation Agreement other than those specifically set forth therein.

12.9         Interpretation.  Wherever the fulfillment of the intent and purpose of this Plan requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural

12.10       Alternative Action.  In the event it shall become impossible for the Bank or the Plan Administrator to perform any act required by this Plan, the Bank or Plan Administrator may

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in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Plan and is in the best interests of the Bank.

12.11       Headings.  Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.

12.12       Validity.  In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision has never been inserted herein.

12.13       Notice.  Any notice or filing required or permitted to be given to the Plan Administrator under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

Senior Vice President

Human Resources Department

National Mercantile Bancorp

1880 Century Park East, Suite 800

Los Angeles, CA 90067

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification.

Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.

IN WITNESS WHEREOF, the Bank has executed this Plan document as of October 30, 2000.

Bank:

MERCANTILE NATIONAL BANK

By:

Title:

Acknowledged:

NATIONAL MERCANTILE BANCORP

By:

Title:

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THIS PARTICIPATION AGREEMENT (this “Agreement”) is entered into as of            20      between Mercantile National Bank a national bank organized and operating under the laws of the United States (the “Bank”), and                                   (“Participant”).

Recital

A.            Participant is a management or highly compensated employee of the Bank, and the Bank desires to have the continued services of Participant.

B.            The Bank has adopted, effective October 30, 2000, the Mercantile National Bank Deferred Compensation Plan (the “Plan”), as may be amended from time to time, and Participant has been selected to participate in the Plan.

C.            Participant desires to participate in the Plan.

Agreement

NOW THEREFORE, it is mutually agreed that:

1.             Definitions.  Unless otherwise provided in this Agreement, the capitalized terms in this Agreement shall have the same meaning as they have in the instrument establishing the Plan (the “Plan Document”).

2.             Integrated Agreement: Parties Bound.  The Plan Document, a copy of which has been made available to Participant, is hereby incorporated into and made a part of this Agreement as though set forth in full in this Agreement.  The parties to this Agreement agree to, and shall be bound by, and have the benefit of, each and every provision of the Plan as set forth in the Plan Document.  This Agreement and the Plan Document, collectively, shall be considered one complete contract between the parties.

3.             Acknowledgment.  Participant hereby acknowledges that Participant has read and understands this Agreement and the Plan Document.

4.             Conditions to Participation.  As a condition to participation in the Plan, Participant must complete, sign, date and return to the Plan Administrator an original copy of this Agreement, an Election Form and a Beneficiary Designation Form, and any other documentation as may in the future be required by the Plan Administrator.

5.             Successors and Assigns.  This Agreement shall inure to the benefit of, and be binding upon the Bank, its successors and assigns, and Participant.

6.             Governing Law.  This Agreement shall be governed by and construed under the internal laws of the State of California, as in effect at the time of the execution of this Agreement.

IN WITNESS WHEREOF, Participant has signed and the Bank has accepted this Participation Agreement as of the date first written above.

PARTICIPANT:
Date	Signature of Participant
	Type or Print Name

AGREED AND ACCEPTED BY THE BANK PLAN ADMINISTRATOR:
Date
	Signature of Plan Administrator or Member Thereof
	Type or Print Name

2

EX-21

Exhibit 21

Subsidiaries

Mercantile National Bank

South Bay Bank, National Association

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-64316, 333-83723, 333-59667 and 333-33095) or our report dated March 28, 2005, with respect to the consolidated financial statements of National Mercantile Bancorp and subsidiaries included in the Annual Report (Form 10-KSB) for the year ended December 31, 2004.

	/s/ Ernst & Young LLP
Los Angeles, California
March 28, 2005

EX-31.1

Exhibit 31.1

I, Scott A. Montgomery, certify that:

1. I have reviewed this annual report on Form 10-KSB of National Mercantile Bancorp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 (b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.  The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date:	March 31,  2005	/s/  SCOTT A. MONTGOMERY
		Scott A. Montgomery
		Chief Executive Officer

EX-31.2

Exhibit 31.2

I, David R. Brown, certify that:

1. I have reviewed this annual report on Form 10-KSB of National Mercantile Bancorp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.  The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date:	March 31,  2005	/s/  DAVID R. BROWN
		David R. Brown
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of National Mercantile Bancorp (the “Company”) on Form 10-KSB for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott A. Montgomery, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  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 results of operations of the Company.

	/s/  SCOTT A. MONTGOMERY
	Scott A. Montgomery
	Chief Executive Officer
Date:  March 31, 2005

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of National Mercantile Bancorp (the “Company”) on Form 10-KSB for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David R. Brown, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  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 results of operations of the Company.

	/s/  DAVID R. BROWN
	David R. Brown
	Chief Financial Officer
Date:  March 31, 2005