10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarter ended March 31, 2002

Commission File Number 0-13789

NASTECH PHARMACEUTICAL COMPANY INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of	11-2658569
incorporation or organization)	(I.R.S. Employer Identification No.)
45 Adams Avenue, Hauppauge, New York	11788
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (631) 273-0101

Securities registered pursuant to Section 12(b) of the Act:   NONE

Securities registered pursuant to Section 12(g) of the Act:

	Name of each exchange
Title of each class	on which registered
Common Stock, $.006 par value	Nasdaq National Market

     Preferred Stock Purchase Rights, $.01 par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  [ x ]          No  [   ]

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

Date	Class	Shares Outstanding
04/24/2002	Common stock — $.006 par value	10,047,591

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
TABLE OF CONTENTS

		PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS			Page
	Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001			1
	Consolidated Statements of Operations for the three months ended March 31, 2002 (unaudited) and 2001 (unaudited)			2
	Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2002 (unaudited) and the year ended December 31, 2001			3
	Consolidated Statements of Cash Flows for the three months ended March 31, 2002 (unaudited) and 2001 (unaudited)			4
	Notes to Financial Statements			5-7
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS				8-9
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK				9
		PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS				10
ITEM 2 – CHANGES IN SECURITIES AND USE OF PROCEEDS				10
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES				10
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS				10
ITEM 5 – OTHER INFORMATION				10
ITEM 6 – EXHIBITS AND REPORTS ON FORM 8-K				10
	SIGNATURES			11

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PART I – FINANCIAL INFORMATION

     ITEM 1 – FINANCIAL STATEMENTS

NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)

					March 31,			December 31,
					2002			2001
					Unaudited
ASSETS
Current assets:
	Cash and cash equivalents				$	17,647		$	11,760
	Accounts receivable					73			71
	Royalties, fees and other receivables					1,207			242
	Inventories					54			85
	Prepaid expenses and other assets					254			162
				Total current assets		19,235			12,320
Property and equipment						5,584			5,438
	Less: Accumulated depreciation and amortization					2,658			2,483
				Property and equipment, net		2,926			2,955
Goodwill						90			90
Other assets						158			75
				Total assets	$	22,409		$	15,440
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
			Accounts payable		$	918		$	559
			Royalties payable			17			10
			Deferred revenue, current portion			1,068			—
			Accrued expenses and other current liabilities			1,673			1,347
				Total current liabilities		3,676			1,916
Capital lease obligation, net of current portion						30			30
Deferred revenue, net of current portion						1,706			—
Stockholders’ equity:
		Preferred stock, $.01 par value; 100,000 authorized: no shares issued and outstanding:				—			—
	Common stock, $0.006 par value; 25,000,000 authorized: 10,034,541 and 9,555,519 shares issued at March 31, 2002 and December 31, 2001, respectively					60			57
	Additional paid-in capital					59,028			52,732
	Accumulated deficit					(42,036	)		(39,235	)
						17,052			13,554
		Less: Treasury stock, at cost; 29,245 and 32,079 shares at March 31, 2002 and December 31, 2001, respectively				55			60
				Total stockholders’ equity		16,997			13,494
				Total liabilities and stockholders’ equity	$	22,409		$	15,440

See accompanying notes to consolidated financial statements

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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)

				Three Months Ended March 31
				2002			2001
Revenues:
	Revenues from manufactured product			$	193		$	153
	License fee, royalty and research income				1,332			564
			Total revenues		1,525			717
Costs and expenses:
		Cost of product sales			78			105
		Research and development			2,552			2,026
		Royalties			7			260
		Sales and marketing			375			148
		General and administrative			1,374			581
			Total costs and expenses		4,386			3,120
Net loss from operations				$	(2,861	)	$	(2,403	)
Interest income, net					60			88
Net loss				$	(2,801	)	$	(2,315	)
Net loss per common share-basic and diluted				$	(0.29	)	$	(0.33	)
Average shares outstanding-basic and diluted					9,711			6,921

See accompanying notes to consolidated financial statements

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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months Ended March 31, 2002 (unaudited) and
For the Year Ended December 31, 2001
(In Thousands, Except Share Data)

	Common Stock				Additional								Total
					Paid-in		Accumulated						Stockholders'
	Shares		Amount		Capital		Deficit			Treasury Stock			Equity
Balance, December 31, 2000		6,880,485	$	41	$	39,678	$	(30,003	)	$	(151	)	$	9,565
Proceeds from the issuance of common shares in connection with private placements, net		2,117,361		12		9,495		—			—			9,507
Shares issued in connection with options and warrants		557,673		4		3,414		—			91			3,509
Compensation related to stock options		—		—		145		—			—			145
Net loss		—		—		—		(9,232	)		—			(9,232	)
Balance December 31, 2001		9,555,519	$	57	$	52,732	$	(39,235	)	$	(60	)	$	13,494
Proceeds from the issuance of common shares in connection with private placements, net		250,000	$	2		4,998		—			—			5,000
Shares issued in connection with options and warrants		229,022		1		1,298		—			5			1,304
Net loss three months ended March 31, 2002		—		—		—		(2,801	)		—			(2,801	)
Balance March 31, 2002		10,034,541	$	60	$	59,028	$	(42,036	)	$	(55	)	$	16,997

See accompanying notes to consolidated financial statements

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NASTECH PHARMACEUTICAL COMPANY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)

			Three Months Ended March 31,
			2002			2001
Operating activities:
	Net loss		$	(2,801	)	$	(2,315	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization		175			211
		Compensation related to stock options		—			125
	Changes in assets and liabilities:
		Accounts and other receivables		(965	)		458
		Inventories		30			15
		Prepaid expenses and other assets		(177	)		(125	)
		Accounts payable		363			(110	)
		Royalties payable		7			260
		Deferred revenue		2,774			—
		Accrued expenses and other current liabilities		323			(49	)
Net cash used in operating activities				(271	)		(1,530	)
Investing activities:
	Property, equipment and other assets			(146	)		(51	)
Net cash provided used in investing activities				(146	)		(51	)
Financing activities:
	Private placement of common shares			5,000			3,899
	Exercise of stock options and warrants			1,304			153
Net cash provided by financing activities				6,304			4,052
Net increase in cash and cash equivalents				5,887			2,471
Cash and cash equivalents – beginning				11,760			6,256
Cash and cash equivalents – ending			$	17,647		$	8,727

See accompanying notes to consolidated financial statements

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NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – General

     The accompanying unaudited financial information should be read in conjunction with the audited financial statements, including the notes thereto as of and for the year ended December 31, 2001, included in the Company’s 2001 annual report filed on Form 10-K. The consolidated financial statements include the financial statements of Nastech and its wholly owned subsidiary, Atossa HealthCare, Inc. All intercompany balances and transactions have been eliminated in consolidation.

     The information furnished in this report reflects all adjustments (consisting of only normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. The results of operations for the three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2002.

Note 2 – Business

     Historically, our business involves research, development, manufacturing and commercialization of nasally administered forms of prescription pharmaceuticals. By using biophysics, physical chemistry and pharmacology in drug development, we seek to maximize therapeutic efficacy and safety, which sometimes involves a change in route of administration.

     We have an accumulated deficit of $42.0 million as of March 31, 2002. We expect operating losses in the foreseeable future as we continue our research toward the development of commercial products. Our development efforts and the future revenues from sales of these products are expected to generate contract research revenue, milestone payments, license fees, royalties and manufacturing product sales for us. We have financed our operations primarily through the sale of common stock in the public market and also through revenues resulting from royalties provided by our collaborative partners and, to a lesser extent, from sales of manufactured product.

     We face certain risks and uncertainties regarding future profitability that arise from our ability to obtain additional funding, protection of patents and property rights, uncertainties regarding our technologies, competition and technological change, government regulations including the need for product approvals, and attracting and retaining key officers and employees.

     As of March 31, 2002 we have $15.6 million of working capital. In February 2002 we entered into a collaboration and license agreement with Pharmacia & Upjohn Company that provides for approximately $48 million in upfront and milestone payments, royalties on product sales, and a $5 million equity investment (Note 4). In July 2000, we entered into an equity line of credit that will allow us to issue during a three-year term up to 1.2 million shares of common stock to an investor that are discounted from the fair market value on the date of issuance. In the past, we received significant revenues from royalties for Stadol®NS™. The patent on Stadol®NS™ expired in August 2001 that has resulted in the discontinuance of royalties for Stadol®NS™ in the United States that has had an adverse effect on revenues and operating results. The Company recognized $15,000 of Stadol®NS™ royalties in the quarter ended March 31, 2002 as compared to $530,000 in the quarter ended March 31, 2001. We believe that our current cash position, the milestone payments and stock sale proceeds we have and will receive from Pharmacia and the funds that can be drawn down under the equity line of credit will provide us with adequate working capital through at least September 30, 2003. In the event these sources do not provide us with adequate working capital, we would be required to curtail or reduce our research and development efforts.

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Note 3 – Net Loss per Common Share

     Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the periods. The effect of employee stock options and warrants totaling approximately 2.8 million and 2.7 million at March 31, 2002 and 2001, respectively, were not included in the net loss per share calculation because their effect would have been antidilutive.

Note 4 — Product Licensing Agreement

     On February 1, 2002, we entered into a licensing agreement with Pharmacia & Upjohn Company. Under the terms of the licensing agreement, Pharmacia receives exclusive, worldwide rights to develop and market nasally administered apomorphine for the treatment of male and female sexual dysfunction and will manage and fund all future development in these indications. We retain development rights in other therapeutic areas. We received an upfront payment at signing in February 2002 of $3.0 million, an additional upfront payment of $2.0 million upon the transfer of the apomorphine IND to Pharmacia in April 2002 and, Pharmacia purchased 250,000 shares of our common stock for $5.0 million in March 2002. Upon satisfaction of some future conditions, we will receive development and sales milestones totaling an additional $43.0 million. Less than half of the total milestone payments under the agreement will be based on achievement of certain sales levels. The upfront payments will be amortized over the estimated development period on a straight-line basis through February 2004. During the quarter ended March 31, 2002, the Company recognized $226,000 of revenue related to the $3.0 million upfront payment received in February 2002.

     The balance of the upfront payment of approximately $2.8 million has been reflected as deferred revenue in the accompanying balance sheet. The development milestone payments will be recognized as revenue based on the percentage of actual product research and development costs incurred to date to the estimated total of such costs to be incurred over the development period, if and when such milestones are received. The sales milestones will be recognized principally when the sales criteria is met.

     The estimated development period and estimated research and development costs will be reassessed each quarter. Increases or decreases in the estimated development period and / or estimated costs will result in the upfront and milestone payments being recognized over longer or shorter periods of time.

     Pharmacia has agreed to reimburse the Company for certain research and development cost for activities conducted by the Company since the execution of the license agreement in February 2002. During the quarter ended March 31, 2002, the Company recorded a receivable of $1,066,000 due from Pharmacia, included in royalties, fees and other receivables, and recorded research income in the same amount. Pharmacia will continue to reimburse the Company its research and development costs until it assumes the full development efforts for apomorphine.

     Pharmacia will also reimburse the Company approximately $2.5 million for additional costs that we will incur in connection with the licensing agreement. Upon commercialization, we will receive royalties on product sales that increase based on sales levels. The agreement also provides for minimum royalties during the nine years following the one year anniversary of the launch of the product. For the first five years following launch of the product, we will manufacture nasally administered apomorphine that will be sold to Pharmacia.

Note 5 – Related Party Transaction

     We pay certain monthly expenses incurred by a company that is owned primarily by our Chief Executive Officer. The company provides us a laboratory facility for certain research and development work. During the periods ending March 31, 2002 and 2001, we incurred rent of approximately $7,800 and $7,600, respectively, that is associated with this company.

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     A member of the Board of Directors provides legal services to us. Fees earned by this director were $35,500 and $10,500, respectively, in the three-month periods ending March 31, 2002 and 2001, respectively.

Note 6 – Adoption of New Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations” (“SFAS 141”), and SFAS No. 142, “Goodwill And Other Intangible Assets” (“SFAS 142”). SFAS 141 addresses the accounting for acquisitions of businesses and is effective for acquisitions occurring on or after July 1, 2001. SFAS 142 addresses the method of identifying and measuring goodwill and other intangible assets acquired in a business combination, eliminates further amortization of goodwill, and requires annual evaluations of impairment of goodwill balances. SFAS 142 is effective for fiscal years beginning after December 15, 2001. We amortized approximately $14,000 per quarter of goodwill related to the acquisition of Atossa HealthCare, Inc. that occurred in year 2000. The Company has adopted SFAS 141 and 142 effective January 1, 2002 and determined that the goodwill of $90,000 was not impaired. The Company will conduct an annual assessment of goodwill impairment on an annual basis. The proforma loss and loss per share for the quarter ended March 31, 2001 excluding goodwill amortization of $14,000 is $2,301,000 and $0.33 loss per share, respectively

     SFAS No.144. “Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”) addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supercedes SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and is effective for financial statements issued for fiscal years beginning after December 15, 2001. There was no impact on the Company financial statements from the adoption of this statement.

Note 7 – Subsequent Event

     In April 2002, we entered into an operating lease agreement to expand our office, laboratory and manufacturing space in Bothell, Washington. The Company will relocate its corporate headquarters to Bothell. Occupancy of the 27,000 square foot facility will begin in June and continue through the end of 2002. The lease term is approximately 10 years, expiring January 31, 2013. Future minimum lease payments are approximately $9.5 million during the lease term. The Company will take a one-time charge of approximately $250,000 for the write down of leasehold improvements in its Adams Avenue facility in the second quarter of 2002.

     On May 2, 2002 the Company and its President, Steven C. Quay, M. D., Ph. D., reached agreement on an amendment and restatement of Dr. Quay’s employment agreement, dated August 2000. In connection with this amended and restated employment agreement, Dr. Quay was granted 900,000 stock options, subject to approval by the stockholders of the Company on or before July 31, 2002, of the Nastech Pharmaceutical Company, Inc. 2002 Stock Option Plan, at exercise prices at or above market, which vest between May 2, 2002 and January 1, 2006. The amended and restated agreement extends the termination date of Dr. Quay’s employment agreement to December 31, 2005.

Note 8 – Income Taxes

     At March 31, 2002, the Company has available net operating loss carryforwards for federal and state income tax purposes of approximately $36 million, net of expired carryforwards, and has available research and development credit carryforwards for federal income tax reporting of approximately $1.4 million, which are available to offset future taxable income, if any. The Company’s ability to use these net operating loss and research and development credit carryforwards is limited by change of control provisions under Section 382 of the Internal Revenue Code.

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Statements contained herein that are not historical fact may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statement made by the Company. These factors include, but are not limited to: (i) the Company’s ability to successfully complete product research and development, including pre-clinical and clinical studies and commercialization; (ii) the Company’s ability to obtain required governmental approvals, including product and patent approvals; (iii) the Company’s ability to attract and/or maintain its key officers and employees and manufacturing, sales, distribution and marketing partners, (iv) the Company’s ability to develop and commercialize its products before its competitors, and (v) the Company’s ability to obtain additional funding. In addition, significant fluctuations in quarterly results may occur as a result of varying milestone payments and the timing of costs and expenses related to the Company’s research and development program. Additional factors that would cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in the Company’s filings with the Securities and Exchange Commission, including those factors discussed under the caption “Risk Factors” in the Company’s most recent Annual Report on Form 10-K.

Results of Operations

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001

     Revenues increased by $808,000, or 112%, to $1.5 million primarily as a result of research and development activities that are being reimbursed by Pharmacia offset by a decline in royalty income from Bristol-Myers Squibb on sales of Stadol®NS™. Revenue recorded as a result of the Pharmacia agreement executed in February 2002 contributed $1.3 million of revenues of which $226,000 is related to the recognition of an upfront payment and the balance of $1,066,000 represents the reimbursement of development costs incurred on intranasal apomorphine as discussed in Note 4. Royalty income from BMS decreased $516,000, or 97%, to $15,000. The patent on Stadol®NS™ expired in August 2001, which has resulted in the discontinuance of royalties for Stadol®NS™ in the U.S. The discontinuance of royalties has had an adverse effect on revenues and operating results.

     Total revenues from Schwarz Pharma on Nascobal® including sales of product and royalties were $193,000 compared to $153,000 in 2001. The increase resulted from a larger product batch manufactured and shipped by us partially offset by a decrease in royalty income from licensee sales.

     Total costs and expenses increased by $1.3 million, or 41%, to $4.4 million in 2002. The change arises primarily from:

     Cost of product sales decreased by $27,000, or 25%, to $78,000, primarily as a result of the write-off of costs in 2001 associated with a production batch of Nascobal failing product release standards.

     Research and development expense increased by $526,000, or 26%, to $2.6 million as a result of expenses incurred on the development activities for our intranasal apomorphine product since the execution of the Pharmacia license agreement in February 2002.

     Royalty expense decreased by $253,000, or 97%, to $7,000 as a result of the discontinuance of royalties for Stadol®NS™ in the U.S. due to patent expiration in August 2001, which reduces the royalty payable to the University of Kentucky Research Foundation (“UKRF”) under a separate agreement between the Company and UKRF. Royalty expenses increase or decrease approximately in proportion to royalty income associated with Stadol®NS™.

     Sales and marketing costs increased $227,000, or 153%, to $375,000 primarily from consulting fees paid in conjunction with introduction to, and negotiations with Pharmacia.

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     General and administrative expense increased $793,000, or 136%, to $1.4 million primarily as a result of legal and consulting costs resulting from negotiations with Pharmacia prior to executing the license agreement and recruiting costs to identify a Chief Financial Officer. Certain sales and marketing costs have been reclassified as general and administrative expenses for the periods presented.

     Interest income decreased by $26,000, or 29%, to $62,000 as a result of decreases in prevailing market rates of interest.

Liquidity and Capital Resources

     At March 31 2002, our liquidity included cash and cash equivalents of $17.6 million compared to $11.8 million at December 31, 2001. We have an accumulated deficit of $42.0 million and expect operating losses in the foreseeable future as we continue our research toward the development of commercial products. Our development efforts and the future revenues from sales of these products are expected to generate contract research revenues, milestone payments, license fees, royalties and manufacturing product sales for us. Upfront payments from our agreement with Pharmacia have totaled $3 million in the three months ended March 31, 2002. An additional upfront payment of $2 million was received in April 2002. These payments have been recorded as deferred revenue and will be recognized as current income ratably during the development period at approximately $626,000 per quarter through February 2004. The estimated development period will be reassessed each quarter. Increases in the estimated development period will result in the upfront and milestone payments being recognized over a longer period of time. The remaining development milestone payments will be recognized as revenue based on the percentage of actual product research and development costs incurred to date to the estimated total of such costs to be incurred over the development period, if and when such milestones are received. The sales milestones will be recognized principally when the sales criteria are met. The timing of the recognition of the milestone payments will possibly create large variations in quarterly income until royalties from product sales reach a stable level and milestone payments eventually cease. We have financed our operations primarily through the sale of common stock and warrants in the public market and also through revenues resulting from royalties provided by our collaborative partners and, to a lesser extent, from sales of manufactured product. Accounts, royalties and fee receivables at March 31, 2002 consist principally of receivables pursuant to the BMS, Schwarz Pharma, Questcor, and Pharmacia agreements.

     At March 31, 2002, we have $15.6 million of working capital. In the past, we received significant royalties for Stadol®NS™, which were discontinued effective August 2001 with the expiration of an underlying patent. This event has adversely affected the recording of revenue and contribution to operations.

     In July 2000, we entered into an equity line of credit agreement. Under the equity line, we have the option, at our discretion, to issue during a three-year term up to 1.2 million shares of our common stock to an investor at prices that are discounted from the fair market value on the date of issuance.

     We believe that our current cash position, including cash received under the agreement with Pharmacia and the funds that can be drawn down under the equity line will provide us with adequate working capital through at least September 30, 2003. In the event they do not provide us with adequate working capital, we may be required to curtail or reduce our research and development activities.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company’s cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in highly-rated investment grade commercial paper and/or money market funds. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

     None

ITEM 2 – CHANGES IN SECURITIES AND USE OF PROCEEDS

     In February 2002 the Company sold 250,000 shares of common stock to Pharmacia & Upjohn Company for $5 million. The capital will be used to fund ongoing research and development and working capital. The private placement was conducted in accordance with the terms of Regulation D promulgated under the Securities Act and was therefore exempt from registration under the Securities Act.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

     None

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

     None

ITEM 5 – OTHER INFORMATION

     On March 21, 2002, the Company announced in a press release that it had reported positive interim results from a Phase I clinical trial of its intranasal formulation of Interferon beta-1a, an FDA approved injection-only drug indicated for treatment of multiple sclerosis. The Phase I pharmacokinetic, pharmacodynamic, safety and tolerance study demonstrated the successful nasal delivery of Interferon beta-1a. The Company believes that additional research may provide multiple sclerosis patients with an easy-to-use, non-invasive alternative to injectable Interferon beta.

ITEM 6 – EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit No.

10.26	Lease Agreement dated April 23, 2002, between the Company and Phase 3 Science Center LLC, Ahwatukee Hills Investors LLC, and J. Alexander’s LLC.
10.27	Amended and Restated Employment Agreement dated May 2, 2002 between the Company and Steven C. Quay, M.D., Ph.D.

(b)	Reports on Form 8-K
	On February 20, 2002, the Company filed a Current Report on Form 8-K, dated February 1, 2002, reporting a collaboration and license agreement between the Company and Pharmacia & Upjohn Company for the development and marketing of the Company’s proprietary nasally administered apomorphine product for the treatment of erectile dysfunction and female sexual dysfunction.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized, in Hauppauge, State of New York, on May 14, 2002.

NASTECH PHARMACEUTICAL COMPANY INC

By: /s/ Steven C. Quay
Steven C. Quay, M.D., Ph.D.
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)

By: /s/ Randall Brock
Randall Brock
Controller
(Acting Principal Financial and Accounting Officer)

-11- EX-10.26 3 w60651ex10-26.txt EX LEASE [Phase 3 Science Center / Nastech Pharmaceutical Company Inc.] THIS LEASE ("Lease") is dated for reference purposes only April 23rd, 2002, by and between PHASE 3 SCIENCE CENTER LLC, a California limited liability company, AHWATUKEE HILLS INVESTORS, LLC, an Arizona limited liability company, and J. ALEXANDER'S LLC, a Delaware limited liability company, as tenants in common (collectively, "Landlord"), and NASTECH PHARMACEUTICAL COMPANY INC., a Delaware corporation ("Tenant"). 1. LEASE PREMISES. 1.1 Landlord hereby leases to Tenant and Tenant hereby leases from Landlord during the Term of this Lease (defined below), on the terms and conditions set forth herein, those certain premises ("Premises") consisting of 27,714 square feet of Rentable Area (comprised of 7,938 square feet in Space C and 19,776 square feet in Spaces D & E) in the building (the "Building") at 3450 Monte Villa Parkway, Bothell, Washington, on real property legally described on Exhibit "A" attached hereto and incorporated herein by this reference. The Building consists of approximately 51,000 square feet of Rentable Area. The Building, the real property upon which the Building is located, and all landscaping, parking facilities, and other improvements and appurtenances related thereto are hereinafter collectively referred to as the "Project." The site plan for the Project is attached hereto as Exhibit "B" and the Premises are outlined on Exhibit "C". All portions of the Project which are for the non-exclusive use of tenants of the Project, which are identified on Exhibit "C" hereto as common areas, including without limitation interior entrance ways, lobbies, corridors, stairwells, elevators, equipment rooms and rest rooms, and exterior roadways, driveways, sidewalks, parking areas, and landscaped areas, are hereinafter referred to as "Common Areas." 2. BASIC LEASE PROVISIONS. 2.1 For convenience of the parties, certain basic provisions of this Lease are set forth herein, which provisions are subject to the remaining terms and conditions of this Lease and are to be interpreted in light of such remaining terms and conditions. 2.1.1 Rentable Area of the Premises: 27,714 square feet, consisting of Space C: 7,938 square feet Spaces D & E: 19,776 square feet 2.1.2 Basic Annual Rent: $831,420 ($30.00 per square foot per year for 27,714 square feet of Rentable Area, subject to adjustment pursuant to Sections 5.1 and 6.1) 1 2.1.3 Monthly Installment of Basic Annual Rent: $69,285 ($2.50 per square foot per month for 27,714 square feet of Rentable Area, subject to adjustment pursuant to Sections 5.1 and 6.1) 2.1.4 Tenant's Pro Rata Share: 54.34% of the Project 2.1.5 (a) Estimated Delivery Date: Spaces D & E: June 1, 2002 Space C: September 1, 2002 (b) Term Commencement Date: November 15, 2002, subject to adjustment pursuant to Section 3.2 (c) Term Expiration Date: January 31, 2013 2.1.6 Security Deposit: (a) Cash in the amount of $277,140; and (b) Letter of Credit in the amount of $415,710 2.1.7 Permitted Use: Uses permitted in Section 10.1 2.1.8 Address for Rent Payment and Notices to Landlord: Phase 3 Properties, Inc. 8910 University Center Lane, Suite 265 San Diego, CA 92122 Address for Notices to Tenant: Before Term Commencement Date: Nastech Pharmaceutical Company Inc. 45 Adams Avenue Hauppauge, NY 11788 Attn: David Wormuth After Term Commencement Date: Nastech Pharmaceutical Company Inc. 3450 Monte Villa Parkway Bothell, WA Attn: Chief Executive Officer 2 2.2.The following exhibits are attached hereto and incorporated herein by this reference: Exhibit "A" Legal Description of Real Property Exhibit "B" Site Plan of the Project Exhibit "C" Outline of the Premises Exhibit "D" Acknowledgment of Term Commencement Date Exhibit "E" Schematic Showing Tenant Improvements Exhibit "E-1" Tenant Improvement Budget Exhibit "E-2" Tenant Signage Exhibit "F" Form of Letter of Credit Exhibit "G" Rules and Regulations Schedule 1 List of Removable Property (Section 17.7) 3. TERM. 3.1 This Lease shall take effect upon the last date of execution hereof by each of the parties hereto, and each of the provisions hereof shall be binding upon and inure to the benefit of Landlord and Tenant from the last date of execution hereof by each of the parties hereto. 3.2 Tenant shall have the full right to use and occupy Spaces D and E on the date by which all of the following have occurred: (a) Landlord has tendered possession of Spaces D and E with the Tenant Improvements located in or serving such portion of the Premises Substantially Complete and otherwise in the condition required hereunder (other than two (2) exhaust fans for Tenant's fume hoods and four (4) lab benches if not received in a timely manner); and (b) Landlord has obtained all approvals and permits from the appropriate governmental authorities required for the legal occupancy of Spaces D and E for the permitted use (the "Spaces D and E Delivery Date"). Tenant shall have the full right to use and occupy Space C on the date by which all of the following have occurred: (i) Landlord has tendered possession of Space C with the Tenant Improvements located in or serving such portion of the Premises Substantially Complete and otherwise in the condition required hereunder; and (ii) Landlord has obtained all approvals and permits from the appropriate governmental authorities required for the legal occupancy of Space C for the permitted use (the "Space C Delivery Date"). The period following the Spaces D and E Delivery Date (as to Spaces D and E) and the Space C Delivery Date (as to Space C) and before the Term Commencement Date shall be referred to herein as the "Early Occupancy Period." All of the terms of this Lease shall apply during the Early Occupancy Period, except that (A) Tenant shall have no obligation to pay Basic Annual Rent (although Tenant shall be required to pay Operating Expenses) and (B) until both the Spaces D and E and Space C Delivery Dates occur, references to Premises shall mean only the portions of the Premises as to which a Delivery Date has occurred. The term of this Lease (the "Term") will commence on November 15, 2002 (the "Term Commencement Date") and shall continue through January 31, 2013 (the "Term Expiration Date"), subject to earlier termination of this Lease as provided herein; provided, if the Spaces D and E Delivery Date has not occurred on or before June 15, 2002, the Term Commencement Date shall be extended one day for each 3 day after sixty (60) days from the date of this Lease that the Spaces D and E Delivery Date occurs except to the extent of a Tenant Delay (defined below); provided further, if the Space C Delivery Date has not occurred on or before the Term Commencement Date, references to Premises in this Lease shall refer only to Spaces D and E until the Space C Delivery Date. Landlord and Tenant shall execute a written acknowledgment of the Term Commencement Date when such is established in substantially the form attached hereto as Exhibit "D" and attach it to this Lease as Exhibit "D-1"; however, failure to execute and deliver such acknowledgment shall not affect Tenant's liability hereunder. 3.3 The term "Tenant Improvements" shall mean the improvements within the Premises for Tenant's use and occupancy as shown on the schematic attached hereto as Exhibit "E" (the "Schematic Plans"). As used herein, the terms "Substantially Complete", "Substantially Completed", and "Substantial Completion" shall mean the later of the date (i) the City of Bothell has issued an interim or final right to occupy the Premises, or (ii) Landlord has substantially completed construction of the Tenant Improvements in accordance with the Schematic Plans (subject only to the completion of typical punch-list items which do not materially interfere with Tenant's use or occupancy of the Premises). Tenant understands that construction of expansion space and tenant improvements for other tenants of the Building will be ongoing at the time of Substantial Completion of the Tenant Improvements. In constructing such expansion space and additional tenant improvements, Landlord shall not unreasonably interfere with Tenant's use of the Premises and shall use reasonable efforts to minimize the noise resulting therefrom. Substantial Completion is not dependent upon receipt of a final certificate of occupancy (but is dependent upon receipt of at least an interim right to occupy) or completion of typical punch-list items which do not materially interfere with Tenant's use or occupancy of the Premises. If Tenant actually occupies and commences the conduct of its business on such portion of the Premises prior to the Substantial Completion thereof, the Delivery Date for such portion of the Premises shall be deemed to have occurred; provided, however, nothing herein shall be deemed to relieve Landlord of its obligation to promptly Substantially Complete the relevant Tenant Improvements. In addition, if the Substantial Completion of a portion of the Tenant Improvements is based on an interim right to occupy the Premises, Landlord shall expeditiously satisfy all requirements to obtain a final right to occupy the Premises as soon as practicable and shall not unreasonably interfere with Tenant's use of the Premises in satisfying such requirements. 3.4 The term "Tenant Delay" as used in this Lease shall mean any delay in the completion of the Tenant Improvements which is due to any negligence or willful misconduct of Tenant or its agents or contractors. The term "Tenant Delay" shall include, but shall not be limited to, (1) any delay in the giving of authorizations or approvals by Tenant, within the time frames specified in this Lease, where such delay actually delays completion of the Tenant Improvements; and (2) any delay attributable to the negligence or willful misconduct of Tenant, or of its agents or contractors, where such acts or failures to act delay the completion of the Tenant Improvements. 4. CONSTRUCTION AND POSSESSION. 4.1 Landlord shall construct the Tenant Improvements in conformity with the Schematic Plans and shall diligently prosecute such construction to completion. Landlord shall 4 contribute for the cost of Tenant Improvements the amount of $630,360.00 ("Tenant Improvement Allowance") ($85.00 per square foot for 7,416 square feet of "usable" area of Space C to be occupied by Tenant requiring improvements). Costs and expenses incurred by Landlord in performing the Tenant Improvements in excess of Tenant Improvement Allowance, if any, shall be paid by Tenant on a monthly basis over the construction period as such costs are incurred. The cost of the Tenant Improvements shall be limited to design, permitting and out-of-pocket construction costs of the Tenant Improvements, including architectural and engineering fees, costs of processing and obtaining permits from the City of Bothell and any other governmental entity with jurisdiction over the Premises, water and sewer connection charges and other expenses related thereto, all as shown on the budget attached hereto as Exhibit "E-1" ("Tenant Improvement Budget"). The cost of the Tenant Improvements shall not include (and Tenant shall have no responsibility for and the Tenant Improvement Allowance shall not be used for) the following: (a) costs attributable to improvements installed outside the demising walls of the Premises except as shown on the Schematic Plans or reflected in the Tenant Improvement Budget; (b) costs for improvements which are not shown on or described in the final plans unless otherwise approved by Tenant; (c) costs incurred to remove Hazardous Materials from the Premises or the surrounding area; (d) attorneys' fees incurred in connection with negotiation of construction contracts, and attorneys' fees, experts' fees and other costs in connection with disputes with third parties; (e) interest and other costs of financing construction costs; (f) costs incurred as a consequence of delay (except for Tenant Delays), construction defects or default by a contractor; (g) costs recoverable by Landlord upon account of warranties and insurance; (h) restoration costs in excess of insurance proceeds as a consequence of casualties; (i) penalties and late charges attributable to Landlord's failure to pay construction costs; or (j) costs to bring the Project other than the Premises into compliance with applicable laws and restrictions, including, without limitation, the Americans with Disabilities Act and environmental laws; and (k) wages, labor and overhead for overtime and premium time unless approved in writing by Tenant. 4.2 Landlord shall cause to be expeditiously prepared final plans, specifications and working drawings of the Tenant Improvements ("Final Plans"), all of which conform to or represent logical evolutions of or developments from the Schematic Plans, and which conform to the Tenant Improvement Budget, for Tenant's approval. Upon Tenant's approval, Landlord shall submit the Final Plans to all appropriate governmental agencies and thereafter Landlord shall use commercially reasonably efforts to obtain required governmental approvals as soon as practicable. After the Final Plans have been approved by Landlord and Tenant as provided above, neither party shall have the right to require extra work or change orders with respect to the construction of the Tenant Improvements without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. All change orders shall specify any change in the Cost Estimate as a consequence of the change order. 4.3 The parties agree that Landlord may retain BN Builders as the general contractor for the construction of the Tenant Improvements, or such other contractor as Landlord may select subject to Tenant's approval, pursuant to a contract with a guaranteed maximum price of the amount shown on the Tenant Improvement Budget. 4.4 Landlord shall use diligent efforts to tender possession of the Premises with the Tenant Improvements Substantially Complete to Tenant on the estimated Delivery Dates as set forth in Section 2.1.5. Tenant agrees that, except as otherwise set forth herein, in the event 5 Landlord fails to tender possession of the Premises with the Tenant Improvements Substantially Complete to Tenant on or before the estimated Delivery Dates, this Lease shall not be void or voidable and Landlord shall not be liable to Tenant for any loss or damage resulting therefrom. In no event, however, shall Tenant's obligation to pay Operating Expenses and any other amounts under this Lease commence for any portion of the Premises until the Delivery Date for such portion of the Premises. Notwithstanding the foregoing, if the Spaces D and E Delivery Date has not occurred for any reason whatsoever within one hundred eighty (180) days from the date of this Lease, or the Space C Delivery Date has not occurred for any reason whatsoever within two hundred ten (210) days after the issuance of a building permit for construction of the Tenant Improvements in Space C (which dates shall be extended by one day for each day the Tenant Improvements for Space D and E or Space C, as the case may be, were actually delayed by Tenant Delay), then, in addition to Tenant's other rights or remedies, Tenant may terminate the Lease by written notice to Landlord given within fifteen (15) days after the applicable date, whereupon any monies previously paid by Tenant to Landlord shall be reimbursed to Tenant, or, at Tenant's election, the date Tenant is otherwise obliged to commence payment of rent with respect to such Space shall be delayed by one day for each day that the applicable Delivery Date is delayed beyond such date. Landlord shall deliver possession of the applicable portions of the Premises to Tenant in good, vacant, broom clean condition, with all building systems in good working order and in compliance with all laws. Tenant's acceptance of the Premises shall not be deemed a waiver of Tenant's right to have defects in the Premises repaired at no cost to Tenant. Tenant shall give notice to Landlord whenever any such defect becomes reasonably apparent, and Landlord shall repair such defect as soon as practicable. 4.5 Prior to entry by Tenant onto any particular portion of the Premises before the applicable Delivery Date, for installing fixtures, placement of personal property, or any other purpose, Tenant shall furnish to Landlord evidence satisfactory to Landlord that insurance coverages required of Tenant under the provisions of Article 21 are in effect. Entry by Tenant onto the Premises prior to the applicable Delivery Date for such purposes shall be subject to all of the terms and conditions of this Lease other than the payment of Basic Annual Rent and Operating Expenses, shall not interfere with the performance by Landlord or Landlord's contractor with construction of the Tenant Improvements, and shall be made only with the advance written consent of Landlord, which consent shall not be unreasonably withheld. In the event of entry by Tenant or its agents onto the Premises prior to the applicable Delivery Date, Tenant agrees to indemnify, protect, defend and hold Landlord harmless from any and all loss or damage to property, completed work, fixtures, equipment, materials or merchandise, or from liability for death of or injury to any person arising from Tenant's entry onto the Premises, except to the extent caused by the negligence or willful misconduct of Landlord or its agents. 4.6 Landlord has applied for and retained the benefit of State of Washington sales tax deferral under the "Retail Sales/Use Tax Deferral for High Technology Industries" statute for the improvements installed by Landlord pursuant to Section 4.1 and the Schematic Plans. Landlord and Tenant acknowledge and agree that the amount of Basic Annual Rent set forth herein reflects the economic benefit of such sales tax deferral having been passed through to Tenant in the form of reduced rent, and would have been greater in an amount equal to the sales tax deferral if Landlord were not entitled to retain the benefits of the sales tax deferral. To the extent permitted by law, Tenant shall be entitled to apply for and retain the benefit of the sales 6 tax deferral under such statute for Tenant's equipment, fixtures, personal property and additional Improvements installed by Tenant. 5. RENT. 5.1 Tenant agrees to pay Landlord as Basic Annual Rent for the Premises the sum set forth in Section 2.1.2, subject to adjustment as set forth in Section 6.1, in the equal monthly installments set forth in Section 2.1.3, subject to adjustment as set forth in Section 6.1, each in advance on the first day of each and every calendar month during the Term of this Lease; provided, however, from the Term Commencement Date through February 1, 2003 (the "Space C Rent Commencement Date"), Basic Annual Rent shall be in monthly installments of $49,440 ($2.50 per square foot per month x 19,776 square feet), and commencing on the Space C Rent Commencement Date, shall be in monthly installments of $69,285; provided further, if the Space C Delivery Date has not occurred on or before September 1, 2002, the Space C Rent Commencement Date shall be extended one day for each day (i) after nine (9) weeks from the date of issuance of a building permit for construction of the Tenant Improvements for Space C that the Space C Delivery Date occurs, except to the extent of a Tenant Delay and (ii) that issuance of a building permit was actually delayed by Landlord. 5.2 In addition, Tenant agrees to pay to Landlord as additional rent ("Additional Rent"), commencing on the applicable Delivery Date for each portion of the Premises: (i) Tenant's Pro Rata Share (as defined in Section 7.4(a) and as set forth in Section 2.1.4) of Operating Expenses as provided in Article 7 and (ii) all other amounts that Tenant assumes or agrees to pay under the provisions of this Lease, including but not limited to any and all other sums that may become due by reason of any default of Tenant under this Lease or failure on Tenant's part to comply with the agreements, terms, covenants and conditions of this Lease to be performed by Tenant. 5.3 Basic Annual Rent and Additional Rent shall together be denominated "Rent." Except as expressly set forth in this Lease, Rent shall be paid to Landlord, without notice, demand, abatement, suspension, deduction, setoff, counterclaim, or defense (except as otherwise set forth herein), in lawful money of the United States of America, at the office of Landlord as set forth in Section 2.1.8 or to such other person or at such other place as Landlord may from time to time designate in writing. 5.4 In the event the Term commences or ends on a day other than the first day of a calendar month, then the Rent for such fraction of a month shall be prorated for such period on the basis of the actual number of days in the month and shall be paid at the then current rate for such fractional month prior to the commencement of the partial month. 6. RENTAL ADJUSTMENTS. 6.1 The Basic Annual Rent as set forth in Section 2.1.2 above shall be increased on each annual anniversary date of the Term Commencement Date in accordance with this Section 6.1. On the first anniversary of the Term Commencement Date, and on each anniversary thereafter, the initial Basic Annual Rent shall be multiplied by a fraction, the numerator of which 7 shall be the Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor for All Urban Consumers (All Items) (1982-84=100) for the U.S. City Average (the "CPI") of the calendar month immediately preceding the adjustment date, and the denominator of which shall be the CPI for the calendar month immediately preceding the Term Commencement Date; provided, however, in no event shall Basic Annual Rent be increased on each anniversary of the Term Commencement Date less than two and one-half percent (2 1/2%) or more than three percent (3%) of the previous year's Basic Annual Rent. 7. OPERATING EXPENSES. 7.1 As used herein, the term "Operating Expenses" shall include: (a) Except as set forth in Section 7.2 below, government impositions including, without limitation, real and personal property taxes and assessments (but excluding personal property taxes and assessments of other tenants of the Project) levied upon the Project or any part thereof; amounts due under any improvement bond upon the Project and assessments levied in lieu thereof (except to the extent they represent costs related to the initial construction of the Project); transportation management assessments or expenses levied upon the Project; any tax on or measured by gross rentals received from the rental of space in the Project or tax based on the square footage of the Building to the extent such tax is in lieu of a property tax (not an income tax, but a tax based on revenue in the nature of a property tax if imposed in the future); and any utilities surcharges or any other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations, 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 Project, and any expenses, including the cost of attorneys or experts, reasonably incurred by Landlord in seeking reduction by the taxing authority of the applicable taxes not to exceed the amount of any such reduction, less tax refunds obtained as a result of an application for review thereof. Tenant shall have the right to contest taxes so long as Tenant indemnifies Landlord from any liability as a result thereof. (b) Except as set forth in Section 7.2 below, all other costs paid or incurred by Landlord which, in accordance with accepted principles of sound accounting practice as applied to the operation and maintenance of first class buildings, are properly chargeable to the maintenance and operation of the Project including, by way of examples and not as a limitation upon the generality of the foregoing, costs of (i) maintenance, repairs and replacements to improvements within the Project as appropriate to maintain the Project in first class condition; (ii) utilities furnished to the Project (except those utilities which are separately metered and payable by individual tenants); (iii) sewer fees; (iv) trash collection; (v) cleaning (including windows); (vi) maintenance of landscape and grounds; (vii) maintenance of drives and parking areas, including periodic resurfacing; (viii) reasonable and customary security services; (ix) maintenance, repair, and replacement of reasonable and customary security devices; (x) building supplies; (xi) maintenance, repair, and replacement of equipment utilized for operation and maintenance of the Project; (xii) costs of maintenance, repairs and replacements of mechanical, plumbing, electrical and other systems of the Project; (xiii) insurance premiums for any insurance reasonably necessary for the Project; (xiv) portions of insured losses deductible by reason of insurance policy terms (insurance deductibles) not to exceed $20,000 in any year 8 ($50,000 for earthquake insurance); (xv) periodic review of Hazardous Material Inventories (as defined in Section 39.6) to confirm compliance with applicable building and fire code requirements; (xvi) service contracts for work of a nature before referenced; (xvii) costs of services of independent contractors retained to do work of a nature before referenced at reasonable and customary rates; (xviii) costs of compensation (including employment taxes and fringe benefits) of all persons who perform regular and recurring duties connected with the day-to-day operation and maintenance of the Project at reasonable and customary rates; and (xix) costs of management services equal to three percent (3.0%) of Basic Annual Rent. 7.2 Notwithstanding the foregoing, Tenant shall not be responsible for the payment of the following costs and expenses: (a) costs incurred for the initial construction of the Project; (b) costs incurred for the repair, maintenance or replacement of the structural components of the footings, foundation, ground floor slab, roof, and load bearing walls of the Building (but excluding painting and ordinary maintenance and repair of exterior surfaces, which are Operating Expenses under Section 7.1(b)); (c) costs covered under any construction or materials warranty procured by Landlord to the extend paid pursuant to the warranty (provided, however, Landlord shall use commercially reasonably efforts at its sole cost and expense to enforce such warranties); (d) costs incurred to correct any defects in design, materials or construction of the Project; (e) costs, expenses and penalties (including without limitation attorneys' fees) incurred as a result of the use, storage, removal or remediation of any toxic or hazardous substances or other environmental contamination not caused by Tenant or its employees, contractors, agents, representatives, or invitees; (f) interest, principal, points and other fees on debt or amortization of any debt secured in whole or part by all or any portion of the Project (provided that interest upon a government assessment or improvement bond payable in installments is an Operating Expense under Section 7.1(a)); (g) costs incurred in connection with the financing, sale or acquisition of the Project or any portion thereof; (h) costs, expenses, and penalties (including without limitation attorneys' fees) incurred due to the violation by Landlord of any underlying deed of trust or mortgage affecting the Project or any portion thereof; (i) depreciation and amortization of any type (provided this exclusion is not intended to delete from Operating Expenses actual costs of maintenance, repairs and replacements which are otherwise included within Operating Expenses); 9 (j) any costs incurred as a result of Landlord's violation of any covenant, condition, restriction, underwriter's requirement, statute, ordinance or other source of applicable law, or breach of contract or tort liability to any other party, including without limitation, any unrelated third party, or Landlord's employees, contractors, agents or representatives; (k) costs incurred in leasing or procuring tenants (including, without limitation, lease commissions, advertising expenses, attorneys' fees and expenses of renovating space for tenants); (l) advertising, marketing, media and promotional expenditures regarding the Project and costs of signs identifying the owner, lender or any contractor thereof; (m) any wages, fees, salaries or other compensation of the executive employees or principals of Landlord; (n) any net income, franchise, capital stock, estate or inheritance taxes or taxes which are the personal obligation of Landlord or of another tenant of the Project; (o) expenses which relate to preparation of rental space for other occupants of the Project, including without limitation building, license and inspection costs, incurred with respect to the installation of improvements made for other occupants of the Project or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant tenant space in the Project for other occupants in the Project; (p) legal expenses arising out of the initial construction of the Project or the Tenant Improvements or for the enforcement of the provisions of any tenant leases other than this Lease; (q) the cost of any work or service performed for or facilities furnished to another occupant of the Project at such occupant's cost; (r) any interest or penalties imposed upon Landlord by any taxing authority for late payment or otherwise; (s) any other expense otherwise chargeable as part of the cost of operation and maintenance but which is not of general benefit to the Project but is primarily for the benefit of one or more specific tenants; (t) Landlord's charitable or political contributions; (u) the amount of any payments to subsidiaries and affiliates of Landlord for services to the Project or for supplies or other materials to the extent that the cost of such services, supplies or materials exceeds the cost which would have been paid had the services, supplies or materials been provided by unaffiliated parties on a competitive basis; provided, 10 however, any fee for management services paid to an affiliate of Landlord shall be in the amount set forth in Section 7.1(b); (v) electric power or other utility costs for which Tenant directly contracts with a public service company; (w) costs occasioned by the act, omission or violation of any law by any other occupant of the Project, or their respective agents, employees or contractors; (x) costs occasioned by casualties, except for insurance deductibles not to exceed $20,000 per year ($50,000 per year for earthquake insurance), or by the exercise of the power of eminent domain; (y) expense reserves; (z) costs which could properly be capitalized under generally accepted accounting principles, except to the extent amortized over the useful life of the capital item in question; (aa) any fee, profit or compensation retained by Landlord or its affiliates for management and administration of the Project other than the fee for management services in the amount set forth in Section 7.1(b); and (bb) taxes or assessment expenses in excess of the amount which would be payable if such tax or assessment expense were paid in installments over the longest permitted term. 7.3 Tenant shall pay to Landlord on the first day of each calendar month of the Term, as Additional Rent, Landlord's good faith estimate of Tenant's Pro Rata Share (as set forth in 2.1.4) of Operating Expenses with respect to the Project for such month. (a) "Tenant's Pro Rata Share" under this Lease shall mean the percentage set forth in Section 2.1.4, or such other amount determined from time to time by dividing the Rentable Area of the Premises by the total Rentable Area of the Project (for instance, such percentage shall be greater than that set forth in Section 2.1.4 if the Building is not expanded as presently contemplated). Notwithstanding anything to the contrary herein, until the Space C Delivery Date, Tenant's Pro Rata Share shall only be 38.77%. (b) Within ninety (90) days after the conclusion of each calendar year, Landlord shall furnish to Tenant in writing a statement (the "Annual Operating Expense Statement") showing in reasonable detail the actual Operating Expenses and Tenant's Pro Rata Share of Operating Expenses for the previous calendar year. Any additional sum due from Tenant to Landlord shall be due and payable within thirty (30) days of Tenant's receipt of such statement. If the amounts paid by Tenant pursuant to this Section 7.3 exceed Tenant's Pro Rata Share of Operating Expenses for the previous calendar year, the difference shall be credited by Landlord against the Rent next due and owing from Tenant; provided that, if the Lease Term has 11 expired, Landlord shall accompany said statement with payment for the amount of such difference. (c) Any amount due under this Section 7.3 for any period which is less than a full month shall be prorated for such fractional month. (d) Notwithstanding this Section 7.3, Operating Expenses which can fairly and reasonably be allocated to one or more tenants of the Project shall be so allocated, and shall be separately scheduled on the Annual Operating Expense Statement. 7.4 Tenant shall have the right, at Tenant's expense, upon reasonable notice during reasonable business hours, to review that portion of Landlord's books, records, invoices, and other data which are relevant to preparation of the Annual Operating Expense Statement, provided any request for such review shall be furnished to Landlord within one (1) year after Tenant's receipt of such statement as to a prior year's Operating Expenses. If the amount of Operating Expenses relating to the Premises identified on such annual statement is found to exceed the actual Operating Expenses of the Premises, Landlord shall, within twenty (20) days after Tenant's request therefor, refund to Tenant the amount of overpayment by Tenant. In addition, if such review reveals that the Operating Expenses paid by Tenant in any year exceed one hundred five percent (105%) of the actual Operating Expenses which should have been paid by Tenant in such year, Landlord shall reimburse Tenant for the reasonable cost of such review. In all other cases, Tenant shall pay for the reasonable cost of the review. 7.5 Operating Expenses for the calendar year in which Tenant's obligation to pay them commences and in the calendar year in which such obligation ceases shall be prorated. Expenses such as taxes, assessments and insurance premiums which are incurred for an extended time period shall be prorated based upon time periods to which applicable so that the amounts attributed to the Premises relate in a reasonable manner to the time period wherein Tenant has an obligation to pay Operating Expenses. The responsibility of Tenant for Operating Expenses pursuant to Section 7.3 shall continue to the date of termination of this Lease. 8. RENTABLE AREA. 8.1 The Rentable Area of the Project is determined by making separate calculations of the Rentable Area of each floor of the Building, and totaling the Rentable Area of each floor within the Building. The Rentable Area of a floor is calculated by measuring to the outside finished surface of each permanent outer building wall where the wall intersects or joins the floor, or where it would have intersected the floor except for recessed entryways, windows and the like (also known as the "drip line", measured from where the outside finished surface of the second floor wall intersects the roof). The full area calculated as set forth above is included as Rentable Area of the Project without deduction for (i) columns and projections, (ii) vertical penetrations such as stairwells, elevator shafts, flues, pipe shafts, vertical ducts, atriums, and the like, and their enclosing walls corridors, (iii) entrance ways, lobbies, corridors, equipment rooms, and rest rooms, and the like, and their enclosing walls, or (iv) any other unusable area of any nature. 12 8.2 The term "Rentable Area" when applied to Tenant is the area to be occupied exclusively by Tenant plus a pro rata allocation of Rentable Area within the Project which is not then utilized or expected to be utilized exclusively by Tenant or other tenants of the Project, including but not limited to the portions of the Building devoted to columns, projections, vertical penetrations, entrance ways, lobbies, corridors, equipment rooms and rest rooms. If the Premises are separated from space occupied by another tenant, the Rentable Area shall be measured to the center of any interior demising walls. 8.3 Prior to the execution of this Lease, the parties have measured the Premises and hereby agree that the Rentable Area as set forth in Section 2.1.1 constitutes the Rentable Area of the Premises. Neither the Rentable Area set forth in Section 2.1.1 nor the Basic Annual Rent or monthly installments of Basic Annual Rent shall be adjusted upon subsequent measurement of the Premises; provided, however, Tenant's Pro Rata Share of Operating Expenses will be increased if the Building is not expanded as presently contemplated. 9. SECURITY DEPOSIT. 9.1 Tenant shall deposit with Landlord (i) upon execution of this Lease, cash in the amount set forth in Section 2.1.6(a) ("Cash Deposit") and (ii) within fourteen (14) days after execution of this Lease an irrevocable stand-by letter of credit in the amount set forth in Section 2.1.6(b) ("Letter of Credit"), to be held by Landlord as security for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term and any extension term hereof (together, the Cash Deposit and the Letter of Credit shall be referred to herein as the "Security Deposit"). The Cash Deposit shall be placed by Landlord in a segregated, interest bearing account, with interest accruing for the benefit of Tenant and paid to the Tenant at least annually, such account to be owned by Landlord but with all interest reported on Tenant's taxpayer identification number and any income tax thereon paid by Tenant. If Tenant defaults (beyond all applicable notice and cure periods) with respect to any provision of this Lease, including but not limited to any provision relating to the payment of Rent, Landlord may (but shall not be required to) immediately draw from the Cash Deposit or Letter of Credit, drawing on the Cash Deposit first and the Letter of Credit only if the Cash Deposit is not sufficient, the amount required to cure the default, and to use, apply or retain the proceeds thereof for the payment of any Rent or any other sum in default, and to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. Landlord shall be entitled to draw upon the Letter of Credit only upon presentation to the bank of written certification that Tenant is in default beyond all applicable notice and cure periods under this Lease. Tenant hereby grants to Landlord a security interest in any Cash Deposit in accordance with the applicable provisions of the Washington Commercial Code to secure the obligations of this Lease. 9.2 Tenant shall be responsible for any expenses in obtaining and maintaining any Letter of Credit, except to the extent such expenses are incurred as a result of Landlord's negligence, willful misconduct or assignment of this Lease. 9.3 The Letter of Credit, and any replacement Letter of Credit, shall be issued by (i) Chase or (ii) another financial institution reasonably acceptable to Landlord, with an office in 13 Seattle, Washington authorized to disburse funds upon a draw request, substantially in the form attached hereto as Exhibit "F". 9.4 In the event of the use of any portion of the Cash Deposit or a partial draw on the Letter of Credit, Tenant shall within ten (10) days after another request therefor replenish the Cash Deposit or replenish the Letter of Credit or substitute a new Letter of Credit to the full amount set forth above. 9.5 The initial Letter of Credit shall be for a period of not less than one (1) year, and any replacement Letter of Credit shall be for a period of not less than one (1) year. The initial Letter of Credit (or any later replacement Letter of Credit) shall be replaced by Tenant by delivering to Landlord a replacement Letter of Credit at least thirty (30) days prior to the expiration of the then current Letter of Credit. If Tenant fails to deliver a replacement Letter of Credit at least thirty (30) days prior to the expiration of the then current Letter of Credit, Landlord shall have the right to immediately draw the total amount of the then current Letter of Credit and hold the proceeds thereof as a security deposit pursuant to the provisions of Section 9.1. The Letter of Credit shall be successively renewed or replaced until that date which is sixty (60) days after the expiration of the initial or any extended term of this Lease. In the event that Landlord draws upon the Letter of Credit solely due to Tenant's failure to renew the Letter of Credit at least thirty (30) days before its expiration (i) such failure to renew shall not constitute a default hereunder and (ii) Tenant shall at any time thereafter be entitled to provide Landlord with a replacement Letter of Credit that satisfies the requirements hereunder, at which time Landlord shall return the cash proceeds of the original Letter of Credit drawn by Landlord. In the event Landlord improperly draws upon the Letter of Credit or misapplies the Letter of Credit proceeds, Tenant shall have the right to offset such amounts against Rent. 9.6 Any Cash Deposit or Letter of Credit shall be transferable by Landlord to a successor Landlord or mortgagee or beneficiary of a deed of trust encumbering the Premises, or in the case of a Letter of Credit, a substitute Letter of Credit shall be issued to any such entity at the request of Landlord; provided, however, that Landlord shall pay any expenses incurred by Tenant on account of any such transfer or issuance. 9.7 Landlord shall deliver the Cash Deposit or Letter of Credit, and any proceeds thereof, to any purchaser of Landlord's interest in the Premises, and thereupon Landlord shall be discharged from any further liability with respect thereto provided that such purchaser has assumed in writing the obligations of Landlord hereunder. This provision shall also apply to any subsequent transfers. Landlord shall return to Tenant, within thirty (30) days following the termination of this Lease, the Letter of Credit and any portions of the Security Deposit and proceeds of the Letter of Credit that have not been properly applied as set forth above. 10. USE. 10.1 Tenant may use the Premises only for research and development; vivarium use; warehouse use; laboratory use; manufacturing and related administrative, executive and general office uses as permitted by (i) the applicable zone, (ii) any other laws, regulations, ordinances, and permits applicable to the Project, and (iii) all covenants, conditions and 14 restrictions recorded against the property ("CC&Rs"), and shall not use the Premises, or permit or suffer the Premises to be used for any other purpose without the prior written consent of Landlord. Landlord warrants that research and development, vivarium, warehouse, laboratory, manufacturing and related office use are permitted under applicable zoning, laws, regulations, ordinances, permits and CC&Rs. 10.2 Tenant shall conduct its business operations and use the Premises in compliance with all federal, state, and local laws, regulations, ordinances, requirements, permits and approvals applicable to the Premises. Tenant shall not use or occupy the Premises in violation of any law or regulation or the certificate of occupancy issued for the Building, and shall, upon five (5) days' written notice from Landlord, discontinue any such use of the Premises which is declared by any governmental authority having jurisdiction to be a violation of law or the certificate of occupancy. Tenant shall comply with any direction of any governmental authority having jurisdiction which shall, by reason of the particular nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or with respect to Tenant's particular use or occupation thereof. Tenant shall not be deemed to be in default of the foregoing obligation if it has the right to appeal such directive and Tenant prosecutes such appeal in a timely fashion and in a manner that does not impose or threaten to impose any lien, charge or other obligation on Landlord or any portion of the Project. 10.3 Tenant shall not knowingly do or permit to be done anything which will invalidate or increase the cost (unless Tenant agrees to pay such increased cost) of any fire, extended coverage or any other insurance policy covering the Premises, or which will make such insurance coverage unavailable on commercially reasonable terms and conditions, and shall comply with all rules, orders, regulations and requirements of the insurers of the Premises. 10.4 Subject to the warranty of Landlord in Section 14.3, Tenant shall comply with the Americans with Disabilities Act of 1990 ("ADA"), and the regulations promulgated thereunder, as amended from time to time. Except as otherwise set forth herein, all responsibility for compliance with the ADA relating to the Premises and the activities conducted by Tenant within the Premises after the Term Commencement Date shall be exclusively that of Tenant and not of Landlord, including any duty to make capital improvements, alterations, repairs and replacements to the Premises; provided, however, (i) Landlord shall be responsible for compliance with the ADA to the extent of a violation of Landlord's warranty in Section 14.3; (ii) Landlord shall make all improvements outside of the Premises required for compliance with the ADA unless required by Improvements (as defined in Section 17.1) of Tenant or a change in use by Tenant; (iii) neither Tenant nor Landlord shall be required to make capital improvements, alterations, repairs or replacements to comply with ADA unless and until required to do so by order of a government entity or court of law exercising property jurisdiction with regard thereto, subject to any right to appeal or otherwise contest any such order or other; and (iv) Tenant shall not be required to comply with or cause the Premises to comply with ADA requiring the construction of alterations unless such compliance is necessitated solely due to Tenant's particular use of the Premises. Any alterations to the Premises made by Tenant for the purpose of complying with the ADA or which otherwise require compliance with the ADA shall be done in accordance with Article 17; provided, that Landlord's consent to such alterations shall not constitute either Landlord's assumption, in whole or in part, of Tenant's responsibility for 15 compliance with the ADA, or representation or confirmation by Landlord that such alterations comply with the provisions of the ADA. 10.5 Tenant may install signage on and about the Premises, including the placement of its name and corporate logo prominently on the Building, Premises, and Building Directory, to the extent permitted by, and in conformity with, applicable provisions of the sign ordinances of the City of Bothell, and to the extent approved by Landlord, which approval shall not be unreasonably withheld or delayed. Tenant acknowledges that it understands that other tenants will occupy space in the Project, and that the maximum allowable signage is to be shared among all of the tenants on a fair and reasonable basis. Tenant further acknowledges it is familiar with the restrictions of the applicable sign ordinances of the City of Bothell, and is not relying on any representations or warranty of Landlord regarding the number, size or location of any signage. Notwithstanding the foregoing, subject to Landlord's reasonable approval and all applicable laws, Tenant shall be entitled to display at least one sign identifying Tenant prominently on the exterior of the Building. Tenant's signage rights shall be transferable to an approved assignee or sublessee. The expense of design, permits, purchase and installation of any signs shall be the responsibility of Tenant and the cost thereof shall be borne by Tenant. At the termination of the Lease, all signs shall be the property of Tenant and may be removed from the Premises by Tenant, subject to the provisions of Article 30. Landlord hereby approves of Tenant's installation of signage as described on Exhibit "E-2". 10.6 No equipment shall be placed at a location within the Building other than a location designed to carry the load of the equipment, and equipment weighing in excess of floor loading capacity shall not be placed in the Building unless in each case, adequate protective measures reasonably acceptable to Landlord are performed by Tenant. 10.7 Tenant shall not use or allow the Premises to be used for any unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance or waste in, on, or about the Premises. 11. BROKERS. Landlord and Tenant represent and warrant one to the other that there have been no dealings with any real estate broker or agent in connection with the negotiation of this Lease other than The Staubach Company, whose commission shall be paid by Landlord. Each shall indemnify, defend, protect, and hold harmless the other from any claim of any other broker, agent or third party in connection with the negotiation of this Lease resulting from any act or agreement of the indemnitor. 12. HOLDING OVER. 12.1 If, with Landlord's express written consent, Tenant holds possession of all or any part of the Premises after the expiration or earlier termination of this Lease, Tenant shall be deemed a tenant from month to month upon the date of such expiration or earlier termination, and in such case Tenant shall continue to pay in accordance with Article 5 the Basic Annual Rent as adjusted in accordance with Article 6, together with Operating Expenses in accordance with Article 7 and other Additional Rent as may be payable by Tenant, and such month-to-month tenancy shall be subject to every other term, covenant and condition contained herein. 16 12.2 If Tenant remains in possession of all or any portion of the Premises after the expiration or earlier termination of the term hereof without the express written consent of Landlord, Tenant shall become a tenant at sufferance upon the terms of this Lease except that monthly rental shall be equal to one hundred twenty-five percent (125%) of the Monthly Installment of Basic Annual Rent in effect during the immediately preceding thirty (30) days. 12.3 Acceptance by Landlord of Rent after such expiration or earlier termination shall not result in a renewal or reinstatement of this Lease. 12.4 The foregoing provisions of this Article 12 are in addition to and do not affect Landlord's right to re-entry or any other rights of Landlord under Article 24 or elsewhere in this Lease or as otherwise provided by law. 13. TAXES ON TENANT'S PROPERTY. 13.1 Tenant shall pay not less than ten (10) days before delinquency taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. Tenant shall not be responsible for taxes levied against any personal property or trade fixtures of other tenants. 13.2 If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or, if the assessed valuation of the Project is increased by the inclusion therein of a value attributable to Tenant's personal property or trade fixtures, and if Landlord after written notice to Tenant pays the taxes based upon such increase in the assessed value, then Tenant shall, within thirty (30) days of receipt of satisfactory evidence of such tax increase, repay to Landlord the taxes so levied against Landlord. 13.3 If any improvements in or alterations to the Premises, whether owned 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 improvements in other spaces in the Project are assessed, then the real property taxes and assessments levied against Landlord or the Project by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property to Tenant and shall be governed by the provisions of Section 13.2 above. Any such excess assessed valuation due to improvements in or alterations to space in the Project leased by other tenants of Landlord shall not be included in the Operating Expenses defined in Article 7, but shall be treated, as to such other tenants, as provided in this Section 13.3, and shall be allocated to such other tenants. If the records of the county assessor are available and sufficiently detailed to serve as a basis for determining whether said tenant improvements or alterations are assessed at a higher valuation than improvements in other spaces in the Project, such records shall be binding on both Landlord and Tenant. 13.4 To the extent Tenant fails to make any payment required by this Article 13 and Landlord does so on Tenant's behalf, after reasonable written notice to Tenant and opportunity for Tenant to make such payment, Tenant shall reimburse Landlord for the cost thereof pursuant to the provisions of Sections 7.1 and 24.3. 17 14. CONDITION OF PREMISES. 14.1 Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty, express or implied, with respect to the condition of the Premises or to the Project, except as set forth herein, or with respect to their suitability for the conduct of Tenant's business. 14.2 Landlord warrants to Tenant that the Tenant Improvements will be built in a good and workmanlike manner and in conformance with Exhibit "E", and all applicable building code requirements, laws, rules, orders, ordinances, directions, regulations, permits, approvals, and requirements of all governmental agencies, offices, departments, bureaus and boards having jurisdiction, and with the rules, orders, directions, regulations, and requirements of any applicable fire rating bureau; that all material and equipment installed will conform with Exhibit "E" and will be new and otherwise of good quality; and that the Project and the Tenant Improvements will be free of patent and latent defects in design, materials and construction. Tenant shall have the right to submit a written "punch list" to Landlord, setting forth any defective item of construction, and Landlord shall promptly cause such items to be corrected. Tenant's acceptance of the Premises or submission of a "punch list" shall not be deemed a waiver of Tenant's rights to have defects in the Tenant Improvements or the Premises repaired at no cost to Tenant. Tenant shall give notice to Landlord whenever any such defect becomes reasonably apparent, and Landlord shall repair such defect as soon as possible. 14.3 Landlord warrants to Tenant that the Project and the Tenant Improvements, at the time of initial completion, will be in compliance with ADA and the regulations promulgated thereunder; provided, however, nothing in this Lease shall be construed to require Landlord to make improvements, alterations, repairs or replacements to comply with ADA unless and until required to do so by order of any government entity or court of law exercising proper jurisdiction with regard thereto, subject to any right to appeal or otherwise contest any such order. 14.4 Landlord warrants and represents that, as of the applicable Delivery Date, (i) the Premises, the Building and the Project will comply with all applicable laws, rules, regulations, codes, ordinances, underwriters' requirements, covenants, conditions and restrictions ("Laws"), (ii) the Premises will be in good and clean operating condition and repair, (iii) the electrical, mechanical, HVAC, plumbing, sewer, elevator and other systems serving the Premises and the Building will be in good operating condition and repair, and (iv) the roof of the Building will be in good condition and water tight. Landlord shall, promptly after receipt of notice from Tenant, remedy any non-compliance with such warranty at Landlord's sole cost and expense. 15. COMMON AREAS AND PARKING FACILITIES. 15.1 Tenant shall have (i) the nonexclusive right, in common with others, to use the Common Areas and (ii) the exclusive right to use the loading dock and receiving area, subject to the rules and regulations adopted by Landlord and attached hereto as Exhibit "G" together with such other reasonable and nondiscriminatory rules and regulations as are hereafter 18 promulgated by Landlord (the "Rules and Regulations"); provided, however, that such rules and regulations do not unreasonably interfere with Tenant's use and enjoyment of the Premises and Common Areas, do not increase Tenant's obligations hereunder or decrease Tenant's rights hereunder and apply non-discriminatorily to all Project occupants. 15.2 Tenant shall not place any equipment, storage containers or any other property on the surface parking area or otherwise outside of the Premises without the express written consent of Landlord. Notwithstanding the foregoing, Tenant may locate a storage unit in an area designated by Landlord at or near the loading area of the Building to store Hazardous Materials (as such term is defined in Article 39), and any other materials necessary to conduct its business, provided that Tenant complies with requirements contained in Article 39 relating to the storage of Hazardous Materials. 15.3 As an appurtenance to the Premises, Tenant, and its employees and invitees, shall be entitled to use without charge sixty eight (68) parking spaces adjacent to the Premises on a reserved and assigned basis, less Tenant's Pro Rata Share of required handicap parking spaces serving the Project. A reasonable number of Tenant's spaces shall be marked as visitor spaces for Tenant's invitees. The Project shall have at least one hundred (100) parking spaces (two (2) parking spaces for each 1,000 square feet of Rentable Area of the entire Project). Landlord shall not grant to any other tenant of the Project the right to use more than two (2) parking spaces for each 1,000 square feet of Rentable Area of such tenant's premises. Landlord shall use commercially reasonable efforts, at its sole cost and expense, to increase the number of parking spaces at the Project by means of re-striping the existing parking areas and applying to the City of Bothell for permission to add an additional twenty two (22) parking spaces to the Project upon completion of the expansion portion of the Project. To the extent Tenant reasonably requires the use of up to an additional nineteen (19) parking spaces, Landlord shall use commercially reasonable efforts to provide such additional parking spaces on the Project. If Landlord is unable to provide such additional parking spaces on the Project, then Landlord shall use commercially reasonable efforts to secure the additional parking spaces at a location reasonably acceptable to Tenant within a radius of ...3 miles paved walking distance from the Premises at Landlord's sole cost, not to exceed Fifty Dollars ($50) per stall per month. If Landlord fails to provide such additional offsite parking spaces, Tenant shall have the right to secure such additional parking spaces at Landlord's cost, not to exceed Fifty Dollars ($50) per stall per month. 16. UTILITIES AND SERVICES. 16.1 Tenant shall pay for all water, gas, electricity, telephone, cable, and other utilities which may be furnished to the Premises during the Term, together with any taxes thereon. Landlord shall install, as part of the Tenant Improvement Budget, separate meters or measuring devices for the determination of Tenant's actual use of water, gas and electricity. Utilities and services provided to the Premises shall be paid by Tenant directly to the supplier of such utility or service, and Tenant shall pay for such utilities and services prior to delinquency during the Term of this Lease. In the event one tenant of the Project is using a disproportionate amount of any utility that is not separately metered, Landlord shall allocate an equitable portion of such utility and charge such utility cost to such tenant. 19 16.2 Except as otherwise set forth herein, Landlord shall not be liable for, nor shall any eviction of Tenant result from, any failure of any such utility or service, and in the event of such failure Tenant shall not be relieved from the operation of any covenant or agreement of this Lease. However, notwithstanding the foregoing, if the Premises should become not reasonably suitable for Tenant's use as a consequence of cessation of utilities or other services which cessation persists for seven (7) consecutive days, then Tenant shall be entitled to an equitable abatement of rent to the extent of the interference with Tenant's use of the Premises occasioned thereby. If the interference persists for more than one hundred twenty (120) consecutive days, Tenant shall have the right to terminate this Lease. 16.3 Tenant shall provide and pay for janitors, maintenance personnel, and other persons who perform duties connected with Tenant's operation and maintenance of the interior of the Premises. 17. ALTERATIONS. 17.1 Except as otherwise set forth herein, Tenant shall make no alterations, additions or improvements (hereinafter in this article, "Improvements") in or to the Premises without Landlord's prior written consent, which shall not be unreasonably withheld or delayed. Tenant shall deliver to Landlord final plans and specifications and working drawings for the Improvements to Landlord, and Landlord shall have ten (10) days thereafter to grant or withhold its consent. If Landlord does not notify Tenant of its decision within the ten (10) days, Landlord shall be deemed to have given its approval. 17.2 If a permit is required to construct the Improvements, Tenant shall deliver a completed, signed-off inspection card to Landlord within ten (10) days of completion of the Improvements, and shall promptly thereafter obtain and record a notice of completion and deliver a copy thereof to Landlord. 17.3 The Improvements shall be constructed only by licensed contractors or mechanics. All contractors shall be approved by Landlord, which approval shall not be unreasonably withheld or delayed. Any such contractor must have in force a general liability insurance policy of not less than $2,000,000 or such higher limits as Landlord may reasonably require, which policy of insurance shall name Landlord as an additional insured. Tenant shall provide Landlord with a copy of the contract with the contractor or mechanic prior to the commencement of any construction requiring Landlord's consent. 17.4 Tenant agrees that any work by Tenant shall be accomplished in such a manner as to permit any fire sprinkler system and fire water supply lines to remain fully operable at all times except when minimally necessary for building reconfiguration work. 17.5 Tenant covenants and agrees that all work done by Tenant shall be performed in full compliance with all laws, rules, orders, ordinances, directions, regulations, permits, approvals, and requirements of all governmental agencies, offices, departments, bureaus and boards having jurisdiction, and in full compliance with the rules, orders, directions, 20 regulations, and requirements of any applicable fire rating bureau. Tenant shall provide Landlord with "as-built" plans showing any material change in the Premises within thirty (30) days after completion. 17.6 Before commencing any work, Tenant shall give Landlord at least five (5) days' prior written notice of the proposed commencement of such work. 17.7 At the time Landlord consents to the Improvements pursuant to Section 17.1, Landlord and Tenant shall together identify (i) those Improvements which Tenant shall be required to remove upon the expiration or earlier termination of the Lease, and (ii) those Improvements which Tenant may remove upon the expiration or earlier termination of this Lease. Landlord and Tenant shall list any such Improvements on Schedule 1 attached hereto, designating those which Tenant shall be required to remove and those which Tenant may remove. With respect to those Improvements not so identified, Landlord and Tenant acknowledge and agree that Landlord's approval of the final plans and specifications and working drawings for the Improvements pursuant to Section 17.1 shall be deemed as Landlord's agreement that those Improvements not so identified shall become the property of Landlord upon the expiration or earlier termination of this Lease, and shall remain upon and be surrendered with the Premises as a part thereof. Those Improvements identified as Improvements which Tenant may remove are included within the term "Tenant's Removable Property" defined in Section 30.3. Notwithstanding the provisions of Section 30.3, Tenant shall, at Landlord's election, upon the expiration or earlier termination of this Lease, remove the Improvements which are identified as Improvements which Tenant shall be required to remove, and restore and return the Premises to the condition they were in when first occupied by Tenant, ordinary wear and tear, casualty and condemnation excepted. 17.8 Notwithstanding anything to the contrary herein, Tenant may construct non-structural alterations, additions and improvements in the Premises without Landlord's prior approval, if the cost of any such project does not exceed Ten Thousand Dollars ($10,000). 18. REPAIRS AND MAINTENANCE. 18.1 Landlord shall perform and construct, and Tenant shall have no responsibility to perform or construct, any repair, maintenance or improvements (a) to the structural and exterior portions of the Building and Project, including foundations, exterior walls, load bearing walls, windows, plate glass, and roofing, and to the mechanical (HVAC), electrical, water, sewer, plumbing, fire sprinkler, and elevator systems of the Project, (b) necessitated by the acts or omissions of Landlord or any other occupant of the Building, or their respective agents, employees or contractors, (c) for which Landlord has a right of reimbursement from others, (d) which could be treated as a "capital expenditure" under generally accepted accounting principles, and (e) to any portion of the Project outside of the demising walls of the Premises, subject to reimbursement by Tenant as its Pro Rata Share of Operating Expenses to the extent provided by Section 7.1. However, subject to Section 21.9, if such maintenance or repairs are required because of any negligence or willful misconduct by Tenant, its agents, servants, employees or invitees, Tenant shall pay to Landlord the portion of such maintenance and repair 21 costs attributable to Tenant's negligence or willful misconduct, unless such maintenance and repairs are covered by insurance carried by Landlord. 18.2 Except as otherwise set forth herein, Tenant shall, throughout the Term of this Lease, at Tenant's sole cost and expense, keep the Premises and every part thereof in good condition and repair. Tenant shall upon the expiration or earlier termination of the Term hereof surrender the Premises to Landlord in the same condition as when received, ordinary wear and tear, casualty, condemnation, alterations not required to be removed by Tenant and Hazardous Materials not required to be remediated by Tenant pursuant to Article 39 excepted. 18.3 There shall be no abatement of Rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Premises, or in or to improvements, fixtures, equipment and personal property therein, unless such injury or interference is unreasonable or is the result of Landlord's negligent or willful act or omission. If repairs or replacements become necessary which by the terms of this Lease are the responsibility of Tenant and Tenant fails to make the repairs or replacements, after reasonable written notice from Landlord and opportunity for Tenant to make such repairs or replacements, Landlord may do so pursuant to the provisions of Section 24.3. 18.5 Notwithstanding any of the foregoing, in the event of a fire, earthquake, flood, war or other similar cause of damage or destruction, this Article shall not be applicable and the provisions of Article 22, entitled "Damage or Destruction," shall apply and control. 19. LIENS. 19.1 Tenant shall keep the Premises, the Building and the property upon which the Building is situated free from any liens arising out of work performed, materials furnished or obligations incurred by Tenant. Tenant further covenants and agrees that any mechanic's lien filed against the Project or the Premises for work claimed to have been done for, or materials claimed to have been furnished to, Tenant will be discharged by Tenant, by bond or otherwise, within thirty (30) days after the filing thereof (or within ten (10) days after the filing thereof if requested by Landlord as necessary to facilitate a pending sale or refinancing), at the cost and expense of Tenant. 19.2 Should Tenant fail to discharge or bond over any lien of the nature described in Section 19.1, Landlord may at Landlord's election pay such claim or post a bond or otherwise provide security to eliminate the lien as a claim against title and the cost thereof shall be immediately due from Tenant as Additional Rent upon receipt of evidence of the amount of Landlord's payment, bond or other security. 19.3 In the event Tenant shall lease or finance the acquisition of equipment, furnishings, or other personal property utilized by Tenant in the operation of Tenant's business, Tenant warrants that any Uniform Commercial Code financing statement executed by Tenant will upon its face or by exhibit thereto indicate that such financing statement is applicable only to personal property of Tenant specifically described in the financing statement, which shall not 22 include improvements described in Section 17.7 which shall become the property of Landlord upon the expiration or earlier termination of this Lease. In no event shall the address of the Building be furnished on the financing statement without qualifying language as to applicability of the lien only to removable property of Tenant described in the financing statement. Should any holder of a security agreement executed by Tenant record or place of record a financing statement which appears to constitute a lien against any interest of Landlord, Tenant shall within ten (10) days after the filing of such financing statement cause (i) copies of the security agreement or other documents to which the financing statement pertains to be furnished to Landlord to facilitate Landlord's being in a position to show such lien is not applicable to any interest of Landlord, and (ii) the holder of the security interest to amend documents of record so as to clarify that such lien is not applicable to any interest of Landlord in the Premises. Landlord shall execute such documents as are reasonably required by Tenant or Tenant's lenders or equipment lessors provided the same do not in any way alter the rights of Landlord under this Lease. 20. INDEMNIFICATION AND EXCULPATION. 20.1 Except to the extent of the responsibility of Landlord pursuant to Section 20.2 hereof, Tenant agrees to indemnify Landlord and its members and affiliates, and their respective shareholders, directors, managers, members, partners, lenders, officers, agents, and employees (collectively, "Landlord's Agents"), against, and to protect, defend, and save them harmless from, all demands, claims, causes of action, liabilities, losses and judgments, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys' fees), for death of or injury to person or damage to property arising out of any occurrence in, upon or about the Premises during the term of this Lease to the extent caused by the negligence or willful misconduct of Tenant, its shareholders, directors, officers, agents, employees, servants, contractors, invitees and subtenants, except to the extent caused by the negligence or willful misconduct of Landlord or Landlord's Agents. Tenant's obligation under this Section 20.1 shall survive the expiration or earlier termination of the term of this Lease. 20.2 Landlord agrees to indemnify Tenant and Tenant's shareholders, directors, managers, members, partners, lenders, affiliates, officers, agents, and employees (collectively "Tenant's Agents") against and save them harmless from all demands, claims, causes of action and judgments, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys' fees), for death of, or injury to, any person or damage to property arising from or out of any occurrence in, upon, or about the Premises during the term of this Lease to the extent caused by the negligence or willful misconduct of Landlord or Landlord's Agents, except to the extent caused by the negligence or willful conduct of Tenant or Tenant's Agents. Landlord's obligations under this Section 20.2 shall survive the expiration or earlier termination of the term of this Lease. 20.3 Notwithstanding any provision of this Article 20 to the contrary, Landlord shall not be liable to Tenant and Tenant assumes all risk of damage to and loss of any fixtures, goods, inventory, merchandise, equipment, records, research, experiments, animals and other living organisms, computer hardware and software, leasehold improvements, and other personal property of any nature whatsoever, and Landlord shall not be liable for injury to Tenant's 23 business or any loss of income therefrom relative to such damage. Tenant acknowledges that it is Tenant's obligation to procure insurance against any such damages or loss pursuant to Sections 21.1 and 21.5, and that it would be impractical for Landlord to procure any such insurance in that the nature of Tenant's business makes the risks uncertain and difficult to underwrite and the potential risks are greater than Landlord is willing to assume. Therefore, regardless of the fault of Landlord, Landlord shall not be liable for any such damage or loss. 20.4 The indemnity obligations of both Landlord and Tenant under this Section 20 shall be satisfied to the extent of proceeds of applicable insurance maintained by the indemnifying party to the extent thereof, and thereafter to proceeds of any applicable insurance maintained by the other party; Landlord and Tenant shall be required to satisfy any such obligation only to the extent it is not satisfied by proceeds of applicable insurance as set forth above. 20.4 Security devices and services, if any, while intended to deter crime may not in given instances prevent theft or other criminal acts of third parties and it is agreed that Landlord shall not be liable for injuries or losses caused by criminal acts of third parties and the risk that any security device or service may malfunction or otherwise be circumvented by a criminal is assumed by Tenant. Tenant shall at Tenant's cost obtain insurance coverage to the extent Tenant desires protection against such criminal acts. 20.5 Neither Landlord nor Tenant shall be liable to the other for any damages arising from any act or neglect of any other tenant or occupant of the Building or Project. 21. INSURANCE - WAIVER OF SUBROGATION. 21.1 Commencing prior to Tenant's first entry onto the Premises for purposes of installing any improvements, fixtures or personal property, but no later than the Term Commencement Date, and continuing at all times during the term of this Lease, Tenant shall maintain, at Tenant's expense, commercial general liability insurance, on an occurrence basis, insuring Tenant and Tenant's agents, employees and independent contractors against all bodily injury, property damage, personal injury and other covered loss arising out of the use, occupancy, improvement and maintenance of the Premises and the business operated by Tenant, or any other occupant, on the Premises. Such insurance shall have a minimum combined single limit of liability per occurrence of not less than $1,000,000.00 and a general aggregate limit of $2,000,000.00. Such insurance shall: (i) name Landlord, and Landlord's lenders if required by such lenders, and any management company retained to manage the Project if requested by Landlord, as additional insureds; (ii) include a broad form contractual liability endorsement insuring Tenant's indemnity obligations under Section 20.1; and (iii) provide for severability of interests or include a cross-liability endorsement, such that an act or omission of an insured shall not reduce or avoid coverage of other insureds. 21.2 At all times during the term of this Lease, Landlord shall maintain, subject to reimbursement by Tenant as an Operating Expense under Section 7.1(b), "all risk" insurance, including, but not limited to, coverage against loss or damage by fire, vandalism, and malicious mischief covering the Project (exclusive of excavations, foundations and footings, and including 24 the Tenant Improvements), in an amount equal to one hundred percent (100%) of the full replacement value thereof. If any boilers or other pressure vessels or systems are installed on the Premises, Landlord shall maintain, subject to reimbursement by Tenant as an Operating Expense under Section 7.1(b), boiler and machinery insurance in an amount equal to one hundred percent (100%) of the full replacement value thereof. The insurance described in this Section 21.2 shall: (i) insure Landlord, and Landlord's lenders if required by such lenders, as their interests may appear; (ii) contain a Lender's Loss Payable Form (Form 438 BFU or equivalent) in favor of Landlord's lenders and name Landlord, or Landlord's lender if required by such lender, as the loss payee; (iii) provide for severability of interests or include a cross-liability endorsement, such that an act or omission of an insured shall not reduce or avoid coverage of other insureds; and (iv) provide that it is primary coverage and non-contributing with any insurance maintained by Landlord or Landlord's lenders, which shall be excess insurance. The full replacement value of the Project, including the Tenant Improvements and other improvements and fixtures insured thereunder, shall, for the purpose of establishing insurance limits and premiums only, be determined by the company issuing the insurance policy and shall be redetermined by said company within six (6) months after completion of any material alterations or improvements to the Premises and otherwise at intervals of not more than three (3) years. Landlord shall promptly increase the amount of the insurance carried pursuant to this Section 21.2 to the amount so redetermined. The proceeds of the insurance described in this Section shall be used for the repair, replacement and restoration of the Project, including the Tenant Improvements and other improvements and fixtures insured thereunder, as further provided in Article 22; provided, however, if this Lease is terminated after damage or destruction, the insurance policy or policies, all rights thereunder and all insurance proceeds shall be assigned to Landlord. 21.3 At all times during this Lease, Landlord shall maintain, pursuant to requirements of its mortgage lender, subject to reimbursement by Tenant as an Operating Expense under Section 7.1(b), commercial general liability insurance, including coverage for death, bodily injury and broad form property damage, with a combined single limit in an amount of not less than $1,000,000 per occurrence and $2,000,000 in the aggregate; umbrella excess liability coverage with a limit of not less than $20,000,000 over primary insurance, which policy shall include coverage for water damage, assumed and contractual liability coverage, premises medical payment, and automobile liability; and rental and/or business interruption insurance to cover loss of income in an amount not less than eighteen (18) months' projected receipts from the entire Project. 21.4 At all times during the term of this Lease, Landlord may maintain, subject to reimbursement by Tenant as an Operating Expense under Section 7.1(b), such additional or different insurance as may be reasonably necessary for the Project or required by Landlord's mortgage lender. 21.5 At all times during the term of this Lease, Tenant shall maintain, at Tenant's expense, "all risk" insurance against all damage and loss to Tenant's Removable Property, including but not limited to fixtures, goods, inventory, merchandise, equipment, records, research, experiments, animals and other living organisms, computer hardware and software, leasehold improvements, and other personal property of any nature whatsoever of Tenant or any subtenant of Tenant that may be occupying the Premises, or any portion thereof, 25 from time to time, in an amount equal to the full replacement value thereof. Notwithstanding anything to the contrary contained here, Tenant shall be entitled to all proceeds from the insurance carried pursuant to this Section 21.5. 21.6 At all times during the term of this Lease, Tenant shall maintain workers' compensation insurance in accordance with Washington law, and employers' liability insurance with limits typical for companies similar to Tenant. 21.7 All of the policies of insurance referred to in this Article 21 shall be written by companies authorized to do business in Washington and rate A+VII or better in Best's Insurance Guide. Each insurer referred to in this Article 21 shall agree, by endorsement on the applicable policy or by independent instrument furnished to Landlord, that it will give Landlord, and Landlord's lenders if required by such lenders, at least ten (10) days' prior written notice before the applicable policy shall be canceled for non-payment of premium, and thirty (30) days' prior written notice before the applicable policy shall be canceled or reduced in coverage, scope, amount or other material term for any other reason (although any failure of an insurer to give notice as provided herein shall not be a breach of this Lease by Tenant). No policy shall provide for a deductible amount in excess of $100,000, unless approved in advance in writing by Landlord. Tenant shall deliver to Landlord, and to Landlord's lenders if required by such lenders, copies of the insurance policies required to be carried by Tenant, certified by the insurer, or certificates evidencing such insurance policies, issued by the insurer, together with evidence of payment of the required premiums, prior to the required date for commencement of such coverage. At least fifteen (15) days prior to expiration of any such policy, Tenant shall deliver to Landlord, and Landlord's lenders if required by such lenders, a certificate evidencing renewal, or a certified copy of a new policy or certificate evidencing the same, together with evidence of payment of the required premiums. If Tenant fails to provide to Landlord any such policy or certificate by the required date for commencement of coverage, or within fifteen (15) days prior to expiration of any policy, or to pay the premiums therefor when required, Landlord shall have the right, but not the obligation, to procure said insurance and pay the premiums therefor. Any premiums so paid by Landlord shall be repaid by Tenant to Landlord with the next due installment of rent, and failure to repay the same shall have the same consequences as failure to pay any installment of Rent. 21.8 Landlord may provide the property insurance required under this Article 21 pursuant to a so-called blanket policy or policies of property insurance maintained by Landlord. 21.9 Notwithstanding anything to the contrary herein, Landlord and Tenant each hereby waives any and all rights of recovery against the other or against the officers, directors, members, managers, partners, employees, subtenants, agents, and representatives of the other, on account of loss or damage to such waiving party or such waiving party's property or the property of others under its control, which is actually insured against or which is required to be insured against under this Lease. All of Landlord's and Tenant's repair and indemnity obligations under the Lease shall be subject to the waiver contained in this paragraph. Prior to obtaining policies of insurance required or permitted under this Lease, Landlord and Tenant shall give notice to the insurers that the foregoing mutual waiver is contained in this Lease, and each 26 party shall use its best efforts to cause such insurer to approve such waiver in writing and to cause each insurance policy obtained by it to provide that the insurer waives all right of recovery by way of subrogation against the other party. If such written approval of such waiver of subrogation cannot be obtained from any insurer or is obtainable only upon payment of an additional premium which the party seeking to obtain the policy reasonably determines to be commercially unreasonable, the party seeking to obtain such policy shall notify the other thereof, and the latter shall have twenty (20) days thereafter to either: (i) identify other insurance companies reasonably satisfactory to the other party that will provide the written approval and waiver of subrogation; or (ii) agree to pay such additional premium. 22. DAMAGE OR DESTRUCTION. 22.1 In the event of damage to or destruction of all or any portion of the Project or the Premises or the improvements and fixtures thereon (collectively, "improvements") arising from a risk covered by the insurance described in Section 21.2, Landlord shall within a reasonable time commence and proceed diligently to repair, reconstruct and restore (collectively, "restore") the improvements to substantially the same condition as they were in immediately prior to the casualty. Tenant shall be responsible for its Pro Rata Share of insurance deductibles and for all costs of restoration in excess of insurance proceeds as Operating Expenses to the extent provided under the provisions of Article 7. 22.2 In the event of any damage to or destruction of all or any portion of the improvements arising from a risk which is not covered by the insurance required to be carried by Landlord pursuant to Section 21.2, Landlord may elect at its cost to restore the improvements, in which event Landlord shall, within a reasonable time, commence and proceed diligently to restore the improvements to substantially the same condition as they were in immediately prior to the casualty. In the event Landlord elects not to restore the improvements, this Lease shall terminate as of the date of the damage or destruction unless Tenant elects to pay any uninsured cost of restoration; provided, however, that Landlord shall not have the right to terminate the Lease if (i) the damage to the Building is relatively minor (e.g., repair or restoration would cost less than ten percent (10%) of the replacement cost of the Building) or (ii) there is no material damage to the Premises. 22.3 In the event the improvements are restored pursuant to Section 22.1 or Section 22.2, this Lease shall continue in full force and effect, notwithstanding such damage or destruction; provided, however, that if the damage or destruction (i) occurs during the last year of the term and the expense of restoration exceeds ten percent (10%) of the replacement cost of the Building, or (ii) occurs at any other time and the expense of restoration (after application of insurance proceeds) exceeds twenty percent (20%) of the replacement cost of the Building, and in either case there is material damage to the Premises, Landlord may at its election terminate the Lease unless Tenant elects to pay the uninsured cost of restoration. 22.4 In satisfying its obligations under this Article 22, Landlord shall be not be required to fulfill its restoration responsibilities with improvements identical to those which were damaged or destroyed; rather, with the consent of Tenant, which consent will not be unreasonably withheld or delayed, Landlord may restore the damage or destruction with 27 improvements reasonably equivalent or of reasonably equivalent value to those damaged or destroyed. 22.5 In the event of damage, destruction and/or restoration as herein provided, Tenant shall not be entitled to any compensation or damages occasioned by any such damage, destruction or restoration, but Tenant shall be entitled to an equitable abatement of rent in proportion to the extent the Premises are not usable by Tenant. Notwithstanding the foregoing, in the event restoration cannot reasonably be completed within one hundred eighty (180) days following the damage or destruction as estimated by Landlord's architect, or is not in fact completed within such one hundred eighty (180) day period (which period shall not be extended more than thirty (30) days pursuant to Sections 22.6 and 42.10 hereof), Tenant at its election may by written notice to Landlord given within fifteen (15) days following such period terminate this Lease. In the event of such termination, Tenant shall have no responsibility for contributing to the expense of restoration. 22.6 Notwithstanding anything to the contrary contained in this Article, should Landlord be delayed or prevented from completing the restoration of the improvements after the occurrence of such damage or destruction by reason of acts of God, war, terrorism, government restrictions, inability to procure the necessary labor or materials, strikes, delay in receipt of insurance proceeds or other causes beyond the control of Landlord (but excluding economic conditions or financial inability to perform), the time for Landlord to commence or complete restoration shall be extended for the time reasonably required as a result of such event. 22.7 If an insured casualty occurs, Landlord shall make the loss adjustment with the insurance company for the insurance carried by Landlord. 22.8 Tenant waives the applicable provisions of Washington law or any similar statute now existing or hereafter adopted governing destruction of the Premises, so that the parties' rights and obligations in the event of damage or destruction shall be governed by the provisions of this Lease. 23. EMINENT DOMAIN. 23.1 In the event the whole of the Project shall be taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, Tenant or Landlord may terminate this Lease effective as of the date possession is required to be surrendered to said authority. Landlord may surrender possession of the Project immediately to said authority. 23.2 In the event of a partial taking of the Project for any public or quasi-public purpose by any lawful power or authority by exercise of right of appropriation, condemnation, or eminent domain, or sold to prevent such taking, then Landlord may elect to terminate this Lease if such taking is of a material nature such as to make it uneconomical to continue use of the unappropriated portions for the purposes for which they were intended, and Tenant may elect to terminate this Lease if such taking is of material detriment to, and substantially interferes with, Tenant's use and occupancy of the Premises. In no event shall this Lease be terminated when 28 such a partial taking does not have a material adverse effect upon Landlord or Tenant or both. Termination by either party pursuant to this section shall be effective as of the date possession is required to be surrendered to said authority. 23.3 If upon any taking of the nature described in this Article 23 this Lease continues in effect, then Landlord shall promptly proceed to restore the remaining portion of the Project, including all improvements and fixtures located in the Premises, to substantially their same condition prior to such partial taking. Basic Annual Rent shall be equitably abated in proportion to the extent to which Tenant's use of the Premises has been diminished. 23.4 All compensation and damages awarded or paid for the condemnation of the Project or any portion of the Project, or for any sale in lieu of condemnation shall, except as otherwise expressly provided in this section, belong to and be the sole property of Landlord. Tenant is entitled to seek to recover from the condemnor, but not from Landlord: (a) The cost of removing any trade fixtures, furniture, or equipment from the portion of the Premises taken by condemnation; (b) The value of any improvements installed by Tenant on the portion of the Premises taken by condemnation that Tenant has a right to remove under this Lease but that Tenant elects not to remove; (c) The then amortized value of all improvements made by Tenant on the portion of the Premises taken by condemnation that could not be removed by Tenant on expiration of this Lease either because of provisions of this Lease or because the improvements would have no economic value on removal from the Premises; (d) Diminution in value of the leasehold estate created by this Lease or the value of the unexpired term of this Lease (but not any bonus value, based on the difference between the Lease rent and fair market value rent, which shall belong to Landlord); and (e) Tenant's moving costs and loss of goodwill. 24. DEFAULTS AND REMEDIES. 24.1 Late payment by Tenant to Landlord of Rent and other sums due will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable 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 any mortgage or trust deed covering the Premises. Therefore, if any installment of Rent due from Tenant is not received by Landlord within five (5) days after Landlord gives Tenant written notice that such installment has not been received, Tenant shall pay to Landlord an additional sum of five percent (5%) of the overdue rent as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payment by Tenant. In addition to the late charge, Rent not paid within thirty (30) 29 days of the date such payment is due shall bear interest from thirty (30) days after the date due until paid at the rate of ten percent (10%) per annum. 24.2 No payment by Tenant or receipt by Landlord of a lesser amount than the rent payment herein stipulated shall be deemed to be other than on account of the rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent 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 rent or pursue any other remedy provided. If at any time a dispute shall arise as to any amount or sum of money to be paid by Tenant to Landlord, Tenant shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of Tenant to institute suit for recovery of the payment paid under protest. 24.3 If Tenant fails to pay any sum of money (other than Basic Annual Rent) required to be paid by it hereunder, or shall fail to perform any other act on its part to be performed hereunder, Landlord may, without waiving or releasing Tenant from any obligations of Tenant, but shall not be obligated to, make such payment or perform such act; provided, that such failure by Tenant continued for ten (10) days (or if such failure cannot be cured within ten (10) days, such reasonable period necessary to cure such failure) after written notice from Landlord demanding performance by Tenant was delivered to Tenant, or resulted or could have resulted in a violation of law or the cancellation of an insurance policy maintained by Landlord. All sums so paid or incurred by Landlord, together with interest thereon, from the date such sums were paid or incurred, at the annual rate equal to ten percent (10%) per annum shall be payable to Landlord on demand as Additional Rent. 24.4 The occurrence of any one or more of the following events shall constitute an immediate default hereunder by Tenant and Landlord shall be entitled to exercise appropriate remedies subject to any applicable notice and cure period: (a) The failure by Tenant to make any payment of Rent, as and when due, where such failure continues for a period of five (5) days after Landlord gives Tenant written notice that Tenant has failed to make such payment; (b) The failure by Tenant to observe or perform any obligation other than described in Section 24.4(a) to be performed by Tenant, beyond the applicable notice and cure period set forth below; (c) Tenant makes an assignment for the benefit of creditors; (d) A receiver, trustee or custodian is appointed to, or does, take title, possession or control of all, or substantially all, of Tenant's assets; (e) An order for relief is entered against Tenant pursuant to a voluntary or involuntary proceeding commenced under any chapter of the Bankruptcy Code; 30 (f) Any involuntary petition is filed against the Tenant under any chapter of the Bankruptcy Code and is not dismissed within ninety (90) days; or (g) Tenant's interest in this Lease is attached, executed upon, or otherwise judicially seized and such action is not released within ninety (90) days of the action. Landlord may not exercise its remedies under Section 24.4(b) until thirty (30) days after written notice of the default from Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required to cure the default, then Landlord may not exercise such remedies if Tenant commences such cure within said thirty (30) day period and thereafter diligently prosecutes the same to completion. Such notice shall specify the alleged default and shall demand that Tenant perform the provisions of this Lease within the applicable period of time or quit the Premises. No notice of default shall be deemed a forfeiture or a termination of this Lease unless Landlord elects otherwise in such notice, and in no event shall a forfeiture or termination occur without such written notice. 24.5 In the event of a default by Tenant beyond all applicable notice and cure periods, and at any time thereafter, and without limiting Landlord in the exercise of any right or remedy which Landlord may have, Landlord shall be entitled to terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event, to the extent permitted by applicable law, Landlord shall have the immediate right to re-enter and remove all persons and property, and such property may be removed and stored in a public warehouse or elsewhere at the reasonable cost of, and for the account of Tenant, without being deemed guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby, except to the extent caused by the negligence or willful misconduct of Landlord or Landlord's Agents. In the event that Landlord shall elect to so terminate this Lease, then Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including: (a) The worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus (b) The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss which Tenant proves could have been reasonably avoided; plus (c) The worth at the time of award of the amount by which the unpaid Rent for the balance of the term after the time of award exceeds the amount of such rental loss which Tenant proves could have been reasonably avoided; plus (d) Any other amount reasonably necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligation under this Lease or which in the ordinary course of things would be likely to result therefrom, including, 31 but not limited to, attorneys' fees and the cost of restoring the Premises to the condition required under the terms of this Lease; plus (e) At Landlord's election, such other reasonable amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. As used in Subsections (a), (b) and (c), the "time of 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 determined. As used in Subsections (a) and (b), the "worth at the time of award" shall be computed by allowing interest at the rate specified in Section 24.1. As used in Subsection (c) above, the "worth at the time of award" shall be computed by taking the present value of such amount using the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percentage point. 24.6 In the event of a default by Tenant, and if Landlord does not elect to terminate this Lease as provided in Section 24.5 or otherwise terminate Tenant's right to possession of the Premises, Landlord may continue this Lease in effect and may enforce all of its rights and remedies under the Lease, including the right from time to time to recover Rent as it becomes due under the Lease. At any time thereafter, Landlord may elect to terminate this Lease and to recover damages to which Landlord is entitled. 24.7 Notwithstanding anything herein to the contrary, Landlord's reentry 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. 24.8 All rights, options, and remedies of Landlord contained in this Lease shall be construed and held to be nonexclusive and cumulative. Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law, whether or not stated in this Lease. No waiver of any default of Tenant hereunder shall be implied from any acceptance by Landlord of any rent or other payments due hereunder or by any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect defaults other than as specified in said waiver. 24.9 Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event later than thirty (30) days after written notice by Tenant specifying wherein Landlord has failed to perform such obligation; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. In the event Landlord fails to cure such default within such period, then 32 Tenant may, in addition to its other remedies, cure any default of Landlord, and Landlord shall reimburse all of Tenant's costs of making such cure promptly upon Tenant's request. 24.10 In the event of any violation of this Lease on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage covering the Premises whose address shall have been furnished to Tenant, and shall offer such beneficiary and/or mortgagee a reasonable opportunity to cure the default, but in no event less than thirty (30) days after the notice is given. 25. ASSIGNMENT OR SUBLETTING. 25.1 Except as hereinafter provided, Tenant shall not, either voluntarily or by operation of law, sell, assign, hypothecate or transfer this Lease, or sublet the Premises or any part thereof, or permit or suffer the Premises or any part thereof to be used or occupied as work space, storage space, concession or otherwise by anyone other than Tenant or Tenant's employees, without the prior written consent of Landlord in each instance, which consent shall not be unreasonably withheld or delayed. 25.2 Tenant may, without Landlord's prior written consent and without constituting an assignment or sublease hereunder, sublet the Premises or assign this Lease to (a) an entity controlling, controlled by or under common control with Tenant, (b) a successor entity related to Tenant by merger, consolidation, nonbankruptcy reorganization, or government action, or (c) a purchaser of substantially all of Tenant's assets located in the Premises. A sale or transfer of Tenant's capital stock shall not be deemed an assignment, subletting or any other transfer of the Lease or the Premises. Notwithstanding the foregoing, any subletting or assignment pursuant to this Section 25.2 must be part of a legitimate business transaction and not designed to avoid the requirement of obtaining Landlord's consent to a subletting or assignment pursuant to other provisions of this Article 25. 25.3 If Tenant desires to assign this Lease or sublease all or any portion of the Premises to an entity whose net worth and liquid assets are equal or greater than Tenant's immediately prior to the assignment, and further provided that the assignee first executes, acknowledges and delivers to Landlord an agreement whereby the assignee agrees to be bound by all of the covenants and agreements in this Lease arising after the effective date of the transfer, then Landlord upon receipt of proof of the foregoing, will consent to the sublease or assignment. 25.4 In the event Tenant desires to assign, hypothecate or otherwise transfer this Lease or sublet the Premises or any part thereof to a transferee other than one set forth in Section 25.2 or 25.3, then at least fifteen (15) days prior to the date when Tenant desires the assignment or sublease to be effective (the "Assignment Date"), Tenant shall give Landlord a notice (the "Assignment Notice") which shall set forth the name, address and business of the proposed assignee or sublessee, information (including references and financial statements) concerning the reputation and financial ability of the proposed assignee or sublessee, the Assignment Date, any ownership or commercial relationship between Tenant and the proposed 33 assignee or sublessee, and the consideration and all other material terms and conditions of the proposed assignment or sublease, all in such detail as Landlord shall reasonably require. 25.5 Landlord in making its reasonable determination as to whether consent should be given to a proposed assignment or sublease, may give consideration to (i) the financial strength of such successor (but may not withhold consent on this ground if the successor's net worth and liquid assets are equal to or greater than Tenant's immediately prior to the assignment), notwithstanding the assignor remaining liable for Tenant's performance, and (ii) any use which such successor proposes to make of the Premises. If Landlord fails to deliver written notice of its determination to Tenant within fifteen (15) days following receipt of the Assignment Notice and the information required under this Section 25.5, Landlord shall be deemed to have approved the request. As a condition to any assignment or sublease to which Landlord has given consent, any such assignee or sublessee must execute, acknowledge and deliver to Landlord an agreement whereby the assignee or sublessee agrees to be bound by (as to an assignment) or be subject to (as to a sublease) all of the covenants and agreements in this Lease. 25.6 Any sale, assignment, hypothecation or transfer of this Lease or subletting of Premises that is not in compliance with the provisions of this Article 25 shall be void. 25.7 The consent by Landlord to an assignment or subletting shall not relieve Tenant or any assignee of this Lease or sublessee of the Premises from obtaining the consent of Landlord to any further assignment or subletting or as releasing Tenant or any assignee or sublessee of Tenant from full and primary liability. 25.8 If Tenant shall sublet the Premises or any part thereof, Tenant hereby immediately and irrevocably assigns to Landlord, as security for Tenant's obligations under this Lease, all rent from any subletting of all or a part of the Premises, and Landlord as assignee of Tenant, or a receiver for Tenant appointed on Landlord's application, may collect such rent and apply it toward Tenant's obligations under this Lease; except that, except during the existence of an act of default by Tenant beyond all applicable notice and cure periods, Tenant shall have the right to collect such rent. 25.9 Notwithstanding any subletting or assignment, Tenant shall remain fully and primarily liable for the payment of all Rent and other sums due, or to become due hereunder, and for the full performance of all other terms, conditions, and covenants to be kept and performed by Tenant. The acceptance of rent or any other sum due hereunder, or the acceptance of performance of any other term, covenant, or condition hereof, from any other person or entity shall not be deemed to be a waiver of any of the provisions of this Lease or a consent to any subletting or assignment of the Premises. 25.10 Any sublease of the Premises shall be subject and subordinate to the provisions of this Lease, shall not extend beyond the term of this Lease, and shall provide that the sublessee shall attorn to Landlord, at Landlord's sole option, in the event of the termination of this Lease. Landlord and any lender shall upon Tenant's request provide any subtenant of the entirety of the Premises with a recognition and nondisturbance agreement in the form set forth in 34 Article 35 hereof on the condition that the sublessee agrees to attorn to Landlord on exactly the same terms and conditions as this Lease (unless such condition is waived by Landlord). 25.11 Except for transactions as described in Section 25.2, notwithstanding the terms of Section 25.8 hereof, in the event Tenant assigns, hypothecates or otherwise transfers this Lease or sublets the Premises, Tenant shall pay to Landlord, as Additional Rent, fifty percent (50%) of the rent and other consideration received from the transferee during the term of this Lease in excess of Rent payable to Landlord under this Lease, after Tenant has recouped any reasonable commissions and legal expenses and tenant improvement costs occasioned by such transfer and payable to third parties. 25.12 In the event Tenant requests the consent of Landlord to assign, hypothecate or otherwise transfer this Lease or sublet the Premises or any part thereof, then Tenant shall pay Landlord's reasonable costs and expenses incurred in connection therewith, including but not limited to attorneys' fees, which costs and expenses shall not exceed Five Hundred Dollars ($500). 26. ATTORNEYS' FEES. 26.1 If either party commences an action or proceeding against the other party arising out of or in connection with this Lease, including any arbitration proceeding, the prevailing party shall be entitled to have and recover from the other party reasonable attorneys' fees, expert witness fees and costs of suit. 27. BANKRUPTCY. 27.1 In the event a debtor, trustee, or debtor-in-possession under the Bankruptcy Code, or other person with similar rights, duties and powers under any other law, proposes to cure any default under this Lease or to assume or assign this Lease, and is obliged to provide adequate assurance to Landlord that (i) a default will be cured, (ii) Landlord will be compensated for its damages arising from any breach of this Lease, or (iii) future performance under this Lease will occur, then adequate assurance shall include any or all of the following, as determined by the Bankruptcy Court: (a) the immediate performance of those acts specified in the Bankruptcy Code or other law as included within the meaning of adequate assurance; (b) an immediate cash payment to compensate Landlord for any monetary defaults or damages arising from a breach of this Lease; (c) the credit worthiness and desirability, as a tenant, of the person assuming this Lease or receiving an assignment of this Lease, at least equal to Landlord's customary and usual credit worthiness requirements and desirability standards in effect at the time of the assumption or assignment, as determined by the Bankruptcy Court; and (d) the assumption or assignment of all of Tenant's interest and obligations under this Lease. 28. DEFINITION OF LANDLORD. 28.1 The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only Landlord or the successor-in-interest of Landlord under this Lease at the time in question. In the 35 event of any transfer, assignment or conveyance of Landlord's title or leasehold, the Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor and any prior grantors) shall be automatically freed and relieved from and after the date of such transfer, assignment or conveyance of all liability for the performance of any covenants or obligations contained in this Lease thereafter to be performed by Landlord, provided that the transferee of such title or leasehold assumes and agrees in writing to observe and perform any and all obligations of Landlord hereunder, during its ownership of the Premises. Landlord may transfer its interest in the Premises or this Lease without the consent of Tenant and such transfer or subsequent transfer shall not be deemed a violation on the part of Landlord or the then grantor of any of the terms or conditions of this Lease; provided, however, that Landlord shall provide Tenant with reasonable written notice of such transfer. 29. ESTOPPEL CERTIFICATE. 29.1 Each party shall, within ten (10) business days of written notice from the other party, execute, acknowledge and deliver to the other party a statement in writing on a form reasonably requested by a proposed lender, purchaser, assignee or subtenant (i) certifying that this 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 the dates to which the rental and other charges are paid in advance, if any, (ii) acknowledging that there are not, to each party's knowledge, any uncured defaults on the part of Landlord or Tenant hereunder (or specifying such defaults if any are claimed) and (iii) setting forth such further information with respect to this Lease or the Premises as may be reasonably requested thereon. Any such statement may be relied upon by any prospective lender, purchaser, assignee or subtenant of all or any portion of the Premises. 30. REMOVAL OF PROPERTY. 30.1 Except as provided in this Article 30, all fixtures and personal property owned by Tenant ("Tenant's Removable Property") shall be and remain the property of Tenant, and may be removed by Tenant at any time. Landlord waives any and all rights, title and interest Landlord now has, or hereafter may have, whether statutory or otherwise, in Tenant's Removable Property. At the expiration or earlier termination of this Lease, Tenant shall remove all Tenant's Removable Property in accordance with this Lease, unless Landlord shall have otherwise agreed in writing. As used in the Lease, "Tenant's Removable Property" includes all of Tenant's inventory, equipment, trade fixtures, furniture, furnishings, books and records and other personal property, including without limitation any and all vacuum pumps, uninterruptible power systems, warehouse racks, parts racks, scientific research equipment, portable cold rooms, movable unattached lunch room and office furnishings and equipment, telecommunications and data equipment (other than cabling), machine shop tools and portable equipment, portable glass wash equipment, equipment monitoring systems, air compressors, emergency generators, fume hoods, and machines and equipment used to produce Tenant's products, unless any such items were installed by Landlord at Landlord's cost as part of the Tenant Improvements described on Exhibit "E". 36 30.2 The Project, Building and Tenant Improvements (except as set forth in Section 30.3 below), and all fixtures and personal property owned by Landlord, shall be and remain the property of Landlord, and shall, upon the expiration or earlier termination of this Lease, remain upon and be surrendered with the Premises as a part thereof. 30.3 That portion of the Tenant Improvements paid for by Tenant shall be and remain the property of Tenant; provided, however, all such Tenant Improvements (other that fixtures and personal property described in Section 30.1) shall, upon the expiration or earlier termination of this Lease, become the property of Landlord and remain upon and be surrendered with the Premises as a part thereof. Prior to the Term Commencement Date, Landlord and Tenant shall identify in writing portions of the Tenant Improvements equal in value to the portion of the Tenant Improvements paid for by Tenant, and those portion paid for by Landlord from the Tenant Improvement Allowance or otherwise. 30.4 Notwithstanding Section 30.1 and 30.3, Tenant may not remove any property if such removal would cause material damage to the Premises, unless such damage can be and is repaired by Tenant. Furthermore, Tenant shall repair any damage to the Premises caused by Tenant's removal of any such property, and shall, prior to the expiration or earlier termination of this Lease, restore and return the Premises to the condition they were in when first occupied by Tenant, reasonable wear and tear, casualty, condemnation, and alterations not required to be removed by Tenant. At a minimum, even if they are determined to be fixtures or personal property owned by Tenant, Tenant shall leave in place and repair any damage to the interior floors, walls, doors and ceilings of the Premises, all case work installed as part of the Tenant Improvements, all cabling and wiring in the Premises, and the heating, ventilation, air conditioning, plumbing, and electrical systems in the Premises; all such property shall become the property of Landlord upon the expiration or earlier termination of this Lease, and shall remain upon and be surrendered with the Premises as a part thereof. The provisions of Article 17 shall apply to any restoration work under this Article as if the restoration was an alteration, addition or improvement thereunder. Should Tenant require any period beyond the expiration or earlier termination of the Lease to complete such restoration, Tenant shall be a tenant at sufferance subject to the provisions of Section 12.2 hereof, unless Tenant obtains Landlord's consent pursuant to Section 12.1 prior to the termination or earlier termination of the Lease, which consent shall not be unreasonably withheld or delayed. 30.5 If Tenant shall fail to remove any fixtures or personal property which it is entitled to remove under this Article 30 from the Premises prior to termination of this Lease, then Landlord may store such property at Tenant's expense and dispose of the property under the applicable provisions of Washington law, as such provisions may be modified from time to time. 31. LIMITATION OF LANDLORD'S LIABILITY. 31.1 If Landlord is in default of this Lease, and as a consequence, Tenant recovers a money judgment against Landlord, the judgment shall be satisfied only out of Landlord's interest in the Project, including the proceeds of sale received on execution of the judgment and levy against the right, title, and interest of Landlord in the Project of which the Premises are a part, and out of rent or other income from the Project receivable by Landlord or 37 out of the consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title, and interest in the Building and Project of which the Premises are a part, and insurance and condemnation proceeds related to the Project. 31.2 Neither Landlord nor Landlord's Agents shall be personally liable for any deficiency except to the extent liability is based upon willful and intentional misconduct. If Landlord is a partnership or joint venture, the partners of such partnership shall not be personally liable and no partner of Landlord shall be sued or named as a party in any suit or action, or service of process be made against any partner of Landlord, except as may be necessary to secure jurisdiction of the partnership or joint venture or to the extent liability is caused by willful and intentional misconduct. If Landlord is a corporation, the shareholders, directors, officers, employees, and/or agents of such corporation shall not be personally liable and no shareholder, director, officer, employee, or agent of Landlord shall be sued or named as a party in any suit or action, or service of process be made against any shareholder, director, officer, employee, or agent of Landlord, except as may be necessary to secure jurisdiction of the corporation. If Landlord is a limited liability company, the members, managers, officers, employees, and/or agents of such limited liability company shall not be personally liable and no member, manager, officer, employee, or agent of Landlord shall be sued or named as a party in any suit or action, or service of process be made against any member, manager, officer, employee, or agent of Landlord, except as may be necessary to secure jurisdiction of the corporation. No partner, shareholder, director, member, manager, employee, or agent of Landlord shall be required to answer or otherwise plead to any service of process and no judgment will be taken or writ of execution levied against any partner, shareholder, director, member, manager, employee, or agent of Landlord. 31.3 Each of the covenants and agreements of this Article 31 shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or by common law. 32. CONTROL BY LANDLORD. 32.1 Landlord reserves full control over the Project to the extent not inconsistent with Tenant's quiet enjoyment and use of Premises or the terms of this Lease. This reservation includes the right to establish ownership of the Building separate from fee title to the real property underlying the Building, to divide the Project into more than one lot, and to construct other buildings or improvements on the real property, provided Tenant's quiet enjoyment of the Premises is not affected. Tenant shall, should Landlord so request, promptly join with Landlord in execution of such reasonable documents as may be appropriate to assist Landlord to implement any such action provided Tenant need not execute any document which is of a nature wherein liability is created in Tenant or if by reason of the terms of such document Tenant will be deprived of the quiet enjoyment and use of the Premises as granted by this Lease. 32.2 Landlord reserves the right to enter the Premises, and to cause its contractors to enter the Premises, upon reasonable prior notice to Tenant, to maintain, repair or replace mechanical (HVAC), electrical, plumbing, sprinkler and other systems and equipment within the Premises or within adjoining premises (including access through the Premises to areas 38 of the Building above and below the Premises). Tenant acknowledges that because of the design and configuration of the Building, and the nature of the Building as a multi-tenant biotech facility, that temporary access through the Premises to other areas of the Building will be reasonably necessary from time to time; provided, however, that such access shall not materially interfere with Tenant's use and occupancy of the Premises, and shall comply with Tenant's reasonable security measures. There shall be no abatement of Rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements to adjoining premises unless such injury or interference is unreasonable or is the result of Landlord's negligent or willful act or omission. 33. QUIET ENJOYMENT. 33.1 So long as Tenant is not in default beyond all applicable notice and cure periods, Landlord covenants that Landlord or anyone acting through or under Landlord will not disturb Tenant's occupancy of the Premises except as permitted by the provisions of this Lease and that Landlord shall use reasonable efforts to enforce the lease obligations of tenants of the balance of the Building and Project to the extent they might otherwise disturb Tenant's occupancy. 34. QUITCLAIM DEED. 34.1 Tenant shall execute and deliver to Landlord on the expiration or termination of this Lease, immediately on Landlord's request, a quitclaim deed to the Premises and Project or other document in recordable form suitable to evidence of record termination of this Lease. 35. SUBORDINATION AND ATTORNMENT. 35.1 Subject to Section 35.2 below, this Lease is subject to and subordinate to the lien of any mortgage or deed of trust now or hereafter in force against the Project and Building of which the Premises are a part, and to all advances made or hereafter to be made upon the security thereof. 35.2 Tenant shall execute and deliver upon demand such instrument or instruments evidencing such subordination of this Lease to the lien of any such mortgage or deed of trust as may be required by Landlord and in a form reasonably satisfactory to Tenant, provided that the lienholder, beneficiary, or mortgagee concurrently executes and delivers to Tenant a non-disturbance agreement in recordable form reasonably satisfactory to Tenant. However, if any such mortgagee or beneficiary so elects at any time prior to or following a default by Tenant beyond all applicable notice and cure periods, this Lease shall be deemed prior in lien to any such mortgage or deed of trust regardless of date and Tenant will execute a statement in writing to such effect at Landlord's request in a form reasonably satisfactory to Tenant. 35.3 In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by the Landlord 39 covering the Premises, the Tenant shall at the election of the purchaser at such foreclosure or sale attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease in accordance with the terms of the non-disturbance Agreement upon such purchaser's written assumption of Landlord's obligations under the Lease. Prior to the first Delivery Date, Landlord shall obtain from any lenders or ground lessors of the Project a written agreement in form reasonably satisfactory to Tenant providing for recognition of Tenant's interests under this Lease in the event of a foreclosure of the lender's security interest or termination of the ground lease. 36. SURRENDER. 36.1 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. 36.2 The voluntary or other surrender of this Lease by Tenant shall not work a merger, unless Landlord consents, and shall, at the option of Landlord, operate as an assignment to it of any or all subleases or subtenancies. 37. WAIVER AND MODIFICATION. No provision of this Lease may be modified, amended or added to except by an agreement in writing executed by Landlord and Tenant. The waiver by Landlord or Tenant of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained. 38. WAIVER OF JURY TRIAL. The parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters 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, and/or any claim of injury or damage. 39. HAZARDOUS MATERIAL. 39.1 During the Term, Tenant, at its sole cost, shall comply with all federal, state and local laws, statutes, ordinances, codes, regulations and orders relating to the receiving, handling, use, storage, accumulation, transportation, generation, spillage, migration, discharge, release and disposal of Hazardous Material (as defined below) in or about the Project by Tenant. Tenant shall not cause or permit any Hazardous Material to be brought upon, kept or used in or about the Project by Tenant, its agents, employees, contractors, invitees or subtenants, in a manner or for a purpose prohibited by any federal, state or local agency or authority. The accumulation of Hazardous Material shall be in approved containers and removed from the Project by duly licensed carriers. Tenant may manifest and store Hazardous Materials waste in a designated storage room within the Premises. Tenant's radioactive materials and radioactive waste, if any, must be managed and stored in Tenant's laboratory floor area. 39.2 Tenant shall immediately provide Landlord with telephonic notice, which shall promptly be confirmed by written notice, of any and all spillage, discharge, release and 40 disposal of Hazardous Material onto or within the Project by Tenant, including the soils and subsurface waters thereof, which by law must be reported to any federal, state or local agency, and any injuries or damages resulting directly or indirectly therefrom. Further, Tenant shall deliver to Landlord each and every notice or order, when said order or notice identifies a violation which may have the potential to adversely impact the Project, received from any federal, state or local agency concerning Hazardous Material and the possession, use and/or accumulation thereof promptly upon receipt of each such notice or order by Tenant. Landlord shall have the right, upon reasonable notice, to inspect and copy each and every notice or order received from any federal, state or local agency concerning Hazardous Material and the possession, use and/or accumulation thereof. 39.3 Tenant shall be responsible for and shall indemnify, protect, defend and hold harmless Landlord and Landlord's Agents from any and all liability, damages, injuries, causes of action, claims, judgments, costs, penalties, fines, losses, and expenses which arise during or after the term of this Lease and which result from Tenant's (or from Tenant's Agents, assignees, subtenants, employees, agents, contractors, licensees, or invitees) receiving, handling, use, storage, accumulation, transportation, generation, spillage, migration, discharge, release or disposal of Hazardous Material in, upon or about the Project in violation of applicable laws, including without limitation (i) diminution in value of the Project or any portion of the Project, (ii) damages for the loss or restriction on use of any portion or amenity of the Premises or Project, (iii) damages arising from any adverse impact on marketing of space in the Premises or the Project, (iv) damages and the costs of remedial work to other property in the vicinity of the Project incurred by Landlord or an affiliate of Landlord, and (v) reasonable consultant fees, expert fees, and attorneys' fees. Landlord shall be responsible for and shall indemnify, protect, defend and hold harmless Tenant and Tenant's Agents on the same basis as above for any claims which result from Landlord's or from Landlord's Agents receiving, handling, use, storage, accumulation, transportation, generation, spillage, migration, discharge, release or disposal of Hazardous Material in, upon or about the Project. Under no circumstance shall Tenant be liable for, and Landlord shall indemnify, defend, protect and hold harmless Tenant, its agents, contractors, stockholders, directors, successors, representatives, and assigns from and against, all losses, costs, claims, liabilities and damages (including attorneys' and consultants' fees) of every type and nature, directly or indirectly arising out of or in connection with any Hazardous Material present at any time in the soil or groundwater of the Project, except to the extent that such actually results from the release or emission of Hazardous Material by Tenant or its agents or employees in violation of applicable environmental laws. 39.4 The indemnification pursuant to the preceding Section 39.3 includes, without limiting the generality of Section 39.3, reasonable costs incurred in connection with any investigation of site conditions or 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, subsoil, ground water, or elsewhere on, under or about the Project, or on, under or about any other property in the vicinity of the Project, to the extent caused by Tenant. Without limiting the foregoing, if the presence of any Hazardous Material on the Project caused by Tenant or Tenant's Agents in violation of laws results in any contamination of the Project, or underlying soil or groundwater, Tenant shall promptly take all actions at its sole expense as are reasonably necessary to return the Project to that condition required by applicable 41 law, provided that Landlord's approval of such action shall first be obtained, which approval shall not be unreasonably withheld, except that Tenant shall not be required to obtain Landlord's prior approval of any action of an emergency nature reasonably required or any action mandated by a governmental authority, but Tenant shall give Landlord prompt notice thereof. 39.5 Landlord acknowledges that it is not the intent of this Article 39 to prohibit Tenant from operating its business as described in Article 10 or to interfere with the operation of Tenant's business. Tenant may operate its business according to the custom of the industry so long as the use or presence of Hazardous Material is strictly and properly monitored according to all applicable governmental requirements. As a material inducement to Landlord to allow Tenant to use Hazardous Material in connection with its business, Tenant agrees to make available to Landlord upon reasonable request a list identifying each type of Hazardous Material to be present in or upon the Project and setting forth all governmental approvals or permits required in connection with the presence of Hazardous Material ("Hazardous Materials Summary"). At Landlord's request, and at reasonable times, Tenant shall make available to Landlord the latest available Hazardous Materials Summary and true and correct copies of the following documents (hereinafter referred to as the "Hazardous Material Documents") relating to the handling, storage, disposal and emission of Hazardous Material: permits; approvals; reports and correspondence; storage and management plans; notice of violations of any laws; plans relating to the installation of any storage tanks to be installed in or under the Project (provided said installation of tanks shall be permitted only after Landlord has given Tenant its written consent to do so, which consent may not be unreasonably withheld); and all closure plans or any other documents required by any and all federal, state and local governmental agencies and authorities for any storage tanks installed in, on or about the Project for the closure of any such tanks. Tenant shall not be required, however, to provide Landlord with that portion of any document which contains information of a proprietary nature and which, in and of itself, does not contain a reference to any Hazardous Material which are not otherwise identified to Landlord in such documentation, unless any such Hazardous Material Document names Landlord as an "owner" or "operator" of the facility in which Tenant is conducting its business. It is not the intent of this subsection to provide Landlord with information which could be detrimental to Tenant's business should such information become possessed by Tenant's competitors. Landlord shall treat all information furnished by Tenant to Landlord pursuant to this Section 39.5 as confidential and shall not disclose such information to any person or entity without Tenant's prior written consent, which consent shall not be unreasonably withheld or delayed, except as required by law. 39.6 Notwithstanding other provisions of this Article 39, it shall be a default under this Lease, and Landlord shall have the right to terminate the Lease and/or pursue its other remedies under Article 24, in the event that (i) Tenant's use of the Premises for the generation, storage, use, treatment or disposal of Hazardous Material is in a manner or for a purpose prohibited by applicable law unless Tenant is diligently pursuing compliance with such law, (ii) Tenant has been required by any governmental authority to take remedial action in connection with Hazardous Material contaminating the Project if the contamination resulted from Tenant's action or use of the Premises, unless Tenant is diligently pursuing compliance with such requirement or is protesting or appealing such requirements in good faith, or (iii) Tenant is subject to an enforcement order issued by any governmental authority in connection with 42 Tenant's use, disposal or storage of a Hazardous Material on the Project, unless Tenant is diligently seeking compliance with such enforcement order or is protesting or appealing such order in good faith. 39.7 Notwithstanding the provisions of Article 25, if (i) any anticipated use of the Premises by a proposed assignee or subtenant involves the generation or storage, use, treatment or disposal of Hazardous Material in any manner or for a purpose prohibited by an applicable law, or (ii) the proposed assignee or sublessee is subject to a final, unappealable enforcement order issued by any governmental authority in connection with such party's use, disposal or storage of Hazardous Material of a type such proposed assignee or sublessee intends to use in the Premises and shall have failed to materially comply with such order to date, it shall not be unreasonable for Landlord to withhold its consent to an assignment or subletting to such proposed assignee or sublessee. 39.8 Landlord represents that, to its actual knowledge and relying on available environmental site assessments, as of the date of this Lease there is no Hazardous Material on the Project, no underground storage tanks are present on the Project, and no action, proceeding or claim is pending or threatened regarding the Project concerning any Hazardous Material or pursuant to any environmental law. Landlord shall provide Tenant with a current Phase I Environmental Site Assessment, and any current Phase II Environmental Site Assessment recommended therein. Should the environmental site assessment(s) disclose the presence of Hazardous Material beyond legally permissible levels, prior to the first Delivery Date, Landlord shall correct the deficiencies to Tenant's reasonable satisfaction and shall cause updates to the environmental site assessment(s) to be issued reflecting the remedy. The environmental site assessment(s) and all updates thereto are hereinafter referred to as the "Base Line Report", and shall be deemed conclusive as to the condition of the Project, unless, within ninety (90) days after Tenant's receipt of the Base Line Report, Tenant causes an inspection of its own to be conducted, which inspection discloses the presence of Hazardous Material materially different from that disclosed in the Base Line Report. 39.9 Subject to Section 32.2, at any time prior to the expiration or earlier termination of the Term, Landlord shall, upon reasonable prior notice to Tenant, have the right to enter upon the Premises at all reasonable times and at reasonable intervals in order to conduct appropriate tests regarding the presence, use and storage of Hazardous Material, and to inspect Tenant's records with regard thereto. Tenant will pay the reasonable costs of any such test which demonstrates that contamination in excess of permissible levels has occurred and such contamination was caused by Tenant's use of the Project during the Term. Tenant shall correct any deficiencies identified in any such tests to the extent required by law in accordance with its obligations under this Article 39 to the extent the deficiencies are the result of Tenant's use of the Project during the term of this Lease. 39.10 Tenant shall at its own expense cause an environmental site assessment of the Premises to be conducted and a report thereof delivered to Landlord upon the expiration or earlier termination of the Lease, such report to be as complete and broad in scope as is necessary to identify any impact on the Project Tenant's operations might have had (hereinafter referred to as the "Exit Report"). Tenant shall correct any deficiencies identified in the Exit Report in 43 accordance with its obligations under this Article 39 prior to the expiration or earlier termination of this Lease. This Article 39 is the exclusive provision in this Lease regarding clean-up, repairs or maintenance arising from receiving, handling, use, storage, accumulation, transportation, generation, spillage, migration, discharge, release or disposal of Hazardous Material in, upon or about the Project, and the provisions of Articles 7, 10, 18, and 20 shall not apply thereto. 39.11 The obligations and indemnities under this Article 39 shall survive the termination of the Lease. 39.12 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 Washington or the United States Government. The term "Hazardous Material" includes, without limitation, any material or substance which is (i) petroleum, (ii) asbestos, (iii) designated as a "hazardous substance" pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. Section 1317), (iv) 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), or (v) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. Section 9601 et. seq. (42 U.S.C. Section 9601). 40. OPTION TO EXTEND TERM. 40.1 Landlord grants to Tenant the right to extend the term of this Lease for one (1) five (5) year period under the same terms and conditions existing in the original Lease except as set forth in this Article 40. Tenant shall exercise such right to extend the term of this Lease by written notice to Landlord given no later than nine (9) months prior to the end of the original term. 40.2 Basic Annual Rent shall be adjusted on the first day of the extension term to ninety five percent (95%) of the fair market rental value of the Premises as of the commencement of the extension term, but in no event shall the adjusted Basic Annual Rent be less than the Basic Annual Rent for the final year of the original term. 40.3 Within thirty (30) days after Tenant's exercise of the option, Landlord shall obtain at its expense and deliver to Tenant an independent appraisal of the fair market rental value of the Premises as of the commencement of the extension term. Following its receipt of Landlord's appraisal, Tenant may elect to obtain at its expense and deliver to Landlord a second independent appraisal of the fair market rental value of the Premises as of the commencement of the extension term. If Tenant elects not to obtain a second appraisal, Landlord's appraisal shall be conclusive. If Tenant's appraisal is less than Landlord's appraisal, the two appraisers shall appoint a third independent appraiser within ten (10) days after delivery of Tenant's appraisal to appraise the fair market rental value of the Premises as of the commencement of the extension term. If the two appraisers fail to select a third qualified appraiser, the third appraiser shall be appointed by the then presiding judge of the county where the Premises are located upon application by either party. The appraisers shall meet not later than ten (10) days following the selection of the last appraiser. At such meeting the appraisers shall attempt to determine the fair 44 market rental value as of the commencement date of the extended term by the agreement of at least two (2) of the appraisers. If two (2) or more of the appraisers agree on the fair market rental value at the initial meeting, such agreement shall be determinative and binding upon the parties hereto and the agreeing appraisers shall, in simple letter form executed by the agreeing appraisers, forthwith notify both Landlord and Tenant of the amount set by such agreement. If multiple appraisers are selected and two (2) appraisers are unable to agree on the fair market rental value, all appraisers shall submit to Landlord and Tenant an independent appraisal of the fair market rental value in simple letter form within twenty (20) days following appointment of the final appraiser. The parties shall then determine the fair market rental value by averaging the appraisals; provided that any high or low appraisal, differing from the middle appraisal by more than ten percent (10%) of the middle appraisal, shall be disregarded in calculating the average. Landlord and Tenant shall bear equally the expense of the third appraiser. 40.4 All appraisers appointed hereunder shall have at least ten (10) years' experience in the appraisal of commercial and industrial real property in Bothell, Washington and shall be members of professional organizations such as the American Appraisal Institute with a designation of MAI or equivalent and shall not have worked for either party or the principals thereof in the three (3) year period preceding such time. 40.5 As used herein, the term "fair market rental value of the Premises" shall mean the base rent that a ready and willing tenant would pay for similarly improved space in Bothell, Washington as of the commencement of the extension term, to a ready and willing landlord, for a term of five (5) years on the terms and conditions of the Lease, determined as if the Premises were exposed for lease on the open market for a reasonable period of time and taking into account all of the purposes for which such property may be used without taking into consideration any improvements to the Premises made at Tenant's expense, and including periodic rental increases, if any. Any appraiser appointed hereunder to determine the "fair market rental value of the Premises" shall take into account all of the other terms and conditions of this Lease. 40.6 Any increase in Basic Annual Rent under this Article 40 which is not determined until after the effective date of the increase shall nevertheless be retroactive to the effective date, and Tenant shall pay any such retroactive increase with the installment of Rent next due. 40.7 The Basic Annual Rent for the extension term determined as set forth above shall be increased on each anniversary date of the commencement of extension term in accordance with this Section 40.7. On the first anniversary of the commencement of the extension term, and on each anniversary thereafter, the initial Basic Annual Rent shall be multiplied by a fraction, the numerator of which shall be the Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor for All Urban Consumers (All Items) (1982-84=100) for the U.S. City Average (the "CPI") of the calendar month immediately preceding the adjustment date, and the denominator of which shall be the CPI for the calendar month immediately preceding the commencement of the extension term; provided, however, in no event shall Basic Annual Rent be increased on each anniversary of the commencement of the extension 45 term less than two percent (2%) or more than three percent (3%) of the previous year's Basic Annual Rent. 40.8 Tenant shall not have the right to exercise its option to extend the term, notwithstanding anything set forth above to the contrary: (a) during the time commencing from the date Landlord gives to Tenant a written notice that Tenant is in default beyond all applicable notice and cure periods under any provision of this Lease and continuing until the default alleged in said notice is cured; (b) during the period of time commencing on the day after a monetary obligation to Landlord is due from Tenant and unpaid beyond all applicable notice and cure periods and continuing until the obligation is paid; or (c) after the expiration or earlier termination of this Lease. The period of time within which the option to extend may be exercised shall not be extended or enlarged by reason of the Tenant's inability to exercise the option because of the foregoing provisions. At the election of Landlord, all rights of Tenant under the provisions of this Article 40 shall terminate and be of no further force or effect even after Tenant's due and timely exercise of an option to extend if, after such exercise, but prior to the commencement of the extension term, (1) Tenant fails to pay to Landlord a monetary obligation of Tenant for a period of sixty (60) days after Landlord gives Tenant notice of notice of nonpayment, or (2) Tenant fails to commence to cure a non-monetary default within thirty (30) days after the date Landlord give Tenant notice of such default. 40.9 Notwithstanding anything to the contrary contained in this section, if Tenant does not, in its sole discretion, approve the rental amount set forth in Landlord's appraisal, Tenant shall have the right to withdraw its exercise of the extension option by giving Landlord written notice of such election to rescind within twenty (20) days after receipt of Landlord's appraisal. If Tenant rescinds its exercise of the extension option, then (a) this Lease shall terminate on the date this Lease would have otherwise terminated absent Tenant's exercise of the extension option; and (b) Tenant shall pay all costs and expenses of the appraisal. 41. RIGHT OF FIRST REFUSAL TO LEASE ADDITIONAL SPACE. 41.1 If, at any time during the Term of this Lease, as it may be extended, Landlord shall solicit or receive a bona fide offer in writing ("Offer") from a third party to lease all or any part of the balance of the space in the Building ("Expansion Space"), Tenant shall have a right of first refusal ("Right of First Refusal") to lease the Expansion Space upon the same terms and conditions as set forth in the Offer. Landlord, promptly following Landlord's solicitation or receipt of the Offer, shall deliver written notice to Tenant specifying the economic terms and conditions stated in the Offer. Tenant shall exercise its Right of First Refusal by providing Landlord with written notice of its exercise within five (5) business days after the date of receipt of Landlord's notice regarding the Offer. If Tenant exercises its Right of First Refusal within the five (5) business-day period, Landlord and Tenant promptly shall execute an amendment to this Lease (or, at Landlord's election, a new Lease) for the Expansion Space, which includes the terms and conditions set forth in the Offer. If Tenant fails to provide Landlord with its written notice of exercise within the five (5) business-day period, then Tenant shall be deemed to have elected not to exercise its Right of First Refusal with respect to the particular Offer at issue. Notwithstanding the foregoing, if Landlord negotiates with the proposed tenant lease terms materially more favorable then those offered to Tenant but rejected, 46 Landlord shall be required to submit the more favorable terms to Tenant for its review. Tenant shall have three (3) business days after receipt of the more favorable terms to accept or reject the Expansion Space. If Tenant rejects the more favorable terms, Landlord shall be free to enter into a lease with the proposed tenant. Tenant's Right of First Refusal shall be continuous during the Term and any extension thereof. Tenant's rejection of any particular Offer shall not relieve Landlord of its obligation to again offer any Expansion Space to Tenant at any time that the Expansion Space subsequently becomes available. If Landlord fails to lease any portion of the Expansion Space within ninety (90) days of delivering to Tenant an Offer for such Expansion Space, Landlord shall again offer such Expansion Space to Tenant as set forth above. 41.2 The Right of First Refusal herein granted to Tenant is not assignable separate and apart from this Lease. 41.3 Tenant shall not have the right to exercise the Right of First Refusal, notwithstanding anything set forth above to the contrary: (a) During the time commencing from the date Landlord gives to Tenant a written notice that Tenant is in default beyond all applicable notice and cure periods under any provision of this Lease and continuing until the default alleged in said notice is cured; (b) During the period of time commencing on the day after a monetary obligation to Landlord is unpaid beyond all applicable notice and cure periods and continuing until the obligation is paid; or (c) After the expiration or earlier termination of this Lease. The period of time within which the Right of First Refusal may be exercised shall not be extended or enlarged by reason of the Tenant's inability to exercise the Right of First Refusal because of the foregoing provisions. At the election of Landlord, all rights of Tenant under the provisions of this Article 41 shall terminate and be of no further force or effect even after Tenant's due and timely exercise of the Right of First Refusal, if, after such exercise, but prior to the execution of said lease, (1) Tenant fails to pay to Landlord a monetary obligation of Tenant for a period of thirty (30) days after Landlord give Tenant notice of nonpayment, or (2) Tenant fails to commence to cure a default within thirty (30) days after Landlord gives Tenant notice of such default. 41.4 The Right of First Refusal is continuing, in that if Tenant fails to exercise the Right of First Refusal with regard to any particular space, the Right of First Refusal shall nevertheless apply to that particular space if Landlord determines to lease all or any part of such space at any later time, and to any other available space in the building in which the Premises are located which Landlord determines to lease. 42. MISCELLANEOUS. 42.1 TERMS AND HEADINGS. Where applicable in this Lease, the singular includes the plural and the masculine or neuter includes the masculine, feminine and neuter. The section headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 42.2 EXAMINATION OF LEASE. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant. 47 42.3 TIME. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. 42.4 COVENANTS AND CONDITIONS. Each provision of this Lease performable by Tenant shall be deemed a covenant. 42.5 ENTIRE AGREEMENT. The terms of this Lease are intended by the parties as a final expression of their agreement with respect to the terms as are included herein, and may not be contradicted by evidence of any prior or contemporaneous agreement. 42.6 SEVERABILITY. Any provision of this Lease which shall prove to be invalid, void, or illegal in no way affects, impairs or invalidates any other provision hereof, and such other provisions shall remain in full force and effect; provided, however, if the provisions of this Lease relating to Tenant's stated use of the Premises shall be determined by any government agency having jurisdiction to be invalid or unenforceable, this Lease, effective as of the date of such determination, shall be deemed to be void and of no further force and effect. 42.7 RECORDING. Either Landlord or Tenant may record a short form memorandum hereof, subject to the requirement to execute and deliver a quitclaim deed pursuant to the provisions of Section 34.1 hereof. 42.8 IMPARTIAL CONSTRUCTION. The language in all parts of this Lease shall be in all cases construed as a whole according to its fair meaning and not strictly for or against either Landlord or Tenant. 42.9 INUREMENT. Each of the covenants, conditions, and agreements herein contained shall inure to the benefit of and shall apply to and be binding upon the parties hereto and their respective heirs, legatees, devisees, executors, administrators, successors, assigns, sublessees, or any person who may come into possession of said Premises or any part thereof in any manner whatsoever. Nothing in this Section 42.9 contained shall in any way alter the provisions against assignment or subletting in this Lease provided. 42.10 FORCE MAJEURE. If either party cannot perform any of its obligations (other than Tenant's obligation to pay Rent), or is delayed in such performance (other than Tenant's obligation to pay Rent), due to events beyond such party's control, the time provided for performing such obligations shall be extended by a period of time equal to the delay attributable to such events. Events beyond a party's control include, but are not limited to, acts of terrorism, acts of God (including earthquake), war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortage of labor or material, government regulation or restriction and weather conditions, but do not include financial inability to perform. 42.11 NOTICES. Any notice, consent, demand, bill, statement, or other communication required or permitted to be given hereunder must be in writing and may be given by (i) personal delivery, (ii) by mail, certified and return receipt requested, or (iii) by recognized overnight delivery services, and if given by personal delivery shall be deemed given on the date 48 of delivery, if given by mail shall be deemed given three (3) business days after deposit in United States Mail if sent by certified mail, addressed to Tenant or Landlord at the addresses shown in Section 2.1.8 hereof, and if give by recognized overnight delivery service shall be deemed given one (1) business day after deposit with the overnight delivery services if addressed to Tenant or Landlord at the addresses shown in Section 2.1.8 hereof. Either party may, by notice to the other given pursuant to this Section, specify additional or different addresses for notice purposes. 42.12 AUTHORITY TO EXECUTE LEASE. Landlord and Tenant each acknowledge that it has all necessary right, title and authority to enter into and perform its obligations under this Lease, that this Lease is a binding obligation of such party and has been authorized by all requisite action under the party's governing instruments, that the individuals executing this Lease on behalf of such party are duly authorized and designated to do so, and that no other signatories are required to bind such party. 42.13 GOVERNING LAW. This Lease shall be construed and enforced pursuant to the law of the State of Washington. 42.14 APPROVALS. Whenever this Lease requires an approval, consent, determination, selection or judgment by either Landlord or Tenant, unless another standard is expressly set forth, such approval, consent, determination, selection or judgment and any conditions imposed thereby shall be reasonable and shall not be unreasonably withheld or delayed and, in exercising any right or remedy hereunder, each party shall at all times act reasonably and in good faith. 42.15 REASONABLE EXPENDITURES. Any expenditure by a party permitted or required under this Lease, for which such party demands reimbursement from the other party, shall be limited to the fair market value of the goods and services involved, shall be reasonably incurred, and shall be substantiated by documentary evidence available for inspection and review by the other party. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the date first above written. LANDLORD: Dated: 9 May, 2002 Phase 3 Science Center LLC A California limited liability company Ahwatukee Hills Investors, LLC An Arizona limited liability company J. Alexander's LLC A Delaware limited liability company By: Phase 3 Properties, Inc., a California Corporation, Property Manager By: /s/ W. NEIL FOX, III ------------------------------ W. Neil Fox, III Chief Executive Officer TENANT: Dated: 23 April, 2002 Nastech Pharmaceutical Company Inc. a Delaware corporation By: /s/ STEVEN C. QUAY M.D., Ph.D. ------------------------------------- Name: Steven C. Quay M.D., Ph.D. -------------------------------- Title: Chairman, CEO, President ------------------------------ STATE OF CALIFORNIA COUNTY OF SAN DIEGO I, Donna Gambee, a Notary Public of the County and State aforesaid, certify that W. Neil Fox III personally came before me this day and acknowledged that he is Chief Executive Officer of Phase 3 Properties, Inc., a California corporation, which is the Property Manager of property owned by Phase 3 Science Center LLC, a California limited liability company, Ahwatukee Hills Investors LLC, an Arizona limited liability company and J. Alexander's LLC, a Delaware limited liability company (collectively, the "Owners") and that by authority duly given, the foregoing was signed in the name of Phase 3 Properties, Inc. by its Chief Executive Officer, as Property Manager of property owned by the Owners, as the act and deed and on behalf of such Owners. Witness my hand and official seal this the 9th day of May, 2002. /s/ DONNA GAMBEE --------------------------------------- Notary Public [OFFICIAL SEAL] Print Name: Donna Gambee ---------------------------- My commission expires: 5 / 25/ 2003 STATE OF Washington COUNTY OF King I, Cara Ledbetter, a Notary Public, do hereby certify that Steven Quay personally appeared before me this day and acknowledged that __he is CEO & President of Nastech Pharmaceutical Company Inc., a Delaware corporation, and that, by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by its CEO & President, sealed with its corporate seal, and attested by himself as its _______________ Secretary. WITNESS my hand and notarial seal, this the 23rd day of April, 2002. - ------------------------------------- Notary Public Print Name: /s/ CARA A. LEDBETTER -------------------------------- My commission expires: 8/15/2008 EXHIBIT "A" LEGAL DESCRIPTION OF REAL PROPERTY That certain real property located in the City of Bothell, County of Snohomish, State of Washington, legally described as Lot 7, Quadrant Monte Villa Center, according to the plat thereof recorded in Volume 54 of Plats, pages 165 through 169, inclusive, records of Snohomish County, Washington. EXHIBIT "B" SITE PLAN OF THE PROJECT EXHIBIT "C" OUTLINE OF THE PREMISES EXHIBIT "D" ACKNOWLEDGMENT OF TERM COMMENCEMENT DATE Pursuant to Section 3.2 of that certain Lease dated _______________, 2002, by and between Phase 3 Science Center LLC, a California limited liability company, [and its co-tenants, collectively,] Landlord, and Nastech Pharmaceutical Company Inc., a Delaware corporation, Tenant, for the Premises described in the Lease in the Building at 3450 Monte Villa Parkway, Bothell, Washington, we hereby acknowledge that the Term Commencement Date of the Lease, as defined therein, is _______________, 200__, and the Term Expiration Date of the Lease, as defined therein, is _______________, 200__. IN WITNESS WHEREOF, the parties hereto have executed this Acknowledgment of Term Commencement Date as of __________, 200__. LANDLORD: Phase 3 Science Center LLC, a California Limited Liability Company Ahwatukee Hills Investors LLC, an Arizona Limited Liability Company J. Alexander's LLC, a Delaware Limited Liability Company By: Phase 3 Properties, Inc., a California Corporation, Property Manager By: _____________________________ W. Neil Fox, III Chief Executive Officer TENANT: Nastech Pharmaceutical Company Inc., a Delaware corporation By: _____________________________ Name: _______________________ Title: _______________________ EXHIBIT "E" SCHEMATIC SHOWING TENANT IMPROVEMENTS EXHIBIT "E-1" TENANT IMPROVEMENT BUDGET EXHIBIT "E-2" TENANT SIGNAGE EXHIBIT "F" FORM LETTER OF CREDIT [FORM LETTER OF CREDIT] IRREVOCABLE STANDBY LETTER OF CREDIT NO. _______________ DATE: _________________ BENEFICIARY: Phase 3 Science Center LLC Ahwatukee Hills Investors LLC J. Alexander's LLC c/o Phase 3 Properties, Inc. 8910 University Center Lane, Suite 265 San Diego, CA 92122 APPLICANT: AMOUNT: $ EXPIRATION DATE: ____________________ LOCATION: At our counter in San Diego. Dear Sir/Madam: We hereby establish our Irrevocable Standby Letter of Credit No. _______________ in your favor. Available for payment by ___________________, Attn: Int'l Dept. of Beneficiary's draft at sight drawn on us, and accompanied by the following documents: 1. The original of this Letter of Credit and amendment, if any. 2. A signed and dated certification from the beneficiary stating the following: "An event of default beyond all applicable notice and cure periods has occurred by _________________________, as Tenant ("Tenant") under that certain Lease Agreement between Tenant and Phase 3 Science Center LLC, as Landlord (the "Lease"), and the terms and conditions of the Lease authorize Landlord to now draw down on the Letter of Credit." or 1 "Tenant has failed to renew this Letter of Credit or deliver to Landlord a replacement letter of credit at least thirty (30) days prior to the expiration of this Letter of Credit." SPECIAL CONDITIONS: 1. This Letter of Credit is transferable in whole but not in part, only upon our receipt of the attached Exhibit "A" (Transfer Form) duly completed and executed by the Beneficiary, together with this original Letter of Credit and amendments (if any) accompanying our transfer charges. 2. Partial drawings are allowed. All documents, including draft(s), must indicate the number and date of this credit. Each draft presented hereunder must be accompanied by this original Letter of Credit for our endorsement thereon of the amount of such draft(s). Documents must be sent to us via overnight courier (i.e., Federal Express, UPS, DHL or any other express courier) at our address: -------------------------- -------------------------- -------------------------- -------------------------- Attn: International Division We hereby engage with drawers and /or bonafide holders that draft(s) drawn under and negotiated in conformance with the terms and conditions of the subject credit will be duly honored on presentation. This credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication 500. ------------------------------ ------------------------------ Authorized Signature Authorized Signature 2 EXHIBIT "G" RULES AND REGULATIONS RULES AND REGULATIONS NOTHING IN THESE RULES AND REGULATIONS SHALL SUPPLANT ANY PROVISION OF THE LEASE. IN THE EVENT OF A CONFLICT OR INCONSISTENCY BETWEEN THESE RULES AND REGULATIONS AND THE LEASE, THE LEASE SHALL PREVAIL. 1. Except as specifically provided in the Lease to which these Rules and Regulations are attached, no sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside of the Premises or the Building without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. 2. If Landlord reasonably objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, or placed on any windowsill, which is visible from the exterior of the Premises, and which is not included in plans approved by Landlord, Tenant shall remove said object. 3. Tenant shall not obstruct any sidewalks or entrances to the Building, or any halls, passages, exits, entrances, or stairways within the Premises, which are required to be kept clear for health and safety reasons. 4. No deliveries shall be made which impede or interfere with other tenants or the operation of the Project. 5. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Fixtures and equipment which cause noise or vibration that may be transmitted to the structure of the Building to such a degree as to be objectionable to other tenants shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate such noise or vibration or reduce such noise and vibration to acceptable levels. 6. Tenant shall not use any method of heating or air-conditioning other than that shown in Tenant Improvement plans; provided, however, the foregoing shall not prohibit Tenant's reasonable use of space heaters and local area fans. 7. Tenant shall not install any radio, television or other antenna, cell or other communications equipment or other devices on the roof or exterior walls of the Premises except to the extent shown on approved Tenant Improvement plans. Tenant shall not interfere with radio, television or other communications from or in the Premises or elsewhere. 8. Canvassing, peddling, soliciting and distribution of handbills or any other written material in the Project outside of the Premises are prohibited, and Tenant shall cooperate to prevent such activities. 9. Tenant shall store all its trash, garbage and Hazardous Material within its Premises or in designated receptacles outside of the Premises. Tenant shall not place in any such receptacle any material which cannot be disposed of in the ordinary and customary manner of trash, garbage and Hazardous Material disposal. 10. The Premises shall not be used for any improper, immoral or objectionable purpose. No cooking shall be done or permitted on the Premises, except that use by Tenant of Underwriter's Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages or use of microwave ovens for employees use shall be permitted, or equipment shown on approved Tenant Improvement plans, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 11. Without the written consent of the Landlord (which shall not be unreasonably withheld or delayed), Tenant shall not use the name of the Project, if any, in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 12. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations (i) reasonably established by Landlord or (ii) established by any governmental agency. 13. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 14. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other Tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Project. 15. 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 terms, covenants, agreements and conditions of the Lease. 16. Landlord reserves the right to make such other and reasonable and nondiscriminatory rules and regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Project, and for the preservation of good order therein, subject to prior notice to Tenant and Tenant's consent, which will not be unreasonably withheld, conditioned or delayed. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted. 2 17. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. 3 SCHEDULE 1 LIST OF REMOVABLE PROPERTY PURSUANT TO SECTION 17.7 PROPERTY TENANT IS REQUIRED TO REMOVE PROPERTY TENANT MAY REMOVE 4 EX-10.27 4 w60651ex10-27.txt EX AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement, (this "Agreement") is executed and entered into on the second (2nd) day of May, 2002 (the "Amendment Date") by and between Nastech Pharmaceutical Company, Inc., a Delaware corporation (the "Company") with offices at 45 Davids Drive, Hauppauge, NY and Steven C. Quay, M.D., Ph.D. (the "Executive"). W I T N E S S E T H : WHEREAS, the Company and the Executive executed and entered into an initial Employment Agreement on or about August 8, 2000 (the "August 2000 Agreement") with a term of three years; and WHEREAS, the Executive has performed his duties under the August 2000 Agreement to the full satisfaction of the Company and has contributed to a large improvement in the Company's performance and prospects; and WHEREAS, the Company desires to obtain an extension of the Executive's contract term with the Company and the Executive is willing to extend his contract term with the Company as provided herein; NOW THEREFORE, in consideration of the mutual promises and agreements herein and for other good and valuable consideration the receipt and sufficiency of which are hereby mutually acknowledged, the Company and the Executive agree as follows: 1. Application of Agreements. This Agreement shall govern the employment relationship between the Company and the Executive from and after the Amendment Date and in other respects to the extent provided herein. To the extent that they are not inconsistent with the terms of this Agreement, the August 2000 Agreement and other agreements between the Company and the Executive shall continue to apply as to the employment of the Executive by the Company prior to the Amendment Date. For example, those earlier agreements shall govern: (a) the Executive's rights to receive incentive compensation with respect to periods prior to those expressly covered by this Agreement even if some such incentive compensation may be payable after the Amendment Date and (b) the rights created by and with respect to the options granted to the Executive to purchase 600,000 shares of the common stock of the Company pursuant to the August 2000 Agreement, including the vesting and exerciseability of those stock options. 2. Employment (a) Subject to the terms and conditions of this Agreement, the Company shall continue to employ the Executive as its President, Chief Executive Officer and Chairman of its Board of Directors (the "Board") during the Employment Period (as defined in Section 8) and to perform such acts and duties and furnish such services to the Company and its Subsidiaries (as defined below) as the Board shall from time to time reasonably direct. The Executive shall have general and active charge of the business and affairs of the Company as its Chief Executive Officer and President and, in such capacity, shall have responsibility for the day-to-day operations of the Company, subject to the authority and control of the Board. During the Employment Period, the Company shall: (i) continue to take such actions as may be necessary to cause the nomination and recommendation of both (A) the Executive for election as a director and as Chairman of the Board and (B) a nominee selected by the Executive and reasonably acceptable to the Company (such nominee, at the option of the Executive, to be changed prior to any annual or other meeting of the stockholders of the Company at which directors are elected or due to the death or resignation of such nominee) for election as a director of the Company and (ii) use all best efforts to cause such persons to be elected to the positions provided for them above respectively. (b) Subject to the terms and conditions of this Agreement, Executive hereby accepts such employment and agrees to devote his full time and best efforts to the duties provided herein, provided that the Executive may engage in other business, research (subject to the further proviso set forth below), professional, and other activities, during his employment by the Company, that (1) involve no conflict of interest with the Company or any of its Subsidiaries in the Business (as those terms are defined below) and (2) do not materially interfere with the reasonable performance by Executive of his duties under this Agreement, provided further that, in the case of any research in medicine or in the health sciences in which the Executive may be involved other than for the benefit of the Company or any such Subsidiary(ies), both of the immediately following clauses "i" and "ii" must be satisfied: (i) Such research shall be in subject matter unrelated to the Business and unrelated to any other products, services, or technology in medicine or the health sciences in which the Company shall then be undertaking, or actively and in good faith considering, research or commercial involvement and (ii) The Executive shall disclose to the Board or to the Compensation Committee on a timely basis the nature and subject matter of any such research in which he may become involved and shall keep the Board or such committee reasonably apprised of material changes in such nature and/or subject matter. For purposes of this Agreement: (1) the "Business" means and includes the development, marketing, selling, and/or commercializing of (a) drug delivery products, services, and/or technology and/or (b) products, services, and/or technology related to the FDA approved Mammary Aspirate Specimen Cytology Test (MASCT) kit and any successor product(s) and (2) the term "Subsidiary" means a corporation or other entity that is at least majority owned, directly or indirectly, by the Company. The foregoing provisos do not limit the obligations of the Executive under Section 16(a) hereof. 3. Salary. For services rendered to the Company during the Employment Period, the Company shall compensate the Executive with a base salary, payable in bi-weekly installments, which shall be $325,000 per annum for the period from the Amendment Date through the end of calendar year 2002 and which shall be increased by ten percent (10%) effective on January 1 of each calendar year after 2002 during the Employment Period. As to any pay periods all or a part of which fall on or after the Amendment Date, the Company shall pay to the Executive within sixty (60) days after the Amendment Date any shortfall of amounts actually delivered to him relative to the amounts that would have been delivered to him if his pay rate had been immediately adjusted as of the Amendment Date. 2 4. Incentive Cash Compensation. (a) For the Company's fiscal year that began January 1, 2002, and for each subsequent fiscal year or portion thereof during the Employment Period, the Executive shall also be entitled to incentive cash compensation based on the "Annual Base Bonus Amount" of one hundred thousand dollars ($100,000.00) (or more if so determined by the Compensation Committee or by the Board) and the performance areas and performance levels on which the Executive and the Board or the Compensation Committee shall agree as described below. (b) The Company and the Executive shall agree periodically on performance criteria for determination of the incentive cash compensation that will be payable to the Executive with respect to each fiscal year of the Company. To the extent possible, such agreement shall be made, as to each fiscal year, prior to the end of the first month of such fiscal year. The Company and the Executive presently intend that such performance criteria shall be comprised of several designated performance areas and two levels of performance in each area, and that, depending on the levels of performance achieved in the various areas, the actual amount of incentive cash compensation actually payable to the Executive for each fiscal year will be between zero and twice the Annual Base Bonus Amount. The Company acknowledges that the business objectives heretofore used in determining the Executive's incentive cash compensation have been, and that the performance areas and performance levels referred to here shall continue to be, based largely on the input and recommendations of the Company's Chief Executive Officer and that, in exercising its review and supervisory role with respect to the determination and adoption of those performance areas and performance levels, the Board or the Compensation Committee, as the case may be, shall act reasonably and in consultation and cooperation with the Chief Executive Officer and consistently with past practice. (c) As soon as practical, and in any event no later than ninety (90) days, following the end of each fiscal year of the Company, the Compensation Committee or the Board shall determine, reasonably and in good faith, the extent to which the applicable performance levels for such fiscal year shall have been achieved and, accordingly, shall cause the appropriate amount of incentive cash compensation to be paid to the Executive forthwith. To the extent that unforeseen developments arise and make the performance areas and performance levels previously agreed upon unachievable and inappropriate as a measure of the performance of the Executive, the Compensation Committee or the Board shall consider in good faith whether a cash bonus should nevertheless be paid to the Executive for the applicable fiscal year. (d) Absent separate agreement between the Executive and the Company, for any fiscal year that ends after the end of the Employment Period, a pro-rated annual bonus shall be payable to the Executive based on the portion of such fiscal year that shall have elapsed to the end of the Employment Period, the methodology referred to above, and the reasonable, good faith determination of the Compensation Committee or the Board of the extent to which reasonably proportionate progress toward achievement of the applicable performance levels was made from the beginning of such fiscal year to the date the Employment Period ended. 5. Stock Options. As further compensation, and in addition to the stock options that were issued to the Executive pursuant to the August 2000 Agreement (which shall remain outstanding and shall be and become exerciseable in accordance with their terms), the Company 3 is granting to the Executive new options to purchase additional shares of common stock of the Company (the "New Options") as follows: (a) All of the New Options shall be deemed granted and issued (and are hereby so granted) on the Amendment Date, provided that this grant and issuance, and the effectiveness of the New Options, are subject to approval by the shareholders of the Company, on or before July 31, 2002, of the Nastech Pharmaceutical Company, Inc. 2002 Stock Option Plan (the "Option Plan"), which has been approved and adopted by the Board. The New Options are issued under and pursuant to the Option Plan. (b) The New Options shall have a term of 10 years, running from the Amendment Date. (c) Among the New Options, options for the maximum permissible number of shares shall be Incentive Stock Options ("ISOs") for purposes of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (together, the "Tax Laws"), and those ISOs are issued with the minimum per-share exercise price consistent with tax-advantaged treatment of those options as ISOs under the Tax Laws. Those ISOs shall be among the New Options referred to in each of the clauses "i," "ii," "iii," "iv," and "v" in paragraph "f" below in this Section 5, with the numbers of shares for which such ISOs will be exerciseable under each of those clauses being determined in such a manner as to maximize the total number of shares as to which such tax advantaged treatment is available; and the ISOs shall vest and become first exerciseable at the times and under the conditions provided in those clauses respectively. (d) The remainder of the New Options shall be non-statutory stock options and shall be issued with a per-share exercise price equal to the per share closing price of common stock of the Company on the Nasdaq National Market on the Amendment Date except that those referred to in clause "v" of paragraph "f" of this Section 5, which will vest (if at all), only on January 1, 2006, shall have an exercise price of Twenty-Five Dollars ($25.00) per share. (e) The exercise prices of the New Options and the numbers of shares that may be purchased upon exercise of the New Options shall be subject to customary anti-dilution adjustments. (f) The New Options, in the aggregate, shall grant the right to purchase a total of nine hundred thousand (900,000) shares of common stock of the Company, and they shall vest and become exerciseable on the dates set forth in the following clauses (or as expressly stated elsewhere in this Agreement in the event of certain circumstances and events provided for herein): (i) New Options for 200,000 shares (some of which shall be ISOs and some of which shall be non-statutory stock options, as provided above) are vested and exerciseable as of the Amendment Date; (ii) New Options for another 200,000 shares (some of which shall be ISOs and some of which shall be non-statutory stock options, as provided above) shall vest and become exerciseable if Executive's employment by the Company or by an affiliate of the Company continues on August 8, 2003; 4 (iii) New Options for another 200,000 shares (some of which shall be ISOs and some of which shall be non-statutory stock options, as provided above) shall vest and become exerciseable if Executive's employment by the Company or by an affiliate of the Company continues on August 8, 2004; (iv) New Options for another 200,000 shares (some of which shall be ISOs and some of which shall be non-statutory stock options, as provided above) shall vest and become exerciseable if Executive's employment by the Company or by an affiliate of the Company continues on August 8, 2005; (v) New Options for another 100,000 shares (some of which shall be ISOs and some of which shall be non-statutory stock options, as provided above) shall vest and become exerciseable on January 1, 2006 if (A) Executive's employment by the Company or by an affiliate of the Company continues on December 31, 2005 and (B) on or before December 31, 2005, the Company and the Executive shall have agreed in writing to continue the employment of Executive by the Company or by an affiliate of the Company on a substantially full time basis (and on such other terms as they may agree) until at least December 31, 2007. (g) Except for those that are ISOs as described above, the New Options shall be transferable by Executive to a trust for the benefit of Executive and/or member(s) of his immediate family and/or to a partnership, limited liability company, and/or other entity owned by Executive and/or by member(s) of his immediate family. The terms of the New Options shall include customary provisions for, among other things, the ability of the Executive, if he so chooses, (A) to pay the exercise price for the options via a same-day-sale exercise arrangement and/or a margin account exercise arrangement with a broker-dealer or bank and/or loan or deferral arrangements with the Company and/or (B) to surrender shares (either previously outstanding shares or shares being purchased by exercise of options) to the Company at fair market value for payment of the minimum amount required to satisfy all withholding requirements and/or to pay all or a part of the exercise price by surrender to the Company, at fair market value, of shares of the Company's common stock that shall then have been owned for at least six months by Executive and/or by a trust, partnership, limited liability company, or other entity for the benefit of, or owned by, Executive and/or member(s) of his immediate family. (h) The shares of Common Stock issuable upon the exercise of the New Options shall be fully vested in the hands of the Executive immediately upon such exercise and issuance. The Company shall cause the shares of Common Stock issuable upon the exercise of the New Options to be registered under the Securities Act of 1933 within ninety (90) days after the Amendment Date pursuant to a Form S-8 or such other form as may be available for such purpose; and the Company shall use its best efforts to maintain such registration, or a substantially similar registration, in effect for such shares and to maintain the similar registration of the shares of Common Stock issuable under the options issued to the Executive pursuant to the August 2000 Agreement. 6. Benefits. During the Employment Period, the Company shall provide or cause to be provided to the Executive such employee benefits as are provided to other officers of the Company. Without limiting the preceding sentence, the benefits provided to the Executive shall include at least family medical and dental, disability, and life insurance. 5 7. Vacation. The Executive shall be entitled to annual vacations in accordance with the Company's vacation policies in effect from time to time for executive officers of the Company. 8. Term; Employment Period. The "Employment Period" under this Agreement shall commence on the Amendment Date and shall terminate at the close of business on December 31, 2005 unless it is (a) extended by written agreement between the parties or by continuing employment of the Executive by the Company as provided in the following sentence or (b) earlier terminated pursuant to Section 9. If the Executive shall remain in substantially full-time employment by the Company beyond what would otherwise be the end of the Employment Period without any written agreement between the parties, this Agreement and the Employment Period shall be deemed to continue on a month-to-month basis and either party shall have the right to terminate the Executive's employment hereunder at the end of any ensuing calendar month on written notice of at least 30 days. 9. Termination (a) Executive's employment by the Company shall be "at will." In other words, either the Company or the Executive may terminate Executive's employment by the Company at the end of any calendar month, with or without Cause or Good Reason (as such terms are defined below), in its or his sole discretion, upon thirty (30) days' prior written notice of termination. In addition, the Executive's employment by the Company may be terminated by his death or disability. Termination of Executive's employment hereunder as provided here shall terminate the Employment Period. (b) For purposes of this Agreement, in the case of a termination of the Executive's employment hereunder by the Executive, the term "Good Reason" shall have the meaning set forth for it below; in the case of a termination of the Executive's employment hereunder by the Company, the term "Cause" shall have the meaning set forth for it below; and the other terms set out below in this Section 9 shall have the meanings provided for them respectively: (i) "Good Reason" shall mean (i) any substantial diminution in the Executive's responsibilities; (ii) failure of the Company to pay to the Executive any amounts of base salary and/or incentive cash compensation as provided for in Sections 3 or 4 above, or to honor promptly any of its obligations or commitments regarding stock options or other benefits referred to in Sections 5 or 6 above, or to honor promptly any of its other material obligations hereunder; (iii) a demotion in the Executive's title or status; or (iv) at any time prior August 8, 2005, either (or both) of the Executive and the nominee of the Executive described in Section 2(a) hereof (and subject to change as provided there) is not elected as a director of the Company, in the case of both such individuals, or as Chairman of the Board, in the case of the Executive (unless due to death or resignation of such individual or, in the case of the nominee only, lost election as a result of the vote against such nominee of non-affiliates of the Company if such vote represents the majority of votes cast). (ii) "Cause" shall mean (i) the Executive's willful and repeated failure to perform his duties hereunder or to comply with any reasonable and proper direction given by the Board if such failure of performance or compliance is not cured within thirty (30) days following 6 receipt by the Executive of written notice from the Company containing a description of such failures and non-compliance and a demand for immediate cure thereof; (ii) the Executive being found guilty in a criminal court of an offense involving moral turpitude; (iii) the Executive's commission of any material act of fraud or theft against the Company; or (iv) the Executive's material violation of any of the material terms, covenants, representations or warranties contained in this Agreement if such violation is not cured within thirty (30) days following receipt by the Executive of written notice from the Company containing a description of the violation and a demand for immediate cure thereof. (c) "Disability" shall mean total and permanent disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. (d) "Termination Date" shall mean (i) if this Agreement is terminated on account of death, the date of death; (ii) if this Agreement is terminated for Disability, the date that such Disability is established; (iii) if this Agreement is terminated by the Company or by the Executive prior to December 31, 2005, the effective date of the termination as provided in Section 9(a) hereof; or (iv) if this Agreement expires by its terms, December 31, 2005. 10. Severance (a) Subject to Section 19 hereof, if (i) the Company terminates the employment of the Executive prior to December 31, 2005 against his will and without Cause, or (ii) the Executive terminates his employment prior to December 31, 2005 for Good Reason, then (A) Executive shall be entitled to receive base salary, incentive cash compensation (determined on a pro-rated basis as provided in Section 4(d) hereof), pay for accrued but unused vacation time, and reimbursement for expenses pursuant to Section 11 hereof through the Termination Date plus the balance of the Executive's compensation hereunder to December 31, 2005 computed using the base salary rate in effect at the date of the termination, and (B) notwithstanding the vesting and exercisability provisions otherwise applicable to the New Options, all of such options shall be fully vested and exercisable upon such termination and shall remain exercisable for the remainder of their terms, and (C) the vesting and exercisability of the stock options issued pursuant to the August, 2000 Agreement shall be accelerated as provided in that agreement. The Company shall make the cash portion of such termination payment within 30 days after such termination. Notwithstanding the foregoing, the Company shall not be required to pay any severance pay for any period following the Termination Date if the Executive materially violates the provisions of Section 16, Section 17 or Section 18 of this Agreement and such violation is not cured within thirty (30) day following receipt of written notice from the Company containing a description of the violation and a demand for immediate cure. (b) Subject to Section 19 hereof, if the Executive voluntarily terminates his employment prior to December 31, 2005 other than for Good Reason, then the Executive shall be entitled to receive salary, accrued vacation, and reimbursement of expenses pursuant to Section 11 hereof through the Termination Date only; vesting of the New Options shall cease on such Termination Date; and only the then-vested New Options (and options issued pursuant to the August 2000 Agreement if and to the extent that their terms or the terms of the associated plan so provide) shall remain vested and exerciseable for the remainder of their terms. 7 (c) Subject to Section 19 hereof, if the Executive's employment is terminated by the Company prior to December 31, 2005 for Cause, then the Executive shall be entitled to receive salary, accrued vacation, and reimbursement of expenses pursuant to Section 11 hereof through the Termination Date only; vesting of the New Options shall cease on such Termination Date; any unexercised New Options, whether or not vested, shall terminate; and the options issued pursuant to the August 2000 Agreement shall remain exerciseable or shall terminate as provided in such options or in the associated plan. (d) Subject to Section 19 hereof, if the Executive's employment is terminated prior to December 31, 2005 due to death or Disability, the Executive (or his estate or legal representative as the case may) be shall be entitled to receive (i) salary, reimbursement of expenses pursuant to Section 11 hereof, and pay for any unused vacation time accrued through the Termination Date; (ii) a pro-rated amount of incentive cash compensation for the fiscal year in which such death or disability occurs (determined as provided in Section 4(d) hereof); and (iii) a lump sum, payable within 30 days after the termination date, equal to base salary at the rate in effect on the date of such termination for the lesser of (a) twelve (12) months and (b) the remaining term of this Agreement at the time of such termination. In such case, vesting of the New Options shall cease on such Termination Date, and only the then-vested New Options (and options issued pursuant to the August 2000 Agreement if and to the extent applicable) shall remain vested and exerciseable for the remainder of their terms. (e) In addition to the provisions of Sections 10(a), 10(b) or 10(c) hereof, as the case may be, to the extent COBRA shall be applicable to the Company or as provided by law, the Executive shall be entitled to continuation of group health plan benefits for the periods provided by law following the Termination Date if the Executive makes the appropriate election and payments. (f) Subject to Section 19 hereof, the Executive acknowledges that, upon termination of this employment, he is entitled to no other compensation, severance or other benefits other than those specifically set forth in this Agreement. 11. Expenses. The Company shall pay or reimburse the Executive for all expenses normally reimbursed by Company that are reasonably incurred by him in furtherance of his duties hereunder and such further expenses as may be authorized and approved by the Company from time to time. Without limiting the foregoing, the Company shall continue to provide Executive with up to Five Thousand Dollars ($5,000.00) per month for local living expenses occasioned by or associated with Executive's service for the Company for all periods until the office is fully operational in the Seattle, Washington area. 12. Facilities and Services. The Company shall furnish the Executive with office space, secretarial and support staff, and such other facilities and services as shall be reasonably necessary for the performance of his duties under this Agreement. 13. Mitigation not Required. In the event this Agreement is terminated, the Executive shall not be required to mitigate amounts payable pursuant hereto by seeking other employment or otherwise. The Executive's acceptance of any such other employment shall not diminish or impair the amounts payable to the Executive pursuant hereto. 8 14. Place of Performance. The Executive shall perform his duties at such locations as the Executive may reasonably choose, provided that the Executive shall make reasonable efforts to accommodate the Company's needs and considerations of efficiency in this regard, and provided further that, in consultation and cooperation with the Executive, the Company shall expand its research facilities at a location or locations reasonably acceptable to the Executive in the Seattle, Washington area during 2002. 15. Insurance and Indemnity. With respect to his service hereunder, the Company shall maintain, at its expense, customary officers and directors liability insurance covering the Executive and, if such coverage is available at reasonable cost, for all other executive officers and directors, in an amount of no less than Five Million Dollars ($5,000,000). The Company shall also indemnify the Executive, to the fullest extent permitted by law, from any liability asserted against or incurred by the Executive (a) by reason of the fact that the Executive is or was an officer, director, employee, or consultant of the Company or any affiliate or related party or is or was serving in any capacity at the request of the Company for any other corporation, partnership, joint venture, trust, employment benefit plan or other enterprise or (b) in connection with any action(s), omission(s), or occurrence(s) during the course of such service or such status as an officer, director, employee, or consultant of or to any of the foregoing. The Company's obligations under this Section 15 shall survive the termination of the Executive's employment hereunder and any termination of this Agreement. 16. Non-Competition (a) The Executive agrees that, except in accordance with his duties under this Agreement on behalf of the Company, he will not during the Employment Period: participate in, be employed in any capacity by, serve as director, consultant, agent or representative for, or have an interest, directly or indirectly, in any enterprise which is engaged in the business of developing, licensing, or selling technology, products or services which are directly competitive with the Business of the Company or any of its Subsidiaries or with any technology, products or services being actively developed, with the bona fide intent to market same, by the Company or any of its Subsidiaries at the time in question. (b) In addition, the Executive agrees that, for a period of six months after the end of Executive's employment by the Company (unless such employment is terminated due to a breach of the terms hereof by the Company in failing to pay to the Executive all sums due him under the terms hereof or to honor any of its other obligations under this Agreement, in which event the following shall be inapplicable), the Executive shall not (1) own, either directly or indirectly or through or in conjunction with one or more members of his or his spouse's family or through any trust or other contractual arrangement, a greater than five percent (5%) interest in, or otherwise control either directly or indirectly, or (2) participate in, be employed in any capacity by, or serve as director, consultant, agent or representative for, any partnership, corporation, or other entity which is engaged in the business of developing, licensing, or selling technology, products or services which are directly competitive with the Business of the Company or any of its Subsidiaries as of the termination of the Executive's employment with the Company or which are directly competitive with any technology, products, or services being actively developed by the Company or any of its Subsidiaries, with the bona fide intent to market same, as of the termination of the Executive's employment at the Company. 9 (c) Executive further agrees, for twelve months following the end of Executive's employment by the Company (unless such employment is terminated due to a breach of the terms hereof by the Company as described above), to refrain from directly or indirectly soliciting Company's collaborative partners, consultants, certified research organizations, principal vendors, licensees or employees except any such solicitation in connection with activities that would not be directly competitive with and adverse to the Business of the Company or any of its Subsidiaries or with and to any products or services being offered by the Company or any of its Subsidiaries at the date such employment terminated or then being actively developed, with the bona fide intent to market same, by the Company or any of its Subsidiaries. (d) The Executive hereby agrees that damages and any other remedy available at law would be inadequate to redress or remedy any loss or damage suffered by the Company upon any breach of the terms of this Section 16 by the Executive, and the Executive therefore agrees that the Company, in addition to recovering on any claim for damages or obtaining any other remedy available at law, also may enforce the terms of this Section 16 by injunction or specific performance, and may obtain any other appropriate remedy available in equity. 17. Assignment of Patents. Executive shall disclose fully to the Company any and all discoveries he shall make and any and all ideas, concepts or inventions he shall conceive or make that are related or applicable to the Business of he Company or of any of its Subsidiaries or to any other products, services, or technology in medicine or the health sciences in which the Company shall during the Employment Period undertake, or actively and in good faith consider, research or commercial involvement provided that either (a) such discovery(ies), idea(s), concept(s) and/or invention(s) are made by Employee during the Employment Period or (b) such discovery(ies), idea(s), concept(s) and/or invention(s) are made by Employee during the period of six months after his employment terminates and are in whole or in part the result of his work with the Company. Such disclosure is to be made promptly after each such discovery or conception, and each such discovery, idea, concept or invention will become and remain the property of the Company, whether or not patent applications are filed thereon. Upon the request and at the expense of the Company, the Executive shall (i) make application through the patent solicitors of the Company for letters patent of the United States and any and all other countries at the discretion of the Company on such discoveries, ideas and inventions, and (ii) assign all such applications to the Company, or at its order, without additional payment by the Company except as provided below. The Executive shall give the Company, its attorneys and solicitors, all reasonable assistance in preparing and prosecuting such applications and, on request of the Company, execute all papers and do all things that may be reasonably necessary to protect the rights of the Company and vest in it or its assigns the discoveries, ideas or inventions, applications and letters patent herein contemplated. Said cooperation shall also include all actions reasonably necessary to aid the Company in the defense of its rights in the event of litigation. To the extent that the Executive's actions referred to in this paragraph are performed after the end of the Executive's employment by the Company, the Company shall promptly compensate the Executive for his time spent in or because of such activities at the rate of Four Hundred Dollars ($400) per hour; and all such activities shall be scheduled in a manner reasonably convenient to the Executive. 10 18. Trade Secrets (a) In the course of the term of this Agreement, it is anticipated that the Executive shall have access to secret or confidential technical, scientific and commercial information, records, data, formulations, specifications, systems, methods, plans, policies, inventions, material and other knowledge that is (are) specifically related or applicable to the Business of he Company or of any of its Subsidiaries or to any other products, services, or technology in medicine or the health sciences in which the Company shall during the Employment Period undertake, or actively and in good faith consider, research or commercial involvement and that is/are owned by the Company or its Subsidiaries ("Confidential Material"). The Executive recognizes and acknowledges that included with the Confidential Material are the following as they may specifically relate or be applicable to the drug delivery business technology, or current or specifically contemplated future drug delivery products or services: the Company's confidential commercial information, technology, formulations, STA-T (Systemic Transnasal Absorption Technology) and know-how, methods of manufacture, chemical formulations, device designs, pending patent applications, clinical data, pre-clinical data and any related materials, all as they may exist from time to time, and that such material is or may be valuable special, and unique aspects of the Company's business. All such Confidential Material shall be and remain the property of the Company. Except as required by his duties to the Company, the Executive shall not, directly or indirectly, either during the term of his employment or at any time thereafter, disclose or disseminate to anyone or make use of, for any purpose whatsoever, any Confidential Material. Upon termination of his employment, the Executive shall promptly deliver to the Company all Confidential Material (including all copies thereof, whether prepared by the Executive or others) which are in the possession or under the control of the Executive. The Executive shall not be deemed to have breached this Section 18 if the Executive shall be specifically compelled by legal process or order of any judicial, legislative, or administrative authority or body to disclose any Confidential Material. (b) The Executive hereby agrees that damages and any other remedy available at law would be inadequate to redress or remedy any loss or damage suffered by the Company upon any breach of the terms of this Section 18 by the Executive, and the Executive therefore agrees that the Company, in addition to recovering on any claim for damages or obtaining any other remedy available at law, also may enforce the terms of this Section 18 by injunction or specific performance, and may obtain any other appropriate remedy available in equity. 19. Payment and Other Provisions After Change of Control (a) In the event the Executive's employment with the Company is terminated either by the Company or by the Executive (other than because of the Executive's death or Disability) following the occurrence of a Change of Control (regardless of whether such termination is for Good Reason or for Cause or otherwise) and the date of such termination is (i) prior to December 31, 2005 and within one year following the occurrence of such Change of Control or (ii) prior to the date upon which all options granted to the Executive pursuant to Section 5 hereof are fully vested, then the Executive shall be entitled to receive from the Company, in lieu of the severance payment otherwise payable pursuant to Section 10 hereof, salary, expense reimbursement, and pay for unused vacation time through the termination date and, in addition, the following: 11 (i) Base Salary: A lump-sum amount equal to the greater of (a) twelve (12) months of Executive's base salary as in effect at the date of termination and (b) the balance of Executive's base salary compensation hereunder to the end of the term of this Agreement, such amount to be paid to the Executive within ten (10) days after the date of termination; (ii) Incentive Cash Compensation: The amount of the Executive's incentive cash compensation for the fiscal year in which the date of termination occurs (determined on a pro-rated basis as provided in Section 4(d) hereof and the Annual Base Bonus Amount for the following fiscal year (regardless of satisfaction of any performance criteria or progress toward such satisfaction), such amounts to be paid to the Executive within ten (10) days after the date of termination; and (iii) Other Benefits: Notwithstanding the vesting and/or exercisability provisions otherwise applicable to the New Options and/or to the stock options issued pursuant to the August 2000 Agreement, all stock options ("options") granted Executive by the Company shall be fully vested and exercisable upon a Change of Control and shall remain exercisable for the remainder(s) of their term(s). (b) For purposes of this Agreement, the term "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or any successor provision) (any of the foregoing hereafter a "Person") of 40% or more of either (a) the then outstanding shares of Capital Stock of the Company (the "Outstanding Capital Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Voting Securities"), provided, however, that such an acquisition by one of the following shall not constitute a change of control: (1) the Company or any of its Subsidiaries, or any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its Subsidiaries or (2) any Person that is eligible, pursuant to Rule 13d-1(b) under the Exchange Act, to file a statement on Schedule 13G with respect to its beneficial ownership of Voting Securities, whether or not such Person shall have filed a statement on Schedule 13G, unless such Person shall have filed a statement on Schedule 13D with respect to beneficial ownership of 40% or more of the Voting Securities or (3) any corporation with respect to which, following such acquisition, more than 60% of both the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Capital Stock or Voting Securities immediately prior to such acquisition in substantially the same proportions as their ownership, immediately prior to such acquisition, of the Outstanding Capital Stock or Voting Securities, as the case may be; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Company's shareholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any 12 such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company (as such terms are used in Rule 14a-11 of Regulation 14A, or any successor section, promulgated under the Exchange Act); or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation (a "Business Combination"), in each case, with respect to which all or substantially all holders of the Outstanding Capital Stock and Voting Securities immediately prior to such Business Combination do not, following such Business Combination, beneficially own, directly of indirectly, in substantially the same proportions, more than 60% of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from the Business Combination; or (iv) A complete liquidation or dissolution of the Company; or (v) A sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, following such sale or disposition, more than 60% of the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors are then owned beneficially, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Capital Stock or Voting Securities Immediately prior to such sale or disposition in substantially the same proportions as their ownership of the Outstanding Capital Stock and Voting Securities, as the case may be, immediately prior to such sale or disposition. (c) In the event that (i) the Executive becomes entitled to any payments or benefits in connection with a Change of Control or the termination of the Executive's employment, whether pursuant to the terms of this Agreement or otherwise (collectively, the "Total Benefits"), and (ii) any of the Total Benefits will be subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Excise Tax"), the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive from the Gross-Up Payment, after the payment of all taxes on the Gross-Up Payment (including but not limited to income, excise and employment taxes and any interest and penalties imposed with respect to all such taxes), is equal to the Excise Tax on the Total Benefits. For purposes of this Section 19(c), the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Excise Tax is (or would be) payable and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence (or of such jurisdiction(s) as may apply income taxation to the Executive's income) at the time the Gross-Up Payment is made. (d) All determinations required to be made under Section 19(c) shall be made by tax counsel selected by the Executive and reasonably acceptable to the Company ("Tax Counsel"), which determinations shall be conclusive and binding on the Company and on the Executive absent manifest error. Prior to any determination of the amount of any Gross-Up Payment payable pursuant to Section 19(c), Tax Counsel shall provide the Executive and the Company with a report setting forth its calculations and containing related supporting 13 information. All fees and expenses of Tax Counsel shall be borne solely by the Company. In the event that, after a Gross-Up Payment is made pursuant to Section 19(c), it is determined that the Excise Tax on the Total Benefits exceeds the amount theretofore taken into account hereunder, the Company shall promptly make an additional Gross-Up Payment (which shall be calculated by Tax Counsel as set forth herein) to the Executive in respect of such excess (plus any associated interest, penalties or additions payable by the Executive to the Internal Revenue Service or any other federal, state, local or foreign taxing authority). 20. Payment of Certain Costs of the Executive. Promptly from time to time the Company shall pay directly (or promptly reimburse the Executive to the extent that the Executive shall have paid) all actual legal, accounting, and other fees and expenses that are or shall have been: (a) Incurred by the Executive in the preparation, revision, and/or negotiation of this Agreement and/or (b) Incurred by the Executive as a result of a bona fide dispute regarding the application of any provision of this Agreement, including all such fees and expenses, if any, incurred in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 280G of the Tax Laws to any payment or benefit provided to the Executive. Such payments shall be made within five (5) business days after delivery to the Company of the Executive's respective written requests for payment accompanied by evidence of fees and expenses incurred by the Executive. 21. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered or certified mail, return receipt requested to his residence in the case of the Executive, or to its principal office in the case of the Company, or to such other addresses as they may respectively designate in writing. 22. Entire Agreement; Waiver. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and may not be changed orally but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Waiver of or failure to exercise any rights provided by this Agreement in any respect shall not be deemed a waiver of any further or future rights. 23. Binding Effect; Assignment. The rights and obligations of this Agreement shall bind and inure to the benefit of any successor of the Company by reorganization, merger or consolidation, or any assignee of all or substantially all of the Company's business or properties. The Executive's rights hereunder are personal to and shall not be transferable nor assignable by the Executive. 24. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 25. Governing Law; Arbitration. This agreement shall be construed in accordance with and governed for all purposes by the laws and public policy of the State of Washington applicable to contracts made and to be performed wholly within such state. Any dispute or 14 controversy arising out of or relating to this Agreement shall be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgement upon the award may be entered in any court having jurisdiction thereover. The arbitration shall be held in King County, Washington or in such other place as the parties hereto may agree. 26. Further Assurances. Each of the parties agrees to execute, acknowledge, deliver and perform, and cause to be executed, acknowledged, delivered and performed, at any time and from time to time, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and/or assurances as may be necessary or proper to carry out the provisions or intent of this Agreement. 27. Severability. The parties agree that if any one or more of the terms, provisions, covenants or restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 28. Condition to Continued Effectiveness. This Agreement and the obligations of the Executive and of the Company hereunder (other than the obligations of the Company set forth below in this paragraph) are dependent upon the approval by the shareholders of the Company, on or before July 31, 2002, of the Option Plan covering the issuance of the New Options. The Company hereby agrees: (a) to solicit, and to use all reasonable efforts to secure, such approval as soon as practicable and, in any event, prior to that date and also (b) to prepare and deliver to the Executive, as soon as practical and, in any event, prior to July 1, 2002, customary, mutually acceptable definitive documentation memorializing the grant of the New Options on the terms provided for herein and otherwise as provided in the Option Plan. If such shareholder approval is not secured by the close of business on July 31, 2002, the Company shall so notify the Executive promptly (in any event by August 5, 2002) and in writing, this Agreement shall become null and void, and the terms of the August 2000 Agreement shall apply without amendment hereby. IN WITNESS WHEREOF, NASTECH PHARMACEUTICAL COMPANY INC. has caused this instrument to be signed by a duly authorized officer and the Executive has hereunto set his hand as of the day and year first above written. COMPANY: NASTECH PHARMACEUTICAL COMPANY INC. By: /s/ BRUCE R. THAW ----------------------- Print name: Bruce R. Thaw Print title: Secretary EXECUTIVE: /s/ STEVEN C. QUAY, M.D., Ph.D. --------------------------------------- Steven C. Quay, M.D., Ph.D. 15 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.26

                                      LEASE

         [Phase 3 Science Center / Nastech Pharmaceutical Company Inc.]

        THIS LEASE ("Lease") is dated for reference purposes only April 23rd,
2002, by and between PHASE 3 SCIENCE CENTER LLC, a California limited liability
company, AHWATUKEE HILLS INVESTORS, LLC, an Arizona limited liability company,
and J. ALEXANDER'S LLC, a Delaware limited liability company, as tenants in
common (collectively, "Landlord"), and NASTECH PHARMACEUTICAL COMPANY INC., a
Delaware corporation ("Tenant").

        1.      LEASE PREMISES.

                1.1 Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord during the Term of this Lease (defined below), on the terms and
conditions set forth herein, those certain premises ("Premises") consisting of
27,714 square feet of Rentable Area (comprised of 7,938 square feet in Space C
and 19,776 square feet in Spaces D & E) in the building (the "Building") at 3450
Monte Villa Parkway, Bothell, Washington, on real property legally described on
Exhibit "A" attached hereto and incorporated herein by this reference. The
Building consists of approximately 51,000 square feet of Rentable Area. The
Building, the real property upon which the Building is located, and all
landscaping, parking facilities, and other improvements and appurtenances
related thereto are hereinafter collectively referred to as the "Project." The
site plan for the Project is attached hereto as Exhibit "B" and the Premises are
outlined on Exhibit "C". All portions of the Project which are for the
non-exclusive use of tenants of the Project, which are identified on Exhibit "C"
hereto as common areas, including without limitation interior entrance ways,
lobbies, corridors, stairwells, elevators, equipment rooms and rest rooms, and
exterior roadways, driveways, sidewalks, parking areas, and landscaped areas,
are hereinafter referred to as "Common Areas."

        2.      BASIC LEASE PROVISIONS.

                2.1 For convenience of the parties, certain basic provisions of
this Lease are set forth herein, which provisions are subject to the remaining
terms and conditions of this Lease and are to be interpreted in light of such
remaining terms and conditions.

                        2.1.1   Rentable Area of the Premises:
                                27,714 square feet, consisting of
                                Space C: 7,938 square feet
                                Spaces D & E: 19,776 square feet

                        2.1.2   Basic Annual Rent:
                                $831,420 ($30.00 per square foot per year for
                                27,714 square feet of Rentable Area, subject to
                                adjustment pursuant to Sections 5.1 and 6.1)


                                       1


                        2.1.3   Monthly Installment of Basic Annual Rent:
                                $69,285 ($2.50 per square foot per month for
                                27,714 square feet of Rentable Area, subject to
                                adjustment pursuant to Sections 5.1 and 6.1)

                        2.1.4   Tenant's Pro Rata Share: 54.34% of the Project

                        2.1.5   (a)     Estimated Delivery Date:
                                        Spaces D & E: June 1, 2002
                                        Space C: September 1, 2002

                                (b)     Term Commencement Date: November 15,
                                        2002, subject to adjustment pursuant to
                                        Section 3.2

                                (c)     Term Expiration Date: January 31, 2013

                        2.1.6   Security Deposit:

                                (a)     Cash in the amount of $277,140; and

                                (b)     Letter of Credit in the amount of
                                        $415,710

                        2.1.7   Permitted Use: Uses permitted in Section 10.1

                        2.1.8   Address for Rent Payment and Notices to
                                Landlord:

                                Phase 3 Properties, Inc.
                                8910 University Center Lane, Suite 265
                                San Diego, CA 92122

                                Address for Notices to Tenant:

                                Before Term Commencement Date:

                                Nastech Pharmaceutical Company Inc.
                                45 Adams Avenue
                                Hauppauge, NY 11788
                                Attn: David Wormuth

                                After Term Commencement Date:

                                Nastech Pharmaceutical Company Inc.
                                3450 Monte Villa Parkway
                                Bothell, WA
                                Attn: Chief Executive Officer


                                       2


                2.2.The following exhibits are attached hereto and incorporated
herein by this reference:

                        Exhibit "A"   Legal Description of Real Property
                        Exhibit "B"   Site Plan of the Project
                        Exhibit "C"   Outline of the Premises
                        Exhibit "D"   Acknowledgment of Term Commencement Date
                        Exhibit "E"   Schematic Showing Tenant Improvements
                        Exhibit "E-1" Tenant Improvement Budget
                        Exhibit "E-2" Tenant Signage
                        Exhibit "F"   Form of Letter of Credit
                        Exhibit "G"   Rules and Regulations
                        Schedule 1    List of Removable Property (Section 17.7)

        3.      TERM.

                3.1 This Lease shall take effect upon the last date of execution
hereof by each of the parties hereto, and each of the provisions hereof shall be
binding upon and inure to the benefit of Landlord and Tenant from the last date
of execution hereof by each of the parties hereto.

                3.2 Tenant shall have the full right to use and occupy Spaces D
and E on the date by which all of the following have occurred: (a) Landlord has
tendered possession of Spaces D and E with the Tenant Improvements located in or
serving such portion of the Premises Substantially Complete and otherwise in the
condition required hereunder (other than two (2) exhaust fans for Tenant's fume
hoods and four (4) lab benches if not received in a timely manner); and (b)
Landlord has obtained all approvals and permits from the appropriate
governmental authorities required for the legal occupancy of Spaces D and E for
the permitted use (the "Spaces D and E Delivery Date"). Tenant shall have the
full right to use and occupy Space C on the date by which all of the following
have occurred: (i) Landlord has tendered possession of Space C with the Tenant
Improvements located in or serving such portion of the Premises Substantially
Complete and otherwise in the condition required hereunder; and (ii) Landlord
has obtained all approvals and permits from the appropriate governmental
authorities required for the legal occupancy of Space C for the permitted use
(the "Space C Delivery Date"). The period following the Spaces D and E Delivery
Date (as to Spaces D and E) and the Space C Delivery Date (as to Space C) and
before the Term Commencement Date shall be referred to herein as the "Early
Occupancy Period." All of the terms of this Lease shall apply during the Early
Occupancy Period, except that (A) Tenant shall have no obligation to pay Basic
Annual Rent (although Tenant shall be required to pay Operating Expenses) and
(B) until both the Spaces D and E and Space C Delivery Dates occur, references
to Premises shall mean only the portions of the Premises as to which a Delivery
Date has occurred. The term of this Lease (the "Term") will commence on November
15, 2002 (the "Term Commencement Date") and shall continue through January 31,
2013 (the "Term Expiration Date"), subject to earlier termination of this Lease
as provided herein; provided, if the Spaces D and E Delivery Date has not
occurred on or before June 15, 2002, the Term Commencement Date shall be
extended one day for each


                                       3


day after sixty (60) days from the date of this Lease that the Spaces D and E
Delivery Date occurs except to the extent of a Tenant Delay (defined below);
provided further, if the Space C Delivery Date has not occurred on or before the
Term Commencement Date, references to Premises in this Lease shall refer only to
Spaces D and E until the Space C Delivery Date. Landlord and Tenant shall
execute a written acknowledgment of the Term Commencement Date when such is
established in substantially the form attached hereto as Exhibit "D" and attach
it to this Lease as Exhibit "D-1"; however, failure to execute and deliver such
acknowledgment shall not affect Tenant's liability hereunder.

                3.3 The term "Tenant Improvements" shall mean the improvements
within the Premises for Tenant's use and occupancy as shown on the schematic
attached hereto as Exhibit "E" (the "Schematic Plans"). As used herein, the
terms "Substantially Complete", "Substantially Completed", and "Substantial
Completion" shall mean the later of the date (i) the City of Bothell has issued
an interim or final right to occupy the Premises, or (ii) Landlord has
substantially completed construction of the Tenant Improvements in accordance
with the Schematic Plans (subject only to the completion of typical punch-list
items which do not materially interfere with Tenant's use or occupancy of the
Premises). Tenant understands that construction of expansion space and tenant
improvements for other tenants of the Building will be ongoing at the time of
Substantial Completion of the Tenant Improvements. In constructing such
expansion space and additional tenant improvements, Landlord shall not
unreasonably interfere with Tenant's use of the Premises and shall use
reasonable efforts to minimize the noise resulting therefrom. Substantial
Completion is not dependent upon receipt of a final certificate of occupancy
(but is dependent upon receipt of at least an interim right to occupy) or
completion of typical punch-list items which do not materially interfere with
Tenant's use or occupancy of the Premises. If Tenant actually occupies and
commences the conduct of its business on such portion of the Premises prior to
the Substantial Completion thereof, the Delivery Date for such portion of the
Premises shall be deemed to have occurred; provided, however, nothing herein
shall be deemed to relieve Landlord of its obligation to promptly Substantially
Complete the relevant Tenant Improvements. In addition, if the Substantial
Completion of a portion of the Tenant Improvements is based on an interim right
to occupy the Premises, Landlord shall expeditiously satisfy all requirements to
obtain a final right to occupy the Premises as soon as practicable and shall not
unreasonably interfere with Tenant's use of the Premises in satisfying such
requirements.

                3.4 The term "Tenant Delay" as used in this Lease shall mean any
delay in the completion of the Tenant Improvements which is due to any
negligence or willful misconduct of Tenant or its agents or contractors. The
term "Tenant Delay" shall include, but shall not be limited to, (1) any delay in
the giving of authorizations or approvals by Tenant, within the time frames
specified in this Lease, where such delay actually delays completion of the
Tenant Improvements; and (2) any delay attributable to the negligence or willful
misconduct of Tenant, or of its agents or contractors, where such acts or
failures to act delay the completion of the Tenant Improvements.

        4.      CONSTRUCTION AND POSSESSION.

                4.1 Landlord shall construct the Tenant Improvements in
conformity with the Schematic Plans and shall diligently prosecute such
construction to completion. Landlord shall


                                       4


contribute for the cost of Tenant Improvements the amount of $630,360.00
("Tenant Improvement Allowance") ($85.00 per square foot for 7,416 square feet
of "usable" area of Space C to be occupied by Tenant requiring improvements).
Costs and expenses incurred by Landlord in performing the Tenant Improvements in
excess of Tenant Improvement Allowance, if any, shall be paid by Tenant on a
monthly basis over the construction period as such costs are incurred. The cost
of the Tenant Improvements shall be limited to design, permitting and
out-of-pocket construction costs of the Tenant Improvements, including
architectural and engineering fees, costs of processing and obtaining permits
from the City of Bothell and any other governmental entity with jurisdiction
over the Premises, water and sewer connection charges and other expenses related
thereto, all as shown on the budget attached hereto as Exhibit "E-1" ("Tenant
Improvement Budget"). The cost of the Tenant Improvements shall not include (and
Tenant shall have no responsibility for and the Tenant Improvement Allowance
shall not be used for) the following: (a) costs attributable to improvements
installed outside the demising walls of the Premises except as shown on the
Schematic Plans or reflected in the Tenant Improvement Budget; (b) costs for
improvements which are not shown on or described in the final plans unless
otherwise approved by Tenant; (c) costs incurred to remove Hazardous Materials
from the Premises or the surrounding area; (d) attorneys' fees incurred in
connection with negotiation of construction contracts, and attorneys' fees,
experts' fees and other costs in connection with disputes with third parties;
(e) interest and other costs of financing construction costs; (f) costs incurred
as a consequence of delay (except for Tenant Delays), construction defects or
default by a contractor; (g) costs recoverable by Landlord upon account of
warranties and insurance; (h) restoration costs in excess of insurance proceeds
as a consequence of casualties; (i) penalties and late charges attributable to
Landlord's failure to pay construction costs; or (j) costs to bring the Project
other than the Premises into compliance with applicable laws and restrictions,
including, without limitation, the Americans with Disabilities Act and
environmental laws; and (k) wages, labor and overhead for overtime and premium
time unless approved in writing by Tenant.

                4.2 Landlord shall cause to be expeditiously prepared final
plans, specifications and working drawings of the Tenant Improvements ("Final
Plans"), all of which conform to or represent logical evolutions of or
developments from the Schematic Plans, and which conform to the Tenant
Improvement Budget, for Tenant's approval. Upon Tenant's approval, Landlord
shall submit the Final Plans to all appropriate governmental agencies and
thereafter Landlord shall use commercially reasonably efforts to obtain required
governmental approvals as soon as practicable. After the Final Plans have been
approved by Landlord and Tenant as provided above, neither party shall have the
right to require extra work or change orders with respect to the construction of
the Tenant Improvements without the prior written consent of the other, which
consent shall not be unreasonably withheld or delayed. All change orders shall
specify any change in the Cost Estimate as a consequence of the change order.

                4.3 The parties agree that Landlord may retain BN Builders as
the general contractor for the construction of the Tenant Improvements, or such
other contractor as Landlord may select subject to Tenant's approval, pursuant
to a contract with a guaranteed maximum price of the amount shown on the Tenant
Improvement Budget.

                4.4 Landlord shall use diligent efforts to tender possession of
the Premises with the Tenant Improvements Substantially Complete to Tenant on
the estimated Delivery Dates as set forth in Section 2.1.5. Tenant agrees that,
except as otherwise set forth herein, in the event


                                       5


Landlord fails to tender possession of the Premises with the Tenant Improvements
Substantially Complete to Tenant on or before the estimated Delivery Dates, this
Lease shall not be void or voidable and Landlord shall not be liable to Tenant
for any loss or damage resulting therefrom. In no event, however, shall Tenant's
obligation to pay Operating Expenses and any other amounts under this Lease
commence for any portion of the Premises until the Delivery Date for such
portion of the Premises. Notwithstanding the foregoing, if the Spaces D and E
Delivery Date has not occurred for any reason whatsoever within one hundred
eighty (180) days from the date of this Lease, or the Space C Delivery Date has
not occurred for any reason whatsoever within two hundred ten (210) days after
the issuance of a building permit for construction of the Tenant Improvements in
Space C (which dates shall be extended by one day for each day the Tenant
Improvements for Space D and E or Space C, as the case may be, were actually
delayed by Tenant Delay), then, in addition to Tenant's other rights or
remedies, Tenant may terminate the Lease by written notice to Landlord given
within fifteen (15) days after the applicable date, whereupon any monies
previously paid by Tenant to Landlord shall be reimbursed to Tenant, or, at
Tenant's election, the date Tenant is otherwise obliged to commence payment of
rent with respect to such Space shall be delayed by one day for each day that
the applicable Delivery Date is delayed beyond such date. Landlord shall deliver
possession of the applicable portions of the Premises to Tenant in good, vacant,
broom clean condition, with all building systems in good working order and in
compliance with all laws. Tenant's acceptance of the Premises shall not be
deemed a waiver of Tenant's right to have defects in the Premises repaired at no
cost to Tenant. Tenant shall give notice to Landlord whenever any such defect
becomes reasonably apparent, and Landlord shall repair such defect as soon as
practicable.

                4.5 Prior to entry by Tenant onto any particular portion of the
Premises before the applicable Delivery Date, for installing fixtures, placement
of personal property, or any other purpose, Tenant shall furnish to Landlord
evidence satisfactory to Landlord that insurance coverages required of Tenant
under the provisions of Article 21 are in effect. Entry by Tenant onto the
Premises prior to the applicable Delivery Date for such purposes shall be
subject to all of the terms and conditions of this Lease other than the payment
of Basic Annual Rent and Operating Expenses, shall not interfere with the
performance by Landlord or Landlord's contractor with construction of the Tenant
Improvements, and shall be made only with the advance written consent of
Landlord, which consent shall not be unreasonably withheld. In the event of
entry by Tenant or its agents onto the Premises prior to the applicable Delivery
Date, Tenant agrees to indemnify, protect, defend and hold Landlord harmless
from any and all loss or damage to property, completed work, fixtures,
equipment, materials or merchandise, or from liability for death of or injury to
any person arising from Tenant's entry onto the Premises, except to the extent
caused by the negligence or willful misconduct of Landlord or its agents.

                4.6 Landlord has applied for and retained the benefit of State
of Washington sales tax deferral under the "Retail Sales/Use Tax Deferral for
High Technology Industries" statute for the improvements installed by Landlord
pursuant to Section 4.1 and the Schematic Plans. Landlord and Tenant acknowledge
and agree that the amount of Basic Annual Rent set forth herein reflects the
economic benefit of such sales tax deferral having been passed through to Tenant
in the form of reduced rent, and would have been greater in an amount equal to
the sales tax deferral if Landlord were not entitled to retain the benefits of
the sales tax deferral. To the extent permitted by law, Tenant shall be entitled
to apply for and retain the benefit of the sales


                                       6


tax deferral under such statute for Tenant's equipment, fixtures, personal
property and additional Improvements installed by Tenant.

        5.      RENT.

                5.1 Tenant agrees to pay Landlord as Basic Annual Rent for the
Premises the sum set forth in Section 2.1.2, subject to adjustment as set forth
in Section 6.1, in the equal monthly installments set forth in Section 2.1.3,
subject to adjustment as set forth in Section 6.1, each in advance on the first
day of each and every calendar month during the Term of this Lease; provided,
however, from the Term Commencement Date through February 1, 2003 (the "Space C
Rent Commencement Date"), Basic Annual Rent shall be in monthly installments of
$49,440 ($2.50 per square foot per month x 19,776 square feet), and commencing
on the Space C Rent Commencement Date, shall be in monthly installments of
$69,285; provided further, if the Space C Delivery Date has not occurred on or
before September 1, 2002, the Space C Rent Commencement Date shall be extended
one day for each day (i) after nine (9) weeks from the date of issuance of a
building permit for construction of the Tenant Improvements for Space C that the
Space C Delivery Date occurs, except to the extent of a Tenant Delay and (ii)
that issuance of a building permit was actually delayed by Landlord.

                5.2 In addition, Tenant agrees to pay to Landlord as additional
rent ("Additional Rent"), commencing on the applicable Delivery Date for each
portion of the Premises: (i) Tenant's Pro Rata Share (as defined in Section
7.4(a) and as set forth in Section 2.1.4) of Operating Expenses as provided in
Article 7 and (ii) all other amounts that Tenant assumes or agrees to pay under
the provisions of this Lease, including but not limited to any and all other
sums that may become due by reason of any default of Tenant under this Lease or
failure on Tenant's part to comply with the agreements, terms, covenants and
conditions of this Lease to be performed by Tenant.

                5.3 Basic Annual Rent and Additional Rent shall together be
denominated "Rent." Except as expressly set forth in this Lease, Rent shall be
paid to Landlord, without notice, demand, abatement, suspension, deduction,
setoff, counterclaim, or defense (except as otherwise set forth herein), in
lawful money of the United States of America, at the office of Landlord as set
forth in Section 2.1.8 or to such other person or at such other place as
Landlord may from time to time designate in writing.

                5.4 In the event the Term commences or ends on a day other than
the first day of a calendar month, then the Rent for such fraction of a month
shall be prorated for such period on the basis of the actual number of days in
the month and shall be paid at the then current rate for such fractional month
prior to the commencement of the partial month.

        6.      RENTAL ADJUSTMENTS.

                6.1 The Basic Annual Rent as set forth in Section 2.1.2 above
shall be increased on each annual anniversary date of the Term Commencement Date
in accordance with this Section 6.1. On the first anniversary of the Term
Commencement Date, and on each anniversary thereafter, the initial Basic Annual
Rent shall be multiplied by a fraction, the numerator of which


                                       7


shall be the Consumer Price Index of the Bureau of Labor Statistics of the
Department of Labor for All Urban Consumers (All Items) (1982-84=100) for the
U.S. City Average (the "CPI") of the calendar month immediately preceding the
adjustment date, and the denominator of which shall be the CPI for the calendar
month immediately preceding the Term Commencement Date; provided, however, in no
event shall Basic Annual Rent be increased on each anniversary of the Term
Commencement Date less than two and one-half percent (2 1/2%) or more than three
percent (3%) of the previous year's Basic Annual Rent.

        7.      OPERATING EXPENSES.

                7.1 As used herein, the term "Operating Expenses" shall include:

                        (a) Except as set forth in Section 7.2 below, government
impositions including, without limitation, real and personal property taxes and
assessments (but excluding personal property taxes and assessments of other
tenants of the Project) levied upon the Project or any part thereof; amounts due
under any improvement bond upon the Project and assessments levied in lieu
thereof (except to the extent they represent costs related to the initial
construction of the Project); transportation management assessments or expenses
levied upon the Project; any tax on or measured by gross rentals received from
the rental of space in the Project or tax based on the square footage of the
Building to the extent such tax is in lieu of a property tax (not an income tax,
but a tax based on revenue in the nature of a property tax if imposed in the
future); and any utilities surcharges or any other costs levied, assessed or
imposed by, or at the direction of, or resulting from statutes or regulations,
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 Project, and any expenses, including the cost of attorneys or
experts, reasonably incurred by Landlord in seeking reduction by the taxing
authority of the applicable taxes not to exceed the amount of any such
reduction, less tax refunds obtained as a result of an application for review
thereof. Tenant shall have the right to contest taxes so long as Tenant
indemnifies Landlord from any liability as a result thereof.

                        (b) Except as set forth in Section 7.2 below, all other
costs paid or incurred by Landlord which, in accordance with accepted principles
of sound accounting practice as applied to the operation and maintenance of
first class buildings, are properly chargeable to the maintenance and operation
of the Project including, by way of examples and not as a limitation upon the
generality of the foregoing, costs of (i) maintenance, repairs and replacements
to improvements within the Project as appropriate to maintain the Project in
first class condition; (ii) utilities furnished to the Project (except those
utilities which are separately metered and payable by individual tenants); (iii)
sewer fees; (iv) trash collection; (v) cleaning (including windows); (vi)
maintenance of landscape and grounds; (vii) maintenance of drives and parking
areas, including periodic resurfacing; (viii) reasonable and customary security
services; (ix) maintenance, repair, and replacement of reasonable and customary
security devices; (x) building supplies; (xi) maintenance, repair, and
replacement of equipment utilized for operation and maintenance of the Project;
(xii) costs of maintenance, repairs and replacements of mechanical, plumbing,
electrical and other systems of the Project; (xiii) insurance premiums for any
insurance reasonably necessary for the Project; (xiv) portions of insured losses
deductible by reason of insurance policy terms (insurance deductibles) not to
exceed $20,000 in any year


                                       8


($50,000 for earthquake insurance); (xv) periodic review of Hazardous Material
Inventories (as defined in Section 39.6) to confirm compliance with applicable
building and fire code requirements; (xvi) service contracts for work of a
nature before referenced; (xvii) costs of services of independent contractors
retained to do work of a nature before referenced at reasonable and customary
rates; (xviii) costs of compensation (including employment taxes and fringe
benefits) of all persons who perform regular and recurring duties connected with
the day-to-day operation and maintenance of the Project at reasonable and
customary rates; and (xix) costs of management services equal to three percent
(3.0%) of Basic Annual Rent.

                7.2 Notwithstanding the foregoing, Tenant shall not be
responsible for the payment of the following costs and expenses:

                        (a) costs incurred for the initial construction of the
Project;

                        (b) costs incurred for the repair, maintenance or
replacement of the structural components of the footings, foundation, ground
floor slab, roof, and load bearing walls of the Building (but excluding painting
and ordinary maintenance and repair of exterior surfaces, which are Operating
Expenses under Section 7.1(b));

                        (c) costs covered under any construction or materials
warranty procured by Landlord to the extend paid pursuant to the warranty
(provided, however, Landlord shall use commercially reasonably efforts at its
sole cost and expense to enforce such warranties);

                        (d) costs incurred to correct any defects in design,
materials or construction of the Project;

                        (e) costs, expenses and penalties (including without
limitation attorneys' fees) incurred as a result of the use, storage, removal or
remediation of any toxic or hazardous substances or other environmental
contamination not caused by Tenant or its employees, contractors, agents,
representatives, or invitees;

                        (f) interest, principal, points and other fees on debt
or amortization of any debt secured in whole or part by all or any portion of
the Project (provided that interest upon a government assessment or improvement
bond payable in installments is an Operating Expense under Section 7.1(a));

                        (g) costs incurred in connection with the financing,
sale or acquisition of the Project or any portion thereof;

                        (h) costs, expenses, and penalties (including without
limitation attorneys' fees) incurred due to the violation by Landlord of any
underlying deed of trust or mortgage affecting the Project or any portion
thereof;

                        (i) depreciation and amortization of any type (provided
this exclusion is not intended to delete from Operating Expenses actual costs of
maintenance, repairs and replacements which are otherwise included within
Operating Expenses);


                                       9


                        (j) any costs incurred as a result of Landlord's
violation of any covenant, condition, restriction, underwriter's requirement,
statute, ordinance or other source of applicable law, or breach of contract or
tort liability to any other party, including without limitation, any unrelated
third party, or Landlord's employees, contractors, agents or representatives;

                        (k) costs incurred in leasing or procuring tenants
(including, without limitation, lease commissions, advertising expenses,
attorneys' fees and expenses of renovating space for tenants);

                        (l) advertising, marketing, media and promotional
expenditures regarding the Project and costs of signs identifying the owner,
lender or any contractor thereof;

                        (m) any wages, fees, salaries or other compensation of
the executive employees or principals of Landlord;

                        (n) any net income, franchise, capital stock, estate or
inheritance taxes or taxes which are the personal obligation of Landlord or of
another tenant of the Project;

                        (o) expenses which relate to preparation of rental space
for other occupants of the Project, including without limitation building,
license and inspection costs, incurred with respect to the installation of
improvements made for other occupants of the Project or incurred in renovating
or otherwise improving, decorating, painting or redecorating vacant tenant space
in the Project for other occupants in the Project;

                        (p) legal expenses arising out of the initial
construction of the Project or the Tenant Improvements or for the enforcement of
the provisions of any tenant leases other than this Lease;

                        (q) the cost of any work or service performed for or
facilities furnished to another occupant of the Project at such occupant's cost;

                        (r) any interest or penalties imposed upon Landlord by
any taxing authority for late payment or otherwise;

                        (s) any other expense otherwise chargeable as part of
the cost of operation and maintenance but which is not of general benefit to the
Project but is primarily for the benefit of one or more specific tenants;

                        (t) Landlord's charitable or political contributions;

                        (u) the amount of any payments to subsidiaries and
affiliates of Landlord for services to the Project or for supplies or other
materials to the extent that the cost of such services, supplies or materials
exceeds the cost which would have been paid had the services, supplies or
materials been provided by unaffiliated parties on a competitive basis;
provided,


                                       10


however, any fee for management services paid to an affiliate of Landlord shall
be in the amount set forth in Section 7.1(b);

                        (v) electric power or other utility costs for which
Tenant directly contracts with a public service company;

                        (w) costs occasioned by the act, omission or violation
of any law by any other occupant of the Project, or their respective agents,
employees or contractors;

                        (x) costs occasioned by casualties, except for insurance
deductibles not to exceed $20,000 per year ($50,000 per year for earthquake
insurance), or by the exercise of the power of eminent domain;

                        (y) expense reserves;

                        (z) costs which could properly be capitalized under
generally accepted accounting principles, except to the extent amortized over
the useful life of the capital item in question;

                        (aa) any fee, profit or compensation retained by
Landlord or its affiliates for management and administration of the Project
other than the fee for management services in the amount set forth in Section
7.1(b); and

                        (bb) taxes or assessment expenses in excess of the
amount which would be payable if such tax or assessment expense were paid in
installments over the longest permitted term.

                7.3 Tenant shall pay to Landlord on the first day of each
calendar month of the Term, as Additional Rent, Landlord's good faith estimate
of Tenant's Pro Rata Share (as set forth in 2.1.4) of Operating Expenses with
respect to the Project for such month.

                        (a) "Tenant's Pro Rata Share" under this Lease shall
mean the percentage set forth in Section 2.1.4, or such other amount determined
from time to time by dividing the Rentable Area of the Premises by the total
Rentable Area of the Project (for instance, such percentage shall be greater
than that set forth in Section 2.1.4 if the Building is not expanded as
presently contemplated). Notwithstanding anything to the contrary herein, until
the Space C Delivery Date, Tenant's Pro Rata Share shall only be 38.77%.

                        (b) Within ninety (90) days after the conclusion of each
calendar year, Landlord shall furnish to Tenant in writing a statement (the
"Annual Operating Expense Statement") showing in reasonable detail the actual
Operating Expenses and Tenant's Pro Rata Share of Operating Expenses for the
previous calendar year. Any additional sum due from Tenant to Landlord shall be
due and payable within thirty (30) days of Tenant's receipt of such statement.
If the amounts paid by Tenant pursuant to this Section 7.3 exceed Tenant's Pro
Rata Share of Operating Expenses for the previous calendar year, the difference
shall be credited by Landlord against the Rent next due and owing from Tenant;
provided that, if the Lease Term has


                                       11


expired, Landlord shall accompany said statement with payment for the amount of
such difference.

                        (c) Any amount due under this Section 7.3 for any period
which is less than a full month shall be prorated for such fractional month.

                        (d) Notwithstanding this Section 7.3, Operating Expenses
which can fairly and reasonably be allocated to one or more tenants of the
Project shall be so allocated, and shall be separately scheduled on the Annual
Operating Expense Statement.

                7.4 Tenant shall have the right, at Tenant's expense, upon
reasonable notice during reasonable business hours, to review that portion of
Landlord's books, records, invoices, and other data which are relevant to
preparation of the Annual Operating Expense Statement, provided any request for
such review shall be furnished to Landlord within one (1) year after Tenant's
receipt of such statement as to a prior year's Operating Expenses. If the amount
of Operating Expenses relating to the Premises identified on such annual
statement is found to exceed the actual Operating Expenses of the Premises,
Landlord shall, within twenty (20) days after Tenant's request therefor, refund
to Tenant the amount of overpayment by Tenant. In addition, if such review
reveals that the Operating Expenses paid by Tenant in any year exceed one
hundred five percent (105%) of the actual Operating Expenses which should have
been paid by Tenant in such year, Landlord shall reimburse Tenant for the
reasonable cost of such review. In all other cases, Tenant shall pay for the
reasonable cost of the review.

                7.5 Operating Expenses for the calendar year in which Tenant's
obligation to pay them commences and in the calendar year in which such
obligation ceases shall be prorated. Expenses such as taxes, assessments and
insurance premiums which are incurred for an extended time period shall be
prorated based upon time periods to which applicable so that the amounts
attributed to the Premises relate in a reasonable manner to the time period
wherein Tenant has an obligation to pay Operating Expenses. The responsibility
of Tenant for Operating Expenses pursuant to Section 7.3 shall continue to the
date of termination of this Lease.

        8.      RENTABLE AREA.

                8.1 The Rentable Area of the Project is determined by making
separate calculations of the Rentable Area of each floor of the Building, and
totaling the Rentable Area of each floor within the Building. The Rentable Area
of a floor is calculated by measuring to the outside finished surface of each
permanent outer building wall where the wall intersects or joins the floor, or
where it would have intersected the floor except for recessed entryways, windows
and the like (also known as the "drip line", measured from where the outside
finished surface of the second floor wall intersects the roof). The full area
calculated as set forth above is included as Rentable Area of the Project
without deduction for (i) columns and projections, (ii) vertical penetrations
such as stairwells, elevator shafts, flues, pipe shafts, vertical ducts,
atriums, and the like, and their enclosing walls corridors, (iii) entrance ways,
lobbies, corridors, equipment rooms, and rest rooms, and the like, and their
enclosing walls, or (iv) any other unusable area of any nature.


                                       12


                8.2 The term "Rentable Area" when applied to Tenant is the area
to be occupied exclusively by Tenant plus a pro rata allocation of Rentable Area
within the Project which is not then utilized or expected to be utilized
exclusively by Tenant or other tenants of the Project, including but not limited
to the portions of the Building devoted to columns, projections, vertical
penetrations, entrance ways, lobbies, corridors, equipment rooms and rest rooms.
If the Premises are separated from space occupied by another tenant, the
Rentable Area shall be measured to the center of any interior demising walls.

                8.3 Prior to the execution of this Lease, the parties have
measured the Premises and hereby agree that the Rentable Area as set forth in
Section 2.1.1 constitutes the Rentable Area of the Premises. Neither the
Rentable Area set forth in Section 2.1.1 nor the Basic Annual Rent or monthly
installments of Basic Annual Rent shall be adjusted upon subsequent measurement
of the Premises; provided, however, Tenant's Pro Rata Share of Operating
Expenses will be increased if the Building is not expanded as presently
contemplated.

        9.      SECURITY DEPOSIT.

                9.1 Tenant shall deposit with Landlord (i) upon execution of
this Lease, cash in the amount set forth in Section 2.1.6(a) ("Cash Deposit")
and (ii) within fourteen (14) days after execution of this Lease an irrevocable
stand-by letter of credit in the amount set forth in Section 2.1.6(b) ("Letter
of Credit"), to be held by Landlord as security for the faithful performance by
Tenant of all of the terms, covenants, and conditions of this Lease to be kept
and performed by Tenant during the term and any extension term hereof (together,
the Cash Deposit and the Letter of Credit shall be referred to herein as the
"Security Deposit"). The Cash Deposit shall be placed by Landlord in a
segregated, interest bearing account, with interest accruing for the benefit of
Tenant and paid to the Tenant at least annually, such account to be owned by
Landlord but with all interest reported on Tenant's taxpayer identification
number and any income tax thereon paid by Tenant. If Tenant defaults (beyond all
applicable notice and cure periods) with respect to any provision of this Lease,
including but not limited to any provision relating to the payment of Rent,
Landlord may (but shall not be required to) immediately draw from the Cash
Deposit or Letter of Credit, drawing on the Cash Deposit first and the Letter of
Credit only if the Cash Deposit is not sufficient, the amount required to cure
the default, and to use, apply or retain the proceeds thereof for the payment of
any Rent or any other sum in default, and to compensate Landlord for any other
loss or damage which Landlord may suffer by reason of Tenant's default. Landlord
shall be entitled to draw upon the Letter of Credit only upon presentation to
the bank of written certification that Tenant is in default beyond all
applicable notice and cure periods under this Lease. Tenant hereby grants to
Landlord a security interest in any Cash Deposit in accordance with the
applicable provisions of the Washington Commercial Code to secure the
obligations of this Lease.

                9.2 Tenant shall be responsible for any expenses in obtaining
and maintaining any Letter of Credit, except to the extent such expenses are
incurred as a result of Landlord's negligence, willful misconduct or assignment
of this Lease.

                9.3 The Letter of Credit, and any replacement Letter of Credit,
shall be issued by (i) Chase or (ii) another financial institution reasonably
acceptable to Landlord, with an office in


                                       13


Seattle, Washington authorized to disburse funds upon a draw request,
substantially in the form attached hereto as Exhibit "F".

                9.4 In the event of the use of any portion of the Cash Deposit
or a partial draw on the Letter of Credit, Tenant shall within ten (10) days
after another request therefor replenish the Cash Deposit or replenish the
Letter of Credit or substitute a new Letter of Credit to the full amount set
forth above.

                9.5 The initial Letter of Credit shall be for a period of not
less than one (1) year, and any replacement Letter of Credit shall be for a
period of not less than one (1) year. The initial Letter of Credit (or any later
replacement Letter of Credit) shall be replaced by Tenant by delivering to
Landlord a replacement Letter of Credit at least thirty (30) days prior to the
expiration of the then current Letter of Credit. If Tenant fails to deliver a
replacement Letter of Credit at least thirty (30) days prior to the expiration
of the then current Letter of Credit, Landlord shall have the right to
immediately draw the total amount of the then current Letter of Credit and hold
the proceeds thereof as a security deposit pursuant to the provisions of Section
9.1. The Letter of Credit shall be successively renewed or replaced until that
date which is sixty (60) days after the expiration of the initial or any
extended term of this Lease. In the event that Landlord draws upon the Letter of
Credit solely due to Tenant's failure to renew the Letter of Credit at least
thirty (30) days before its expiration (i) such failure to renew shall not
constitute a default hereunder and (ii) Tenant shall at any time thereafter be
entitled to provide Landlord with a replacement Letter of Credit that satisfies
the requirements hereunder, at which time Landlord shall return the cash
proceeds of the original Letter of Credit drawn by Landlord. In the event
Landlord improperly draws upon the Letter of Credit or misapplies the Letter of
Credit proceeds, Tenant shall have the right to offset such amounts against
Rent.

                9.6 Any Cash Deposit or Letter of Credit shall be transferable
by Landlord to a successor Landlord or mortgagee or beneficiary of a deed of
trust encumbering the Premises, or in the case of a Letter of Credit, a
substitute Letter of Credit shall be issued to any such entity at the request of
Landlord; provided, however, that Landlord shall pay any expenses incurred by
Tenant on account of any such transfer or issuance.

                9.7 Landlord shall deliver the Cash Deposit or Letter of Credit,
and any proceeds thereof, to any purchaser of Landlord's interest in the
Premises, and thereupon Landlord shall be discharged from any further liability
with respect thereto provided that such purchaser has assumed in writing the
obligations of Landlord hereunder. This provision shall also apply to any
subsequent transfers. Landlord shall return to Tenant, within thirty (30) days
following the termination of this Lease, the Letter of Credit and any portions
of the Security Deposit and proceeds of the Letter of Credit that have not been
properly applied as set forth above.

        10.     USE.

                10.1 Tenant may use the Premises only for research and
development; vivarium use; warehouse use; laboratory use; manufacturing and
related administrative, executive and general office uses as permitted by (i)
the applicable zone, (ii) any other laws, regulations, ordinances, and permits
applicable to the Project, and (iii) all covenants, conditions and


                                       14


restrictions recorded against the property ("CC&Rs"), and shall not use the
Premises, or permit or suffer the Premises to be used for any other purpose
without the prior written consent of Landlord. Landlord warrants that research
and development, vivarium, warehouse, laboratory, manufacturing and related
office use are permitted under applicable zoning, laws, regulations, ordinances,
permits and CC&Rs.

                10.2 Tenant shall conduct its business operations and use the
Premises in compliance with all federal, state, and local laws, regulations,
ordinances, requirements, permits and approvals applicable to the Premises.
Tenant shall not use or occupy the Premises in violation of any law or
regulation or the certificate of occupancy issued for the Building, and shall,
upon five (5) days' written notice from Landlord, discontinue any such use of
the Premises which is declared by any governmental authority having jurisdiction
to be a violation of law or the certificate of occupancy. Tenant shall comply
with any direction of any governmental authority having jurisdiction which
shall, by reason of the particular nature of Tenant's use or occupancy of the
Premises, impose any duty upon Tenant or Landlord with respect to the Premises
or with respect to Tenant's particular use or occupation thereof. Tenant shall
not be deemed to be in default of the foregoing obligation if it has the right
to appeal such directive and Tenant prosecutes such appeal in a timely fashion
and in a manner that does not impose or threaten to impose any lien, charge or
other obligation on Landlord or any portion of the Project.

                10.3 Tenant shall not knowingly do or permit to be done anything
which will invalidate or increase the cost (unless Tenant agrees to pay such
increased cost) of any fire, extended coverage or any other insurance policy
covering the Premises, or which will make such insurance coverage unavailable on
commercially reasonable terms and conditions, and shall comply with all rules,
orders, regulations and requirements of the insurers of the Premises.

                10.4 Subject to the warranty of Landlord in Section 14.3, Tenant
shall comply with the Americans with Disabilities Act of 1990 ("ADA"), and the
regulations promulgated thereunder, as amended from time to time. Except as
otherwise set forth herein, all responsibility for compliance with the ADA
relating to the Premises and the activities conducted by Tenant within the
Premises after the Term Commencement Date shall be exclusively that of Tenant
and not of Landlord, including any duty to make capital improvements,
alterations, repairs and replacements to the Premises; provided, however, (i)
Landlord shall be responsible for compliance with the ADA to the extent of a
violation of Landlord's warranty in Section 14.3; (ii) Landlord shall make all
improvements outside of the Premises required for compliance with the ADA unless
required by Improvements (as defined in Section 17.1) of Tenant or a change in
use by Tenant; (iii) neither Tenant nor Landlord shall be required to make
capital improvements, alterations, repairs or replacements to comply with ADA
unless and until required to do so by order of a government entity or court of
law exercising property jurisdiction with regard thereto, subject to any right
to appeal or otherwise contest any such order or other; and (iv) Tenant shall
not be required to comply with or cause the Premises to comply with ADA
requiring the construction of alterations unless such compliance is necessitated
solely due to Tenant's particular use of the Premises. Any alterations to the
Premises made by Tenant for the purpose of complying with the ADA or which
otherwise require compliance with the ADA shall be done in accordance with
Article 17; provided, that Landlord's consent to such alterations shall not
constitute either Landlord's assumption, in whole or in part, of Tenant's
responsibility for


                                       15


compliance with the ADA, or representation or confirmation by Landlord that such
alterations comply with the provisions of the ADA.

                10.5 Tenant may install signage on and about the Premises,
including the placement of its name and corporate logo prominently on the
Building, Premises, and Building Directory, to the extent permitted by, and in
conformity with, applicable provisions of the sign ordinances of the City of
Bothell, and to the extent approved by Landlord, which approval shall not be
unreasonably withheld or delayed. Tenant acknowledges that it understands that
other tenants will occupy space in the Project, and that the maximum allowable
signage is to be shared among all of the tenants on a fair and reasonable basis.
Tenant further acknowledges it is familiar with the restrictions of the
applicable sign ordinances of the City of Bothell, and is not relying on any
representations or warranty of Landlord regarding the number, size or location
of any signage. Notwithstanding the foregoing, subject to Landlord's reasonable
approval and all applicable laws, Tenant shall be entitled to display at least
one sign identifying Tenant prominently on the exterior of the Building.
Tenant's signage rights shall be transferable to an approved assignee or
sublessee. The expense of design, permits, purchase and installation of any
signs shall be the responsibility of Tenant and the cost thereof shall be borne
by Tenant. At the termination of the Lease, all signs shall be the property of
Tenant and may be removed from the Premises by Tenant, subject to the provisions
of Article 30. Landlord hereby approves of Tenant's installation of signage as
described on Exhibit "E-2".

                10.6 No equipment shall be placed at a location within the
Building other than a location designed to carry the load of the equipment, and
equipment weighing in excess of floor loading capacity shall not be placed in
the Building unless in each case, adequate protective measures reasonably
acceptable to Landlord are performed by Tenant.

                10.7 Tenant shall not use or allow the Premises to be used for
any unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance or
waste in, on, or about the Premises.

        11.     BROKERS. Landlord and Tenant represent and warrant one to the
other that there have been no dealings with any real estate broker or agent in
connection with the negotiation of this Lease other than The Staubach Company,
whose commission shall be paid by Landlord. Each shall indemnify, defend,
protect, and hold harmless the other from any claim of any other broker, agent
or third party in connection with the negotiation of this Lease resulting from
any act or agreement of the indemnitor.

        12.     HOLDING OVER.

                12.1 If, with Landlord's express written consent, Tenant holds
possession of all or any part of the Premises after the expiration or earlier
termination of this Lease, Tenant shall be deemed a tenant from month to month
upon the date of such expiration or earlier termination, and in such case Tenant
shall continue to pay in accordance with Article 5 the Basic Annual Rent as
adjusted in accordance with Article 6, together with Operating Expenses in
accordance with Article 7 and other Additional Rent as may be payable by Tenant,
and such month-to-month tenancy shall be subject to every other term, covenant
and condition contained herein.


                                       16


                12.2 If Tenant remains in possession of all or any portion of
the Premises after the expiration or earlier termination of the term hereof
without the express written consent of Landlord, Tenant shall become a tenant at
sufferance upon the terms of this Lease except that monthly rental shall be
equal to one hundred twenty-five percent (125%) of the Monthly Installment of
Basic Annual Rent in effect during the immediately preceding thirty (30) days.

                12.3 Acceptance by Landlord of Rent after such expiration or
earlier termination shall not result in a renewal or reinstatement of this
Lease.

                12.4 The foregoing provisions of this Article 12 are in addition
to and do not affect Landlord's right to re-entry or any other rights of
Landlord under Article 24 or elsewhere in this Lease or as otherwise provided by
law.

        13.     TAXES ON TENANT'S PROPERTY.

                13.1 Tenant shall pay not less than ten (10) days before
delinquency taxes levied against any personal property or trade fixtures placed
by Tenant in or about the Premises. Tenant shall not be responsible for taxes
levied against any personal property or trade fixtures of other tenants.

                13.2 If any such taxes on Tenant's personal property or trade
fixtures are levied against Landlord or Landlord's property or, if the assessed
valuation of the Project is increased by the inclusion therein of a value
attributable to Tenant's personal property or trade fixtures, and if Landlord
after written notice to Tenant pays the taxes based upon such increase in the
assessed value, then Tenant shall, within thirty (30) days of receipt of
satisfactory evidence of such tax increase, repay to Landlord the taxes so
levied against Landlord.

                13.3 If any improvements in or alterations to the Premises,
whether owned 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 improvements in other
spaces in the Project are assessed, then the real property taxes and assessments
levied against Landlord or the Project by reason of such excess assessed
valuation shall be deemed to be taxes levied against personal property to Tenant
and shall be governed by the provisions of Section 13.2 above. Any such excess
assessed valuation due to improvements in or alterations to space in the Project
leased by other tenants of Landlord shall not be included in the Operating
Expenses defined in Article 7, but shall be treated, as to such other tenants,
as provided in this Section 13.3, and shall be allocated to such other tenants.
If the records of the county assessor are available and sufficiently detailed to
serve as a basis for determining whether said tenant improvements or alterations
are assessed at a higher valuation than improvements in other spaces in the
Project, such records shall be binding on both Landlord and Tenant.

                13.4 To the extent Tenant fails to make any payment required by
this Article 13 and Landlord does so on Tenant's behalf, after reasonable
written notice to Tenant and opportunity for Tenant to make such payment, Tenant
shall reimburse Landlord for the cost thereof pursuant to the provisions of
Sections 7.1 and 24.3.


                                       17


        14.     CONDITION OF PREMISES.

                14.1 Tenant acknowledges that neither Landlord nor any agent of
Landlord has made any representation or warranty, express or implied, with
respect to the condition of the Premises or to the Project, except as set forth
herein, or with respect to their suitability for the conduct of Tenant's
business.

                14.2 Landlord warrants to Tenant that the Tenant Improvements
will be built in a good and workmanlike manner and in conformance with Exhibit
"E", and all applicable building code requirements, laws, rules, orders,
ordinances, directions, regulations, permits, approvals, and requirements of all
governmental agencies, offices, departments, bureaus and boards having
jurisdiction, and with the rules, orders, directions, regulations, and
requirements of any applicable fire rating bureau; that all material and
equipment installed will conform with Exhibit "E" and will be new and otherwise
of good quality; and that the Project and the Tenant Improvements will be free
of patent and latent defects in design, materials and construction. Tenant shall
have the right to submit a written "punch list" to Landlord, setting forth any
defective item of construction, and Landlord shall promptly cause such items to
be corrected. Tenant's acceptance of the Premises or submission of a "punch
list" shall not be deemed a waiver of Tenant's rights to have defects in the
Tenant Improvements or the Premises repaired at no cost to Tenant. Tenant shall
give notice to Landlord whenever any such defect becomes reasonably apparent,
and Landlord shall repair such defect as soon as possible.

                14.3 Landlord warrants to Tenant that the Project and the Tenant
Improvements, at the time of initial completion, will be in compliance with ADA
and the regulations promulgated thereunder; provided, however, nothing in this
Lease shall be construed to require Landlord to make improvements, alterations,
repairs or replacements to comply with ADA unless and until required to do so by
order of any government entity or court of law exercising proper jurisdiction
with regard thereto, subject to any right to appeal or otherwise contest any
such order.

                14.4 Landlord warrants and represents that, as of the applicable
Delivery Date, (i) the Premises, the Building and the Project will comply with
all applicable laws, rules, regulations, codes, ordinances, underwriters'
requirements, covenants, conditions and restrictions ("Laws"), (ii) the Premises
will be in good and clean operating condition and repair, (iii) the electrical,
mechanical, HVAC, plumbing, sewer, elevator and other systems serving the
Premises and the Building will be in good operating condition and repair, and
(iv) the roof of the Building will be in good condition and water tight.
Landlord shall, promptly after receipt of notice from Tenant, remedy any
non-compliance with such warranty at Landlord's sole cost and expense.

        15.     COMMON AREAS AND PARKING FACILITIES.

                15.1 Tenant shall have (i) the nonexclusive right, in common
with others, to use the Common Areas and (ii) the exclusive right to use the
loading dock and receiving area, subject to the rules and regulations adopted by
Landlord and attached hereto as Exhibit "G" together with such other reasonable
and nondiscriminatory rules and regulations as are hereafter


                                       18


promulgated by Landlord (the "Rules and Regulations"); provided, however, that
such rules and regulations do not unreasonably interfere with Tenant's use and
enjoyment of the Premises and Common Areas, do not increase Tenant's obligations
hereunder or decrease Tenant's rights hereunder and apply non-discriminatorily
to all Project occupants.

                15.2 Tenant shall not place any equipment, storage containers or
any other property on the surface parking area or otherwise outside of the
Premises without the express written consent of Landlord. Notwithstanding the
foregoing, Tenant may locate a storage unit in an area designated by Landlord at
or near the loading area of the Building to store Hazardous Materials (as such
term is defined in Article 39), and any other materials necessary to conduct its
business, provided that Tenant complies with requirements contained in Article
39 relating to the storage of Hazardous Materials.

                15.3 As an appurtenance to the Premises, Tenant, and its
employees and invitees, shall be entitled to use without charge sixty eight (68)
parking spaces adjacent to the Premises on a reserved and assigned basis, less
Tenant's Pro Rata Share of required handicap parking spaces serving the Project.
A reasonable number of Tenant's spaces shall be marked as visitor spaces for
Tenant's invitees. The Project shall have at least one hundred (100) parking
spaces (two (2) parking spaces for each 1,000 square feet of Rentable Area of
the entire Project). Landlord shall not grant to any other tenant of the Project
the right to use more than two (2) parking spaces for each 1,000 square feet of
Rentable Area of such tenant's premises. Landlord shall use commercially
reasonable efforts, at its sole cost and expense, to increase the number of
parking spaces at the Project by means of re-striping the existing parking areas
and applying to the City of Bothell for permission to add an additional twenty
two (22) parking spaces to the Project upon completion of the expansion portion
of the Project. To the extent Tenant reasonably requires the use of up to an
additional nineteen (19) parking spaces, Landlord shall use commercially
reasonable efforts to provide such additional parking spaces on the Project. If
Landlord is unable to provide such additional parking spaces on the Project,
then Landlord shall use commercially reasonable efforts to secure the additional
parking spaces at a location reasonably acceptable to Tenant within a radius of
...3 miles paved walking distance from the Premises at Landlord's sole cost, not
to exceed Fifty Dollars ($50) per stall per month. If Landlord fails to provide
such additional offsite parking spaces, Tenant shall have the right to secure
such additional parking spaces at Landlord's cost, not to exceed Fifty Dollars
($50) per stall per month.

        16.     UTILITIES AND SERVICES.

                16.1 Tenant shall pay for all water, gas, electricity,
telephone, cable, and other utilities which may be furnished to the Premises
during the Term, together with any taxes thereon. Landlord shall install, as
part of the Tenant Improvement Budget, separate meters or measuring devices for
the determination of Tenant's actual use of water, gas and electricity.
Utilities and services provided to the Premises shall be paid by Tenant directly
to the supplier of such utility or service, and Tenant shall pay for such
utilities and services prior to delinquency during the Term of this Lease. In
the event one tenant of the Project is using a disproportionate amount of any
utility that is not separately metered, Landlord shall allocate an equitable
portion of such utility and charge such utility cost to such tenant.


                                       19


               16.2   Except as otherwise set forth herein, Landlord shall not
be liable for, nor shall any eviction of Tenant result from, any failure of any
such utility or service, and in the event of such failure Tenant shall not be
relieved from the operation of any covenant or agreement of this Lease. However,
notwithstanding the foregoing, if the Premises should become not reasonably
suitable for Tenant's use as a consequence of cessation of utilities or other
services which cessation persists for seven (7) consecutive days, then Tenant
shall be entitled to an equitable abatement of rent to the extent of the
interference with Tenant's use of the Premises occasioned thereby. If the
interference persists for more than one hundred twenty (120) consecutive days,
Tenant shall have the right to terminate this Lease.

               16.3 Tenant shall provide and pay for janitors, maintenance
personnel, and other persons who perform duties connected with Tenant's
operation and maintenance of the interior of the Premises.

        17.    ALTERATIONS.

               17.1   Except as otherwise set forth herein, Tenant shall make no
alterations, additions or improvements (hereinafter in this article,
"Improvements") in or to the Premises without Landlord's prior written consent,
which shall not be unreasonably withheld or delayed. Tenant shall deliver to
Landlord final plans and specifications and working drawings for the
Improvements to Landlord, and Landlord shall have ten (10) days thereafter to
grant or withhold its consent. If Landlord does not notify Tenant of its
decision within the ten (10) days, Landlord shall be deemed to have given its
approval.

               17.2   If a permit is required to construct the Improvements,
Tenant shall deliver a completed, signed-off inspection card to Landlord within
ten (10) days of completion of the Improvements, and shall promptly thereafter
obtain and record a notice of completion and deliver a copy thereof to Landlord.

               17.3   The Improvements shall be constructed only by licensed
contractors or mechanics. All contractors shall be approved by Landlord, which
approval shall not be unreasonably withheld or delayed. Any such contractor must
have in force a general liability insurance policy of not less than $2,000,000
or such higher limits as Landlord may reasonably require, which policy of
insurance shall name Landlord as an additional insured. Tenant shall provide
Landlord with a copy of the contract with the contractor or mechanic prior to
the commencement of any construction requiring Landlord's consent.

               17.4   Tenant agrees that any work by Tenant shall be
accomplished in such a manner as to permit any fire sprinkler system and fire
water supply lines to remain fully operable at all times except when minimally
necessary for building reconfiguration work.

               17.5   Tenant covenants and agrees that all work done by Tenant
shall be performed in full compliance with all laws, rules, orders, ordinances,
directions, regulations, permits, approvals, and requirements of all
governmental agencies, offices, departments, bureaus and boards having
jurisdiction, and in full compliance with the rules, orders, directions,

                                       20



regulations, and requirements of any applicable fire rating bureau. Tenant shall
provide Landlord with "as-built" plans showing any material change in the
Premises within thirty (30) days after completion.

               17.6   Before commencing any work, Tenant shall give Landlord at
least five (5) days' prior written notice of the proposed commencement of such
work.

               17.7   At the time Landlord consents to the Improvements pursuant
to Section 17.1, Landlord and Tenant shall together identify (i) those
Improvements which Tenant shall be required to remove upon the expiration or
earlier termination of the Lease, and (ii) those Improvements which Tenant may
remove upon the expiration or earlier termination of this Lease. Landlord and
Tenant shall list any such Improvements on Schedule 1 attached hereto,
designating those which Tenant shall be required to remove and those which
Tenant may remove. With respect to those Improvements not so identified,
Landlord and Tenant acknowledge and agree that Landlord's approval of the final
plans and specifications and working drawings for the Improvements pursuant to
Section 17.1 shall be deemed as Landlord's agreement that those Improvements not
so identified shall become the property of Landlord upon the expiration or
earlier termination of this Lease, and shall remain upon and be surrendered with
the Premises as a part thereof. Those Improvements identified as Improvements
which Tenant may remove are included within the term "Tenant's Removable
Property" defined in Section 30.3. Notwithstanding the provisions of Section
30.3, Tenant shall, at Landlord's election, upon the expiration or earlier
termination of this Lease, remove the Improvements which are identified as
Improvements which Tenant shall be required to remove, and restore and return
the Premises to the condition they were in when first occupied by Tenant,
ordinary wear and tear, casualty and condemnation excepted.

               17.8   Notwithstanding anything to the contrary herein, Tenant
may construct non-structural alterations, additions and improvements in the
Premises without Landlord's prior approval, if the cost of any such project does
not exceed Ten Thousand Dollars ($10,000).

        18.    REPAIRS AND MAINTENANCE.

               18.1   Landlord shall perform and construct, and Tenant shall
have no responsibility to perform or construct, any repair, maintenance or
improvements (a) to the structural and exterior portions of the Building and
Project, including foundations, exterior walls, load bearing walls, windows,
plate glass, and roofing, and to the mechanical (HVAC), electrical, water,
sewer, plumbing, fire sprinkler, and elevator systems of the Project, (b)
necessitated by the acts or omissions of Landlord or any other occupant of the
Building, or their respective agents, employees or contractors, (c) for which
Landlord has a right of reimbursement from others, (d) which could be treated as
a "capital expenditure" under generally accepted accounting principles, and (e)
to any portion of the Project outside of the demising walls of the Premises,
subject to reimbursement by Tenant as its Pro Rata Share of Operating Expenses
to the extent provided by Section 7.1. However, subject to Section 21.9, if such
maintenance or repairs are required because of any negligence or willful
misconduct by Tenant, its agents, servants, employees or invitees, Tenant shall
pay to Landlord the portion of such maintenance and repair

                                       21



costs attributable to Tenant's negligence or willful misconduct, unless such
maintenance and repairs are covered by insurance carried by Landlord.

               18.2   Except as otherwise set forth herein, Tenant shall,
throughout the Term of this Lease, at Tenant's sole cost and expense, keep the
Premises and every part thereof in good condition and repair. Tenant shall upon
the expiration or earlier termination of the Term hereof surrender the Premises
to Landlord in the same condition as when received, ordinary wear and tear,
casualty, condemnation, alterations not required to be removed by Tenant and
Hazardous Materials not required to be remediated by Tenant pursuant to Article
39 excepted.

               18.3   There shall be no abatement of Rent and no liability of
Landlord by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements in or to any
portion of the Premises, or in or to improvements, fixtures, equipment and
personal property therein, unless such injury or interference is unreasonable or
is the result of Landlord's negligent or willful act or omission. If repairs or
replacements become necessary which by the terms of this Lease are the
responsibility of Tenant and Tenant fails to make the repairs or replacements,
after reasonable written notice from Landlord and opportunity for Tenant to make
such repairs or replacements, Landlord may do so pursuant to the provisions of
Section 24.3.

               18.5   Notwithstanding any of the foregoing, in the event of a
fire, earthquake, flood, war or other similar cause of damage or destruction,
this Article shall not be applicable and the provisions of Article 22, entitled
"Damage or Destruction," shall apply and control.

        19.    LIENS.

               19.1   Tenant shall keep the Premises, the Building and the
property upon which the Building is situated free from any liens arising out of
work performed, materials furnished or obligations incurred by Tenant. Tenant
further covenants and agrees that any mechanic's lien filed against the Project
or the Premises for work claimed to have been done for, or materials claimed to
have been furnished to, Tenant will be discharged by Tenant, by bond or
otherwise, within thirty (30) days after the filing thereof (or within ten (10)
days after the filing thereof if requested by Landlord as necessary to
facilitate a pending sale or refinancing), at the cost and expense of Tenant.

               19.2   Should Tenant fail to discharge or bond over any lien of
the nature described in Section 19.1, Landlord may at Landlord's election pay
such claim or post a bond or otherwise provide security to eliminate the lien as
a claim against title and the cost thereof shall be immediately due from Tenant
as Additional Rent upon receipt of evidence of the amount of Landlord's payment,
bond or other security.

               19.3   In the event Tenant shall lease or finance the acquisition
of equipment, furnishings, or other personal property utilized by Tenant in the
operation of Tenant's business, Tenant warrants that any Uniform Commercial Code
financing statement executed by Tenant will upon its face or by exhibit thereto
indicate that such financing statement is applicable only to personal property
of Tenant specifically described in the financing statement, which shall not

                                       22



include improvements described in Section 17.7 which shall become the property
of Landlord upon the expiration or earlier termination of this Lease. In no
event shall the address of the Building be furnished on the financing statement
without qualifying language as to applicability of the lien only to removable
property of Tenant described in the financing statement. Should any holder of a
security agreement executed by Tenant record or place of record a financing
statement which appears to constitute a lien against any interest of Landlord,
Tenant shall within ten (10) days after the filing of such financing statement
cause (i) copies of the security agreement or other documents to which the
financing statement pertains to be furnished to Landlord to facilitate
Landlord's being in a position to show such lien is not applicable to any
interest of Landlord, and (ii) the holder of the security interest to amend
documents of record so as to clarify that such lien is not applicable to any
interest of Landlord in the Premises. Landlord shall execute such documents as
are reasonably required by Tenant or Tenant's lenders or equipment lessors
provided the same do not in any way alter the rights of Landlord under this
Lease.

        20.    INDEMNIFICATION AND EXCULPATION.

               20.1   Except to the extent of the responsibility of Landlord
pursuant to Section 20.2 hereof, Tenant agrees to indemnify Landlord and its
members and affiliates, and their respective shareholders, directors, managers,
members, partners, lenders, officers, agents, and employees (collectively,
"Landlord's Agents"), against, and to protect, defend, and save them harmless
from, all demands, claims, causes of action, liabilities, losses and judgments,
and all reasonable expenses incurred in investigating or resisting the same
(including reasonable attorneys' fees), for death of or injury to person or
damage to property arising out of any occurrence in, upon or about the Premises
during the term of this Lease to the extent caused by the negligence or willful
misconduct of Tenant, its shareholders, directors, officers, agents, employees,
servants, contractors, invitees and subtenants, except to the extent caused by
the negligence or willful misconduct of Landlord or Landlord's Agents. Tenant's
obligation under this Section 20.1 shall survive the expiration or earlier
termination of the term of this Lease.

               20.2   Landlord agrees to indemnify Tenant and Tenant's
shareholders, directors, managers, members, partners, lenders, affiliates,
officers, agents, and employees (collectively "Tenant's Agents") against and
save them harmless from all demands, claims, causes of action and judgments, and
all reasonable expenses incurred in investigating or resisting the same
(including reasonable attorneys' fees), for death of, or injury to, any person
or damage to property arising from or out of any occurrence in, upon, or about
the Premises during the term of this Lease to the extent caused by the
negligence or willful misconduct of Landlord or Landlord's Agents, except to the
extent caused by the negligence or willful conduct of Tenant or Tenant's Agents.
Landlord's obligations under this Section 20.2 shall survive the expiration or
earlier termination of the term of this Lease.

               20.3   Notwithstanding any provision of this Article 20 to the
contrary, Landlord shall not be liable to Tenant and Tenant assumes all risk of
damage to and loss of any fixtures, goods, inventory, merchandise, equipment,
records, research, experiments, animals and other living organisms, computer
hardware and software, leasehold improvements, and other personal property of
any nature whatsoever, and Landlord shall not be liable for injury to Tenant's

                                       23



business or any loss of income therefrom relative to such damage. Tenant
acknowledges that it is Tenant's obligation to procure insurance against any
such damages or loss pursuant to Sections 21.1 and 21.5, and that it would be
impractical for Landlord to procure any such insurance in that the nature of
Tenant's business makes the risks uncertain and difficult to underwrite and the
potential risks are greater than Landlord is willing to assume. Therefore,
regardless of the fault of Landlord, Landlord shall not be liable for any such
damage or loss.

               20.4   The indemnity obligations of both Landlord and Tenant
under this Section 20 shall be satisfied to the extent of proceeds of applicable
insurance maintained by the indemnifying party to the extent thereof, and
thereafter to proceeds of any applicable insurance maintained by the other
party; Landlord and Tenant shall be required to satisfy any such obligation only
to the extent it is not satisfied by proceeds of applicable insurance as set
forth above.

               20.4   Security devices and services, if any, while intended to
deter crime may not in given instances prevent theft or other criminal acts of
third parties and it is agreed that Landlord shall not be liable for injuries or
losses caused by criminal acts of third parties and the risk that any security
device or service may malfunction or otherwise be circumvented by a criminal is
assumed by Tenant. Tenant shall at Tenant's cost obtain insurance coverage to
the extent Tenant desires protection against such criminal acts.

               20.5   Neither Landlord nor Tenant shall be liable to the other
for any damages arising from any act or neglect of any other tenant or occupant
of the Building or Project.

        21.    INSURANCE - WAIVER OF SUBROGATION.

               21.1   Commencing prior to Tenant's first entry onto the Premises
for purposes of installing any improvements, fixtures or personal property, but
no later than the Term Commencement Date, and continuing at all times during the
term of this Lease, Tenant shall maintain, at Tenant's expense, commercial
general liability insurance, on an occurrence basis, insuring Tenant and
Tenant's agents, employees and independent contractors against all bodily
injury, property damage, personal injury and other covered loss arising out of
the use, occupancy, improvement and maintenance of the Premises and the business
operated by Tenant, or any other occupant, on the Premises. Such insurance shall
have a minimum combined single limit of liability per occurrence of not less
than $1,000,000.00 and a general aggregate limit of $2,000,000.00. Such
insurance shall: (i) name Landlord, and Landlord's lenders if required by such
lenders, and any management company retained to manage the Project if requested
by Landlord, as additional insureds; (ii) include a broad form contractual
liability endorsement insuring Tenant's indemnity obligations under Section
20.1; and (iii) provide for severability of interests or include a
cross-liability endorsement, such that an act or omission of an insured shall
not reduce or avoid coverage of other insureds.

               21.2   At all times during the term of this Lease, Landlord shall
maintain, subject to reimbursement by Tenant as an Operating Expense under
Section 7.1(b), "all risk" insurance, including, but not limited to, coverage
against loss or damage by fire, vandalism, and malicious mischief covering the
Project (exclusive of excavations, foundations and footings, and including


                                       24



the Tenant Improvements), in an amount equal to one hundred percent (100%) of
the full replacement value thereof. If any boilers or other pressure vessels or
systems are installed on the Premises, Landlord shall maintain, subject to
reimbursement by Tenant as an Operating Expense under Section 7.1(b), boiler and
machinery insurance in an amount equal to one hundred percent (100%) of the full
replacement value thereof. The insurance described in this Section 21.2 shall:
(i) insure Landlord, and Landlord's lenders if required by such lenders, as
their interests may appear; (ii) contain a Lender's Loss Payable Form (Form 438
BFU or equivalent) in favor of Landlord's lenders and name Landlord, or
Landlord's lender if required by such lender, as the loss payee; (iii) provide
for severability of interests or include a cross-liability endorsement, such
that an act or omission of an insured shall not reduce or avoid coverage of
other insureds; and (iv) provide that it is primary coverage and
non-contributing with any insurance maintained by Landlord or Landlord's
lenders, which shall be excess insurance. The full replacement value of the
Project, including the Tenant Improvements and other improvements and fixtures
insured thereunder, shall, for the purpose of establishing insurance limits and
premiums only, be determined by the company issuing the insurance policy and
shall be redetermined by said company within six (6) months after completion of
any material alterations or improvements to the Premises and otherwise at
intervals of not more than three (3) years. Landlord shall promptly increase the
amount of the insurance carried pursuant to this Section 21.2 to the amount so
redetermined. The proceeds of the insurance described in this Section shall be
used for the repair, replacement and restoration of the Project, including the
Tenant Improvements and other improvements and fixtures insured thereunder, as
further provided in Article 22; provided, however, if this Lease is terminated
after damage or destruction, the insurance policy or policies, all rights
thereunder and all insurance proceeds shall be assigned to Landlord.

               21.3   At all times during this Lease, Landlord shall maintain,
pursuant to requirements of its mortgage lender, subject to reimbursement by
Tenant as an Operating Expense under Section 7.1(b), commercial general
liability insurance, including coverage for death, bodily injury and broad form
property damage, with a combined single limit in an amount of not less than
$1,000,000 per occurrence and $2,000,000 in the aggregate; umbrella excess
liability coverage with a limit of not less than $20,000,000 over primary
insurance, which policy shall include coverage for water damage, assumed and
contractual liability coverage, premises medical payment, and automobile
liability; and rental and/or business interruption insurance to cover loss of
income in an amount not less than eighteen (18) months' projected receipts from
the entire Project.

               21.4   At all times during the term of this Lease, Landlord may
maintain, subject to reimbursement by Tenant as an Operating Expense under
Section 7.1(b), such additional or different insurance as may be reasonably
necessary for the Project or required by Landlord's mortgage lender.

               21.5   At all times during the term of this Lease, Tenant shall
maintain, at Tenant's expense, "all risk" insurance against all damage and loss
to Tenant's Removable Property, including but not limited to fixtures, goods,
inventory, merchandise, equipment, records, research, experiments, animals and
other living organisms, computer hardware and software, leasehold improvements,
and other personal property of any nature whatsoever of Tenant or any subtenant
of Tenant that may be occupying the Premises, or any portion thereof,


                                       25



from time to time, in an amount equal to the full replacement value thereof.
Notwithstanding anything to the contrary contained here, Tenant shall be
entitled to all proceeds from the insurance carried pursuant to this Section
21.5.

               21.6   At all times during the term of this Lease, Tenant shall
maintain workers' compensation insurance in accordance with Washington law, and
employers' liability insurance with limits typical for companies similar to
Tenant.

               21.7   All of the policies of insurance referred to in this
Article 21 shall be written by companies authorized to do business in Washington
and rate A+VII or better in Best's Insurance Guide. Each insurer referred to in
this Article 21 shall agree, by endorsement on the applicable policy or by
independent instrument furnished to Landlord, that it will give Landlord, and
Landlord's lenders if required by such lenders, at least ten (10) days' prior
written notice before the applicable policy shall be canceled for non-payment of
premium, and thirty (30) days' prior written notice before the applicable policy
shall be canceled or reduced in coverage, scope, amount or other material term
for any other reason (although any failure of an insurer to give notice as
provided herein shall not be a breach of this Lease by Tenant). No policy shall
provide for a deductible amount in excess of $100,000, unless approved in
advance in writing by Landlord. Tenant shall deliver to Landlord, and to
Landlord's lenders if required by such lenders, copies of the insurance policies
required to be carried by Tenant, certified by the insurer, or certificates
evidencing such insurance policies, issued by the insurer, together with
evidence of payment of the required premiums, prior to the required date for
commencement of such coverage. At least fifteen (15) days prior to expiration of
any such policy, Tenant shall deliver to Landlord, and Landlord's lenders if
required by such lenders, a certificate evidencing renewal, or a certified copy
of a new policy or certificate evidencing the same, together with evidence of
payment of the required premiums. If Tenant fails to provide to Landlord any
such policy or certificate by the required date for commencement of coverage, or
within fifteen (15) days prior to expiration of any policy, or to pay the
premiums therefor when required, Landlord shall have the right, but not the
obligation, to procure said insurance and pay the premiums therefor. Any
premiums so paid by Landlord shall be repaid by Tenant to Landlord with the next
due installment of rent, and failure to repay the same shall have the same
consequences as failure to pay any installment of Rent.

               21.8   Landlord may provide the property insurance required under
this Article 21 pursuant to a so-called blanket policy or policies of property
insurance maintained by Landlord.

               21.9   Notwithstanding anything to the contrary herein, Landlord
and Tenant each hereby waives any and all rights of recovery against the other
or against the officers, directors, members, managers, partners, employees,
subtenants, agents, and representatives of the other, on account of loss or
damage to such waiving party or such waiving party's property or the property of
others under its control, which is actually insured against or which is required
to be insured against under this Lease. All of Landlord's and Tenant's repair
and indemnity obligations under the Lease shall be subject to the waiver
contained in this paragraph. Prior to obtaining policies of insurance required
or permitted under this Lease, Landlord and Tenant shall give notice to the
insurers that the foregoing mutual waiver is contained in this Lease, and each


                                       26



party shall use its best efforts to cause such insurer to approve such waiver in
writing and to cause each insurance policy obtained by it to provide that the
insurer waives all right of recovery by way of subrogation against the other
party. If such written approval of such waiver of subrogation cannot be obtained
from any insurer or is obtainable only upon payment of an additional premium
which the party seeking to obtain the policy reasonably determines to be
commercially unreasonable, the party seeking to obtain such policy shall notify
the other thereof, and the latter shall have twenty (20) days thereafter to
either: (i) identify other insurance companies reasonably satisfactory to the
other party that will provide the written approval and waiver of subrogation; or
(ii) agree to pay such additional premium.

        22.    DAMAGE OR DESTRUCTION.

               22.1   In the event of damage to or destruction of all or any
portion of the Project or the Premises or the improvements and fixtures thereon
(collectively, "improvements") arising from a risk covered by the insurance
described in Section 21.2, Landlord shall within a reasonable time commence and
proceed diligently to repair, reconstruct and restore (collectively, "restore")
the improvements to substantially the same condition as they were in immediately
prior to the casualty. Tenant shall be responsible for its Pro Rata Share of
insurance deductibles and for all costs of restoration in excess of insurance
proceeds as Operating Expenses to the extent provided under the provisions of
Article 7.

               22.2   In the event of any damage to or destruction of all or any
portion of the improvements arising from a risk which is not covered by the
insurance required to be carried by Landlord pursuant to Section 21.2, Landlord
may elect at its cost to restore the improvements, in which event Landlord
shall, within a reasonable time, commence and proceed diligently to restore the
improvements to substantially the same condition as they were in immediately
prior to the casualty. In the event Landlord elects not to restore the
improvements, this Lease shall terminate as of the date of the damage or
destruction unless Tenant elects to pay any uninsured cost of restoration;
provided, however, that Landlord shall not have the right to terminate the Lease
if (i) the damage to the Building is relatively minor (e.g., repair or
restoration would cost less than ten percent (10%) of the replacement cost of
the Building) or (ii) there is no material damage to the Premises.

               22.3   In the event the improvements are restored pursuant to
Section 22.1 or Section 22.2, this Lease shall continue in full force and
effect, notwithstanding such damage or destruction; provided, however, that if
the damage or destruction (i) occurs during the last year of the term and the
expense of restoration exceeds ten percent (10%) of the replacement cost of the
Building, or (ii) occurs at any other time and the expense of restoration (after
application of insurance proceeds) exceeds twenty percent (20%) of the
replacement cost of the Building, and in either case there is material damage to
the Premises, Landlord may at its election terminate the Lease unless Tenant
elects to pay the uninsured cost of restoration.

               22.4   In satisfying its obligations under this Article 22,
Landlord shall be not be required to fulfill its restoration responsibilities
with improvements identical to those which were damaged or destroyed; rather,
with the consent of Tenant, which consent will not be unreasonably withheld or
delayed, Landlord may restore the damage or destruction with

                                       27



improvements reasonably equivalent or of reasonably equivalent value to those
damaged or destroyed.

               22.5   In the event of damage, destruction and/or restoration as
herein provided, Tenant shall not be entitled to any compensation or damages
occasioned by any such damage, destruction or restoration, but Tenant shall be
entitled to an equitable abatement of rent in proportion to the extent the
Premises are not usable by Tenant. Notwithstanding the foregoing, in the event
restoration cannot reasonably be completed within one hundred eighty (180) days
following the damage or destruction as estimated by Landlord's architect, or is
not in fact completed within such one hundred eighty (180) day period (which
period shall not be extended more than thirty (30) days pursuant to Sections
22.6 and 42.10 hereof), Tenant at its election may by written notice to Landlord
given within fifteen (15) days following such period terminate this Lease. In
the event of such termination, Tenant shall have no responsibility for
contributing to the expense of restoration.

               22.6   Notwithstanding anything to the contrary contained in this
Article, should Landlord be delayed or prevented from completing the restoration
of the improvements after the occurrence of such damage or destruction by reason
of acts of God, war, terrorism, government restrictions, inability to procure
the necessary labor or materials, strikes, delay in receipt of insurance
proceeds or other causes beyond the control of Landlord (but excluding economic
conditions or financial inability to perform), the time for Landlord to commence
or complete restoration shall be extended for the time reasonably required as a
result of such event.

               22.7   If an insured casualty occurs, Landlord shall make the
loss adjustment with the insurance company for the insurance carried by
Landlord.

               22.8   Tenant waives the applicable provisions of Washington law
or any similar statute now existing or hereafter adopted governing destruction
of the Premises, so that the parties' rights and obligations in the event of
damage or destruction shall be governed by the provisions of this Lease.

        23.    EMINENT DOMAIN.

               23.1   In the event the whole of the Project shall be taken for
any public or quasi-public purpose by any lawful power or authority by exercise
of the right of appropriation, condemnation or eminent domain, or sold to
prevent such taking, Tenant or Landlord may terminate this Lease effective as of
the date possession is required to be surrendered to said authority. Landlord
may surrender possession of the Project immediately to said authority.

               23.2   In the event of a partial taking of the Project for any
public or quasi-public purpose by any lawful power or authority by exercise of
right of appropriation, condemnation, or eminent domain, or sold to prevent such
taking, then Landlord may elect to terminate this Lease if such taking is of a
material nature such as to make it uneconomical to continue use of the
unappropriated portions for the purposes for which they were intended, and
Tenant may elect to terminate this Lease if such taking is of material detriment
to, and substantially interferes with, Tenant's use and occupancy of the
Premises. In no event shall this Lease be terminated when

                                       28



such a partial taking does not have a material adverse effect upon Landlord or
Tenant or both. Termination by either party pursuant to this section shall be
effective as of the date possession is required to be surrendered to said
authority.

               23.3   If upon any taking of the nature described in this Article
23 this Lease continues in effect, then Landlord shall promptly proceed to
restore the remaining portion of the Project, including all improvements and
fixtures located in the Premises, to substantially their same condition prior to
such partial taking. Basic Annual Rent shall be equitably abated in proportion
to the extent to which Tenant's use of the Premises has been diminished.

               23.4   All compensation and damages awarded or paid for the
condemnation of the Project or any portion of the Project, or for any sale in
lieu of condemnation shall, except as otherwise expressly provided in this
section, belong to and be the sole property of Landlord. Tenant is entitled to
seek to recover from the condemnor, but not from Landlord:

                      (a)    The cost of removing any trade fixtures,
furniture, or equipment from the portion of the Premises taken by condemnation;

                      (b)    The value of any improvements installed by Tenant
on the portion of the Premises taken by condemnation that Tenant has a right to
remove under this Lease but that Tenant elects not to remove;

                      (c)    The then amortized value of all improvements made
by Tenant on the portion of the Premises taken by condemnation that could not be
removed by Tenant on expiration of this Lease either because of provisions of
this Lease or because the improvements would have no economic value on removal
from the Premises;

                      (d)    Diminution in value of the leasehold estate
created by this Lease or the value of the unexpired term of this Lease (but not
any bonus value, based on the difference between the Lease rent and fair market
value rent, which shall belong to Landlord); and

                      (e)    Tenant's moving costs and loss of goodwill.

        24.    DEFAULTS AND REMEDIES.

               24.1   Late payment by Tenant to Landlord of Rent and other sums
due will cause Landlord to incur costs not contemplated by this Lease, the exact
amount of which will be extremely difficult and impracticable 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 any mortgage or
trust deed covering the Premises. Therefore, if any installment of Rent due from
Tenant is not received by Landlord within five (5) days after Landlord gives
Tenant written notice that such installment has not been received, Tenant shall
pay to Landlord an additional sum of five percent (5%) of the overdue rent as a
late charge. The parties agree that this late charge represents a fair and
reasonable estimate of the costs that Landlord will incur by reason of late
payment by Tenant. In addition to the late charge, Rent not paid within thirty
(30)


                                       29



days of the date such payment is due shall bear interest from thirty (30)
days after the date due until paid at the rate of ten percent (10%) per annum.

               24.2   No payment by Tenant or receipt by Landlord of a lesser
amount than the rent payment herein stipulated shall be deemed to be other than
on account of the rent, nor shall any endorsement or statement on any check or
any letter accompanying any check or payment as rent 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 rent or pursue any other remedy
provided. If at any time a dispute shall arise as to any amount or sum of money
to be paid by Tenant to Landlord, Tenant shall have the right to make payment
"under protest" and such payment shall not be regarded as a voluntary payment,
and there shall survive the right on the part of Tenant to institute suit for
recovery of the payment paid under protest.

               24.3   If Tenant fails to pay any sum of money (other than Basic
Annual Rent) required to be paid by it hereunder, or shall fail to perform any
other act on its part to be performed hereunder, Landlord may, without waiving
or releasing Tenant from any obligations of Tenant, but shall not be obligated
to, make such payment or perform such act; provided, that such failure by Tenant
continued for ten (10) days (or if such failure cannot be cured within ten (10)
days, such reasonable period necessary to cure such failure) after written
notice from Landlord demanding performance by Tenant was delivered to Tenant, or
resulted or could have resulted in a violation of law or the cancellation of an
insurance policy maintained by Landlord. All sums so paid or incurred by
Landlord, together with interest thereon, from the date such sums were paid or
incurred, at the annual rate equal to ten percent (10%) per annum shall be
payable to Landlord on demand as Additional Rent.

               24.4   The occurrence of any one or more of the following events
shall constitute an immediate default hereunder by Tenant and Landlord shall be
entitled to exercise appropriate remedies subject to any applicable notice and
cure period:

                      (a)    The failure by Tenant to make any payment of Rent,
as and when due, where such failure continues for a period of five (5) days
after Landlord gives Tenant written notice that Tenant has failed to make such
payment;

                      (b)    The failure by Tenant to observe or perform any
obligation other than described in Section 24.4(a) to be performed by Tenant,
beyond the applicable notice and cure period set forth below;

                      (c)    Tenant makes an assignment for the benefit of
creditors;

                      (d)    A receiver, trustee or custodian is appointed to,
or does, take title, possession or control of all, or substantially all, of
Tenant's assets;

                      (e)    An order for relief is entered against Tenant
pursuant to a voluntary or involuntary proceeding commenced under any chapter of
the Bankruptcy Code;

                                       30



                      (f)    Any involuntary petition is filed against the
Tenant under any chapter of the Bankruptcy Code and is not dismissed within
ninety (90) days; or

                      (g)    Tenant's interest in this Lease is attached,
executed upon, or otherwise judicially seized and such action is not released
within ninety (90) days of the action.

                      Landlord may not exercise its remedies under
Section 24.4(b) until thirty (30) days after written notice of the default from
Landlord to Tenant; provided, however, that if the nature of Tenant's default is
such that more than thirty (30) days are reasonably required to cure the
default, then Landlord may not exercise such remedies if Tenant commences such
cure within said thirty (30) day period and thereafter diligently prosecutes the
same to completion. Such notice shall specify the alleged default and shall
demand that Tenant perform the provisions of this Lease within the applicable
period of time or quit the Premises.

                      No notice of default shall be deemed a forfeiture or a
termination of this Lease unless Landlord elects otherwise in such notice, and
in no event shall a forfeiture or termination occur without such written notice.

               24.5   In the event of a default by Tenant beyond all applicable
notice and cure periods, and at any time thereafter, and without limiting
Landlord in the exercise of any right or remedy which Landlord may have,
Landlord shall be entitled to terminate Tenant's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Premises to Landlord. In
such event, to the extent permitted by applicable law, Landlord shall have the
immediate right to re-enter and remove all persons and property, and such
property may be removed and stored in a public warehouse or elsewhere at the
reasonable cost of, and for the account of Tenant, without being deemed guilty
of trespass, or becoming liable for any loss or damage which may be occasioned
thereby, except to the extent caused by the negligence or willful misconduct of
Landlord or Landlord's Agents. In the event that Landlord shall elect to so
terminate this Lease, then Landlord shall be entitled to recover from Tenant all
damages incurred by Landlord by reason of Tenant's default, including:

                      (a)    The worth at the time of award of any unpaid Rent
which had been earned at the time of such termination; plus

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

                      (c)    The worth at the time of award of the amount by
which the unpaid Rent for the balance of the term after the time of award
exceeds the amount of such rental loss which Tenant proves could have been
reasonably avoided; plus

                      (d)    Any other amount reasonably necessary to
compensate Landlord for all the detriment proximately caused by Tenant's failure
to perform its obligation under this Lease or which in the ordinary course of
things would be likely to result therefrom, including,


                                       31



but not limited to, attorneys' fees and the cost of restoring the Premises to
the condition required under the terms of this Lease; plus

                      (e)    At Landlord's election, such other reasonable
amounts in addition to or in lieu of the foregoing as may be permitted from time
to time by applicable law.

                      As used in Subsections (a), (b) and (c), the "time of
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 determined. As used in Subsections (a) and (b), the "worth
at the time of award" shall be computed by allowing interest at the rate
specified in Section 24.1. As used in Subsection (c) above, the "worth at the
time of award" shall be computed by taking the present value of such amount
using the discount rate of the Federal Reserve Bank of San Francisco at the time
of award plus one percentage point.

               24.6   In the event of a default by Tenant, and if Landlord does
not elect to terminate this Lease as provided in Section 24.5 or otherwise
terminate Tenant's right to possession of the Premises, Landlord may continue
this Lease in effect and may enforce all of its rights and remedies under the
Lease, including the right from time to time to recover Rent as it becomes due
under the Lease. At any time thereafter, Landlord may elect to terminate this
Lease and to recover damages to which Landlord is entitled.

               24.7   Notwithstanding anything herein to the contrary,
Landlord's reentry 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.

               24.8   All rights, options, and remedies of Landlord contained in
this Lease shall be construed and held to be nonexclusive and cumulative.
Landlord shall have the right to pursue any one or all of such remedies or any
other remedy or relief which may be provided by law, whether or not stated in
this Lease. No waiver of any default of Tenant hereunder shall be implied from
any acceptance by Landlord of any rent or other payments due hereunder or by any
omission by Landlord to take any action on account of such default if such
default persists or is repeated, and no express waiver shall affect defaults
other than as specified in said waiver.

               24.9   Landlord shall not be in default unless Landlord fails to
perform obligations required of Landlord within a reasonable time, but in no
event later than thirty (30) days after written notice by Tenant specifying
wherein Landlord has failed to perform such obligation; provided, however, that
if the nature of Landlord's obligation is such that more than thirty (30) days
are required for performance, then Landlord shall not be in default if Landlord
commences performance within such thirty (30) day period and thereafter
diligently prosecutes the same to completion. In the event Landlord fails to
cure such default within such period, then

                                       32



Tenant may, in addition to its other remedies, cure any default of Landlord, and
Landlord shall reimburse all of Tenant's costs of making such cure promptly upon
Tenant's request.

               24.10  In the event of any violation of this Lease on the part
of Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgagee of a mortgage covering the Premises
whose address shall have been furnished to Tenant, and shall offer such
beneficiary and/or mortgagee a reasonable opportunity to cure the default, but
in no event less than thirty (30) days after the notice is given.


        25.    ASSIGNMENT OR SUBLETTING.

               25.1   Except as hereinafter provided, Tenant shall not, either
voluntarily or by operation of law, sell, assign, hypothecate or transfer this
Lease, or sublet the Premises or any part thereof, or permit or suffer the
Premises or any part thereof to be used or occupied as work space, storage
space, concession or otherwise by anyone other than Tenant or Tenant's
employees, without the prior written consent of Landlord in each instance, which
consent shall not be unreasonably withheld or delayed.

               25.2   Tenant may, without Landlord's prior written consent and
without constituting an assignment or sublease hereunder, sublet the Premises or
assign this Lease to (a) an entity controlling, controlled by or under common
control with Tenant, (b) a successor entity related to Tenant by merger,
consolidation, nonbankruptcy reorganization, or government action, or (c) a
purchaser of substantially all of Tenant's assets located in the Premises. A
sale or transfer of Tenant's capital stock shall not be deemed an assignment,
subletting or any other transfer of the Lease or the Premises. Notwithstanding
the foregoing, any subletting or assignment pursuant to this Section 25.2 must
be part of a legitimate business transaction and not designed to avoid the
requirement of obtaining Landlord's consent to a subletting or assignment
pursuant to other provisions of this Article 25.

               25.3   If Tenant desires to assign this Lease or sublease all or
any portion of the Premises to an entity whose net worth and liquid assets are
equal or greater than Tenant's immediately prior to the assignment, and further
provided that the assignee first executes, acknowledges and delivers to Landlord
an agreement whereby the assignee agrees to be bound by all of the covenants and
agreements in this Lease arising after the effective date of the transfer, then
Landlord upon receipt of proof of the foregoing, will consent to the sublease or
assignment.

               25.4   In the event Tenant desires to assign, hypothecate or
otherwise transfer this Lease or sublet the Premises or any part thereof to a
transferee other than one set forth in Section 25.2 or 25.3, then at least
fifteen (15) days prior to the date when Tenant desires the assignment or
sublease to be effective (the "Assignment Date"), Tenant shall give Landlord a
notice (the "Assignment Notice") which shall set forth the name, address and
business of the proposed assignee or sublessee, information (including
references and financial statements) concerning the reputation and financial
ability of the proposed assignee or sublessee, the Assignment Date, any
ownership or commercial relationship between Tenant and the proposed


                                       33



assignee or sublessee, and the consideration and all other material terms and
conditions of the proposed assignment or sublease, all in such detail as
Landlord shall reasonably require.

               25.5   Landlord in making its reasonable determination as to
whether consent should be given to a proposed assignment or sublease, may give
consideration to (i) the financial strength of such successor (but may not
withhold consent on this ground if the successor's net worth and liquid assets
are equal to or greater than Tenant's immediately prior to the assignment),
notwithstanding the assignor remaining liable for Tenant's performance, and (ii)
any use which such successor proposes to make of the Premises. If Landlord fails
to deliver written notice of its determination to Tenant within fifteen (15)
days following receipt of the Assignment Notice and the information required
under this Section 25.5, Landlord shall be deemed to have approved the request.
As a condition to any assignment or sublease to which Landlord has given
consent, any such assignee or sublessee must execute, acknowledge and deliver to
Landlord an agreement whereby the assignee or sublessee agrees to be bound by
(as to an assignment) or be subject to (as to a sublease) all of the covenants
and agreements in this Lease.

               25.6   Any sale, assignment, hypothecation or transfer of this
Lease or subletting of Premises that is not in compliance with the provisions of
this Article 25 shall be void.

               25.7   The consent by Landlord to an assignment or subletting
shall not relieve Tenant or any assignee of this Lease or sublessee of the
Premises from obtaining the consent of Landlord to any further assignment or
subletting or as releasing Tenant or any assignee or sublessee of Tenant from
full and primary liability.

               25.8   If Tenant shall sublet the Premises or any part thereof,
Tenant hereby immediately and irrevocably assigns to Landlord, as security for
Tenant's obligations under this Lease, all rent from any subletting of all or a
part of the Premises, and Landlord as assignee of Tenant, or a receiver for
Tenant appointed on Landlord's application, may collect such rent and apply it
toward Tenant's obligations under this Lease; except that, except during the
existence of an act of default by Tenant beyond all applicable notice and cure
periods, Tenant shall have the right to collect such rent.

               25.9   Notwithstanding any subletting or assignment, Tenant shall
remain fully and primarily liable for the payment of all Rent and other sums
due, or to become due hereunder, and for the full performance of all other
terms, conditions, and covenants to be kept and performed by Tenant. The
acceptance of rent or any other sum due hereunder, or the acceptance of
performance of any other term, covenant, or condition hereof, from any other
person or entity shall not be deemed to be a waiver of any of the provisions of
this Lease or a consent to any subletting or assignment of the Premises.

               25.10  Any sublease of the Premises shall be subject and
subordinate to the provisions of this Lease, shall not extend beyond the term of
this Lease, and shall provide that the sublessee shall attorn to Landlord, at
Landlord's sole option, in the event of the termination of this Lease. Landlord
and any lender shall upon Tenant's request provide any subtenant of the entirety
of the Premises with a recognition and nondisturbance agreement in the form set
forth in


                                       34



Article 35 hereof on the condition that the sublessee agrees to attorn to
Landlord on exactly the same terms and conditions as this Lease (unless such
condition is waived by Landlord).

               25.11  Except for transactions as described in Section 25.2,
notwithstanding the terms of Section 25.8 hereof, in the event Tenant assigns,
hypothecates or otherwise transfers this Lease or sublets the Premises, Tenant
shall pay to Landlord, as Additional Rent, fifty percent (50%) of the rent and
other consideration received from the transferee during the term of this Lease
in excess of Rent payable to Landlord under this Lease, after Tenant has
recouped any reasonable commissions and legal expenses and tenant improvement
costs occasioned by such transfer and payable to third parties.

               25.12  In the event Tenant requests the consent of Landlord to
assign, hypothecate or otherwise transfer this Lease or sublet the Premises or
any part thereof, then Tenant shall pay Landlord's reasonable costs and expenses
incurred in connection therewith, including but not limited to attorneys' fees,
which costs and expenses shall not exceed Five Hundred Dollars ($500).

        26.    ATTORNEYS' FEES.

               26.1   If either party commences an action or proceeding against
the other party arising out of or in connection with this Lease, including any
arbitration proceeding, the prevailing party shall be entitled to have and
recover from the other party reasonable attorneys' fees, expert witness fees and
costs of suit.

        27.    BANKRUPTCY.

               27.1   In the event a debtor, trustee, or debtor-in-possession
under the Bankruptcy Code, or other person with similar rights, duties and
powers under any other law, proposes to cure any default under this Lease or to
assume or assign this Lease, and is obliged to provide adequate assurance to
Landlord that (i) a default will be cured, (ii) Landlord will be compensated for
its damages arising from any breach of this Lease, or (iii) future performance
under this Lease will occur, then adequate assurance shall include any or all of
the following, as determined by the Bankruptcy Court: (a) the immediate
performance of those acts specified in the Bankruptcy Code or other law as
included within the meaning of adequate assurance; (b) an immediate cash payment
to compensate Landlord for any monetary defaults or damages arising from a
breach of this Lease; (c) the credit worthiness and desirability, as a tenant,
of the person assuming this Lease or receiving an assignment of this Lease, at
least equal to Landlord's customary and usual credit worthiness requirements and
desirability standards in effect at the time of the assumption or assignment, as
determined by the Bankruptcy Court; and (d) the assumption or assignment of all
of Tenant's interest and obligations under this Lease.

        28.    DEFINITION OF LANDLORD.

               28.1   The term "Landlord" as used in this Lease, so far as
covenants or obligations on the part of Landlord are concerned, shall be limited
to mean and include only Landlord or the successor-in-interest of Landlord under
this Lease at the time in question. In the

                                       35



event of any transfer, assignment or conveyance of Landlord's title or
leasehold, the Landlord herein named (and in case of any subsequent transfers or
conveyances, the then grantor and any prior grantors) shall be automatically
freed and relieved from and after the date of such transfer, assignment or
conveyance of all liability for the performance of any covenants or obligations
contained in this Lease thereafter to be performed by Landlord, provided that
the transferee of such title or leasehold assumes and agrees in writing to
observe and perform any and all obligations of Landlord hereunder, during its
ownership of the Premises. Landlord may transfer its interest in the Premises or
this Lease without the consent of Tenant and such transfer or subsequent
transfer shall not be deemed a violation on the part of Landlord or the then
grantor of any of the terms or conditions of this Lease; provided, however, that
Landlord shall provide Tenant with reasonable written notice of such transfer.

        29.    ESTOPPEL CERTIFICATE.

               29.1   Each party shall, within ten (10) business days of written
notice from the other party, execute, acknowledge and deliver to the other party
a statement in writing on a form reasonably requested by a proposed lender,
purchaser, assignee or subtenant (i) certifying that this 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 the dates to which the rental and other charges are paid in advance,
if any, (ii) acknowledging that there are not, to each party's knowledge, any
uncured defaults on the part of Landlord or Tenant hereunder (or specifying such
defaults if any are claimed) and (iii) setting forth such further information
with respect to this Lease or the Premises as may be reasonably requested
thereon. Any such statement may be relied upon by any prospective lender,
purchaser, assignee or subtenant of all or any portion of the Premises.

        30.    REMOVAL OF PROPERTY.

               30.1   Except as provided in this Article 30, all fixtures and
personal property owned by Tenant ("Tenant's Removable Property") shall be and
remain the property of Tenant, and may be removed by Tenant at any time.
Landlord waives any and all rights, title and interest Landlord now has, or
hereafter may have, whether statutory or otherwise, in Tenant's Removable
Property. At the expiration or earlier termination of this Lease, Tenant shall
remove all Tenant's Removable Property in accordance with this Lease, unless
Landlord shall have otherwise agreed in writing. As used in the Lease, "Tenant's
Removable Property" includes all of Tenant's inventory, equipment, trade
fixtures, furniture, furnishings, books and records and other personal property,
including without limitation any and all vacuum pumps, uninterruptible power
systems, warehouse racks, parts racks, scientific research equipment, portable
cold rooms, movable unattached lunch room and office furnishings and equipment,
telecommunications and data equipment (other than cabling), machine shop tools
and portable equipment, portable glass wash equipment, equipment monitoring
systems, air compressors, emergency generators, fume hoods, and machines and
equipment used to produce Tenant's products, unless any such items were
installed by Landlord at Landlord's cost as part of the Tenant Improvements
described on Exhibit "E".


                                       36



               30.2   The Project, Building and Tenant Improvements (except as
set forth in Section 30.3 below), and all fixtures and personal property owned
by Landlord, shall be and remain the property of Landlord, and shall, upon the
expiration or earlier termination of this Lease, remain upon and be surrendered
with the Premises as a part thereof.

               30.3   That portion of the Tenant Improvements paid for by Tenant
shall be and remain the property of Tenant; provided, however, all such Tenant
Improvements (other that fixtures and personal property described in Section
30.1) shall, upon the expiration or earlier termination of this Lease, become
the property of Landlord and remain upon and be surrendered with the Premises as
a part thereof. Prior to the Term Commencement Date, Landlord and Tenant shall
identify in writing portions of the Tenant Improvements equal in value to the
portion of the Tenant Improvements paid for by Tenant, and those portion paid
for by Landlord from the Tenant Improvement Allowance or otherwise.

               30.4   Notwithstanding Section 30.1 and 30.3, Tenant may not
remove any property if such removal would cause material damage to the Premises,
unless such damage can be and is repaired by Tenant. Furthermore, Tenant shall
repair any damage to the Premises caused by Tenant's removal of any such
property, and shall, prior to the expiration or earlier termination of this
Lease, restore and return the Premises to the condition they were in when first
occupied by Tenant, reasonable wear and tear, casualty, condemnation, and
alterations not required to be removed by Tenant. At a minimum, even if they are
determined to be fixtures or personal property owned by Tenant, Tenant shall
leave in place and repair any damage to the interior floors, walls, doors and
ceilings of the Premises, all case work installed as part of the Tenant
Improvements, all cabling and wiring in the Premises, and the heating,
ventilation, air conditioning, plumbing, and electrical systems in the Premises;
all such property shall become the property of Landlord upon the expiration or
earlier termination of this Lease, and shall remain upon and be surrendered with
the Premises as a part thereof. The provisions of Article 17 shall apply to any
restoration work under this Article as if the restoration was an alteration,
addition or improvement thereunder. Should Tenant require any period beyond the
expiration or earlier termination of the Lease to complete such restoration,
Tenant shall be a tenant at sufferance subject to the provisions of Section 12.2
hereof, unless Tenant obtains Landlord's consent pursuant to Section 12.1 prior
to the termination or earlier termination of the Lease, which consent shall not
be unreasonably withheld or delayed.

               30.5   If Tenant shall fail to remove any fixtures or personal
property which it is entitled to remove under this Article 30 from the Premises
prior to termination of this Lease, then Landlord may store such property at
Tenant's expense and dispose of the property under the applicable provisions of
Washington law, as such provisions may be modified from time to time.

        31.    LIMITATION OF LANDLORD'S LIABILITY.

               31.1   If Landlord is in default of this Lease, and as a
consequence, Tenant recovers a money judgment against Landlord, the judgment
shall be satisfied only out of Landlord's interest in the Project, including the
proceeds of sale received on execution of the judgment and levy against the
right, title, and interest of Landlord in the Project of which the Premises are
a part, and out of rent or other income from the Project receivable by Landlord
or

                                       37



out of the consideration received by Landlord from the sale or other
disposition of all or any part of Landlord's right, title, and interest in the
Building and Project of which the Premises are a part, and insurance and
condemnation proceeds related to the Project.

               31.2   Neither Landlord nor Landlord's Agents shall be personally
liable for any deficiency except to the extent liability is based upon willful
and intentional misconduct. If Landlord is a partnership or joint venture, the
partners of such partnership shall not be personally liable and no partner of
Landlord shall be sued or named as a party in any suit or action, or service of
process be made against any partner of Landlord, except as may be necessary to
secure jurisdiction of the partnership or joint venture or to the extent
liability is caused by willful and intentional misconduct. If Landlord is a
corporation, the shareholders, directors, officers, employees, and/or agents of
such corporation shall not be personally liable and no shareholder, director,
officer, employee, or agent of Landlord shall be sued or named as a party in any
suit or action, or service of process be made against any shareholder, director,
officer, employee, or agent of Landlord, except as may be necessary to secure
jurisdiction of the corporation. If Landlord is a limited liability company, the
members, managers, officers, employees, and/or agents of such limited liability
company shall not be personally liable and no member, manager, officer,
employee, or agent of Landlord shall be sued or named as a party in any suit or
action, or service of process be made against any member, manager, officer,
employee, or agent of Landlord, except as may be necessary to secure
jurisdiction of the corporation. No partner, shareholder, director, member,
manager, employee, or agent of Landlord shall be required to answer or otherwise
plead to any service of process and no judgment will be taken or writ of
execution levied against any partner, shareholder, director, member, manager,
employee, or agent of Landlord.

               31.3   Each of the covenants and agreements of this Article 31
shall be applicable to any covenant or agreement either expressly contained in
this Lease or imposed by statute or by common law.

        32.    CONTROL BY LANDLORD.

               32.1   Landlord reserves full control over the Project to the
extent not inconsistent with Tenant's quiet enjoyment and use of Premises or the
terms of this Lease. This reservation includes the right to establish ownership
of the Building separate from fee title to the real property underlying the
Building, to divide the Project into more than one lot, and to construct other
buildings or improvements on the real property, provided Tenant's quiet
enjoyment of the Premises is not affected. Tenant shall, should Landlord so
request, promptly join with Landlord in execution of such reasonable documents
as may be appropriate to assist Landlord to implement any such action provided
Tenant need not execute any document which is of a nature wherein liability is
created in Tenant or if by reason of the terms of such document Tenant will be
deprived of the quiet enjoyment and use of the Premises as granted by this
Lease.

               32.2   Landlord reserves the right to enter the Premises, and to
cause its contractors to enter the Premises, upon reasonable prior notice to
Tenant, to maintain, repair or replace mechanical (HVAC), electrical, plumbing,
sprinkler and other systems and equipment within the Premises or within
adjoining premises (including access through the Premises to areas


                                       38



of the Building above and below the Premises). Tenant acknowledges that because
of the design and configuration of the Building, and the nature of the Building
as a multi-tenant biotech facility, that temporary access through the Premises
to other areas of the Building will be reasonably necessary from time to time;
provided, however, that such access shall not materially interfere with Tenant's
use and occupancy of the Premises, and shall comply with Tenant's reasonable
security measures. There shall be no abatement of Rent and no liability of
Landlord by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements to adjoining
premises unless such injury or interference is unreasonable or is the result of
Landlord's negligent or willful act or omission.

        33.    QUIET ENJOYMENT.

               33.1   So long as Tenant is not in default beyond all applicable
notice and cure periods, Landlord covenants that Landlord or anyone acting
through or under Landlord will not disturb Tenant's occupancy of the Premises
except as permitted by the provisions of this Lease and that Landlord shall use
reasonable efforts to enforce the lease obligations of tenants of the balance of
the Building and Project to the extent they might otherwise disturb Tenant's
occupancy.

        34.    QUITCLAIM DEED.

               34.1   Tenant shall execute and deliver to Landlord on the
expiration or termination of this Lease, immediately on Landlord's request, a
quitclaim deed to the Premises and Project or other document in recordable form
suitable to evidence of record termination of this Lease.

        35.    SUBORDINATION AND ATTORNMENT.

               35.1   Subject to Section 35.2 below, this Lease is subject to
and subordinate to the lien of any mortgage or deed of trust now or hereafter in
force against the Project and Building of which the Premises are a part, and to
all advances made or hereafter to be made upon the security thereof.

               35.2   Tenant shall execute and deliver upon demand such
instrument or instruments evidencing such subordination of this Lease to the
lien of any such mortgage or deed of trust as may be required by Landlord and in
a form reasonably satisfactory to Tenant, provided that the lienholder,
beneficiary, or mortgagee concurrently executes and delivers to Tenant a
non-disturbance agreement in recordable form reasonably satisfactory to Tenant.
However, if any such mortgagee or beneficiary so elects at any time prior to or
following a default by Tenant beyond all applicable notice and cure periods,
this Lease shall be deemed prior in lien to any such mortgage or deed of trust
regardless of date and Tenant will execute a statement in writing to such effect
at Landlord's request in a form reasonably satisfactory to Tenant.

               35.3   In the event any proceedings are brought for foreclosure,
or in the event of the exercise of the power of sale under any mortgage or deed
of trust made by the Landlord

                                       39



covering the Premises, the Tenant shall at the election of the purchaser at such
foreclosure or sale attorn to the purchaser upon any such foreclosure or sale
and recognize such purchaser as the Landlord under this Lease in accordance with
the terms of the non-disturbance Agreement upon such purchaser's written
assumption of Landlord's obligations under the Lease. Prior to the first
Delivery Date, Landlord shall obtain from any lenders or ground lessors of the
Project a written agreement in form reasonably satisfactory to Tenant providing
for recognition of Tenant's interests under this Lease in the event of a
foreclosure of the lender's security interest or termination of the ground
lease.

        36.    SURRENDER.

               36.1   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.

               36.2   The voluntary or other surrender of this Lease by Tenant
shall not work a merger, unless Landlord consents, and shall, at the option of
Landlord, operate as an assignment to it of any or all subleases or
subtenancies.

        37.    WAIVER AND MODIFICATION. No provision of this Lease may be
modified, amended or added to except by an agreement in writing executed by
Landlord and Tenant. The waiver by Landlord or Tenant of any breach of any term,
covenant or condition herein contained shall not be deemed to be a waiver of any
subsequent breach of the same or any other term, covenant or condition herein
contained.

        38.    WAIVER OF JURY TRIAL. The parties hereto shall and they hereby do
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties hereto against the other on any matters 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, and/or any claim of injury or
damage.

        39.    HAZARDOUS MATERIAL.

               39.1   During the Term, Tenant, at its sole cost, shall comply
with all federal, state and local laws, statutes, ordinances, codes, regulations
and orders relating to the receiving, handling, use, storage, accumulation,
transportation, generation, spillage, migration, discharge, release and disposal
of Hazardous Material (as defined below) in or about the Project by Tenant.
Tenant shall not cause or permit any Hazardous Material to be brought upon, kept
or used in or about the Project by Tenant, its agents, employees, contractors,
invitees or subtenants, in a manner or for a purpose prohibited by any federal,
state or local agency or authority. The accumulation of Hazardous Material shall
be in approved containers and removed from the Project by duly licensed
carriers. Tenant may manifest and store Hazardous Materials waste in a
designated storage room within the Premises. Tenant's radioactive materials and
radioactive waste, if any, must be managed and stored in Tenant's laboratory
floor area.

               39.2   Tenant shall immediately provide Landlord with telephonic
notice, which shall promptly be confirmed by written notice, of any and all
spillage, discharge, release and


                                       40



disposal of Hazardous Material onto or within the Project by Tenant, including
the soils and subsurface waters thereof, which by law must be reported to any
federal, state or local agency, and any injuries or damages resulting directly
or indirectly therefrom. Further, Tenant shall deliver to Landlord each and
every notice or order, when said order or notice identifies a violation which
may have the potential to adversely impact the Project, received from any
federal, state or local agency concerning Hazardous Material and the possession,
use and/or accumulation thereof promptly upon receipt of each such notice or
order by Tenant. Landlord shall have the right, upon reasonable notice, to
inspect and copy each and every notice or order received from any federal, state
or local agency concerning Hazardous Material and the possession, use and/or
accumulation thereof.

               39.3   Tenant shall be responsible for and shall indemnify,
protect, defend and hold harmless Landlord and Landlord's Agents from any and
all liability, damages, injuries, causes of action, claims, judgments, costs,
penalties, fines, losses, and expenses which arise during or after the term of
this Lease and which result from Tenant's (or from Tenant's Agents, assignees,
subtenants, employees, agents, contractors, licensees, or invitees) receiving,
handling, use, storage, accumulation, transportation, generation, spillage,
migration, discharge, release or disposal of Hazardous Material in, upon or
about the Project in violation of applicable laws, including without limitation
(i) diminution in value of the Project or any portion of the Project, (ii)
damages for the loss or restriction on use of any portion or amenity of the
Premises or Project, (iii) damages arising from any adverse impact on marketing
of space in the Premises or the Project, (iv) damages and the costs of remedial
work to other property in the vicinity of the Project incurred by Landlord or an
affiliate of Landlord, and (v) reasonable consultant fees, expert fees, and
attorneys' fees. Landlord shall be responsible for and shall indemnify, protect,
defend and hold harmless Tenant and Tenant's Agents on the same basis as above
for any claims which result from Landlord's or from Landlord's Agents receiving,
handling, use, storage, accumulation, transportation, generation, spillage,
migration, discharge, release or disposal of Hazardous Material in, upon or
about the Project. Under no circumstance shall Tenant be liable for, and
Landlord shall indemnify, defend, protect and hold harmless Tenant, its agents,
contractors, stockholders, directors, successors, representatives, and assigns
from and against, all losses, costs, claims, liabilities and damages (including
attorneys' and consultants' fees) of every type and nature, directly or
indirectly arising out of or in connection with any Hazardous Material present
at any time in the soil or groundwater of the Project, except to the extent that
such actually results from the release or emission of Hazardous Material by
Tenant or its agents or employees in violation of applicable environmental laws.

               39.4   The indemnification pursuant to the preceding Section 39.3
includes, without limiting the generality of Section 39.3, reasonable costs
incurred in connection with any investigation of site conditions or 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, subsoil, ground water, or elsewhere on, under or about the
Project, or on, under or about any other property in the vicinity of the
Project, to the extent caused by Tenant. Without limiting the foregoing, if the
presence of any Hazardous Material on the Project caused by Tenant or Tenant's
Agents in violation of laws results in any contamination of the Project, or
underlying soil or groundwater, Tenant shall promptly take all actions at its
sole expense as are reasonably necessary to return the Project to that condition
required by applicable


                                       41



law, provided that Landlord's approval of such action shall first be obtained,
which approval shall not be unreasonably withheld, except that Tenant shall not
be required to obtain Landlord's prior approval of any action of an emergency
nature reasonably required or any action mandated by a governmental authority,
but Tenant shall give Landlord prompt notice thereof.

               39.5   Landlord acknowledges that it is not the intent of this
Article 39 to prohibit Tenant from operating its business as described in
Article 10 or to interfere with the operation of Tenant's business. Tenant may
operate its business according to the custom of the industry so long as the use
or presence of Hazardous Material is strictly and properly monitored according
to all applicable governmental requirements. As a material inducement to
Landlord to allow Tenant to use Hazardous Material in connection with its
business, Tenant agrees to make available to Landlord upon reasonable request a
list identifying each type of Hazardous Material to be present in or upon the
Project and setting forth all governmental approvals or permits required in
connection with the presence of Hazardous Material ("Hazardous Materials
Summary"). At Landlord's request, and at reasonable times, Tenant shall make
available to Landlord the latest available Hazardous Materials Summary and true
and correct copies of the following documents (hereinafter referred to as the
"Hazardous Material Documents") relating to the handling, storage, disposal and
emission of Hazardous Material: permits; approvals; reports and correspondence;
storage and management plans; notice of violations of any laws; plans relating
to the installation of any storage tanks to be installed in or under the Project
(provided said installation of tanks shall be permitted only after Landlord has
given Tenant its written consent to do so, which consent may not be unreasonably
withheld); and all closure plans or any other documents required by any and all
federal, state and local governmental agencies and authorities for any storage
tanks installed in, on or about the Project for the closure of any such tanks.
Tenant shall not be required, however, to provide Landlord with that portion of
any document which contains information of a proprietary nature and which, in
and of itself, does not contain a reference to any Hazardous Material which are
not otherwise identified to Landlord in such documentation, unless any such
Hazardous Material Document names Landlord as an "owner" or "operator" of the
facility in which Tenant is conducting its business. It is not the intent of
this subsection to provide Landlord with information which could be detrimental
to Tenant's business should such information become possessed by Tenant's
competitors. Landlord shall treat all information furnished by Tenant to
Landlord pursuant to this Section 39.5 as confidential and shall not disclose
such information to any person or entity without Tenant's prior written consent,
which consent shall not be unreasonably withheld or delayed, except as required
by law.

               39.6   Notwithstanding other provisions of this Article 39, it
shall be a default under this Lease, and Landlord shall have the right to
terminate the Lease and/or pursue its other remedies under Article 24, in the
event that (i) Tenant's use of the Premises for the generation, storage, use,
treatment or disposal of Hazardous Material is in a manner or for a purpose
prohibited by applicable law unless Tenant is diligently pursuing compliance
with such law, (ii) Tenant has been required by any governmental authority to
take remedial action in connection with Hazardous Material contaminating the
Project if the contamination resulted from Tenant's action or use of the
Premises, unless Tenant is diligently pursuing compliance with such requirement
or is protesting or appealing such requirements in good faith, or (iii) Tenant
is subject to an enforcement order issued by any governmental authority in
connection with


                                       42



Tenant's use, disposal or storage of a Hazardous Material on the Project, unless
Tenant is diligently seeking compliance with such enforcement order or is
protesting or appealing such order in good faith.

               39.7   Notwithstanding the provisions of Article 25, if (i) any
anticipated use of the Premises by a proposed assignee or subtenant involves the
generation or storage, use, treatment or disposal of Hazardous Material in any
manner or for a purpose prohibited by an applicable law, or (ii) the proposed
assignee or sublessee is subject to a final, unappealable enforcement order
issued by any governmental authority in connection with such party's use,
disposal or storage of Hazardous Material of a type such proposed assignee or
sublessee intends to use in the Premises and shall have failed to materially
comply with such order to date, it shall not be unreasonable for Landlord to
withhold its consent to an assignment or subletting to such proposed assignee or
sublessee.

               39.8   Landlord represents that, to its actual knowledge and
relying on available environmental site assessments, as of the date of this
Lease there is no Hazardous Material on the Project, no underground storage
tanks are present on the Project, and no action, proceeding or claim is pending
or threatened regarding the Project concerning any Hazardous Material or
pursuant to any environmental law. Landlord shall provide Tenant with a current
Phase I Environmental Site Assessment, and any current Phase II Environmental
Site Assessment recommended therein. Should the environmental site assessment(s)
disclose the presence of Hazardous Material beyond legally permissible levels,
prior to the first Delivery Date, Landlord shall correct the deficiencies to
Tenant's reasonable satisfaction and shall cause updates to the environmental
site assessment(s) to be issued reflecting the remedy. The environmental site
assessment(s) and all updates thereto are hereinafter referred to as the "Base
Line Report", and shall be deemed conclusive as to the condition of the Project,
unless, within ninety (90) days after Tenant's receipt of the Base Line Report,
Tenant causes an inspection of its own to be conducted, which inspection
discloses the presence of Hazardous Material materially different from that
disclosed in the Base Line Report.

               39.9   Subject to Section 32.2, at any time prior to the
expiration or earlier termination of the Term, Landlord shall, upon reasonable
prior notice to Tenant, have the right to enter upon the Premises at all
reasonable times and at reasonable intervals in order to conduct appropriate
tests regarding the presence, use and storage of Hazardous Material, and to
inspect Tenant's records with regard thereto. Tenant will pay the reasonable
costs of any such test which demonstrates that contamination in excess of
permissible levels has occurred and such contamination was caused by Tenant's
use of the Project during the Term. Tenant shall correct any deficiencies
identified in any such tests to the extent required by law in accordance with
its obligations under this Article 39 to the extent the deficiencies are the
result of Tenant's use of the Project during the term of this Lease.

               39.10  Tenant shall at its own expense cause an environmental
site assessment of the Premises to be conducted and a report thereof delivered
to Landlord upon the expiration or earlier termination of the Lease, such report
to be as complete and broad in scope as is necessary to identify any impact on
the Project Tenant's operations might have had (hereinafter referred to as the
"Exit Report"). Tenant shall correct any deficiencies identified in the Exit
Report in


                                       43



accordance with its obligations under this Article 39 prior to the expiration or
earlier termination of this Lease. This Article 39 is the exclusive provision in
this Lease regarding clean-up, repairs or maintenance arising from receiving,
handling, use, storage, accumulation, transportation, generation, spillage,
migration, discharge, release or disposal of Hazardous Material in, upon or
about the Project, and the provisions of Articles 7, 10, 18, and 20 shall not
apply thereto.

               39.11  The obligations and indemnities under this Article 39
shall survive the termination of the Lease.

               39.12  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 Washington or the United States
Government. The term "Hazardous Material" includes, without limitation, any
material or substance which is (i) petroleum, (ii) asbestos, (iii) designated as
a "hazardous substance" pursuant to Section 311 of the Federal Water Pollution
Control Act (33 U.S.C. Section 1317), (iv) 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), or (v) defined as a
"hazardous substance" pursuant to Section 101 of the Comprehensive Environmental
Response Compensation and Liability Act, 42 U.S.C. Section 9601 et. seq. (42
U.S.C. Section 9601).

        40.    OPTION TO EXTEND TERM.

               40.1   Landlord grants to Tenant the right to extend the term of
this Lease for one (1) five (5) year period under the same terms and conditions
existing in the original Lease except as set forth in this Article 40. Tenant
shall exercise such right to extend the term of this Lease by written notice to
Landlord given no later than nine (9) months prior to the end of the original
term.

               40.2   Basic Annual Rent shall be adjusted on the first day of
the extension term to ninety five percent (95%) of the fair market rental value
of the Premises as of the commencement of the extension term, but in no event
shall the adjusted Basic Annual Rent be less than the Basic Annual Rent for the
final year of the original term.

               40.3   Within thirty (30) days after Tenant's exercise of the
option, Landlord shall obtain at its expense and deliver to Tenant an
independent appraisal of the fair market rental value of the Premises as of the
commencement of the extension term. Following its receipt of Landlord's
appraisal, Tenant may elect to obtain at its expense and deliver to Landlord a
second independent appraisal of the fair market rental value of the Premises as
of the commencement of the extension term. If Tenant elects not to obtain a
second appraisal, Landlord's appraisal shall be conclusive. If Tenant's
appraisal is less than Landlord's appraisal, the two appraisers shall appoint a
third independent appraiser within ten (10) days after delivery of Tenant's
appraisal to appraise the fair market rental value of the Premises as of the
commencement of the extension term. If the two appraisers fail to select a third
qualified appraiser, the third appraiser shall be appointed by the then
presiding judge of the county where the Premises are located upon application by
either party. The appraisers shall meet not later than ten (10) days following
the selection of the last appraiser. At such meeting the appraisers shall
attempt to determine the fair


                                       44



market rental value as of the commencement date of the extended term by the
agreement of at least two (2) of the appraisers. If two (2) or more of the
appraisers agree on the fair market rental value at the initial meeting, such
agreement shall be determinative and binding upon the parties hereto and the
agreeing appraisers shall, in simple letter form executed by the agreeing
appraisers, forthwith notify both Landlord and Tenant of the amount set by such
agreement. If multiple appraisers are selected and two (2) appraisers are unable
to agree on the fair market rental value, all appraisers shall submit to
Landlord and Tenant an independent appraisal of the fair market rental value in
simple letter form within twenty (20) days following appointment of the final
appraiser. The parties shall then determine the fair market rental value by
averaging the appraisals; provided that any high or low appraisal, differing
from the middle appraisal by more than ten percent (10%) of the middle
appraisal, shall be disregarded in calculating the average. Landlord and Tenant
shall bear equally the expense of the third appraiser.

               40.4   All appraisers appointed hereunder shall have at least ten
(10) years' experience in the appraisal of commercial and industrial real
property in Bothell, Washington and shall be members of professional
organizations such as the American Appraisal Institute with a designation of MAI
or equivalent and shall not have worked for either party or the principals
thereof in the three (3) year period preceding such time.

               40.5   As used herein, the term "fair market rental value of the
Premises" shall mean the base rent that a ready and willing tenant would pay for
similarly improved space in Bothell, Washington as of the commencement of the
extension term, to a ready and willing landlord, for a term of five (5) years on
the terms and conditions of the Lease, determined as if the Premises were
exposed for lease on the open market for a reasonable period of time and taking
into account all of the purposes for which such property may be used without
taking into consideration any improvements to the Premises made at Tenant's
expense, and including periodic rental increases, if any. Any appraiser
appointed hereunder to determine the "fair market rental value of the Premises"
shall take into account all of the other terms and conditions of this Lease.

               40.6   Any increase in Basic Annual Rent under this Article 40
which is not determined until after the effective date of the increase shall
nevertheless be retroactive to the effective date, and Tenant shall pay any such
retroactive increase with the installment of Rent next due.

               40.7   The Basic Annual Rent for the extension term determined as
set forth above shall be increased on each anniversary date of the commencement
of extension term in accordance with this Section 40.7. On the first anniversary
of the commencement of the extension term, and on each anniversary thereafter,
the initial Basic Annual Rent shall be multiplied by a fraction, the numerator
of which shall be the Consumer Price Index of the Bureau of Labor Statistics of
the Department of Labor for All Urban Consumers (All Items) (1982-84=100) for
the U.S. City Average (the "CPI") of the calendar month immediately preceding
the adjustment date, and the denominator of which shall be the CPI for the
calendar month immediately preceding the commencement of the extension term;
provided, however, in no event shall Basic Annual Rent be increased on each
anniversary of the commencement of the extension

                                       45



term less than two percent (2%) or more than three percent (3%) of the previous
year's Basic Annual Rent.

               40.8   Tenant shall not have the right to exercise its option to
extend the term, notwithstanding anything set forth above to the contrary: (a)
during the time commencing from the date Landlord gives to Tenant a written
notice that Tenant is in default beyond all applicable notice and cure periods
under any provision of this Lease and continuing until the default alleged in
said notice is cured; (b) during the period of time commencing on the day after
a monetary obligation to Landlord is due from Tenant and unpaid beyond all
applicable notice and cure periods and continuing until the obligation is paid;
or (c) after the expiration or earlier termination of this Lease. The period of
time within which the option to extend may be exercised shall not be extended or
enlarged by reason of the Tenant's inability to exercise the option because of
the foregoing provisions. At the election of Landlord, all rights of Tenant
under the provisions of this Article 40 shall terminate and be of no further
force or effect even after Tenant's due and timely exercise of an option to
extend if, after such exercise, but prior to the commencement of the extension
term, (1) Tenant fails to pay to Landlord a monetary obligation of Tenant for a
period of sixty (60) days after Landlord gives Tenant notice of notice of
nonpayment, or (2) Tenant fails to commence to cure a non-monetary default
within thirty (30) days after the date Landlord give Tenant notice of such
default.

               40.9   Notwithstanding anything to the contrary contained in this
section, if Tenant does not, in its sole discretion, approve the rental amount
set forth in Landlord's appraisal, Tenant shall have the right to withdraw its
exercise of the extension option by giving Landlord written notice of such
election to rescind within twenty (20) days after receipt of Landlord's
appraisal. If Tenant rescinds its exercise of the extension option, then (a)
this Lease shall terminate on the date this Lease would have otherwise
terminated absent Tenant's exercise of the extension option; and (b) Tenant
shall pay all costs and expenses of the appraisal.

        41.    RIGHT OF FIRST REFUSAL TO LEASE ADDITIONAL SPACE.

               41.1   If, at any time during the Term of this Lease, as it may
be extended, Landlord shall solicit or receive a bona fide offer in writing
("Offer") from a third party to lease all or any part of the balance of the
space in the Building ("Expansion Space"), Tenant shall have a right of first
refusal ("Right of First Refusal") to lease the Expansion Space upon the same
terms and conditions as set forth in the Offer. Landlord, promptly following
Landlord's solicitation or receipt of the Offer, shall deliver written notice to
Tenant specifying the economic terms and conditions stated in the Offer. Tenant
shall exercise its Right of First Refusal by providing Landlord with written
notice of its exercise within five (5) business days after the date of receipt
of Landlord's notice regarding the Offer. If Tenant exercises its Right of First
Refusal within the five (5) business-day period, Landlord and Tenant promptly
shall execute an amendment to this Lease (or, at Landlord's election, a new
Lease) for the Expansion Space, which includes the terms and conditions set
forth in the Offer. If Tenant fails to provide Landlord with its written notice
of exercise within the five (5) business-day period, then Tenant shall be deemed
to have elected not to exercise its Right of First Refusal with respect to the
particular Offer at issue. Notwithstanding the foregoing, if Landlord negotiates
with the proposed tenant lease terms materially more favorable then those
offered to Tenant but rejected,


                                       46



Landlord shall be required to submit the more favorable terms to Tenant for its
review. Tenant shall have three (3) business days after receipt of the more
favorable terms to accept or reject the Expansion Space. If Tenant rejects the
more favorable terms, Landlord shall be free to enter into a lease with the
proposed tenant. Tenant's Right of First Refusal shall be continuous during the
Term and any extension thereof. Tenant's rejection of any particular Offer shall
not relieve Landlord of its obligation to again offer any Expansion Space to
Tenant at any time that the Expansion Space subsequently becomes available. If
Landlord fails to lease any portion of the Expansion Space within ninety (90)
days of delivering to Tenant an Offer for such Expansion Space, Landlord shall
again offer such Expansion Space to Tenant as set forth above.

               41.2   The Right of First Refusal herein granted to Tenant is not
assignable separate and apart from this Lease.

               41.3   Tenant shall not have the right to exercise the Right of
First Refusal, notwithstanding anything set forth above to the contrary: (a)
During the time commencing from the date Landlord gives to Tenant a written
notice that Tenant is in default beyond all applicable notice and cure periods
under any provision of this Lease and continuing until the default alleged in
said notice is cured; (b) During the period of time commencing on the day after
a monetary obligation to Landlord is unpaid beyond all applicable notice and
cure periods and continuing until the obligation is paid; or (c) After the
expiration or earlier termination of this Lease. The period of time within which
the Right of First Refusal may be exercised shall not be extended or enlarged by
reason of the Tenant's inability to exercise the Right of First Refusal because
of the foregoing provisions. At the election of Landlord, all rights of Tenant
under the provisions of this Article 41 shall terminate and be of no further
force or effect even after Tenant's due and timely exercise of the Right of
First Refusal, if, after such exercise, but prior to the execution of said
lease, (1) Tenant fails to pay to Landlord a monetary obligation of Tenant for a
period of thirty (30) days after Landlord give Tenant notice of nonpayment, or
(2) Tenant fails to commence to cure a default within thirty (30) days after
Landlord gives Tenant notice of such default.

               41.4   The Right of First Refusal is continuing, in that if
Tenant fails to exercise the Right of First Refusal with regard to any
particular space, the Right of First Refusal shall nevertheless apply to that
particular space if Landlord determines to lease all or any part of such space
at any later time, and to any other available space in the building in which the
Premises are located which Landlord determines to lease.

        42.    MISCELLANEOUS.

               42.1   TERMS AND HEADINGS. Where applicable in this Lease, the
singular includes the plural and the masculine or neuter includes the masculine,
feminine and neuter. The section headings of this Lease are not a part of this
Lease and shall have no effect upon the construction or interpretation of any
part hereof.

               42.2   EXAMINATION OF LEASE. Submission of this instrument for
examination or signature by Tenant does not constitute a reservation of or
option for lease, and it is not effective as a lease or otherwise until
execution by and delivery to both Landlord and Tenant.


                                       47



               42.3   TIME. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor.

               42.4   COVENANTS AND CONDITIONS.  Each provision of this Lease
performable by Tenant shall be deemed a covenant.

               42.5   ENTIRE AGREEMENT. The terms of this Lease are intended by
the parties as a final expression of their agreement with respect to the terms
as are included herein, and may not be contradicted by evidence of any prior or
contemporaneous agreement.

               42.6   SEVERABILITY. Any provision of this Lease which shall
prove to be invalid, void, or illegal in no way affects, impairs or invalidates
any other provision hereof, and such other provisions shall remain in full force
and effect; provided, however, if the provisions of this Lease relating to
Tenant's stated use of the Premises shall be determined by any government agency
having jurisdiction to be invalid or unenforceable, this Lease, effective as of
the date of such determination, shall be deemed to be void and of no further
force and effect.

               42.7   RECORDING. Either Landlord or Tenant may record a short
form memorandum hereof, subject to the requirement to execute and deliver a
quitclaim deed pursuant to the provisions of Section 34.1 hereof.

               42.8   IMPARTIAL CONSTRUCTION.  The language in all parts of
this Lease shall be in all cases construed as a whole according to its fair
meaning and not strictly for or against either Landlord or Tenant.

               42.9   INUREMENT. Each of the covenants, conditions, and
agreements herein contained shall inure to the benefit of and shall apply to and
be binding upon the parties hereto and their respective heirs, legatees,
devisees, executors, administrators, successors, assigns, sublessees, or any
person who may come into possession of said Premises or any part thereof in any
manner whatsoever. Nothing in this Section 42.9 contained shall in any way alter
the provisions against assignment or subletting in this Lease provided.

               42.10  FORCE MAJEURE. If either party cannot perform any of its
obligations (other than Tenant's obligation to pay Rent), or is delayed in such
performance (other than Tenant's obligation to pay Rent), due to events beyond
such party's control, the time provided for performing such obligations shall be
extended by a period of time equal to the delay attributable to such events.
Events beyond a party's control include, but are not limited to, acts of
terrorism, acts of God (including earthquake), war, civil commotion, labor
disputes, strikes, fire, flood or other casualty, shortage of labor or material,
government regulation or restriction and weather conditions, but do not include
financial inability to perform.

               42.11  NOTICES. Any notice, consent, demand, bill, statement, or
other communication required or permitted to be given hereunder must be in
writing and may be given by (i) personal delivery, (ii) by mail, certified and
return receipt requested, or (iii) by recognized overnight delivery services,
and if given by personal delivery shall be deemed given on the date


                                       48



of delivery, if given by mail shall be deemed given three (3) business days
after deposit in United States Mail if sent by certified mail, addressed to
Tenant or Landlord at the addresses shown in Section 2.1.8 hereof, and if give
by recognized overnight delivery service shall be deemed given one (1) business
day after deposit with the overnight delivery services if addressed to Tenant or
Landlord at the addresses shown in Section 2.1.8 hereof. Either party may, by
notice to the other given pursuant to this Section, specify additional or
different addresses for notice purposes.

               42.12  AUTHORITY TO EXECUTE LEASE. Landlord and Tenant each
acknowledge that it has all necessary right, title and authority to enter into
and perform its obligations under this Lease, that this Lease is a binding
obligation of such party and has been authorized by all requisite action under
the party's governing instruments, that the individuals executing this Lease on
behalf of such party are duly authorized and designated to do so, and that no
other signatories are required to bind such party.

               42.13  GOVERNING LAW.  This Lease shall be construed and
enforced pursuant to the law of the State of Washington.

               42.14  APPROVALS. Whenever this Lease requires an approval,
consent, determination, selection or judgment by either Landlord or Tenant,
unless another standard is expressly set forth, such approval, consent,
determination, selection or judgment and any conditions imposed thereby shall be
reasonable and shall not be unreasonably withheld or delayed and, in exercising
any right or remedy hereunder, each party shall at all times act reasonably and
in good faith.

               42.15  REASONABLE EXPENDITURES. Any expenditure by a party
permitted or required under this Lease, for which such party demands
reimbursement from the other party, shall be limited to the fair market value of
the goods and services involved, shall be reasonably incurred, and shall be
substantiated by documentary evidence available for inspection and review by the
other party.






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

LANDLORD:

Dated:  9 May, 2002

Phase 3 Science Center LLC
A California limited liability company

Ahwatukee Hills Investors, LLC
An Arizona limited liability company

J. Alexander's LLC
A Delaware limited liability company

        By:    Phase 3 Properties, Inc.,
               a California Corporation,
               Property Manager

               By:    /s/ W. NEIL FOX, III
                      ------------------------------
                      W. Neil Fox, III
                      Chief Executive Officer


TENANT:

Dated:  23 April, 2002

Nastech Pharmaceutical Company Inc.
a Delaware corporation


By:     /s/ STEVEN C. QUAY M.D., Ph.D.
        -------------------------------------
        Name:  Steven C. Quay M.D., Ph.D.
             --------------------------------
        Title: Chairman, CEO, President
               ------------------------------





    STATE OF CALIFORNIA
    COUNTY OF SAN DIEGO

        I, Donna Gambee, a Notary Public of the County and State aforesaid,
     certify that W. Neil Fox III personally came before me this day and
     acknowledged that he is Chief Executive Officer of Phase 3 Properties,
     Inc., a California corporation, which is the Property Manager of property
     owned by Phase 3 Science Center LLC, a California limited liability
     company, Ahwatukee Hills Investors LLC, an Arizona limited liability
     company and J. Alexander's LLC, a Delaware limited liability company
     (collectively, the "Owners") and that by authority duly given, the
     foregoing was signed in the name of Phase 3 Properties, Inc. by its Chief
     Executive Officer, as Property Manager of property owned by the Owners, as
     the act and deed and on behalf of such Owners.

        Witness my hand and official seal this the 9th day of May, 2002.


                                         /s/ DONNA GAMBEE
                                    ---------------------------------------
                                    Notary Public
    [OFFICIAL SEAL]                 Print Name: Donna Gambee
                                               ----------------------------
    My commission expires: 5 / 25/ 2003








STATE OF Washington

COUNTY OF King

I, Cara Ledbetter, a Notary Public, do hereby certify
that Steven Quay personally appeared before me this day
and acknowledged that __he is CEO & President of Nastech Pharmaceutical Company
Inc., a Delaware corporation, and that, by authority duly given and as the act
of the corporation, the foregoing instrument was signed in its name by its
CEO & President, sealed with its corporate seal, and attested by himself as
its _______________ Secretary.

WITNESS my hand and notarial seal, this the 23rd day of April, 2002.


- -------------------------------------
Notary Public
Print Name:       /s/ CARA A. LEDBETTER
                 --------------------------------
My commission expires: 8/15/2008







                                   EXHIBIT "A"

                       LEGAL DESCRIPTION OF REAL PROPERTY


That certain real property located in the City of Bothell, County of Snohomish,
State of Washington, legally described as Lot 7, Quadrant Monte Villa Center,
according to the plat thereof recorded in Volume 54 of Plats, pages 165 through
169, inclusive, records of Snohomish County, Washington.




EXHIBIT "B"

                            SITE PLAN OF THE PROJECT








                                   EXHIBIT "C"

                             OUTLINE OF THE PREMISES








                                   EXHIBIT "D"

                    ACKNOWLEDGMENT OF TERM COMMENCEMENT DATE

        Pursuant to Section 3.2 of that certain Lease dated _______________,
2002, by and between Phase 3 Science Center LLC, a California limited liability
company, [and its co-tenants, collectively,] Landlord, and Nastech
Pharmaceutical Company Inc., a Delaware corporation, Tenant, for the Premises
described in the Lease in the Building at 3450 Monte Villa Parkway, Bothell,
Washington, we hereby acknowledge that the Term Commencement Date of the Lease,
as defined therein, is _______________, 200__, and the Term Expiration Date of
the Lease, as defined therein, is _______________, 200__.

        IN WITNESS WHEREOF, the parties hereto have executed this Acknowledgment
of Term Commencement Date as of __________, 200__.

LANDLORD:

Phase 3 Science Center LLC,
a California Limited Liability Company

Ahwatukee Hills Investors LLC,
an Arizona Limited Liability Company

J. Alexander's LLC,
a Delaware Limited Liability Company

By:     Phase 3 Properties, Inc.,
        a California Corporation,
        Property Manager


        By:    _____________________________
               W. Neil Fox, III
               Chief Executive Officer

TENANT:

Nastech Pharmaceutical Company Inc.,
a Delaware corporation


By:     _____________________________
        Name:  _______________________
        Title: _______________________





                                   EXHIBIT "E"

                      SCHEMATIC SHOWING TENANT IMPROVEMENTS





                                  EXHIBIT "E-1"

                            TENANT IMPROVEMENT BUDGET





                                  EXHIBIT "E-2"

                                 TENANT SIGNAGE









                                   EXHIBIT "F"

                              FORM LETTER OF CREDIT





                             [FORM LETTER OF CREDIT]

            IRREVOCABLE STANDBY LETTER OF CREDIT NO. _______________

                                                     DATE: _________________


BENEFICIARY:          Phase 3 Science Center LLC
                      Ahwatukee Hills Investors LLC
                      J. Alexander's LLC
                      c/o Phase 3 Properties, Inc.
                      8910 University Center Lane, Suite 265
                      San Diego, CA 92122

APPLICANT:




AMOUNT:               $


EXPIRATION DATE:      ____________________

LOCATION:             At our counter in San Diego.


Dear Sir/Madam:

We hereby establish our Irrevocable Standby Letter of Credit No. _______________
in your favor. Available for payment by ___________________, Attn: Int'l Dept.
of Beneficiary's draft at sight drawn on us, and accompanied by the following
documents:

1.      The original of this Letter of Credit and amendment, if any.

2.      A signed and dated certification from the beneficiary stating the
        following:

        "An event of default beyond all applicable notice and cure periods has
        occurred by _________________________, as Tenant ("Tenant") under that
        certain Lease Agreement between Tenant and Phase 3 Science Center LLC,
        as Landlord (the "Lease"), and the terms and conditions of the Lease
        authorize Landlord to now draw down on the Letter of Credit."


        or


                                       1




        "Tenant has failed to renew this Letter of Credit or deliver to Landlord
        a replacement letter of credit at least thirty (30) days prior to the
        expiration of this Letter of Credit."


SPECIAL CONDITIONS:

1.      This Letter of Credit is transferable in whole but not in part, only
        upon our receipt of the attached Exhibit "A" (Transfer Form) duly
        completed and executed by the Beneficiary, together with this original
        Letter of Credit and amendments (if any) accompanying our transfer
        charges.

2.      Partial drawings are allowed.

All documents, including draft(s), must indicate the number and date of this
credit. Each draft presented hereunder must be accompanied by this original
Letter of Credit for our endorsement thereon of the amount of such draft(s).

Documents must be sent to us via overnight courier (i.e., Federal Express, UPS,
DHL or any other express courier) at our address:

                             --------------------------
                             --------------------------
                             --------------------------
                             --------------------------
                             Attn:  International Division

We hereby engage with drawers and /or bonafide holders that draft(s) drawn under
and negotiated in conformance with the terms and conditions of the subject
credit will be duly honored on presentation.

This credit is subject to the Uniform Customs and Practice for Documentary
Credits (1993 Revision), International Chamber of Commerce Publication 500.



        ------------------------------      ------------------------------
        Authorized Signature                Authorized Signature





                                       2









                                   EXHIBIT "G"

                              RULES AND REGULATIONS





                              RULES AND REGULATIONS

NOTHING IN THESE RULES AND REGULATIONS SHALL SUPPLANT ANY PROVISION OF THE
LEASE. IN THE EVENT OF A CONFLICT OR INCONSISTENCY BETWEEN THESE RULES AND
REGULATIONS AND THE LEASE, THE LEASE SHALL PREVAIL.

1.      Except as specifically provided in the Lease to which these Rules and
        Regulations are attached, no sign, placard, picture, advertisement, name
        or notice shall be installed or displayed on any part of the outside of
        the Premises or the Building without the prior written consent of
        Landlord, which consent shall not be unreasonably withheld. Landlord
        shall have the right to remove, at Tenant's expense and without notice,
        any sign installed or displayed in violation of this rule.

2.      If Landlord reasonably objects in writing to any curtains, blinds,
        shades, screens or hanging plants or other similar objects attached to
        or used in connection with any window or door of the Premises, or placed
        on any windowsill, which is visible from the exterior of the Premises,
        and which is not included in plans approved by Landlord, Tenant shall
        remove said object.

3.      Tenant shall not obstruct any sidewalks or entrances to the Building, or
        any halls, passages, exits, entrances, or stairways within the Premises,
        which are required to be kept clear for health and safety reasons.

4.      No deliveries shall be made which impede or interfere with other
        tenants or the operation of the Project.

5.      Tenant shall not place a load upon any floor of the Premises which
        exceeds the load per square foot which such floor was designed to carry
        and which is allowed by law. Fixtures and equipment which cause noise or
        vibration that may be transmitted to the structure of the Building to
        such a degree as to be objectionable to other tenants shall be placed
        and maintained by Tenant, at Tenant's expense, on vibration eliminators
        or other devices sufficient to eliminate such noise or vibration or
        reduce such noise and vibration to acceptable levels.

6.      Tenant shall not use any method of heating or air-conditioning other
        than that shown in Tenant Improvement plans; provided, however, the
        foregoing shall not prohibit Tenant's reasonable use of space heaters
        and local area fans.

7.      Tenant shall not install any radio, television or other antenna, cell or
        other communications equipment or other devices on the roof or exterior
        walls of the Premises except to the extent shown on approved Tenant
        Improvement plans. Tenant shall not interfere with radio, television or
        other communications from or in the Premises or elsewhere.






8.      Canvassing, peddling, soliciting and distribution of handbills or any
        other written material in the Project outside of the Premises are
        prohibited, and Tenant shall cooperate to prevent such activities.

9.      Tenant shall store all its trash, garbage and Hazardous Material within
        its Premises or in designated receptacles outside of the Premises.
        Tenant shall not place in any such receptacle any material which cannot
        be disposed of in the ordinary and customary manner of trash, garbage
        and Hazardous Material disposal.

10.     The Premises shall not be used for any improper, immoral or
        objectionable purpose. No cooking shall be done or permitted on the
        Premises, except that use by Tenant of Underwriter's Laboratory approved
        equipment for brewing coffee, tea, hot chocolate and similar beverages
        or use of microwave ovens for employees use shall be permitted, or
        equipment shown on approved Tenant Improvement plans, provided that such
        equipment and use is in accordance with all applicable federal, state,
        county and city laws, codes, ordinances, rules and regulations.

11.     Without the written consent of the Landlord (which shall not be
        unreasonably withheld or delayed), Tenant shall not use the name of the
        Project, if any, in connection with or in promoting or advertising the
        business of Tenant except as Tenant's address.

12.     Tenant shall comply with all safety, fire protection and evacuation
        procedures and regulations (i) reasonably established by Landlord or
        (ii) established by any governmental agency.

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

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

15.     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 terms,
        covenants, agreements and conditions of the Lease.

16.     Landlord reserves the right to make such other and reasonable and
        nondiscriminatory rules and regulations as, in its judgment, may from
        time to time be needed for safety and security, for care and cleanliness
        of the Project, and for the preservation of good order therein, subject
        to prior notice to Tenant and Tenant's consent, which will not be
        unreasonably withheld, conditioned or delayed. Tenant agrees to abide by
        all such Rules and Regulations hereinabove stated and any additional
        rules and regulations which are adopted.


                                       2



17.     Tenant shall be responsible for the observance of all of the foregoing
        rules by Tenant's employees, agents, clients, customers, invitees and
        guests.


                                       3




                                   SCHEDULE 1

               LIST OF REMOVABLE PROPERTY PURSUANT TO SECTION 17.7


                      PROPERTY TENANT IS REQUIRED TO REMOVE

                           PROPERTY TENANT MAY REMOVE





                                       4

EX-10.27

                  AMENDED AND RESTATED EMPLOYMENT AGREEMENT


        This Amended and Restated Employment Agreement, (this "Agreement") is
executed and entered into on the second (2nd) day of May, 2002 (the "Amendment
Date") by and between Nastech Pharmaceutical Company, Inc., a Delaware
corporation (the "Company") with offices at 45 Davids Drive, Hauppauge, NY and
Steven C. Quay, M.D., Ph.D. (the "Executive").

                            W I T N E S S E T H :

        WHEREAS, the Company and the Executive executed and entered into an
initial Employment Agreement on or about August 8, 2000 (the "August 2000
Agreement") with a term of three years; and

        WHEREAS, the Executive has performed his duties under the August 2000
Agreement to the full satisfaction of the Company and has contributed to a
large improvement in the Company's performance and prospects; and

        WHEREAS, the Company desires to obtain an extension of the Executive's
contract term with the Company and the Executive is willing to extend his
contract term with the Company as provided herein;

        NOW THEREFORE, in consideration of the mutual promises and agreements
herein and for other good and valuable consideration the receipt and
sufficiency of which are hereby mutually acknowledged, the Company and the
Executive agree as follows:

        1.     Application of Agreements. This Agreement shall govern the
employment relationship between the Company and the Executive from and after
the Amendment Date and in other respects to the extent provided herein. To the
extent that they are not inconsistent with the terms of this Agreement, the
August 2000 Agreement and other agreements between the Company and the
Executive shall continue to apply as to the employment of the Executive by the
Company prior to the Amendment Date. For example, those earlier agreements
shall govern: (a) the Executive's rights to receive incentive compensation
with respect to periods prior to those expressly covered by this Agreement
even if some such incentive compensation may be payable after the Amendment
Date and (b) the rights created by and with respect to the options granted to
the Executive to purchase 600,000 shares of the common stock of the Company
pursuant to the August 2000 Agreement, including the vesting and
exerciseability of those stock options.

        2.     Employment

               (a)    Subject to the terms and conditions of this Agreement,
the Company shall continue to employ the Executive as its President, Chief
Executive Officer and Chairman of its Board of Directors (the "Board") during
the Employment Period (as defined in Section 8) and to perform such acts and
duties and furnish such services to the Company and its Subsidiaries (as
defined below) as the Board shall from time to time reasonably direct. The
Executive shall have general and active charge of the business and affairs of
the Company as its Chief Executive Officer and President and, in such
capacity, shall have responsibility for the day-to-day operations of the
Company, subject to the authority and control of the Board. During the
Employment Period, the Company shall: (i) continue to take such actions as may
be necessary to









cause the nomination and recommendation of both (A) the Executive for election
as a director and as Chairman of the Board and (B) a nominee selected by the
Executive and reasonably acceptable to the Company (such nominee, at the
option of the Executive, to be changed prior to any annual or other meeting of
the stockholders of the Company at which directors are elected or due to the
death or resignation of such nominee) for election as a director of the
Company and (ii) use all best efforts to cause such persons to be elected to
the positions provided for them above respectively.

               (b)    Subject to the terms and conditions of this Agreement,
Executive hereby accepts such employment and agrees to devote his full time
and best efforts to the duties provided herein, provided that the Executive
may engage in other business, research (subject to the further proviso set
forth below), professional, and other activities, during his employment by the
Company, that (1) involve no conflict of interest with the Company or any of
its Subsidiaries in the Business (as those terms are defined below) and (2) do
not materially interfere with the reasonable performance by Executive of his
duties under this Agreement, provided further that, in the case of any
research in medicine or in the health sciences in which the Executive may be
involved other than for the benefit of the Company or any such
Subsidiary(ies), both of the immediately following clauses "i" and "ii" must
be satisfied:

                      (i) Such research shall be in subject matter unrelated
to the Business and unrelated to any other products, services, or technology
in medicine or the health sciences in which the Company shall then be
undertaking, or actively and in good faith considering, research or commercial
involvement and

                      (ii) The Executive shall disclose to the Board or to the
Compensation Committee on a timely basis the nature and subject matter of any
such research in which he may become involved and shall keep the Board or such
committee reasonably apprised of material changes in such nature and/or
subject matter.

For purposes of this Agreement: (1) the "Business" means and includes the
development, marketing, selling, and/or commercializing of (a) drug delivery
products, services, and/or technology and/or (b) products, services, and/or
technology related to the FDA approved Mammary Aspirate Specimen Cytology Test
(MASCT) kit and any successor product(s) and (2) the term "Subsidiary" means a
corporation or other entity that is at least majority owned, directly or
indirectly, by the Company. The foregoing provisos do not limit the
obligations of the Executive under Section 16(a) hereof.

        3.     Salary. For services rendered to the Company during the
Employment Period, the Company shall compensate the Executive with a base
salary, payable in bi-weekly installments, which shall be $325,000 per annum
for the period from the Amendment Date through the end of calendar year 2002
and which shall be increased by ten percent (10%) effective on January 1 of
each calendar year after 2002 during the Employment Period. As to any pay
periods all or a part of which fall on or after the Amendment Date, the
Company shall pay to the Executive within sixty (60) days after the Amendment
Date any shortfall of amounts actually delivered to him relative to the
amounts that would have been delivered to him if his pay rate had been
immediately adjusted as of the Amendment Date.



                                      2



        4.     Incentive Cash Compensation.

               (a) For the Company's fiscal year that began January 1, 2002,
and for each subsequent fiscal year or portion thereof during the Employment
Period, the Executive shall also be entitled to incentive cash compensation
based on the "Annual Base Bonus Amount" of one hundred thousand dollars
($100,000.00) (or more if so determined by the Compensation Committee or by
the Board) and the performance areas and performance levels on which the
Executive and the Board or the Compensation Committee shall agree as described
below.

               (b) The Company and the Executive shall agree periodically on
performance criteria for determination of the incentive cash compensation that
will be payable to the Executive with respect to each fiscal year of the
Company. To the extent possible, such agreement shall be made, as to each
fiscal year, prior to the end of the first month of such fiscal year. The
Company and the Executive presently intend that such performance criteria
shall be comprised of several designated performance areas and two levels of
performance in each area, and that, depending on the levels of performance
achieved in the various areas, the actual amount of incentive cash
compensation actually payable to the Executive for each fiscal year will be
between zero and twice the Annual Base Bonus Amount. The Company acknowledges
that the business objectives heretofore used in determining the Executive's
incentive cash compensation have been, and that the performance areas and
performance levels referred to here shall continue to be, based largely on the
input and recommendations of the Company's Chief Executive Officer and that,
in exercising its review and supervisory role with respect to the
determination and adoption of those performance areas and performance levels,
the Board or the Compensation Committee, as the case may be, shall act
reasonably and in consultation and cooperation with the Chief Executive
Officer and consistently with past practice.

               (c) As soon as practical, and in any event no later than ninety
(90) days, following the end of each fiscal year of the Company, the
Compensation Committee or the Board shall determine, reasonably and in good
faith, the extent to which the applicable performance levels for such fiscal
year shall have been achieved and, accordingly, shall cause the appropriate
amount of incentive cash compensation to be paid to the Executive forthwith.
To the extent that unforeseen developments arise and make the performance
areas and performance levels previously agreed upon unachievable and
inappropriate as a measure of the performance of the Executive, the
Compensation Committee or the Board shall consider in good faith whether a
cash bonus should nevertheless be paid to the Executive for the applicable
fiscal year.

               (d) Absent separate agreement between the Executive and the
Company, for any fiscal year that ends after the end of the Employment Period,
a pro-rated annual bonus shall be payable to the Executive based on the
portion of such fiscal year that shall have elapsed to the end of the
Employment Period, the methodology referred to above, and the reasonable, good
faith determination of the Compensation Committee or the Board of the extent
to which reasonably proportionate progress toward achievement of the
applicable performance levels was made from the beginning of such fiscal year
to the date the Employment Period ended.

        5.     Stock Options. As further compensation, and in addition to the
stock options that were issued to the Executive pursuant to the August 2000
Agreement (which shall remain outstanding and shall be and become exerciseable
in accordance with their terms), the Company






                                      3



is granting to the Executive new options to purchase additional shares of
common stock of the Company (the "New Options") as follows:

        (a) All of the New Options shall be deemed granted and issued (and are
hereby so granted) on the Amendment Date, provided that this grant and
issuance, and the effectiveness of the New Options, are subject to approval by
the shareholders of the Company, on or before July 31, 2002, of the Nastech
Pharmaceutical Company, Inc. 2002 Stock Option Plan (the "Option Plan"), which
has been approved and adopted by the Board. The New Options are issued under
and pursuant to the Option Plan.

        (b) The New Options shall have a term of 10 years, running from the
Amendment Date.

        (c) Among the New Options, options for the maximum permissible number
of shares shall be Incentive Stock Options ("ISOs") for purposes of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder
(together, the "Tax Laws"), and those ISOs are issued with the minimum
per-share exercise price consistent with tax-advantaged treatment of those
options as ISOs under the Tax Laws. Those ISOs shall be among the New Options
referred to in each of the clauses "i," "ii," "iii," "iv," and "v" in
paragraph "f" below in this Section 5, with the numbers of shares for which
such ISOs will be exerciseable under each of those clauses being determined in
such a manner as to maximize the total number of shares as to which such tax
advantaged treatment is available; and the ISOs shall vest and become first
exerciseable at the times and under the conditions provided in those clauses
respectively.

        (d) The remainder of the New Options shall be non-statutory stock
options and shall be issued with a per-share exercise price equal to the per
share closing price of common stock of the Company on the Nasdaq National
Market on the Amendment Date except that those referred to in clause "v" of
paragraph "f" of this Section 5, which will vest (if at all), only on January
1, 2006, shall have an exercise price of Twenty-Five Dollars ($25.00) per
share.

        (e) The exercise prices of the New Options and the numbers of shares
that may be purchased upon exercise of the New Options shall be subject to
customary anti-dilution adjustments.

        (f) The New Options, in the aggregate, shall grant the right to
purchase a total of nine hundred thousand (900,000) shares of common stock of
the Company, and they shall vest and become exerciseable on the dates set
forth in the following clauses (or as expressly stated elsewhere in this
Agreement in the event of certain circumstances and events provided for
herein):

               (i) New Options for 200,000 shares (some of which shall be ISOs
and some of which shall be non-statutory stock options, as provided above) are
vested and exerciseable as of the Amendment Date;

               (ii) New Options for another 200,000 shares (some of which
shall be ISOs and some of which shall be non-statutory stock options, as
provided above) shall vest and become exerciseable if Executive's employment
by the Company or by an affiliate of the Company continues on August 8, 2003;




                                      4





                      (iii) New Options for another 200,000 shares (some of
which shall be ISOs and some of which shall be non-statutory stock options, as
provided above) shall vest and become exerciseable if Executive's employment
by the Company or by an affiliate of the Company continues on August 8, 2004;

                      (iv) New Options for another 200,000 shares (some of
which shall be ISOs and some of which shall be non-statutory stock options, as
provided above) shall vest and become exerciseable if Executive's employment
by the Company or by an affiliate of the Company continues on August 8, 2005;

                      (v) New Options for another 100,000 shares (some of
which shall be ISOs and some of which shall be non-statutory stock options, as
provided above) shall vest and become exerciseable on January 1, 2006 if (A)
Executive's employment by the Company or by an affiliate of the Company
continues on December 31, 2005 and (B) on or before December 31, 2005, the
Company and the Executive shall have agreed in writing to continue the
employment of Executive by the Company or by an affiliate of the Company on a
substantially full time basis (and on such other terms as they may agree)
until at least December 31, 2007.

               (g) Except for those that are ISOs as described above, the New
Options shall be transferable by Executive to a trust for the benefit of
Executive and/or member(s) of his immediate family and/or to a partnership,
limited liability company, and/or other entity owned by Executive and/or by
member(s) of his immediate family. The terms of the New Options shall include
customary provisions for, among other things, the ability of the Executive, if
he so chooses, (A) to pay the exercise price for the options via a
same-day-sale exercise arrangement and/or a margin account exercise
arrangement with a broker-dealer or bank and/or loan or deferral arrangements
with the Company and/or (B) to surrender shares (either previously outstanding
shares or shares being purchased by exercise of options) to the Company at
fair market value for payment of the minimum amount required to satisfy all
withholding requirements and/or to pay all or a part of the exercise price by
surrender to the Company, at fair market value, of shares of the Company's
common stock that shall then have been owned for at least six months by
Executive and/or by a trust, partnership, limited liability company, or other
entity for the benefit of, or owned by, Executive and/or member(s) of his
immediate family.

               (h) The shares of Common Stock issuable upon the exercise of
the New Options shall be fully vested in the hands of the Executive
immediately upon such exercise and issuance. The Company shall cause the
shares of Common Stock issuable upon the exercise of the New Options to be
registered under the Securities Act of 1933 within ninety (90) days after the
Amendment Date pursuant to a Form S-8 or such other form as may be available
for such purpose; and the Company shall use its best efforts to maintain such
registration, or a substantially similar registration, in effect for such
shares and to maintain the similar registration of the shares of Common Stock
issuable under the options issued to the Executive pursuant to the August 2000
Agreement.

        6.     Benefits.  During the Employment Period, the Company shall
provide or cause to be provided to the Executive such employee benefits as are
provided to other officers of the Company.  Without limiting the preceding
sentence, the benefits provided to the Executive shall include at least family
medical and dental, disability, and life insurance.


                                      5





        7.     Vacation.  The Executive shall be entitled to annual vacations
in accordance with the Company's vacation policies in effect from time to time
for executive officers of the Company.

        8.     Term; Employment Period. The "Employment Period" under this
Agreement shall commence on the Amendment Date and shall terminate at the
close of business on December 31, 2005 unless it is (a) extended by written
agreement between the parties or by continuing employment of the Executive by
the Company as provided in the following sentence or (b) earlier terminated
pursuant to Section 9. If the Executive shall remain in substantially
full-time employment by the Company beyond what would otherwise be the end of
the Employment Period without any written agreement between the parties, this
Agreement and the Employment Period shall be deemed to continue on a
month-to-month basis and either party shall have the right to terminate the
Executive's employment hereunder at the end of any ensuing calendar month on
written notice of at least 30 days.

        9.     Termination

               (a) Executive's employment by the Company shall be "at will."
In other words, either the Company or the Executive may terminate Executive's
employment by the Company at the end of any calendar month, with or without
Cause or Good Reason (as such terms are defined below), in its or his sole
discretion, upon thirty (30) days' prior written notice of termination. In
addition, the Executive's employment by the Company may be terminated by his
death or disability. Termination of Executive's employment hereunder as
provided here shall terminate the Employment Period.

               (b) For purposes of this Agreement, in the case of a
termination of the Executive's employment hereunder by the Executive, the term
"Good Reason" shall have the meaning set forth for it below; in the case of a
termination of the Executive's employment hereunder by the Company, the term
"Cause" shall have the meaning set forth for it below; and the other terms set
out below in this Section 9 shall have the meanings provided for them
respectively:

                      (i) "Good Reason" shall mean (i) any substantial
diminution in the Executive's responsibilities; (ii) failure of the Company to
pay to the Executive any amounts of base salary and/or incentive cash
compensation as provided for in Sections 3 or 4 above, or to honor promptly
any of its obligations or commitments regarding stock options or other
benefits referred to in Sections 5 or 6 above, or to honor promptly any of its
other material obligations hereunder; (iii) a demotion in the Executive's
title or status; or (iv) at any time prior August 8, 2005, either (or both) of
the Executive and the nominee of the Executive described in Section 2(a)
hereof (and subject to change as provided there) is not elected as a director
of the Company, in the case of both such individuals, or as Chairman of the
Board, in the case of the Executive (unless due to death or resignation of
such individual or, in the case of the nominee only, lost election as a result
of the vote against such nominee of non-affiliates of the Company if such vote
represents the majority of votes cast).

                      (ii) "Cause" shall mean (i) the Executive's willful and
repeated failure to perform his duties hereunder or to comply with any
reasonable and proper direction given by the Board if such failure of
performance or compliance is not cured within thirty (30) days following






                                      6






receipt by the Executive of written notice from the Company containing a
description of such failures and non-compliance and a demand for immediate
cure thereof; (ii) the Executive being found guilty in a criminal court of an
offense involving moral turpitude; (iii) the Executive's commission of any
material act of fraud or theft against the Company; or (iv) the Executive's
material violation of any of the material terms, covenants, representations or
warranties contained in this Agreement if such violation is not cured within
thirty (30) days following receipt by the Executive of written notice from the
Company containing a description of the violation and a demand for immediate
cure thereof.

               (c) "Disability" shall mean total and permanent disability as
defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended.

               (d) "Termination Date" shall mean (i) if this Agreement is
terminated on account of death, the date of death; (ii) if this Agreement is
terminated for Disability, the date that such Disability is established; (iii)
if this Agreement is terminated by the Company or by the Executive prior to
December 31, 2005, the effective date of the termination as provided in
Section 9(a) hereof; or (iv) if this Agreement expires by its terms, December
31, 2005.

        10.    Severance

               (a) Subject to Section 19 hereof, if (i) the Company terminates
the employment of the Executive prior to December 31, 2005 against his will
and without Cause, or (ii) the Executive terminates his employment prior to
December 31, 2005 for Good Reason, then (A) Executive shall be entitled to
receive base salary, incentive cash compensation (determined on a pro-rated
basis as provided in Section 4(d) hereof), pay for accrued but unused vacation
time, and reimbursement for expenses pursuant to Section 11 hereof through the
Termination Date plus the balance of the Executive's compensation hereunder to
December 31, 2005 computed using the base salary rate in effect at the date of
the termination, and (B) notwithstanding the vesting and exercisability
provisions otherwise applicable to the New Options, all of such options shall
be fully vested and exercisable upon such termination and shall remain
exercisable for the remainder of their terms, and (C) the vesting and
exercisability of the stock options issued pursuant to the August, 2000
Agreement shall be accelerated as provided in that agreement. The Company
shall make the cash portion of such termination payment within 30 days after
such termination. Notwithstanding the foregoing, the Company shall not be
required to pay any severance pay for any period following the Termination
Date if the Executive materially violates the provisions of Section 16,
Section 17 or Section 18 of this Agreement and such violation is not cured
within thirty (30) day following receipt of written notice from the Company
containing a description of the violation and a demand for immediate cure.

               (b) Subject to Section 19 hereof, if the Executive voluntarily
terminates his employment prior to December 31, 2005 other than for Good
Reason, then the Executive shall be entitled to receive salary, accrued
vacation, and reimbursement of expenses pursuant to Section 11 hereof through
the Termination Date only; vesting of the New Options shall cease on such
Termination Date; and only the then-vested New Options (and options issued
pursuant to the August 2000 Agreement if and to the extent that their terms or
the terms of the associated plan so provide) shall remain vested and
exerciseable for the remainder of their terms.





                                      7


               (c) Subject to Section 19 hereof, if the Executive's employment
is terminated by the Company prior to December 31, 2005 for Cause, then the
Executive shall be entitled to receive salary, accrued vacation, and
reimbursement of expenses pursuant to Section 11 hereof through the
Termination Date only; vesting of the New Options shall cease on such
Termination Date; any unexercised New Options, whether or not vested, shall
terminate; and the options issued pursuant to the August 2000 Agreement shall
remain exerciseable or shall terminate as provided in such options or in the
associated plan.

               (d) Subject to Section 19 hereof, if the Executive's employment
is terminated prior to December 31, 2005 due to death or Disability, the
Executive (or his estate or legal representative as the case may) be shall be
entitled to receive (i) salary, reimbursement of expenses pursuant to Section
11 hereof, and pay for any unused vacation time accrued through the
Termination Date; (ii) a pro-rated amount of incentive cash compensation for
the fiscal year in which such death or disability occurs (determined as
provided in Section 4(d) hereof); and (iii) a lump sum, payable within 30 days
after the termination date, equal to base salary at the rate in effect on the
date of such termination for the lesser of (a) twelve (12) months and (b) the
remaining term of this Agreement at the time of such termination. In such
case, vesting of the New Options shall cease on such Termination Date, and
only the then-vested New Options (and options issued pursuant to the August
2000 Agreement if and to the extent applicable) shall remain vested and
exerciseable for the remainder of their terms.

               (e) In addition to the provisions of Sections 10(a), 10(b) or
10(c) hereof, as the case may be, to the extent COBRA shall be applicable to
the Company or as provided by law, the Executive shall be entitled to
continuation of group health plan benefits for the periods provided by law
following the Termination Date if the Executive makes the appropriate election
and payments.

               (f) Subject to Section 19 hereof, the Executive acknowledges
that, upon termination of this employment, he is entitled to no other
compensation, severance or other benefits other than those specifically set
forth in this Agreement.

        11.    Expenses. The Company shall pay or reimburse the Executive for
all expenses normally reimbursed by Company that are reasonably incurred by
him in furtherance of his duties hereunder and such further expenses as may be
authorized and approved by the Company from time to time. Without limiting the
foregoing, the Company shall continue to provide Executive with up to Five
Thousand Dollars ($5,000.00) per month for local living expenses occasioned by
or associated with Executive's service for the Company for all periods until
the office is fully operational in the Seattle, Washington area.

        12.    Facilities and Services.  The Company shall furnish the
Executive with office space, secretarial and support staff, and such other
facilities and services as shall be reasonably necessary for the performance
of his duties under this Agreement.

        13.    Mitigation not Required. In the event this Agreement is
terminated, the Executive shall not be required to mitigate amounts payable
pursuant hereto by seeking other employment or otherwise. The Executive's
acceptance of any such other employment shall not diminish or impair the
amounts payable to the Executive pursuant hereto.


                                      8






        14.    Place of Performance. The Executive shall perform his duties at
such locations as the Executive may reasonably choose, provided that the
Executive shall make reasonable efforts to accommodate the Company's needs and
considerations of efficiency in this regard, and provided further that, in
consultation and cooperation with the Executive, the Company shall expand its
research facilities at a location or locations reasonably acceptable to the
Executive in the Seattle, Washington area during 2002.

        15.    Insurance and Indemnity. With respect to his service hereunder,
the Company shall maintain, at its expense, customary officers and directors
liability insurance covering the Executive and, if such coverage is available
at reasonable cost, for all other executive officers and directors, in an
amount of no less than Five Million Dollars ($5,000,000). The Company shall
also indemnify the Executive, to the fullest extent permitted by law, from any
liability asserted against or incurred by the Executive (a) by reason of the
fact that the Executive is or was an officer, director, employee, or
consultant of the Company or any affiliate or related party or is or was
serving in any capacity at the request of the Company for any other
corporation, partnership, joint venture, trust, employment benefit plan or
other enterprise or (b) in connection with any action(s), omission(s), or
occurrence(s) during the course of such service or such status as an officer,
director, employee, or consultant of or to any of the foregoing. The Company's
obligations under this Section 15 shall survive the termination of the
Executive's employment hereunder and any termination of this Agreement.

        16.    Non-Competition

               (a) The Executive agrees that, except in accordance with his
duties under this Agreement on behalf of the Company, he will not during the
Employment Period: participate in, be employed in any capacity by, serve as
director, consultant, agent or representative for, or have an interest,
directly or indirectly, in any enterprise which is engaged in the business of
developing, licensing, or selling technology, products or services which are
directly competitive with the Business of the Company or any of its
Subsidiaries or with any technology, products or services being actively
developed, with the bona fide intent to market same, by the Company or any of
its Subsidiaries at the time in question.

               (b) In addition, the Executive agrees that, for a period of six
months after the end of Executive's employment by the Company (unless such
employment is terminated due to a breach of the terms hereof by the Company in
failing to pay to the Executive all sums due him under the terms hereof or to
honor any of its other obligations under this Agreement, in which event the
following shall be inapplicable), the Executive shall not (1) own, either
directly or indirectly or through or in conjunction with one or more members
of his or his spouse's family or through any trust or other contractual
arrangement, a greater than five percent (5%) interest in, or otherwise
control either directly or indirectly, or (2) participate in, be employed in
any capacity by, or serve as director, consultant, agent or representative
for, any partnership, corporation, or other entity which is engaged in the
business of developing, licensing, or selling technology, products or services
which are directly competitive with the Business of the Company or any of its
Subsidiaries as of the termination of the Executive's employment with the
Company or which are directly competitive with any technology, products, or
services being actively developed by the Company or any of its Subsidiaries,
with the bona fide intent to market same, as of the termination of the
Executive's employment at the Company.






                                      9



               (c) Executive further agrees, for twelve months following the
end of Executive's employment by the Company (unless such employment is
terminated due to a breach of the terms hereof by the Company as described
above), to refrain from directly or indirectly soliciting Company's
collaborative partners, consultants, certified research organizations,
principal vendors, licensees or employees except any such solicitation in
connection with activities that would not be directly competitive with and
adverse to the Business of the Company or any of its Subsidiaries or with and
to any products or services being offered by the Company or any of its
Subsidiaries at the date such employment terminated or then being actively
developed, with the bona fide intent to market same, by the Company or any of
its Subsidiaries.

               (d) The Executive hereby agrees that damages and any other
remedy available at law would be inadequate to redress or remedy any loss or
damage suffered by the Company upon any breach of the terms of this Section 16
by the Executive, and the Executive therefore agrees that the Company, in
addition to recovering on any claim for damages or obtaining any other remedy
available at law, also may enforce the terms of this Section 16 by injunction
or specific performance, and may obtain any other appropriate remedy available
in equity.

        17.    Assignment of Patents. Executive shall disclose fully to the
Company any and all discoveries he shall make and any and all ideas, concepts
or inventions he shall conceive or make that are related or applicable to the
Business of he Company or of any of its Subsidiaries or to any other products,
services, or technology in medicine or the health sciences in which the
Company shall during the Employment Period undertake, or actively and in good
faith consider, research or commercial involvement provided that either (a)
such discovery(ies), idea(s), concept(s) and/or invention(s) are made by
Employee during the Employment Period or (b) such discovery(ies), idea(s),
concept(s) and/or invention(s) are made by Employee during the period of six
months after his employment terminates and are in whole or in part the result
of his work with the Company. Such disclosure is to be made promptly after
each such discovery or conception, and each such discovery, idea, concept or
invention will become and remain the property of the Company, whether or not
patent applications are filed thereon. Upon the request and at the expense of
the Company, the Executive shall (i) make application through the patent
solicitors of the Company for letters patent of the United States and any and
all other countries at the discretion of the Company on such discoveries,
ideas and inventions, and (ii) assign all such applications to the Company, or
at its order, without additional payment by the Company except as provided
below. The Executive shall give the Company, its attorneys and solicitors, all
reasonable assistance in preparing and prosecuting such applications and, on
request of the Company, execute all papers and do all things that may be
reasonably necessary to protect the rights of the Company and vest in it or
its assigns the discoveries, ideas or inventions, applications and letters
patent herein contemplated. Said cooperation shall also include all actions
reasonably necessary to aid the Company in the defense of its rights in the
event of litigation. To the extent that the Executive's actions referred to in
this paragraph are performed after the end of the Executive's employment by
the Company, the Company shall promptly compensate the Executive for his time
spent in or because of such activities at the rate of Four Hundred Dollars
($400) per hour; and all such activities shall be scheduled in a manner
reasonably convenient to the Executive.




                                      10





        18.    Trade Secrets

               (a) In the course of the term of this Agreement, it is
anticipated that the Executive shall have access to secret or confidential
technical, scientific and commercial information, records, data, formulations,
specifications, systems, methods, plans, policies, inventions, material and
other knowledge that is (are) specifically related or applicable to the
Business of he Company or of any of its Subsidiaries or to any other products,
services, or technology in medicine or the health sciences in which the
Company shall during the Employment Period undertake, or actively and in good
faith consider, research or commercial involvement and that is/are owned by
the Company or its Subsidiaries ("Confidential Material"). The Executive
recognizes and acknowledges that included with the Confidential Material are
the following as they may specifically relate or be applicable to the drug
delivery business technology, or current or specifically contemplated future
drug delivery products or services: the Company's confidential commercial
information, technology, formulations, STA-T (Systemic Transnasal Absorption
Technology) and know-how, methods of manufacture, chemical formulations,
device designs, pending patent applications, clinical data, pre-clinical data
and any related materials, all as they may exist from time to time, and that
such material is or may be valuable special, and unique aspects of the
Company's business. All such Confidential Material shall be and remain the
property of the Company. Except as required by his duties to the Company, the
Executive shall not, directly or indirectly, either during the term of his
employment or at any time thereafter, disclose or disseminate to anyone or
make use of, for any purpose whatsoever, any Confidential Material. Upon
termination of his employment, the Executive shall promptly deliver to the
Company all Confidential Material (including all copies thereof, whether
prepared by the Executive or others) which are in the possession or under the
control of the Executive. The Executive shall not be deemed to have breached
this Section 18 if the Executive shall be specifically compelled by legal
process or order of any judicial, legislative, or administrative authority or
body to disclose any Confidential Material.

               (b) The Executive hereby agrees that damages and any other
remedy available at law would be inadequate to redress or remedy any loss or
damage suffered by the Company upon any breach of the terms of this Section 18
by the Executive, and the Executive therefore agrees that the Company, in
addition to recovering on any claim for damages or obtaining any other remedy
available at law, also may enforce the terms of this Section 18 by injunction
or specific performance, and may obtain any other appropriate remedy available
in equity.

        19.    Payment and Other Provisions After Change of Control

               (a) In the event the Executive's employment with the Company is
terminated either by the Company or by the Executive (other than because of
the Executive's death or Disability) following the occurrence of a Change of
Control (regardless of whether such termination is for Good Reason or for
Cause or otherwise) and the date of such termination is (i) prior to December
31, 2005 and within one year following the occurrence of such Change of
Control or (ii) prior to the date upon which all options granted to the
Executive pursuant to Section 5 hereof are fully vested, then the Executive
shall be entitled to receive from the Company, in lieu of the severance
payment otherwise payable pursuant to Section 10 hereof, salary, expense
reimbursement, and pay for unused vacation time through the termination date
and, in addition, the following:




                                      11





                      (i) Base Salary: A lump-sum amount equal to the greater
of (a) twelve (12) months of Executive's base salary as in effect at the date
of termination and (b) the balance of Executive's base salary compensation
hereunder to the end of the term of this Agreement, such amount to be paid to
the Executive within ten (10) days after the date of termination;

                      (ii) Incentive Cash Compensation: The amount of the
Executive's incentive cash compensation for the fiscal year in which the date
of termination occurs (determined on a pro-rated basis as provided in Section
4(d) hereof and the Annual Base Bonus Amount for the following fiscal year
(regardless of satisfaction of any performance criteria or progress toward
such satisfaction), such amounts to be paid to the Executive within ten (10)
days after the date of termination; and

                      (iii) Other Benefits: Notwithstanding the vesting and/or
exercisability provisions otherwise applicable to the New Options and/or to
the stock options issued pursuant to the August 2000 Agreement, all stock
options ("options") granted Executive by the Company shall be fully vested and
exercisable upon a Change of Control and shall remain exercisable for the
remainder(s) of their term(s).

        (b)    For purposes of this Agreement, the term "Change of Control"
shall mean:

                      (i) The acquisition by any individual, entity or group
(within the meaning of Rule 13d-3 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") or any successor provision) (any
of the foregoing hereafter a "Person") of 40% or more of either (a) the then
outstanding shares of Capital Stock of the Company (the "Outstanding Capital
Stock") or (b) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Voting Securities"), provided, however, that such an
acquisition by one of the following shall not constitute a change of control:
(1) the Company or any of its Subsidiaries, or any employee benefit plan (or
related trust) sponsored or maintained by the Company or any of its
Subsidiaries or (2) any Person that is eligible, pursuant to Rule 13d-1(b)
under the Exchange Act, to file a statement on Schedule 13G with respect to
its beneficial ownership of Voting Securities, whether or not such Person
shall have filed a statement on Schedule 13G, unless such Person shall have
filed a statement on Schedule 13D with respect to beneficial ownership of 40%
or more of the Voting Securities or (3) any corporation with respect to which,
following such acquisition, more than 60% of both the then outstanding shares
of common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally
in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Capital Stock or
Voting Securities immediately prior to such acquisition in substantially the
same proportions as their ownership, immediately prior to such acquisition, of
the Outstanding Capital Stock or Voting Securities, as the case may be; or

                      (ii) Individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at least
a majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election or nomination for election by the
Company's shareholders was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for this
purpose, any








                                      12









such individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
Directors of the Company (as such terms are used in Rule 14a-11 of Regulation
14A, or any successor section, promulgated under the Exchange Act); or

                      (iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation (a "Business Combination"), in each
case, with respect to which all or substantially all holders of the
Outstanding Capital Stock and Voting Securities immediately prior to such
Business Combination do not, following such Business Combination, beneficially
own, directly of indirectly, in substantially the same proportions, more than
60% of, respectively, the then outstanding shares of common stock or the
combined voting power of the then outstanding voting securities entitled to
vote generally in the election of directors, as the case may be, of the
corporation resulting from the Business Combination; or

                      (iv) A complete liquidation or dissolution of the
Company; or

                      (v) A sale or other disposition of all or substantially
all of the assets of the Company other than to a corporation with respect to
which, following such sale or disposition, more than 60% of the then
outstanding shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors are then owned beneficially, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Capital Stock or Voting Securities
Immediately prior to such sale or disposition in substantially the same
proportions as their ownership of the Outstanding Capital Stock and Voting
Securities, as the case may be, immediately prior to such sale or disposition.

               (c) In the event that (i) the Executive becomes entitled to any
payments or benefits in connection with a Change of Control or the termination
of the Executive's employment, whether pursuant to the terms of this Agreement
or otherwise (collectively, the "Total Benefits"), and (ii) any of the Total
Benefits will be subject to the excise tax imposed under Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Excise Tax"), the Company
shall pay to the Executive an additional amount (the "Gross-Up Payment") such
that the net amount retained by the Executive from the Gross-Up Payment, after
the payment of all taxes on the Gross-Up Payment (including but not limited to
income, excise and employment taxes and any interest and penalties imposed
with respect to all such taxes), is equal to the Excise Tax on the Total
Benefits. For purposes of this Section 19(c), the Executive shall be deemed to
pay federal income taxes at the highest marginal rate of federal income
taxation in the calendar year in which the Excise Tax is (or would be) payable
and state and local income taxes at the highest marginal rate of taxation in
the state and locality of the Executive's residence (or of such
jurisdiction(s) as may apply income taxation to the Executive's income) at the
time the Gross-Up Payment is made.

               (d) All determinations required to be made under Section 19(c)
shall be made by tax counsel selected by the Executive and reasonably
acceptable to the Company ("Tax Counsel"), which determinations shall be
conclusive and binding on the Company and on the Executive absent manifest
error. Prior to any determination of the amount of any Gross-Up Payment
payable pursuant to Section 19(c), Tax Counsel shall provide the Executive and
the Company with a report setting forth its calculations and containing
related supporting





                                      13




information. All fees and expenses of Tax Counsel shall be borne solely by the
Company. In the event that, after a Gross-Up Payment is made pursuant to
Section 19(c), it is determined that the Excise Tax on the Total Benefits
exceeds the amount theretofore taken into account hereunder, the Company shall
promptly make an additional Gross-Up Payment (which shall be calculated by Tax
Counsel as set forth herein) to the Executive in respect of such excess (plus
any associated interest, penalties or additions payable by the Executive to
the Internal Revenue Service or any other federal, state, local or foreign
taxing authority).

        20.    Payment of Certain Costs of the Executive. Promptly from time
to time the Company shall pay directly (or promptly reimburse the Executive to
the extent that the Executive shall have paid) all actual legal, accounting,
and other fees and expenses that are or shall have been:

               (a) Incurred by the Executive in the preparation, revision,
and/or negotiation of this Agreement and/or

               (b) Incurred by the Executive as a result of a bona fide
dispute regarding the application of any provision of this Agreement,
including all such fees and expenses, if any, incurred in seeking to obtain or
enforce any right or benefit provided by this Agreement or in connection with
any tax audit or proceeding to the extent attributable to the application of
Section 280G of the Tax Laws to any payment or benefit provided to the
Executive.

Such payments shall be made within five (5) business days after delivery to
the Company of the Executive's respective written requests for payment
accompanied by evidence of fees and expenses incurred by the Executive.

        21.    Notices. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing and if sent by registered or
certified mail, return receipt requested to his residence in the case of the
Executive, or to its principal office in the case of the Company, or to such
other addresses as they may respectively designate in writing.

        22.    Entire Agreement; Waiver. This Agreement contains the entire
understanding of the parties with respect to the subject matter hereof and may
not be changed orally but only by an agreement in writing, signed by the party
against whom enforcement of any waiver, change, modification or discharge is
sought. Waiver of or failure to exercise any rights provided by this Agreement
in any respect shall not be deemed a waiver of any further or future rights.

        23.    Binding Effect; Assignment.  The rights and obligations of this
Agreement shall bind and inure to the benefit of any successor of the Company
by reorganization, merger or consolidation, or any assignee of all or
substantially all of the Company's business or properties.  The Executive's
rights hereunder are personal to and shall not be transferable nor assignable
by the Executive.

        24.    Headings.  The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.

        25.    Governing Law; Arbitration. This agreement shall be construed
in accordance with and governed for all purposes by the laws and public policy
of the State of Washington applicable to contracts made and to be performed
wholly within such state. Any dispute or




                                      14




controversy arising out of or relating to this Agreement shall be settled by
arbitration in accordance with the rules of the American Arbitration
Association, and judgement upon the award may be entered in any court having
jurisdiction thereover. The arbitration shall be held in King County,
Washington or in such other place as the parties hereto may agree.

        26.    Further Assurances. Each of the parties agrees to execute,
acknowledge, deliver and perform, and cause to be executed, acknowledged,
delivered and performed, at any time and from time to time, all such further
acts, deeds, assignments, transfers, conveyances, powers of attorney and/or
assurances as may be necessary or proper to carry out the provisions or intent
of this Agreement.

        27.    Severability. The parties agree that if any one or more of the
terms, provisions, covenants or restrictions of this Agreement shall be
determined by a court of competent jurisdiction to be invalid, void, or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.

        28.    Condition to Continued Effectiveness. This Agreement and the
obligations of the Executive and of the Company hereunder (other than the
obligations of the Company set forth below in this paragraph) are dependent
upon the approval by the shareholders of the Company, on or before July 31,
2002, of the Option Plan covering the issuance of the New Options. The Company
hereby agrees: (a) to solicit, and to use all reasonable efforts to secure,
such approval as soon as practicable and, in any event, prior to that date and
also (b) to prepare and deliver to the Executive, as soon as practical and, in
any event, prior to July 1, 2002, customary, mutually acceptable definitive
documentation memorializing the grant of the New Options on the terms provided
for herein and otherwise as provided in the Option Plan. If such shareholder
approval is not secured by the close of business on July 31, 2002, the Company
shall so notify the Executive promptly (in any event by August 5, 2002) and in
writing, this Agreement shall become null and void, and the terms of the
August 2000 Agreement shall apply without amendment hereby.

        IN WITNESS WHEREOF, NASTECH PHARMACEUTICAL COMPANY INC. has caused
this instrument to be signed by a duly authorized officer and the Executive
has hereunto set his hand as of the day and year first above written.




      COMPANY:                 NASTECH PHARMACEUTICAL COMPANY INC.


                               By: /s/ BRUCE R. THAW
                                  -----------------------
                               Print name: Bruce R. Thaw

                               Print title:  Secretary



      EXECUTIVE:
                                      /s/ STEVEN C. QUAY, M.D., Ph.D.
                                    ---------------------------------------
                                      Steven C. Quay, M.D., Ph.D.


                                      15