10-Q

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended July 31, 2000
/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                to

Commission file number 0-21103

ADVANCED DIGITAL INFORMATION CORPORATION

Incorporated under the laws
of the State of Washington I.R.S. Identification
No. 91-1618616

11431 Willows Road
P.O. Box 97057
Redmond, Washington 98073-9757

(425) 881-8004

    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 / /

    The total shares of common stock without par value outstanding at the end of the quarter reported is 51,670,901.

Item 1.  Financial Statements

Advanced Digital Information Corporation

Consolidated Balance Sheets

(In thousands, except for share data)

			October 31, 1999			July 31, 2000
						(Unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	156,548		$	201,666
	Accounts receivable, net of allowances of $1,004 in 1999 and $1,581 in 2000			44,568			54,429
	Inventories, net			33,317			46,807
	Marketable equity securities			2,222			25,550
	Prepaid expenses and other			1,063			1,309
	Deferred income taxes			4,664			5,018
		Total current assets		242,382			334,779
Property, plant and equipment, net				8,712			13,245
Investment in Crossroads Systems, Inc				185,544			8,097
Intangible and other assets and investment in common stock				16,336			22,050
			$	452,974		$	378,171
Liabilities and Shareholders' Equity
Current liabilities:
	Accounts payable		$	20,582		$	29,387
	Accrued liabilities			11,439			11,746
	Income taxes payable			3,138			12,830
	Deferred revenue			4,105			7,287
	Current portion of long-term debt			8,753			5,794
Total current liabilities				48,017			67,044
Long-term debt				1,507			1,229
Deferred income taxes				64,168			1,814
Minority interest				324			—
Commitments				—			—
Shareholders' equity: Preferred stock, no par value; 4,000,000 shares authorized; none issued and outstanding				—			—
Common stock, no par value; 160,000,000 shares authorized, 51,670,901 issued and outstanding (50,931,534 in 1999)				191,155			198,800
Retained earnings				31,227			108,561
Accumulated other comprehensive income:
	Cumulative translation adjustment			(963	)		(1,979	)
	Unrealized investment gains			117,539			2,702
		Total shareholders' equity		338,958			308,084
			$	452,974		$	378,171

See the accompanying notes to these consolidated financial statements.

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Advanced Digital Information Corporation

Consolidated Statements of Income

(In thousands, except for per share data)

		Three months ended July 31,						Nine months ended July 31,
		1999			2000			1999			2000
		(Unaudited)
Net sales		$	57,191		$	66,022		$	160,379		$	194,783
Cost of sales			37,075			43,943			105,830			126,387
	Gross profit		20,116			22,079			54,549			68,396
Operating expenses:
	Selling and administrative		9,409			12,997			27,502			36,530
	Research and development		3,440			4,370			9,490			12,444
			12,849			17,367			36,992			48,974
Operating profit			7,267			4,712			17,557			19,422
Other income:
	Interest income		191			2,967			515			7,640
	Interest expense		(182	)		(92	)		(729	)		(282	)
	Gain on sale of Crossroads Systems, Inc.		—			14,345			—			88,791
	Gain on sale of marketable equity securities		7			—			571			1,536
	Foreign currency transaction gains (losses)		117			(80	)		207			(20	)
	Other		(92	)		—			(92	)		—
			41			17,140			472			97,665
Income before provision for income taxes			7,308			21,852			18,029			117,087
Minority interest			98			—			381			18
Provision for income taxes			2,663			7,629			6,504			39,735
Net income		$	4,547		$	14,223		$	11,144		$	77,334
Basic net income per share		$	0.11		$	0.28		$	0.28		$	1.50
Diluted net income per share		$	0.11		$	0.27		$	0.27		$	1.44

See the accompanying notes to these consolidated financial statements.

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Advanced Digital Information Corporation

Consolidated Statements of Cash Flows

(In thousands)

			Nine months ended July 31,
			1999			2000
			(Unaudited)
Cash flows from operating activities:
	Net income		$	11,144		$	77,334
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization		2,797			3,374
		Allowance for doubtful accounts receivable		613			970
		Allowance for inventory obsolescence		3,716			4,741
		Gain on sale of marketable equity securities		(571	)		(90,327	)
		Deferred income taxes		—			(993	)
		Other		538			159
	Change in assets and liabilities:
		Accounts receivable		(4,387	)		(11,680	)
		Inventories		(6,354	)		(19,356	)
		Prepaid expenses and other		212			(291	)
		Other assets		(51	)		12
		Accounts payable		5,480			9,129
		Accrued liabilities		690			516
		Income taxes payable		3,512			14,611
		Deferred revenue		1,547			3,436
Net cash provided by (used in) operating activities				18,886			(8,365	)
Cash flows from investing activities:
	Purchase of property, plant and equipment			(3,627	)		(7,451	)
	Investment in marketable equity securities			(1,769	)		(26,769	)
	Proceeds from sale of marketable equity securities			2,756			94,292
	Acquisition of minority interest			—			(4,765	)
	Other investments in equity securities			(11,000	)		(1,822	)
Net cash provided by (used in) investing activities				(13,640	)		53,485
Cash flows from financing activities:
	Proceeds from short-term and long-term debt			10,734			—
	Repayment of short-term and long-term debt			(14,234	)		(2,094	)
	Repayment of other long-term liabilities			(300	)		—
	Proceeds from issuance of common stock for stock options			2,486			2,855
Net cash provided by (used in) financing activities				(1,314	)		761
Effect of exchange rate changes on cash				(500	)		(763	)
Net increase in cash and cash equivalents				3,432			45,118
Cash and cash equivalents at beginning of period				28,226			156,548
Cash and cash equivalents at end of period			$	31,658		$	201,666

See the accompanying notes to these consolidated financial statements.

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Advanced Digital Information Corporation

Consolidated Statements of Changes in Shareholders' Equity

Nine months ended July 31, 2000

(In thousands)

(Unaudited)

			Common Stock					Accumulated Other Comprehensive Income (Loss)
						Retained Earnings
			Shares	Amount							Total
Balance at October 31, 1999			50,932	$	191,155	$	31,227	$	116,576		$	338,958
Purchases under Stock Purchase Plan			55		753							753
Exercise of stock options, including tax benefit of $4,439			684		6,892							6,892
Comprehensive income, net of tax:
	Net income						77,334
	Unrealized investment gains (losses):
		Unrealized losses							(56,124	)
		Reclassification adjustment: gain included in net income							(58,713	)
	Foreign currency translation adjustment								(1,016	)
		Comprehensive income (loss)										(38,519	)
Balance at July 31, 2000			51,671	$	198,800	$	108,561	$	723		$	308,084

See the accompanying notes to these consolidated financial statements.

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements

July 31, 2000

(Unaudited)

Note 1.  Basis of presentation

    The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended October 31, 1999. In our opinion all normal recurring adjustments which are necessary for the fair presentation of the results for the interim periods are reflected herein. Operating results for the nine-month period ended July 31, 2000, are not necessarily indicative of results to be expected for a full year.

    All references to the number of shares and per share amounts of our common stock in the accompanying financial statements and these notes have been restated to reflect a two-for-one stock split effected on March 14, 2000.

Note 2.  Recent accounting pronouncements

    In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements." This pronouncement summarizes certain of the SEC staff's views on applying generally accepted accounting principles to revenue recognition. We are required to adopt SAB 101 in the fiscal year ending October 2001. We do not expect this adoption to have a material impact on our results of operations, financial position or cash flows.

Note 3.  Earnings per share

    The following table sets forth the computation of basic and diluted net income per share for the three months and nine months ended July 31, 1999 and 2000:

		Three months ended July 31,				Nine months ended July 31,
		1999		2000		1999		2000
Numerator:
	Net income	$	4,547	$	14,223	$	11,144	$	77,334
Denominator:
	Denominator for basic net income per share—weighted average shares		39,952		51,654		39,462		51,442
	Dilutive potential common shares from Team Member (employee) stock options		2,099		1,851		1,530		2,335
	Denominator for diluted net income per share—adjusted weighted average shares and assumed conversions		42,051		53,505		40,992		53,777
Basic net income per share		$	0.11	$	0.28	$	0.28	$	1.50
Diluted net income per share		$	0.11	$	0.27	$	0.27	$	1.44

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Note 4.  Inventories

    Inventory is comprised as follows:

	October 31, 1999			July 31, 2000
Finished goods	$	13,871		$	16,240
Work-in-process		3,892			6,400
Raw materials		22,133			34,564
		39,896			57,204
Allowance for inventory obsolescence		(6,579	)		(10,397	)
	$	33,317		$	46,807

Note 5.  Investment in Crossroads Systems, Inc. and other marketable equity securities

    At times we invest in certain marketable equity securities. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," such investments are classified as available-for-sale. Under FAS 115, unrealized investment gains and losses, net of taxes, are reflected as a net amount in a separate component of shareholders' equity until realized. For the purpose of computing realized gains and losses, costs are identified on a specific identification basis.

    In August 1997, we purchased an approximately 15% interest in Crossroads for a purchase price of $4,000,000. In October 1999, Crossroads completed an initial public offering. During the nine months ended July 31, 2000, we sold approximately 30% of our interest in Crossroads, at market prices averaging over $100 per share and resulting in a net gain of $88,791,000. Of this gain, $14,345,000 was recorded in the third quarter of fiscal 2000. The fair value of the remaining investment is $8,097,000 at July 31, 2000 based upon the market price on that date of $4.563 per share. The difference between the cost basis and fair value of $5,376,000, net of taxes of $1,882,000, is recorded as an unrealized investment gain.

    At July 31, 2000, the cost basis of other marketable equity securities was $26,769,000 and the fair value was $25,550,000. The difference between the cost basis and fair value of $1,218,000, net of benefit for taxes of $426,000 is recorded as an unrealized investment loss. During the current fiscal year, we sold certain marketable equity securities and realized gains of $1,536,000.

Note 6.  Acquisition of minority interest

    Effective January 1, 2000, we acquired the 20% minority interest in ADIC/GRAU Storage Systems GmbH & Co. KG for a total purchase price of $4,765,000 in cash. In connection with the acquisition, we recorded approximately $4,422,000 of goodwill and other intangible assets, with an average useful life of eight years.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our financial statements included in our Annual Report on Form 10-K for the year ended October 31, 1999. This discussion contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Such risks are detailed in our Annual Report on Form 10-K and are incorporated herein by reference. Our actual results could differ materially from those discussed here. We undertake no obligation to publicly release any revisions to these forward-looking statements that may be required to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

General

    We provide hardware and software-based data storage solutions to the open systems marketplace. Our storage solutions integrate into a wide range of rapidly evolving network computing environments and are designed to enable organizations to organize, protect and retrieve complex mission-critical data. We design, manufacture, sell and support specialized data storage hardware and software products and provide related services. Currently, we derive substantially all of our revenue from the sale of storage libraries and related service and support. As a result of our investments in software development, we expect sales of our proprietary software products to increase in the future. We distribute our products primarily through value-added resellers (VARs), and original equipment manufacturers (OEMs), and we also sell directly to large end users.

Results of Operations

    Net Sales.  Net sales increased during the third quarter of fiscal 2000 by 15% to $66.0 million from $57.2 million in the third quarter of fiscal 1999. Net sales for the nine months ended July 31, 2000 were $194.8 million, an increase of 21% from $160.4 million during the nine months ended July 31, 1999. The increase in both periods was due to increased sales of FastStor and Scalar products, both in branded and OEM business. A reduction in sales of larger libraries and associated service revenues especially in Europe where large libraries have generally been strongest, offset this increase. Revenue from OEM customers was 21% of total sales in the third quarter of fiscal 2000 as compared to 17% of total sales in the third quarter of fiscal 1999. We expect significant revenues associated with major OEM agreements over the next two fiscal quarters.

    Gross Profit.  Gross profit was $22.1 million or 33% of net sales for the three months ended July 31, 2000 compared to $20.1 million or 35% of net sales for the same period in fiscal 1999. The decrease in percentage of net sales was due in large part to increasing fixed costs and to the reduction in revenues from sales of large libraries which typically have higher gross margins. For the nine months ended July 31, 2000, gross profit was $68.4 million or 35% of net sales compared to $54.6 million or 34% of net sales for the same period in fiscal 1999. Increased OEM revenues may have a negative effect on gross margin percentage over the next few quarters.

    Selling and Administrative Expenses.  Selling and administrative expenses were $13.0 million or 20% of net sales for the three months ended July 31, 2000 compared to $9.4 million or 16% of net sales for the same period in fiscal 1999. The dollar and percentage increases are due to a combination of increased sales and administrative personnel both in the headquarters office and in regional offices, and marketing costs associated with our increased efforts to take advantage of new products and sales channels. We expect to continue increasing spending levels as opportunities are identified.

    Research and Development Expenses.  Research and development expenses were $4.4 million or 7% of net sales for the third quarter of fiscal 2000 compared to $3.4 million or 6% of net sales for the third quarter of fiscal 1999. Approximately half of the research and development spending thus far in

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fiscal 2000 was related to software-based products that may be incorporated into intelligent peripherals or sold separately. We intend to continue to invest in software development and new hardware products.

    Other Income.  Other income was $17.1 million for the third quarter of fiscal 2000 and $97.7 million for the nine months ended July 31, 2000. These total other income amounts include gain on sales of a portion of our equity interest in Crossroads Systems, Inc. of $14.3 million and $88.8 million, respectively. The increase in interest income in the three months and nine months ended July 31, 2000, is the result of the investment of cash balances received in the follow-on stock offering in September 1999 and interest income earned on the additional cash balances received as a result of the sales of marketable equity securities. Interest expense in fiscal 2000 relates to interest on operating credit lines through a German bank. In fiscal 1999 we incurred interest associated primarily with a bank loan used to finance the acquisition of EMASS. All U.S. bank debt was paid off during fiscal 1999.

    Provision for Income Taxes.  Income tax expense for the nine months ended July 31, 2000 was $39.7 million, an effective tax rate of 34%. The effective tax rate includes taxes paid in various federal, state and international jurisdictions. This compares with income tax expense in fiscal 1999 of $6.5 million, an effective tax rate of 36%. The large dollar amount of taxes owed in fiscal 2000 is associated with the gain on sale of Crossroads. There are significant deferred tax assets for net operating loss carryforwards and other temporary differences associated with MountainGate and with subsidiaries acquired in the EMASS transaction. At October 31, 1999 a valuation allowance had been established on a portion of these deferred tax assets. During the first two quarters of fiscal 2000 we determined that it was more likely than not that we could realize a portion of these deferred tax assets and consequently reduced the previously established valuation allowance by $850,000. At July 31, 2000 we had a valuation allowance of $2.4 million which, if reduced, will lower our effective income tax rate in future periods.

Liquidity and Capital Resources

    In both fiscal 2000 and fiscal 1999 operating cash was primarily used to fund increases in accounts receivable and inventories and was offset by net income, depreciation and other allowances and accounts payable. Additionally, cash used in operating activities in fiscal 2000 reflects an increase in income taxes payable of $14.6 million. This increase is the net of a provision for taxes, less estimated tax payments, including payments made in the U.S. of $22.9 million. Excluding the estimated tax payments made in relation to the gain on sales of Crossroads, significant cash would have been provided by operating activities for fiscal 2000. In the comparable period of fiscal 1999, cash of $18.9 million was provided by operating activities.

    Cash flows provided by investing activities were $53.5 million for the first nine months of fiscal 2000, compared to cash flows used in investing activities of $13.6 million in the first nine months of fiscal 1999. Fiscal 2000 cash flows reflect the proceeds from the sale of Crossroads and other marketable equity securities, as well as investments in marketable equity securities. Fiscal 1999 uses include $11.0 million associated with two strategic investments. The first was a $4.0 million investment in LiveVault Corporation (formerly known as Network Integrity, Inc.), a developer of specialized data protection software products. The second investment for $7.0 million was in SkyDesk (formerly known as @Backup, Inc.), an Internet-based backup and data access service company.

    Cash flows provided by financing activities in the first nine months of fiscal 2000 were $761 thousand. This amount reflects $2.9 million associated with the exercise of stock options, offset by certain payments of long-term and short-term debt. The tax benefit of such stock option exercises is an element of cash flows from operating activities. Cash flows provided by financing activities in the first nine months of fiscal 1999 include a partial payment of certain U.S. bank debt of $14.2 million.

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    During the first nine months of fiscal 2000, we committed to the worldwide implementation of a fully-integrated Enterprise Resource Planning information system. We anticipate that the total cost of this project will be approximately $5.0 million of which $2.5 million has been incurred through July 31, 2000. During the period, we also signed a lease for a new Redmond, Washington facility. The new facility, totaling 78,000 square feet, will provide for increased manufacturing capacity, additional office space, and expanded test and systems engineering labs.

    At July 31, 2000, our cash and cash equivalents totaled $201.7 million, up from $156.5 million at October 31, 1999. Our working capital, the difference between current assets and current liabilities, was $267.7 million at July 31, 2000, with a ratio of current assets to current liabilities of 5 to 1. Additionally, at July 31, 2000, our investment in Crossroads Systems, Inc. had a market value of $8.1 million. The market for technology stocks is extremely volatile and there is no assurance that we will realize this value when and if we liquidate the remainder of our investment in Crossroads.

    We believe that our existing cash and cash equivalents, available bank lines of credit, debt capacity and anticipated cash flow from our operating activities will be sufficient to fund our working capital and capital expenditure needs for at least the next 12 months. We may utilize cash to acquire or invest in businesses, products or technologies that we believe are strategic. We regularly evaluate other companies and technologies for possible acquisition by us. In addition, we have made and expect to continue to make substantial investments in companies with whom we have identified potential synergies. However, we have no present commitments or agreements with respect to any material acquisition of other businesses, products or technologies.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk Management

    We are exposed to various market risks, including changes in foreign currency rates and interest rates. We may enter into various derivative transactions to manage certain of these exposures. We do not hold or issue derivative instruments for trading purposes.

    The assets and liabilities of our non-U.S. subsidiaries have functional currencies other than the U.S. dollar and are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. A 10% depreciation in the U.S. dollar would result in an approximately $970,000 decrease in income before provision for income taxes for the first nine months of fiscal 2000.

    At July 31, 2000, we had variable rate debt of approximately $5.7 million provided by German banks, and fixed rate debt of $1.3 million, also provided by a German bank. The fair value of such debt approximates the carrying amount on the consolidated balance sheet at July 31, 2000. We have entered into an interest rate swap agreement on the variable rate debt, which fixes the interest rate at 4.3%.

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PART II—OTHER INFORMATION

Item 1.	Legal Proceedings.
	None
Item 2.	Changes in Securities.
	None
Item 3.	Defaults Upon Senior Securities.
	None
Item 4.	Submission of Matters to a Vote of Security Holders.
	None
Item 5.	Other information.
	None
Item 6.	Exhibits and Reports on Form 8-K.
	No reports on Form 8-K were filed during the fiscal quarter ended July 31, 2000.
	The following exhibits are filed as part of this report.

Exhibit Number	Description
10.1	Lease Agreement between Laguna South Exchange LLC and ADIC
27.1	Financial Data Schedule

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SIGNATURES

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

	ADVANCED DIGITAL INFORMATION CORPORATION
Dated: September 13, 2000	/S/ PETER H. VAN OPPEN Peter H. van Oppen, Chairman and Chief Executive Officer
September 13, 2000	/S/ JON W. GACEK Jon W. Gacek, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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QuickLinks

PART II—OTHER INFORMATION
SIGNATURES

EX-10.1

                                     LEASE

LEASE, dated March 9, 2000, between Laguna South Exchange LLC, a Washington
limited liability company ("Landlord"), and Advanced Digital Information
Corporation, a Washington corporation ("Tenant").

1.   BASIC LEASE TERMS. This Section sets forth certain basic terms of this
     Lease for reference purposes. This Section is to be read in conjunction
     with the other provisions of this Lease; provided, however, to the extent
     of any inconsistency between this Section and the other provisions of this
     Lease, this Section shall control.

Lease Premises (see Section 2):

Address:     17275 N.E. 67th Court
             Redmond WA 98052

Rentable Sq. Ft. ("RSF"): 78,676

                                              
Rent (See sections 5 and 6):                     Brokers (See Section 36)
Base Monthly Rent: $62,014                       For Tenant:    Leo Backer, Leibsohn and Company
Rent Adjustment: Base Monthly Rent Shall         For Landlord:  Scott Davis, CB Richard Ellis
                 Increase as follows::






Effective Date                            New Base Monthly Rent
- --------------                            ---------------------

                                       
06-01-2003                                      $63,564.35
06-01-2004                                      $65,153.46
06-01-2005                                      $66,782.29
06-01-2006                                      $68,451.85
06-01-2007                                      $70,163.15
06-01-2008                                      $71,917.23
06-01-2009                                      $73,715.16


                                                 
Security Deposit: $83,931.45                        Addresses for Notices (See Section 29):

Estimated Additional Rent: $13,768.30               Landlord:     14850 N.E. 31st Circle
                                                                  Redmond WA 98052
                                                                  Attention: Bill Hart/Glenn Hart
                                                                  Phone: 425-556-9100
                                                                  Fax: 425-556-9200

                                                    Tenant:       PO Box 97057
                                                                  Redmond WA 98073-9757
                                                                  Attention: Leslie S. Rock
                                                                  Phone: (425) 881-8004
                                                                  Fax: (425) 881-2296



Term:             Ten (10) years, subject to        Permitted Use (see Section 7): Office, light
                  provisions of Section 3.          manufacturing, warehouse and distribution,
                                                    assembly and repair and maintenance of electronic
                                                    components for the computer industry and sales
                                                    activities directly related thereto.


Commencement Date    See Section 3                  Rent Commencement Date:    Commencement Date subject
                                                                               to Section 4.


Expiration Date      June 14, 2010                  Extension Options: One five (5) year



                                       1




Operating Expenses (See Section 8): Tenant's
Share is 100% of Operating Expenses

1A.  SPECIAL LEASE TERMS. The following additional Lease terms shall apply. To
     the extent of any inconsistency between this Section 1A and the other
     provisions of this Lease, this Section 1A shall control.

       1A.1       IMPROVEMENT OF PREMISES.

                  1A.1.1 INITIAL IMPROVEMENTS. Landlord agrees to perform the
                  following work in subparagraphs (a) and (b) below on behalf of
                  Tenant at Landlord's cost and expense prior to Lease
                  Commencement. Landlord will complete the work described in
                  subparagraph (c) below in a timely manner after the permit is
                  issued and work can begin:

                    a)     Provide all new gas HVAC units on both the downstairs
                           assembly area and the upstairs office area.
                    b)     Repair window seals throughout, and/or replace
                           windows where required.
                    c)     Provide a complete parking lot revision as specified
                           in Section 24.

                  1A.1.2 SECONDARY TENANT IMPROVEMENTS. Additionally, Landlord
                  agrees to perform the following work, under acceptable terms
                  and conditions to both parties, at Tenant's sole cost and
                  expense, or to allow Tenant to perform the following work at
                  Tenant's sole cost and expense. In the event Tenant elects to
                  have Landlord perform the following work at Landlord's cost,
                  then the monthly rent shall be adjusted upward by the cost of
                  the improvements at the interest rate set forth in Section
                  33.8, amortized over the remaining lease term. The amount of
                  Secondary Tenant Improvements that the Landlord is willing to
                  amortize is limited to one hundred and fifty thousand dollars
                  ($150,000). Costs of such improvements in excess of $150,000
                  shall be paid to Landlord by Tenant upon completion of the
                  work. The following Tenant improvements have been approved by
                  Landlord and Tenant shall not be required to remove these
                  improvements at the termination or expiration of the Lease:

                    a)     Construct the low bay mezzanine space into a/c
                           assembly area complete with a drop ceiling, 75 foot
                           candles of lighting, sprinklered, VCT or comparable
                           flooring and SO power drops.
                    b)     Sheetrock, tape and paint all walls in the low-bay
                           assembly area.
                    c)     Improve lighting in the high-bay warehouse area to 75
                           foot candles.
                    d)     Upgrade lunchroom and rest rooms in office area.
                    e)     Add or expand existing rest rooms on the first floor,
                           location subject to Landlord approval.
                    f)     Add or expand existing rest rooms in the high-bay
                           area for manufacturing to accommodate approximately
                           100 employees.
                    g)     Remove approximately 10 offices in the office area
                           (subject to Landlord's consent).
                    h)     Demolish walls in low-bay area.
                    i)     Re-configure the lunch room into office or lab space.
                    j)     Construct a new lunch room in the southeast corner of
                           the first floor (assembly space) near the main
                           entrance to accommodate approximately 160 employees.
                    k)     Add air conditioning (at Tenant's option) to the
                           high-bay warehouse.


                                       2





         1A.2     MEASUREMENT. The RSF contained in the Premises has been
                  determined under this Lease to be 78,676 square feet based
                  upon a measurement equal to the "Construction Area" (for a
                  single-tenant building), as defined in the Building Owners and
                  Managers Association International (BOMA) American National
                  Standard Method for Measuring Floor Area in Office Buildings,
                  which measurement Landlord and Tenant accept and approve.
                  Landlord and Tenant further acknowledge and agree that any
                  calculation of Base Monthly Rent on a per RSF basis is for
                  convenience of calculation purposes only in order to determine
                  the Base Monthly Rent. Any actual measurement of the square
                  footage or rentable square footage of the Premises and
                  Building shall not be relevant to or control the calculation
                  of Base Monthly Rent.

         1A.3     SIGNAGE. LANDLORD SHALL ALLOW TENANT TO INSTALL EXTERIOR
                  BUILDING SIGNAGE IDENTIFYING TENANT ON THE BUILDING. SAID
                  SIGNAGE IS SUBJECT TO CITY OF REDMOND APPROVAL.

2.       PREMISES. Landlord agrees to lease to Tenant and Tenant agrees to lease
         from Landlord the Premises described on EXHIBIT A-1 and consisting of
         approximately the RSF designated in Section 1. The Premises are the
         entirety of the building (the "Building"), located on the real property
         described on EXHIBIT A-2 ("Property").

3.       TERM.

         3.1      The term of this Lease ("Term") shall commence on the later of
                  (1) June 15, 2000, or (2) fifteen days after after Landlord's
                  work set forth in Section 1A.1.1 above is completed.

         3.2      The Term shall expire on the Expiration Date set forth in
                  Section 1, unless sooner terminated as provided in this Lease.

4.       CONSTRUCTION OF PREMISES; EARLY POSSESSION; DELAYED DELIVERY OF
         POSSESSION.

         4.1      Any improvements to or construction on the Premises shall be
                  carried out in accordance with applicable work documents
                  approved as provided for herein.

         4.2      If Landlord permits Tenant to occupy the Premises prior to the
                  Commencement Date set forth in Section 1, the Commencement
                  Date shall be such date of occupancy. Tenant's occupancy prior
                  to the originally Scheduled Commencement Date shall be subject
                  to all the provisions of this Lease and shall not advance the
                  Expiration Date. In addition, the provisions of Section 14 of
                  this Lease shall apply during the period commencing on the
                  first date upon which Tenant or its employees, agents, or
                  contractors are present on the Premises.

         4.3      If Landlord for any reason cannot deliver possession of the
                  Premises to Tenant at the Commencement Date in addition to the
                  provisions of the Landlord's Construction Agreement relating
                  to such delay, the following shall occur: (i) the Commencement
                  Date shall be the date on which possession of the Premises is
                  delivered to Tenant, (ii) this Lease shall not be void or
                  voidable, nor shall Landlord be liable to Tenant for any loss
                  or damage resulting therefrom, and (iii) the Rent Commencement
                  Date shall be delayed and shall commence on the delayed
                  Commencement Date, except as provided in Section 4.4.

         4.4      If any act or failure to act by Tenant causes any delay in
                  Landlord's completion of the Premises, thereby delaying
                  Tenant's occupancy of the Premises beyond June 1, 2000, then
                  Landlord may at its option require Tenant to commence payment
                  of Rent on June 1, 2000, notwithstanding such delay in
                  delivery of possession.


                                       3






5.       RENT.

         5.1      Tenant shall pay to Landlord the Base Monthly Rent specified
                  in Section 1 and the Additional Rent as set forth in Section 8
                  and elsewhere in this Lease (the Base Monthly Rent and the
                  Additional Rent are collectively referred to as "Rent"). Rent
                  shall be paid in advance, on or before the first day of each
                  calendar month of the Lease Term.

         5.2      Rent shall be paid without prior notice, demand, set off,
                  counterclaim, deduction or defense and, except as otherwise
                  expressly provided in this Lease, without abatement or
                  suspension. Any such abatement or suspension shall be null and
                  void upon any default by Tenant hereunder, and Tenant shall
                  thereafter upon Landlord's demand pay to Landlord 200% of the
                  amount of Rent abated or suspended.

         5.3      Payment of Rent shall begin on the Rent Commencement Date set
                  forth in Section 1, subject to Section 4. Rent for any period
                  during the Lease term that is for less than one month shall be
                  prorated for the actual number of days in such period.

         5.4      All Rent shall be paid to Landlord at the address for notices
                  set forth in Section 1, in lawful money of the United States
                  of America, or to such other person or at such other place as
                  Landlord may from time to time designate in writing.

6.       PREPAID RENT AND SECURITY DEPOSIT.

         6.1      Upon execution of this Lease, Tenant shall pay to landlord the
                  First Months Rent. The Security Deposit set forth in Section 1
                  shall not be due until the first day of year five (5) of this
                  Lease (the Prepaid Rent and the Security Deposit being
                  collectively referred to as the "Deposit").

         6.2      Landlord shall have the right to all or any of the Deposit to
                  cure any Default by Tenant under this Lease or to compensate
                  Landlord for any damage sustained by it resulting from such
                  Default. In the event of any such application of the Deposit,
                  Tenant shall, on demand, immediately pay to Landlord the
                  amount necessary to replenish the Deposit to the amount set
                  forth in Section 1. The Security Deposit will not be used to
                  remove the approved Tenant Improvements.

         6.3      If Tenant is not in Default at the expiration or termination
                  of this Lease, Landlord shall return the remaining Security
                  Deposit to Tenant, less any amounts necessary to return the
                  Premises and the approved Tenant Improvements to their
                  original condition, reasonable wear and tear excepted.
                  Approved Tenant Improvements will not need to be removed from
                  the Premises pursuant to Section 1A.1.2 above).

         6.4      In the event this Lease is terminated before the end of the
                  Term for any reason, any Rent paid for any period after the
                  date of such termination shall be treated as an addition to
                  the Security Deposit.

         6.5      Landlord's obligations with respect to the Security Deposit
                  are those of a debtor and not a trustee. Landlord may maintain
                  the security deposit separate from Landlord's general funds or
                  may commingle the Security Deposit with other funds of
                  Landlord. No interest shall accrue for Tenant on the Deposit.

7.       USE OF PREMISES.


                                        4




         7.1      Tenant shall use the Premises only for the purpose set forth
                  in Section 1. Tenant acknowledges that it has determined to
                  its satisfaction that the Premises can be used for those
                  purposes. Tenant waives any right to terminate this Lease in
                  the event the Premises cannot be used for such purposes during
                  the Term. The Premises may not be used for any other purpose
                  without Landlord's written consent.

         7.2      Tenant shall not do or permit anything to be done in or about
                  the Premises or bring or keep anything therein which will in
                  any way increase the cost of or affect any fire or other
                  insurance upon the Building or any part thereof or any of its
                  contents, or cause cancellation of any insurance policy
                  covering the Building or any part thereof or any of its
                  contents.

         7.3      Tenant shall not use or allow the Premises to be used for any
                  unlawful purpose or in any way constituting a nuisance.

8.       ADDITIONAL RENT FOR OPERATING EXPENSES.

         8.1      TENANT PAYMENT. Tenant shall pay, as Additional Rent, all
                  Operating Expenses. Operating Expenses shall be payable on or
                  before the first day of the first full calendar month of the
                  Term or upon the Commencement Date, whichever first occurs,
                  and on the first day of each successive calendar month
                  thereafter during the Term in the same manner as Base Monthly
                  Rent.

         8.2      ACCOUNTING PERIOD. An accounting period is a calendar year;
                  except the first accounting period shall commence on the
                  Commencement Date and end in December 31 of the same calendar
                  year. The last accounting period shall end on the Expiration
                  Date of the Lease Term. Annualized Operating Expenses shall be
                  prorated on a per diem basis for any accounting period that is
                  less than a full calendar year.

         8.3      ADJUSTMENT. Landlord can adjust the Operating Expenses at the
                  commencement of each new accounting period throughout the
                  Lease term, whereupon Tenant's Additional Rent shall be
                  adjusted accordingly. Prior to each January 1 of the Term,
                  Landlord shall furnish Tenant a written statement of the
                  estimated monthly Operating Expenses for the coming calendar
                  year. The estimated monthly Operating Expenses for the period
                  before the first January 1 after the Commencement Date will be
                  provided by Landlord to Tenant no later than 90 days prior to
                  the Commencement Date. Landlord may, by written notice to
                  Tenant, revise its estimate of Operating Expenses from time to
                  time by written notice to Tenant, following which notice
                  Tenant shall increase or decrease, as the case may be, the
                  Additional Rent for the remainder of that accounting period.


                                       5






         8.4      RECONCILIATION. Within 90 days after each January 1 during the
                  Term, or as soon thereafter as practicable, Landlord shall
                  deliver to Tenant a written statement setting forth the actual
                  Operating Expenses during the preceding calendar year (or
                  portion of such calendar year after the Commencement Date). To
                  the extent actual Operating Expenses exceeded the estimated
                  Operating Expenses paid by Tenant, Tenant shall pay Additional
                  Rent to Landlord within 30 days after receipt of such
                  statement by Tenant, together with interest at the rate set
                  forth in Section 33.8. To the extent actual Operating Expenses
                  were less than the estimated Operating Expenses paid by
                  Tenant, Tenant shall receive a credit against its next payable
                  Rent or such amount shall otherwise be refunded to Tenant as
                  Landlord determines in its sole discretion.


                                       6




         8.5      DEFINITIONS. "Operating Expenses" means all expenses and
                  charges incurred by Landlord in the operation of the Building
                  and Property, as a first-class facility, including without
                  limitation the following costs by way of illustration: (i) all
                  real property taxes, assessments and other general or special
                  charges levied during the Term by any public, governmental or
                  quasi-governmental authority against the real or personal
                  property included in the Building or Property, including
                  without limitation Landlord's personal property used in the
                  maintenance, repair or operation of the Building or the
                  Property, or any other tax on the leasing of the Building or
                  in the rents from the Building (other than federal, state or
                  local income or franchise tax); (ii) any and all assessments,
                  fees, charges and impositions Landlord must pay for the
                  Building and Property, transportation or any other improvement
                  monitoring or management plans, or any other covenant,
                  condition or reciprocal easement agreements; (iii)
                  electricity, gas and similar energy sources, refuse
                  collection, water, sewer and other utilities' services for the
                  Building and the Property; (iv) all licenses, permits and
                  inspection fees, property management fees paid to independent
                  or affiliated contractors or to Landlord, and legal,
                  accounting and other professional expenses; (v) all costs and
                  expenses relating to the Premises Maintenance Obligations (as
                  defined in Section 9.1), including reasonable reserves; (vi)
                  all costs and expenses relating to the Premises Services
                  Obligations (as defined in Section 9.2), including reasonable
                  reserves; (vii) all costs of improvements or alterations to
                  the Building and Property required by Laws, or to save labor,
                  or to reduce Operating Expenses; (viii) all premiums and
                  deductibles for liability, property damage, casualty,
                  automobile, rental loss, compensation or other insurance
                  maintained by Landlord for the Building or Property; (ix) the
                  cost (amortized over such reasonable period of time as
                  Landlord shall determine together with market rate interest as
                  reasonably determined by Landlord on the unamortized balance)
                  of any capital improvements made to the Property or Building
                  by Landlord for the replacement of any Building equipment
                  needed to operate the Building at the same quality levels as
                  prior to replacement; (x) costs incurred in the management of
                  the Building and Property (including supplies, wages and
                  salaries of employees used in the management, operation and
                  maintenance thereof and payroll taxes and similar governmental
                  charges with respect thereto, and Building management office
                  rental, if any) commensurate with the costs charged tenants
                  for management of similar buildings with similar tenants in
                  the Bellevue/Redmond area; and (xi) any other expense or
                  charge whether or not described above that in accordance with
                  generally accepted accounting and management practices is
                  properly an expense of maintaining, operating or repairing the
                  Building or Property. Operating Expenses shall not include
                  depreciation on the Building or equipment therein, Landlord's
                  executive salaries, real estate brokers' commissions, and
                  costs or expenses for which Landlord is reimbursed or
                  indemnified, by an insurer or condemnor. Except as provided
                  for above, Landlord shall not collect more than 100% of
                  Operating Expenses and shall not recover any item of cost more
                  than once.

         8.6      TENANT OBLIGATION. Landlord shall have the same rights with
                  respect to Tenant's nonpayment of Operating Expenses as
                  required under this Lease as it has with respect to any other
                  nonpayment of Rent under this Lease.

9.       PREMISES MAINTENANCE AND SERVICES OBLIGATIONS.


                                       7





         9.1      PREMISES MAINTENANCE OBLIGATIONS. Landlord shall cause to be
                  performed all repairs, maintenance, cleaning, replacements,
                  resurfacing and monitoring to the roof membrane, roof,
                  irrigation system, patios, decks, exterior finishes and
                  painting, exterior windows, parking areas, and grounds of the
                  Premises and the Building. Tenant shall cause to be performed
                  all repairs, maintenance, cleaning, replacements, resurfacing
                  and monitoring of all other parts and areas of the Premises,
                  Building and Property, including, without limitation, the
                  elevator equipment and system, the signs, interior windows,
                  doors, skylights, service areas, interior finishes and
                  painting, heating, ventilating and air conditioning systems,
                  cleaning and refuse removal systems, and similar items. The
                  Landlord's obligations shall include establishing reserves
                  (but excluding the telephone, data, cable television,
                  satellite transmission, computer and security systems of the
                  Premises), and any other reasonable and necessary maintenance,
                  repair and replacement (but excluding Tenant's obligations set
                  forth above and trade fixtures) required to keep the Premises,
                  Building and Property in first class order, condition and
                  repair and in compliance with all service and maintenance
                  requirements imposed by any warranty, service or maintenance
                  contract in effect for any portion of the Premises, building
                  or Property (collectively, "Premises Maintenance
                  Obligations").

         9.2      PREMISES SERVICES OBLIGATIONS. Landlord shall arrange for and
                  cause to be provided, all services to the Premises, Building
                  and Property of a continuing nature, including without
                  limitation, janitorial, landscape and irrigation system
                  maintenance, parking lot sweeping and maintenance, window
                  washing, rubbish removal, maintenance of the heating,
                  ventilating, and air conditioning systems, property management
                  services and other similar desired and necessary services (but
                  excluding telephone, cable television, data transmission,
                  satellite transmission, and security system services or
                  computer cabling or wiring) (collectively "Premises Services
                  Obligations").

         9.3      OPERATING EXPENSE. In the manner and to the extent provided in
                  Section 8, any and all costs arising from Landlord's
                  performance of the Premises Maintenance and Services
                  Obligations shall be paid in full by Tenant as Additional Rent
                  and Operating Expenses under this Lease.

         9.4      DEFAULT. Landlord shall perform Landlord's Premises
                  Maintenance and Service Obligations diligently and promptly as
                  circumstances warrant, but so long as Landlord acts with such
                  diligence, Landlord shall not be liable for any failure to
                  perform Landlord's Premises Maintenance and Services
                  Obligations unless such failure shall persist for the period
                  beyond that cure period stated in Section 18.2 after written
                  notice of the failure to perform such Premises Maintenance and
                  Services Obligations is given to Landlord by Tenant. Tenant
                  shall perform Tenant's Premises Maintenance Obligations
                  diligently and promptly as circumstances warrant. Failure to
                  do so shall constitute a default under Section 18.1, subject
                  to the cure periods provided for therein.

         9.5      SURRENDER. Tenant shall surrender the Premises to Landlord
                  upon the expiration or sooner termination of this Lease, in
                  the same condition as when received or as Tenant has modified
                  the Premises with Landlord approval, excluding ordinary wear
                  and tear. Upon expiration or termination of this Lease, any
                  and all damage done to the Premises as a result of Tenant's
                  removal of any personal property, fixtures or furnishings
                  shall be repaired and the Premises restored, at Tenant's
                  expense.


                                       8





         9.6      NO OBLIGATION TO ALTER. Except as provided elsewhere in this
                  Lease, Landlord shall have no obligation whatsoever to alter,
                  remodel, improve, repair, decorate, or paint the Premises or
                  any part thereof, including without limitation any obligation
                  to alter or remodel the Premises as may be required under
                  the Americans with Disabilities Act. Tenant affirms that
                  Landlord has made no representations to Tenant about the
                  condition of the Premises or the Building, except as
                  specifically herein set forth.

         9.7      TENANT WAIVER. Tenant waives the right to make repairs at
                  Landlord's expense under any law, statute, or ordinance now or
                  hereafter in effect.

10.      STRUCTURAL AND UTILITY MAINTENANCE AND REPAIR RESPONSIBILITY.

         10.1     STRUCTURAL REPAIRS. Subject to the provisions of Section 15,
                  Landlord shall, at Landlord's expense, maintain, repair and
                  replace the roof structure (excluding membrane (except that,
                  if the average costs to maintain, repair and replace the
                  membrane incurred by Tenant over the term (or extension of
                  term, if extended) exceed $5,000 a year, then at the end of
                  the Term Landlord will reimburse Tenant for the aggregate
                  amount of the annual overage in excess of $5,000)), all
                  exterior and bearing walls, the floor slab and the foundation
                  of the Building ("Structural Repairs"). Landlord shall give
                  reasonable advance notice to Tenant of such repairs to the
                  extent practical and feasible.

         10.2     UTILITIES REPAIRS. Subject to the provisions of Section 15,
                  Landlord shall, at Landlord's expense, if required, or cause
                  the utility purveyor to maintain, repair and replace the
                  underground electrical, water, sewer and plumbing utility
                  systems serving the Buildings insofar as such utility systems
                  are located outside the Building between the public right of
                  way and the Building, and the conduits and pipes or wiring
                  located therein and forming a part thereof, ("Utility Systems
                  Repairs").

         10.3     TENANT'S RESPONSIBILITY. To the extent that such Structural
                  Repairs or Utility Systems Repairs are necessitated in part or
                  in whole by the act, neglect, fault, or omission of any duty
                  by the Tenant, its agents, servants, employees, or invitees,
                  Tenant shall pay to Landlord the reasonable costs of such
                  Structural Repairs or Utility Systems Repairs, within thirty
                  (30) days after Landlord's submission of a reasonably detailed
                  invoice for the same, but only to the extent such costs were
                  necessitated by the act, neglect, fault or omission of any
                  duty by the Tenant. Landlord shall not be liable for any
                  failure to make any such Structural Repairs or Utility Systems
                  Repairs, unless such failure shall persist after Landlord's
                  receipt of written notice from Tenant and beyond the cure
                  periods set forth in Section 18.2.

11.      UTILITIES AND SERVICES.

         11.1     LANDLORD RESPONSIBILITY. Landlord shall arrange for and cause
                  to be provided, at Tenant's expense, heat, light, water,
                  electricity, gas and any and all other utility services,
                  excluding, however, telecommunications and data communications
                  services, telephone service, cable television service,
                  satellite transmission service, if any, or computer cabling or
                  wiring.


                                       9




         11.2     TENANT RESPONSIBILITY. Tenant shall pay, as Additional Rent,
                  prior to delinquency, for heat, water, electricity, gas and
                  any and all other utility services supplied to the Premises
                  and will pay any required deposits therefor. Tenant shall keep
                  the temperature of the Building at such level as may
                  reasonably be requested by Landlord to protect the Building.
                  At Tenant's request, Tenant may be billed directly by utility
                  providers for some or all of utility services provided to the
                  Building and Premises. In such event those utility expenses
                  will not be considered as Operating Expenses or Additional
                  Rent. However, if Tenant fails to timely pay for such utility
                  services, Landlord shall have the right to pay such utility
                  expenses on behalf of Tenant and Tenant shall reimburse
                  Landlord as Additional Rent for such payment within five (5)
                  days of Landlord's demand, together with late fees and
                  interest as provided for in Section 33.8. In addition, if
                  Tenant fails to timely pay any utility expenses, Tenant shall
                  forfeit at Landlord's option the right to pay utility expenses
                  through direct billing and utility expenses shall then be
                  included as Operating Expenses.

         11.3     FAILURE OF SERVICES. In the event of any failure or
                  interruption of such utilities and services, Landlord shall
                  diligently attempt to resume service promptly. Tenant shall
                  not be entitled to any abatement or reduction of Rent by
                  reason of any failure or interruption of utilities or
                  services, no eviction of Tenant shall result from any such
                  failure or interruption, and Tenant shall not be relieved from
                  the performance of any obligation in this Lease because of
                  such failure or interruption.

12.      LIMITS ON LANDLORD'S LIABILITY. Landlord's liability in respect to its
         obligations under Section 9, 10 and 11 to repair and maintain portions
         of the Premises and Building and to provide utilities and services
         (collectively, "Repair and Service Obligations") is subject to the
         following limitations.

         12.1     CIRCUMSTANCES BEYOND LANDLORD'S CONTROL. Landlord shall not be
                  liable for any failure of Repair and Service Obligations when
                  such failure is caused by (i) strikes, lockouts or other labor
                  disturbance or labor dispute of any character, (ii)
                  governmental regulation, moratorium or other governmental
                  action, (iii) inability despite the exercise of reasonable
                  diligence to obtain electricity, water or fuel from the
                  providers thereof, (iv) acts of God or (v) any other cause
                  beyond Landlord's reasonable control.

         12.2     LANDLORD LIABILITY. Subject to Section 12.1, Landlord shall
                  not be liable for any failure of Repair and Service
                  Obligations, unless such failure shall persist for an
                  unreasonable time after written notice of the need of such
                  repairs or maintenance or of the interruption of services is
                  given to Landlord by Tenant. Landlord shall not be liable for
                  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 Building, the Premises, or the
                  Property, or to fixtures, appurtenances, and equipment
                  therein, or the failure of Repair and Service Obligations.
                  Without limiting the generality of this Section 12, in no
                  event shall Landlord have any liability for consequential
                  damages resulting from any act or omission of Landlord in
                  respect of its Repair and Service Obligations, even if
                  Landlord has been advised of the possibility of such
                  consequential damages.

         12.3     RENT ABATEMENT. Except as specifically provided in Sections 15
                  and 16, there shall be no abatement of Rent in any
                  circumstances under this Lease.


                                       10




13.      ALTERATIONS AND ADDITIONS BY TENANT. With prior written consent of
         Landlord, Tenant may make at its expense additional improvements or
         alterations to the Premises. Any repairs or new construction by Tenant
         shall be done in conformity with plans and specifications approved by
         Landlord, by contractors approved by Landlord, and subject to
         Landlord's reasonable rules and regulations regarding such
         construction. All work performed shall be done lien-free in a
         workmanlike manner and shall become the property of Landlord. Landlord
         may require that Tenant provide to Landlord, at Tenant's expense, a
         lien and completion bond in an amount equal to 150% of the estimated
         cost of any improvements, additions, or alterations in the Premises.
         Landlord shall not unreasonably withhold its consent to Tenant's
         proposed alterations or improvements if the conditions of this Section
         13 are satisfied. All such alterations and improvements shall become
         the property of Landlord; provided that Landlord may require Tenant to
         remove any improvements or alterations at the expiration or termination
         of the Term (except those improvements which Landlord has agreed may
         remain, either as provided herein or after the date hereof), such
         removal to occur at Tenant's expense; and Tenant shall repair all
         damage to the Premises or Building occurring as a result of such
         removal. In the event Tenant fails to remove any improvements or
         alterations as required by Landlord or repair any damage occurring
         during such removal, Landlord shall be entitled to remove any
         improvements or alterations or make such repairs, at Tenant's expense,
         and shall further be entitled to draw upon the Deposit.

14.      INSURANCE; INDEMNITY.

         14.1     TENANT WAIVER. Landlord shall not be liable to Tenant, and
                  Tenant hereby waives all claims against Landlord, for injury
                  or damage to any person or property in or about the Premises,
                  Building, Property or Common Areas by or from any cause
                  whatsoever, including without limitation any acts or omissions
                  of any other tenants, licensees or invitees of the Building.

         14.2     TENANT INDEMNITY. Tenant shall indemnify and defend (using
                  legal counsel acceptable to Landlord) Landlord and hold
                  harmless, from and against any and all loss, cost, damage,
                  liability and expense (including reasonable attorneys' fees)
                  whatsoever that may arise out of or in connection with
                  Tenant's occupation, use or improvement of the Premises, or
                  that of its employees, agents or contractors, or Tenant's
                  breach of its obligations under this Lease. To the extent
                  necessary to fully indemnify Landlord from claims made by
                  Tenant or its employees, this indemnity constitutes a waiver
                  of Tenant's immunity under the Washington Industrial Act, RCW
                  Title 51. This indemnity shall survive the expiration or
                  termination of the Term. Landlord and Tenant acknowledge that
                  this indemnity obligation has been negotiated and agreed to by
                  them.


                                                     /s/  [ILLEGIBLE]
                  -------------------                -----------------
                  Landlord's Initials                Tenant's Initials


         14.3     LANDLORD RESPONSIBILITY. The exculpation, release and
                  indemnity provisions of Sections 14.1 and 14.2 shall not apply
                  to the extent the subject claims thereunder were caused by
                  Landlord's gross negligence or willful misconduct. However, in
                  no event shall Landlord be liable to Tenant for consequential
                  damages.

         14.4     TENANT INSURANCE. Tenant shall procure and maintain throughout
                  the Term at Tenant's expense, the following insurance:


                                       11




                  14.4.1 Comprehensive general public liability insurance,
                  insuring Tenant against liability arising out of the Lease and
                  the use, occupancy, or maintenance of the Premises and all
                  areas appurtenant thereto. Such insurance shall be in the
                  amount of not less than $5,000,000 combined single limit for
                  injury to or death of one or more persons in an occurrence,
                  and for damage to tangible property (including loss of use) in
                  an occurrence (or in such amount as Landlord determines in its
                  reasonable discretion). Such policy shall insure the
                  operations of independent contractors and contractual
                  liability (covering the indemnity in Section 14.2) and shall;
                  (1) name Landlord as an additional insured, (ii) provide a
                  waiver of subrogation endorsements with respect to Landlord,
                  and (iii) provide that it is primary and noncontributing with
                  any insurance in force or on behalf of Landlord.

                  14.4.2 Standard form property insurance insuring against the
                  perils of fire, extended coverage, vandalism, malicious
                  mischief, special extended coverage ("All-Risk") and sprinkler
                  leakage. This insurance policy shall be upon all personal
                  property for which Tenant is legally liable or that was
                  installed at Tenant's expense, and that is located in the
                  Building or Premises, including without limitation all
                  Tenant's furnishings, fixtures, furniture, fittings, and
                  equipment and all improvements to the Premises installed by
                  Tenant, in an amount not less than 90% of the full replacement
                  cost thereof. In the event of a dispute as to the amount of
                  full replacement cost, the decision of Landlord or any
                  mortgagees of Landlord shall be conclusive. Such policy shall
                  also include business interruption coverage, covering direct
                  or indirect loss of Tenant's earnings attributable to Tenant's
                  inability to use fully or obtain access to the Premises or
                  Building, in an amount as will properly reimburse Tenant. Such
                  policy shall name Landlord and any mortgagees to Landlord as
                  insured parties, as their respective interests may appear.

                  14.4.3 Workman's Compensation and Employer's Insurance (as
                  required by state law).

                  14.4.4 Any other form or forms of insurance as Tenant or
                  Landlord or any mortgagees of Landlord may reasonably require
                  from time to time in form, in amounts and for insurance risks
                  against which a prudent tenant would protect itself.

         14.5     POLICIES. All policies of insurance to be obtained by Tenant
                  hereunder shall be in a form satisfactory to Landlord and
                  shall be issued by insurance companies holding a General
                  Policyholder Rating of "A" and a Financial Rating of "X" or
                  better in the most current issue of Best's Insurance Guide.
                  Tenant shall provide Landlord with certificates of such
                  insurance. No such policy shall be cancelable or reducible in
                  coverage except after 30 days' prior written notice to
                  Landlord. Tenant shall, within ten days prior to the
                  expiration of such policies, furnish Landlord with renewals
                  or "binders" thereof, or Landlord may order such insurance and
                  charge the cost thereof to Tenant as Additional Rent.

         14.6     LANDLORD'S INSURANCE. Landlord shall maintain liability and
                  casualty insurance for the Building and Property adequate in
                  Landlord's judgment to cover (with deductibles deemed
                  appropriate by Landlord) the risks customarily insured against
                  by owners of properties similar to the Building.

         14.7     PROCEEDS. The proceeds of any insurance policies maintained by
                  or for the benefit of Landlord shall belong to and be paid
                  over to Landlord. Any interest or right of Tenant in any such
                  proceeds shall be subject to Landlord's interest and right in
                  such proceeds.


                                       12




         14.8     WAIVER OF SUBROGATION. Anything in this Lease to the contrary
                  notwithstanding, Tenant and Landlord each waives its entire
                  right of recovery, claims, actions, or causes of action
                  against the other for loss or damage to the Premises,
                  Building, or Property or any personal property of such party
                  therein that is caused by or incident to the perils covered by
                  normal extended coverage clauses of standard fire insurance
                  policies carried by the waiving party and in force at the time
                  of damage or loss, including without limitation deductibles
                  and retentions under any such insurance policies in effect,
                  and self-insurance against any such perils. Tenant and
                  Landlord each waives any right of subrogation it may have
                  against the other party to the extent of recovery under any
                  such insurance, and shall cause each insurance policy obtained
                  by it to provide that the insurance company waives all right
                  to recovery by way of subrogation against the other party in
                  connection with any such loss or damage. If either Landlord or
                  Tenant is unable to obtain its insurer's permission to waive
                  any claim against the other party, such party shall promptly
                  notify the other party of such inability.

         14.9     NOTICE OF ACCIDENTS. Tenant shall promptly notify Landlord of
                  any casualty or accident occurring in or about the Premises.

15.      DESTRUCTION.

         15.1     If the Premises or the Building is destroyed by fire,
                  earthquake, or other casualty to the extent that they are
                  untenantable in whole or in part as reasonably determined by
                  Landlord, or if any destruction of the Premises or Building
                  occurs in the last two (2) years of the Term, then Landlord
                  shall have the right but not the obligation to proceed with
                  reasonable diligence to rebuild and restore the Premises or
                  the Building or such part thereof.

         15.2     Landlord shall within 30 days after such destruction or injury
                  notify Tenant whether Landlord intends to rebuild. If Landlord
                  fails to notify Tenant within such period, then this Lease
                  shall terminate as the end of such period.

         15.3     During the period from destruction or damage until restoration
                  (or termination of this Lease), Rent shall be abated in the
                  same ratio as that portion of the Premises which Landlord
                  determined is unfit for occupancy shall bear to the whole
                  Premises, to the extent that Landlord receives the proceeds of
                  Tenant's business interruption insurance. If damage is due to
                  the fault or neglect of Tenant or its agents, employees.
                  invitees, or licensees, there shall be no abatement of Rent.

         15.4     Landlord shall not be required to repair any injury or damage
                  by fire or other cause, or to make any repairs or replacements
                  of any panels, decoration, office fixtures, paintings, floor
                  covering, or any other improvements to the Premises installed
                  by Tenant. Instead, if Landlord repairs or rebuilds the
                  Premises under this Section 15, Tenant shall repair or rebuild
                  such Tenant-installed improvements and other items of
                  property.

         15.5     Tenant shall not be entitled to any compensation or damages
                  from Landlord for loss of the use of the whole or any part of
                  the Premises, the property of Tenant, or any inconvenience or
                  annoyance occasioned by such damage, repair, reconstruction,
                  or restoration.

16.      CONDEMNATION.


                                       13




         16.1     If all or part of the Premises are taken under power of
                  eminent domain, or sold under the threat of the exercise of
                  said power, this Lease shall terminate as to the part so taken
                  as of the date the condemning authority takes possession.

         16.2     If more than 25% of the floor area of Premises is taken by
                  condemnation, Landlord or Tenant may, by written notice to the
                  other within ten days after notice of such taking, terminate
                  this Lease as to the remainder of the Premises as of the date
                  the condemning authority takes possession.

         16.3     If Landlord or Tenant does not so terminate, this Lease shall
                  remain in effect as to such remainder, except that the Rent
                  shall be reduced in the proportion that the rentable floor
                  area taken bears to the original rentable total floor area.
                  However, if circumstances make abatement based on floor area
                  unreasonable, the Rent shall abate by a reasonable amount to
                  be determined by Landlord. In the event that neither Landlord
                  nor Tenant elects to terminate this Lease, Landlord's
                  responsibility to restore the remainder of the Premises shall
                  be limited to the amount of any condemnation award allocable
                  to the Premises, as determined by Landlord.

         16.4     Any award for the taking of all or part of the Premises under
                  the power of eminent domain, including payment made under
                  threat of the exercise of such power, shall be the property of
                  Landlord, whether made as compensation for diminution in value
                  of the leasehold or for the taking of the fee or as severance
                  damages. Tenant shall only be entitled to such compensation as
                  may be separately awarded or recoverable by Tenant in Tenant's
                  own right for the loss of or damage to improvements to the
                  Premises installed by Tenant, Tenant's trade fixtures and
                  removable personal property. Landlord shall not be liable to
                  Tenant for the loss of the use of all or any part of the
                  Premises taken by condemnation.

         16.5     Landlord shall have the exclusive authority to grant
                  possession and use to the condemning authority and to
                  negotiate and settle all issues of just compensation or, in
                  the alternative, to conduct litigation concerning such issues;
                  provided however, that Landlord shall not enter into any
                  settlement of any separate award that may be made to Tenant as
                  described in Section 16.4 without Tenant's prior approval of
                  such settlement, which approval shall not be unreasonably
                  withheld or delayed.

17.      ASSIGNMENT AND SUBLETTING.

         17.1     Tenant shall not assign this Lease, or sublet the Premises or
                  any part thereof, either by operation of law or otherwise, or
                  permit any other party to occupy all or any part of the
                  Premises, without first obtaining the written consent of
                  Landlord, such consent shall not be unreasonably withheld or
                  delayed.. Tenant shall propose such assignment or sublease by
                  written notice to Landlord, and such notice shall specify an
                  effective date which shall be the first day of a calendar
                  month and shall be not less than 30 days after the date of
                  such notice. This Lease shall not be assignable by operation
                  of law. Tenant shall further provide to Landlord other
                  information and creditworthiness materials concerning any
                  proposed assignee or sublessee as is requested by Landlord.


                                       14




         17.2     If Tenant is a corporation, any transfer of this Lease from
                  Tenant by merger, consolidation, or liquidation, or any change
                  in the ownership of or power to vote 50% or more of the
                  outstanding voting stock of Tenant shall constitute an
                  assignment under this Lease. If Tenant is a partnership or
                  limited liability company, any change in the identity or
                  majority ownership of partners or members in Tenant serving as
                  general partner or manager or owning 50% or more of the
                  outstanding economic interests in such entity shall constitute
                  an assignment under this Lease.

         17.3     In the alternative to consenting to a proposed assignment or
                  sublease, Landlord shall have the right to recapture the
                  Premises, or applicable portion thereof. Landlord may exercise
                  such right by notice to Tenant within 20 days after receipt of
                  Tenant's notice. Such recapture shall terminate this Lease as
                  to the applicable portion of the Premises effective on the
                  effective date proposed in Tenant's notice.

         17.4     If Landlord elects not to recapture and thereafter elects to
                  give its consent to the proposed assignment or sublease, (i)
                  Landlord may charge Tenant a reasonable sum to reimburse
                  Landlord for legal and administrative costs incurred in
                  connection with such consent; (ii) in the event of a sublease,
                  Landlord and Tenant shall share equally in any rent and other
                  proceeds paid to Tenant in excess of the Rent to be paid to
                  Landlord under this Lease; and (iii) in the event of an
                  assignment or a sublease, Tenant shall remain liable to
                  Landlord for the performance of all Tenant's obligations under
                  this Lease.

         17.5     If the Lease is assigned pursuant to the provisions of said
                  Revised Bankruptcy Act, 11 U.S.C. Section 101 et seq., any and
                  all consideration paid or payable in connection with such
                  assignment shall be Landlord's exclusive property and paid or
                  delivered to Landlord, and shall not constitute the property
                  of tenant or tenant's estate on bankruptcy. Any person or
                  entity to whom the Lease is assigned pursuant to the Revised
                  Bankruptcy Act shall be deemed automatically to have assumed
                  all of Tenant's obligations under this Lease.

         17.6     In the event of any sale of the Building or Property, or any
                  assignment of this Lease by Landlord, Landlord shall be
                  relieved of all liability under this Lease arising out of any
                  act, occurrence, or omission occurring after sale or
                  assignment; and the purchaser or assignee at such sale or
                  assignment or any subsequent sale or assignment of Lease, the
                  Property, or Building, shall be deemed without any further
                  agreement to have assumed all of the obligations of the
                  Landlord under this Lease accruing after the date of such sale
                  or assignment.

         17.7     Subject to the provisions of this Section 17, this Lease shall
                  be binding upon and inure to the benefit of the parties, their
                  heirs, successors and assigns.

18.      DEFAULT.

         18.1     The occurrence of any one or more of the following events
                  shall constitute a material default and breach of the Lease by
                  Tenant ("Default"):

                  18.1.1 vacation or abandonment of all or any portion of the
                  Premises;

                  18.1.2 failure by Tenant to make any payment required as and
                  when due, where such failure shall continue after three days'
                  written notice from Landlord;


                                       15




                  18.1.3 failure by Tenant to observe or perform any of the
                  covenants, conditions, or provisions of this Lease, other than
                  the making of any payment, where such failure shall continue
                  after 30 days' written notice from Landlord; or

                  18.1.4   (i) the making by Tenant of any general assignment or
                  general arrangement for the benefit of creditors; (ii) the
                  filing by or against Tenant of a petition in bankruptcy,
                  including reorganization or arrangement, unless, in the case
                  of a petition filed against Tenant, the same is dismissed
                  within 30 days; (iii) the appointment of a trustee or receiver
                  to take possession of substantially all of Tenant's assets
                  located at the Premises or of Tenant's interest in this Lease;
                  (iv) the seizure by any department of any governmental or any
                  officer thereof of the business or property of Tenant; and (v)
                  adjudication that Tenant is bankrupt.

         18.2     Tenant shall notify Landlord promptly of any Default by Tenant
                  (or event or occurrence which, with the passage of time, the
                  giving of notice, or both, would become a Default) that by its
                  nature is not necessarily known to Landlord.

         18.3     Landlord shall be in default if it fails to observe or perform
                  any of the covenants, conditions, or provisions of this Lease,
                  where such failure shall continue after 30 days' written
                  notice from Tenant; provided, however, that if the nature of
                  Landlord's obligation is such that more than 30 days are
                  required for performance, Landlord shall not be in default if
                  Landlord commences performance within 30 days after Tenant's
                  notice and thereafter completes such performance diligently
                  and within a reasonable time. Tenant shall copy Landlord's
                  lender with any such notice of default, if Tenant has been
                  provided with the name and address of any such lender.

         18.4     In no event shall a default by Landlord under this Lease give
                  rise to any right of Tenant to terminate this Lease or
                  withhold or offset the payment of Base Monthly Rent or
                  Additional Rent. The obligations of Tenant to pay Base Monthly
                  Rent and Additional Rent shall continue unaffected in all
                  events unless suspended or terminated pursuant to an express
                  provision of this Lease.

19.      REMEDIES IN DEFAULT.


                                       16


         19.1     Upon a default by Tenant, Landlord shall have the following
                  remedies, in addition to all other rights and remedies
                  provided by law or otherwise provided in this Lease, to which
                  Landlord may resort cumulatively or in the alternative:

                  19.1.1 Landlord may continue this Lease in full force and
                  effect, and this Lease shall continue in full force and effect
                  as long as Landlord does not terminate this Lease, and
                  Landlord shall have the right to collect Rent when due.

                  19.1.2 Landlord may terminate Tenant's right to possession of
                  the Premises at any time by giving written notice to that
                  effect, and relet the Premises or any part thereof. Tenant
                  shall be liable immediately to Landlord for all costs Landlord
                  incurs in reletting the Premises or any part thereof,
                  including, without limitation, brokers' commissions, expenses
                  of cleaning the Premises required by the reletting, and like
                  costs. Reletting may be for a period shorter or longer than
                  the remaining term of this Lease. No act by Landlord other
                  than giving written notice to Tenant shall terminate this
                  Lease. Acts of maintenance, efforts to relet the Premises, or
                  the appointment of a receiver on Landlord's initiative to
                  protect Landlord's interest under this Lease shall not
                  constitute a termination of Tenant's right to possession. On
                  termination, Landlord has the right to remove all Tenant's
                  Personal Property and store same at Tenant's cost and to
                  recover from Tenant as damages:

                           (i)   The worth at the time of award of unpaid Rent
                                 and other sums due and payable which had been
                                 earned at the time of termination; plus

                           (ii)  The worth at the time of award of the amount by
                                 which the unpaid Rent and other sums due and
                                 payable which would have been payable after
                                 termination until the time of award exceeds the
                                 amount of such Rent loss that Tenant proves
                                 could have been reasonably avoided; plus

                           (iii) The worth at the time of award of the amount by
                                 which the unpaid Rent and other sums due and
                                 payable for the balance of the Term after the
                                 time of award exceeds the amount of such Rent
                                 loss that Tenant proves could be reasonably
                                 avoided; plus

                           (iv)  Any other amount necessary which is to
                                 compensate Landlord for all the detriment
                                 proximately caused by Tenant's failure to
                                 perform Tenant's obligations under this Lease,
                                 or which, in the ordinary course of things,
                                 would be likely to result therefrom, including,
                                 without limitation, any costs or expenses
                                 incurred by Landlord: (A) in retaking
                                 possession of the Premises; (B) in maintaining,
                                 repairing, preserving, restoring, replacing,
                                 cleaning, altering or rehabilitating the
                                 Premises or any portion thereof, including such
                                 acts for reletting to a new tenant or tenants;
                                 (C) for leasing commissions; and (D) necessary
                                 or appropriate to relet the Premises; plus

                           (v)   At Landlord's election, such other amounts in
                                 addition to or in lieu of the foregoing as may
                                 be permitted from time to time by the laws of
                                 the State of Washington.

                  19.1.3 The "worth at the time of award" of the amounts
                  referred to in subsections 19.1.2(i) and 19.1.2(ii) above is
                  computed by allowing interest at the interest rate in Section
                  33.8 on the unpaid Rent and other sums due and payable from
                  the termination date through the date of award. The "worth at
                  the time of award" of the amount referred to in subsection
                  19.1.2(iii) above is computed by discounting such amount at
                  the discount rate of the Federal Reserve Bank of San Francisco
                  at time of award plus one percent (1%).

                                       17




         19.2     Whether Landlord has elected to terminate this Lease or not,
                  Tenant agrees to pay Landlord the cost of recovering
                  possession of the Premises, the expenses of reletting, and any
                  other costs or damages arising out of Tenant's Default,
                  including without limitation the costs of removing persons and
                  property from the Premises, the costs of preparing or altering
                  the Premises for reletting, broker's commissions, and
                  attorneys' fees.

20.      ACCESS. Tenant shall permit Landlord to enter the Premises at all
         reasonable times for the purpose of inspecting, altering, and repairing
         the Premises and the Building and ascertaining compliance with the
         provisions of this Lease by Tenant. The existence or exercise of such
         right of access shall not be construed as imposing any obligation on
         Landlord to inspect, discover or correct or repair any condition in the
         Premises or the Building. Landlord may also show the Premises to
         prospective purchasers or tenants at reasonable times, provided that
         Landlord shall not materially interfere with Tenant's business
         operation.

21.      HOLD-OVER TENANCY. If without execution of a new Lease or written
         extension Tenant shall hold over after the expiration or termination of
         the Term, with Landlord's written consent, Tenant shall be deemed to be
         occupying the Premises as a Tenant from month to month, which tenancy
         may be terminated as provided by law, unless the parties agree
         otherwise at the time of Landlord's consent. If Tenant shall hold over
         after expiration or termination of the Term without Landlord's written
         consent, the Base Monthly Rent payable shall be 200% of the Base
         Monthly Rent payable in the last month prior to expiration or
         termination of the Term, and Tenant shall continue to pay Additional
         Rent. During any such tenancy, Tenant shall continue to be bound by all
         of the terms, covenants, and conditions of this Lease, insofar as
         applicable.

22.      COMPLIANCE WITH LAWS. Tenant shall not use the Premises or permit
         anything to be done in or about the Premises which will in any way
         conflict with any applicable law, statute, ordinance, or governmental
         rule or regulation and any restrictive covenants and obligations
         created by private contracts which affect the use and operation of the
         Premises, Building, Common Areas or Business Park, now and hereafter in
         force ("Laws"). Tenant shall at its sole cost and expense promptly
         comply with all Laws, including without limitation the Americans with
         Disabilities Act, and with the requirements of any board of fire
         insurance underwriters or other similar bodies now or hereafter
         constituted, relating to, or affecting the use or occupancy of the
         Premises. Notwithstanding the foregoing, Landlord warrants and
         represents that as of the Commencement Date, the Premises and Building
         will be, to the best of Landlord's knowledge, in compliance with all
         Laws. The judgment of any court of competent jurisdiction, or the
         admission of Tenant in any action, whether Landlord be a party thereto
         or not, that Tenant has violated any Law, shall be conclusive of the
         fact as between Landlord and Tenant.

23.      RULES AND REGULATION. Tenant shall faithfully observe and comply with
         the rules and regulations that Landlord shall from time to time
         promulgate with respect to the Premises, Building, their structure or
         systems. Landlord reserves the right from time to time to make all
         reasonable modifications to such rules and regulations. Additions and
         modifications to rules and regulations shall be binding on Tenant upon
         delivery of a copy of them to Tenant.


                                       18




24.      PARKING. Parking on the Premises shall be revised per EXHIBIT C,
         subject to City of Redmond approval, to provide a minimum of 135
         parking spaces. Tenant may further maximize available parking stalls
         and or truck dock access by re-striping all or a portion of the parking
         lot depicted on EXHIBIT C to accommodate a higher ratio of compact
         stalls, and to add tandem stalls, and Tenant will be solely responsible
         for all costs and permits required to add additional stalls. Landlord
         shall work with Tenant in order help to maximize its truck dock access.
         Tenant's parking on the Premises shall be subject to reasonable rules
         and regulations and any charges that may be established or altered by
         Landlord for such parking facilities from time to time. Tenant shall
         comply with any and all private and governmentally imposed parking
         restrictions applicable to the Premises, including without limitation,
         the requirements of all designations placed on parking stalls, such as
         car pools. Tenant on the fifth month of commencement of lease term or
         November 15, 2000 whichever occurs first shall have a one time right to
         cancel this lease, if the Landlord is unable to secure a permit for the
         revised parking by this time. Tenant shall notify Landlord in writing
         within fifteen (15) days after the fifth (5th) month of this lease of
         its intention to terminate. Tenant's failure to deliver such statement
         within such time shall be conclusive upon Tenant that this Lease is in
         full force and effect, without modification.

25.      ESTOPPEL CERTIFICATES. Tenant shall execute, within ten business days
         following Landlord's request, a certificate in such reasonable form as
         may be required by Landlord or a prospective purchaser, mortgagee or
         trust deed beneficiary, or Landlord's successor after a sale or
         foreclosure, certifying: (i) the Commencement Date of this Lease, (ii)
         that the Lease is unmodified and in full force and effect, (or if there
         have been modifications hereto, that this Lease is in full force and
         effect, and stating the date and nature of such modifications); (iii)
         that there have been no current defaults under this Lease by either
         Landlord or Tenant except as specified in Tenant's statement, (iv) the
         dates to which the Base Monthly Rent, Additional Rent and other charges
         have been paid, and (v) any other information reasonably requested by
         the requesting party. Such certificate may be relied upon by Landlord
         and/or such other requesting party. Tenant's failure to deliver such
         statement within such time shall be conclusive upon Tenant that this
         Lease is in full force and effect, without modification except to the
         extent represented by Landlord, that there are no uncured defaults in
         Landlord's performance under this Lease, and that not more than one
         month's Rent has been paid in advance. Tenant's failure to deliver said
         statement within ten business days of request, shall constitute
         Tenant's Default.

26.      SUBORDINATION. Tenant agrees that this Lease shall be subordinate to
         the lien of any mortgage, deeds of trust, or ground leases now or
         hereafter placed against the Property or Building, and to all renewals
         and modifications, supplements, consolidations, and extensions thereof.
         Notwithstanding the foregoing, Landlord serves the right; however, to
         subordinate or cause to be subordinated any such mortgage, deed of
         trust or ground lease to this Lease. Upon a foreclosure or conveyance
         in lieu of foreclosure under such mortgage or deed of trust, or a
         termination of such ground lease, and a demand by Landlord's successor,
         Tenant shall attorn to and recognize such successor as Landlord under
         this Lease. Tenant shall execute and deliver on request and in the form
         requested by Landlord, any instruments reasonably necessary or
         appropriate to evidence, effect or confirm such subordination. Should
         Tenant fail to sign and return any such documents within ten business
         days of request, Tenant shall be in Default. Tenant hereby irrevocably
         appoints Landlord as attorney-in-fact of Tenant to execute, deliver and
         record any such document in the name and on behalf of Tenant.


                                       19




27.      REMOVAL OF PROPERTY. On expiration or other termination of this Lease,
         Tenant shall remove (i) all personal property of Tenant on the
         Premises, including without limitation all Tenant's furnishings,
         fixtures, furniture, fittings, cabling, wiring and equipment; (ii) all
         improvements to the Premises which Landlord requests be removed under
         Section 13; and (iii) at Landlord's request, all non-standard or
         specialty improvements made to the Premises by Landlord or Tenant.
         Tenant shall repair or reimburse Landlord for the cost of repairing any
         damage to the Premises resulting from the installation or removal of
         such property of Tenant. All property of Tenant remaining on the
         Premises after reentry or termination of this Lease shall conclusively
         be deemed abandoned and may be removed by Landlord. Landlord may store
         such property of Tenant in any place selected by Landlord, including
         but not limited to a public warehouse, at the expense and risk of the
         owner thereof, with the right to sell such stored property of Tenant
         without notice to Tenant. The proceeds of such sale shall be applied
         first to the cost of such sale, second to the payment of the cost of
         removal and storage, if any, and third to the payment of any other
         amounts that may then be due from Tenant to Landlord under this Lease,
         and any balance shall be paid to Tenant.

28.      PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency all
         personal property taxes payable with respect to all property of Tenant
         located on the Premises or the Building and promptly upon request of
         Landlord shall provide satisfactory evidence of such payment. "Personal
         property taxes" under this Section 28 shall include all property taxes
         assessed against the property of Tenant, whether assessed as real or
         personal property.

29.      NOTICES. All notices under this Lease shall be in writing. Notices
         shall be effective (i) when mailed by certified mail, return receipt
         requested (ii) when personally delivered, or (iii) when sent by fax, in
         each case to the address or fax number of the receiving party set forth
         in Section 1, Either party may change its address and fax number for
         notices to the other from time to time.

30.      CONDITION OF PREMISES. By taking possession of the Premises, Tenant
         accepts the Premises as being in good, sanitary order, condition and
         repair, and further accepts all aspects of the Premises, Building, and
         Property in their present condition, AS IS, including latent defects,
         without any representations or warranties, express or implied, from
         Landlord.

31.      HAZARDOUS SUBSTANCES.

         31.1     Tenant shall not, without first obtaining Landlord's prior
                  written approval, generate, release, emit, store, deposit,
                  transport, or dispose of (collectively "Release") any
                  hazardous substances, sewage, petroleum products, hazardous
                  materials, toxic substances or any pollutants or substances,
                  defined as hazardous or toxic in applicable federal, state and
                  local laws and regulations ("Hazardous Substances") in, on or
                  about the Premises. In the event, and only in the event,
                  Landlord approves such Release of Hazardous Substances on the
                  Premises, such Release shall occur safely and in compliance
                  with all applicable federal, state, and local laws and
                  regulations.

         31.2     Tenant shall indemnify and defend (with counsel approved by
                  Landlord) Landlord, and hold Landlord harmless, from and
                  against any and all claims, liabilities, losses, damages,
                  cleanup costs, and expenses (including reasonable attorneys'
                  fees) arising out of or in any way relating to the Release by
                  Tenant or any of its agents, representatives, employees or
                  invitees, or the presence of any Hazardous Substances in, on
                  or about the Premises occurring as a result of or in
                  connection with Tenant's use or occupancy of the Premises at
                  any time after the Commencement Date.


                                       20




         31.3     Landlord shall have the right from time to time to enter the
                  Premises, Building and Property and inspect the same for the
                  presence of Hazardous Substances and compliance with the
                  provisions of this Section 31 and inspect the Premises,
                  Building and Property. Landlord may cause tests to be
                  performed for Hazardous Substances on the Premises from time
                  to time. Tenant shall bear the cost of the first such test in
                  any calendar year and any other such test that occurs upon a
                  reasonable suspicion by Landlord that there may be Hazardous
                  Substances in the Premises in violation of Tenant's
                  obligations under this Lease.

         31.4     The provisions of this Section 31 shall survive the expiration
                  or termination of this Lease with respect to any occurrences
                  during the Term.

32.      SIGNS. Tenant shall not place upon or install in windows or other
         openings or exterior sides of doors or walls of the Premises any
         symbols, drapes, or other materials without the written consent of
         Landlord, which consent shall not be unreasonably withheld or delayed.
         Tenant shall observe and comply with the requirements of all Laws.

33.      GENERAL PROVISIONS.

         33.1     ATTORNEYS' FEES. In the event Landlord reasonably requires the
                  services of any attorney in connection with any Default or
                  violation by Tenant of the terms of this Lease or the exercise
                  by Landlord of its remedies for any Default by Tenant under
                  this Lease, or a request by Tenant for Landlord's waiver of
                  any terms of this Lease or extension of time to perform or pay
                  any obligation of Tenant under this Lease, Tenant shall
                  promptly on demand reimburse Landlord for its reasonable
                  attorneys' fees incurred in such instance. In the event of any
                  litigation, arbitration or other proceeding (including
                  proceedings in bankruptcy and probate and on appeal) brought
                  to enforce or interpret or otherwise arising under this Lease,
                  the substantially prevailing party therein shall be entitled
                  to the award of its reasonable attorneys' fees, witness fees,
                  and court costs incurred therein and in preparation therefor.

         33.2     GOVERNING LAW. This Lease shall be governed by and construed
                  in accordance with the laws of the State of Washington.

         33.3     CUMULATIVE REMEDIES. No remedy or election under this Lease
                  shall be deemed exclusive but shall, wherever possible, be
                  cumulative with all other remedies at law or in equity.

         33.4     EXHIBITS; ADDENDA. Exhibits and Addenda, if any, affixed to
                  this Lease are a part of and incorporated into this Lease.

         33.5     INTERPRETATION. This Lease has been submitted to the scrutiny
                  of all parties hereto and their counsel, if desired, and shall
                  be given a fair and reasonable interpretation in accordance
                  with the words hereof, without consideration or weight being
                  given to its having been drafted by any party hereto or its
                  counsel.

         33.6     JOINT OBLIGATION. If there is more than one Tenant under this
                  Lease, the obligations hereunder imposed upon Tenants shall be
                  joint and several.

         33.7     KEYS. Upon expiration or termination of this Lease, Tenant
                  shall surrender all keys to the Premises to Landlord at the
                  place then fixed for payment of Rent and shall inform Landlord
                  of all combination locks, safes, and vaults, if any, in the
                  Premises.


                                       21




         33.8     LATE CHARGES; INTEREST. Late payment by Tenant to Landlord of
                  Rent or other sums due under this Lease will cause Landlord to
                  incur costs not contemplated by this Lease, the exact amount
                  of which would be difficult and impractical to ascertain. Such
                  costs include without limitation 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.
                  Accordingly, Tenant shall pay to Landlord as Additional Rent a
                  late charge equal to five percent (5%) of such installment as
                  liquidated damages for such late payment, other than for time
                  value damages. Payment of the Rent via Tenant's delivery of a
                  check returned for "Insufficient Funds" shall constitute the
                  delinquent payment of Rent and shall be subject to the late
                  charge and interest provisions of this Section. In addition,
                  any Rent or other sums due under this Lease to Landlord that
                  is not paid when due shall bear interest at the rate per annum
                  of two percent (2%) over the prime rate in effect at U.S.
                  Bank, Seattle Main Office, on the day such Rent or other sum
                  was due. The existence or payment of charges and interest
                  under this Section shall not cure or limit Landlord's remedies
                  for any Default under this Lease. Tenant will have a one (1)
                  five (5) day grace period per year of the lease term that rent
                  will not be deemed late.

         33.9     LIGHT, AIR, AND VIEW. Landlord does not guarantee the
                  continued present status of light, air, or view in, to or from
                  the Premises.

         33.10    MEASUREMENTS. All measurements of the Premises stated in this
                  Lease, even if approximations, shall govern and control over
                  any actual measurement of the Premises. The Rent provided in
                  this Lease shall not be modified or changed by reason of any
                  measurement or re-measurement of the Premises that may occur
                  after the date of this Lease, and is agreed by Landlord and
                  Tenant to constitute the negotiated rent for the Premises.

         33.11    NAME. Tenant shall not use the name of the Building for any
                  purpose other than as an address of the business conducted by
                  the Tenant in the Premises.

         33.12    PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all of the
                  agreements of the parties with respect to any matter covered
                  or mentioned in this Lease, and no prior agreements of
                  understandings pertaining to any such matters shall be
                  effective for any purpose. No provision of this Lease may be
                  amended or added to except by an agreement in writing signed
                  by the parties or their respective successors in interest.
                  This Lease shall not be effective or binding on any party
                  until fully executed by both parties hereto.

         33.13    RECORDATION. Tenant shall not record this Lease or a short
                  form memorandum of this Lease without the prior written
                  consent of Landlord.


                                       22





         33.14    LIMITATION OF LIABILITY. In consideration of the benefits
                  accruing hereunder, Tenant's sole and exclusive remedy shall
                  be against the Landlord's interest in the Rents, issues, and
                  profits of the Project, and not against any other assets of
                  Landlord, or its members individually, or of the shareholders,
                  officers, directors, members, partners, or employees of any
                  successors or assigns, except to the extent caused by
                  Landlord's gross negligence or willful misconduct of Landlord.
                  Without limiting the foregoing:

                  a.       The sole and exclusive remedy shall be against assets
                  of Landlord relating to the Premises, as described in Section
                  2;

                  b.       No shareholder, director, officer, member, or partner
                  of Landlord shall be sued or named as a party in any suit or
                  action;

                  c.       No service of process shall be made against any
                  entity or individual other than a general partner of Landlord
                  or Landlord's designated agent for service of process;

                  d.       No individual or entity other than Landlord shall be
                  required to answer or otherwise plead to any service or
                  process;

                  e.       No judgment may be taken against any individual or
                  entity other than Landlord;

                  f.       Any judgment taken against any individual or entity
                  other than Landlord may be vacated and set aside at any time
                  without hearing;

                  g.       No writ of execution may at any time be levied
                  against the assets of any individual or entity other than
                  Landlord;

                  h.       These covenants and agreements are enforceable both
                  by Landlord and also by any shareholder, director, officer,
                  member, or partner of Landlord.

                  Tenant agrees that each of the foregoing provisions shall be
                  applicable to any covenant or agreement either expressly
                  contained in this Lease or imposed by statute or at common
                  law.

         33.15    SEVERABILITY. That any provision of this Lease is invalid,
                  void, or illegal shall in no way affect, impair, or invalidate
                  any other provision of this Lease and such other provision
                  shall remain in full force and effect.

         33.16    TIME. Time is of the essence of this Lease and each of its
                  provisions.

         33.17    WAIVER. No provision of this Lease shall be deemed to have
                  been waived by Landlord unless such waiver is in writing
                  signed by Landlord's duly authorized representatives. The
                  waiver by either party of any provision of this Lease shall
                  not be deemed to be a waiver of such provision or any other
                  provision, in any subsequent instance. The acceptance of Rent
                  by Landlord shall not be deemed to be a waiver of any
                  preceding Default or breach by Tenant under this Lease,
                  whether known or unknown to Landlord, other than the failure
                  of the Tenant to pay the particular Rent so accepted.

         33.18    NO WASTE. Tenant shall not commit or suffer to be committed
                  any waste, damage or nuisance in or upon the Premises.


                                       23




         33.19    QUIET ENJOYMENT. Provided Tenant observes its obligations
                  under this Lease, its quiet enjoyment of the Premises
                  throughout the Term shall not be disturbed.

34.      AUTHORITY OF TENANT.

         34.1     If Tenant is a corporation, each individual executing this
                  Lease on behalf of Tenant represents and warrants that (s)he
                  is duly authorized by all necessary action of the directors of
                  Tenant to execute and deliver this Lease in behalf of Tenant,
                  and that this Lease is binding upon Tenant in accordance with
                  its terms.

         34.2     If Tenant is a partnership or limited liability company, each
                  individual executing this Lease on behalf of Tenant represents
                  and warrants the (s)he is duly authorized in accordance with
                  Tenant's partnership agreement or limited liability company
                  agreement by all necessary action of the partners or members
                  or managers of Tenant to execute and deliver this Lease on
                  behalf of Tenant, and, and that this Lease is binding upon
                  Tenant in accordance with its terms.

35.      FINANCIAL STATEMENTS. Tenant shall furnish to Landlord upon request
         Tenant's most recent annual audited financial statements. If requested
         by Landlords Lender Tenant shall furnish to Landlord from time to time,
         within 30 days of request, Tenant's most recent financial statements,
         including at a minimum a balance sheet, income statement and statement
         of changes in financial condition, or the equivalent, dated as of and
         for a period ending not more than one quarter prior to the date of
         delivery. Such statements shall be in the form furnished to Tenant's
         principal lender and/or to Tenant's shareholders or other owners, but
         at a minimum shall be reviewed or compiled by an independent certified
         public accountant. Tenant shall accompany such statements with a
         certificate of its chief financial officer that the statements fairly
         present the financial condition and results of operations of Tenant as
         of and for the period ending on the date of such statements.

36.      BROKERAGE FEE. Landlord shall pay a market standard brokerage fee equal
         to the sum of five percent (5%) of the aggregate Base Monthly Rent for
         the first sixty months of the Lease Term, plus two and one-half percent
         (2-1/2%) of the aggregate Base Monthly Rent for the next thirty-six
         (60) months. The total brokerage fee shall be reduced by $31,007, which
         will be credited to Tenant as payment towards its first months rent
         due. The commission shall be due and payable 10 days after the
         expiration of Tenants right to cancel lease as specified in Section 24
         of this Lease. The brokerage fee shall be split evenly between the two
         agents listed in Section 1 of this Lease. Each party represents and
         warrants to the other that it has not had dealings with any real estate
         broker or agent, or salesperson other than the agents identified in
         Section 1, such that the other party would have any liability for any
         commissions or other compensation to such broker, agent or salesperson,
         and that no such broker, agent salesperson has asserted any claim or
         right to any such commission or other compensation. Each party so
         representing and warranting shall defend and indemnify the other party
         and hold the other party harmless from and against any and all loss,
         cost, liability, damage and expense (including reasonable attorneys'
         fees) whatsoever that may arise out of the breach of such
         representation and warranty.

         EXECUTED the day and year above written.

LANDLORD:


                                       24





LAGUNA SOUTH EXCHANGE LLC,
a Washington limited liability company
By Exchange Properties Corporation,
a Washington corporation, Member
- ---------------------------------------


By:
      ---------------------------------

Its:
      ---------------------------------


TENANT:

ADVANCED DIGITAL INFORMATION
CORPORATION, a Washington corporation
- ---------------------------------------


By:   /s/ Jon Gacek
      ---------------------------------

Its:   CFO
      ---------------------------------


                                       25





STATE OF WASHINGTON        )
                           ) ss.
COUNTY OF__________________)



     On this _____ day of ______________________,____, before me, the
undersigned, a Notary Public in and for the State of Washington, personally
appeared _____________________, to me known to be the ________________ of
_________________, the ______________ that executed the foregoing instrument,
and acknowledged the said instrument to be the free and voluntary act and deed
of said corporation for the uses and purposes therein mentioned, and on oath
stated that he/she was duly authorized to execute the said instrument on behalf
of said corporation.


     WITNESS MY HAND AND OFFICIAL SEAL hereto affixed the day and year first
above written.



                   ___________________________________________________________

                   Name_______________________________________________________

                   NOTARY PUBIC in and for the State of Washington residing at

                   __________________________________________________________.

                   My commission expires ____________________________________.


STATE OF WASHINGTON      )
                         ) ss.
COUNTY OF KING           )


     On this 9th day of MARCH 2000, before me, the undersigned, a Notary
Public in and for the State of WASHINGTON, personally appeared JON GACEK, to
me known to be the Sr. VP & CFO of ADIC, the tenant that executed the
foregoing instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of said ______________, for the uses and purposes
therein mentioned, and on oath stated that he/she was authorized to execute
said instrument on behalf of the ADIC.

     WITNESS MY HAND AND OFFICIAL SEAL hereto affixed the day and year first
above written.


[SEAL]             /s/ Pauline Dorothy Arevalo
                   -----------------------------------------------------------
                   Name    Pauline Dorothy Arevalo
                         -----------------------------------------------------
                   NOTARY PUBLIC in and for the State of Washington residing at
                   Kirkland.
                   My commission expires 01-20-03.


                                       26





                                   EXHIBIT A

                                  THE BUILDING




                                     [MAP]


                                       27






                                   EXHIBIT B

                               LEGAL DESCRIPTION




LEGAL DESCRIPTION:

THAT PORTION OF LOTS 18 AND 19 OF MARYMOOR BUSINESS CAMPUS, AS PER PLAT RECORDED
IN VOLUME 117 OF PLATS, PAGES 25 THROUGH 29, RECORDS OF KING COUNTY, AS FOLLOWS:

BEGINNING AT THE SOUTHWEST CORNER OF SAID LOT 18;
THENCE SOUTH 88 DEG. 12' 44" EAST ALONG THE SOUTH LINE OF SAID LOTS 18 AND 19, A
DISTANCE OF 342.77 FEET;
THENCE NORTH 01 DEG. 47' 16" EAST PARALLEL WITH THE WEST LINE OF LOT 19, A
DISTANCE OF 414.97 FEET TO THE NORTHERLY LINE OF SAID LOT 19;
THENCE NORTH 88 DEG. 12' 44" WEST 3.17 FEET TO A POINT OF CURVE IN SAID
NORTHERLY LINE;
THENCE ALONG SAID CURVE TO THE LEFT, HAVING A RADIUS OF 25.00 FEET THROUGH A
CENTRAL ANGLE OF 38 DEG. 12' 48", AN ARC DISTANCE OF 16.67 FEET TO A POINT OF
REVERSE CURVE IN SAID NORTHERLY LINE;
THENCE ON SAID CURVE TO THE RIGHT ALONG SAID NORTHERLY LINE AND THE
NORTHEASTERLY LINE OF SAID LOT 18, HAVING A RADIUS OF 45.00 FEET, THROUGH A
CENTRAL ANGLE OF 128 DEG. 12' 48", AN ARC DISTANCE OF 100.70 FEET TO THE NORTH
LINE OF SAID LOT 18;
THENCE NORTH 88 DEG. 12' 44" WEST 255.00 FEET TO THE NORTHWEST CORNER OF SAID
LOT 18;
THENCE SOUTH 01 DEG. 18' 42" WEST 444.99 FEET TO THE POINT OF BEGINNING;

(ALSO KNOWN AS PARCEL 1 OF CITY OF REDMOND LOT LINE ADJUSTMENT NO. SS-83-42,
RECORDED UNDER RECORDING NO. 8312291131);

SITUATE IN THE CITY OF REDMOND, COUNTY OF KING, STATE OF WASHINGTON.


                                       28






                                   EXHIBIT C

                           NEW PARKING CONFIGURATION




               SECTION 12, TOWNSHIP 25 NORTH, RANGE 5 EAST, W.M.



                                     [MAP]


                                       29




                          RIDER--OPTION TO EXTEND TERM


         R1. Tenant shall have one (1) option to extend the Term for an
additional five (5) years (the "Extended Term"), provided that Tenant is not in
default at the time of exercise of the option or commencement of the Extended
Term (unless the default is cured within any applicable cure period). Tenant
shall exercise that option by giving Landlord written notice of its election
to do so no less than nine (9) months prior to the end of the Term ("Tenant's
Notice of Exercise"). The exercise of such option to extend shall be for the
entire Premises and shall be on the same terms and conditions as set forth in
the Lease except that the Base Monthly Rent shall be adjusted as set forth
below. The option provided in this Rider is personal to Tenant and may not be
exercised by any assignee of Tenant or subtenant of the Premises and may not
be exercised during any period in which more than fifty percent (50%) of the
RSF of the Premises is subleased by Tenant.

         R2. Upon receipt of Tenant's Notice of Exercise, Landlord shall advise
Tenant in writing of Landlord's calculation of the Base Monthly Rent for the
Extended Term, which shall be equal to the fair market rental value of the
Premises for a five (5) year term, but not less than Base Monthly Rent during
the Term (the "Fair Market Rental"), not later than six (6) months prior to the
end of the Term. If Tenant disagrees with such calculation, it shall advise
Landlord in writing thereof within twenty (20) days thereafter, and the parties
shall promptly meet to attempt to resolve their differences. If these
differences as to Fair Market Rental are not resolved within a two (2) month
period, then the parties shall submit the matter to arbitration in accordance
with the terms of paragraph C below so that Fair Market Rental is determined no
later than three (3) months prior to the end of the Term.

         R3. If the parties are unable to reach agreement on Fair Market Rental
during the period specified in paragraph B, then within ten (10) days thereafter
either party may advise the other in writing of the name and address of its
arbitrator. The arbitrator shall be a licensed commercial real estate broker or
appraiser (MAI or member of a successor or similar institution) with at lease
ten (10) years experience dealing with rental rates in the Redmond, Washington
and greater Eastside areas. The duty of any and all arbitrator(s) appointed
under this paragraph shall be to determine the Fair Market Rental. In doing so,
Fair Market Rental for purposes of this determination shall not include the
value of any improvements made by Tenant to the Premises; provided that, if
Landlord reimburses Tenant for the unamortized costs of those improvements
(using a 15-year straight-line amortization schedule to determine those costs),
the value of those improvements shall be included in the determination of Fair
Market Rental.

         R3.1 Within ten (10) business days after receipt of such notice from
the initiating party (the "Instigator") designating its arbitrator, the other
party (the "Recipient") shall give notice to Instigator, specifying the name
and address of the person designated by Recipient to act as arbitrator on its
behalf who shall be similarly qualified. If Recipient fails to notify
Instigator of the appointment of its arbitrator, within or by the time above
specified, then the arbitrator appointed by Instigator shall be the
arbitrator to determine the issue. If two (2) arbitrators are so chosen the
arbitrators so chosen shall meet within ten (10) business days after the
second arbitrator is appointed. The arbitrators shall have the right to
consult experts and competent authorities with factual information or
evidence pertaining to a determination of Fair Market Rental, but any such
consultation shall be made in the presence of both parties with full right on
their part to cross-examine. The arbitrators shall have no power to modify
the provisions of this Lease. Any decision rendered by an arbitrator or
arbitrators concerning Fair Market Rental shall be in writing and delivered
in counterparts to the parties.

                                       30




         R3.2 If within ten (10) business days after such first meeting the two
arbitrators shall be unable to agree promptly upon a determination of Fair
Market Rental, they, themselves, shall appoint a third arbitrator, who shall be
a competent and impartial person with qualifications similar to those required
of the first two arbitrators. If they are unable to agree upon such appointment
within five (5) business days after expiration of said ten (10) day period, the
third arbitrator shall be selected by the parties themselves, if they can agree
thereon, within a further period of ten (10) business days. If the parties do
not so agree, then either party, on behalf or both, may request appointment of
such a qualified person by the then presiding judge of King County Superior
Court acting in his or her private non-judicial capacity, and the other party
shall not raise any question as to such Judge's full power and jurisdiction to
entertain the application for and make the appointment. The request to the
presiding judge shall include a request to make that appointment within ten (10)
business days. The person appointed by the presiding judge shall be the third
arbitrator, and the parties agree to indemnify and hold the presiding judge
fully and completely harmless from and against all claims arising out of the
presiding judge's appointment of that arbitrator.

         R3.3 The three (3) arbitrators shall decide the dispute by following
the procedure set forth in this Section. Within ten (10) business days after
appointment of the third arbitrator, the arbitrators selected by each of the
parties shall state in writing his or her determination of the Fair Market
Rental supported by the reasons therefor with counterpart copied to each party.
The arbitrators shall arrange for a simultaneous exchange of such proposed
resolutions. The role of the third arbitrator shall be to select which of the
two proposed resolutions most closely approximates his or her determination of
Fair Market Rental. The third arbitrator shall have no right to propose a middle
ground or any modification of either of the two proposed resolutions. The
resolution he or she chooses as most closely approximating his or her
determination shall constitute the decision of the arbitrators and be final and
binding upon the parties. The third arbitrator shall render his or her decision
in writing, with counterpart copies to each party, within ten (10) business days
after submission of the proposed resolutions by the other two arbitrators.

         R3.4 In the event of a failure, refusal or inability of any arbitrator
to act, his or her successor shall be appointed by him, but in the case of the
third arbitrator, his or her successor shall be appointed in the same manner as
provided for appointment of the third arbitrator. Each party shall pay the fee
and expenses of its respective arbitrator and both shall share equally the fee
and expenses of the third arbitrator, if any, and the attorneys' fees and
expenses of counsel for the respective parties and of witnesses shall be paid by
the respective party engaging such counsel or calling such witnessses.


                                       31

EX-27.1

 


<ARTICLE> 5

<MULTIPLIER> 1,000

                             
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          OCT-31-2000
<PERIOD-START>                             NOV-01-1999
<PERIOD-END>                               JUL-31-2000
<CASH>                                         201,666
<SECURITIES>                                    25,550
<RECEIVABLES>                                   56,010
<ALLOWANCES>                                     1,581
<INVENTORY>                                     46,807
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<PP&E>                                          13,245
<DEPRECIATION>                                       0
<TOTAL-ASSETS>                                 378,171
<CURRENT-LIABILITIES>                           67,044
<BONDS>                                          1,229
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<OTHER-SE>                                     308,084
<TOTAL-LIABILITY-AND-EQUITY>                   378,171
<SALES>                                        194,783
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<OTHER-EXPENSES>                                12,444
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<INTEREST-EXPENSE>                                 282
<INCOME-PRETAX>                                117,087
<INCOME-TAX>                                    39,735
<INCOME-CONTINUING>                             77,334
<DISCONTINUED>                                       0
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<EPS-BASIC>                                       1.50
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